Sanchez's Eagle Ford Now and Bakken Later Plan

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A lot has been written about two of America's hottest energy plays, the Bakken shale and the Eagle Ford.  Many hype the "pure play" potential of various companies in either one - including me - but here is a company that can make you some loot by being a "pure play" in both plays, the Eagle Ford now, the Bakken later.

Sanchez Energy (NYSE: SN) recently went public after a long private history.  It is proceeding with an aggressive development plan in the Eagle Ford and has a long-term vision for developing its Bakken acreage.  

Here is an easy to organize and understand SWOT summary, outlining Sanchez's key strengths, weaknesses, opportunities, and threats:

Strengths

  • Sanchez has an exceptionally strong balance sheet currently carrying zero debt, having $144 million in cash from a preferred convertible offering and $500 million in credit lines.    
  • The company's 95,000 net acres in oil portion of the Eagle Ford Shale has been largely de-risked, is relatively low risk vs the overall industry and is available for rapid development.
  • The Eagle Ford has significant infrastructure already in place which will allow it to transport product to refiners without sustaining a significant discount to global spot prices and at higher prices than current competing Bakken plays.
  • The company has 19 active Eagle Ford wells and have demonstrated improving well rates as the company has increased frack stages utilizing its experience.
  • Total daily production to end 2012 will be about 4500 barrels per day which at $70/barrel equates to $114 million in revenue for 2013 that will be augmented by new well production coming on-line. 

Weaknesses

  • The company may need further financing in 2014 if production decelerates or oil prices fall significantly.  
  • The company is not completely staffed and needs more rig crews to execute its ramp up in production.  

Opportunities

  • The company has identified 800 to 1200 potential drilling locations dependent upon well pad spacing.  Better spacing may significantly improve production results.
  • The company could be able to acquire more acreage from smaller drillers or partial well interests as an operator over time.
  • Natural gas capture could add significant revenue to results as capture equipment is put into place by 2015 in order comply with EPA requirements.
  • The company holds 82,000 net acres in northern Montana prospective for the Heath, Three Forks, and Bakken Shales which upon the area being de-risked may proceed with potentially high margin development. 
  • International oil demand continues to drift upward which will lead to greater revenue over time.  
  • An eventual domestic economic recovery would generate wider profits as the United States is still heavily oil dependent.
  • Sanchez could be a quick take-over candidate or at least sell acreage for a tidy profit.  Apache Corp (NYSE: APA), which is one of the Eagle Ford's largest acreage holders, Pioneer Natural Resources (NYSE: PXD) and EOG Resources (NYSE: EOG) are all potential suiters with proximate drilling going and balance sheets with capital available.

Threats

  • The biggest threat to all of the companies using hydraulic fracturing to produce oil would be if the EPA or other government put a stop to the practice.  While this is not likely based upon recent policy by the EPA, it is not an impossibility.
  • With transportation using over half of all oil, a major breakthrough in battery technology leading to large market share increases for electric and hybrid vehicles combined with a mass shift to natural gas for larger vehicles could reduce top and bottom lines for Sanchez.
  • Execution risk due to rapid expansion.
Sanchez appears to have an opportunity to execute on two major oil plays in coming years which could transform this company into an earnings powerhouse.


Kirk and clients of Bluemound Asset Management, LLC do not own any shares in companies mentioned.  Neither Kirk nor Bluemound clients plan any transactions in the next 3 trading days in the mentioned company's securities. Opinions subject to change at any time without notice. Follow Kirk on Twitter @KirkSpano, http://bluemoundam.com or http://AmericanResourceBoom.com. The Motley Fool owns shares of Apache and SANCHEZ ENERGY CORP COM USD0.01. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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