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Krause Fund Research Spring 2018

Energy Recommendation: HOLD Analysts: Ian Taylor ian-taylor@uiowa.edu

Matthew Mauser matthew-mauser@uiowa.edu

Ryan Schmidt ryan-schmidt-1@uiowa.edu

Company Overview Pioneer Natural Resources is a pure upstream energy company involved in the exploration and production of oil, gas, and natural gas liquids (NGL). Pioneer is an unconventional producer of oil and natural gases. Unconventional production methods include extraction of oil from shale & natural gas from coal bed methane layers. The Irving, TX based company is transitioning into a “pure play” firm by divesting all operations not located on the Permian Basin of West Texas. This strategic decision is rooted in cost reduction and consolidating operations towards their most profitable reserves. Stock Performance Highlights 52 week High $192.93 52 week Low $125.46 Beta Value 1.26 Average Daily Volume 1,521,689 Share Highlights Market Capitalization $27.92 b Shares Outstanding 170,300,825 Book Value per share $72.95 EPS (2017) $4.86 P/E Ratio 33.90 Dividend Yield 0.05% Company Performance Highlights ROA 4.9% ROE 8.00% Sales $5.455B Financial Ratios Current Ratio 1.41 Debt to Equity 0.24

Pioneer Natural Resources (NYSE: PXD)

April 15, 2018

Current Price $188.32 Target Price $198-$204

Pioneer Natural Resources: Pure Play with High Growth and Low Costs

• Decreasing costs and increasing margins: We expect Pioneer’s production cost/BOE to be $4.45 by 2022. Due to unconventional oil extraction methods from shale and operations moved to Permian Basin. • Strong liquidity positon: We expect Pioneer to have a debt/equity ratio of 0.24 and an interest coverage ratio of 22.87 in 2022. Allowing them to pay of all future debt obligations with cash regardless of a decreasing oil price environment. • Increasing production growth: Pioneer is expected to increase production at a rate of 15% in years 2018 & 2019, and at a rate of 20% in years 2020-2022. Extracting oil with hydraulic fracturing from shale rich with organic material will enable Pioneer to continue the trend of high production expansion in the United States. • Decreasing oil prices: We expect oil prices to be $52.87 and average commodity prices to be $38.89 in 2022. This will limit the revenue growth of Pioneer, who is dependent upon oil prices to determine the prices at which they can sell their goods. One Year Stock Performance

Source: Factset17

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As of April 15, 2018 our University of Iowa Krause Fund analyst team recommends a “hold” rating for Pioneer Natural Resources. There are many factors that we considered when determining the target price. Those factors are explained in detail within the report. One key factor that drove our valuation was Pioneer’s growth opportunity within the Permian Basin. Moving to be a pure play company within this area and leaving the Raton Field, Eagle Ford Shale and the West Pan Handle will allow Pioneer to capture these growth expectations. We also expect Pioneer to become more efficient with their exploration & production costs, resulting in increased profit margins. Increased production in the United States due to enhanced shale drilling technology will allow Pioneer to maximize revenue and cost savings. Debt is not of great concern for Pioneer as they have significant cash flow and liquidity that can easily cover interest and principal payments. Our primary concern with Pioneer relates to volatility in oil prices. With an economic outlook on increased oil demand, United States production growth and low but stable oil prices, Pioneer is a well-positioned company within the exploration & production industry. Interest Rates Interest rates are an important economic variable to monitor as it drives a firms cost of debt. The 30-Treasury Yield (3.02%) was used as the risk free rate to calculate cost of debt given the long-term valuation timeline. Rising rates lead to increased borrowing costs, as investors require a certain rate of return over the risk free rate. We expect the rate to reach 3.4% by 2022 stimulated by the recent hikes in the federal funds rate, and the fast growing economy. The Exploration and Production industry is often highly leveraged in order to increase operations and acquire more reserves. Firms with low cost of debt, good capital structure, and ability to pay back lenders have a significant advantage. World Real Gross Domestic Product Real Gross Domestic Product (GDP) is a macroeconomic measurement that represents the total monetary value of all goods and services produced within an economy in a given time period after adjusting for the effects of inflation. Real GDP growth is a key determinant of demand for oil and energy resources. Economic expansion results in increased demand for goods and services from industries in which oil is an important input, such as manufacturing and transportation. The following chart displays the strong

association between the total world consumption of liquid fuels, world GDP, and West Texas Intermediate (WTI) crude oil prices. Figure 1.

Source: EIA18

In general, energy companies stand to benefit from real GDP growth, as the resulting increase in demand for energy resources causes the price of oil to rise, driving top-line growth. We project global GDP growth to grow at 3.8% in 2022, because central banks are expected to gradually remove post-crisis accommodations, in addition to an upturn in world investment growth. Domestic Growth Outlook In 2017 US real GDP grew at a rate of 2.3%, a significant increase from the 1.5% growth observed in 201622. This growth is attributed to increases in personal consumption expenditures, as well as residential and nonresidential fixed investment. Figure 2.

Source: Federal Reserve Economic Data19

In the next year, we predict US real GDP growth to increase around 50 basis points and reach 2.8%, marking another year of significant improvement. The tax reform

Macroeconomic Outlook

Executive Summary

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enacted in the Tax Cuts and Jobs Act of 2017 will boost corporate profits and therefore business investment. In addition, rising personal income and consumer confidence, combined with decreasing unemployment encourages consumption that drives economic expansion. Over the following 2-3 years, we expect US real GDP to slow from its rapid expansion and decline to around 2.1% as investor euphoria from the recent bull market will wear off. Additionally, the Federal Reserve has indicated that they plan to incrementally raise interest rates over this period in an effort to slow economic growth and maintain a Goldilocks state in the economy20. The following chart displays the future interest rate projections of the Fed officials. Figure 3.

Source: Federal Open Market Committee20

In the long-run we expect US real GDP growth to stabilize at a CV of approximately 2.6%. International Growth Outlook We consider China, India, and the Euro area to be the main drivers of foreign demand for energy resources. The following chart supports this assumption, displaying petroleum oil consumption by country. Figure 4.

Source: EIA18

The International Monetary Fund provides estimates of real GDP growth in Figure 5 for these countries over 2018, 2019, and 2020. In this period, China is forecasted to

realize growth of 6.5%, 6.3%, and 6.2%, respectively. Over the same period, India is expected to realize growth of 7.4%, 7.8%, and 7.8%, respectively. The Euro area has projected growth of 1.9%, 1.7%, and 1.6%, respectively21. Figure 5.

Source: IMF 21

These higher growth rates will be a significant driver of total world energy demand and consumption in the future. Energy Commodities Supply & Demand Supply and demand is the primary driver of price for energy commodities. Unlike natural gas and natural gas liquids, oil prices (WTI Crude) are determined on a global scale making supply and demand more volatile. Oil demand increases with consumption, as energy is needed to fill the growth. World GDP is strong indicator of oil demand. Supply for oil is largely determined by the production of OPEC nations and Non-OPEC nations. The most recent data shows that OPEC members controlled 81.3% of the Worlds Proven Crude Oil Reserves14. OPEC’s production has substantial influence on supply and therefore price. As a result of increasing OPEC production and record high U.S production we expect crude oil to drop and stabilize in 2022 at $52.87 per barrel. Figure 6 shows the 10-year average U.S production of crude oil. After running a regression of global GDP percentage increases versus percentage increases in oil demand; we found that a 1% increase in global GDP growth results in a 0.48% increase in oil demand. Current global oil demand levels are 98.96 MMBOE/day, and based on our calculations and GDP growth forecasts we project this level to be 108.12 MMBOE/day by 2022.

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Figure 6.

Source: EIA 15

Natural gas and natural gas liquids are priced according to regional supply and demand and therefore are less volatile. We project natural gas prices to decrease due to new technology for unconventional drilling methods. Techniques like shale extraction and hydraulic fracturing resulted in high U.S production and low production cost. The increased supply will drop the price slowly before stabilizing at $3.02/MMcf by 2022. Due to increase demand of NGLs we expect a stable price growth to $19.94 per barrel by 2022. Natural gas liquids can be transported further than normal natural gases making them in higher demand. We expect an average price of the three commodities mix of $38.89 by 2022. Industry Overview The Oil and Gas industry can be broken down into three parts which together make up the integrated process. Upstream firms deal in the exploration and production of the earth’s natural resources. These companies have high exploration costs, but they are the most profitable when wells start to produce. Mid-stream firms process, store, and ship these natural resources. Transportation of these resources comes from pipelines, railroads, and oil tankers. These firms have lower margins but are more stable. Finally, downstream firms are responsible for the refining of natural resources into consumable products as well as the marketing of these products. Well-known oil giants like Chevron and Exxon Mobil are integrated firms that have operations in all three parts. E&P firms compete by their ability to cut costs. Firms attempt to cut costs by focusing only on their most efficient assets. E&P firms experience huge profits if new reserves are found, however they are very sensitive to market condition. Sales price is determined by the market

and is influenced by a variety of factors such a geopolitical tension, supply & demand, natural disasters, wars etc. Product mix includes oil, natural gas, and natural gas liquids. In the U.S., the West Texas Intermediate (WTI Crude) is used as the crude oil benchmark. Industry Life Cycle The upstream oil & gas industry is currently in the mature stage of the industry life cycle. This is evident when considering the correlation between industry growth and growth of the general economy. The demand for oilfield services has reached a steady state, and much of the observed changes are simply due to overall economic growth in areas that demand oil. Additionally, the competitive dynamic is that the industry is increasingly becoming more concentrated among the large operators. This encourages growth through M&A to attempt to gain market share. New Initiatives, Developments & Trends The global upstream sector is expected to continue increasing M&A activity. North American companies lead the surge with 76% of the M&A share, with regards to both deal value and deal count1. Buyers and sellers are focusing on enhancing oil field assets, attempting to increase portfolios in core areas and decrease noncore assets. A majority of the deals encompassed proven oil producing fields rather than fields under development or fields under exploration1. We expect this trend of North American led M&A to continue into the future due to increasing oil production within the United States; which is at a high relative to the past five decades. United States production is expected to continue to increase2. This increased production will benefit exploration companies that can cut drilling costs efficiently. The unconventional way of extracting oil & gas through shale in order to reduce extracting costs will continue in the United States in the short term, and is expected to continue in the long term assuming it is sustainable2. One driver of increased oil production in the United States is activity in the Permian Basin. The Permian Basin is one of the U.S’s largest oil and natural gas basins and is responsible for about 30% of the United States daily oil production15. Figure 7 shows Permian Basin rig count and additional production each new rig brings. Since bottoming out in 2016 Permian Basin rig count has seen a dramatic increase stimulating rising production. Overall efficiency of drilling rigs is represented by new well oil production per rig. Rig efficiencies are around all-time highs as on average each additional rig adds close to 600 barrels per day.

Industry Analysis

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Figure 7.

Source: EIA15

Industry Leaders & Followers Industry leaders are integrated firms that operate in all three parts of the integration process. Oil giants like Chevron and Exxon Mobil explore for, produce, ship, refine and market the earth’s natural resources. Since these firms operate in all segments of the supply chain, they influence industry norms. Best-positioned firms within the exploration and production industry have superior capital structure and debt. Top companies have low production costs and still manage to be profitable when energy commodity prices decline. Industry followers have large amounts of debt and struggle to produce positive cash flows to pay back their creditors. Companies with high debt to equity ratios rely heavily on debt to finance their operations and therefore have a higher default risk. Inferior firms also have high production costs because of inefficient operations. These firms rely on high oil prices in order to stay profitable. Porter’s 5 Forces Analysis Threat of New Entrants: Low The exploration and production of natural resource is extremely capital-intensive making new competition highly unlikely. The high bankruptcy risk for new firms discourages entry. New firms tend to have high debt in order to grow operations quickly but suffer in times with low oil prices, as they do not have significant cash flow to pay back their debt. Bargaining Power of the Suppliers: Moderate Exploration and Production companies are the suppliers of oil and natural gas and can have a significant impact on price based on production levels. Production quotas from large international organizations like OPEC can have huge influence on oil prices. However, one company alone does not have much influence. Therefor suppliers will continue to have moderate bargaining power in the future. Bargaining Power of the Consumer: Moderate

Oil and natural gas prices are determined by the market therefore consumer demand has influence on price. If demand is less than production, the surplus causes a drop in price. Although consumers can influence price based on demand, energy commodities are relatively price inelastic and have stable demand. Threat of Substitutes: Low Some form of energy will always be needed to meet the worlds demand. Renewable energy could potentially substitute oil & gas. However, oil & gas companies are protected as oil & gas is still needed to meet the large global demand. Competitive Rivalry: High Firms compete through cutting costs, debt management, and production growth. Firms with lower cost can be profitable during times of low oil prices. Ability to repay debt without re-financing is key to surviving in a highly levered industry. Lastly, ability to grow reserves and maintain long term producing wells is a significant advantage Financial Summary & Earnings Analysis Pioneer reported 2017 revenues of $5.5 billion, a dramatic increase of 61.3% from 2016 revenues of $3.4 billion. This jump is attributed to increases in revenues from the oil & gas production and sale of purchased oil & gas production groups, which rose 45.5% and 62.8%, respectively. A large reason for this strong revenue growth was the rise in oil production that the company saw, up 16% from 2016 to 272 thousand barrels oil equivalent per day (MBOE/day), as well as a rise in realized oil prices over the year from an average of $39.65 per barrel to $48.24 per barrel7. Pioneer ended 2017 with a cash balance of $2.2 billion, or $5.26 per share, and a net debt to operating cash flow ratio of 0.30. This puts the company in a good position to pay off its May 2018 maturities of long-term debt of $450 million, which it has stated it will repay in cash during the year. Pioneer’s total balance of long-term debt is $2.3 billion, and the amount of all debt liabilities due within the next two years is $1.6 billion13. Overall, Pioneer reported a 2017 net income attributable to common stockholders of $833 million, and a diluted EPS of $4.857. This shattered estimates of $1.33, and is a 245.5% increase from 2016 diluted EPS of ($3.34)25. The company’s sharp turnaround from the previous year can be

Company Analysis

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explained by a $1.1 billion increase in oil & gas revenues, a 25% increase in average realized commodity price, as well as a decrease in production costs per barrel of 12% as a part of the company’s cost reduction initiatives7. Management guidance indicates a positive outlook for 2018, based on expected production increases of around 10,000 BOEPD, continuing decrease in production costs, and increase in commodity prices7. Products, Markets & Customers Pioneer’s goal is to profitably explore, develop and produce oil & gas reserves. The portfolio of resources that they offer include oil, natural gas and natural gas liquids (NGLs). Pioneer generates revenue through their ability to produce and sell oil & natural gas to customers. The largest customers of oil, NGLs and gas were Occidental Energy Marketing Inc., Plains Marketing L.P., Sunoco Logistics Partners L.P. and Enterprise Products Partners L.P. in fiscal year 20177. Figure 8.

Source: Net Advantage 7

Those four corporations accounted for 62% of business in 2017. Marketing methods used by Pioneer are consistent with traditional industry practices. The sales prices for their products are negotiated based on index or spot price, price regulations, distance from the well to pipeline, commodity quality and prevailing supply and demand conditions7. Although these prices are heavily impacted by external market factors that are not controllable within Pioneer. Production In 2017 Permian Basin production represents 86% of total production. Pioneer will lose 14% of operations due to the divesting of Eagle ford and Raton field. However, Increased drilling in the Permian Basin will make up for the lost production. Production capacity can be measure by rig count. In 2017 Pioneer had 16 active horizontal rigs in the Permian Basin and will have 20 in 2018. These four rigs will greatly increase production capacity. Due to the significant rig increase we project overall production growth of 15% through 2020 and 20% through 2022.

Figure 9 shows the 2017 production mix based on commodities. Figure 9.

Source: PXD7

Pioneer’s production costs come from their three main revenue streams: oil, gas, and NGLs. Costs for these are standardized into “BOE”, barrel of oil equivalent, to make the costs comparable. For the purpose of this report, only production costs in the Permian Basin will be analyzed. The Permian Basin has been Pioneers most cost efficient reserve to date. Due to the low cost and large reserves in the Permian Basin, divesting other operations will also increase margins. Figure 8 shows Pioneers 2017 production costs based on location. The In the future we expect costs to decrease to $4.45/BOE by 2022 as the company consolidates its operations and becomes more efficient. As Eagle ford and Raton field operations stop, Pioneer will also see an increase in future margins due to positive cost synergies. Figure 10.

Source: PXD7

Competition Competitors of Pioneer include major oil & gas companies, independent oil & gas companies and individuals engaged in the exploration and development of oil & gas properties7. Although Pioneer has smaller market share relative to sales than some of their competitors, Pioneer differentiates itself with technological innovation and an intense focus on price and cost management7. The four largest competitors to Pioneer in the oil & gas exploration and production industry from largest to smallest are ConocoPhillips, EOG Resources Incorporated, Anadarko Petroleum Corporation and Concho Resources Incorporated8.

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Figure 11.

Source: Net Advantage 8

• ConocoPhillips (COP): Explores for, produces,

transports, and markets crude oil, bitumen, natural gas, liquefied natural gas (LNG), and natural gas liquids worldwide9.

• EOG Resources, Inc. (EOG): Explores for, develops, produces, and markets crude oil and natural gas together with its subsidiaries throughout the US and some other countries10.

• Anadarko Petroleum Corporation (APC): Engages in the exploration, development, production, and marketing of oil & gas properties located onshore US, offshore US and other countries within three segments: Oil and Gas Exploration and Production, Midstream, and Marketing11.

• Concho Resources, Inc. (CXO): An independent oil & natural gas company, engages in the acquisition, development, exploration, and production of oil and natural gas properties in the United States12.

Figure 12.

Source: Net Advantage 8-12

Each competitor has an average of 58% oil, 31% gas and 11% NGLs, with the exception of Concho Resources, Inc. who has 0% NGLs.

Figure 13.

Source: Net Advantage 8

Figure 14.

Source: Net Advantage 8-12

Figure 15.

Source: Net Advantage 8-12

Figure 16.

Source: Net Advantage 8-12; PXD 7

The four charts above show key metrics between Pioneer and its competitors as of fiscal year end 2017. Pioneer is not the largest company nor does it have the most sales relative to its peers, but it does have the lowest Debt/EBITDA ratio at 1.10 in addition to the highest ROE of 7.70%. Showing that they are in the best position to pay off their incurred debt relative to their peers; a factor that is important in the energy industry during times of decreasing oil prices. Another important factor to consider is their MBOE/Drilling metric of 168x. This metric measures

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how efficient a company is at extracting oil at a low cost. Pioneer is currently on the low end of the spectrum with the average ratio at 250x in the industry, but they have been cutting their margins over the last four years by a total of 46%, and are expected to continue that trend. The proven reserve peer comparison chart shows the amount of oil & gas that Pioneer is able to add to their reserves relative to the amount of oil & gas produced within the last fiscal year. The ratio is calculated by dividing the amount of oil produced within the year by the current levels of proven reserves. Higher ratios show that companies are more efficiently adding to their proven reserves. Pioneer was able to report the second highest ratio at 10.09% compared to the industry average of 8.13%. Moving forward they will be a pure play in the Permian Basin in Texas, and we expect the Pioneer proven reserve replacement ratio to increase to 13.39% in 2022. Due to our production outlook in 2022, we expect Pioneer to produce 217,692 MBOE and have proven reserves at 1,624,622 MBOE. SWOT Analysis Strengths: Well-Positioned Operation Pioneer is now a pure-play in the Texas West Permian Basin, boasting a 2017 proven reserves balance of $20.4 billion7. This location is one of the strongest to be based out of in the oil industry, as West Texas accounts for 75% of proven oil fields with a remaining estimated life of 40 years7. Low Production Costs As part of their company cost cutting initiatives, Pioneer has decreased their per barrel production costs by 38% over the last 3 years, from $9.6/BOE to $6/BOE7. Pioneer is poised to continue decreasing these margins, which boosts profitability and bottom-line growth. Weaknesses: Commodity Price Dependency As a producer, Pioneer’s business model inherently exposes them to volatility in commodity prices. While the company benefits in a rising price environment, should prices decrease, this will damage sales numbers. Over-reliance on realized prices on commodity sales leaves much of Pioneer’s success up to the market. Opportunities: Loosening Environmental Regulation The oil production industry is subject to government regulations at all levels of operation. In many cases, compliance with policy standards will increase production

costs and decrease profitability. However, the Trump administration has indicated that they plan to decrease regulatory pressure in an attempt to solidify the United States as an energy powerhouse24. Short-Term Increase in Oil Prices The EIA projects the price per barrel of WTI crude oil in 2018 to be $59.37, a year over year increase of $8.58 per barrel18. This will increase Pioneer’s average realized commodity selling price, boosting revenues. Threats: Prolonged Freezing Temperatures Winter weather that has been increasingly more intense in the first parts of the calendar year is expected to negatively affect Pioneer’s operations. Management estimates production losses of 6 MBOE/day during the first quarter due to these freezing temperatures7. Using a discounted cash flow, economic profit model and relative valuation analyses, we give Pioneer Natural Resources a HOLD rating with an intrinsic stock price target of $198-$204 that is above the current price of $188.32. To arrive at this price recommendation, we forecasted future cash flows through the continuing value period of 2022. We chose this forecast because Pioneer is not planning any major operational changes in the next five years. We believe they will realize expected growth in the Permian Basin while also stabilizing that growth in five years due to the exploration industry’s correlation to volatile oil prices. Our forecast estimates take into consideration management guidance, historical patterns and personal predictions. In February of 2018, Pioneer announced their divestiture plans to become a pure play in the Permian Basin within Texas13. Our growth forecasts show moderately high growth in the first three years, and higher growth in the final two years. This growth assumption is in line with management guidance, although we aimed for a more conservative growth estimate. The next three years we forecast Pioneer to spend relatively more than historical averages on capital expenditures to achieve their target volume growth rate of 20% in 2022. Managerial guidance expects capital expenditures to be $2.9 billion in order to settle into the Permian Basin as a pure play; our model is well in line considering our forecasts show capital expenditures of $2.835 billion13. The continuing value growth rate assumption was made at 2.5%. Due to Pioneer being a pure play exploration

Macroeconomic Outlook

Valuation Analysis

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company operating within the United States, where the country’s GDP is 2.9%. We do not expect Pioneer to grow at a rate that exceeds the United States, so we predict that they will grow at 2.5% indefinitely. Revenue Growth We projected revenue growth based on volume growth and commodity price increases. We first separated volume growth into three main segments: oil, gas and NGLs. With managerial guidance on volume growth expected to reach annualized growth rates of 26% through the year 202613. We project volume growth in all three categories to be 15% in the first three years and 20% in the final two years. Our target price for oil in the continuing value period is $52.87, for gas is $3.03 and for NGLs to be $19.94. We projected our commodity prices on a weighted average of oil, gas and NGL prices on an annualized per year basis with a target price of $38.89 for Pioneer in 2022. The high percentage growth seen in 2018 is due to Pioneers 2017 oil price of $48.24 rising to an annualized expected price of $58.17 in 2018. Oil, gas and NGL price changes are very consistent with price changes seen in the oil, gas and NGL futures market price changes. We then multiplied our total production (MBOE) by the weighted average commodity price each year to get the projected revenue. Oil & Gas Production Expense Oil & gas production expense for Pioneer is calculated by the annualized price of oil in a given year multiplied by total production volume. This is expected to grow by 113% over the five-year period due to significant volume increases. Although that may seem high, this is a positive for Pioneer because they are improving their margins by cutting their production cost to extract one BOE of oil. In the past four years Pioneer has been able to cut their production cost per BOE from $11.10 to $6.00. This is due to their unique extraction technology to efficiently extract oil & gas from shale. Management guidance outlines that they expect to continue to cut production costs given their horizontal Permian Basin wells and cost reduction initiatives13. In 2017, the production cost per BOE in the Permian Basin was $4.79, and with Pioneer moving to be a pure play and consolidating their costs even further, we expect their production cost/BOE to be $4.45. Purchased Oil & Gas Expense Purchased oil & gas expense for Pioneer comes from their aim to diversify their revenues and satisfy unused pipeline capacity commitments. Pioneer purchases and sells third party transactions to Gulf Coast and international export markets in order to gain that diversification. They assume the risk and the reward of the transaction. We projected

this based upon a historical moving average of purchased oil & gas expense compared to revenue, varying from 54%-57%. The reason that Pioneer loses money both historically and in our forecast when purchased oil & gas expense is combined with sales of purchased oil & gas is due to transportation costs of that oil & gas. Therefore, we show this expense growing with proportion to revenue and staying consistent with historical trends. Debt Debt is very important within the energy industry. Due to volatile oil prices, energy firms run the risk of defaulting on payments if a large principle of debt comes due when oil prices are low. We forecasted their payments of debt directly from management guidance on debt maturity payments; in May of 2018, Pioneer has a debt maturity of $450 million coming due, and plans to pay that balance entirely with cash13. We also want to highlight that Pioneer has minimal risk regarding the issue of not meeting interest payments or defaulting on principal payments. The debt-to-equity ratio for Pioneer has historically been low and is forecasted to be 0.24 in 2022. They do not have any principal payments coming due that exceed their cash balance. They also have a high interest coverage ratio expected to be 14.68 in 2018 and 22.87 in 2022, showing that they can easily meet interest payments. Weighted Average Cost of Capital (WACC) We calculated a WACC of 8.71% using Pioneer’s capital structure of 90.30% equity and 9.70% debt. We anticipate that Pioneer will continue to maintain the same capital structure indefinitely into the future. The WACC is calculated from the cost of equity and cost of debt calculations explained below. Cost of Equity We utilized the Capital Asset Pricing Model (CAPM) to calculate the cost of equity to be 9.26%. The three variables within the CAPM are listed below.

• Risk Free Rate= 3.02% • Equity Risk Premium (ERP)= 4.95% • Beta= 1.26

The risk free rate represents the current 30-year U.S. treasury yield3. The equity risk premium is derived from Damodaran’s TTM implied ERP on April 1, 20184. We felt that this ERP was best to reflect the historical geometric average of returns against the market. Beta was calculated on a historical average of two-year, three-year, five-year and eight-year monthly beta’s5. Cost of Debt

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To calculate the cost of debt for Pioneer we found that their current bond rating on publically traded debt is a Baa2 rating on Moody’s6. We then referenced the Damodaran default spread on companies with a market capitalization greater than $5 billion with a debt rating of Baa2; to find that default premium to be 1.27%4. We then took the current risk free rate and added the default premium to get a pre-tax cost of debt of 4.29%. From there we multiplied the pre-tax cost of debt by one minus the marginal tax rate of 21.93% and calculated the cost of debt to be 3.35%. We found the marginal tax rate to be 21.93% by taking a historical average of the marginal tax rate and then subtracted 14% to get the new rate under the new tax law. Valuation Models After macroeconomic, industry and company specific analysis, we arrived with an intrinsic value for Pioneer Natural Resources of $198-$204. We arrived at this valuation using the different valuation methods discussed below, but we believe that that discounted cash flow, economic profit and relative valuation analyses are the best representation of the true value of Pioneer. We do not believe that the dividend discount model is an accurate representation due to the fact that Pioneer issues a very small dividend. Discounted Cash Flow & Economic Profit Model Using the discounted cash flow and economic profit model we arrive at a price of $200.46 per share. We believe this is an accurate representation of the value of Pioneer. The important assumptions within these models is a continuing value (CV) growth rate of 2.5%. NOPLAT has grown historically by 43% and 151% in the previous two years and is forecasted to continue to grow at an annualized rate of 71% until 2022, driven by revenue growth. Free cash flows are projected to be relatively low in years 2018, 2019 and 2022 due to high capital expenditures to pave way for revenue growth; thus resulting in high NOPLAT growth. From 2021 going forward to 2022 free cash flows are significantly higher due to a reduction in capital expenditures because operations in the Permian Basin are expected to stabilize. These models are able to capture the company specific advantages of Pioneer, such as their ability to cut production costs in addition to expanding operations to increase production. Relative Valuation We believe that this is another valuation metric that shows an accurate valuation of Pioneer. Using comparable companies to obtain an implied forward P/E ratio and per share price based on enterprise value/EBITDA multiples shows a per share range of $203.44-$204.12. The peers

that we used are companies within the energy industry that have a market capitalization over $15 billion, compete with Pioneer and are strictly exploration and production companies. The companies include Conoco Phillips, EOG Resources Inc., Anadarko Petroleum Corporation, Concho Resources Inc., Continental Resources Inc., Devon Energy Corporation and Noble Energy Inc. Compared to the average of their peers, Pioneer currently has relatively lower P/E ratios in 2018 and 2019. We also used an enterprise value/EBITDA multiple to see how they compete relative to their peers ignoring capital structure. They are trading at a slightly higher multiple (11.20x vs. 11.09x) and we believe it is reflective of their previous business plan of not operating as a pure play. Thus showing an accurate depiction of Pioneer operating as an average company within the industry in the past. Figures 17 & 18.

Source: Net Advantage 8

Dividend Discount Model (DDM) We do not believe that the dividend discount model is the most accurate representation of the value of Pioneer. Pioneer currently issues a dividend of $0.08 per share, but is expected to raise that dividend to $0.16 per share according to management13. The dividend yield is only 0.04% and we believe that this is not significant enough to derive a valuation. For our calculations we found a continuing value stock price in 2022, assuming a dividend of $0.16 for each year until then. We then discounted

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those values back with the cost of equity to get a valuation of $162.38 per share. Beta vs. Risk-Free Rate Differences in beta and the risk-free rate are important to our model because they affect Pioneer’s WACC value in the cost of equity determination. Changes in the risk-free rate have less of an impact on intrinsic value per share than changes in beta, which is likely to be the variable that will see more volatility due the cyclical nature of the oil production industry. Figure 19.

CV Growth Rate vs. Equity Risk Premium The CV growth of NOPLAT is important to our model because it represents growth into perpetuity at the steady state, while the equity risk premium is a key driver in the WACC calculation. Changes in either variable do not result in large differences in intrinsic value per share. Figure 20.

Depreciation vs. Pre-tax Cost of Debt Due to how Pioneer is primarily financed with equity, changes in pre-tax cost of debt do not result in large changes to share value. However, the depreciation rate on their equipment largely affects the value of Pioneer’s invested capital, and therefore their free cash flow in the DCF calculation. Pioneer’s ability to maintain usefulness of their key operating equipment will have a large impact on their intrinsic value per share. Figure 21.

Production Cost 2022E vs. Production Volume 2022E Production cost is important to our model because improving efficiency in production expenses is key, as Pioneer is a commodity based business. However, changes in production volume have a significant impact, as Pioneer’s revenue is driven by the amount of oil it can produce and sell. Figure 22.

ROIC vs SG&A Margins 2022E When testing ROIC vs SG&A margins we found that the intrinsic stock price is moderately volatile with both metrics. ROIC affects the economic profit model, and it can be seen that the stock value changes more with a decrease in ROIC than an increase in ROIC. SG&A margins affect the NOPLAT calculation, but do not significantly influence the target stock price. Figure 23.

Commodity Price 2022E vs. Tax Rate Changes in the tax rate are important to our model because they affect the value of NOPLAT, and therefore our DCF intrinsic value per share. However, changes in commodity prices have much more of an impact on share value, as Pioneer is a commodity based business, and realized prices on their sold goods is a key driver of value. Figure 24.

Macroeconomic Outlook

Sensitivity Analysis

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Important Disclaimer This report was created by students enrolled in the Security Analysis (6F:112) class at the University of Iowa. The report was originally created to offer an internal investment recommendation for the University of Iowa Krause Fund and its advisory board. The report also provides potential employers and other interested parties an example of the students’ skills, knowledge and abilities. Members of the Krause Fund are not registered investment advisors, brokers or officially licensed financial professionals. The investment advice contained in this report does not represent an offer or solicitation to buy or sell any of the securities mentioned. Unless otherwise noted, facts and figures included in this report are from publicly available sources. This report is not a complete compilation of data, and its accuracy is not guaranteed. From time to time, the University of Iowa, its faculty, staff, students, or the Krause Fund may hold a financial interest in the companies mentioned in this report.

References: 1. Deloitte (2017). Oil & Gas Mergers and Acquisitions Report-Midyear 2017. Deloitte, Retrieved from https://www2.deloitte.com/content/dam/Deloitte/us/Documents/energy-resources/us-oil-gas-m-n-a-report-midyear-2017.pdf 2. Deloitte (2018). 2018 Oil and Gas Industry Outlook. Deloitte, Retrieved from https://www2.deloitte.com/us/en/pages/energy-and-resources/articles/oil-and-gas-industry-outlook.html 3. Federal Reserve (2018). Selected Interest Rates (Daily) – H.15. Board of Governors of the Federal Reserve System, Retrieved from https://www.federalreserve.gov/releases/h15/ 4. Damodaran (2018). Damodaran Online. Damodaran, Retrieved from http://pages.stern.nyu.edu/~adamodar/ 5. Bloomberg (2018). Pioneer Natural Resources. Bloomberg, Retreived from Bloomberg Technology 6. FINRA (2018). Bonds. Morningstar, Retrieved from http://finra-markets.morningstar.com/BondCenter/Results.jsp 7. Pioneer Natural Resources (2018). 2017 10-K and Annual Report. United States Securities and Exchange Commission. Retreived from http://investors.pxd.com/static-files/ffe0b7cd-0887-4038-b339-6b7d08b21b27 8. Net Advantage (2017). S&P 500 Oil & Gas Exploration & Production. S&P Global Market Intelligence. Retrieved from https://www-capitaliq-com.proxy.lib.uiowa.edu/CIQDotNet/Index/IndexWidgetTearsheet.aspx?companyId=2671485 9. Net Advantage (2017). ConocoPhillips. S&P Global Market Intelligence. Retrieved from https://www-capitaliq-com.proxy.lib.uiowa.edu/CIQDotNet/company.aspx?companyId=296527

10. Net Advantage (2017). EOG Resources Inc. S&P Global Market Intelligence. Retrieved from https://www-capitaliq-com.proxy.lib.uiowa.edu/CIQDotNet/company.aspx?companyId=269660&fromSearchProfiles=True 11. Net Advantage (2017). Anadarko Petroleum Corporation. S&P Global Market Intelligence. Retrieved from https://www-capitaliq-com.proxy.lib.uiowa.edu/CIQDotNet/company.aspx?fromSearchProfiles=True&companyId=251349 12. Net Advantage (2017). Concho Resources Inc. S&P Global Market Intelligence. Retrieved from https://www-capitaliq-com.proxy.lib.uiowa.edu/CIQDotNet/company.aspx?companyId=26906 13. Pioneer Natural Resources (2018). IPAA Oil & Gas Investment Symposium. Pioneer Natural Resources, Retrieved from http://investors.pxd.com/static-files/cf1c8bdc-b204-4f42-91af-90e515213d7a 14. Organization of the Petroleum Exporting Countries (2018). Annual Statistical Bulletin. OPEC, Retrieved from http://www.opec.org/opec_web/en/publications/202.html 15. EIA (2018). U.S Energy Information Administrations: Weekly U.S. Field Production of Crude Oil. EIA, Retrieved from https://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=pet&s=wcrfpus2&f=w 16. IMF (2018). Real GDP Growth. IMF, Retrieved from http://www.imf.org/external/datamapper/NGDP_RPCH@WEO/OEMDC/ADVEC/WEOWORLD 17. Factset (2018). PXD-US. Factset, Retrieved from Factset Techonology 18. U.S. Energy Information Administration (2018). EIA – Independent Statistics and Analysis. EIA, Retrieved from http://www.eia.gov/ 19. Federal Reserve (2018). Real Gross Domestic Product. Federal Reserve Economic Data, Retrieved from https://fred.stlouisfed.org/series/A191RL1A225NBEA 20. Federal Open Market Committee (2018). FOMC Projection materials. Federal Open Market Committee, Retrieved from https://www.federalreserve.gov/monetarypolicy/fomcprojtabl20180321.htm 21. IMF (2018). Real GDP Growth. International Monetary Fund, Retrieved from http://www.imf.org/external/datamapper/NGDP_RPCH@WEO/CHN/IND/EURO 22. Bureau of Economics Analysis (2018). News Release: Gross Domestic Product. Bureau of Economic Analysis, Retrieved from https://bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm 23. Decker, S., Wethe, D., and Yaseijko, C. (2018). Halliburton Takes Fracking Fight From Oil Field to Patent

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Office. Bloomberg, Retrieved from https://www.bloomberg.com/news/articles/2018-02-06/halliburton-takes-fracking-fight-from-oil-field-to-patent-office 24. Tan, Huileng. (2018). Here’s how Trump’s energy policies may impact oil output, prices. CNBC, Retrieved from https://www.cnbc.com/2017/01/31/us-crude-oil-output-has-some-ways-to-go-before-big-price-impact-consulant.html 25. Nasdaq (2018). PXD Earnings Date. Nasdaq, Retrieved from https://www.nasdaq.com/earnings/report/pxd

Pioneer Natural ResourcesKey Assumptions of Valuation Model

Ticker Symbol PXDCurrent Share Price $188.32Current Model Date 4/15/2018FY End (month/day) Dec. 31Shares outstanding 170,300,825PXD Baa2 default premium 1.27%Pre-Tax Cost of Debt 4.29%Cost of Equity 9.26%Beta 1.26Risk-Free Rate 3.02%Equity Risk Premium 4.95%CV Growth of NOPLAT 2.50%CV Growth of EPS 2.50%CV ROE 15.09%CV ROIC 19.20%Total Commodity Price 2022E 38.89$ Production Cost per BOE 2022E 4.45$ General & Administrative Margins 2022E 3.79%Oil & Gas Production Expense Margin 2022E 9.47%Production MBOE 2022E 217,692 Oil Price 2022E 52.87Current Dividend Yield 0.04%

Pioneer Natural ResourcesRevenue Decomposition

Fiscal Years Ending Dec. 31 2015 2016 2017 2018E 2019E 2020E 2021E 2022EOil, volume (MBbls) 38452 48926 57878 66560 76544 88025 105630 126756Oil, price (USD) $ 43.55 $ 39.65 $ 48.24 $ 58.17 $ 57.51 $ 54.45 $ 52.34 $ 52.87 Oil, revenue (mm USD) $ 1,675 $ 1,940 $ 2,792 $ 3,871.63 $ 4,402.06 $ 4,792.55 $ 5,529.07 $ 6,701.23 Y/Y Growth production 17.5% 27.2% 18.3% 15.00% 15.00% 15.00% 20.00% 20.00%Y/Y Growth Revenue -40.14% 15.84% 43.93% 38.67% 13.70% 8.87% 15.37% 21.20%Production Cost $/BOE 9.6$ 6.8$ 6.0$ 4.79$ 4.70$ 4.61$ 4.52$ 4.45$ Oil as % of Total Production 51.63% 57.17% 58.23% 58.23% 58.23% 58.23% 58.23% 58.23%

NGL, volume (MBbls) 14086 15922 20078 23090 26553 30536 36643 43972NGL, price (USD) $ 13.31 $ 13.49 $ 19.31 $ 18.92 $ 19.11 $ 19.35 $ 19.64 $ 19.94 NGL, revenue (mm USD) $ 187 $ 215 $ 388 $ 436.94 $ 507.51 $ 590.93 $ 719.76 $ 876.66 Y/Y Growth production -10.6% 13.0% 26.1% 15.00% 15.00% 15.00% 20.00% 20.00%Y/Y Growth Revenue -56.59% 14.56% 80.51% 12.70% 16.15% 16.44% 21.80% 21.80%NGL, as % of Total Production 18.91% 18.60% 20.20% 20.20% 20.20% 20.20% 20.20% 20.20%

Gas, volume (MMcf) 131642 124428 128665 147965 170159 195683 234820 281784Gas, price (USD) 2.40$ 2.11$ 2.63$ $ 3.10 $ 3.07 $ 3.04 $ 3.02 $ 3.03 Gas, revenue (mm USD) $ 315.94 $ 262.54 $ 338.39 $ 458.69 $ 522.22 $ 594.54 $ 708.10 $ 853.97 Y/Y Growth production -4.4% -5.5% 3.4% 15.00% 15.00% 15.00% 20.00% 20.00%Y/Y Growth Revenue -44.30% -16.90% 28.89% 35.55% 13.85% 13.85% 19.10% 20.60%Gas, volume in MBOE 21940 20738 21444 24661 28360 32614 39137 46964Natural Gas as % of Total Production 29.46% 24.23% 21.57% 21.57% 21.57% 21.57% 21.57% 21.57%

Total (MBOE) 74478 85586 99400 114310 131457 151175 181410 217692Total, price (USD) 29.25$ 28.25$ 35.39$ $ 40.85 $ 40.58 $ 39.33 $ 38.50 $ 38.89 Total Production Revenue (mm USD) $ 2,178.49 $ 2,417.80 $ 3,517.77 $ 4,669.83 $ 5,334.23 $ 5,946.24 $ 6,985.18 $ 8,466.04 Y/Y Growth in Production 4.3% 14.9% 16.1% 15.00% 15.00% 15.00% 20.00% 20.00%Y/Y Growth in Revenue -42.64% 10.99% 45.49% 32.75% 14.23% 11.47% 17.47% 21.20%Sales of purchased oil and gas (mm) 964 1,533 1,776 2462 2962 3146 3752 4576Sales of purchased oil and gas as % of total production revenue 44.25% 63.40% 50.49% 52.71% 55.54% 52.91% 53.72% 54.06%

Estimated Volume Purchased, MBOE 34291 56531 51060 62284 75327 82217 100486 121239Purchased oil & gas expense as a percentage production revenue 46.04% 66.05% 51.37% 54.49% 57.30% 54.39% 55.39% 55.69%

Revenue by GeographyUnited States:Spraberry Field, Volume (MBOE) 45748 62523 81842Eagle Ford Shale Field, Volume (MBOE) 16550 12528 8116Raton Gas Field (MBOE) 6794 5895 5384Other (MBOE) 5386 4640 4059Total, United States (MBOE) 74478 85586 99401US Revenue, (mm USD) $ 2,178.48 $ 2,417.80 $ 3,517.80 Y/Y Growth in production -10.2% -13.2% -8.7%Y/Y Growth in Revenue -50.3% -13.9% -12.5%

Pioneer Natural ResourcesIncome StatementIn Millions $Fiscal Years Ending Dec. 31 2015 2016 2017 2018E 2019E 2020E 2021E CV (2022)Revenues and other income:

Oil & gas revenue 2178.00 2418.00 3518.00 4669.83 5334.23 5946.24 6985.18 8466.04Sales of purchased oil & gas 964.00 1533.00 1776.00 2461.65 2962.37 3146.26 3752.46 4576.38

Operating Revenue: 3142.00 3951.00 5294.00 7131.48 8296.59 9092.50 10737.64 13042.42Total interest & other revenues 22.00 32.00 53.00 36.78 37.89 39.04 40.22 41.43Derivative gains (losses), net 879.00 (161.00) (100.00) 0.00 0.00 0.00 0.00 0.00Gain (loss) on disposition of assets, net 782.00 2.00 208.00 0.00 0.00 0.00 0.00 0.00

Total revenues 4825.00 3824.00 5455.00 7168.26 8334.49 9131.54 10777.86 13083.85Costs and expenses:

Oil & gas production expense 717.00 581.00 591.00 547.55 617.85 696.92 819.97 968.73Production & ad valorem taxes 145.00 136.00 215.00 228.46 242.76 257.96 274.10 291.26Depletion, depreciation & amortization 1385.00 1480.00 1400.00 1563.39 1732.43 1879.01 2006.11 2055.49Purchased oil & gas 1003.00 1597.00 1807.00 2544.44 3056.62 3233.89 3869.19 4715.00Impairment of oil & gas properties 1056.00 32.00 285.00 0.00 0.00 0.00 0.00 0.00Exploration & abandonments expense 99.00 119.00 106.00 108.12 109.76 111.21 112.57 113.75General & administrative expense 327.00 325.00 326.00 346.07 362.87 378.74 394.52 494.31Accretion of discount on asset retirement obligations 12.00 18.00 19.00 19.38 19.67 19.93 20.18 20.39Interest expense 187.00 207.00 153.00 97.94 138.79 153.74 165.65 175.76Other 315.00 288.00 244.00 255.57 267.01 277.89 288.91 299.41

Total Expenses 5246.00 4783.00 5146.00 5710.92 6547.75 7009.30 7951.22 9134.10Income (loss) from continuing operations before income taxes (421.00) (959.00) 309.00 1457.34 1786.73 2122.24 2826.64 3949.76Income tax provision (benefit) (155.00) (403.00) (524.00) 319.60 391.83 465.41 619.88 866.18Income (loss) from continuing operations (266.00) (556.00) 833.00 1137.75 1394.90 1656.83 2206.76 3083.57Income from discontinued operations, net of tax (7.00) 0.00 0.00 0.00 0.00 0.00 0.00 0.00Net income (loss) attributable to common stockholders (273.00) (556.00) 833.00 1137.75 1394.90 1656.83 2206.76 3083.57

Basic earnings per share attributable to common stockholders (1.83) (3.34) 4.86 $6.70 $8.23 $9.78 $13.03 $18.22Weighted average basic shares outstanding 149.00 166.00 170.00 170 169 169 169 169Dividends per common share 0.08 0.08 0.08 $0.16 $0.16 $0.16 $0.16 $0.16

Pioneer Natural ResourcesBalance Sheet

Fiscal Years Ending Dec. 31 2015 2016 2017 2018E 2019E 2020E 2021E CV (2022)ASSETS

Current Assets: Cash and cash equivalents 1,391.00 1,118.00 896.00 1,589.60 1,788.14 3,176.92 5,338.16 8,448.84

Short-term investments 0.00 1,441.00 1,218.00 1,254.78 1,292.68 1,331.72 1,371.93 1,413.37 Accounts recievable 385.00 518.00 640.00 849.18 987.92 1,082.69 1,278.58 1,553.03 Income tax recievable 43.00 3.00 7.00 16.75 20.54 24.40 32.49 45.40 Inventories 155.00 181.00 212.00 385.13 448.05 491.03 579.87 704.34 Prepaid expenses 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Other current Assets 1,220.00 37.00 37.00 37.63 38.27 38.92 39.58 40.25 Total current assets 3,194.00 3,298.00 3,010.00 4,133.08 4,575.59 6,145.67 8,640.62 12,205.23 Property plant and equipment at cost: Oil and gas properties Proved properties 16,631.00 18,566.00 20,404.00 23,234.56 26,065.11 28,895.67 31,268.38 33,641.09 Unproved properties 169.00 486.00 558.00 563.03 568.06 573.09 578.11 583.14 Accumulated depletion, depreciation, and amortization (6,778.00) (8,211.00) (9,196.00) (10,759.39) (12,491.81) (14,370.82) (16,376.93) (18,432.42) Total property, plant and equipment 10,022.00 10,841.00 11,766.00 13,038.20 14,141.36 15,097.93 15,469.56 15,791.81 Deferred income taxes 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Goodwill 272.00 272.00 270.00 270.00 270.00 270.00 270.00 270.00 Other property and equipment, net 1,523.00 1,529.00 1,759.00 1,788.90 1,819.31 1,850.24 1,881.70 1,913.69 Other assets: Long-term derivative assets 64.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Long-term investments 0.00 420.00 66.00 67.99 70.05 72.16 74.34 76.59 Other 79.00 99.00 132.00 134.24 136.53 138.85 141.21 143.61Total Assets 15,154.00 16,459.00 17,003.00 19,432.41 21,012.83 23,574.86 26,477.43 30,400.91

LIABILITIES AND STOCKHOLDER'S EQUITY

Current Liabilities Accounts payable: 883.00 875.00 1,282.00 1,958.49 2,278.46 2,497.04 2,948.84 3,581.79 Trade 798.00 741.00 1,174.00 1,735.88 2,019.48 2,213.21 2,613.66 3,174.66 Due to affiliates 85.00 134.00 108.00 222.61 258.98 283.83 335.18 407.13 Interest payable 65.00 68.00 59.00 30.59 43.34 48.01 51.73 54.89 Income taxes payable 2.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Other current liabilities Short-term derivatives 0.00 77.00 232.00 57.57 59.01 60.49 62.00 63.55 Deferred revenue 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Current portion of long term debt 448.00 485.00 449.00 450.00 0.00 450.00 500.00 600.00 Other 64.00 61.00 106.00 107.80 109.63 111.50 113.39 115.32 Total current liabilities 1,462.00 1,566.00 2,128.00 2,604.45 2,490.45 3,167.03 3,675.96 4,415.55 Long term debt 3,207.00 2,728.00 2,283.00 3,235.11 3,583.75 3,861.30 4,096.95 4,245.84 Long-term derivative liabilities 1.00 7.00 23.00 9.40 9.63 9.87 10.12 10.37Defered income taxes 1,776.00 1,397.00 899.00 892.35 885.75 879.19 872.69 866.23Other liabilities 333.00 350.00 391.00 397.65 404.41 411.28 418.27 425.38Total Liabilties 6,779.00 6,048.00 5,724.00 7,138.95 7,373.98 8,328.68 9,073.99 9,963.38

Stockholder's Equity: Common stock 6,269.00 8,894.00 8,976.00 8,979.84 8,983.68 8,987.52 8,991.36 8,995.20 Treasury stock 199.00 218.00 249.00 349.00 375.25 401.50 427.75 454.00 Retained earnings 2,298.00 1,728.00 2,547.00 3,657.63 5,025.42 6,655.16 8,834.83 11,891.33 Accumulated other comprehensive income (loss): Net deffered hedge gains (loss), net of tax 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Total stock holders equity atrributed to common stock ho 8,368.00 10,404.00 11,274.00 12,288.47 13,633.85 15,241.18 17,398.44 20,432.54 Non controlling interest in consolidating subsidiares 7.00 7.00 5.00 5.00 5.00 5.00 5.00 5.00 Total stockholders equity 8,375.00 10,411.00 11,279.00 12,293.47 13,638.85 15,246.18 17,403.44 20,437.54Total Liabilities and Stock holder's equity 15,154.00 16,459.00 17,003.00 19,432.41 21,012.83 23,574.86 26,477.43 30,400.91

Pioneer Natural ResourcesCash Flow StatementIn Millions $Fiscal Years Ending Dec. 31 2015 2016 2017Net income (loss) (273) (556) 833Adjustments to reconcile net income (loss) to net cash provided by operating activities

Depletion, depreciation & amortization 1385 1480 1400Impairment of oil & gas properties 1056 32 285Impairment of inventory & other property and equipment 86 8 2Exploration expenses, including dry holes 28 42 22Deferred income taxes (178) (379) (519)Gain on disposition of assets, net (782) (2) (208)Accretion of discount on asset retirement obligations 12 18 19Discontinued operations (4) - -Interest expense 18 13 5Derivative related activity (3) 851 174Amortization of stock-based compensation 90 89 79Other noncash items 38 66 74

Change in operating assets and liabilitiesAccounts receivable, net 54 (134) (122)Income taxes receivable (20) 40 (4)Inventories 8 (32) (35)Derivatives - (24) -Investments - (22) 8Other current assets 0 (7) (3)Accounts payable (258) 58 134Interest payable 25 3 (9)Other current liabilities (34) (46) (45)

Net cash flows from operating activities 1248 1498 2090Cash flows from investing activities

Proceeds from disposition of assets, net of cash sold 553 507 352Payments for acquisitions - (428) -Proceeds from investments - 902 1465Purchase of investments - (2741) (899)Additions to oil & gas properties (2110) (1857) (2365)Additions to other assets & other property & equipment, net (283) (203) (336)

Net cash flows from investing activities (1840) (3820) (1783)Cash flows from financing activities

Borrowings under long-term debt 998 - -Principal payments on long-term debt - (455) (485)Proceeds from issuance of common stock, net of issuance costs - 2534 -Distributions to noncontrolling interests (1) - -Exercise of long-term incentive plan stock options & employee stock purchases 13 8 6Purchase of treasury stock (31) (25) (36)Payment of financing fees (9) - -Dividends paid (12) (13) (14)

Net cash flows from financing activities 958 2,049 (529)Net increase (decrease) in cash & cash equivalents 366 (273) (222)Cash & cash equivalents, beginning of period 1,025 1,391 1,118Cash & cash equivalents, end of period 1,391 1,118 896

Pioneer Natural ResourcesCash Flow StatementIn Millions $Fiscal Years Ending Dec. 31 2018E 2019E 2020E 2021E CV (2022)Net income (loss) 1,137.75 1,394.90 1,656.83 2,206.76 3,083.57Adjustments to reconcile net income (loss) to net cash provided by operating activities

Depletion, depreciation & amortization 1,563.39 1,732.43 1,879.01 2,006.11 2,055.49Changes in defered income taxes (6.65) (6.60) (6.55) (6.50) (6.46)

Change in operating assets and liabilitiesAccounts receivable, net (209.18) (138.74) (94.77) (195.90) (274.44)Income taxes receivable (9.75) (3.79) (3.86) (8.10) (12.91)Inventories (173.13) (62.92) (42.98) (88.84) (124.47)Other current assets (0.63) (0.64) (0.65) (0.66) (0.67)Accounts payable 676.49 319.97 218.58 451.80 632.95

Deferred revenue 0.00 0.00 0.00 0.00 0.00Interest payable (28.41) 12.76 4.67 3.72 3.16Short-term derivative liabilities (174.43) 1.44 1.48 1.51 1.55Other current liabilities 1.80 1.83 1.86 1.90 1.93

Net cash flows from operating activities 2,777.24 3,250.64 3,613.61 4,371.79 5,359.70Cash flows from investing activities

(Increase) decrease in short-term investments (36.78) (37.89) (39.04) (40.22) (41.43)(Increase) decrease in long-term investments (1.99) (2.05) (2.12) (2.18) (2.25)Additions to oil & gas properties (Capital expenditures) (2,835.59) (2,835.59) (2,835.59) (2,377.74) (2,377.74)Additions to other assets & other property & equipment, net (29.90) (30.41) (30.93) (31.45) (31.99)Long-term derivative assets 0.00 0.00 0.00 0.00 0.00

Long-term derivative liabilities (13.60) 0.23 0.24 0.25 0.25(Increase) decrease in other assets (2.24) (2.28) (2.32) (2.36) (2.40)

Goodwill 0.00 0.00 0.00 0.00 0.00Net cash flows from investing activities (2,920.11) (2,907.99) (2,909.75) (2,453.70) (2,455.55)

Cash flows from financing activitiesBorrowings under long-term debt 952.11 348.64 277.55 235.65 148.90Current portion of long-term debt 1.00 (450.00) 450.00 50.00 100.00Proceeds from issuance of common stock, net of issuance costs 3.84 3.84 3.84 3.84 3.84Distributions to noncontrolling interests 0.00 0.00 0.00 0.00 0.00Purchase of treasury stock (100.00) (26.25) (26.25) (26.25) (26.25)Other liabilities 6.65 6.76 6.87 6.99 7.11

Net deffered hedge gains (loss), net of tax 0.00 0.00 0.00 0.00 0.00 Non controlling interest in consolidating subsidiares 0.00 0.00 0.00 0.00 0.00

Dividends paid (27.12) (27.11) (27.09) (27.08) (27.07)Net cash flows from financing activities 836.47 (144.12) 684.92 243.15 206.53

Net increase (decrease) in cash & cash equivalents 693.60 198.53 1,388.78 2,161.24 3,110.68Cash & cash equivalents, beginning of period 896.00 1,589.60 1,788.14 3,176.92 5,338.16Cash & cash equivalents, end of period 1,589.60 1,788.14 3,176.92 5,338.16 8,448.84

Pioneer Natural ResourcesCommon Size Income StatementIn Millions $Fiscal Years Ending Dec. 31 2015 2016 2017 2018E 2019E 2020E 2021E CV (2022)Revenues and other income:

Oil & gas revenue 69.32% 61.20% 66.45% 65.48% 64.29% 65.40% 65.05% 64.91%Sales of purchased oil & gas 30.68% 38.80% 33.55% 34.52% 35.71% 34.60% 34.95% 35.09%

Operating Revenue 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%Total interest & other revenues 0.70% 0.81% 1.00% 0.52% 0.46% 0.43% 0.37% 0.32%Derivative gains (losses), net 27.98% -4.07% -1.89% 0.00% 0.00% 0.00% 0.00% 0.00%Gain (loss) on disposition of assets, net 24.89% 0.05% 3.93% 0.00% 0.00% 0.00% 0.00% 0.00%

Total revenues 153.56% 96.79% 103.04% 100.52% 100.46% 100.43% 100.37% 100.32%

Costs and expenses: 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Oil & gas production expense 22.82% 14.71% 11.16% 7.68% 7.45% 7.66% 7.64% 9.47%Production & ad valorem taxes 4.61% 3.44% 4.06% 3.20% 2.93% 2.84% 2.55% 2.23%Depletion, depreciation & amortization 44.08% 37.46% 26.45% 21.92% 20.88% 20.67% 18.68% 15.76%Purchased oil & gas 31.92% 40.42% 34.13% 35.68% 36.84% 35.57% 36.03% 36.15%Impairment of oil & gas properties 33.61% 0.81% 5.38% 0.00% 0.00% 0.00% 0.00% 0.00%Exploration & abandonments expense 3.15% 3.01% 2.00% 1.52% 1.32% 1.22% 1.05% 0.87%General & administrative expense 10.41% 8.23% 6.16% 4.85% 4.37% 4.17% 3.67% 3.79%Accretion of discount on asset retirement obligations 0.38% 0.46% 0.36% 0.27% 0.24% 0.22% 0.19% 0.16%Interest expense 5.95% 5.24% 2.89% 1.37% 1.67% 1.69% 1.54% 1.35%Other 10.03% 7.29% 4.61% 3.58% 3.22% 3.06% 2.69% 2.30%

Total Expenses 166.96% 121.06% 97.20% 80.08% 78.92% 77.09% 74.05% 70.03%

Income (loss) from continuing operations before income taxes -13.40% -24.27% 5.84% 20.44% 21.54% 23.34% 26.32% 30.28%Income tax benefit (provision) -4.93% -10.20% -9.90% 4.48% 4.72% 5.12% 5.77% 6.64%

Income (loss) from continuing operations -8.47% -14.07% 15.73% 15.95% 16.81% 18.22% 20.55% 23.64%Income from discontinued operations, net of tax -0.22% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Net income (loss) attributable to common stockholders -8.69% -14.07% 15.73% 15.95% 16.81% 18.22% 20.55% 23.64%

Pioneer Natural ResourcesBalance SheetAs a % of Sales Fiscal Years Ending Dec. 31 2015 2016 2017 2018E 2019E 2020E 2021E CV (2022)ASSETS

Current Assets: Cash and cash equivalents 44.27% 28.30% 16.92% 22.29% 21.55% 34.94% 49.71% 64.78%

Short-term investments 0.00% 36.47% 23.01% 17.60% 15.58% 14.65% 12.78% 10.84% Accounts recievable 12.25% 13.11% 12.09% 11.91% 11.91% 11.91% 11.91% 11.91% Income tax recievable 1.37% 0.08% 0.13% 0.23% 0.25% 0.27% 0.30% 0.35% Inventories 4.93% 4.58% 4.00% 5.40% 5.40% 5.40% 5.40% 5.40% Prepaid expenses 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Defered income taxes Other current Assets 38.83% 0.94% 0.70% 0.53% 0.46% 0.43% 0.37% 0.31% Total current assets 101.65% 83.47% 56.86% 57.96% 55.15% 67.59% 80.47% 93.58% Property plant and equipment at cost: 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Oil and gas properties 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Proved properties 529.31% 469.91% 385.42% 325.80% 314.17% 317.80% 291.20% 257.94% Unproved properties 5.38% 12.30% 10.54% 7.89% 6.85% 6.30% 5.38% 4.47% Accumulated depletion, depreciation, and amortization -215.72% -207.82% -173.71% -150.87% -150.57% -158.05% -152.52% -141.33% Total property, plant and equipment 318.97% 274.39% 222.25% 182.83% 170.45% 166.05% 144.07% 121.08% Deferred income taxes 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Goodwill 8.66% 6.88% 5.10% 3.79% 3.25% 2.97% 2.51% 2.07% Other property and equipment, net 48.47% 38.70% 33.23% 25.08% 21.93% 20.35% 17.52% 14.67% Other assets: 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Long-term derivative assets 2.04% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Long-term investments 0.00% 10.63% 1.25% 0.95% 0.84% 0.79% 0.69% 0.59% Other 2.51% 2.51% 2.49% 1.88% 1.65% 1.53% 1.32% 1.10%Total Assets 482.30% 416.58% 321.17% 272.49% 253.27% 259.28% 246.59% 233.09%

LIABILITIES AND STOCKHOLDER'S EQUITY

Current Liabilities Accounts payable: 28.10% 22.15% 24.22% 27.46% 27.46% 27.46% 27.46% 27.46% Trade 25.40% 18.75% 22.18% 24.34% 24.34% 24.34% 24.34% 24.34% Due to affiliates 2.71% 3.39% 2.04% 3.12% 3.12% 3.12% 3.12% 3.12% Interest payable 2.07% 1.72% 1.11% 0.43% 0.52% 0.53% 0.48% 0.42% Income taxes payable 0.06% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Other current liabilities 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Short-term derivatives 0.00% 1.95% 4.38% 0.81% 0.71% 0.67% 0.58% 0.49% Deferred revenue 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Current portion of long term debt 14.26% 12.28% 8.48% 6.31% 0.00% 4.95% 4.66% 4.60% Other 2.04% 1.54% 2.00% 1.51% 1.32% 1.23% 1.06% 0.88% Total current liabilities 46.53% 39.64% 40.20% 36.52% 30.02% 34.83% 34.23% 33.86%Long term debt 102.07% 69.05% 43.12% 45.36% 43.20% 42.47% 38.15% 32.55%Long-term derivative liabilities 0.03% 0.18% 0.43% 0.13% 0.12% 0.11% 0.09% 0.08%Defered income taxes 56.52% 35.36% 16.98% 12.51% 10.68% 9.67% 8.13% 6.64%Other liabilities 10.60% 8.86% 7.39% 5.58% 4.87% 4.52% 3.90% 3.26%Total Liabilties 215.75% 153.08% 108.12% 100.10% 88.88% 91.60% 84.51% 76.39%

0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Stockholder's Equity: 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Additional paid in captial 199.52% 225.11% 169.55% 125.92% 108.28% 98.85% 83.74% 68.97% Treasury stock 6.33% 5.52% 4.70% 4.89% 4.52% 4.42% 3.98% 3.48% Retained earnings 73.14% 43.74% 48.11% 51.29% 60.57% 73.19% 82.28% 91.17% Accumulated other comprehensive income (loss): 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Net deffered hedge gains (loss), net of tax 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Total stock holders equity atrributed to common stock ho 266.33% 263.33% 212.96% 172.31% 164.33% 167.62% 162.03% 156.66% Non controlling interest in consolidating subsidiares 0.22% 0.18% 0.09% 0.07% 0.06% 0.05% 0.05% 0.04% Total stockholders equity 266.55% 263.50% 213.05% 172.38% 164.39% 167.68% 162.08% 156.70%Total Liabilities and Stock holder's equity 482.30% 416.58% 321.17% 272.49% 253.27% 259.28% 246.59% 233.09%

Pioneer Natural ResourcesBalance SheetAs a % of Total AssetsFiscal Years Ending Dec. 31 2015 2016 2017 2018E 2019E 2020E 2021E CV (2022)ASSETS

Current Assets: Cash and cash equivalents 9.18% 6.79% 5.27% 8.18% 8.51% 13.48% 20.16% 27.79%

Short-term investments 0.00% 8.76% 7.16% 6.46% 6.15% 5.65% 5.18% 4.65% Accounts recievable 2.54% 3.15% 3.76% 4.37% 4.70% 4.59% 4.83% 5.11% Income tax recievable 0.28% 0.02% 0.04% 0.09% 0.10% 0.10% 0.12% 0.15% Inventories 1.02% 1.10% 1.25% 1.98% 2.13% 2.08% 2.19% 2.32% Prepaid expenses 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Defered income taxes 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Other current Assets 8.05% 0.22% 0.22% 0.19% 0.18% 0.17% 0.15% 0.13% Total current assets 21.08% 20.04% 17.70% 21.27% 21.78% 26.07% 32.63% 40.15% Property plant and equipment at cost: Oil and gas properties Proved properties 109.75% 112.80% 120.00% 119.57% 124.04% 122.57% 118.09% 110.66% Unproved properties 1.12% 2.95% 3.28% 2.90% 2.70% 2.43% 2.18% 1.92% Accumulated depletion, depreciation, and amortization -44.73% -49.89% -54.08% -55.37% -59.45% -60.96% -61.85% -60.63% Total property, plant and equipment 66.13% 65.87% 69.20% 67.10% 67.30% 64.04% 58.43% 51.95% Deferred income taxes 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Goodwill 1.79% 1.65% 1.59% 1.39% 1.28% 1.15% 1.02% 0.89% Other property and equipment, net 10.05% 9.29% 10.35% 9.21% 8.66% 7.85% 7.11% 6.29% Other assets: Long-term derivative assets 0.42% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Long-term investments 0.00% 2.55% 0.39% 0.35% 0.33% 0.31% 0.28% 0.25% Other 0.52% 0.60% 0.78% 0.69% 0.65% 0.59% 0.53% 0.47%Total Assets 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%

LIABILITIES AND STOCKHOLDER'S EQUITY

Current Liabilities Accounts payable: 5.83% 5.32% 7.54% 10.08% 10.84% 10.59% 11.14% 11.78% Trade 5.27% 4.50% 6.90% 8.93% 9.61% 9.39% 9.87% 10.44% Due to affiliates 0.56% 0.81% 0.64% 1.15% 1.23% 1.20% 1.27% 1.34% Interest payable 0.43% 0.41% 0.35% 0.16% 0.21% 0.20% 0.20% 0.18% Income taxes payable 0.01% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Other current liabilities Short-term derivatives 0.00% 0.47% 1.36% 0.30% 0.28% 0.26% 0.23% 0.21% Deferred revenue 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Current portion of long term debt 2.96% 2.95% 2.64% 2.32% 0.00% 1.91% 1.89% 1.97% Other 0.42% 0.37% 0.62% 0.55% 0.52% 0.47% 0.43% 0.38% Total current liabilities 9.65% 9.51% 12.52% 13.40% 11.85% 13.43% 13.88% 14.52%Long term debt 21.16% 16.57% 13.43% 16.65% 17.06% 16.38% 15.47% 13.97%Long-term derivative liabilities 0.01% 0.04% 0.14% 0.05% 0.05% 0.04% 0.04% 0.03%Defered income taxes 11.72% 8.49% 5.29% 4.59% 4.22% 3.73% 3.30% 2.85%Other liabilities 2.20% 2.13% 2.30% 2.05% 1.92% 1.74% 1.58% 1.40%Total Liabilties 44.73% 36.75% 33.66% 36.74% 35.09% 35.33% 34.27% 32.77%

Stockholder's Equity: Additional paid in captial 41.37% 54.04% 52.79% 46.21% 42.75% 38.12% 33.96% 29.59% Treasury stock 1.31% 1.32% 1.46% 1.80% 1.79% 1.70% 1.62% 1.49% Retained earnings 15.16% 10.50% 14.98% 18.82% 23.92% 28.23% 33.37% 39.12% Accumulated other comprehensive income (loss): Net deffered hedge gains (loss), net of tax 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Total stock holders equity atrributed to common stock ho 55.22% 63.21% 66.31% 63.24% 64.88% 64.65% 65.71% 67.21% Non controlling interest in consolidating subsidiares 0.05% 0.04% 0.03% 0.03% 0.02% 0.02% 0.02% 0.02% Total stockholders equity 55.27% 63.25% 66.34% 63.26% 64.91% 64.67% 65.73% 67.23%Total Liabilities and Stock holder's equity 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%

Pioneer Natural ResourcesValue Driver Estimationin millionsFiscal Years Ending Dec. 31 2015 2016 2017 2018E 2019E 2020E 2021E CV (2022)NOPLAT ComputationEBITA:Net Sales 3142.00 3951.00 5294.00 7131.48 8296.59 9092.50 10737.64 13042.42 -Cost of Goods Sold 717.00 581.00 591.00 547.55 617.85 696.92 819.97 968.73

-Production & ad valorem taxes 145.00 136.00 215.00 228.46 242.76 257.96 274.10 291.26 -Depletion & depreciation 1367.00 1467.00 1395.00 1558.39 1727.43 1874.01 2001.11 2050.49 -Purchased oil & gas 1003.00 1597.00 1807.00 2544.44 3056.62 3233.89 3869.19 4715.00 -Impairment of oil & gas properties 1056.00 32.00 285.00 0.00 0.00 0.00 0.00 0.00 -Exploration & abandonments expense 99.00 119.00 106.00 108.12 109.76 111.21 112.57 113.75 -General & administrative expense 327.00 325.00 326.00 346.07 362.87 378.74 394.52 494.31 -Other 315.00 288.00 244.00 255.57 267.01 277.89 288.91 299.41

+Implied interest on operating leases 5.10 4.54 4.03 23.64 26.20 28.41 30.34 31.08EBITA -1881.90 -589.46 329.03 1566.52 1938.50 2290.29 3007.59 4140.55

LESS: Adjusted TaxesProvision for income tax -155.00 -403.00 -524.00 319.60 391.83 465.41 619.88 866.18 +Tax shield on Interest Expense 68.85 73.17 52.08 21.48 30.44 33.72 36.33 38.54 +Tax shield on implied lease interest 1.88 1.61 1.37 5.18 5.75 6.23 6.65 6.82 -Tax on Derivitive Gains/Losses 323.65 -56.91 -34.04 0.00 0.00 0.00 0.00 0.00 -Tax on Interest Income 8.10 11.31 18.04 8.07 8.31 8.56 8.82 9.09 -Tax on disposition of assets 287.93 0.71 70.80 0.00 0.00 0.00 0.00 0.00 +Tax shield on accretion of discount on asset retirement obligations 4.42 6.36 6.47 4.25 4.31 4.37 4.43 4.47Adjusted Taxes -699.53 -276.96 -518.88 342.44 424.02 501.16 658.47 906.93

PLUS: Change in Deferred Tax Liabilities Current year DTL 1776.00 1397.00 899.00 892.35 885.75 879.19 872.69 866.23 - Current year DTA 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00Net DTL for current year 1776.00 1397.00 899.00 892.35 885.75 879.19 872.69 866.23

Previous year DTL 1803.00 1776.00 1397.00 899.00 892.35 885.75 879.19 872.69 - Previous year DTA 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00Net DTL for previous year 1803.00 1776.00 1397.00 899.00 892.35 885.75 879.19 872.69

Net Change in DTL (Current-Previous year) -27.00 -379.00 -498.00 -6.65 -6.60 -6.55 -6.50 -6.46

NOPLAT: EBITA - Adjusted Taxes + Change in DT -1209.37 -691.50 349.91 1217.43 1507.88 1782.57 2342.62 3227.17-0.43 -1.51 2.48 0.24 0.18 0.31 0.38

Invested Capital Computation

Operating Current Assets:Normal Cash 32.03 25.38 36.21 47.58 55.33 60.62 71.54 86.85

Accounts recievable 385.00 518.00 640.00 849.18 987.92 1082.69 1278.58 1553.03 Inventories 155.00 181.00 212.00 385.13 448.05 491.03 579.87 704.34 Prepaid expenses 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Income tax recievable 43.00 3.00 7.00 16.75 20.54 24.40 32.49 45.40Operating Current Assets: 615.03 727.38 895.21 1298.64 1511.83 1658.73 1962.49 2389.62

Operating Current Liabilities: Accounts payable: 883.00 875.00 1282.00 1958.49 2278.46 2497.04 2948.84 3581.79 Income taxes payable 2.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00Operating current liabilities 885.00 875.00 1282.00 1958.49 2278.46 2497.04 2948.84 3581.79

Net Working Capital -269.97 -147.62 -386.79 -659.85 -766.63 -838.31 -986.34 -1192.17

Plus: Net PPE 10022.00 10841.00 11766.00 13038.20 14141.36 15097.93 15469.56 15791.81

Plus: PV of operating Leases 105.86 93.98 551.08 610.66 662.33 707.13 724.54 739.63

Plus: other L-T operating assets Other property and equipment, net 1523.00 1529.00 1759.00 1788.90 1819.31 1850.24 1881.70 1913.69 Other 79.00 99.00 132.00 134.24 136.53 138.85 141.21 143.61Total other L-T operating assets 1602.00 1628.00 1891.00 1923.15 1955.84 1989.09 2022.90 2057.29

Less: other L-T operating liabilities 333.00 350.00 391.00 397.65 404.41 411.28 418.27 425.38

Invested Capital: 11126.89 12065.36 13430.29 14514.51 15588.49 16544.57 16812.39 16971.18

ROIC=NOPLAT/Beginning ICNOPLAT -1209.37 -691.50 349.91 1217.43 1507.88 1782.57 2342.62 3227.17Beginning IC 11377.44 11126.89 12065.36 13430.29 14514.51 15588.49 16544.57 16812.39

Return on invested capital -10.63% -6.21% 2.90% 9.06% 10.39% 11.44% 14.16% 19.20%FCF=NOPLAT-∆IC

NOPLAT -1209.37 -691.50 349.91 1217.43 1507.88 1782.57 2342.62 3227.17∆IC -250.55 938.47 1364.93 1084.23 1073.97 956.08 267.82 158.79

Free Cash Flows -958.82 -1629.96 -1015.01 133.20 433.91 826.49 2074.80 3068.38EP=Beginning IC*(ROIC-WACC)

Beginning IC 11377.44 11126.89 12065.36 13430.29 14514.51 15588.49 16544.57 16812.39ROIC -10.63% -6.21% 2.90% 9.06% 10.39% 11.44% 14.16% 19.20%WACC 8.68% 8.68% 8.68% 8.68% 8.68% 8.68% 8.68% 8.68%

Economic Profit -2196.93 -1657.31 -697.36 51.68 248.02 429.49 906.55 1767.86

Pioneer Natural ResourcesWeighted Average Cost of Capital (WACC) Estimation

Shares outstanding 170,300,825.00 MV Equity $32,071,051,364.00MV Debt $3,283,077,859.07 BetaPV of Operating Leases $551,077,859.07 2-year monthly 1.44Total MV $35,354,129,223.07 3-year monthly 1.35

5-year monthly 0.99% Equity 90.71% 8-year monthly 1.25% Debt 9.29% Monthly Average 1.26

AVG Marginal Tax Rate 21.93%

Beta 1.26Risk Free Rate 3.02%ERP 4.95%

Cost of Equity 9.26%Cost of Debt 3.35%WACC 8.71%

Pioneer Natural ResourcesDiscounted Cash Flow (DCF) and Economic Profit (EP) Valuation Models

Key Inputs: CV Growth 2.50% CV ROIC 19.20% WACC 8.71% Cost of Equity 9.26%

Fiscal Years Ending Dec. 31 2017 2018E 2019E 2020E 2021E 2022E

DCF ModelNOPLAT 350 1217 1508 1783 2343 3227growth(NOPLAT) 247.92% 23.86% 18.22% 31.42% 37.76%

Invested Capital 13430 14515 15588 16545 16812 16971 -Capital Expenditures 1084 1074 956 268 159

Free Cash Flow 133 434 826 2075 3068ROIC 9.06% 10.39% 11.44% 14.16% 19.20%Continuing Value (CV) 45211

Discount Periods 1 2 3 4 4PV Free Cash Flow 123 367 643 1486PV CV 32374

Value of Operating Assets 34,992,257,522.55 +Excess Cash 859,789,027.62 +Short-term investments 1,218,000,000.00 +Long-term investments 66,000,000.00 -Debt (3,283,077,859.07) -PV of operating leases (551,077,859.07) -PV of employee stock options (ESOP) (13,609,818.17) -Non controlling interests (5,000,000.00) Value of Equity 33,283,281,013.86 Shares Outstanding 170,300,825.00 Intrinsic Value (per share) $195.44Target Price as of 4/15/2018 $200.46

EP ModelBeginning Invested Capital 13430 14515 15588 16545 16812ROIC 9.06% 10.39% 11.44% 14.16% 19.20%Economic Profit 48 244 425 902 1763Continuing Value 28398PV Free Cash Flow 44 206 331 646 20335

PV(Economic Profit) 21,561,973,006.88 +Beginning Invested Capital 13,430,288,831.45 Value of Operating Assets 34,992,261,838.33 +Excess Cash 859,789,027.62 +Short-term investments 1,218,000,000.00 +Long-term investments 66,000,000.00 -Debt (3,283,077,859.07) -PV of operating leases (551,077,859.07) -PV of employee stock options (ESOP) (13,609,818.17) -Non controlling interests (5,000,000.00) Value of Equity 33,283,285,329.64 Shares Outstanding 170,300,825Intrinsic Value (per share) $195.44Target Price as of 4/15/2018 $200.46

Pioneer Natural ResourcesDividend Discount Model (DDM) or Fundamental P/E Valuation Model

Fiscal Years Ending 2018E 2019E 2020E 2021E 2022E

EPS 6.70$ 8.23$ 9.78$ 13.03$ 18.22$

Key Assumptions CV growth 2.50% CV ROE 15.09% Cost of Equity 9.26%

Future Cash Flows P/E Multiple (CV Year) 12.34 EPS (CV Year) $18.22 Future Stock Price $224.88 Dividends Per Share 0.16 0.16 0.16 0.16

Number of Periods 1 2 3 4 4 Discounted Cash Flows 0.15 0.13 0.12 0.11 157.80$

Intrinsic Value $158.31Target Price as of 4/15/2018 $162.38

Pioneer Natural ResourcesRelative Valuation Models

EPS EPSTicker Company Price 2018E 2019E P/E 18 P/E 19 EBITDA EV/EBITDACOP Conoco Phillips $59.29 $2.72 $2.90 21.80 20.44 78,782,900,000 9,761,000,000 8.07 EOG EOG Resources, Inc. $105.27 $3.93 $4.79 26.79 21.98 65,627,000,000 4,914,100,000 13.35 APC Anadarko Petroleum Corporation $60.41 $1.54 $1.61 39.23 37.52 45,987,800,000 3,882,000,000 11.85 CXO Concho Resources Inc. $150.33 $3.70 $5.01 40.63 30.01 23,947,500,000 1,577,000,000 15.19 CLR Contenintal Resources, Inc. $58.95 $2.40 $2.69 24.56 21.91 27,582,900,000 2,362,100,000 11.68 DVN Devon Energy Corporation $31.79 $1.49 $2.39 21.34 13.30 29,060,300,000 3,361,000,000 8.65 NBL Noble Energy, Inc. $30.30 $0.78 $1.06 38.85 28.58 21,211,700,000 2,403,000,000 8.83

Average 30.46 24.82 Average 11.09

PXD Pioneer Natural Resources $188.32 $6.70 $8.23 28.1 22.9 34,992,257,523 3,124,907,997 11.20

Implied Relative Value: P/E (EPS18) $ 204.12 P/E (EPS19) $ 204.31 Enterprise Value $ 34,645,722,938 Shares Outstanding 170,300,825 Share Price $ 203.44

Enterprise Value

Key Management Ratios

Fiscal Years Ending Dec. 31 2015 2016 2017 2018E 2019E 2020E 2021E 2022E

Liquidity Ratios Definition:Current Ratio Current Assets/Current Liabilities 2.18 2.11 1.41 1.59 1.84 1.94 2.35 2.76Operating Cash Flow Ratio Operating Cash Flow/Current Liabilities 0.85 0.96 0.98 1.07 1.31 1.14 1.19 1.21Quick Ratio (Cash+Marketable Securities+A/R)/Current Liabilities 1.21 1.96 1.29 1.42 1.63 1.77 2.17 2.59

Activity or Asset-Management RatiosAssets Turnover Ratio Sales/Average Total Assets 0.21 0.25 0.32 0.39 0.41 0.41 0.43 0.46Receivables Turnover Ratio Sales/Average Accounts Receivables 7.62 8.75 9.14 9.58 9.03 8.78 9.09 9.21

Financial Leverage RatiosDebt-to-Equity Ratio Total Debt/Total Equity 0.44 0.31 0.24 0.30 0.26 0.28 0.26 0.24Equity Ratio Total Equity/Total Assets 0.55 0.63 0.66 0.63 0.65 0.65 0.66 0.67Interest Coverage Ratio EBITDA/Interest Expense -10.06 -2.85 2.15 15.99 13.97 14.90 18.16 23.56

Profitability RatiosReturn on Assets Net Income/Total Assets -1.80% -3.38% 4.90% 5.85% 6.64% 7.03% 8.33% 10.14%Return on Equity Net Income/ Beginning Shareholder's Equity -3.18% -6.64% 8.00% 10.09% 11.35% 12.15% 14.47% 17.72%Profit Margin Net Income/Sales -8.69% -14.07% 15.73% 15.95% 16.81% 18.22% 20.55% 23.64%

Payout Policy RatiosPayout Ratio (Dividends per Share + Repurchases)/ Net Income -11.38% -4.51% 4.34% 8.80% 1.89% 1.59% 1.20% 0.85%

Present Value of Operating Lease Obligations (2017) Present Value of Operating Lease Obligations (2016) Present Value of Operating Lease Obligations (2015)

Operating Operating OperatingFiscal Years Ending Dec. 31 Leases Fiscal Years Ending Dec. 31 Leases Fiscal Years Ending Leases2018 27 2017 26 2016 242019 42 2018 24 2017 232020 53 2019 23 2018 212021 40 2020 18 2019 212022 37 2021 4 2020 17Thereafter 680 Thereafter 11 Thereafter 15Total Minimum Payments 879 Total Minimum Payments 106 Total Minimum Payments 121Less: Interest 328 Less: Interest 12 Less: Interest 15PV of Minimum Payments 551 PV of Minimum Payments 94 PV of Minimum Payments 106

Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases

Pre-Tax Cost of Debt 4.29% Pre-Tax Cost of Debt 4.29% Pre-Tax Cost of Debt 4.29%Number Years Implied by Year 6 Payment 18.4 Number Years Implied by Year 6 Payment 2.8 Number Years Implied by Year 6 Payment 1.0

Lease PV Lease Lease PV Lease Lease PV LeaseYear Commitment Payment Year Commitment Payment Year Commitment Payment1 27 25.9 1 26 24.9 1 24 23.02 42 38.6 2 24 22.1 2 23 21.13 53 46.7 3 23 20.3 3 21 18.54 40 33.8 4 18 15.2 4 21 17.85 37 30.0 5 4 3.2 5 17 13.86 & beyond 37 376.0 6 & beyond 4 8.2 6 & beyond 15 11.7PV of Minimum Payments 551.1 PV of Minimum Payments 94.0 PV of Minimum Payments 105.9

Effects of ESOP Exercise and Share Repurchases on Common Stock Balance Sheet Account and Number of Shares Outstanding

Number of Options Outstanding (shares): 138,493Average Time to Maturity (years): 3.61Expected Annual Number of Options Exercised: 38,364

Current Average Strike Price: 100.10$ Cost of Equity: 9.00%Current Stock Price: $188.32

2018E 2019E 2020E 2021E 2022EIncrease in Shares Outstanding: 38,364 38,364 38,364 38,364 38,364Average Strike Price: 100.10$ 100.10$ 100.10$ 100.10$ 100.10$ Increase in Common Stock Account: 3,840,208 3,840,208 3,840,208 3,840,208 3,840,208

Change in Treasury Stock 100,000,000 26,250,000 26,250,000 26,250,000 26,250,000Expected Price of Repurchased Shares: 188.32$ 205.27$ 223.74$ 243.88$ 265.83$ Number of Shares Repurchased: 531,011 127,881 117,322 107,635 98,748

Shares Outstanding (beginning of the year) 170,000,000 169,507,353 169,417,835 169,338,877 169,269,606Plus: Shares Issued Through ESOP 38,364 38,364 38,364 38,364 38,364Less: Shares Repurchased in Treasury 531,011 127,881 117,322 107,635 98,748 Shares Outstanding (end of the year) 169,507,353 169,417,835 169,338,877 169,269,606 169,209,222

VALUATION OF OPTIONS GRANTED IN ESOP

Ticker Symbol PXDCurrent Stock Price $188.32Risk Free Rate 3.02%Current Dividend Yield 0.04%Annualized St. Dev. of Stock Returns 9.55%

Average Average B-S ValueRange of Number Exercise Remaining Option of OptionsOutstanding Options of Shares Price Life (yrs) Price GrantedRange 1 138,493 100.10 3.61 98.27$ 13,609,818$ Total 138,493 100.10$ 3.61 98.56$ 13,609,818$