Parsley Energy (PE)

[dan_s]

Updating my forecast/valuation model now. - Dan

Third Quarter 2016 Highlights
•Net production averaged 43.0 MBoe per day, up 20% versus 2Q16 and 99% year-over-year. Net oil production increased 24% versus 2Q16 and 131% year-over-year, with oil volumes representing 67% of total production in 3Q16.
•The Company is increasing full-year 2016 production guidance from 36.0-38.0 MBoe per day to 37.0-39.0 MBoe per day.
•Parsley is adding 550 gross / 450 net horizontal drilling locations to the Company's Midland Basin inventory, reflecting a second target zone in the Wolfcamp B interval. Parsley's 15 operated wells completed in the upper portion of the Wolfcamp B interval across the Company's Midland Basin acreage footprint are exceeding the Company's 1 MMBoe EUR type curve for Wolfcamp A/B wells by 6% at 180 days and 9% at 360 days, in line with results from wells completed by the Company in the lower portion of the Wolfcamp B interval. Based on the average lateral length, working interest, royalty burden, and expected costs associated with the Wolfcamp B locations added to inventory, Parsley estimates that the average net present value per added location is approximately $3-$5 million.[1]
•Parsley posted strong results from the Company's first set of stacked wells in the Wolfcamp A, Upper Wolfcamp B, and Lower Wolfcamp B intervals. Completed concurrently with engineered sequencing, the three wells are on average tracking slightly ahead of the Company's 1 MMBoe EUR type curve after almost one month of production. The Grace 45-1-4306H, completed in the Upper Wolfcamp B interval, recently registered the second-highest 24-hour initial production rate in the Company's history at 2,420 Boe per day, representing 306 Boe per day per thousand stimulated feet.
•Lease operating expense ("LOE") per Boe decreased for the sixth consecutive quarter, down 5% versus 2Q16 to $4.15.
•The Company is lowering full-year 2016 LOE per Boe guidance from $4.50-$5.25 to $4.25-$4.75.
•Subsequent to the end of 3Q16, Parsley closed the previously announced acquisition of approximately 9,100 net acres and certain associated mineral and overriding royalty interests in Glasscock County, Texas.
•On October 28, Parsley entered into a new revolving credit agreement which replaces the Company's previously existing amended and restated credit agreement. The borrowing base under the new credit agreement increased 89% from the borrowing base under the previously existing credit agreement, to $900 million, with a Company-elected commitment amount of $600 million. As of the end of 3Q16, pro-forma for the closing of the aforementioned acquisition of assets in Glasscock County and the newly elected commitment amount, liquidity stands at $801 million, consisting of $201 million of cash on hand and $600 million of undrawn borrowing capacity on the revolving credit facility.

[dan_s]

"Parsley Energy continues to set the pace for efficient production growth, having more than doubled our oil volumes over the past twelve months while substantially reducing development and operating costs over the same period," said Bryan Sheffield, Parsley's President and CEO. "We are proud of the way we have managed through the downcycle by opportunistically expanding our asset base and reducing our cost structure to the point that well-level returns today match returns at $85 oil two years ago. We remain well-positioned for future growth, with a strong balance sheet and a high-quality drilling inventory distributed across scalable operating areas in premier portions of the Midland and Southern Delaware Basins. In fact, in light of our favorable combination of highly productive wells and low costs, we have deployed a fifth horizontal rig and continue to contemplate additional rig activity as we look toward 2017. In the meantime, we are raising full-year 2016 production guidance even as we transition to larger pad projects and undertake additional density that could translate to a flattish production profile in the fourth quarter on the way to rapid and efficient growth in 2017. Future growth potential is also enhanced by the prospect of significant resource expansion, of which adding a second target zone in the Wolfcamp B interval is just one component."

[dan_s]

I have updated my forecast model and it will be posted to the EPG website later today.

My valuation increases by $3.40/share to $42.00. This compares to First Call's price target of $42.06.

Parsley's production has rapidly increased during the first three quarters of 2016. Growth is expected to flatten out in Q4 and then accelerate in 2017. Note that the multiple that I'm using to value PE is much lower than what I'm using to value CXO, FANG and PXD. This one has a lot more upside for us.