NOTE 1.

ORGANIZATION AND NATURE OF OPERATIONS

Parsley Energy, Inc. (individually or together with its subsidiaries, as the context requires, the “Company,” “we,” “us,” or “our”) was formed on December 11, 2013, pursuant to the laws of the State of Delaware, as a wholly-owned subsidiary of Parsley Energy, LLC (“Parsley LLC”), a Delaware limited liability company formed on June 11, 2013 and is engaged in the acquisition, development, production, exploration, and sale of crude oil and natural gas properties located primarily in the Permian Basin, which is located in West Texas and Southeastern New Mexico. Concurrent with the formation of Parsley LLC, all of the interest holders of Parsley Energy, L.P. (“Parsley LP”), Parsley Energy Management, LLC (“PEM”) and Parsley Energy Operations, LLC (“Operations”) exchanged their interest in each entity in return for interest in Parsley LLC (the “Exchange”). Prior to the formation of Parsley LLC, 67.8% of Parsley LP, 100% of PEM and 100% of Operations were held by Mr. Bryan Sheffield, Parsley LLC’s President and Chief Executive Officer (“Sheffield”). Subsequent to Parsley LLC’s formation, Sheffield controlled 53.7% of Parsley LLC. As such, as all power and authority to control the core functions of Parsley LP, PEM and Operations were, and continue to be, controlled by Sheffield, the Exchange has been treated as a reorganization of entities under common control and the results of Parsley LP, PEM and Operations have been consolidated and combined for all periods.

Parsley LP was formed on February 29, 2008, as a Texas limited partnership and is primarily engaged in the acquisition, development, production, exploration, and sale of crude oil and natural gas properties located in the Permian Basin in West Texas. On September 9, 2011, Parsley LP formed, and held all of the interest in, Spraberry Energy, LLC (“Spraberry”), a Texas limited liability company. On November 20, 2012, Spraberry merged with and into Parsley LP, thereby terminating Spraberry’s corporate existence.

PEM was formed on February 19, 2008, as a Texas limited liability company and was formed to be the general partner of Parsley LP.

Operations was formed on February 19, 2008, as a Texas limited liability company and is primarily engaged in the operation of crude oil and natural gas properties located in the Permian Basin in West Texas.

Parsley LP also owns a noncontrolling 42.5% investment in Spraberry Production Services LLC (“SPS”). SPS was formed on August 27, 2010, as a Texas limited liability company and is primarily engaged in the oilfield services business servicing properties located in the Permian Basin in West Texas.

Initial Public Offering

On May 29, 2014, the Company completed its initial public offering (the “IPO”) of 57.5 million shares of the Company’s Class A Common Stock, par value $0.01 per share (“Class A Common Stock”), at a price of $18.50 per share. Approximately 7.5 million of the shares were sold by selling stockholders and the Company did not receive any proceeds from the sale of those shares. The remaining approximately 50 million shares of the Company’s Class A Common Stock that were sold resulted in gross proceeds of approximately $924.3 million to the Company and net proceeds, after deducting underwriting discounts and commissions and offering expenses, of approximately $867.8 million. The material terms of the IPO are described in the Company’s final prospectus, dated May 22, 2014 and filed with the Securities and Exchange Commission (“SEC”) pursuant to Rule 424(b)(4) of the Securities Act of 1933, as amended, on May 27, 2014.

A portion of the proceeds from the IPO was used to repay all outstanding borrowings under our amended and restated credit agreement (as amended, the “Revolving Credit Agreement”) with Wells Fargo Bank, National Association, as the administrative agent, to make a cash payment in settlement of the Preferred Return (as defined herein), to fund the OGX Acquisition (as defined herein), and to pay fees and expenses related to the IPO. The remaining proceeds will be used to fund a portion of the Company’s exploration and development program and for general corporate purposes.

Corporate Reorganization

On May 29, 2014, in connection with the IPO, Parsley LLC underwent a corporate reorganization (“Corporate Reorganization”) whereby (a) all of the membership interests (including outstanding incentive units) in Parsley LLC held by its then existing owners (the “Existing Owners”) were converted into a single class of units in Parsley LLC (“PE Units”), (b) certain of the Existing Owners contributed all of their PE Units to the Company in exchange for an equal number of shares of the Company’s Class A Common Stock, (c) certain of the Existing Owners contributed only a portion of their PE Units to the Company in exchange for an equal number of shares of the Company’s Class A Common Stock and continue to own a portion of the PE Units and (d) Parsley Energy Employee Holdings, LLC (“PEEH”), an entity owned by certain of Parsley LLC’s officers and employees that was formed to hold a portion of the incentive units in Parsley LLC, was merged with and into the Company, with the Company surviving the merger and the members of PEEH receiving shares of the Company’s Class A Common Stock. As a result of the above transactions, the Company issued a total of 43.2 million shares of its Class A Common Stock.

Upon completion of the IPO, the Company issued and contributed 32.1 million shares of its Class B Common Stock, par value $0.01 per share (“Class B Common Stock”) and all of the net proceeds of the IPO to Parsley LLC in exchange for 93.2 million PE Units. Parsley LLC distributed to each of the Existing Owners that continued to own PE Units following the Corporate Reorganization and the IPO (collectively, the “PE Unit Holders”), one share of Class B Common Stock for each PE Unit such PE Unit Holder held. After giving effect to these transactions the Company owned an approximate 74.3% interest in Parsley LLC, with the remaining holders of PE Units (the “PE Unitholders”) owning an approximate 25.7% interest in Parsley LLC.

Private Placement of Common Stock

On February 5, 2015, the Company entered into an agreement to sell 14,885,797 shares of its Class A Common Stock, par value $0.01 per share (“Class A Common Stock”), in a private placement (the “Private Placement”) at a price of $15.50 per share to selected institutional investors. The Private Placement closed on February 11, 2015, and resulted in gross proceeds of approximately $230.7 million to the Company and net proceeds, after deducting underwriting discounts and commissions and offering expenses, of approximately $224.0 million. The net proceeds were used to repay a portion of outstanding borrowings under our Revolving Credit Agreement and for general corporate purposes.

Upon completion of the Private Placement, the Company contributed all of the net proceeds to Parsley Energy, LLC (“Parsley LLC”) in exchange for 14,885,797 PE Units. As a result, the Company’s ownership of Parsley LLC increased to 77.2%, with the PE Unit Holders’ ownership of Parsley LLC decreasing to 22.8%.

Pacesetter Drilling, LLC

On April 21, 2015, Operations, established a limited liability company, Pacesetter Drilling, LLC (“Pacesetter”), as a wholly owned subsidiary. On June 15, 2015, Pacesetter entered into an asset purchase agreement with an oilfield drilling company to acquire certain property, equipment, and other assets (the “Pacesetter Acquisition”). The Pacesetter Acquisition was accounted for using the acquisition method under Accounting Standards Codification (“ASC”) Topic 805, “Business Combinations.” Operations and Pacesetter’s President contributed cash in exchange for ownership in Pacesetter. Pacesetter then paid total consideration of $7.0 million for its interest in the purchased assets, of which $4.4 million was allocated to Operations and $2.6 million was allocated to the noncontrolling interest. As a result of the Pacesetter Acquisition, Operations has a 63.0% interest in Pacesetter.

Public Offerings of Common Stock

On September 18, 2015, the Company entered into an agreement to sell 14,950,000 shares of its Class A Common Stock (including 1,950,000 shares issued pursuant to the underwriters’ option to purchase additional shares) at a price of $15.00 per share in an underwritten public offering (the “September Offering”). The September Offering resulted in gross proceeds of approximately $224.3 million to the Company and net proceeds, after deducting underwriting discounts and commissions and offering expenses, of approximately $217.0 million. A portion of the net proceeds was used to repay borrowings outstanding under our Revolving Credit Agreement and the remainder of the net proceeds were used to fund a portion of the Company’s capital program, including acquisitions.

Upon completion of the September Offering, the Company contributed all of the net proceeds to Parsley LLC in exchange for 14,950,000 PE Units. As a result, the Company’s ownership of Parsley LLC increased to 79.4%, with the PE Unit Holders’ ownership of Parsley LLC decreasing to 20.6%.

On December 9, 2015, the Company and NGP X US Holdings, L.P., one of the Company’s stockholders (“NGP”), entered into an agreement to sell 14,202,500 shares of Class A Common Stock, including 12,911,364 shares of Class A Common Stock issued and sold by the Company and 1,291,136 shares of Class A Common Stock sold by NGP, at a price of $18.00 per share in an underwritten public offering (the “December Offering”). On December 10, 2015, the underwriters exercised in full their option to purchase additional shares. The December Offering resulted in gross proceeds of approximately $228.7 million to the Company and net proceeds, after deducting underwriting discounts and commissions and offering expenses, of approximately $228.4 million. A portion of the net proceeds from the offering was used to fund the acquisition of 6,040 gross (5,274 net) acres located in Upton, Reagan and Glasscock Counties, Texas, and the remaining net proceeds were used to fund a portion of the Company’s capital program and for general corporate purposes. The Company did not receive any of the proceeds from the sale of shares by NGP.

Upon completion of the December Offering, the Company contributed all of the net proceeds to Parsley LLC in exchange for 12,911,364 PE Units. As a result, the Company’s ownership of Parsley LLC increased to 81.0%, with the PE Unit Holders’ ownership of Parsley LLC decreasing to 19.0%.