- United States
- Oil and Gas
Calculating The Intrinsic Value Of Pioneer Natural Resources Company (NYSE:PXD)
- Using the 2 Stage Free Cash Flow to Equity, Pioneer Natural Resources fair value estimate is US$178
- Current share price of US$195 suggests Pioneer Natural Resources is potentially trading close to its fair value
- Analyst price target for PXD is US$262, which is 47% above our fair value estimate
How far off is Pioneer Natural Resources Company (NYSE:PXD) from its intrinsic value? Using the most recent financial data, we'll take a look at whether the stock is fairly priced by taking the forecast future cash flows of the company and discounting them back to today's value. Our analysis will employ the Discounted Cash Flow (DCF) model. It may sound complicated, but actually it is quite simple!
We generally believe that a company's value is the present value of all of the cash it will generate in the future. However, a DCF is just one valuation metric among many, and it is not without flaws. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.
View our latest analysis for Pioneer Natural Resources
We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company's cash flows. Generally the first stage is higher growth, and the second stage is a lower growth phase. To begin with, we have to get estimates of the next ten years of cash flows. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.
A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, and so the sum of these future cash flows is then discounted to today's value:
10-year free cash flow (FCF) forecast
|Levered FCF ($, Millions)||US$3.98b||US$3.78b||US$3.68b||US$3.21b||US$3.19b||US$3.20b||US$3.23b||US$3.27b||US$3.32b||US$3.37b|
|Growth Rate Estimate Source||Analyst x14||Analyst x12||Analyst x8||Analyst x3||Analyst x1||Est @ 0.32%||Est @ 0.84%||Est @ 1.21%||Est @ 1.47%||Est @ 1.65%|
|Present Value ($, Millions) Discounted @ 9.3%||US$3.6k||US$3.2k||US$2.8k||US$2.3k||US$2.1k||US$1.9k||US$1.7k||US$1.6k||US$1.5k||US$1.4k|
("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$22b
The second stage is also known as Terminal Value, this is the business's cash flow after the first stage. The Gordon Growth formula is used to calculate Terminal Value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 2.1%. We discount the terminal cash flows to today's value at a cost of equity of 9.3%.
Terminal Value (TV)= FCF2032 × (1 + g) ÷ (r – g) = US$3.4b× (1 + 2.1%) ÷ (9.3%– 2.1%) = US$48b
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$48b÷ ( 1 + 9.3%)10= US$20b
The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is US$42b. In the final step we divide the equity value by the number of shares outstanding. Relative to the current share price of US$195, the company appears around fair value at the time of writing. Valuations are imprecise instruments though, rather like a telescope - move a few degrees and end up in a different galaxy. Do keep this in mind.
Now the most important inputs to a discounted cash flow are the discount rate, and of course, the actual cash flows. If you don't agree with these result, have a go at the calculation yourself and play with the assumptions. The DCF also does not consider the possible cyclicality of an industry, or a company's future capital requirements, so it does not give a full picture of a company's potential performance. Given that we are looking at Pioneer Natural Resources as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighted average cost of capital, WACC) which accounts for debt. In this calculation we've used 9.3%, which is based on a levered beta of 1.211. Beta is a measure of a stock's volatility, compared to the market as a whole. We get our beta from the industry average beta of globally comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.
SWOT Analysis for Pioneer Natural Resources
- Earnings growth over the past year exceeded the industry.
- Debt is not viewed as a risk.
- Dividends are covered by earnings and cash flows.
- Dividend is in the top 25% of dividend payers in the market.
- No major weaknesses identified for PXD.
- Good value based on P/E ratio compared to estimated Fair P/E ratio.
- Annual earnings are forecast to decline for the next 3 years.
Valuation is only one side of the coin in terms of building your investment thesis, and it ideally won't be the sole piece of analysis you scrutinize for a company. It's not possible to obtain a foolproof valuation with a DCF model. Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/overvalued?" For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. For Pioneer Natural Resources, there are three important aspects you should further examine:
- Risks: For example, we've discovered 2 warning signs for Pioneer Natural Resources (1 makes us a bit uncomfortable!) that you should be aware of before investing here.
- Future Earnings: How does PXD's growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart.
- Other Solid Businesses: Low debt, high returns on equity and good past performance are fundamental to a strong business. Why not explore our interactive list of stocks with solid business fundamentals to see if there are other companies you may not have considered!
PS. Simply Wall St updates its DCF calculation for every American stock every day, so if you want to find the intrinsic value of any other stock just search here.
Valuation is complex, but we're helping make it simple.
Find out whether Pioneer Natural Resources is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.View the Free Analysis
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
Pioneer Natural Resources
Pioneer Natural Resources Company operates as an independent oil and gas exploration and production company in the United States.
Outstanding track record established dividend payer.