- The much anticipated completion report for Sanchez Energy's Sante North Unit #1H step-out Eagle Ford test in Fayette County, Texas has been released.
- While on the surface the result looks disappointing, additional information is required to draw a definitive conclusion.
- The test result puts in question commerciality of the Sante prospect (20,000+ net acres) and, if confirmed negative, may curtail productive limits of the company's Marquis area.
Yesterday morning, the Texas Railroad Commission database revealed a fresh public filing by Sanchez Energy (SN) detailing a production test for the company's much anticipated exploratory well on its Marquis prospect in the Eagle Ford Shale play (the location is shown on the map below).
According to the filing, the Sante North Unit #1H well was completed on January 22, 2014 and tested on January 26, 2014.
- The well tested at 150 barrels of 44°API gravity oil, 104 Mcf of natural gas and 766 barrels of water over a 24-hour period, flowing via production tubing on a 16/64 choke.
- The well had a ~4,500-foot lateral and was completed with ~4.0 million pounds of proppant. Based on my analysis, the amount of proppant per foot of completed lateral is essentially in-line with the company's existing wells in the Prost area.
- The well demonstrated flowing tubing pressure of 955 psi, which is substantially below the average flowing pressure of ~2,700 psi seen in the Prost tests.
- The well's depth (11,583 feet depth) is similar to the Prost area.
The 24-hour test rate compares unfavorably to Prost wells that have tested in the 700 barrels of oil range, on average. Given the ~$9.0 million drill & complete cost per well, the test result is obviously far below what would be needed to consider the well commercial or even "encouraging."
In the absence of commentary from the company, it is not clear what caused the weak test result and it is premature at this point to draw definitive conclusions.
- Wells in the company's Prost area have often achieved peak IP rates almost immediately after being brought on-line (many wells were tested 2-7 days after the completion date, similar to the Sante North well and posted very strong production rates). However, the lower flowing pressure seen in the Sante North test may indicate that the well needs a longer time to reach peak production and the test rate is not necessarily indicative of the peak rate (the wall may need to "clean up" further). The very low (30 barrels) amount of oil produced prior to the test (according to the filing) may also point in that direction.
- The management would also need to confirm that the well did not encounter mechanical problems and was executed properly.
Regardless of the reasons, the result disappoints relative to the high expectation that was set by Sanchez's drilling success in the Prost area which extended Magnum Hunter's (MHR) and Penn Virginia's (PVA) success in Gonzales and Lavaca counties (adjacent positions). The hope was that the productive core of the play would extend further north into Fayette County and that the Sante well would de-risk a large portion of Sanchez's massive acreage position in the area.
This is the company's second attempt to prove up the Sante block. Another well, the Sante Unit A #1H, was tested in 2013. The test report showed a flow rate of 40 barrels of oil, 58 Mcf of natural gas and 17 barrels of water on a 12/64 choke at 420 psi flowing tubing pressure. The company commented in the past that the well's weak performance was attributable to mechanical issues encountered during completion, with only a small percentage of frac stages contributing to production.
Clearly, two unsuccessful test wells by no means condemn the prospectivity of this area. However, the key take-away from this most recent news is that still only a very small portion of the company's Marquis prospect is proven (slightly over 10,000 net acres at the Prost area out of the ~69,000 net acre total). The company still needs to demonstrate that other areas within the Marquis prospect are also highly productive and economically competitive.
Continued success in proving up the Marquis acreage was important to the stock as Sanchez is in need of expanding its currently relatively small portfolio of core assets (which include the southern portion of the ~9,800-acre non-operated Palmetto block; ~3,600-acre operated Wycross block; Alexander Ranch in La Salle County; and the 10,000+ acre Prost area, as shown on the map below).
(Source: Sanchez Energy, February 2014)
The stock price reacted with a sharp move down during yesterday's session in response to the news, news that clearly did not go unnoticed. It would have been certainly helpful if the company elected to issue a press release or included a discussion slide in its most recent corporate presentation to provide information on this obviously important well.
The Marquis Prospect
As a reminder, Sanchez Energy has leased a substantial acreage position at the easternmost frontier of the South Texas Eagle Ford play (the Marquis Area shown on the map below). The Marquis accounts for ~58% of Sanchez's total net acreage in the Eagle Ford and is expected to be the company's most active operating area in 2014: Sanchez has allocated $300-$315 million of drilling & completion capital to the Marquis (48% of the total). The company currently has three operated rigs and one non-operated rig active in the area.
(Source: Sanchez Energy, February 2014)
As of year end 2013, Sanchez has brought on production over 20 operated Eagle Ford wells in the area, with the vast majority of drilling concentrated within a compact core area called Prost. Well results have been reasonably consistent and very encouraging, given that the delineation of the prospect has just started. The company's well results (based on data through November 2013) are summarized on the cumulative production graph below.
(Source: Zeits Energy Analytics)
The Five Mile Creek Area
The Five Mile Creek area is another prospect within the Marquis that Sanchez is in the process of evaluating. The Five Mile Creek is located updip from the Prost area. While well costs are expected to be lower in this area compared to the Prost, the obvious concern is that reservoir energy and pressure is also lower, resulting in lower EURs.
A number of wells have already been drilled in the vicinity by offset operators (Sanchez actually owns a producer that was acquired as part of a property package). The results to date have been less impressive than in the Prost area. However, the full potential of the Five Mile Creek is yet to be evaluated.
In terms of size, the Five Mile Creek project is on the same scale as the Prost. In addition to operated units, the area includes acreage operated by Oak Valley (private) and other operators in which Sanchez holds non-op interests.
Sanchez planned to start drilling in the Five Mile Creek area in December by moving in the rig from the Sante block once the drilling of the Sante North #1H is completed. An additional non-operated rig is being run by Oak Valley. Oak Valley has recently completed three wells at Five Mile Creek, just north of Prost, in which Sanchez has a working interest. These results (not yet available) will be an important new test of acreage productivity at Five Mile Creek.
Well Costs and Price Realizations
Given the significant depth in the Prost area, the company's completed well cost has been in the $9 million range. The high cost is partially explained by the need to run an intermediate string of pipe, which adds in ~$800,000 per well in cost. Longer drilling time and higher formation pressures also add to the overall bill.
At Five Mile Creek, which is shallower, the company plans to attempt to drill wells without the intermediate string of pipe and hopes to see well costs lower than in the Prost area by ~$1 million in the long run.
The Marquis area produces high-quality 40-43° API gravity "black" sweet crude, which commands high price realizations. In terms of transportation cost, the area has a slight disadvantage given the lack of oil gathering infrastructure. Trucking adds estimated $3.50 per barrel operating cost relative to better established areas where take-away solutions are better developed.
Disclaimer: Opinions expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisor capacity. This is not an investment research report. The author's opinions expressed herein address only select aspects of potential investment in securities of the companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies' SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author's best judgment as of the date of publication, and are subject to change without notice.