Heaven for frackers. Bryan Sheffield (left) with father Scott in a
Permian Basin oilfield. (Photo by Scogin Mayo, for Forbes, 2014.)
Amid the carnage of the American oil industry, shares of Parsley Energy have doubled in the past year. How did Bryan Sheffield do it?
Life is pretty good for Bryan Sheffield. From his office in a new
high-rise in downtown Austin, the CEO of Parsley Energy has an expansive
view of the Colorado River. Down below is 6th Street, the heart of
Austin’s legendary live music scene. Considering the depression wracking
the American oil industry, Sheffield, 38, is a little sheepish about
his shiny digs, a carry over from the time of $100 oil.
The last time I saw Sheffield was out in Midland, Texas at Parsley’s original HQ. It was mid 2014 and I was working on a story for Forbes Magazine about how he got his start
in 2008 taking over a bunch of old oil wells in the Permian Basin that
his grandfather Joe Parsley had drilled decades before. Turned out that
Parsley’s wells were smack dab in one of the sweet spots for a thick
layer of oil-bearing rock called the Wolfcamp. It’s just one strata of
dozens within the layer cake of rock under west Texas, but so promising
that in 2014 Parsley raised $900 million in its IPO. Acreage in the
region topped out in 2014 at about $37,000 an acre. When we did that
Forbes story, Sheffield’s shares in Parsley made him nearly a
billionaire.
Of course the industry tumbled from there. So far we’ve seen 75
bankruptcies, $1 trillion in equity value wiped out. American oil
production has slid from 9.6 million barrels per day to 8.9 million, and
falling. Parsley shares tumbled too, from $25 a share soon after the
IPO to $11.50 in December 2014.
But a funny thing happened. Parsley last year showed that it can not
only survive the downturn, but thrive. Bucking all the trends, Parsley
is set to grow its oil and gas production nearly 50% this year to 34,000
barrels per day, with 44,000 bpd possible by the end of 2017. “We are
fortunate, lucky,” says Sheffield. “It comes down to having the best
rock inside the best play in the United States.” Parsley shares have
retraced all their losses to trade at all-time highs. Sheffield owns
38.5 million shares, or about 20% of the company — worth just over $1
billion.
Investors have been throwing money at Parsley and other pure-play
Permian operations because the company has shown that at $45 oil prices
it can generate a 50% rate of return drilling new wells in the Midland
basin (a sub-basin of the bigger Permian). It’s not the only one. The
Permian has emerged as the last man standing. Of course the region has
seen massive layoffs and the mothballing of hundreds of rigs and
fracking crews. But oil volumes out of the Permian have held pretty
flat, levelling off at 2 million bpd.
Of the 400 rigs still drilling in the U.S. (down 75% from 2014), 120 of
them are working the Permian — more than any other region.
Not even dilution has scared off the Permian bulls. Since early 2015
Parsley has sold $1.2 billion worth of new shares and $200 million in
notes in order to fund acquisitions. In two deals last year it acquired
more acreage in its core region for $280 million. And this year it paid
another $640 million in two deals. Sheffield says he’ll keep acquiring
as long as the prices are right. “The market is giving me the money to
enable me to keep making acquisitions,” he says.
Prices for good acreage have bounced back as high as $25,000 in
choice areas. According to Chris Atherton, president of online oilfield
auction site EnergyNet, $1 million would get you between 80 and 125
leasehold acres in the Permian, or roughly 15 barrels per day of flowing
oil production.
Parsley has more than 120,000 net acres in the Midland and south
Delware basins. Its stock market capitalization is $5 billion against
just $500 million in debt. Expected EBITDA this year is about $350
million. “We’re getting the best of both worlds,” says Sheffield. “Oil
is going back up and costs are coming down. Now the operators have the
advantage.” Parsley spends about $5 million to drill and complete each
well, down from $8.5 million. The big savings is in fracking costs, down
by half from the peak. That will go back up if oil prices do. “You can
lock in rigs for 2 to 3 years, but you can’t lock in fracking.” Parsley
expects to invest about $425 million on drilling this year.
Parsley has about 25 years of drilling inventory at its current pace.
That kind of running room could prove appetizing to a bigger oil
company. Those with decades of experience in the region include Chevron CVX +0.13%, Occidental Petroleum OXY +0.00%, Apache APA -1.70% and ExxonMobil XOM +0.25%, which doubled its Permian production last year. There’s also Pioneer Natural Resources PXD -0.52%, which has been run for three decades by Sheffield’s father, Scott Sheffield.
Any of them could be a consolidator of the smaller publicly traded
Permian pure-plays, if they don’t consolidate among themselves.
Sheffield says Parsley benchmarks itself against Diamondback Energy
(Ticker: FANG), RSP Permian (RSPP), and Callon Energy (CPE). Friendly
competition makes them all better operators. “We’re all in the same
area,” says Sheffield. “It holds us accountable.”
All those companies are working hard at deals to acquire prospective acreage. “We’re
trying to swallow the small fish and the minnows,” says Sheffield.
“Exxon is looking at all of us and waiting for us to get bigger and
bigger.”
As the oil market balances, Permian oil output will grow again. A
climb to $75 would be more than enough to rekindle boom times in the
Permian, and maybe overload the market once more. “We’re going to add
rigs again and then the other guys will add rigs again and then we’ll
overshoot,” says Sheffield. “If oil goes back to $65, then it will go
back to $45. The risk is that we overproduce again.
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