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UPDATE: Permian producers Parsley Energy, Jagged Peak to merge in $2.27B deal

Permian Basin-focused oil and gas producers Parsley Energy Inc. and Jagged Peak Energy Inc. agreed to merge in an all-stock deal valued at about $2.27 billion.

The merger consideration includes Jagged Peak's net debt of about $625 million as of June 30, according to an Oct. 14 news release.

Under the deal, Jagged Peak shareholders would get 0.447 Parsley class A common share for each Jagged Peak common share held, which represents $7.59 per Jagged Peak share based on Parsley's closing price Oct. 11. Upon closing, Parsley shareholders will hold about 77% of the merged entity, while Jagged Peak shareholders will own about 23%.

As a result of the deal, Parsley's Permian Basin position would be about 267,000 net acres, composed of 147,000 net acres in the Midland Basin and 120,000 net acres in the Delaware Basin. Jagged Peak's high-margin, oil-weighted Delaware Basin asset base would be integrated into Parsley's legacy position.

Parsley aims to achieve well cost savings of at least $100 per lateral foot across Jagged Peak's inventory in the Delaware Basin, the company said. Both producers' overlapping positions in the basin would result in an optimized lease geometry and additional extended lateral wells.

The combined company would also benefit from Jagged Peak's water infrastructure assets near Parsley's existing water infrastructure network.

The merger is expected to generate cash general and administrative savings of $25 million in the first year, increasing to a range of $40 million to $50 million in annual savings in the following years.

Parsley said it expects to maintain its dividend at current levels in the near term. Free cash flow enhancements from the deal would support plans to increase return of capital in the future.

Based on Parsley's preliminary pro forma 2020 outlook, the company estimates capital expenditures to reach $1.6 billion to $1.9 billion, which will result in oil production of 126,000 barrels of oil per day to 134,000 bbl/d in 2020.

"The combined assets of Jagged Peak and Parsley Energy are a great fit that create a stronger combined Permian company," Jagged Peak President and CEO Jim Kleckner said. "The pro-forma company provides our shareholders with premier acreage in both the Midland and Delaware sub-basins, while providing additional scale, significant operational synergies, and free cash flow in this competitive environment."

Parsley's board of directors will also increase to 11 after including two Jagged Peak board members. Parsley's executive team will lead the combined company, whose headquarters will remain in Austin, Texas.

The transaction is subject to closing conditions and regulatory approvals, including approval from the companies' shareholders, but is expected to close in the first quarter of 2020. Private equity firm Quantum Energy Partners LLC, which owns about 68% of the outstanding voting shares of Jagged Peak, has committed to vote to approve the deal.

Tudor Pickering Holt & Co. is serving as financial adviser to Parsley, while Citi and RBC Capital Markets LLC are acting as financial advisers to Jagged Peak.

Kirkland & Ellis LLP is serving as Parsley's legal counsel and Vinson & Elkins LLP is acting as Jagged Peak's legal counsel.