Is Sanchez Energy Repeating an Old Debt Mistake?
Sanchez Energy’s production expansion
Since 1Q16, crude oil (USO) (SCO) prices have risen from lows of $26.05 per barrel to $49.30 per barrel as of September 13. Natural gas (UNG)(UGAZ) prices also rose during this period. Natural gas prices rose from lows of $1.61 per MMBtu (million British thermal units) in 1Q16 to $3.06 per MMBtu on September 13. In order to take advantage of rising crude oil (USO) and natural gas (UNG) prices, Sanchez Energy (SN) decided to go on an expansion spree in 1Q17. According to Sanchez Energy’s production guidance, it plans to expand its production ~31% from ~53 Mboepd (thousand barrels of oil equivalent per day) in 2016 to ~70 Mboepd in 2017.
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Sanchez Energy’s debt expansion
However, to increase its production in 2017, Sanchez Energy increased its capital expenditures and completed an acquisition. In 1Q17, Sanchez Energy acquired 318,000 gross acres in the western Eagle Ford for ~$2.3 billion from Anadarko Petroleum (APC). Due to higher capital expenditures and these acquisitions, Sanchez Energy’s net debt rose from ~$1.2 billion in 4Q16 to ~$1.8 billion in 2Q17.
As of 2Q17, Sanchez Energy’s trailing 12-month EBITDA stood at ~$189 million and its net debt-to-EBITDA stood at ~9.3x—much higher than the upstream industry’s average net debt-to-EBITDA of ~3.5x.
In the next part, we’ll analyze the important energy events this week.