Sanchez Energy: Bold Acquisition Will Power Shares Higher

| About: Sanchez Energy (SN)

It has been some months since I updated readers on Sanchez Energy (NYSE:SN) which I bought and wrote about in late October. The stock is up just under 15% since then. The company just made a major acquisition which should have a significantly positive effect on the company's prospects so it seems time to provide an updated profile on this fast growing Eagle Ford energy producer:

The Acquisition -

Sanchez will pay $265mm to acquire additional acreage in the Eagle Ford shale region from Hess (NYSE:HES).

The acreage consists of about 13.4 million barrels oil equivalent (BOE) of proved reserves and 4,500 BOE per day of current production on 43,000 acres.

Benefits -

This deal adds considerably to the 95,000 acres the company operates on in the area. More importantly, it more than doubles the 3,800 BOE the company was operating at during the company's recent update after earnings. It also adds an additional 50% to the 9,000 BOE the company's CEO has for a goal for year-end 2013.

Early Results -

  • Canaccord Genuity reiterated its "Buy" rating on SN after the announcement. It also upped its price target to $36 from $34 a share.
  • Consensus earnings estimates have already gone from $2.59 a share to $2.85 over the last week. Look for this to go up further as analysts factor in this additional production on revenues and earnings.

Four additional reasons you want to own SN at just over $19 a share:

  1. SN is very cheap. The stock is selling for less than 7x 2014's projected earnings.
  2. Production should now end this year at 13,500 BOE from 3,800 BOE currently factoring in organic growth and production from the new acquisition.
  3. The company had more than $60mm in net cash on the books prior to the acquisition and just did a private placement for $225mm of cumulative preferred stock at a reasonable 6.5%. It should easily be able to digest this $265mm all cash deal.
  4. The median price target from the 12 analysts that cover the stock is $26 a share. This is more than 30% above the current stock price. Look for the median price target to go up over next few weeks as deal gets factored into analysts' projections.

Disclosure: I am long HES, SN. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.