By Ryan Holeywell and Collin Eaton
HOUSTON — Sanchez Energy Corp. has entered a $639 million deal to purchase 106,000 net acres from Royal Dutch Shell subsidiaries in the Eagle Ford Shale, the Houston-based oil and gas company announced Wednesday.
The move nearly doubles Sanchez Energy’s footprint in the Eagle Ford region of South Texas to 226,000 acres. It would make Sanchez the fifth-largest, publicly-traded leaseholder in the Eagle Ford by acreage, based on fourth-quarter data compiled by Bloomberg. It’s currently ranked 12th.
The deal also doubles the size of Sanchez’s proved reserves to 119 million barrels of oil equivalent and is expected to nearly double its production later this year to as much as 49,000 barrels per day.
The assets include proved reserves of 60 million barrels of oil equivalent, according to Sanchez Energy, and production of 24,000 barrels of oil equivalent per day, based on first quarter figures. The acreage, which is contiguous, is located in Dimmit, LaSalle and Webb counties.
Historic deal for Sanchez
It gives Sanchez “a substantial underpinning of cash flow and reserves,” and it provides ample room for the company to use what it has learned already to boost the region’s production through process efficiency and cost reductions like multiwell-pad drilling, said Tony Sanchez III, president and CEO of Sanchez Energy.
Sanchez Energy: Not as many Eagle Ford deals this year, CEO says
“There’s quite a bit of running room for us to spend the next several years continuing to ramp production organically and generating a high competitive rate of return at the wellhead,” Sanchez said in an interview with FuelFix in his Houston office.
It’s by far the largest deal Sanchez has struck by value. The company spent $265 million on its second-largest acquisition, purchasing 43,000 acres of South Texas oil land from Hess Corp. That deal, struck last year, also doubled the size of the company, Tony Sanchez said.
Shell in the Eagle Ford
The announcement comes just two months after Shell announced that it would cut spending in its upstream Americas unit by 20 percent and try to exit several unconventional plays, including the Eagle Ford, amid disappointing results. Shell said it had lost $900 million on its North and South American upstream business in 2013.
The planned sale includes all of Shell’s operating assets in the Eagle Ford.
A Shell spokeswoman said the acreage it has agreed to sell represents the company’s primary assets in the Eagle Ford, but it has retained 147,000 acres of non-operated leases in Maverick County. That acreage is being drilled by BlackBrush Terrace LP, which has a 50 percent working interest.
Sanchez Energy said the newly acquired acreage has 176 producing wells on-site, but Shell hasn’t added new ones this year. Because of that, production is expected to decline until the mid- to late-third quarter, when Sanchez’s operations would begin having an impact.
While Shell has faced challenges developing its shale resources in the Eagle Ford and elsewhere, Sanchez said he’s confident his company’s more nimble approach will work in the region.
“I think what makes us comfortable with the asset is our experience with our nearby assets, and we felt that what we had seen from a development standpoint both on cost and well performance was something we could apply here in an efficient manner,” Sanchez said.
“When we ran our models, we felt very comfortable we could generate a good rate of return,” he said. “We think there’s a lot of upside to be had.”
Sanchez Energy Corp. was formed in August 2011 and completed its initial public offering that year. Since then it’s acquired assets in the Eagle Ford Shale and the Tuscaloosa Marine Shale, which extends from Louisiana to Mississippi. It’s the only publicly traded company among five affiliated businesses.
In the company’s annual report released earlier this year, Sanchez said he planned a strategic shift from growing by acquisition to developing existing assets. But, he also noted, the company would “consider opportunistic acquisitions if they complement our asset portfolio.”
Tony Sanchez said the timing and location of the deal are optimal for his company since it already has operations just a few miles east of the newly acquired acreage.
“With the addition of this acreage, we have substantially increased our drilling inventory – positioning Sanchez Energy to be a leading low-cost producer in the Eagle Ford for years to come,” Sanchez said in a statement.
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