KLR Group: Buy Sanchez Energy

In a report published Tuesday, KLR analyst John Gerdes upgraded the rating on Sanchez Energy Corp (NYSE: SN) from Accumulating to Buy, while maintaining the $15 price target. Although the stock has underperformed the E&P sector since late April, there now is about 50 percent upside to the valuation.

"Our economic model anticipates Sanchez increases development across its asset portfolio from three to four net rigs this year to six net rigs in '16 and seven to eight net rigs in '17, assuming a robust commodity price recovery," Gerdes said.

Sanchez Energy intends to drill 58 net wells across its Catarina ranch in 2015, while developing Eagle Ford in western Cararin and demarcating Lower Eagle Ford in central and eastern Catarina. In addition, the company is in the process of conducting a one-rig program and intends to drill 11 net wells in Palmetto. The analyst expects the company to recover about 700 Mboe from Southern Palmetto, at a cost of $7-7.5 million.

Sanchez Energy's second test in the Tuscaloosa Marine Shale (TMS) produced about 60Mbo in the first four months, and the analyst expects this region to recover about 300 Mbo.

"The Upper TMS Morris #2H in Wilkinson County experienced completion issues during cleanout and the company plans to recover the lost bottomhole assembly late this year. Sanchez is drilling the Bloomer #2H in Wilkinson County and plans to drill three TMS wells in '15," Gerdes added.