fall 2018 pioneer natural resources energy (nyse: pxd ... · recommendation: analysts andrew ball...
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Krause Fund Research
Fall 2018
Energy Recommendation:
Analysts
Andrew Ball
Samuel Bries
Adam Goedken
Gregory Hensley
Company Overview
Pioneer Natural Resources is an upstream energy company
that operates by exploring and producing oil, natural gas
liquids (NGLs), and other gases. Pioneer uses fracking to
extract oil from shale fields and natural gas from methane
layers. Pioneer is based in Irving, Texas and is in the process
of becoming a pure play firm in the Permian Basin, located
in Western Texas. By divesting from assets outside of the
Permian Basin, Pioneer expects to reduce companywide costs
and focus on their lucrative operations in the Permian Basin.
Stock Performance Highlights 52-week High $213.40
52-week Low $140.54
Beta Value 0.71
Average Daily Volume 1.589 m
Share Highlights Market Capitalization $27.233 b
Shares Outstanding 170.4 m
EPS (2017) $4.86
P/E Ratio 14.18
Dividend Yield 0.22%
Dividend Payout Ratio 4%
Company Performance Highlights ROA 4.9%
ROE 8%
Sales $5.455 b
Financial Ratios Current Ratio 1.41
Debt to Equity 0.26
Pioneer Natural Resources (NYSE: PXD)
Current Price $159.82
Target Price $147-$152
Cost Control and Impressive Regional Growth
Already Factored into PXD Price
Investment Positives
• Pioneer operates with low costs in Western Texas.
Currently, their oil and gas production costs are 17% of revenues,
5% lower than those of their main competitor in the Permian
Basin, Concho.
• The company is becoming a pure play – divesting in their
least profitable regions will raise their overall profit. Pioneer plans
to move more operations to the Permian Basin, a fast-growing
region where they benefit from greater profit margins.
• Q1-Q3 2018 reports suggest large revenue gains in this fiscal
year, with oil futures suggesting Pioneer will face a more
favorable oil price outlook from 2019-2020.
Investment Negatives
• DCF/EP analysis suggests favorable news about the company
and optimistic estimates about revenue growth and cost savings
are already priced into PXD stock.
• Pioneer is sensitive to oil price risk, and currently future
curves project a decrease in oil prices after 2019, dropping to
$60.06 in 2022 (from a forecasted $62.32 in 2019). Actual oil
price can also differ greatly from futures estimates.
One Year Stock Performance PXD one year stock performance relative to the S&P 500 Index
and the U.S Energy Select Sector SPDR Fund
Source: Wall Street Journal1
November 11, 2018 SELL
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Macroeconomic Outlook
Executive Summary
As of November 11, 2018, our University of Iowa Krause Fund
analyst team recommends a SELL rating for Pioneer Natural
Resources. Pioneer has been reducing costs and maximizing
revenue by capitalizing on growth opportunities in the Permian
Basin. However, Pioneer’s success is largely dependent on the
price of oil. While we believe the macroeconomic environment
will be favorable for oil and gas exploration and production
companies in the future, there is still a high level of uncertainty
in the oil price marketplace. The United States’ move toward
greater energy independence does not negate the influence of
OPEC on oil supply and demand. Oil price risk—evidenced by a
slight decline in oil futures by 2020 and projected in our
models—led us to view Pioneer Natural Resources as an
overvalued stock.
World Real Gross Domestic Product (GDP)
Real Gross Domestic Product (GDP) is one of the key indicators
of economic development that influences the demand for oil and
other energy resources. Economic expansion occurs when the
demand for goods and services increase. In an economic
expansion, sales of products for which oil and natural gas are
inputs increase, and consumers are less frugal with their energy
consumption. Businesses look to grow, requiring more energy
consumption than before. Consequently, real GDP growth causes
demand for energy resources causes oil prices to rise, driving
revenue growth. Figure 1 shows a correlation between economic
growth and oil demand and consumption.
Figure 1
Source: U.S. Energy Information Administration2
Domestic Growth Outlook
Healthy domestic growth will be a positive for energy companies
in the U.S. The U.S. economy grew at 4.2% and 3.5% in the
second and third quarter, respectively, in 2018, a large increase
from 3.1% and 3.2% growth in the second and third quarter of
2017. Strong consumer and business spending are the two primary
factors that have helped drive the strong economic growth in the
past two quarters.3 According to the Federal Reserve Bank of
Atlanta, U.S GDP growth is expected to be 2.9% in the fourth
quarter of 2018.4
Figure 2
Source: FRED Economic Data3
In the next year, we predict that U.S real GDP growth will grow
at a rate of 3.0%, a 70-basis-point increase from an annualized
growth rate of 2.3% from 2017. The Tax Cuts and Jobs Act of
2017 has contributed to large corporate profits and business
investment in the last year. The Commerce Department noted that
after-tax profits across the U.S rose 16.1% in the 2nd quarter from
the previous year, the largest year-over-year gain in six years.5 As
a result, per-share earnings for companies in the S&P 500 rose
24.8% over the second quarter of 2017.
Figure 3
Source: Wall Street Journal5
In addition to rising corporate profits and business investment,
metrics such as consumer confidence, rising personal incomes, a
strong labor market, and a jobless rate of 3.7%, have encouraged
greater consumer and business consumption that has driven
economic expansion. Figure 4 shows the U.S. Consumer
Confidence level directed by the Conference Board Consumer
Confidence, which current levels show at 98.3.6 Given that
consumer confidence is measured based on household surveys of
consumers’ opinions on current conditions and future
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expectations of the economy, we expect this trend to continue.
Given these metrics, we expect U.S. GDP to grow at 3.00% for
the foreseeable future.
Figure 4
Source: Trading Economics6
International Growth Outlook
For our analysis of the international marketplace, we consider
China and India to be the main foreign drivers for energy
resources. China and India together contribute nearly 50% of
global oil demand.7 Figure 5, below, shows world oil demand
growth by year, showing China and India’s dominance for the
demand of oil.
Figure 5
Source: International Energy Agency7
The International Monetary Fund has projected global GDP to
grow at 3.7% for 2018 and 2019, with China and India’s GDP
expected growth rates to be 6.20% and 7.70%, respectively.8 As
China and India continue to expand their economies and
international footprint, they will use more oil, which will drive oil
demand and consumption higher. Future curves project that oil
prices will reach $60.06 in 2022.
Figure 6
Source: International Monetary Fund8
With an expected 3.7% world GDP growth rate for 2018 and
2019, increased activity in the international marketplace will be a
significant driver for energy demand and consumption. Energy
demand and consumption will not only come from larger
economies such as China and India, but also emerging market and
developing countries benefiting from overall world growth, and a
positive rotation in the global business cycle.9
Figure 7
Source: International Monetary Fund8
Interest Rates
Interest rates are a key economic variable to consider as they are
one of the major determinants of a firm's cost of debt. Rising
interest rates lead to higher borrowing costs, as investors require
a higher return for riskier investments taken by the firm. The 10-
Treasury Yield (3.186%) was used as the risk-free rate to calculate
the cost of debt in our valuation. Figure 8 shows that the 10-
Treasury yield has been rising steadily over the past year with oil
prices. Due to the recent hikes in the federal funds rate, we expect
the rate to reach 4.00% by 2020 to trump rising inflation.
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Figure 8
Source: FRED Economics Data10
As of September of 2018, Federal Reserve officials have raised
interest rates for the third time this year and have reaffirmed their
outlook for further rate hates into 2019.11 The federal funds rate
currently stands at 2.25%, a 25-basis-point increase in September
from its last rate of 2.00%.
Figure 9
Source: Bloomberg11
Oil exploration and production companies are often highly
leveraged, as they look to expand their operations by acquiring
more reserves. As the federal funds rate is projected to increase 3
times during 2019, firms with a low cost of debt that have a history
of paying back their lenders are able to maneuver better in this
environment.
Energy Commodities Supply & Demand
For energy commodities, supply and demand is the definitive
driver of price. Oil and gas prices fluctuate due to supply and
demand of the commodity. If prices are high, energy companies
are more likely to produce more, and vice versa. Upstream
companies, like Pioneer, benefit the most from high oil prices,
while midstream and downstream companies benefit less, though
these companies are still impacted by oil prices. Oil prices
increase as oil demand increases. Oil demand is determined by
consumption. The oil production of OPEC and non-OPEC
countries influence the supply of oil greatly. Figure 10 shows how
changes in the oil production of Saudi Arabia, an OPEC country,
can influence WTI crude oil prices. OPEC’s oil exports represent
about 60% of the total petroleum traded internationally, producing
0.3 million barrels per day in quarter 3 of 2018, its largest
production amount in over a year.
Figure 10
Source: U.S. Energy Information Administration12
In 2017, world oil production rose by 0.6 million b/d, below
average for the second consecutive year. Production fell in the
Middle East (-250,000 b/d) and South & Central America (-
240,000 Kb/d), but this was outweighed by growth in North
America (820.00 b/d), specifically the U.S. (690,000 b/d).13
Figure 11
Source: U.S. Energy Information Administration14
Figure 11 provides the growth U.S. production of crude oil,
showing a steep increase since the financial crisis of 2008.
In 2017, global natural gas production increased by 4%; the fastest
rate since the immediate aftermath of the financial crisis.15 Figure
12 shows the growth of natural gas production in the world.
Recently the U.S. has begun increasing production of oil and
natural gas as they work to become more energy independent.
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Figure 12
Source: BP Global Report15
OPEC as a Geopolitical Player
Beyond world GDP and energy commodity supply/demand,
geopolitics also influences the price of oil. One major player in
the geopolitics of the supply and demand, and ultimately the price
of oil, is OPEC. OPEC was established to provide regular supply,
stable markets and a fair return on investments to investors. While
OPEC does not control the price of oil, they play a big part in it.
By restricting oil production and slashing oil supplies, OPEC
could force oil prices to rise, benefiting net exporters of oil, but
hurting large importers of oil, such as China.
Figure 13
Source: OPEC Annual Statistical Bulletin 201816
As the U.S. looks to become more energy independent, the EIA
projects that the United States will become a net energy exporter
by 2020, primarily driven by higher oil prices and technology and
a reduction in regulation within the oil and gas exploration
industry.17
Figure 14
Source: U.S. Energy Information Administration17
Overview
The oil and gas industry has three main parts: upstream,
midstream, and downstream. Upstream firms operate by
exploring for oil and producing oil. Revenues are largely driven
by the market price of oil. Pioneer Natural Resources is
considered an upstream firm. Midstream firms operate by storing
and transporting oil, NGLs, and other natural gases. Pioneer
works with these companies to ship oil from their rigs to
refineries. Downstream firms operate by refining the oil, NGLs,
and natural gases into consumable products, as well as marketing
the finished products. Downstream revenues are driven through a
“crack spread” which is the difference between the cost of
production and the revenues received from selling the finished
energy products.
Figure 15
Source: EnergyHQ18
Developments and Trends
Global oil production and consumption is expected to continue
rising for the foreseeable future. The United States is becoming
more energy independent, which makes OPEC less of a driver of
oil prices domestically. Figure 16 shows that world oil demand
continues to grow at a steady rate, with 98.45 mb/d in quarter 2 of
2018.19 Recently, we have seen large growth in the natural gas
production industry that has outpaced demand for natural gases.
This large gap between supply and demand has caused natural gas
prices to drop substantially in recent years.
Industry Analysis
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Figure 16
Source: International Energy Agency19
Industry Leaders
The largest firms in the oil and gas industry are integrated oil
firms, which means they operate across all three production
streams. Exxon Mobil and British Petroleum are among the
largest firms in the industry.
Exxon Mobil – Exxon Mobil Corporation is an American
multinational oil and gas corporation. Exxon Mobil is the largest
of the world’s big oil companies, with daily production of 3.921
million BOE.20 The company is the world’s 9th largest company
listed by revenue.
British Petroleum – The British Petroleum Company plc, or BP
plc, is a British multinational oil and gas company. BP is one of
the world’s seven oil and gas “supermajors”. As of 2017, BP has
operations in 70 countries worldwide and produced around 3.6
million barrels per day.21
Industry leaders can operate at low costs relative to their
competitors and are not solely reliant on the price of oil to stay
profitable. Leaders often implement derivative trading along with
their operations to profit off of trends in the oil and gas industry.
Followers in the oil and gas industry are often unable to produce
energy products cheaply and are reliant on high oil prices to
remain profitable. These follower companies often have high
levels of debt, and experience cash flow issues when oil prices dip
below desirable levels. Pioneer is a relatively mature, medium-
sized energy firm that engages in some derivative activity but is
still sensitive to changes in oil prices.
Porter’s Five Forces Analysis
Threat of New Entrants
Large established companies and smaller newer companies can
both compete in this space. Larger companies are usually more
profitable and have access to more reserves. Small companies rely
on discovering new reserves, which is expensive and risky.
Threat of Substitutes
New developments in renewable energy are a direct threat to the
demand of fossil fuels in the long-term. The rise of all-electric
cars could potentially cause a drastic reduction in global oil
demand.
Bargaining Power of Suppliers
Suppliers do not choose the price of the commodities that their
revenue is based on. Those commodity prices are generally
volatile, and oil and gas exploration/production companies often
try to hedge against volatility through derivative contracts.
Bargaining Power of Buyers
Buyers are in the midstream or downstream sectors. They can
negotiate some of the price that they pay, but price is mainly
decided by market price of the commodity purchased.
Rivalry among Existing Competitors
Large companies are simply able to produce more oil and natural
gas than smaller ones. Companies are constantly fighting to be
the lowest cost producer or finding new areas to drill from.
Financial Summary Analysis
In fiscal year 2017, Pioneer reported revenues of $5.45 billion, a
61% increase from 2016. A large driver of revenue growth came
from oil and gas production. Revenue per BOE increased from
$28.25 in 2016 to $35.39 in 2017. Earnings per share rose from
($3.34) in 2016 to $4.86 in 2017. This swing in earnings was
almost entirely driven by Pioneer’s 61% growth in revenues from
the year before.22
Pioneer saw a decrease in their ending cash account for 2017,
which we attribute to Pioneer paying off long term debt. PXD
spent $450 million last year on retirement of long term debt, a rate
they plan on maintaining in years to come.22
Pioneer announced Q3 earnings on November 6, 2018. The
quarterly earnings release revealed that Pioneer saw a
companywide production increase of 16%. In the Permian Basin,
oil production rose 7% from Q2, beating Pioneer’s own guidance
by between 1% and 4.45%. Q3 revenue was $2.48 billion vs
$1.27B.23 While Pioneer saw a large increase in revenue,
Pioneer’s margins in the Permian Basin shrank. Pioneer estimated
Permian Basin production costs to be $9.68 per BOE, which is
significantly higher than the $4.79 per BOE Pioneer observed
during 2017.23 Production costs have been rising steadily in the
Permian Basin, however Q/Q production costs per BOE decreased
by $0.92 since Q2 of 2018.24
Table 1
FY2017 Q2 2018 Q3 2018
Cost/BOE $4.79 $10.60 $9.68
It is worth noting that Pioneer had a tax benefit instead of expense
in 2016 and 2017. We believe that forecasting a tax benefit for
future years is unrealistic, so we have set tax expense to be at 21%,
the new corporate tax rate after the passing of the Tax Cuts and
Jobs Act in 2017.
Company Analysis
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Products
Pioneer has several products: oil, natural gas liquids (NGLs), and
other natural gases. Pioneer Natural Resources offers pumping,
well, and sand services. In September, PXD secured a long-term
sand supply contract with U.S. Silica Holdings which will cut
their costs of sand used for fracking in half.25 Because fracking
operations make up about 20% of Pioneer’s revenues, we expect
this deal with U.S. Silica to provide a significant cut in costs and
an increase in net income from operations.22
Production
Pioneer Natural Resources operates primarily in the Permian
Basin in West Texas. As of 2017, the Permian Basin represents
82% of total oil, NGL, and gas production for the company.
Operating in the Permian Basin is particularly notable because the
region is the fastest growing area in the world in terms of
production. 60% of all production growth in the world is
estimated to come from the Permian Basin alone.26 Analysts
estimate that if this trend continues, the Permian Basin will be the
third largest oil producing area in the world, only behind Russia
and Saudi Arabia.27
Figure 17
Source: Energy Information Administration28
Pioneer’s revenues and costs are broken down per BOE (barrel of
oil equivalent), which allows for comparison between production
region and across companies to determine performance. The
product sales mix is 79% crude oil, 11% NGL, and 10% natural
gas.We found that the Permian Basin offers a significantly
cheaper cost of production per BOE compared to Pioneer’s other
operations around Texas. The total production cost per BOE in
the Permian Basin is $4.79, while production cost in Eagle Ford,
southeast of the Permian region, is $11.35 per BOE.22
Table 1
Concho Natural Resources, a Permian Basin pure play company,
has production costs at $5.80 per BOE in the exact same region.29
PXD producing the same product 17% cheaper than their largest
competitor in the region will allow Pioneer to achieve higher
sustained profits as long as their competitive advantage remains.
Markets and Customers
Pioneer sells their products to transportation companies including
Sunoco Logistics Partners, Occidental Energy Marketing, Plains
Marketing, and Enterprise Products Partners. Sales to these four
companies make up 62% of all Pioneer’s oil, NGL, and gas
revenues.22 Pioneer has contracts with these companies and sells
directly to their pipelines for transportation. Prices are factored
off of market price, quality, and distance from wells. Market price
is susceptible to seasonal variability. Generally, demand rises in
the winter and decreases during summer months.
Competition
Overview
Pioneer Natural Resources operates in the exploration and drilling
sub-industry of the energy sector. We identified competitors
based on having operations in this space, but not just this sub-
industry. Another variable we took into consideration is the
presence or future presence within Texas. We decided to look at
the ROA, net profit margin, and debt-to-equity ratio as a way to
compare these competitors. The competitors analyzed are:
Apache, Concho, and Occidental. Figure 18
Source: Apache Corporation Form 10-K30
Apache Corporation and Pioneer are complete substitutes, as both
are exploration and drilling companies. The main difference is
that Apache has less of a focus on the Permian Basin. In
September 2018, Apache announced that it would begin making
large land purchases in the Permian Basin. A rush of companies
to the West Texas area will decrease Pioneer’s market share in the
future if they do not continue investing in the Basin. When
analyzing the ratio, Apache outperforms Pioneer dramatically in
all three categories.30
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Figure 19
Source: Concho Natural Resources Form 10-K29
Concho Natural Resources is an exploration and production
operating solely in the Permian Basin. In March 2018, Concho
acquired RSP Permian for $9.5 billion in the largest-ever
acquisition in the Permian region.29 While Pioneer still maintains
a competitive advantage when it comes to costs per BOE, Concho
will now be able to produce more oil and NGLs in the region,
which will decrease Pioneer’s share of production in the area.
Concho is close to a complete substitute to Pioneer. Concho
outperforms Pioneer in ROA and net profit margin, but a Pioneer
has a lower debt-to-equity.29 For exploration and drilling
companies, it is important to have a lower debt since the success
of the company is skewed toward volatile commodity prices.
Figure 20
Source: Occidental Petroleum Form 10-K31
Occidental Petroleum is the third-largest petroleum producer in
Texas, and the largest operator in the Permian Basin. Occidental
is an integrated oil and gas company, meaning that is does
exploration and drilling, but it also has a midstream and
downstream business segment.31 When comparing the ratios,
Pioneer outperforms in ROA and net profit margin, but has larger
debt-to-equity ratio. However, the results may show how the other
business segments impact the overall performance of the business.
SWOT Analysis
Strengths
Pioneer maintains a significant competitive advantage on its
competitors by being able to produce at the lowest cost per BOE
in the Permian Basin. Should Pioneer continue to grow, we see it
becoming a dominant force in the West Texas drilling market.
Weaknesses
Pioneer is rather dependent on the price of oil and natural gas.
Significant changes in revenue are largely due to changes in
commodities. In order for Pioneer to maintain profitability
beyond the price of oil, they may need to invest in new production
rigs which is expensive.
Opportunities
The Permian Basin is in the process of becoming one of the most
productive areas in the world when it comes to oil and natural gas.
High levels in the growth of the region paired with Pioneer’s low
cost competitive advantage provides a bright opportunity in the
future.
Threats
The aggressive merger and acquisition environment that is
beginning to sprout in the region threatens Pioneer’s market share
in the future. Should the aggressive M+A continue, Pioneer could
find itself being a small player in a large competitive environment.
Overview
After analyzing the economic environment, the exploration and
drilling industry, and key company performance drivers, we
recommend a SELL rating for Pioneer Natural Resources. We
believe the DCF/EP model represents the most complete view of
our forecast of company performance. The DCF/EP model
estimates a stock value of $149.90; this is below the current stock
price of $159.82. While we found that Pioneer would benefit from
growth and expansion in the coming years, we determined that
these variables were already factored into current price, and the
company is currently slightly overvalued.
Revenue Decomposition
Crude Oil Revenue
We calculated sales of oil by multiplying production of crude oil
by the annualized price of barrel of oil equivalent (BOE). Crude
oil futures for December of each forecasted year determined oil
revenue per barrel. We forecasted volume for 2018 based on the
data that has already been released determining our growth to be
5%. Production growth moving forward is grown to 10% in 2019
and then, in 2020 and beyond, to production average over the past
10 years: 16.45%. Natural Gas Revenue
We calculated natural gas revenue by multiplying natural gas
volume by annualized price per million cubic feet (MMcf).
Natural gas futures of December of each forecasted year
determined projected natural gas per (MMcf). We based natural
gas production off of the past 10 years decline rate of 8.06%.
Valuation Analysis
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Natural gas production has been volatile over the past 10 years,
but has been trending down. The decision to use the average of
the growth and decline rates would balance out the volatility and
give a consistent trend. NGL Revenue
We calculated NGL by multiplying NGL production by
annualized price per MMcf. Pioneer does not report NGL
production mixes to determine price or volume. We decided to
use a three-year rolling average for both price and volume. The
resulting volume was consistently increasing while the prices
were on a decline. Sales of Purchased Oil and Gas
Pioneer does not provide insight into the amount of purchased oil
and gas the company sells. Our group decided that we would find
the average percentage of the past years of sales of purchased oil
and gas to the oil and gas produced by Pioneer. The resulting ratio
for sales of purchased oil and gas would be 27.43% of oil and gas
production sales.
Costs
Oil and Gas Production Our assumption for oil and gas production cost is based on the
amount of the crude oil produced. We took the average percentage
of oil and gas production cost of the amount of crude oil over the
past two years to get 1.1%. We believe the correlation of the past
two years will continue. We used this percentage times the crude
oil forecasted each year to get the oil and gas production cost. Purchased Oil and Gas
Our group decided to tie purchased oil and gas to the amount of
sales of purchased oil and gas. We did this since the amount sold
derives from the amount purchased. We took the percentage of
sales or purchased by the amount purchased for the past three
years to get 104.4%. It is important that resulting percentage is
greater than 100%, because Pioneer cannot consistently sell more
than it purchases. We then took that percentage times the
forecasted sales of purchased oil and gas.
WACC
We estimated Pioneer’s WACC to be 7.97% using Pioneer’s
capital structure of 77% equity and 23% debt. Both of these
numbers were calculated by finding the market value of each
financing instrument, and then dividing the sum by the value for
debt or equity. We used this WACC for all years in the future
because we do not expect Pioneer’s capital structure to change in
the future.
Cost of Equity
To calculate the cost of equity we applied the Capital Asset
Pricing Model (CAPM) and calculated our cost of equity to be
8.38%. Our variables used in the CAPM are as follows:
● Risk Free Rate = 3.186%
● Equity Risk Premium = 5.32%
● Beta = 0.977
Our risk free rate represents the yield on the 10-year U.S. Treasury
as of November 11, 2018.32 The equity risk premium was given
by Damodaran’s implied ERP as of November 1, 2018.33 We
believe that this number accurately represents the geometric
average of our expected market risk premium. Our beta was
calculated by taking the average of the 2 year raw betas calculated
daily, weekly, and monthly on Bloomberg.
Cost of Debt
To calculate Pioneer’s cost of debt we used the yield on a Pioneer
corporate bond maturing in 10 years. We found the yield to be
5.077% on the SEC’s EDGAR database.34 To find the after-tax
cost of debt to be used in our cost of capital calculation, we took
the yield on the 10-year corporate bond and then adjusted it to
reflect the marginal tax rate of 21% due to the new tax plan. This
calculation gave us an after-tax cost of debt of 4.011%.
Valuation Models
We used a discounted cash flow/economic profit (DCF/EP)
model, a dividend discount model, (DDM), and a relative
valuation to analyze Pioneer’s stock value. Ultimately, we
decided the DCF/EP model represented the most complete and
accurate valuation for Pioneer. Results
DCF/EP DDM Relative
Valuation
Target Price as of
11.11.18 $148.32 $95.32 $12.30
DCF/EP
The DCF/EP model is based on our research and beliefs about the
Pioneer’s riskiness and growth; therefore, we believe it is the most
informed model for calculating the intrinsic value of Pioneer’s
stock. Pioneer’s projected future revenue growth and other key
drivers indicate a slightly lower value of $149.90. The DCF model determines the value of operating assets using the
sum of the present values of free cash flows (net operating profit
less adjusted taxes, i.e., NOPLAT, less capital expenditures).
Alternatively, the EP model uses present value of economic profit
(the difference between ROIC and WACC) added to beginning
invested capital to calculate the value of operating assets. Both
approaches use the WACC for discounting. For the DCF and EP
models, we estimated continuing value (CV) growth of NOPLAT
to be 3%, the effects of which we tested in our sensitivity analysis.
As CV growth rises, intrinsic stock price falls, because our model
predicts a lower ROIC than WACC in the CV year. Given our
short investment horizon, we do not believe this projected future
destruction of value is cause for concern.
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DDM
The DDM is not a useful way to understand the value of Pioneer
stock. The DDM calculates intrinsic stock value using the present
value of future dividend payments. This present value is found by
discounting back estimated future dividends and a perpetual value
of future cash flows past a CV year. We decided this model was
less informative than the DCF/EP model, as the DDM is heavily
based on one assumption: a constant dividend per share of $0.32.
Companies within the exploration and drilling industry pay a
minimal dividend, meaning DDM will be below the true value. Relative Valuation
The relative P/E valuation does not produces a stock price similar
to PXD’s current stock price and it is not a reflection of Pioneer’s
fundamental value. The relative P/E calculation uses an average
of industry peers’ estimated P/E ratio multiplied by our forecasted
earnings per share to estimate an implied value. While this
approach may be useful for comparison purposes or quick value
estimations, the company’s selection creates an unrealistic
number. In the exploration and drilling industry it is not
uncommon to have negative net income. Two companies selected
have a negative net income skewing the entire relative valuation.
Sensitivity Analysis
Beta, Equity Risk Premium
The beta is one component of the equity risk premium that is used
to determine WACC. WACC is a key assumption in determining
the intrinsic value of Pioneer. Small increases in the Beta and
Equity risk premium have a large impact in the stock price of
Pioneer.
Purchased Oil and Gas 2022, Production Volume 2022
Pioneer derives its revenue from selling the oil and gas that it
produces and buys. Increasing a small amount of production
slowly increases the stock price. Increasing purchases oil and gas
decreases the stock value, as it is as it is expensive for Pioneer to
resell inventory rather than producing it themselves.
Marginal Tax Rate, Normal cash
Small changes in the marginal tax rate have a larger impact on the
stock price than small changes in normal cash. Normal cash
percentage of sales is based on the convention of the industry.
Increases in normal cash will increase invested capital, which will
decrease the value of the stock. On the other hand, increasing
marginal tax rate will allow Pioneer to keep more revenue,
increasing NOPLAT and boosting stock price.
Risk Free Rate, CV NOPLAT Growth Rate
Incremental changes in the risk free rate have a larger impact on
the stock price than changes in CV NOPLAT growth rate.
Together, the two variables make a much larger impact on the
stock price compared to changing individually.
Cost of Debt, Price Per Barrel 2022
In the exploration and drilling industry, the cost of debt is crucial
since its ability to pay back is based on price of commodities.
Price per barrel in 2022 has a large impact on the stock price
showing how impactful the price per barrel. The cost of debt does
not make as much make as much a difference on stock price, but
when both are changing it can make a much a larger variation in
the stock price.
11 | P a g e
Important Disclaimer
This report was created by students enrolled in the Security
Analysis (6F:112) class at the University of Iowa. The report was
originally created to offer an internal investment recommendation
for the University of Iowa Krause Fund and its advisory board.
The report also provides potential employers and other interested
parties an example of the students’ skills, knowledge and abilities.
Members of the Krause Fund are not registered investment
advisors, brokers or officially licensed financial professionals.
The investment advice contained in this report does not represent
an offer or solicitation to buy or sell any of the securities
mentioned. Unless otherwise noted, facts and figures included in
this report are from publicly available sources. This report is not
a complete compilation of data, and its accuracy is not guaranteed.
From time to time, the University of Iowa, its faculty, staff,
students, or the Krause Fund may hold a financial interest in the
companies mentioned in this report.
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c.
Pioneer Natural ResourcesKey Assumptions of Valuation Model
Ticker Symbol PXDCurrent Share Price $159.82Current Model Date 11/11/2018FY End (month/day) Dec. 31
Pre-Tax Cost of Debt 5.60%Beta 0.97666667Risk-Free Rate 3.19%Equity Risk Premium 5.32%CV Growth of NOPLAT 3%CV Growth of EPS 3%CV ROE 7%CV ROIC 13%Current Dividend Yield 0.19%Marginal Tax Rate 21%Effective Tax RateWACC 7.97%Cost of Debt 0.05077Cost of Equity 0.08052Weight of Equity 0.91 Intrinsic Value per Share 149.90$ Normal Cash 0.7%Price per BOE 31.96Production Oil and Gas 2022 105564.72Purchased Oil and Gas 2022 2,475.17 Price Per Barrel 2022 Selling 60.06$ Dividend per Share 0.32Weight of Debt 0.09
Pioneer Natural ResourcesRevenue Decomposition
Fiscal Years Ending Dec. 31 2015 2016 2017 2018E 2019E 2020E 2021E 2022EOil (MBbls) 38,452 48,926 57,878 60,772 66,850 77,846 90,652 105,565 Y/Y 21.04% 27.24% 18.30% 5.00% 10.00% 16.45% 16.45% 16.45%Price Oil Per Barrel 43.55$ 39.65$ 48.24$ 60.81$ 62.32$ 61.76$ 61.00$ 60.06$ Revenue from Oil 1,674.57$ 1,939.91$ 2,792.05$ 3,695.57$ 4,166.07$ 4,807.80$ 5,529.79$ 6,340.22$ NGLs (MBbls) 14,086 15,922 20,078 22,688 26,630 31,643 36,833 43,291 Y/Y -0.14% 13.04% 26.10% 13.00% 17.38% 18.82% 16.40% 17.53%Price NGLs per Bbl 13.31$ 13.49$ 19.31$ 19.12$ 18.93$ 18.74$ 18.55$ 18.36$ Revenue from NGLs 187.49$ 214.79$ 387.70$ 433.72$ 504.00$ 592.89$ 683.22$ 794.99$ Natural Gas (MMcf) 131,642 124,428 128,665 118295 108760 99994 91934 84524Y/Y 6.28% -5.48% 3.41% -8.06% -8.06% -8.06% -8.06% -8.06%Price Gas per (MMcf) 2.40$ 2.11$ 2.63$ 3.78$ 2.97$ 2.81$ 2.79$ 2.80$ Revenues from Gas 315.94$ 262.54$ 338.39$ 446.56$ 323.34$ 280.98$ 256.04$ 236.67$ Total (MBOE) 74,478 85,586 99,400 113,656 130,855 150,751 173,202 199,315 BOE production growth 11.97% 14.91% 16.14% 14.34% 15.13% 15.20% 14.89% 15.08%Total Per Barrel 29.25$ 28.25$ 35.39$ 30.96$ 31.53$ 32.63$ 31.71$ 31.96$ Revenues of Oil and Gas per BOE 2,178.49$ 2,417.81$ 3,517.78$ 4,575.85$ 4,993.41$ 5,681.66$ 6,469.05$ 7,371.87$ Sales of Purchased Oil and Gas 700.00 1,091.00 1,776.00 1,255.16 1,369.70 1,558.49 1,774.47 2,022.11 Total Operating Revenue 2,878.49$ 3,508.81$ 5,293.78$ 5,831.01$ 6,363.11$ 7,240.15$ 8,243.51$ 9,393.99$ Interest and Other 22.00 32.00 53.00 53.00 53.00 53.00 53.00 53.00 Derivative Gains (Losses), net 879.00 (161.00) (100.00) - - - - -
23% -118% -38% -36% -57% -70% -55% -54%Gain on disposition of assets, net 208.00 2.00 782.00 - - - - -
Total Revenues 2,878.49$ 3,508.81$ 5,293.78$ 5,884.01$ 6,416.11$ 7,293.15$ 8,296.51$ 9,446.99$
Pioneer Natural ResourcesIncome StatementIn Millions $Fiscal Years Ending Dec. 31 2015 2016 2017 2018E 2019E 2020E 2021E 2022ERevenues and Other Income:
Oil and Gas Sales 2,178.00$ 2,418.00$ 3,518.00$ $ 4,575.85 $ 4,993.41 $ 5,681.66 $ 6,469.05 $ 7,371.87 Sales of purchased oil and gas 700.00 1091.00 1776.00 1255.16 1369.70 1558.49 1774.47 2022.11
Operating Revenue 2878.00 3509.00 5294.00 5831.01 6363.11 7240.15 8243.51 9393.99Interest and Other 22.00 32.00 53.00 53.00 53.00 53.00 53.00 53.00Derivative gains (losses), net 879.00 (161.00) (100.00) - - - - - Gain on disposition of assets, net 782.00 2.00 208.00 - - - - -
Total Revenues: 4561.00 3382.00 5455.00 5884.01 6416.11 7293.15 8296.51 9446.99Costs and Expenses:Oil and Gas Production 717.00 581.00 591.00 671.11 738.23 1056.97 1230.85 1433.32Production and Ad Valorem Taxes 145.00 136.00 215.00 236.81 258.42 294.04 334.79 381.51Depletion, Depreciation and Amortization 1385.00 1480.00 1400.00 1458.27 1522.32 1578.44 1627.60 1670.66Purchased Oil and Gas 739.00 1155.00 1807.00 1310.32 1429.89 1626.97 1852.44 2475.17Impairment of Oil and Gas Properties 1056.00 32.00 285.00 - - - - - Exploration and Abandonments 99.00 119.00 106.00 106.00 106.00 106.00 106.00 106.00General and Administrative Expenses 327.00 325.00 326.00 323.71 322.63 321.84 320.47 319.39Accretion of discount on asset retirement obligations 12.00 18.00 19.00 19.00 19.00 19.00 19.00 19.00Interest 187.00 207.00 153.00 186.40 175.62 206.54 214.99 222.96Other 315.00 288.00 244.00 243.36 265.37 354.88 403.70 459.68
Total Expenses: 4982.00 4341.00 5146.00 4554.98 4837.47 5564.69 6109.83 7087.71Income (loss) from continuing operations before income taxes (421.00) (959.00) 309.00 1276.03 1525.64 1675.47 2133.68 2306.28Income tax benefit 155.00 403.00 524.00 (267.97) (320.38) (351.85) (448.07) (484.32)Income (loss) from continuing operations (266.00) (556.00) 833.00 1008.06 1205.25 1323.62 1685.61 1821.96Loss from discontinued operations, net of tax (7.00) - - - - - - - Net income (loss) attributable to common stockholders (273.00) (556.00) 833.00$ 1,008.06$ 1,205.25$ 1,323.62$ 1,685.61$ 1,821.96$ Basic EPS (1.83) (3.34) 4.86$ 5.95$ 7.12$ 7.82$ 9.97$ 10.78$ Basic weighted average shares outstanding 149.00 166.00 170.00 169.41 169.30 169.20 169.12 169.04Dividends per share 0.08 0.08 0.08 0.32 0.32 0.32 0.32 0.32
Pioneer Natural ResourcesBalance SheetIn Millions $Fiscal Years Ending Dec. 31 2015 2016 2017 2018E 2019E 2020E 2021E 2022EASSETS
Current Assets:Cash & cash equivalents 1,391.00$ 1,118.00$ 896.00$ 2,269.10$ 2,593.49$ 3,988.50$ 5,397.96$ 7,018.34$ Short-term investments - 1441.00 1218.00 1256.81 1296.85 1338.16 1380.80 1424.79Accounts receivable - trade, net 384.00 517.00 639.00 859.27 937.68 1066.92 1214.78 1384.32Accounts receivable - due from affiliates 1.00 1.00 1.00 9.05 9.87 11.23 12.79 14.58Income taxes receivable 43.00 3.00 7.00 24.07 26.26 29.88 34.02 38.77Inventories 155.00 181.00 212.00 448.27 514.95 605.62 665.92 713.17Prepaid expenses 17.00 - - - - - - - Notes receivable 498.00 - - - - - - -
Derivatives 694.00 14.00 11.00 11.62 12.27 12.96 13.69 14.47Other current assets 11.00 23.00 26.00 35.90 39.18 44.58 50.75 57.84
Total Current Assets 3194.00 3298.00 3010.00 4914.08 5430.55 7097.86 8770.72 10666.27Property, plant and Equipment, at cost:Oil & gas - proved properties 16631.00 18566.00 20404.00 22340.20 24276.39 26212.59 28148.78 30084.98Oil & gas - unproved properties 169.00 486.00 558.00 596.88 635.77 674.65 713.53 752.42Accumulated depletion, depreciation & amortization 6778.00 8211.00 9196.00 10654.27 12176.59 13755.03 15382.62 17053.29Total property, plant & equipment 10022.00 10841.00 11766.00 12282.81 12735.57 13132.21 13479.69 13784.11Long-term investments - 420.00 66.00 68.10 70.27 72.51 74.82 77.21Goodwill 272.00 272.00 270.00 270.00 270.00 270.00 270.00 270.00Other property & equipment, net 1523.00 1529.00 1759.00 1894.76 2041.01 2198.54 2368.22 2551.01Derivatives 64.00 - - - - - - - Other assets, net 79.00 99.00 132.00 134.66 137.33 139.99 142.66 145.32 Total Assets 15,154.00$ 16,459.00$ 17,003.00$ 19,564.42$ 20,684.72$ 22,911.11$ 25,106.11$ 27,493.91$
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:Accounts Payable: Trade 798.00$ 741.00$ 1,174.00$ 1,575.92$ 1,719.73$ 1,956.76$ 2,227.94$ 2,538.87$ due to affiliates 85.00 134.00 108.00 205.19 223.91 254.78 290.08 330.57Interest payable 65.00 68.00 59.00 58.57 55.18 64.90 67.55 70.06Income taxes payable 2.00 - - - - - - - Current portion of long-term debt 448.00 485.00 449.00 450.00 0.00 450.00 450.00 450.00Derivatives - 77.00 232.00 232.00 232.00 232.00 232.00 232.00Other current liabilities 64.00 61.00 106.00 141.54 154.46 175.75 200.10 228.03
Total Current Liabilities 1462.00 1566.00 2128.00 2663.22 2385.28 3134.18 3467.67 3849.52Long-term debt 3207.00 2728.00 2283.00 3221.40 3459.06 3618.25 3784.52 3941.63Derivatives 1.00 7.00 23.00 23.00 23.00 23.00 23.00 23.00Deferred income taxes 1776.00 1397.00 899.00 870.38 842.67 815.84 789.86 764.71Other liabilities 333.00 350.00 391.00 649.74 709.03 806.75 918.56 1046.75 Total Liabilities 6779.00 6048.00 5724.00 7427.73 7419.03 8398.02 8983.61 9625.62Stockholders' Equity:Common stock 6269.00 8894.00 8976.00 8979.84 8983.68 8987.52 8991.36 8995.20Treasury stock, at cost 199.00 (218.00) (249.00) (349.00) (374.92) (400.84) (426.75) (452.67)Retained earnings (accumulated deficit) 2298.00 1728.00 2547.00 3500.85 4651.93 5921.40 7552.89 9320.76Total equity attributable to common stockholders 8368.00 10404.00 11274.00 12131.69 13260.69 14508.08 16117.50 17863.29Noncontrolling interest in consolidating subsidiaries 7.00 7.00 5.00 5.00 5.00 5.00 5.00 5.00
Total Stockholders' Equity 8375.00 10411.00 11279.00 12136.69 13265.69 14513.08 16122.50 17868.29 Total Liabilities and Stockholders' Equity 15,154.00$ 16,459.00$ 17,003.00$ 19,564.42$ 20,684.72$ 22,911.11$ 25,106.11$ 27,493.91$
Pioneer Natural ResourcesCash Flow StatementIn Millions $Fiscal Years Ending Dec. 31 2015 2016 2017 2018E 2019E 2020E 2021E 2022ECASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (loss) (273.00) (556.00) 833.00 1,008.06 1,205.25 1,323.62 1,685.61 1,821.96Adjustments to reconcile net income to net cash provided by operating activities:
Depletion, depreciation & amortization 1,248.00 1,480.00 1,400.00 1,458.27 1,522.32 1,578.44 1,627.60 1,670.66Impairment of oil & gas properties 1,056.00 32.00 285.00Change in deferred income taxes - - - (28.62) (27.71) (26.83) (25.98) (25.15)
Changes in Assets and Liabilities:Accounts receivable, net 54.00 (134.00) (122.00) (228.32) (79.24) (130.60) (149.41) (171.32)Income taxes receivable (20.00) 40.00 (4.00) (17.07) (2.20) (3.62) (4.14) (4.75)Inventories 8.00 (32.00) (35.00) (236.27) (66.68) (90.67) (60.30) (47.25)Investments - (22.00) 8.00 - - - - - Other current assets 2.00 (7.00) (3.00) (9.90) (3.28) (5.40) (6.18) (7.08)Accounts payable (258.00) 58.00 134.00 401.92 143.81 237.04 271.17 310.93Accounts Payable affilites 97.19 18.72 30.86 35.31 40.48Interest payable 25.00 3.00 (9.00) (0.43) (3.39) 9.72 2.65 2.51Income taxes payable 1.00 (2.00) - - - - - - Other current liabilities (35.00) (44.00) (45.00) 35.54 12.92 21.29 24.36 27.93
Net Cash Flows from Operating Activities 1,248.00 1,498.00 2,090.00 2,480.37 2,720.54 2,943.84 3,400.68 3,618.92
CASH FLOWS FROM INVESTING ACTIVITIES(Increase) decrease in short-term investments - - - (39.42) (40.70) (42.01) (43.36) (44.76)(Increase) decrease in long-term investments - - - (2.10) (2.17) (2.24) (2.31) (2.38)Proceeds from disposition of assets, net of cash sold 553.00 507.00 352.00 - - - - - Payments for acquisitions - (428.00) - - - - - - Proceeds from investments - 902.00 1,465.00 - - - - - Purchase of investments - (2,741.00) (899.00) - - - - - Distribution from (investment in) unconsolidated subsidiaryAdditions to oil & gas - proved properties (2,110.00) (1,857.00) (2,365.00) (1,936.20) (1,936.20) (1,936.20) (1,936.20) (1,936.20)Additions to Oil & gas - unproved properties (10.00) (317.00) (72.00) (38.88) (38.88) (38.88) (38.88) (38.88)Additions to other assets & other property & equipment, net (283.00) (203.00) (336.00) (135.76) (146.24) (157.53) (169.69) (182.79)
(Increase) decrease in other assets (2.66) (2.66) (2.66) (2.66) (2.66)Net Cash Flows from Investing Activities (1,840.00) (3,820.00) (1,783.00) (2,155.03) (2,166.85) (2,179.52) (2,193.11) (2,207.68)
CASH FLOWS FROM FINANCING ACTIVITIESBorrowings under long-term debt 998.00 - - 938.40 237.66 159.18 166.28 157.11Proceeds from issuance of common stock, net of issuance costs - 2,534.00 - - - - - - Distributions to noncontrolling interests (1.00) - - - - - - - Current portion of long-term debt - - - 1.00 (450.00) 450.00 - - Other liabilities - - - 258.74 59.29 97.73 111.80 128.19Exercise of long-term incentive plan stock options & employee stock purchases 6.00 7.00 6.00 3.84 3.84 3.84 3.84 3.84Purchase of treasury stock (31.00) (25.00) (36.00) (100.00) (25.92) (25.92) (25.92) (25.92)Dividends paid (12.00) (13.00) (14.00) (54.21) (54.18) (54.15) (54.12) (54.09)
Net Cash Flows from Financing Activities 958.00 2,049.00 (529.00) 1,047.76 (229.30) 630.69 201.88 209.13Net increase (decrease) in cash & cash equivalents 366.00 (273.00) (222.00) 1,373.10 324.39 1,395.01 1,409.46 1,620.38Cash & cash equivalents, beginning of year 1,025.00 1,391.00 1,118.00 896.00 2,269.10 2,593.49 3,988.50 5,397.96Cash & cash equivalents, end of year 1,391.00 1,118.00 896.00 2,269.10 2,593.49 3,988.50 5,397.96 7,018.34
Pioneer Natural ResourcesCommon Size Income Statement
Fiscal Years Ending Dec. 31 2015 2016 2017 2018E 2019E 2020E 2021E 2022E
Revenues and Other Income:Oil and gas 75.68% 68.91% 66.45% 78.47% 85.64% 97.44% 110.94% 126.43%Sales of purchased oil and gas 24.32% 31.09% 33.55% 21.53% 23.49% 26.73% 30.43% 34.68%
Operating Revenue 100.00% 100.00% 100.00% 100.00% 109.13% 124.17% 141.37% 161.10%Interest and other 0.76% 0.91% 1.00% 0.91% 0.91% 0.91% 0.91% 0.91%Derivative gains (losses), net 30.54% -4.59% -1.89% 0.00% 0.00% 0.00% 0.00% 0.00%Gain on disposition of assets, net 27.17% 0.06% 3.93% 0.00% 0.00% 0.00% 0.00% 0.00%Hurricane activity, net 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Total Revenues:Costs and expenses:Oil and gas production 24.91% 16.56% 11.16% 11.51% 11.60% 14.60% 14.93% 15.26%Production and ad valorem taxes 5.04% 3.88% 4.06% 4.06% 4.06% 4.06% 4.06% 4.06%Depletion, depreciation and amortization 48.12% 42.18% 26.45% 25.01% 23.92% 21.80% 19.74% 17.78%Purchased oil and gas 25.68% 32.92% 34.13% 22.47% 22.47% 22.47% 22.47% 26.35%Impairment of oil and gas properties 36.69% 0.91% 5.38% 0.00% 0.00% 0.00% 0.00% 0.00%Exploration and abandonments 3.44% 3.39% 2.00% 1.82% 1.67% 1.46% 1.29% 1.13%General and administrative 11.36% 9.26% 6.16% 5.55% 5.07% 4.45% 3.89% 3.40%Accretion of discount on asset retirement 0.42% 0.51% 0.36% 0.33% 0.30% 0.26% 0.23% 0.20%Interest 6.50% 5.90% 2.89% 3.20% 2.76% 2.85% 2.61% 2.37%Other 10.95% 8.21% 4.61% 4.17% 4.17% 4.90% 4.90% 4.89%
Total Expenses: 173.11% 123.71% 97.20% 78.12% 76.02% 76.86% 74.12% 75.45%Exploration and abandonments -14.63% -27.33% 5.84% 21.88% 23.98% 23.14% 25.88% 24.55%before income taxesIncome tax benefit 5.39% 11.48% 9.90% -4.60% -5.04% -4.86% -5.44% -5.16%Income (loss) from continuing operations -9.24% -15.84% 15.73% 17.29% 18.94% 18.28% 20.45% 19.39%Loss from discontinued operations, net -0.24% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%of taxNet income (loss) attributable to common stockholders -9.49% -15.84% 15.73% 17.29% 18.94% 18.28% 20.45% 19.39%
Pioneer Natural ResourcesCommon Size Balance Sheet
Fiscal Years Ending Dec. 31 2015 2016 2017 2018E 2019E 2020E 2021E 2022E
ASSETSCurrent Assets:Cash & cash equivalents 32.16% 38.85% 25.53% 42.86% 44.48% 62.68% 74.56% 85.14%Short-term investments 0.00% 50.07% 34.71% 23.74% 22.24% 21.03% 19.07% 17.28%Accounts receivable - trade, net 8.88% 17.96% 18.21% 16.23% 16.08% 16.77% 16.78% 16.79%Accounts receivable - due from affiliates 0.02% 0.03% 0.03% 0.17% 0.17% 0.18% 0.18% 0.18%Income taxes receivable 0.99% 0.10% 0.20% 0.45% 0.45% 0.47% 0.47% 0.47%Inventories 3.58% 6.29% 6.04% 8.47% 8.83% 9.52% 9.20% 8.65%Prepaid expenses 0.39% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Assets held for sale 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Deferred income taxes 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Notes receivable 11.51% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Discontinued operations held for sale 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Derivatives 16.05% 0.49% 0.31% 0.22% 0.21% 0.20% 0.19% 0.18%Other current assets 0.25% 0.80% 0.74% 0.68% 0.67% 0.70% 0.70% 0.70%
Total Current Assets 73.85% 114.59% 85.78% 92.82% 93.13% 111.55% 121.14% 129.39%Property, plant and Equipment, at cost:Oil & gas - proved properties 384.53% 645.10% 581.48% 421.99% 416.33% 411.95% 388.79% 364.95%Oil & gas - unproved properties 3.91% 16.89% 15.90% 11.27% 10.90% 10.60% 9.86% 9.13%Accumulated depletion, depreciation & amortization 156.72% 285.30% 262.07% 201.25% 208.82% 216.17% 212.46% 206.87%Total property, plant & equipment 231.72% 376.69% 335.31% 232.01% 218.41% 206.38% 186.18% 167.21%Long-term investments 0.00% 14.59% 1.88% 1.29% 1.21% 1.14% 1.03% 0.94%Deferred income taxes 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Goodwill 6.29% 9.45% 7.69% 5.10% 4.63% 4.24% 3.73% 3.28%Other property & equipment, net 35.21% 53.13% 50.13% 35.79% 35.00% 34.55% 32.71% 30.95%Investment in unconsolidated affilaite 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Derivatives 1.48% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Other assets, net 1.83% 3.44% 3.76% 2.54% 2.36% 2.20% 1.97% 1.76% Total Assets 350.38% 571.89% 484.55% 369.56% 354.74% 360.06% 346.76% 333.52%
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:Accounts Payable: Trade 18.45% 25.75% 33.46% 29.77% 29.49% 30.75% 30.77% 30.80%due to affiliates 1.97% 4.66% 3.08% 3.88% 3.84% 4.00% 4.01% 4.01%Interest payable 1.50% 2.36% 1.68% 1.11% 0.95% 1.02% 0.93% 0.85%Income taxes payable 0.05% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Current portion of long-term debt 10.36% 16.85% 12.80% 8.50% 0.00% 7.07% 6.22% 5.46%Deferred income taxes 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Discontinued operations held for sale 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Liabilities held for sale 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Derivatives 0.00% 2.68% 6.61% 4.38% 3.98% 3.65% 3.20% 2.81%Deferred revenue 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Other current liabilities 1.48% 2.12% 3.02% 2.67% 2.65% 2.76% 2.76% 2.77%
Total Current Liabilities 33.80% 54.41% 60.64% 50.31% 40.91% 49.26% 47.90% 46.70%Long-term debt 74.15% 94.79% 65.06% 60.85% 59.32% 56.86% 52.27% 47.81%Derivatives 0.02% 0.24% 0.66% 0.43% 0.39% 0.36% 0.32% 0.28%Deferred income taxes 41.06% 48.54% 25.62% 16.44% 14.45% 12.82% 10.91% 9.28%Deferred revenue 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Other liabilities 7.70% 12.16% 11.14% 12.27% 12.16% 12.68% 12.69% 12.70% Total Liabilities 156.74% 210.15% 163.12% 140.30% 127.23% 131.98% 124.08% 116.77%
Stockholders' equity:Common stock 217.82% 253.46% 169.55% 154.00% 141.18% 124.13% 109.07% 95.75%Additional paid-in capital 6.91% -6.21% -4.70% -5.99% -5.89% -5.54% -5.18% -4.82%Treasury stock, at cost 4.60% -7.57% -7.10% -6.59% -6.43% -6.30% -5.89% -5.49%Retained earnings (accumulated deficit) 53.13% 60.04% 72.58% 66.13% 79.78% 93.06% 104.32% 113.07%Net deferred hedge gains (losses), net of tax 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Total equity attributable to common stockholders 193.48% 361.50% 321.29% 229.16% 227.42% 228.00% 222.61% 216.70%Noncontrolling interest in consolidating subsidiaries 0.16% 0.24% 0.14% 0.09% 0.09% 0.08% 0.07% 0.06%
Total Stockholders' Equity 193.64% 361.74% 321.43% 229.25% 227.50% 228.08% 222.68% 216.76% Total Liabilities and Stockholders' Equity 350.38% 571.89% 484.55% 369.56% 354.74% 360.06% 346.76% 333.52%
Pioneer Natural ResourcesValue Driver EstimationIn MillionsFiscal Years Ending Dec. 31 2015 2016 2017 2018E 2019E 2020E 2021E 2022E
NOPLAT ComputationEBITA:Net Sales $ 2,878.00 $ 3,509.00 $ 5,294.00 $ 5,831.01 $ 6,363.11 $ 7,240.15 $ 8,243.51 $ 9,393.99 - Cost of Goods Sold 717.00 581.00 591.00 671.11 738.23 1056.97 1230.85 1433.32 - Production and ad valorem taxes 145.00 136.00 215.00 236.81 258.42 294.04 334.79 381.51 - Depletion, depreciation and amortization 1385.00 1480.00 1400.00 1458.27 1522.32 1578.44 1627.60 1670.66 - Purchased oil and gas 739.00 1155.00 1807.00 1310.32 1429.89 1626.97 1852.44 2475.17 - Impairment of oil and gas properties 1056.00 32.00 285.00 - - - - - - Exploration and abandonments 99.00 119.00 106.00 106.00 106.00 106.00 106.00 106.00 - General and administrative expenses 327.00 325.00 326.00 323.71 322.63 321.84 320.47 319.39 - Other 315.00 288.00 244.00 243.36 265.37 354.88 403.70 459.68 + Implied Interest on Operating Leases 7.73 5.17 4.61 24.72 25.63 26.43 27.13 27.74EBITA (1,897.27)$ (601.83)$ 324.61$ 1,506.14$ 1,745.89$ 1,927.44$ 2,394.80$ 2,575.98$
LESS: Adjusted TaxesProvision for Income Taxes (155.00)$ (403.00)$ (524.00)$ 267.97$ 320.38$ 351.85$ 448.07$ 484.32$ + Tax shield on interest expense 39.27 43.47 32.13 39.14 36.88 43.37 45.15 46.82 + Tax Shield on Implied Lease Interest 1.62 1.09 0.97 5.19 5.38 5.55 5.70 5.83 - Tax on Derivative Gains/Losses 184.59 -33.81 -21.00 - - - - - - Tax on Interest Income 4.62 6.72 11.13 11.13 11.13 11.13 11.13 11.13 - Tax on disposition of assets 164.22 0.42 43.68 0.00 0.00 0.00 0.00 0.00retirement obligations 2.52 3.78 3.99 3.99 3.99 3.99 3.99 3.99Adjusted Taxes (465.02)$ (327.99)$ (520.72)$ 305.16$ 355.51$ 393.63$ 491.78$ 529.83$
PLUS: Change in Deferred Tax LiabilitiesCurrent year DTL 1,776.00$ 1,397.00$ 899.00$ 870.38$ 842.67$ 815.84$ 789.86$ 764.71$ - Current year DTA - - - - - - - - Net DTL for current year 1776.00 1397.00 899.00 870.38 842.67 815.84 789.86 764.71
Previous year DTL 1803.00 1776.00 1397.00 899.00 870.38 842.67 815.84 789.86 - Previous year DTA - - - - - - - - Net DTL for previous year 1803.00 1776.00 1397.00 899.00 870.38 842.67 815.84 789.86
Net Change in DtL (Current-Previous year) (27.00)$ (379.00)$ (498.00)$ (28.62)$ (27.71)$ (26.83)$ (25.98)$ (25.15)$
NOPLAT: EBIT - Adjusted Taxes + Change in DT (1,459.26)$ (652.84)$ 347.33$ 1,172.36$ 1,362.67$ 1,506.98$ 1,877.05$ 2,021.01$
Invested Capital Computation
Operating Current Assets:Normal Cash 20.15 24.56 37.06 40.82 44.54 50.68 57.70 65.76Accounts Recievable 385.00 518.00 640.00 868.32 947.55 1078.16 1227.57 1398.89Inventories 155.00 181.00 212.00 448.27 514.95 605.62 665.92 713.17Prepaid Expenses 17.00 - - - - - - - Income tax recievable 43.00 3.00 7.00 24.07 26.26 29.88 34.02 38.77Operating Current Assets: 620.15 726.56 896.06 1381.47 1533.31 1764.34 1985.22 2216.60
Operating Current Liabilities:Accounts Payable 883.00 875.00 1282.00 1781.11 1943.64 2211.54 2518.02 2869.44Income taxes payable 2.00 - - - - - - - Deferred Revenue - - - - - - - - Other Current Liabilities 64.00 61.00 106.00 141.54 154.46 175.75 200.10 228.03Operating Current Liabilities 885.00 875.00 1282.00 1922.65 2098.10 2387.29 2718.13 3097.47
Net Working Capital -264.85 -148.44 -385.94 -541.18 -564.79 -622.95 -732.90 -880.87
PLUS: Net PPE 10022.00 10841.00 11766.00 12282.81 12735.57 13132.21 13479.69 13784.11
PLUS: PV of operating leases 152.21 101.84 90.77 486.89 504.84 520.56 534.34 546.40
PLUS: Other L-T operating assetsOther property and equipment, net 1523.00 1529.00 1759.00 1894.76 2041.01 2198.54 2368.22 2551.01Other 79.00 99.00 132.00 134.66 137.33 139.99 142.66 145.32
Total Other L-T operating assets 1602.00 1628.00 1891.00 2029.43 2178.33 2338.53 2510.88 2696.33
LESS: Other L-T operating liabilities 333.00 350.00 391.00 649.74 709.03 806.75 918.56 1046.75
Invested Capital: 11178.35 12072.40 12970.82 13608.21 14144.92 14561.59 14873.45 15099.21ROIC=NOPLAT/Beginning IC
NOPLAT -1459.26 -652.84 347.33 1172.36 1362.67 1506.98 1877.05 2021.01Beginning IC 11167.59 11178.35 12072.40 12970.82 13608.21 14144.92 14561.59 14873.45
Return on Invested Capital -0.13 -0.06 0.03 0.09 0.10 0.11 0.13 0.14FCF=NOPLAT-Change in IC
NOPLAT -1459.26 -652.84 347.33 1172.36 1362.67 1506.98 1877.05 2021.01Change in IC 10.76 894.05 898.42 637.39 536.71 416.68 311.85 225.77
Free Cash Flows -1470.02 -1546.88 -551.09 534.97 825.96 1090.30 1565.19 1795.24EP=Beginning IC*(ROIC-WACC)
Beginning IC 11167.59 11178.35 12072.40 12970.82 13608.21 14144.92 14561.59 14873.45ROIC -0.13 -0.06 0.03 0.09 0.10 0.11 0.13 0.14WACC 0.10 0.10 0.10 0.08 0.08 0.08 0.08 0.08
Economic Profit -2576.01 -1770.67 -859.91 138.52 278.03 379.56 716.42 835.52
Pioneer Natural ResourcesWeighted Average Cost of Capital (WACC) EstimationCost Of EquityRisk Free Rate 3.19%Risk Premium 5.32%Beta 0.98 Cost of Equity 8.38%
Cost of DebtDebt Rating BBBPre-tax Cost of Debt 5.08%Tax Rate 21.00%After-Tax Cost of Debt 4.01%
MV of EquityShares Outstanding 170.00 Share Price 159.82$ Market Value of Equity 27,169.40$
Market Value of DebtCurrent Portion of Long-Term Debt 449.00$ Long-Term Debt 2,283.00$ PV of Operating Leases 90.77$ Market Value of Debt 2,822.77$
Weights% Equity 90.59%% Debt 9.41%
WACC 7.97%
Pioneer Natural ResourcesDiscounted Cash Flow (DCF) and Economic Profit (EP) Valuation Models
Key Inputs: CV NOPLAT Growth 3.00% CV ROIC 13% WACC 7.97% Cost of Equity 8.38%
Fiscal Years Ending Dec. 31 2018E 2019E 2020E 2021 2022 (CV)
DCF ModelNOPLAT 1172.36 1362.67 1506.98 1877.05 2021.01-CapEx 637.39 536.71 416.68 311.85 225.77Unlevered Free Cash Flow 534.97 825.96 1090.30 1565.19 1795.24ROIC 0.09 0.10 0.11 0.13 0.13Continuing Value 31197.32
Periods to discount 1 2 3 4 4
Present value of FCF 495.48 708.52 866.23 1151.72Present value of CV 22956.05
Value of Operating Assets 26,177,999,482.77$ Excess Cash 858,942,000.00$ Short-Term Investments 1,218,000,000.00$ Long-Term Investments 66,000,000.00$ Debt 2,732,000,000.00$ PV of Operating Leases 90,765,088.54$ PV of Stock Options 10,669,407.60$ Non controlling interests 5,000,000.00$
Value of Equity 25,482,506,986.63$ Shares Outstanding 170,000,000.00 Intrinsic Value per Share 149.90$
Target Price as of 10/25/2018 148.32$
EP ModelBeginning Invested Capital 12971 13608 14145 14562 15678ROIC 9% 10% 11% 13% 13%Economic Profit 139 278 380 716 836Continuing Value
Periods to Discount 1 2 3 4 4
Present Value of Economic Profit 128 238 302 527Present Value of Economic Profit (CV) 12012Present Value 13,207,176,394.23$ Beginning Invested Capital 12,970,823,088.54$ Value of Operating Assets 26,177,999,482.77$ Excess Cash 858,942,000.00$ Short-Term Investments 1,218,000,000.00$ Long Term Investments 66,000,000.00$ Less: Debt 2,732,000,000.00$ Less: PV of Operating Leases 90,765,088.54$ Less: PV of Stock Options 10,669,407.60$ Less: Non controlling interests 5,000,000.00$ Value of Equity 25,482,506,986.63$ Shares Outstanding 170,000,000.00 Intrinsic Value per Share 149.90$ Target Price as of 10/25/2018 148.32$
Pioneer Natural ResourcesDividend Discount Model (DDM) or Fundamental P/E Valuation Model
Fiscal Years Ending 2018E 2019E 2020E 2021E 2022E
EPS 5.95$ 7.12$ 7.82$ 9.97$ 10.78$
Key Assumptions CV growth 3.00% CV ROE 6.84% Cost of Equity 8.05%
Future Cash Flows P/E Multiple (CV Year) 11.1125 EPS (CV Year) 10.78 Future Stock Price 119.77 Dividends Per Share 0.32 0.32 0.32 0.32 0.32 Number of Periods 1 2 3 4 4 Discounted Cash Flows 0.30 0.27 0.25 0.23 87.87
Intrinsic Value 88.93$ Target Price 95.32$
Pioneer Natural ResourcesRelative Valuation Models
EPS EPSTicker Company Price 2018E 2019E P/E 18 P/E 19 Enterprise Value EBITA EV/EBITACVE Cenovus Energy Inc. $8.46 $0.29 $0.47 29.16 17.99 17,670,000,000.00 1,528,546,712.80 11.56APA Apache Corporation $37.08 $2.01 $2.38 18.45 15.58 23,020,000,000.00 4,631,790,744.47 4.97CXO Concho Resources Inc. $136.52 $4.57 $6.56 29.87 20.81 3,136,000,000.00 148,134,152.10 21.17ORIG Ocean Rig UDW Inc. $21.60 (0.40) (0.46) (54.00) (46.96) 6,500,000,000.00 736,126,840.32 8.83DO Diamond Offshore Drilling,Inc. $14.59 (1.11) (1.14) (13.14) (12.80) 3,840,000,000.00 398,340,248.96 9.64
Average 2.07 (1.07) Average 11.234
PXD Pioneer Natural Resources $159.82 5.95 7.12 26.9 22.4 28,190,000,000.00 1,922,919,508.87 14.66
Implied Relative Value: P/E (EPS18) $ 12.30 P/E (EPS19) (7.65)$ Enterprise Value 28,190,000,000.00$ Shares Outstanding 169,412,659.80$ Share Price $166.40
Pioneer Natural ResourcesKey Management Ratios
Fiscal Years Ending 2015 2016 2017 2018E 2019E 2020E 2021E 2022E
Liquidity RatiosCurrent Ratio 2.18 2.11 1.41 1.85 2.28 2.26 2.53 2.77Operating CF Ratio 0.85 0.96 0.98 0.93 1.14 0.94 0.98 0.94Quick Ratio 1.21 1.96 1.29 1.65 2.02 2.04 2.31 2.55
Activity or Asset-Management RatiosAsset Turnover 0.19 0.22 0.32 0.32 0.32 0.33 0.34 0.36Recievables Turnover 7.02 7.79 9.16 7.78 7.08 7.22 7.23 7.23
Financial Leverage RatiosDebt-to-Equity 0.44 0.32 0.26 0.32 0.28 0.30 0.28 0.26Equity Ratio 0.55 0.63 0.66 0.62 0.64 0.63 0.64 0.65Interest Coverage Ratio 15.85 15.79 22.91 21.58 24.18 0.00 0.00 0.00
Profitability RatiosReturn on Assets -1.80% -3.38% 4.90% 5.15% 5.83% 5.78% 6.71% 6.63%Return on Equity -3.10% -6.64% 8.00% 8.94% 9.93% 9.98% 11.61% 11.30%Profit Margin -9.49% -15.84% 15.73% 17.29% 18.94% 18.28% 20.45% 19.39%
Payout Policy RatiosPayout Ratio -11.38% -4.51% 4% 10% 2% 2% 2% 1%
Present Value of Operating Lease Obligations (2018) Present Value of Operating Lease Obligations (2017) Present Value of Operating Lease Obligations (2016) Present Value of Operating Lease Obligations (2015)
Operating Operating Operating OperatingFiscal Years Ending Dec. 31 Leases Fiscal Years Ending Dec. 31 Leases Fiscal Years Ending Fiscal Years Ending Leases2018 27 2017 26 2016 24 2015 25.3052019 42 2018 24 2017 23 2016 34.632020 53 2019 23 2018 21 2017 34.632021 40 2020 18 2019 21 2018 31.0552022 37 2021 4 2020 17 2019 31.055Thereafter 680 Thereafter 11 Thereafter 15 Thereafter 26.569Total Minimum Payments 879 Total Minimum Payments 106 Total Minimum Payments 121 Total Minimum Payments 183.244Less: Interest 392 Less: Interest 15 Less: Interest 19 Less: Interest 31PV of Minimum Payments 487 PV of Minimum Payments 91 PV of Minimum Payments 102 PV of Minimum Payments 152
Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases
Pre-Tax Cost of Debt 5.60% Pre-Tax Cost of Debt 5.60% Pre-Tax Cost of Debt 5.60% Pre-Tax Cost of Debt 5.60%Number Years Implied by Year 6 Payment 18.4 Number Years Implied by Year 6 Payment 2.8 Number Years Implied by Year 6 Payment 1.0 Number Years Implied by Year 6 Payment 1.0
Lease PV Lease Lease PV Lease Lease PV Lease Lease PV LeaseYear Commitment Payment Year Commitment Payment Year Commitment Payment Year Commitment Payment1 27 25.6 1 26 24.6 1 24 22.7 1 25.305 24.02 42 37.7 2 24 21.5 2 23 20.6 2 34.63 31.13 53 45.0 3 23 19.5 3 21 17.8 3 34.63 29.44 40 32.2 4 18 14.5 4 21 16.9 4 31.055 25.05 37 28.2 5 4 3.0 5 17 12.9 5 31.055 23.66 & beyond 37 318.3 6 & beyond 4 7.6 6 & beyond 15 10.8 6 & beyond 26.569 19.2PV of Minimum Payments 486.9 PV of Minimum Payments 90.8 PV of Minimum Payments 101.8 PV of Minimum Payments 152.2
Effects of ESOP Exercise and Share Repurchases on Common Stock Balance Sheet Account and Number of Shares Outstanding
Number of Options Outstanding (shares): 138,493Average Time to Maturity (years): 3.61Expected Annual Number of Options Exercised: 38,364
Current Average Strike Price: 100.10$ Cost of Equity: 9.00%Current Stock Price: $159.82
2018E 2019E 2020E 2021E 2022 (CV)
Increase in Shares Outstanding: 38,364 38,364 38,364 38,364 38,364Average Strike Price: 100.10$ 100.10$ 100.10$ 100.10$ 100.10$ Increase in Common Stock Account: 3,840,208 3,840,208 3,840,208 3,840,208 3,840,208
Change in Treasury Stock 100,000,000 25,917,625 25,917,625 25,917,625 25,917,625Expected Price of Repurchased Shares: 159.82$ 174.20$ 189.88$ 206.97$ 225.60$ Number of Shares Repurchased: 625,704 148,778 136,493 125,223 114,884
Shares Outstanding (beginning of the year) 170,000,000 169,412,660 169,302,246 169,204,116 169,117,257Plus: Shares Issued Through ESOP 38,364 38,364 38,364 38,364 38,364Less: Shares Repurchased in Treasury 625,704 148,778 136,493 125,223 114,884 Shares Outstanding (end of the year) 169,412,660 169,302,246 169,204,116 169,117,257 169,040,737
VALUATION OF OPTIONS GRANTED IN ESOP
Ticker Symbol PXDCurrent Stock Price $159.82Risk Free Rate 3.19%Current Dividend Yield 0.19%Annualized St. Dev. of Stock Returns 33.90%
From Fact Set past 5 years
Average Average B-S ValueRange of Number Exercise Remaining Option of OptionsOutstanding Options of Shares Price Life (yrs) Price GrantedRange 1 138,493 100.10 3.61 77.04$ 10,669,408$ Total 138,493 100.10$ 3.61 78.01$ 10,669,408$