Portfolio holding Pioneer Natural Resources (PXD) reported better-than-expected earnings after the closing bell Tuesday.

Total revenue of $6.92 billion exceeded expectations of $6.89 billion. Adjusted diluted earnings of $9.36 per share was better than the $8.81 per share expected by the Street. Operating cash flow for the quarter of $3.22 a bit short versus the $3.45 billion expected. After accounting for all capital requirements, free cash flow of $2.66 billion came well above expectations of $2.49 billion.

Capital allocation

We pay close attention to cash flow metrics because our investment thesis is that production and exploration holdings — Chevron (CVX), Coterra (CTRA) and Pioneer (PXD) — will generate significant cash flows and then turn around and distribute that cash to shareholders via dividends and buybacks.

Within the earnings presentation, management estimated the payout investors can expect at given WTI oil prices. At $60 oil, we are looking at a 5% yield; at $80 oil an 8% yield; at $100 oil a 12% yield; at $120 oil a 16% yield; and at $140 oil a 20% yield. The takeaway: There is a significant cushion and that even should WTI prices come down in the future, Pioneer has the capacity to offer an attractive cash dividend payout.

Dividend payments are only one way that management returns capital to shareholders; the other being share buybacks. Since the end of the first quarter, the company repurchased $750 million worth of shares, with $500 million of that being completed during the second quarter at an average price of $235. Another $250 million in July at an average price of $213 per share.

Combining the third-quarter dividend payout with the second-quarter share repurchase activity annualizes to a roughly 19% total shareholder return.

Looking ahead, management has $3 billion remaining under the current share repurchase authorization. This is roughly 5.5% of the company’s valuation.

Guidance

For the third quarter, management is targeting oil production of 345 to 360 MBoe/d (thousand barrels of oil per day), versus 359 MBoe/d expected. Total oil equivalent production is forecast to be between 635 and 660 MBoe/d, slightly above the 644 expected at the midpoint.

For fiscal year 2022, management offered the following guidance:

• Oil production in the range of 350 to 365 MBoe/d, in line with expectations at the midpoint.

• Total oil equivalent production in the range of 623 to 648 MBoe/d, versus 643.7 MBoe/d expected.

• Operating cash flow in excess of $13 billion, slightly above the $12.7 billion expected.

• Free cash flow in excess of $9 billion, slightly above the $8.98 billion expected.

• Capital budget of $3.6 billion to $3.8 billion, versus $3.6 billion expected, with management noting that the budget will be fully funded by 2022 cash flows.

Quarterly production and pricing

Total oil equivalent production came in at 643 MBoe/d, edging our expectations of 642 MBoe/d. The makeup of this production was as follows:

• Oil: 347.96 vs. 348.2 expected MBbls/d (one thousand standard barrels of 42 U.S. gallons per day)

• NGL: 160.18 vs. 157.9 expected MBbls/d

• Gas: 808.18 vs. 799.0 expected MMcf/d (one million cubic feet per day)

Pricing, excluding the impact of derivatives (hedging activity such as selling futures contracts to lock in prices in future periods and therefore operate with increased certainty), the average realized price for oil was $110.56 vs. $107.40 expected, while natural gas was $44.21 vs. $45.30 expected and gas was $6.72 vs. $6.70 expected.

Bottom line

This was a great release from Pioneer that once again demonstrated management’s commitment to shareholder returns. With plans to return over 95% of its fiscal second-quarter free cash flow via dividends and buybacks, our investment thesis — predicated on a return of the majority of cash generated to shareholders — remains very much intact. Moreover, with over 20 years of inventory that provides sub-$40 breakeven price, we see plenty of capacity for the cash returns to continue even should WTI prices come down a bit from here.

With the latest increase to the companies base-plus-variable dividend payout to $8.57 per share in the third (current) quarter, Pioneer is the highest dividend yielding company in the S&P 500 at 15%.