What happened
Shares of Pioneer Natural Resources (NYSE: PXD) fell 9.3% during the first half of 2023, according to data provided by S&P Global Market Intelligence. That was an underwhelming performance, considering the S&P 500 rallied 15.9% during that period.
Lower oil prices weighed on the oil stock during the year's first half. However, that wasn't the only storyline. Pioneer made headlines a couple of times as rumors swirled about potential merger deals involving the company.
So what
Oil prices continued to cool off this year. Crude has steadily fallen after peaking at over $100 a barrel last summer, ending the first half of 2023 at around $70. Lower oil prices impact the company's earnings and cash flow.
Pioneer Natural Resources realized $75.15 per barrel of oil sold during the first quarter, down from $83.53 in the fourth quarter and a peak of $110.56 in last year's second quarter. As a result, its earnings and cash flow declined, as shown in the chart:
Quarter | Adjusted Earnings | Operating Cash Flow | Free Cash Flow |
|---|---|---|---|
First quarter 2023 | $1.3 billion ($5.21 per share) | $2.3 billion | $948 million |
Fourth quarter 2022 | $1.5 billion ($5.91 per share) | $2.6 billion | $1.7 billion |
Data source: Pioneer Natural Resources.
The company's falling free cash flow gave it less money to return to shareholders. After paying a $5.58-per-share base-plus-variable dividend for the fourth quarter, Pioneer's combined payout fell to $3.34 per share during the first quarter.
While falling oil prices were a key storyline for Pioneer during the first half, they weren't the only news of note. The company was in the headlines a few times for rumored M&A transactions.
In February, Bloomberg reported that Pioneer Natural Resources was considering an acquisition of Range Resources(NYSE: RRC). The company quickly dismissed the rumors, putting out a press release stating that it was "not contemplating a significant business combination or other acquisition transaction." A combination with Range didn't make any sense because Range produces gas in the Marcellus shale, while Pioneer is a leading oil producer in the Midland side of the Permian Basin. That's why initial rumors of potential interest in a deal weighed on Pioneer's stock price.
The company made M&A headlines again a couple of months later, this time as an acquisition target. The Wall Street Journal reported that ExxonMobil(NYSE: XOM) was considering a potential deal to acquire Pioneer. That combination would make a lot of sense because it would enable Exxon to boost its position in the prolific Permian Basin. News of Exxon's interest lifted Pioneer's stock, helping cushion some of the impact of falling oil prices.
Now what
Oil prices weighed on Pioneer's share prices during the first half of the year. That trend could reverse in the second half. Saudi Arabia has been pressing to push prices higher by holding back its production. Meanwhile, demand is growing, putting it on pace to surpass supplies in the second half. That could push oil prices higher, which would provide a boost to Pioneer's earnings and cash flow, potentially providing a lift to its stock price.
Add the potential upside from M&A, and Pioneer's first-half sell-off looks like a compelling buying opportunity.
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Matthew DiLallo has no position in any of the stocks mentioned. The Motley Fool recommends Pioneer Natural Resources. The Motley Fool has a disclosure policy.
