SAN ANTONIO -- Confirming type curves and infill spacing are key factors in determining ongoing value for acquirers, attendees heard at Hart Energy’s DUG Eagle Ford conference in a review of recent blockbuster deals in the basin by Randy King, managing partner of Anderson King Energy Consultants LLC.

And Sanchez Energy Corp.’s (NYSE: SN) ongoing efforts in terms of capital efficiency--helped by lowering costs associated with its type curves and the successful downspacing of its wells--has positioned the company as a consolidator in the Eagle Ford, Sanchez’s COO Christopher Heinson told attendees.

With 20 deals of at least $75 million in size, total transactions in the last 12 months in South and Southeast Texas came to $17.1 billion, according to King, whose firm participated as technical adviser in two notable transactions. These were GeoSouthern’s sale of its Eagle Ford interests to Devon Energy (NYSE: DVN) in a deal valued at $6 billion and, more recently, the sale by Treadstone Energy Partners LLC of its Buda-Rose assets for $715 million to Energy & Exploration Partners Inc.

“In both cases, there was minimal production when they first captured the assets,” said King, so that each exemplified “a ‘build it from the ground up’ story.”

In the 20 transactions under review, with an average deal size approaching $900 million, the average valuation came in at about $25,000/acre, although four deals had metrics of more than $50,000/acre, said King. Half of the deals were transacted at more than $100,000 per flowing barrel of oil equivalent per day (boe/d), “reflecting the big upside associated with these plays.” The other half brought in new entrants who did not have prior positions in the plays.

The Treadstone transaction valued the company at $39,000/acre, based on its 18,300 net acres, or at $84,816 per flowing boe/d, based on early June net production of 8,430 boe/d. The company’s assets were located in Houston and Madison counties, with acreage HBP in the Buda-Rose play.

King recounted how Treadstone began to drill vertical wells in a naturally fractured area, followed by two stage fracks primarily in the Georgetown and Buda, and was making “fabulous” wells. The natural fracture system gave up fluid at an “astounding rate,” and even with very high water cuts, wells could produce at rates of 400 bbl/d to 500 bbl/d of oil. Rates of return were in some cases up to 500% to 600%.

“We’ve got horizontal reserves with vertical wells,” King recalled a close observer saying.

Importantly, he noted, Treadstone continues to refine production techniques by testing different frack treatments and artificial-lift systems. The company more than doubled production going into the sale process.

“Don’t slow down,” King said to potential sellers. “It’s much smarter to keep moving ahead. The multiples of cash flow and production all improve with a higher producing rate.”

In terms of “technical learnings,” King pointed to confirming type curves and infill spacing as being top priorities in determining value for acquirers, especially as exploration and production (E&P) companies move to early pad drilling to enable cost savings and to achieve higher EURs.

“Confirming the type curves and infill spacing is probably the single most important determinant in ongoing value for acquirers. The issue of repeatability, and the scope of that repeatability confirmed by actual performance, is a huge geometric driver in valuation,” said King.

In addition, whereas recently run downspacing programs might have targeted reserves comparable to previously drilled wells, similar programs going forward might realize higher levels of reserves from the positive effect of closer spacing via the “rubble-ization” of shale intervals between wells--a “real side benefit,” noted King.

“Downspacing is really not a ‘sequential’ option in these heavily stimulated completions. You have to commit to that closer spacing very early,” he emphasized.

As for “transaction considerations,” King noted several items, including the desire by private sellers to ‘walk away’ after closing. However, to earn that right, sellers must be willing to work hard on diligence issues and transaction concerns, he emphasized.

“It’s not a birthright that you can walk away after closing,” he said.

After completing four Eagle Ford acquisitions since mid-2013, Sanchez Energy’s acquisition strategy continues to be “opportunistic” and one based on a conservative financial position that allows it to move swiftly if new assets become available that meet the company’s criteria, said Heinson.

“Our philosophy is to remain opportunistic. We are benefitting from having a deep inventory of high rate of return wells across the Eagle Ford,” said Heinson. “We are never in a position where we need to make an acquisition, so that lets us be very picky.”

Sanchez views itself as the “preferred purchaser, the natural consolidator within the Eagle Ford,” according to Heinson. He noted that to maintain that stance of being a potential bidder for assets, the company has an internal guideline of maintaining a debt-to-EBITDA ratio of no more than 2x, quickly bringing leverage down if it temporarily exceeds that level.

In its latest--and largest--Catarina acquisition, Sanchez bought assets in June from Royal Dutch Shell Plc (NYSE: RDS-A, RDS-B) for $639 million. Its next-largest acquisition was its Catulla purchase from Hess Corp. (NYSE: HES) a little over a year earlier for $265 million.

Heinson highlighted results from the latter acquisition, at its Alexander Ranch operations, as illustrating its advantage in terms of a lower cost structure. Whereas the prior operator was drilling wells at an average cost of $8.8 million, earning an internal rate of return (IRR) of 13% at the wellhead, Sanchez had within three months lowered well costs to $6.0 million and, with its latest well, to about $5.5 million.

“This is an asset that has gone from a 13% rate of return to having returns of over 50% for us,” he said, noting that locations to be drilled at Alexander Ranch have risen by 70% due to downspacing and infill programs. And having sought out other areas capable of reproducing similar returns, Sanchez now thinks that as much as 70% to 80% of acreage in the Eagle Ford basin is prospective for 40% rates of return, up from its estimate of just 20% of the basin’s acreage in 2012, Heinson said.

Acquisition metrics for the Catarina assets were highly attractive at $10.65/bbl, based on Ryder Scott 2013 year-end proved reserves, and $26,374 per flowing boe/d, based on first quarter 2014 production, according to Heinson. The metrics are based on upper Eagle Ford production only; significant additional upside could come from lower Eagle Ford development in western Catarina and lower Eagle Ford development in eastern Catarina.

Recalling that “the day we liked this asset the least was day one,” Heinson said what sparked interest on Sanchez’s part was the significantly better results being achieved by offset operators just across the lease line on the western portion of the property. Sanchez discovered that the roughly 200 previously drilled wells in western Catarina had typically been landed in the upper Eagle Ford, leaving the more common industry target--the “very rich, high-porosity” lower Eagle Ford interval--undeveloped.

“That was the point where we said, ‘We think we have something here,’” recalled Heinson. “What they (Hess) had done was essentially prove that the upper Eagle Ford is viable across a large area of that ranch. That’s an area where some of these offset operators--SM Energy, Rosetta, Anadarko--are now talking about stacked pay potential between their existing lower Eagle Ford wells and the upper Eagle Ford.”

In its current development plan, Sanchez has two rigs targeting the lower Eagle Ford, which it views as the most attractive zone while recognizing additional infill potential exists in the upper Eagle Ford as a secondary target.

Further upside also exists in eastern Catarina, comprising 37,000 net acres of the 106,000 total net contiguous acres at Catarina. Much of eastern Catarina has been only very lightly appraised, Heinson said, although vertical well data from the area has shown similarities with Alexander Ranch and Sanchez’s Briggs Ranch, 10 miles to the east, where wells have EURs of about 600,000 boe/well. Comparing the 37,000 acres at eastern Catarina to the roughly 6,000 acres at Alexander Ranch, Heinson said the upcoming exploration program by Sanchez might find that “there could be six or seven versions of that ranch that we valued at $265 million” in its Cotulla acquisition.

In pursuing its overall acquisition strategy, Heinson said any bid by Sanchez would depend on first undertaking a “deep technical analysis” of the assets, recognizing that the Eagle Ford is “expanding vertically.” Post-acquisition, capital efficiency is expected to improve with greater cost savings and economies of scale, positioning Sanchez as a consolidator in the Eagle Ford. And the company would continue to maintain a conservative financial position.

“We want to maintain plenty of dry powder, post-acquisition, so we can remain the likely buyer for any assets within the Eagle Ford, even after close.”