Parsley Energy,Inc. recently announced the completion of its acquisition of smaller rival Jagged Peak Energy in a deal worth $1.8 billion.
This strategic move provides Jagged Peak Energy stockholders with 0.447 shares of Parsley Energy Class A common stock for each share held.
Rationale Behind the Deal
Per Parsley Energy, this “low premium” deal will leave an immediate positive impact on its 2020 cash flow along with net asset value and returns on invested capital. Additionally, the Permian pure play will be able to curb general and administrative costs by almost $25 million in the first year followed by $40-$50 million annual savings subsequently.
This all-stock deal will help the combined entity maintain a strong balance sheet with a pro forma net leverage ratio of 1.6x LTM adjusted earnings before interest, income taxes, depreciation, depletion, amortization and exploration expense.
Parsley Energy’s assets reportedly complement Jagged Peak’s high-margin, oil-heavy assets in the Delaware Basin. The companies’ integration is expected to make a significant contiguous impression on the Delaware Basin, resulting in more optimized lease geometry with additional extended lateral walls. Of the sprawling 267,000 Permian Basin net acres that Parsley Energy will hold, 147,000 net acres will be in the Midland Basin and the remaining 120,000 in the Delaware Basin.
Parsley Energy, Inc. Price
As soon as the deal gets effective, Parsley Energy stakeholders will possess 77% of the consolidated company while the rest will be held by Jagged Peak shareholders.
S. Wil VanLoh, Jr., the former founder and executive officer of Quantum Energy Partners and an ex director of Jagged Peak will shortly join the special committee of the Parsley Energy board. Further, Jim Kleckner, who served as the president, chief executive officer and director of Jagged Peak will also be added to Parsley’s board.
CEO Hopeful About Annual Returns
In a separate press release, Parsley Energy CEO Matt Gallagher expressed optimism on higher investor returns from shale players since stockholders recently approved Parsley Energy’s $1.8-billion acquisition of its competitor Jagged Peak Energy. It could be possible that shareholders believe that despite higher spending on M&A activity, domestic shale companies will have sufficient free cashflows to reward its stockholders with dividends and share repurchases.
Zacks Rank & Key Picks
Parsley Energy carries a Zacks Rank #3 (Hold). Better-ranked players in the energy space include BP Midstream Partners BPMP, Oasis Midstream Partners LP OMP and TC Energy Corporation TRP, each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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