Houston-based Sanchez Energy Corp. second quarter production exceeded the high end of guidance, and now the company plans to raise spending by up to $50 million with an eye on growing production by 5-8% next year, it said Monday.

“Process improvements and efficiency gains continue to drive our operating performance, with several wells coming in below $3.0 million,” said CEO Tony Sanchez. “Our development focus remains on Catarina [in the Eagle Ford Shale] and further delineation of the South-Central region of the lease as results in this region, including the exceptional results from the E33 Pad that we reported in July 2016, continue to meet or exceed our expectations [see Shale Daily, July 19].”

During a conference call Monday, CEO Sanchez said the company is still keeping an eye out for merger and acquisition opportunities; however, any deal would have to be competitive with the company’s decades of drilling inventory.

Recent well results, coupled with an uptick in commodity pricing, have driven returns to levels that Sanchez believes justify increased activity. Sanchez has increased its initial 2016 upstream capital spending guidance of $200 million to $250 million, originally published in January, by $50 million to $250 million to $300 million. The majority of the incremental spending is planned for the fourth quarter. “At this level of capital spending, the company anticipates it will be able to maintain relatively flat production in 2016 while maintaining a significant cash balance and financial flexibility heading into 2017,” it said.

The spending increase is to be largely offset by consideration received in the company’s recent Carnero Gathering System transaction with Sanchez Production Partners LP (see Shale Daily, July 6).

“At our updated level of upstream capital spending, we anticipate that the company will be able to maintain relatively flat production in 2016 while maintaining a significant cash balance and financial flexibility as we head into next year,” CEO Sanchez said. “While not expected to have a significant impact on 2016 production, this positions the company to be able to deliver total production growth of between 5% and 8% in 2017, depending upon the amount of Catarina production being processed in ethane rejection…We expect this year’s capital spending increase to have an even more meaningful impact on 2018 production.”

The Sanchez Eagle Ford development plan remains primarily focused on Catarina, where the company is running three rigs and expects to drop to two rigs during the fourth quarter. Second quarter development activity was primarily focused in South-Central Catarina, where the company has realized some of the best production results on the lease, Sanchez said. South-Central Catarina well results continue to trend above expectations, with recent results from the E33 Pad currently tracking estimated ultimate recoveries about 20% to 30% above the company’s original guidance of approximately 1.1 million boe.

Drilling and completion costs in the second quarter averaged $3.3 million per well at Catarina and $3.3 million per well at Cotulla, with the best wells coming in below $3.0 million per well in both areas. As of June 30, Sanchez had 657 gross (539 net) producing wells with 16 gross (14.5 net) wells in various stages of completion.

Revenues of about $111 million (exclusive of hedge settlements) were up about 39% when compared to the first quarter of 2016 due to improvements in realized commodity prices during the second quarter, Sanchez said. Commodity price realization during the second quarter included natural gas liquids realization of $14.47/bbl, up from $8.91/bbl in the first quarter, after total production was affected by 2,000-3,000 b/d as a result of “significant” ethane rejection. Revenue, inclusive of realized hedge gains, for the second quarter totaled about $146 million, an increase of about 10% when compared to the prior quarter. The effect of the decrease in commodity prices was partially offset by higher production due to better well performance and efficiency gains across the portfolio.

Sanchez reported a net loss of $186.9 million (minus $3.20/share) for the second quarter, which includes a non-cash after tax impairment charge of $87.4 million and a non-cash mark-to-market loss on the value of the hedge portfolio of $93.5 million. The net loss reported for the year-ago quarter was $566.9 million (minus $9.91/share).

The company had liquidity of about $624 million as of June 30, which consisted of $324 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.

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