Another consolidation in the Permian Basin and another acquisition in our portfolio in a week. Since last year, there has been much consolidation in the Permian Basin, starting with Anadarko Petroleum being bought by Occidental Petroleum (partly financed by Warren Buffett). This year, Chevron (which lost the Anadarko deal) acquired Noble Energy. One of the reasons why I invested in upstream oil and gas stocks in the Permian Basin is that I was looking for these consolidations. Now, Concho Resources is being acquired by ConocoPhillips and Parsley Energy by Pioneer Natural Resources. Parsley Energy will be acquired by Pioneer Natural Resources in an all stock transaction for about $7.6 billion including the debts of Parsley Energy, representing a premium of 7.9%, whereby, each share of Parsley Energy will be converted into 0.1252 shares of Pioneer Natural Resources common stock. The combined company will have a proforma enterprise value of about $23.9 billion.
At current stock prices, the spread on the deal is only about 1%. If we’re looking at the possibility of making money by arbitrage, then we should be bullish on Pioneer Natural Resources and like any other oil company, the stock price is highly correlated with oil prices.
My investment in Parsley Energy dates back to May 2019 and since then, the stock is down 53% underperforming both the S&P 500 and S&P 500 Energy indices.
My cost basis on Parsley Energy is $10.92 and it represents 1.3% of my portfolio, meaning that we will need for the stock price to rise by 12.2% in order for us to break even on the investment. Whether this is possible or not depends on oil prices until the deal is done and the movements of Pioneer Natural Resources stocks. The deal is expected to close in the first quarter of 2021.
I am not going to speculate on short term oil prices. For the time being, I’ll just hold on the stock. If we do have higher oil prices, then, we may make some better returns, otherwise, we will have to accept the loss and move on. Since it is only 1.3% of our portfolio, it won’t be such a big blow. I am also considering making an investment in Pioneer Natural Resources.
In case, the deal doesn’t go though, I’ll still hold Parsley Energy for the long-term as they are a financially strong upstream oil company. Read the full analysis on my Research Partnership: https://ishfaaqpeerally.teachable.com/courses/662813/lectures/25221395
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