Pioneer Natural Resources Gets a Boost

 | May 06, 2013 | 5:00 PM EDT  | Comments
  • Comment
  • Print Print
  • Print
Stock quotes in this article:

pxd

That got my attention: Today, May 6, analysts at FBR Capital dramatically raised their price target on Pioneer Natural Resources (PXD) to $225 a share from $125. The shares were up 3.2% to $133.81 as of 2 p.m. New York time.

This isn't just another case of an analyst picking a number out of his or her hat, or getting all gaga-goo-goo over an earnings surprise. The new target price is based on something called "de-risking." De-risking is as much a part of the normal life cycle of an oil or natural gas asset as the progression from phase I to phase II to phase III to Food and Drug Administration approval is for a drug company.

Here's what's involved:

When an oil or natural gas company has initial success in exploring a new geology, it estimates the potential size of the reserve it believes it has discovered. That initial estimate is just that, an estimate, and it's based on the best information the company has at the time.

But that information is, of course, incomplete. And the company, Wall Street analysts and investors apply a confidence factor to that estimate. That confidence factor is based on the company's exploration track record, management's past tendency to undershoot or overshoot estimates, how well-understood the geology is from the work of the company itself or other exploration companies and the number of wells the company has drilled in the area.

Ideally, what happens as the company drills more exploratory and then production wells is that the confidence factor goes up. The company has collected more data that leads it to confirm its earlier estimates or raise or lower them. Even if it leaves the projected size of the reserve the same, the additional confidence in the estimate has value. The risk that the company's projection will be wrong to the downside has decreased. And that makes the value of the projected reserve go up for investors, since they are more confident that what they believe they're buying is actually what they're buying.

And that's what is happening right now with Pioneer's leased acreage in the northern section of the Wolfcamp Shale formation in the Permian Basin. Pioneer has estimated that what's called the Spraberry Trend contains 4.6 billion barrels of oil equivalent. An initial rig has drilled three wells in this area. The company said in its May 1 first-quarter earnings report that the first of those wells has been the best horizontal well drilled in the Wolfcamp Shale to date, with a 30-day average peak rate flow of 1,402 barrels of oil equivalent a day. Especially important, given the strength in oil prices relative to the bust in natural gas prices, production from the well has been 75% oil.

Those initial wells have therefore already done a good bit of de-risking on Pioneer's northern Spraberry/Wolfcamp acreage of about 600,000 acres, enough so that the company has announced a $1 billion drilling program in the northern Spraberry/Wolfcamp area. In 2013, the company will drill 30 to 40 wells that will, if successful, confirm the company's understanding of the stacked rock formations in this geology.

The new target price is based on the de-risking of this resource to date and the increased odds that Pioneer's estimate of the size of this reserve will turn out to be accurate.

The great thing about de-risking, once it begins, is that other Wall Street houses, perhaps some that are more conservative about turning exploration results into reserves, will gradually join in as the process continues. For example, Credit Suisse sees a substantial chance for de-risking in 2013, but that company hasn't raised its $150-a-share target price recently.

Columnist Conversations

The bearish star cluster on the Starbucks (SBUX) chart that I highlighted last week preceded price action this...
Ford is working on its third straight gain following two days of steep loses to start this week. At this...
Market is holding on for gains for now but think Doug Kass is right and could see some decent profit taking by...
I have a full blown article surrounding the U.S. Retail Sector coming out on soon, but for now let's just lo...

BEST IDEAS

REAL MONEY'S BEST IDEAS

Columnist Tweets

BROKERAGE PARTNERS

Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data provided by Interactive Data. Company fundamental data provided by Morningstar. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by Interactive Data Managed Solutions.


TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

IDC calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.