Two years ago, Pioneer Natural Resources was reversing course and retrenching after Wall Street soured on the Irving-based oil and gas company.
“The market clearly isn’t paying for your business model,” one analyst said while another complained that Pioneer’s stock price hadn’t moved much in three years.
A week later, the CEO abruptly retired after two decades at Pioneer, and chairman Scott Sheffield returned to his former role as top executive.
Pioneer, whose oil and gas production had been growing rapidly in the Permian Basin, dropped its audacious goal of trying to produce the equivalent of a million barrels of oil a day by 2026. Soon after, Pioneer was restructuring, laying off hundreds of workers and buying out others — spending $159 million on employee-related charges in 2019.
That wasn’t enough cutting. Amid the pandemic and low oil prices, Pioneer laid off about 50 in its well services business last June. In the third quarter, it laid off 300 more.
Pioneer ended last year with 1,853 employees, almost 2,000 fewer than in 2017, according to its annual public filings.
Yet on April 1, Pioneer announced a $6.4 billion acquisition, including debt, to add DoublePoint Energy and its 97,000 acres in the Permian. That followed the purchase of another Permian player, Parsley Energy, in January; when the Parsley deal was announced in October, it was valued at $7.6 billion.
How does such a spending spree fit with Pioneer’s professed strategy of austerity?
“In a way, it’s consistent,” said Peter McNally, global sector lead at research firm Third Bridge. “The stock market has decided you can’t ramp up rig count in response to commodity prices, but you can engineer growth by doing acquisitions.
“It’s more about financial engineering than petroleum engineering.”
As the shale business has matured, it more resembles a manufacturing operation than a wildcatter enterprise. That’s led to more consolidation amid a push for ever-greater efficiencies. Pioneer has relatively low leverage and the lowest costs in the Permian, and now it’s become the biggest player there.
“They’re probably in a situation where it’s acquire or be acquired,” said Bruce Bullock, director of the Maguire Energy Institute at Southern Methodist University.
Shale wells decline so quickly that companies must keep replacing their drilled assets in “a kind of perpetual motion machine,” he said.
The good news for Pioneer: “Wall Street’s beginning to open up again” for oil and gas companies, Bullock said. “But it’s still a very narrow window.”
The shale and fracking revolution has been a great success in producing oil and gas, but investors have often been disappointed as cash kept flowing into drilling and production. At one point, Pioneer was putting all its excess cash into capital spending, the CEO told analysts in February.
Now that contribution has been cut roughly in half — “a big change,” Sheffield said. He’s pledged to grow production just 5 percent a year, a far cry from the 16 percent average annual increases from 2016-18.
“Seeing three downturns in 11 years, I just think it’s better to have the best balance sheet in the business,” Sheffield said in the call to discuss 2020 results.
The latest purchases will add to cash flow, Pioneer said, and allow the company to return more money to shareholders — a top priority. Pioneer has adopted a variable dividend policy so it can pay out more if oil prices are high.
It bought Parsley in an all-stock transaction, issuing 52 million shares, along with the assumption of debt. The DoublePoint deal includes $1 billion in cash and some debt, but the biggest chunk will come from issuing over 27 million shares of Pioneer stock.
While this means some dilution for shareholders, Pioneer’s stock price has been climbing since the fall — and is up over 30 percent this year. Over the same time, oil prices have rebounded, too.
The DoublePoint deal is consistent with what Pioneer has been telling shareholders about potential acquisitions, President Richard Dealy said in a recording that accompanied the April 1 announcement.
It adds to cash flow, earnings and returns. It adds high-quality acreage next to Pioneer’s holdings, which provides significant synergies. And the deal structure maintains Pioneer’s strong balance sheet.
“This acquisition checks all those boxes,” Dealy said in the recording.
Pioneer plans to slow DoublePoint’s drilling activity — from a 30 percent annual growth rate to 5 percent by next year. It will reduce the number of rigs from seven to about five. Pioneer expects to save about $1 billion over 10 years through operating efficiencies and reductions in overhead and interest expense.
With Parsley, Pioneer projected cost savings of over $2 billion in a 10-year period.
“This is a case of assets being worth more in the hands of a different operator (with a substantial scale advantage),” David Meats, director of research, energy and utilities for Morningstar, wrote in an email.
The purchase won’t damage Pioneer’s balance sheet because so much is being paid with stock.
“The variable dividend makes sense to us as well,” Meats wrote. Exploration and production companies “have reached an inflection point where they are cash generators, rather than cash users.”
That also shifts the investment case: “Income generation is the reason to own these stocks,” he said.
Another energy analyst, Stewart Glickman of CFRA, said Pioneer was being opportunistic. It struck a deal for Parsley while the pandemic was getting worse, which resulted in paying a small premium. And Pioneer could absorb the target’s debt load.
With DoublePoint, Pioneer took advantage of its rising stock price, which was tracking the price of oil. Now the test is whether the company can stick to its austerity goals.
Since last fall, oil prices have increased about 50 percent, and Pioneer is still harping on keeping production growth low.
“A lot of these companies, including Pioneer, have been surprisingly good at being disciplined,” Glickman said. “They’ve really held the line.”
