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Growth Focused Oil Producers – Taking More Risks?

Parsley Energy recently announced the purchase of 30,000 acres of mineral rights in Pecos and Reeves counties in Texas. This $280 million deal follows their April acquisition of leased acreage in the same counties, extending their position and ownership in the Southern Delaware Basin. Parsley’s current investor deck indicates the investment in this area is a push towards forming a second core growth area apart from their Midland Basin position. And between last month’s leasehold acquisition and the recent mineral rights purchase, Parsley’s investment totaling near a half billion dollars in the Southern Delaware should point to an area of high potential.

The acquired mineral rights are mostly located in the northern part of Pecos County, overlapping with a significant portion of Parsley’s previously leased acreage. While many E&P companies have focused more on growing their leased acreage, Parsley is now looking to increase their overall revenue take per well by purchasing the mineral rights associated with their leased acreage. This will increase their portion of the net revenue from production as there will no longer be a royalty obligation to pay, which, according to the company, has averaged 17.5%. They will also benefit from collecting the royalties from other active producers for the acreage where they now own the mineral rights.

But how does the acreage look when we run a well level analysis on historical production? The first thing that comes to light is the lack of overall activity on the Pecos County side of Parsley’s acreage. Many of the major land grabs in 2016 have been additions to proven acreage near an operator’s current holdings — essentially an expansion of established core areas. However, the majority of Parsley’s Southern Delaware assets are largely unproven and relatively un-drilled compared to other sections of the Permian.

This map shows the historical drilling activity for Parsley Energy (also includes Jagged Peak, an operator who they share a JV with) broken out from the other active producers in the basin. Reeves County has been an area of many large wells in the Permian, but the limited activity in the northern part of Pecos County can clearly be seen. Despite this, the wells that have been drilled by Parsley and Jagged Peak have seen excellent results.

The chart above looks at the average 30-day IP rates for wells drilled since 2015 in a 10 miles radius from Parsley’s Southern Delaware acreage. Parsley’s first horizontal well produced a 30-day average IP of over 1,100 Boe/d on a 4,500’ lateral. Jagged Peak also has strong results in their 4 recent wells, shedding some additional light onto the potential of this play. While further drilling assessment and development needs to be completed, the initial well results by Parsley and Jagged Peak look promising. The mineral rights acquisition gives Parsley a strong position in a play that has potential. Whether or not this move pays off will depend on the development and realized production of the play in the upcoming years.

Half of a billion dollars is a large purchase in this commodity price environment, especially for an area that still needs to be fully appraised and developed. However, the optimism and risk of a big move like this one could be a sign that the industry is moving towards a more growth focused phase of recovery.

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