Among the relatively smaller companies in the oil and gas space, I have been bullish on Parsley Energy (PE, Financial), and the stock has certainly not disappointed from growth and stock returns perspective.
For the year to date, Parsley Energy has provided stellar returns of 49%, and the upside momentum is likely to continue for the stock in the coming months.
With Parsley Energy being active on the capital expenditure and acquisition front, let's start with the company’s balance sheet and liquidity profile. This will put into perspective the point that robust investments and opportunistic acquisitions will continue for Parsley Energy.
As of the first quarter (pro forma for acquisition and equity offering announced in April and May), Parsley Energy had total liquidity of $821 million that included $296 million in cash and $525 million in the first lien borrowing base availability. With robust liquidity position even after the recent acquisition, Parsley Energy is well positioned for strong growth in the next 12 to 24 months.
While the company has been diluting equity for funding acquisitions, the acquisitions are attractive from a long-term perspective and near-term dilution should not concern investors. The fact that Parsley Energy stock has been trending higher even after equity dilution underscores the point.
The company’s balance sheet is healthy and remains robust considering that Parsley Energy has $550 million in debt maturity in 2022 and $200 million in debt maturity in 2024. With no near-term refinancing pressure and with a comfortable net debt to LTM EBITDAX of 2.1, Parsley Energy has strong financial muscles to navigate challenging times.
From a liquidity perspective, Parsley Energy reported operating cash flow of $19 million for the first quarter and OCF will continue to boost overall liquidity in the foreseeable future. The reason for believing that OCF will remain strong is Parsley Energy has nearly 100% of 2016 production volume hedged at midpoint of production guidance. Further, the company has been adding to 2017 hedges; as oil trends higher, the outlook for 2017 (oil without hedging) is brighter than before.
Coming to the recent acquisition, Parsley Energy announced on May 23 that the company will be acquiring mineral rights in 29,813 acres in South Delaware Basin for $280.5 million. With an estimated net current production of 280boepd, the asset has substantial long-term cash flow generation potential. According to Parsley Energy, South Delaware Basin is likely to be the second core area for the company. This acquisition is a long-term game changer. Further, the company also acquired 885 net acres on existing Parsley leasehold for $9.0 million.
Clearly, Parsley Energy is aggressive on the acquisition front, and the acquisitions have delivered value for shareholders. The acquisition spree is likely to continue considering the company’s liquidity position and considering that there are companies looking to sell assets for deleveraging.
Besides all these factors, the near-term rally will also be fueled by the point that Parsley Energy expects 2016 production growth in the range of 60% to 80%. While organic and inorganic growth will support this growth, 2017 is likely to be another strong year for the company in terms of production growth. This will help the positive stock momentum continue beyond the next three to six months. Considering all these factors, Parsley Energy is certainly worth buying even after the big year-to-date rally.
Disclosure: No positions in the stock.
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