Pioneer Natural Resources’ acquisition of Parsley Energy
By: Daniel Chen and Oliver Hulme-Vickerstaff
On the 20th of October, Pioneer Natural Resources announced its acquisition of Parsley Energy, marking the creation of one of the largest players in the Permian basin, completing the deal recently on the 12th of January.
The $7.6bn debt-inclusive transaction is all-stock, falling into a common trend in the oil industry as firms are waiting on the recovery from the pandemic and the Russia-Saudi Arabia oil price war. This represents a 7.9% premium, which is unsurprisingly low considering the market environment and previous consolidation deals seen during this period.
Pioneer has issued 52 million shares of common stock. With Parsley shareholders receiving 0.1252 common shares for each of their own, they will gain 24% ownership of the combined company, leaving 76% to the original Pioneer shareholders.
Company Details: Pioneer Natural Resources
Pioneer Natural Resources is an independent energy company engaged in oil and natural gas exploration and production exclusively in the Permian Basin. Pre-acquisition, it had 1.135 billion barrels of oil equivalent.
Headquarters: Irving, Texas
CEO: Scott Sheffield
Number of employees: 2300
LTM Revenue: $9.67bn
LTM EBITDA: $2.82bn
LTM EV/Revenue: 1.96
LTM EV/EBITDA: 5.78
Advisors: Goldman Sachs, Morgan Stanley
Company Details: Parsley
Parsley Energy is also a Permian-focused independent oil and natural gas company. It develops unconventional reserves, with a strong focus on ESG and unique drilling infrastructure that allows for horizontal wells which are said to more efficiently capture resources.
Headquarters: Austin, Texas
CEO: Matt Gallagher
Number of employees: 500
LTM Revenue: $1.75bn
LTM EBITDA: -$3.81bn
LTM EV/Revenue: 4.34
LTM EV/EBITDA: -1.99
Advisors: Credit Suisse, Wells Fargo
Both companies’ shareholders voted unanimously in favour of the all-stock transaction, involving the issuance of 52 million shares of Pioneer common stock to acquire all outstanding shares of Parsley Energy. Each Parsley share was exchanged for 0.1252 Pioneer shares, with Pioneer shareholders now owning approximately 76% of the combined entity, valued at $7.6 billion. On the date of announcing the deal (19 October 2020), this represented a 7.9% premium for Parsley. The acquisition is expected to be accretive in free cash flow per share and earnings per share by the end of 2021.
Despite taking on Parsley’s $3 billion debt burden, Pioneer expects their pro-forma leverage to continue being one of the industry’s lowest. Following the acquisition, Fitch upgraded its rating for both companies to BBB+, expecting no significant integration risk considering their adjacent acreage. A further $75 million in interest expense savings could be achieved through refinancing Parsley’s existing high yield debt at a lower interest rate, freeing up capital to support Pioneer’s goal of increasing returns to shareholders.
Now controlling nearly 930,000 net acres across the Permian basin, holding locations in the Delaware and Midland sub-basins, Pioneer occupies a prime position among upstream companies in Texas. With the deal increasing their proved resources by 65%, Pioneer has become one of the largest players in the Permian basin with 328,000 barrels per day of oil production.
Parsley’s highly complementary assets should help increase operational efficiency and reduce expenses, potentially realising annual synergies of $325 million. This includes $150 million in operational synergies, alongside $100 million in administrative savings and the aforementioned $75 million in interest savings.
The combination of sharing facilities and capitalising on economies of scale could lead to cost savings of $2 billion over a 10-year period, magnified by their low cost, high margin Permian acreage. Given the deal’s expected synergies, Pioneer maintains its competitiveness with other producers like ConocoPhillips and Devon Energy, both of which have undergone similar recent mergers.
Both firms are also active on the environmental forefront, having been recognized as industry leaders in methane flaring intensity. The addition of Parsley’s infrastructure into Pioneer’s portfolio will likely be reflected by increased popularity from ESG investors, considering the potential for further reductions in their combined 0.6% flaring intensity, as compared to the 1.7% industry average. Although unsuccessful, the two companies have been pushing for stricter methane emission regulations from the Texas Railroad Commission. Such environmental-centric advances and commitment to ESG set the foundation for future success.
Risks and uncertainties
Immediate risks related directly to the transaction are minimal, and as at 28th January, Pioneer’s stock price has increased almost 50% since the announcement of the acquisition. Prior to the shareholder vote on the deal, there was some worry by investors regarding conflicts of interest, as Bryan Sheffield, the founder of Parsley Energy, is the son of Pioneer’s CEO, Scott Sheffield. It was feared that some investors would challenge the deal over corporate governance issues and executive pay packages, but these worries did not materialise, as shareholders of both companies universally voted in favour of the deal.
The acquisition comes at a time of somewhat manic consolidation in the oil industry, as key players merge to increase efficiency and improve cost structures amid significant economic uncertainty. Given that both companies’ operations are solely within the Permian basin, their diversification into other locations and markets is limited, particularly when compared to some of their larger peers. Therefore, if future regulations surrounding Permian operations change, Pioneer has very few alternative options to ensure uninterrupted production. For now, most regulatory risk in the U.S. oil industry surrounds issuing new permits for drilling on federal land, which the Biden administration recently suspended for 60 days. Although, this poses little risk to Pioneer, as their complete drilling area lies on private land. Large players in the industry cannot get complacent, as Biden’s almost immediate revoking of the Keystone XL Pipeline permit demonstrates his government’s willingness to intervene in further oil infrastructure developments. With Pioneer and Parsley’s limited diversification, this could indicate lower potential for future growth in the U.S. drilling space.
The U.S. government’s approach to controlling the Covid-19 pandemic will also alter the success of the deal going forward. If Joe Biden stays true to his threat of a 100-day lockdown, oil demand could be seriously depressed. The performance of Pioneer is inherently tied to crude oil prices, which are currently sitting at approximately $50/barrel, having hovered around $40/barrel (the break-even price for many companies) between the April 2020 crash and November 2020. Furthermore, to align with the Democratic party’s climate change goals, methane emission regulations could be toughened in the near future, which may divert capital away from Pioneer’s more productive assets. The current priority of ESG considerations in investment decisions requires Pioneer to continue their clear commitment to sustainability. This level of transparency should be maintained in the future to retain capital inflows from investors that could be easily swayed by attractive returns in alternative energies.