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Sanchez Energy: Market Hates A Plan That Is On Track


  • The stock is up nicely over the last two weeks. Now will that finally break the long downtrend?
  • Cash flow in the second quarter moved sharply in the right direction. Now will the third quarter follow suit?
  • Increasing well productivity appears to allow for a lower-than-anticipated capital budget.
  • Management alluded to "un-sub" generating cash in the conference call.
  • The market wants to see the vaunted great well results translate into greater cash flow and higher production.

Mr. Market celebrated when Sanchez Energy (SN) made the latest acquisition.

Source: Seeking Alpha Website November 4, 2017

As shown above, back in January, the market loved the idea of the acquisition. But ever since management announced the actual strategy for integrating this purchase and taking advantage of the assets, Mr. Market has hated the execution every step of the way. The quarterly conference calls, production announcements, and earnings results have provided some small positive bumps along the way. In fact, the stock is up nicely over the last two weeks or so.

But clearly the market has been heading for the exits and is not yet about to change its strategy. Still, Sanchez Energy management has a sound, if speculative, strategy. So even though I was stopped out of this investment idea early, I am waiting for the freight train to stop to get back on. Maybe this time around the stock will level off and finally begin its climb.

Sanchez Energy First Quarter 2017 10-Q

Source: Sanchez Energy Second Quarter 2017 10-Q

Part of the problem may be the cash flow. This company has about $1.9 billion in debt and another $400 million mezzanine equity that needs to be dealt with as of the third quarter. Yet, management really did not discuss cash flow. As discussed in previous articles, the corporate structure is a little complex at the current time.

But the market wants to know how that debt will be paid. While management has a plan, they are not really good at explaining the plan so the stock continues to take a beating. Cash flow from operations in the first quarter was negative. The second quarter needed about $78 million to erase the negative cash flow and get to the balance shown above. That eclipsed the second-quarter cash flow from operations of about $62

This article was written by

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I am a high school teacher for a decade. I am now retired.  Before that I was an analyst (operations and financial) and for a short time a Controller I have a B.S. with an emphasis in Accounting and an MBA (for which I studied Finance, Economics, and Management) I passed the CPA exam on the first try and am a retired CPA in the state of Maryland. I have a high school teaching credential and an MA in Math Education

Occassionally write articles for Rida Morwa''s High Dividend Opportunities https://seekingalpha.com/author/rida-morwa/research

Occassionally write articles on Tag Oil for the Panick High Yield Report


Analyst’s Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in SN,SCAZP over the next 72 hours. 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.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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