Investment overview
Parsley Energy Inc. (PE, Financial) has been in my research coverage several times in the past and the company is one the best stocks to consider among the relatively small players in the exploration industry.
The high-growth energy company outperformed in terms of stock upside in fiscal 2016, but the stock is 21% lower year to date. As the company’s fundamentals and growth remains robust, I see this near-term correction as a good opportunity to accumulate this value creator.
High-growth energy stock
Even as conditions for the energy sector remain challenging, Parsley Energy has pursued aggressive organic and inorganic growth. To put things into perspective, it has reported 16% compound quarterly production growth over 12 quarters as a publicly listed company.
The growth trajectory is unlikely to decline as Parsley has made several big acquisitions so far this year. Most recently, the company announced the acquisition of undeveloped acreage and producing oil and gas properties in the core of the Midland Basin from Double Eagle Energy Permian LLC for $2.8 billion.
As a result of the acquisition, the annual production guidance for 2017 has been revised from 62 to 68 thousand barrels of oil equivalent per day to between 65 and 71 thousand barrels of oil equivalent per day. Further, fourth-quarter 2017 production guidance has been revised to between 78 and 88 thousand barrels of oil equivalent per day. Even if the mid-range of this guidance is considered as the production estimate for first-quarter 2018, the production for the quarter will be at least 50% higher compared to first-quarter 2017.
With this growth rate, I expect Parsley Energy to trend higher again after the stock has corrected on equity dilution and profit booking.
Appetite for acquisitions
A key positive for Parsley Energy is the company has managed to keep fundamentals strong and leverage in control after several acquisitions in the last 12 months. As a result, the company’s financial flexibility remains high and allows for more opportunistic acquisitions in the foreseeable future.
As of April 2017 (pro forma for Double Eagle acquisition), Parsley Energy had $616 million in cash and an undrawn credit facility of $997 million. With a total liquidity buffer of $1.6 billion, the company’s growth trajectory is unlikely to be hindered by financial constraints.
The company has a lot of financial muscle because it funded acquisitions through issuing common shares. While this might be a concern as it involves equity dilution, the company’s growth trajectory has more than offset this concern.
The company’s financial strength can also be attributed to its debt maturity profile, which is excellent as the notes do not mature until 2024 and 2025. Considering the company's ample liquidity and an extended debt maturity profile, it is not surprising that Parsley was upgraded by Moody’s to B1 from B2. Therefore, the credit risk is minimal for this high-growth stock.
Attractive cash margin
Another important reason to be bullish on Parsley Energy for the long term is the cash margin the company has been delivering. For first-quarter 2017, the company reported an average realized (un-hedged) oil price of $40.48 and a cash margin of $30.63 for the same period.
Importantly, the company’s cash margin as a percentage of the realized oil price has been trending higher as a result of cost controls. The key point here is even if oil trades at $50 to $60 per barrel in the next few years, Parsley Energy is well positioned to report healthy cash flows.
Besides a steady cash margin, Parsley Energy also has one of the best hedged positions in the industry with 80% of consensus oil volumes hedged for second-half 2017 and 70% hedges in place for fiscal 2018. This will ensure that even if oil prices remain relatively volatile, the company’s cash flow is stable.
Strong reserves growth
As of fiscal 2015, Parsley Energy had total proven reserves of 124 million barrels of oil equivalent per day, which surged to 222 million barrels of oil equivalent by 2016. With its 2017 acquisitons, the company’s reserves have swelled further, providing long-term production growth visibility.
Just to put things in perspective, the company’s drilling inventory after the Double Eagle acquisition in April 2017 stands at 4,360. The multiyear drilling inventory coupled with high financial flexibility will ensure Parsley Energy witnesses strong growth momentum in the years ahead.Â
Conclusion
Parsley Energy delivered strong returns in 2016, and the company’s acquisitions have been fuelling growth in 2017. The decline in the stock price due to equity dilution and profit booking is a temporary condition and is a good opportunity for investors to accumulate the stock.
I do not expect major downside for oil prices even if the upside is gradual in the coming years. Some stability in energy prices should increase investor confidence toward the sector and broad industry factors will support stock upside in the long term.
Disclosure: No positions in the stock.
