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.

$2.3 Billion in Eagle Ford Assets Depart Anadarko for Sanchez Energy

The acquired assets (155,000 net acres to Sanchez Energy and Blackstone) are primarily located in Dimmit and Webb counties, contiguous to Sanchez’s existing assets.

Sales volumes from these properties totaled approximately 45,000 barrels of liquids per day and approximately 131 million cubic feet of natural gas per day at the end of the fourth quarter of 2016, Anadarko reported.

$2.3 Billion in Eagle Ford Assets Depart Anadarko for Sanchez Energy

The acreage includes approximately 130 gross drilled but uncompleted wells, Blackstone said in a press release.

Upon completion of the acquisition, Sanchez Energy will be one of the largest leaseholders and producers in the Eagle Ford Shale, Sanchez CEO Tony Sanchez III said during a conference call this morning.

Sanchez highlights of the acquired asset:

  • Approximately 318,000 gross operated acres (155,000 net to Sanchez Energy and Blackstone), contiguous to the Catarina asset;
  • Current production of approximately 67,000 Boe/d (70 percent liquids) from the acquired assets;
  • Proved reserves of approximately 300 MMBoe (70 percent liquids, 75 percent proved developed) from the acquired asset;
  • Estimated total resource potential of over 1,100 MMBoe;
  • Significant near-term, low-risk production growth driven by 132 gross DUCs located in the most attractive areas of the asset, with individual rates of return expected to exceed 100 percent;
  • More than 4,000 Eagle Ford drilling locations— 20 years of economic drilling inventory at current strip prices;
  • Eagle Ford Shale development covers approximately 80 percent of the acreage, with significant resource potential from the Austin Chalk and Pearsall Shale;
  • Sanchez Energy will fully fund its 50% of the acquisition through a combination of cash on hand and commercial bank and preferred equity commitments at a newly formed non-recourse subsidiary; and
  • Blackstone will fund its 50% of the acquisition through a separate entity via equity and commercial bank commitments.

In the conference call held this morning Chief Executive Officer of Sanchez Energy Tony Sanchez III, said, “…we plan to be very active on the drilling site, starting with four operated rigs on these assets specifically in the second quarter of this year. With a significant runway of over 20 years of additional drilling, we are very excited to begin deploying capital on this asset. When valuing this transaction, the PDP in the DUCs account for approximately 80% of the purchase price.

“As we have experienced on Catarina, there is an extensive multi-bench development potential on this area. As the quality and thickness of the Upper and Middle Eagle Ford zones improve across the Comanche acreage, the extent of our inventory has dramatically increased. There has been limited drilling activity on the acquired acreage over the last two years and as we currently analyze – as we analyze current completion designs versus the size of the completion jobs previously pumped on this acreage, we see significant room for type curve improvement. Previous wells drilled on the acreage were pumped with roughly 1,000 pounds per foot of proppant or less. When we begin completing these wells, we expect to be pumping between 1,700 and 2,500 pounds per foot of proppant, and we anticipate EURs doubling in most of these areas.

“There’re many similarities to this property in Catarina, at the time of that acquisition. Not only were completion designs in need of updating, but there is a significant DUC inventory, potential for both Middle and Upper Eagle Ford development, extensive water and midstream infrastructure built out and high quality roads and facilities. The $2.3 billion purchase price will be funded by $1.15 billion by Blackstone and $1.15 billion by Sanchez. So, we’re splitting it evenly. SN will fund its $1.15 billion with approximately $400 million of cash already on hand and approximately $750 million from a new revolver and a new non-convertible preferred equity investments that are made at a newly created non-recourse subsidiary that we refer to as UnSub.

“This accretive and transformative acquisition more than doubles our drilling inventory, adds 132 high rate of return DUCs, increases Sanchez Energy’s resource potential by over 550 MMBoe and provides a path for strong growth within projected cash flow,” Sanchez said in a press release.


Sanchez Energy expects to be at 100,000 BOEPD production in 12-18 months

“The Comanche Eagle Ford Asset generates free cash flow that can be allocated to help fund our 2017 capital budget and comes with a large inventory of high rate of return drilling opportunities that will build upon our already high quality drilling program.  As a result, we project that Sanchez Energy will be producing in excess of 100,000 Boe/d while operating within cash flow in the next 12 to 18 months. Importantly, this transaction is expected to improve the company’s leverage ratio by over one turn in the next 12 to 18 months.”

Blackstone’s Angelo Acconcia said, “We are excited to form this strategic partnership with Sanchez Energy, to help effectuate this transformative acquisition and to help Sanchez Energy grow and facilitate future acquisitions in the area.”

Financing the transaction

In its press release Sanchez Energy said its portion of the acquisition will be funded utilizing two components. Through a restricted subsidiary, it expects to fund its portion of the acquisition with cash on hand. Additionally, a newly formed unrestricted subsidiary of Sanchez Energy (“UnSub”) will finance its portion of the acquisition with proceeds from non-convertible perpetual preferred equity issued to GSO Capital Partners LP (“GSO”), borrowings under a new revolving credit facility (non-recourse to SN), and a $100 million contribution in cash from Sanchez Energy.

The preferred equity is structured to provide a 10 percent annual cash dividend and a 14 percent required return upon redemption to GSO and is not convertible into Sanchez Energy common stock.  While the entirety of the transaction will be consolidated for financial reporting, the preferred equity and debt of UnSub will be non-recourse to SN.

The following table provides a breakdown of the assets and purchase price allocation:

Sanchez Energy

Blackstone          Parent          UnSub            Total

Asset Allocation:

PDP                                                         50         %            0       %        50      %           100       %

PDNP                                                      50         %            30     %        20      %           100       %

PUD                                                        50         %            30     %        20      %           100       %


Funding Source ($MM):

Cash                                                                                $394(1)        $   0                 $   394

RBL Draw/Preferred Equity                                          $   0             $   744             $   744


Total(2)                                               $   1,137              $   394         $   744             $   2,275


(1) Includes $100 million contribution to UnSub

(2) Prior to any purchase price adjustments

“Our extensive experience over the last two decades as an investor across all segments of the energy sector, access to equity and debt capital on a very large scale and a history of creative, flexible solutions to complex challenges, make Blackstone a uniquely well positioned partner for energy companies seeking to fund their continued growth through the inherent volatility and capital intensive nature of the energy industry,” added David Foley, Chief Executive Officer, Blackstone Energy Partners.  “Our partnership with Sanchez Energy provides capital for the continued development of this acreage, creating additional jobs for American workers and providing significant benefits to the economy.”

Responding to a question about financing the deal on today’s conference call, Sanchez said, “The other thing that we’ve accomplished through this structure, I mean, if you think about it not only what it does today, but think about it over the next three years, is we’ve been able to take a very large asset and execute a transaction; what we’ve also done it in a way where we don’t overlever the company or we don’t dilute our shareholders. So, we were able to effectively through the preferred equity structured UnSub, we’re able to raise a proper kind of equity that match to the cash flows.

“So, even at UnSub where you’ve got $750 million of capitalization, it’s actually $850 million of capital, because you’ve got roughly $250 million of RBL, okay, $500 million of pref equity and then a $100 million of common equity which is coming from SN in the form of cash. So, it’s an – arguably it’s an under levered or certainly not a very highly levered type structure in that matter. So basically it allows us to digest this big asset because we’re able to put the production in this un-sub structure [and] match the financing sources to that. But all of the thousands of drilling locations and DUCs, 60% of those that we bought are cleared to SN parent per se. The way I think about it, it’s all rolled together; it’s all part of the same company.”

The companies said the transaction is expected to close in the first quarter of 2017.

Kirkland & Ellis served as legal advisor and Jefferies & Company, Inc. served as the sole financial advisor to Blackstone.  JPMorgan Chase & Co., Citigroup Inc. and Morgan Stanley are providing committed debt financing to back Blackstone’s working interest purchase.

Anadarko said that its sponsored master limited partnership, Western Gas Partners, LP (ticker: WES), will continue to own and operate its midstream assets in South Texas and is expected to benefit from drilling commitments made by the buyers in conjunction with this transaction, Anadarko said in a press release.

Anadarko CEO comments on the sale

“The ongoing success of our portfolio-management activities provides us with the flexibility to further accelerate capital investments in our higher-return oil opportunities in the Delaware Basin, the DJ Basin, and the deepwater Gulf of Mexico, which drive our ability to deliver a 12- to 14-percent five-year compounded annual oil growth rate,” Al Walker, Anadarko chairman, president and CEO, said in a press release. “We are deeply grateful to the team at Anadarko, which has built the Eagleford Shale into a coveted asset that will continue to be an important domestic source of energy for our nation.”

What Sanchez likes about the Western Eagle Ford geology

During today’s call, Sanchez Chief Operating Officer Chris Heinson discussed technical aspects of the Western Eagle Ford shale.

We’ll start with slide 6. The Comanche acquisition is a latest move in our strategy to reposition ourselves as Western Eagle Ford operators. We’ve been attracted to the Western Eagle Ford, there is unique geology. The Western Eagle Ford starting in La Salle and Frio counties, starts thickening towards the Maverick Basin, which continues towards the West. This thickening allows for expansion of the entire Eagle Ford section.

$2.3 Billion in Eagle Ford Assets Depart Anadarko for Sanchez Energy

The Upper Eagle Ford in particular increases in thickness and quality in Southern Dimmit County. The position is ideally set up to take advantage of the high quality Upper and Middle Eagle Ford in the volatile oil window, focusing on the map of the Upper Eagle Ford thickness, you can follow a trend that runs through Central Catarina, and up through area three of the Comanche asset.

Slide 7 contains additional details of how the Eagle Ford changes moving to the West. Moving from East to West, you see similar thickness of reservoir within the Upper Eagle Ford and Middle Eagle Ford, but improving porosity.

$2.3 Billion in Eagle Ford Assets Depart Anadarko for Sanchez Energy

The Lower Eagle Ford, which is approximately 30 feet to 60 feet thick in Catarina, increases to approximately 200 feet, while maintaining reservoir quality over the entire section. The vast majority of the Comanche asset is located on the transition of the volatile oil and a condensate window, allowing for strong economics due to the high liquids recovery, and also high degree of energy and mobility of the reservoir fluids, which improves recovery.

Slide 8 shows the continued evolution of completion designs in the Western Eagle Ford, as illustrated from our Catarina experiences. Our completions over the last year have averaged approximately 1,750 pounds per foot to 2,000 pounds per foot, which is up close to 1,000 pounds per foot over what was pumped early in 2014, and earlier. These changes in design have seen EURs more than double, while well costs have reduced significantly. The Comanche asset has largely been developed on 750 pounds per foot profit loading, provide an opportunity for Sanchez to acquire latest techniques to achieve significantly better results that, Tony, had referred to.

$2.3 Billion in Eagle Ford Assets Depart Anadarko for Sanchez Energy

Slide 9 has a type log of the Comanche area 3. The log is typical of much of the Western Eagle Ford with high porosity and high TOC in the Lower Eagle Ford. In an Upper Eagle Ford section that although has lower porosity in TOC than the Lower Eagle Ford, has significantly lowered total clay content. The lower clay content of the Upper Eagle Ford causes the zone to be ideal for hydraulic FRAC allowing for more effective stimulations than we typically observed in the Lower Eagle Ford. Also, notable are the presence of multiple FRAC barriers, and at least two distinct targets in the thick lower Eagle Ford section. The Comanche asset has been primarily developed in the lower Eagle Ford, leaving the Middle Eagle Ford and Upper Eagle Ford almost completely undeveloped except for a few appraisal wells. The total number of undeveloped location in Eagle Ford exceeds 4,000.

Also notable is the presence of matrix porosity in the Lower Austin Chalk. We believe this zone to be perspective for unconventional development, and will be a focus of our appraisal efforts in the following years.

$2.3 Billion in Eagle Ford Assets Depart Anadarko for Sanchez Energy

Slide 10 provides additional details on development scheme and the economics within Area 3. Area 3 is the large contiguous block of acreage Northwest of Catarina in South Central Dimmit County. It is the area with the greatest amount of future drilling locations with over 2,000 locations in the Eagle Ford in this area alone. It contains a significant portion of our DUC inventory. We expect economics to be strong across the Upper, Middle and Lower Eagle Ford benches. The type curve approximates the performance of all benches, wells in this area are expected to cost $3.2 million per well, and produce three stream EURs in excess of 600,000 barrels of oil equivalent with over 70% liquids.

$2.3 Billion in Eagle Ford Assets Depart Anadarko for Sanchez Energy

Slide 12, directly compares our latest acquisition with the Catarina acquisition. The similarity of these assets is remarkable. Both assets were largely underwritten based upon significant cash flow potential of its existing developed wells and they drilled, but uncompleted inventory. Both are located adjacent to each other in a volatile and condensate window of the Western Eagle Ford.

$2.3 Billion in Eagle Ford Assets Depart Anadarko for Sanchez Energy

Both have tremendous amount of highly economic undeveloped inventory spending decades at our forecasted initial development phase. Perhaps, most significant from an operation standpoint, both assets were planned and initially developed by large organizations with extensive facilities expertise. Both Shell and Anadarko invested heavily in the water gathering roads and facilities.

We’ve enjoyed this benefit on Catarina for years, saving an estimated $150,000 per well on frac water as well as significant LOE savings from eliminating trucking. We’ve seen Western Gas -gather as the asset – as a benefit similar to Catarina where Sanchez’s production partners gathers our production. We have the freedom to focus on capital exception and well maintenance, allowing us to better optimize tasks, while third party handles the responsibility that they have.

Slide 13 demonstrates, how quickly our organization can ramp up activity on a nearly acquired asset. In Catarina, we are able to double production nine months from a combination of factors. We were able to keep the transition period to minimum and start running drilling rigs on the asset within two weeks. We had a completion spread started to work within the first month after close.

$2.3 Billion in Eagle Ford Assets Depart Anadarko for Sanchez Energy

The chart to the right shows just how impactful an inventory of DUCs is to early production. In Catarina, the 22 DUCs we completed in the initial six-month of operations increased production by over 10,000 barrels of oil equivalents per day. On the Comanche Asset, we have a 132 DUCs that we anticipate completing within the first year of operation.

Slide 14 describes, what you should generally expect for initial development plan. As mentioned previously, the key to successful 2017 will be for quick transition of operatorship and an initial focus on DUC inventory. We expect the first DUCs will start coming online late in the second quarter and continue to add production into early 2018. We expect a similar ramp-up in drilling activity in the second quarter with multi-bench development starting in Day 1 on all three Eagle Ford benches. We expect that we will drill between a 100 new wells and a 120 new wells in 2017 with a locations almost exclusively located in areas 3 and areas 5.

$2.3 Billion in Eagle Ford Assets Depart Anadarko for Sanchez Energy

Conference call Q&A

Q: So, on my math, 4,000 locations implies, I guess 40-acre spacing – 16 wells per DSU, that’s sort of on the high end of at least what I’ve seen in the Eagle Ford, can you talk about how you get to 16 wells per DSU if that’s the right number?

Sanchez: So, you get there by having multiple benches. So, in our development plan we’ve not assumed tighter than 600-foot lateral spacing. And the combination of the 4,000 is coming in from the two additional loans that we have forecasted, primarily in Area 3, but also in Area 5 and Areas 1 and 2 there are significant opportunity to develop multiple benches. I think actually if – I think actually our initial well count was fairly conservative, as we’ve sort of understood how the geology develops, particularly going to the West sort of in that Western Area 3 and Areas 1 and 2. The Lower Eagle Ford is over 200 feet thick in that zone and to this point, we’ve really only assumed one lateral landed within that 200 feet of Lower Eagle Ford.

My full expectation is that multiple wells would be able to be simultaneously developed within that Lower Eagle Ford. So, even though you have 600 foot sort of lateral spacing within a bench, you may effectively have 300 foot apparent spacing for the stack locations and then when we start doing the full bench development, you’ll actually have laterals that are directly on top of existing other levels. And of course, due to those presence of the factors, we don’t expect any interference. And that’s been consistent with our experience in Catarina?

Q: Can you just elaborate a little bit on how the actual cash flows through the UnSub, my assumption is that cash flow services the RBL and the GSO preferred in CapEx. And then does the cash flow to the parent from there?

Sanchez: Yeah. This is Tony. You’re right on the first part. The cash flow services the debt and the preferred and if you really think about how we structure it, we put all the initial PDP cash flows there, so expect at that 250 level with the $1 million level. Just cash flows alone after UnSub share of the CapEx should pay down the debt entirely in the next two years to three years.

And so that entity itself from day one is producing – will generate a significant amount of free cash flow after servicing the debt and after paying the coupon on the preferred. So, the way we set it up is basically through cash flows alone, UnSub will basically refinanced itself, it will pay off – it will pay off the RBL and will be in a position to pay off or redeem the preferred at a 14%rate of return, over some time depending on pace of drilling anywhere from three years to five years. So it’s effectively – we’ve effectively equitized the acquisition, but we’ve capped the return on the equity at 14%.

And I think the clear implication here is that SN will be in a position, to consolidate UnSub. Basically, UnSub should go away sometime over the next few years, and we’ll just roll it all up together. So think about it that way, if it’s split up in its components. But the real intention here over the next short-term to medium-term is to consolidate that subsidiary up.

But it’s 100% owned right now.

Q: Who sets the pace of drilling?

Sanchez: We do. We basically have an operating committee and a board that is evenly represented between SN and Blackstone. And so on the SN side, we coordinate with GSO, which just happens to be Blackstone’s credit business, but they’re on our side of the ownership working interest here.

And so we work with GSO to set a drilling pace in terms of what we would want to do on our side, and then coordinate a drilling pace with Blackstone. And over the last few months that we worked with the different groups, I think there’s quite a bit of alignment in terms of how we see execution and this development plan laying out.

Q: You mentioned the Lower Eagle Ford getting thicker as you move into Comanche and CM potential, I guess for a stagger-stack type of pattern, is that something you guys might test in 2017 or how do you think about potentially looking at delineating that concept?

Sanchez: We’ve been almost exclusively developing staggered multi-bench development in Catarina really over the last year and year-and-a-half. So it’s really nothing new, it’s what we always do. So we don’t feel like it actually needs to be test. It’s quite proven over in this western region. What we do plan on really trying to get an understanding of is just how many benches there are out in the west.

With the Eagle Ford thickening so dramatically, we know that we’re quite confident that in the western sort of two thirds of the asset, there is three distinct benches that we feel are basically de-risk completely and are ready for co-development of all three of those benches with a rig on day one doing development work not necessarily appraisal. Where we are wanting to get a better understanding over the next couple of years is, is there a possibility that there is a fourth batch, a second Lower Eagle Ford location that can be developed going West into the thicker Eagle Ford, and then as I mentioned earlier there’s also a porosity member that starts developing in that Lower Austin Chalk and those two zones are going to be what gets tested and what has a fair amount of analysis looked at to figure out if there is a possibility where you could have possibly four distinct benches simultaneously developed and if the Chalk ends up working up, an actual fifth bench.

 Q: Great. That’s helpful. And then last one from me. Just thinking about kind of I guess bridging the gap to that free cash flow neutral or positive position you guys expect to be in, in the year, year plus or so. You guys look at potentially monetizing some assets maybe to the eastern part of the basin, maybe using bank debts or just kind of wondering how you kind of bridge that gap given that large component of the existing cash on the books is going to fund this deal.

Sanchez: That’s a good question and I think that’s something we’ve been working on for most of 2016. So, people did ask what we’re up to monetizing assets and we’ve sold between – between what we sold the SPP and what we sold on the MP side. We monetized, I guess almost $300 million or $400 million for cash. So a lot of that cash – all of the cash that we needed to do this acquisition has already been raised. We don’t need to sell anymore noncore – “noncore” – “non-core” E&P assets, but I think we would be opportunistic. If the price will rise, we probably would take that price because as you could see now, we’re coring up here in what we refer to as a Western part of the Eagle Ford.

On a go-forward basis from the development program given the cash on hand and the mix of some of that cash going to close this deal, relieving ourselves in cash cushion to go through and develop. But given where our cash cushion lies post close of this deal, we think we’ve got the existing liquidity to fund the development of these assets that would take us to the cash flow positives full cycle position and that in large part rests on the DUCs.

If you go to the slide that, that shows the Catarina case study, that DUC – the effect of the DUCs, I don’t think can be understated here because it brings cash flow and production ramp aggressively and early and I think that this DUC inventory which is six or seven times the numbers of DUCs that we had at Catarina, I think is going to prove to be very beneficial as we drive towards cash flow breakeven at the corporate level and then from there it would be cash flow positives.

Q: How should we think about the minimum oil price necessary for this transaction to give your required rate of return? Obviously, it’s highly economic at the strip, but just thinking about it [from a] downside case.

Sanchez: What makes this acquisition so attractive to us is; number one, we got comfortable with it because of our two-and-a-half years of experience at Catarina, immediately next door, so when you look at – when you look at what a buyer of this asset would point to as a comp or as an analog, it is Catarina and nobody understands that better than us.

So, we feel extremely comfortable with the types of production profiles that we would expect from this asset, immediately acquired asset. So, as we – as we model out the wellhead rate of returns at strip, I think, we find what we expect, which is very high rates of return in many cases, significantly over 50% rates of return at existing strip. So, I think you should expect our hedging strategy to not change, we’ve hedged in the past and we’ve continued to hedge on our legacy assets and that would continue here as well.

So, we make money here at strip. We like where it is. Obviously, we like it to be higher, but I think we, and Chris, could get into a little bit more detail here. I think in the event of another significant downturn in oil prices, we have a lot of downside protection, and a lot of cushion because of our cost structure being so low, and so we can withstand oil prices dipping back into the low $30s or even $20s, and look what happened the last time that, that occurred. We didn’t stop drilling. We certainly slowed down. We never stop drilling on Catarina, as oil prices went into the $20s. Now they have sustained though, they would probably slow down more significantly than we did, but I view that from a high level, our approach to drilling and development on this asset will be consistent with what we find at Catarina and what we’ve done in the past.

Taking what Tony just mentioned, we do assume, we’re going to have a similar cost structure. And so assuming that similar cost structure out onto the new Comanche assets. The rates – the breakeven prices are very, very attractive and are highest sort of rate of return area, that’s the Area 5, we mentioned earlier. The expected breakeven there is very close to $30 and if you kind of look at the overall assets, sort of the general average is somewhere around that $35 a barrel range or much of that 4,000 well inventory. We are going to give a detailed breakout in the Analyst Day presentation and generally what you’ll end up seeing in that presentation is that most of our inventory including some of our legacy inventory now at Catarina and other places, all fall within this sort of $30 to $40 breakeven level.

Q: Just given the well cost in Catarina is trending below $3 million, I think around $2.8 million or so. Should we interpret the well cost at Comanche – on the Comanche type curves is just conservatism?

Sanchez: Yeah. There is a degree of conservatism in there, just because we have not fully contracted those services. Of course, what we’ve done, well cost actually trend lower as you get – as you move a little bit shallower and the average Comanche well is about 500 feet to 1,000 feet shallower than our Catarina. So, we would expect them to be lower cost than a given Catarina well. But I think, unlike the Catarina wells, which already have some sort of term contracts and procurements all kind of locked in for sustainability going forward. We’re going to be doing that work in the next couple weeks.

Q: We’re just curious with the HBP status of this asset? And then, maybe as a follow up and Chris, you might have mentioned this, when do you guys get outside and drill outside of kind of areas, areas three and areas five?

Sanchez:  Essentially the entirety of the acreage is held by production. We have a very small number of a continuous development. The total impact is about 15 net wells a year for our continuous development obligations for the entirety of this acreage position. So, at least in terms of relative comparison to Catarina, the continuous development provisions are actually quite light for this asset. Look – early on, we’re going to heavily focus on areas 3 and 5 that I think starting in 2018. We’ll probably start doing some appraisal and actually developments kind of going into those other regions. We – we do expect there to be really good results, as we move further West into areas 1 and 2. And of course, their acreage immediately offset from Catarina is – is very well known, and we do expect to have continued success extending just directly across the lease we signed there as well.

Q: You mentioned kind of the net 25% interest, any chance as we think out kind of over the next couple years of – maybe increasing net working interest or just the other parties involved, most likely hot sellers and the working interest kind of is what it is?

Sanchez:  I think Blackstone Energy is a rather long-term investor, but it’s – I think if we do good work and the value of those asset increases, and they – and they want to exit that if we’re not ready to, and we agree on value, I think there is a transaction to do there. So keep in mind between Blackstone and SN we’re buying 50% of this asset. So there is another 50% working interest out there. And I think we don’t – we would hope that that working interest will become available sooner or later, and we certainly would position ourselves to be the buyer. But I would also look at the – I would also look at the question of acquisitions over and above this more broadly and we in Blackstone view there to be a consolidation opportunity to exist here in the Eagle Ford, and so we’re continuing to look for good assets that would have some kind of an overlay with these assets in a strategic standpoint.

Q: I’m looking at slide 10 and you’ve got an Area 3 target strategy, you’ve got a [ph] gun barrel illustration there. I’m just wondering are you going to go – right from the starting you’re going to go and start developing out that scheme or are you going to do something maybe a little bit more modulated in the early going?

Sanchez: We’re going to start developing the three benches on day one. When the rig start moving in and developing within Area 3, they’re going to be developing all three of those benches. We have a tremendous amount of confidence in each one of those benches, because what we’ve been developing it so heavily over on our Catarina asset and we have well control all the way around in those benches, there’re other companies largely appraisal work, we’re ready to start developing.

In fact one of the key to our model and our efficiency is that you go out to an area and you try and develop every location on all benches simultaneously. In that way when you’re completing the wells, you probably get slightly better completions in all zones, but most importantly, you prevent from having to bracket and interfere with offset wells later on. So, we have plans to continue this multi-bench development and really we’re going to describe that in a little bit more detail on the Analyst Day. But what we views is a concept that we’ve discussed in the past is oil [ph] cropping. So we’ll go into an area, develop every location within that sub-region and when the rigs move, the intention is not to have those rigs come back on for at least many years.

Q: What’s the average lateral length of the acquired DUC inventory?

Sanchez: The average later length is, just over 6,000 feet, they tend to be 6,000 foot laterals to 6,500 foot laterals.

Q: Okay. And how does that compare with the average lateral length that you’re looking for in Comanche when you start to actually operate the acreage going forward?

Sanchez: In Catarina we’ve been averaging around 6,500 foot laterals. For us, in our cost structure that’s pretty much the sweet spot for recovery and efficiency in maximizing what our IRRs are on a well-head basis. Due to our cost structure, we’re able to drill those incremental laterals at a relatively cheaper rate than some of the other operators that are pushed in these acreage, extended to long laterals. You start losing productivity on a per foot basis when you push off much beyond that 7,000 foot laterals. So we’ve gotten really comfortable with the 6,500 foot laterals being close to optimum.

EDITOR’S NOTE: Tony Sanchez III, CEO of Sanchez Energy, will be presenting at EnerCom Dallas, March 1-2, 2017. Register here.

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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