Image source: Anadarko Petroleum.

What happened

Shares of Sanchez Energy (NYSE: SN) soared on Friday, up 22% at 10:45 a.m. EST, after the driller announced a strategic joint venture. The company entered a 50-50 partnership with Blackstone Energy Partners, a company controlled by The Blackstone Group (NYSE:BX), to acquire 318,000 acres in the western Eagle Ford shale from Anadarko Petroleum (NYSE:APC) for $2.3 billion.

So what

Sanchez is partnering with Blackstone to acquire an asset that is contiguous with its Catarina position in the Eagle Ford shale. Because of the adjacent strategic location, Sanchez expects to capture substantial operating synergies from its increased scale. Furthermore, the properties acquired from Anadarko Petroleum currently generate free cash flow, which Sanchez will use to help fund its 2017 capital expenditure budget. As a result, the company sees its production increasing to more than 100,000 barrels of oil equivalent per day (BOE/d) while living within cash flow over the next 12 to 18 months. That is almost twice the 51,500 BOE/d that Sanchez produced last quarter and 17% above pro forma production when accounting for its share of the Anadarko assets. In addition, the transaction should push the company's leverage ratio down by one turn over that same timeframe.

With a $2 billion enterprise value before today's rally, Sanchez needed to be creative to finance its $1.15 billion contribution. A portion of that funding will come from cash on hand, which stood at $329 million as of late November, due to recent asset sales. The rest of the financing will come from the proceeds of a nonconvertible perpetual preferred equity issuance to GSO Capital Partners, which is the credit arm of Blackstone Group, and borrowings under a new revolving credit facility.

Now what

This transaction is transformative for Sanchez Energy. It significantly increases the company's size and scale, and provides it with a clear path for growth while allowing it to live within cash flow at current commodity prices. That puts the company on pace to create tremendous value for investors as it uses its improved scale to get the most out of the combined resource position.

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