If you’re going to enter into a merger or acquisition deal in the greater Permian Basin region these days, it had better meet three key objectives:
- contain a large amount of acreage that is adjacent to your own in order to take advantage of economies of scale;
- add substantial acreage in the prolific Delaware Basin portion of the region; and
- increase your company’s free cash flow.
Parsley Energy believes its acquisition of Jagged Peak Energy achieves all three goals. Describing the combination of the two companies as “a natural fit,” Matt Gallagher, Parsley's President and CEO, said this about the deal:
Jagged Peak's oily, high-margin asset base slots in nicely to our returns-focused development approach, its acreage footprint and water infrastructure dovetails into our legacy Delaware Basin position, and its corporate culture aligns with our core values. In short, we now have a premier Delaware Basin business that rivals our foundational Midland Basin business. This transaction also creates tangible synergies that will enhance our corporate free cash flow profile and will be shared by the combined shareholder base.
Enverus M&A Analyst Andrew Dittmar, in an email distributed on Monday, agreed with Gallagher’s assessment, saying that “The merger checks the key boxes investors should be looking for with in-basin consolidation including complementary acreage, a low premium and all-stock consideration and looks positive for both companies’ long term...Parsley is adding highly complementary acreage that is immediately adjacent to its position on the eastern edge of the Delaware Basin, a portion of the play known for producing a higher percentage oil. The deal substantially boosts Parsley’s operations on the Delaware side of the Permian, complementing their operations in the Midland Basin.”
When viewing deals like this, it’s always interesting to analyze whether the transaction is designed to make the acquiring company a more-attractive takeover target by a larger firm looking to acquire prime Permian assets, or to simply grow the acquirer into a more substantial, larger-cap going concern that is better positioned to compete in the world’s hottest oil play. This has become especially true this year, as many analysts have continued to predict a rise in M&A activity that has thus far not really materialized.
Dittmar’s view appears to be that the acquisition of Jagged Peak sets the combined company up to be more competitive for the long term: “This merger between two Permian pure-plays looks to be right out of the shale company consolidation playbook, something investors and industry analysts have been calling for and builds Parsley’s scale in a key portion of the Delaware Basin,” he said, adding, “The acquisition additionally indicates Parsley views itself maturing into a Permian large cap and closing the gap with Pioneer, Diamondback and Concho versus any interest in being a target itself for the larger companies.”
So, if your first reaction to this deal was to assume that it would soon lead to an even larger deal in which Parsley itself would become the acquired party, you may end up being disappointed. But overall, 2019 has thus far seen a very health level in U.S. M&A activity for the oil and gas industry.
Enverus noted in a report released on October 2 that transactions announced during Q3 2019 exceeded $17 billion in total value, capped of course by BP’s $5.6 billion sale of its remaining Alaska assets to Houston-based independent Hilcorp. Dittmar attributes some of the elevated level of M&A deals to ongoing tightness for E&P companies in obtaining access to capital. “Shale companies are turning to deals as another option in the toolbox to bridge the gap to free cash flow and hopefully shift market sentiment back in their favor.”
Interestingly, aside from the huge acquisition of Anadarko Petroleum by Oxy, most of the M&A deals thus far this year have involved assets outside the Permian region. “In contrast to prior years, where Permian asset deals dominated, we are seeing broad geographic diversity in the current market and a variety of deal types including joint ventures and royalties.” Dittmar said.
So, the long-anticipated flurry of deals involving big Permian producers gobbling up smaller companies with prime leasehold assets has thus far failed to materialize, and, at least on the surface, this deal between Parsley and Jagged Peak does not appear to be one designed to trigger a larger deal down the road.
But the speculation about certain companies will no doubt continue, because if nothing else, it makes for great coffee bar conversation.