Sanchez Energy (SN)

[dan_s]

I have updated my forecast/valuation model for Sanchez Energy and posted it to the EPG website. I urge all of you to take a long hard look at the RED BOX.

My valuation of SN increases $0.15 to $6.00/share.
I gained more confidence in my forecast last week because on July 9th Scott Hanold at RBC Capital published an updated report on SN in which he rates it a BUY with a $6.00 price target. All of the other analysts reports that are averaged into the First Call price target are dated prior to the company's Q1 earnings report and they are based on much lower oil & gas prices than we have today. SN is just another example of why you should ignore First Call EPS and price targets for small-caps, they are worthless during the rebound phase of oil price cycles.

Sanchez is a pure play on the Eagle Ford. It is actually the largest leaseholder in the Eagle Ford.
> It does have a lot of debt.
> It does have preferred stock sitting in front of the common stock
> It does outspend cash flow from operations

With all that bad stuff, it still has a lot of upside because (a) leverage works both ways, (b) it sells its oil at a premium to WTI and (c) the Eagle Ford is getting more "love" these days because of the pipeline issues in the Permian Basin. If the company can achieve the high end of their 2018 production guidance (80,000 to 84,000 Boepd) then my forecast for 2019 will go up and so will my valuation.

If they achieve the high end of production guidance and WTI moves over $70/bbl, they should get a significant increase in the value of their proven reserve at 12-31-2018.

If Venezuela + Iran + Libya + etc. causes oil to spike to $100/bbl, then SN is a possible triple. "Debt ain't so bad when the oil price spikes".

SN doesn't have any near-term liquidity issues. Cash on hand + cash flow from operations will fund their drilling & completions budget through 2019.

[mattreue]

I just don't trust the management. (I held a large position in SPP, now SNMP, and a smaller amount of common). If I trusted them, I would be all in.

[dan_s]

Why don't you trust them?

[mkarpoff]

OK, so you project about a 25% upside from here. However, the 2023 bond (which I own) has about a 16% YTM. Personally, I prefer the latter given the risk/reward with SN. You have other faves which, if your projections are accurate, have greater appreciation possibilities with less risk.

[davidc257]

Quite a beating the last couple of days! At this point is it a buy, sell, or hold? What are the prospects? What is your current valuation?

[dan_s]

"Q2 Production of 7.2 million barrels of oil equivalent (“MMBoe”), or 79,516 barrels of oil equivalent per day (“Boe/d”)" < This compares to my forecast, which was based on their guidance, of 82,000 Boepd. They are seeing steeper decline rates in the Comanche area.

Obviously, this is not good because Sanchez most grow production and proven reserve growth to justify there high debt level.

Revenue from the sale of oil, natural gas, and NGLs was approximately $259 million during the second quarter 2018, approximately 48 percent higher when compared to the second quarter 2017. Adjusted Revenue for the second quarter 2018, a non-GAAP financial measure that includes a $26.4 million loss on hedge settlements and $5.1 million in sales and marketing revenue, was $232.9 million, which was 27 percent higher when compared to the second quarter 2017. < Compares to my forecast of $237.9 million Q2 revenues.

Commodity price realizations during the second quarter 2018, which include the impact of hedge settlements, were $52.80 per Bbl of oil, $22.76 per Bbl of NGLs, and $3.21 per thousand cubic feet (“Mcf”) of natural gas. < Compares to my forecast for realized commodity prices (net of cash settlements on hedges during the quarter) of $56.00/bbl for oil, $20.00/bbl for NGLs and $3.00/Mcf for natural gas. So, higher gas and NGL prices almost offset the impact of lower volume and the lower oil price.