Thursday, November 14, 2013

Sanchez Energy's Earnings Call

Last week, Sanchez hosted an earnings call. Here are the TMS highlights:
  • Additionally we have entered the Tuscaloosa Marine Shale, which will provide substantial upside and value creation as that play continues to be de-risked through an increased drilling pace.  While our drilling focus continues to be on the Eagle Ford, we are very excited about recent developments in the TMS and look forward to participating with other operators in the area, as well as kicking off our operated drilling program early next year.  Other operators in the play have recently announced increased capital commitments for the purpose of accelerated drilling programs, which is a positive move for the TMS in terms of its development cycle.
  • In the TMS we’re in the midst of planning for our 2014 program, which we expect will include participation in several non-operated wells prior to the start of our operated program. We are in the process of filing several drilling unit requests with the Mississippi state board of oil and gas and are evaluating options on drilling rigs. With the majority of our leases either HBP by shallow production or with sufficient remaining term, we can take the time needed to correctly plan our operations.  
  • As mentioned, we’ve significantly strengthened our balance sheet and liquidity this quarter with the issuance of the 11 million shares of common stock at a price of $23 per share before operating costs and added $200 million of tack-on notes to our second quarter $400 million senior note offering. These offerings are used in part to fund our previously announced acquisitions in the TMS, Wycross and Five Mile Creek areas in the Eagle Ford.

  • Q&A

    Neal Dingmann - SunTrust
    And two more if I could. Tony just moving over to TMS, what do you envision? I know you mentioned a few non-op wells initially. Is that the plan maybe for the first half of next year? Number one, is it mostly just on the non, you’ll stay on the non-operated side? I’m trying to get a sense of how many of these wells you’ll be part of early on or when we can think about the first operated well?

    Tony Sanchez - President & CEO
    Yes, I’d say we are shooting for our first operated well as soon as possible. I think the logistics of drilling wells in Mississippi has some leave time associated with them from a permitting process principally, but we are working on getting our units formed that we would operate and would spud as soon as possible.

    The most likely would be, hopefully sometime early in the first quarter. You had commented that and you thought that we were gong to be participating principally as a non-op into the first half. I think we’ll always participate as a non-op, but I think our operated program will become the voice point starting in the first quarter of next year.

    I’m looking at the math now. Other companies are actively forming units, and principally in Wilkinson and Amite Counties of Mississippi and I’ve seen AFEs come across my desk that we are signing off on. Some of them are low interest wells, 3% to 5% working interest. Others are hired at 20% or 30% and our more times than now we’re going to participate, but we are working diligently to get our units set up, to get the paperwork in place, the services sourced rigs and on to start really as soon as practically possibility. I just think its going to fall hopefully in the first half of the first quarter of next year.

    Ron Mills - Johnson Rice
    Okay. And then Tony, just to clarify some comments about the TMS, it sounds like you want to start the operated program as soon as possible. It sounds like you have some at least well proposals in front of you. Do you think it’s one of these things where the non-op definitely comes before the operated or could you start your operated program even before you’ve really participated in many non-op wells?

    Tony Sanchez - President & CEO
    No, I think logistically that non-op is going to begin first and so when we get a better sense of the ordering of the wells, what our working interest is in the wells, where they are, we’ll start to put that out there. But the way a lot of this planning goes is you go out and you form a bunch of units, you take it to the Mississippi Oil and Gas Board and get them approved, send letters to the non-participating other mineral owners or lessees and get the things like surface use agreements and air permits and things done.

    So you basically because of the lead-time you got to start working on a bunch of them at the same time. When we get a better idea of the ordering, we’ll put that out, but its highly likely that we’ll be predicating as a non-op first, and that’s entirely a function of timing at this point.

    Phillips Johnston - Capital One
    Okay, and then just in TMS, you talked about getting units set up, but have you actually determined yet where the first three operated wells will be located or is that going to be sort of contingent on how some of the non-op results come in?

    Tony Sanchez - President & CEO
    I would say, we’re actually in the process of filing units across the – across section of we’ll consider it the mid county and then we’re looking at recent well results where the non-op interest would be what’s the timing of the non-op wells and where it makes sense for us to test the TMS. So there’s a lot of factors in play and we don’t have it determined yet.

    Joe DeDominic - Chief Operating Officer
    Fundamentally we’re going to approach it the same way we did the Eagle Ford in 2011 and 2010. Just get up as close as to where its proven successful as possible, then we work our way out from there.

    Ben Wyatt - Stephens
    Great. Just jumping over to the TMS, Joe I know you spent some time down there in a previous slide, but just curious kind of how you guys are thinking with your initial wells. Will you guys be kind of above the rubble zone, below the rubble zone or are you guys kind of think there’s already a secret sauce on the way to drill and complete these wells? Just maybe some initial thoughts around how you guys will go about that.

    Tony Sanchez - President & CEO
    Yes, we talked about that. Obviously we’re talking a couple of wells for next year initially. We’ve actually talked internally about do we want to drill one above, one below and maybe one just partially in the rubble zone, because there’s actually some thinking that maybe the rubble zone is important for productivity.

    So we’re evaluating new data that comes in. We’ve of course been with and talking to other operators in the play and I think as an industry we’re all trying to land in the right spot to be most effective and get the most oil for the cheapest amount, dollars right. So there is some sharing going on among operators and so we’re trying to figure out how best to approach it. But I think you’d see us trying to do a little bit of both initially, to try and learn the best way to go forward.

    Paul Grigel - Macquarie Research Equities
    Hi, good afternoon. Most of my questions have been answered. Just a quick one on the TMS, really two parts. One, on the AFEs that you guys have been looking at on the non-op side, where have well costs been coming in and then on your first off wells, I know it’s still early, but any projection or change in projection on what you’re expecting for well costs as well?

    Joe DeDominic - Chief Operating Officer
    What was the second part of the question?

    Paul Grigel - Macquarie Research Equities
    On the operated wells that you guys will be going forward, if there’s been any change to what you’ve presumed for well costs in the TMS.

    Joe DeDominic - Chief Operating Officer
    Yes, ASC’s have been coming in the $13 million to $15 million range per well and we see our preliminary estimates of what it would cost on an operated basis in that same range.

    I think like we experienced in the Eagle Ford, the big decrease in well cost will come as a result of development drilling. The TMS people had complained about the high well costs. Our first Eagle Ford wells would cost in $15 million to $16 million. Now we’re regularly bringing them in at $9 million.

    So again, once we go into a development program where we’re drilling off multi well pads, we have some continuity to the program and we would expect well costs to come substantially down, but on a one off basis we’re seeing them in the $13 million to $15 million range, which is certainly lower than where they were even six months ago. So they’ve already started to come down, no question, but I would expect another big step down once we start pad drilling.

    ENTIRE TRANSCRIPT

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