Despite a steep decline in benchmark crude oil prices, Pioneer Natural Resources (NYSE: PXD) did not curtail production or slash dividends, thanks to the company’s low production costs and sizable hedge position. While the company’s revenues are expected to contract by 30% to $6.5 billion for the full year, a slew of measures such as 50% reduction in capital expenditure and single-digit growth in production volumes are likely to save costs and generate positive operating cash. Trefis analyzes the Impact Of The Covid-19 Recession On Pioneer Natural Resources in an interactive dashboard with a focus on liquidity reserves and concludes that the company could generate $700 million of positive cash in 2020, net of capital expenses and dividend payouts.
Impact On Revenues
- Per EIA, the global crude oil demand is expected to contract by 10-12% this year with an expectation of a slow recovery in 2021.
- However, the WTI and Brent are likely to remain under $40 due to a strong build-up of inventories and subdued demand.
- The company produces 98% of its crude oil and natural gas volumes from the Permian Basin in the U.S.
- Thus, PXD’s revenues are likely to contract by 30% to $6.5 billion, primarily due to lower realized prices.
Impact On Cash Flows
- In 2019, the company incurred $20 per barrel of oil equivalent in operating expenses that include lease and well costs, transportation costs, depreciation & amortization, general & administrative, and net interest expenses.
- While the transportation costs are expected to decline due to lower production volumes, well & lease costs, general & administrative expenses, D&A is likely to remain flat on an absolute basis and increase on an oil equivalent basis.
- Thus, the net margin is likely to shrink, negatively impacting operating cash flow in 2020.
- We estimate that Free cash flow from operations (FCFO) will go down from $3.1 billion in 2019 to $2.3 billion in 2020. Also, with expected capital expenditures of $1.4 billion for the year, FCFO-CapEx will be $900 million in 2020.
Cash Balance Impact
- This will lead to a 2020 cash balance of $1.3 billion, which is higher than in 2019.
- Cash balance includes $200 million of dividend payout, which the company is targeting for the full year.
- To sum things up, PXD can weather a recession through Q4 with a 30% decline in revenues by cutting Capex and raising production without suspending dividend payout.
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