Pioneer Natural Resources Co. and Parsley Energy Inc. have become the latest Permian Basin independent producers to announce a merger, but analysts are mixed on how shareholders will receive the all-stock deal, which is valued at $7.6 billion including Parsley debt.
With Parsley Chairman Bryan Sheffield being the son of Pioneer CEO Scott Sheffield, the merger is more than just a family reunion.
"The [Pioneer-Parsley] combination would create a Permian Basin giant with nearly 930,000 net acres, including 820,000 in the [unconventional] Midland Basin," Stifel said in an Oct. 20 commentary.
Tudor Pickering Holt & Co. said Parsley has been considered a takeout target for some time, so its involvement in a merger came as little surprise.
A merger of the two companies "would make a ton of sense from multiple perspectives," the analysts said. "It wouldn't be out of the realm of possibility with increased scale for the combined company to further work down well costs towards leading-edge levels."
The transaction represents a 7.9% premium to Parsley shareholders based on closing share prices as of Oct. 19, Pioneer said in announcing the deal.
That figure was generally in line with analysts' broad expectations in advance of the late Oct. 20 deal announcement.
Most analysts did not question the possibility of a merger of the two companies, but what Pioneer was actually going to pay was more of a point of contention. Some observers believed there would be little to no premium in an all-equity deal, while others believed the agreement would require Pioneer to pony up a respectable premium to work.
"We believe that if a deal transacts as we'd expect, it would likely be nearly all equity as with little to no premium as seen with most recent E&P deals. In our opinion, [Pioneer] stock would trade moderately higher if there is little to no premium for a deal though we believe [Parsley] shares would need to see at least a modest premium for a similar reaction," Truist said in an Oct. 20 analysis, prior to the deal's announcement.
Siebert Williams Shank & Co. analyst Gabriele Sorbara, on the other hand, took the stance that Parsley could and would fetch a premium.
"We think a deal would garner a similar 10%+ premium as in the ConocoPhillips/[Concho Resources Inc.] merger," Sorbara said, prior to the deal announcement. The analyst said there was no pressing need for Pioneer to make a move, but picking up Parsley would allow the company to increase its acreage in the Permian to the point where it can compete with the largest operators in the region. The strong condition of both balance sheets, Sorbara said, would allow for the combined company to remain stable with a total liquidity of more than $2.4 billion.
Stifel praised Parsley for having "exceptional inventory" in the Permian and said the combination of the companies would be a "logical fit." Still, the firm suggested that Pioneer shareholders may not be thrilled with the idea of the company buying out a smaller competitor.
"[Pioneer] investors that have been anticipating the company would be a seller rather than a buyer could be disappointed with the deal," Stifel said. "[Parsley] shareholders would essentially own shares in a larger version of the company they already own."
Truist said that the deal could be as much a case of necessity for both companies as much as it is an opportunity for Pioneer, considering the difficult climate the oil and gas industry finds itself in. Pioneer needs to find as many areas as possible where it can turn a profit with prices in the mid- to high $30 per barrel range, while Parsley may be looking for a soft landing spot.
"While we believe even a combined company would face challenges producing attractive free cash flow at $40/bbl oil, we recognize the necessity of scale should prices remain at current levels," the Truist analysts said.
Shares of Pioneer Natural Resources on the NYSE fell 4.0% to close at $83.53 on Oct. 20 while shares of Parsley Energy climbed 5.2% to close at $10.62. The S&P 500 Index climbed 0.5%.