SAN ANTONIO—Think of Sundance Energy as the little engine that could.

Okay, maybe “little” is an imprecise term, but an argute technical team and financial savvy for the Denver-based U.S. subsidiary of Australian Securities Exchange-listed Sundance Energy Australia Ltd., may yet allow the small publically held independent to turn a sow’s ear of challenged big company divestiture objectives into a potential silk purse of free cash flow underwriting its expansion program over the next half-decade.

While investors have a wait-and-see attitude about energy, Sundance offers a value play based on acreage potential alone.

Technical skill in operations, coupled with financial acumen, has placed the company at the thematic forefront of what investors are seeking out of energy these days, which is an undervalued company able to grow while living within free cash flow.

Sundance has amassed 55,000-acres in the overpressured volatile oil window of the Eagle Ford Shale in Live Oak, La Salle, McMullen and Atascosa counties in Texas and is currently running a two-rig program drilling Live Oak County wells at the rate of two monthly.

The resource is there. The last seven Live Oak County wells in August averaged 24-hour IPs of 1,320 barrels of oil equivalent per day (boe/d), or 350 boe/d per 1,000 ft of lateral, placing the productive potential in line with top-tier Permian Basin wells on an apples-to-apples basis.

Laterals provide two-stream production that is 75% oil. In total, Sundance produced 8,000 bbl/d in the second quarter of 2018 and plans to ramp production to 21,000 boe/d by the end of 2019 on another 65 to 75 wells at an individual well cost of $5.5 million, generating $250 million to $275 million in EBITDA. Growth will be underwritten on free cash flow and will not require incremental capital to unlock.

Sundance CEO Eric McCrady outlined the company’s program for attendees at Hart Energy’s recently held DUG Eagle Ford conference and exhibition. It incorporates commitments from two Patterson UTI Energy Inc. pad-capable 1,500 hp AC-VFD rigs and a contract with Halliburton Co. (NYSE: HAL) that provides best-in-class completion results at firm pricing and guarantees frack crew availability.

But it’s the story behind the Sundance narrative that adds color to its Eagle Ford gambit. And that story centers on midstream. In the first half of 2018, Sundance purchased two parcels totaling 31,000 acres from Pioneer Natural Resources Co. (NYSE: PXD), which is divesting its Eagle Ford assets to redeploy capital to the Permian Basin. Pioneer’s property was entangled with expensive legacy midstream contracts dating to 2015, which made the divestitures a hard sell.

Sundance management, which McCrady said prides itself on its dealmaking acumen as well as its engineering skills, renegotiated the midstream contracts, which opened the door to the stalled property sales, reduced costs associated with developing the acreage, and provided midstream carriers reliable high-quality oil to Corpus Christi and the Houston Ship Channel over the next decade.

“Because these assets were burdened by these high-cost midstream contracts, there was less competition to acquire the assets,” McCrady said. “Even though it required significant work, we were able to get those deals cut and now we have a core Eagle Ford position that will see Sundance growing for the next decade through the drill bit in the basin.”

The two acquisitions from Pioneer closed for a combined $332 million and involved an aggregate 31,900 acres, bringing Sundance’s Eagle Ford acreage to 56,000. Sundance has 1,000 noncore acres in Dimmitt County currently for sale dating back to its 2013 entry into the Eagle Ford. The company currently operates 200 Eagle Ford wells, including 100 wells the company has drilled on its own. McCrady identified 440 locations on the newly acquired properties.

The Pioneer deal involved agility on the financial side. Sundance raised $260 million in equity and restructured its credit facilities to generate $340 million for the transaction.

“We were able to do that by buying assets and fixing high-cost midstream contracts,” McCrady said. “Secondly, you need to have capital to execute on your development plan. That capital structure at closing gave us the ability to run effectively a 35-to-40-well program every 12 months through being free cash flow positive. That sets us up through the end of next year to drive capital efficient growth in our asset base.”

A review of the company’s drilling program back to 2013 emphasized a need to increase its hedging profile.

“We are actually hedging barrels of oil prior to bringing the wells online,” McCrady said. “Once we have a certain date for when the wells come online, we start to layer in hedging. Today, we have 70% of production hedged for 2018 and 40% for 2019. We know what our costs are. We know what the recoveries are going to be, and now we know what the pricing is going to be when we bring wells online. That secures the capital to reinvest into the next well down the road.”

Sundance sells its oil for two separate prices. McMullen County oil is sold into Corpus Christi and the offshore Brent market, providing Brent pricing at the wellhead and a premium differential to WTI. This arrangement holds even in the face of a potential future flood of Permian Basin oil as new pipeline capacity is added.

Sundance also sends oil from the wellhead on properties outside of McMullen County to the Houston Ship Channel on a premium to Louisiana Light Sweet crude pricing.

The company currently has a proved reserve base of almost $1 billion and an enterprise value of $550 million, according to McCrady. Yet, its market cap is only $380 million, offering a value play in a pure play Eagle Ford entity.

This is not the first rodeo for Sundance. The company sold its nonoperated interest in the Bakken’s South Antelope field in 2012 for $172.4 million, netting $140 million. Capital was deployed to the Denver-Julesburg Basin’s Wattenberg Field, which Sundance sold in 2014 for $116 million.

The company is now “all in” as an Eagle Ford pure play. While the Eagle Ford narrative has been about a few big companies with big programs like EOG Resources Inc. (NYSE: EOG), ConocoPhillips Co. (NYSE: COP), Marathon Oil Corp. (NYSE: MRO), Devon Energy Corp. (NYSE: DVN), Encana Corp. (NYSE: ECA), BHP Billiton Ltd. (NYSE: BHP) and Pioneer, an evolving story is unfolding that sees private equity-backed young management teams with exceptional technical skills buying divested assets from the big boys, applying the latest completion techniques in slickwater and proppant loading to produce exceptional results from exceptional reservoir rock quality.

Can Sundance be a major part of that narrative? Like the little engine that could, they think they can, they think they can.

Richard Mason can be reached at rmason@hartenergy.com.

Comments