What happened

Shares of Parsley Energy (PE) dropped on Tuesday and were down nearly 13% at 10:45 a.m. EST. Fueling the sell-off was the Permian Basin producer's operational update for the fourth quarter and its plans for 2018, neither of which analysts liked.

So what

Parsley Energy said that it produced between 80,000 to 81,000 barrels of oil equivalent per day (BOE/D) during the fourth quarter, which pushed its full-year average to 68,000 BOE/D. That was at the top of the company's guidance range, and up a remarkable 78% from 2016. That said, the company noted that it needed to spend $1.2 billion to achieve this rate, which was more than its guidance for capital spending, which was between $1 billion and $1.15 billion.

A pipeline and an oil pump at sunset.

Image source: Getty Images.

Parsley also said that the higher spending rate would continue in 2018. The company noted that while it initially expected capital spending to be between $1.35 billion and $1.55 billion this year, it now believes it will be at the high end of that range due to the rapid inflation of service and equipment costs. Further, the company noted that despite spending at that the upper end of its budget, oil production would only average 65,000 to 70,000 barrels per day (BPD) this year. While that would be 50% higher than last year, it's slightly less than its preliminary outlook that crude output would average 67,500 to 72,500 BPD this year. Driving the decline was the cold start to the year and the recent sale of some non-core properties.

The announcement that Parsley Energy would spend more and yet produce less fueled a rash of downgrades on Tuesday, with several analysts cutting the stock from bullish ratings such as buy and overweight to more neutral stances like hold or equal weight. Those downgrades are giving investors another reason to bail on the stock.

Now what

On the one hand, Parsley Energy's report is disappointing because its costs are going up while production won't grow quite as fast as anticipated. That said, the driller is expecting output to rise more than 50% this year, which should produce a gusher of cash flow for the company since costs aren't growing as fast as profitability. Because of that, this sell-off could be short-lived if oil prices hold up since that should enable the company to report strong profit growth in the coming quarters.