Energy Prospectus

Per Stifel on December 9: Initiating Coverage of Parsley Energy with a Buy Rating

Our recent profile on PE can be downloaded from the EPG website. My valuation is $22.20/share, with a lot of upside from their if they hit my production forecast. - Dan

PE Trading at Discount to Permian Peers...
We are initiating coverage on the shares of Parsley Energy, Inc. with a Buy rating and a 12-month target price of $23 per share. PE shares are currently trading at 7.1x 2017E EBITDA and 68% of our total risked NAV, a 5% and 20% premium toits mid-cap peer group averages. However, based on 2017E EBITDA, the shares currently trade at a 21% discount to its Permian Basin peers. Our $23 target price assumes the shares trade at 83% of our total NAV and an implied 2017E EBITDA of 8.4x, in line with our mid-cap peer group average but still at a 7% discount to its Permian peers.

…Despite Large Potential NAV Upside
We believe the bulk of the company’s near-term NAV upside is rooted in upward performance and type curve revisions in the Wolfcamp and delineation of the Lower Spraberry, which we estimate has the combined potential to conservatively increase our NAV $5-$10/share over the next 12-months. With PE’s Wolfcamp type curve currently tracking a 1.1 MMBoe type curve, we
conservatively project that $3/share of NAV upside potential could be realized in 1Q16, pending additional positive data points.

2016 Growth Could Surprise to the Upside…
Due to continued type curve outperformance and the expected increase in capital efficiencies (50% of 2016 wells will be drilled on pads), we believe PE could be in position to beat our 2016 and 2017 growth estimates. Currently, we project PE will grow 38% and 33% in 2016 and 2017, 2% below and 4% above consensus, respectively.

…Supported by a Strong Balance Sheet and Hedge Portfolio
We forecast PE's YE15 debt/TTM EBITDA to be 3.0x and we project that the company’s YE16 and YE17 leverage will decrease to 2.2x and 1.5x, significantly lower than its peer group averages of 2.7x and 2.7x, respectively. Should we remain in a flat $40/bl oil price environment through 2017, the company’s debt metrics would only increase to 2.2x and 2.8x at YE16 and YE17. PE
has essentially 100% of its 2016 production hedged with put spreads: long puts at $54.51-$53.25/bl and short puts at $38.13-$38.25/bl.

Well Economics Impressive, Even at Low Prices
PE’s Core Wolfcamp A/B economic returns rank among the best in the lower 48. At $50/bl WTI, we estimate the company generates a 1.8x PVI 10 and has a threshold breakeven of approximately $40/bbl, assuming a $6 million all-in well cost (includinginfrastructure) and a 1 MMBoe type curve.

More from Stifel:

Permian Bolt-On Acquisition Accretive to NAV, Funded Through Share Offering

PE Adds to Core Midland Basin Position...
After the close, PE announced a bolt-on acquisition of 5,274 net acres offsetting the company's existing acreage in Reagan, Upton, and Glasscock Counties, TX for $148.5 million from private equity-backed PCORE Exploration & Production, LLC. Backing out the existing production value (1,000 Boe/d from three horizontal wells), which we estimate at approximately $35 million or
$35,000/flowing Boe, PE paid $22,000 per undeveloped acre. Two of the acquired wells are currently operated by PE, the third well was recently turned to sales, and a fourth well is expected to be completed by the seller prior to closing (expected in early January).

...Funded Through Common Share Offering
Concurrent with the acquisition, PE announced a public offering of 8.5 million common shares, with an over-allotment option of 1.275 million shares. We expect the offering to fully cover the acquisition purchase price, allowing PE to keep its top-tier balance sheet intact.

Increasing NAV After Adding Core Wolfcamp Inventory
PE management estimates the acquisition added 238 net horizontal locations, including locations from various formations from the Lower Spraberry down through the Atoka. Assuming 50% of management's total location count are Wolfcamp A and B locations (~120) and discounting that number by 25%, we are adding 90 net wells to our inventory estimate, which increases our total risked NAV 4% to $29/share.

Decreasing CFPS Estimates
We are decreasing our 2015 and 2016 CFPS estimates 4.8% to $1.07 and $1.40, respectively, accounting for the share dilution.

PE Trading at Discount to Permian Peers
PE is trading at 8.1x our 2017E EBITDA and 64% of our total risked NAV, an 18% and 13% premium to its mid-cap peer group. However, based on 2017E EBITDA, the shares currently trade at an 11% discount to its Permian Basin peers. Our $23 target price assumes the shares trade at 78% of our total NAV and an implied 2017E EBITDA of 9.7x, in line with our projected mid-cap oil-weighted peer group