Is Pioneer Natural Resources’ Premium Justified?
Pioneer Natural Resources: What Sets It Apart?
Pioneer Natural Resources’ relative valuation
Pioneer Natural Resources (PXD) has a forward EV-to-EBITDA ( enterprise value to earnings before interest, tax, depreciation, and amortization) ratio of ~17x, which is much lower than that of other crude oil producers from the Permian Basin such as EOG Resources (EOG). EOG has a forward EV-to-EBITDA ratio of ~20x. Crude oil producer Occidental Petroleum (OXY), which operates in an unconventional resource space, has a forward EV-to-EBITDA ratio of ~14x. PXD’s forward EV-to-EBITDA of ~17x is higher than OXY’s. When compared with the ratios of offshore players Murphy Oil (MUR) and Noble Energy (NBL), PXD’s forward EV-to-EBITDA is much higher. These companies have forward EV-to-EBITDA ratios of ~8x and ~10x, respectively. Therefore, PXD’s valuation appears to higher within its peer group. The average EV-to-EBITDA ratio for the upstream industry is ~11.1x.
The table above shows the fundamental ratios for S&P 500 (SPY) upstream companies with similar production mixes and overlapping geographical areas of operation. Even when compared based on price-to-sales, PXD appears very expensive, with a metric of ~7.3x. PXD’s price-to-book metric is in the middle of the range, at ~2.5x.
Is PXD’s premium justified?
Typically, companies with a lower leverage or higher current ratio trade at a premium to their book value or have a higher price-to-sales metric. This could be due to a fear of an energy-driven debt crisis as a result of commodity prices staying low or moving further down for much longer than anticipated.
As of 4Q15, PXD has a lower debt-to-equity ratio of ~44% and a higher current ratio of ~2.2x. As of March 2016, on a pro forma basis and adjusted for the January 2016 equity offering of ~$1.6 billion and the $500 million expected to be received in mid-2016 from the sale of the Eagle Ford shale midstream business, PXD’s estimated 2016 net debt-to-operating cash flow ratio comes in at only ~0.2x. Given its strong liquidity and low debt, PXD’s stock trading at a premium is justified.
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