Sanchez Energy Corporation’s (ticker: SN) development of its Catarina assets in the Eagle Ford (EF) are exceeding company expectations, SN management said in a news release on December 10, 2014. The Catarina, acquired from Royal Dutch Shell (ticker: RDS.B) in May 2014 for a price of $639 million, instantly doubled Sanchez’s asset base and production volumes. Announced production is currently 45 MBOEPD, which exceeds the company’s previous estimates of 40 to 44 MBOEPD for Q4’14. The current volume is a company record and 16% higher than average Q3’14 production of 38.6 MBOEPD.
Catarina Update
The majority of Shell’s development in the Catarina were focused on the Upper EF formation, and nine wells previously completed by RDS averaged 24-hour and 30-day rates of 1,402 BOEPD and 1,200 BOEPD, respectively, according to SN’s Q3’14 report. Nine more Upper EF wells completed by SN averaged 30-day production rates of 1,067 BOEPD, while three Lower EF wells produced an average rate of 1,280 BOEPD (65% liquids) apiece. The Lower wells are tracking along SN’s type curves of 600 to 700 MBOE.
Catarina requires 50 wells to be drilled annually, and Sanchez anticipates meeting those requirements by employing 2.0 to 2.5 net rigs. An appraisal well drilled in the northwestern part of the Catarina has proved to be prospective for both Upper and Lower EF formations, and the company believes both can be simultaneously developed throughout the region.
Eight more Catarina wells are expected to be placed online by year-end. A full list of completed wells can be seen below.
Source: SN December 2014 Presentation
Sanchez also announced the completion of a well in the Tuscaloosa Marine Shale (TMS), with a lateral length of 5,600 feet. The TMS well yielded a peak 24-hour rate of 1,143 BOEPD and a 30-day rate of 920 BOEPD (91% liquids). SN is undertaking the region as part of a joint venture with privately held Sanchez Resources. Another lateral drilled to 6,450 feet is targeting the upper TMS and is forecasted to begin production within December. The TMS wells are shallower than traditional wells in the region due to the “rubble zone,” which SN believes allows for shallower decline rates. A total of 110,000 net acres are held in the play.
Balance Sheet
Sanchez announced total liquidity of $1,180 in its update – $530 million in cash and a total of $650 million on its available borrowing base following its increased commitment last month. SN has elected to use $300 million of the borrowing base, and has a total of $1.5 billion under its first lien revolving credit facility.
Net debt to pro forma EBITDA (trailing twelve months), according to Sanchez, is 1.8x. Upon purchasing the Catarina asset, management said its goal was to keep its net debt to EBITDA multiple below 2.0x. Its current level is well below its restrictive covenant of maintaining a 4.0x net debt to EBITDA multiple. The revolver and senior notes will not begin to mature until 2019 and 2021, respectively.
As previously mentioned by management, Sanchez intends to fully fund its 2015 capital program of $850 to $900 million through cash on hand and from operations. There will be nothing drawn on the company’s credit facility.
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Analyst Commentary
Global Hunter Securities Dirty Energy Daily (12.10.14)
Initial Lower Eagle Ford results at Catarina came in strong at close to 1.3 Mboepd, and SN's second TMS well IP'd at 1.1 Mboepd. Current production is 45 Mboepd vs. our Q4:14 projection of 42 Mboepd, and liquidity remains robust at $1.2B. We think this is a positive ops update, particularly in light of SN's current trading multiple of 1.1x 2015E CFPS. We continue to believe that SN's strong liquidity and core EFS acreage position the company well for a downturn in commodity prices.
