Sanchez Energy: Breakeven Point May Approach $70 Oil

| About: Sanchez Energy (SN)

Summary

Sanchez Energy is selling its Carnero Processing stake and some oil and gas assets to Sanchez Production Partners.

This should net Sanchez $73 million in cash and relieve it of $32 million in capital contribution commitments. Further Eagle Ford transactions may still occur.

Sanchez's unhedged breakeven point may rise to $66 to 69 oil (depending on preferred dividend payments) due to the loss of the benefits from owning the Raptor plant.

Sanchez has a healthy cash position, with projected 2017 year-end cash at $275+ million despite significant expected cash burn during 2017.

Sanchez remains highly leveraged and it is important for Sanchez to effectively use its cash position to reduce its leverage.

Sanchez Energy (NYSE:SN) has continued to sell assets to Sanchez Production Partners (SPP), raising around $73 million in net proceeds with its agreement to sell its stake in Carnero Processing (the Raptor Plant) and some oil and gas assets in the Cotulla and Palmetto regions. Sanchez Energy also relieves itself of an additional $32 million in estimated capital contributions for Carnero Processing.

Sanchez Energy may also still sell the Eagle Ford assets that it was previously reported to be looking to sell. The Cotulla wells that were sold to Sanchez Production Partners appear to be in different counties than the Cotulla assets that were being marketed according to the previous reports. The Sanchez Production Partners transaction also only includes 11 of the 76 producing Palmetto wells that Sanchez Energy had working interests in at the end of Q2 2016.

The Carnero Processing Transaction

Sanchez Energy is selling its 50% interest in Carnero Processing for $47.7 million plus the assumption of the remaining $32.3 million in estimated capital contributions. This is a good return on the $40.2 million that Sanchez Energy has invested into Carnero Processing during the last year.

However, this means that Sanchez has sold its stake in both its joint ventures with Targa Resources Partners now. The two joint ventures (Carnero Processing and Carnero Gathering) were supposed to improve Sanchez Energy's finances by approximately $17 million to $29 million per year from lower processing and gathering fees and higher liquids yields. This is based on Sanchez's estimate that the projects would have a rate of return in the mid-teens at the minimum volume commitment, potentially increasing to the mid-20s depending on third-party volumes. Sanchez has made approximately $18.5 million from the sale of its two joint venture stakes so far, but the long-run impact appears negative given that Sanchez appears to be giving up at least nearly that much ($17+ million per year) in future benefits.

The Eagle Ford Transaction

Sanchez Energy is also receiving $24.9 million (net of closing adjustments) from Sanchez Production Partners for its working interests in 34 wells, of which 23 appear to be in the Maverick area of the Cotulla and 11 are in the Palmetto. These assets are expected to produce 700 BOEPD (73% oil) during 2017, making the received price approximately $35,600 per flowing BOE based on 2017 production numbers. This appears to be a generally reasonable price, although perhaps a bit on the lower side, now that oil has stabilized, since the price would probably be roughly 4x 2017 EBITDA at current strip prices.

2017 Outlook

After these transactions, Sanchez Energy may still end up with around 59,000 BOEPD in production in 2017 with a $250 million capital expenditure budget in 2017 and its planned increased activity in Q4 2016. Sanchez's oil production percentage may go down a bit further with its concentration on the Catarina and its sale of primarily oil assets, so I have modeled 30% oil production for Sanchez's 2017 results.

At $53 WTI oil and $3.25 Henry Hub natural gas in 2017, I estimate that Sanchez Energy will end up with approximately $543 million in revenue. This includes slightly negative hedge value as Sanchez has oil hedges in the low $50s and natural gas hedges at $3.

Barrels/Mcf

$ Per Barrel/Mcf (Realized)

$ Million

Oil

6,460,500

$48.00

$310

NGLs

7,321,900

$13.00

$95

Natural Gas

46,515,600

$3.15

$147

Hedge Value

-$9

Total Revenue

$543

Sanchez would have approximately $675 million in cash expenditures if it pays its preferred dividends in cash again, or $659 million if it doesn't. This leads to estimated cash burn of $116 million to $132 million in 2017. Sanchez's unhedged breakeven point has increased to around $66 WTI oil without cash preferred dividend payments and $69 WTI oil with cash preferred dividend payments after its sale of its Carnero Processing and Carnero Gathering stakes, since it will not receive the production expense benefit of those projects anymore.

$ Million

Production Expenses

$199

Production Taxes

$30

Cash SG&A

$60

Capital Expenditures

$250

Interest Expense

$120

Preferred Dividends

$16

Total Cash Expenditures

$675

Conclusion

Sanchez Energy has plenty of liquidity despite its projected 2017 cash burn, with its projected 2017 year-end cash balance at $275+ million, after taking into account these recent agreements with Sanchez Production Partners and assuming $250 million in capital expenditures in 2017.

While these transactions boost Sanchez's liquidity and cash position, they also have the effect of reducing Sanchez's expected EBITDA and increasing Sanchez's unhedged breakeven point. As Sanchez's unhedged breakeven point remains well above current oil prices and its leverage remains elevated, it is imperative that Sanchez utilizes its cash position very effectively for transactions or development activities that reduce its leverage.

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