In the continued consolidation of oil and gas producers at a difficult time for the industry, Parsley Energy Inc. announced Monday that it agreed to purchase fellow Permian Basin player Jagged Peak Energy Inc. for $2.27 billion.
The price includes $1.645 billion in stock and $625 million in debt as of June 30.
Analysts had named Jagged Peak as a potential takeout target, including those at Raymond James and Seaport Global Securities last year. Parsley also has been thought of as a target, possibly by Chevron Corp., which lost Anadarko Petroleum to Occidental Petroleum earlier this year.
Seaport senior analyst Mike Kelly said the deal is accretive on financial metrics “that matter,” that their combined positions “fit like a glove” and that the deal’s synergies are “real and significant,” which the firm estimates will boost net asset value by $550 million.
Two of the biggest law firms handling oil and gas deals – Vinson & Elkins and Kirkland & Ellis – worked on the transaction.
Kirkland counseled Austin-based Parsley with a team led by corporate partners Sean Wheeler, Doug Bacon and Kim Hicks with associates Jennifer Singh, Will Mabry and Camille Walker.
Others from Kirkland were capital markets partners Julian Seiguer and Michael Rigdon (Seiguer advised Parsley on several transactions while at V&E, including its $1.1 billion initial public offering); transactional partner Anthony Speier; executive compensation partner Scott Price and associate Laura Gallo; environmental transactions partner Paul Tanaka and associate Jim Dolphin; and tax partner David Wheat.
Kirkland said the transaction marks the 10th public energy M&A deal it has led over the last 12 months despite a tough energy market.
V&E advised Denver-based Jagged Peak, which used the firm for its $474 million IPO in 2017. Partner Steve Gill led the deal team with assistance from associates Alex Robertson, Mariam Boxwala, Madison Guidry, Elizabeth Janicki and Sydney Verner.
Other Texas members of its team were partner Shane Tucker, counsel Dario Mendoza and associate Carolyn Exnicios on executive compensation/benefits; partner John Lynch on tax; partner Sean Becker and associate Peter Goetschel on labor/employment; and senior associate Matt Dobbins and associate Laura Ashdown on environmental.
Senior associate Joclynn Townsend and associate Alicia Vesely advised on energy transactions/projects; partner Guy Gribov and associate Alexander Kamel on finance; and partners Michael Holmes and Craig Zieminski on litigation. Antitrust matters were handled out of its Washington, D.C., office.
Tudor, Pickering, Holt provided financial advice to Parsley, including Travis Nichols and Maynard Holt. Citi assisted Jagged Peak, including Chris Miller, Michael Shelly, Mark Shafir and Serge Tismen. RBC Capital Markets also advised Jagged Peak.
Parsley’s in-house counsel on the deal included general counsel Colin Roberts, senior counsel Matt Hendrix and corporate counsel Justin Hunter.
Roberts joined Parsley in 2013 after working as an associate at Alston & Bird for four-and-a-half years. The University of Kentucky-educated lawyer also was an associate at AlixPartners for two years and a financial accountant at ExxonMobil for two years.
The Stanford Law School-trained Hendrix previously was in private practice at Paul Hastings, Jones Day, Latham & Watkins and O’Melveny & Myers. Hunter, a graduate of BYU Law School, previously was at Vinson & Elkins and a law clerk to now-retired Vice Chancellor John W. Noble of the Delaware Court of Chancery Court who is now at Morris James.
Jagged Peak general counsel Christopher Humber led the deal in-house. He joined the company in 2016 after previously serving as a consultant to the company and others. Before that, the Emory University-trained lawyer was general counsel of Bonanza Creek Energy, working on its 2011 IPO; a partner at Kendall, Koenig & Oelsner in Denver; and an associate at Hogan & Hartson (now Hogan Lovells) in Denver and Arnold & Porter in Washington, D.C. and McLean, Va.
Under the agreement’s terms, Jagged Peak shareholders will receive 0.447 of a share of Parsley stock for each of their shares worth $7.59 per share, which represents a 1.5% premium over Jagged Peak’s 30-day volume weighted average price and 11.2% over its Oct. 11 closing price.
The transaction is expected to close in the first quarter of 2020 if it clears both sets of shareholders and regulators. Houston private equity firm Quantum Energy Partners, which owns 68% of Jagged Peak’s outstanding voting shares, committed to vote in favor of the transaction.
Parsley stockholders will end up with 77% of the combination and Jagged Peak shareholders will hold 23%. Parsley’s board will be expanded to 11 directors to include two members from Jagged Peak’s board. The combined company will be led by Parsley’s executive management team and remain headquartered in Austin.
The companies said most of Jagged Peak’s Delaware Basin acreage directly offsets Parsley’s and that Jagged Peak’s asset base will integrate smoothly into Parsley’s near-term development program.
The transaction will bring Parsley’s Permian position to 267,000 net acres, including 147,000 net acres in the Midland and Delaware basins.
Parsley said it expects the low-premium transaction to boost its financial metrics next year, including cash flow per share, free cash flow per share, cash return on capital invested and net asset value.
The combination is anticipated to generate cash general and administrative savings of around $25 million in the first year and $40 million to $50 million of annual savings after that, translating to a net present value of $250 million to $300 million. Parsley expects the synergy to help expand its margins and enhance corporate free cash flow.
Parsley said other synergies could include capital efficiency gains in the Delaware Basin; the companies’ overlapping acreage and their combined water infrastructure; and cost of capital advantages, including progress toward an investment grade credit profile that could make opportunistic debt refinancing easier.
The companies said the all-stock terms ensure the combination will keep a strong balance sheet while maintaining its dividend per share at current levels in the near term, with the anticipated free cash flow enhancements expected to support increased return of capital in the future. They said that both companies recently added to their 2020 hedge positions and most of the combination’s expected 2020 oil production is subject to hedge protection.
Matt Gallagher, Parsley’s president and CEO, said in the release that the combination was a natural fit, noting that Jagged Peak’s oily, high-margin asset base slots in nicely with its returns-focused development approach, its acreage footprint and water infrastructure.
“In short, we now have a premier Delaware Basin business that rivals our foundational Midland Basin business,” he said. “This transaction also creates tangible synergies that will enhance our corporate free cash flow profile and will be shared by the combined shareholder base.”
Jagged Peak president and CEO Jim Kleckner said the combined assets of Jagged Peak and Parsley will create a stronger combined Permian company, providing its shareholders with top acreage in both the Midland and Delaware sub-basins “while providing additional scale, significant operational synergies and free cash flow in this competitive environment.”
S. Wil VanLoh Jr., founder and CEO of Quantum and a Jagged Peak director, said the inevitable consolidation in the Permian has started and Jagged Peak made a decisive move to team up with the right partner.
“The combination of the two companies will create a unique platform that will benefit from scale, capital allocation optionality and peer-leading economics that we believe will represent one of the most compelling investment vehicles in the Permian,” he said.