Permian Basin Merger Mania Continues With A Deal Of Destiny

The new Merger Mania in the U.S. shale patch continued on Tuesday with the announcement of a deal by Pioneer Natural Resources
PXD
to acquire Parsley Energy in what would have to be classified as one of the most logical combinations of companies in recent history. The synergies that exist between these two companies has been obvious for some time, really since the founding of Parsley Energy in 2008. It is in fact a deal that seemed destined to ultimately take place.

Start with the fact that the company’s co-founder and former CEO, Bryan Sheffield, is the son of current PNR CEO Scott Sheffield. Or that the Parsley name itself is a tribute to a former oil and gas company, Parker and Parsley, that was founded by Bryan Sheffield’s grandfather, Joe Parsley. Or that Parsley’s current CEO, Matthew Gallagher, is a former employee of PNR, where Bryan Sheffield also worked for a couple of years beginning in 2006. Or that Parsley Energy’s initial production base consisted of about 100 vertical stripper wells that Parker & Parsley had drilled decades before.

But those are just the family relationships. The business synergies between the two companies are equally compelling. Both, for example, are pure Permian Basin plays with acreage that is mainly concentrated within the Eastern half of the greater Permian Region, known as the Midland Basin.

As can be seen on the map below, prepared by the good folks at Enverus, those respective acreage holdings have a high degree of contiguity, a feature that will enable the combined company to benefit from new economies of scale:

Equally as beneficial to the new, combined company, Parsley also owns large patches of acreage in the prolific Delaware Basin, which makes up the Western half of the Permian Region. Taken together, the new company will rival Chevron, Oxy, ConocoPhillips and ExxonMobil in total Permian acreage with a base of 930,000 acres that currently produces 558,000 barrels of oil equivalent per day. In its press statement, PNR said that it expects to attain $325 million in annual economies as a result of the new efficiencies and savings in general and administrative expenses the deal will provide.

Andrew Dittmar, Senior M&A Analyst at Enverus, agreed in a note last night that his particular merger was not an unexpected event: “A tie-up of Pioneer and Parsley has been something at least in the background of potential shale company combinations given their tight asset fit in the Midland Basin and shared history through Parker & Parsley. However, it took an industry slowdown that sparked a wave of consolidation to finally bring these two together.

“This is part of a historic winnowing of U.S.-based independent E&P companies. There has now been over $40 billion in public-public corporate mergers year-to-date. In just two days, we have seen two of the top 10 U.S.-based E&P acquisitions of the last 10 years amounting to over $20 billion in combined value.”

Dittmar also pointed to the fact that the new company will now enjoy decades of drilling opportunities, saying “Unlike some corporate deals we have seen, for Pioneer adding inventory isn’t a particular concern given its massive runway that amounts to nearly 30 years of drilling at expected rig rates. Instead, the company is looking to bolster free cash flow metrics as it builds around a sustainable reinvestment rate of 65-75% that prioritizes getting cash back to shareholders.”

With a price tag of $4.5 billion that grows to $7.6 billion including assumed debt, Enverus ranks this as the 10th-largest merger to take place in the U.S. oil and gas sector since 2010. It is interesting to note that three of those 10 largest mergers – including the recent Chevron/Noble Energy
NBL
and Monday’s ConocoPhillips/Concho Resources deals – have taken place in just the last three months, all with a heavy focus on the Permian Basin.

A look at that Enverus acreage map shows a collection of potential targets remaining for companies that are in buying mode. One suspects that this Permian-focused Merger Mania has yet to run its course.