Parsley Energy says it is "attractive" for any buyer

By Stephen Cunningham on 6/14/2019

WASHINGTON (Bloomberg) -- Parsley Energy Inc. said it would be “attractive” for any potential buyer as the U.S. shale driller expects to generate positive free cash flow in the back half of this year.

“We are attractive for purchasers whatever type of investor it is,” CEO Matt Gallagher said in a phone interview on Thursday. “That’s always a goal, an objective of ours.” He declined to say whether the company had been approached about a deal.

Last month’s $38-billion takeover of Anadarko Petroleum Corp. by Occidental Petroleum Corp. fueled speculation that an M&A spree could follow among companies exploring for oil in the Permian Basin, which straddles Texas and New Mexico. But major producers including Exxon Mobil Corp., and Chevron Corp. have said they are wary of scooping up smaller rivals as would-be sellers are demanding too much money.

Scott Sheffield, the CEO of shale producer Pioneer Natural Resources Co., recently cited Parsley, which was founded by his son, as being among the top targets in the Permian.

“We are in a small handful of companies that have some of the best rock and a healthy business model and a very long runway of inventories,” Gallagher said. “There are four or five good companies that always go to the top of that conversation.”

‘Healthy consolidation’

Gallagher sees “healthy consolidation” among independent drillers operating in the world’s biggest shale basin over the next decade.

There’s been a “pickup in M&A questioning but not a material pickup in M&A discussions,” Gallagher said. Acquisitions are “complicated and you have to be able to underwrite a commodity view for a sustained period of time.”

The CEO anticipates a more gradual pace of deal-making, with one to two big announcements and 10-20 smaller ones a year going forward.

Executives at some of the biggest oil producers have been talking down the prospect of deals in the Permian, saying they won’t be bailing out struggling drillers anytime soon.

“There’s a component of hardball but there’s also some reality that everybody’s really focused on their own models,” Gallagher said. “They also want to deliver on what they say before they go shopping.”

What Bloomberg Intelligence says

While we appreciate the Permian’s success, the legacy play is crowded, and infrastructure constraints have ignited volatility in differentials and slowed output. Bifurcation in valuations between smaller and larger E&Ps will be reconciled through consolidation, but we reject the view of a wholesale wave, with investors mandating more controlled spending and return of excess cash while voicing skepticism over recent M&A. Still, the Permian will overshadow peers even in a clouded commodity backdrop.  --Vincent G. Piazza, senior industry analyst, and Michael Kay, senior industry analyst 

Parsley has declined 37% over the past 12 months, compared with a 21% drop in the Russell 1000 Energy Index. The shares were down 1% at $17.27 as of 10:12 a.m. in New York. Investors have soured not only on the Permian but the oil industry in general given the slump in oil prices and a failure to rein in costs.

After being in exploration mode between 2012 to 2017, the shale sector hasn’t switched to delivering returns as quickly as it should have. “Patience is up from an investor standpoint and we have to start showing returns on the income statements," Gallagher said.

Although the driller hasn’t been active on the acquisitions front this year or last, Gallagher played down the possibility it could be left behind by its rivals.

“It’s like riding a bike -- you don’t lose it. And the focus is on fundamental value drivers so there’s no need to just get bigger to say you’re getting bigger.”

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