Will Inter-Dealings Annihilate this 905% Upside?
Sanchez Energy (SN) is crushing goals left and right.
For the fourth quarter, the company increased production by a whopping 905% year-over-year.
And with an additional $640 million in capital from efforts in the Eagle Ford Shale, Sanchez could double its new production rate in 2014.
A small-cap star, Sanchez has begun purchasing bolt-on acreage and other acquisitions, to boot – like the $230.1-million Wycross acquisition that added 32 rigs to Sanchez Energy’s portfolio.
There’s another side to this story, however – one you certainly need to be aware of before considering an investment…
All in the Family
One of the recent Sanchez acquisitions – the Tuscaloosa Marine Shale – is barely applied to the company’s bottom-line intentions released for 2014.
The company paid $100 million for the area, and $65 million in exploration and wells… Yet it’s only going to make up less than 5% of the company’s revenue next year, if that.
Which begs the question, why spend stockholders’ money if you’re not going to use it to boost the bottom line?
Of course, that’s not the only question investors are asking…
Even Robin Thicke Wouldn’t Approve of These Blurred Lines
Sanchez Energy is the only publicly held affiliate beneath Sanchez Oil and Gas. And there are three other privately held affiliates, all owned and/or operated by a member of the Sanchez family.
The problem is, not all investors agree that this is the best structure for shareholders.
While family involvement in business is not infrequent in the energy industry, this particular family’s fine print is what raises red flags.
You see, the Sanchez executives and stockholding family members are allowed to pursue other energy opportunities.
And who’s to say where lines between family and business – or the welfare of the publicly held Sanchez Energy and its stockholders – are blurred?
As I mentioned above, Sanchez Energy bought the Tuscaloosa Marine Shale area – 40,000 acres – for $100 million, or $2,500 an acre.
They bought it from privately (family) owned Sanchez Resources, LLC. This is over 17 times what Devon Energy Corp. (DVN) sold similar neighboring land for.
And now that the region isn’t being factored into Sanchez Energy’s 2014 bottom line, who’s exactly benefitting from the massive price inflation?
Ultimately, the Tuscaloosa purchase, along with the $230-million acquisition of the Wycross acreage, might boost share value in the long run.
After all, Sanchez Energy is putting up monster production numbers and is acquiring the means to continue the trend.
And while the total one-year returns on shares (37.59%) have trumped the overall market (21.52% for the S&P), I’m just not convinced yet.
Sanchez Energy’s super close family dealings raise questions too big for me to put my money on.
I’ll wait for a pullback to see if Sanchez can deliver on its projected growth and its ability to keep its business geared towards shareholders – and not family.
And “the chase” continues,