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Morningstar | Parsley Is a Midland-Focused Permian Basin Pure Play

Parsley Energy is a midsize Permian Basin pure play, with about 200,000 net acres of leasehold in the Delaware and Midland basins. The latter accounts for roughly three fourths of its total footprint and will attract the lion’s share of the firm’s capital budget during 2019, as it offers more favorable drilling economics. But the substitution of locally sourced sand, coupled with decreasing cycle times, are bringing drilling and completion costs down on the Delaware side, and this asset could feature more heavily in the activity mix. In both areas, Parsley’s acreage is characterized by strong oil cuts, making it one of the most liquid-weighted operators in our upstream coverage.Like most peers, Parsley has gravitated away from growth for growth’s sake and is now prioritizing free cash flows and returns. The 2019 incentive plan includes a component linked to cash returns on capital invested, formally aligning management and shareholder interests. And while the firm does not yet have the ability to fund its capital program organically, management aims to keep the 2019 outspending below $250 million (which is consistent with our forecast). The budget this year was based on a conservative assumption of $50 per barrel for West Texas Intermediate crude, but management has no plans to ramp activity if crude prices remain above that level.In 2017, the strategy was to maximize the value of the firm's acreage by packing as many wells into it as possible (using eight to 16 wells per section per reservoir zone). Tightly spaced wells can interfere with one another, leading to weaker average well performance and reduced capital efficiency. So in the following year, Parsley pivoted to wider spacing, with staggered configurations designed to minimize interference. The impact on well performance was significant—initial production rates trended higher throughout the year. This year, management is further focusing on returns rather than growth, using fewer rigs, increasing proppant loading, and incorporating even wider spacing while focusing on the most lucrative geological zones.