On February 14, 2012, Sanchez Energy Corp. (NYSE: SN) disclosed its 2012 capital expenditure budget and drill plan as well as operating guidance for fiscal year 2012. SN plans to spend approximately $135 million (midpoint of CAPEX guidance) drilling 23 gross (16.5 net) wells in the volatile and black oil windows of the Eagle Ford in South Texas. The company will also spend an estimated $10 million on central production facilities and related infrastructure, leasing and seismic for a total estimated CAPEX of $145 million (midpoint). See drill-plan breakdown by prospect below:

(1)Gonzales County
(2)Atascosa, DeWitt, Fayette, Lavaca and Webb Counties
(3)Frio and Zavala Counties

SN is guiding its 2012 average production rate to range from 2,000 BOEPD to 2,400 BOEPD with an exit rate of 4,500 (midpoint of guidance), 233% more than the company’s 2011 production exit rate of 1,350 BOEPD. See SN’s 2012 operating cost guidance below:

  • LOE (MM): $5.0 to $5.5
  • G&A (MM): $7.0 to $8.0
  • Production Taxes (% of revenue): 7.0% to 7.5%
OAG360 Comments

SN exited 2011 with seven wells producing in the Eagle Ford shale at a rate of 1,350 BOEPD. Of the seven wells, six were in its Palmetto prospect (50% WI) located in Gonzales County and produced at average 30-day IP rates of 950 BOEPD gross. For comparison, Magnum Hunter Resources (NYSE: MHR) currently has three operated wells in Gonzales County which produced at average 30-day IP rates of 493 BOEPD gross. SN’s seventh well is in its Maverick prospect (81% WI), located in Frio and Zavala Counties, produced at an average 30-day IP rate of 242 BOEPD gross.

For 2012, SN will continue to develop its Palmetto and Maverick prospects as well as spud its first Marquis prospect well. The company’s 2012 drill plan allocates a midpoint CAPEX of $54 million to each the Palmetto and the Marquis and $24 million to the Maverick. The Marquis well completions will be important to pay attention to because 61% of the company’s 90,700 acres in the Eagle Ford lie in the Marquis prospect, versus 10% for Palmetto and 29% for Maverick. OAG360 notes that SN’s Palmetto completions have improved as development of the play progressed (see Figure 1. below), and we expect the same for the company’s Maverick and Marquis prospects as SN continues to figure out the play.

SN’s Palmetto Prospect Completions Improve Over-time

Figure 1.

Source: SN’s S-1/A dated 11/30/2011, 2011 year-end production press release

Efficient Production Driving Value

SN’s trailing twelve month capital efficiency is 338%, meaning the company is generating $2.38 of EBITDA for every $1.00 it invests in exploration and development of acreage, which is the highest value out of ECI’s 26 company small cap peer set. The company’s ability to produce efficiently, combined with oily assets (86% of proved reserves are oil compared to 52% in peer set) in a depressed natural gas market, positions it well to outperform its peers. OAG360 notes that oil traded at 37.9X the price of natural gas (above 6:1 ratio) as of February 7, 2012.


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