Parsley Energy PE has reached an agreement to acquire smaller rival Jagged Peak Energy JAG in an all-stock deal worth $2.27 billion comprising $625-million net debt as of Jun 30.
This strategic move would provide Jagged Peak Energy stockholders with 0.447 shares of Parsley Energy Class A common stock for each share held, accounting for an 11.2% premium to the closing price prior to the acquisition announcement.
Rationale Behind the Deal
Per Parsley Energy, this “low premium” deal will leave an immediate positive impact on its 2020 cash flow along with net asset value and returns on invested capital. Additionally, the Permian pure play will be able to curb general and administrative costs by almost $25 million in the first year followed by $40-$50 million annual savings subsequently.
This all-stock deal will help the combined entity maintain a strong balance sheet with a pro forma net leverage ratio of 1.6x LTM adjusted earnings before interest, income taxes, depreciation, depletion, amortization and exploration expense.
Parsley Energy’s assets are said to well complement Jagged Peak’s high-margin, oil-heavy assets in the Delaware Basin. The integration between the two companies is expected to make a significant contiguous impression on the Delaware Basin, resulting in more optimized lease geometry with additional extended lateral walls. Of the 267,000 Permian Basin net acres that Parsley Energy will hold, 147,000 net acres will be in the Midland Basin and the remaining 120,000 in the Delaware Basin.
The transaction is expected to close by the first quarter of 2020 and is contingent on pending approvals and customary conditions. Upon the closure of the deal, Parsley Energy stakeholders will possess 77% of the consolidated company while the rest will be held by Jagged Peak shareholders.
Following announcement of the transaction, shares of Parsley Energy fell 10.6% to $15.18 in yesterday’s trading while the Jagged Peak Energy stock slid almost 1.5% at $6.72. Particularly, shareholders of Parsley Energy appear to question the logic of gaining scale through buyouts amid weakness in oil prices. Sceptics of the deal feel that the company might have been better off taking a more disciplined approach to capital deployment for maximizing shareholder value.
Parsley Energy, Inc. Price
Parsley Energy, Inc. price | Parsley Energy, Inc. Quote
Zacks Rank & Key Picks
Parsley Energy carries a Zacks Rank #3 (Hold). Better-ranked players in the energy space include BP Midstream Partners BPMP and TC Energy Corporation TRP, each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
BP Midstream’s earnings beat the Zacks Consensus Estimate in three of the trailing four quarters.
TC Energy earnings beat the Zacks Consensus Estimate in each of the last four quarters.
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