Why Parsley Energy Could Be 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"] has been on a run so far this year with the oil price rally rubbing off positively on its stock price. The company’s shares shot up further recently after Chevron announced that it is acquiring Anadarko for $33 billion; Wall Street is excited that Parsley could be in line for the next takeover.

Anadarko was also being courted by Occidental Petroleum. But now that the former chose to go with Chevron, Occidental would now be looking to make another acquisition. Let’s take a look at the reasons why Occidental or any other oil major could consider lapping up Parsley.

Efficient Production Growth  

Parsley anticipates total production in the range of 124,000 to 134,000 barrels of oil equivalent per day this year. This represents an 18% increase in production over last year’s levels. Parsley’s oil production, in particular, is expected to increase to a range of 80,000-85,000 barrels of oil per day from 69,500 barrels per day last year.

But what’s really impressive is that the increase in Parsley’s production will be achieved at a lower capital budget. The company anticipates capital expenditure between $1.35 billion and $1.55 billion this year.

The mid-point of that range represents a drop of nearly 18% from 2018 levels. At the same time, Parsley’s general and administrative expenses per barrel of oil equivalent will drop from $3.28 last year to $3.00 per barrel in 2019.

Parsley has designed its 2019 capital expense in a way that it does not exceed the operating cash flow by more than $250 million, assuming a WTI oil price of $50 per barrel. But as WTI oil is currently trading at more than $60 per barrel, there’s a good chance that the company might remain cash flow positive at its current capital expense level.

Outpacing the Market’s Expectations

Analysts expect Parsley’s revenue to increase just 4% year over year, while earnings are expected to increase from $1.41 per share. But it won’t be surprising to see the company beat those estimates because its production is expected to jump in the late teens.

Parsley is on track to boost its production in an efficient manner this year makes it an attractive acquisition target for companies looking to add high-quality assets to their portfolio.

Also, Parsley had recorded an average realized oil price of $60.59 per barrel in 2018. Now, oil prices have been on the rise so far this year, breaking well beyond Parsley’s average realized price for last year.

And because they have the potential to jump higher going forward because of constrained supply and strong Chinese demand, Parsley can record a higher average realized price in 2019.

With all that said, the fact that Parsley is on track to boost its production in an efficient manner this year makes it an attractive acquisition target for companies looking to add high-quality assets to their portfolio. But even if that doesn’t happen, Parsley investors shouldn’t lose heart because the company can do well even if it is not acquired.

In all, Parsley shareholders should continue keeping the stock in their portfolios because of its potential of delivering growth in the future at a lower cost base.

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.


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