Sanchez Production Partners (ticker: SPP), a midstream-focused Master Limited Partnership, increased its footprint in the Eagle Ford with a $345 million cash acquisition announced on September 28, 2015. The assets, purchased from Sanchez Energy Corporation (ticker: SN) consist of 150 miles of gathering lines and associated infrastructure in four gathering and processing facilities. The transaction is expected to close in October 2015.
The assets are located in the western part of SN’s Catarina asset, which has been the target area of Sanchez’s recent operations. In accordance with the sale, SN will engage in fixed gathering rates for an initial 15 year term. The first five years will require minimum delivery commitments of 10.2 MBOPD and 142 MMcf/d. The Catarina asset as a whole produced 71% of SN volumes in Q2’15, equaling about 38.2 MBOEPD.
The latest acquisition is the second to be announced between SPP and SN – the first was an agreement for wellbore interests in the Palmetto asset in Gonzales County. The transaction, completed for $85 million, included escalating working interest and total volumes of roughly 1,000 BOEPD.
Sanchez Energy Boosts Balance Sheet
Upon closing, SN will increase its liquidity to approximately $918 million from its previous total of $572 million on June 30, 2015. The liquidity includes an elected commitment of $300 million on its undrawn revolving credit facility. SN’s near-term budget appears to be well-financed – its 2016 capital expenditure plan of $250 to $300 million can be fully financed from the midstream sale alone. KLR Group believes SN will exit 2015 with about $850 million in available liquidity.
The extra capital provides some flexibility for SN both organically and on the acquisition market. Commenting on the release, Tony Sanchez III, Chief Executive Officer of Sanchez Energy, said, “By further enhancing our liquidity and financial flexibility, we are now well positioned to accelerate drilling plans as commodity prices recover or to capitalize on acquisition opportunities as conditions may warrant.”
Although organic growth has been a staple of Sanchez’s story lately, the company built out its Eagle Ford position by being a big player on the M&A market. In a 14-month span stretching across 2013 and 2014, the company secured 163,400 acres for roughly $1,153 million. Its production volumes have increased by about 25% since it announced its landmark Catarina deal in May 2014.
Analyst notes from SunTrust Robinson Humphrey and Global Hunter Securities viewed the transaction as a positive move for SN, considering the company raised liquidity without giving up any of its Eagle Ford acreage.
SN Moving Forward
Operational efficiencies achieved by SN led to a $50 million reduction in 2015 capital expenditures, spearheaded by well costs that have declined to $4.4 million from $7.5 million when the company first entered the play. The Catarina asset includes a drilling commitment of 50 wells per annum, but SN exceeded the requirement by drilling a total of 68 wells. The extra 18 wells can be “banked” into its next drilling term, providing flexibility on the pace of operations. The company believes its banked well count can reach anywhere from 20 to 30.
Its reduced expenditures are not getting in the way of operations: the company expects says Q3’15 production “will likely meet or exceed” the high end of its 46 to 50 MBOEPD guidance range. The divesture is expected to increase its lease operating expense (LOE) by $1.95/BOE. For the first half of 2015, LOE costs were $7.78/BOE – below the guided range of $9.00 to $10.00 per BOE. In the release, SN said LOE costs “reaffirms belief that the expense savings realized year-to-date in 2015 are sustainable on a go-forward basis.”
Sanchez Production Partners Increases Eagle Ford Stake
SPP’s acquired midstream interests cover approximately 35,000 acres – about 16% of SN’s total Eagle Ford acreage and roughly 81% of its classified Western Catarina acreage. Gerry Willinger, Interim Chief Executive Officer of the general partner of SPP, said the transaction “represents the culmination of over two years of work to refocus and improve SPP’s strategic direction and financial outlook.”
SPP will issue more than 19 million units in a private placement with Stonepeak Infrastructure Partners, resulting in $350 million in gross proceeds. Stonepeak will receive two board seats in association with the placement. SPP anticipates amending its $500 million credit facility, which includes an increase of its borrowing base to $200 million from its previous allotment of $110 million. The company currently has $106 million in debt, which matures in March 2020.
Management believes the transaction will more than double SPP’s adjusted EBITDA, which led to a proposed annual distribution of $1.60 per unit. The proposal is subject to approval from the board of directors of its general partner, and SPP anticipates the initial distribution will be paid in November 2015.
The company is also actively marketing its Midcontinent assets, which include 207,000 developed and 15,000 undeveloped acres in Oklahoma and Kansas. The assets include the right to develop 500,000 additional acres in Osage County, Oklahoma, along with its interests in 2,337 production wells (76% operated). The company does not anticipate a potential sale having any effect on its borrowing base adjustments.