Production volumes continue to rise for Sanchez Energy Corporation (ticker: SN), an Eagle Ford-focused E&P nearing the third anniversary of its 2011 initial public offering. The landmark acquisition of its Catarina asset in May 2014 doubled its asset base and provided a fourth regional focus area for the company. Q3’14 represents the first full quarter of the realized Catarina impact. The company’s growth timeline of acquiring, and now executing, on its properties is leading to new records on a quarterly basis.
Financial Results
Sanchez reported record revenue of $207.4 million in its Q3’14 results, announced on November 4, 2014. Net income attributable to shareholders totaled $42.7 million ($0.77 per basic share). The company holds $896 million in liquidity despite spending roughly $1.1 billion for Eagle Ford acquisitions since March 2013.
Sanchez is electing to dial back its aggressive growth program as a result of recent market volatility. Preliminary expenditures for 2015 are projected to be in the $850 to $900 million range, a decrease of approximately 24% from the original estimates. The company assumes prices of $80 per barrel and $3.75 per MmBtu for the upcoming year and anticipates being able to fund operations entirely through cash on hand and from operations.
“We believe we’ll be best served by reducing our capital spending and maintaining a significant amount of liquidity and financial flexibility,” said Mike Long, Chief Financial Officer of Sanchez Energy, in a conference call following the release. “We can do this and still deliver good levels of production growth, and continue our focus on the manufacturing process driven cost management.”
Tony Sanchez III, Chairman and Chief Executive Officer of Sanchez Energy, said another reduction in capital spending is possible if commodities drop below SN’s current assumed prices. “We have strategically built our operational capability to enable us to both flex upward or downward in our spending plans if the situation warrants,” he said. “As demonstrated by the revised spending plan, we will continue to assess the most appropriate use of our capital resources without compromising our long term financial position.”
Eagle Ford Production
SN reported production rates of approximately 38.6 MBOEPD in Q3’14, nearly double Q2’14’s production of 20.4 MBOEPD. The production jump was boosted by the 187 gross wells acquired in the Catarina deal, increasing the company’s previous gross well count by 67%. A total of 458 gross wells are spread across SN’s acreage in the Eagle Ford and TMS, with 339 being added through acquisitions or production since Q2’13. Internal estimates place the company’s reserves at 125 MMBOE.
The Catarina is now in “full-scale development mode,” according to management. Nine Upper Eagle Ford wells, completed by the previous operator, averaged 1,402 BOEPD (64% liquids) and 1,200 BOEPD on 24-hour and 30-day periods, respectively. The newer wells being completed by Sanchez are utilizing longer laterals and more fracturing stages, and two recent wells averaged 24-hour rates of 1,358 and 2,193 BOEPD, respectively. A second frac team has been brought in to assist with the well inventory, which now stands at 21 (10 in the Upper Eagle Ford). The region contributed approximately 48% of all SN production in the quarter.
Impact from Capital Revisions
Sanchez will streamline its upstream operations in 2015, emphasizing its development drilling while cutting back on step-out wells and appraisals. Activity in the Marquis and Tuscaloosa Marine Shale (TMS) positions will decline as a result. “This does not diminish our expectations about those areas,” reassured Sanchez III.
Even with the reduced capital commitments, the company estimates only 2.5 gross rigs will be required to meet drilling requirements in the Catarina leases. All other positions are held by production or involve long term leases. Its gross rig count for 2015 will be 6.25, down from the preliminary estimate of 8.0.
The company’s upward trend for growth, however, remains consistent. Projected volumes for Q4’14 are 40 to 44 MBOEPD, representing a 9% midpoint increase compared to Q3’14. Production for 2015 is expected to average 50 MBOEPD, which will represent an increase of roughly 20% to 25% compared to 2014’s production, pro forma for the Catarina purchase.
How Does the Recent Election Affect SN?
The Republican victory in the recent election has revitalized hopes for two major energy industry issues: Crude exports and the Keystone pipeline. Sanchez is more interested in the former, and was straightforward about its intentions in its first-ever Analyst Day this past summer. John Happ, Senior Vice President of Marketing and Midstream for Sanchez said “Our condensate is focused on new markets, and by new markets, I mean exports. We are holding our breath just like everybody else about what Congress will decide, but we are confident in our ideas about the Catarina.”
Sanchez III revealed the company has been speaking with Enterprise Products Partners (ticker: EPD) to secure a position if the export market becomes a reality. “We are working… to batch a good amount of our condensate production out at Catarina to take advantage of the uplift due to export pricing and share some of that improved pricing with EPD,” he said.
Chris Heinson, Chief Operating Officer of SN, explains the Catarina acquisition was made in order to secure a more balanced portfolio. “We viewed it as a risk mitigant,” he said. “We felt there was more downside risk in the oil prices when we were trading in that $95 to $100 range than there was in gas prices. And as you’ve seen, oil prices have moved down very substantially and gases stayed up much better relative to oil. [We believed] better diversification in our portfolio made sense.”
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