Sanchez Readies For Growth With $107 Million Sale

Sanchez Energy Corp. (NYSE: SN) is still on the warpath toward growth despite already doubling its acreage position in the past five years.

The Houston-based company said Oct. 6 it sold about $107 million worth of noncore E&P and midstream assets in the Eagle Ford Shale. The sales follow a trend Sanchez Energy started in March 2015 to sell off noncore assets to affiliate Sanchez Production Partners LP (NYSE: SPP).

Including its most recent transactions, SPP has purchased about $581 million in assets from Sanchez Energy.

So far, it’s been a winning strategy.

Sanchez Energy exited third-quarter 2016 with about $629 million in liquidity, comprised of roughly $329 million in cash and a $300 million undrawn revolver.

Sanchez Energy CEO Tony Sanchez III said the money could be used to expand the company’s territory.

“As we look to pursue asset acquisitions and an organic growth strategy that stems from our extensive inventory of drilling opportunities … we continue to see our liquidity as a key competitive advantage,” Sanchez said in a statement.

The Ally

Sanchez Energy’s plans to sell noncore E&P and midstream assets in South Texas mark the company’s third midstream and fourth overall sale to SPP.

“The transactions announced [Oct. 6] are further evidence of the benefits of our strategic relationship with SPP,” Sanchez said.

In the E&P sale, SPP will pay Sanchez Energy about $27 million for working interest in 23 producing Eagle Ford wells in Dimmit and Zavala counties, Texas. The sale includes escalating working interest in an additional 11 producing wellbores in the Palmetto Field.

Current production from the E&P asset is 700 boe/d, comprised of 73% oil, 13% NGL and 14% gas and proved reserves of 2,136 Mboe.

The E&P transaction screens accretive relative to Sanchez Energy based on a flowing barrel valuation, but also slightly dilutive on proved reserves, according to Kashy Harrison, senior research analyst with Piper Jaffray & Co.

“The transaction screens slightly dilutive on proved reserves at $12.64/boe relative to SN at $13.38/boe,” Harrison said in an Oct. 6 report. "Overall, we view the transactions as positive on the margin as they provide SN with incremental liquidity and slightly reduces capital commitments.”

On the midstream side of the deal, SPP is buying a 50% stake in Carnero Processing LLC, an Eagle Ford midstream joint venture (JV) between Sanchez Energy and Targa Resources Corp. (NYSE: TRGP).

The JV consists of gathering and processing assets to be constructed for the Catarina acreage in the Eagle Ford.

For the stake in Carnero Processing, SPP will make an initial payment of $47.7 million and assume Sanchez Energy's remaining capital commitments, which are estimated at about $32.3 million.

In July, SPP purchased Sanchez Energy's stake in Carnero Gathering LLC for about $44 million.

In addition, SPP will obtain an option to acquire a lease from Sanchez Energy that is intended for the construction of a marine crude storage terminal in Point Comfort, Texas.

Battle Plan

Sanchez has previously hinted that it was eyeing A&D transactions.

In July, Sanchez told Hart Energy that acquisitions in other basins were fair game following a $44 million midstream divestiture. However, any purchase would have to make economic sense to justify diverting capital and resources away from the company’s core assets in the Eagle Ford.

More recently, Seaport Global Securities said the company would be more inclined to stay in the Eagle Ford due to high acreage costs in the Permian Basin and Stack.

Sanchez Energy has about 3,000 net drilling locations across 200,000 net acres in the Eagle Ford in South Texas. The company also has about 60,000 net acres in the Tuscaloosa Marine Shale (TMS) in Louisiana and Mississippi, though Sanchez values the assets’ present value at just $5 million.

The company's operations largely focus on its Catarina asset in the Eagle Ford, where it's currently running three rigs in the area and expects to drop to two rigs during the fourth quarter. Sanchez Energy's most recent Catarina wells’ 30-day IP rates average 1,600-1,900 barrels of oil equivalent per day (boe/d).

Since its IPO in December 2011, Sanchez Energy has increased its production by 92 times, as of June 30, to about 55,900 boe/d from 609 boe/d. The company’s upstream budget for 2016 is between $200 million and $250 million, down from $600 million to $650 million in 2015.

Sanchez Energy’s divestitures are expected to close fourth-quarter 2016 and were reviewed and approved by the company’s board of directors following review and approval by the board's audit committee. The audit committee is comprised of independent directors.

Jefferies LLC was sole financial adviser to the board's audit committee. Richards, Layton & Finger PA was counsel to the board’s audit committee. Akin Gump Strauss Hauer & Feld LLP represented Sanchez Energy in connection with the negotiation of the transactions.

Emily Moser can be reached at emoser@hartenergy.com.

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