Royal Dutch Shell Plc’s (NYSE: RDS.A) Harrison Ranch Eagle Ford was something of a tough sell in May 2014 when Sanchez Energy Corp. (NYSE: SN) stepped in to buy what it renamed the Catarina.

The play wasn’t particularly coveted by other E&Ps. It had sections that possibly were difficult to drill, and it sold for roughly 60% of what Shell paid. While it was easy then to doubt the Sanchez deal, even so-called mature plays such as the Eagle Ford have shown they still have the horsepower to open up.

At the end of the fourth quarter, the Catarina accounted for more than 79% of Sanchez’s daily production.

In a Jan. 19 operations update, Sanchez said its Catarina average drilling and completion costs in the fourth quarter of 2015 fell to $3.5 million per well, a 15% drop from its third-quarter well costs of $4.1 million.

The company also reported record production of 5.4 million barrels of oil equivalent (MMboe) averaging 58 Mboe/d in the fourth quarter. Steon performance from new wells in the Cotulla area was also reported

With improved well results and cost efficiencies, the company also guided its 2016 capex $50 million lower from prior estimates of $200 million to $250 million.

"At Catarina, well performance continues to exceed our initial expectations as we have extended the efficiency gains realized since acquiring the asset in 2014,” said Tony Sanchez III, CEO. We are now routinely drilling and completing wells at Catarina for approximately $3.5 million per well, which represents a reduction of almost 60% when compared to average well costs around the time of our acquisition.”

The company also met its 50-well drilling commitment for the Catarina on Jan. 1, six months ahead of schedule.

"Since we can bank up to 30 wells drilled during the remaining term of this commitment period towards the next annual drilling commitment period, which runs from July 1, 2016, through June 30, 2017, we have significant financial flexibility to execute our plans in 2016,” he said.

On Jan. 19, Sanchez said its south-central Catarina wells exceeded expectations, averaged 30-day rates of more than 1,300 barrels of oil equivalent per day (boe/d) and EURs tracking at nearly double the 600-700 Mboe of the western Catarina type curve.

"A total of 41 wells have been drilled toward the company's [goal of] 50-well annual drilling commitment at Catarina” from July to June 2016, he said.

“With our two rig drilling program and new drilling efficiencies, we are currently averaging nine days spud to total depth at Catarina,” Sanchez said. “As a result, the company expects to nearly fulfill its current drilling commitment by year-end 2015. This would provide us with significant discretion to manage the capital needed to meet all drilling obligations through the first half of 2016, which would greatly improve our financial flexibility as we head into next year.”

Though Sanchez’s purchase of the Catarina doubled proved reserves and production, it was not always a given that Sanchez had made the right move, or that Shell had either.

Sanchez purchased the assets from Shell for $639 million roughly four years after Shell bought Harrison Interests’ assets for $1 billion and a royalty stake in 2010.

At the time, the contiguous acreage block of about 106,000 acres had production of about 20 Mboe/d.

“For more than a year, during our discussions with industry, we have consistently heard operators state that Shell's acreage was not on their respective radars,” David Tameron, senior analyst with Wells Fargo Securities LLC, said in 2014. “While commentary was admittedly vague, body language suggested to us that the lack of interest was due to unique qualities of the acreage rather than a repudiation of the surrounding area.”

Tudor, Pickering, Holt & Co. also noted that a midsection of the lease had seen limited drilling activity suggesting “perhaps something there that discourage further development.”

In July 2014, Sanchez dedicated a frack crew to completing 22 drilled but uncompleted wells (DUCs) Shell left behind.

By March, Sanchez increased their proved reserves by 129% year-over-year to about 134 MMboe, largely due to the company's Catarina acquisition.

At Catarina today, third quarter development focused primarily in western Catarina, with a portion of the development focused on continued delineation of the south-central area of the ranch.

Well results in eastern Catarina have continued to exhibit a flat decline profile and EURs are approaching the 600-700 Mboe type curve designated for Western Catarina.


At Catarina, fourth quarter of 2015 development was focused primarily in Western and South-Central Catarina.

In July 2014, Sanchez dedicated a frack crew to completing 22 DUCs Shell left behind. Currently, the company is running one rig on the western side, with another coming in August, and a third rig coming online in the third quarter targeting the East.

Sanchez also said it has received commitments from its lending group to change the borrowing base under its $1.5 billion first lien revolving credit facility to $500 million from $550 with an unchanged elected commitment of $300 million. The company has nothing drawn on the borrowing base.

Sanchez also closed two midstream transactions. The first, the Western Catarina Midstream divestiture, improved the company’s cash position heading into 2016 by about $345 million.

The second, a joint venture with Targa Resources (TRGP) to construct a cryogenic processing plant and a high pressure gathering pipeline near Catarina, is expected to provide a path to improved yields, lower processing fees, and significant marketing benefits.

Since the joint venture assets are expected to provide stable cash flows over time, Sanchez will continue to explore potential alternative financing or other options to maintain our liquidity as the project develops.

Darren Barbee can be reached at dbarbee@hartenergy.com.