This is a Z4 Research Pre Call Quick Note
The 1Q20 Numbers:
- Volumes were as expected (in total and in composition),
- Realized oil prices were tight to WTI at a $0.49 discount. We note that Midland pricing has in the last few days reversed back to premiums as the press releases detailing voluntary curtailments have mounted from mid cap and larger players.
- Operating costs continue to impress with cash G&A setting a new quarterly low at $1.65 / BOE (aided by senior staff taking minimum 50% cash pay cuts).
- Management maintained the dividend at $0.05 per quarter. This is positive given that: 1) it's a relatively new dividend a course reversal so soon after initiation would likely be poorly received, and 2) it's part of the free cash flow AND return of capital all upstream NAM investors not just want to see now but require from all names outside of the really small caps.
- EPS was a beat at $0.29 vs $0.24 expected.
- Parsley generated free cash of $19 mm for the quarter vs outspend of $135mm in the year ago quarter.
- Capex for the quarter was $379 mm, well below the Street's expectation of $420 mm and representing over half of the new 2020 budget.
2020 Guidance:
- Capex - Revised to below $0.7 B from the previously reduced below < $1.0 B and vs original $1.6 to $1.8 B.
- Drilling and completion operations have been temporarily suspended. It appears a price near $30 WTI would prompt them to return to a 4 to 5 rig program. Given the lack of growth they will benefit from a lower base decline in 2021 and this takes the form of management guiding to a maintenance budget for 2021 of ~ $600 mm (that would appear to hold oil only volumes in 2021 flat at about 110,000 bopd). Should they not restart operations they see oil volumes at about 90,000 bopd at YE20 and a 2021 budget needed to maintain flat from there at just $450 mm.
- Management noted that they see wells that do get drilled and completed in the second half of 2020 doing so for a 20% haircut to original budget figures.
- Production for 2020
- They had previously suspended prior guidance of 200 to 210 MBOEpd (125 to 133 MBOpd) and did not issue new production guidance with this release.
- The Street is already taking into account expected reduced capex and curtailments (see below) and is below the now suspended range at 193 MBOEpd. Look for questions on the call attempting to establish guide posts for conditions in June necessary to lift (or further curtail) volumes.
- Free Cash Flow For 2020:
- Given the changes in the budget and an expectation of lower but as of yet undefined production guidance they are establishing free cash flow generation guidance of "at least" $300 mm under a $20 to $30 WTI expectation. The Street is currently estimating free cash flow of $165 mm.
- Favorite Quote Watch: "Parsley's 2020 activity plans will remain flexible, but we remain inflexible in our commitment to allocate incremental capital based on unhedged rates of return in prevailing market conditions. Regardless of the activity scenario we pursue for the remainder of the year, we are committed to generating healthy free cash flow in 2020, exiting the year with a solid balance sheet, ample scale, a shallower oil base decline, and visibility to sustained free cash flow in 2021 and beyond. In short, we will endure with relevance."
Highlights:
- Wells completed in the quarter were 97% working interest with 28 Midland wells and 23 Delaware wells completed for the quarter.
- They had 15 rigs and 5 spreads at the start of the year and as noted above are at 0 and 0 now. They plan to be at 4 to 5 rigs when oil market fundamentals are constructive. They don't have a time frame on that but the presentation points to $30 stabilized price as a case for restarting operations. For reference, at the time of this writing the 2H20 strip was just over $27. We would expect management to need to see at least a month of pricing for the back half near $30 to really get back to completion operations.
- They put the full year early rig contract termination costs at just $15 mm.
- Curtailments:
- in March they started shutting in 400 higher cost wells (most of them old verticals) for a total of 1 to 2,000 net Bopd. Note that this action helps to contain per unit LOE as volumes contract.
- in April they shut in several pads mostly acquired from JAG (noting they were flaring gas) that had net oil production of 4 to 5,000 net bopd.
- in May they expect to "voluntarily curtail" up to 23,000 net bopd.
- This yields reduced volumes in May at least along the lines of 28 to 30,000 bopd.
Balance Sheet:
- Net debt to quarterly annualized EBITDA of 1.6x, compared to 1.4x last quarter.
- Previously noted the commitment amount was increased from $1.0 B to $1.075 in April as the borrowing base was reaffirmed at $2.7 B.
Nutshell: Solid quarter all things considered (closing and integrating the major acquisition of Jagged Peak while oil prices go into free fall) and management continues to demonstrated its grasp of controlling the controllable. Estimates are likely to ebb in the wake of the quarter although the Street is already sub prior (and now suspended) production guidance and right now we do not anticipate a major further volume based downdraft in estimates. It's good to see them again highlighting significant free cash flow even at rock bottom oil prices. The stock may initially ease on the continued suspension of guidance but multiples are fairly low and the balance sheet is in good shape. PE is currently the 7th largest position in the ZLT and is our 2nd largest oily position (basically tied with MGY). It's down 43% since the 4Q19 report on tumbling oil prices from the double whammy of Covid-19 and related OPEC+ squabbles. We see the name as our Core Permian holding.
