Sanchez Energy Soars on Acquisition - Analyst Blog

Independent exploration and production (E&P) company Sanchez Energy Corporation SN spiked close to 9% after the May 21 announcement of the acquisition of Eagle Ford assets in South Texas from Royal Dutch Shell plc (RDS.A). The deal at once doubled the company's holdings in the Eagle Ford shale.

As a result, the Houston-based defensive E&P stock soared to a 52-week high of $34.50 on Thursday. However, a cross section of investors swiftly opted for profit booking that lead to the stock ultimately closing at $31.41, representing an impressive year-to-date return of 28.2%.

Per the deal, Sanchez Energy would acquire 106,000 net acres, located in Dimmit, LaSalle, and Webb Counties, TX. The deal, involving cash transaction of about $639.0 million, is expected to close toward the end of the current quarter. The effective date of the agreement is Jan 1, 2014. A total of about 176 operated producing wells and other related facilities are included in the deal. The assets under consideration had net production of 24,000 barrels of oil equivalent per day – 60% liquids – in the first quarter of 2014.

A recent start-up with a life span beginning only in 2011, Sanchez Energy stock has made rapid strides to improve its position in investor psyche, with top line racing from a meager $14.5 million in 2011 to $314 million in 2013. However, the stock started to tumble since the advent of 2014 after an Eagle Ford well yielded more water than oil.

Nevertheless, management prudently improved the position of the company with the first quarter witnessing a three-fold rise in both production and revenue year over year. At the same time, the company maintained a brisk speed in the addition of new wells and cost reduction. As a result, the first quarter witnessed the addition of 172 new wells and overall total well costs reduction of 30% across all its Eagle Ford operations.

Headquartered in Houston, TX, Sanchez Energy focuses on acquisition, exploration and development of oil and natural gas resources, primarily in the Eagle Ford Shale in South Texas. Sanchez Energy currently holds a Zacks Rank #5 (Strong Sell).

Meanwhile, one can consider better-ranked stocks from the E&P space such as Athlon Energy Inc. ATHL and Ultra Petroleum Corp. UPL. Both these stocks sport a Zacks Rank #1 (Strong Buy).