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Tickers in this Article: PXD, MEMP, COG, EOG
Pioneer Natural Resources Company (PXD) reported fourth quarter 2012 adjusted earnings of 83 cents per share, missing the Zacks Consensus Estimate of 85 cents. The quarterly earnings plunged from the year-earlier adjusted income of $1.19 per share. The underperformance was mainly due to lower price realization.
Full-year 2012 adjusted earnings came in at $3.66 per share, missing our expectation of $3.68 and dropped more than 12% from the year-ago profit level of $4.18.
 
Revenues and other income in the quarter increased 18.8% year over year to $818.7 million, and comfortably surpassed the Zacks Consensus Estimate of $787.0 million.
 
For the full year, total revenue increased about 18% to $3,228.3 million from the year-ago level of $2,751.5 million and beat the Zacks Consensus Estimate of $3,117.0 million.
 
Production
 
Total production in the reported quarter averaged approximately 164.8 thousand barrels of oil equivalent per day (MBOE/d), up 20.6% year over year, attributable to the company's core growth assets - Spraberry field and Eagle Ford Shale. Again, its encouraging drilling results from the horizontal Wolfcamp Shale play are also expected to contribute considerably to its production growth in the future.
 
Oil production averaged 67.1 thousand barrels per day (MBbl/d), showing a significant improvement of 33.5% year over year. Natural gas liquids (NGLs) production surged 22.1% year over year to 31.9 MBbl/d. Natural gas production increased to 394.8 million cubic feet per day (MMcf/d) from the year-ago level of approximately 361.8 MMcf/d.
 
For full-year 2012, total production was 155.5 MBOE/d versus 120.4 MBOE/d in the year earlier period.
 
Price Realization
 
On an oil equivalent basis, the average realized price was $48.45 per barrel in the reported quarter versus $52.86 in the year-ago quarter. The average realized price for oil was $85.60 per barrel, compared with $95.75 in fourth quarter 2011.
 
Average natural gas price dropped 5% to $3.20 per Mcf from the year-earlier level. Natural gas liquids were sold at $30.69 per barrel, down from $45.70 in the year-ago quarter.
 
Cash, Debt & Capex
 
At the end of the quarter, the cash balance was $229.4 million. Long-term debt was $3,721.2 million, representing a debt-to-capitalization ratio of 38.8% (versus 38.0% in the preceding quarter).
 
Capital Outlay
 
In 2013, Pioneer plans to spend $3.0 billion in total. Of this, the company has planned drilling capex of $2.75 billion (prior expectation was $2.4 billion) and capital for vertical integration of $0.25 billion.
 
An amount of $70 million has been allocated for the expansion of the Brady, Texas sandmine and $145 million has been set aside for the company's new Midland office building and several new field buildings. However, the budget excludes acquisitions, asset retirement obligations, capitalized interest and geological and geophysical G&A.
 
Guidance
 
Pioneer expects its production to average between 165 MBOE/d and 170 MBOE/d for the first quarter of 2013.
 
Production costs are expected to range between $14.00 and $16.00 per BOE, and depletion, depreciation and amortization expense is expected to average around $13.50 to $15.50 per BOE. The first quarter exploration expense guidance is $25-$35 million and the tax rate is expected in the 35-40% range.
 
Our Take
 
Pioneer's oil-weighted reserves base and large drilling inventory with significant resource potential are likely to unlock value for shareholders. With a ramp-up in activity at its three core liquids-rich growth assets in Texas, Pioneer aims to boost its production, which would in turn improve its earnings and growth outlook.
 
In particular, Pioneer's stepped-up activities in the horizontal Wolfcamp Shale play - where EOG Resources Inc. (EOG) is also a leaseholder - provide a multi-year inventory of development drilling opportunities.
 
During the reported quarter, Pioneer inked a $1.7 billion farm out agreement with a U.S. subsidiary of Sinochem Group for 40% of its 100% holding in the highly prospective horizontal Wolfcamp Shale play.
 
Pioneer will retain its current working interest as well as operatorship in all horizons shallower than the Wolfcamp horizon. Per the development plan, both the companies have proposed to drill 86 horizontal Wolfcamp Shale wells in 2013. This will increase to 120 wells in 2014 and 165 wells in 2015.
 
The company also abandoned its plan to divest its Barnett shale properties. In spite of receiving an unidentified number of bids in Dec 2012, the company believes that not a single one valued the properties correctly.
 
However, we remain skeptical about the company's lower-than-expected earnings for three quarters in a row. Earnings got a beating from lower price realization and higher expenses.
 
The company holds a Zacks Rank #3, which is equivalent to a short-term Hold rating. However, there are other stocks in the oil and gas sector - Cabot Oil & Gas Corp (COG) and Memorial Production Partners L.P. (MEMP) - which hold a Zacks Rank #1 (Strong Buy) and are expected to perform better.

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