SANCHEZ ENERGY (SN) - EARNINGS CALL MARCH 11, 2014 - TMS EXCERPT

TMS highlights from Sanchez Energy's earnings call:
     

·       Our ability to make step changes in efficiency and challenging areas will continue to be important as we prepare for our first operated wells in the TMS, which we expect to spud in early May
Neal D. Dingmann – SunTrust Robinson Humphrey
·       Okay, then lastly, I know that TMS is still few months away, just your thoughts as far as two things there, one are you participating near-term in some of these wells, I forget it. And number two, on your wells you have coming after six months down the road, is it too early as you already determined as far as how you want to drill it below the levels now and how you want to try to frac it or complete it? Have you guys started looking at [matters] that still kind of in the process?
·       Antonio R. Sanchez, III
·       It’s definitely in the process, Chris, can give you more details here, but it’s always in the process. I mean we’re continuing to tweak our Eagle Ford completions. We’re as high as ever on the TMS. There is a long lead time associated in getting the drilling there as you know. So that’s moving along, we expect to start our first well probably no later than May. The above levels are not below, it looks like below is the preferred way to go right now. We are participating where we can, any places we’ve got leases and formed units by other operators. So we’re committing the capital. We’ve got a team in place to execute and we’re looking forward to doing, I think it’s a basin that can add tremendous upside to our prospects. Chris?
·       Christopher D. Heinson
·       Just to expand on the TMS a little bit. It’s well known that TMS is a technically challenging environment to drill and we’ve been working the technical design of our wells for a period. One of the things that Sanchez – we’re shooting to do is we’re not just trying to drill wells for the sake of appraising the acreage. We actually believe we have a good shot of making money on our very first well. And so we have spent a lot of time and effort designing the well. As far as target goes, the so called rubble zone, it’s not actually a real zone.
·       What it is, is a highly fractured area just above the Richland sand or the Richland silt which is a zone that we look towards. People have gotten themselves into trouble when they have tried to land above that Richland sand because the rubble down is just no telling how far it may extend vertically in the section. So some operators who are trying to avoid it ended up intersecting highly fractured zones when they landed north of the Richland sand. So we will be targeting just below the Richland sand that would be our target. And we think we can actually complete up until that fractured zone.
·       Neal D. Dingmann – SunTrust Robinson Humphrey
·       Chris do you have any working interest in any of these non-ops now, or, you’re just waiting for your first one?
·       Christopher D. Heinson
·       We are participating for very small interest in (inaudible) well. It’s should be fracking soon. And there are several other wells that are coming up on a non-op basis that we’re participating in
·       Stephen P. Shepherd – Simmons & Co. International
·       Okay, that’s helpful. Thank you. My next question would be, anymore detail you can give about the TMS non-op program for this year, any idea of which well should be participating in, where are those wells are going to be drilled, anything like that you can offer?
·       Christopher D. Heinson
·       Yes, this is Chris. We have participated in one well that’s not to be completed actually this Sunday, that’s the loss in well. Additionally, we’ve seen most of dozen locations units formed in an around places where we have some acreage. Now, it looks a little bit difficult to predict, because there is a fairly extensive land process around the unit formation is when those operators were actually drilled.
·       We’ve seen that most amount of activity in and around Wilkinson county, where we actually have a fair amount of acreage, that’s going to be highly active area, so we expect quite a bit of non-op.
·       Dan E. McSpirit – BMO Capital Markets
·       Yeah, thank you. You expressed drilling your first operated TMS well in the context of making a return rather than simply defining the leasehold. What [field lower] [ph] returns are being targeted and how sooner do you see the TMS competing with the returns generated in South Texas?
·       Antonio R. Sanchez, III
·       Yes, so we think about it in terms of return that is sure. We are looking at, and I’m speaking off the top of my head here, but early on when we started looking at the TMS, we looked at what the returns would be, add a call it $15 million well cost which would be at the high-end of what a single well should cost out here and then looked at them anywhere from 500 MBoe to 600 MBoe EURs all the way up to 800. What we – based on the type curves that we had build most of which were on actual data and kind of juxtaposing that to what we get in Eagle Ford we got some comfort around the shape of that type curve and we are looking at returns at those high capital costs in the 17% to low 20%. So once we got our hands around that, we figured that’s a positive return from an appraisal well and we started look at the TMS under a development scenario. And because of its leverage to oil prices and the high IP rates you can get those returns then kicked up pretty quickly with the reduction in costs.
·       So a $10 million well cost at a 600,000 barrel EUR would generate at $90 a 50% rate of return. If you go up to 800,000 barrels, you’re looking at anywhere from 75% to well over 100% rate of return. So it’s – if you use those book-ins to make a judgment on the play which is the way we looked at it we started to get really comfortable with the potential that the TMS has. And then we’ve got some experience to base it on, the first wells that we drilled in Marquis, our first two wells cost a $16 million and then $15 million and now we’re drilling them for under $9 million. So we’ve got experience in dropping well costs from that kind of a magnitude to something substantially lower.

·       So I think that the price is there. We think that if the technical challenges are solved, that the TMS is going to be offering very competitive rates of return to what we’re drilling over in the Eagle Ford. We’re not prepared to make a decision yet and we probably won’t make a decision to go into full scale development until we have a number of wells under our belt. But all the pieces are in place to turn that TMS into a huge play. And I think with the introduction of several other operators into the area more money being spent by more players generally speeds up the process that I just described. So does that kind of answer your question, Dan?

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Replies to This Discussion

Permalink Reply by Skip Peel - Mineral Consultant on April 27, 2014 at 7:46

Sanchez Energy: The Tuscaloosa Marine Shale Factor (Seeking Alpha article excerpt)

Apr. 23, 2014 8:43 AM ET  |  About: SN

  • While the company’s 40,000-acre position is relatively small, the leverage it provides to the success of the TMS play is large enough to have a material impact on the stock.
  • Sanchez plans to drill four operated wells in the TMS in 2014.
Permalink Reply by Skip Peel - Mineral Consultant on April 28, 2014 at 2:55

Excerpt from Sanchez First Quarter Update - 4/28/14

Tuscaloosa Marine Shale Operations Update

"We expect to spud our first operated TMS well, the Dry Fork East #2H, in Wilkinson County, Mississippi during May. Our plan is to appraise the acreage by drilling a pilot hole, taking extensive cores and running additional logs as we build our knowledge base in this area. This well has a planned 7,000 foot lateral. We expect to use the rig that will drill the Dry Fork East well continuously this year, which should enable us to spud four gross operated wells in addition to participating in 10 -15 gross non-operated wells."

"We are pleased with recent results coming from the TMS play. We anticipate having non-operated interests in up to five wells that are either drilling now or are expected to spud during the second quarter – not including the Lawson 25H-1 well, which has seen very good sustained production rates from a short, 3,800-foot lateral with only 14 frac stages. The next several months should see a steadily increasing number of TMS well results from multiple operators."

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