Pioneer Natural Resources (PXD) and Parsley Energy have entered into a definitive agreement under which Pioneer will acquire all of the outstanding shares of Parsley in an all-stock transaction worth approximately $4.5 billion as of October 19, 2020.
Parsley (PE) shareholders will receive a fixed exchange ratio of 0.1252 shares of Pioneer common stock for each share of Parsley stock. The total value for the transaction, inclusive of Parsley debt, is approximately $7.6 billion.
After closing, existing Pioneer shareholders will own 76% of the combined company and existing Parsley shareholders will own 24%. Pioneer will issue approximately 52 million shares of common stock in the transaction.
Scott D. Sheffield, Pioneer’s CEO stated, “This transaction creates an unmatched independent energy company by combining two complementary and premier Permian assets, further strengthening Pioneer’s leadership position within the upstream energy sector.”
This combination is expected to drive annual synergies of $325 million and to be accretive to cash flow per share, free cash flow per share, earnings per share and corporate returns beginning in the first year- with expected cost savings of over $2 billion over a ten-year period.
“The addition of Parsley’s high-quality assets enhances Pioneer’s investment framework by improving our free cash flow profile and strengthening our ability to return capital to shareholders” Sheffield added.
According to the companies, the enhanced cash flow generation should create a more robust free cash flow profile while lowering the reinvestment rate to a range of 65% to 75% at strip pricing.
Together the two companies will have an asset base in the Permian Basin of approximately 930,000 net acres with a production base of 328 thousand barrels of oil per day and 558 thousand barrels oil equivalent per day.
Shares in Pioneer dropped 4% on Tuesday, and 0.75% after-hours. On a year-to-date basis PXD is now trading down almost 45%. However, the stock boasts a bullish Strong Buy Street consensus while the average analyst price target of $121 indicates 45% upside potential lies ahead.
RBC Capital’s Scott Hanold reiterated his buy rating on Pioneer following the news, arguing that the deal represents a ‘slight positive’ for Pioneer based on the stronger free cash flow (FCF).
“We think a primary motivator for the Pioneer Natural Resources and Parsley Energy combination was to enhance the FCF story with scale and cost savings” he explained. Both already had a deep inventory, good balance sheets, and strong hedge books, Hanold noted.
“PXD’s shareholder return framework remains largely unchanged targeting a 10% “total return” to shareholders but this could move higher in 2022+” the analyst added. He sees a combined FCF yield of 8% in 2021 at strip prices with FCF/share up 70%, compared to stand-alone PXD. (See PXD stock analysis on TipRanks)
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