The carnage in the energy industry has not spared even the best names in the oil and gas exploration segment. While the depression remains, there are some stocks that have shown amazing resilience. This article discusses one stock that has remained firm and has a bright long-term outlook. The reason for discussing this name is to bring forward some deep value ideas in the sector that can be slowly accumulated.
I had discussed Parsley Energy (NYSE:PE) on June 22, 2015, and the stock was then trading at $18.36 with oil trading at $60 per barrel. Oil is roughly trading at half the level it was trading at in June 2015 and Parsley Energy is trading at $16.3. The stock has declined by just 11.3% in the last seven months, and I must mention that Parsley Energy was trading at $19 on Feb. 3, 2016. The recent broad market carnage has resulted in the stock correcting, but I expect upside once the markets calm down.
If energy companies are analyzed, one of the major factors that has accelerated the stock downturn in the crisis is leverage. Energy XXI (EXXI) is a good example of a stock that has capitulated due to excess leverage and cash burn. Similarly, in the offshore drilling sector, Seadrill (NYSE:SDRL) has crumbled due to leverage concerns.
Therefore, the first factor that has contributed to strong stock action for Parsley Energy is a quality balance sheet and robust liquidity position. I see the following positives from the company's balance sheet perspective:
- As of Sept. 30, 2015, Parsley Energy had $550 million in long-term debt that matures only in 2022. I must add here that S&P upgraded (August 2015) the company's senior unsecured notes to B- from CCC+. This underscores my point on strong balance sheet position.
- Including the equity offering in December 2015 and the cash outflow on acquisitions, Parsley Energy has $243 million in cash reserves along with $575 million in undrawn credit facility. This provides total liquidity cushion of $818 million. I must add here that the company's borrowing base was increased from $500 million to $575 million in 2015, and this again underscores the company's strong credit position.
- Parsley Energy expects 2015 capital expenditure in the range of $325 to $375 million. For 2016, even if the same level of investment is considered, Parsley Energy is fully funded for 2016 (largely through available cash and operating cash flows). Even for 2017, the stock is fully funded if the credit facility remains un-utilized. Therefore, I expect the company's credit health to remain strong over the next 12-24 months.
Therefore, from a balance sheet perspective, Parsley Energy is a very interesting stock and offers quality credit metrics at a time when many midsize companies are struggling. It is also important to mention that Parsley Energy is healthy even from a cash flow perspective considering the point that nearly all of the estimated production for 2016 is hedged. For the first nine months of 2015, Parsley Energy generated $110 million in operating cash flows and I expect cash flows to remain strong through 2016.
Moving to the company's growth and asset discussion, Parsley Energy has been an excellent performer on this front as well. While the company's December 2015 reserves data is awaited, the reserves for year ended December 2014 increased by 66% year over year and proved developed reserves for the same period increased by 126%. In 2015, Parsley Energy has continued to grow organically and inorganically and I expect strong reserves development. From a forward looking perspective, Parsley Energy has a strong balance sheet position and I expect many distressed asset sales in 2016. Parsley Energy is well-positioned to grow inorganically this year with a strong liquidity buffer.
Therefore, strong financials is the first factor supporting the stock and strong reserves growth (proved developed reserves) is the second critical factor supporting Parsley Energy's stock. The third factor is a function of the above two points -- strong production growth momentum even in challenging times with hedged positions ensuring decent price realization.
Parsley Energy is on track for 55% production growth on a year-over-year basis (FY 2015 compared to FY 2014), and I expect the production growth momentum to sustain in 2016 for the following reasons:
- In January 2016 company presentation, Parsley Energy has stated that it expects to reach production of 30mboe/day sometime in Q1 2016 and this will be 40% higher than Q3 2015 production. This is an initial indication by the company that production growth will sustain.
- Parsley Energy acquired 238 net horizontal drilling locations in December 2015 and the company expects net production of approximately 1,000 boepd during the month of November from three producing horizontal wells. With another horizontal well completed, the acquisition will provide meaningful production upside in Q1 2016 and through 2016.
- With more than 1,100 net Wolf camp and Spraberry drilling locations in the heart of Midland Basin and with a fully financed investment program, the company's is likely to be robust. The company's strong production growth will be supported by well-hedged positions.
In conclusion, Parsley Energy is well-positioned from a financial perspective even in difficult times, and the company's quality Permian asset base ensures that production growth will also remain robust through 2016. The stock has remained resilient in the last six months, and this is an indication of the value the stock holds at current levels. I am bullish on Parsley Energy at current levels and long-term investors can consider accumulating the stock through 2016 as oil prices remain largely depressed.
Disclosure: I/we 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.