By Aron Adamski, BSc Economics @LSE
OVERVIEW OF THE DEAL:
- Announcement date: 20/10/2020
- Industry: Oil and Gas Exploration and Production
- Implied EV/NTM EBITDA: 5.93x
- Financing: All-share
- Acquirer advisors: Goldman Sachs & Morgan Stanley
- Target advisors: Credit Suisse Securities & Wells Fargo Securities
Pioneer Natural Resources Company entered into an agreement to acquire Parsley Energy from Quantum Energy Partners for $4.5 bn. Under the terms of the agreement, Pioneer will acquire all of the outstanding shares of Parsley, and Parsley shareholders will receive a fixed exchange ratio of 0.1252 shares of Pioneer common stock for each share of Parsley common stock owned. This represents an 8% premium to share price before the announcement. The total value for the transaction, inclusive of Parsley $3 bn debt assumed by Pioneer, is approximately $7.6 bn.
Upon closing of the deal, existing Pioneer shareholders will own approximately 76% of the combined company and existing Parsley shareholders will own approximately 24% of the combined company. Parsley Energy will be continuing as the surviving corporation and a wholly-owned subsidiary of Pioneer. Under the terms of termination, Parsley would be required to pay Pioneer a termination fee of $135 mn and Pioneer would be required to pay Parsley a termination fee of $270 mn.
The transaction is expected to have minimal impact on the employment status of existing Pioneer employees.
The acquisition is subject to regulatory approvals, listing on the New York Stock Exchange, Pioneer’s and Parsley’s shareholders approvals, and other customary closing conditions. The transaction has been unanimously approved by the Boards of Directors of both Pioneer and Parsley. Quantum Energy Partners support agreement in connection with the transaction.
The deal is expected to drive annual synergies of $325 million and to be accretive to cash flow per share, free cash flow per share, earnings per share and corporate returns beginning in 2021.
The transaction is expected to close in the first quarter of 2021.
“The combination of our two high-quality Permian companies is focused on creating tangible and durable value for shareholders in the long term, with a primary focus on free cash flow.” ~ Pioneer Natural Resources Company
OVERVIEW OF PIONEER NATURAL RESOURCES COMPANY:
- Founded in: 1997
- Headquartered in: Irving, Texas, United States
- Market Cap: £10.41 bn
- EV: £12.07 bn
- LTM EBITDA: £2.22 bn
- EV/ LTM EBITDA: 5.44x
The company explores for, develops and produces oil, natural gas liquids (NGLs), and gas within the United States, with operations in the Permian Basin in West Texas. The company is ranked 341st on the Fortune 500 list. As of December 31, 2019, the company had 1.135 billion barrels of oil equivalent of proved reserves, of which 53% was petroleum, 25% was natural gas liquids, and 22% was natural gas. In 2019, the company produced 345 thousand barrels of oil equivalent per day, of which 61% was petroleum, 21% was natural gas liquids, and 18% was natural gas.
OVERVIEW OF PARSLEY ENERGY:
- Founded in:
- Headquartered in:
- Market Cap: £3.39 bn
- EV: £5.8 bn
- LTM EBITDA: £1.18 bn
- EV/ LTM EBITDA: 4.92x
Parsley Energy is an independent oil and natural gas company that engages in the acquisition, development, exploration, production, and sale of crude oil and natural gas properties in the Permian Basin in west Texas and Southeastern New Mexico. As of December 31, 2019, the company’s estimated proved oil, natural gas and NGLs reserves were 592.3 million barrels of oil equivalent. In 2019 the customers that accounted for approximately 10% of the company’s revenue included Shell Trading Company, Lion Oil and Targa Pipeline Mid-Continent.
STRATEGIC RATIONALE:
HORIZONTAL INTEGRATION/SYNERGIES/MARKET SHARE
The two firms expect the combination to lead to annual cost savings of $325m. This would be achieved through reduced cost of capital, as altogether they hold assets covering 930,000 net acres -none of which is on federal land, which could be subject to a ban on new drilling should Joe Biden win the US presidential election next month. On 22/10 Moody’s announced that it will review Parsley for upgrade following the announcement of the deal.
Also, the horizontal nature of the deal means that the combined group can achieve significant economies of scale, leading to improved margins.
“The post-merger Pioneer will be the largest acreage holder in the Midland Basin with 820,000 net acres in the basin that is contiguous and allow for significant operational efficiencies as we put these two assets together,”~ Richard Dealy, CFO Pioneer Natural Resources Company
“The combined company will be the leading Permian independent exploration and production company with a premium asset base of approximately 930,000 net acres with no federal acreage and a production base of 328 thousand barrels of oil per day and 558 thousand barrels oil equivalent per day as of the second quarter of 2020. Additionally, based on year-end 2019 proved reserves, this transaction will increase Pioneer’s proved reserves by approximately 65%.” ~ Pioneer Natural Resources Company
RELATIONSHIP
In March Pioneer and Parsley collectively called on the Texas regulator to impose production cuts in order to boost prices in the midst of the price crash. Both have also called for reduced levels of “flaring” — where drillers burn off the less valuable gas found alongside the oil, a highly polluting practice. In the past, both firms worked together effectively, hence the combination is likely to be effective.
CONSOLIDATION
The deal marks 4th “mega” acquisition in the oil and gas industry since oil price crash earlier this year, signalling increased consolidation within the sector. The other deals earlier this year include:
- ConcoPhillips’ acquisition of Concho for $13.3 bn
- Chevron’s $13 bn acquisition of Noble Energy
- Devon Energy’s acquisition of WPX for $12 bn
RISKS AND UNCERTAINTIES:
JOE BIDEN
During the second live presidential debate, Democratic nominee Joe Biden suggested that he would stop subsidising the oil industry in an attempt to accelerate transition of America to clean energy by 2050. This could potentially be fatal to the combined group in the long-run, due to increased costs. However, this isn’t likely to happen given that in the LTM period both firms had strong EBITDA margins. For example, Parsley’s margin stood at 81.5%, suggesting a likely cut in subsidies won’t have a large impact on profitability.
