Sanchez Energy Corp. (NYSE: SN) has executed an agreement with Sanchez Production Partners LP (SPP) pursuant to which the company will divest, and SPP will acquire and operate, certain pipeline, gathering, and compression assets located on the Western part of its Catarina asset in the Eagle Ford shale play in South Texas, for cash consideration of $345 million. The transaction is expected to close in October.
Sanchez Energy previously reported that it maintained liquidity of $572 million as of June 30, which included $300 million in available capacity on the company's undrawn bank credit facility. As a result of the sale of midstream assets, pro forma liquidity will increase to $918 million, inclusive of cash on hand and the $300 million elected commitment under its undrawn revolving credit facility.
As part of the divestiture, Sanchez Energy will sell 150 miles of midstream gathering lines and associated midstream infrastructure concentrated in four gathering and processing facilities. Concurrent with the closing, the company will enter into a gathering agreement with SPP that provides for fixed rates over an initial term of 15 years. For the first five years of the gathering agreement, there will be a minimum delivery commitment of 10,200 barrels per day of liquids and 142 MMcf/d of gas. The company anticipates that the gathering agreement will result in an increase in lease operating expense (LOE) of approximately $1.95 per boe. Prior to this transaction, Sanchez’s LOE was $7.78 per boe for the first half of 2015, which was lower than the company’s previous companywide guidance range of $9–10 per boe.
Sanchez Energy has also confirmed that its third-quarter 2015 average production will likely meet or exceed the high end of the previous guidance range of 46,000 to 50,000 boe per day. The company says that it remains confident that it will be able to build a 20- to 30-well bank toward its 50-well per year drilling commitment at Catarina at its current rig count while continuing to drive strong asset-level performance and year-over-year production growth given its previously stated capital run rate of $250 million per year. Based on the updated guidance provided regarding the impact to total LOE from the gathering agreement with SPP, the company now expects LOE to be in the range of $9.75 to $10.75 per boe for the fourth quarter of 2015 and in 2016.
Cannacord Genuity analysts, in a note Tuesday morning, commented, “With ~223K net acres in the Eagle Ford (EF), SN is one of the most levered companies to the play relative to its size. The focus is on the Catarina area of the EF, where recent results have been impressive and costs have declined dramatically. A 66K net acre position in the Tuscaloosa Marine Shale provides optionality. We believe the stock is very oversold and offers significant value at current levels, particularly given the enhanced liquidity position provided by the midstream sale.”