MKM Bullish On Parsley Energy, Downgrades SRCI Energy

It’s been another difficult year for oil stock investors so far, and one analyst adjusted his ratings on two exploration and production stocks.

The Analyst

MKM Partners analyst John Gerdes downgraded SRC Energy Inc SRCI from Buy to Neutral and lowered his price target from $6 to $5.

Gerdes also initiated coverage of Parsley Energy Inc PE with a Buy rating and $26 target.

The Thesis

The SRC Energy downgrade comes on the heels of the PDC Energy Inc PDCE acquisition of SRC. The PDC acquisition values SRC at about $1.65 billion, or about $3.99 per share. SRC shareholders will receive 0.158 shares of PDC for each share of SRC they have and will assume 38 percent ownership of the combined company.

Gerdes is anticipating 64.5 Mboepd of production in 2019 from PDC Energy, roughly in-line with the midpoint of the company’s guidance.

Gerdes is much more bullish on Parsley, which he said is among the top E&P plays on a full-cycle oil industry return. The company’s cash operating margin is about 30% higher than its peer group average thanks to its 61% oil exposure and its roughly 20% lower per-unit cash expenses, Gerdes said.

“Underpinned by an industry competitive capital intensity, the company generates a 145%-150% full-cycle return versus the industry median cash recycle ratio of 110%-115%,” he wrote in a note.

Given MKM’s 2020 base case price forecasts of $55 WTI oil and $2.55 Henry Hub gas, Parsely shares have more than 60% upside.

Price Action

SRC shares traded higher by 3.6% to $4.81 at time of publication. Parsely shares were up 1.9% at $16.72.

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