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Morningstar | Pioneer Has Favorable Pricing Differentials Locked in as Permian Production Continues to Grow. See Updated Analyst Note from 09 Aug 2018

We're raising our fair value estimate for narrow-moat Pioneer Natural Resources to $200 per share from $190 following the release of the company's second-quarter results. Higher near-term oil prices account for the bulk of the fair value estimate increase. Our long-term outlook for oil remains unchanged at $55 per barrel for West Texas Intermediate.

Permian volumes rose sequentially to 280 mboe/d for an increase of 8%, putting adjusted production right at the midpoint of guidance. Over the long run, we’re expecting impressive production growth from Pioneer. We think total production can more than double by 2026. However, we would preach caution on the likelihood of the company meeting its optimistic goal to push total production to more than 1 million barrels per day of oil equivalent by 2026. With other Permian producers also looking to aggressively grow production from attractive acreage, we think the ramp up in overall basin activity implied by 1 million boe/d for Pioneer would be too much oil for the market to handle.

Pioneer's marketing moves have continued to insulate the company from wide differentials between in-basin prices and benchmark WTI prices in Cushing, Oklahoma. In the second quarter, Pioneer delivered more than 90% of its Permian oil to the Gulf Coast under firm transport contracts, benefiting from Brent related prices that are above the Cushing benchmark. Further, the company has a similar percentage of Permian oil locked in at Gulf Coast pricing through early 2021, by which time we expect Midland versus Cushing differentials will have normalized from elevated levels due to takeaway capacity build out. On top of all this, Pioneer has basis swaps in place for the roughly 10% of oil the company doesn't have under firm contract to the Gulf.

We remind investors that oil prices are still more than 15% above our midcycle estimate of $55/bbl WTI, reflecting above-average near-term supply disruptions. There are about 100 more U.S. tight oil rigs active than necessary to balance the market in the long run, and lower prices are required--sooner or later--to incentivize a slowdown in the shale patch and avoid a painful glut.

For more information on our long-term crude outlook, please see our June report, "Oil Prices Are Unsustainably High, Stretching Energy Valuations."