Sanchez Energy Corp Poised to Capture Eagle Ford Upside

October 29, 2012

Eagle Ford, Production

Sanchez Energy Corp (ticker: SN) is a pure-play South Texas oil company with a 95,000 net acre position targeting the liquids-rich Eagle Ford Shale, Pearsall Shale, Austin Chalk, and Buda Limestone. Back in December 2011, SN made its initial public offering (IPO) at $22 per share making the company one of the only pure-play Eagle Ford shale companies in the public markets. More recently, to accelerate drilling across the booming areas of South Texas, SN raised $150 million (net proceeds of approximately $144.6 million) through a convertible preferred equity offering. Additionally, the company announced earlier this month that they anticipate closing both a $250 million first lien revolving credit facility, with an initial borrowing base of $27.5 million, and a $250 million second lien term loan, with an initial commitment of $50 million, to provide further liquidity. OAG360 notes that the company has no usage planned in 2012 under either tranche of the credit facilities.

Positioned to Ramp Up Production

The company’s production rate on September 30, 2012 (exit rate) was 1,700 BOEPD (86% oil), an increase of 42% from the exit rate achieved on June 30, 2012. The company will disclose its average quarterly production rate when they release Q3’12 results in November.

We remind our readers that when Sanchez completed its initial public offering, the company had virtually no production. Between now and December 31, 2012, SN believes its production will reach between 4,000 BOEPD and 5,000 BOEPD. How will they get there? The company has seven wells already drilled and waiting on completion, and will continue to run two rigs in each of its three areas of operations in the Eagle Ford.

An additional 12 wells will be spud by the end of the year. To put it simply, in one year since its IPO, Sanchez Energy expects to grow production from less than 800 BOEPD to 4,500 BOEPD (midpoint of 2012 estimated exit rate). The company has put the pieces in order, and developed a sound foundation to meaningfully ramp up production over coming quarters. The $150 million raised through its convertible preferred equity offering provides near-term liquidity to ramp up activity on its Eagle Ford inventory. Oil & Gas 360® will provide additional details after Sanchez Energy reports Q3’12 results.

Downspacing and Room to Run

The Eagle Ford is beginning to distinguish the long-term players from the short-term players. The rapid development of the Eagle Ford has forced companies to either overpay for acreage to build out a deep inventory of drilling locations, or drill up the limited inventory of what they have and sell. We believe Sanchez Energy has acquired a multi-year inventory of drilling prospects, 800 net identified locations, and has long-term visibility and growth prospects in South Texas. Additional catalysts on the horizon include downspacing which could increase SN’s identified net locations to 1,200, as well as continued industry testing of the Pearsall, Buda Lime and Austin Chalk formations.

Recent Transactions and Announced Results

Oil & Gas 360® compiled a few transactions and operational updates centered on the Eagle Ford region from the previous 12 months:

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