Pioneer Energy Offers Attractive Value, Jefferies Upgrades

"We are not overly concerned with covenant risk given our outlook as we look for Production Services and in particular PES's industry-leading well service fleet to drive recovery and to offset lower Drilling Services contribution," analyst Brad Handler wrote in a note.

Further, Handler noted that asset sales and potential equity issuance can help meet leverage and coverage ratios if needed in the second half of 2017.

Meanwhile, the brokerage added that Pioneer Energy's well servicing fleet of 125 tall-mast rigs is well suited for both production and completion work in unconventional wells, particularly with longer lateral horizontals.

"Company guidance of 10–15 percent improvement in revenues and ~175bps improvement in gross margins for 3Q16 appears reasonable, in our view," Handler highlighted.

The analyst acknowledged that the company's drilling services EBITDA may come under pressure from the end of Pioneer Energy's rateable recognition of early termination revenues in the third quarter and rolling legacy contracts.

However, Handler believes the continued recovery momentum should help Pioneer Energy satisfy its minimum EBITDA covenants, which apply through the second quarter 2017.

As such, the analyst now sees 2016 loss of $1.25 a share versus prior estimate of $1.30 loss. The analyst also raised his 2017/18 EPS estimates by $0.10 to ($1.10)/($0.50).

In addition, Handler increased the price target on the stock to $6 from $5.

At time of writing, shares climbed 12.50 percent to $3.69.

Full ratings data available on Benzinga Pro.