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.