Morgan Stanley Upgrades Pioneer Natural Resources, Sees 40% Upside

In a report published Monday, Morgan Stanley analyst Evan Calio upgraded the rating on

to Overweight, while maintaining the price target at $190. "Despite offering best-in-class reserve upside, drilling inventory, and growth potential, PXD has lagged Permian and large-cap peers driven by macro and hedge-fund criticism," analyst Evan Calio wrote. Pioneer Natural Resources' shares have declined 18 percent since the first week of May, as compared to a 7 percent decline in the Permian peers and a 12 percent decline in E&Ps with Permian exposure. Calio believes that the stock and the sector pullback provided "a good entry point." The analyst said that while the oil price was likely to remain volatile in the near term, "it is in the midst of a multi-year cyclical recovery." There was high demand for oil and supply was expected to "ultimately decelerate (due to capex reductions)." In the report Morgan Stanley noted, "We believe US E&Ps represent greater value than consensus believes given the dynamic (improving) nature of US unconventional NAVs. Given the sector pullback to new lows, substantial underperformance vs. market, and advantaged global asset position, we view risk-reward as attractive." Calio believes that Pioneer Natural Resources' "inventory depth" would enable it to grow production "longer than peers and cause the market to assign the stock a consolidation multiple." Moreover, the Spraberry could "significantly add to PXD's inventory and future growth potential," the report stated.