Pioneer beats on earnings, announces succession, tweaks dividend — a mix pressuring the oil stock

Published Wed, Apr 26 20237:39 PM EDT

Pioneer Natural Resources (PXD) posted solid first-quarter results after the bell Wednesday, thanks to higher-than-expected energy production. Free cash flow, however, was a slight miss. It was also a bittersweet evening as CEO Scott Sheffield said he will retire at the end of the year after more than two decades collectively at the helm. Pioneer's oil and gas revenue fell 19% year-over-year, to $3.17 billion, missing analysts' forecasts of $3.7 billion, according to Refinitiv. But this may not be an accurate comparison as we think the analyst estimates include oil and gas plus other income items. Pioneer's adjusted diluted earnings per share (EPS) declined 32.7% on an annual basis to $5.21, topping expectations of $4.91. Unlike most companies that hold their earnings conference calls with analysts and investors the day they report, Pioneer hosts its quarterly calls the next day — so Thursday at 10 a.m. ET. Bottom line Overall the quarter looks fine to us with production coming in at the high end of guidance. But, the big news was Sheffield's retirement announcement and that Rich Dealy, the company's President and COO, will become the new CEO on Jan. 1, 2024. After his exit, Sheffield is expected to remain on Pioneer's board. This change in leadership is significant because it comes at a time when buyout rumors are swirling around the company. Is the company more likely to sell to Exxon Mobil (XOM) with Sheffield no longer running the show? Or does the appointment of Dealy, who brings more than 30 years of experience at Pioneer and its predecessor, mean the company is not for sale? The quick appointment of a new leader suggests no deal is coming soon. As a result, it's not surprising to see Pioneer trading down roughly 2.5% at around $217.50 per share in after-hours trading. PXD YTD mountain Pioneer Natural Resources YTD Capital allocation Another reason for the selling pressure on the stock could be from income-oriented investors. Pioneer set its second-quarter base plus variable dividend at $3.34 a share – factoring in a base dividend of $1.25, which was raised 14% from $1.10, and a variable dividend of $2.09. On an annualized basis, the new yield moves down to 6% based on Wednesday's closing price. A far cry from the 10% dividend yield we've come to know and love from Pioneer, but there's a reason behind it. Management wants more flexibility to repurchase shares instead of paying a huge variable dividend. Buybacks are actually more valuable nowadays if you think oil prices are going higher in the future. Pioneer announced it's refining its peer-leading capital return framework. The company continues to expect to return at least 75% of quarterly free cash flow to shareholders, but after paying the (now raised) base dividend, management will allocate what remains within the 75% to variable dividends and opportunistic share repurchases. This means that Pioneer will likely shift what previously went to the variable dividend into share buybacks. This isn't the same explicit prioritization of buybacks over variable dividends that we saw from fellow exploration and production (E & P) company Coterra Energy (CTRA), which tilts more natural gas . But, it's a notable change at Pioneer. Some investors may not like to lose out on the yield, but buying back stock when times are leaner instead of paying an unsustainable dividend is a more shareholder-friendly way to run the company in this tougher commodity environment. Under this new framework, Pioneer management can more easily opportunistically purchase stock when it believes there is a valuation disconnect in the market. And, it looks like Pioneer jumped on the opportunity to buy back its stock on the cheap in the first quarter. repurchasing $500 million of stock, up from $400 million in the fourth quarter, at an average price of $206 per share. That's a nice trade with the stock closing at $222.48 on Wednesday. Pioneer also said the board authorized a new $4 billion share repurchase program. Given the $1.9 billion on its existing authorization, the news suggests Pioneer wants to more actively utilize buybacks as a tool to return capital. Management will surely be asked about the revised framework on Pioneer's conference call and discuss what other trends they are seeing. Check your email inboxes for any significant updates. Pioneer's total Q1 production of 680,000 barrels of oil equivalent per day (MBoe/d) and oil production of 361,000 barrels per day beat estimates, topped the year-ago period and came in at the high end of management's original guidance. That's a positive outcome given the company's is oil-weighted and crude offers a much higher profit margin than natural gas. Notably, Pioneer doesn't hedge its oil production, making its realized pricing closer to that of the underlying commodity. Second-quarter guidance provided by Pioneer looked solid from our vantage point and relative to analyst estimates of FactSet. Total Q2 production is estimated between 674,000 and 702,000 barrels of oil equivalent per day, which at the midpoint exceeds forecasts of nearly 681,000. Oil production is forecast between 357,000 to 372,000 barrels per day, which at the midpoint tops estimates of 364,000. Pioneer made no changes to its full-year 2023 production or capital budget outlook. 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Scott Sheffield, CEO of Pioneer Natural Resources.

Adam Jeffery | CNBC