Parsley Energy Is Still a Takeover Target

Parsley Energy [stock_market_widget type="inline" template="generic" color="default" assets="PE" markup="(NYSE: {symbol} {currency_symbol}{price} ({change_pct}))" api="yf"] stock shot up higher in April after it emerged that the company could prove to be a takeover target for one of the big oil companies. After all, the company was poised to deliver efficient production growth this year and reduce its capital expenses at the same time.

But the problem is that the initial excitement around Parsley being a takeover target has fizzled. The stock has lost value and its results were not good enough to help sustain the momentum.

A Wrong Step Forward

Parsley Energy’s first-quarter results were a mixed bag. Its adjusted earnings of $0.22 per share missed the Wall Street estimate by a couple of cents. However, revenue increased nearly 9% year over year.

The market usually doesn’t appreciate a mixed earnings performance, but a closer look at Parsley’s results indicates that there were a few things to like about the company that investors shouldn’t ignore.

For instance, its average daily production went up to 125,400 barrels of oil equivalent per day during the quarter. This was a 34% increase over the prior-year period’s production of 93,444 BOE/day. This sharp rise in Parsley’s production allowed the company to offset the weak oil price scenario that it experienced during the quarter.

Parsley’s average realized oil price was down to $51.83 per barrel from $61.99 per barrel in the year-ago period. On a consolidated basis, Parsley’s average price per barrel of oil equivalent came in at $36.20 after accounting for the derivatives impact, down from $43.97 per barrel in the prior-year period.

At the same time, its lease operating expenses increased to $3.65 per BOE from $3.43 per BOE a year ago. But the increase in the top line was not strong enough to mitigate the higher expenses and lower prices. This is evident from the fact that Parsley’s operating income fell to $116 million during the first quarter as compared to $169 million in the year-ago period.

So, this could have dented the confidence of any potential buyer, especially considering that oil prices had started dropping since the end of April.

Still a Good Bet?

The good news for Parsley is that oil prices are inching up once again. If they keep moving higher, Parsley might get an interested party because it plans to deliver sustainable free cash flow and improved capital efficiency even in a $50 oil pricing scenario.

The company plans to do this by delivering production between 124,000 and 134,000 barrels of oil equivalent per day this year, which would be a jump of 18% over last year. The higher production is expected to be achieved at a capital expense of $1.35 billion to $1.55 billion, which represents a decline of 18% over the year-ago period at the mid-point.

As such, Parsley’s ability to reduce costs and increase production could prove to be handy for anyone looking to acquire a shale player. Chief Executive Officer Matt Gallagher believes the same, stating:

“We are in a small handful of companies that have some of the best rock and a healthy business model and a very long runway of inventories,” Gallagher said. “There are four or five good companies that always go to the top of that conversation.”

So don’t be surprised to see Parsley actually getting a buyer in case the oil pricing scenario keeps improving.

The opinions provided in this article are those of the author and do not constitute investment advice. Readers should assume that the author and/or employees of Capital 10X hold positions in the company or companies mentioned in the article. For more information, please see our Content Disclaimer.

Harsh Singh Chauhan has a wealth of experience evaluating publicly-traded companies across several verticals, including technology, oil and gas, retail, and consumer goods. His financial writing has been published across platforms such as The Motley Fool, TheStreet, and Seeking Alpha. Harsh's philosophy is to find great businesses for the long run based on company fundamentals and industry prospects. Address: 682 Indian Road, Toronto, Ontario, M6P 2C9. Phone: 416-721-8257.


Please enter your comment!
Please enter your name here