PARSLEY ENERGY STOCK ANALYSIS: Permian Basin Dynasty


Like I told you a few weeks ago, I'm going to invest in $CXO soon. I've been looking at the $oil and $natgas companies with operations in the Permian Basin and I've decided that Concho Resources was the best one for its size, the amount of proved reserve it has, the financials and the current valuations. However, there is another company which I like a lot, $PE . Which one is better? Concho Resources is becoming bigger and bigger every year by acquiring new companies. Right now it has a market cap of about $20 Billions and it can compete with giants such as $OXY or $XOM in the Permian Basin. Parsley Energy, on the other hand, is much smaller with only a market cap of $5 Billions, so it won't be able to make any major acquisitions but on its own, it can grow much more than Concho Resources.

Parsley Energy is a rather young company founded in 2008 by Bryan Sheffield, the son of current CEO of $PXD Scott Sheffield. This family has been on the oil business for generations. As far as the company is concerned, only 2.5% of its shares outstanding is owned by Institutional Investors with the largest holders being Vanguard Group and $JPM . According to the father of value investing, Benjamin Graham, when a company is already owned by institutional investors, it is already too late to invest. If you look at companies such as $AAPL or $AMZN, they are owned 60% by institutional investor. Why does this matter? When institutional investors will buy shares of the company, the price will go up so it is better for you to buy before they buy. That's how you beat the market $SPX500 . However, you should also be careful and not invest in any random company just because nobody bought it yet. You should look at the finances.

Parsley energy right now has a book value of about $5.6 B, about the same as the market price. The Enterprise value of the company is about $8.0 B. Analysts like to use EV/EBIDTA to know if oil companies are undervalued, and if you use that metric, you find a value of 6.00 which is lower than its peers. I don't really like this metric so I used discounted cash flows. I calculated the rate at which the company is producing oil and gas today and assumed that they are not going to increase productions until they ran out of all their proved reserves. I assumed that the price of oil will always be around $40 and using the appropriate discount rate, I found out that the company is trading below its intrinsic value. Now, just imagine if oil prices keep increasing and the company keeps increasing production. I'm certainly going to invest in this company very soon.

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