Parsley Energy, Inc. (NYSE: PE) (“Parsley,” “Parsley Energy,” or the “Company”) today announced that it has entered into agreements to acquire, in unrelated transactions, certain undeveloped acreage and producing oil and gas properties located adjacent to the Company’s existing operating areas in the Midland and Southern Delaware Basins for an aggregate purchase price of $607 million in cash, with certain transactions still subject to customary closing conditions. The Company has also acquired certain mineral interests in the Southern Delaware Basin for an aggregate purchase price of $43 million. Parsley intends to finance these acquisitions through an equity offering announced concurrently with the acquisitions. The Company also introduced 2017 capital plans and operating guidance that contemplate a 75% increase in net lateral footage and production growth of almost 60% versus 2016, effectively pulling forward value from a growing asset base.
Acquisition Highlights
- Approximately 23,000 net leasehold acres
- Estimated current net production of approximately 2,300 Boe per day
- Approximately 340 net horizontal drilling locations in primary target intervals (Wolfcamp A, Wolfcamp B, Lower Spraberry, and Bone Spring formations)
- Approximately 660 net royalty acres
Midland Basin
- Approximately 25,200 gross / 17,800 net leasehold acres in Upton, Reagan, Glasscock, and Midland Counties, TX for approximately $402 million
- Estimated current net production of approximately 1,200 Boe per day
- Approximately 230 net horizontal drilling locations in the Wolfcamp A, Wolfcamp B, and Lower Spraberry target intervals, with additional locations in less developed intervals and potential upside from tighter spacing and additional flow units in primary target intervals
- Those transactions not yet closed are scheduled to close on or before February 27, 2017, subject to the satisfaction of customary closing conditions.
Southern Delaware Basin
- Approximately 6,600 gross / 5,200 net acres in Reeves, Pecos, and Ward Counties, TX for approximately $205 million
- Estimated current net production of approximately 1,100 Boe per day
- Approximately 110 net horizontal drilling locations in the upper Wolfcamp and 2nd and 3rdBone Spring target intervals, with potential upside from tighter spacing and additional target intervals
- Mineral rights translating to a 17% average royalty interest in approximately 3,900 net acres, or approximately 660 net royalty acres, in Reeves and Pecos Counties, TX for approximately $43 million
- Those transactions not yet closed are scheduled to close on or before January 31, 2017, subject to the satisfaction of customary closing conditions.
Matt Gallagher, Parsley’s President and Chief Operating Officer, commented, “Having maintained healthy activity levels, steadily supplemented our acreage portfolio, and increased our operational capacity throughout the downturn, Parsley has a head start toward leading production and cash flow growth in a more benign commodity price environment. The Company’s 2017 capital program spans our development areas and demonstrates our commitment to pulling value forward from new and legacy assets, alike. On top of sustainable growth from our reliably prolific and expanding Midland Basin resource base, we believe 2017 will mark an inflection point for Parsley in the Southern Delaware Basin as years of exploration and delineation begin to pay substantial dividends. We expect production from the Southern Delaware to increase fourfold by the end of the year and, boosted by this contribution, we expect to generate significant production momentum through the end of 2017. This production growth should be characterized by robust returns and expanding margins as a function of meaningfully higher average lateral lengths, net revenue interest, and oil as a percent of total production, accompanied by lower unit costs and development costs per lateral foot.”
Parsley plans to complete 120-140 gross operated horizontal wells in 2017. At an average lateral length of approximately 8,000 feet, 2017 completions would represent approximately 75% more net lateral footage than the Company completed in 2016. While project timing will influence quarterly completion schedules, the Company does not at this time expect significant variation in the level of drilling activity over the course of the year.
Anticipated capital spending of $750-$900 million incorporates the aforementioned horizontal wells and also associated facilities, infrastructure, and other expenditures, which will represent a larger portion of total development spending in the Southern Delaware Basin than in the Midland Basin as Parsley transitions to development mode in the Southern Delaware Basin.
Given an anticipated increase in oil as a percent of total production, the Company expects growth in oil volumes to outpace overall production growth in 2017. While Parsley expects to generate robust year-over-year production growth of approximately 58%, the Company expects even sharper oil volume growth of approximately 65% versus 2016. Drilling and completion activity should account for more than 95% of anticipated 2017 production growth, with an estimated contribution of approximately 1,000 Boe per day from already producing wells associated with newly announced acquisitions. The Company expects steady production growth over the first half of 2017, followed by steeper growth through the end of the year as projects initiated early in the year come online.
Capital Allocation
Parsley intends to deploy approximately 60% of planned 2017 development capital in the Midland Basin, with the balance allocated to the Southern Delaware Basin—a ratio that should hold relatively steady throughout the year.
The Company continues to evaluate the resource potential associated with several target formations and well-spacing configurations that have not yet been incorporated in the Company’s inventory of horizontal drilling locations. While Parsley regularly implements new designs and technologies across its development program, approximately 20% of planned capital expenditures are specifically designated for projects that could be classified as delineation activity inasmuch as it involves less proven target zones and/or spacing configurations. Accordingly, Parsley expects to take significant steps toward an optimized development program even as the Company generates superior production growth.
Parsley expects to bring 85-95 horizontal wells online in the Midland Basin. Drilling and completion activity in the Midland Basin will focus on the Wolfcamp A and Wolfcamp B intervals, with additional activity planned for the Lower Spraberry, Middle Spraberry, and Wolfcamp C formations.
Parsley expects to bring 35-45 horizontal wells online in the Southern Delaware Basin. Drilling and completion activity in the Southern Delaware Basin will focus on the upper Wolfcamp interval, with additional activity planned for the Middle Wolfcamp, 2nd and 3rd Bone Spring, and additional flow units in the upper Wolfcamp interval. In addition, contemplated drilling locations in the Southern Delaware Basin are weighted toward leasehold on which the Company holds mineral interests, enhancing the economic profile of such drilling projects.
Cost Outlook
Unit cost guidance for 2017 represents incremental reductions relative to anticipated 2016 averages, which in turn represent significant declines from prior period costs. Parsley also expects lower development costs per lateral foot in 2017 than in 2016 despite a significantly greater capital allocation to more intensive Southern Delaware drilling projects, higher average completion intensity across the development program, and modest service and equipment cost inflation.
Hedging Update
In view of the anticipated production growth outlined above, Parsley has added meaningfully to its oil hedge portfolio, thereby reducing the variability of its anticipated cash flows and enhancing the Company’s ability to execute its expressed development plan. Given increased visibility to near-term commodity prices, the Company has elected to hedge a larger percentage of its anticipated oil volumes in the second half of 2017 than in the first half of 2017, and has also established a meaningful position in 2018. Parsley hedges oil volumes with put spreads, which provide downside protection while retaining exposure to higher oil prices. Based on the possibility of basin-specific tightness associated with potential Permian Basin production growth, the Company has also entered into basis swaps covering the next several quarters.
About Parsley Energy, Inc.
Parsley Energy, Inc. is an independent oil and natural gas company focused on the acquisition and development of unconventional oil and natural gas reserves in the Permian Basin in West Texas.