Parsley Energy (PE, Financial) is among the best names in the U.S. oil and gas exploration industry, and the stock has not disappointed with stellar returns of 93% in the last year.
With oil trending higher and sustaining at relatively higher levels, Parsley Energy has surged, and the company has also become relatively aggressive in terms of growth for fiscal 2017 and beyond.
The broad conclusion is that Parsley Energy will continue to create value through fiscal 2017 and for the long term.
This is an appropriate time to discuss the stock because Parsley Energy touched a high of $38.3 on Dec. 2, 2016 and has subsequently declined to current levels of $31. This correction can be used for accumulation and as sentiments remain bullish for oil, good days are ahead for Parsley Energy.
The big Permian Basin acquisition
Before talking about the acquisition in the Permian Basin, I want to briefly discuss the company’s acquisition on Jan. 10. Parsley Energy announced the acquisition adjacent to the company's existing operating areas in the Midland and Southern Delaware Basins for an aggregate purchase price of $607 million in cash. The acquisition added 4,600boepd to the company’s production along with addition of 680 horizontal drilling locations.
This underscores the point that Parsley Energy has accelerated acquisitions recently sensing that oil is likely to remain bullish, and this strategy will create significant shareholder value.
It was announced on Feb. 7 that Parsley Energy entered into an agreement to acquire certain undeveloped acreage and producing oil and gas properties in the core of the Midland Basin from Double Eagle Energy Permian LLC for an aggregate purchase price of approximately $2.8 billion. The acquisition will add approximately 71,000 net acres to the Company's Midland Basin acreage portfolio, bringing total Permian Basin net acreage to approximately 227,000 acres.
The chart below shows the acquired leasehold; it significantly expands the company’s presence in the core operating area.
Of the acquired 71,000 net leasehold acres, Parsley Energy expected net production of approximately 3,600boepd as of Jan. 1. Importantly, the acquired asset had 3,300 net horizontal drilling locations including approximately 1,800 net locations in high priority target intervals (Lower Spraberry, Wolfcamp A, Wolfcamp B).
The acquisition increased the company’s already deep drilling inventory and helped Parsley Energy further consolidate in its core operating area. The acquisition is well timed and as drilling activity accelerates, significant shareholder value creation will be impending.
Revised guidance for fiscal 2017
As a result of this acquisition, there is an upward revision to fiscal 2017 guidance, and this will take the stock higher in the medium term. In terms of rig count, Parsley Energy earlier expected 10 rigs to be operational by the fourth quarter, but the company now expects 14 operational rigs by that quarter. While the impact of this will be seen significantly in fiscal 2018, the stock is likely to react positively to accelerated investment plans.
Considering gradual increase in rig activity coupled with production from the acquired asset, Parsley Energy now expects fiscal 2017 production to be in the range of 62-68Mboe/d as compared to the prior guidance of 57-63Mboe/d.
While these are some key numbers for fiscal 2017, Parsley Energy is positioned for good growth in production in fiscal 2017 and fiscal 2018. The trend for oil is likely to remain bullish, and this would imply strong cash flow generation in the coming years through increased production coupled with EBITDA margin expansion.
It would not be surprising to see further acquisitions by Parsley Energy considering the fact that the company has strong financial muscles. I will discuss the financial strength later in the article. Just to put things in perspective, Parsley Energy acquired assets that added 24.2mmboe to reserves in fiscal 2016.
The recent stock decline
Parsley Energy's decline from recent highs of $38 to current levels of $31 is a buying opportunity, but the reason for the correction also needs to be discussed.
The key factor that has triggered stock correction is the company’s offering of Class A common stock. Parsley Energy announced on Feb. 7 that it has priced an underwritten public offering of 36 million shares of Class A common stock for total gross proceeds of approximately $1.116 billion. The proceeds from this offering will be used to fund the company’s big Permian Basin acquisition along with proceeds from the $450.0 million private placement of senior unsecured notes due 2025.
The equity dilution is likely to have an impact only in the near term; as the benefit from the acquisition starts to flow in the form of higher production and higher level of rig activity, the stock is likely to trend higher again. The correction is an opportunity to accumulate with a 12-to 24-month investment horizon.
It is important to mention here that Parsley Energy has been acquiring assets on a regular basis and common stock offering has also been frequent. However, the stock has continued to move higher as equity dilution has been more than offset by value creation from the acquisition.
Conclusion
I see the biggest acquisition for Parsley Energy as a positive in the coming years, and this is a significant step toward making the company bigger in terms of assets and production. Parsley Energy has an excellent track record of delivering value through acquisitions and I see things no different this time.
After the impact of equity dilution is discounted, I see the stock moving higher again on prospects of strong production growth in fiscal 2017 and fiscal 2018. If oil continues to consolidate and trend gradually higher, 2017 can be another big year for Parsley Energy in terms of robust stock returns.
Disclosure: No positions in the stock.
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