Nobody said a 60% downturn in the price of oil would be easy to digest, and many thought a flood of bankruptcies could have been very possible. In a new and very comprehensive report, Baird marvels at the current sector ingenuity. Producers are quickly adapting to the price collapse by focusing on core acreage and the highest returning projects. Baird also thinks this is making companies better in the field and in the corporate front office.
The Baird analysts are not alone in their love of the Permian Basin, where some companies are adding back wells. Three stocks are now listed as the top picks, and one is actually a contrarian play as it resides in the Bakken formation, which is not a Wall Street favorite now. All three are rated Overweight at the firm.
Pioneer Natural Resources
The Baird analysts like this one as a pure crude oil play in the Permian Basin. Pioneer Natural Resources Co. (NYSE: PXD) was the ultimate shale-oil growth story for the past five years, and it was eviscerated in the sell-off. The stock has recently declined over 15% and also offers investors a better entry point.
Pioneer is a huge player in the Permian basin and the Eagle Ford in Texas, and the company owns more than 20,000 locations in the world’s second largest oil reservoir in the Midland Basin. In addition, the company owns its own frac fleets, allowing Pioneer to be a low-cost, high-margin producer, which could prove to be huge with prices lower for a protracted period.
Pioneer was also one of the firms named by the U.S. Department of Commerce to produce and export condensate. With a big secondary last November and more asset sales on tap, the company could have balance sheet debt close to zero this year.
Pioneer Natural Resources’ crude oil and natural gas production has increased over the past 13 quarters. From the first quarter of 2012 through last year total production increased 38%, from 13.5 to 18.5 million barrels of oil equivalent. Despite the quarter-over-quarter decline to start this year, crude oil and natural gas production in the first quarter of 2015 was still up 17% over the year-ago period.
Pioneer investors are paid a tiny 0.5% dividend. The Baird price target for the stock is $186, and the Thomson/First Call consensus target is lower at $182.81. Pioneer closed trading on Tuesday at $142.50 a share.