Marking the second blockbuster deal in as many days, Pioneer Natural Resources is set to become the Permian Basin’s largest oil producer by acquiring Parsley Energy.
The all-stock deal valued at $4.5 billion will bolster Pioneer’s already massive position in the Permian by adding nearly 250,000 acres operated by Parsley in the world’s most prolific tight-oil region. This would swell Pioneer’s holdings to around 930,000 acres—the equivalent of more than 1,450 sq mi.
Post-acquisition, the Dallas-based shale producer will boast a combined production output of 328,000 B/D, placing Pioneer above the Permian’s current production leader, Occidental Petroleum. Additionally, Pioneer said the transaction ups its proved reserve base by about 65%.
Also notable is that the deal will hand Pioneer its first major stake of around 110,000 acres in the Delaware Basin, known as the less-mature of the Permian’s two shale plays. Pioneer has been operating solely in the Permian’s other half—the Midland Basin—ever since it sold off its assets in the Eagle Ford Shale in 2018.
Only a Few Survivors
Pioneer announced the acquisition plans after markets closed on 20 October, describing it as one that “will transform the investing landscape” by creating a combined company with greater scale and ability to deliver “tangible and durable value for investors.”
Pioneer’s Chief Executive Officer Scott Sheffield, said this deal, the fourth major combination in recent weeks, is a race to gain scale which will eventually leave about four US independents with market caps of $10 billion.
“There will be only three or four investable survivors: ConocoPhillips, EOG, Pioneer, and maybe Hess,” he said. After these deals, the companies that could provide the scale and balance sheets to successfully build such a company will be limited at $50/bbl Brent.
Below that size range public companies have little visibility or clout in financial markets. “It is about size and scale to deal with what will happen over the next 10 years,” Sheffield said.
He also predicted that European-based majors, Shell and BP, will “not be making any more large acquisitions of fossil fuels companies” because of political pressures there, and the future US policies on climate change or investor pressure could limit deals by ExxonMobil and Chevron.
Saving $2 Billion Over the Next Decade
As part of the agreement, which has yet to clear regulatory approval, Parsley shareholders are receiving a 7.9% premium for their stock, each share of which will be exchanged for 0.1252 shares of Pioneer stock. This will leave Pioneer shareholders with a 76% ownership of the combined company while Parsley shareholders will own 24%.
The agreed share price is based on the closing price as of 19 October, which is before rumors of the impending sale were made public. The $4.5-billion deal includes Parsley’s total debt load of more than $7.6 billion. (Also on 19 October, ConocoPhillips announced it was buying Concho Resources in a deal valued a $9.7 billion, making it the shale sector’s biggest acquisition of the year.)
To reduce that debt, Pioneer outlined a plan to create at least $325 million in annual savings for the combined company. The company said the acquisition should result in $150 million in savings from operational efficiencies and another $100 million involves eliminating redundant general and administrative costs.
The remainder of the savings will come from Pioneer’s lower interest rates to finance its debt, an average rate of 2% compared to Parsley’s average of 5%. Over the next 10 years, Pioneer said these reductions in spend will exceed $2 billion in savings.
Pioneer also expects that the large scale will allow it to reduce the percentage of its cash flow that will be reinvested in the business from 70% or more to around 65% or less, adding more money to what the company can pay out in dividends after it begins its variable dividend in 2021.
Reflecting the growing importance of the US onshore sector’s environment, social, and governance (ESG) policies, Pioneer’s announcement emphasized that its efforts to maintain low flaring intensity will continue. The combined flaring rate of both Pioneer and Parsley equates to about 0.6% of total produced gas. This compared to an average of 1.7% of gas that is flared by peers, both figures are according to data shared by Pioneer in its announcement.
Matt Gallagher, Parsley’s president and CEO, and A.R. Alameddine, Parsley’s lead director, are the only two executives from the company who will be staying on with Pioneer as board members.
Austin-based Parsley was founded in 2008 by Bryan Sheffield, the son of current Pioneer boss Scott Sheffield. The younger Sheffield served as CEO of Parsley until early 2018 when he resigned the position while remaining on the board as its executive chairman.
