Sanchez Energy Corporation has reported financial and operating results for fourth-quarter and full-year 2018 and provided its outlook for 2019.  A summary of the report follows:

Fourth-quarter 2018 production of 79,946 barrels of oil equivalent per day (Boe/d), or 7.4 million barrels of oil equivalent (MMBoe), an increase of six percent compared to third-quarter 2018;

• Year-end proved reserves of 380 MMBoe, an increase of approximately five percent over the prior year’s record reserves of 363 MMBoe, which represents a reserve replacement ratio of 148 percent;
• Brought 44 wells online during fourth-quarter 2018 for a total of 217 wells brought online during full-year 2018;  
• Fourth-quarter 2018 net income of $119.4 million, compared to net income of $5.6 million in third-quarter 2018 and a net loss of $61.4 million in fourth-quarter 2017;
• Fourth-quarter 2018 Adjusted EBITDAX (a non-GAAP financial measure) of $111.3 million, compared to $123.9 million in third-quarter 2018 and $137.4 million in fourth-quarter 2017;
• Set preliminary 2019 capital budget at a range of $100 million to $150 million; and
• Suspending dividends on Series A Convertible Perpetual Preferred Stock and Series B Convertible Perpetual Preferred Stock beginning with the three-month period ending March 31, 2019. 

MANAGEMENT COMMENTS

“We worked diligently throughout 2018 to manage production declines and improve our understanding of the large and complex Comanche asset,” said Tony Sanchez, III, president and chief executive officer of Sanchez Energy.  “As we incorporated the results of our initial testing, early last year we reverted to a more conservative choke strategy, implemented a completion optimization strategy, and increased artificial lift conversion and workover activity across the entire asset base.  These initiatives began to show signs of positive impact late in the year, with fourth-quarter 2018 production coming in six percent higher than the prior quarter.  

“Sanchez Energy has assembled a quality asset base, which affords us a high degree of flexibility when developing the company’s drilling, capital and strategic plans. Throughout much of last year, we were focused on long-term organic growth in the context of rising commodity prices.  However, given the sharp downturn in oil and natural gas prices that began late last year, we are taking the prudent step of significantly reducing our drilling activity to focus on capital preservation and maximize our liquidity position, while we work to improve the balance sheet.  To that end, we have set the company’s preliminary 2019 capital budget at a range of $100 million to $150 million.  Despite the substantial reduction from 2018 levels, this lower budget for 2019 still meets all of the company’s drilling and development commitments at Catarina and Comanche for the 12-month periods that extend into this year, and is designed to improve our capital efficiency by focusing on lower risk projects and optimization opportunities.”

OPERATIONS UPDATE 

During fourth-quarter 2018, the company spud 33 gross (25 net) wells, completed 40 gross (23 net) wells and brought 44 wells online, for a total of 217 wells brought online during full-year 2018.  Of the 44 wells brought online during the quarter, 26 wells were at Comanche and 18 wells were at Catarina.  Drilling activity was concentrated in Areas 3 and 5 of Comanche and the South Central and Northwest areas of Catarina.  With a heightened focus on lowering costs through a reduction in drilling time, the company drilled several wells during the quarter at a record spud-to-rig release time of less than six days. 

At Comanche, completions activity was split between Area 3 and Area 5, with a majority of wells targeting the Lower Eagle Ford A or B formations.  The company is currently conducting trials involving wider well spacing while continuing with larger frac designs of 2,000 pounds of proppant and 50 barrels of fluid per foot of lateral length.

At Catarina, the company conducted trials during the quarter involving “pre-loading” as a strategy for mitigating frac interference on six parent wells.  Early results from the trials show promise, with parent wells returning to pre-frac oil and natural gas flow rates upon cleanup of water from the reservoir.  The company is evaluating further enhancements to its pre-loading strategy as part of a continuing focus on minimizing the impact of new well completions on existing production.

Consistent with the focus on improving capital efficiency, the company increased its workover activity during fourth-quarter 2018 with encouraging results. The additional workover activity is expected to continue throughout 2019 with a primary focus on gas lift redesign. 

DRILLING AND DEVELOPMENT COMMITMENTS

As of June 30, 2018, the company achieved a 26-well drilling bank at Catarina that can be applied toward its current annual drilling commitment for the period that extends from July 1, 2018 to June 30, 2019. The company drilled an additional 36 wells between July 1, 2018 and Dec. 31, 2018 at Catarina, resulting in a total of 62 wells toward the current annual drilling commitment of 50 wells.  Accordingly, the company has met its annual drilling commitment for the period July 1, 2018 to June 30, 2019 and has achieved a bank of 12 wells toward the next annual drilling commitment period, which begins on July 1, 2019. 

As of Aug. 31, 2018, the company achieved a 30-well bank at Comanche that can be applied toward its current annual development commitment for the period that extends from Sept. 1, 2018 to Aug. 31, 2019. The company completed and equipped an additional 27 wells at Comanche between Sept. 1, 2018 and Dec. 31, 2018, resulting in a total of 57 wells toward the current annual development commitment of 60 wells. The company’s 2019 capital budget includes the additional activity needed to meet the annual development commitment at Comanche for the period Sept. 1, 2018 to Aug. 31, 2019.

CAPITAL EXPENDITURES

Capital expenditures incurred during full-year 2018 totaled approximately $593 million, of which approximately 99 percent was allocated to drilling, completion and infrastructure and one percent was allocated to leasing and business development activities.

2019 OUTLOOK

The company has set its preliminary 2019 capital budget at a range of $100 million to $150 million, which at the midpoint represents a reduction of approximately 79 percent when compared to 2018 capital expenditures of approximately $593 million.

As a result of delisting proceedings initiated by the New York Stock Exchange on Feb. 20, 2019, the company’s common stock began trading on the OTC Pink Marketplace operated by OTC Markets Group Inc. ("OTC Pink") under ticker symbol "SNEC" upon the opening of trading on Feb. 21, 2019.

The company remains committed to strengthening its balance sheet and is evaluating strategies to maximize its liquidity and reduce financial leverage.  As the company considers its strategic alternatives, the board of directors has elected to suspend the dividend on Sanchez Energy’s Series A Convertible Perpetual Preferred Stock and Series B Convertible Perpetual Preferred Stock, beginning with the three-month period ending March 31, 2019.

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