Current SN Stock Info

Sanchez Energy and Blackstone Energy Partners form 50/50 venture to acquire Anadarko Comanche assets producing approximately 67,000 BOEPD (33,500 net to Sanchez)
Sanchez Energy Corporation (ticker: SN) and funds managed by Blackstone Energy Partners (ticker: BX) have entered a strategic 50/50 partnership and together they have signed a definitive purchase agreement to acquire Anadarko Petroleum Corporation’s (ticker: APC) working interest in approximately 318,000 gross operated acres in the Western Eagle Ford for approximately $2.3 billion.

Analyst Commentary

From Stephens:

SN announced it has entered a 50/50 strategic partnership with Blackstone Energy Partners (NYSE: BX; not covered) to acquire ~155K net acres in the Eagle Ford and ~67 Mboepd (70% liquids) in associated production from Anadarko (NYSE: APC; not covered) for a total of $2.275 billion. SN will fund its portion of the acquisition via cash on hand, a preferred equity offering, and borrowings on the Company's revolver. We estimate the Company paid ~$2.5K per acre (assumptions below), which we believe is accretive based on our fully developed Catarina $/acre value. The acquisition more than doubles SN's drilling inventory and provides a stronger vehicle for growth within cash flow, and the Company now believes it will be producing in excess of 100 Mboepd in 12-18 months while operating within cash flow and de-levering the balance sheet. Our rating, price target and estimates under review.

Acquisition Details. SN announced it has entered a 50/50 partnership with Blackstone to acquire a total of ~155K net acres and ~67 Mboepd (70% liquids) in associated production in the Western Eagle Ford from Anadarko for $2.275 billion. We estimate a transaction price of ~$2.5K per acre (assuming $50K per flowing bbl for oil, $3K per flowing for natural gas and $15K per flowing bbl for NGLs). The acreage is contiguous to SN's Catarina asset and includes ~300 Mmboe in proved reserves (70% liquids, 75% proved developed) as well as 132 DUCs, which SN plans to draw down through 2017. SN estimates over 4,000 Eagle Ford locations (>20 years of drilling inventory) economic at current strip with ~80% of the acreage suitable for Eagle Ford drilling and the remainder with resource potential from the Austin Chalk and Pearsall Shale. The transaction is expected to close in 1Q17.

Funding Details. SN plans to fund its portion of the acquisition via ~$394 million in cash on hand and the remaining ~$744 million via proceeds from the issuance of non-convertible perpetual preferred equity to GSO Capital Partners LP as well as borrowings under a new revolving credit facility. The preferred equity is structured to provide a 10% annual cash dividend, 14% required return upon redemption and is not convertible into SN common stock.

From KLR:
Sanchez Energy Corp. (SN) KLR
Upgrade To Buy; Transformative Western Eagle Ford Acquisition
Price Target: $15.00
Price: $8.70

Investment thesis

We are upgrading SN from Hold to Buy and increasing our target price $6 to $15 per share with the integration of a substantial value accretive western Eagle Ford asset purchase. Accordingly, Sanchez’s mid-cycle capital yield should increase over 10% to ~120% versus the industry median cash recycle ratio of ~140%.

Substantial western Eagle Ford acquisition (Comanche)
Sanchez is acquiring ~77,500 net acres (~24% WI) prospective in the Eagle Ford for ~$1.137 billion in cash. The assets are adjacent to the north and west of the company’s Catarina Ranch assets and are producing ~33.5 Mboepd (~67% liquids), implying an attractive ~$34K/Boe production rate multiple. In the second half of this year, the company anticipates conducting a five-rig program (~24% WI) on the acquired assets and drilling 100-120 wells this year focused on northern Areas 3/5. Sanchez anticipates completing the entirety of its ~130 DUC well backlog (~60% in Area 5, ~40% in Area 3) by year-end.

The company plans to fund the acquisition with almost $400 million of cash from the parent and ~$750 million of preferred equity/bank line from an unrestricted subsidiary (~$500 million in preferred equity, ~$240 million in bank line). Free cash flow from the acquired assets after this year is intended to repay the unrestricted subsidiary preferred equity and subsequently the bank line. The transaction should close at the end of 1Q/17. Pro forma the acquisition, Sanchez’s ’17 net debt-to-EBITDA decreased from ~4.9x to ~4x.

Eagle Ford wells (~6,500’ laterals, ~30 frac stages, 1,750-2,000 lbs/ft proppant loading) should cost ~$3.2 million. Area 3 wells commence at ~1,250 Boepd (~40% oil, 30%-35% gas, 25%-30% NGLs) and should recover ~625 Mboe. Area 5 wells commence at 1,100+ Boepd (~65% oil, ~20% gas, ~15% NGLs) and should recover ~600 Mboe.

Assuming ~90-acre development spacing (~600’ lateral offset), the company has ~2,000 locations in Area 3 (Upper/Middle/Lower Eagle Ford) and ~600 locations in Area 5 (Upper/Lower Eagle Ford) with ~300 Mmboe of net resource potential (~15 years of drilling inventory). The inventory constitutes ~300 Lower and ~2,300 Middle/Upper Eagle Ford locations.

Steady-state Catarina development

Sanchez is conducting a two-rig program mainly in South-Central Catarina Ranch. The company plans to drill ~50 net wells on Catarina Ranch per year. Catarina Lower/Middle Eagle Ford wells (~6,500’ laterals, ~30 frac stages, 1,750-2,000 lbs/ft proppant loading) cost ~$3 million.
South-Central Catarina Ranch Lower/Middle Eagle Ford wells, along the southern lease line, have produced ~300 Mboe the first 14 months and should recover 1,300+ Mboe. Four wells on the next row north are performing in line with the southern row. Sanchez is testing four wells in North-Central Catarina along the northern lease line. Western Catarina Ranch Lower/Middle Eagle Ford wells have produced approximately 300 Mboe the first 18 months and should recover 1,100+ Mboe. The company plans to drill two stacked Upper/Middle Eagle Ford pads in western Catarina.

From BMO:
Anadarko: Eagle Ford Proceeds Below Expectations, but Increases Dry Powder

The sale of Anadarko’s Eagle Ford assets for $2.3B was below our expectation, but we think most will look past the lower valuation as the divestiture sharpens the U.S. onshore focus on the Delaware and DJ Basin, while reducing leverage to be in line with the large-cap median, and providing optionality to further accelerate activity and increase the 12-14% multiyear oil CAGR.

From UBS:
Anadarko Agrees to sell Eagle Ford assets for ~$2.3bn; minimal impact to NAV

APC agreed to sell its Eagle Ford assets to Sanchez Energy & Blackstone Group for ~$2.3bn. This compares to our recently revised expectations of $2.2 billion following SM Energy's Eagle ford divestiture of essentially the same acreage. With production down ~13% since 1Q16 and APC's plan to allocate no rigs to the region over the next 5 years, the divestiture was expected. We estimate APC sold the assets for ~10x 2016 EBITDA, below its current 2016E EV/EBITDA multiple of ~12.7x given the declining production profile of the assets. The divested assets include ~155,000 net acres primarily located in Dimmit and Webb Counties, with production of ~67 MBoed (36%/32%/32% oil/NGLs/gas) at the end of 4Q16. APC has announced or closed >$7bn of divestitures since the beginning of 2016.

Divestiture consistent with strategy of focusing activity in the DJ & Delaware

The deal is not surprising as APC had no plans to allocate rigs to the play in its 5-year plan to deliver 2016-20 oil growth of 12-14% per annum. Management noted proceeds provide it increased flexibility to accelerate development in the Delaware and DJ Basins where it recently disclosed plans to increase activity from 9 and 5 rigs currently to 14 and 6, respectively, by the end of 1Q17. Given an expected cash balance of ~$5.5 billion at the end of 1Q17, APC is well positioned to further accelerate capex and its 12-14% per annum oil growth rate from increased capex as well as potentially make bolt on acquisitions to increase its inventory in the DJ, Delaware and deepwater GoM.

Reducing production & CFPS estimates but improving oil mix & leverage ratio

We lowered 2017-18 production to ~675 MBoed & ~760 MBoed from ~734 MBoed & ~818 MBoed, respectively. We reduced 2017-18 CFPS estimates from to $8.85 & $13.50 from $9.65 & $14.55, respectively. Assuming current futures strip prices, we estimate the Eagle Ford sale reduces APC's YE17 net debt/EBITDX to 1.6x from 1.8x, below the peer average of 1.9x. We estimate the transaction has de minimus impact on our companywide NAV of ~$111/sh on the UBS price deck ($87/sh at futures strip).

Valuation: discount to peers on price/NAV and also on EV/DACF

Our $82 PT assumes 0.75x NAV (unchanged).

From Johnson Rice:
Sanchez Production Partners LP
Midstream Growth Potential Expands with SN's Eagle Ford Purchase
January 13, 2017

SPP: $11.55

Key Takeaway:

Following Sanchez Energy’s announced acquisition of Anadarko’s Eagle Ford position (working interest ~155,000 net acres and associated production of ~67 mboe/d) for total consideration of ~$2.3b through a strategic 50/50 partnership with funds managed by Blackstone Energy Partners (~$1.15b SN’s share), we see several positive implications for the SPP story. The broadening acreage footprint within Sanchez Energy, which runs contiguous to the existing Catarina asset, now creates a more diversified production pool along with potential for expanded 3rd party volumes through SPP’s existing midstream assets, while also developing a more tangible growth path.

We expect the most direct near-term benefit will be potential incremental volumes at SPP’s Raptor processing plant which would improve ‘17/’18 distribution coverage levels near-term and likely accelerate strategic expansion opportunities particularly organic growth offshoots of the Raptor plant (i.e. fractionator, seco phase 2, ethane line) which would become more attractive given the higher throughput. Bottom line, we expect the broadening production pool and growth opportunities along with near-term upside potential to our existing forecasts should accelerate yield compression toward our targeted low-teens (%) level and we reiterate our Buy rating.

Key Points:

Implications to existing midstream infrastructure assets. We expect the most direct potential impact near-term would be incremental volumes on the acquired acreage (contiguous to the Catarina Asset) being sent to the Raptor processing plant (50% JV with Targa), which is expected to be operational by April ‘17. Importantly, Sanchez Energy will maintain control of the gross acreage volumes on which we expect there is ~100mmcf/d of production that is on interruptible contract, which we would be a strong potential candidate to be directed to Raptor. In addition, we believe there are incremental volumes rolling off existing contracts in ’17 providing further upside. Accelerated Sanchez Energy activity in the region will also drive further long-term upside potential - with preliminary plans of completing the 132 DUCs by year-end 2017 and running 5 rigs on the properties during 2H:17+, Sanchez’s total production is expected to grow to 100,000+ boe/d within 12-18 months.

The Raptor plant was the key strategic asset within the planned midstream acquisitions associated with the recent equity offering. Our current estimates forecast ~135-140mmcf/d in ‘17 at Raptor on base case Catarina volumes through SN, while the aforementioned volumes have potential to drive volumes toward an expanded capacity of the plant at ~260mmcf/d. Our sensitivity analysis suggests that an incremental 100mmcf/d at Raptor would generate >$5mm in annual EBITDA contribution. We expect the capacity expansion at Raptor to 260mmcf/d from initial target of 200mmcf/d should cost between $4mm - $4.5mm with the ability to be completed within the anticipated timeline (i.e. operational by April '17). In turn, our estimated '17/'18 distribution coverage ratios would improve to 1.5x/1.3x from 1.4x/1.1x currently.

From Suntrust Robinson Humphrey:
Creatively Financed Eagle Ford Deal Gets Market Approval

Rating: Hold
Market Cap (M): $497; Price: $8.70 as of 01/12/2017
Price Target: $8.00

Sector: Exploration & Production

Sanchez and Blackstone, in a 50/50 partnership, announced the acquisition of 155,000 net Eagle ford acres for $2.3Bn, or ~2k/acre after backing out production (price paid lower than prior Eagle Ford transactions). The deal significantly expands Sanchez’s footprint in the Western Eagle Ford without diluting existing shareholders as Sanchez’s part of the deal is financed with cash, non-recourse RBL, and preferred equity with no common stock issued. Operationally, management noted the upstream/midstream synergies between the acquired acreage and the Catarina asset, which we believe could translate to improved well returns in Comanche like the company was able to do in Catarina. At first blush, the deal appears positive though we still have to wade through the financial details of the transactions.

• ~$2,000 per acre after adjusting for 67 mboepd production (70% liquids) at $30k/flowing bbl.
• 155,000 net acres in the Western EF, adjacent to SN’s Catarina asset
• 132 high rate of return DUCs
• Greater than 4,000 drilling locations, or over 20 years of inventory at current strip pricing
• As a result of the transaction, Sanchez anticipates achieving over 100 mboepd, while operating within cash flows, in 12-18 months. To put that in perspective, the street previously had the company with production of ~60 mboepd through 2020.

Financing (the $1.15B Sanchez portion):
• $400mm cash through a restricted subsidiary that encompasses 60% of DUCs & PUDs
• $750mm non-recourse RBL and preferred equity that encompasses 40% DUCS & PUDs  

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