Sanchez Energy: $900 Million Debt And Equity Offering - Quick Synopsis

| About: Sanchez Energy (SN)


Following the Catarina acquisition, Sanchez Energy is putting in place permanent capital components.

The company is offering $200 million of common stock and is terming out its bank borrowings with a $700 million senior notes offering.

The offerings signal potential acceleration of drilling activity in Catarina and other prospects, including the TMS.

This morning, Sanchez Energy (NYSE:SN) launched two significant public offerings:

  • A ~$200 million common stock offering (5,000,000 shares plus an additional 750,000 "green shoe" shares; yesterday's closing price for the stock was $34.71 per share). The offering represents less than 10% increase in the number of the company's shares.
  • A concurrent $700 million debt offering (of senior unsecured notes due 2023).

Sanchez intends to use the proceeds from these financings to fund its recently announced Catarina acquisition; to repay borrowings under its credit facility; and for general corporate purposes.

The offerings are a logical move in light of the Company's substantial ($550-$600 million, net of the post-closing adjustments) Catarina acquisition. The equity component of the financing, in combination with the favorable net cash flow profile of the Catarina asset, should allow Sanchez to accelerate the drilling program on the acquired properties while preserving the credit strength of its balance sheet.

As a reminder, Sanchez will be required to drill a minimum of 50 wells per annum on the Catarina prospect in order to meet the continued drilling requirement under the lease agreement. The company anticipates that the asset will generate positive free cash flow in 2015. However, the 2014 Catarina budget envisions a modest deficit. In the second half of 2014, Sanchez's drilling & completion capital plan for Catarina is $205-$215 million. The drilling & completion budget for 2015 is planned to be in the $330-$370 million range and is based on 50-60 net wells. In addition to the D&C budget, Sanchez may need to reserve some capital for other spending categories, including production infrastructure, particularly if the company achieves success on the less developed eastern part of the block.

One might argue that due to its high proved developed reserve value, the Catarina acquisition did not require equity financing and was essentially credit-neutral. However, the equity financing is prudent and should provide the flexibility to accelerate the development of Catarina to a pace above the 50-well minimum. In this context, I expect any negative reaction from the market to the announcement to be transitory.

The only negative news is the decision by the company's insiders to include their shares in the offering. According to the press release, the "green shoe" shares (up to 750,000 shares) will be provided by Mr. A.R. Sanchez, Jr. (the company's CEO); Sanchez Oil & Gas Corporation; and TAEP Security Trust. The company's stock has performed strongly, and the decision by the CEO to reduce his exposure (even though by a relatively small amount) may be perceived as a negative signal.

In Conclusion…

Sanchez Energy is offering its stock and senior notes on the heels of a very favorable acquisition and at a time when the market's interest in the company's "story" may be high. The timing is opportune and the offerings should be well received.

The $900 million financing is significant for a company with a $3.4 billion firm value. From a corporate finance perspective, the step is logical and should have been anticipated.

The offerings should result in an adequate capital structure that reflects the company's rich opportunity set.

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