Sanchez Finds Success in Eagle Ford

Focus: ENERGY

Igor Greenwald Image Igor Greenwald Chief Investment Strategist, MLP Profits

It’s not unusual for an MLP to end up treated like an unloved stepchild by its birth parent. Yet that’s the route Sanchez Production Partners (SPP) took on the way to its current status as the preferred midstream operator in the Eagle Ford, asserts Igor Greenwald, editor of Investing Daily's The Energy Strategist.

Ironically, getting abandoned by its original utility sponsor in 2009 may have prevented the MLP, then called Constellation Energy Partners, from subsequently making the same pricey acquisitions that ended up bankrupting most of its upstream rivals in recent years.

It still took a 1-for-10 reverse split 18 months ago to keep the shares out of penny-stock limbo. But by then SPP had already found a new sponsor in Sanchez Energy (SN).

It’s been a mutually beneficial relationship so far, with SN helping to transform SPP into predominantly a midstream logistics MLP.

SPP in turn has helped SN raise capital toward a transformative recent leasehold acquisition in the Eagle Ford that should pump additional volume into its gathering lines and gas plant.

Midstream operations are expected to account for some 70% of this year’s cash flow. SPP expects to earn enough to produce 1.3x coverage on a distribution currently yielding an annualized 13.3%.

Discounting the upstream oil and gas production cash flow entirely and assuming higher outlays to preferred investors in the years ahead we still end up with a yield of 8% or so fully backed by midstream assets under long-term contract with the sponsor.

Key to growth will be the aggressive drilling plans of sponsor Sanchez Energy, which expects a 50% production boost from its pending $2.3 billion leasehold acquisition from Anadarko Petroleum (APC) adjacent to SPP’s current service area.

Output is expected to jump another 25% next year, crude prices permitting. But Sanchez is now one of Eagle Ford’s largest and lowest-cost operators, and has secured a private equity investment to finance its expansion.

And there’s meaningful upside here from higher oil prices ( as well as downside should those head significantly lower, of course.) Buy SPP below $17.

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