Dallas-based Permian Basin pure-play Pioneer Natural Resources Co. agreed late Tuesday to join forces with competitor Parsley Energy Inc. in an all-stock deal valued at $7.6 billion including debt.

The combined company would hold substantial sway in the Permian, with an estimated 930,000 net acres with no federal leases. At the end of June, the combined production base was 558,000 boe/d, including 328,000 b/d of oil. Based on proved reserves at the end of 2019, the transaction would increase Pioneer’s proved reserves by an estimated 65%.

“This transaction creates an unmatched independent energy company by combining two complementary and premier Permian assets, further strengthening Pioneer’s leadership position within the upstream energy sector,” said Pioneer CEO Scott D. Sheffield. “Parsley’s high quality portfolio in both the Midland and Delaware Basins, when added to Pioneer’s peer-leading asset base, will transform the investing landscape by creating a company of unique scale and quality that results in tangible and durable value for investors.”

The combination is expected to drive annual synergies of $325 million “and to be accretive to cash flow per share, free cash flow per share, earnings per share and corporate returns beginning in the first year, creating an even more compelling investment proposition,” Sheffield said.

“Further, Pioneer’s emphasis on environmental stewardship aligns with Parsley’s culture of sustainable operations. The addition of Parsley’s high quality assets enhances Pioneer’s investment framework by improving our free cash flow profile and strengthening our ability to return capital to shareholders. We look forward to integrating Parsley into Pioneer and continuing our history of strong execution.”

Under the terms of the agreement, Parsley shareholders would trade each of their shares for 0.1252 shares of Pioneer common stock, in a trade valued at $4.5 billion. Pioneer also is assuming Parsley’s debt, putting the total value of the transaction at around $7.6 billion.

The combination, said Parsley CEO Matt Gallagher, would create “an organization set to thrive as we forge a strong new link at the low end of the global cost curve. With neighboring acreage positions located entirely in the low-cost, high-margin Permian Basin, the industrial logic of this transaction is sound.

“Furthermore, the Pioneer team shares our belief that a clear returns-focused mindset is the best tool to compete for capital within the broader market. Sustainable free cash flow and growing return of capital are now investment prerequisites for the energy sector and this combination strengthens those paths for our shareholders.”

The mega deal comes only one day after ConocoPhillips agreed to pay $9.7 billion to buy Permian heavyweight Concho Resources Inc. 

“The inevitable consolidation in the Permian marches on, and I couldn’t think of a better combination of assets than Pioneer and Parsley,” said Quantum Energy Partners CEO S. Wil VanLoh Jr., whose private equity firm is Parsley’s largest shareholder. “This combination will provide Parsley shareholders new structural advantages” that include a lower cost of capital, a stronger balance sheet, economies of scale and enhanced environmental, societal and governance (ESG) capabilities.

Parsley last year acquired Permian pure-play, Jagged Peak Energy Inc., and it has worked since to reduce natural gas flaring from its operations. Both Gallagher and Sheffield have been outspoken advocates to improve ESG capabilities, including reducing gas flaring in the Permian, to improve shareholder value.

The enhanced cash flow generation of the combined company is expected to strengthen Pioneer’s investment framework, lowering the reinvestment rate to 65-75% at strip pricing. Operational savings would be driven by using shared facilities, overlapping operations, scale efficiencies and benefits provided by Pioneer’s water infrastructure in the Permian. 

Further synergies would be realized “from adjacent acreage footprints and the ability to drill extended laterals where lease configurations of the separate companies prevented long-lateral horizontal wells,” Pioneer management said.

“The combined company will continue to aggressively pursue improvements and promote a culture that prioritizes sustainable operations.”

The all-stock transaction constitutes a 7.9% premium to Parsley shareholders based on closing share prices as of Monday (Oct. 19). Pioneer plans to issue 52 million shares of common stock in the transaction. After closing, existing Pioneer shareholders would own 76% of the combined company and existing Parsley shareholders would own 24%.

The transaction, set to be completed early next year, has been unanimously approved by each board. Quantum, which owns 17% of Parsley’s outstanding shares, has executed a voting and support agreement in connection with the transaction.

Once completed, Pioneer’s board would be expanded to 13 to include Gallagher and Parsley’s lead director A.R. Alameddine. Pioneer’s executive management team would lead the combined company with the headquarters remaining in Dallas.

Earlier this month, Pioneer announced it was shuffling its executive team effective Jan. 1 and laying off about 300 people combined as part of a makeover in light of the tighter oil and gas market. The independent in August increased its 2020 oil production guidance by 2.5% to average 203,000-213,000 b/d, even with shut-ins earlier this year. At the time, the company said it would keep about 6,000 b/d shut-in for the foreseeable future because of low oil prices.