Parsley Energy: Very Strong Public Debut For This Permian Basin Player

May.27.14 | About: Parsley Energy, (PE)

Summary

Parsley is a pure play on the Permian Basin.

The company has and is currently still showing rapid as well as profitable growth.

While the company faces the usual risks, there might be more upside potential if profitable growth continues.

Parsley Energy (NYSE:PE) is an independent oil and natural gas company focusing on development and exploration of unconventional oil and gas in the Permian Basis, located in West Texas.

The company witnessed a very successful public debut last week. If the company can maintain its spectacular and profitable growth this year, valuations are actually still appealing.

The Public Offering

Parsley was founded back in 2008 after acquiring operating rights to produce in the Midland Basin. The company now focuses on three sub-areas - the Midland Basin, the Central Basin Platform and the Delaware Basin.

The company focuses on high oil and liquids-rich content trough both vertical as well as horizontal drilling. The company currently holds a working interest of 57% in 431 gross producing wells, having leased or acquired 98,656 net acres in the Permian Basin in recent years.

As a result of the drilling programs, the company has boosted average daily production to 11,139 barrels of oil-equivalent for March of this year, driven by organic growth.

Parsley sold 50 million shares for $18.50 apiece, thereby raising $925 million in gross proceeds. The company sold 42.5 million shares thereby raising $786 million for corporate purposes while selling shareholders offered the remainder of the shares.

The pricing of the offering took place above the high end of the preliminary offering range of $15-$18 per share set by the firm and its bankers. At $22.20 per share, the equity in the firm is valued at $1.76 billion.

The major banks that brought the company public were Credit Suisse, JPMorgan, Goldman Sachs, Wells Fargo Securities, Morgan Stanley, Raymond James and RBC Capital Markets, among many others.

Valuation

Parsley is focused on growth through development, exploitation and drilling of its inventory of potential drilling locations. The company has identified thousands of drilling locations on existing acreage ranging from 20 to 80 acre-potential.

The company set a $430 million capital budget for drilling and completion this year, as it anticipates to complete 151 gross vertical wells and another 30 horizontal wells. The company currently has 54.8 million barrels of oil-equivalent in reserves, sufficient to secure current production rates for some 13 years ahead in time. Important to notice, some 77% of its reserves are held in liquids, being oil and NGL. In its filing, the company attributes a present value of proven reserves of $731 million.

For 2013, Parsley generated revenues of $121.0 million which is up significantly from revenues of $37.7 million reported a year earlier. The company more than doubled its net earnings to $27.5 million. Note that earnings attributable to investors are ¨inflated¨ due to very low effective tax rates.

Before the offering took place the company operated with roughly $19 million in cash and equivalents while the company has $430 million in debt outstanding, resulting in a net debt position of about $410 million. The company raised $786 million in gross proceeds which it will use to reduce leverage under its credit facility and fund the $133 million acquisition of recent acreage. The remainder of the funds will be used to fund the capital expenditures going forward.

As such the company will likely have a net cash position of around $300-$350 million following closure of the offering. This would value operating assets at around $1.45 billion. This valuation would imply a valuation of roughly 12 times last year's sales and over 50 times annual earnings.

Investment Thesis

As noted above, the public offering of Parsley has been a huge success. Shares were offered some 12.1% above the midpoint of the offering range after which shares rose by 20% on their first day.

While valuations are steep based on last year's metrics, the company is preparing for continued growth. In April it bought 5,040 net acres in the Midland Basin for $132.8 million. Just a few weeks earlier it bought 2,240 gross acres in the Midland Basin as well for a consideration of $169 million. These deals increase the drilling inventory and prospects for future growth.

Risks to investing in emerging oil and gas shale plays include of course volatile prices, reliance upon reserves estimates as well as the limited operating history. While the balance sheet is strong, capital expenditures will be very high in the near-term future, draining on available cash. Other risks include the concentrated nature of the assets in geographical terms and the corporate structure with a new company acquiring assets of the predecessor ahead of the offering.

For now the company is geared to growth. Note that 2013's results were based on an average production of 5,011 barrels of oil-equivalent per day, while production has surpassed 11,000 barrels in March and currently tracks around 13,000 barrels per day. At this rate annual revenues could increase by about 150% this year to about $300 million. If earnings follow foot they could come in at $60-$75 million.

The $1.45 billion equity valuation becomes a lot more appealing at that point in time if these results materialize for this year. That being said, I will await the first quarterly report being issued as a private company to get more clues before possibly jumping onboard.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.