Sanchez Energy Corporation (ticker: SN) is as a fast growing independent oil and gas company targeting the liquids-rich Eagle Ford Shale, Pearsall Shale, Austin Chalk, and Buda Limestone plays. The company made its initial public offering in December 2011, and has since reported rapid development on its Eagle Ford acreage.
During 2012, the company grew production 170% from 2011 levels totaling 468.8 MBOE of oil and gas produced during the year. Approximately 89% of this volume was oil. At year-end 2011, SN reported 6.7 MMBOE in proved reserves. As of year-end 2012, proved reserves increased to 21.2 MMBOE (85% oil), an increase of 216% compared to year-end 2011. We want to point out that 82% of SN’s proved reserves were classified as proved undeveloped (PUDs) at December 31, 2012. In June 2012, approximately 91% of SN’s proved reserves were classified as PUDs. The PUD count shouldn’t be alarming – the company has shown the ability to add PUD locations since its IPO, and has successfully added capital sources to funds its expansionary growth strategies.
Recent Financial Results: Increasing Revenues and Higher Production is the Story
During 2012, SN reported a net loss of $18.4 million, or a loss of $0.56 per share. Total 2012 revenues increased 197% year over year – but they real story was in its Q4’12 results where the company increased revenues 259% on 208% higher production when compared to Q4’11. The company exited 2012 with a daily production rate of 4,500 BOE/D. The ability to meet a forecasted rate is a highly desirable attribute. For 2013, the company announced an exit production rate of 8,500 to 9,000 BOEPD.
Infrastructure is Top of Mind: Operations Update
From Q3’12 to Q4’12 the company grew production 29% to approximately 1,874 BOEPD – which was constrained due to a variety of timing issues affecting the production rate. Sanchez said in a news release back in January 2013, “Due to take-away constraints and central production facility startup issues associated with the Palmetto area, we estimate our year-end production was adversely impacted by approximately 750 BOEPD.” Adding the 750 BOEPD constrained production capacity to the company’s average 2012 production of 1,284 BOEPD would be 2,034 BOEPD. Exiting 2012, SN had 17 wells in various stages of drilling (two) and completion (15). These 15 wells are primarily located in the Palmetto and Marquis areas. An important catalyst to continue to follow is SN’s infrastructure improvements and build outs in the Palmetto area which are expected to be completed by late Q2’13. The plan is to alleviate the bottlenecks in the area to allow for wells to flow to sales without timely delays.
What to Look for in 2013
Aside from an infrastructure build out, we believe there are important operational objectives that will have investors’ attention during 2013. SN re-iterated its 2013 average production guidance of 5,500 BOEPD to 6,500 BOEPD and a 2013 exit rate of 8,500 BOEPD to 9,500 BOEPD. It will be important to see if the company can provide a roadmap to investors about how any future curtailments will affect company guidance going forward, and how investors should digest future guidance from the company.
We also want to point to the company’s down spacing tests. SN completed down spacing tests late in 2012 assuring the company it can reduce its well spacing from 80 acres to 60 acres. SN is carrying out additional tests and evaluating supplementary reductions to 40 acre spacing on a five well pad. Here is a story we wrote last year about the potential upside for Sanchez if down spacing in the Eagle Ford was confirmed by the industry.
Here is a map of Sanchez’ Eagle Ford operations. Click to enlarge.
EOG Resources (ticker: EOG) is testing 40-acre and 65-acre spacing across its 569,000 net acres. Map of EOG’s Eagle Ford acreage is below. Click to enlarge.
Final Thoughts on Sanchez
SN’s asset intensity, a metric measuring the percentage of cash flow required to maintain flat production, is only 23% based on the September 30, 2012 calculation. We anticipate that when the 10-K is filed later this month for 2012, this metric will remain a strong point for SN implying a great deal of growth and running room despite a high PUD percentage, which normally is often viewed as a metric establishing the upper limits of growth potential. SN has a long history of success operating in South Texas. The Eagle Ford formation is the primary driver for reserve, production, revenue and EBITDA growth. Production in 2013, comparing year-over-year exit rates, could potentially rise 50%. Nearly 90% of SN’s production is crude oil, a meaningful percentage when compared to lower priced NGLs. Capital spending in 2013 will be an estimated $347 million, 94% allocated to drilling. Based on that drilling budget, Sanchez expects to drill 46 gross (33.5 net) wells in the Eagle Ford, a substantial increase over the 31 gross (17.5 net) wells drilled in 2012. The company will concentrate its efforts in Palmetto ($125 million), where 12.5 net wells are planned, and Marquis ($190 million), where 19 net wells are planned.
You can look ahead with Sanchez.
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