Tuesday, March 11, 2014

Sanchez Energy - Earnings Call

TMS highlights from Sanchez Energy's earnings call:
     
·       Our ability to make step changes in efficiency and challenging areas will continue to be important as we prepare for our first operated wells in the TMS, which we expect to spud in early May
Neal D. Dingmann – SunTrust Robinson Humphrey
·       Okay, then lastly, I know that TMS is still few months away, just your thoughts as far as two things there, one are you participating near-term in some of these wells, I forget it. And number two, on your wells you have coming after six months down the road, is it too early as you already determined as far as how you want to drill it below the levels now and how you want to try to frac it or complete it? Have you guys started looking at [matters] that still kind of in the process?
·       Antonio R. Sanchez, III
·       It’s definitely in the process, Chris, can give you more details here, but it’s always in the process. I mean we’re continuing to tweak our Eagle Ford completions. We’re as high as ever on the TMS. There is a long lead time associated in getting the drilling there as you know. So that’s moving along, we expect to start our first well probably no later than May. The above levels are not below, it looks like below is the preferred way to go right now. We are participating where we can, any places we’ve got leases and formed units by other operators. So we’re committing the capital. We’ve got a team in place to execute and we’re looking forward to doing, I think it’s a basin that can add tremendous upside to our prospects. Chris?
·       Christopher D. Heinson
·       Just to expand on the TMS a little bit. It’s well known that TMS is a technically challenging environment to drill and we’ve been working the technical design of our wells for a period. One of the things that Sanchez – we’re shooting to do is we’re not just trying to drill wells for the sake of appraising the acreage. We actually believe we have a good shot of making money on our very first well. And so we have spent a lot of time and effort designing the well. As far as target goes, the so called rubble zone, it’s not actually a real zone.
·       What it is, is a highly fractured area just above the Richland sand or the Richland silt which is a zone that we look towards. People have gotten themselves into trouble when they have tried to land above that Richland sand because the rubble down is just no telling how far it may extend vertically in the section. So some operators who are trying to avoid it ended up intersecting highly fractured zones when they landed north of the Richland sand. So we will be targeting just below the Richland sand that would be our target. And we think we can actually complete up until that fractured zone.
·       Neal D. Dingmann – SunTrust Robinson Humphrey
·       Chris do you have any working interest in any of these non-ops now, or, you’re just waiting for your first one?
·       Christopher D. Heinson
·       We are participating for very small interest in (inaudible) well. It’s should be fracking soon. And there are several other wells that are coming up on a non-op basis that we’re participating in
·       Stephen P. Shepherd – Simmons & Co. International
·       Okay, that’s helpful. Thank you. My next question would be, anymore detail you can give about the TMS non-op program for this year, any idea of which well should be participating in, where are those wells are going to be drilled, anything like that you can offer?
·       Christopher D. Heinson
·       Yes, this is Chris. We have participated in one well that’s not to be completed actually this Sunday, that’s the loss in well. Additionally, we’ve seen most of dozen locations units formed in an around places where we have some acreage. Now, it looks a little bit difficult to predict, because there is a fairly extensive land process around the unit formation is when those operators were actually drilled.
·       We’ve seen that most amount of activity in and around Wilkinson county, where we actually have a fair amount of acreage, that’s going to be highly active area, so we expect quite a bit of non-op.
·       Dan E. McSpirit – BMO Capital Markets
·       Yeah, thank you. You expressed drilling your first operated TMS well in the context of making a return rather than simply defining the leasehold. What [field lower] [ph] returns are being targeted and how sooner do you see the TMS competing with the returns generated in South Texas?
·       Antonio R. Sanchez, III
·       Yes, so we think about it in terms of return that is sure. We are looking at, and I’m speaking off the top of my head here, but early on when we started looking at the TMS, we looked at what the returns would be, add a call it $15 million well cost which would be at the high-end of what a single well should cost out here and then looked at them anywhere from 500 MBoe to 600 MBoe EURs all the way up to 800. What we – based on the type curves that we had build most of which were on actual data and kind of juxtaposing that to what we get in Eagle Ford we got some comfort around the shape of that type curve and we are looking at returns at those high capital costs in the 17% to low 20%. So once we got our hands around that, we figured that’s a positive return from an appraisal well and we started look at the TMS under a development scenario. And because of its leverage to oil prices and the high IP rates you can get those returns then kicked up pretty quickly with the reduction in costs.
·       So a $10 million well cost at a 600,000 barrel EUR would generate at $90 a 50% rate of return. If you go up to 800,000 barrels, you’re looking at anywhere from 75% to well over 100% rate of return. So it’s – if you use those book-ins to make a judgment on the play which is the way we looked at it we started to get really comfortable with the potential that the TMS has. And then we’ve got some experience to base it on, the first wells that we drilled in Marquis, our first two wells cost a $16 million and then $15 million and now we’re drilling them for under $9 million. So we’ve got experience in dropping well costs from that kind of a magnitude to something substantially lower.
·       So I think that the price is there. We think that if the technical challenges are solved, that the TMS is going to be offering very competitive rates of return to what we’re drilling over in the Eagle Ford. We’re not prepared to make a decision yet and we probably won’t make a decision to go into full scale development until we have a number of wells under our belt. But all the pieces are in place to turn that TMS into a huge play. And I think with the introduction of several other operators into the area more money being spent by more players generally speeds up the process that I just described. So does that kind of answer your question, Dan?
·       Dan E. McSpirit – BMO Capital Markets
·       It does, and as a follow up to that just on that discussion and I appreciate the thoughts on under your base case or may be even under your high case, TMS return scenario, is there - what acreage in South Texas does not compete?
·       Antonio R. Sanchez, III
·       Probably the northern Cotulla acreage, so Zavala and Frio County don’t compete. Palmetto certainly would compete, the best part of - in Marquis, Prost and Five Mile Creek would compete, but yeah, those lower IP rate areas where the shale is shallower in the Eagle Ford does not compete to the TMS. The nice thing about how we’ve – the way we’re thinking about timing here is by the time we go into full scale development at the TMS, we will have largely drilled up some of our core positions in the La Salle County area, like Alexander Ranch. There we’ve got about another call it year and a half of drilling there. And then the Southern part of our Palmetto area, so we’ll move up into the middle of Palmetto. We’ll continue our Marquis area development, but we’ll be able to take certain discreet assets that we have already drilled up intensely such as the Alexander Ranch asset will be the key one. That would then generate a very large amount of free cash flow that we will use to fund our TMS development.
·       Dan E. McSpirit – BMO Capital Markets
·       Got it. And then as a follow and a final question, if you invested another dollar on leasehold acquisition, where would you put it, South Texas or acquired TMS perspective leasehold.
·       Antonio R. Sanchez, III
·       What, can you give me $2 and I’ll put $1 in each. I mean it’s interesting. TMS you can’t really get a good acreage in that core area where we are.
·       Dan E. McSpirit – BMO Capital Markets
·       Okay.
·       Antonio R. Sanchez, III
·       So we are picking up bits and pieces here and there, but they tend to be either non-full interest, but we’re hoping to get into formed units by other companies, or they’re additive to our units, but we are not being able to pick up big blocks anymore in the TMS, which is why we moved early when we did.
·       Phillips Johnston – Capital One Southcoast
·       Hi, guys thanks. Just following up on plans in the TMS, your CapEx budget for the year is $60 million to $65 million and I think you are planning on drilling and completing two net wells. So I’m just wondering if you can comment on what AFE you are assuming for both of those wells and what other kind of cost here are baked into your full year CapEx budget for TMS?
·       Michael G. Long
·       I’ll let Chris talk about what we’re thinking about for our first AFE on our well. We’ve made an – as Tony explained we’ve been AFE-ed or notified that we have acreage in several units that have been formed, we are expecting those non-operated wells to get drilled out into the future. We don’t have a – our deadline is to win any of those non-op wells will start, so our estimate of capital costs is an estimate at this point. So we don’t have precision or control over the non-op. We do know what we want to do on our first well with a lot of science and then what follow-up wells might be, but I can’t speak to the timing or the exact working interest we’ll have on all those non-op wells until the final AFE with a proposed spud -date for them comes in from the non-operators.
·       Christopher D. Heinson
·       Yes, our first well is expected to cost just over $15 million, but that includes the costs for the pilot hole associated with that. After drilling that well our next well will not have a pilot hole, so we expect cost to come down a little bit from there roughly about $1.5 million maybe even little bit more if we take up a few efficiency improvements along the way after our first well.
·       Curtis Trimble – Global Hunter Securities
·       Got you. Okay. Switch gears over to the TMS, I was wondering if you could talk a little bit about the acreage movements, I know early on maybe there was some discussions about swapping acreage over in Concordia Parish [Unclear] something possibly further South and East. And then, obviously there have been some fairly significant moves in the past few months on non-op any of that surprising, any of that actually occurred and had a little bit of scuttlebutt about possibly some of the better wells the Anderson wells for instance being drilled up again, [salt domes] and maybe that leading to some incremental natural fracturing that led to better deliverability any opinion or validity to that?
·       Antonio R. Sanchez, III
·       I’ll take the first one on acreage swaps. We’re not planning any large scale acreage swaps. Many of the operators have a fairly broken up acreage position. And so what we’re all trying to do to is work together try and make sure we form as many contiguous units as possible. And so there’s some minor trading back and forth but no major acreage swaps trying to move ourselves to a better part of the play.
·       We have actually what we’ve seen is sort of the core of the TMS is collapsing down into a much narrower window. Looks like the core of the core is that sort of Southern Wilkinson County going into Southern and mid – just across Louisiana State line. But it’s been structurally quite. So we don’t see anything structurally associated with salt domes or anything as being significant contributors for the Anderson.
·       Curtis Trimble – Global Hunter Securities
·       [Inaudible]] between what you’ve seen thus far from Lawson drill data and overall depth at Horseshoe Hill area that you guys have a little non-op participation in as well?
·       Christopher D. Heinson
·       I am sorry I didn’t hear the first part of your question.
·       Curtis Trimble – Global Hunter Securities
·        in terms of content fitness, anything like that of the target zone in the TMS between the Lawson area and the Horseshoe Hill area?
·       Christopher D. Heinson
·       All right, in fact the TMS as a zone is actually relatively predictable. [Inaudible] there is not much structurally going along or over the whole region?
·       Curtis Trimble – Global Hunter Securities
·       Because everything else that’s around it [inaudible] upper and lower?
·       Christopher D. Heinson
·       Yes.
SOURCE:

No comments:

Post a Comment