Parsley Energy Primed For Oil And Gas Growth Spurt

Shutterstock photo

Parsley Energy hit the ground running in its stock market debut this spring.

Fueled by prospects for heady growth in the oil-rich Permian Basin of West Texas where it operates,Parsley Energy ( PE ) stock spurted 20% above its initial public offering price to close at 22.20 on its first day of trading on May 23. And the company's shares have traded mostly at or above that price since.

Why the hot IPO reception from investors? "It's somewhat sector related," said Cindi Profaca, managing director of "Energy stocks in general have done very well this year. Obviously, with the need for us to be able to extract more oil reserves from resources in the U.S., people see this as a good play getting in right as the company is going public."

The vast majority of Parsley Energy's 111,644 net acres are in the Midland Basin, a subarea of the Permian Basin. And most of its identified vertical and horizontal drilling locations are located in the core area of the Midland Basin. The majority of its reserves and production are positioned in the "stacked pay" fairway of the Spraberry, Wolfberry and Wolftoka trends.

From the time it started drilling operations in 2009 through the end of March 2014, it has drilled and placed in production over 400 vertical wells in the Midland Basin.

Sideways Strategy

In 2013, Parsley Energy began increasing its focus on a horizontal drilling development program, which CEO and founder Bryan Sheffield sees as having the potential for far greater returns than the basin-leading returns it is achieving from vertical drilling, as has already been proved by other operators in the area.

Parsley Energy had placed on production three horizontal wells, had one well being finished and another being drilled as of April 30.

Sheffield is eying more opportunities with its horizontal drilling program.

"I am excited about transitioning to a horizontal driller over time, which will in turn help us execute on our growth strategy," Sheffield told IBD. "We have accumulated a core position in the sweet spot in the Midland Basin.

"I feel like we have enough acreage to ramp up on horizontal rigs and plan to run six by 2015 (from two working currently) as well as maintain our seven to eight vertical rigs."

He hopes to achieve "substantially greater returns" with horizontal drilling than what Parsley Energy is achieving with vertical drilling, which is "generating basin-leading returns."

"The whole goal is to capture the stacked-pay potential through horizontal drilling," he added.

Stacked pay refers to multiple productive oil and gas formations on top of each other "like a sandwich," said Sheffield.

He says that means Parsley Energy can drill multiple horizontal wells on top of each other.

Drilling Techniques

Horizontal drilling is a technique used in certain formations where a well is drilled vertically to a certain depth, then drilled at a right angle within a specified interval.

Parsley Energy has been successful with its initial horizontal drilling efforts, says Renaissance Capital analyst Nick Einhorn.

"At the time of the IPO, Parsley had results from its first horizontal wells, which were pretty strong," he said. "Early on, what they're trying to do with horizontal drilling is working. Generally, the Permian Basin has been pretty attractive for a few years because of its potential for very strong returns from horizontal drilling."

Most of the publicly traded companies in that area have benefited from "strong returns" from horizontal drilling, he added.

Einhorn says Parsley Energy is one of the faster-growing publicly trade companies in the Permian Basin.

He cites the fact that the company's average net production tripled in the first quarter from a year earlier to 9,163 barrels of oil equivalent per day.

"The growth should continue to be pretty high," said Einhorn. "But they're spending a lot in capex (capital expenditures) to drive the growth.

"There's no question they're going to grow fast. The question is how their growth relates to capex spending to drill the wells. That's the challenge of valuing fast-growing E&Ps (exploration and production companies)."

In an initiation report on Parsley Energy, JPMorgan analyst Joseph Allman noted that the company's core acreage in and around Midland, northern Upton and southern Martin counties in Texas, as well as its tier 1 acreage outside of its core, should "allow the company to grow production and reserves at strong double-digit rates for the next several years."

He estimates the company will boost production 120% in 2014 and 70% in 2015 compared with the exploration and production group median of 13% in 2014 and 16% in 2015.

As of March 31, the company had identified 1,594 80- and 40-acre potential vertical drilling locations, 1,986 20-acre potential vertical drilling locations and 1,681 potential horizontal drilling locations on its existing acreage, which includes only 20 vertical locations in its Gaines County (Midland Basin) acreage, according to a company filing with the SEC.

It also started a vertical appraisal drilling program in the Delaware Basin during the 2014 first quarter and expects to drill three vertical appraisal wells this year.

Through this effort, the company has identified a multiyear inventory of 3,580 potential vertical drilling locations and 1,681 potential horizontal drilling locations on its existing acreage, excluding its Southern Delaware Basin acreage.

Energy IPOs

Parsley Energy is one of a handful of oil exploration and production companies that have launched IPOs since the start of this year, includingRSP Permian ( RSPP ),Rice Energy ( RICE ) andEnable Midstream Partners ( ENBL ).

Parsley Energy began operations in August 2008 when it acquired operator rights to well producing from the Spraberry Trend in the Midland Basin from Joe Parsley, a co-founder of Parker & Parsley Petroleum Co.

Parker & Parsley merged with Mesa Inc. to createPioneer Natural Resources ( PXD ).

Bryan Sheffield is the son of Pioneer's CEO Scott Sheffield.

Parsley Energy "grew organically from scratch," from two employees at its inception to about 125 today, said Bryan Sheffield.

Followers are upbeat about the company's prospects.

Analysts polled by Thomson Reuters expect 2015 earnings to spurt 105% to 84 cents a share from the 41 cents anticipated for 2014.

They expect a 57% rise in 2016 and a 34% increase in 2017.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

In This Story


Other Topics