Sanchez Energy Corp. (SN) is a fast growing independent oil and gas company targeting the liquids-rich Eagle Ford Shale, Pearsall Shale, Austin Chalk, and Buda Limestone plays. From 2011 to 2012, SN grew average production and reserves 170% and 216%, respectively. And, let's not forget that more than 85% of production and reserves are oil-weighted.
Spreading its Wings
In a move that significantly expands the company's asset base within the Eagle Ford, on March 19, 2013, SN announced its purchase of 43,000 net acres from Hess Corp. (HES) for $265 million. Pro forma, the transaction increases SN's acreage position in the Eagle Ford to 138,000 net acres and boosts production to approximately 8,300 BOEPD (using average production from the first two months of 2013).
- More than doubles SN's production by adding 4,500 BOEPD at a cost of $59,000 per flowing BOEPD;
- Increases SN's proved reserves 63% by adding 13.4 MMBOE of proved reserves at $19.70 per BOE;
- Adds 50 gross producing wells for a new total of 84 gross producing wells.
Funding the Acquisition
SN secured commitments for $325 million in debt financing and said the company expects to access the capital markets in the near term. Following the acquisition announcement, SN placed a total of 4,500,000 shares of its 6.50% Cumulative Perpetual Convertible Preferred Stock, Series B. Aggregate net proceeds from this offering are expected to be approximately $217 million.
The Market Places a Justified Premium on Sanchez Energy
Sanchez Energy's acquisition of Hess assets highlights several key points about the market's view of SN and the Eagle Ford in general. Based on announced metrics, this acquisition is valued at $59,000 per flowing BOEPD and $19.70 per proved BOE, which is the proverbial "screaming deal" most companies in the patch seek. SN trades at a premium to its Eagle Ford peers and we would expect Sanchez to continue trading at a premium as the company provides investors with a unique combination of advantages in the play.
First, this transaction starkly demonstrates Sanchez can get deals done. The fact that the Hess acquisition essentially doubles production is a testament to the ability of the Sanchez team to find and close accretive deals. Not all companies can demonstrate this success.
Second, from its IPO in December 2011, Sanchez management has been heralding the company's legacy, heritage and relationships in Texas which ultimately led to this particular transaction.
Finally, Sanchez Energy can not only find accretive deals because of its unique position in the Eagle Ford play, but the company can execute a transaction at metrics well below market expectations in terms of acreage valuations. OAG360 is aware of one investment bank's valuation of the Hess acreage in the $800+ MM range - and yet Sanchez was able to announce this acquisition at what amounts to a 75% discount. This merely highlights the bid-ask spread between buyers and sellers in the Eagle Ford, but also clearly shows Sanchez will be able to access deals at very compelling valuations.
Industry Eagle Ford Valuations
The Eagle Ford acreage valuation disconnect has been demonstrated before. OAG360 agreed with Aurora's management team in our write-up titled, Aurora Oil & Gas Limited: Pure Play Eagle Ford Producer Makes Strategic Acquisition, a report which postulated that the disconnect in valuations between Eagle Ford buyers and sellers witnessed in 2012 was likely to shrink during 2013 as M&A values fell back to a more reasonable level. Although it's early, according to PLS's M&A database, the average Eagle Ford transaction during 2013 is $54,239 per flowing BOEPD. Eagle Ford M&A valuations during 2012 averaged $109,568 per flowing BOEPD. Sanchez's acquisition of the Hess acreage further validates the assertion that Eagle Ford acreage valuations are coming down.
Final Thoughts on Sanchez
Down spacing is viewed as a catalyst for just about every company in the Eagle Ford. SN completed down spacing tests late in 2012 assuring the company it can reduce its well spacing from 80 acres to 60 acres. SN is carrying out additional tests and evaluating supplementary reductions to 40 acre spacing on a five well pad.
We are not assuming this new acreage position is viable for 60 to 40 acre spacing; however, doing the simple math - the 43,000 net acres bought from Hess has been developed on 860 acres per well. We would expect the company could significantly add to its inventory given additional development on any tighter spacing. Most operators in the Eagle Ford are developing on 80 acre spacing.
We believe the company will likely update its 2013 guidance given the acquisition.
The momentum is building early in 2013 for Sanchez Energy.