Oil and gas explorer Sanchez Energy is firing on all
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.
), 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.
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 (
) (profiled in The New America Oct. 8),Penn Virginia (
),Carrizo Oil & Gas (
) (in The New America Sept. 13),Matador Resources (
) 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
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
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
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
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
"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
"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."