The recent rise in the price of oil has a lot of investors salivating over oil stocks. They want to know which one to buy. Long story short, Pioneer Natural Resources (NYSE:PXD) is the one to buy. The bullish case is for PXD stock is easy to make, as Pioneer Natural Resources produces oil in the Permian Basin, where production is inexpensive. The company would thus be one of the first producers to make money when prices rise.
This hope has sent PXD stock up 50% so far this year, with almost half that gain earned in the last three months. This is despite the fact that Pioneer Natural Resources last showed a profit a year ago.
By Nov. 1 we should know if the optimism is justified. That’s the next time PXD reports earnings. Analysts are expecting a profit. If the company beats earnings estimates, the stock will fly.
Why Pioneer Natural Resources?
The Permian is a unique reservoir for fracking, which involves cracking oil-producing rock with explosive bursts of sand and water. There are no political problems. The area is relatively isolated and dry, so water contamination is not an issue.
Because West Texas has been producing oil for generations, there is plenty of cheap infrastructure through which the oil can get to refineries that can process it into fuel quickly.
More important is the fact that the shale that holds the oil is extremely thick. Most drillers have to do slant wells, going down and then across the field, before cracking the rock with sand and brine in order to get a producing well that may deplete in just a few years. But in the Permian, the shale is thick enough and rich enough that some drillers have done vertical wells that can be fracked once and produce for years.
PXD is continuing to push the fracking technology forward with a new Version 3.0 well that produces more oil with less wastewater. It has been lowering the price at which it can make a profit, so as oil prices rise over $50 per barrel, it is well positioned to make big profits.
Pioneer Natural Resources management has been feeding the frenzy for its stock, telling reporters and analysts it could put 100 more rigs to work over the next year.
The Risks to PXD
Oil prices remain a risk for PXD stock investors. Regardless of its costs, its margins will be determined by what it can get for its product in the market.
So when the price of West Texas Intermediate — the standard U.S. oil that Pioneer Natural Resources produces — wavers, as it did on Oct. 11, that is going to be reflected later in the price of PXD stock. The stock is on a tear because the chart for WTI has been very bullish since August, with the price now over $50 per barrel.
The bullish talk from the oil pits, and the Pioneer Natural Resources, have analysts expecting earnings of 21 cents per share, on revenue of $946 million, when the company reports on Nov. 1. That would not come close to making up the $1.65 per share losses of last quarter, but it would represent hope for better days.
Bottom Line on PXD Stock
In the present environment, hope for PXD is good enough. Pioneer Natural Resources has managed to stay cash-flow positive throughout the oil bust, only one-quarter of its assets are subject to debt and during the bust, it both wrote down the value of its assets and successfully issued more stock, so it is in good financial shape. PXD stock is leveraged for good news.
But if good news doesn’t come, the stock has nowhere to go but down.
Dana Blankenhorn is a financial journalist who dabbles in fiction, his latest being The Reluctant Detective Travels in Time. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn. As of this writing, he did not hold a position in any of the aforementioned securities.