Current SN Stock Info

Sanchez Energy Corporation (ticker: SN) reported a net loss of $4.8 million for the first quarter 2018, or $(0.30) per share attributable to common stockholders. The quarter included $24.4 million in non-cash mark-to-market losses related to hedging activities, Sanchez said.

Production

Sanchez had production of ~7.3 MMBOE, or 80,572 BOEPD in Q1 2018. According to Sanchez, the company’s first quarter 2018 production came in below guidance due to weather, natgas takeaway capacity and completions test issues with the Comanche asset. Overall, the company estimates that Q1 production was negatively impacted 3,500 BOEPD.

Sanchez Energy Produced 7.3 MMBOE in Q1

SN Longer Laterals, May 2018

“Post the operational tests, we have transitioned to the exclusive use of slickwater design completions on all of the Comanche properties, and project improved production rates as these wells begin producing hydrocarbons later in the second quarter,” CEO Tony Sanchez III said. “We also returned to a more conservative choke management strategy, which we expect to result in lower base decline rates and a more stable production profile, allowing us to optimize the productivity of the multi-zone development plan at Comanche.”

Drilling

During the first quarter of 2018, the company drilled 49 gross (25.67 net) wells and completed 73 gross (23.3 net) wells. The company brought 62 wells on-line at Comanche and 6 wells on-line at Catarina during the quarter.

Sanchez said it finished completion activities on all of the 132 gross DUCs acquired with the Comanche assets in March 2017. With continuous drilling activity on the asset, the company exited the first quarter of 2018 with 42 gross DUCs at Comanche.

Sanchez Energy Produced 7.3 MMBOE in Q1

SN Comanche Area 5, May 2018

As of March 31, 2018, the company had 2,233 gross (883.2 net) producing wells with 59 gross wells in various stages of completion.

“Taking these added wells into account, along with higher working interests and the move to full slickwater completions, we now expect our full year capital budget to be between $475 million and $525 million,” Sanchez said.

CapEx

Capital expenditures incurred during the first quarter of 2018 totaled approximately $150 million, which were allocated approximately 99% to drilling, completion and infrastructure, with the remaining 1% to leasing and business development activities.

Q2 and 2018 guidance

According to Sanchez, production for the second quarter is projected to average between 80,000 – 84,000 BOEPD.

Sanchez Energy Produced 7.3 MMBOE in Q1

SN Comanche Well Results, May 2018

The company projects an average production rate of between 80,000 – 84,000 BOEPD for the full year.

Conference call Q&A excerpts

Q: Could you just talk about the spacing or target in the Area 5 for Comanche?

CEO Tony Sanchez III: Yeah, Area 5 has been a consistent performer – we’ve talked about that in the past. We don’t have the Upper Eagle Ford across much of Area 5, what we have is two benches that thus far have been working well with co-development, the Lower Eagle Ford A and the Lower Eagle Ford B.

We’re going to get some tests on some Upper Eagle Ford results on the far western side of Area 5, where the rock looks very similar to where we see good results coming out of the Eastern part of Area 3.

So, we think that that feature in the Upper will continue over there. But by and large Area 5 is going to be a Lower only development program, except for maybe the far Western side where we have some results coming around midyear.

Sanchez Energy Produced 7.3 MMBOE in Q1

SN Comanche Area 3, May 2018

Q: The legacy DUCs had underperformed expectations… was this true for the DUCs taken as a whole, or was this more specific to the second half 2017 test?

CEO Tony Sanchez III: It was a combination… A large part of the impact in the first quarter was driven by DUCs that we completed in the third and fourth quarters. And some of these DUCs either were too closely spaced together in and of themselves, or we drilled some new wells in between them that then resulted in the section itself being too closely either laterally spaced or apparent spacing in the stacked and staggered configuration. So, it was that underperformance that carried through into the first quarter and it was pretty clear that spacing was an issue here early on.

But, as you know, the well underperformance doesn’t just stop at the quarter end, it kind of carries on through. So, we have some catch up to do in that regard. Now, the economics around the DUCs is tremendous, even underperforming type curves on the DUCs since we’re only spending capital on the completion piece, the IRRs were very strong. I don’t have specific off the top of my head, but they were all north of 50%, some of them well north of that.

So, in spite of the underperformance it was still a very place to put some capital.

Q (continued): You mentioned that aggressive choke management produced negative effects in all areas. Are there particular areas that will disproportionately benefit from the conservative choking that you’re going to implement going forward?

CEO Tony Sanchez III: Yeah, I’ll start the answer and then turn it over to Chris for a little bit more specificity.

But the choke management, it’s – we had such a large position, about half a million acres that we’re operating in and we are seeing significant changes even in close vicinity. So I wouldn’t apply – even the spacing comments, I wouldn’t apply it for the whole thing. In some places tighter spacing work better than other areas.

In terms of choke management, we have seen some variation, there are some areas largely the oilier areas benefit from a more aggressive choke strategy plan. And in the gassier areas or the higher condensate areas, what we found was that we had some spikes in gas oil ratios. And so, the underperformance came from largely a drop-in yields at the wellbore and a non-flattening of the production curve coming from these wells.

So prior to really the second half of last year, our policy had been largely conservative choke strategy, which let us achieve steady quarter-over-quarter gains in production. What we try to implement really was to drive towards shrinking working capital uses and bringing production forward and NPV forward, without much of an effect on IRR. In some places that worked and other places it didn’t work and it had the negative effect of actually probably hurting the well.

And so, that carryover into the first quarter had an effect as well. And looking at the data, it’s pretty clear that overall a more conservative choke strategy is warranted. But in some places we could still be a little bit more aggressive and those tend to be the oilier areas.

SVP and COO Christopher D. Heinson: The only thing I’ll add to Tony’s comments, because I think he addressed where the benefit would be, and that’s the higher areas. The only thing I would comment is, we didn’t see that dramatic of a delta due to choke management in the first quarter, it was about 1,000.

The choke management changed from sort of this mix of aggressive and intermediate down to a conservative, actually slightly more conservative than we’ve historically run over the last three to five years, that delta carries through on the next following quarters on the program.

So, you have a transition where you’ve gone from aggressive to a conservative program, which has a timing effect on when the wedge production comes online for 2018. That effect had a fairly significant change in the overall 2018 production profile.

We do expect those changes to have benefits to the 2019 and 2020 production programs, as those shallow declines will shallow the base going into 2019 and 2020. That should add, as Tony commented, a stable platform for us to continue to grow in the out years, but it did have an impact on our annual guidance for 2018.

Q (continued): In the condensate areas, there was a problem that you were kind of getting to, new point or something, that pulling on wells will be too hard and so by pulling back you’re maintaining a higher condensate yield, it was that sort of problem?

SVP and COO Christopher D. Heinson: Yeah, that’s exactly right. We ended up hitting the bubble point pretty quickly over in the gassier areas, and you started having condensate fall-out on us a little bit earlier than we would have otherwise expected.

And with the change to a conservative choke, we can push that point where we start seeing gas break out. We’ve seen it go as far as a year. And that really enhances your early time oil recoveries.


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