Sanchez Production Partners (ticker: SPP), the latest piece of Sanchez Oil & Gas’ (SOG) corporate umbrella, reported its first quarterly results as a limited partnership on May 15, 2015. SPP reported Q1’15 production of 3,596 BOEPD and completed its first transaction, acquiring 1,000 BOEPD of producing assets from Sanchez Energy (ticker: SN). SPP believes the assets will produce consistent volumes through the year 2019.
Sanchez Production Partners represents a unique facet to the Sanchez Oil & Gas family by providing a different business model and scope than other organizations in the tree. SPP is a reliable vehicle for a business development relationship with SN, considering the E&P “has a substantial inventory of assets with characteristics favorable to the MLP model,” says the company press release. SOG spent about two years implementing its MLP model and believes its size is advantageous for asset acquisitions in the current commodity environment.
Another Tool for Sanchez
SOG described the thought process of Sanchez Production Partners in a company presentation on May 18, 2015. According to SOG, the MLP extends the company’s reach into smaller markets that were previously viewed as unattainable due to their size and scope. SOG has historically been very active on acquisitions, particularly in the Eagle Ford Shale. The parent company has financed five acquisitions for approximately $1.1 billion since 2013, allowing SN to become a premier operator in the Eagle Ford Shale. Production for SN has more than doubled on a year-over-year basis due to organic growth and asset purchases.
SPP, meanwhile, is seen as an ideal platform for SN’s non-operated, proved developed producing assets. The structure, combined with a hedging system, provides reliable cash flow with low overhead costs. SPP’s capital intensity (defined as the amount of every EBITDA dollar required to maintain a flat production rate) of 17% is the lowest of the 12 upstream MLPs in EnerCom’s MLP Scorecard Benchmarking Report. Its asset base holds more than 21 MMBOE of proved reserves, 84% of which are proved developed producing.
SPP’s growth will be predicated by additional acquisitions and joint bid ventures, some of which may be of the midstream variety. As the MLP grows, SOG management expects to access capital markets and receive larger borrowing bases to fuel the growth model. “We believe a large-scale transaction will be key to recapitalizing SPP and resuming distributions to unitholders,” said Gerry Willinger, Interim Chief Executive Officer of Sanchez Production Partners, in a conference call following the release.
The company plans on divesting its legacy Midcontinent assets as early as June as the MLP progresses towards its goal of reaching its distribution coverage of 1.2x and borrowing base utilization of 80%.
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