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Based in Houston, Texas, Sanchez Energy (NYSE:SN) scheduled a $250 million IPO with a market capitalization of $825 million at a price range mid-point of $25 for Wednesday, December 14, 2011.

11 IPOs to raise $3.5 billion week of December 12, includes Zynga (NASDAQ:ZNGA). See the full IPO calendar.

SUMMARY

SN is basically a drilling fund put together by a private equity firm to go after shale oil deposits by using the hydraulic fracking process.

VALUATION

SN is priced too high to be interesting on the IPO at 62x earnings and 3.5 times book value. We would pass on the SN IPO.

BUSINESS

SN is an independent exploration and production company focused on the exploration, acquisition and development of unconventional oil and natural gas resources and recently formed for the purpose of acquiring SEP I’s unconventional oil and natural gas assets, which are held in SEP Holdings III and will be contributed to SN as part of the formation transactions.

SN has accumulated approximately 39,000 net leasehold acres in the oil and condensate, or black oil and volatile oil, windows of the Eagle Ford Shale in Gonzales, Zavala and Frio Counties of South Texas.

The term “unconventional oil” is used to distinguish that oil from oil which can be extracted using traditional oil well methods. Unconventional oil, or black oil, is more sticky and is not as valuable as lighter grade crude oil.

Most of SN’s leases are in the Eagle Ford Shale deposit, which is one of the most actively drilled targets for oil and gas in the United States in 2010

DIVIDEND POLICY

SN plans to pay no dividends.

CAPITAL EXPENDITURES

From January 2012 through December 2013 SN plans $413 mm in drilling capital expenditures

EAGLE FORD SHALE WELL RESULTS

In July 2011, SN completed its first Maverick area Eagle Ford horizontal well, the Alpha Ware #1H, in Zavala County, Texas. This well was a 6,513 foot lateral well and was completed using a 20 stage hydraulic fracture stimulation. The 30-day average initial production rate from this well was 242 bopd. Through October 10, 2011, the Alpha Ware #1H has produced a total of approximately 14,262 bo. SN is the operator of the well and have a 60% working interest in the well.

In February 2011, SN completed its fourth Eagle Ford horizontal well in the Palmetto area, the Barnhart #4H, in Gonzales County, Texas. This well was a 5,507 foot lateral well and was completed using a 16 stage hydraulic fracture stimulation. The 30-day average initial production rate from this well was 893 boe/d (713 bopd and 1,080 mcf/d) using a 15/64 inch restricted choke. Through October 10, 2011, the Barnhart #4H has produced a total of approximately 153,066 boe (115,815 bo and 223,507 mcf). We have a 50% working interest in the well.

In November 2010, SN completed its third Eagle Ford horizontal well in the Palmetto area, the Barnhart #3H, in Gonzales County, Texas. This well was a 5,320 foot lateral well and was completed using a 16 stage hydraulic fracture stimulation. The 30-day average initial production rate from this well was 663 boe/d (618 bopd and 271 mcf/d) using a 15/64 inch restricted choke. Through October 10, 2011, the Barnhart #3H has produced a total of approximately 99,843 boe (94,510 bo and 31,995 mcf). We have a 50% working interest in the well.

In October 2010, SN completed its second Eagle Ford horizontal well in its Palmetto area, the Barnhart #2H, in Gonzales County, Texas. This well was a 5,100 foot lateral well and was completed using a 12 stage hydraulic fracture stimulation. The 30-day average initial production rate from this well was 1,102 boe/d (880 bopd and 1,330 mcf/d) using a 13/64 inch restricted choke. Through October 10, 2011, the Barnhart #2H has produced a total of approximately 153,268 boe (117,945 bo and 211,935 mcf). We have a 50% working interest in the well.

In July 2010, SN completed its first Eagle Ford horizontal well in the Palmetto area, the Barnhart #1H, in Gonzales County, Texas. This well was a 3,902 foot lateral well and was completed using a 12 stage hydraulic fracture stimulation. The 30-day average initial production rate from this well was 491 boe/d (447 bopd and 268 mcf/d) using a 17/64 inch restricted choke. Through October 10, 2011, the Barnhart #1H has produced a total of approximately 77,504 boe (66,856 bo and 63,886 mcf). SN has a 50% working interest in the well.

RECENT DEVELOPMENTS

On November 8, 2011, SN entered into a contribution agreement, or the Marquis Contribution Agreement, with Ross Exploration to acquire Marquis LLC, which owns a 100% working interest and an approximate 75% net revenue interest in approximately 54,900 net acres in Fayette, Lavaca, Atascosa, Webb and DeWitt Counties of South Texas.

SN has agreed to pay Ross Exploration approximately $89 million in cash, subject to customary pre- and post-closing adjustments (and exclusive of certain costs and expenses for which SN has agreed to reimburse Ross Exploration in cash at closing), and $20 million in shares of common stock, or 800,000 shares of common stock assuming an initial public offering price of $25.00 per share (the midpoint of the price range). The acreage that SN is acquiring is subject to an overriding royalty interest that was previously conveyed by Ross Exploration to an affiliate as part of the transactions contemplated by the

Marquis Contribution Agreement.

48,600 net acres are located in what SN believes to be the volatile oil window of the Eagle Ford Shale in southwest Fayette and northeast Lavaca Counties, Texas. For the period from January 2012 through December 2013, SN plans to spend approximately $135 million to drill 18 gross (18 net) wells in SN’s Marquis area.

Since the end of the third quarter of 2011, SN has drilled its fifth and sixth Eagle Ford Shale horizontal wells in our Palmetto area, the Barnhart #5H and #6H, in Gonzales County, Texas. SN is currently finishing completion activities on these two wells and expects them to commence production in December 2011.

COMPETITION

SN operates in a highly competitive environment for leasing and acquiring properties and in securing trained personnel

Competitors include, but are not limited to, Chesapeake Energy Corporation (NYSE:CHK), Marathon (NYSE:MRO), EOG Resources (NYSE:EOG), GeoResources (NASDAQ:GEOI), Penn Virginia (NYSE:PVA) and Magnum Hunter Resources (NYSE:MHR). Many competitors possess and employ financial, technical and personnel resources substantially greater than SN, which can be particularly important in the areas in which SN operates.

As a result, SN competitors may be able to pay more for productive oil and natural gas properties and exploratory prospects, as well as evaluate, bid for and purchase a greater number of properties and prospects than SN’s financial or personnel resources permit.

USE OF PROCEEDS

Of $231 million

  • $50 million cash consideration to SEP I for the contribution by SEP I to SN of all the limited liability company interests in SEP Holdings III.
  • $89 million cash consideration for all of the limited liability company interests in Marquis LLC.
  • $92 million for drilling, exploration and acquisition expenditures and general corporate purposes.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Source: IPO Preview: Sanchez Energy