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Morningstar | Pioneer is One the Few Narrow Moat U.S. E&Ps

Following divestitures, Pioneer Natural Resources has become a Permian Basin pure play and is the largest acreage holder in the Midland portion of the Permian (750,000 gross acres). The Midland contains some of the best horizontal shale drilling opportunities in the United States, and by our estimates, roughly 90% of the firm’s drilling locations are Tier 1. This suggests Pioneer has a deep inventory of low-cost prospects to drill. Pioneer holds about 20,000 drilling locations, which should support decades of activity. In fact, at the projected rig count of 22 for 2019, we estimate the company could drill well past 2050 before it ran out of Tier 1 opportunities. The company is currently drilling the Wolfcamp A, Wolfcamp B, and Spraberry horizons in the Midland.Pioneer also has relatively low royalty rates because most of its current acreage was acquired in the 1990s before the shale boom. Pioneer has an extensive history drilling traditional vertical wells in Texas. Solid acreage and low royalties result in attractive well economics that should fuel meaningful increases in production. Although, we expect the company will fall well short of its prior overly ambitious goal to increase production to a million barrels of oil equivalent per day by 2026. For reference, Pioneer plans to produce only about 325 mboe/d of Permian oil and gas in 2019, making the 1 million boe/d production forecast represent a tripling in production. To be sure, we’re expecting a massive increase in Permian oil production, but with other producers also looking to aggressively ramp Permian production, we have our doubts that Pioneer will end up achieving its production goal; as too much Permian production has the ability to swamp global markets, weighing on commodity prices.Like other Permian operators, Pioneer’s production is weighted toward oil—80% of 2018 production was liquids. We’re somewhat bearish on the long-term outlook for crude prices. We expect marginal production to come from U.S. shale where breakevens are likely to be subdued by continued productivity gains and limits to well cost inflation. Our midcycle price is $55 per barrel for West Texas Intermediate.