Two recommendations today—an energy company with an improving future, and some profit-taking.
Parsley Energy, Inc. (PE)
From BI Research
Parsley Energy, Inc. (PE) reported Q4 results on Thursday and the shares advanced 7.8% on Friday. Clearly, investors were more impressed with the look ahead than Q4, which came up $.04 short on adjusted EPS, posting $.30. Revenues of $455 million were less than 1% shy of estimates, and a whopping 46% over the year ago level. Actually, the way oil prices hit the skids in Q4, and with hedging and all, it is an absolute miracle that results were as close to the consensus as they were, so I think investors wisely looked ahead.
For the full year, revenues soared an impressive 89% to $1.83 billion, of which $1.54 billion came from oil sales, and adjusted EPS more than doubled to $1.41. As to oil production, Q4 net oil production increased 50% to 7.1 million barrels. And total Q4 net production including natural gas and liquids was 11.0 million boe, up 49%. For the full year, total net production increased 61% to 39.9 million boe, with almost none of that coming from acquisitions.
Meanwhile, average sales pricing for the year before hedging was $60.6/barrel vs. $48.95 ($58 vs. $48 after hedging), but gas prices were horrifically bad at $1.37/mcf vs. $2.43 last year, and Q4 was even lower. I should also mention that proved reserves net of all the pluses and minuses (like new finds proven up, divestitures and production drawdowns) during the year increased 25% to 521.7 million boe, and newly discovered proven reserves during 2018 added 160 million barrels as compared to production in 2018 of 39.9 million barrels, so a nice ratio there of 4 to1.
So, you can see we have a very rapidly growing and well-managed company here.
For 2019, the company’s goal is to not overspend on cap ex by more than $250 million, on its way to a goal of becoming cash flow positive as soon as Q4. Assuming a $50 WTI oil price (it’s $56 now), that currently works out to a 2019 capital spending budget of $1.35 to $1.55 billion (vs. $1.76 billion last year, down due to lower oil prices). And, as I understand it, if oil prices improve, then that will go mostly to reducing the $250 million overspend, as opposed to more capital spending.
Its plans call for better efficiency of capital employed (by 8 to 10%). For example, Parsley plans to use 10-15% more sand this year in its well completions with 75% sourced from (cheaper) local sand mines and a 15% increase in the average lateral length, as well as taking advantage of lower service and equipment costs that have come down with the price of oil. (In this regard, note that while Parsley’s lateral lengths average a very long 9,300 feet in 2018, the company recently successfully drilled a 3 mile (about 16,000 feet) lateral that was one of the longest ever drilled in the Permian, so the trend to longer laterals, and more sand, continues.)
All this is expected to lead to 2019 net production of 45 to 49 million boe. Guidance was basically unchanged from that given out in December. However, for now WTI oil prices are 12% higher at $56/barrel.
As of this writing the current EPS consensus for 2019 calls for a $1.41, followed by $2.19 in 2020. However, if oil prices continue to ratchet back up this year, as many expect them to, EPS estimates will ratchet back up also, as will the stock price.
By almost any measure, the company can control, it is knocking the ball out of the park, and it operates “exclusively in the most prolific portion of Permian Basin, one of the most prolific oil basins on earth.” Accordingly, the shares are a Buy.
Tom Bishop, BI Research, www.biresearch.com, February 25, 2019