What happened
Shares of Sanchez Energy (NYSE: SN) leaped more than 11% by 3:15 p.m. EDT Friday after the Eagle Ford Shale driller announced the sale of some non-core assets.
So what
Sanchez Energy sold its non-core Marquis asset in the Eagle Ford, which consists of 21,000 net acres in Fayette and Lavaca Counties, Texas. The assets currently produce 1,750 barrels of oil per equivalent per day, 74% of which is oil, from more than 100 wells. In exchange, the company received $50 million in cash and preferred stock that could convert into 1.5 million shares of the seller's common stock.
Image source: Getty Images.
The Marquis asset is on the eastern side of the Eagle Ford, which is an area that the company hasn't invested much capital into over the past several years. That's because it earns much higher returns on the western side of the Eagle Ford, which is where it has amassed more than 340,000 net acres over the past few years.
One of the drivers of that expansion was Sanchez Energy's decision to team up with a leading private equity fund to acquire Anadarko Petroleum's (APC) Western Eagle Ford position. The partners paid $2.3 billion for Anadarko's land, with Sanchez financing its 50% portion of the joint venture with cash on hand, preferred stock, and borrowings under a credit facility.
Because that deal consumed most of the money that Sanchez Energy had built up during the downturn by jettisoning non-core assets, investors have started to worry about its financial situation, given the recent slide in crude prices. However, by selling Marquis, the company now has an extra $50 million, which gives it some more breathing room.
Now what
That said, this transaction is a drop in the bucket for Sanchez Energy, with nearly $1.9 billion in debt. However, it does enable the company to convert an underutilized asset into cash, which will help it bridge the growing gap between cash flow and capital spending this year, since oil is well below the more than $50 a barrel it anticipated. That buys it a bit more time as it waits for crude prices to recover, which is what it's banking on so its big gamble pays off.
