As some of you may know, I’ve been watching (and investing in) the energy space for years.

This sector can frustrate investors like few can. When times are good, they’re really good. And when they’re bad… well let’s just say that it’s easy to think the sky is falling and it will never return to “normal” again.

I won’t rehash what happened last spring, when the coronavirus outbreak sent demand through the floor, turning futures prices negative for the first time ever. We all know that the entire sector sold off mercilessly.

Fast forward to today, and energy prices have staged a strong comeback. And it could be just the beginning…

Back in September, I wrote that investors would be unwise to write off this sector just yet. You can read that piece here. But if you’re like a lot of investors who don’t see a lot of upside in the big players, but don’t want to risk your money on a smaller, speculative play either, you may be wondering where to turn.

My Pick For An Energy Rebound

Allow me to introduce you to Pioneer Natural Resources (NYSE: PXD).

When I first recommended Pioneer over at my premium service, Takeover Trader, the shale oil producer was languishing in the $90 range. It rebounded into triple-digit territory a month later and has since broken out above $130 – approaching pre-crash levels.

A rising tide lifts all boats. And the crude markets have indeed been buoyant lately, pushing benchmark West Texas Intermediate (WTI) back to the $50 per barrel range. That’s a remarkable recovery from April, when demand dried up, inventories swelled and futures prices briefly dipped into negative territory for the first time ever.

With daily production in excess of 350,000 barrels of oil equivalent (BOE), Pioneer is making the most of this upturn. Efforts to corral capital spending have replenished cash flows (without denting production). At the same time, efficiency initiatives have lowered production costs by 25% over the past year, widening margins.

Management is expecting to close out fiscal 2020 with $600 million in positive free cash flows – amid one of the most devastating oil collapses on record.

Thanks to its lean operation, Pioneer has one of the lowest breakeven levels in the industry and can turn a profit with oil prices as low as $30 per barrel. With OPEC doing its part to curb output in support of higher prices, Pioneer has gone back on offense and now has eight horizontal drilling rigs in operation. The company has upped its guidance and is now expecting to close out 2020 with production of 365,000 barrels per day.

Action to Take

At $35 per barrel, Pioneer can generate $2.3 billion in annual operating cash flow, enough to cover spending needs with $800 million in free cash flow to spare. In my initial profile back in May, I asked how that surplus would look if oil prices recovered to $50.

That’s no longer hypothetical – we’re there.

For starters, we can expect to see a more generous variable dividend distribution. But that’s not what really excites potential acquirers.

Pioneer is the largest remaining independent Permian Basin pure-play (all others have already been taken out).

It boasts 680,000 net acres in this geologically endowed hotspot that are brimming with 20,000+ potential drilling locations. On top of that, Pioneer has one of the strongest and least-leveraged balance sheets in its peer group, with $1.3 billion in cash.

Over at Takeover Trader, we’re sitting on a nice 40%+ gain with PXD. But I think the energy sector will remain strong in 2021. So if you haven’t looked into this one yet, there’s still time.

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