One day after Tuscaloosa Marine Shale (TMS) pioneer Goodrich Petroleum Corp. said it would redirect capital from the Eagle Ford Shale to the emerging play, Eagle Ford-focused Sanchez Energy Corp. Thursday announced deals worth $78 million that give it entry into the TMS.
"We have been watching the evolution of the TMS and assessing the technical and economic development of the play for almost three years," CEO Tony Sanchez said Thursday during a conference call. "With recent well results trending toward 600,000 and 800,000 bbl EURs [estimated ultimate recoveries], and IPs [initial production rages] ranging from 1,000 to 1,500 b/d, well costs trending down toward $12 million, the core of the TMS has the potential to be a world-class play.
"It is important to note that of the well recovery estimates, over 90% is crude oil which is priced off of LLS [Louisiana light sweet index]. Using some high-level industry metrics and assumptions, we estimate that our position exposes us to over 200 million net bbl of recoverable resource potential."
Sanchez added that the TMS is an extension of the same geology found in the Eagle Ford, which his company knows well. The risk-reward balance in the play has shifted in recent weeks, given encouraging well results being reported by Goodrich as well as Encana Corp., Sanchez told analysts.
"We think that right now the risk is fundamentally shifted to repeatability, to consistently getting well costs within a range that generates strong rates of return that are comparable to what we could get in other basins, including the Eagle Ford," he said.
The company has struck agreements to acquire about 40,000 net undeveloped acres in the core of the TMS for cash and shares of its common stock plus an initial three-well drilling carry, the company said. The acreage lies predominantly in southern Mississippi in Wilkinson and Amite counties, atop the "toe" of the Louisiana "boot."
The company established an area of mutual interest (AMI) in the play with affiliate SR Acquisition I LLC (SR). Sanchez is to acquire all of the working interests in the AMI owned by an unaffiliated private equity firm plus a portion of SR's working interests (WI), resulting in Sanchez owning an undivided 50% WI across the AMI through the TMS formation. The AMI holds rights to about 115,000 gross acres and 80,000 net acres.
"With the closing of this acquisition we believe we have secured a solid acreage position in the core of this rapidly developing trend," CEO Sanchez said. "Recent well results by other operators in the area are encouraging with respect to both strong well performance and decreasing drilling and completion costs [see Shale Daily, Aug. 8]."
Total consideration for the transactions is about $78 million, consisting of $70 million of cash and 342,760 Sanchez common shares (valued at $8.2 million based on Wednesday's closing price). SR will receive $13.5 million in cash for the sale of its interest, and the balance of the common stock and cash is to be paid to unaffiliated third parties, including the unnamed private equity firm, which made its initial investment in 2010.
Sanchez has further committed, as a part of the total consideration, to carry SR for its 50% working interest in an initial three gross (1.5 net) TMS wells to be drilled within the AMI, and at Sanchez's election it may carry SR in an additional three gross (1.5 net) wells if it desires to participate in additional drilling within the AMI.
"We expect to commence our operated TMS drilling program in early 2014 and also anticipate participating in several non-operated wells given our proximity to other active operators in the area," Sanchez said.
Meanwhile, Sanchez production from the Eagle Ford has been booming (see Shale Daily, June 5).
For the second quarter, Sanchez reported production of 703,000 boe, an increase of 98% over the first quarter and an increase of 799% over the same period a year ago; revenues of $59.1 million, an increase of 90% over the first quarter and an increase of 835% over the same period a year ago. Proved reserves at the end of June were 43 million boe, an increase of 103% from the end of 2012 and 187% from one year ago.
"Our second quarter of 2013 was marked by substantial reserve, production and revenue growth as a result of increasing well count, well performance, results of tighter spacing pilots, and the closing on June 1 of our acquisition [see Shale Daily, June 5]," said CEO Sanchez. "Specifically, in our Cotulla area we have increased production volumes from approximately 4,500 boe/d when we announced the transaction to a current rate in excess of 6,000 boe/d."
At the end of the second quarter the company had 104 gross producing wells and has since added 11 wells, including seven associated with its recently closed 10,300-net acre acquisition in Marquis, which Sanchez calls its Five Mile Creek area, located just to the northwest of its Prost development in Fayette and Lavaca counties, TX.
Current daily production exceeds 12,000 boe/d, and there are 26 wells either drilling or in completion, the company said.
"We continue to expand our pad drilling activities resulting in steady cost efficiency gains," the CEO said. We now have pads being built in our Marquis area to accommodate up to eight wells. The impact of this more efficient practice is to spread out the completion timing of wells and onset of new production but it clearly benefits us in the long run. As we bring these wells online, we anticipate continued production increases going forward.
"Therefore, we reaffirm our 2013 production exit rate guidance of 15,000-17,000 boe/d and have added guidance for our expected average daily production rates for the third quarter of 11,000-12,000 boe/d and rates of 13,000-15,000 boe/d for the fourth quarter of 2013."
Net income was $3.2 million (10 cents/share) compared to a net loss of $15.6 million (minus 47 cents/share) for the year-ago quarter. Adjusted net income was $5.8 million, up 35% from the first quarter and 9,756% from the year-ago quarter.