Sanchez Energy Reduces Spending To Extend Cash Runway To The End Of 2018

| About: Sanchez Energy (SN)

Summary

Sanchez Energy reduced its 2016 capital expenditures to a range of $200 million to $250 million.

It is now likely to end 2016 with $320 million in cash with $40 oil and $2.50 natural gas.

2017 cash burn is around $150 million at $45 oil and $2.75 natural gas, but Sanchez Energy has enough cash to last until the end of 2018 at those prices.

Its credit facility and joint venture interest are also potential sources of cash.

High debt levels are still a long-term concern as Sanchez may not generate positive cash flow until oil gets above the $55 to $60 range along with $3 natural gas.

Sanchez Energy (NYSE:SN) reported Q4 2015 production numbers and then gave guidance for 2016 production and capital expenditures during its analyst and investor day meeting. The Q4 production numbers were strong at 58,115 BOEPD, well above previous guidance. It also reduced 2016 capital expenditures to a range of $200 million to $250 million, down $50 million from previous expectations.

While Sanchez Energy is still expected to burn cash in 2016 despite hedges, it will likely end 2016 with around $320 million in cash now. Oil at $45 and natural gas at $2.75 in 2017 would result in an additional $150 million in cash burn, but it now appears that Sanchez can wait out a pricing recovery until after 2018 before needing to access its credit facility. Long-term, Sanchez needs around $55 to $60 oil and $3 natural gas to breakeven, which is around where many long-term forecasts currently are, so it is not in particularly good or poor shape in that regard.

Revising The 2016 Outlook

Sanchez Energy indicated that 2016 production would be 48,000 to 52,000 BOEPD. In 2015, Sanchez averaged approximately 52,560 BOEPD in production, so the guidance midpoint reflects a 5% decline in production. However, since Sanchez Energy has a history of using conservative guidance, I am using 53,000 BOEPD in my calculations.

The percentage of oil production continues to drop as production growth is driven primarily by Catarina production, which was 22% oil in Q3 2015. Oil's share of total production for Sanchez Energy went down to 33.5% in Q4 2015, from 34.4% in Q3 2015. Therefore it seems reasonable to use a 32% oil split for 2016. This is slightly lower than Sanchez's guidance for a 33% oil split for 2016, as any production outperformance versus guidance is mostly likely going to be driven by NGLs and natural gas.

Sanchez Energy is projected to deliver $576 million in revenue, including $180 million in hedge value at $40 WTI oil and $2.50 Henry Hub natural gas.

Barrels/Mcf

$ Per Barrel/Mcf (Realized)

$ Million

Oil

6,207,360

$35.00

$217

NGLs

6,401,340

$12.00

$77

Natural Gas

40,735,800

$2.50

$102

Hedge Value

$180

Total Revenue

$576

Click to enlarge

With the lowered capital expenditure budget, Sanchez is expected to burn approximately $46 million in 2016 at $40 oil and $2.50 natural gas.

$ Per BOE

$ Million

Production Expenses

$9.25

$179

Production Taxes

$1.19

$22

Cash SG&A

$3.09

$60

Capital Expenditures

$11.60

$225

Interest Expense

$6.19

$120

Preferred Dividends

$0.82

$16

Total Cash Expenditures

$32.78

$622

Click to enlarge

Sanchez Energy is heavily hedged, so a $10 change in the price of oil during 2016 only affects cash flow by around $11 million, including the effect of oil price changes on NGL pricing. A $0.50 change in the price of natural gas would affect 2016 cash flow by around $1 million.

The reduction in capital expenditures and increased production should allow Sanchez Energy to have roughly $320 million in cash at the end of 2016. This includes the effect of the remaining Targa midstream JV expenditures, which are not included in the table above.

Reduced CapEx Improves Cash Runway

I am feeling somewhat more comfortable about Sanchez's financial position given that it has reduced its capital expenditure budget while maintaining production levels. At $45 oil and $2.75 natural gas in 2017, Sanchez Energy would likely burn approximately $150 million if it keeps capital expenditures at $225 million. This would bring its cash position down to $170 million at the end of 2017.

It is therefore unlikely to need to use its credit facility before the end of 2018, if oil stays above $45 and natural gas stays above $2.75 in that year. Sanchez has also mentioned the possibility of selling its Targa JV interest to raise cash if needed.

Sanchez appears to need around $55 to $60 oil with NGLs at 30% of oil prices, along with $3 natural gas to reach breakeven cash flow with $225 million in capital expenditures and no hedges.

Conclusion

It is a positive move that Sanchez Energy has reduced its 2016 capital expenditure budget, which appears to have helped extend its cash runway to the end of 2018 (assuming that capital expenditures remain at that level). Sanchez still faces long term challenges with its large debt load though, as there is a significant chance that Sanchez uses up the majority of its cash over the next few years and then operates near breakeven cash flow until its debt matures. Sanchez's bonds reflect these concerns as they are trading for under 40 cents on the dollar.

I do think there was some room for capital expenditures to be trimmed further though, as well economics do not look strong at current prices. Sanchez's presentation looks at well economics at a low of $45 oil and $2.50 natural gas, both significantly above current levels. With much of a well's value coming in the first two years, low prices now can significantly affect the lifetime value of the well, even if there is a strong recovery in a couple years.

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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.