Why Has Pioneer Natural Resources' Dividend Declined 78% in 16 months?

One of the most important things to understand about oil and natural gas producers is that energy prices play a huge role in financial performance. That’s the big picture backstory behind Pioneer Natural Resources(NYSE: PXD) string of dividend cuts over the past 16 months. But, still, there’s a bit more to know about why the company’s dividend cuts were perfectly predictable.

Pioneer is focused on commodities

In the second quarter of 2023, Pioneer Natural Resources produced 711 million barrels of oil equivalents per day, a metric that basically compresses oil and natural gas into one measure. That was toward the high side of the company’s guidance, so it was a good quarter production-wise. A year ago the company produced roughly 642 million barrels, so this was also a nice year-over-year jump in production.

Image source: Getty Images.

But here’s the interesting thing — despite the strong production results, the energy company’s top line fell from $6.9 billion in the second quarter of 2022 to just $4.6 billion in the same quarter of 2023. Why? Put simply, Pioneer sells commodity products that are subject to often volatile and swift price swings. The average price per barrel of oil equivalent in the second quarter of 2022 was $79.31 versus $46.03 in 2023.

Higher production couldn’t overcome the nearly 40% decline in the per-barrel price of the product Pioneer sells. And with the revenue decline came an earnings decline. The bottom line dropped from $9.78 per share a year ago to just $4.71 in the second quarter of 2023. That’s just a touch over 50% lower, which would be shocking for most companies, but not so much for an energy producer.

And the dividend was cut, as well

At about the same time as it reported second-quarter 2022 financial results, Pioneer declared a dividend of $8.57 per share. With earnings of $9.78 it could easily afford that. But with earnings of $4.71 per share in the second quarter of 2023, that large a dividend wouldn’t have been fiscally prudent. So the dividend announcement was just $1.84 per share. That’s a big difference, but clearly the dividend had to be trimmed because the company’s earnings were materially lower.

Pioneer has a variable dividend policy that openly ties dividend payments to financial results. So, when energy prices are rising, dividend investors get to share in the upside. But when prices are falling, dividend investors have to share in the pain, too, in the way of dividend cuts. Given the nature of the energy business, it is actually a pretty reasonable dividend policy even though it clearly results in dividend variability from quarter to quarter.

PXD Dividend Per Share (Quarterly) Chart

PXD Dividend Per Share (Quarterly) data by YCharts

That might turn off dividend investors trying to create a reliable stream of income for retirement. But it might interest investors looking to create a hedge, or sorts, against energy costs if they use oil, natural gas, or gasoline. Basically, just when you might be facing higher energy costs for these vital fuels, you will likely be receiving higher dividends from Pioneer Natural Resources. That would help soften the blow to your wallet.

Know what you are buying with Pioneer

At one point not too long ago, Pioneer’s dividend yield was in the double digits. If that was all you considered when buying, you would have been sorely disappointed by the swift decline in the dividend payment. But the company’s dividend cuts that have taken place over the past year or so were entirely predictable. That’s because of both the nature of the energy industry and the company’s specific dividend policy. This is not a stock for conservative dividend investors, but it could have a place in your portfolio if you understand its dividend approach.

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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool recommends Pioneer Natural Resources. The Motley Fool has a disclosure policy.

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