Krause Fund Research Fall 2018 Pioneer Natural Resources Energy (NYSE: PXD)

Recommendation: SELL November 11, 2018

Current Price $159.82 Analysts Target Price $147-$152 Andrew Ball [email protected] Cost Control and Impressive Regional Growth Samuel Bries [email protected] Already Factored into PXD Price Adam Goedken [email protected] Gregory Hensley Investment Positives [email protected] • Pioneer operates with low costs in Western Texas. Company Overview Currently, their oil and gas production costs are 17% of revenues, 5% lower than those of their main competitor in the Permian

Basin, Concho. Pioneer Natural Resources is an upstream energy company that operates by exploring and producing oil, natural gas • The company is becoming a pure play – divesting in their liquids (NGLs), and other gases. Pioneer uses fracking to least profitable regions will raise their overall profit. Pioneer plans extract oil from shale fields and natural gas from methane to move more operations to the Permian Basin, a fast-growing layers. Pioneer is based in Irving, Texas and is in the process region where they benefit from greater profit margins. of becoming a pure play firm in the Permian Basin, located in Western Texas. By divesting from assets outside of the Permian Basin, Pioneer expects to reduce companywide costs • Q1-Q3 2018 reports suggest large revenue gains in this fiscal and focus on their lucrative operations in the Permian Basin. year, with oil futures suggesting Pioneer will face a more favorable oil price outlook from 2019-2020. Stock Performance Highlights 52-week High $213.40 Investment Negatives 52-week Low $140.54 Beta Value 0.71 • DCF/EP analysis suggests favorable news about the company Average Daily Volume 1.589 m and optimistic estimates about revenue growth and cost savings are already priced into PXD stock. Share Highlights • Pioneer is sensitive to oil price risk, and currently future Market Capitalization $27.233 b curves project a decrease in oil prices after 2019, dropping to Shares Outstanding 170.4 m $60.06 in 2022 (from a forecasted $62.32 in 2019). Actual oil EPS (2017) $4.86 price can also differ greatly from futures estimates. P/E Ratio 14.18

Dividend Yield 0.22% Dividend Payout Ratio 4% One Year Stock Performance PXD one year stock performance relative to the S&P 500 Index Company Performance Highlights and the U.S Energy Select Sector SPDR Fund ROA 4.9% ROE 8% Sales $5.455 b

Financial Ratios Current Ratio 1.41 Debt to Equity 0.26

Source: Wall Street Journal1 1 | P a g e

Healthy domestic growth will be a positive for energy companies Executive Summary in the U.S. The U.S. economy grew at 4.2% and 3.5% in the second and third quarter, respectively, in 2018, a large increase from 3.1% and 3.2% growth in the second and third quarter of As of November 11, 2018, our University of Iowa Krause Fund 2017. Strong consumer and business spending are the two primary analyst team recommends a SELL rating for Pioneer Natural factors that have helped drive the strong economic growth in the Resources. Pioneer has been reducing costs and maximizing past two quarters.3 According to the Federal Reserve Bank of revenue by capitalizing on growth opportunities in the Permian Atlanta, U.S GDP growth is expected to be 2.9% in the fourth Basin. However, Pioneer’s success is largely dependent on the quarter of 2018.4 price of oil. While we believe the macroeconomic environment will be favorable for oil and gas exploration and production Figure 2 companies in the future, there is still a high level of uncertainty in the oil price marketplace. The United States’ move toward greater energy independence does not negate the influence of OPEC on oil supply and demand. Oil price risk—evidenced by a slight decline in oil futures by 2020 and projected in our models—led us to view Pioneer Natural Resources as an overvalued stock.

Macroeconomic Outlook

World Real Gross Domestic Product (GDP) Source: FRED Economic Data3 Real Gross Domestic Product (GDP) is one of the key indicators of economic development that influences the demand for oil and In the next year, we predict that U.S real GDP growth will grow other energy resources. Economic expansion occurs when the at a rate of 3.0%, a 70-basis-point increase from an annualized demand for goods and services increase. In an economic growth rate of 2.3% from 2017. The Tax Cuts and Jobs Act of expansion, sales of products for which oil and natural gas are 2017 has contributed to large corporate profits and business inputs increase, and consumers are less frugal with their energy investment in the last year. The Commerce Department noted that consumption. Businesses look to grow, requiring more energy after-tax profits across the U.S rose 16.1% in the 2nd quarter from 5 consumption than before. Consequently, real GDP growth causes the previous year, the largest year-over-year gain in six years. As demand for energy resources causes oil prices to rise, driving a result, per-share earnings for companies in the S&P 500 rose revenue growth. Figure 1 shows a correlation between economic 24.8% over the second quarter of 2017. growth and oil demand and consumption. Figure 3 Figure 1

Source: Wall Street Journal5

In addition to rising corporate profits and business investment, metrics such as consumer confidence, rising personal incomes, a strong labor market, and a jobless rate of 3.7%, have encouraged greater consumer and business consumption that has driven economic expansion. Figure 4 shows the U.S. Consumer Confidence level directed by the Conference Board Consumer Source: U.S. Energy Information Administration2 Confidence, which current levels show at 98.3.6 Given that consumer confidence is measured based on household surveys of Domestic Growth Outlook consumers’ opinions on current conditions and future 2 | P a g e expectations of the economy, we expect this trend to continue. Figure 6 Given these metrics, we expect U.S. GDP to grow at 3.00% for the foreseeable future.

Figure 4

Source: International Monetary Fund8

With an expected 3.7% world GDP growth rate for 2018 and Source: Trading Economics6 2019, increased activity in the international marketplace will be a significant driver for energy demand and consumption. Energy International Growth Outlook demand and consumption will not only come from larger

economies such as China and India, but also emerging market and For our analysis of the international marketplace, we consider developing countries benefiting from overall world growth, and a China and India to be the main foreign drivers for energy positive rotation in the global business cycle.9 resources. China and India together contribute nearly 50% of global oil demand.7 Figure 5, below, shows world oil demand Figure 7 growth by year, showing China and India’s dominance for the demand of oil.

Figure 5

Source: International Monetary Fund8

Interest Rates

Source: International Energy Agency7 Interest rates are a key economic variable to consider as they are one of the major determinants of a firm's cost of debt. Rising The International Monetary Fund has projected global GDP to interest rates lead to higher borrowing costs, as investors require grow at 3.7% for 2018 and 2019, with China and India’s GDP a higher return for riskier investments taken by the firm. The 10- expected growth rates to be 6.20% and 7.70%, respectively.8 As Treasury Yield (3.186%) was used as the risk-free rate to calculate China and India continue to expand their economies and the cost of debt in our valuation. Figure 8 shows that the 10- international footprint, they will use more oil, which will drive oil Treasury yield has been rising steadily over the past year with oil demand and consumption higher. Future curves project that oil prices. Due to the recent hikes in the federal funds rate, we expect prices will reach $60.06 in 2022. the rate to reach 4.00% by 2020 to trump rising inflation.

3 | P a g e

Figure 8 0.3 million barrels per day in quarter 3 of 2018, its largest production amount in over a year.

Figure 10

Source: FRED Economics Data10

As of September of 2018, Federal Reserve officials have raised interest rates for the third time this year and have reaffirmed their outlook for further rate hates into 2019.11 The federal funds rate currently stands at 2.25%, a 25-basis-point increase in September from its last rate of 2.00%.

Figure 9 Source: U.S. Energy Information Administration12

In 2017, world oil production rose by 0.6 million b/d, below average for the second consecutive year. Production fell in the Middle East (-250,000 b/d) and South & Central America (- 240,000 Kb/d), but this was outweighed by growth in North America (820.00 b/d), specifically the U.S. (690,000 b/d).13

Figure 11

Source: Bloomberg11

Oil exploration and production companies are often highly leveraged, as they look to expand their operations by acquiring more reserves. As the federal funds rate is projected to increase 3 times during 2019, firms with a low cost of debt that have a history of paying back their lenders are able to maneuver better in this environment.

Energy Commodities Supply & Demand Source: U.S. Energy Information Administration14

For energy commodities, supply and demand is the definitive Figure 11 provides the growth U.S. production of crude oil, driver of price. Oil and gas prices fluctuate due to supply and showing a steep increase since the financial crisis of 2008. demand of the commodity. If prices are high, energy companies are more likely to produce more, and vice versa. Upstream In 2017, global natural gas production increased by 4%; the fastest companies, like Pioneer, benefit the most from high oil prices, rate since the immediate aftermath of the financial crisis.15 Figure while midstream and downstream companies benefit less, though 12 shows the growth of natural gas production in the world. these companies are still impacted by oil prices. Oil prices Recently the U.S. has begun increasing production of oil and increase as oil demand increases. Oil demand is determined by natural gas as they work to become more energy independent. consumption. The oil production of OPEC and non-OPEC countries influence the supply of oil greatly. Figure 10 shows how changes in the oil production of Saudi Arabia, an OPEC country, can influence WTI crude oil prices. OPEC’s oil exports represent about 60% of the total petroleum traded internationally, producing 4 | P a g e

Figure 12

Figure 14

Source: U.S. Energy Information Administration17

Industry Analysis

15 Source: BP Global Report Overview OPEC as a Geopolitical Player The oil and gas industry has three main parts: upstream, Beyond world GDP and energy commodity supply/demand, midstream, and downstream. Upstream firms operate by geopolitics also influences the price of oil. One major player in exploring for oil and producing oil. Revenues are largely driven the geopolitics of the supply and demand, and ultimately the price by the market price of oil. Pioneer Natural Resources is of oil, is OPEC. OPEC was established to provide regular supply, considered an upstream firm. Midstream firms operate by storing stable markets and a fair return on investments to investors. While and transporting oil, NGLs, and other natural gases. Pioneer OPEC does not control the price of oil, they play a big part in it. works with these companies to ship oil from their rigs to By restricting oil production and slashing oil supplies, OPEC refineries. Downstream firms operate by refining the oil, NGLs, could force oil prices to rise, benefiting net exporters of oil, but and natural gases into consumable products, as well as marketing hurting large importers of oil, such as China. the finished products. Downstream revenues are driven through a “crack spread” which is the difference between the cost of Figure 13 production and the revenues received from selling the finished energy products.

Figure 15

Source: EnergyHQ18

Developments and Trends

Global oil production and consumption is expected to continue Source: OPEC Annual Statistical Bulletin 201816 rising for the foreseeable future. The United States is becoming more energy independent, which makes OPEC less of a driver of As the U.S. looks to become more energy independent, the EIA oil prices domestically. Figure 16 shows that world oil demand projects that the United States will become a net energy exporter continues to grow at a steady rate, with 98.45 mb/d in quarter 2 of by 2020, primarily driven by higher oil prices and technology and 2018.19 Recently, we have seen large growth in the natural gas a reduction in regulation within the oil and gas exploration production industry that has outpaced demand for natural gases. industry.17 This large gap between supply and demand has caused natural gas prices to drop substantially in recent years.

5 | P a g e

Figure 16 cars could potentially cause a drastic reduction in global oil demand.

Bargaining Power of Suppliers Suppliers do not choose the price of the commodities that their revenue is based on. Those commodity prices are generally volatile, and oil and gas exploration/production companies often try to hedge against volatility through derivative contracts.

Bargaining Power of Buyers Buyers are in the midstream or downstream sectors. They can negotiate some of the price that they pay, but price is mainly decided by market price of the commodity purchased.

Rivalry among Existing Competitors Large companies are simply able to produce more oil and natural Source: International Energy Agency19 gas than smaller ones. Companies are constantly fighting to be the lowest cost producer or finding new areas to drill from. Industry Leaders

The largest firms in the oil and gas industry are integrated oil firms, which means they operate across all three production Company Analysis streams. Exxon Mobil and British Petroleum are among the largest firms in the industry. Financial Summary Analysis Exxon Mobil – Exxon Mobil Corporation is an American multinational oil and gas corporation. Exxon Mobil is the largest In fiscal year 2017, Pioneer reported revenues of $5.45 billion, a of the world’s big oil companies, with daily production of 3.921 61% increase from 2016. A large driver of revenue growth came million BOE.20 The company is the world’s 9th largest company from oil and gas production. Revenue per BOE increased from listed by revenue. $28.25 in 2016 to $35.39 in 2017. Earnings per share rose from ($3.34) in 2016 to $4.86 in 2017. This swing in earnings was British Petroleum – The British Petroleum Company plc, or BP almost entirely driven by Pioneer’s 61% growth in revenues from plc, is a British multinational oil and gas company. BP is one of the year before.22 the world’s seven oil and gas “supermajors”. As of 2017, BP has operations in 70 countries worldwide and produced around 3.6 Pioneer saw a decrease in their ending cash account for 2017, million barrels per day.21 which we attribute to Pioneer paying off long term debt. PXD spent $450 million last year on retirement of long term debt, a rate Industry leaders can operate at low costs relative to their they plan on maintaining in years to come.22 competitors and are not solely reliant on the price of oil to stay profitable. Leaders often implement derivative trading along with Pioneer announced Q3 earnings on November 6, 2018. The their operations to profit off of trends in the oil and gas industry. quarterly earnings release revealed that Pioneer saw a Followers in the oil and gas industry are often unable to produce companywide production increase of 16%. In the Permian Basin, energy products cheaply and are reliant on high oil prices to oil production rose 7% from Q2, beating Pioneer’s own guidance remain profitable. These follower companies often have high by between 1% and 4.45%. Q3 revenue was $2.48 billion vs levels of debt, and experience cash flow issues when oil prices dip $1.27B.23 While Pioneer saw a large increase in revenue, below desirable levels. Pioneer is a relatively mature, medium- Pioneer’s margins in the Permian Basin shrank. Pioneer estimated sized energy firm that engages in some derivative activity but is Permian Basin production costs to be $9.68 per BOE, which is still sensitive to changes in oil prices. significantly higher than the $4.79 per BOE Pioneer observed during 2017.23 Production costs have been rising steadily in the Porter’s Five Forces Analysis Permian Basin, however Q/Q production costs per BOE decreased by $0.92 since Q2 of 2018.24 Threat of New Entrants Large established companies and smaller newer companies can Table 1 both compete in this space. Larger companies are usually more FY2017 Q2 2018 Q3 2018 profitable and have access to more reserves. Small companies rely Cost/BOE $4.79 $10.60 $9.68 on discovering new reserves, which is expensive and risky.

Threat of Substitutes It is worth noting that Pioneer had a tax benefit instead of expense New developments in renewable energy are a direct threat to the in 2016 and 2017. We believe that forecasting a tax benefit for demand of fossil fuels in the long-term. The rise of all-electric future years is unrealistic, so we have set tax expense to be at 21%, the new corporate tax rate after the passing of the Tax Cuts and Jobs Act in 2017. 6 | P a g e

Products Concho Natural Resources, a Permian Basin pure play company, has production costs at $5.80 per BOE in the exact same region.29 Pioneer has several products: oil, natural gas liquids (NGLs), and PXD producing the same product 17% cheaper than their largest other natural gases. Pioneer Natural Resources offers pumping, competitor in the region will allow Pioneer to achieve higher well, and sand services. In September, PXD secured a long-term sustained profits as long as their competitive advantage remains. sand supply contract with U.S. Silica Holdings which will cut their costs of sand used for fracking in half.25 Because fracking Markets and Customers operations make up about 20% of Pioneer’s revenues, we expect this deal with U.S. Silica to provide a significant cut in costs and Pioneer sells their products to transportation companies including an increase in net income from operations.22 Sunoco Logistics Partners, Occidental Energy Marketing, Plains Marketing, and Enterprise Products Partners. Sales to these four Production companies make up 62% of all Pioneer’s oil, NGL, and gas revenues.22 Pioneer has contracts with these companies and sells Pioneer Natural Resources operates primarily in the Permian directly to their pipelines for transportation. Prices are factored Basin in West Texas. As of 2017, the Permian Basin represents off of market price, quality, and distance from wells. Market price 82% of total oil, NGL, and gas production for the company. is susceptible to seasonal variability. Generally, demand rises in Operating in the Permian Basin is particularly notable because the the winter and decreases during summer months. region is the fastest growing area in the world in terms of production. 60% of all production growth in the world is Competition estimated to come from the Permian Basin alone.26 Analysts estimate that if this trend continues, the Permian Basin will be the Overview third largest oil producing area in the world, only behind Russia and Saudi Arabia.27 Pioneer Natural Resources operates in the exploration and drilling sub-industry of the energy sector. We identified competitors Figure 17 based on having operations in this space, but not just this sub- industry. Another variable we took into consideration is the presence or future presence within Texas. We decided to look at the ROA, net profit margin, and debt-to-equity ratio as a way to compare these competitors. The competitors analyzed are: Apache, Concho, and Occidental.

Figure 18

Source: Energy Information Administration28

Pioneer’s revenues and costs are broken down per BOE (barrel of oil equivalent), which allows for comparison between production region and across companies to determine performance. The product sales mix is 79% crude oil, 11% NGL, and 10% natural gas.We found that the Permian Basin offers a significantly cheaper cost of production per BOE compared to Pioneer’s other operations around Texas. The total production cost per BOE in the Permian Basin is $4.79, while production cost in Eagle Ford, 22 southeast of the Permian region, is $11.35 per BOE. Source: Apache Corporation Form 10-K30

Table 1 Apache Corporation and Pioneer are complete substitutes, as both are exploration and drilling companies. The main difference is that Apache has less of a focus on the Permian Basin. In September 2018, Apache announced that it would begin making large land purchases in the Permian Basin. A rush of companies to the West Texas area will decrease Pioneer’s market share in the future if they do not continue investing in the Basin. When analyzing the ratio, Apache outperforms Pioneer dramatically in all three categories.30

7 | P a g e

Figure 19 in the Permian Basin. Should Pioneer continue to grow, we see it becoming a dominant force in the West Texas drilling market.

Weaknesses

Pioneer is rather dependent on the price of oil and natural gas. Significant changes in revenue are largely due to changes in commodities. In order for Pioneer to maintain profitability beyond the price of oil, they may need to invest in new production rigs which is expensive.

Opportunities

The Permian Basin is in the process of becoming one of the most Source: Concho Natural Resources Form 10-K29 productive areas in the world when it comes to oil and natural gas. High levels in the growth of the region paired with Pioneer’s low Concho Natural Resources is an exploration and production cost competitive advantage provides a bright opportunity in the operating solely in the Permian Basin. In March 2018, Concho future. acquired RSP Permian for $9.5 billion in the largest-ever acquisition in the Permian region.29 While Pioneer still maintains Threats a competitive advantage when it comes to costs per BOE, Concho will now be able to produce more oil and NGLs in the region, The aggressive merger and acquisition environment that is which will decrease Pioneer’s share of production in the area. beginning to sprout in the region threatens Pioneer’s market share Concho is close to a complete substitute to Pioneer. Concho in the future. Should the aggressive M+A continue, Pioneer could outperforms Pioneer in ROA and net profit margin, but a Pioneer find itself being a small player in a large competitive environment. has a lower debt-to-equity.29 For exploration and drilling companies, it is important to have a lower debt since the success of the company is skewed toward volatile commodity prices. Valuation Analysis

Figure 20 Overview

After analyzing the economic environment, the exploration and drilling industry, and key company performance drivers, we recommend a SELL rating for Pioneer Natural Resources. We believe the DCF/EP model represents the most complete view of our forecast of company performance. The DCF/EP model estimates a stock value of $149.90; this is below the current stock price of $159.82. While we found that Pioneer would benefit from growth and expansion in the coming years, we determined that these variables were already factored into current price, and the company is currently slightly overvalued.

Source: Occidental Petroleum Form 10-K31 Revenue Decomposition

Occidental Petroleum is the third-largest petroleum producer in Crude Oil Revenue Texas, and the largest operator in the Permian Basin. Occidental We calculated sales of oil by multiplying production of crude oil is an integrated oil and gas company, meaning that is does by the annualized price of barrel of oil equivalent (BOE). Crude exploration and drilling, but it also has a midstream and oil futures for December of each forecasted year determined oil downstream business segment.31 When comparing the ratios, revenue per barrel. We forecasted volume for 2018 based on the Pioneer outperforms in ROA and net profit margin, but has larger data that has already been released determining our growth to be debt-to-equity ratio. However, the results may show how the other 5%. Production growth moving forward is grown to 10% in 2019 business segments impact the overall performance of the business. and then, in 2020 and beyond, to production average over the past 10 years: 16.45%. SWOT Analysis Natural Gas Revenue Strengths We calculated natural gas revenue by multiplying natural gas volume by annualized price per million cubic feet (MMcf). Pioneer maintains a significant competitive advantage on its Natural gas futures of December of each forecasted year competitors by being able to produce at the lowest cost per BOE determined projected natural gas per (MMcf). We based natural gas production off of the past 10 years decline rate of 8.06%. 8 | P a g e

Natural gas production has been volatile over the past 10 years, but has been trending down. The decision to use the average of Our risk free rate represents the yield on the 10-year U.S. Treasury the growth and decline rates would balance out the volatility and as of November 11, 2018.32 The equity risk premium was given give a consistent trend. by Damodaran’s implied ERP as of November 1, 2018.33 We believe that this number accurately represents the geometric NGL Revenue average of our expected market risk premium. Our beta was We calculated NGL by multiplying NGL production by calculated by taking the average of the 2 year raw betas calculated annualized price per MMcf. Pioneer does not report NGL daily, weekly, and monthly on Bloomberg. production mixes to determine price or volume. We decided to use a three-year rolling average for both price and volume. The Cost of Debt resulting volume was consistently increasing while the prices were on a decline. To calculate Pioneer’s cost of debt we used the yield on a Pioneer corporate bond maturing in 10 years. We found the yield to be 34 Sales of Purchased Oil and Gas 5.077% on the SEC’s EDGAR database. To find the after-tax Pioneer does not provide insight into the amount of purchased oil cost of debt to be used in our cost of capital calculation, we took and gas the company sells. Our group decided that we would find the yield on the 10-year corporate bond and then adjusted it to the average percentage of the past years of sales of purchased oil reflect the marginal tax rate of 21% due to the new tax plan. This and gas to the oil and gas produced by Pioneer. The resulting ratio calculation gave us an after-tax cost of debt of 4.011%. for sales of purchased oil and gas would be 27.43% of oil and gas production sales. Valuation Models

Costs We used a discounted cash flow/economic profit (DCF/EP) model, a dividend discount model, (DDM), and a relative Oil and Gas Production valuation to analyze Pioneer’s stock value. Ultimately, we Our assumption for oil and gas production cost is based on the decided the DCF/EP model represented the most complete and amount of the crude oil produced. We took the average percentage accurate valuation for Pioneer. of oil and gas production cost of the amount of crude oil over the past two years to get 1.1%. We believe the correlation of the past Results two years will continue. We used this percentage times the crude oil forecasted each year to get the oil and gas production cost. DCF/EP DDM Relative Valuation Purchased Oil and Gas Our group decided to tie purchased oil and gas to the amount of Target Price as of $148.32 $95.32 $12.30 sales of purchased oil and gas. We did this since the amount sold 11.11.18 derives from the amount purchased. We took the percentage of sales or purchased by the amount purchased for the past three years to get 104.4%. It is important that resulting percentage is DCF/EP greater than 100%, because Pioneer cannot consistently sell more than it purchases. We then took that percentage times the The DCF/EP model is based on our research and beliefs about the forecasted sales of purchased oil and gas. Pioneer’s riskiness and growth; therefore, we believe it is the most

informed model for calculating the intrinsic value of Pioneer’s WACC stock. Pioneer’s projected future revenue growth and other key

drivers indicate a slightly lower value of $149.90. We estimated Pioneer’s WACC to be 7.97% using Pioneer’s capital structure of 77% equity and 23% debt. Both of these numbers were calculated by finding the market value of each The DCF model determines the value of operating assets using the financing instrument, and then dividing the sum by the value for sum of the present values of free cash flows (net operating profit debt or equity. We used this WACC for all years in the future less adjusted taxes, i.e., NOPLAT, less capital expenditures). because we do not expect Pioneer’s capital structure to change in Alternatively, the EP model uses present value of economic profit the future. (the difference between ROIC and WACC) added to beginning invested capital to calculate the value of operating assets. Both Cost of Equity approaches use the WACC for discounting. For the DCF and EP models, we estimated continuing value (CV) growth of NOPLAT To calculate the cost of equity we applied the Capital Asset to be 3%, the effects of which we tested in our sensitivity analysis. Pricing Model (CAPM) and calculated our cost of equity to be As CV growth rises, intrinsic stock price falls, because our model 8.38%. Our variables used in the CAPM are as follows: predicts a lower ROIC than WACC in the CV year. Given our short investment horizon, we do not believe this projected future ● Risk Free Rate = 3.186% destruction of value is cause for concern. ● Equity Risk Premium = 5.32% ● Beta = 0.977

9 | P a g e

DDM Marginal Tax Rate, Normal cash The DDM is not a useful way to understand the value of Pioneer Small changes in the marginal tax rate have a larger impact on the stock. The DDM calculates intrinsic stock value using the present stock price than small changes in normal cash. Normal cash value of future dividend payments. This present value is found by percentage of sales is based on the convention of the industry. discounting back estimated future dividends and a perpetual value Increases in normal cash will increase invested capital, which will of future cash flows past a CV year. We decided this model was decrease the value of the stock. On the other hand, increasing less informative than the DCF/EP model, as the DDM is heavily marginal tax rate will allow Pioneer to keep more revenue, based on one assumption: a constant dividend per share of $0.32. increasing NOPLAT and boosting stock price. Companies within the exploration and drilling industry pay a minimal dividend, meaning DDM will be below the true value.

Relative Valuation

The relative P/E valuation does not produces a stock price similar to PXD’s current stock price and it is not a reflection of Pioneer’s fundamental value. The relative P/E calculation uses an average of industry peers’ estimated P/E ratio multiplied by our forecasted earnings per share to estimate an implied value. While this approach may be useful for comparison purposes or quick value estimations, the company’s selection creates an unrealistic number. In the exploration and drilling industry it is not Risk Free Rate, CV NOPLAT Growth Rate uncommon to have negative net income. Two companies selected Incremental changes in the risk free rate have a larger impact on have a negative net income skewing the entire relative valuation. the stock price than changes in CV NOPLAT growth rate. Together, the two variables make a much larger impact on the Sensitivity Analysis stock price compared to changing individually.

Beta, Equity Risk Premium The beta is one component of the equity risk premium that is used to determine WACC. WACC is a key assumption in determining the intrinsic value of Pioneer. Small increases in the Beta and Equity risk premium have a large impact in the stock price of Pioneer.

Cost of Debt, Price Per Barrel 2022 In the exploration and drilling industry, the cost of debt is crucial since its ability to pay back is based on price of commodities. Price per barrel in 2022 has a large impact on the stock price showing how impactful the price per barrel. The cost of debt does not make as much make as much a difference on stock price, but when both are changing it can make a much a larger variation in the stock price. Purchased Oil and Gas 2022, Production Volume 2022 Pioneer derives its revenue from selling the oil and gas that it produces and buys. Increasing a small amount of production slowly increases the stock price. Increasing purchases oil and gas decreases the stock value, as it is as it is expensive for Pioneer to resell inventory rather than producing it themselves.

10 | P a g e

Important Disclaimer 11. Miller, Rich, Christopher, Condon (2018). “The Fed’s New Dot Plot.” Bloomberg. Retrieved from This report was created by students enrolled in the Security https://www.bloomberg.com/news/articles/2018-09-12/wall- Analysis (6F:112) class at the University of Iowa. The report was street-is-bullish-on-global-economy-despite-emerging- originally created to offer an internal investment recommendation markets for the University of Iowa Krause Fund and its advisory board. 12. Changes in Saudi Arabia Crude Oil Production Can Affect The report also provides potential employers and other interested Oil Prices (2018). U.S. Energy Information Administration. parties an example of the students’ skills, knowledge and abilities. Retrieved from Members of the Krause Fund are not registered investment https://www.eia.gov/finance/markets/crudeoil/supply- advisors, brokers or officially licensed financial professionals. opec.php. The investment advice contained in this report does not represent 13. Statistical Review of World Energy (2018). BP Global. an offer or solicitation to buy or sell any of the securities Retrieved from mentioned. Unless otherwise noted, facts and figures included in https://www.bp.com/content/dam/bp/en/corporate/pdf/energ this report are from publicly available sources. This report is not y-economics/statistical-review/bp-stats-review-2018-full- a complete compilation of data, and its accuracy is not guaranteed. report.pdf From time to time, the University of Iowa, its faculty, staff, 14. U.S. Field Production of Crude Oil (2018). U.S. Energy students, or the Krause Fund may hold a financial interest in the Information Administration. Retrieved from companies mentioned in this report. https://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=pet &s=mcrfpus1&f=m. 15. Natural Gas Production (2018). BP Global. Retrieved from References https://www.bp.com/en/global/corporate/energy- economics/statistical-review-of-world-energy/natural- 1. Wall Street Journal: Pioneer Natural Resources (2018). Wall gas/natural-gas-production.html Street Journal. Retrieved from 16. OPEC Share of World Crude Oil Reserves (2017). https://quotes.wsj.com/PXD?mod=searchresults_companyq Organization of the Petroleum Exporting Countries (OPEC). uotes. Retrieved from 2. What Drives Crude Oil Prices: Demand Non- OECD (2018). https://www.opec.org/opec_web/en/data_graphs/330.htm. U.S. Energy Information Administration. Retrieved from 17. U.S Gross Energy Trade, AEO2018 Reference (2018). U.S https://www.eia.gov/finance/markets/crudeoil/demand- Energy Information Administration. Retrieved from nonoecd.php. https://www.eia.gov/todayinenergy/detail.php?id=34912. 3. Percentage Change of Gross Domestic Product (2018). 18. Upstream-Midstream-Downstream (2018). EnergyHQ. FRED Economic Data. Retrieved from Retrieved from https://energyhq.com/2017/04/upstream- https://fred.stlouisfed.org/series/CPGDPAI midstream-downstream-whats-the-difference/. 4. GDPNow: Center For Quantitative Economic Research 19. World Oil Demand (2018). International Energy Agency. (2018). Federal Reserve Bank of Atlanta. Retrieved from Retrieved from https://www.frbatlanta.org/cqer/research/gdpnow.aspx https://www.iea.org/oilmarketreport/omrpublic/ 5. Torry, Harriety, Francis, Theo (2018). “U.S. Corporate 20. ExxonMobil (2018). Retrieved from Profits Soared in Second Quarter, Boosted by Tax Cuts and https://en.wikipedia.org/wiki/ExxonMobil. Economic Growth.” Wall Street Journal. Retrieved from 21. British Petroleum Company plc (2018). https://www.wsj.com/articles/u-s-corporate-profits-soared- https://en.wikipedia.org/wiki/BP. in-second-quarter-boosted-by-tax-cuts-and-economic- 22. Pioneer Natural Resources 10-K (2017). Pioneer Natural growth-1535559230. Resources. Retrieved from http://investors.pxd.com/static- 6. United States Consumer Sentiment (2018). Trading files/6deca81a-a6a9-4ee0-9288-ea885c45520d. Economics.Retrieved from 23. Pioneer Natural Resources Company 2018 Q3 – Results – https://tradingeconomics.com/united-states/consumer- Earnings Call Slides (2018). Seeking Alpha. Retrieved from confidence. https://seekingalpha.com/article/4219581-pioneer-natural- 7. World Oil Demand Growth (2018). International Energy resources-company-2018-q3-results-earnings-call-slides. Agency. Retrieved from https://www.iea.org/oil2018/. 24. Pioneer Natural Resources Company 2018 Q2 – Results – 8. Real GDP Growth: Annual Percent Change (2018). Earnings Call Slides (2018). Seeking Alpha. Retrieved from International Monetary Fund. Retrieved from https://seekingalpha.com/article/4196568-pioneer-natural- https://www.imf.org/external/datamapper/NGDP_RPCH@ resources-company-2018-q2-results-earnings-call-slides. WEO/OEMDC/ADVEC/WEOWORLD. 25. Pioneer Natural Resources: News Release (2018). Pioneer 9. Kennedy, Simon (2018). “Economists Bullish on Global Natural Resources. Retrieved from Growth Despite Emerging Market Turmoil.” Bloomberg. http://investors.pxd.com/news-releases/news-release- Retrieved from details/pioneer-natural-resources-company-and-us-silica- https://www.bloomberg.com/news/articles/2018-09-12/wall- announce-west. street-is-bullish-on-global-economy-despite-emerging- 26. Mosier, Jeff (2018). “Permian Basin Could Double Oil markets. Production by 2023, Trailing Only Saudi Arabia, Russia. 10. Spot Crude Oil Price: WTI and 10-Year Treasury Constant Dallas News. Retrieved from Maturity (2018). FRED Economic Research. Retrieved from https://www.dallasnews.com/business/energy/2018/06/13/pe https://fred.stlouisfed.org/series/DGS10/.

11 | P a g e

rmian-basin-could-double-oil-production-2023-trail-saudi- arabia/ 27. Burkhard, Jim (2018). “Fixing the Permian Mismatch: Upstream Growth and Mid-stream Takeaway Capacity.” IHSMarkit. Retrieved from https://ihsmarkit.com/research- analysis/fixing-permian-mismatch-upstream-growth- midstream-take-away-capacity.html. 28. Permian Region Drilling Productivity Report (2018). Energy Information Administration. Retrieved from https://www.eia.gov/petroleum/drilling/pdf/permian.pdf. 29. Concho Natural Resources Inc. 2017 Annual Report (2017). Concho Natural Resources, Inc. Retrieved from https://s2.q4cdn.com/413021264/files/doc_financials/annual /2017/469845_Concho-2017-AnnualReport-Web.pdf. 30. Apache Corporation 2017 Summary Annual Report (2017). Apache Corporation. Retrieved from https://issuu.com/apachecorporation/docs/apache_2017_ann ual_report. 31. Occidental Petroleum Corporation 2017 Annual Report (2017). Occidental Petroleum Corporation. Retrieved from http://www.oxypublications.com/annualreport/PDF/2017/O ccidental_AR_2017.pdf. 32. U.S. 10 Year Treasury (2018). CNBC. Retrieved from https://www.cnbc.com/quotes/?symbol=US10Y. 33. Implied Equity Risk Premium Update (2018). Damodaran Online. Retrieved from http://pages.stern.nyu.edu/~adamodar/. 34. Company Search: EDGAR Database (2018). U.S Securities and Exchange Commission. Retrieved from https://www.sec.gov/edgar/searchedgar/legacy/companysear c.

12 | P a g e

Pioneer Natural Resources Key Assumptions of Valuation Model

Ticker Symbol PXD Current Share Price $159.82 Current Model Date 11/11/2018 FY End (month/day) Dec. 31

Pre-Tax Cost of Debt 5.60% Beta 0.97666667 Risk-Free Rate 3.19% Equity Risk Premium 5.32% CV Growth of NOPLAT 3% CV Growth of EPS 3% CV ROE 7% CV ROIC 13% Current Dividend Yield 0.19% Marginal Tax Rate 21% Effective Tax Rate WACC 7.97% Cost of Debt 0.05077 Cost of Equity 0.08052 Weight of Equity 0.91 Intrinsic Value per Share $ 149.90 Normal Cash 0.7% Price per BOE 31.96 Production Oil and Gas 2022 105564.72 Purchased Oil and Gas 2022 2,475.17 Price Per Barrel 2022 Selling $ 60.06 Dividend per Share 0.32 Weight of Debt 0.09 Pioneer Natural Resources Revenue Decomposition

Fiscal Years Ending Dec. 31 2015 2016 2017 2018E 2019E 2020E 2021E 2022E Oil (MBbls) 38,452 48,926 57,878 60,772 66,850 77,846 90,652 105,565 Y/Y 21.04% 27.24% 18.30% 5.00% 10.00% 16.45% 16.45% 16.45% Price Oil Per Barrel $ 43.55 $ 39.65 $ 48.24 $ 60.81 $ 62.32 $ 61.76 $ 61.00 $ 60.06 Revenue from Oil $1,674.57 $1,939.91 $ 2,792.05 $ 3,695.57 $ 4,166.07 $ 4,807.80 $ 5,529.79 $ 6,340.22 NGLs (MBbls) 14,086 15,922 20,078 22,688 26,630 31,643 36,833 43,291 Y/Y -0.14% 13.04% 26.10% 13.00% 17.38% 18.82% 16.40% 17.53% Price NGLs per Bbl $ 13.31 $ 13.49 $ 19.31 $ 19.12 $ 18.93 $ 18.74 $ 18.55 $ 18.36 Revenue from NGLs $ 187.49 $ 214.79 $ 387.70 $ 433.72 $ 504.00 $ 592.89 $ 683.22 $ 794.99 Natural Gas (MMcf) 131,642 124,428 128,665 118295 108760 99994 91934 84524 Y/Y 6.28% -5.48% 3.41% -8.06% -8.06% -8.06% -8.06% -8.06% Price Gas per (MMcf) $ 2.40 $ 2.11 $ 2.63 $ 3.78 $ 2.97 $ 2.81 $ 2.79 $ 2.80 Revenues from Gas $ 315.94 $ 262.54 $ 338.39 $ 446.56 $ 323.34 $ 280.98 $ 256.04 $ 236.67 Total (MBOE) 74,478 85,586 99,400 113,656 130,855 150,751 173,202 199,315 BOE production growth 11.97% 14.91% 16.14% 14.34% 15.13% 15.20% 14.89% 15.08% Total Per Barrel $ 29.25 $ 28.25 $ 35.39 $ 30.96 $ 31.53 $ 32.63 $ 31.71 $ 31.96 Revenues of Oil and Gas per BOE $2,178.49 $2,417.81 $ 3,517.78 $ 4,575.85 $ 4,993.41 $ 5,681.66 $ 6,469.05 $ 7,371.87 Sales of Purchased Oil and Gas 700.00 1,091.00 1,776.00 1,255.16 1,369.70 1,558.49 1,774.47 2,022.11 Total Operating Revenue $ 2,878.49 $ 3,508.81 $ 5,293.78 $ 5,831.01 $ 6,363.11 $ 7,240.15 $ 8,243.51 $ 9,393.99 Interest and Other 22.00 32.00 53.00 53.00 53.00 53.00 53.00 53.00 Derivative Gains (Losses), net 879.00 (161.00) (100.00) - - - - - 23% -118% -38% -36% -57% -70% -55% -54% Gain on disposition of assets, net 208.00 2.00 782.00 - - - - -

Total Revenues $2,878.49 $3,508.81 $ 5,293.78 $ 5,884.01 $ 6,416.11 $ 7,293.15 $ 8,296.51 $ 9,446.99 Pioneer Natural Resources Income Statement In Millions $ Fiscal Years Ending Dec. 31 2015 2016 2017 2018E 2019E 2020E 2021E 2022E Revenues and Other Income: Oil and Gas Sales $ 2,178.00 $ 2,418.00 $ 3,518.00 $ 4,575.85 $ 4,993.41 $ 5,681.66 $ 6,469.05 $ 7,371.87 Sales of purchased oil and gas 700.00 1091.00 1776.00 1255.16 1369.70 1558.49 1774.47 2022.11 Operating Revenue 2878.00 3509.00 5294.00 5831.01 6363.11 7240.15 8243.51 9393.99 Interest and Other 22.00 32.00 53.00 53.00 53.00 53.00 53.00 53.00 Derivative gains (losses), net 879.00 (161.00) (100.00) - - - - - Gain on disposition of assets, net 782.00 2.00 208.00 - - - - - Total Revenues: 4561.00 3382.00 5455.00 5884.01 6416.11 7293.15 8296.51 9446.99 Costs and Expenses: Oil and Gas Production 717.00 581.00 591.00 671.11 738.23 1056.97 1230.85 1433.32 Production and Ad Valorem Taxes 145.00 136.00 215.00 236.81 258.42 294.04 334.79 381.51 Depletion, Depreciation and Amortization 1385.00 1480.00 1400.00 1458.27 1522.32 1578.44 1627.60 1670.66 Purchased Oil and Gas 739.00 1155.00 1807.00 1310.32 1429.89 1626.97 1852.44 2475.17 Impairment of Oil and Gas Properties 1056.00 32.00 285.00 - - - - - Exploration and Abandonments 99.00 119.00 106.00 106.00 106.00 106.00 106.00 106.00 General and Administrative Expenses 327.00 325.00 326.00 323.71 322.63 321.84 320.47 319.39 Accretion of discount on asset retirement obligations 12.00 18.00 19.00 19.00 19.00 19.00 19.00 19.00 Interest 187.00 207.00 153.00 186.40 175.62 206.54 214.99 222.96 Other 315.00 288.00 244.00 243.36 265.37 354.88 403.70 459.68 Total Expenses: 4982.00 4341.00 5146.00 4554.98 4837.47 5564.69 6109.83 7087.71 Income (loss) from continuing operations before income taxes (421.00) (959.00) 309.00 1276.03 1525.64 1675.47 2133.68 2306.28 Income tax benefit 155.00 403.00 524.00 (267.97) (320.38) (351.85) (448.07) (484.32) Income (loss) from continuing operations (266.00) (556.00) 833.00 1008.06 1205.25 1323.62 1685.61 1821.96 Loss from discontinued operations, net of tax (7.00) ------Net income (loss) attributable to common stockholders (273.00) (556.00) $ 833.00 $ 1,008.06 $ 1,205.25 $ 1,323.62 $ 1,685.61 $ 1,821.96 Basic EPS (1.83) (3.34) $ 4.86 $ 5.95 $ 7.12 $ 7.82 $ 9.97 $ 10.78 Basic weighted average shares outstanding 149.00 166.00 170.00 169.41 169.30 169.20 169.12 169.04 Dividends per share 0.08 0.08 0.08 0.32 0.32 0.32 0.32 0.32 Pioneer Natural Resources Balance Sheet In Millions $ Fiscal Years Ending Dec. 31 2015 2016 2017 2018E 2019E 2020E 2021E 2022E ASSETS

Current Assets: Cash & cash equivalents $ 1,391.00 $ 1,118.00 $ 896.00 $ 2,269.10 $ 2,593.49 $ 3,988.50 $ 5,397.96 $ 7,018.34 Short-term investments - 1441.00 1218.00 1256.81 1296.85 1338.16 1380.80 1424.79 Accounts receivable - trade, net 384.00 517.00 639.00 859.27 937.68 1066.92 1214.78 1384.32 Accounts receivable - due from affiliates 1.00 1.00 1.00 9.05 9.87 11.23 12.79 14.58 Income taxes receivable 43.00 3.00 7.00 24.07 26.26 29.88 34.02 38.77 Inventories 155.00 181.00 212.00 448.27 514.95 605.62 665.92 713.17 Prepaid expenses 17.00 ------Notes receivable 498.00 ------Derivatives 694.00 14.00 11.00 11.62 12.27 12.96 13.69 14.47 Other current assets 11.00 23.00 26.00 35.90 39.18 44.58 50.75 57.84 Total Current Assets 3194.00 3298.00 3010.00 4914.08 5430.55 7097.86 8770.72 10666.27 Property, plant and Equipment, at cost: Oil & gas - proved properties 16631.00 18566.00 20404.00 22340.20 24276.39 26212.59 28148.78 30084.98 Oil & gas - unproved properties 169.00 486.00 558.00 596.88 635.77 674.65 713.53 752.42 Accumulated depletion, depreciation & amortization 6778.00 8211.00 9196.00 10654.27 12176.59 13755.03 15382.62 17053.29 Total property, plant & equipment 10022.00 10841.00 11766.00 12282.81 12735.57 13132.21 13479.69 13784.11 Long-term investments - 420.00 66.00 68.10 70.27 72.51 74.82 77.21 Goodwill 272.00 272.00 270.00 270.00 270.00 270.00 270.00 270.00 Other property & equipment, net 1523.00 1529.00 1759.00 1894.76 2041.01 2198.54 2368.22 2551.01 Derivatives 64.00 ------Other assets, net 79.00 99.00 132.00 134.66 137.33 139.99 142.66 145.32 Total Assets $ 15,154.00 $ 16,459.00 $ 17,003.00 $ 19,564.42 $ 20,684.72 $ 22,911.11 $ 25,106.11 $ 27,493.91

LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities: Accounts Payable: Trade $ 798.00 $ 741.00 $ 1,174.00 $ 1,575.92 $ 1,719.73 $ 1,956.76 $ 2,227.94 $ 2,538.87 due to affiliates 85.00 134.00 108.00 205.19 223.91 254.78 290.08 330.57 Interest payable 65.00 68.00 59.00 58.57 55.18 64.90 67.55 70.06 Income taxes payable 2.00 ------Current portion of long-term debt 448.00 485.00 449.00 450.00 0.00 450.00 450.00 450.00 Derivatives - 77.00 232.00 232.00 232.00 232.00 232.00 232.00 Other current liabilities 64.00 61.00 106.00 141.54 154.46 175.75 200.10 228.03 Total Current Liabilities 1462.00 1566.00 2128.00 2663.22 2385.28 3134.18 3467.67 3849.52 Long-term debt 3207.00 2728.00 2283.00 3221.40 3459.06 3618.25 3784.52 3941.63 Derivatives 1.00 7.00 23.00 23.00 23.00 23.00 23.00 23.00 Deferred income taxes 1776.00 1397.00 899.00 870.38 842.67 815.84 789.86 764.71 Other liabilities 333.00 350.00 391.00 649.74 709.03 806.75 918.56 1046.75 Total Liabilities 6779.00 6048.00 5724.00 7427.73 7419.03 8398.02 8983.61 9625.62 Stockholders' Equity: Common stock 6269.00 8894.00 8976.00 8979.84 8983.68 8987.52 8991.36 8995.20 Treasury stock, at cost 199.00 (218.00) (249.00) (349.00) (374.92) (400.84) (426.75) (452.67) Retained earnings (accumulated deficit) 2298.00 1728.00 2547.00 3500.85 4651.93 5921.40 7552.89 9320.76 Total equity attributable to common stockholders 8368.00 10404.00 11274.00 12131.69 13260.69 14508.08 16117.50 17863.29 Noncontrolling interest in consolidating subsidiaries 7.00 7.00 5.00 5.00 5.00 5.00 5.00 5.00 Total Stockholders' Equity 8375.00 10411.00 11279.00 12136.69 13265.69 14513.08 16122.50 17868.29 Total Liabilities and Stockholders' Equity $ 15,154.00 $ 16,459.00 $ 17,003.00 $ 19,564.42 $ 20,684.72 $ 22,911.11 $ 25,106.11 $ 27,493.91 Pioneer Natural Resources Cash Flow Statement In Millions $ Fiscal Years Ending Dec. 31 2015 2016 2017 2018E 2019E 2020E 2021E 2022E CASH FLOWS FROM OPERATING ACTIVITIES:

Net Income (loss) (273.00) (556.00) 833.00 1,008.06 1,205.25 1,323.62 1,685.61 1,821.96 Adjustments to reconcile net income to net cash provided by operating activities: Depletion, depreciation & amortization 1,248.00 1,480.00 1,400.00 1,458.27 1,522.32 1,578.44 1,627.60 1,670.66 Impairment of oil & gas properties 1,056.00 32.00 285.00 Change in deferred income taxes - - - (28.62) (27.71) (26.83) (25.98) (25.15) Changes in Assets and Liabilities: Accounts receivable, net 54.00 (134.00) (122.00) (228.32) (79.24) (130.60) (149.41) (171.32) Income taxes receivable (20.00) 40.00 (4.00) (17.07) (2.20) (3.62) (4.14) (4.75) Inventories 8.00 (32.00) (35.00) (236.27) (66.68) (90.67) (60.30) (47.25) Investments - (22.00) 8.00 - - - - - Other current assets 2.00 (7.00) (3.00) (9.90) (3.28) (5.40) (6.18) (7.08) Accounts payable (258.00) 58.00 134.00 401.92 143.81 237.04 271.17 310.93 Accounts Payable affilites 97.19 18.72 30.86 35.31 40.48 Interest payable 25.00 3.00 (9.00) (0.43) (3.39) 9.72 2.65 2.51 Income taxes payable 1.00 (2.00) ------Other current liabilities (35.00) (44.00) (45.00) 35.54 12.92 21.29 24.36 27.93 Net Cash Flows from Operating Activities 1,248.00 1,498.00 2,090.00 2,480.37 2,720.54 2,943.84 3,400.68 3,618.92

CASH FLOWS FROM INVESTING ACTIVITIES (Increase) decrease in short-term investments - - - (39.42) (40.70) (42.01) (43.36) (44.76) (Increase) decrease in long-term investments - - - (2.10) (2.17) (2.24) (2.31) (2.38) Proceeds from disposition of assets, net of cash sold 553.00 507.00 352.00 - - - - - Payments for acquisitions - (428.00) ------Proceeds from investments - 902.00 1,465.00 - - - - - Purchase of investments - (2,741.00) (899.00) - - - - - Distribution from (investment in) unconsolidated subsidiary Additions to oil & gas - proved properties (2,110.00) (1,857.00) (2,365.00) (1,936.20) (1,936.20) (1,936.20) (1,936.20) (1,936.20) Additions to Oil & gas - unproved properties (10.00) (317.00) (72.00) (38.88) (38.88) (38.88) (38.88) (38.88) Additions to other assets & other property & equipment, net (283.00) (203.00) (336.00) (135.76) (146.24) (157.53) (169.69) (182.79) (Increase) decrease in other assets (2.66) (2.66) (2.66) (2.66) (2.66) Net Cash Flows from Investing Activities (1,840.00) (3,820.00) (1,783.00) (2,155.03) (2,166.85) (2,179.52) (2,193.11) (2,207.68)

CASH FLOWS FROM FINANCING ACTIVITIES Borrowings under long-term debt 998.00 - - 938.40 237.66 159.18 166.28 157.11 Proceeds from issuance of common stock, net of issuance costs - 2,534.00 ------Distributions to noncontrolling interests (1.00) ------Current portion of long-term debt - - - 1.00 (450.00) 450.00 - - Other liabilities - - - 258.74 59.29 97.73 111.80 128.19 Exercise of long-term incentive plan stock options & employee stock purchases 6.00 7.00 6.00 3.84 3.84 3.84 3.84 3.84 Purchase of treasury stock (31.00) (25.00) (36.00) (100.00) (25.92) (25.92) (25.92) (25.92) Dividends paid (12.00) (13.00) (14.00) (54.21) (54.18) (54.15) (54.12) (54.09) Net Cash Flows from Financing Activities 958.00 2,049.00 (529.00) 1,047.76 (229.30) 630.69 201.88 209.13 Net increase (decrease) in cash & cash equivalents 366.00 (273.00) (222.00) 1,373.10 324.39 1,395.01 1,409.46 1,620.38 Cash & cash equivalents, beginning of year 1,025.00 1,391.00 1,118.00 896.00 2,269.10 2,593.49 3,988.50 5,397.96 Cash & cash equivalents, end of year 1,391.00 1,118.00 896.00 2,269.10 2,593.49 3,988.50 5,397.96 7,018.34 Pioneer Natural Resources Common Size Income Statement

Fiscal Years Ending Dec. 31 2015 2016 2017 2018E 2019E 2020E 2021E 2022E Revenues and Other Income: Oil and gas 75.68% 68.91% 66.45% 78.47% 85.64% 97.44% 110.94% 126.43% Sales of purchased oil and gas 24.32% 31.09% 33.55% 21.53% 23.49% 26.73% 30.43% 34.68% Operating Revenue 100.00% 100.00% 100.00% 100.00% 109.13% 124.17% 141.37% 161.10% Interest and other 0.76% 0.91% 1.00% 0.91% 0.91% 0.91% 0.91% 0.91% Derivative gains (losses), net 30.54% -4.59% -1.89% 0.00% 0.00% 0.00% 0.00% 0.00% Gain on disposition of assets, net 27.17% 0.06% 3.93% 0.00% 0.00% 0.00% 0.00% 0.00% Hurricane activity, net 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Total Revenues: Costs and expenses: Oil and gas production 24.91% 16.56% 11.16% 11.51% 11.60% 14.60% 14.93% 15.26% Production and ad valorem taxes 5.04% 3.88% 4.06% 4.06% 4.06% 4.06% 4.06% 4.06% Depletion, depreciation and amortization 48.12% 42.18% 26.45% 25.01% 23.92% 21.80% 19.74% 17.78% Purchased oil and gas 25.68% 32.92% 34.13% 22.47% 22.47% 22.47% 22.47% 26.35% Impairment of oil and gas properties 36.69% 0.91% 5.38% 0.00% 0.00% 0.00% 0.00% 0.00% Exploration and abandonments 3.44% 3.39% 2.00% 1.82% 1.67% 1.46% 1.29% 1.13% General and administrative 11.36% 9.26% 6.16% 5.55% 5.07% 4.45% 3.89% 3.40% Accretion of discount on asset retirement 0.42% 0.51% 0.36% 0.33% 0.30% 0.26% 0.23% 0.20% Interest 6.50% 5.90% 2.89% 3.20% 2.76% 2.85% 2.61% 2.37% Other 10.95% 8.21% 4.61% 4.17% 4.17% 4.90% 4.90% 4.89% Total Expenses: 173.11% 123.71% 97.20% 78.12% 76.02% 76.86% 74.12% 75.45% Exploration and abandonments -14.63% -27.33% 5.84% 21.88% 23.98% 23.14% 25.88% 24.55% before income taxes Income tax benefit 5.39% 11.48% 9.90% -4.60% -5.04% -4.86% -5.44% -5.16% Income (loss) from continuing operations -9.24% -15.84% 15.73% 17.29% 18.94% 18.28% 20.45% 19.39% Loss from discontinued operations, net -0.24% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% of tax Net income (loss) attributable to common stockholders -9.49% -15.84% 15.73% 17.29% 18.94% 18.28% 20.45% 19.39% Pioneer Natural Resources Common Size Balance Sheet

Fiscal Years Ending Dec. 31 2015 2016 2017 2018E 2019E 2020E 2021E 2022E ASSETS Current Assets: Cash & cash equivalents 32.16% 38.85% 25.53% 42.86% 44.48% 62.68% 74.56% 85.14% Short-term investments 0.00% 50.07% 34.71% 23.74% 22.24% 21.03% 19.07% 17.28% Accounts receivable - trade, net 8.88% 17.96% 18.21% 16.23% 16.08% 16.77% 16.78% 16.79% Accounts receivable - due from affiliates 0.02% 0.03% 0.03% 0.17% 0.17% 0.18% 0.18% 0.18% Income taxes receivable 0.99% 0.10% 0.20% 0.45% 0.45% 0.47% 0.47% 0.47% Inventories 3.58% 6.29% 6.04% 8.47% 8.83% 9.52% 9.20% 8.65% Prepaid expenses 0.39% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Assets held for sale 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Deferred income taxes 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Notes receivable 11.51% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Discontinued operations held for sale 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Derivatives 16.05% 0.49% 0.31% 0.22% 0.21% 0.20% 0.19% 0.18% Other current assets 0.25% 0.80% 0.74% 0.68% 0.67% 0.70% 0.70% 0.70% Total Current Assets 73.85% 114.59% 85.78% 92.82% 93.13% 111.55% 121.14% 129.39% Property, plant and Equipment, at cost: Oil & gas - proved properties 384.53% 645.10% 581.48% 421.99% 416.33% 411.95% 388.79% 364.95% Oil & gas - unproved properties 3.91% 16.89% 15.90% 11.27% 10.90% 10.60% 9.86% 9.13% Accumulated depletion, depreciation & amortization 156.72% 285.30% 262.07% 201.25% 208.82% 216.17% 212.46% 206.87% Total property, plant & equipment 231.72% 376.69% 335.31% 232.01% 218.41% 206.38% 186.18% 167.21% Long-term investments 0.00% 14.59% 1.88% 1.29% 1.21% 1.14% 1.03% 0.94% Deferred income taxes 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Goodwill 6.29% 9.45% 7.69% 5.10% 4.63% 4.24% 3.73% 3.28% Other property & equipment, net 35.21% 53.13% 50.13% 35.79% 35.00% 34.55% 32.71% 30.95% Investment in unconsolidated affilaite 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Derivatives 1.48% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Other assets, net 1.83% 3.44% 3.76% 2.54% 2.36% 2.20% 1.97% 1.76% Total Assets 350.38% 571.89% 484.55% 369.56% 354.74% 360.06% 346.76% 333.52%

LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities: Accounts Payable: Trade 18.45% 25.75% 33.46% 29.77% 29.49% 30.75% 30.77% 30.80% due to affiliates 1.97% 4.66% 3.08% 3.88% 3.84% 4.00% 4.01% 4.01% Interest payable 1.50% 2.36% 1.68% 1.11% 0.95% 1.02% 0.93% 0.85% Income taxes payable 0.05% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Current portion of long-term debt 10.36% 16.85% 12.80% 8.50% 0.00% 7.07% 6.22% 5.46% Deferred income taxes 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Discontinued operations held for sale 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Liabilities held for sale 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Derivatives 0.00% 2.68% 6.61% 4.38% 3.98% 3.65% 3.20% 2.81% Deferred revenue 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Other current liabilities 1.48% 2.12% 3.02% 2.67% 2.65% 2.76% 2.76% 2.77% Total Current Liabilities 33.80% 54.41% 60.64% 50.31% 40.91% 49.26% 47.90% 46.70% Long-term debt 74.15% 94.79% 65.06% 60.85% 59.32% 56.86% 52.27% 47.81% Derivatives 0.02% 0.24% 0.66% 0.43% 0.39% 0.36% 0.32% 0.28% Deferred income taxes 41.06% 48.54% 25.62% 16.44% 14.45% 12.82% 10.91% 9.28% Deferred revenue 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Other liabilities 7.70% 12.16% 11.14% 12.27% 12.16% 12.68% 12.69% 12.70% Total Liabilities 156.74% 210.15% 163.12% 140.30% 127.23% 131.98% 124.08% 116.77%

Stockholders' equity: Common stock 217.82% 253.46% 169.55% 154.00% 141.18% 124.13% 109.07% 95.75% Additional paid-in capital 6.91% -6.21% -4.70% -5.99% -5.89% -5.54% -5.18% -4.82% Treasury stock, at cost 4.60% -7.57% -7.10% -6.59% -6.43% -6.30% -5.89% -5.49% Retained earnings (accumulated deficit) 53.13% 60.04% 72.58% 66.13% 79.78% 93.06% 104.32% 113.07% Net deferred hedge gains (losses), net of tax 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Total equity attributable to common stockholders 193.48% 361.50% 321.29% 229.16% 227.42% 228.00% 222.61% 216.70% Noncontrolling interest in consolidating subsidiaries 0.16% 0.24% 0.14% 0.09% 0.09% 0.08% 0.07% 0.06% Total Stockholders' Equity 193.64% 361.74% 321.43% 229.25% 227.50% 228.08% 222.68% 216.76% Total Liabilities and Stockholders' Equity 350.38% 571.89% 484.55% 369.56% 354.74% 360.06% 346.76% 333.52% Pioneer Natural Resources Value Driver Estimation In Millions Fiscal Years Ending Dec. 31 2015 2016 2017 2018E 2019E 2020E 2021E 2022E

NOPLAT Computation EBITA: Net Sales $ 2,878.00 $ 3,509.00 $ 5,294.00 $ 5,831.01 $ 6,363.11 $ 7,240.15 $ 8,243.51 $ 9,393.99 - Cost of Goods Sold 717.00 581.00 591.00 671.11 738.23 1056.97 1230.85 1433.32 - Production and ad valorem taxes 145.00 136.00 215.00 236.81 258.42 294.04 334.79 381.51 - Depletion, depreciation and amortization 1385.00 1480.00 1400.00 1458.27 1522.32 1578.44 1627.60 1670.66 - Purchased oil and gas 739.00 1155.00 1807.00 1310.32 1429.89 1626.97 1852.44 2475.17 - Impairment of oil and gas properties 1056.00 32.00 285.00 ------Exploration and abandonments 99.00 119.00 106.00 106.00 106.00 106.00 106.00 106.00 - General and administrative expenses 327.00 325.00 326.00 323.71 322.63 321.84 320.47 319.39 - Other 315.00 288.00 244.00 243.36 265.37 354.88 403.70 459.68 + Implied Interest on Operating Leases 7.73 5.17 4.61 24.72 25.63 26.43 27.13 27.74 EBITA $ (1,897.27) $ (601.83) $ 324.61 $ 1,506.14 $ 1,745.89 $ 1,927.44 $ 2,394.80 $ 2,575.98

LESS: Adjusted Taxes Provision for Income Taxes $ (155.00) $ (403.00) $ (524.00) $ 267.97 $ 320.38 $ 351.85 $ 448.07 $ 484.32 + Tax shield on interest expense 39.27 43.47 32.13 39.14 36.88 43.37 45.15 46.82 + Tax Shield on Implied Lease Interest 1.62 1.09 0.97 5.19 5.38 5.55 5.70 5.83 - Tax on Derivative Gains/Losses 184.59 -33.81 -21.00 ------Tax on Interest Income 4.62 6.72 11.13 11.13 11.13 11.13 11.13 11.13 - Tax on disposition of assets 164.22 0.42 43.68 0.00 0.00 0.00 0.00 0.00 retirement obligations 2.52 3.78 3.99 3.99 3.99 3.99 3.99 3.99 Adjusted Taxes $ (465.02) $ (327.99) $ (520.72) $ 305.16 $ 355.51 $ 393.63 $ 491.78 $ 529.83

PLUS: Change in Deferred Tax Liabilities Current year DTL $ 1,776.00 $ 1,397.00 $ 899.00 $ 870.38 $ 842.67 $ 815.84 $ 789.86 $ 764.71 - Current year DTA ------Net DTL for current year 1776.00 1397.00 899.00 870.38 842.67 815.84 789.86 764.71

Previous year DTL 1803.00 1776.00 1397.00 899.00 870.38 842.67 815.84 789.86 - Previous year DTA ------Net DTL for previous year 1803.00 1776.00 1397.00 899.00 870.38 842.67 815.84 789.86

Net Change in DtL (Current-Previous year) $ (27.00) $ (379.00) $ (498.00) $ (28.62) $ (27.71) $ (26.83) $ (25.98) $ (25.15)

NOPLAT: EBIT - Adjusted Taxes + Change in DT $ (1,459.26) $ (652.84) $ 347.33 $ 1,172.36 $ 1,362.67 $ 1,506.98 $ 1,877.05 $ 2,021.01

Invested Capital Computation

Operating Current Assets: Normal Cash 20.15 24.56 37.06 40.82 44.54 50.68 57.70 65.76 Accounts Recievable 385.00 518.00 640.00 868.32 947.55 1078.16 1227.57 1398.89 Inventories 155.00 181.00 212.00 448.27 514.95 605.62 665.92 713.17 Prepaid Expenses 17.00 ------Income tax recievable 43.00 3.00 7.00 24.07 26.26 29.88 34.02 38.77 Operating Current Assets: 620.15 726.56 896.06 1381.47 1533.31 1764.34 1985.22 2216.60

Operating Current Liabilities: Accounts Payable 883.00 875.00 1282.00 1781.11 1943.64 2211.54 2518.02 2869.44 Income taxes payable 2.00 ------Deferred Revenue ------Other Current Liabilities 64.00 61.00 106.00 141.54 154.46 175.75 200.10 228.03 Operating Current Liabilities 885.00 875.00 1282.00 1922.65 2098.10 2387.29 2718.13 3097.47

Net Working Capital -264.85 -148.44 -385.94 -541.18 -564.79 -622.95 -732.90 -880.87

PLUS: Net PPE 10022.00 10841.00 11766.00 12282.81 12735.57 13132.21 13479.69 13784.11

PLUS: PV of operating leases 152.21 101.84 90.77 486.89 504.84 520.56 534.34 546.40

PLUS: Other L-T operating assets Other property and equipment, net 1523.00 1529.00 1759.00 1894.76 2041.01 2198.54 2368.22 2551.01 Other 79.00 99.00 132.00 134.66 137.33 139.99 142.66 145.32 Total Other L-T operating assets 1602.00 1628.00 1891.00 2029.43 2178.33 2338.53 2510.88 2696.33

LESS: Other L-T operating liabilities 333.00 350.00 391.00 649.74 709.03 806.75 918.56 1046.75

Invested Capital: 11178.35 12072.40 12970.82 13608.21 14144.92 14561.59 14873.45 15099.21 ROIC=NOPLAT/Beginning IC NOPLAT -1459.26 -652.84 347.33 1172.36 1362.67 1506.98 1877.05 2021.01 Beginning IC 11167.59 11178.35 12072.40 12970.82 13608.21 14144.92 14561.59 14873.45 Return on Invested Capital -0.13 -0.06 0.03 0.09 0.10 0.11 0.13 0.14 FCF=NOPLAT-Change in IC NOPLAT -1459.26 -652.84 347.33 1172.36 1362.67 1506.98 1877.05 2021.01 Change in IC 10.76 894.05 898.42 637.39 536.71 416.68 311.85 225.77 Free Cash Flows -1470.02 -1546.88 -551.09 534.97 825.96 1090.30 1565.19 1795.24 EP=Beginning IC*(ROIC-WACC) Beginning IC 11167.59 11178.35 12072.40 12970.82 13608.21 14144.92 14561.59 14873.45 ROIC -0.13 -0.06 0.03 0.09 0.10 0.11 0.13 0.14 WACC 0.10 0.10 0.10 0.08 0.08 0.08 0.08 0.08 Economic Profit -2576.01 -1770.67 -859.91 138.52 278.03 379.56 716.42 835.52 Pioneer Natural Resources Weighted Average Cost of Capital (WACC) Estimation Cost Of Equity Risk Free Rate 3.19% Risk Premium 5.32% Beta 0.98 Cost of Equity 8.38%

Cost of Debt Debt Rating BBB Pre-tax Cost of Debt 5.08% Tax Rate 21.00% After-Tax Cost of Debt 4.01%

MV of Equity Shares Outstanding 170.00 Share Price $ 159.82 Market Value of Equity $ 27,169.40

Market Value of Debt Current Portion of Long-Term Debt $ 449.00 Long-Term Debt $ 2,283.00 PV of Operating Leases $ 90.77 Market Value of Debt $ 2,822.77

Weights % Equity 90.59% % Debt 9.41%

WACC 7.97% Pioneer Natural Resources Discounted Cash Flow (DCF) and Economic Profit (EP) Valuation Models

Key Inputs: CV NOPLAT Growth 3.00% CV ROIC 13% WACC 7.97% Cost of Equity 8.38%

Fiscal Years Ending Dec. 31 2018E 2019E 2020E 2021 2022 (CV)

DCF Model NOPLAT 1172.36 1362.67 1506.98 1877.05 2021.01 -CapEx 637.39 536.71 416.68 311.85 225.77 Unlevered Free Cash Flow 534.97 825.96 1090.30 1565.19 1795.24 ROIC 0.09 0.10 0.11 0.13 0.13 Continuing Value 31197.32

Periods to discount 1 2 3 4 4

Present value of FCF 495.48 708.52 866.23 1151.72 Present value of CV 22956.05

Value of Operating Assets $ 26,177,999,482.77 Excess Cash $ 858,942,000.00 Short-Term Investments $ 1,218,000,000.00 Long-Term Investments $ 66,000,000.00 Debt $ 2,732,000,000.00 PV of Operating Leases $ 90,765,088.54 PV of Stock Options $ 10,669,407.60 Non controlling interests $ 5,000,000.00 Value of Equity $ 25,482,506,986.63 Shares Outstanding 170,000,000.00 Intrinsic Value per Share $ 149.90 Target Price as of 10/25/2018 $ 148.32

EP Model Beginning Invested Capital 12971 13608 14145 14562 15678 ROIC 9% 10% 11% 13% 13% Economic Profit 139 278 380 716 836 Continuing Value

Periods to Discount 1 2 3 4 4

Present Value of Economic Profit 128 238 302 527 Present Value of Economic Profit (CV) 12012 Present Value $ 13,207,176,394.23 Beginning Invested Capital $ 12,970,823,088.54 Value of Operating Assets $ 26,177,999,482.77 Excess Cash $ 858,942,000.00 Short-Term Investments $ 1,218,000,000.00 Long Term Investments $ 66,000,000.00 Less: Debt $ 2,732,000,000.00 Less: PV of Operating Leases $ 90,765,088.54 Less: PV of Stock Options $ 10,669,407.60 Less: Non controlling interests $ 5,000,000.00 Value of Equity $ 25,482,506,986.63 Shares Outstanding 170,000,000.00 Intrinsic Value per Share $ 149.90 Target Price as of 10/25/2018 $ 148.32 Pioneer Natural Resources Dividend Discount Model (DDM) or Fundamental P/E Valuation Model

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

EPS $ 5.95 $ 7.12 $ 7.82 $ 9.97 $ 10.78

Key Assumptions CV growth 3.00% CV ROE 6.84% Cost of Equity 8.05%

Future Cash Flows P/E Multiple (CV Year) 11.1125 EPS (CV Year) 10.78 Future Stock Price 119.77 Dividends Per Share 0.32 0.32 0.32 0.32 0.32 Number of Periods 1 2 3 4 4 Discounted Cash Flows 0.30 0.27 0.25 0.23 87.87

Intrinsic Value $ 88.93 Target Price $ 95.32 Pioneer Natural Resources Relative Valuation Models

EPS EPS Ticker Company Price 2018E 2019E P/E 18 P/E 19 Enterprise Value EBITA EV/EBITA CVE Cenovus Energy Inc. $8.46 $0.29 $0.47 29.16 17.99 17,670,000,000.00 1,528,546,712.80 11.56 APA Apache Corporation $37.08 $2.01 $2.38 18.45 15.58 23,020,000,000.00 4,631,790,744.47 4.97 CXO Concho Resources Inc. $136.52 $4.57 $6.56 29.87 20.81 3,136,000,000.00 148,134,152.10 21.17 ORIG Ocean Rig UDW Inc. $21.60 (0.40) (0.46) (54.00) (46.96) 6,500,000,000.00 736,126,840.32 8.83 DO Diamond Offshore Drilling,Inc. $14.59 (1.11) (1.14) (13.14) (12.80) 3,840,000,000.00 398,340,248.96 9.64 Average 2.07 (1.07) Average 11.234

PXD Pioneer Natural Resources $159.82 5.95 7.12 26.9 22.4 28,190,000,000.00 1,922,919,508.87 14.66

Implied Relative Value: P/E (EPS18) $ 12.30 P/E (EPS19) $ (7.65) Enterprise Value $ 28,190,000,000.00 Shares Outstanding $ 169,412,659.80 Share Price $166.40 Pioneer Natural Resources Key Management Ratios

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

Liquidity Ratios Current Ratio 2.18 2.11 1.41 1.85 2.28 2.26 2.53 2.77 Operating CF Ratio 0.85 0.96 0.98 0.93 1.14 0.94 0.98 0.94 Quick Ratio 1.21 1.96 1.29 1.65 2.02 2.04 2.31 2.55

Activity or Asset-Management Ratios Asset Turnover 0.19 0.22 0.32 0.32 0.32 0.33 0.34 0.36 Recievables Turnover 7.02 7.79 9.16 7.78 7.08 7.22 7.23 7.23

Financial Leverage Ratios Debt-to-Equity 0.44 0.32 0.26 0.32 0.28 0.30 0.28 0.26 Equity Ratio 0.55 0.63 0.66 0.62 0.64 0.63 0.64 0.65 Interest Coverage Ratio 15.85 15.79 22.91 21.58 24.18 0.00 0.00 0.00

Profitability Ratios Return on Assets -1.80% -3.38% 4.90% 5.15% 5.83% 5.78% 6.71% 6.63% Return on Equity -3.10% -6.64% 8.00% 8.94% 9.93% 9.98% 11.61% 11.30% Profit Margin -9.49% -15.84% 15.73% 17.29% 18.94% 18.28% 20.45% 19.39%

Payout Policy Ratios Payout Ratio -11.38% -4.51% 4% 10% 2% 2% 2% 1% Present Value of Operating Lease Obligations (2018) Present Value of Operating Lease Obligations (2017) Present Value of Operating Lease Obligations (2016) Present Value of Operating Lease Obligations (2015)

Operating Operating Operating Operating Fiscal Years Ending Dec. 31 Leases Fiscal Years Ending Dec. 31 Leases Fiscal Years Ending Fiscal Years Ending Leases 2018 27 2017 26 2016 24 2015 25.305 2019 42 2018 24 2017 23 2016 34.63 2020 53 2019 23 2018 21 2017 34.63 2021 40 2020 18 2019 21 2018 31.055 2022 37 2021 4 2020 17 2019 31.055 Thereafter 680 Thereafter 11 Thereafter 15 Thereafter 26.569 Total Minimum Payments 879 Total Minimum Payments 106 Total Minimum Payments 121 Total Minimum Payments 183.244 Less: Interest 392 Less: Interest 15 Less: Interest 19 Less: Interest 31 PV of Minimum Payments 487 PV of Minimum Payments 91 PV of Minimum Payments 102 PV of Minimum Payments 152

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

Pre-Tax Cost of Debt 5.60% Pre-Tax Cost of Debt 5.60% Pre-Tax Cost of Debt 5.60% Pre-Tax Cost of Debt 5.60% 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 Number Years Implied by Year 6 Payment 1.0

Lease PV Lease Lease PV Lease Lease PV Lease Lease PV Lease Year Commitment Payment Year Commitment Payment Year Commitment Payment Year Commitment Payment 1 27 25.6 1 26 24.6 1 24 22.7 1 25.305 24.0 2 42 37.7 2 24 21.5 2 23 20.6 2 34.63 31.1 3 53 45.0 3 23 19.5 3 21 17.8 3 34.63 29.4 4 40 32.2 4 18 14.5 4 21 16.9 4 31.055 25.0 5 37 28.2 5 4 3.0 5 17 12.9 5 31.055 23.6 6 & beyond 37 318.3 6 & beyond 4 7.6 6 & beyond 15 10.8 6 & beyond 26.569 19.2 PV of Minimum Payments 486.9 PV of Minimum Payments 90.8 PV of Minimum Payments 101.8 PV of Minimum Payments 152.2 Effects of ESOP Exercise and Share Repurchases on Common Stock Balance Sheet Account and Number of Shares Outstanding

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

Current Average Strike Price: $ 100.10 Cost of Equity: 9.00% Current Stock Price: $159.82

2018E 2019E 2020E 2021E 2022 (CV) Increase in Shares Outstanding: 38,364 38,364 38,364 38,364 38,364 Average 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 25,917,625 25,917,625 25,917,625 25,917,625 Expected Price of Repurchased Shares: $ 159.82 $ 174.20 $ 189.88 $ 206.97 $ 225.60 Number of Shares Repurchased: 625,704 148,778 136,493 125,223 114,884

Shares Outstanding (beginning of the year) 170,000,000 169,412,660 169,302,246 169,204,116 169,117,257 Plus: Shares Issued Through ESOP 38,364 38,364 38,364 38,364 38,364 Less: Shares Repurchased in Treasury 625,704 148,778 136,493 125,223 114,884 Shares Outstanding (end of the year) 169,412,660 169,302,246 169,204,116 169,117,257 169,040,737 VALUATION OF OPTIONS GRANTED IN ESOP

Ticker Symbol PXD Current Stock Price $159.82 Risk Free Rate 3.19% Current Dividend Yield 0.19% Annualized St. Dev. of Stock Returns 33.90% From Fact Set past 5 years

Average Average B-S Value Range of Number Exercise Remaining Option of Options Outstanding Options of Shares Price Life (yrs) Price Granted Range 1 138,493 100.10 3.61 $ 77.04 $ 10,669,408 Total 138,493 $ 100.10 3.61 $ 78.01 $ 10,669,408