CEO discusses key behind Sanchez Energy’s rapid growth

HOUSTON – Sanchez Energy’s major planned Eagle Ford Shale buy announced Wednesday is the latest in a string of acquisitions that the three-year-old company believes will push its revenue to more than $1 billion next year.

Houston-based Sanchez Energy has experienced a rapid rise since it formed in August 2011. It had $14.5 million that year and garnered $314 million in 2013.

But for all the bartering and deal-making, CEO Tony Sanchez III — a former investment banker — says he’s still focused on growing the old-fashioned way.

“A company like ours has to grow in order to be valued in the capital markets,” Sanchez said said in an interview with FuelFix in his Houston office Wednesday afternoon. “But what we try to do is maintain a source of growth through organic drilling opportunities that can push the corporate growth, and not rely on acquisitions.”

Take last year for example. The oil and gas producer, which is expected to amass 226,000 net acres in the Eagle Ford Shale once its latest deal closes, grew its oil production nearly fivefold between the first quarters of 2013 and 2014.

Even though much of that production growth came from another deal that doubled Sanchez in size — a $265 million acquisition of South Texas oil land — roughly 60 percent of the increase stemmed from the company’s existing properties and internal efforts to cut costs and drill more wells for less money, Tony Sanchez said.

Improving efficiency

New drilling and production methods are helping a lot, including Multiwell drilling platforms called pads and zipper fracs that allow crews to hydraulically fracture two adjacent wells simultaneously. That whittled Sanchez Energy’s drilling costs down 32 percent in the Eagle Ford – a big part of why Sanchez is now tackling a huge tract there that proved too costly for Royal Dutch Shell.

But it’s not as if Sanchez struck the deal in a vacuum. Much of the North American oil industry has shifted its focus to improved efficiency in the past two years, a bid by smaller oil companies to work more oil out of hard-to-reach places, he said.

“It’s becoming increasingly evident that efficiency, process and cost controls are the key drivers of generating positive returns and profits in these plays,” Sanchez said. “They’re so capital intensive. It matters how quickly you can get to your first oil sales, how quickly you can get your gas wells hooked up. There’s not a lot of room for error in these shale basins, and I think the industry is beginning to realize that.”

Cutting costs

Sanchez is betting heavily on the company’s cost reductions, and says the same ingenuity that made tougher Eagle Ford land profitable could work in Louisiana and Mississippi. In the Tuscaloosa Marine Shale, where Sanchez bought acreage last year, operators have found some of the deepest oil reservoirs in the country. Individual well costs can exceed $15 million – when they need to be at $10 million, Sanchez said. But he expects the company to get there.

In difficult basins, “costs have much more of an effect on returns than in the core” of a shale play, he said. “By focusing on cost reductions and efficiencies, more of the play that had previously been uneconomic or marginally uneconomic suddenly becomes economic and competes for capital.”

Sanchez Energy shares surged 19 percent in early trading Thursday to $34.31 on the New York Stock Exchange.

Keep an eye on Fuelfix for more from the interview with Tony Sanchez.

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