Parsley Energy Announces Third Quarter 2018 Financial And Operating Results

AUSTIN, Texas, Nov. 1, 2018 /PRNewswire/ -- Parsley Energy, Inc. (NYSE: PE) ("Parsley," "Parsley Energy," or the "Company") today announced financial and operating results for the quarter ended September 30, 2018. The Company has posted to its website a presentation that supplements the information in this release.

Third Quarter 2018 Highlights

• Net oil production increased 9% quarter-over-quarter and 56% year-over-year to 73.5 MBo per day. Total net production averaged 116.2 MBoe per day.⁽¹⁾
• Parsley reported an average unhedged oil price realization of $62.78/Bbl net of transportation costs during 3Q18, representing a premium of $7.43/Bbl to the average Midland price⁽²⁾ for the quarter. Parsley also finalized previously announced marketing agreements that will supplement its takeaway capacity in 2019.
• The Company registered favorable trends in capital and operating costs during the third quarter of 2018.
• Operational efficiency and a higher proportion of local sand usage drove a 9% quarter-over-quarter reduction in average drilling and completion cost per lateral foot.
• Both general and administrative expense ("G&A") per Boe and cash based G&A per Boe, which excludes stock-based compensation expense, decreased quarter-over-quarter and year-over-year to $3.51⁽¹⁾ and $3.07⁽¹⁾ respectively, representing Company-record levels in each case.
• Parsley reported lease operating expense ("LOE") per Boe of $3.72, up only slightly versus the peer-leading expense the Company posted in 2Q18.
• Driven by faster drilling and completion operations, Parsley set a new Company record for completed lateral footage in one quarter, placing 46 gross (45 net) operated horizontal wells on production during 3Q18 at an average completed lateral length of approximately 9,400 feet.
• The Company high-graded its acreage portfolio by agreeing to multiple transactions that serve to divest certain acreage in central Reagan County, southern Upton County, and northern Howard County for combined proceeds of approximately $170 million, subject to customary post-closing adjustments.

Summary Comment and Outlook

"Parsley Energy's development program in 2018 has centered on operational continuity, and that focus has made us a more efficient organization," said Bryan Sheffield, Parsley's Chairman and CEO. "Since stabilizing our activity levels 12 months ago, Parsley has built operational momentum while expanding operating margins to Company-record levels. Looking ahead, we intend to keep a disciplined eye on cost control and operational efficiency while maintaining a steady development pace until we are in position to fund incremental activity with operating cash flow. This plan accelerates our progress toward a self-sustaining organic growth model, and at current commodity prices we expect to generate free cash flow by the end of 2019. This is the natural next step in Parsley's corporate evolution, and I am excited that we have assembled the right team to create shareholder value from our extensive inventory of high-quality assets."

Operational Update

Parsley delivered healthy execution across multiple disciplines during the third quarter, highlighted by efficient development operations and the successful pursuit of transactions that streamline the Company's premier Permian Basin acreage position.

Activity Overview

During the third quarter, the Company spud 46 and placed on production 46 gross operated horizontal wells. Parsley's working interest on wells placed on production was approximately 98%, with an average completed lateral length of approximately 9,400 feet. Completion activity was weighted toward the Midland Basin, where the Company placed on production 38 gross operated horizontal wells, with the remainder placed on production in the Delaware Basin. Faster drilling and completion operations translated to a new Company record for completed lateral footage in one quarter despite deliberately reduced equipment utilization as Parsley prioritized adherence to its stated budget. Analogous decisions regarding rig and frac spread utilization may characterize fourth quarter development operations as the Company again intends to emphasize conformity with full-year capital spending expectations.

"We challenged our teams to deliver more footage with the same equipment and they have delivered throughout 2018," said Matt Gallagher, Parsley's President. "The path to strong corporate returns and robust cash flow growth runs through west Texas, and our field personnel are setting the pace for the rest of the organization as we embrace new challenges and objectives."

Acreage Optimization

Parsley recently high-graded the Company's acreage portfolio by agreeing to multiple transactions that serve to divest approximately 11,850 net acres in central Reagan County, southern Upton County, and northern Howard County for combined proceeds of approximately $170 million, subject to customary post-closing adjustments. These transactions include multiple divestitures and a trade through which Parsley exchanged acreage for other acreage and cash. Production on the divested and net traded assets was approximately 1,200 net Boe per day during 3Q18. All sales are expected to close by the end of 2018.

Notable Well Results

Parsley turned six wells to production in Martin County during 3Q18, comprised of two three-well pads targeting the Wolfcamp A and Wolfcamp B zones in a staggered configuration. Early results from these two-mile lateral wells are promising, with peak 30-day production rates averaging approximately 1,500 Boe per day (77% oil). One of these projects registered the Company's strongest 30-day oil rate from a three-well pad to date.

Also in Martin County, Parsley successfully utilized recycled water from its initial recycling pilot program during completion operations on one of the aforementioned pads, with reductions in both water sourcing and disposal costs. Following this successful initiative, Parsley intends to scale up its water recycling efforts on a targeted basis over the next several quarters.

Takeaway Positioning

During 3Q18, Parsley reported an average unhedged oil price realization of $62.78/Bbl net of transportation costs, representing a premium of $7.43/Bbl to the average Midland price⁽²⁾ for the quarter. Parsley's reduced exposure to less favorable Midland basis differentials is the product of a proactive marketing strategy that began diversifying regional pricing exposure nearly 18 months ago. Parsley has also captured recent strength in NGL prices, reporting a 3Q18 NGL realization of $31.26/Bbl, representing a 15% quarter-over-quarter increase.

Parsley finalized previously disclosed marketing agreements with large oil purchasers during 3Q18, supplementing its advantaged takeaway position. These firm transport agreements increase Parsley's crude deliverability during 2019 and maintain favorable pricing elements by pricing a significant portion of the Company's barrels relative to Gulf Coast and international benchmarks.

Financial Update

Healthy execution in 3Q18 translated to strong performance in key financial measures.

Profitability

During 3Q18, the Company recorded net income attributable to its stockholders of $113.3 million, or $0.41 per share, compared to net income attributable to its stockholders of $119.2 million, or $0.44 per share, during 2Q18. 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 3Q18 was $126.2 million, or $0.45 per share, compared to $106.4 million, or $0.39 per share, in 2Q18.⁽³⁾

Adjusted earnings before interest, income taxes, depreciation, depletion, amortization, and exploration expense ("Adjusted EBITDAX") for 3Q18 was $385.0 million, up 13% quarter-over-quarter and up more than 130% when compared to the same measure in 3Q17.⁽³⁾

Operating Costs

Parsley registered favorable trends in operating costs and margins during the third quarter of 2018. The Company reported LOE per Boe of $3.72,⁽¹⁾ up only slightly versus the peer-leading expense the Company posted in 2Q18. Stable LOE costs were driven by expansion of Parsley's cost-effective water management system and lower than anticipated workover activity.

Both G&A per Boe and cash based G&A per Boe, which excludes stock-based compensation expense, decreased quarter-over-quarter and year-over-year to $3.51⁽¹⁾ and $3.07⁽¹⁾ respectively. Encouraging G&A cost trends are a function of ongoing production growth on a stable development pace following a period of increasing development activity.

Strong realized oil and NGL pricing and favorable trends in the aforementioned cash operating costs drove a robust operating cash margin of $37.13 per Boe, or 78% of the Company's average realized price per Boe.⁽³⁾

Capital Expenditures

Parsley reported capital expenditures of $444 million during the quarter, comprised of $383 million for operated drilling and completion activity, $52 million for operated facilities and infrastructure, and $9 million associated with non-operated development activity. The combination of cycle time compression, longer average lateral lengths, and a higher proportion of local sand usage translated to a 9% quarter-over-quarter reduction in average drilling and completion cost per lateral foot during the third quarter.

Liquidity and Hedging

As of September 30, 2018, Parsley had approximately $1.2 billion of liquidity, consisting of $168 million of cash and cash equivalents and an undrawn amount of $991 million on the Company's revolver.⁽⁴⁾ Pro forma for the recently announced divestiture and acreage trade, the Company had approximately $1.3 billion of liquidity, including $333 million of cash and cash equivalents.

Almost all of Parsley's expected 2018 oil production is subject to hedge protection, and the Company recently added to its 2019 and 2020 hedge positions. Parsley's portfolio of option contracts protects its balance sheet and anticipated cash flow while retaining significant exposure to higher commodity prices. The Company has also entered into various basis swaps to protect against expansion of regional oil price differentials. For details on Parsley's hedge position, please see the tables below under Supplemental Information and/or the Company's Quarterly Report on Form 10-Q, upon availability, for the three months ended September 30, 2018.

Conference Call Information

Parsley Energy will host a conference call and webcast to discuss its results for the third quarter of 2018 on Friday, November 2 at 9:00 a.m. Eastern Time (8:00 a.m. Central Time). Participants should call 877-709-8150 (United States/Canada) or 201-689-8354 (International) 10 minutes before the scheduled time and request the Parsley Energy conference call. A telephone replay will be available shortly after the call through November 9 by dialing 877-660-6853 (United States/Canada) or 201-612-7415 (International). Conference ID: 13684065. A live broadcast will also be available on the internet at www.parsleyenergy.com under the "Events & Presentations" section of the website. The Company has also posted to its website a presentation that supplements the information in this release.

About Parsley Energy, Inc.

Parsley Energy, Inc. is an independent oil and natural gas company focused on the acquisition and development of unconventional oil and natural gas reserves in the Permian Basin in West Texas. For more information, visit the Company's website at www.parsleyenergy.com.

Forward Looking Statements

Certain statements contained in this news release constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements represent Parsley Energy's expectations or beliefs concerning future events, and it is possible that the results described in this news release will not be achieved. These forward-looking statements are subject to risks, uncertainties and other factors, many of which are outside of Parsley Energy's control, which could cause actual results to differ materially from the results discussed in the forward-looking statements. Any forward-looking statement speaks only as of the date on which it is made, and, except as required by law, Parsley Energy does not undertake any obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. New factors emerge from time to time, and it is not possible for Parsley Energy to predict all such factors. When considering these forward-looking statements, you should keep in mind the risk factors and other cautionary statements found in the Company's filings with the SEC, including its Annual Report on Form 10-K. The risk factors and other factors noted in the Company's SEC filings could cause its actual results to differ materially from those contained in any forward-looking statement.

Reconciliation of Non-GAAP Financial Measures

Adjusted EBITDAX

Adjusted EBITDAX is not a measure of net income as determined by GAAP. Adjusted EBITDAX is a supplemental non-GAAP financial measure that is used by management and external users of the Company's consolidated financial statements, such as industry analysts, investors, lenders and rating agencies. The Company defines Adjusted EBITDAX as net income (loss) before depreciation, depletion and amortization, exploration and abandonment costs, net interest expense, interest income, income tax expense (benefit), change in Tax Receivable Agreement ("TRA") liability, stock-based compensation, acquisition costs, idle charges, (gain) loss on sale of property, asset retirement obligation accretion expense, loss on early extinguishment of debt, inventory write down, (gain) loss on derivatives, net settlements on derivative instruments and net premiums on options that settled during the period.

Management believes Adjusted EBITDAX is useful because it allows the Company to more effectively evaluate its operating performance and compare the results of its operations from period to period without regard to its financing methods or capital structure. The Company excludes the items listed above from net income in arriving at Adjusted EBITDAX because these amounts can vary substantially from company to company within its industry depending upon accounting methods and book values of assets, capital structures, and the method by which the assets were acquired. Adjusted EBITDAX should not be considered as an alternative to, or more meaningful than, net income as determined in accordance with GAAP or as an indicator of the Company's operating performance. Certain items excluded from Adjusted EBITDAX are significant components in understanding and assessing a company's financial performance, such as a company's cost of capital and tax structure, as well as the historic costs of depreciable assets, none of which are components of Adjusted EBITDAX. The Company's computations of Adjusted EBITDAX may not be comparable to other similarly titled measure of other companies. The Company believes that Adjusted EBITDAX is a widely followed measure of operating performance.

The following table presents a reconciliation of Adjusted EBITDAX to the GAAP financial measure of net (loss) income for each of the periods indicated.

Operating Cash Margin

The Company defines operating cash margin as net income (loss) before income tax expense (benefit), other revenues, depreciation, depletion and amortization, exploration and abandonment costs, stock-based compensation, acquisition costs, asset retirement obligation accretion expense, other operating expenses, net interest expense, (gain) loss on sale of property, prepayment premium on extinguished debt, derivative (gain) loss, change in TRA liability, interest income, and other (income) expense. Operating cash margin is not a measure of operating income as determined by GAAP. The amounts included in the calculations of operating cash margin were computed in accordance with GAAP. Operating cash margin is presented herein and reconciled to the GAAP measure of net income attributable to Parsley Energy, Inc. stockholders. The Company uses operating cash margin as an indicator of the Company's profitability and ability to manage its operating income. This measure is provided in addition to, and not as an alternative for, and should be read in conjunction with, the information contained in the Company's condensed consolidated financial statements prepared in accordance with GAAP (including the notes), included in its SEC filings and posted on its website. The following table provides a reconciliation of operating cash margin to net income attributable to Parsley Energy, Inc. stockholders.

Adjusted Net Income

Adjusted net income is not a measure of net income determined in accordance with GAAP. Adjusted net income is a supplemental non-GAAP performance measure used by the Company's management to evaluate financial performance, prior to non-cash gains or losses on derivatives, net cash received for derivative settlements, net premiums received on options that settled during the period, (gain) loss on sale of property, exploration and abandonment costs, acquisition costs, idle charges, loss on early extinguishment of debt, and change in TRA liability, while adjusting for noncontrolling interest and the associated changes in estimated income tax. Management believes adjusted net income is useful because it may enhance investors' ability to assess Parsley's historical and future financial performance. Adjusted net income should not be considered an alternative to, or more meaningful than, consolidated net income, operating income, or any other measure of financial performance presented in accordance with GAAP. The following table presents a reconciliation of the non-GAAP financial measure of adjusted net income to the GAAP financial measure of net income (loss).

Supplemental Information

Impact of ASC 606 Adoption

Parsley adopted ASC 606 effective January 1, 2018 using the modified retrospective approach. As a result, the Company changed its accounting policy for revenue recognition, which resulted in the following adjustments: