RJ's Update on Parsley Energy (PE)
Posted: Mon Mar 05, 2018 1:55 pm
From Raymond James 3-5-2018:
Parsley Energy (PE/Strong Buy)
Parsley is an independent oil and natural gas exploration and production company headquartered in Austin, TX. Operations focus on
acquiring, exploring, and developing unconventional oil and liquids-rich natural gas reserves in the Permian Basin. Proved reserves
were 416 MMboe at year-end 2017 (60% oil and 50% developed). Parsley shares have dipped this year due to operational concerns
after weak 4Q17 production results and an ugly ops update in January, but we view the issues as transitory given the steps Parsley
has already taken to address various issues. Further, the 2018 plan focuses on asset development over step-out delineation and the
company remains in the top-5 of its peer group for debt-adjusted production growth with ample liquidity, which we expect to
register well with returns-focused investors. Key questions and themes:
Active portfolio management: The Permian land grab is mostly over at this point and many operators in our coverage now look
to acreage trades/swaps as a means to improve the continuity of their acreage positions. Parsley used this strategy effectively in
2017 to add various high-impact locations to its inventory across its portfolio throughout the year (including the notable Double
Eagle deal that closed in April). Given Parsley’s current acreage position, which areas are key targets for contiguous acreage
lock-up via trades or acquisitions in 2018?
Transition to development mode: Parsley’s 2018 capital program calls for $1.35-1.55B all-in, which includes 5-10% service cost
inflation between the midpoint and upper bound of the capex plan. As noted, Parsley’s program will focus on executing a steady
development pace with limited step-out delineation activity this year. With its manufacturing-style strategy, Parsley expects to
put roughly 40 wells online each quarter, which prioritize target zones and 660-ft well spacing with 9,500-ft average lateral
lengths. Cycle times should decrease throughout the year given a transition to smaller well pads, but executing the plan will be
the bigger focus for investors. Given recent operational challenges, what is the sensitivity to Parsley’s full year plan if similar
challenges arise in 2018?
Wolfcamp C “revival”: Parsley brought five WCC wells online in 2017 with average IP-30 rates of 198 Boe/1,000-ft lateral (~62%
oil), and two additional step-out WCC wells in early 2018 (peak IP-24hr rates exceeding 1,000 Boe/d) validate Parsley’s WCC
fairway in the Midland Basin. Management cited a higher gas component as the reason for minimal WCC investment this year
(5-6% of capital), but the test wells confirm further potential upside in Parsley’s “core of the core” acreage position. What
macro environment would spark additional WCC investment? How does the drilling and completion design change for this zone,
if at all?
Parsley Energy (PE/Strong Buy)
Parsley is an independent oil and natural gas exploration and production company headquartered in Austin, TX. Operations focus on
acquiring, exploring, and developing unconventional oil and liquids-rich natural gas reserves in the Permian Basin. Proved reserves
were 416 MMboe at year-end 2017 (60% oil and 50% developed). Parsley shares have dipped this year due to operational concerns
after weak 4Q17 production results and an ugly ops update in January, but we view the issues as transitory given the steps Parsley
has already taken to address various issues. Further, the 2018 plan focuses on asset development over step-out delineation and the
company remains in the top-5 of its peer group for debt-adjusted production growth with ample liquidity, which we expect to
register well with returns-focused investors. Key questions and themes:
Active portfolio management: The Permian land grab is mostly over at this point and many operators in our coverage now look
to acreage trades/swaps as a means to improve the continuity of their acreage positions. Parsley used this strategy effectively in
2017 to add various high-impact locations to its inventory across its portfolio throughout the year (including the notable Double
Eagle deal that closed in April). Given Parsley’s current acreage position, which areas are key targets for contiguous acreage
lock-up via trades or acquisitions in 2018?
Transition to development mode: Parsley’s 2018 capital program calls for $1.35-1.55B all-in, which includes 5-10% service cost
inflation between the midpoint and upper bound of the capex plan. As noted, Parsley’s program will focus on executing a steady
development pace with limited step-out delineation activity this year. With its manufacturing-style strategy, Parsley expects to
put roughly 40 wells online each quarter, which prioritize target zones and 660-ft well spacing with 9,500-ft average lateral
lengths. Cycle times should decrease throughout the year given a transition to smaller well pads, but executing the plan will be
the bigger focus for investors. Given recent operational challenges, what is the sensitivity to Parsley’s full year plan if similar
challenges arise in 2018?
Wolfcamp C “revival”: Parsley brought five WCC wells online in 2017 with average IP-30 rates of 198 Boe/1,000-ft lateral (~62%
oil), and two additional step-out WCC wells in early 2018 (peak IP-24hr rates exceeding 1,000 Boe/d) validate Parsley’s WCC
fairway in the Midland Basin. Management cited a higher gas component as the reason for minimal WCC investment this year
(5-6% of capital), but the test wells confirm further potential upside in Parsley’s “core of the core” acreage position. What
macro environment would spark additional WCC investment? How does the drilling and completion design change for this zone,
if at all?