DALLAS—CEO Tony Sanchez unabashedly admits the good and bad of Sanchez Energy Corp.’s (NYSE: SN) Eagle Ford deal history—the luck, the mistakes and the audacity of assets bought, sold or overlooked.
The Houston-based company has taken risks while making a point to avoid a cash flow catastrophe by acquiring assets that immediately make money.
“We like to buy assets that we can protect our downside, and that comes in the form of a lot of producing wells with stable production [meaning] cash flow, to underpin our analysis,” Sanchez told an audience at Oil and Gas Investor’s A&D Strategies and Opportunities conference.
“So, if we are wrong, we have production to back us up.”
In contrast to the company's Eagle Ford deals, the rash of Permian Basin deals that have captured the oil industry’s interest for more than 18 months have largely consisted of acquisitions for undeveloped acreage. Only some included production of more than 10,000 barrels of oil equivalent per day (boe/d), according to Moody’s Investors Service.
Sanchez candidly acknowledged that about three years ago, after looking at the Permian, he passed on it.
“We have looked at acquisitions in a variety of basins, certainly the Permian,” he said. While not seeing the potential then, Sanchez said the play clearly has “tremendous rock. So I was wrong on that one.”
Still, in March, the company—along with 50/50 partner Blackstone Energy Partners—closed its largest deal to date. Sanchez Energy and Blackstone purchased what it calls the Comanche area from Anadarko Petroleum Corp. (NYSE: APC) for $2.1 billion.
Leading up to the deal, however, Sanchez Energy was required to raise $3.5 billion of committed, “no-outs financing,” Sanchez said—about 10 times the company’s market cap.
Through a combination of private equity, preferred equity capital, balance sheet and off balance sheet capital, “somehow we figured out how to raise $3.5 billion when our market cap was sitting … at about $350 million,” Sanchez said.
“We did punch way above our weight class and I’m very happy that we were able to execute on that deal,” he said, “because the returns in each of these positions are very strong, even in today’s lower commodity prices.”
The Comanche deal mirrors the company’s first major Eagle Ford acquisition, which has set its momentum rolling south ever since. In 2014, the company purchased its Catarina area assets from Royal Dutch Shell Plc’s (NYSE: RDS.A) for $639 million.
“Catarina and Comanche are almost exactly the same from a profile perspective except that Comanche is just several orders of magnitude larger,” Sanchez said. Both had strong PDP and drilled but uncompleted (DUC) wells with existing value worth at 75% of the price Sanchez Energy paid.
Each deal also included developed water infrastructure, third-party gathering and developed road and facility infrastructures.
“Both of these assets were categorized as big assets, lot of running room, underpinned with a lot of cash flow and stable, existing cash flow from a widely dispersed well perspective,” he said.
The Catarina and Comanche deals also feature large, contiguous acreage with few land owners, meaning the company won’t have to deal with the splintered interests that confound other shale players.
When acquired what was then the Harrison Ranch Eagle Ford from Shell, production averaged about 15,000 boe/d. Today, Sanchez Energy’s production in that area averages about 40,000 boe/d.
Sanchez Energy intends to replicate its Catarina success.
“We’ve really been able to integrate it quite successfully. We expect to do the same with Comanche,” he said.
Whether it will see the same level of success as Catarina depends on execution and exploration, though the company now considers itself in a manufacturing mode for development.
Yet in the Catarina purchase, made years before advances in proppant loading and service cost declines, Sanchez Energy was willing to pay for 106,000 net acres despite what a large, supposedly worthless chunk of acreage in the middle of the position.
“Even we said that the middle of this acquisition was the dead zone,” Sanchez said.
At the time, development had taken hold on the western part of the asset and the eastern seemed likely to be developed, while the center was forsaken because the lower Eagle Ford eroded away as it moved inward.
Sanchez was correct: the lower Eagle Ford did narrow and disappear.
“What we didn’t realize was that middle and upper Eagle Ford developed in that central part of that ranch,” Sanchez said. Dead center, the company has drilled some of its best wells on the asset.
“So there is a little bit of serendipity working in our favor,” he said.
In the Comanche area, Sanchez sees increased stack opportunities. He said the Eagle Ford thickens as it moves toward the Mexican border and appears to have developed at thicker intervals into independent reservoirs.
“We have three or four zones to develop across this position in the western Eagle Ford,” he said.
Integrating Comanche is proceeding, though Sanchez noted that the company has grown to about 350 employees from 200 in a matter of two months. But Sanchez wanted to show that the company was serious about doing business and ramping up production.
Since closing its deal with Anadarko, Sanchez has brought 57 Comanche wells on-line and expects to complete its 132 DUC inventory by its one year anniversary of closing the deal.
“It hasn’t been without a little bit of indigestion, but our operating teams have done a tremendous job here,” he said.
Despite its attention for being an acquirer, Sanchez said the company has been as active selling as it has buying. The buy-side deals simply outweighed the sales and allowed the company to grow.
Sanchez noted that in September, the company closed the sale of its Javelina natural gas assets in the Eagle Ford Shale for about $105 million in cash. Sanchez Energy sold the acreage, largely in La Salle and Webb counties, Texas, to Vitruvian Exploration IV LLC.
And for a company that has been mostly Eagle Ford-centric, Sanchez hasn’t shied from looking at the Scoop, Stack, Niobrara and elsewhere. The company also still owns acreage in the Tuscaloosa Marine Shale.
“We continue to maintain that position,” he said. “I do see us at some point taking another shot at it.”
Darren Barbee can be reached at firstname.lastname@example.org.