Sanchez Energy (ticker: SN) is as a fast growing independent oil and gas company targeting the liquids-rich Eagle Ford Shale, Pearsall Shale, Austin Chalk, and Buda Limestone plays. During Q1’13, the company increased production by 320% from one year ago to 355 MBOE and 106% from Q4’12 levels of 172.4 MBOE.
Coming off a Q4’12 where the company was below production guidance, Sanchez is producing approximately 6,000 BOEPD, with 7.5 net wells in initial flow back, undergoing completion, or waiting on completion. Prior to the Hess acquisition announcement on March 20, SN had a 2013 exit rate production goal of 8,500 to 9,000 BOEPD. SN since increased its 2013 exit rate goal to 12,500 to 14,500 BOEPD.
Downspacing Doubles Net Drilling Locations
In our write-up titled, Sanchez Energy Corp: A Longview on the Eagle Ford; Reports 2012 Results, we pointed out that downspacing would be an important catalyst for Sanchez. In today’s announcement, SN increased its net potential drilling locations by moving to an average of 50-acre well spacing in both Palmetto and Marquis compared to 80-to-120-acre well spacing at year-end 2012.
Using figures from SN’s March 2013 investor presentation (link), the company has a combined 66,746 net acres in the Palmetto and Marquis areas. Assuming 50-acre spacing across the entire 66,746 acres in Palmetto and Marquis, the company essentially doubled its net drilling locations from approximately 667 net locations to 1,335 net locations attributed to future downspacing in these areas.
Numbers for Clarity – How does Sanchez Stack Up?
The Sanchez Energy growth story is demonstrated by a handful of key operational highlights and positive metrics:
- According to EnerCom’s E&P database of 95 companies, as of April 19, 2013, Sanchez Energy’s Trailing twelve month (TTM) Cash Margin per BOE is $55.26 compared to the 95 company average of $26.58 per BOE;
- The company’s asset intensity, or amount of cash flow needed to keep production flat, is 27%, ranking fifth best out of the 95 company database. As we’ve said previously, this metric will remain a strong point for SN implying a great deal of growth and running room despite a high PUD percentage, which normally is often viewed as a metric establishing the upper limits of growth potential.
- Sanchez’s 3-Year F&D cost is $16.68 per BOE compared to the industry average of $27.48 per BOE;
- The company’s debt-to-market capitalization is 0%.
Final Thoughts on Sanchez
Infrastructure has been a concern for some investors as lack of flow through capacity dampened the company’s fourth quarter 2012 production. Sanchez plans to alleviate the bottlenecks in its operating areas to allow for wells to flow to sales without timely delays. They are proving effective in trying to stay ahead of the curve by doubling their processing and takeaway capacity in the Palmetto area to 20,000 BOPD and 30 MMcf/d in anticipation of production growth during 2013. SN has five Prost wells coming online at an average initial production rate of 1,044 BOEPD and three more wells undergoing or waiting on completion. Because of this, SN is concurrently constructing the gathering system infrastructure to support the existing and future increases in production from its ongoing development program.
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