On the heels of the COP-CXO announcement, word leaked out “from sources familiar that asked not to be named” that Pioneer and Parsley were in discussions.  The two Midland based producers have a storied family history (Parsley was founded by Brian, the Chairman of Pioneer’s son, and he remains as Chairman of Parsley) and a core presence in the city.  As you’d expect, therefore, there is some uproar about governance issues with approving this deal but… he/she in glass houses, shouldn’t throw stones and our industry isn’t exactly known for governance.  To me, the deal is either accretive to the acquirer, or it isn’t… and by accretive I mean bolsters the underlying NAV of the company and allows it to cut costs.  Governance or no…. this is about consolidation and accretion.

Let’s start with the position overview, with thanks to ShaleProfile Analytics.

If I’m honest, taking everything else aside, I don’t love this deal and it’s one of the reasons I didn’t think the rumor was “as real” as COP-CXO.  Pioneer has almost 700,000 acres in the Midland basin.  Why does it need 248,000 more, that includes 111,000 in the Delaware and lots of spacing issues and asset quality problems that come from the Jagged Peak deal.  In a #technicaltuesday in January post PE-JAG close, we looked at that deal in more depth, but I didn’t understand why Parsley would have done it (I certainly know why Jagged Peak did it).  Nonetheless, I substantially discount most of the Delaware basin position.  So, what is Pioneer after?

A couple things come to mind:  G&A savings, obviously.  Parsley’s G&A run rate is $156 mm.  And although you could make the case that it’s about a commitment to the city of Midland, in that Pioneer doesn’t want Parsley to be taken over by a company headquartered in Houston, my counter would be that regardless, jobs in Midland will be lost as a result of this transaction.

You could make the point that for Pioneer to do a SMID (small or intermediate cap company) acquisition of a CDEV or Callon, you would want to be set up in the Delaware first.  It’s not a horrible argument, but that’s the role Parsley could play by itself for the next few years.   Taking that argument to the logical conclusion, Pioneer needs chips for trading now that Occidental has it’s arms around Anadarko, Devon will have WPX, Chevron will have Noble, and Conoco will have Concho.  Add the financial distress of QEP and Callon (who should NOT have done the Carrizo deal and should already be apart of Parsley), the bankruptcy of Oasis and their stranded Delaware asset and PDC Energy whose Delaware position stands out like a sore thumb, and maybe the view is that Pioneer needs to have some acreage to trade to help consolidate in and around it’s core position in Midland.  Non op, JV, fringe, PDP…. all things you won’t get value for selling but can trade at appropriate relative value.  A deal for this reason would be surprising, but where there’s smoke… there’s usually fire, so I can’t reject it out of hand.  But personally, it feels like a dilutive strategy for Pioneer.

So to me, the most logical reason to do the deal is as a defense.  Pioneer has one of the best balance sheets in industry and a huge core position in the Midland basin.  For a major with debt and dividend problems, buying Pioneer would likely be extremely accretive.  When the best defense is a good offense, creating shareholder votes, transition issues and integration projects, it might buy Pioneer more time to mount a more sustained defense against it’s own takeover.

Time will tell, but it’s about time companies start consolidating because this is way overdue.