Sanchez Energy Wades Into Tuscaloosa Marine Shale For $78 Million

Transaction Type
Sellers
Announce Date
Post Date
Estimated Price
78MM
Description

To acquire 40,000 undeveloped net acres in the core of the Tuscaloosa Marine Shale.

Sanchez Energy Corp. (NYSE: SN) announced Aug. 8 that it is acquiring 40,000 net acres in the core of the Tuscaloosa Marine Shale (TMS) for $78 million.

The undeveloped land would be paid for with $70 million cash and 342,760 shares of common stock valued at $8.2 million. The acreage is contiguous and has three or more years of remaining lease terms to allow for further de-risking.

Tony Sanchez III, president and CEO, said the company has been watching the evolution of the Tuscaloosa for nearly three years and assessing the technical and economic development of the play.

“We now believe it is an appropriate time for Sanchez Energy to enter the play and we have the opportunity to do so by leveraging the groundwork undertaken by Sanchez Resources over the past several years,” he said. “With the closing of this acquisition, we believe we have secured a solid acreage position in the core of this rapidly developing trend.”

Jeff Dietert, Simmons & Co. International managing director and head of research, noted that the purchase was paid from Sanchez Resources, the private partnership controlled by the Sanchez family, and an unaffiliated private equity firm. He was unsure how investors would react to the company stepping outside of the Eagle Ford, which has essentially been a sure thing.

“Given the high cost of TMS wells and uncertainty regarding whether the play will ultimately prove economic, we believe investors will question the merits of such a transaction given that it likely is attracting capital away from high certainty, high rate of return Eagle Ford development,” Dietert said.

The TMS is rapidly being defined and results have steadily improved in an identified sweet spot in southwest Mississippi and southeast Louisiana, Sanchez said.

Tuscaloosa well production within the past 20 months has seen enhanced results, with a number of 1,000 or more barrels of oil equivalent per day (BOE/d) initial production rates.

The play’s laterals average 5,450 feet, 19 fracing stages and have 30-day IP of 613 BOE.

Most recently, Encana Corp.’s (NYSE: ECA) Anderson 17H?2 12 well produced a 24-hour IP of 1,540 BOE.

Industry participants are announcing EURs ranging from 400,000 to 800,000 BOE per well with drilling and completion costs between $10 million and $15 million, the company said.

Strong well performance and decreased drilling and completions costs have also been encouraging, Sanchez said.

“We expect to commence our operated TMS drilling program in early 2014 and also anticipate participating in several non-operated wells given our proximity to other active operators in the area,” Sanchez said. “We are excited to bring our development skills and expertise to such a dynamic basin, and believe the strategic diversification to the TMS will continue our track record of building shareholder value.”

Deal Details

Sanchez established an area of mutual interest (AMI) with affiliate SR Acquisition I LLC in the Tuscaloosa. As part of the transaction, Sanchez Energy will acquire all of the working interests in the AMI owned by an unaffiliated private equity firm plus a portion of SR’s working interests, resulting in Sanchez owning an undivided 50% working interest across the AMI through the formation. The AMI holds rights to approximately 115,000 gross acres and 80,000 net acres.

SR will receive approximately $13.5 million in cash for the sale of its interest. The balance of the common stock and cash will be paid to unaffiliated third parties including the private equity firm, which made its initial investment in 2010.

Sanchez is an independent oil and gas company targeting onshore U.S. Gulf Coast oil resource plays with a focus on its 140,000 net acres in the Eagle Ford Shale.