Energy Prospectus

I love it when two of our Sweet 16 companies merge because it easy for me to combine the two forecast/valuation models.
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Investor's Business Daily: This Father-Son Shale Merger May Add To Permian Basin Frenzy
GILLIAN RICH10:03 AM ET 10/20/2020

Consolidation in the prolific Permian Basin continues as Pioneer Natural Resources (PXD) is reportedly in talks to buy Parsley Energy (PE).

The all-stock deal between the two Permian shale companies could be completed by the end of the month, sources told the Wall Street Journal. Parsley has a market value of about $4 billion, according to the report. The merger would be a family affair as Pioneer CEO Scott Sheffield is the father of Parsley's co-founder and chairman, Bryan Sheffield. Parsley's current CEO, Matt Gallagher, has previously worked at Pioneer.

Analysts are bullish on the possible merger.

"Parsley has long stood as one of our top consolidation targets, and rumor of a potential deal hitting financial headlines shouldn't come as a big surprise," wrote analysts at Tudor, Pickering & Holt in a morning note. "It wouldn't be out of the realm of possibility with increased scale for the combined company to further work down well costs towards leading-edge levels."

The combined company would have roughly 928,000 net acres, according to the analysts, in the Permian Basin.

Read more: https://finance.yahoo.com/m/caaa0d2c-36 ... yptr=yahoo

My forecast/valuation models for both companies have been updated. They can be downloaded directly from the EPG website home page.

Pioneer Natural Resources Co. (PXD) has agreed to buy Parsley Energy Inc.(PE) for $4.5 billion, the latest in a flurry of U.S. oil tie-ups as companies seek to weather low prices brought about by the coronavirus pandemic.

The all-stock deal values Parsley at a 7.9% premium to its closing value Monday and would solidify Pioneer's place as one of the largest producers in the Permian Basin of Texas and New Mexico, the top American oil field.

Pioneer Chief Executive Scott Sheffield said that size and scale would be key to surviving as an independent oil- and-gas producer as the world transitions away from fossil fuels.

"There's really going to be three or four players left in the U.S. independent sector," he said in an interview Tuesday.

The Wall Street Journal reported on Monday that the companies were in talks to combine. Shares in Parsley increased about 5% on Tuesday, as Pioneer's stock fell around 4%.

The deal comes a day after ConocoPhillips(COP) agreed to buy Concho Resources Inc.(CXO) for $9.7 billion. Last month, Devon Energy Corp.(DVN) agreed to a $2.6 billion merger with WPX Energy Inc.(WPX), while Chevron Corp.(CVX) in July agreed to buy Noble Energy Inc. for about $5 billion.

"The combination of Parsley and Pioneer creates an organization set to thrive as we forge a strong new link at the low end of the global cost curve," Parsley Chief Executive Matt Gallagher said in a statement. He is poised to join the combined company's board of directors.

Mr. Sheffield, Pioneer's chief, is the father of Parsley's co-founder and chairman, Bryan Sheffield. Pioneer Chairman J. Kenneth Thompson said in an interview that neither Scott Sheffield nor Bryan Sheffield was allowed to participate in deal negotiations.

Scott Sheffield said he was also barred from discussing the acquisition with executives.

Pioneer said it expects the combined to realize roughly $325 million in savings annually by reducing administrative expenses and other costs.

The deal, which is expected to close early next year, is subject to approval from the shareholders of both companies. The companies said that Quantum Energy Partners, Parsley's largest shareholder with a 17% stake, backs the combination.

Write to Rebecca Elliott at rebecca.elliott@wsj.com

A lot of M&A activity is a sign that this cycle is turning north. Plus, the Wall Street Gang loves M&A and it draws more attention from investors. After our webinar tomorrow, I will add the PXD and PE forecast models together and see what the company looks like on a combined basis. Since both are trading way below my valuation before the deal was announced, my valuation of "Post Merger PXD" will be over $120/share.

7% premium is garbage

Don't be sad, be glad. If you own PE today, your basis in the stock will transfer over to PXD when the merger closes. You will then own stock in a MUCH LARGER company that has more upside. Plus, the merger should result in significant cost savings much of which comes with the increased scale. PXD has much lower cost of capital, so they will refinance PE debt at a much lower interest rate.