Total capital plan for 2015 is expected to be in a range of $600 million to $650 million, of which $560 to $600 million will be for well drilling and completion and $40 to $50 million will be for midstream, leasing, and other.
Excluding carryover capital from 2014, the capital budget will be annualized at a rate of $400 – $450 million. This compares to the initial 2015 capital budget of approximately $1.15 billion, set prior to the decline in oil prices. The new budget represents a reduction of approximately 60%.
Activity will be reduced from 8 gross (7 net) rigs to 3.5 rigs (3.0 net), a reduction of almost 60% from fourth quarter 2014 levels.
Capital plan will be fully funded from operating cash flows and cash on hand without the need to draw on the Company's unused corporate credit facility through year end 2015.
Average production for 2015 will range between 40,000 and 44,000 BOE/D, an increase of approximately 40% over expected 2014 average production at the mid-point of the guidance range.
Targeted well costs at Catarina in 2015 are approximately $5 million per well (down from approximately $7.5 million per well), driven by service sector price reductions and increased efficiencies.
At $60 per barrel for oil and $3.75 per mmbtu for natural gas, rates of return at Catarina and Palmetto are in excess of 35% and 60%, respectively.
Tony Sanchez, III, President and Chief Executive Officer of Sanchez Energy, commented: "In response to the deteriorating commodity price environment, Sanchez Energy has elected to further reduce its 2015 capital plan to a range of $600 to $650 million. This is a reduction of almost 30% from the $875 million capital plan announced in early November, which was itself reduced from the initial 2015 capital plan of $1.15 billion set prior to oil prices declining materially in the second half of 2014. The new 2015 capital plan will focus our capital spending on those areas with high rates of return while maximizing future potential. As a result, 2015 production is expected to average between 40,000 and 44,000 BOE/D, allowing us to maintain our expected fourth quarter 2014 average daily production rate and increase 2015 production year over year by approximately 40%. This revised capital plan, which assumes a flat price deck of $60 per barrel for oil and $3.75 per mmbtu for natural gas, is expected to be fully funded from cash flow from operations and cash on hand. As a result, we do not forecast any usage under our undrawn bank credit facility, which has a $650 million borrowing base with an elected commitment of $300 million.
We have asked all service vendors to reduce prices according to the changing commodity price environment. Material reductions have been made and are ongoing in all operating cost segments. At Catarina, we expect a decrease in overall well costs, with total drilling and completion costs averaging $5 million per well by mid-January.
Based on the above capital plan, Sanchez Energy expects average 2015 production to range between 40,000 and 44,000 BOE/D, an increase of approximately 40% over expected 2014 production at the mid-point of the guidance range. First quarter 2015 average production is expected to be between 40,000 and 44,000 BOE/D. Typical pad size in 2015 will vary between 5 and 10 wells per pad. Subsequent quarterly average production will fluctuate due to the use of extensive multi-well pad drilling.
In Catarina, Sanchez Energy continues to see well results perform above initial expectations, demonstrating resilience in this lower commodity price environment. Using initial type curve expectations and targeted average well costs of $5 million per well, rates of returns are in excess of 35% at $60 per barrel of oil and $3.75 per mmbtu for natural gas. The 25% reduction of overall well cost is driven primarily by the reduction of unit costs that are being realized in the service sector. Efficiency gains and optimization will continue as Catarina benefits from a more manufacturing line based approach. This approach has decreased costs by 30% or more within the first year of operations in the Marquis and Cotulla areas. Development at Palmetto will be focused on the southern portion of the ranch where rates of return are in excess of 60% at $60 per barrel of oil and $3.75 per mmbtu for natural gas and average well costs between $7.0 and $7.5 million.