Sanchez Energy Corp. (NYSE: SN) is stockpiling cash to pry away assets in the Eagle Ford, or perhaps elsewhere, provided the right deal comes along.
The Houston company recently cashed in some of its Eagle Ford midstream assets in a July 5 sale worth about $44 million. As a result, the company’s liquidity is expected to increase to about $664 million, consisting of $364 million cash and $300 million from an undrawn revolver.
Sanchez Energy CEO Tony Sanchez III said proceeds from the deal provide the company with additional firepower to expand its territory in the Eagle Ford.
“This liquidity creates a key competitive advantage for Sanchez Energy that allows us to pursue asset acquisitions and an organic growth strategy that stems from our extensive inventory of drilling opportunities that are highly economic at today's commodity price levels,” he said in a statement.
As for where Sanchez is looking to add acreage, some other basins are fair game, Sanchez told Hart Energy. However, any purchase would have to make economic sense to justify diverting capital and resources away from the company’s core assets in the Eagle Ford.
Sanchez Energy has about 2,900 net drilling locations across 200,000 net acres in the Eagle Ford in South Texas. The company also has about 62,000 net acres in the Tuscaloosa Marine Shale in Louisiana and Mississippi tucked away in its portfolio.
Since its IPO in December 2011, Sanchez Energy has increased its production output by 9,177%, to about 56,500 barrels of oil equivalent per day (boe/d) in March from 609 boe/d. The company’s upstream budget for 2016 is between $200 million and $250 million, down from $600 million to $650 million in 2015.
Midstream Divestiture
Sanchez Energy said it closed the sale of its 50% interest in Carnero Gathering LLC, an Eagle Ford midstream joint venture (JV), to Sanchez Production Partners LP (NYSE: SPP). SPP is owned by Sanchez Energy affiliates.
In October 2015, Sanchez Energy entered into two separate JV agreements with Targa Resources Corp. (NYSE: TRGP). The agreements included 50:50 ownership in gathering and processing assets to be constructed for Sanchez’s Catarina acreage in the Eagle Ford.
A product of the JV, Carnero will consist of 45 miles of high pressure natural gas pipelines when completed. About 10 miles of the system are still under construction. The pipelines currently connect SPP’s existing Western Catarina midstream system to nearby South Texas pipelines.
For its stake in Carnero, Sanchez Energy will receive an initial payment of $37 million in cash, estimated remaining capital commitments of $7.4 million and possible future payments.
Ultimately, Carnero will link up to a cryogenic natural gas processing plant under construction by the JV in La Salle County, Texas. The cryogenic plant is expected to have initial capacity of 200 million cubic feet per day (MMcf/d) with the ability to increase to 260 MMcf/d. The plant is set to be operational in early 2017.
Targa will hold all of the transportation capacity on Carnero, and the gathering JV will receive fees for transportation.
Sanchez Energy has already invested about $26 million in Carnero since entering the JV. The company initially expected to invest about $115 million for its stake in the plant and gathering pipelines.
Related to its funding of the cash consideration required to close the transaction, SPP has amended its $500 million credit facility to stipulate the conditions for investments in the JVs.
Johnson Rice & Co. LLC was sole financial adviser and Richards, Layton & Finger was counsel to the Sanchez Energy board’s audit committee. Akin Gump Strauss Hauer & Feld LLP represented Sanchez Energy.
Stifel was sole financial adviser to SPP’s conflicts committee, which was represented by Potter Anderson & Corroon LLP. Andrews Kurth LLP represented SPP.
Emily Moser can be reached at emoser@hartenergy.com.
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