Why Hold Strategy Is Apt For Pioneer Natural (PXD) Right Now

We issued an updated research report on upstream energy player, Pioneer Natural Resources Company (NYSE:PXD) on Aug 17. We believe that strong focus on the low-cost and lucrative Permian Basin will help Pioneer Natural counter the rise in exploration expenses.

The company currently carries a Zacks Rank #3 (Hold), implying that the stock will perform in line with the broader U.S. equity market over the next one to three months.

We appreciate the company’s focus on the Permian Basin. The company has considerable interest in the basin, which is among the lucrative oil shale plays with less risk for operation. In other words, the company’s presence in the Permian Basin is likely to prove beneficial, especially in the wake of weak crude and gas pricing environment.

Pioneer Natural has strong financials. Since the beginning of 2016, long-term debt load has been declining. Also, cash balances, though falling since the beginning of 2017, have scaled to $2.2 billion from $200 million at the end of 2012. This improvement is reflected in the current debt-to-capitalization ratio of 20.5%, which is much lower than 49.4% of the broader industry.

Also, Pioneer Natural expects production growth in 2017 between 15% and 18%. In second-quarter 2017, the company’s production grew 12% year over year to 259.1 MBOE/d, which touched the high end of the company’s guidance. The outperformance can be attributed to the Spraberry/Wolfcamp horizontal drilling program of the company.

However, expenses related to exploration increased almost 45% during the second quarter of this year. If the trend continues, the company’s profits might get hurt.

It is to be noted that despite the massive recovery in oil price since last February, the price of the commodity is significantly below the level reached in early 2014. Lower commodity price realizations could dent the company’s revenues, earnings and cash flow. Also, the Zacks Consensus Estimate for the company’s third-quarter 2017 earnings has been revised downward over the last 30 days.

On top of that, over the last year, the company’s price fell 28.6%, comparing favorably with the broader industry’s 31.9% decline.

Stocks to Consider

A few better-ranked players in the energy sector include TransCanada Corporation (TO:TRP) , Transmontaigne Partners LP (NYSE:TLP) and Range Resources Corporation (NYSE:RRC) . All the stocks sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

TransCanada posted an average positive earnings surprise of 4.06% over the last four quarters.

Transmontaigne posted an average positive earnings surprise of 6.60% over the last four quarters.

Range Resources’s 2017 earnings are estimated to grow 116.5%.

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