Sanchez Energy Corp. (ticker: SN) brands itself as a fast growing independent oil and gas company targeting the liquids-rich Eagle Ford Shale, Pearsall Shale, Austin Chalk, and Buda Limestone plays. The company made its initial public offering in December 2011 and since reported rapid development on its Eagle Ford acreage. On January 22, 2013, SN updated investors on its operational progress and we wanted to take a closer look at the company’s growth profile over the last several months.
Sanchez Energy Emerges
Sanchez Energy publicly announced its first operational results during Q4’11. SN’s production as they exited Q4’11 was approximately 1,350 BOEPD. Shortly after its year-end 2011 results news release, SN forecast a 2012 exit rate of 4,000 to 5,000 BOEPD. Here we are 12 months later, and SN’s exited 2012 producing 4,500 BOEPD representing an increase of 233% from its year-end 2011 exit rate. On the reserves front, at year-end 2011, SN reported 6.7 MMBOE in proved reserves. As of year-end 2012, proved reserves increased to 21.2 MMBOE (85% oil), an increase of 216% compared to year-end 2011. We want to point out that 82% of SN’s proved reserves were classified as proved undeveloped (PUDs) at December 31, 2012. In June 2012, approximately 91% of SN’s proved reserves were classified as PUDs.
So in short, from our perspective, Sanchez Energy certainly qualifies as a fast growing independent oil and gas company. The company plans to issue 2013 CAPEX guidance in February 2013. OAG360 notes that SN will be presenting at EnerCom’s The Oil & Services Conference™ 11 on February 19, 2013. You can register to attend, or listen to the webcast at www.theoilandservicesconference.com.
SN will continue its derisking efforts in the Eagle Ford while creating operational efficiencies to reduce costs. Management teams in the Eagle Ford, specifically SN, attribute 3D seismic as the difference maker when it comes to cost reduction. In SN’s Palmetto area, the company had previously been completing wells with 14 to 18 stages. Now, because of 3D seismic data, operators are able to position wells more accurately in order to drill longer laterals and increase frac stages to more than 20. Below, we put together a chart of SN’s operating costs per quarter from Q3’11 through Q3’12. Given SN’s large ramp up in production and operational synergies developed over the last several quarters, we expect costs per unit of production to continue to trend downward for Q4’12 and beyond.
Many operators in the Eagle Ford are experimenting with tighter well spacing and SN is no different. For readers that don’t know, tighter well spacing can result in an increase of net identified drilling locations, proved reserves, and net resource potential. Using 120 acre well spacing, SN currently has approximately 800 net identified potential Eagle Ford drilling locations. Decreasing well density down to just 80 acre well spacing (many operators have confirmed efficiencies at 80 acre spacing) results in an increase of 400 net locations to 1,200 drilling locations. OAG360 notes that operators like Marathon Oil (ticker: MRO) are pilot testing 60 and 40 acre spacing. Back in mid-2012, OAG360 published an article on what tighter well spacing could mean for SN. We are excited to see what operators have to say about downspacing efforts on year-end conference calls.
In addition to derisking the Eagle Ford formation, and testing tighter spacing, SN also has upside opportunities in the Buda Limestone, Austin Chalk, and Pearsall Shale formations which they will drill and test in the second half of 2013.
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