Parsley Energy to buy Jagged Peak in $1.62 billion shale expansion

(Reuters) - U.S. shale producer Parsley Energy Inc PE.N on Monday agreed to buy smaller peer Jagged Peak Energy Inc JAG.N in an all-stock deal valued at $1.62 billion, adding acreage in an oil-rich part of the top U.S. shale basin.

FILE PHOTO: A pump jack on a lease owned by Parsley Energy operates in the Permian Basin near Midland, Texas U.S. August 23, 2018. Picture taken August 23, 2018. REUTERS/Nick Oxford

Shares of Parsley Energy, which was itself seen as a buyout target for some time, fell about 11% to $15.14, the latest oil and gas producer to bear the brunt of investors seeking higher returns, instead of expansion spurred by volatile oil prices.

Jagged Peak’s shares fell 2.6% to $6.64, compared with the offer price of $7.59 per share.

Callon Petroleum Co CPE.N shares tumbled about 15% on July 15, after the company agreed to buy Carrizo. And last month, billionaire investor John Paulson's hedge fund urged Callon to drop the proposed $1.2 billion buyout and instead consider selling itself.

SunTrust Robinson analyst Neal Dingmann said the Parsley-Jagged Peak deal was overall positive, but Parsley’s shares would be pressured by the current investor angst against deals and worries over the timing of the company’s free cash flow among other reasons.

Texas-based Parsley tried to allay some concerns. The company said it expects the “low-premium” deal to immediately add to 2020 cash flow per share, and anticipates the free cash flow enhancements to support future increased return of capital.

The deal, expected to close in the first quarter of 2020, also provides Parsley Energy access to Jagged Peak’s oil and natural gas reserves in the southern Delaware Basin, a part of the Permian shale region.

Parsley said, following the deal, it will have about 267,000 net acres in the Permian, which has emerged as the biggest U.S. oil production area and the second biggest for natural gas.

“Jagged Peak’s oily, high-margin asset base slots in nicely to our returns-focused development approach, its acreage footprint and water infrastructure dovetails into our legacy Delaware Basin position,” Parsley’s Chief Executive Officer Matt Gallagher said in a statement.

The offer of 0.447 shares of Parsley Class A common stock values Jagged Peak at $7.59 per share, based on Parsley’s closing price on Friday. The offer represents a premium of 11.3% to Jagged Peak’s last close.

Including Jagged Peak’s debt of about $625 million as of June 30, the deal is valued at $2.27 billion.

Parsley expects the deal to generate savings of about $25 million in the first year, and $40-$50 million of annual savings thereafter.

Reporting by Arundhati Sarkar and Shradha Singh in Bengaluru; Editing by Sriraj Kalluvila