Sanchez Energy Corporation (ticker: SN) is a Houston, Texas, based growth oriented independent exploration and production company focused on the exploration, acquisition, and development of oil resources in the onshore U.S. Gulf Coast with a current focus on the liquids-rich Eagle Ford Shale, Austin Chalk, Buda Limestone, and Pearsall Shale.
Sanchez Energy reported its Q3’13 results on November 7, 2013. A company record of 1.1 MMBOE (11.8 MBOEPD) was produced in the quarter, a 54% increase compared to Q2’13. Current production is 16.5 MBOEPD with crude oil accounting for roughly 76%, and an additional 15 to 20 wells will be brought online in Q4’13. Revenue totaled $94 million and adjusted EBITDA was $63.8 million, increases of 59% and 48%, respectively, compared to Q2’13. Adjusted net income attributable to common stockholders as was $13.6 million, an increase of 134% compared to Q2’13.
Production in 2014 Expected to Double Due to Eagle Ford Operations
SN expects 2014 overall production to double due to the wells nearing completion. A total of 32 wells (15 operated) were completed in Q3’13 and 23 new wells (15 operated) were drilled in the quarter. Nine gross drilling rigs (four operated) are currently active, all in the Eagle Ford, and 20 wells are in completion or flow-back.
Sanchez currently has 19 wells in various stages of completion across three different areas in the Eagle Ford. Testing is underway on 40-acre spacing pilots and SN expects to add drilling inventory locations based on initial results. On its Q3’13 conference call, SN described its well development approach as “cautious” in comparison to its competitors by using restricted chokes and enhanced well research. The chokes allow for more consistent numbers and reliable flowing pressures, while increased geographical knowledge narrows down completion costs.
Eagle Ford Q3’13 Results
Despite the conservative approach, Sanchez’s five completed wells in the Marquis have provided initial production rates of 1 MBOPD with a 30-day rate of 600 BOEPD. SN plans to step out wells and receive results as early as Q1’14 through the four rigs (three operated) in the region.
Q3’13 Results by Play
Sanchez shares its Palmetto assets (50% WI) with Marathon Oil (ticker: MRO) as the operator, and 16 new wells were completed and brought online in Q3’13. An additional eight wells will be brought online in Q4’14. MRO is using two rigs to develop six-well groupings, and initial production rates of 1,026 BOPD have prompted discussions of developing the southern portion of the play.
In the Cottulla-Maverick, the first two well 40-acre pilot tests have been completed and a total of three wells are in stages of completion. Its Wycross acreage holds one active SN rig and the completion of another two-well pilot at a different location is expected in December 2013. Original plans of 60-acre spacing has been increased to 40-acre spacing after the pilot performed above expectations with an 80-day average rate of 550 BOPD
Tuscaloosa Marine Shale Operations
The 2014 program for the Tuscaloosa Marine Shale (TMS) is being planned and will likely include participation in several non-operated wells. Sanchez said in the conference call that the operating program will be a focal point in Q1’14, even though they will probably always participate as a non-operator in the play. The majority of SN’s leases in the region are held by production, which allows for ample time to research the area. Sanchez expects the approach to be similar to their plan in the Eagle Ford in 2011. Like the Eagle Ford, well costs for TMS are expected to drop once the development program progresses. Pad drilling, program continuity and downspacing contributed to a decrease in well price to $9 million from $15 million in the Eagle Ford.
2014 Guidance: Company Expects to Spud Up to 80 Net Wells
SN’s is in line with its 2013 operating capital of $470 million, with a year-to-date total of $296 million. Approximately $186 was spent before acquisitions. Adjusted EBITDA attributable to shareholders rose to $64 million, up from $43 million in Q2’13, after SN issued 11 million shares at $23 per share.
Sanchez’s 2014 preliminary operating capital program is approximately $700 million, and calls to spud 75 to 80 net wells by using approximately five net rigs. Roughly 95% of the program will be directed to the drilling in completion in wells, resulting in 2014 production expected to increase more than 100% over full-year 2013 production. Cost structure guidance for the year has not been provided, but per unit cash for general administration and expense is expected to be between $4 and $6 per barrel in 2014.
SN mentioned in the conference call they are not aggressively pursuing the acquisition of acreage, and its partnership with Abraxas Petroleum in the Wycross is consistent and not expected to change. SN plans to release inventory wells added by its 40-acre downspacing campaigns its year-end 2013 conference call.
Oil & Gas 360® compiled a few paragraphs from research analysts who wrote on Sanchez Energy following the announcement. OAG360 suggests that you contact the analyst and/or salesperson to receive a complete copy of the report. Please read the important disclosures at the end of this note.
Stifel Note – 11.7.13
Well Positioned Eagle Ford Player
3Q Earnings Summary: 3Q13 EPS and EBITDA of $0.36 and $63.8 million compared to Street consensus of $0.0.35 and $63.6 million and our estimate of $0.43 and $67.4 million. EPS fell short of our estimates on G&A (+38%) and interest expense (+71%). The 3Q13 operating margin of $73.02//Boe was near our forecast of $73.38/Boe.
4Q13 Production Projected at High End: Pre-released (10/24/13) production of 11.8 MBoe/d, which increased 54% from 2Q13, was near the high end of guidance of 11.0 to 12.0 MBoe/d. Likewise, management expects 4Q13 volumes to be near the high end of its 15 to 17 MBoe range, which suggests our estimate of 16.3 MBoe/d could be conservative. Management also reiterated 2014 production growth guidance of more than 100%.
Strong Liquidity: Liquidity was $665 million at September 30, 2013 consisting of $175 million in undrawn revolving credit capacity and $490 million in cash. Cash and liquidity were reduced to $270 million and $445 million in October following the close of the Wycross acquisition from Rock Oil (private). Sanchez anticipates a significant increase to its revolving credit line when the borrowing base is redetermined in 4Q13.
Operations Update Light: The operations update consisted of a well and rig count by area within the Eagle Ford. Sanchez currently has 160 gross producing Eagle Ford wells and 20 more in various stages of completion. The company currently has 9 rigs (4 operated) running in the play.
Neutral Release: While Sanchez had a strong 3Q13, this release is neutral with little new information. We look for management to discuss recent well results, including some increased density pilots, and additional details on its 2014 plans, including Tuscaloosa Marine Shale activity.
Valuation: Our target price assumes the stock’s maintains a 26% discount to our projected price/NAV and EV/2014E EBITDA group multiples narrows to 15%.
Oil and Gas Prices: Our NAV estimate of $27/share declines to $9/share assuming a long-term NYMEX natural oil price of $60/Bl compared to our $90/Bl assumption. On the other hand, our estimate only declines $3/share to $25/share based on a long term natural gas price of $3/MMBtu, compared to our long-term forecast of $5/MMBtu.
Reserve Uncertainty: The company’s Palmetto Eagle Ford wells have been producing for less than two years, while our reserve estimates assume more than 30 years of future production. Actual production could deviate significantly from our forecasts and cause us to lower our NAV estimates.
Regulatory/Environmental Risks: Potential unfavorable legislation affecting fracture stimulation or other regulatory or environmental issues could delay development and increase costs.
Concentrated Asset Base: Regulatory issues, infrastructure constraints, or shortages of oil field services or equipment that impact the Eagle Ford could have an adverse effect on the stock.
SunTrust Robinson Humphrey Note – 11.7.13
Big 2014 Production Growth Expected
Sanchez beat STRH 3Q estimates as production topped forecasts and G&A expenses came in lower than expected. Though no specific well data given, production is expected to remain strong more than doubling next year sequentially. Stock should outperform on the beat and positive guidance.
3Q13 Earnings Recap
- Recurring EPS of $0.36 versus STRH $0.32E and Street consensus $0.36.
- Production of 11,773 Boe/d versus STRH 10,789e Boe/d and Street consensus 11,547e Boe/d.
- Blended liquids price of $97.22/Bbl versus STRH $94.20/Bbl estimate.
- Natural gas price of $3.94 versus STRH $3.06 estimate.
- CAPEX of $293mm (including $107mm acquisition) versus STRH $175mm estimate; $665mm liquidity
- 6 net Eagle Ford rigs currently running.
- Reaffirm total 2014 production guidance to more than double 2014.
- 76% of production oil, 14% natural gas and 10% NGLs during 3Q13.
- Forming multiple drilling units in the TMS in preparation for the 2014 operated drilling plan though a number of non-operated wells are likely to be completed first.
- Expect to take Wycross acquisition over on or before January 1.
- Entered into additional hedges including those in 2015 also.
Simmons Note – 11.7.13
Sanchez Energy (SN – $27.84/sh – Overweight) 3Q’13 Earnings Quick Look.
SCI estimates SN’s 3Q adjusted eps at 26c which is below both SCI and the Street at 33c and 36c, respectively.
The miss relative to our estimates was driven by higher costs (LOE, G&A and DD&A) and weaker pricing realizations across the board.
3Q production of 11.8 MBoe/d was previously reported on 10/24 and thus caused no variance to our model. Pre-released production came in near the high end of company guidance of 11-12 MBoe/d.
The operations update was light with specifics given that SN provided a comprehensive operations update as part of its 10/24 press release. However, management is now stating that it believes 4Q production volumes are on track to come in at or near the high end of the company’s unchanged 15-17 MBoe/d guidance range. Current production (before considering production shut-in for offset operations) is 16.5 MBoe/d which implies that our current 4Q production estimate of 15.5 MBoe/d is biased higher.
Management reiterated its belief that ’14 production should more than double vs. ’13 production.
All in, with little positive incremental news flow outside of strong pre–reported 3Q production volumes, coupled with a 6% EBITDA miss relative to our estimates for the quarter, we would not be surprised to see the shares take a bit of a breather tomorrow. However, we believe commentary surrounding the prospect for strong 4Q production at or near the high end of guidance is indicative of the quality of the company’s Eagle Ford asset base and should be the focal point in this release.
YTD SN is 58% vs. the EPX up 26%.
Johnson Rice & Company Note – 11.7.13
Sanchez’ operating commentary was better than expected on its conference call, with its downspacing tests pointing to 40-acre spacing across most of its acreage and stong production rates at Marquis rivaling those at Palmetto. In addition, the increased rig count at Marquis should allow for signficant de-risking of the southern extension of Prost and its recently Five-Mile Creek acreage. With its capital spending budgets remaining unchanged and recent debt/equity offerings funding its activity beyond 2014, Sanchez remains on track to more than double its production in 2014.
Downspacing – Sanchez currently has 40-acre downspacing tests ongoing in three of its operating areas at Palmetto, Marquis, and Cotulla (Alexander Ranch), and results thus far suggest that denser drilling will be required to adequately develop the assets. Of the different areas, Palmetto has the most production history from four 40-acre pilot wells being on-line for more than 120 days and performing in-line with wells drilled on 60-acre spacing. Based on the peformance of the five-well pilot test Sanchez believes 40-acre spacing is the appropriate density on which to develop the southern part of Palmetto. At Cotulla, the Company has drilled two 40-acre pilot tests at Cotulla with initial rates in line with the Company’s forecast, however, Sanchez noted the wells had produced less than 30 days. On the newly acquired Wycross acreage, Sanchez now plans to develop the asset on 40-acre spacing (vs. previous 60-acre assumption) based on successful testing of 40-acre spacing on a two well pilot that produced in-line with other wells on the asset and averaged 550 boed over the first 80 days online. Downspacing to 40-acres across these areas should allow Sanchez to add numerous locations to their drilling inventory and organically grow production and reserves.
Controlled flowback is key – In addition to resource expansion, Sanchez is focused on producing its wells utilizing “controlled flowback”. This technique is employed by intentionally choking back initial production rates to minimize pressure drawdown which is expected to maintain higher reservoir pressure and maximize oil recovery. After testing different methods over the past year, Sanchez believes the optimal strategy at this time is to produce its wells at a restricted rate (14/64”) initially and then open up the choke to the appropriate long term size over 20-30 days.
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