Parsley To Acquire Jagged Peak In $2.3 Billion All-Stock Transaction

Parsley Energy Inc. on Oct. 14 agreed to acquire its neighbor in the Delaware Basin, Jagged Peak Energy Inc., in an all-stock transaction valued at about $2.3 billion, including the assumption of debt.

The acquisition will more than double Austin, Texas-based Parsley’s position in the Delaware Basin, where the companies expect the creation of a highly contiguous, interlocking footprint will lead to a more optimized lease geometry with additional extended lateral wells and support further operational efficiencies.

As a result, the combination is expected to generate cash general and administrative savings of about $25 million in the first year and $40 million to $50 million of annual savings thereafter, according to a joint press release from the companies.

Jagged Peak was formed in April 2013 by private-equity firm Quantum Energy Partners before going public in 2017 in one of the rare, non-SPAC IPOs for upstream since the oil market crash of 2014. The Denver-based company holds about 78,000 net acres in the Southern Delaware Basin, the majority of which directly offsets Parsley’s legacy position.

“The inevitable consolidation in the Permian has started and Jagged Peak made a decisive move to team up with the right partner,” S. Wil VanLoh Jr., a Jagged Peak director and the founder and CEO of Quantum Energy Partners, said in a statement on Oct. 14.

On a pro forma basis, Parsley will have roughly 267,000 net acres in the Permian Basin with about 120,000 net acres in the Delaware Basin. Pro forma production for the second quarter is about 178,400 barrels of oil equivalent per day, 65% oil.

Mike Kelly, senior analysts with Seaport Global Securities LLC, said the addition of Jagged Peak Delaware position to Parsley “fits like a glove,” adding that the company’s water assets also add real value.

Jagged Peak has invested nearly $90 million fresh and produced water infrastructure across its acreage position, which is located near existing Parsley water assets.

“For [Parsley], this is a cash flow and valuation accretive deal that significantly ups its Delaware position, which we think possesses the most upside potential across the Permian,” Kelly said in an Oct. 14 research note.

For 2020, Parsley said it is planning for a capex between $1.6 billion and $1.9 billion, which Kelly said is 15% below the sum of the two standalone companies. Pro forma 2020 oil production is pegged between 126,000 and 134,000 barrels per day, only about 2.5% below consensus, Kelly also noted.

Parsley plans to deploy 15 development rigs and four-to-five frac spreads on average in 2020. The company said it anticipates five of its development rigs will operate in the Delaware Basin, where Parsley has seen a material reduction in well costs in 2019.

In particular, Parsley said it expects well cost savings of at least $100 per lateral foot across Jagged Peak’s remaining inventory in the Delaware Basin. Parsley’s current average drilling, completion and equipment cost in the Delaware is about $1,100-$1,150 per lateral foot.

According to VanLoh, the combination of the two companies will represent “one of the most compelling investment vehicles in the Permian” through scale, capital allocation optionality and peer-leading economics.

“We look forward to partnering with the Parsley team as they mature into a Permian pure-play large-cap,” he added in his statement. 

Following the close of the transaction expected in first-quarter 2020, Parsley shareholders will own about 77% of the combined company with Jagged Peak shareholders owning the remaining roughly 23%.

Under the terms of the agreement, Jagged Peak shareholders will receive a fixed exchange ratio of 0.447 shares of Parsley Class A common stock for each share of Jagged Peak stock they own. This represents $7.59 per Jagged Peak share based on Parsley’s closing price on Oct. 11, and a premium of 1.5% compared to Jagged Peak’s 30-day volume-weighted average price, according to the joint release.

Closing of the transaction remains subject to customary closing conditions and regulatory approvals, including approval by both Parsley and Jagged Peak shareholders, though Quantum Energy Partners, Jagged Peak’s majority shareholder, has agreed to vote its shares in favor of the transaction.

In the release, Parsley CEO Matt Gallagher called the acquisition of Jagged Peak a “natural fit.”

“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,” Gallagher said in the Oct. 14 statement. “In short, we now have a premier Delaware Basin business that rivals our foundational Midland Basin business.”

The transaction is Parsley’s first major acquisition since the company’s founder Bryan Sheffield took a step back from the CEO role and Gallagher, formerly president and COO, took the helm earlier this year.

Parsley’s board will be expanded to 11 directors upon closing of the transaction to include two members from the current Jagged Peak board. The combined company will be led by Parsley’s executive management team and will remain headquartered in Austin.

As part of the transaction agreement, Parsley will also assume Jagged Peak’s net debt of about $625 million as of June 30. The company expects it will retain a strong balance sheet with a pro forma net leverage ratio of 1.6-times last 12-month adjusted EBITDA.

Parsley also expects to maintain its dividend per share at current levels in the near term supported by the anticipated free cash flow enhancements from Jagged Peak acquisition.

Tudor, Pickering, Holt & Co. is exclusive financial adviser to Parsley Energy, and Kirkland & Ellis LLP is serving as the company’s legal counsel for the transaction. Citi and RBC Capital Markets LLC are financial advisers to Jagged Peak with Vinson & Elkins LLP serving as its legal counsel.