Parsley Energy (PE) Q2 Results - Very Good

[dan_s]

Parsley Energy Announces Second Quarter 2018 Financial And Operating Results; Raises Production Guidance And Lowers Unit Cost Estimates

Second Quarter 2018 Highlights

•Net oil production increased 14% quarter-over-quarter and 57% year-over-year to 67.7 MBo per day. Total net production averaged 107.8 MBoe per day. < This compares to my Q2 forecast of 63.5 MBOPD and 99.0 MBoepd.

•Parsley reported an unhedged oil price realization of $64.29/Bbl net of transportation costs during 2Q18. This represents a differential of just $3.62 compared to the average NYMEX WTI price for the quarter, displaying the benefits of the Company's diversified pricing exposure. Parsley also agreed in principle to bolster its takeaway capacity through multiple agreements with large oil purchasers that would, if all are completed, cover up to 165,000 Bo per day of gross operated oil production by year-end 2019.

•The Company demonstrated strong cost control during the second quarter of 2018, driven by significant savings from the Company's growing water infrastructure network and the execution of a stable development plan. As a result, Parsley is lowering full-year 2018 unit cost estimates.

•Parsley reported 2Q18 lease operating expense ("LOE") per Boe of $3.66, up only slightly versus the peer-leading expense the Company posted in 1Q18, and is lowering full-year 2018 LOE per Boe guidance from $3.75-$5.00 to $3.50-$4.25. < Compares to my forecast of $4.20/Boe for LOE.

•Both general and administrative expense ("G&A") per Boe and cash based G&A per Boe, which excludes stock-based compensation expense, decreased quarter-over-quarter and year-over-year to $3.67 and $3.12, respectively. Parsley is lowering full-year 2018 cash G&A per Boe guidance from $3.50-$4.25 to $3.25-$3.65.

•Parsley placed 45 gross (44 net) operated horizontal wells on production during 2Q18. This higher-than-anticipated net well count was driven by operational efficiency gains and acreage trades that increased Parsley's average working interest. In light of these trends, the Company is increasing the number of operated horizontal wells it expects to place on production in 2018 from 144 net wells to approximately 158 net wells. These additional net wells are not predicated on the addition of incremental rigs or completion crews. < This is VERY GOOD NEWS.

•Having compressed cycle times to levels last achieved in early 2017 prior to the integration of major acquisitions and the associated activity ramp, Parsley's contemplated development program in the second half of 2018 reflects a gradual transition back to a larger average pad size.

•The Company is increasing full-year 2018 net oil production guidance from 65-70 MBo per day to 68.0-70.5 MBo per day. At the midpoint, the updated range translates to estimated year-over-year growth of 54%.

•Parsley is revising its 2018 capital budget as a result of shorter cycle times and higher working interest. The Company previously indicated that sustained oil price strength and associated service and equipment cost inflation would bias expectations toward the upper end of its initial guidance range of $1.35-$1.55 billion. These expectations were confirmed, primarily as a function of labor tightness, while the imposition of steel tariffs also translated to higher well costs. Relative to the top of the previous range, Parsley is revising its 2018 capital budget upward by $100-$200 million to reflect the additional net wells the Company expects to place on production this year, yielding an updated range of $1.65-$1.75 billion.

"Parsley Energy continues to execute across the organization in 2018," said Bryan Sheffield, Parsley's Chairman and CEO. "With a steady development profile in place, our teams have found ways to boost operational efficiencies and extract more value per barrel of production. We expect these trends to continue as we implement Parsley's standard of excellence across a long-lived, high quality asset base."

[dan_s]

I have updated my forecast model for Parsley and it will be on the EPG website this afternoon.

I have increased my valuation by $0.50 to $42.00/share.

Following such an outstanding Q2 report, I could justify a higher multiple of operating cash flow per share to value it, but ...
1. The crashing natural gas prices in West Texas could linger on through mid-2019. Higher NGL prices are helping mitigate this issue.
2. PE is still outspending their cash flow from operations, which is not in favor with the Wall Street Gang these days.

That said ...
> PE is an "Aggressive Growth" company that is on-track to exit this year with over 130,000 Boepd of production (~65% crude oil). < Production s/b up more than 60% YOY.
> It has more than enough liquidity and access to capital to fund their D&C program
> It should be generating free cash flow by this time next year (@$65/bbl WTI)
> It has a lot of running room in a large Tier One leasehold position
> Last but not least, it is profitable and will be reporting strong results quarter-after-quarter.