Current SN Stock Info

Sanchez Energy Corporation (ticker: SN) is a Houston, Texas, based, growth oriented, independent exploration and production company focused on the exploration, acquisition, and development of oil resources in the onshore U.S. Gulf Coast with a current focus on the liquids-rich Eagle Ford Shale, Austin Chalk, Buda Limestone, Pearsall Shale and Tuscaloosa Marine Shale.

Sanchez Energy’s aggressive drilling program from 2013 yielded quarterly record production of 1,731 MBOE (86% liquids) for Q4’13, according to an earnings release on March 5, 2014. The total is 60% greater than Q3’13 totals and an increase of 904% from Q4’12. Revenue also climbed to $130.1 million – increases of 38% and 679% compared to totals from Q3’13 and Q4’12, respectively. The company averaged roughly 18.8 MBOEPD during Q4’13.

Sanchez Energy recently presented at EnerCom’s The Oil & Services Conference™ 12 in San Francisco. Click here for a list of questions asked at their breakout session.

2013 Totals

Fiscal 2012 results pale in comparison to Sanchez’s 2013 campaign. SN recorded 3,872 MBOE in production and $314.4 in revenue, which are both company records and increases of 726% and 629% compared to 2012. Adjusted EBITDA of $226.7 million is 785% higher on a year-to-year comparison and adjusted net income of $33.2 million is an increase of 351%. Proved reserves climbed 177% to reach 58.7 MMBOE for a PV-10 value of $1.47 billion.

Sanchez currently has $154 million in cash on hand with an additional $325 million in undrawn funds from its credit facility. The company holds an option to increase its borrowing base to $400 million, but management said it does not believe the extra commitment is necessary.

Operations Review

Sanchez enters Q1’14 with 200 gross producing wells in five project areas, which is 158 more wells than year-end 2012. Acquisitions added 74 gross wells while drilling operations contributed a total of 84 wells. The company is currently running seven gross rigs (six net) with an additional 15 gross wells awaiting completion. Drilling costs dropped 25% in Q4’13 compared to the previous quarter and completion costs for the same time period decreased by 35%.

Upward Production Trend Expected to Continue

Sanchez places production guidance for Q1’14 at 18 to 20 MBOEPD, which would be an increase of 6% if the high point is reached. Full year 2014 guidance is expected to reach 21 – 23 MBOEPD, which is roughly double 2013’s average of 10.6 MBOEPD. Roughly 50% of SN’s anticipated production is hedged, and management projects operating costs to remain consistent throughout the upcoming year.

SN has allotted $650 million to $700 million for its 2014 drilling plan, and roughly 90% of expenditures will be directed at development of its Eagle Ford assets. The company plans on continuing to run seven gross rigs and expects 70 net wells to be spud and completed. The Marquis assets are estimated to account for roughly half of both the expenditures and completions guidance.

Management said more wells were completed in 2013 due to increased drilling efficiency. In the Alexander Ranch area of the Cotulla Field, the operations team spud and drilled a well to total depth in less than eight days. Drilling and completion costs in the same region decreased to $6 million per well compared to $8.3 million per well when the team first commenced appraisals. Similar efficiency is taking place in the Prost area, where well costs have dropped to $8.5 million per well from $11 million to $14 million per well for the same period.

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Analyst Commentary

KLR Group Morning Brief – (3.6.14)
Sanchez announced yesterday 4Q/13 recurring EPS of $0.27 vs. our $0.39 due to lower price realizations. Production of ~18.8 Mboepd (~73% oil, ~13% NGLs, ~14% gas) in 4Q/13 was pre-announced. In the Cotulla area, well costs decreased from ~$7 million to ~$6 million. In the Prost area, well costs decreased from ~$9 million to ~$8.5 million. The company plans to spud its first TMS well in 2Q/14.

SunTrust Robinson Humphrey Quick Thoughts – (3.6.14)
Sanchez reported 4Q13 adjusted earnings below forecasts largely due to non-cash items though more importantly cash flow results came in ahead of estimates driven by higher than expected production and 2014 production expectations (though likely conservative) suggests ~100% growth. Stock could slightly underperform on 4Q earnings miss and unchanged guidance from late January though we believe cash flow and possible upside to production should be the focus.
4Q13 Earnings Recap
Recurring EPS of $0.27 versus STRH $0.31E and Street consensus $0.32.
Production of 18.8 Mboe/d versus STRH 17.8 Mboe/d and Street consensus 18.1 Mboe/d.
Blended liquids price of $83.28/Bbl versus STRH $90.77/Bbl estimate.
Natural gas price of $3.12 versus STRH $3.84 estimate.
CAPEX of $184mm versus STRH $150mm estimate; $454mm liquidity.
6 net rigs running currently.
Year-end reserves of 58.7 Mmboe (+177% YoY) with a PV-10 of $1.47B.
Unchanged from January 27 with 1Q 2014 production between 18-20 Mboe/d vs. STRH at 20.6 Mboe/d.
Unchanged from January 27 with full year 2014 production between 21-23 Mboe/d vs. STRH at 23 Mboe/d.
Operations Highlights
Alexander Ranch well costs decreased from $8.3mm prior to the acquisition to a current ~$6mm per well.
Prost well costs decreased from an initial ~$12.5mm to $8.5mm in early 4Q and likely notably lower now.
Completion costs decreased 35% from 3Q to 4Q.
3 rigs running at Marquis, 1 at Cotulla, 1 at Wycross, and 1 at Palmetto.

Stifel Note – (3.6.14)
4Q13 Earnings Summary
4Q13 EPS and EBITDA of $0.26 and $98.6mn compared to Street consensus of $0.32 and $94.6mn and our estimates of $0.21 and $98.6mn. EPS beat our estimate on production costs/Boe (-22%), DD&A/Boe (-5%) and realized price (+2%) partially offset by interest expense (+40%). EPS missed consensus on DD&A/Boe (+5%).
Pre-released Production Above High End
Pre-released (1/27/14) production of 18.8 MBoe/d, which increased 60% from 3Q13 and 905% y/y, was above the high end of guidance of 15 to 17 MBoe/d.
Borrowing Base Increased
Liquidity was $454mn at YE14 including $300mn of undrawn credit line capacity and $154mn of cash. The borrowing base was increased to $400mn on 2/28/13 although the company elected to a commitment of only $325mn.
Cost Containment Highlights Update
Well costs in the Alexander Ranch Field in the Cotulla project, where recent wells have been drilled in 8 days or less, were approximately $6.0mn in 4Q13 compared to $8.3mn prior to SN's acquisition of the properties and the $8.0mn embedded in our NAV estimate. Likewise, Prost area wells in the Marquis project were $8.5mn in 4Q13 compared to our $9.0mn NAV assumption.
The release did not include an update on the Sante North 1H well, which experienced mechanical issues when the company was drilling out plugs. The well flowed modest oil rates from 7 of 22 frac stages. At last report (2/19/14), management expected a rig on location in early March to drill out the remaining 15 plugs and return the well to production. We anticipate more discussion on this well, which could de-risk a significant portion of Marquis, on tomorrow's conference call. Our NAV estimate currently excludes value for the Sante area as well as the TMS, where SN's first well remains on track for a 2Q13 spud.
Guidance Affirmed
The company reiterated 1Q14 and FY14 production guidance of 18 to 20 MBoe/d and 21 to 23 MBoe/d respectively.
Modestly Positive Release
Despite the EPS miss, we view the release as modestly positive as efficiencies contributed to a production beat and lower than expected well costs.
Our target price assumes the stock's maintains a 26% premium to our projected price/NAV and EV/2014E EBITDA group multiples narrows 17%.
Oil and Gas Prices
Our NAV estimate of $37/share declines to $28/share assuming a long-term NYMEX natural oil price of $75/Bl compared to our $90/Bl assumption. On the other hand, our estimate only declines $3/share to $34/share based on a long-term natural gas price of $3/MMBtu, compared to our long-term forecast of $5/MMBtu.
Reserve Uncertainty
The company’s Palmetto Eagle Ford wells have been producing for less than two years, while our reserve estimates assume more than 30 years of future production. Actual production could deviate significantly from our forecasts and cause us to lower our NAV estimates.
Regulatory/Environmental Risks
Potential unfavorable legislation affecting fracture stimulation or other regulatory or environmental issues could delay development and increase costs.
Concentrated Asset Base
Regulatory issues, infrastructure constraints, or shortages of oil field services or equipment that impact the Eagle Ford could have an adverse effect on the stock.

Johnson Rice & Company Morning Energy Call – (3.6.14)
Sanchez reported a solid quarter with costs falling and its production ramping to 19 mboe/d. Recent shifts to pad drilling and zipper fracs have driven costs down 28%-32% in its Alexander Ranch and Prost areas respectively, which should continue in to 2014 as additional efficiencies are gained. We look to tomorrows call for commentary on its step-out wells in Marquis; however, no updated results are expected, as its Five Mile Creek well is still drilling and the remaining plugs are due to be drilled out at its Sante North well in the coming days. We re-iterate our Focus List rating on the stock, as it remains attractive on a valuation basis and has a number of upcoming catalysts (EF results and the beginning of its operated TMS program during 2Q).

Capital One Securities Morning Energy Summary – (3.6.14)
Neutral. Operational results in line as lower costs offset lower realized prices. 4Q EBITDA was $98MM vs $96MM/$99MM Street/COS. 4Q EPS was 27c vs 31c/45c Street/COS. The EPS miss was primarily driven by non-operational items including higher-than-expected interest expense and tax rate. Production was pre-announced in late January at 18.1 Mboe/d (ex prior period adjustment), which came in above the high end of the original 15 - 17 Mboe/d guidance range. SN reaffirmed 1Q14 guidance of 18 - 20 Mboe/d and FY14 guidance of 21 - 23 Mboe/d. CAPEX for 2013 came in at $480MM, which was 2% above SN’s $470MM guidance. This figure excludes $631MM spent on acquisitions last year. SN has achieved lower well costs in both the Cotulla and Prost. At Cotulla, well costs decreased from $8.3MM initially to $6.0MM in 4Q13 (below the $7.5MM that we model). At Prost, initial well costs ranged from $11MM - $14MM, but have decreased to $8.5MM in 4Q13 (below the $9.0MM avg that we model for the Marquis area).  

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