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Parsley Energy Details First Quarter 2020 Results

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   |    Monday,May 04,2020

Parsley Energy, Inc. reported its Q1 2020 results.

Updated 2020 Outlook

• On March 11, 2020, the World Health Organization declared the novel coronavirus 2019 ("COVID-19") a pandemic. COVID-19 has had a material negative impact on global economic activity and, as a result, has also caused significant global oil demand destruction. This unprecedented decline, combined with recent periods of increased production from foreign oil producers (most notably Saudi Arabia and Russia), resulted in a sharp drop in near-term oil prices.
• In light of this lower commodity price environment, Parsley is revising its baseline capital budget assumption from a $30-$35 WTI oil price to a $20-$30 WTI oil price for the remainder of 2020. In this environment, the Company is reducing its 2020 capital budget to less than $700 million, with reported 1Q20 capital expenditures of $379 million representing more than 50% of this revised full-year budget.
• With regional oil prices recently trading below $20 per barrel, Parsley has suspended all new drilling and completion activity in the near-term. Parsley's future activity plans will continue to be driven by unhedged return profiles.
• Parsley remains committed to free cash flow generation and, in the context of $20-$30 WTI oil prices for the remainder of the year, is now targeting at least $300 million of free cash flow⁽¹⁾ in 2020. In a lower oil price environment, Parsley will adjust as needed to preserve its balance sheet.

Recent Highlights

• Parsley made strides on multiple fronts over the past three months to reinforce the strength of its balance sheet:
• In the first quarter of 2020, Parsley lowered its cost of debt and extended its debt maturity profile by refinancing its outstanding 6.250% senior unsecured notes due 2024 with 4.125% senior unsecured notes due 2028.
• Throughout March, Parsley added to its 2020 and 2021 hedge positions, further insulating the Company's cash flow in the event of a prolonged downturn in oil prices.
• In April, Parsley entered into an amendment to its revolving credit agreement, which reaffirmed its borrowing base at $2.7 billion, increased the elected commitment amount from $1.0 billion to $1.075 billion, and extended the maturity date by two years to October 28, 2023.
• Declared 2Q20 quarterly dividend of $0.05 per share⁽²⁾ payable on June 19, 2020.
• Parsley successfully integrated the assets of Jagged Peak Energy Inc. ("Jagged Peak"), following the acquisition closing on January 10, 2020. Parsley is reaffirming its previously disclosed synergy targets for corporate cost optimization, which were outlined when the transaction was announced in October 2019.
• 1Q20 net oil production increased 41% quarter-over-quarter and 61% year-over-year to 126.6 MBo per day. Total 1Q20 net production averaged 197.0 MBoe per day.

Matt Gallagher, Parsley's President and CEO, said: "In the face of unparalleled global demand destruction, one thing of certainty is that demand will recover from recent lows, but the magnitude and timing are less clear. In these challenging times, we remain focused on controlling what we can control and making sound incremental investment decisions based on the facts at hand. Parsley responded decisively on multiple fronts to adapt to rapidly changing market conditions over the past two months and our company is well built for the endurance test now facing the industry. Parsley's 2020 activity plans will remain flexible, but we remain inflexible in our commitment to allocate incremental capital based on unhedged rates of return in prevailing market conditions. Regardless of the activity scenario we pursue for the remainder of the year, we are committed to generating healthy free cash flow in 2020, exiting the year with a solid balance sheet, ample scale, a shallower oil base decline, and visibility to sustained free cash flow in 2021 and beyond. In short, we will endure with relevance."

Operational Update

During the first quarter of 2020, the Company spud 51 and placed on production 46 gross operated horizontal wells. Parsley's working interest on wells placed on production was approximately 97%, with an average completed lateral length of approximately 9,400 feet. The Company placed on production 28 gross operated horizontal wells in the Midland Basin, with the remainder placed on production in the Delaware Basin.

During January and February, Parsley operated 15 development rigs and five frac spreads before steadily dropping activity throughout March. In April, as a result of regional oil prices trading below $20 per barrel, Parsley temporarily suspended all new drilling and completion operations. Parsley plans to reactivate operations at a stabilized activity level of four-to-five rigs and one-to-two frac spreads when oil market fundamentals are more constructive and in line with Parsley's baseline price assumptions. As a result of these reduced activity levels, Parsley estimates that it will record a charge of approximately $15 million during 2Q20 related to the early termination of certain rig contracts.

In mid-March, Parsley began voluntarily shutting in approximately 400 wells, most of which are vertical wells, for economic reasons. Net oil production associated with these higher per-Boe cost wells was approximately 1-2 MBo per day. In mid-April, Parsley voluntarily shut in several pads that were flaring natural gas, most of which were recently acquired from Jagged Peak in the Delaware Basin. These wells had combined net oil production of approximately 4-5 MBo per day. Throughout the first quarter, Parsley implemented various midstream solutions to mitigate flaring on the recently acquired assets and expects to significantly and more permanently mitigate flaring on these remaining Delaware Basin pads in the coming months.

In addition to the aforementioned shut-ins of 5-7 MBo per day, Parsley expects to voluntarily curtail up to 23 MBo per day of net oil production volumes in May based on near-term regional pricing dynamics. Parsley does not expect to incur any transportation-related deficiency expenses as a result of these temporary production curtailments. Parsley will continue to evaluate its voluntary curtailment level on a regular basis and will adjust production levels quickly and responsibly as market conditions evolve.

Financial Update

Healthy execution in 1Q20 translated to strong performance in key financial measures.

Profitability

During 1Q20, the Company recorded net loss attributable to its stockholders of $3.4 billion, or $9.20 per share. Excluding, on a tax-adjusted basis, certain items that the Company does not view as indicative of its ongoing financial performance, adjusted net income for 1Q20 was $107.2 million, or $0.29 per share.⁽¹⁾

Adjusted earnings before interest, income taxes, depreciation, depletion, amortization, and exploration expense ("Adjusted EBITDAX") for 1Q20 was $457.2 million.⁽¹⁾

As a result of the recent fall in oil prices and Parsley's decision to significantly reduce its near-term development activity plans, the Company recognized a non-cash impairment charge of $4.4 billion for certain proved reserves during 1Q20. In addition, the Company recognized leasehold abandonment and impairment charges associated with unproved oil and natural gas properties of $557 million during 1Q20.

Realized Pricing

During 1Q20, Parsley reported an average unhedged oil price realization of $45.32 per Bbl net of transportation costs, representing a discount of $0.49 to the average WTI Cushing price⁽³⁾ for the quarter.

Operating Costs

During the first quarter of 2020, the Company reported lease operating expense ("LOE") per Boe of $4.11. Parsley expects supplier price reductions, the shut-in of higher per-Boe cost vertical wells, and continued utilization of the Company's integrated water handling system will help offset a decrease in near-term production volumes. However, given ongoing uncertainty relating to commodity prices and the Company's production volumes, which has created a uniquely challenging operating environment, Parsley is temporarily suspending its unit cost guidance.

Both general and administrative expense ("G&A") per Boe and cash based G&A per Boe⁽¹⁾, which excludes stock-based compensation expense, decreased quarter-over-quarter and year-over-year to $2.01 and $1.65, respectively, representing Company-low record levels in each case. Encouraging G&A cost trends are a function of ongoing corporate cost savings initiatives including Executive Vice Presidents and more senior officers electing to reduce their respective 2020 cash compensation by at least 50% when compared to 2019. During 1Q20, Parsley incurred restructuring and other termination costs of $34.8 million and acquisition costs of $14.4 million, largely related to severance agreements, relocation expenses and advisor fees associated with Parsley's acquisition of Jagged Peak. These one-time costs are reported separately from the Company's G&A and cash based G&A. Parsley now expects full-year 2020 cash based G&A of approximately $130 million, a reduction of approximately $35 million versus the midpoints of prior guidance.⁽⁴⁾

Healthy realized oil pricing and continued focus on cost controls drove a strong operating cash margin of $22.34 per Boe, or 72% of the Company's average realized price per Boe.⁽¹⁾

Capital Expenditures

Parsley reported capital expenditures of $379 million during the first quarter of 2020, comprised of $372 million for operated drilling, completion, and equipment activity, and $7 million associated with water infrastructure and non-operated development activity. Parsley is reducing its full-year 2020 capital guidance from less than $1.0 billion to less than $700 million.

Return of Capital Program

Parsley Energy today announced that its Board of Directors declared a quarterly dividend of $0.05 per share.⁽²⁾ The dividend is payable on June 19, 2020, to shareholders of record on June 9, 2020.

Liquidity and Hedging

The Company entered into an amendment to its revolving credit agreement on April 27, 2020, which reaffirmed its borrowing base at $2.7 billion, increased the elected commitment amount from $1.0 billion to $1.075 billion, and extended the maturity date by two years to October 28, 2023. As of March 31, 2020, Parsley had approximately $739 million of liquidity, consisting of $45 million of cash and cash equivalents and an availability of $693 million on the Company's revolver.⁽⁵⁾

In this lower commodity price environment, Parsley proactively managed its hedge position, restructuring its existing 2020 hedge positions to provide additional protection against lower oil prices using swaps and two-way collars. Additionally, Parsley has also moved aggressively to protect its 2021 cash flow by adding swap positions.

The Company now expects net settlement gains of nearly $650 million during 2Q20 through 4Q21 under a go forward $30 WTI oil price and current basis differentials.⁽⁶⁾ This represents an increase of more than $350 million in aggregate downside protection from the Company's hedge position on February 19, 2020. For details on Parsley's hedge position, please see the tables below under Supplemental Information and/or, upon availability, the Company's Quarterly Report on Form 10-Q for the three months ended March 31, 2020.

2020 Guidance

In light of the lower commodity price environment, the Company is reducing its 2020 capital budget to less than $700 million, with reported 1Q20 capital expenditures of $379 million representing more than 50% of this revised full-year budget. Given recent market volatility and ongoing uncertainty, the Company has temporarily suspended its detailed guidance on production, activity and unit costs. For further detail, please see the table below.