Parsley Energy (PE, Financial) has been among the best oil and gas exploration stocks in terms of growth in challenging times as well as in terms of stock returns.
For the year to date, Parsley Energy has surged by 83%, and this has been backed by strong fundamental developments. There is more juice in the rally in the next 12 to 24 months. This makes Parsley Energy worth holding for the medium to long term.
The first factor that has contributed to strong stock upside for Parsley Energy has been strong production growth. For the second quarter, Parsley Energy reported production growth of 60% on a year-on-year basis with fiscal year production growth guidance of 66% on a year-on-year basis.
The reason for strong production growth has been organic as well as inorganic growth. Just to put things into perspective, Parsley Energy has acquired 33,000 net acres in the first half of the year. Even in the last year, the acquisition-driven growth was robust.
An important point to note here is that Parsley Energy has $525 million in available credit facility and $189 million in cash. With robust financial muscles (net debt to annualized EBITDAX of 1.7), the company is well positioned to continue acquiring assets in the second half of 2016 and beyond. In particular, as the conditions remain challenging for the oil and gas industry, I see appealing acquisition opportunities.
From a production growth perspective, it is important to note that net production increased by 60% on a year-on-year basis for the second quarter. However, oil production for the second quarter increased by 82% on a year-on-year basis. I expect a robust increase in oil production to continue with the overall production profile increasingly tilting toward oil production.
Besides being an aggressive acquirer coupled with robust investments in existing properties, Parsley Energy has also been doing exceedingly well on the cost control front. For the second quarter, the lease operating expense per barrel of oil equivalent declined for the fifth consecutive quarter. On a year-on-year basis, lease operating expense for the second quarter declined by 52% as compared to the second quarter of 2015. This cost reduction clearly has a positive impact on the EBITDAX margin. Further, cash G&A has also been declining, and I am specifically focusing on the cost aspect as it throws light on management efficiency.
While oil has been sideways recently, I expect oil to trend higher in the future, and Parsley Energy has a deep drilling inventory for times when oil price realization is higher. Considering the current financial flexibility, Parsley Energy can significantly ramp up rig count when there is meaningful recovery in oil prices.
Several oil and gas companies will emerge from the crisis weaker in fundamentals. However, Parsley Energy is likely to maintain strong fundamentals and financial flexibility emerging out of the crisis.
In the near term, I expect operating cash flows for the company to remain decent even if oil remains sideways. Parsley Energy has well hedged positions for the remainder of the fiscal year and through fiscal year 2017. This is likely to support healthy cash generation that will further add to the company’s cash buffer for investments.
Another key stock upside trigger is that Parsley Energy is still at an early stage of working on the resource potential in the South Delaware Basin. Once there is more progress on that front, I expect meaningful upside in proved reserves, which can potentially trigger another round of stock upside.
Parsley Energy is worth considering even after the big upside year to date. With the company’s strong production growth to sustain through fiscal years 2016 and 2017, there are exciting times ahead. Further, more acquisitions can potentially translate into an increase in production.
Disclosure: No positions in the stock.
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