I recently discussed Parsley Energy (PE, Financial) as a potential long-term value creator in the energy sector. With the company releasing fourth quarter 2015 results and providing guidance for 2016, there are several points to be discussed. Based on the company’s guidance for the next 12 months, I maintain my bullish view on the stock.
It is also important to mention that Parsley Energy is among the very few energy names that have had positive returns in the last 12 months with the stock returning 32% during this period. This is an indication of the strong fundamentals and bright outlook for the stock even in challenging times for the industry. While it’s difficult to provide price targets, Parsley Energy has the potential to provide strong returns even in the next 12 months.
Coming to the positive factors, the company’s strong balance sheet and liquidity position is the first reason for the stock remaining firm. As of fourth quarter 2015, Parsley Energy had $575 million in available facility and $195 million in cash. With total liquidity of $770 million, Parsley Energy is well positioned for investments in the next 12 to 24 months.
To put things into perspective, Parsley Energy expects to incur capital expenditure of $380 million to $430 million in fiscal year 2016. Considering the midrange of the guidance, capital expenditure of $400 million would imply that the company is fully financed for the next 12 months. Further, if 2017 capital expenditures were also $400 million, Parsley Energy is fully financed for the next 24 months (also considering operating cash flow buffer).
An important point to note here is that the company’s capital expenditure estimate for 2016 is the same as that for 2015, and there are very few companies that will not cut investment targets for 2016. This again underscores the company’s sound health and bright outlook.
The next positive trigger for 2016 is sustained production growth. For 2015, production volumes surged by 55% on a year-on-year basis with oil volumes higher by 69%. For 2016, Parsley Energy expects production growth in the range of 35% to 50% with oil volumes growth projected at 50% to 70%. Clearly, the strong growth trajectory is likely to sustain on robust investments; this will ensure that the stock remains firm.
Parsley Energy has very strong hedges in place with almost all of the expected production for 2016 being hedged. This will ensure that operating cash flows remain decent even in a scenario where oil and gas prices remain sideways to marginally higher.
Beside these points related to the guidance for fiscal year 2016, Parsley Energy has witnessed robust horizontal inventory growth in the last year. From horizontal drilling inventory of approximately 1,900 locations in fiscal year 2014, the company’s horizontal drilling inventory as of December 2015 was 2,500. This ensures that the company’s long-term growth visibility remains strong. Once oil sustains at higher levels, investors can expect Parsley Energy to significantly ramp up the number of rigs in the core operating area.
The company’s proved reserves increased from 91mmboe in fiscal year 2014 to 124mmboe in fiscal year 2015. This trend is likely to continue in fiscal year 2016. Parsley Energy has taken the inorganic route for reserves and production growth in fiscal year 2015. It will not be surprising if the company pursues further acquisitions in the core area in 2016 considering the financial flexibility.
Parsley Energy has a solid balance sheet, quality Permian assets, strong production growth visibility and an ever-expanding drilling inventory. With all these positives, the stock should remain firm in 2016. In the last 12 months, the stock has returned 32%; it would not be surprising if the stock delivers another 20% to 30% returns in the next 12 months.
Disclosure: No positions in the stock.
