Sanchez Launches Offerings, Wycross Acquisition

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To acquire assets in the Eagle Ford consisting of 11 MMBOE of proved reserves on 3,600 net acres in McMullen County.

Sanchez Energy Corp. (NYSE: SN) has snared another big deal, adding to its Eagle Ford shale holdings with a purchase of McMullen County, Texas, acreage for $220 million cash, the company announced Sept 9.

The deal adds 11 million barrels of oil equivalent (MMBOE) of proved reserves and 2,000 BOE/d of current production on about 3,600 net acres.

Sanchez has been on a tear of late. In May, Sanchez spent $280.4 million for Hess Corp.’s (NYSE: HES) Eagle Ford Shale assets, including proved reserves of 13.4 MMBOE, 4,500 BOE/d of current production and roughly 43,000 net acres. The reserves consist of 81% oil and 8% natural gas liquids (NGLs). The deal also follows a $78 million purchase in August of 40,000 Tuscaloosa Marine Shale acres.

Tony Sanchez III, company president and CEO, said the Eagle Ford Wycross assets provide an excellent combination of high quality production and reserves with a continuous development program for at least the next two years. The new Wycross area is adjacent to Sanchez’s Cotulla area and can be integrated into its operations seamlessly, Sanchez said.

“The profile of these wells with average 24-hour initial production rates in excess of 1,000 BOE/d and average 30 day initial production rates in excess of 800 BOE/d rival some of the best wells in the Eagle Ford,” he said.

Subash Chandra, equity analyst for Jeffries, said Sanchez paid up for the Eagle Ford land at $110,000 per flowing BOE, similar to the $111,500 paid in July by Exco (NYSE: XCO) to Chesapeake (NYSE: CHK).However, “The numbers on a per acre basis are vastly different, as SN paid $61,000 per acre while XCO paid $12,400.”

Chandra said the deal is among the more expensive per acre transactions Jeffries has tracked in the play. On a reserve basis, Sanchez paid $20 per BOE, the same as its acquisition of 43,000 acres from Hess earlier in the year. However, the Hess transaction averaged $59,000 per flowing BOE.

The price difference may be explained “by more prolific wells and more future drilling locations in McMullen.”

Sanchez Energy’s acquisition has an average working interest of 60% with development potential in approximately 3,600 net contiguous acres in McMullen County.

The purchase ups Sanchez’ proved reserves by 25% at a cost of about $19.65 per BOE. Production will increase by 2,000 BOE/d for a company increase of 15% over current production of 13,500 BOE/d.

The purchase comes with 12 producing wells with 40 identified proved undeveloped locations based on 60-acre spacing and the potential to further down-space to 40 acres. Wycross wells have shown strong rates of return with historical wells averaging 24-hour initial production rates in excess of 1,000 BOE/d and 30-day initial production rates in excess of 800 BOE/d.

“We have used a development drilling plan to assess reserves and valuation assuming well spacing on 60 acres but firmly expect that optimal development will take place with 40 acre spacing, providing additional upside potential,” Sanchez said. “We currently plan to bring a rig suited to efficiently develop this asset later this year. As a result, we are expecting that the current production rate of approximately 2,000 BOE/d will stay flat on average for the balance of 2013.”

Sanchez announced a preliminary 2014 operating capital plan of $700 million to spud 76 net wells and complete 79 net wells along with related facilities, leasing, and geologic and geophysical activities. Sanchez plans to direct 94% of operating capital to drilling and completion activities with the lion share in the Eagle Ford.

Despite spending more than half a billion dollars in 2013, Sanchez has cut its 2013 operating capital plan to $470 million from from $475 million as it continues to reduce drilling and completion costs per well due to efficiency gains from pad drilling.