Shares of Pioneer Natural Resources (PXD) reported solid third-quarter results. The oil-and-gas producer keeps its promise to return excess cash to shareholders, checking the main box in our investment thesis for the company.

• Total revenue climbed by 36.5% year-on-year, to $6.09 billion.

• Adjusted earnings-per-share came in at $7.48, slightly missing analysts’ forecasts of $7.50 a share, according to estimates compiled by Refinitiv.

• Cash flow from operating activities totaled $3 billion, topping estimates of $2.76 billion, according to FactSet. As a result, Pioneer’s free cash flow — money the business generates minus capital expenditures — was $1.7 billion, just shy of the $1.76 billion predicted by analysts.

Capital allocation

This is an important part of Pioneer’s earnings reports each quarter. We own the company due to their disciplined capital return programs. That helps sweeten overall investment returns for shareholders.

On top of its dividend, Pioneer announced Thursday that it bought back $500 million worth of stock during the third quarter, at an average price of $218 per share. In the second quarter, by comparison, Pioneer also repurchased $500 million in stock, at $235 per share on average. The company has $2.75 billion remaining on its current share repurchase authorization.

Pioneer’s third-quarter buyback, combined with the declared fourth-quarter dividend payment, adds up to an annualized 12% total shareholder return, according to the company.

Quarterly production and pricing

Total oil equivalent production in the third quarter came in at 657,000 barrels a day, ahead of the 648,100 barrels a a day predicted by analysts. Here’s a breakdown:

• Oil: 354,040 barrels a day, ahead of expectations for 353,600 barrels a day.

• Natural gas liquids (NGL): 162,370 barrels a day, beating forecasts for 160,700 barrels a day.

• Gas: 841,000 cubic feet per day, above a consensus estimate of 805,500 cubic feet a day.

Pioneer’s average realized price for oil was $94.23 per barrel, edging out estimates of $93.3 per barrel. The company’s average realized price for natural gas liquids was $38.09 per barrel, missing expectations of $38.30 per barrel. Pioneer recorded an average realized price for gas of $7.58 per thousand cubic feet, topping estimates of $7.20 per thousand cubic feet. The aforementioned prices exclude the impact of hedging activity.

Guidance

Pioneer offered investors the following fourth-quarter guidance:

• Oil production of 346,500 barrels a day to 361,500 barrels a day, compared to analysts’ forecasts of 358,700 barrels a day, according to FactSet.

• Total oil equivalent production per day in a range of 655,000 barrels to 680,000 barrels, versus a consensus estimate of 653,900 barrels a day.

Pioneer also reiterated its full-year capital budget range of $3.6 billion to $3.8 billion, compared with analysts’ expectations of $3.76 billion. Projected full-year operating cash flow of more than $12 billion topped forecasts of $11.93 billion.

Management also left unchanged its full-year production outlook. The company continues to forecast oil production between 350,000 barrels a day and 365,000 barrels a day, while it expects total production of barrels of oil equivalent a day between 623,000 and 648,000.

Bottom line

Pioneer’s results were solid considering the sharp drop in oil prices during the third quarter of this year. In the three months ended Sept. 30, West Texas Intermediate crude — the U.S. oil benchmark — fell by roughly 25%. Wall Street was well aware of that setup, though, so it wasn’t a surprise to find out Pioneer’s net income, free cash flow and sales declined on a quarter-over-quarter basis.

Most importantly, Pioneer continued to demonstrate its commitment to returning the majority of its excess cash to shareholders via buybacks and dividends. Under its base-plus-variable dividend model, Pioneer said Thursday its fourth-quarter payout will be $5.71 per share. That equates to an annualized dividend yield of roughly 8.6% based on Pioneer’s Thursday closing price of $265.84 — easily among the largest of any company in the S&P 500 as of Thursday. While that’s less than the $8.57 per share Pioneer paid out in the third quarter, we anticipated a smaller payout for the fourth given the summer slide in oil.

That said, oil prices have rebounded by more than 10% since the start of October as a result of production cuts agreed by the Organization of the Petroleum Exporting Countries and its oil-producing allies, which should provide a tailwind for Pioneer and other energy firms in the coming months. We would be buying Pioneer on a pullback.