Sanchez Energy Soars In Eagle Ford Oil Exploration


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Oil and gas explorer Sanchez Energy is firing on all cylinders.

It already holds the biggest acreage position in the prolific Eagle Ford Shale in South Texas, among companies of its size. And it has a strong appetite for more.

Houston-basedSanchez ( SN ), whose market cap is near $1.4 billion, made two additional acquisitions in Eagle Ford during the second half of 2013.

In July it added 10,800 net acres in Fayette, Gonzales and Lavaca counties in its Marquis area, with an expected production of 250 barrels of oil equivalent, or BOE, per day.

In October it completed the Wycross acquisition, adding 3,600 net acres in McMullen County, with net proved reserves of 11.2 million BOE and production estimated at 2,000 BOE/d. All combined, Sanchez holds 120,000 net acres in the Eagle Ford Shale. It also bought 40,000 net undeveloped acres in the Tuscaloosa Marine Shale (TMS) in Louisiana last year.

Productive Land

The Eagle Ford Shale has been especially popular among oil and gas firms the past five years and is one of the main drivers of the U.S. energy boom. This is mostly due to large amounts of recoverable oil in this massive area. It has a relatively higher proportion of oil, condensate and natural gas liquids (NGLs) too, which command higher prices than natural gas.

Competitors operating there includeRosetta Resources ( ROSE ) (profiled in The New America Oct. 8),Penn Virginia ( PVA ),Carrizo Oil & Gas ( CRZO ) (in The New America Sept. 13),Matador Resources ( MTDR ) andMagnum Hunter Resources (MHR).

"The two Eagle Ford acquisitions, they were immediate and rigs were running and they simply continued to pick up right where the prior operators left off," said Curtis Trimble, analyst at Global Hunter Securities. "They've been immediately accretive to production and financial metrics. This is indicative of a good and solid operating plan."

The TMS acquisition is not expected to produce much in 2014 and Sanchez is planning to invest only $60 million to $65 million of a total of $650 to $700 million in projected capital expenditures this year.

"They're basically going to slow-play that and allow others to define best practices, which is a capital-efficient way to go about it," Trimble said, adding that the approach eases concerns investors originally had.

Trimble also says he wouldn't be surprised to see more acquisitions, as the Sanchez family has expressed the desire to have a larger company.

In addition to the land acquisition, Sanchez has also been pumping out oil and gas at a rocket-fast rate in the existing areas. In the fourth quarter of 2013, production stood at 1,731 million BOE, or 18,810 BOE per day. This was 60% higher than in the prior quarter and a jump of 905% vs. the year-ago period. Production contained 73% oil, 13% NGLs, and 14% natural gas.

"One of the things that excites me the most about this company is how levered they are to this play, meaning they have a big position (in Eagle Ford) for a company their size," said Stephen Berman, analyst at Canaccord Genuity.

"They're really moving into full-scale development mode in the Eagle Ford now, which should lead to substantial production and cash-flow growth as they move forward," he added. "They exited the year on a nice little run and I think they have some real momentum here."

A Wealth Of Wells

At the end of 2013, Sanchez had 187 gross producing wells, six gross rigs running across Marquis, Palmetto and Cotulla, its three Eagle Ford areas, and 15 wells that are in various stages of completion.

Sanchez's stock price wavered Tuesday and Wednesday, erasing a week of lift, after results of a test on its Sante North 1H well showed far more water than oil produced.

The company clarified on Wednesday that it was a partial well test, and the stock advanced Thursday and Friday.

Sanchez's 2014 operating capital plan calls for seven more gross rigs and 70 net wells for the year. It sees reaching average production of 21,000 to 23,000 BOE a day.

"Sanchez has been amongst the most aggressive (in Eagle Ford), coming out of a late 2011 IPO and it has navigated the development scenario extremely well in terms of deployment of capital and well performance," said Trimble.

Indeed, drilling wells and pumping oil require a significant amount of capital. In addition to using internally generated cash flow, Sanchez went to the capital markets in 2013 again to add to cash reserves.

It issued $200 million in senior notes in a private offering in September. The same month, Sanchez did a stock offering of 9,600,000 shares at $23 per share. The net proceeds were partly used to fund its Wycross acquisition, with the remainder to be deployed in the Eagle Ford and for general corporate purposes.

The company has also realized significant cost efficiencies due to its move to pad drilling across all its assets. It has achieved approximately 10% in cost savings, thanks to the location costs being spread out over multiple wells, savings in time and costs involved with rig mobilization between wells, as well as shared operating resources and facilities.

Downspacing, where the company drills more wells in a given area, is another way to extend the economic returns from that area.

"We're just starting to see the early evidence of that," said Trimble. "As you go to full-scale development ... you could easily see a 10% to 12% degradation in well cost."

One risk for oil and gas companies is access to water, notes Trimble. When going into full-scale development, water needs rise proportionately. In a period of drought, such as now in Texas, this could be an issue. Also, oil and gas firms are dependent on pricing of crude oil and NGLs. Finally, infrastructure must stay ahead of production growth. So far, build-out in the area has stayed ahead of the curve, notes Berman.

The Sanchez family has been in the area over 40 years and has built solid relationships with landowners, service firms and employees.

"I think the results are speaking for themselves," said Berman. "I like the use of the term 'underpromise and overdeliver' -- so you give guidance and you beat that guidance, and the company has been doing that lately, and its consistency in that is what investors look for."

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing Investing Ideas
Referenced Stocks: SN , ROSE , PVA , CRZO , MTDR

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