Pioneer Natural Resources: Picking An Entry Point (NYSE:PXD)

Our last article on Pioneer Natural Resources (NYSE:PXD) discussed the company’s dividend policy and outlook as well as where we would be interested in establishing a position. Our belief was that $200/share provided an interesting entry point based off of our belief on where the dividend is going and growing headwinds facing both the economy and energy prices. With recent rumors swirling regarding Pioneer and potential M&A targets, we shifted our attention elsewhere and established some opportunistic positions that would have us purchasing positions in energy names if they fell further. Namely, we focused on Devon Energy (DVN) and wrote about that trade on February 22nd.

The M&A deal talk that had us scratching our heads was a Bloomberg report that linked Pioneer to Range Resources Corporation (RRC). To be clear, Range Resources is a fine company, and is quite good at what they do, however, it is a different kind of exposure to energy than what investors get with Pioneer; namely, dry natural gas and not oil. The transaction as it was reported made little sense, and caused a stir, especially after Pioneer’s CEO, Scott Sheffield, came out and denied Bloomberg’s reporting.

So after having filled our exposure to Devon, we are once again turning our sights towards Pioneer.

So, What Is The Trade?

We were looking to add exposure to Pioneer Natural Resources stock on the next pullback, assuming that there is one. We are interested in being buyers of Pioneer shares at around $195/share and utilized the options market to set up this trade. We sold the PXD March 24, 2023 Puts with a strike price of $195 for an option premium of $2.05, or $205 per contract. So, if the pullback does happen, we will be owners of Pioneer shares at a cost basis of $192.95/share. If the option is not exercised, we will generate a return of 1.05% for writing an out-of-the-money put at just over 4% below current prices and waiting 16 days.

This put trade gets money in our pocket now and enables us to buy at what we view as a potentially more opportunistic purchase price; which will enable us to be buyers at a little over 5% below current prices.

Fed And Energy Market Could Give You Pause

One of the reasons we have looked below the $200/share level we previously discussed is because we have the Federal Reserve coming out on March 22nd, with futures markets telling us a rate hike is guaranteed. The question is whether the Federal Reserve sticks to the 0.25% raise markets we’re expecting or if they raise by 0.50% to stay aggressive. An aggressive Fed is not going to be good for the economy or energy markets, so we strategically picked the March 24th expiration date on our option trade as that will give us the ability to choose to cover, ride out the trade to expiration, or possibly extend and reposition if the stock has rallied. Having the ability to choose the next step with such a short period until expiration should take a lot of the time value out of the option and hopefully have us looking at realistic prices should we want to do something.

If oil prices can hold at these levels and potentially gravitate higher, that would be good for Pioneer shares, but the key is that prices need to hold while facing the fact that more Fed rate hikes are coming down the chute. Oil has been rangebound for the last few months, but the key is that it does not break below $70/barrel.

Final Thoughts

The real drag on Pioneer Natural Resources Company’s stock price has been the precipitous fall in oil and natural gas prices. Oil prices need to stay north of $70/barrel to keep this story intact, although the company can continue paying dividends and returning capital to shareholders (even while servicing debt moving forward) at lower oil prices – but there is a chance some investors get bored and move on when the realized and expected cash dividends are trending lower instead of higher.

Keeping the March 22nd Federal Reserve meeting in mind, investors can position themselves to have some optionality on put trades by utilizing the weekly options that expire March 24th, or to take that risk off of the table could utilize the monthly options issuances that expire on March 17th. Our choice with Pioneer Natural Resources Company is to use the March 24th expiration and potentially trade around the meeting if we need to, but readers can set up potential trades to fit their own needs and risk parameters.