By Hannah Ohlsson, Knut Örnéus, Edvard Bruu & Wilma Tillqvist (Stockholm School of Economics), Luca Delpippo, William Zhang, Jinghan Jennifer & Sanjana Ramaswamy (University of St. Andrews)
Overview of the deal
Acquirer: Pioneer Natural Resources (PXD)
Target: Parsley Energy Inc. (PE)
Implied Equity Value: $4.5bn
Total Transaction Size: $7.6bn
Closed date: 19/10/20
Target advisor: Credit Suisse Securities (USA) LLC and Wells Fargo Securities, LLC as financial advisors and Vinson & Elkins LLP as a legal advisor.
This $7.6bn acquisition comes in the wake of a significant fall in oil prices following the Saudi-Russia oil war in the context of consolidation in the oil industry. The deal will see Pioneer become the largest producer in the Permian Basin, the world’s most productive oil reservoir. The deal, welcomed by both the boards of Pioneer and Parsley, will generate pro forma benefits as well as expected $325mn per annum cost synergies under the new combination. With benefits such as a potential higher yield for shareholders in Pioneer, a combined effort to promote ESG, and a stronger balance sheet, the strategic rationale of the acquisition is strong. There remains, however, the tension surrounding the future of the oil industry as government- and investor attitudes towards fossil fuels change in the direction of a greener future. Regulatory- and market impacts on the oil industry could be to the detriment of the new company, should oil prices continue to stagnate and political pressure affect the profitability of the oil industry as a whole.
“The inevitable consolidation in the Permian marches on and I couldn’t think of a better combination of assets than Pioneer and Parsley. This combination will provide Parsley shareholders new structural advantages including a lower cost of capital, a fortified balance sheet, economies of scale, and enhanced ESG capabilities, while amplifying all of the relative strengths of our standalone model.” -S. Wil VanLoh, Jr., a Parsley director and the Founder and Chief Executive Officer of Quantum Energy Partners, Parsley’s largest shareholder
Company Details: Acquirer – Pioneer Natural Resources
Pioneer Natural Resources explores, develops, and produces oil and gas reserves. It is a Permian pure-play company and operates exclusively in the Permian Basin, one of the world’s largest oil fields located in western Texas and southeastern New Mexico.
Founded in 1997, headquartered in Irving, TX
CEO: Scott D. Sheffield
Number of employees: 2300
Market Cap: $13.08 billion (as of 05/11/20)
EV: $16.3 billion
LTM Revenue: $9.67 billion
LTM EBITDA: $2.82 billion
LTM EV/Revenue: 1.69x
LTM EV/EBITDA: 5.78x
Company Details: Target - Parsley Energy
Parsley Energy is a Permian pure-play company focusing on acquisition, development, exploration, and production of oil and natural gas resources. Properties are located in two areas of the Permian Basin, the Midland Basin, and the Southern Delaware Basin.
Founded in 2008, headquartered in Austin, TX
CEO: Matt Gallagher
Number of employees: 500
Market Cap: $4.08 billion (as of 05/11/20)
EV: $7.6 billion
LTM Revenue: $1.75 billion
LTM EBITDA: -$3.81 billion
LTM EV/Revenue: 4.34x
LTM EV/EBITDA: -1.99x
Projections and Assumptions
This acquisition will see Pioneer Natural Resources become the largest oil producer in the world’s most prolific oil reservoir, the Permian Basin. Parsley’s biggest shareholder expects the acquisition to provide the group with a lower cost of capital and economies of scale, yielding immediate benefits for the new combination after the acquisition is materialised. Parsley shareholders will receive a fixed number of shares in Pioneer, providing an immediate benefit of a 7.9% premium on Parsley’s share price on Monday close. This acquisition will come as a part of a long line of consolidations in the Permian Basin and help Pioneer compete against producers such as Northern Offshore, Marathon Oil, and Black Ridge Oil and Gas. In essence, the short-term upsides of the acquisition include a consolidation of the Permian Basin, competitive advantage, and a modest premium for Parsley Shareholders.
With regard to the long-term upside potential of this transaction, synergies play a crucial role in creating value. Both companies expect the deal to lead to $325mn in savings annually. According to Pioneer’s statement on the acquisition, $150mn of these savings will come from operational synergies, $100mn will come from General and Administrative costs, and $75mn from interest expense savings. These interest savings will materialise as a result of debt refinancing under the combination of the two companies, pushing the interest rates on some debt contracts down. With the current economic strains facing companies across the world, resulting from coronavirus related restrictions, many companies have not been able to pay out dividends to investors, including Pioneer. This could change in the next year or two, however, with new flexibility over reinvesting and a larger cash flow resulting from the new transaction allowing Pioneer to set a base dividend of $2.20 per share, ‘with a variable component starting in 2021.’ This would represent a higher yield for investors in Pioneer and signal confidence in the future of the new company to existing and future shareholders. It is also a sign that the bigger balance sheet of the new company could translate into tangible benefits for investors.
With shareholder activism and social pressures causing headaches for many oil companies due to climate change, now more than ever oil companies are pushing for a stronger ESG focus. Here, both Pioneer and Parsley excel in their commitment to focus on ESG, in the context of the oil industry. Both companies are focused on reducing flaring, the process of controlled burning of natural gas in the oil production and refining process. The combined flaring intensity of both companies was 0.6% in Q2 2020, with the industry average sitting at 1.7%. Pioneer hopes that new infrastructure acquired with Parsley will help to reduce flaring even further and strengthen both companies’ commitment to ESG in the long term. Overall, the pro forma benefits leading to higher yields for investors, synergies, and combined commitment to ESG should yield success in the future for Pioneer and Parsley.
Risks and Uncertainties
As a consequence of the Covid-19 pandemic, the oil industry has been faced with decreased demand and the industry has started to consolidate. Covid-19, together with the climate change discourse, might negatively impact the outlook of the oil industry that currently is fairly volatile. This is one major uncertainty that will determine the success of the acquisition.
A further uncertainty going forward is governmental and regulatory approvals and the risk that Pioneer or Parsley might be unable to obtain the approval required for the proposed transaction. Furthermore, the outcome of the American election, which as of the writing of this report has not reached a definitive result, will impact the future regulations that the industry will face.
Potential cost savings, synergies, and growth have been emphasized as the main reasons for the proposed transaction. However, if demand remains low for a long time period, there is a risk that the acquisition might not be as profitable as emphasized in the deal announcement. Moreover, something that has been discussed is the expected lower cost of capital of the combined firm, which will be dependent on the credit rating achieved for the combined company.