The best time to consider exposure to stocks or sectors is when sentiments are overbearish. This gives attractive entry points in quality stocks that have been beaten down due to weak sentiments.
The energy sector has faced massive carnage, and there are reasons to remain bearish on the sector in the foreseeable future. However, it’s a good time to buy some quality names in the sector in small quantities. Exposure to these names can be increased once there is more stability in oil prices.
Parsley Energy (PE, Financial) is one name in the sector that has immense long-term potential, and it trades at attractive valuations. It is interesting to note that in the last year Parsley Energy has declined by just 2%, underscoring the company’s quality and fundamentals.
Coming to the balance sheet factors first, Parsley Energy has current debt of just $550 million that is scheduled to mature in 2022. With net debt to annual adjusted EBITDAX of 1.9, the company is not overleveraged, and this is one of the big positives in challenging times.
Further, the company has a robust cash position of $243 million and undrawn credit facility of $575 million. With total liquidity of $818 million, Parsley Energy is well-financed for growth in the next 12 to 24 months. Considering these critical balance sheet factors, it is not surprising that the company’s senior unsecured notes were upgraded to B- from an earlier rating of CCC+.
Besides the strong fundamentals, the company’s production growth trajectory is another key reason for strong stock performance in the last year. Strong production growth should continue in 2016, and this is already indicated by the company’s January presentation.
While 3Q15 production was higher by 41% on a year-on-year basis, Parsley Energy expects 1Q16 production to be more than 40% higher than 3Q15 production. The key positive for Parsley Energy is that the company has nearly 100% of expected 2016 production hedged. This will ensure that the company can maintain strong production growth and deliver decent cash flows even in the current energy price environment.
Parsley Energy is well-positioned for acquisition-driven growth in 2016 considering the company’s strong financial flexibility. While there are companies that can potentially resort to distress sale of assets to repair the balance sheet, Parsley Energy is well-positioned to acquire assets and further drive production growth.
Even from existing Permian assets, Parsley Energy has robust growth prospects with more than 1,100 net Wolfcamp and Spraberry locations in the heart of Midland Basin. Overall, the company has a deep drilling inventory with 77% horizontal drilling locations (2,479 net locations). Further rig deployments and acceleration in production growth can be expected if oil trends higher and sustains at higher levels.
With these points in consideration, Parsley Energy is worth considering with a three- to five-year investment horizon. The potential risk is that oil continues at depressed levels for a prolonged period. However, the company’s credit metrics are strong and likely to remain strong through 2016 even if oil hovers around current levels. Big exposure to any oil and gas stock is not recommended, but gradual exposure can be considered to quality names in the sector and Parsley Energy deserves a place in the long-term portfolio.
Disclosure: No positions in the stock.
