Sanchez Energy Corporation (NYSE: SN) is a fast growing independent oil and gas company focused on the liquids rich Eagle Ford formation in South Texas. Assuming 120-acre spacing, Sanchez has approximately 750 economic drilling locations on its 92,000 net acreage position in the Eagle Ford. This is among the larger positions, if not the largest, among similarly-sized companies.
The company made its entrance into the market in December 2011, with its initial public offering, and for the first time, on March 28, 2012, the company reported operational and financial results for the period ended December 31, 2012.
For the full-year 2011, SN reported net income of $2.0 million, or $0.09 per share, compared to a net loss of $2.8 million, or a loss of $0.12 per share, for the same period in 2010. Revenues for the year totaled $14.5 million, an increase of 219% from 2010 levels. Production volumes were 173,710 BOE, an increase of 184% compared to 2010. Sanchez exited 2011 producing 1,350 BOEPD.
Adjusted EBITDA for 2011 was $6.7 million, $8.0 million more than the Adjusted EBITDA loss of $1.3 million in 2010. For the fourth quarter, adjusted EBITDA increased 40% to $2.1 million, compared to the same period in 2010.
Clearly the highlight for the year was Sanchez’s initial public offering. SN raised $203.3 million in proceeds by issuing 10 million shares, creating one of the largest, pure play Eagle Ford oil-focused public companies. At the time of posting this article, Sanchez had a market capitalization of $752 million and was trading at $22.81 per share. The stock hit a low of $16.96 during trading on January 13, 2012, but rallied to as much as $25.23 per share during trading on February 24, 2012.
OAG360 notes that the company ended the year with proved reserves of 6.7 MMBOE, a 117% increase from 2010, and an associated PV-10 value of $152.4 million. From 2010 to 2011, the company grew production by 184% by only drilling and completing two net wells. Given SN’s 2011 exit rate of 1,350 BOEPD, and PV-10 of $152.4 million, investors clearly perceive long-term value in the company’s Eagle Ford position, and the management team’s ability to successfully drill and complete wells that will ultimately translate into increasing production and reserves.
2012 – A Year of Organic Growth
The company currently has three rigs running across its three core areas in the Eagle Ford Shale (one in each): Maverick, Palmetto and Marquis. SN plans to spend $126 million to $144 million of its $136 to $144 million 2012 CAPEX budget to drill and complete 16.5 net wells.
In Palmetto, the company’s 50/50 joint-venture with Marathon (NYSE: MRO) commenced the first of 13 (6.5 net) wells planned for 2012 – the first of five wells being delineation wells across the northern portion of its Palmetto acreage block. The remaining eight will be drilled on the southern acreage block where SN’s last two wells, the Barnhart #5 and #6, have produced more than 105,000 BOE per well since December 2011.
The company originally believed the Palmetto wells could have an estimated ultimate recovery (EUR) of 600 MBOE. These wells are flowing naturally, i.e., without the benefit of artificial lift. Based on our analysis, using an EUR of 600 MBOE, each of these wells would have an estimated NPV of $7.1 million net to SN, or 65% greater than the original cost to drill and complete each well.
In the Maverick area, SN announced initial results on a vertical well, The Mark & Sandra #1, which produced 207 BOEPD for one month before being shut-in to add a completion in the lower Austin Chalk. The two zones will be comingled in the two producing zones. SN reiterated on the conference call that they are committed to the horizontal program; however, the company mentioned they will likely drill a couple other vertical wells in the next few quarters to test the economics and producibility of comingling vertical wells. Also in Maverick, SN commenced completion operations on Ray #1H (100% WI), the first of four net horizontal wells planned in 2012 targeting the Eagle Ford formation. The rig that drilled the Ray well has moved to drill the Petro Pards #1H (100% WI) and drilling operations have commenced on this second of four planned horizontal wells. This well is targeting the Eagle Ford Shale formation.
In Marquis, SN is currently drilling the Prost #1H, which is the first of six net wells to be drilled here in 2012. The company picked up more acreage this year, approximately 1,600 net acres, that complements its core Fayette and northern Lavaca, County area. This acquisition brings SN’s total leasehold in Marquis to approximately 56,000 net acres.
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Sanchez reiterated its 2012 forecast to exit the year producing between 4,000 to 5,000 BOE per day net to the company. OAG360 notes that SN has no debt and a strong cash and cash equivalents position of $63 million on the balance sheet as of December 31, 2011. The management team outlined its financial flexibility on the company’s conference call saying that based upon its expected production rates and expectations for commodity prices, SN expects its cash and cash flow to fund all but about $25 million to $30 million of its planned capital spending budget for this year. The difference is expected to be supplied from a new credit facility, which SN plans to put in place later this year.
A Valuation Catalyst: Downspacing the Eagle Ford
At current 120-acre spacing, Sanchez estimates approximately 750 economic drilling locations on its 92,000 net acreage position in the Eagle Ford. As OAG360 has reported on previously in its write-up: “Sanchez Energy: The Stars are Bright and Aligning”, large Eagle Ford players like Marathon Oil (NYSE: MRO) and EOG Resources (NYSE: EOG) announced the potential for down spacing which would offer a long-term valuation catalyst for SN’s shareholders. Marathon Oil, Sanchez’s drilling partner in its Palmetto prospect, plans to test the Palmetto acreage for down-spacing to 60-acre and 40-acres spacing units. SN owns 9,400 net acres in Palmetto, and using a spacing estimate of 120-acres, the company projects owning 75 net un-risked drilling locations. If Marathon’s down-spacing program is successful at 60-acres, SN’s un-risked drilling location projection more than doubles to 157 net un-risked drilling locations and at 40-acres SN would have 235 net un-risked drilling locations. Evaluated differently, using the $7.1MM NPV per well (net to SN) noted above, at 235 net un-risked drilling locations the Palmetto wells alone (using a conservative 50% success rate) would have a NPV of $834.3 million.
EOG Resources (NYSE: EOG) initially evaluated its Eagle Ford acreage on 130-acre spacing units, before further study of the shale and the drilling of down-spaced wells led the company to determine a range of 65-acre to 90-acre spacing units would be optimal for hydrocarbon recovery. EOG estimates its downspacing will increase its recovery of oil in the Eagle Ford to 6% from 4%.
During presentations made in New Orleans March 25-29, 2012, companies with operations in the Eagle Ford told the audience of institutional investors that drilling and completion costs were coming down as much as 20%. Using the reduction in costs, OAG360 estimates that an Eagle Ford well needs a blended price of $43.29 per BOE to generate a 10% IRR. The Eagle Ford is in the early stages of development. Stretching 120 miles across the middle of Texas like a fine leather belt, operators are aggressively working to complete better wells today than yesterday. A 25% increase in EUR or the IP rate changes the blended price to $38.91 to generate a 10% IRR.