In December, Bryan Shef­field, chairman, president and CEO of Parsley Energy Inc. (PE), rang the opening bell at the New York Stock Exchange, even as crude oil prices were slumping dramatically each day. It was an ironic turn of events since the Midland, Texas-based company’s IPO in May 2014, when the industry was soaring, oil rose above $100/bbl and any and all Permian-focused E&Ps were the toast of Wall Street, boasting premium valuations.

Although he may be new to the public arena, this is not Sheffield’s first rodeo. The son of Scott Sheffield, (CEO of Pioneer Natural Resources) and grandson of legendary Midland oilman Joe Parsley of Parker & Parsley fame (a predecessor to Pioneer), as a child, Bryan Sheffield witnessed the toll that the oil cycles took on people, companies, the city of Midland itself.

In fact, Sheffield says he originally didn’t want to be in the oil business. After getting a degree at Southern Methodist University in Dallas, he traded Eurodollars in Chicago, learning a lot about hedging along the way.

But the lure of the legacy was great, and so he returned to Midland, where at the request of his grandfather he took over field management of 109 wells and learned the business firsthand by driving to each location in turn as part of an intense six-month internship at Pioneer. Later, those 109 wells became the basis of his own 2008 startup, Parsley Energy, formed with backing from friends, family, Chambers Energy Partners and Natural Gas Partners.

Bryan Sheffield, chairman, president and CEO of Parsley Energy Inc., is strategizing for the current downturn. "We are asking ourselves, do you really want to drill your flush production that close to the breakeven price?"

Investor: As a third-generation Midland oilman, what outcome do you see for this downturn?

Sheffield: The bottom fell out right when I started this company in 2008, so I’ve seen this before. I’m 36, and I’ve seen this before. The last time, there was a big bounce back a few months later, so I don’t think this will last.

Investor: So you think this will get better soon?

Sheffield: It depends what you mean by better, but I think $60 oil is what we’ll see when we get the bounce back. I don’t think you’ll see $70 or $80 for up to 18 months. We’re fighting more production and we’re a victim of our own success. Everyone—the media and people inside the industry—blames OPEC for this downturn, but it’s really not that, it’s us. We’ve been drilling like madmen out here, so it’s both parties, the shale players and OPEC.

I grew up in Midland, and I saw times when my dad had to cut back jobs at Parker & Parsley in the 1980s; I remember him coming home with an office-full of boxes—I think he was out of a job for a day or two. It was a tough time. Then in the ’90s, he had to cut back every vice president’s salary, and he cut back his own by 40% to send a message. But I don’t think it’s going to be that way this time—the whole world’s changed and there’s so much more demand for oil.

Investor: Despite those experiences, you started Parsley anyway.

Sheffield: As a child I did see those tough times and as a result, I didn’t want to go into the oil business. But being a contract operator is one way to start a company, other than by using private equity. There had been some downspacing over the years, and some of the wells have been plugged, but there was a drilling campaign in the ’80s and ’90s to keep production up. We’ve drilled about 40 wells on those old properties—we’re still a contract operator of those wells—and they are among the 700 wells we operate today as Parsley Energy.

Investor: In light of your initial reluctance, why did you go public?

Sheffield: I didn’t like leverage, but at the same time, I wanted to protect my equity, because we had these great leases under the shallow rights we obtained in north Upton County, so I got “pushed” to add leverage when I was a private company. Then we did a $550-million bond offering before we went public, so we’ve drilled and acquired in the last eight months using that $550 million cash. We were net debt-to-EBITDA zero in May at the IPO, but that has changed as we’ve drilled since then, pulling on the cash. But our revolver is untouched.

Investor: What sort of lessons learned are you drawing on now?

Sheffield: From my observations growing up, I’d say, always be prudent with your balance sheet and maintain flexibility with your leverage—in our case the IPO allowed us to reboot our balance sheet to net debt of zero. You always high-grade your locations and focus on the core—proving up new areas has to take a backseat. You move your rigs to the best areas in the core to get through these times. Prepare your drilling contracts by staggering them and don’t get locked into too many long-term rig contracts. We have some contracts that roll off in May.

The other thing is, focus on costs—that’s all our engineers and drilling superintendents are doing now, looking for ways to decrease drilling and facility costs. I’ve talked to a lot of my competitors and peers, and during the high-commodity-price period we were all so busy focusing on growing production, testing new zones and adding fracturing stages that we didn’t have time to look back as much as we wanted to see what else we could do to improve our projects. We just didn’t have enough people to focus heavily on analyzing LOE and AFE costs. Before, instead of finding ways to drill a well cheaper, we were busy testing zones, optimizing production and getting as many reserves as possible.

That’s why we moved Parsley from Midland to Austin, to be able to hire more people and try to keep up with our growing production. We now have about 75 employees in Austin and 100 in Midland.

Investor: Where are you with respect to guidance for 2015?

Sheffield: It’s a moving target. The board approved a capex number in November before the OPEC meeting, but right after the OPEC meeting I emailed the board members and said we need to relook at that number. I just had to email them again and said, give me two more weeks. Every company is having the same problem … but I think we’re getting close [at press time the company had not released formal 2015 guidance for budget or production].

It’s volatile. We can still grow even with a cutback in rigs; we can preserve our balance sheet and manage our leverage, but it is a balancing act. We have not pulled on our revolver just yet as we had cash on the balance sheet up through December.

Investor: Everyone focuses on the breakeven price today. What are you modeling for your plays?

Sheffield: Between $40 and $45 for the November-December AFE costs, but fortunately we’ve seen service costs come down already 5% to 15%. The service companies are moving faster now in cost reductions than they did in ’08-’09, I think because of what OPEC did and all this buzz in every newspaper about oil falling. We’re modeling a conservative 15% cost reduction for our budget and we’re using $50 oil flat. Two weeks ago we were using $60 flat and four weeks before that, $70 flat. It’s important to be mindful of your leverage profile and liquidity position.

Investor: What kind of returns do you expect?

Sheffield: We are asking ourselves, do you really want to drill your flush production that close to the breakeven price? You might need to fold your arms and wait to see if your costs come down or oil goes back up. It goes back to managing your growth profile.

We were drilling our Wolfcamp horizontals with 60% to 70% returns and now we’re close to breakeven at $40 to $45. If we get a bounce back to $60 oil and a 15% to 25% cost reduction, I believe we’ll see north of 40% returns because we’re in the core of the Wolfcamp-Wolfberry play.

Investor: Luckily, you have some excellent acreage. Your wells are doing better than your type curve and better than many of your peers. Why?

Sheffield: It all goes back to the thickness, depth and thermal maturity that characterize the sweet spot. We’re a proven opportunity—we just rotated last year from being a vertical operator to being a horizontal one. That took us three or four months. In our sweet spot, the Wolfcamp is 2,000 feet thick compared to the fringe areas, and there are six different benches—some operators have mentioned they think you can drill two horizontals in the Wolfcamp B because it’s thick enough. You can call it the Upper B and the Lower B. It makes sense in certain areas and some people are testing it. We have not yet.

We are in the sweet spot in west Reagan, south Midland and north Upton counties, so we’re very fortunate in our zip code. Your best vertical Wolfberry IPs predict where the best horizontals will be for Wolfcamp development. We have hundreds and hundreds of logs from our vertical program, so we know where the sweet spot is and where not to drill—it’s like walking down Park Avenue and you make one wrong turn and you’re not in the elite neighborhood. It’s a large field. These horizontal Wolfcamp wells cost $7.5 million without facilities and without cost reductions—it’s a moving number and it is moving south.

Investor: Is now the right time to do some more bolt-on deals?

Sheffield: You have to always look at deals and be mindful of opportunities, but again, you need to watch your balance sheet while not losing your growth profile. If an opportunity comes about in the core, we do need to look at it, if it helps our growth profile. I hear people predict more distressed sales are coming, but I don’t think there are many distressed companies in the core area; they can manage through this. Now if you’re on the fringe, that’s different. Prices have to change, but it’s going to take a while.

Investor: Meanwhile, you keep improving your assets.

Sheffield: We’ll probably taper back on experimentation, but we’re always tweaking. I don’t see us doing any science projects or downspacing right now, but once things stabilize … downspacing and the Upper and Lower B will be talking points again. General speaking, the trend is more sand, less fluid and tighter frack stage spacing. Longer laterals are primarily a function of the geometry of our lease lines.

Investor: What about your Atoka and Woodford exploration?

Sheffield: We actually mapped the southern Midland Basin around the Central Basin Platform to chase the Penn—the Atoka is inside the Penn. This is another stacked pay area, but it is deeper and highly pressured, so the challenge is costs. We just got the 3-D seismic in a few months ago. We also tested the Woodford and that was productive—but for now we need to focus on our 1,600 locations in the core area of the Midland Basin. We’re going to pound on the core. The majority of our production is from about 500 vertical wells that have lower decline rates than the horizontal wells our peers have.

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