Commenting on Parsley Energy’s acquisition of Jagged Peak Energy, Artem Abramov, head of shale research at Rystad Energy, said:
“The deal implies a WTI oil price of $60 per barrel, which, from a fundamental perspective, suggests that the rather negative initial market reaction may be warranted. Parsley Energy must prove to investors that it is able to integrate the acquired assets into its portfolio, and generate more value than previous indicators have suggested.”
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The acquisition will make Parsley Energy a more diversified Permian company, likely resulting in increased Delaware spending moving forward.
Rystad Energy’s well by well data from ShaleWellCube suggests that the combined company has achieved outstanding production growth over the last four years on a gross operated basis. Operated two-stream output increased from less than 50,000 barrels of oil equivalent per day (boepd) in early 2016 to almost 230,000 boepd in June 2019. The merged company exhibits some of the youngest base production in the Permian Basin, as more than 85% of current output comes from the last three vintages, meaning wells turned-in-line in 2017 to 2019 year-to-date.
“This young base implies steep base decline, and emphasizes the necessity of maintaining robust completion activity to offset decline and achieve continuous production growth,” Abramov added.
The deal price net of debt implies a 15% premium from the mid-point of Jagged Peak Energy’s recent market capitalization. Within a WTI environment between $40 and $70, we estimate the proved developed producing (PDP) value of JAG’s assets at $1.1 billion to $1.9 billion. However, despite offering robust well economics in the context of US onshore, well results in Southern Delaware are not as favorable as in other parts of the basin, such as in Delaware New Mexico, Loving County or Culberson, with its improved gas prices.
“As such, our model suggests very little valuation upside in $40 WTI world, with at least a $60 WTI needed to bring JAG’s fundamental asset value in alignment with the announced deal value,” Abramov observed.
Head of Shale Research
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About Rystad Energy
Rystad Energy is an independent energy research and business intelligence company providing data, tools, analytics and consultancy services to the global energy industry. Our products and services cover energy fundamentals and the global and regional upstream, oilfield services and renewable energy industries, tailored to analysts, managers and executives alike. Rystad Energy’s headquarters are located in Oslo, Norway with offices in London, New York, Houston, Aberdeen, Stavanger, Moscow, Rio de Janeiro, Singapore, Bangalore, Tokyo, Sydney and Dubai.