Bloomsburg Investment Group - Faculty and Staff Resources · Parsley Energy Inc A -13.1% Pioneer...

Bloomsburg Investment GroupEquity Analysis

Parsley Energy (PE)Senior Analyst:

Samuel Stellwagon & Jared Ortega, Class of 2020Junior Analyst:

Devon Gagstetter & Nicole Wilson, Class of 2020Gerrick Hardy, Class of 2021, Luke Smith, Class of 2022

Corporate Details:

Name

Ticker

Domicile

Sector

Industry

Exchange

Last Close

Price 52 Wk High

Price 52 Wk Low

Latest Dividend

Dividend Yield % TTM

Beta 5 Yr (MoEnd)

Avg Daily Volume (3 Mo)

Shares Outstanding (mil)

Number of Analysts

Parsley Energy Inc A

PE

United States

Energy

Oil & Gas E&P

NEW YORK STOCK EXCHANGE, INC.

20.29

33.43

14.17

5,243,092.35

317.09

4

Corporate Summary:

Parsley Energy, Inc. is an independent oil and gas company that focuses on acquisition, development, and exploitation of oil and natural gas reserves in the Permian Basin. PE is headquartered in Austin, Texas and was founded in 2008 by its CEO Brian Sheffield, which quickly set the stage for the successful growth of the publicly-traded independent oil and gas company. The company operates throughout the Permian Basin, which is in West Texas and Southeastern New Mexico and includes three sub-areas: the Midland Basin, the Central Basin Platform and the Delaware Basin. As of December 31, 2017, its acreage position consisted of 219,747 net acres, including 174,392 net acres in the Midland Basin and 45,355 net acres in the Delaware Basin.

Bloomsburg Investment Group Opinion:

After a re-evaluation, the Energy Sector strongly believes that PE should be held within the portfolio. First, the Permian basin has grown exponentially over the past few years, and there's more room to grow, and we believe the growth is also sustainable. Also, revenue has more than tripled since 2016, and profits are following along with this growth. For being a relatively new company, their financial situation is very strong. Recently, PE has participated in the wastewater industry trend, which can diversify and increase their revenue. Another reason the sector believes this is a hold is the increase in the amount of crude oil produced the United States has seen in. PE solely derives revenue from the United States, which is now the number one exporter of oil. With political and OPEC risk high, PE operating only in the United States can also be a strength. Although we recognize the exposure to cyclical tie to crude oil prices, we believe PE is a tremendous performer for the industry they operate in, and should be held within the Energy Sector.

of 7US Dollar4/15/2019 Parsley Energy Inc A

Source: Morningstar Direct

Parsley Energy Inc APE

Financial Summary, Year End 2018 (in millions)

Market Capitaliza�on

Total Revenue

Gross Profit

Opera�ng Income

Net Income Cont Ops

Net Income

Current Assets

Cash

Total Assets

Current Liabili�es

Longterm Liabili�es

Total Liabili�es

Total Equity

Opera�ng Cash Flow

Inves�ng Cash Flow

Financing Cash Flow

Change In Cash

EBITDA

Enterprise Value

Capital Expenditure

P/E Ra�o Forward

PEG Ra�o

Dividend Yield % TTM

6,433.71

1,826.43

956.37

621.59

445.97

369.13

540.71

163.22

9,391.36

648.95

2,422.68

5,568.06

1,218.97

1,594.04

15.91

390.97

1,263.02

8,454.57

2,018.10

13.77

Financial Highlights

Revenue Increase- Q4 Revenue total of $454.88 million; up 46.03% year-over-year. The company’s revenue has seen exponential growth over past three years, which is largely due to the shale oil boom in the Permian Basin. This figure saw a significant drop in 2015, which can be attributed to the drop in oil prices. EPS- Q4 EPS of $0.30, down from $0.45 in Q3. Rigs- Reduced development rig activity from 16 to 14 in Q4. As oil entered a bear market in Q4 of 2018, PE cut down on drilling activity as their margins were being squeezed.Rating Upgrade- Received credit rating upgrade by Moody’s in November 2018 from B1 to Ba3 (S&P- B+ to BB-).Developed Reserves- Nearly 50% increase in proved developed reserves in FY 2018.Net Acreage- 21.57% increase in net acreage in 2018 from 2017.Current Ratio- Current Ratio of 0.83 (PDX-1.42; FANG-0.91; CXO-1.04).

Investment Growth

Time Period: 4/1/2016 to 3/31/2019

6/2016 9/2016 12/2016 3/2017 6/2017 9/2017 12/2017 3/2018 6/2018 9/2018 12/2018 3/2019-40.0%

-30.0%

-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

Parsley Energy Inc A -14.6% S&P 500 TR USD 46.3%




PE Weighs Water Segment Sale

Early 2019 transactions will occur to gain water assets to enhance value in PE. Nearby rivals of PE are interested in tapping their systems for their water needs. About 20% of wastewater produced by the top 10 explorers in the Permian is now outsourced to water-focused companies like WaterBridge and Goodnight Midstream, while the rest is handled by the drillers themselves. It is possible that this could grow to about 50% as early as next year. (Bloomberg)

Stakes Grow from Permian Basin Assessment

On Thursday December 7, 2018 a new assessment showed that the Permian Basin could hold more promise then before. The assessment estimates more than 46 billion barrels of oil and 280 trillion cubic feet of gas are shown within the basin. If this is true, this will be the largest continuous oil and gas resource potential to ever be assessed. Top officials within the Trump administration back this up saying the assessment underscores the activity that’s already happening in the basin. (Press Herald)

Chevron Plans to Buy Anadarko for $33 Billion

Shares of Anadarko increased 32% to $61.78 on Friday April 12th, following an announcement that Chevron plans to buy Anadarko. The total enterprise value of this deal is set to be $50 billion. This deal shows that Parsley can be a potential buyout candidate in the future showing their 10% increase on Friday as well. (The Street)

Permian Basin Expected to Double Oil Output

Pipelines are being added to the Permian Basin in order to expand for more growth. Installing new pipelines is predicted to boost prices for a Permian producer. Oil output is expected to double to 8 million in just four years with this expansion. Permian output is looking to reach 5 million barrels a day by 2020. (CNBC)




Investment Growth

Time Period: 5/24/2014 to 3/31/2019

9/2014 3/2015 9/2015 3/2016 9/2016 3/2017 9/2017 3/2018 9/2018 3/2019-60.0%

-40.0%

-20.0%

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

Parsley Energy Inc A -13.1% Pioneer Natural Resources Co -24.3% Concho Resources Inc -15.0%Diamondback Energy Inc 40.1%

Competitor Comparison

Revenue(mil)

Revenue %Chg

GrossProfit(mil)

GrossMargin %

NetIncome

(mil)

NetIncome %

Chg

NetMargin %

MarketCap

(mil)(Daily)

CurrentRatio

ReceivableTurnover

Parsley Energy Inc A

Pioneer Natural Resources Co

Concho Resources Inc

Diamondback Energy Inc

9,379.00 77.16 2,776.00 29.60 978.00 17.41 10.37 28,359.61 1.42 14.02

4,151.00 60.52 3,256.00 78.44 2,286.00 139.12 54.66 22,845.94 1.04 10.42

1,826.43 88.87 956.37 52.36 369.13 245.71 20.21 6,433.71 0.83 13.94

2,176.26 80.59 1,143.70 52.55 845.67 75.36 38.86 17,470.47 0.91 9.56

Competitor Comparison (Cont.)

AssetTurnover

ROA %

TotalDebt

to TotalEquity

ROE % Beta 5 YrP/E

RatioForward

PEG RatioP/B

RatioCurrent

DividendYield %

TTM

FreeCash

Flow /Sales %

TTMParsley Energy Inc APioneer Natural Resources CoConcho Resources IncDiamondback Energy Inc

0.20 4.06 0.39 7.18 13.77 1.160.54 5.58 0.19 8.32 1.00 21.79 0.85 2.34 0.29

0.15 5.76 0.33 8.92 0.81 12.87 0.84 1.28 0.470.21 11.34 0.23 16.39 1.13 25.84 2.81 1.22 0.11

Industry Environment:

The segment that PE is in is the called the upstream segment These companies are responsible for finding and extracting oil or natural gases from the reserves available. Through fracking and horizontal drilling, these companies have become more and more efficient as of late. These companies are greatly impacted by oil barrel prices, OPEC due to their strength in relation to amount of oil supplied, and innovation of extraction techniques and studies. Shale oil production growth as of late has served as a benefit to this segment.

The process in which wastewater from fracking activities is disposed of within injection wells. The wastewater is subject to environmental regulations due to its high salt and chemical content, heavy metals, and radioactive material. After the treatment process, smaller amounts of fluids or solid “cake” must be disposed of via injection into the ground or brought to a landfill. Near well injection sites, fracking is not permitted due to the risk of leakage. These wells are cased, the water is sent thousands of feet underground, and it is usually injected into a limestone or sandstone formation. The water that is safe to be reused is typically then recycled to be utilized in the fracking process once again.

Environmental regulations greatly impact upstream oil companies. With that being said, the addition of more regulations can increase the costs of extraction, disposal of wastes, and operation costs in totality. Many of the Obama era regulations in the US have been re-evaluated by the Trump Administration due to the costs of regulations being too “burdensome” on the industry. Changes in the political administration in the 2020 election could serve as a risk as this industry has followed a trend of less regulation through the Trump presidency.

OPEC is the global organization consists of 15 member countries that export oil. These 15 members control about 44% of the oil produced as well as ownership of about 81.5% of the world’s oil reserves. This organization works in efforts of considering the trends of oil barrel prices and the global supply limits to the producers of oil. This is done to keep a steady supply of oil available for consumers while considering the profitability of oil producers and investors. OPEC has recently cut global oil supplies for all of its members due to an oversaturation within the market.




Strengths:

Permian Basin Growth- The Permian is expected to grow in the next 3 years. Despite the fact that the Permian Basin growth has been beyond expectations, there is still expected growth in the basin. This could benefit PE tremendously, as they always look to grow revenue.U.S Growth- The United States has recently become the largest exporter of oil in the United States. With growth in oil, the revenue shall increase as well.Horizontal Drilling- PE utilizes horizontal drilling in their energy fields. Horizontal drilling leads to higher quantities of oil, and a lower cost over time. They do have a high starting cost.Two Main Segments- One thing newer companies try to do is stretch beyond their means. Although PE is volatile and so is their revenue, they have not tried to expand to other regions besides the Permian Basin. It shows they are being cautious and not stretching themselves too thin.Pro-Drilling Environment- On top of the United States being the number one exporter of oil, a pro-drilling government benefits PE. They tend to face regulation and can export more oil.

Weaknesses:

Crude Oil Price Risk- PE’s stock and key financial statements are highly tied to the price of crude oil. As we have seen over the past year, this can negatively affect their stock price.One Primary Customer- Royal Dutch is 62% of PE’s revenue. Although an argument could be made as this being a strength, PE already is heavily reliant of crude oil, and adding one primary customer can be a risk, even though Royal Dutch is a very reliable company.Land Saturation- A lot of the land in Permian is already owned leaving less opportunity to drill. Also, PE made some of their revenue from selling drilled land, which will slow down the more and more they drill.Cost of Drilling- Lack of pipelines going to Permian means a lot of oil is transported by truck, a position that is in high demand with low supply in Permian. Also, with larger companies drilling in the Permian, they have more capital to allocate to expenses, which can increase cost.OPEC Risk- PE is affected by the announcements and news that OPEC releases. OPEC controls around 40% of the oil market, and the reliance on what they do and say with their supply can hurt or benefit PE.

Opportunities:

Permian Basin is Still New- According to the USGS There is an estimated 46.3 billion barrels of oil, 280 trillion cubic feet of natural gas, and 20 billion barrels of NGL left in the permian. This is due to the Permian Basin being in the infancy of its life period, with much of the reserve yet to be utilized for extraction or explored. This makes this highly growing area a sustainable safe haven for upstream companies long into the future. OPEC Cutback- OPEC will take 1.2 million barrels of oil per day off the market to raise oil prices. This was done in an effort to combat the drop in oil prices that occured due to a surplus in the supply in relation to the global demand. Overall, any future adjustments will assure the satisfaction of consumers, profitability for oil producers, and lastly profitability for investors of the energy sector.Trump Re-Election- The Trump administration has positively impacted the energy sector in various ways in regards to reducing regulatory trends. Additionally, the administration has positively boosted the US oil and natural gas market in specific with the goal of boosting production from US companies as much as possible. This has mainly been driven by the Permian Basin. Increased Usage of LNG- LNGs have served as a means of bringing natural gas to places in which would not have been able to been accessed previously due to a lack of transportation pipelines. They are typically transported via large ships/tankers which are called LNG carriers. The US has become a net exporter of LNGs as of late due to growth in natural gas production. Additionally, the downward trend of LNG imports has also positively impacted this market with imports dropping every year since its peak in 2007. Electric Vehicle Tax Credit- The U.S already imposed a vehicle tax credit decrease for TSLA electric vehicles, and this could occur for other electric vehicle manufacturers as their sales increase. This is a great opportunity for PE, as people could shift back to a gas vehicle instead.

Threats:

2020 Election- If President Trump is to not win re-election in 2020, and a democratic candidate that has a negative viewpoint of crude oil production in the United States wins, you could the market react negatively to the news, specifically energy.Increase in Costs- The cost of drilling in the Permian Basin have already increased, and if they continually increase, this could hurt a lot of key financial components of PE.U.S Sanctions- The increasing ongoing volatile political events that the U.S is having with Iran and Venezuela can have large effects on OPEC and the oil markets as a whole. This could also be an opportunity if their supply decrease in these regions.Environmental Concerns- As electric vehicle sales increase, this is decreasing one of the main uses of refined oil around the world: gasoline & diesel. Also, more areas are looking to decrease plastic usage, which oil is a part of the manufacturing process.Potential Lawsuits- The oil extraction industry is very exposed to the potential of lawsuits. If safety is not a top concern for PE, this could increase their lawsuit costs.Parent-Child Well- If Parsley drills wells in close proximity of one another, the company could experience decreased crude oil output from the respective wells due to the “Parent-Child Well Problem”. When wells are drilled nearby pre-existing wells, the hydraulic fracturing causes disruption in the neighbor well. This hurts profitability and forces the company to write down the value of the property on its books.




Valuation: Reserve Replacement Ratio

To calculate the reserve replacement ratio, you take the Year End Oil & Gas Reserves - Year Start Oil & Gas Reserves - Oil & Gas Production / Oil & Gas Production x100To the energy sector, this shows how effective a company is at acquiring and improving their operations while utilizing their current reserves. Overall, it shows potential longevity of a drilling company. (In Percentage)PE- 363.60FANG- 1,479.23PXD- 153.46CXO- 464.46

Valuation: Percentage of Reserves Developed

Source- Bloomberg(In Percentage)PE- 59.67FANG- 65.13PXD- 91.81CXO- 69.42

Valuation: Price/Cash Flow Ratio

Instead of using P/E Ratio, the sector viewed the P/CF as a more relatable statistics as these numbers cannot be manipulated, because it calculates cash flow instead of earnings. So, this ratio tells you how much cash a stock produces relative to its stock price. A company like PE, which is very volatile and new, relies on positive cash flow.PE- 4.6FANG- 7.1PXD- 8.9CXO- 7.8

We view this ratio as PE may be undervalued relative to their competitors. Although none of their P/CF are outliers, we feel this is another metric that helps prove PE is undervalued.




Bloomsburg Investment Group Disclaimer

This report was developed by student members of the Bloomsburg Investment Group (BIG). The purpose of the report is to provide research analysis of securities to potential and existing donors of The BIG Fund. The report is designed to exemplify the abilities of our members through investment research and analysis. Analysts of the Bloomsburg Investment Group and The BIG Fund are not registered brokers, investment advisors, or licensed financial professionals. The generated opinion of our analysts is not an offer or solicitation to buy or sell any security, and due diligence is recommended before making any financial transaction. Information included in this report was compiled from different public sources. Not all relevant data was included into the report, and accuracy is not guaranteed. Students, faculty, and staff of Bloomsburg University may have a financial interest in any company listed in this report. Sources Cited

CNBCYahoo FinanceBloombergCapital IQParsley EnergyDallas NewsThe StreetNew York TimesEnvironmental DefenseThe StreetForbeseia.gov



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