Sanchez says Eagle Ford acreage holds untapped potential

Aug. 13, 2014
Sanchez Energy Corp. believes there is untapped Lower Eagle Ford shale potential in the South Texas acreage it is acquiring from subsidiaries of Royal Dutch Shell PLC.

Rachael Seeley,
Editor

Sanchez Energy Corp. believes there is untapped Lower Eagle Ford shale potential in the South Texas acreage it is acquiring from subsidiaries of Royal Dutch Shell PLC.

The $639 million deal will bring Sanchez 106,000 contiguous acres in the condensate window of the play in Dimmit, LaSalle, and Webb counties.

Known as the Catarina project area, the acreage will nearly double Sanchez's Eagle Ford leasehold to 226,000 net acres and increase production to 40,000 boe/d.

"We think this is a catalyst for the company," Chief Executive Officer Tony Sanchez told analysts in May.

The sellers are Swepi LP and Shell Gulf of Mexico Inc.

Sanchez will hold 100% working interest and 74% net revenue interest in the Catarina area. Production averaged 24,000 boe/d in the first quarter, comprising 52% condensate and 48% NGL and natural gas.

Although most drilling activity in the Eagle Ford shale targets the Lower Eagle Ford, the majority of wells drilled in Catarina thus far have targeted the less-explored Upper Eagle Ford.

"The Lower Eagle Ford, which is the traditional target of this play, is largely undeveloped," Sanchez said.

Sanchez is pleased that Shell demonstrated the productivity of the Upper Eagle Ford but said the Lower Eagle Ford is the most attractive target. "It's highly encouraging that the asset performance to date looks like it's actually coming from a separate and distinct reservoir," he said.

The company's supposition is backed up by production data. Of the 176 producing wells on the acreage, just 16 landed more than 50% of their laterals in the Lower Eagle Ford. "Of those, a significant number, 10 of them say, are some of the best producers on the entire ranch," Sanchez said.

Another 49 wells have been drilled by Shell and are awaiting completion. That includes 22 wells that were drilled to total depth and cased and 27 wells that were drilled to a surface casing point. Sanchez Energy expects to land the majority of laterals for the latter group of wells in the Lower Eagle Ford.

"We've got a huge inventory of wells waiting to be fraced ... As soon as we take over operations, which is at the end of June, we plan to move our frac spreads in and start our work," Sanchez said.

Ryder Scott, a reservoir appraisal company, estimates the acquired leasehold holds 60 million boe of proved reserves, 21% condensate and 43% gas. Proved developed reserves are estimated at 36 million boe.

Sanchez believes those figures can be increased during the next year and a half. "There is a lot of upside potential here for reserve growth," he said.

Development plans

The company plans to spend $205-215 million on drilling and completion in the Catarina area in the second half of 2014, equivalent to roughly 25% of its annual drilling and completion budget.

After the deal closes in late June, Sanchez plans to commence operations with a three-rig drilling program. Near the end of the year, the third rig will be relocated to separate Eagle Ford acreage in LaSalle County.

At least 200 low-risk drilling locations have been identified, and the company estimates 800 locations could be added through appraisal work on the less-explored eastern portion of the leasehold. "The asset has quite a bit of acreage that is yet to be delineated," Sanchez said.

Chief Operating Officer Christopher Heinson said the Eagle Ford shale is more than 120 ft thick in the eastern area of the asset. "We're really excited about the upside potential in the eastern Catarina," he said.

The terms of the lease call for the company to drill at least 50 wells/year, a feat that Sanchez is confident can be accomplished with a two-rig program. Sanchez said the company recently shadowed Shell at a Catarina development well that was drilled from spud to total depth in just 7 days.

Ample pipeline and processing capacity is in place to accommodate rising production, which is expected to increase from 24,000 boe/d to more than 40,000 boe/d by yearend. "Shell did a great job of building out the [midstream] facilities," Sanchez said.

Four regional gas processing facilities are in place for separation and stabilization of NGL, as well as a field gathering system for all produced fluids that includes more than 180 miles of pipeline and a water disposal well.

Sanchez expects it can reduce operating costs on the acquired acreage, as it did for its Alexander Ranch acquisition in the company's Cotulla area, a few miles to the northeast in LaSalle County.

Over the course of 9 months, Sanchez reduced costs at Alexander Ranch to roughly $6.0 million/well from the $8.8 million/well average reported by the previous operator.

Deal evolution

The Catarina acquisition was a marketed transaction for which Sanchez was the winning bidder. The sale was managed by Evercore Group LLP. Sanchez began evaluating the acreage late last year and had ample time to perform due diligence and consider a tremendous data set.

"We actually have really good geoscience coverage of data. We have 14 pilot holes, five cores, and 3D seismic over the ranch. We had this data available to us as we were doing the analysis," Heinson said.

In the past 18 months, Sanchez has closed a number of acquisitions that have increased its holdings in the onshore US Gulf Coast.

Last year, the company purchased the Alexander Ranch acreage in the Cotulla area from Hess Corp. for $280 million.

It also acquired 3,600 net acres in the Cotulla area's Wycross development in McMullen County, Tex., for $230 million, as well as 40,000 net acres of undeveloped leasehold in the emerging Tuscaloosa Marine Shale in Louisiana for a total cost $78 million.

Sanchez said the company is not actively looking for acquisitions as a source of growth, but it is open to considering opportunities as they arise.

The latest Eagle Ford deal is expected to close by June 30 and carry a retroactive effective date of Jan. 1.

SANCHEZ ACQUISITION*

Buyer: Sanchez Energy Corp.
Seller: Swepi LP, Shell Gulf of Mexico, Inc.
Cost: $639 million
Acres: 106,000 net
Location: Dimmit, LaSalle, and Webb counties, Tex.
Net production: 24,000 boe/d (52% condensate)*
Producing wells: 176 net
Proved reserves: 60 million boe

*Reflects data for first-quarter 2014.
Source: Sanchez