Permian Basin prowler Parsley Energy agreed Monday to buy fellow play operator Jagged Peak Energy in an all-stock deal valued at $2.3 billion, supporting industry projections of more mergers and acquisitions among midcap upstream players at a time of wobbly oil prices.
The acquisition, whose price includes about $625 million of Jagged Peak net debt, moves Parsley deeper into the southern Delaware Basin, the western side of the West Texas-New Mexico basin.
The transaction also builds up Parsley's free cash flow, Parsley CEO Matt Gallagher said, at a time when upstream executives are determined to cushion their balance sheets against unpredictable oil prices, pay down debt and return more cash to shareholders.
"This is a simple deal," Gallagher said during a webcast to explain the transaction, which is estimated to close in Q1 2020. "It's about buttressing our model with high-margin cash flow and high-return Permian oil projects ... in which free cash flow growth is king."
Jagged Peak will contribute 78,000 net acres to the total 267,000 net Permian acres, as well as second-half 2019 38,300 b/d of oil equivalent production to a total 178,400 boe/d in the combined Parsley post-closing, Gallagher said.
Moreover, those oil volumes (total pro forma 115,700 b/d in second half) are not subject to West Texas Light or WTS (Midland Sour) crude discounts.
LONGER LATERALS
The larger scale will also allow longer laterals, or horizontal legs, made possible by contiguous acreage position, Gallagher said. It will permit Parsley to drop a drilling rig, leaving a combined 15 from the current 16, and rotate rigs in and out of the basin as needed, he said.
Increased scale and production levels will also accelerate Parsley's road to investment-grade profile, potentially helping future opportunistic debt refinancing.
And it will lower per-well price tags as Parsley applies its own cost metrics to Jagged Peak's inventory.
Both Parsley and Jagged Peak are sited in favorable oil quality windows, Gallagher added. Produced Delaware Basin oil volumes from the companies weigh in at an average 41 degree API gravity, according to joint Parsley-Jagged Peak presentation slides.
With low, uncertain oil prices that lately have bounced around in the low $50s/b, and a 2020 futures curve stuck at about the same range, analysts have predicted more mergers of midcap companies.
These were kicked off in July with news that Callon Petroleum would buy Carrizo Oil & Gas for $3.2 billion, creating a larger Permian player that includes Eagle Ford Shale exposure. Midcap deals continued with the August announcement of PDC Energy's plan to purchase SRC Energy for $1.7 billion, creating a weightier presence in the Wattenberg Field of Colorado.
Both of those deals are still pending and should close before year-end.
MERGERS 'MAKE SENSE'
Last week, Seaport Global analyst Mike Kelly downgraded 13 mostly midcap upstream producers, suggesting that "going the merger-of-equals route makes the most sense with this group."
The companies included Jagged Peak and larger companies including Devon Energy, Whiting Petroleum and SM Energy, as well as Centennial Resource Development, Lonestar Resources, Rosehill Resources and Lilis Energy.
In Jagged Peak's case, "we fully agree that handing over the keys to Parsley makes tremendous sense," Kelly said. The transaction "significantly ups its Delaware position, which we think possesses the most upside potential across the Permian."
Under the deal's terms, Jagged Peak shareholders will receive 0.447 Parsley share per Jagged Peak share. That implies a price of $7.59 per Jagged Peak share, based on Parsley's Friday closing price of $16.97/share, and reflects an 11% premium to Jagged Peak's Friday closing price of $6.82/share.
In addition, Quantum Energy Partners, Jagged Peak's majority shareholder, has agreed to vote its shares in favor of the transaction, the presentation said. The combined company's board will be expanded to 11 directors to accommodate two new members.
