In order to get quantity, sometimes you need to focus on
That's exactly what the small-cap oil and gas producer Sanchez
Energy has been doing. Its main focus is the prolific Eagle Ford
Shale in South Texas.
) has been drilling wells since 1972, but only went public in
December 2011. Its effort to pursue high-quality acreage with
high-producing wells has paid off. Sanchez has the largest
presence in the Eagle Ford Shale among the public companies
"All acreage in the Eagle Ford Shale is not created equal,"
said Adam Michael, an analyst at Miller Tabak.
"The Eagle Ford Shale has different regions. Some parts of it
are more oily, some parts are all gas and some parts are
liquids-rich (natural gas liquids such as propane and butane),"
he explained. "But Sanchez has most of their acreage in the oil
window. They have more acreage per unit of market capitalization
than any other company out there. And they also happen to have
very good acreage. They've been drilling some of the best wells
in the Eagle Ford."
Sanchez has about 94,000 acres in the region with 49 producing
wells. Its three primary project areas are Marquis, Palmetto and
It has identified more than 1,000 drilling locations in the
region, based on a 80- to 120-acre spacing between wells. But the
company is also planning to downspace, which means drill wells
closer together. It is moving toward 50 acres between wells. This
will allow it to drill more wells in the Marquis and Palmetto
The largest and most important area from an outlook point of
view is the Marquis. "They've drilled about half-a-dozen wells in
the Marquis. The wells look really good, but there is a lot of
running room because they have 50,000 acres in the Marquis. If
they can prove that most of those acres are also going to be good
wells, then there is over a decade of drilling locations. Then,
they can just drill forever," said Michael.
Currently, the Marquis wells produce at or above 1,000 BOE, or
barrels of oil equivalent, per day.
In Palmetto, Sanchez operates on 10,000 acres in a 50/50 joint
venture withMarathon Oil (
). The company has 25 proved developed producing, or PDP, wells
there. It expects completion of four more.
"Their Palmetto acreage is located in a very attractive
neighborhood in Gonzales County, which is an area that has
historically enjoyed some of the highest initial production rates
in the play," said Stephen Shepherd, analyst at Simmons & Co.
Production rates have been as high as 1,500 BOE per day.
"The Palmetto is going to be accelerating because they are
drilling with more rigs, they're drilling more wells and they are
going to actually add a third rig, so they'll be drilling three
times as many wells as they were at the beginning of the year,"
Sanchez also expanded its central facility in Palmetto for a
total capacity of 20,000 barrels per day. It now has access to an
oil pipeline, giving it the connection to the Marshall sales
point. As a result, it expects to save $3 per barrel in
transportation costs and have fewer transport disruptions.
This facility expansion came on the heels of some capacity
issues the company experienced in Palmetto in 2012.
"It's 80% to 85% oil, and there were oil-loading capacity
issues in the field," said Ronald Mills, an analyst at Johnson
Rice. "They were only able to load so many oil trucks a day."
Sanchez recently acquired operated assets with working
interests in 43,000 acres, called Cotulla, fromHess (
) for $265 million. This gives it access to 13.4 million BOE of
proved reserves and a current production of 4,500 BOE per day
from 50 wells.
The advantage of the Cotulla acquisition is that the company
added developed acreage to its portfolio, as opposed to the raw
land it had in other areas.
"When it's developed, by nature it does come with production
and therefore cash flows," said Mills. "Developed reserves are
'bankable' from a commercial lending standpoint. So it really
helps from a liquidity standpoint.
"The acquisition basically fast-forwarded the company by about
18 months in terms of getting them to that level, vs. if they
would have done that by drilling organically on its legacy
That said, Sanchez will not be growing the production in
Cotulla, but instead it will just maintain the existing
"Those properties are self-funding, in the sense that the
current production from the Hess properties is funding that level
of activity," noted Mills. "It (Cotulla acquisition) added
critical mass and scale to the company in doing it with a more
developed asset base."
Analysts expect Sanchez to make smart acquisitions in terms of
getting assets at a really good price such as the Cotulla
transaction. But their primary focus should remain on the Eagle
The company recently hired Joseph DeDominic as its newly
appointed chief operating officer. DeDominic has over 24 years of
experience in the oil and gas industry, and most recently
atOccidental Petroleum (
) for the past 12 years.
He built a business unit at Occidental from a nonoperating
unit to an operating one, noted Mills. "He has brought a lot of
these processes down to Sanchez, and it has really helped them
from an operational and management standpoint.
"The Sanchez family has been actively drilling in South Texas
since 1972. They've benefited, as they've built out the Eagle
Ford Shale position, from strong relationships with landowners
through the 40 years of drilling. And that is something that not