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Eagle Ford Player Sanchez Cuts Back, Again

Houston-based Sanchez Energy Corp. has again cut its capital spending plan for this year due to depressed commodity prices. The original plan to spend $1.15 billion has now been cut to $600-650 million with the latest reduction. Previous guidance was for $875 million.

Sanchez, which is focused on the Eagle Ford and Tuscaloosa Marine shales, said it has appealed to service vendors for price reductions and "material reductions" have been made in all operating segments.

"The new 2015 capital plan will focus our capital spending on those areas with high rates of return while maximizing future potential," said CEO Tony Sanchez. "As a result, 2015 production is expected to average between 40,000 and 44,000 boe/d, allowing us to maintain our expected fourth quarter 2014 average daily production rate and increase 2015 production year over year by approximately 40%.

"This revised capital plan, which assumes a flat price deck of $60/bbl for oil and $3.75/MMBtu for natural gas, is expected to be fully funded from cash flow from operations and cash on hand. As a result, we do not forecast any usage under our undrawn bank credit facility, which has a $650 million borrowing base with an elected commitment of $300 million."

More than 90% of the capital plan will be allocated toward drilling and completing wells, of which more than 90% will be directed to the development of Eagle Ford Shale properties, the company said.

In a note titled "No Joy in Mudville," BMO Capital Markets analyst Dan McSpirit wrote Thursday that the company's latest production guidance "...amounts to little more than holding 4Q14 production flat, at least how we have it modeled...Multi-well pad drilling will be the program this year, and thus, we expect lumpiness in the growth profile, with 2Q2015 and 4Q2015 showing the greatest sequential growth per our discussions with management."

The 2015 Sanchez drilling plan calls for the company to move from eight gross (seven net) rigs across its Eagle Ford position and one gross and net rig in the Tuscaloosa Marine Shale (TMS) in the fourth quarter of 2014 to four gross (3.5 net) rigs focusing on Catarina and Palmetto in the Eagle Ford and 0.25 gross and net rigs in the TMS.

"This represents an approximately 60% reduction in average rig count from fourth quarter 2014 to 2015," Sanchez said. "Our 2015 capital plan of $600 to $650 million is inclusive of carryover activity from the fourth quarter of 2014. On an annualized run rate basis, our 2015 capital plan would be $400 to $450 million as a result of reduced activity and lower wells costs from the service sector. A 2016 capital plan reflecting this $400 to $450 million with 3.5 gross (three net) rigs focused on Catarina and Palmetto in the Eagle Ford would allow us to maintain our production levels over 2015."

According to analysts at Tudor, Pickering, Holt & Co. (TPH), more than 40 exploration and production companies have announced 2015 capital budgets since early December. Of these, the average plan calls for a more than 30% reduction in spending from 2014.

"Ultimately, we think domestic industry activity may fall about 40% as crude and natural gas have fallen an additional [approximately] 25% over the last month," TPH said in a note Thursday.

"Even on announced budgets, which in some cases are now stale, average production growth is only up +8% y/y and flat exit to exit. Our confidence continues to grow in a macro forecast, which suggests production declines in 2016 will help balance global supply-demand."

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