I have written on Parsley Energy (PE, Financial) several times in the last 12 months, and I have remained bullish on the stock. Parsley Energy has not disappointed, trending higher by 39% in the last 12 months.
The trigger for this article is the acquisition and public offering announced by the company on Monday. Parsley Energy announced agreements to acquire undeveloped acreage and produce oil and gas properties located adjacent to the company’s existing operating areas in the Southern Delaware and Midland Basins for an aggregate purchase price of $359 million in cash. These assets currently have net production of approximately 2,300boepd from nine producing horizontal wells and 97 vertical wells.
There are several positives that I see related to this acquisition.
- It strengthens the company’s presence in core operating areas of Southern Delaware and Midland Basins.
- It increases the company’s net acreage by 20% with the assets likely to have robust potential in terms of long-term horizontal drilling inventory.
- It increases the company’s 2016 production outlook and more importantly, it increases the company’s cash flow visibility beyond 2016.
However, Parsley Energy has been active on the public offering front, and the company has once again issued 18,250,000 shares for proceeds of $390.6 million. From an investor’s perspective, equity dilution remains one concern, but the stock trended higher by 6.4% in Wednesday’s trade.
This might indicate that the equity dilution factor is more than offset by the positive of the impact of acquisition on long-term cash flows. Further, equity-backed growth is relatively favorable in the medium term; several companies have faced the debt trap as oil prices have trended lower.
With Parsley Energy still having robust financial flexibility (acquisition financed by equity offering), the company’s production growth is likely to remain strong in the next 24 months. The company has increased 2016 capital expenditure to $410 million to $460 million from an earlier guidance of $380 million to $430 million. 2017 should be another strong year from a capital investment perspective as the company’s cash position and undrawn credit facility before acquisition provides enough buffer for $400 million to $500 million investment for fiscal year 2017.
The company’s fiscal year 2016 production is likely to be higher by 35% to 50% compared to fiscal year 2015, and fiscal year 2017 production growth should remain robust considering the investment flexibility. Further, it is entirely likely that Parsley Energy will pursue further acquisition in its core asset in the next 12 to 18 months. Therefore, strong production growth is likely to take the stock higher.
As I have written in the past, Parsley Energy has a deep drilling inventory, and this ensures that the long-term production growth trend will remain robust. The deep drilling inventory implies that once oil trends meaningfully higher and sustains at higher levels, Parsley Energy can substantially increase the number of operational rigs.
Parsley Energy remains an attractive stock to consider for the next three to five years, and fresh exposure to the stock can be considered on any correction. Parsley Energy has trended higher by 25% in year to date and a 5% to 10% correction is entirely likely. Any such correction is a buying opportunity for the medium to long term.
Disclosure: No positions in the stock.
