After Parsley Energy Inc.’s (NYSE: PE) $1.8 billion deal binge in the past 12 months, clearly, the company still has an appetite for Permian treats.
Parsley said Feb. 7 it has an agreement to acquire 71,000 net acres from Midland E&P Double Eagle Energy Permian LLC for $2.8 billion. The acquisition, if closed, will raise Parsley’s Permian profile to 227,000 acres—a footprint large enough to support 20 horizontal rigs.
The deal represents a large-scale consolidation effort in the Midland and Parsley stands to become the second-largest leaseholder in the basin. The deal is also a departure for the company, which typically adds bolt-on or modestly-sized deals, according to Capital One Securities.
“This acquisition is a hefty, transformational deal that will vault PE to the second largest acreage holder in the Midland Basin among publicly traded companies, trailing only Pioneer Natural Resources, which is about 4x the size,” Capital One said in a Feb. 8 report.
The company currently holds 109,000 Midland Basin acres and 48,000 Delaware Basin acres, according to a January presentation.
Analysts estimated the transaction ranged from about $36,000/ acre to $37,000/ acre, in line or modestly more expensive than Midland deals.
“We view the location of the acreage as being in mostly (about 80%) high quality areas of the Midland Basin, while some of it extends east in Howard County, Texas, where de-risking is likely needed, and in central/east Glasscock, where the” gas to oil ratio (GOR) begins to rise, said Chris Stevens, an analyst at KeyBanc Capital Markets.
Double Eagle, backed by private-equity firm Apollo Global Management, also holds acreage in the Midcontinent, Eagle Ford and the Powder River and Denver-Julesburg (D-J) basins. The Fort Worth, Texas-based company actively operates in Texas, Oklahoma, New Mexico, Louisiana, Colorado, Kansas, Nebraska and Wyoming.
The acquisition adds most of its acreage to Parsley’s presence in Glasscock, Reagan, Upton and Reeves counties, Texas. Parsley said the acreage adds to the basin’s “sweet spot” with considerable Wolfcamp thickness with differentiated multi-target potential.
In the third quarter, Parsley averaged 43,000 barrels of oil equivalent per day (boe/d). Double Eagle’s 3,600 boe/d will add about 8% production to Parsley.
Parsley said it will offer 36 million shares of common stock to pay for the acquisition. A subsidiary is also offering a private placement of $350 million in senior unsecured notes due 2025 to eligible purchasers. In January, Parsley had about $1 billion in liquidity.
Following the transaction, Parsley will control 179,000 net acres in the Midland Basin, which vaults from fifth-largest Permian leaseholder to second among publicly traded E&Ps. The company said it would deploy a vertical rig to hold the Double Eagle acreage it is acquiring.
The acquisition increases Parsley’s total Permian acreage by about 45% and positions the company to grow.
“But it comes with a price,” said David Tameron, senior analyst, Wells Fargo Securities. The company’s 2017 spending will outpace cash flow even more. The company also will further dilute its equity through a share offering and add debt.
“Higher outspends resulting from lower crude prices will likely provide a headwind to PE's activity in the basin,” Tameron said in a Feb. 7 report.
The company’s inventory will also swell to 7,900 net horizontal drilling locations, including 4,300 in high-value intervals including the Wolfcamp A, Wolfcamp B and Lower Spraberry in the Midland Basin and the Upper Wolfcamp in the Southern Delaware Basin.
In 2016, Parsley increased its proved reserves by 80% to 222.3 MMboe from 123.8 MMboe in 2015. Despite its acquisition pace, 98.7 MMboe were added organically while 24.2 MMboe were added through deals, Tameron said.
Parsley CEO Bryan Sheffield said the transaction maintains its focus on “core-of-the-core acreage with the most favorable reservoir characteristics.”
The acquisition also positions the company with inventory that will last for years at the low end of the cost curve.
“The infusion of high-quality drilling locations substantially increases our peak production potential and extends our inventory of drilling locations while enhancing the quality of that inventory,” Sheffield said.
Double Eagle was formed by Cody C. Campbell and John A. Sellers about two years ago.
In November, the company secured an investment commitment from Magnetar Capital for up to $450 million in Midland acquisitions.
On Jan. 10, Parsley said it would purchase bolt-on acreage in the Midland and Delaware for $607 million. In all, the company purchased 23,000 net acres with production of 2,300 boe/d and 340 net horizontal locations, said Irene Haas, an analyst at Wunderlich Securities.
Parsley paid about $20,000 per acre for the Midland and $32,000 per acre for the Delaware Basin acreage.
In a report early Feb. 7, Haas said she looked forward to “more granularity on how PE plans to delineate its new acreage.”
Darren Barbee can be reached at firstname.lastname@example.org.