Sanchez Energy Corp. (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. The company’s recent Cotulla acquisition back in March 2013 meaningfully expanded SN’s Eagle Ford inventory translating into greater production and reserve growth and increased capital spending.
A Recap of the Cotulla Acquisition
On March 19, 2013, SN announced its purchase of 43,000 net acres from Hess Corp. (ticker: HES) for $265 million. Pro forma, the transaction increases SN’s acreage position in the Eagle Ford to 138,000 net acres and boosts production to approximately 8,300 BOEPD (using average production from the first two months of 2013).The acquisition more than doubled SN’s production by adding 4,500 BOEPD at a cost of $59,000 per flowing BOEPD; increased SN’s proved reserves 63% by adding 13.4 MMBOE of proved reserves at $19.70 per BOE; and added 50 gross producing wells for a new total of 84 gross producing wells.
Current Pro Forma Snapshot of Sanchez
During May 2013, SN’s average production was 12,200 BOEPD, an increase of more than 200% over its average Q1’13 production rate of 3,943 BOEPD. This represents 200 BOEPD more than SN initially guided after the acquisition. As of June 3, 2013, SN’s current proved reserves, pro-forma for the acquired Cotulla assets, were 36.3 MMBOE (87% liquids), with a PV-10 of $734 million. At the time of posting, SN’s market capitalization was approximately $715 million.
Adding Three Rigs to Eagle Ford Operations – Six Total Rigs now Running
With an increase in running room in one of the most sought after plays in the lower 48, SN increased its spending plans and production outlook. Sanchez will now spend $475 million during 2013, an increase of $128 million, or 37%. This 37% increase will fund an additional three rigs in the Eagle Ford bringing the total amount of rigs working for SN to six. Instead of drilling 33.5 net (46 gross) wells during 2013 as previously planned, SN will now drill 46.7 net (65 gross) wells. With the additional three rigs working, SN increased its 2013 exit production guidance to range between 15,000 BOEPT to 17,000 BOEPD and 2014 exit guidance to range between 20,000 BOEPD to 22,000 BOEPD.
Funding the Additional Output
On June 3, 2013, SN issued $350 million worth of senior notes due 2021. Proceeds will be used to repay $96 million outstanding on its revolving credit facility, pay down the remaining $50 million on its second lien term loan, and for general corporate purposes. Assuming SN’s total debt position is $350 million after the use of proceeds, the company’s debt to market capitalization is 49% – in-line with EnerCom’s database median of 89 E&P companies.
Downspacing. SN completed down spacing tests late in 2012, assuring the company it can reduce its well spacing from 80 acres to 60 acres. SN is carrying out additional tests and evaluating supplementary reductions to 40-acre spacing on a five well pad. We are not assuming this new acreage position is viable for 60 to 40 acre spacing; however, doing the simple math – the 43,000 net acres bought from Hess has been developed on 860 acres per well. We would expect the company could significantly add to its inventory given additional development on any tighter spacing. Most operators in the Eagle Ford are developing on 80 acre spacing.
Infrastructure. An important catalyst to continue to follow is SN’s infrastructure improvements and build outs are expected to be completed by late Q2’13. SN still expects to spend $40 million of its total CAPEX budget on facilitates, leasing and seismic. The plan is to alleviate the bottlenecks in the area to allow for wells to flow to sales without timely delays. In anticipation of this expected growth in production, SN is doubling its processing and takeaway capacity in Palmetto to 20,000 BOPD and 30 MMcf/d. In Marquis, with five recent Prost wells coming online at an average IP rate of 1,044 BOE/d and additional wells undergoing or waiting on completion, SN is concurrently constructing the gathering system infrastructure to support the existing and future increases in production from the ongoing development program. Additionally, SN expects to deploy a second rig in the Prost area in June 2013. As a result, SN hopes to take completed wells from flow back to sales, including gas, in a very short period of time.
[sam_ad id=”32″ codes=”true”]
Important disclosures: The information provided herein is believed to be reliable; however, EnerCom, Inc. makes no representation or warranty as to its completeness or accuracy. EnerCom’s conclusions are based upon information gathered from sources deemed to be reliable. This note is not intended as an offer or solicitation for the purchase or sale of any security or financial instrument of any company mentioned in this note. This note was prepared for general circulation and does not provide investment recommendations specific to individual investors. All readers of the note must make their own investment decisions based upon their specific investment objectives and financial situation utilizing their own financial advisors as they deem necessary. Investors should consider a company’s entire financial and operational structure in making any investment decisions. Past performance of any company discussed in this note should not be taken as an indication or guarantee of future results. EnerCom is a multi-disciplined management consulting services firm that regularly intends to seek business, or currently may be undertaking business, with companies covered on Oil & Gas 360®, and thereby seeks to receive compensation from these companies for its services. In addition, EnerCom, or its principals or employees, may have an economic interest in any of these companies. As a result, readers of EnerCom’s Oil & Gas 360® should be aware that the firm may have a conflict of interest that could affect the objectivity of this note. The company or companies covered in this note did not review the note prior to publication. EnerCom, or its principals or employees, may have an economic interest in any of the companies covered in this report or on Oil & Gas 360®. As a result, readers of EnerCom’s reports or Oil & Gas 360® should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. As of the report date, neither EnerCom nor any of its employees has a financial interest in any equity or debt of any company mentioned in this report.