Sanchez Boosts Value By Selling Noncore Eagle Ford Assets

Sanchez Energy Corp.’s (NYSE: SN) latest deal sheds noncore producing assets in the Eagle Ford Shale by selling to its affiliate to raise money without borrowing money or selling equity in the company.

The Houston company said March 31 it closed an agreement for the sale of working interests in producing Eagle Ford wells to its related company, Sanchez Production Partners LP (NYSE MKT: SPP), for $85 million in cash and stock.

"This transaction, which we feel is not only repeatable, but may potentially include midstream assets in the future, enables us to enhance liquidity at an advantageous cost of capital to fund our growth without having to increase leverage or dilute our shareholders by issuing equity," said Tony Sanchez III, president and CEO of Sanchez Energy, in a release.

The wells, located in the nonoperated Palmetto Field, have proved reserves of 5.2 million barrels of oil equivalent (MMboe) and a forecasted production for 2015 of 1,000 boe/d. However, they only represent about 2% of SN's total net production volume.

Despite the sale, the company is maintaining its production guidance of 40-44 Mboe/d for 2015 due to strong results from the Catarina Field, also in the Eagle Ford.

Patrick Rigamer, Global Hunter Securities senior analyst, views the move as a positive for the company and an “accretive way to pull value from lower producing assets.”

“Though small in scale, we believe that SN’s sale of working interest in producing wells accelerates the value of mature production and does so, on an accretive basis,” Rigamer said.

The company is selling an 18.2% working interest in 59 wellbores that scales up to 47.5% over the next five years.

The valuation of the assets is about $85,000 per estimated boe/d and about 7.7x 2015 estimated EBITDA for the assets. Rigamer estimates that SN is trading at roughly $55,000 per boe/d, making the sale a premium to the company’s current public trading multiples.

Rigamer said with no bank debt to pay down, proceeds from the sale will contribute directly to SN’s development program.

"Going forward, we would not be surprised to see more transactions like this, and the midstream assets at Catarina are looking like prime candidates for a value accretive transaction when the time is right," he said.

Another Financing Vehicle

The deal initiates SPP's business development relationship with SN, which has a substantial inventory of producing assets with characteristics favorable to the MLP model.

“Having completed the conversion from a limited liability company to a limited partnership earlier this month, we are very pleased to announce our first transaction that leverages the operational platform and service relationships of our sponsor, Sanchez Oil & Gas Corp.,” said Charles C. Ward, CFO of the general partner of SPP.

The transaction structure should allow SPP to achieve flat production over the first five years of the asset's production life cycle, which minimizes maintenance capital requirements and creates a framework for SPP's growth, Ward said.

SN can access capital through SPP as a third financing vehicle, without engaging in debt or dilutive equity offerings.

In the fourth quarter of 2014, SN had liquidity of $774 million, including $474 million in cash. It has a $550 million borrowing base post asset sale with an elected commitment of $300 million and no money drawn.

The equity component of the purchase price will allow SN to participate in the appreciation of the value of SPP's equity as it continues to move closer to the completion of its transformation and resumption of distributions, Sanchez said.
The sale only conveys interests in certain wellbores at existing producing intervals, retaining upside for SN from PUD, probable, and possible locations as well as any new locations that come as result of down-spacing, stacking of new horizontal wellbores, and development of any non-Eagle Ford formations such as the Austin Chalk or the Buda.

Sanchez said SN will initiate guidance for the second quarter of 2015 and update its full year guidance after the company’s planned first quarter operational update late in April.

On March 31, the company said it has reduced its 2015 capital plan to $600-650 million from $1.1-1.2 billion in order to preserve liquidity and financial flexibility. About 70% of its drilling and completion spending is in Catarina.

The transaction has an effective date of Jan. 1. SPP financed the deal with a combination of preferred equity raised in a private placement, common units, borrowings under an amended and restated credit facility, and available cash.

Jefferies LLC was sole financial adviser to the audit committee of the SN's board of directors and delivered a fairness opinion from a financial point of view in connection with the transaction. Richards, Layton & Finger represented the audit committee as legal advisers.

Stifel provided a fairness opinion to the conflicts committee of the board of directors of SPP's general partner.