Since 2014, when Eagle Ford player Sanchez Energy Corp. (SN) purchased Royal Dutch Shell Plc’s (RDS.A) assets, the company has had a bounce—perhaps even a hint of swagger—in its step.

Its completions yield “superior” results, its focus “relentless,” growth “transformational” and most recently its midstream assets picked up from Shell have proven valuable investments.

It’s hard to argue with any of those. On Sept. 28, Sanchez announced that it has executed an agreement to sell about 150 miles of Catarina midstream gathering lines and infrastructure to Sanchez Production Partners LP (SPP).

The $345 million divestiture will bring Sanchez’s equity to $918 million and also carries it into borrowing base redetermination season flush with spending credibility.

The Catarina midstream assets were part of Sanchez’s Shell acquisition. In its deal with SPP, Sanchez made back more than half of the money it paid Shell in 2014—$639 million. Shell’s assets included 60 million barrels of oil equivalent (MMboe) in proved reserves and 106,000 contiguous net acres.

Many E&Ps have sold midstream assets, which have largely retained their value despite 2015’s drop in commodity prices. In the Bakken Shale, Hess Corp. (HES) sold a 50% interest in its midstream assets for $5.4 billion, including $2.7 billion in cash. Pioneer Natural Resources (PXD) dealt its Eagle Ford midstream interests for more than $1 billion.

SPP is a publically traded limited partnership focused on the acquisition, development and production of oil and natural gas properties and other integrated assets. The company is owned by Sanchez Energy affiliates.

Sanchez’s midstream transaction is expected to close in October. Pro forma for the transaction, its liquidity will increase to $918 million, including:

  • $272 million cash;
  • $300 million of revolver capacity; and
  • $345 million in expected proceeds.

Since its IPO in December 2011, Sanchez has increased its production output by 114%, to 52,923 boe/d in June from 609 boe/d. In 2015, Sanchez reduced its capital plan up to $600 million from $650 million.

But in 2015, the company has devoted three-fourths of its spending to Catarina.

The Western Catarina midstream divestiture highlights Sanchez’s ability to capture the full spectrum of value in its asset base and raise capital outside of traditional markets, said Tony Sanchez III, CEO.

"The midstream assets which we acquired as part of the Catarina transaction in 2014 cover a dedicated area of approximately 35,000 net acres, or about 16% of our total Eagle Ford footprint,” Sanchez said. “The sale of these assets to SPP is further evidence of the quality of our Catarina asset, which is central to our plans for development and growth.”

Continued development of the Catarina and the other Eagle Ford areas should produce more opportunities to accelerate returns through midstream and other asset monetization strategies, Sanchez said.

“We believe these strategies will be the key to maintaining a strong balance sheet, which supports our ability to generate the returns investors have come to expect from Sanchez Energy," he said.

Sanchez Energy said the divestiture provides capital for core operations without the need to access capital markets. The sale also provides Sanchez the ability to accelerate drilling activity when appropriate.

“SN mentions a number of proceeds uses including asset acquisitions, drilling acceleration [not near term] and acreage bolt-ons,” said Brian Gamble, analyst at Simmons & Co. International. “Additionally, upon closure of the acquisition, SN will enter into a gathering agreement with SPP which provides for fixed rates over 15 years and a minimum delivery commitment of 10.2 Mbbl/d of liquids and 142 MMcf/d of natural gas.”

Sanchez’s initial gathering agreement with SPP is a 15-year term, with potential five-year renewal periods. The company will provide a minimum quarterly quantity of 10,200 bbl/d for liquids and 142 MMcf/d for gas for the first five years.

Sanchez said the lease operating expense (LOE) from the divestiture will result in an increase companywide of $1.95 LOE/boe. The company's LOE guidance in the fourth quarter of 2015 is up nearly 8% to $10.25 at the midpoint.

Sanchez also said its third-quarter 2015 average production will likely meet or beat high end guidance of up to 50,000 boe/d.

The company remains confident that it will be able to build a 20-30 well bank toward its 50-well per year drilling commitment at Catarina at its current rig count while continuing to drive performance and year-over-year production growth.

The Western Catarina midstream divestiture was reviewed and approved by Sanchez Energy’s board following review and approval by the board's audit committee, which is comprised of independent directors.

Evercore Group LLC was sole financial adviser to the audit committee. Richards, Layton & Finger PA was counsel to the audit committee and Akin Gump Strauss Hauer & Feld LLP represented Sanchez Energy in connection with the negotiation for the Western Catarina midstream divestiture.

Contact the author, Darren Barbee, at dbarbee@hartenergy.com.