Houston-based Sanchez Energy Corp. will continue to focus on the Eagle Ford Shale next year, and so far this year, Sanchez has managed to squeeze the company's drilling and completion (D&C) costs to their lowest level ever.
"As we begin to craft our drilling plans for next year, our development focus remains on Catarina and the Maverick area of Cotulla where results continue to exceed expectations," said CEO Tony Sanchez. "Recent step-out wells in South Central and Northwestern Catarina have provided further definition on the extent of their fairways. Recent wells, along with a pilot drilled in North Central Catarina, have confirmed the Upper Eagle Ford is aerially extensive across the western side of Catarina. We now estimate over 350 Upper Eagle Ford locations, more than double our initial projection.
"Additionally, enhanced completions are being tested in the Upper and Middle Eagle Ford with promising initial results. As of Sept. 30, 2016, we had drilled 39 of our 50 well annual drilling commitment at Catarina for the period from July 2016 through June 2017. Recent wells in the Maverick area of Cotulla are outperforming type curves by 10 to 15% and have returns in excess of 85% at recent strip pricing. We anticipate allocating a larger portion of development capital to the Maverick area of Cotulla going into 2017."
The company's Eagle Ford plan remains primarily focused on Catarina and the Maverick area of Cotulla. Sanchez is running three rigs and expects to drop to two rigs during the fourth quarter. The company tested advanced completion designs in the Upper and Middle Eagle Ford on the western portion of Catarina during the third quarter. The initial results from these tests have been encouraging, and the company plans to test these designs, which involve tighter cluster spacing and increased fluid and proppant loading, in other areas of the ranch. In addition, recent results in Hausser have been outperforming expectations and are expected to compete for capital as Sanchez looks to formalize its 2017 budget.
Drilling and completion costs in the third quarter averaged about $3 million per well at both Catarina and Cotulla, with the best wells coming in below $2.8 million. As of Sept. 30, the company had 676 gross (558 net) producing wells with 19 gross (17 net) wells in various stages of completion.
"The continued reductions to our cost structure this quarter are solely due to further process and efficiency realizations that are suspected to be sustainable if prices further increase," COO Christopher Heinson told analysts during a conference call Monday. "The average drilling and completion cost of $3.0 million in the quarter represents the lowest average well cost we've ever achieved, and it is 27% lower than the third quarter of 2015.
"What is notable about the savings achieved over the last year is that they came after petroleum service price concessions plateaued, and came as a result of improvements and efficiencies related to process and design changes. During the third quarter, we continued to see strides in both drilling and completion efficiencies. Wells in Catarina averaged approximately seven days from spud to total depth during the quarter."
Third quarter production consisted of 33% oil, 30% natural gas liquids (NGL) and 37% natural gas. By asset area, Catarina, Marquis, Cotulla/ Wycross, and Palmetto/Tuscaloosa Marine Shale/other comprised 80%, 4.6%, 12.6%, and 2.8%, respectively, of third quarter production. Commodity price realizations, including hedges, were $57.18/bbl oil, $13.81/bbl NGLs and $3.22/Mcf of natural gas. The current hedge position is 18,000 b/d of oil and 99,153 MMBtu/d of natural gas in 2016, 6,000 to 7,000 b/d of oil and 93,521 MMBtu/d of natural gas in 2017, 40,000 to 50,000 MMBtu/d of natural gas in 2018 and 20,000 MMBtu/d of natural gas in 2019.
Sanchez reported a net loss of $70.25 million (minus $1.19/share) for the third quarter, which includes a non-cash after tax impairment charge of $59.6 million and a non-cash mark-to-market loss on the value of the hedges of $9.5 million. In the year-ago quarter, the company reported a net loss of nearly $420.9 million (minus $7.33/share). Adjusted net income in the third quarter was $9.4 million compared to an adjusted net loss of $28.4 million in the third quarter 2015.
The company said it had liquidity of $629 million as of Sept. 30, which consisted of $329 million in cash and cash equivalents and an undrawn bank credit facility with an elected commitment amount of $300 million and a borrowing base of $350 million.