A lot of email has been coming in asking me which stocks to center on as oil has retreated a bit from the $50 level.
Today's announcement of further sales of Permian Basin assets from Devon Energy (DVN) to Pioneer Natural Resources (PXD) is the perfect contrast of who to buy on a dip (Devon) and who to sell on a rally (Pioneer).
We've noted the nice turnaround in Devon's energy strategy and stock price, which we outlined in a column on June 6. At that time, we were pleasantly encouraged by the near-$1 billion in non-core asset sales in the Granite Wash and Eagle Ford. We had heard from CEO David Hager that he planned to make up to $3 billion in asset sales in order to bring debt down and recommit capital to their core Oklahoma STACK play, but nothing that's said on conference calls means a thing until you actually see the strategy executed.
On Thursday, the encouragement got even deeper as Devon sold another $858 million of non-core assets in the Midland subsector of the Permian, bringing their total announced sales already above $2 billion dollars. That's a superb job of accelerating needed asset sales at reasonable valuations considering today's oil market -- and delivers much of what Hager has promised to shareholders: a stronger balance sheet with reduced debt and core concentration of capex on proven shale acreage. The already-announced sale of its 50% ownership in the Access pipeline should bring sales up the promised $3 billion mark.
In a market for oil stocks that has recently been under some pressure, Devon is barely down today -- for good reason.
And then there's CEO Scott Sheffield's Pioneer Natural Resources, the buyer of $435 million of those Midland assets. (As an aside, the other buyer went unnamed -- could it be Mark Papa at Silver Run Acquisitions (SRAQU)?)
No matter the other buyer, I have also outlined the contrast of the strategy that Sheffield continues to pursue of increasing production at breakneck speed by increasing both working acreage and reserves. In an oil environment where virtually everyone has recognized the need to hunker down, restore balance sheets and wait for better market conditions for growth, Sheffield continues to operate Pioneer as if he's convinced that oil prices will reach triple digits again soon, increasing production 18% for 2016 alone, in a market that's barely gotten back to $50 once.
He could be right in his bullishness, but he's banking his company on that bet. Every time he increases capex, buys new acreage and increases production he sends his company's leverage further into the red. For this Devon buy, Pioneer will undertake a 5.25 million secondary stock offering, hence the major 6% hit to shares today.
Devon claims that much of this acreage is unproven, while Pioneer is well acquainted with its potential. Of the 28,000 acres it bought, 15,000 acres are near their already-strong Wolfcamp A acreage. From a straight who-got-the-best-deal perspective, you'd have to give the nod to Pioneer.
But from a strategic perspective, I'm much more impressed with Devon's move.
I'm very bullish on oil, like Scott Sheffield. I believe as he clearly does that oil markets are rebalancing quickly, that quality acreage is rare and will be this cheap for only a very short time to come. But when I'm investing in oil stocks, I'd much rather have the company that will survive if I'm only moderately right in my bullishness. What happens if oil, in fact, goes only as high as $60, but cannot breach that for the next few years? For Devon, it will be equipped to survive even that more extended bust cycle. For Pioneer, the anchor of debt it's strapped around its neck will ultimately prove to be fatal.
Does this make Pioneer a worse bet? For me, it does. Of course, if oil does precisely what I think it can and breach $100 by the end of next year, Scott Sheffield will look like a genius and the shares of Pioneer Natural will greatly outperform Devon.
The choice is yours.
As for me, I previously recommended buying Devon as it pulled back to around $35. It's there now. That's the one I'm pulling the trigger on.