Analysts Like Pioneer Natural Resources

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Analysts continue to be impressed with Pioneer Natural Resources (NYSE: PXD) and are raising their price targets. The ball got rolling last month when analysts over at FBR Capital raised their price target on the company to $225 per share. Then analysts over at UBS followed up and raised their price target to $155. Now analysts at Bank of America/Merrill Lynch have raised their target to $200. With all of these upgrades going on, it pays to have a look at what makes Pioneer Natural Resources so special.

First-quarter results

Pioneer's impressive first-quarter results really got the ball rolling. Adjusted income in the first quarter came in at $136 million, or $1.02 per share. First quarter oil production was 171,000 barrels of oil equivalent per day. Prior guidance was for only 165,000 to 170,000 barrels; the results represent an increase of 6,000 barrels from last quarter.

The answer lies in the Permian Basin

Pioneer is one of the most active drillers in Texas' Spraberry/Wolfcamp field in the Permian Basin. The company has 900,000 prime acres in this oil field. Oil companies have been drilling for oil in the region since 1923 when oil was first discovered in the area. The Spraberry field is one of the largest and most prolific oil fields in the U.S.

Analysts are getting excited about Pioneer because the company is in the early stages of a new horizontal-drilling program in the Wolfcamp Shale portion of the Spraberry field. So far, the geologic data and drilling results have been impressive. In its first horizontal-drilling well in the Wolfcamp, the 24-hour initial production rate came in at 1,572 barrels of oil equivalent per day. This type of flow-rate indicates the potential for Pioneer's leasehold as the company drills more wells.

According to Pioneer's geological data, the company estimates that there is 22 billion barrels of oil equivalent in the Wolfcamp Shale. On the first-quarter earnings call, chairman and CEO Scott Sheffield said

So you see, the Wolfcamp..will probably end up being the biggest discovery in North America. Before the shale era, Prudhoe Bay, was your largest discovery at about 13 billion barrels recoverable.

Looking forward

Pioneer Natural Resources expects second-quarter production to be between 174,000 and 179,000 barrels of oil equivalent per day.

In the second quarter, Pioneer is expected to close its $1.7 billion deal with Chinese company Sinochem to fund drilling costs in the Permian Basin. Pioneer is selling 40% of its interest in approximately 207,000 net acres in the Wolfcamp Shale. At closing, Sinochem will pay Pioneer $500 million and pay the remaining $1.2 billion by carrying a portion of Pioneer's share of future drilling and facilities costs.

I really like this deal for Pioneer. Pioneer gets a deep-pocketed partner to fund the drilling costs and only had to give up 40%. Pioneer will continue as operator and will conduct all leasing, drilling, completion, operations and marketing activities in the joint interest area. Pioneer and Sinochem have agreed to a development plan, which forecasts the drilling of 86 horizontal Wolfcamp Shale wells during 2013, increasing to 120 wells in 2014 and 165 wells in 2015.

Other players in the Permian Basin

The Permian Basin is quite active among the oil companies. The biggest player in the region is Occidental Petroleum (NYSE: OXY). Last year, Occidental accounted for 16% of the oil produced in the Permian Basin, making the company the number-one producer in Texas. The company has 2.5 million net acres in the Permian Basin.

The exciting part about owning Occidental is that the company is still undervalued. The stock is still trading below its all-time high of $115 from two years ago. The company has a great collection of assets and current CEO Steve Chazen has talked about restructuring the company to create shareholder value.

Besides its Permian Basin assets, Occidental has significant operations in California, South America, North Africa, and the Middle East. The company also has a chemicals business as well as midstream assets. There is a lot of value locked within the company. Hopefully, Chazen can unlock that value for shareholders and get the stock back toward the all-time highs.

Another significant player in the Permian Basin is Apache (NYSE: APA) with 1.6 million net acres. Apache now operates more than 12,000 wells in 152 fields. Last year, liquids production was up 25%. Apache cemented its position in the Permian Basin when it bought BP's assets in the region in 2010.

Apache is finally looking at ways to reward shareholders. For the longest time, Apache was focused on acquiring assets. Now the focus at Apache is divestitures and returning money to shareholders. The company just announced that it would sell $4 billion in assets to retire debt and repurchase 30 million shares. For shareholders, this is likely just the start of a full-scale restructuring of Apache's businesses. Management at Apache realizes that the stock has under-performed the oil and gas sector with a rise in the past year of only 1%. I see more value being unlocked in Apache shares going forward.

Foolish assessment

I think there's a lot of potential in the Permian Basin for companies with prime acreage. Pioneer Natural Resources is one such company and I can see why the analysts are upgrading the stock. If the Wolfcamp Shale can deliver as projected, Pioneer Natural Resources can certainly justify a much higher share price.

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Mark Yagalla has no position in any stocks mentioned. The Motley Fool owns shares of Apache. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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