(PXD) Pioneer Natural Resources Company Closes South African Unit Sale

Pioneer Natural Resources Company (PXD) has completed the previously announced sale of its South African operation to the state-run firm The Petroleum Oil and Gas Corporation of South Africa (SOC) Ltd. (PetroSA). The net consideration of the transaction is $52 million.

Since the effective date of the transaction, January 1, 2012, Pioneer obtained $37.5 million in cash from the ongoing operations, while the remaining $14.5 million of the proceeds were collected at closing.

Pioneer will also enjoy a pre-tax gain of $29 million to $35 million in the third quarter of 2012 from the sale. The company was the first international oil company to venture in the country’s oil production in association with PetroSA. It has also joined offshore development activities in the Sable oil field and South Gas Coast. Sable oilfield came online in 2003 while South Gas Coast started generating gas and condensate in 2008.

Although Pioneer has offloaded its South African operation, its oil-weighted reserves base and large drilling inventory with significant resource potential are likely to unlock value for shareholders. With a ramp-up in activity at its three core liquids-rich growth assets in Texas, Pioneer has set a goal to increase production through 2014 that would in turn improve its earnings and growth outlook.

Irving, Texas-based Pioneer expects to maintain its compound annual production growth target at more than 20% through 2014 with liquids increasing from 58% of total production in the quarter to 65% in 2014. This liquids-focused production target is estimated to generate a compound annual operating cash flow growth of more than 25% over 2012–2014.

The company now expects its production growth to range between 25–29% versus the earlier expectation of 23% to 25% for the current year. This is mainly based on strong drilling results and the robust outcome of wells that are likely to outweigh reduced drilling operations for the balance of 2012.

In particular, Pioneer’s stepped up activities in the horizontal Wolfcamp Shale play – where EOG Resources Inc. (EOG) is also a leaseholder – provides a multi-year inventory of development drilling opportunities. The company’s first two successful wells in Upton County are already registering above expected results.

However, taking into consideration Pioneer’s sensitivity to gas/oil price volatility, as well as drilling results, costs, geo-political risks and project timing delays, we see limited upside potential for its shares.

We maintain our long-term Neutral recommendation on the stock. The company holds a Zacks #3 Rank, which is equivalent to a short-term Hold rating.

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