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Sanchez Energy Corp. (NYSE: SN) rode off with Royal Dutch Shell Plc’s (NYSE: RDS-A, RDS-B) 106,000 net acres in the Eagle Ford on May 21, doubling the company’s proved reserves and production.
The $639 million acquisition adds about 60 million barrels of oil equivalent (MMboe) of proved reserves to Sanchez Energy. Shell’s holdings produced 24,000 boe/d in the first-quarter.
In September, Shell said it was cutting ties with its Eagle Ford position in Dimmit, LaSalle and Webb counties, Texas, due to unrelated impairment charges. The assets include 176 wells and current production of about 20 Mboe/d. Shell picked up the Catarina asset in 2010 from Harrison Interests, purportedly in exchange for $1 billion of cash and a royalty stake, said David Tameron, a senior analyst at Wells Fargo Securities LLC.
Sanchez Energy will call the position Catarina. When the acquisition is closed, Sanchez Energy’s position in the Eagle Ford will be about 226,000 acres with up to 3,000 potential drilling locations. Average first-quarter 2014 pro forma production will be about 42,800 boe/d.
The deal price attributes values of $32,000 per boe/d or $10.65/ boe of proved reserves—without attributing any value to the undeveloped acreage, said Patrick Rigamer, an analyst with Global Hunter Securities LLC.
“SN scores another major acquisition in the Eagle Ford,” Rigamer said. “With current production of 20 Mboe/d, the purchase is well below previous transactions in the Eagle Ford. At this price, the transaction appears highly accretive to cash flow and increases our price target to $39 from $36.”
The acquired assets include 200 identified future drilling locations with 800 additional potential locations, giving SN multiple years of double-digit growth.
Tameron said some may find it curious that Shell was willing to part with a contiguous acreage block with significant production.
“We think it's worth noting that there is reason to believe this deal may provide poor insight into the region's value,” Tameron said. “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.”
Tony Sanchez III, the company’s president and CEO, said the transaction plays to the company’s demonstrated strengths and track record of making opportunistic acquisitions, as well as its technical capabilities to improve operating results.
In the first-quarter of 2014, Sanchez Energy grew production 376% year-over-year.
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Sanchez said the estimated 200 de-risked, ready-to-drill locations will provide at least four years of drilling inventory at a pace of 50 wells per year.
“The timing and location of the transaction are optimal, given that our operations in the neighboring Eagle Ford areas just a few miles to the east are where we have developed increased technical expertise, cost savings, and production gains on a scale that puts our oil and gas manufacturing operations at the leading edge of our industry,” Sanchez said. “With the addition of this acreage, we have substantially increased our drilling inventory–positioning Sanchez Energy to be a leading low-cost producer in the Eagle Ford for years to come.”
Sanchez Energy will begin tackling a backlog of 22 uncompleted wells. Current drilling plans call for about 50 wells per year with a two- to-three rig program that will hold the acquired acreage.
Incremental spending is forecast at $225 million in 2014 and $375 million in 2015.
Rigamer said individual wells are forecast to generate internal rates of return (IRRs) of 35% to 50% with EURs of 600 to 700 Mboe at $6.5 million well costs.
“At these rates, SN forecasts the program will be self-funding beginning in 2015,” he said. Sanchez Energy's drilling has primarily focused in the Upper Eagle Ford, but Sanchez said he plans to focus drilling in the Lower Eagle Ford, based on offsetting operator results, while retaining the Upper Eagle Ford as a secondary target with stacked lateral potential.
The deal will be financed by $950 million committed debt financing, conditioned upon closing of the acquisition, and other closing conditions including execution and delivery of definitive documents, Sanchez Energy said.
Jefferies LLC acted as financial advisor and Akin Gump Strauss Hauer & Feld LLP acted as legal advisor to the company.
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