Did Pioneer Natural Resources Pay Too Much for Parsley Energy?

Late Tuesday, Pioneer Natural Resources Co. (NYSE: PXD) announced that it had reached an agreement to acquire all the outstanding stock of Parsley Energy Inc. (NYSE: PE) in an all-stock transaction valued at $4.5 billion. Pioneer will issue approximately 52 million new shares of common stock and exchange one share of Parsley stock for 0.1252 shares of Pioneer stock (approximately $10.44 per share). Including Parsley’s debt, the deal has a total value of $7.6 billion.

According to the announcement, the transaction price reflects a premium of 7.9% to Parsley’s closing price on October 19, the day the acquisition discussions were made public. Pioneer shareholders will own about 76% of the combined company and current Parsley shareholders will own the rest.

Parsley’s largest shareholder, Quantum Energy Partners, owns 17% of the company’s outstanding shares and has agreed to the deal. Matt Gallagher, Parsley’s president and CEO, and A.R. Alameddine, Parsley’s lead director, will be added to Pioneer’s expanded board once the transaction is completed, now expected in the first quarter of next year.

Pioneer CEO Scott Sheffield is the father of Parsley’s executive board chair and founder, Bryan Sheffield. Neither Sheffield took part in discussions of the transaction, according to Pioneer’s chief financial officer, who said on the conference call announcing the deal the two firms “had a robust process of them not being involved in the negotiations.”

The combined company, which will retain Pioneer’s name and management, will have an asset base of approximately 930,000 net acres (none of it federally managed) and daily production of 328,000 barrels of oil and 558,000 barrels of oil equivalent. Based on 2019 data, Pioneer’s proved reserves will increase by about 65%.

According to Pioneer’s 2019 annual report, the company had proved reserves of 1.14 billion barrels of oil equivalent. Parsley reported 592 million barrels of proved reserves at the end of 2019. That totals 1.73 million barrels, somewhat less than a 65% increase to Pioneer’s total at the end of last year.

Pioneer is paying about $13 per barrel of proved reserves for Parsley’s 592 million barrels. That’s even more than the implied price of around $9.70 per barrel that ConocoPhillips paid on Monday for Concho Resources and far more than the roughly $5 a barrel Chevron paid in July for Noble Energy or that Devon paid for WPX Energy late last month.

The combined company expects to realize annual cost savings of $325 million, and the acquisition is also expected to boost cash flow, free cash flow per share, earnings per share and return on capital employed beginning next year. Interest expenses are expected to decrease by $75 million a year.

The Chevron acquisition of Noble Energy in July lit the fuse for what now seems to be weekly announcements of deals in the oil patch. That first deal, however, remains among the best of the lot. Chevron paid a premium of 7.6% to Noble’s stock price and just $5 per proved barrel of reserves and about $1.50 per risked barrel.

Devon acquired WPX Energy’s proved reserves for a bit more than $5 a barrel and paid only a 2.6% premium to WPX’s share price.

Pioneer’s shares traded down about 1% early Wednesday, at $82.74 in a 52-week range of $48.62 to $159.01. The stock’s consensus price target is $131.28 and Pioneer pays a dividend yield of 2.63%.

Parsley’s stock traded down about 1.7% to $10.44, in a 52-week range of $3.92 to $20.12. The stock closed at $10.62 on Tuesday. Parsley pays a dividend yield of 1.98%.

ALSO READ: After Conoco’s Huge Purchase, Are 2 Top Permian Stocks Also Takeover Targets?


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