10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2013

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 1-35372

Sanchez Energy Corporation

(Exact name of registrant as specified in its charter)

Delaware	45-3090102
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

1111 Bagby Street, Suite 1800 Houston, Texas	77002
(Address of principal executive offices)	(Zip Code)

(713) 783-8000
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x  No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o	Accelerated filer x	Non-accelerated filer o	Smaller reporting company o
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No x

Number of shares of registrant’s common stock, par value $0.01 per share, outstanding as of November 6, 2013: 46,359,613.

We are an “emerging growth company” as defined under the Jumpstart Our Business Startups Act of 2012, commonly referred to as the “JOBS Act”.  We will remain an “emerging growth company” for up to five years from the date of the completion of our initial public offering (the “IPO”) on December 19, 2011, or until the earlier of (1) the last day of the fiscal year in which our total annual gross revenues exceed $1 billion, (2) the date that we become a “large accelerated filer” as defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which would occur if the market value of our common equity that is held by non-affiliates is $700 million or more as of the last business day of our most recently completed second fiscal quarter or (3) the date on which we have issued more than $1 billion in non-convertible debt during the preceding three year period.

As an “emerging growth company”, we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies” including, but not limited to:

·not being required to comply with the auditor attestation requirements related to our internal control over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act;

·reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements; and

·exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved.

In addition, Section 107 of the JOBS Act provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended (the “Securities Act”), for complying with new or revised accounting standards. Under this provision, an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to avail ourselves of this exemption from new or revised accounting standards and, therefore, we will not be subject to new or revised accounting standards at the same time as other public companies that are not emerging growth companies.

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.  All statements, other than statements of historical facts, included in this Quarterly Report on Form 10-Q that address activities, events or developments that we expect, believe or anticipate will or may occur in the future are forward-looking statements, including statements relating to successfully closing our announced acquisitions, the anticipated benefits of our acquisitions, any planned takeover of operations, future down-spacing and movement to pad drilling to further reduce costs and to produce additional upside potential and other aspects of any proposed acquisitions.  These statements are based on certain assumptions we made based on management’s experience, perception of historical trends and technical analyses, current conditions, anticipated future developments and other factors believed to be appropriate and reasonable by management.  When used in this Quarterly Report on Form 10-Q, words such as “will,” “potential,” “believe,” “estimate,” “intend,” “expect,” “may,” “should,” “anticipate,” “could,” “plan,” “predict,” “project,” “profile,” “model,” “strategy,” “future” or their negatives or the statements that include these words, are intended to identify forward-looking statements, although not all forward-looking statements contain such identifying words.  In particular, statements, express or implied, concerning our future operating results and returns or our ability to replace or increase reserves, increase production, or generate income or cash flows are forward-looking statements.  Forward-looking statements are not guarantees of performance.  Such statements are subject to a number of assumptions, risks and uncertainties, many of which are beyond our control.  Although we believe that the expectations reflected in our forward-looking statements are reasonable and are based on reasonable assumptions, no assurance can be given that these assumptions are accurate or that any of these expectations will be achieved (in full or at all) or will prove to have been correct.  Important factors that could cause our actual results to differ materially from the expectations reflected in the forward looking statements include, among others:

·our ability to successfully execute our business and financial strategies;

·our ability to replace the reserves we produce through drilling and property acquisitions;

·the realized benefits of the acquisition of SN Marquis LLC (“Marquis LLC”), the acreage acquired in the Tuscaloosa Marine Shale (the “TMS transactions”), the acquisition of assets from Hess Corporation (“Hess”, and such acquisition transaction, the “Cotulla acquisition’’) and liabilities assumed in connection therewith, and the acquisition of the Wycross properties and other assets and liabilities assumed in connection therewith (the “Wycross acquisition”);

·the extent to which our drilling plans are successful in economically developing our acreage in, and to produce reserves and achieve anticipated production levels from, our existing and future projects;

·the accuracy of reserve estimates, which by their nature involve the exercise of professional judgment and may therefore be imprecise;

·the extent to which we can optimize reserve recovery and economically develop our plays utilizing horizontal and vertical drilling, advanced completion technologies and hydraulic fracturing;

·our ability to successfully execute our hedging strategy and the resulting realized prices therefrom;

·competition in the oil and natural gas exploration and production industry for employees and other personnel, equipment, materials and services and, related thereto, the availability and cost of employees and other personnel, equipment, materials and services;

·our ability to access the credit and capital markets to obtain financing on terms we deem acceptable, if at all, and to otherwise satisfy our capital expenditure requirements;

·the availability, proximity and capacity of, and costs associated with, gathering, processing, compression and transportation facilities;

·the timing and extent of changes in prices for, and demand for, crude oil and condensate, natural gas liquids (“NGLs”), natural gas and related commodities;

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·our ability to compete with other companies in the oil and natural gas industry;

·the impact of, and changes in, government policies, laws and regulations, including tax laws and regulations, environmental laws and regulations relating to air emissions, waste disposal, hydraulic fracturing and access to and use of water, laws and regulations imposing conditions and restrictions on drilling and completion operations and laws and regulations with respect to derivatives and hedging activities;

·developments in oil-producing and natural gas-producing countries;

·our ability to effectively integrate acquired crude oil and natural gas properties into our operations, fully identify existing and potential problems with respect to such properties and accurately estimate reserves, production and costs with respect to such properties;

·the extent to which our crude oil and natural gas properties operated by others are operated successfully and economically;

·the use of competing energy sources and the development of alternative energy sources;

·the extent to which we incur uninsured losses and liabilities or losses and liabilities in excess of our insurance coverage; and

·the other factors described under “Part I, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Part II, Item 1A. Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q and in our other public filings with the Securities and Exchange Commission (the “SEC”).

In light of these risks, uncertainties and assumptions, the events anticipated by our forward-looking statements may not occur, and, if any of such events do, we may not have correctly anticipated the timing of their occurrence or the extent of their impact on our actual results.  Accordingly, you should not place any undue reliance on any of our forward-looking statements.  Any forward-looking statement speaks only as of the date on which such statement is made, and we undertake no obligation to correct or update any forward-looking statement, whether as a result of new information, future events or otherwise, except as required by applicable law.

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Sanchez Energy Corporation

Form 10-Q

For the Quarterly Period Ended September 30, 2013

Table of Contents

PART I
Item 1.	Unaudited Financial Statements
	Condensed Consolidated Balance Sheets as of September 30, 2013 and December 31, 2012	6
	Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2013 and 2012	7
	Condensed Consolidated Statement of Stockholders’ Equity for the Nine Months Ended September 30, 2013	8
	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2013 and 2012	9
	Notes to the Condensed Consolidated Financial Statements	10
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	30
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	47
Item 4.	Controls and Procedures	49
PART II
Item 1.	Legal Proceedings	50
Item 1A.	Risk Factors	50
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	52
Item 3.	Defaults Upon Senior Securities	52
Item 4.	Mine Safety Disclosures	53
Item 5.	Other Information	53
Item 6.	Exhibits	54
SIGNATURES		57

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PART I — FINANCIAL INFORMATION

Item 1. Unaudited Financial Statements

Sanchez Energy Corporation

Condensed Consolidated Balance Sheets (Unaudited)

(in thousands, except share amounts)

	September 30,			December 31,
	2013			2012
ASSETS
Current assets:
Cash and cash equivalents	$	479,999		$	50,347
Investments	10,000			11,591
Oil and natural gas receivables	36,565			10,435
Joint interest billing receivables	3,452			—
Fair value of derivative instruments	40			2,145
Deferred tax asset	7,520			—
Other current assets	739			438
Total current assets	538,315			74,956
Oil and natural gas properties, at cost, using the full cost method:
Unproved oil and natural gas properties	268,556			138,937
Proved oil and natural gas properties	868,284			232,523
Total oil and natural gas properties	1,136,840			371,460
Less: Accumulated depreciation, depletion, amortization and impairment	(98,729		)	(22,605		)
Total oil and natural gas properties, net	1,038,111			348,855
Other assets:
Debt issuance costs, net	19,869			2,595
Fair value of derivative instruments	423			—
Other assets	2,575			168
Total assets	$	1,599,293		$	426,574
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	26,779		$	—
Accounts payable - related entities	782			13,454
Other payables	2,973			—
Accrued liabilities	110,084			44,828
Dividends payable	5,485			—
Fair value of derivative instruments	7,033			1,003
Total current liabilities	153,136			59,285
Long term debt, net of discount	593,032			—
Asset retirement obligations	3,507			546
Deferred tax liability	3,852			—
Other non-current liabilities	478			—
Total liabilities	754,005			59,831
Commitments and contingencies (Note 16)
Stockholders’ equity:
Preferred stock ($0.01 par value, 15,000,000 shares authorized; 3,000,000 shares of 4.875% Cumulative Perpetual Convertible, Series A, issued and outstanding as of each of September 30, 2013 and December 31, 2012, respectively; 4,500,000 and zero shares of 6.500% Cumulative Perpetual Convertible, Series B, issued and outstanding as of September 30, 2013 and December 31, 2012, respectively)	75			30
Common stock ($0.01 par value, 150,000,000 shares authorized; 46,350,513 and 33,762,400 shares issued and outstanding as of September 30, 2013 and December 31, 2012, respectively)	464			338
Additional paid-in capital	863,805			385,086
Accumulated deficit	(19,056		)	(18,711		)
Total stockholders’ equity	845,288			366,743
Total liabilities and stockholders’ equity	$	1,599,293		$	426,574

The accompanying notes are an integral part of these condensed consolidated financial statements.

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Sanchez Energy Corporation

Condensed Consolidated Statements of Operations (Unaudited)

(in thousands, except per share amounts)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2013			2012			2013			2012
REVENUES:
Oil sales	$	87,436		$	12,308		$	171,635		$	25,858
Natural gas liquids sales	3,190			3			6,166			10
Natural gas sales	3,574			182			6,520			594
Total revenues	94,200			12,493			184,321			26,462
OPERATING COSTS AND EXPENSES:
Oil and natural gas production expenses	11,026			610			21,098			2,015
Production and ad valorem taxes	5,531			613			10,942			1,569
Depreciation, depletion, amortization and accretion	38,372			4,580			76,368			9,291
General and administrative (inclusive of stock-based compensation expense of $6,657 and $836, respectively, for the three months ended September 30, 2013 and 2012, and $14,369 and $24,800, respectively, for the nine months ended September 30, 2013 and 2012)	15,195			2,844			35,564			31,451
Total operating costs and expenses	70,124			8,647			143,972			44,326
Operating income (loss)	24,076			3,846			40,349			(17,864		)
Other income (expense):
Interest and other income	32			12			104			31
Interest expense	(9,460		)	—			(17,613		)	—
Realized and unrealized gains (losses) on derivative instruments	(14,436		)	(2,191		)	(13,812		)	809
Income (loss) before income taxes	212			1,667			9,028			(17,024		)
Income tax benefit	3,668			—			3,668			—
Net income (loss)	3,880			1,667			12,696			(17,024		)
Less:
Preferred stock dividends	(5,485		)	(264		)	(13,041		)	(264		)
Net income allocable to participating securities	—			(21		)	—			—
Net income (loss) attributable to common stockholders	$	(1,605	)	$	1,382		$	(345	)	$	(17,288	)
Net income (loss) per common share - basic and diluted	$	(0.05	)	$	0.04		$	(0.01	)	$	(0.52	)
Weighted average number of shares used to calculate net income (loss) attributable to common stockholders - basic and diluted	34,737			33,000			33,651			33,000

The accompanying notes are an integral part of these condensed consolidated financial statements.

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Sanchez Energy Corporation

Condensed Consolidated Statement of Stockholders’ Equity for the Nine Months Ended September 30, 2013 (Unaudited)

(in thousands)

	Series A			Series B								Additional						Total
	Preferred Stock			Preferred Stock			Common Stock					Paid-in			Accumulated			Stockholders’
	Shares	Amount		Shares	Amount		Shares		Amount			Capital			Deficit			Equity
BALANCE, December 31, 2012	3,000	$	30	—	$	—	33,762		$	338		$	385,086		$	(18,711	)	$	366,743
Common shares issued, net of offering costs of $12,422	—	—		—	—		11,040		111			241,387			—			241,498
Issuance of Series B Preferred Stock, net of offering costs of $8,439	—	—		4,500	45		—		—			216,516			—			216,561
Preferred stock dividends	—	—		—	—		—		—			—			(13,041		)	(13,041		)
Purchase of oil and natural gas properties for common stock	—	—		—	—		343		3			7,517			—			7,520
Restricted stock awards, net of forfeitures	—	—		—	—		1,257		13			(13		)	—			—
Purchases of common stock	—	—		—	—		(52	)	(1		)	(1,057		)	—			(1,058		)
Stock-based compensation	—	—		—	—		—		—			14,369			—			14,369
Net income	—	—		—	—		—		—			—			12,696			12,696
BALANCE, September 30, 2013	3,000	$	30	4,500	$	45	46,350		$	464		$	863,805		$	(19,056	)	$	845,288

The accompanying notes are an integral part of these condensed consolidated financial statements.

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Sanchez Energy Corporation

Condensed Consolidated Statements of Cash Flows (Unaudited)

(in thousands)

	Nine Months Ended September 30,
	2013			2012
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	12,696		$	(17,024	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation, depletion, amortization and accretion	76,368			9,291
Stock-based compensation	14,369			24,800
Unrealized losses (gains) on derivative instruments	6,820			(1,594		)
Amortization of deferred financing costs and debt discount	5,862			—
Deferred taxes	(3,668		)	—
Changes in operating assets and liabilities:
Accounts receivable	(29,903		)	(3,114		)
Other current assets	(301		)	(214		)
Price risk management activities, net	3,484			(618		)
Accounts payable	8,427			—
Accounts payable - related entities	(12,672		)	13,402
Other payables	829			—
Accrued liabilities	26,413			1,266
Net cash provided by operating activities	108,724			26,195
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for oil and natural gas properties	(295,670		)	(88,798		)
Payments for other property and equipment	(1,665		)	—
Acquisitions of oil and natural gas properties	(402,669		)	—
Purchases of investments	(10,000		)	(11,583		)
Sale of investments	11,591			—
Net cash used in investing activities	(698,413		)	(100,381		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings	236,000			—
Repayment of borrowings	(236,000		)	—
Issuance of senior notes, net of discount	593,000			—
Issuance of common stock	253,920
Issuance of preferred stock	225,000			150,000
Payments for stock offering costs	(20,861		)	(5,488		)
Financing costs	(23,104		)	—
Preferred dividends paid	(7,556		)	—
Purchase of common stock	(1,058		)	—
Net cash provided by financing activities	1,019,341			144,512
Increase in cash and cash equivalents	429,652			70,326
Cash and cash equivalents, beginning of period	50,347			63,041
Cash and cash equivalents, end of period	$	479,999		$	133,367
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Asset retirement obligations	$	2,833		$	205
Change in accrued capital expenditures	38,842			23,207
Capital expenditures in accounts payable	18,352			—
Deferred premium liabilities	718			563
Purchase of oil and natural gas properties in exchange for common stock	7,520			—
Accrued preferred stock dividends	5,485			—
SUPPLEMENTAL DISCLOSURE:
Cash paid for interest	$	2,020		$	—

The accompanying notes are an integral part of these condensed consolidated financial statements.

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Note 1.   Organization

Sanchez Energy Corporation (together with its consolidated subsidiaries, the “Company,” “we,” “our,” “us” or similar terms) is an independent exploration and production company focused on the acquisition, exploration, and development of unconventional oil and natural gas resources onshore along the U.S. Gulf Coast, primarily in the Eagle Ford Shale in South Texas. As of September 30, 2013, the Company had accumulated acreage in the Eagle Ford Shale in Gonzales, Zavala, Frio, Fayette, Lavaca, Atascosa, Webb, DeWitt, Dimmit and LaSalle Counties of South Texas.  In August 2013, the Company added undeveloped acreage targeting the Tuscaloosa Marine Shale (“TMS”) located in Southwest Mississippi and Southeast Louisiana.  In addition, the Company has some minor property interests located in the Haynesville Shale in north central Louisiana.

The Company was formed in August 2011 to acquire, explore and develop unconventional oil and natural gas assets.  On December 19, 2011, the Company completed its IPO of 10.0 million shares of common stock, par value $0.01 per share, at a price to the public of $22.00 per share and received net proceeds of approximately $203.3 million in cash (net of expenses and underwriting discounts and commissions).

In connection with its IPO, on December 19, 2011, the Company entered into a contribution, conveyance and assumption agreement whereby Sanchez Energy Partners I, LP (“SEP I”), an affiliate of the Company, contributed to the Company 100% of the limited liability company interests in SEP Holdings III, LLC (“SEP Holdings III”), which owns interests in unconventional oil and natural gas assets consisting of undeveloped leasehold, proved oil and natural gas reserves and related equipment and other assets (the “SEP I Assets”) in exchange for approximately 22.1 million shares of the Company’s common stock and $50.0 million in cash.  The acquisition of oil and natural gas properties from SEP I was a transaction among entities under common control and, accordingly, the Company recorded the assets and liabilities acquired at their historical carrying values and presented the historical operations of the SEP I Assets on a retrospective basis for all periods prior to the IPO presented in its financial statements.  In addition, the $50.0 million payment was reflected as a distribution to SEP I in the financial statements.

Also in connection with its IPO, the Company entered into a contribution agreement whereby it acquired 100% of the limited liability company interests in Marquis LLC, which owns evaluated and unevaluated properties in Fayette, Lavaca, Atascosa, Webb and DeWitt Counties of South Texas (the “Marquis Assets”) in exchange for 909,091 shares of the Company’s common stock, valued at $20.0 million, and approximately $89.0 million in cash from the proceeds of the IPO. The acquisition was accounted for as a purchase of assets and recorded at cost at the acquisition date.

Also in connection with its IPO, on December 19, 2011, the Company entered into a services agreement and other related agreements with Sanchez Oil & Gas Corporation (“SOG” and together with its affiliates (excluding the Company but including SEP I) collectively referred to as members of the “Sanchez Group”), an affiliate of the Company, pursuant to which SOG (directly or through its subsidiaries) agreed to provide the Company with the services and data that the Company believes are necessary to manage, operate and grow its business, and the Company agreed to reimburse SOG for all direct and indirect costs incurred on its behalf.

On June 19, 2012 and September 17, 2012, SEP I distributed substantially all of the approximately 22.1 million shares of the Company’s common stock that SEP I owned to the partners of SEP I (the “Distribution”).  The 21,932,659 shares of common stock distributed to SEP I’s partners constituted 66.5% of the then issued and outstanding shares of the Company’s common stock.  The Distribution was a return on SEP I’s partners’ capital contributions to SEP I, thus no consideration was paid to SEP I for the shares of the Company’s common stock distributed.  Since June 19, 2012, the Company has not been under common control with SEP I.

Note 2.   Summary of Significant Accounting Policies

The accompanying condensed consolidated financial statements are unaudited and were prepared from the Company’s records.  The condensed consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP” or “U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.  The Company derived the condensed consolidated balance sheet as of December 31, 2012 from the audited financial statements filed in its Annual Report on Form 10-K for the fiscal year ended December 31, 2012 (the “2012 Annual Report”).  Because this is an interim period filing presented using a condensed format, it does not include all of the disclosures required by U.S. GAAP.  These condensed consolidated financial statements should be read in connection with the consolidated financial statements and notes thereto included in the 2012 Annual Report, which contains a summary of the Company’s significant accounting policies and other disclosures.  In the opinion of management, these financial statements include the adjustments and accruals, all of which are of a normal recurring nature, which are necessary for a fair presentation of the results for the interim periods.  These interim results are not necessarily indicative of results to be expected for the entire year.

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As of September 30, 2013, the Company’s significant accounting policies are consistent with those discussed in Note 2 in the notes to the Company’s consolidated financial statements contained in its 2012 Annual Report, as supplemented by the significant accounting policy set forth below.

Our acquisitions, except those acquisitions made between entities under common control, are accounted for under the acquisition method of accounting in accordance with ASC Topic 805, “Business Combinations” (“ASC Topic 805”). An acquisition may result in the recognition of a gain or goodwill based on the measurement of the fair value of the assets acquired at the acquisition date as compared to the fair value of consideration transferred, adjusted for purchase price adjustments. Any such gain or any loss resulting from the impairment of goodwill is recognized in current period earnings and classified in operating costs and expenses in the accompanying condensed consolidated statements of operations. The initial accounting for acquisitions may not be complete and adjustments to provisional amounts, or recognition of additional assets acquired or liabilities assumed, may occur as more detailed analyses are completed and additional information is obtained about the facts and circumstances that existed as of the acquisition dates. The results of operations of the properties acquired in our acquisitions have been included in the condensed consolidated financial statements since the closing dates of the acquisitions.

Basis of Presentation

The acquisition of oil and natural gas properties from SEP I was a transaction among entities under common control and accordingly, the Company recorded the assets and liabilities acquired at their historical carrying values and has presented the historical accounts of the SEP I Assets on a retrospective basis for all periods prior to the IPO presented in the consolidated financial statements.

SOG is a private oil and gas company engaged in the exploration for and development of oil and natural gas. SOG has historically acted as the operator of a significant portion of SEP I’s oil and natural gas properties. SOG provided all employee, management, and administrative support to SEP I and, for periods prior to December 19, 2011, a proportionate share of SOG’s general and administrative costs were allocated to the SEP I Assets. The costs of these services associated with the SEP I Assets were allocated to the SEP I Assets primarily based on the ratio of capital expenditures between the entities to which SOG provides services and the SEP I Assets. However, other factors, such as time spent on general management services and producing property activities, were also considered in the allocation of these costs. Management believes such allocations were reasonable; however, they may not be indicative of the actual expense that would have been incurred had the SEP I Assets been operated as an independent company for periods prior to December 19, 2011. On December 19, 2011, SOG began providing similar types of services to the Company under the services agreement as described below (Note 11).

Principles of Consolidation

The Company’s condensed consolidated financial statements include the accounts of the Company and its subsidiaries.  All intercompany balances and transactions have been eliminated.

Use of Estimates

The condensed consolidated financial statements are prepared in conformity with U.S. GAAP, which requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The most significant estimates pertain to proved oil and natural gas reserves and related cash flow estimates used in the depletion and impairment of oil and natural gas properties, fair value accounting for acquisitions, the evaluation of unproved properties for impairment, the fair value of commodity derivative contracts and asset retirement obligations, accrued oil and natural gas revenues and expenses and the allocation of general and administrative expenses. Actual results could differ materially from those estimates.

Reclassifications

Certain reclassifications have been made to the 2012 condensed consolidated financial statements to conform to the 2013 presentation.  These reclassifications were not material to the accompanying condensed consolidated financial statements.

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Note 3. Acquisitions

Our acquisitions, except those acquisitions made between entities under common control, are accounted for under the acquisition method of accounting in accordance with ASC Topic 805, “Business Combinations” (“ASC Topic 805”). An acquisition may result in the recognition of a gain or goodwill based on the measurement of the fair value of the assets acquired at the acquisition date as compared to the fair value of consideration transferred, adjusted for purchase price adjustments. Any such gain or any loss resulting from the impairment of goodwill is recognized in current period earnings and classified in operating costs and expenses in the accompanying condensed consolidated statements of operations. The initial accounting for acquisitions may not be complete and adjustments to provisional amounts, or recognition of additional assets acquired or liabilities assumed, may occur as more detailed analyses are completed and additional information is obtained about the facts and circumstances that existed as of the acquisition dates. The results of operations of the properties acquired in our acquisitions have been included in the condensed consolidated financial statements since the closing dates of the acquisitions.

Tuscaloosa Marine Shale (“TMS”) Asset Purchase

In August 2013, the Company completed its acquisition of assets, which consisted of undeveloped acreage in Mississippi and Louisiana covering the emerging TMS trend, from three sellers (two third parties and one related party of the Company) for total consideration of approximately $70 million in cash and the issuance of 342,760 common shares of the Company, valued at approximately $7.5 million.  The total consideration provided to SR Acquisition I, LLC (together with its parent company Sanchez Resources, LLC, where applicable, “SR”), an affiliate of the Company, was $14.4 million, and included $0.9 million in customary closing adjustments.  The acquisitions were accounted for as the purchase of assets at cost at the acquisition date.

Pursuant to the terms of the agreements, the Company established an Area of Mutual Interest (“AMI”) with SR in the TMS.  As part of the transactions, the Company acquired all of the working interests in the AMI owned by the third party plus a portion of SR’s working interests, resulting in the Company owning an undivided 50% working interest across the AMI through the TMS. The Company has further committed, as a part of the total consideration, to carry SR for its 50% working interest in an initial 3 gross (1.5 net) TMS wells to be drilled within the AMI and, at the Company’s election, it may carry SR in an additional 3 gross (1.5 net) TMS wells if it desires to participate in additional drilling within the AMI.

Cotulla Acquisition

On May 31, 2013, the Company completed the Cotulla acquisition for an aggregate adjusted purchase price of $281.6 million.  The effective date of the transaction was March 1, 2013.

The purchase price was funded with borrowings under the Company’s First Lien Credit Agreement, cash on hand, and proceeds from the Company’s private placement of the Series B Convertible Preferred Stock. The preliminary purchase price allocation for the Cotulla acquisition has been finalized except for the settlement of certain post-closing adjustments with the seller.  The total purchase price was allocated to the assets purchased and liabilities assumed in the Cotulla acquisition based upon fair values on the date of acquisition as follows (in thousands):

Proved oil and natural gas properties	$	265,468
Unproved properties	16,745
Other assets acquired	856
Fair value of assets acquired	283,069
Asset retirement obligations	(1,138		)
Other liabilities assumed	(351		)
Fair value of net assets acquired	$	281,580

The following unaudited pro forma combined results for each of the three and nine months ended September 30, 2013 and 2012 reflect the consolidated results of operations of the Company as if the Cotulla acquisition and related financings had occurred on January 1, 2012.  The pro forma information includes adjustments primarily for revenues and expenses from the acquired properties, depreciation, depletion, amortization and accretion, interest expense and debt issuance cost amortization for acquisition debt, and stock dividends for the issuance of preferred stock.

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The unaudited pro forma combined financial statements give effect to the events set forth below:

·The Cotulla acquisition completed May 31, 2013.

·The increase in borrowings under the First Lien Credit Agreement to finance a portion of the acquisition, and the related adjustments to interest expense.

·Issuance of Series B Convertible Preferred Stock and related adjustments to preferred dividends (in thousands, except per share amounts):

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2013			2012			2013		2012
Revenues	$	94,200		$	42,228		$	237,926	$	96,819
Net income (loss) attributable to common stockholders	$	(1,669	)	$	(2,747	)	$	407	$	(23,127	)
Net income (loss) per common share, basic and diluted	$	(0.05	)	$	(0.08	)	$	0.01	$	(0.70	)

The unaudited pro forma combined financial information is for informational purposes only and is not intended to represent or to be indicative of the combined results of operations that the Company would have reported had the Cotulla acquisition been completed as of the dates set forth in this unaudited pro forma combined financial information and should not be taken as indicative of the Company’s future combined results of operations. The actual results may differ significantly from that reflected in the unaudited pro forma combined financial information for a number of reasons, including, but not limited to, differences in assumptions used to prepare the unaudited pro forma combined financial information and actual results.

The amounts of revenue and revenues in excess of direct operating expenses included in the Company’s condensed consolidated statements of operations for the Cotulla acquisition are shown in the table that follows.  Direct operating expenses include lease operating expenses and production and ad valorem taxes (in thousands):

	Three Months Ended		Nine Months Ended
	September 30, 2013		September 30, 2013
Revenues	$	40,267	$	48,741
Excess of revenues over direct operating expenses	$	29,890	$	34,819

Note 4. Cash and Cash Equivalents

As of September 30, 2013 and December 31, 2012, cash and cash equivalents consisted of the following (in thousands):

	September 30,		December 31,
	2013		2012
Cash at banks	$	309,826	$	5,265
Money market funds	170,173		82
Commercial paper (1)	—		45,000
Total cash and cash equivalents	$	479,999	$	50,347

(1) These securities matured three months or less from date of purchase.

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Note 5. Investments

At September 30, 2013, the Company held certain investments in marketable securities as a means of temporarily investing the proceeds from its offering of the Senior Notes (defined below).  The Company classified these securities as held-to-maturity investments on the condensed consolidated balance sheet.  At December 31, 2012, the Company held certain investments in marketable securities as a means of temporarily investing the proceeds from its Series A Convertible Preferred Stock offering until the funds were needed for operating purposes.  At the time of acquisition, the Company classified these securities as “available-for-sale” due primarily to the Company’s potential liquidity requirements that could result in these securities being sold prior to maturity.

The Company’s investments as of September 30, 2013 and December 31, 2012 consisted of the following (in thousands):

	September 30,		December 31,
	2013		2012
Commercial paper	$	—	$	7,500
Corporate notes and bonds	10,000		4,091
Total investments	$	10,000	$	11,591

The Company’s investments as of September 30, 2013 consisted of held-to-maturity securities, and accordingly are to be measured at their amortized cost basis on the condensed consolidated balance sheet.  The Company purchased its existing investments at an immaterial discount and therefore has not reflected that discount or the subsequent amortization separately in the condensed consolidated financial statements.  As of September 30, 2013, we recorded a $0.1 million loss on the sale of investments during the period.  There were no gains or losses recorded on investments held as of September 30, 2013 and December 31, 2012 due to the fact that the fair value of these investments approximated the costs paid for these securities.

Note 6.  Oil and Natural Gas Properties

The Company’s oil and natural gas properties are accounted for using the full cost method of accounting.  All direct costs and certain indirect costs associated with the acquisition, exploration and development of oil and natural gas properties are capitalized. Once evaluated, these costs, as well as the estimated costs to retire the assets, are included in the amortization base and amortized to depletion expense using the units-of-production method.  Depletion is calculated based on estimated proved oil and natural gas reserves.  Proceeds from the sale or disposition of oil and natural gas properties are applied to reduce net capitalized costs unless the sale or disposition causes a significant change in the relationship between costs and the estimated quantity of proved reserves.

Capitalized costs (net of accumulated depreciation, depletion and amortization and deferred income taxes) of proved oil and natural gas properties are subject to a full cost ceiling limitation.  The ceiling limits these costs to an amount equal to the present value, discounted at 10%, of estimated future net cash flows from estimated proved reserves less estimated future operating and development costs, abandonment costs (net of salvage value) and estimated related future income taxes.  In accordance with SEC rules, the oil and natural gas prices used to calculate the full cost ceiling are the 12-month average prices, calculated as the unweighted arithmetic average of the first-day-of-the-month price for each month within the 12-month period prior to the end of the reporting period, unless prices are defined by contractual arrangements. Prices are adjusted for “basis” or location differentials.  Prices are held constant over the life of the reserves.  If unamortized costs capitalized within the cost pool exceed the ceiling, the excess is charged to expense and separately disclosed during the period in which the excess occurs. Amounts thus required to be written off are not reinstated for any subsequent increase in the cost center ceiling.  No impairment expense was recorded for the three and nine month periods ended September 30, 2013 or 2012.

Investments in unproved properties and major development projects are capitalized and excluded from the amortization base until proved reserves associated with the projects can be determined or until impairment occurs.  Once the assessment of unproved properties is complete and when major development projects are evaluated, the costs previously excluded from amortization are transferred to the full cost pool subject to periodic amortization.  The Company assesses the carrying value of its unproved properties that are not subject to amortization for impairment periodically.  If the results of an assessment indicate that the properties are impaired, the amount of the asset impaired is added to the full cost pool subject to both periodic amortization and the ceiling test.

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Note 7. Long-Term Debt

Long-term debt at September 30, 2013 consisted of $600 million principal amount under the 7.75% Senior Notes (as defined below), including the Additional Notes (as defined below) which were issued at a discount to face value of $7.0 million, maturing on June 15, 2021.  The Company did not have any long-term debt outstanding at December 31, 2012.

Credit Facility

Previous Credit Agreements:  On November 16, 2012, we and our subsidiaries, SEP Holdings III and Marquis LLC (collectively referred to with us as the “Original Borrowers”), entered into the Previous First Lien Credit Agreement, dated as of November 15, 2012, among the Original Borrowers, as borrowers, Capital One, National Association, as administrative agent, sole lead arranger and sole book runner, and each of the other lenders party thereto. The Previous First Lien Credit Agreement provided for a $250 million revolving credit facility which was to mature November 16, 2015 and was secured by a senior lien on substantially all of the assets of the Original Borrowers. The borrowing base under the Previous First Lien Credit Agreement, initially set at $27.5 million, was increased to $95 million on February 21, 2013.

Also on November 16, 2012, we entered into the Second Lien Term Credit Agreement (the “Second Lien Term Credit Agreement”), dated as of November 15, 2012, among the Original Borrowers, as borrowers, Macquarie Bank Limited, as administrative agent, sole lead arranger and sole book runner, and the other lenders party thereto. The Second Lien Term Credit Agreement provided for a $250 million term loan facility which was to mature May 16, 2016 and was secured by a lien on substantially all of the assets of the Original Borrowers that was junior to the liens on such assets under the Previous First Lien Credit Agreement. The Second Lien Term Credit Agreement provided for an initial commitment of $50 million, subject to customary conditions, with the remaining commitments subject to the approval of the lenders and other customary conditions.  We borrowed $50 million under the Second Lien Term Credit Agreement in January 2013.

In connection with the purchase and sale agreement to purchase the Cotulla assets (Note 3), the Company entered into commitment letters for $325 million in debt financing and issued the Series B Convertible Preferred Stock.  The $325 million in debt financing contemplated by the commitment letters consisted of an amendment and restatement of the Company’s Previous First Lien Credit Agreement to increase the borrowing base from $95 million to $175 million and a $150 million bridge loan credit facility.  Availability of the debt financing was conditioned upon, and was intended to be available concurrently with, the closing of the Cotulla acquisition and was subject to the satisfaction of various customary closing conditions, including the execution and delivery of definitive documents. On May 30, 2013, the Company borrowed $90 million under its Previous First Lien Credit Agreement.  The Company did not enter into a definitive agreement for the bridge loan credit facility and it was never activated.

Current Credit Agreement:  On May 31, 2013, the Original Borrowers and a new subsidiary of the Company, SN Cotulla Assets, LLC (“SN Cotulla”) (collectively, the “Borrowers”) entered into the First Lien Credit Agreement with Royal Bank of Canada as the administrative agent, Capital One, National Association as the syndication agent and RBC Capital Markets as sole lead arranger and sole book runner and each of the other lenders party thereto.

The First Lien Credit Agreement amended and restated the Previous First Lien Credit Agreement in its entirety to renew, extend and rearrange the debt outstanding under the Previous First Lien Credit Agreement (but not to repay or pay off such debt) and to, among other things, (i) replace Capital One with Royal Bank of Canada as administrative agent and issuing bank, (ii) increase the maximum credit amount to $500 million, (iii) increase the borrowing base to $175 million, and (iv) make certain other amendments.   The Borrowers’ obligations under the First Lien Credit Agreement are secured by a first priority lien on substantially all of their assets and the assets of the Company’s existing and future subsidiaries not designated as “unrestricted subsidiaries,” including a first priority lien on all ownership interests in existing and future subsidiaries. Availability under the First Lien Credit Agreement is at all times subject to customary conditions and the then applicable borrowing base, which was initially set at $175 million and is subject to periodic redetermination. The borrowing base was also subject to reduction by 25% of the amount of the increase in the Borrowers’ net debt (taking into consideration any required repayment of debt) resulting from the issuance of certain debt, including pursuant to the issuance of the Senior Notes (as defined below). The borrowing base can be redetermined up or down by the lenders based on, among other things, their evaluation of the Company’s oil and natural gas reserves.  All borrowings under the First Lien Credit Agreement bear interest, at the option of the Borrowers, either at an alternate base rate or a eurodollar rate.  The alternate base rate of interest is equal to the sum of (a) the greatest of (i) the administrative agent’s U.S. “prime rate”, (ii) the federal funds effective rate plus ½ of 1% and (iii) the one-month LIBO Rate multiplied by the statutory reserve rate, plus 1% and (b) the applicable margin.  The eurodollar rate of interest is equal to the sum of (x) the LIBO Rate for the applicable interest period multiplied by the statutory reserve rate and (y) the applicable margin.  The applicable margin varies from 1.00% to 1.75% for alternate base rate borrowings and from 2.00% to 2.75% for

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eurodollar borrowings, depending on the utilization of the borrowing base.  Furthermore, the Borrowers are required to pay a commitment fee on the unused committed amount at a rate varying from 0.375% to 0.50% per annum, depending on the utilization of the borrowing base. Additionally, the First Lien Credit Agreement provides for the issuance of letters of credit, limited in the aggregate to the lesser of $20 million and the total availability thereunder. As of September 30, 2013, there were no letters of credit outstanding.

The First Lien Credit Agreement contains various affirmative and negative covenants and events of default that limit the Borrowers’ ability to, among other things, incur indebtedness, make restricted payments, grant liens, consolidate or merge, dispose of certain assets, make certain investments, engage in transactions with affiliates and hedge transactions and make certain acquisitions. Furthermore, the First Lien Credit Agreement contains financial covenants that require the Borrowers to satisfy certain specified financial ratios, including (i) current assets to current liabilities of at least 1.0 to 1.0 and (ii) net debt to consolidated EBITDA of not greater than 4.0 to 1.0. Upon an event of default, the administrative agent may, at its election or at the direction of lenders holding, as applicable, at least 50% of (i) the maximum committed amounts (if no borrowings or letters of credit are outstanding) or (ii) the outstanding borrowings and letter of credit exposure (if borrowings or letters of credit are outstanding) thereunder, accelerate the amounts due under the First Lien Credit Agreement. The obligations under the First Lien Credit Facility are guaranteed by all of the Company’s existing and future subsidiaries not designated as ‘‘unrestricted subsidiaries.” As of September 30, 2013, the Company was in compliance with the covenants of the First Lien Credit Agreement.

On May 31, 2013, the Borrowers entered into several conforming and technical amendments to the Second Lien Term Credit Agreement.  Pursuant to its terms, the First Lien Credit Agreement matures on May 31, 2018.  However, the First Lien Credit Agreement would mature on November 16, 2015 if the Second Lien Term Credit Agreement were not repaid in full on or before November 16, 2015.  On May 31, 2013, the Company borrowed $96 million under its First Lien Credit Agreement.  The Company used proceeds from this borrowing to repay the $90 million outstanding under the Previous First Lien Credit Agreement.  On June 13, 2013, the Company used proceeds from its Senior Notes (as defined below) offering described below to repay the $96 million outstanding under the First Lien Credit Agreement and the $50 million outstanding under the Second Lien Term Credit Agreement.  The Second Lien Term Credit Agreement was retired with no further availability.  On July 3, 2013, Macquarie Bank Limited novated its rights and obligations under hedging agreements with the Company to Société Générale, a lender under the First Lien Credit Agreement.  The borrowing base on the First Lien Credit Agreement was increased to $175 million as a result of the redetermination conducted by the banks based upon the Company’s June 30, 2013 updated reserves and remains $175 million as of September 30, 2013. The next redetermination of the borrowing base was scheduled to occur on or before October 1, 2013 and that process is currently underway, with other redeterminations scheduled to occur quarterly through July 1, 2014 and then semi-annually thereafter on April 1 and October 1 of each year.

From time to time, the agents and lenders under the First Lien Credit Agreement and their affiliates have provided, and may provide in the future, investment banking, commercial lending, hedging and financial advisory services to the Company and its affiliates in the ordinary course of business, for which they have received, or may in the future receive, customary fees and commissions for these transactions.

7.75% Senior Notes Due 2021

On June 13, 2013, the Company completed a private offering to eligible purchasers of $400 million in aggregate principal amount of the Company’s 7.75% senior notes that will mature on June 15, 2021 (the “Original Notes”).  Interest is payable on each June 15 and December 15, commencing December 15, 2013.  The Company received net proceeds from this offering of approximately $388 million, after deducting initial purchasers’ discounts and estimated offering expenses, which the Company used to repay all of the approximately $96 million in borrowings outstanding under its First Lien Credit Agreement and to retire the Second Lien Term Credit Agreement by repaying in full the $50 million in borrowings outstanding.  The Original Notes are the senior unsecured obligations of the Company and are guaranteed on a joint and several senior unsecured basis by, with certain exceptions, substantially all of the Company’s existing and future subsidiaries.   The borrowing base under the Company’s First Lien Credit Agreement was reduced to $87.5 million upon issuance of the Original Notes, and was later increased to $175 million, all of which is available for future revolver borrowings as of September 30, 2013.

On September 18, 2013, the Company issued an additional $200 million in aggregate principal amount of its 7.750% senior notes due 2021 (the “Additional Notes” and, together with the Original Notes, the “Senior Notes”) in a private offering to eligible purchasers at a price to the purchasers of 96.5% of the Additional Notes.  The Company received net proceeds from this offering of approximately $188.8 million, after deducting the initial purchasers’ discounts and estimated offering expenses of approximately $4.2

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million.  The Company also received cash for accrued interest from June 13, 2013 through the date of issuance of $4.1 million.  The Additional Notes were issued under the same indenture as the Original Notes, and are therefore treated as a single class of debt securities under the indenture.  The Company used the net proceeds from the offering to partially fund the acquisition of Wycross properties (the “Wycross acquisition”), completed in October 2013, and intends to use the remaining proceeds to fund a portion of the 2013 capital budget, a portion of the preliminary 2014 capital budget, and for general corporate purposes.

The Senior Notes are the senior unsecured obligations of the Company and rank equally in right of payment with all of the Company’s existing and future senior unsecured indebtedness. The Senior Notes rank senior in right of payment to the Company’s future subordinated indebtedness. The Senior Notes are effectively junior in right of payment to all of the Company’s existing and future secured debt (including under the First Lien Credit Agreement) to the extent of the value of the assets securing such debt. The Senior Notes are fully and unconditionally guaranteed on a joint and several senior unsecured basis by the subsidiary guarantors party to the indenture governing the Senior Notes (collectively, the “Subsidiary Guarantors”). To the extent set forth in the indenture governing the Senior Notes, certain subsidiaries of the Company will be required to fully and unconditionally guarantee the Senior Notes on a joint and several senior unsecured basis in the future.

The indenture governing the Senior Notes, among other things, restricts the Company’s ability and the ability of the Company’s restricted subsidiaries to: (i) incur additional indebtedness or issue preferred stock; (ii) pay dividends or make other distributions; (iii) make other restricted payments and investments; (iv) create liens on their assets; (v) incur restrictions on the ability of restricted subsidiaries to pay dividends or make certain other payments; (vi) sell assets, including capital stock of restricted subsidiaries; (vii) merge or consolidate with other entities; and (viii) enter into transactions with affiliates.

The Company has the option to redeem all or a portion of the Senior Notes, at any time on or after June 15, 2017 at the applicable redemption prices specified in the indenture plus accrued and unpaid interest. The Company may also redeem the Senior Notes, in whole or in part, at a redemption price equal to 100% of their principal amount plus a make whole premium, together with accrued and unpaid interest and additional interest, if any, to the redemption date, at any time prior to June 15, 2017. In addition, the Company may redeem up to 35% of the Senior Notes prior to June 15, 2016 under certain circumstances with the net cash proceeds from certain equity offerings at the redemption price specified in the indenture. The Company may also be required to repurchase the Senior Notes upon a change of control.

Note 8.  Derivative Instruments

To reduce the impact of fluctuations in oil and natural gas prices on the Company’s revenues, or to protect the economics of property acquisitions, the Company periodically enters into derivative contracts with respect to a portion of its projected oil and natural gas production through various transactions that fix or, through options, modify the future prices to be realized. These transactions may include price swaps whereby the Company will receive a fixed price for its production and pay a variable market price to the contract counterparty. Additionally, the Company may enter into collars, whereby it receives the excess, if any, of the fixed floor over the floating rate or pays the excess, if any, of the floating rate over the fixed ceiling price. In addition, the Company enters into option transactions, such as puts or put spreads, as a way to manage its exposure to fluctuating prices. These hedging activities are intended to support oil and natural gas prices at targeted levels and to manage exposure to oil and natural gas price fluctuations. It is never the Company’s intention to enter into derivative contracts for speculative trading purposes.

Under Accounting Standards Codification (“ASC”) Topic 815, “Derivatives and Hedging,” all derivative instruments are recorded on the condensed consolidated balance sheets at fair value as either short-term or long-term assets or liabilities based on their anticipated settlement date. The Company will net derivative assets and liabilities for counterparties where it has a legal right of offset.  Changes in the derivatives’ fair values are recognized currently in earnings unless specific hedge accounting criteria are met.  The Company has elected not to designate its current derivative contracts as hedges.  Therefore, changes in the fair value of these instruments are recognized in earnings and included as realized and unrealized gains (losses) on derivative instruments in the condensed consolidated statements of operations.

As of September 30, 2013, the Company had the following crude oil swaps, options, and put spreads covering anticipated future production as indicated below:

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	Derivative
Contract Period	Instrument	Barrels	Purchased		Sold
October 1, 2013 - December 31, 2013	Put Spread	92,000	$	95.00	$	75.00
October 1, 2013 - December 31, 2013	Swap	46,000	$	97.10	n/a
October 1, 2013 - December 31, 2013	Swap	92,000	$	88.90	n/a
October 1, 2013 - December 31, 2013	Put Spread	92,000	$	90.00	$	75.00
October 1, 2013 - December 31, 2013	Swap	69,000	$	94.50	n/a
October 1, 2013 - December 31, 2013	Swap	69,000	$	95.25	n/a
October 1, 2013 - December 31, 2013	Swap	92,000	$	96.80	n/a
October 1, 2013 - December 31, 2013	Swap	46,000	$	103.69	n/a
October 1, 2013 - December 31, 2013	Swap	46,000	$	103.70	n/a
January 1, 2014 - December 31, 2014	Swap	273,750	$	91.35	n/a
January 1, 2014 - December 31, 2014	Swap	273,750	$	92.45	n/a
January 1, 2014 - December 31, 2014	Swap	273,750	$	92.00	n/a
January 1, 2014 - June 30, 2014	Swap	90,500	$	97.19	n/a
January 1, 2014 - December 31, 2014	Swap	365,000	$	95.45	n/a
January 1, 2014 - December 31, 2014	Asian Option	365,000	$	90.00	$	99.10
July 1, 2014 - December 31, 2014	Put Spread	184,000	$	90.00	$	75.00

As of September 30, 2013, the Company had the following three-way crude oil collar contracts that combine a long and short put with a short call as indicated below:

Contract Period	Barrels	Short Put		Long Put		Short Call		Pricing Index
January 1, 2014 - December 31, 2014	547,500	$	65.00	$	85.00	$	102.25	NYMEX West Texas Intermediate crude
January 1, 2014 - December 31, 2014	365,000	$	75.00	$	95.00	$	107.50	Louisiana light sweet crude

The Company deferred the payment of premiums associated with certain of its oil derivative instruments.  At September 30, 2013, the balance of deferred payments totaled approximately $1.2 million. These premiums are being paid to the counterparty with each monthly settlement beginning July 2013.

Balance Sheet Presentation

The Company’s derivatives are presented on a net basis as “Fair value of derivative instruments” on the condensed consolidated balance sheets.  The following table summarizes the gross fair values of derivative instruments, presenting the impact of offsetting the derivative assets and liabilities on the Company’s condensed consolidated balance sheets for the periods indicated (in thousands):

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	September 30, 2013
				Gross Amounts			Net Amounts
				Offset in the			Presented in
	Gross Amount			Condensed			the Condensed
	of Recognized			Consolidated			Consolidated
	Assets			Balance Sheets			Balance Sheets
Offsetting Derivative Assets:
Current asset	$	3,396		$	(3,356	)	$	40
Long-term asset	1,860			(1,437		)	423
Total asset	$	5,256		$	(4,793	)	$	463
Offsetting Derivative Liabilities:
Current liability	$	(10,389	)	$	3,356		$	(7,033	)
Long-term liability	(1,915		)	1,437			(478		)
Total liability	$	(12,304	)	$	4,793		$	(7,511	)

	December 31, 2012
				Gross Amounts			Net Amounts
				Offset in the			Presented in
	Gross Amount			Condensed			the Condensed
	of Recognized			Consolidated			Consolidated
	Assets			Balance Sheets			Balance Sheets
Offsetting Derivative Assets:
Current asset	$	37,012		$	(34,867	)	$	2,145
Long-term asset	—			—			—
Total asset	$	37,012		$	(34,867	)	$	2,145
Offsetting Derivative Liabilities:
Current liability	$	(34,867	)	$	34,867		$	—
Long-term liability	—			—			—
Total liability	$	(34,867	)	$	34,867		$	—

Gain (Loss) on Derivatives

Gains and losses on derivatives are reported on the condensed consolidated statements of operations as “Realized and unrealized gains (losses) on derivative instruments.”  Realized gains (losses) represent amounts related to the settlement of derivative instruments or the expiration of contracts.  Unrealized gains (losses) represent the change in fair value of the derivative instruments to be settled in the future and are non-cash items which fluctuate in value as commodity prices change.  The following summarizes the Company’s realized and unrealized gains (losses) on derivative instruments for the three and nine months ended September 30, 2013 and 2012 (in thousands):

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	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2013			2012			2013			2012
Realized losses on derivative instruments	$	(5,531	)	$	(87	)	$	(6,992	)	$	(785	)
Unrealized gains (losses) on derivative instruments	(8,905		)	(2,104		)	(6,820		)	1,594
Total realized and unrealized gains (losses) on derivative instruments	$	(14,436	)	$	(2,191	)	$	(13,812	)	$	809

Note 9.Fair Value of Financial Instruments

Measurements of fair value of derivative instruments are classified according to the fair value hierarchy, which prioritizes the inputs to the valuation techniques used to measure fair value. Fair value is the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements are classified and disclosed in one of the following categories:

Level 1: Measured based on unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. Active markets are considered those in which transactions for the assets or liabilities occur in sufficient frequency and volume to provide pricing information on an ongoing basis.

Level 2: Measured based on quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability. This category includes those derivative instruments that can be valued using observable market data. Substantially all of these inputs are observable in the marketplace throughout the term of the derivative instrument, can be derived from observable data, or supported by observable levels at which transactions are executed in the marketplace.

Level 3: Measured based on prices or valuation models that require inputs that are both significant to the fair value measurement and less observable from objective sources (i.e. supported by little or no market activity). The valuation models used to value derivatives associated with the Company’s oil and natural gas production are primarily industry standard models that consider various inputs including: (a) quoted forward prices for commodities, (b) time value, and (c) current market and contractual prices for the underlying instruments, as well as other relevant economic measures. Although third party quotes are utilized to assess the reasonableness of the prices and valuation techniques, there is not sufficient corroborating evidence to support classifying these assets and liabilities as Level 2.

Financial assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurement. Management’s assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of the fair value of assets and liabilities and their placement within the fair value hierarchy levels.

Fair Value on a Recurring Basis

The following tables set forth, by level within the fair value hierarchy, the Company’s financial assets and liabilities that were accounted for or disclosed at fair value on a recurring basis as of September 30, 2013 and December 31, 2012 (in thousands):

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	As of September 30, 2013
	Active Market
	for Identical		Observable			Unobservable			Total
	Assets		Inputs			Inputs			Carrying
	(Level 1)		(Level 2)			(Level 3)			Value
Cash and cash equivalents:
Money market funds	$	170,173	$	—		$	—		$	170,173
Investments:
Corporate notes and bonds	—		10,000			—			10,000
Oil derivative instruments:
Swaps	—		(5,245		)	—			(5,245		)
Three-way collars	—		—			(138		)	(138		)
Asian Options	—		—			(32		)	(32		)
Puts	—		—			(414		)	(414		)
Debt:
Senior Notes	—		586,500			—			586,500
Total	$	170,173	$	591,255		$	(584	)	$	760,844

	As of December 31, 2012
	Active Market
	for Identical		Observable			Unobservable		Total
	Assets		Inputs			Inputs		Carrying
	(Level 1)		(Level 2)			(Level 3)		Value
Cash and cash equivalents:
Commercial paper	$	—	$	45,000		$	—	$	45,000
Money market funds	82		—			—		82
Investments:
Commercial paper	—		7,500			—		7,500
Corporate notes and bonds	—		4,091			—		4,091
Oil derivative instruments:
Swaps	—		(870		)	—		(870		)
Puts	—		—			3,015		3,015
Total	$	82	$	55,721		$	3,015	$	58,818

The Level 1 instruments presented in the table above consist of money market funds included in cash and cash equivalents on the Company’s condensed consolidated balance sheets at September 30, 2013 and December 31, 2012. The Company’s money market funds represent cash equivalents backed by the assets of high-quality banks and financial institutions.  The Company identified the money market funds as Level 1 instruments due to the fact that the money market funds have daily liquidity, quoted prices for the underlying investments can be obtained and there are active markets for the underlying investments.

The Level 2 instruments presented in the table above include commercial paper and corporate notes and bonds included in cash and cash equivalents and investments on the Company’s condensed consolidated balance sheet at September 30, 2013 and December 31, 2012.  The Company identified the commercial paper and corporate notes and bonds as Level 2 instruments due to the fact that although the assets do not have regular market pricing, their fair value can be readily determined based on other data values

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or market prices. These asset values can be closely approximated using simple models and extrapolation methods using known, observable prices as parameters.

The Company uses a market approach to determine fair value of its Senior Notes using observable market data, which results in a Level 2 fair value measurement.  The estimated fair value of the Company’s Senior Notes was $586.5 million at September 30, 2013.

The Company’s oil derivative instruments, which consist of oil swaps, options, and puts, are classified as either Level 2 or Level 3 in the table above.  The fair value of the Company’s derivatives is based on third-party pricing models which utilize inputs that are either readily available in the public market, such as oil forward curves, or can be corroborated from active markets of broker quotes.  These values are then compared to the values given by the Company’s counterparties for reasonableness.  Since oil swaps do not include optionality and therefore generally have no unobservable inputs, they are classified as Level 2.  The Company’s oil puts, Asian options and three-way collars include some level of unobservable input, such as volatility curves, and are therefore classified as Level 3.   Derivative instruments are also subject to the risk that counterparties will be unable to meet their obligations. Such non-performance risk is considered in the valuation of the Company’s derivative instruments, but to date has not had a material impact on estimates of fair values. Significant changes in the quoted forward prices for commodities and changes in market volatility generally lead to corresponding changes in the fair value measurement of the Company’s oil derivative instruments.

The fair values of the Company’s oil derivative instruments classified as Level 3 at September 30, 2013 and December 31, 2012 were ($0.6) million and $3.0 million, respectively.  The significant unobservable inputs for Level 3 contracts include unpublished forward prices of oil, market volatility and credit risk of counterparties.  Changes in these inputs will impact the fair value measurement of the Company’s derivative contracts.

The following table sets forth a reconciliation of changes in the fair value of the Company’s oil derivative instruments classified as Level 3 in the fair value hierarchy (in thousands):

	Significant Unobservable Inputs
	(Level 3)
	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2013			2012			2013			2012
Beginning balance	$	3,003		$	7,369		$	3,015		$	1,461
Realized and unrealized gains (losses) included in earnings	(4,305		)	(2,191		)	(4,154		)	809
Settlements	—			(962		)	(163		)	(1,190		)
Purchase of derivative contracts	718			—			718			2,952
Buy out of derivative contracts	—			—			—			184
Ending balance	$	(584	)	$	4,216		$	(584	)	$	4,216
Change in unrealized gains (losses) included in earnings related to derivatives still held as of September 30, 2013 and 2012	$	(3,338	)	$	(1,994	)	$	(2,445	)	$	1,523

Fair Value on a Non-Recurring Basis

The Company follows the provisions of ASC 820-10 for nonfinancial assets and liabilities measured at fair value on a non-recurring basis.  Fair-value measurements of assets acquired and liabilities assumed are based on inputs that are not observable in the market and thus represent Level 3 inputs. The fair value of acquired properties is based on market and cost approaches. Our purchase price allocation for the Cotulla acquisition is presented in Note 3.  Liabilities assumed include asset retirement obligations existing at the date of acquisition.  The asset retirement obligation estimates are derived from historical costs as well as management’s expectation of future cost environments.  As there is no corroborating market activity to support the assumptions, the Company has

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designated these liabilities as Level 3.  A reconciliation of the beginning and ending balances of the Company’s asset retirement obligations is presented in Note 10.

Note 10.Asset Retirement Obligations

Asset retirement obligations represent the present value of the estimated cash flows expected to be incurred to plug, abandon and remediate producing properties, excluding salvage values, at the end of their productive lives in accordance with applicable laws. The significant unobservable inputs to this fair value measurement include estimates of plugging, abandonment and remediation costs, well life, inflation and credit-adjusted risk-free rate. The inputs are calculated based on historical data as well as current estimates. When the liability is initially recorded, the carrying amount of the related long-lived asset is increased. Over time, accretion of the liability is recognized each period, and the capitalized cost is amortized over the useful life of the related asset. Upon settlement of the liability, any gain or loss is treated as an adjustment to the full cost pool.

The changes in the asset retirement obligation for the nine months ended September 30, 2013 and 2012 were as follows (in thousands):

	2013		2012
Abandonment liability as of January 1,	$	546	$	83
Liabilities incurred during period	727		205
Acquisitions	1,138		—
Revisions	968		—
Accretion expense	128		9
Abandonment liability as of September 30,	$	3,507	$	297

During the first quarter of 2013, the Company reviewed its asset retirement obligation estimates. A quote was obtained from a third party that indicated anticipated costs for future abandonment had increased from previous estimates.  As a result, the Company increased its estimates of future asset retirement obligations by $1.0 million to reflect anticipated increased costs for plugging and abandonment.

Note 11.   Related Party Transactions

SOG, headquartered in Houston, Texas, is a private full service oil and natural gas company engaged in the exploration and development of oil and natural gas primarily in the South Texas and onshore Gulf Coast areas on behalf of its affiliates.   The Company refers to SOG, SEP I, and their affiliates (but excluding the Company) collectively as the “Sanchez Group.”

The Company does not have any employees.  On December 19, 2011 it entered into a services agreement with SOG pursuant to which specified employees of SOG provide certain services with respect to the Company’s business under the direction, supervision and control of SOG. Pursuant to this arrangement, SOG performs centralized corporate functions for the Company, such as general and administrative services, geological, geophysical and reserve engineering, lease and land administration, marketing, accounting, operational services, information technology services, compliance, insurance maintenance and management of outside professionals. The Company compensates SOG for the services at a price equal to SOG’s cost of providing such services, including all direct costs and indirect administrative and overhead costs (including the allocable portion of salary, bonus, incentive compensation and other amounts paid to persons that provide the services on SOG’s behalf) allocated in accordance with SOG’s regular and consistent accounting practices, including for any such costs arising from amounts paid directly by other members of the Sanchez Group on SOG’s behalf or borrowed by SOG from other members of the Sanchez Group, in each case, in connection with the performance by SOG of services on the Company’s behalf. The Company also reimburses SOG for sales, use or other taxes, or other fees or assessments imposed by law in connection with the provision of services to the Company (other than income, franchise or margin taxes measured by SOG’s net income or margin and other than any gross receipts or other privilege taxes imposed on SOG) and for any costs and expenses arising from or related to the engagement or retention of third party service providers.

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The initial term of the services agreement is five years. The term will automatically extend for additional 12-month periods unless either party provides 180 days written notice otherwise prior to the expiration of the applicable 12-month period. Either party may terminate the agreement at any time upon 180 days written notice.

In connection with the services agreement, SOG also entered into a licensing agreement with the Company pursuant to which it granted to the Company a license to the unrestricted use of proprietary seismic, geological and geophysical information related to the Company’s properties owned by SOG, and all such information related to the Company’s properties not otherwise licensed to the Company will be interpreted and used by SOG for the Company’s benefit under the services agreement. In addition, SOG entered into a contract operating agreement with the Company under which SOG agreed to develop, manage and operate the Company’s properties or engage a responsible unaffiliated industry operator and joint owner for such development, management and operation.  No costs, fees or other expenses are payable by the Company under these agreements. The licensing agreement and contract operating agreement will terminate concurrently with the termination or expiration of the services agreement.

Prior to entering into the services agreement, SOG incurred general and administrative expenses that were allocated to the Company based on the ratio of capital expenditures between the entities to which SOG provided services and the SEP I Assets.  Other factors, such as time spent on general management services and producing property activities, were also considered in the allocation of these costs.  Beginning December 19, 2011, the costs were allocated to the Company according to the terms of the services agreement.  Salaries and associated benefit costs of SOG employees are allocated to the Company based on the actual time spent by the professional staff on the properties and business activities of the Company. General and administrative costs, such as office rent, utilities, supplies, and other overhead costs, are allocated to the Company based on a fixed percentage that is reviewed quarterly and adjusted, if needed, based on the activity levels of services provided to the Company. General and administrative costs that are specifically incurred by or for the specific benefit of the Company are charged directly to the Company.  Expenses allocated to the Company for general and administrative expenses for the three and nine months ended September 30, 2013 and 2012 are as follows (in thousands):

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2013		2012		2013		2012
Administrative fees	$	4,638	$	1,341	$	10,540	$	3,586
Third-party expenses	2,287		667		4,571		3,065
Total included in general and administrative expenses	$	6,925	$	2,008	$	15,111	$	6,651

As of September 30, 2013 and December 31, 2012, the Company had a net payable to SOG and other members of the Sanchez Group of $0.8 million and $13.5 million, respectively, which is reflected as “Accounts payable — related entities” in the condensed consolidated balance sheets.  This amount consists primarily of obligations for general and administrative costs due to SOG and revenue payable to affiliated entities.

In August 2013, the Company completed its acquisition of undeveloped acreage in the TMS trend from two third parties, and one related party of the Company, SR.  The total consideration paid to SR was approximately $14.4 million, and included $0.9 million in customary closing adjustments.  Because the transactions included a related party, our audit committee, which is comprised entirely of independent directors, reviewed and approved these transactions.  In connection with the approval of these transactions, our audit committee received a fairness opinion from an independent financial advisor selected by the committee.

Note 12. Accrued Liabilities

The following information summarizes accrued liabilities as of September 30, 2013 and December 31, 2012 (in thousands):

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	September 30,		December 31,
	2013		2012
Capital expenditures	$	82,402	$	43,560
General and administrative costs	3,401		268
Production taxes	1,942		471
Ad valorem taxes	2,153		114
Lease operating expenses	6,365		415
Interest payable	13,821		—
Total accrued liabilities	$	110,084	$	44,828

Note 13. Stockholders’ Equity

Common Stock Offerings - On December 19, 2011, the Company completed its IPO of 10.0 million shares of common stock, par value $0.01 per share, at a price to the public of $22.00 per share.  The Company received net proceeds of approximately $203.3 million from the sale of the shares of common stock (net of expenses and underwriting discounts and commissions).

On September 18, 2013, the Company completed a public offering of 11,040,000 shares of common stock (including 1,440,000 shares purchased pursuant to the full exercise of the underwriters’ overallotment option), at an issue price of $23.00 per share.  The Company received net proceeds from this offering of approximately $241.5 million, after deducting underwriters’ fees and offering expenses of approximately $12.4 million.  The Company used the net proceeds from the offering to partially fund the Wycross acquisition, completed in October 2013, and intends to use the remaining proceeds to fund a portion of the 2013 capital budget, a portion of the preliminary 2014 capital budget, and for general corporate purposes.

Series A Convertible Preferred Stock Offering - On September 17, 2012, the Company completed a private placement of 3,000,000 shares of Series A Convertible Preferred Stock, which were sold to a group of qualified institutional buyers pursuant to the Rule 144A exemption from registration under the Securities Act. The issue price of each share of the Series A Convertible Preferred Stock was $50.00. The Company received net proceeds from the private placement of approximately $144.5 million, after deducting initial purchasers’ discounts and commissions and offering costs payable by the Company of approximately $5.5 million.

Pursuant to the Certificate of Designations for the Series A Convertible Preferred Stock, each share of Series A Convertible Preferred Stock is convertible at any time at the option of the holder thereof at an initial conversion rate of 2.3250 shares of common stock per share of Series A Convertible Preferred Stock (which is equal to an initial conversion price of approximately $21.51 per share of common stock) and is subject to specified adjustments. Based on the initial conversion price, approximately 6,975,000 shares of common stock would be issuable upon conversion of all of the outstanding shares of the Series A Convertible Preferred Stock.

The annual dividend on each share of Series A Convertible Preferred Stock is 4.875% on the liquidation preference of $50 per share and is payable quarterly, in arrears, on each January 1, April 1, July 1 and October 1, commencing on January 1, 2013, when, as and if declared by the Company’s Board of Directors (the “Board”). No dividends were accrued or accumulated prior to September 17, 2012. The Company may, at its option, pay dividends in cash and, subject to certain conditions, common stock or any combination thereof.  As of September 30, 2013, there were $1.8 million in accrued dividends that had been declared but had not yet been paid.

Except as required by law or the Company’s Amended and Restated Certificate of Incorporation, holders of the Series A Convertible Preferred Stock will have no voting rights unless dividends fall into arrears for six or more quarterly periods (whether or not consecutive). In that event and until such arrearage is paid in full, the holders of the Series A Convertible Preferred Stock and the holders of the Series B Convertible Preferred Stock, voting as a single class, will be entitled to elect two directors and the number of directors on the Company’s Board will increase by that same number.

At any time on or after October 5, 2017, the Company may at its option cause all outstanding shares of the Series A Convertible Preferred Stock to be automatically converted into common stock at the then-prevailing conversion price, if, among other conditions, the closing sale price (as defined) of the Company’s common stock equals or exceeds 130% of the then-prevailing conversion price for a specified period prior to the conversion.

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If a holder elects to convert shares of Series A Convertible Preferred Stock upon the occurrence of certain specified fundamental changes, the Company will be obligated to deliver an additional number of shares above the applicable conversion rate to compensate the holder for lost option time value of the shares of Series A Convertible Preferred Stock as a result of the fundamental change.

Series B Convertible Preferred Stock Offering - On March 26, 2013, the Company completed a private placement of 4,500,000 shares of Series B Convertible Preferred Stock, which were sold in a private offering to eligible purchasers. The issue price of each share of the Series B Convertible Preferred Stock was $50.00. The Company received net proceeds from the private placement of approximately $216.6 million, after deducting placement agent’s fees and offering costs payable by the Company of approximately $8.4 million.

Pursuant to the Certificate of Designations for the Series B Convertible Preferred Stock, each share of Series B Convertible Preferred Stock is convertible at any time at the option of the holder thereof at an initial conversion rate of 2.3370 shares of common stock per share of Series B Convertible Preferred Stock (which is equal to an initial conversion price of approximately $21.40 per share of common stock) and is subject to specified adjustments. Based on the initial conversion price, approximately 10,516,500 shares of common stock would be issuable upon conversion of all of the outstanding shares of the Series B Convertible Preferred Stock.

The annual dividend on each share of Series B Convertible Preferred Stock is 6.500% on the liquidation preference of $50 per share and is payable quarterly, in arrears, on each January 1, April 1, July 1 and October 1, commencing on July 1, 2013, when, as and if declared by the Company’s Board. No dividends were accrued or accumulated prior to March 27, 2013. The Company may, at its option, pay dividends in cash and, subject to certain conditions, common stock or any combination thereof.  As of September 30, 2013, there were $3.7 million in accrued dividends that had been declared but had not yet been paid.

Except as required by law or the Company’s Amended and Restated Certificate of Incorporation, holders of the Series B Convertible Preferred Stock will have no voting rights unless dividends fall into arrears for six or more quarterly periods (whether or not consecutive). In that event and until such arrearage is paid in full, the holders of the Series B Convertible Preferred Stock and the holders of the Series A Convertible Preferred Stock, voting as a single class, will be entitled to elect two directors and the number of directors on the Company’s Board will increase by that same number.

At any time on or after April 6, 2018, the Company may at its option cause all outstanding shares of the Series B Convertible Preferred Stock to be automatically converted into common stock at the then-prevailing conversion price, if, among other conditions, the closing sale price (as defined) of the Company’s common stock equals or exceeds 130% of the then-prevailing conversion price for a specified period prior to the conversion.

If a holder elects to convert shares of Series B Convertible Preferred Stock upon the occurrence of certain specified fundamental changes, the Company will be obligated to deliver an additional number of shares above the applicable conversion rate to compensate the holder for lost option time value of the shares of Series B Convertible Preferred Stock as a result of the fundamental change.

Earnings (Loss) Per Share - The following table shows the computation of basic and diluted net earnings (loss) per share for the three and nine months ended September 30, 2013 and 2012 (in thousands, except per share amounts):

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	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2013			2012			2013			2012
Net income (loss)	$	3,880		$	1,667		$	12,696		$	(17,024	)
Less:
Preferred stock dividends	(5,485		)	(264		)	(13,041		)	(264		)
Net income allocable to participating securities(1)	—			(21		)	—			—
Net income (loss) attributable to common stockholders	$	(1,605	)	$	1,382		$	(345	)	$	(17,288	)
Weighted average number of unrestricted outstanding common shares used to calculate basic net income (loss) per share	34,737			33,000			33,651			33,000
Dilutive shares (2)(3)(4)	—			—			—			—
Denominator for diluted net income (loss) per common share	34,737			33,000			33,651			33,000
Net income (loss) per common share - basic and diluted	$	(0.05	)	$	0.04		$	(0.01	)	$	(0.52	)

(1) For the three and nine months ended September 30, 2013, no losses were allocated to participating restricted stock because such securities do not have a contractual obligation to share in the Company’s losses.

(2) The three and nine months ended September 30, 2013 excludes 410,779 and 625,920 shares of weighted average restricted stock and 17,491,500 and 14,141,800 shares of common stock, respectively, resulting from an assumed conversion of the Company’s Series A Convertible Preferred Stock and Series B Convertible Preferred Stock from the calculation of the denominator for diluted earnings per common share as we were in a loss position.

(3) The three months ended September 30, 2012 excludes 71,842 shares of weighted average restricted stock from the calculation of the denominator for diluted earnings per common share as these shares were anti-dilutive. The nine months ended September 30, 2012, excludes 254,757 shares of weighted average restricted stock from the calculation of the denominator for diluted earnings per common share as we were in a loss position.

(4) The three and nine months ended September 30, 2012 exclude 996,429 and 330,931 shares of common stock, respectively, resulting from an assumed conversion of the Company’s Series A Convertible Preferred Stock and Series B Convertible Preferred Stock from the calculation of the denominator for diluted earnings per common share as these shares were anti-dilutive.

Note 14. Stock-Based Compensation

At the Annual Meeting of Stockholders of the Company held on May 23, 2012, the Company’s stockholders approved the Sanchez Energy Corporation Amended and Restated 2011 Long Term Incentive Plan (the “LTIP”). The Company’s Board had previously approved the amendment of the Sanchez Energy Corporation 2011 Long Term Incentive Plan on April 16, 2012, subject to stockholder approval.

The LTIP provides for the award of stock options, stock appreciation rights, restricted stock, phantom stock, other stock-based awards or stock awards, or any combination thereof.  Any director or consultant of the Company or any employee of the Company, a subsidiary of the Company or a Sanchez Group Member (as defined in the LTIP) is eligible to participate in the LTIP. The LTIP provides that the maximum number of shares of the Company’s common stock available for incentive awards shall be no more than 15% of the issued and outstanding shares of common stock.

The Company records stock-based compensation expense for awards granted to its directors (for their services as directors) in accordance with the provisions of ASC 718, “Compensation — Stock Compensation.”  Stock-based compensation expense for these awards is based on the grant-date fair value and recognized over the vesting period using the straight-line method. The fair value of restricted stock awards is based on the closing sales price of the Company’s common stock on the grant date.

Awards granted to employees of the Sanchez Group (including those employees of the Sanchez Group who also serve as the Company’s officers) and consultants in exchange for services are considered awards to non-employees and the Company records stock-based compensation expense for these awards at fair value in accordance with the provisions of ASC 505-50, “Equity-Based Payments to Non-Employees.”   For awards granted to non-employees, the Company records compensation expenses equal to the fair value of the stock-based award at the measurement date, which is determined to be the earlier of the performance commitment date or the service completion date.  Compensation expense for unvested awards to non-employees is revalued at each period end and is

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amortized over the vesting period of the stock-based award.  Stock-based payments are measured based on the fair value of goods or services received or the equity instruments granted, whichever is more determinable.

For the restricted stock awards granted to non-employees, stock-based compensation expense is based on fair value remeasured at each reporting period and recognized over the vesting period using the straight-line method.  Compensation expense for these awards will be revalued at each period end until vested.

The Company recognized the following stock-based compensation expense for the periods indicated which is reflected as general and administrative expense in the consolidated statements of operations (in thousands):

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2013		2012		2013		2012
Restricted stock awards, directors	$	242	$	91	$	473	$	184
Restricted stock awards, non-employees	6,415		745		13,896		2,308
Restricted stock awards, cancelled	—		—		—		22,308
Total stock-based compensation expense	$	6,657	$	836	$	14,369	$	24,800

Based on the $26.41 per share closing price of the Company’s common stock on September 30, 2013, there was approximately $34.5 million of unrecognized compensation cost related to these non-vested restricted shares outstanding.  The cost is expected to be recognized over an average period of approximately 2.0 years.

A summary of the status of the non-vested shares as of September 30, 2013 is presented below (in thousands):

	Number of Non-Vested Shares
Non-vested common stock at January 1,	762
Granted	1,329
Vested	(185	)
Forfeited	(71	)
Non-vested common stock at September 30,	1,835

As of September 30, 2013, approximately 4.7 million shares remain available for future issuance to participants.

Note 15. Income Taxes

The SEP I Assets contributed by SEP I were historically owned by a limited partnership that is not a taxable entity and is a disregarded entity for federal income tax purposes.  SEP I’s taxable income or loss was allocated to the limited and general partners of SEP I.  With the transfer of the properties to the Company, the SEP I Assets’ operations are now subject to federal and state income taxes.

The Company’s estimated annual effective income tax rates are used to allocate expected annual income tax expense to interim periods. The rates are determined based on the ratio of estimated annual income tax expense to estimated annual income before income taxes by taxing jurisdiction, except for discrete items, which are significant, unusual or infrequent items for which income taxes are computed and recorded in the interim period in which the specific transaction occurs. The estimated annual effective income tax rates are applied to the year-to-date income before income taxes by taxing jurisdiction to determine the income tax expense allocated to the interim period. The Company updates its estimated annual effective income tax rate at the end of each quarterly period

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considering the geographic mix of income based on the tax jurisdictions in which the Company operates. Actual results that are different from the assumptions used in estimating the annual effective income tax rate will impact future income tax expense. The difference between the statutory federal income taxes calculated using a U.S. federal statutory corporate income tax rate of 35% and the Company’s effective tax rate is summarized as follows (in thousands):

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2013			2012			2013			2012
Income tax expense (benefit) at the statutory rate	$	74		$	584		$	3,160		$	(5,958	)
Rescission of restricted stock	—			—			—			7,808
Change in valuation allowance	(3,742		)	(584		)	(6,828		)	(1,850		)
Net income tax (benefit)	$	(3,668	)	$	—		$	(3,668	)	$	—

At September 30, 2013, the Company had estimated net operating loss carryforwards of $348.2 million which begin to expire in 2031.

In recording deferred income tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred income tax assets will be realized.  The ultimate realization of deferred income tax assets is dependent upon the generation of future taxable income during the periods in which those deferred income tax assets would be deductible.  The Company believes that after considering all the available objective evidence, both positive and negative, historical and prospective, with greater weight given to historical evidence, management has determined that it is more likely than not that the deferred tax assets will be realized and therefore has released the valuation allowance against its net deferred tax asset in the third quarter of 2013.  The Company will continue to assess the valuation allowance against deferred tax assets considering all available information obtained in future reporting periods.

At September 30, 2013, the Company had no material uncertain tax positions.

Note 16. Commitments and Contingencies

From time to time, the Company may be involved in lawsuits that arise in the normal course of its business. It is the opinion of management and counsel that the outcome of any such lawsuits will not materially affect the financial position and operations of the Company.

Note 17.  Subsidiary Guarantors

The Company has filed a registration statement on Form S-3 with the SEC, which became effective January 14, 2013 and registered, among other securities, debt securities.  The subsidiaries of the Company (the “Subsidiaries”) are co-registrants with the Company, and the registration statement registers guarantees of debt securities by the Subsidiaries. As of September 30, 2013, the Subsidiaries are 100 percent owned by the Company and any guarantees by the Subsidiaries will be full and unconditional (except for customary release provisions). The Company has no assets or operations independent of the Subsidiaries and there are no significant restrictions upon the ability of the Subsidiaries to distribute funds to the Company. In the event that more than one of the Subsidiaries provide guarantees of any debt securities issued by the Company, such guarantees will constitute joint and several obligations.

Note 18. Subsequent Events

On October 4, 2013, the Company completed the Wycross acquisition, consisting of operated assets with an average working interest of approximately 60% in net contiguous acres in McMullen County, Texas, with an effective date of July 1, 2013, for approximately $230.1 million, subject to further customary post-closing adjustments.

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In October 2013, the Company entered into the following crude oil swap contracts using WTI prices:

	Derivative
Contract Period	Instrument	Barrels	Purchased		Sold
January 1, 2015 - December 31, 2015	Swap	365,000	$	90.05	n/a
January 1, 2015 - December 31, 2015	Swap	365,000	$	89.65	n/a

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes appearing in Part I, Item 1 of this Quarterly Report on Form 10-Q and information contained in our 2012 Annual Report. The following discussion contains “forward-looking statements” that reflect our future plans, estimates, beliefs and expected performance.  Please see “Cautionary Note Regarding Forward-Looking Statements.”

Business Overview

We are an independent exploration and production company focused on the exploration, acquisition and development of unconventional oil and natural gas resources in the onshore U.S. Gulf Coast, with a current focus on the Eagle Ford Shale in South Texas.  As of September 30, 2013, we had accumulated approximately 122,000 net leasehold acres in the oil and condensate, or black oil and volatile oil, windows of the Eagle Ford Shale in South Texas.

Initial Public Offering

On December 19, 2011, we completed our IPO of 10.0 million shares of common stock, par value $0.01 per share, at a price to the public of $22.00 per share.  We received net proceeds of approximately $203.3 million from the sale of the shares of common stock (net of expenses and underwriting discounts and commissions).  We paid $50 million of the net proceeds from the offering as partial consideration (together with our issuance to SEP I of approximately 22.1 million shares of our common stock) for the contribution by SEP I of the limited liability company interests in SEP Holdings III and approximately $89 million of the net proceeds as partial consideration (together with our issuance of 909,091 shares of our common stock) for the acquisition of the limited liability company interests in Marquis LLC.   SEP Holdings III and Marquis LLC each own interests in certain oil, natural gas and related assets.

Basis of Presentation

Prior to the Distribution, SEP I was under common control with us.  Because the SEP I Assets were acquired from an “entity under common control with us,” we recorded the SEP I Assets retrospectively at their historical carrying values, and no goodwill or other intangible assets were recognized.  We acquired the Marquis Assets from parties not under common control with us, and accordingly, the Marquis Assets have been included in our historical financial statements since December 19, 2011.

SOG is a private oil and gas company engaged in the exploration for and development of oil and natural gas. SOG has historically acted as the operator of a significant portion of SEP I’s oil and natural gas properties. SOG provided all employee, management, and administrative support to SEP I and, for periods prior to December 19, 2011, a proportionate share of SOG’s general and administrative costs were allocated to the SEP I Assets. The costs of these services associated with the SEP I Assets were allocated to the SEP I Assets primarily based on the ratio of capital expenditures between the entities to which SOG provides services and the SEP I Assets. However, other factors, such as time spent on general management services and producing property activities, were also considered in the allocation of these costs. Management believes such allocations were reasonable; however, they may not be indicative of the actual expense that would have been incurred had the SEP I Assets been operated as an independent company for periods prior to December 19, 2011.  On December 19, 2011, SOG began providing similar types of services to the Company under the services agreement as described in Note 11 of the notes to the condensed consolidated financial statements.

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Our Properties

Our Eagle Ford Shale acreage is now comprised of approximately 9,800 net acres in Gonzales County, Texas, which we refer to as our Palmetto area, approximately 43,000 net acres in Dimmit, Frio, LaSalle, Zavala and Frio Counties, Texas, which we refer to as our Cotulla-Maverick area, and approximately 69,000 net acres in Fayette, Lavaca, Atascosa, Webb and DeWitt Counties, Texas, which we refer to as our Marquis area.  We own all rights and depths on the majority of our Eagle Ford Shale acreage. We believe this acreage to be prospective for other zones, including the Buda Limestone, Austin Chalk and Pearsall Shale formations that lie above and below the Eagle Ford Shale.  We are currently evaluating these other zones, which may present us with additional drilling locations. Several of our existing wells are either producing from or have logged pay in the Buda Limestone and the Austin Chalk formations.

On May 31, 2013, we closed the Cotulla acquisition which significantly expanded our asset base and production in the Eagle Ford Shale.  We acquired approximately 44,461 net acres in Dimmit, Frio, LaSalle and Zavala Counties of South Texas with 53 gross wells producing an estimated average of approximately 4,950 boe/d for the month of May 2013.  The acquisition included estimated proved reserves as of March 31, 2013 of 14.2 mboe, 66% oil, 13% NGLs and 21% natural gas, with proved developed reserves estimated to account for approximately 48% of total proved reserves.  We combined our new Cotulla area with our previous Maverick area to form one operating area now known as our Cotulla-Maverick area.

On August 8, 2013 we announced an asset acquisition of approximately 40,000 net undeveloped acres in the TMS trend in Southwest Mississippi and Southeast Louisiana and the formation of an area of mutual interest and a 50/50 joint venture with our affiliate, SR.  The joint venture controls approximately 115,000 gross and 80,000 net acres in what we believe to be the core of the TMS trend.

In addition, we have approximately 700 net acres in the Haynesville Shale in Natchitoches Parish, Louisiana. We do not currently anticipate spending any capital on our Haynesville acreage in the near future. The majority of our Haynesville leases are held by production, giving us and our partners the option to accelerate drilling should natural gas prices increase.

Finally, we had amassed approximately 10,000 net acres in northern Montana, which we believed to be prospective for the Heath, Three Forks and Bakken Shales.  The majority of the leases have expired, with the remaining leases expiring in 2014.  Management has determined that we will not likely pursue any drilling activity on these remaining leases and intends to let the leases expire at the end of their original term.

Recent Developments

On October 4, 2013, the Company completed the Wycross acquisition, consisting of operated assets with an average working interest of approximately 60% in approximately 3,600 net contiguous acres in McMullen County, Texas, with an effective date of July 1, 2013, for approximately $230.1 million, subject to further customary post-closing adjustments.

Outlook

Beginning in the second half of 2008, the United States and other industrialized countries experienced a significant economic slowdown, which led to a substantial decline in worldwide energy demand. During this same period, North American natural gas supply was increasing as a result of the rise in domestic unconventional natural gas production. The combination of lower energy demand due to the economic slowdown and higher North American natural gas supply resulted in significant declines in oil, NGLs and natural gas prices. Oil prices have steadily increased and have averaged approximately $98.09 for the year to date period ended September 30, 2013.  Approximately 75% of our proven reserve base is crude oil.  Volatility in commodity prices and sustained periods of low prices for oil or natural gas could materially and adversely affect our financial position, our results of operations, the quantities of oil and natural gas reserves that we can economically produce, the price of our common stock and our access to capital.

As an oil and natural gas company, we face the challenge of natural production declines. As initial reservoir pressures are depleted, oil and natural gas production from a given well or formation decreases. Our future growth will depend on our ability to continue to add estimated reserves in excess of our production. Accordingly, we plan to maintain our focus on adding reserves through development projects associated with our current property base and improving the economics of producing oil and natural gas from our properties. In addition, we regularly review acquisition opportunities from third parties or other members of the Sanchez Group.

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Our ability to add estimated reserves through acquisitions and development projects is dependent on many factors, including our ability to raise capital, obtain regulatory approvals and procure contract drilling rigs and personnel.

Results of Operations

Three Months Ended September 30, 2013 Compared to Three Months Ended September 30, 2012

Revenue and Production

The following table summarizes production, average sales prices and operating revenue for our oil, NGLs and natural gas operations for the periods indicated (in thousands, except average sales price and percentages):

	Three Months Ended				Increase (Decrease)
	September 30,				2013 vs 2012
	2013		2012		$			%
Net Production:
Oil (mbo)	825.9		122.3		703.6			575	%
Natural gas liquids (mbbl)	106.2		0.2		106.0			*
Natural gas (mmcf)	906.3		67.1		839.2			1251	%
Total oil equivalent (mboe)	1,083.2		133.7		949.5			710	%
Average Sales Price:
Oil ($ per bo) (1)	$	105.86	$	100.61	$	5.25		5	%
Natural gas liquids ($ per bbl)	$	30.03	$	20.05	$	9.98		50	%
Natural gas ($ per mcf)	$	3.94	$	2.72	$	1.22		45	%
Oil equivalent ($ per boe) (1)	$	86.96	$	93.48	$	(6.52	)	(7	)%
REVENUES:
Oil sales (1)	$	87,436	$	12,308	$	75,128		610	%
Natural gas liquids sales	3,190		3		3,187			*
Natural gas sales	3,574		182		3,392			1864	%
Total revenues	$	94,200	$	12,493	$	81,707		654	%

(1) Excludes the impact of oil derivative instruments.

* Not meaningful.

The following table sets forth information regarding combined net production of oil, NGLs and natural gas attributable to our properties for each of the periods presented:

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	Three Months Ended
	September 30,
	2013	2012
Production:
Oil - mbo
Palmetto	256.8	54.3
Marquis	179.5	25.5
Cotulla-Maverick	389.6	42.5
Other	—	—
Total	825.9	122.3
Natural gas liquids - mbbl
Palmetto	21.2	0.2
Marquis	11.1	—
Cotulla-Maverick	73.9	—
Other	—	—
Total	106.2	0.2
Natural gas - mmcf
Palmetto	256.4	52.1
Marquis	101.4	—
Cotulla-Maverick	541.9	—
Other	6.6	15.0
Total	906.3	67.1
Net production volumes:
Total oil equivalent (mboe)	1,083.2	133.7
Average daily production (boe/d)	11,773.9	1,452.7

Net Production.  Production increased from 133.7 mboe in the three months ended September 30, 2012 to 1,083.2 mboe for the three months ended September 30, 2013 due to our drilling program as well as the Cotulla acquisition which was completed on May 31, 2013. The number of gross wells producing at the period end and the production for the periods were as follows:

	Three Months Ended September 30,
	2013		2012
	# Wells	mboe	# Wells	mboe
Palmetto	42	320.7	9	63.1
Marquis	22	207.6	2	25.5
Cotulla-Maverick	78	553.8	9	42.6
Other	1	1.1	1	2.5
Total	143	1,083.2	21	133.7

For the three months ended September 30, 2013, 76% of our production was oil, 14% was natural gas and 10% was NGLs compared to the three months ended September 30, 2012 production that was 92% oil, 8% natural gas and de minimis NGLs.

Average Sales Price.  Our average realized oil price for the three months ended September 30, 2013 increased to $105.86 per bo as compared to $100.61 per bo for the three months ended September 30, 2012. The average price realized for our natural gas production for the three months ended September 30, 2013 was $3.94 per mcf, 45% higher than the average sales price for the three

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months ended September 30, 2012 of $2.72 per mcf.  For the three months ended September 30, 2013 and 2012, our average NGLs price was $30.03 per bbl and $20.05 per bbl, respectively.

Revenues.  Oil, NGL, and natural gas sales revenues totaled approximately $94.2 million and $12.5 million for the three months ended September 30, 2013 and 2012, respectively. Oil sales revenue for the three months ended September 30, 2013 increased approximately $75.1 million with $70.8 million attributable to the increase in production and $4.3 million due to the higher average sales price compared to the three months ended September 30, 2012. Natural gas sales revenue for the three months ended September 30, 2013 increased approximately $3.4 million with $2.3 million attributable to the increase in production and $1.1 million due to the higher average sales price compared to the three months ended September 30, 2012. NGLs sales revenue for the three months ended September 30, 2013 increased approximately $3.2 million with $2.1 million attributable to the increase in production partially and $1.1 million due to the higher average sales price compared to the three months ended September 30, 2012.

Costs and Operating Expenses

The table below presents a detail of expenses for the periods indicated (in thousands, except percentages):

	Three Months Ended						Increase (Decrease)
	September 30,						2013 vs 2012
	2013			2012			$			%
OPERATING COSTS AND EXPENSES:
Oil and natural gas production expenses	$	11,026		$	610		$	10,416		1708	%
Production and ad valorem taxes	5,531			613			4,918			802	%
Depreciation, depletion, amortization and accretion	38,372			4,580			33,792			738	%
General and administrative (inclusive of stock-based compensation expense of $6,657 and $836, respectively, for the three months ended September 30, 2013 and 2012)	15,195			2,844			12,351			434	%
Total operating costs and expenses	70,124			8,647			61,477			711	%
Interest and other income	32			12			20			167	%
Interest expense	(9,460		)	—			(9,460		)	*
Realized and unrealized losses on derivative instruments	(14,436		)	(2,191		)	(12,245		)	(559	)%
Income tax benefit	3,668			—			3,668			*

* Not meaningful.

Oil and Natural Gas Production Expenses.  Oil and natural gas production expenses are the costs incurred to produce our oil and natural gas, as well as the daily costs incurred to maintain our producing properties. Such costs also include field personnel costs, utilities, chemical additives, salt water disposal, maintenance, repairs and occasional well workover expenses related to our oil and natural gas properties. Our oil and natural gas production expenses increased 1708% to approximately $11.0 million for the three months ended September 30, 2013 as compared to $0.6 million for the same period in 2012. The increase in oil and natural gas production expenses in the third quarter of 2013 compared to the same period of 2012 is directly attributable to the increase in production activities and well count in the Eagle Ford Shale largely as a result of the Cotulla acquisition which was completed on May 31, 2013.  Our average production expenses increased from $4.56 per boe during the three months ended September 30, 2012 to $10.18 per boe for the three months ended September 30, 2013.  The increase in production expenses per boe during the period was due to higher per boe costs related to the properties acquired from Hess in the Cotulla acquisition.  These higher costs were the result of a significant amount of equipment rentals on the acquired properties. There was a reduction in equipment rentals during September 2013 that the Company expects to continue to contribute to a decrease in production expenses per boe during the fourth quarter of 2013.

Production and Ad Valorem Taxes.  Production and ad valorem taxes are paid on produced oil and natural gas based upon a percentage of gross revenues or at fixed rates established by state or local taxing authorities. Our production and ad valorem taxes totaled $5.5 million and $0.6 million for the three months ended September 30, 2013 and 2012, respectively. The increase in production and ad valorem taxes in the third quarter of 2013 compared to the same period in 2012 was due to the significant increase

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in production volumes over the periods. Our average production and ad valorem taxes increased from $4.59 per boe during the three months ended September 30, 2012 to $5.11 per boe for the three months ended September 30, 2013.

Depreciation, Depletion, Amortization and Accretion.  Depreciation, depletion, amortization and accretion (“DD&A”) reflects the systematic expensing of the capitalized costs incurred in the acquisition, exploration and development of oil and natural gas properties. We use the full-cost method of accounting and accordingly, we capitalize all costs associated with the acquisition, exploration and development of oil and natural gas properties, including unproved and unevaluated property costs. Internal costs are capitalized only to the extent they are directly related to acquisition, exploration and development activities and do not include any costs related to production, selling or general corporate administrative activities. Capitalized costs of oil and natural gas properties are amortized using the units of production method based upon production and estimates of proved oil and natural gas reserve quantities. Unproved and unevaluated property costs are excluded from the amortizable base used to determine DD&A expense. Our DD&A expense for the third quarter of 2013 increased approximately $33.8 million to $38.4 million ($35.43 per boe) from $4.6 million ($34.27 per boe) in the third quarter of 2012.  This increase in the depletion rate primarily resulted from a substantial increase in the basis of our oil and natural gas properties, including $706.1 million in future development costs for the proved undeveloped reserves, which was an increase of 74% over the September 30, 2012 estimate of $406.2 million.  Estimated reserves at September 30, 2013 were 1706% higher than at September 30, 2012.  Higher production for the third quarter of 2013 as compared to the same period in 2012 resulted in a $32.6 million increase in expense and the change in the depletion rate resulted in a $1.2 million increase in expense.

General and Administrative Expenses.  Our general and administrative (“G&A”) expenses, including stock-based compensation expense, totaled $15.2 million for the three months ended September 30, 2013 compared to $2.8 million for the same period in 2012.  Excluding the stock-based compensation, G&A expenses for the three months ended September 30, 2013 and 2012 were $8.5 million and $2.0 million, respectively.  This increase was due primarily to additional costs for added personnel of SOG performing services for the Company and consulting services.  Our G&A expenses, excluding stock-based compensation expense, decreased from $15.03 per boe during the three months ended September 30, 2012 to $7.88 per boe for the three months ended September 30, 2013.  For the three months ended September 30, 2013 and 2012, we recorded non-cash stock-based compensation expense of approximately $6.7 million and $0.8 million, respectively.  The increase in non-cash stock-based compensation expense in the third quarter of 2013 was due primarily to the increase in awards made during the year and the associated amortization recognized.  Further, because the Company records stock-based compensation expense for awards granted to non-employees at fair value and the unvested awards are revalued each period, impacting the amortization over the remaining life of the awards, the Company’s increase in stock price during 2013 has caused an increase to the amortization expense recognized during the year.

Interest Expense.  For the three months ended September 30, 2013, interest expense totaled $9.5 million and included $1.2 million in amortization of debt issuance costs.  The interest expense incurred during the three months ended September 30, 2013 is related to the Senior Notes issued during 2013.  We did not incur any interest expense for the three months ended September 30, 2012.

Commodity Derivative Transactions.  We apply mark-to-market accounting to our derivative contracts; therefore the full volatility of the non-cash change in fair value of our outstanding contracts is reflected in other income and expense.  During the three months ended September 30, 2013, we recognized an $8.9 million unrealized loss on our commodity derivative contracts related to the change in fair value of our derivative contracts and a $5.5 million realized loss associated with settlements and/or expirations on our commodity derivative contracts.  During the three months ended September 30, 2012, we recognized a $2.1 million unrealized loss related to the change in fair value of our derivative contracts and a $0.1 million realized loss associated with settlements and/or expirations on our commodity derivative contracts.

Income Tax Expense.   The properties contributed by SEP I were historically owned by a limited partnership that is not a taxable entity and is a disregarded entity for federal income tax purposes.  Their taxable income or loss, which may vary substantially from the net income or loss reported in the consolidated statements of operations, was allocated to the limited and general partners of SEP I.  With the transfer of the SEP I Assets to us, the SEP I Assets’ operations were subject to federal and state income taxes.  At the date of acquisition, we estimated that the aggregate net tax basis of the SEP I Assets exceeded the aggregate net book basis by $24.9 million, resulting in a deferred tax asset of $8.7 million, which was fully offset by a valuation allowance.  In the third quarter of 2013, management has determined that it is more likely than not that the deferred tax assets will be realized and released the valuation allowance, resulting in an income tax benefit of $3.7 million for the three and nine months ended September 30, 2013.

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Nine Months Ended September 30, 2013 Compared to Nine Months Ended September 30, 2012

Revenue and Production

The following table summarizes production, average sales prices and operating revenue for our oil, NGLs and natural gas operations for the periods indicated (in thousands, except average sales price and percentages):

	Nine Months Ended				Increase (Decrease)
	September 30,				2013 vs 2012
	2013		2012		$			%
Net Production:
Oil (mbo)	1,643.9		253.5		1,390.4			548	%
Natural gas liquids (mbbl)	231.4		0.4		231.0			*
Natural gas (mmcf)	1,594.5		254.9		1,339.6			526	%
Total oil equivalent (mboe)	2,141.0		296.4		1,844.6			622	%
Average Sales Price:
Oil ($ per bo) (1)	$	104.41	$	101.99	$	2.42		2	%
Natural gas liquids ($ per bbl)	$	26.65	$	26.61	$	0.04		0	%
Natural gas ($ per mcf)	$	4.09	$	2.33	$	1.76		76	%
Oil equivalent ($ per boe) (1)	$	86.09	$	89.28	$	(3.19	)	(4	)%
REVENUES:
Oil sales (1)	$	171,635	$	25,858	$	145,777		564	%
Natural gas liquids sales	6,166		10		6,156			*
Natural gas sales	6,520		594		5,926			998	%
Total revenues	$	184,321	$	26,462	$	157,859		597	%

(1) Excludes the impact of oil derivative instruments.

* Not meaningful.

The following table sets forth information regarding combined net production of oil, NGLs and natural gas attributable to our properties for each of the periods presented:

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	Nine Months Ended
	September 30,
	2013	2012
Production:
Oil - mbo
Palmetto	672.2	168.3
Marquis	412.9	25.5
Cotulla-Maverick	558.8	59.7
Other	—	—
Total	1,643.9	253.5
Natural gas liquids - mbbl
Palmetto	108.3	0.4
Marquis	31.1	—
Cotulla-Maverick	92.0	—
Other	—	—
Total	231.4	0.4
Natural gas - mmcf
Palmetto	698.6	190.8
Marquis	216.1	—
Cotulla-Maverick	657.0	—
Other	22.8	64.1
Total	1,594.5	254.9
Net production volumes:
Total oil equivalent (mboe)	2,141.0	296.4
Average daily production (boe/d)	7,842.6	1,081.7

Net Production.  Production increased from 296.4 mboe in the nine months ended September 30, 2012 to 2,141.0 mboe for the nine months ended September 30, 2013 due to our drilling program as well as the Cotulla acquisition which was completed on May 31, 2013. The number of gross wells producing at the period end and the production for the periods were as follows:

	Nine Months Ended September 30,
	2013		2012
	# Wells	mboe	# Wells	mboe
Palmetto	42	896.9	9	200.4
Marquis	22	480.1	2	25.5
Cotulla-Maverick	78	760.3	9	59.8
Other	1	3.7	1	10.7
Total	143	2,141.0	21	296.4

For the nine months ended September 30, 2013, 77% of our production was oil, 12% was natural gas and 11% was NGLs compared to the nine months ended September 30, 2012 production that was 86% oil, 14% natural gas and de minimis NGLs.

Average Sales Price.  Our average realized oil price for the nine months ended September 30, 2013 increased to $104.41 per bo as compared to $101.99 per bo for the nine months ended September 30, 2012. The average price realized for our natural gas

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production for the nine months ended September 30, 2013 was $4.09 per mcf, 76% higher than the average sales price for the nine months ended September 30, 2012 of $2.33 per mcf.  For the nine months ended September 30, 2013 and 2012, our average NGLs price was $26.65 per bbl and $26.61 per bbl, respectively.

Revenues.  Oil, NGL, and natural gas sales revenues totaled approximately $184.3 million and $26.5 million for the nine months ended September 30, 2013 and 2012, respectively. Oil sales revenue for the nine months ended September 30, 2013 increased approximately $145.8 million with $141.8 million attributable to the increase in production and $4.0 million due to the higher average sales price compared to the nine months ended September 30, 2012. Natural gas sales revenue for the nine months ended September 30, 2013 increased approximately $5.9 million with $3.1 million attributable to the increase in production and $2.8 million due to the higher average sales price compared to the nine months ended September 30, 2012. NGLs sales revenue for the nine months ended September 30, 2013 increased approximately $6.2 million substantially all of which was attributable to the increase in production compared to the nine months ended September 30, 2012.

Costs and Operating Expenses

The table below presents a detail of expenses for the periods indicated (in thousands, except percentages):

	Nine Months Ended					Increase (Decrease)
	September 30,					2013 vs 2012
	2013			2012		$			%
OPERATING COSTS AND EXPENSES:
Oil and natural gas production expenses	$	21,098		$	2,015	$	19,083		947	%
Production and ad valorem taxes	10,942			1,569		9,373			597	%
Depreciation, depletion, amortization and accretion	76,368			9,291		67,077			722	%
General and administrative (inclusive of stock-based compensation expense of $14,369 and $24,800, respectively, for the nine months ended September 30, 2013 and 2012)	35,564			31,451		4,113			13	%
Total operating costs and expenses	143,972			44,326		99,646			225	%
Interest and other income	104			31		73			235	%
Interest expense	(17,613		)	—		(17,613		)	*
Realized and unrealized gains on derivative instruments	(13,812		)	809		(14,621		)	(1807	)%
Income tax benefit	3,668			—		3,668			*

* Not meaningful.

Oil and Natural Gas Production Expenses.   Our oil and natural gas production expenses increased 947% to approximately $21.1 million for the nine months ended September 30, 2013 as compared to $2.0 million for the same period in 2012. The increase in oil and natural gas production expenses in the nine months ended September 30, 2013 compared to the same period of 2012 is directly attributable to the increase in production activities and well count in the Eagle Ford Shale largely as a result of the Cotulla acquisition which was completed on May 31, 2013.  Our average production expenses increased from $6.80 per boe during the nine months ended September 30, 2012 to $9.85 per boe for the nine months ended September 30, 2013. The increase in production expenses per boe during the period was due to higher per boe costs related to the properties acquired from Hess in the Cotulla acquisition.  These higher costs were the result of a significant amount of equipment rentals on the acquired properties.  There was a reduction in equipment rentals during September 2013 that the Company expects to continue to contribute to a decrease in production expenses per boe during the fourth quarter of 2013.

Production and Ad Valorem Taxes.   Our production and ad valorem taxes totaled $10.9 million and $1.6 million for the nine months ended September 30, 2013 and 2012, respectively. The increase in production and ad valorem taxes in the nine months ended September 30, 2013 compared to the same period in 2012 was due to the significant increase in production volumes over the periods. Our average production and ad valorem taxes decreased from $5.29 per boe during the nine months ended September 30, 2012 to $5.11 per boe for the nine months ended September 30, 2013.

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Depreciation, Depletion, Amortization and Accretion.   Our DD&A expense for the nine months ended September 30, 2013 increased approximately $67.1 million to $76.4 million ($35.66 per boe) from $9.3 million ($31.34 per boe) in the same period of 2012.  This increase in the depletion rate primarily resulted from a substantial increase in the basis of our oil and natural gas properties, including $706.1 million in future development costs for the proved undeveloped reserves, which was an increase of 74% over the September 30, 2012 estimate of $406.2 million.  Estimated reserves at September 30, 2013 were 1706% higher than at September 30, 2012.  Higher production for the first nine months of 2013 as compared to the same period in 2012 resulted in a $57.9 million increase in expense and the change in the depletion rate resulted in a $9.2 million increase in expense.  For further discussion of our DD&A expense, see “- Three Months Ended September 30, 2013 Compared to Three Months Ended September 30, 2012 — Costs and Operating Expenses — Depreciation, Depletion, Amortization and Accretion.”

General and Administrative Expenses.  Our G&A expenses, including stock-based compensation expense, totaled $35.6 million for the nine months ended September 30, 2013 compared to $31.5 million for the same period in 2012.  Excluding the stock-based compensation, G&A expenses for the nine months ended September 30, 2013 and 2012 were $21.2 million and $6.6 million, respectively.  This increase was due to higher legal costs, primarily related to acquisitions, additional costs for added personnel of SOG performing services for the Company, and consulting services. Our average G&A expenses, excluding stock-based compensation expense, decreased from $22.44 per boe during the nine months ended September 30, 2012 to $9.90 per boe for the nine months ended September 30, 2013.  For the nine months ended September 30, 2013 and 2012, we recorded acquisition related costs in G&A expenses of $4.0 million and $0, respectively.  This increase contributed $1.86 per boe to the per boe increase between the periods.  For the nine months ended September 30, 2013 and 2012, we recorded non-cash stock-based compensation expense of approximately $14.4 million and $24.8 million, respectively.  The non-cash stock-based compensation expense recognized in 2012 was due primarily to the rescission and cancellation of 1.1 million shares of restricted stock.  For the restricted stock awards granted to non-employees that were rescinded and cancelled, stock-based compensation expense was based on the fair value at the date of cancellation, and the associated unrecognized compensation expense was accelerated and recognized as stock-based compensation expense.  At the date of cancellation, the fair value of the stock awards cancelled was approximately $22.3 million, or $20.28 per restricted share, which when combined with other stock-based compensation expense of $2.5 million, resulted in $24.8 million in stock-based compensation expense for the nine months ended September 30, 2012.

Interest Expense.  For the nine months ended September 30, 2013, interest expense totaled $17.6 million and included $5.8 million in amortization of debt issuance costs and write-offs of previously incurred debt issuance costs in connection with the termination of the Second Lien Term Credit Agreement and the commitment for the bridge loan credit facility, as well as in connection with the modification of the First Lien Term Credit Agreement during the period.  The expense incurred is primarily related to the issuance of the Senior Notes issued during 2013. We did not incur any interest expense for the nine months ended September 30, 2012.

Commodity Derivative Transactions.   During the nine months ended September 30, 2013, we recognized a $6.8 million unrealized loss on our commodity derivative contracts related to the change in fair value of our derivative contracts and a $7.0 million realized loss associated with settlements and/or expirations on our commodity derivative contracts.  During the nine months ended September 30, 2012, we recognized a $1.6 million unrealized gain related to the change in fair value of our derivative contracts and a $0.8 million realized loss associated with settlements and/or expirations on our commodity derivative contracts.

Income Tax Expense.   For a discussion of our income tax expense, see “- Three Months Ended September 30, 2013 Compared to Three Months Ended September 30, 2012 — Costs and Operating Expenses — Income Tax Expense.”

Critical Accounting Policies and Estimates

The preparation of financial statements in accordance with U.S. GAAP requires our management to select and apply accounting policies that best provide the framework to report our results of operations and financial position.  The selection and application of those policies requires our management to make difficult subjective or complex judgments concerning reported amounts of revenue and expenses during the reporting period and the reported amounts of assets and liabilities at the date of the financial statements.  As a result, there exists the likelihood that materially different amounts would be reported under different conditions or using different assumptions.

As of September 30, 2013, our critical accounting policies were consistent with those discussed in our 2012 Annual Report, as supplemented by the critical accounting policy set forth below.

Our acquisitions, except those acquisitions made between entities under common control, are accounted for under the acquisition method of accounting in accordance with ASC Topic 805, “Business Combinations” (“ASC Topic 805”). An acquisition may result in the recognition of a gain or goodwill based on the measurement of the fair value of the assets acquired at the acquisition

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date as compared to the fair value of consideration transferred, adjusted for purchase price adjustments. Any such gain or any loss resulting from the impairment of goodwill is recognized in current period earnings and classified in operating costs and expenses in the accompanying condensed consolidated statements of operations. The initial accounting for acquisitions may not be complete and adjustments to provisional amounts, or recognition of additional assets acquired or liabilities assumed, may occur as more detailed analyses are completed and additional information is obtained about the facts and circumstances that existed as of the acquisition dates. The results of operations of the properties acquired in our acquisitions have been included in the condensed consolidated financial statements since the closing dates of the acquisitions.

Use of Estimates

The condensed consolidated financial statements are prepared in conformity with U.S. GAAP, which requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The most significant estimates pertain to proved oil and natural gas reserves and related cash flow estimates used in the depletion and impairment of oil and natural gas properties, fair value accounting for acquisitions, the evaluation of unproved properties for impairment, the fair value of commodity derivative contracts and asset retirement obligations, accrued oil and natural gas revenues and expenses and the allocation of general and administrative expenses.  Actual results could differ materially from those estimates.

Liquidity and Capital Resources

As of September 30, 2013, we had approximately $480.0 million in cash, $10 million in investments, and $600 million of indebtedness.  Our First Lien Credit Agreement, with a current borrowing base of $175 million, was unused as of September 30, 2013, resulting in available liquidity of approximately $665 million. Immediately following the end of the third quarter, we closed the Wycross acquisition, paying approximately $220 million in cash.

On November 16, 2012, we and our subsidiaries, SEP Holdings III and Marquis LLC (collectively referred to with us as the Original Borrowers), entered into the Previous First Lien Credit Agreement, dated as of November 15, 2012, among the Original Borrowers, as borrowers, Capital One, National Association, as administrative agent, sole lead arranger and sole book runner, and each of the other lenders party thereto. The Previous First Lien Credit Agreement provided for a $250 million revolving credit facility which was to mature November 16, 2015 and was secured by a senior lien on substantially all of the assets of the Original Borrowers. The borrowing base under the Previous First Lien Credit Agreement, initially set at $27.5 million, was increased to $95 million on February 21, 2013.

Also on November 16, 2012, we entered into the Second Lien Term Credit Agreement, dated as of November 15, 2012, among the Original Borrowers, as borrowers, Macquarie Bank Limited, as administrative agent, sole lead arranger and sole book runner, and the other lenders party thereto. The Second Lien Term Credit Agreement provided for a $250 million term loan facility which was to mature May 16, 2016 and was secured by a lien on substantially all of the assets of the Original Borrowers that was junior to the liens on such assets under the Previous First Lien Credit Agreement. The Second Lien Term Credit Agreement provided for an initial commitment of $50 million, subject to customary conditions, with the remaining commitments subject to the approval of the lenders and other customary conditions.  We borrowed $50 million under the Second Lien Term Credit Agreement in January 2013.

On May 31, 2013, the Original Borrowers and our new subsidiary, SN Cotulla (collectively referred to with us as the Borrowers), entered into the First Lien Credit Agreement with Royal Bank of Canada as the administrative agent, Capital One, National Association as the syndication agent, and RBC Capital Markets as sole lead arranger and sole book runner and each of the other lenders party thereto. The First Lien Credit Agreement amended and restated the Previous First Lien Credit Agreement in its entirety to renew, extend and rearrange the debt outstanding under the Previous First Lien Credit Agreement (but not to repay or pay off such debt) and to, among other things, (i) replace Capital One with Royal Bank of Canada as administrative agent and issuing bank, (ii) increase the maximum credit amount to $500 million, (iii) increase the borrowing base to $175 million, and (iv) make certain other amendments.   The Borrowers’ obligations under the First Lien Credit Agreement are secured by a first priority lien on substantially all of their assets and the assets of our existing and future subsidiaries not designated as ‘‘unrestricted subsidiaries,’’ including a first priority lien on all ownership interests in existing and future subsidiaries. Availability under the First Lien Credit Agreement is at all times subject to customary conditions and the then applicable borrowing base, which was initially set at $175 million and is subject to periodic redetermination. The borrowing base is also subject to reduction by 25% of the amount of the increase in the Borrowers’ net debt (taking into consideration any required repayment of debt) resulting from the issuance of certain debt, including pursuant to the issuance of the Senior Notes. The borrowing base can be redetermined up or down by the lenders based

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on, among other things, their evaluation of our oil and natural gas reserves.  The next redetermination of the borrowing base was scheduled to occur on or before October 1, 2013 and that process is currently underway, with other redeterminations scheduled to occur quarterly through July 1, 2014 and then semi-annually thereafter on April 1 and October 1 of each year.

On May 31, 2013, the Borrowers entered into several conforming and technical amendments to the Second Lien Term Credit Agreement. Pursuant to its terms, the First Lien Credit Agreement matures on May 31, 2018.  However, the First Lien Credit Agreement would mature on November 16, 2015 if the Second Lien Term Credit Agreement were not repaid in full on or before November 16, 2015. On May 31, 2013, we borrowed $96 million under the First Lien Credit Agreement.  We used proceeds from this borrowing to repay the $90 million outstanding under the Previous First Lien Credit Agreement.  On June 13, 2013, we used proceeds from our Senior Note offering to repay the $96 million outstanding under the First Lien Credit Agreement and the $50 million outstanding under the Second Lien Term Credit Agreement.  The Second Lien Term Credit Agreement was retired with no further availability. On July 3, 2013, Macquarie Bank Limited novated its rights and obligations under hedging agreements with us to Société Générale, a lender under the First Lien Credit Agreement. The borrowing base on the First Lien Credit Agreement was reduced to $87.5 million following the issuance of the Senior Notes. The borrowing base on the First Lien Credit Agreement was increased to $175 million as a result of the redetermination conducted by the banks based upon the Company’s June 30, 2013 updated reserves and remains $175 million as of September 30, 2013.  As noted above, the borrowing base is currently being reviewed and we expect it to increase to be in excess of $200 million upon completion of the review process.

On June 13, 2013, the Company completed a private offering to eligible purchasers of $400 million in aggregate principal amount of the Company’s 7.750% senior notes that will mature on June 15, 2021 (the “Original Notes”).  Interest is payable on each June 15 and December 15, commencing December 15, 2013.  The Company received net proceeds from this offering of approximately $388 million, after deducting initial purchasers’ discounts and estimated offering expenses, which the Company used to repay all of the approximately $96 million in borrowings outstanding under its First Lien Credit Agreement and to retire the Second Lien Term Credit Agreement by repaying in full the $50 million in borrowings outstanding.  The Original Notes are the senior unsecured obligations of the Company and are guaranteed on a joint and several senior unsecured basis by, with certain exceptions, substantially all of the Company’s existing and future subsidiaries.   The borrowing base under the Company’s First Lien Credit Agreement was reduced to $87.5 million, upon issuance of the Original Notes, and was later increased to $175 million, all of which is available for future revolver borrowings.

On September 18, 2013, the Company issued an additional $200 million in aggregate principal amount of its 7.750% senior notes due 2021 (the “Additional Notes” and, together with the Original Notes, the “Senior Notes”) in a private offering to eligible purchasers at a price to the purchasers of 96.5% of the Additional Notes.  The Company received net proceeds from this offering of approximately $188.8 million, after deducting the initial purchasers’ discounts and estimated offering expenses of approximately $4.2 million.  The Company also received cash for accrued interest from June 13, 2013 through the date of issuance, of $4.1 million.  The Additional Notes were issued under the same indenture as the Original Notes, and are therefore treated as a single class of debt securities under the indenture.  The Company used the net proceeds from the offering to partially fund the Wycross acquisition, completed in October 2013, and intends to use the remaining proceeds to fund a portion of the 2013 capital budget, a portion of the preliminary 2014 capital budget, and for general corporate purposes.

The Senior Notes are our senior unsecured obligations and rank equally in right of payment with all of our existing and future senior unsecured indebtedness. The Senior Notes rank senior in right of payment to our future subordinated indebtedness. The Senior Notes are effectively junior in right of payment to all of our existing and future secured debt (including under the First Lien Credit Agreement) to the extent of the value of the assets securing such debt. The Senior Notes are fully and unconditionally guaranteed on a joint and several senior unsecured basis by the Subsidiary Guarantors. To the extent set forth in the indenture governing the Senior Notes, certain of our subsidiaries will be required to fully and unconditionally guarantee the Senior Notes on a joint and several senior unsecured basis in the future.

On September 18, 2013, the Company completed a public offering of 11,040,000 shares of common stock (including 1,440,000 shares purchased pursuant to the full exercise of the underwriters’ overallotment option), at an issue price of $23.00.  The Company received net proceeds from this offering of approximately $241.5 million, after deducting underwriters’ fees and offering expenses of approximately $12.4 million.  The Company used the net proceeds from the offering to partially fund the Wycross acquisition, completed in October 2013, and intends to use the remaining proceeds to fund a portion of the 2013 capital budget, a portion of the preliminary 2014 capital budget, and for general corporate purposes.

We expect to use our cash on hand, our internally generated cash flow from operations, the proceeds from the offering of the Senior Notes, and the proceeds from the recent equity offering to fund our planned capital expenditures through the end of 2013. Our

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revised capital budget for 2013 projects an investment of $420 million of development capital to drill 74 gross (55 net) Eagle Ford Shale wells, a possible small interest participation in one or more TMS wells, and a further $50 million for facilities, leasing and seismic activities. This 2013 capital budget of $470 million represents an increase of 176% over our capital spending during 2012 of $170 million and 35% over our initial 2013 spending plan of $347 million, largely as a result of our completion of the Cotulla acquisition on May 31, 2013, the TMS transactions on September 18, 2013, and the Wycross acquisition in October 2013.

Cash Flows

Our cash flows for the nine months ended September 30, 2013 and 2012 (in thousands) are as follows:

	Nine Months Ended
	September 30,
	2013			2012
Cash Flow Data:
Net cash provided by operating activities	$	108,724		$	26,195
Net cash used in investing activities	$	(698,413	)	$	(100,381	)
Net cash provided by financing activities	$	1,019,341		$	144,512

Net Cash Provided by Operating Activities.  Net cash provided by operating activities was approximately $108.7 million for the nine months ended September 30, 2013 compared to $26.2 million for the same period in 2012. The increase in net cash provided by operating activities for the nine months ended September 30, 2013 was due primarily to higher net income resulting from an increase in production and realized prices as well as higher accrued liabilities and accounts payable for the current year compared to the same period in 2012, offset by higher accounts receivable and lower accounts payable — related entities for the nine months ended September 30, 2013 as compared to the same period in 2012.

Net Cash Used in Investing Activities.  Net cash flows used in investing activities totaled approximately $698.4 million for the nine months ended September 30, 2013 compared to $100.4 million for the same period in 2012.  Capital expenditures for leasehold and drilling activities for the nine months ended September 30, 2013 totaled $295.7 million, primarily associated with the drilling and completing of 46 wells.  We paid cash of approximately $402.7 million for the oil and natural gas properties acquired in the Cotulla acquisition, the TMS transactions, the escrow deposit related to the Wycross acquisition as well as other immaterial acquisitions of oil and natural gas properties.  In addition, we invested $1.7 million in computers and other equipment and purchased $10 million of marketable securities.  Partially offsetting these costs were proceeds of $11.6 million from the sale of marketable securities.  For the nine months ended September 30, 2012, we incurred capital expenditures of $88.8 million, primarily associated with the drilling and completing of 11 wells and invested $11.6 million in available-for-sale securities.

Net Cash Provided by Financing Activities.  Net cash flows provided by financing activities totaled approximately $1.0 billion for the nine months ended September 30, 2013 compared to $144.5 million for the same period in 2012.  During the nine months ended September 30, 2013, we received net proceeds from the private placement of preferred stock of approximately $216.6 million, after deducting placement agent’s fees and offering costs payable by us of approximately $8.4 million.  We also received net proceeds of approximately $577.0 million from the private placement of our Senior Notes, consisting of face value of $600 million, including the Additional Notes which were issued at a discount to face value of $7.0 million, less debt issuance costs of approximately $16.0 million, included in the $23.1 million discussed below.   The Company also received cash of $4.1 million for accrued interest from June 13, 2013 through the date of issuance.  During the third quarter of 2013, the Company completed a public offering of common stock, and received net proceeds from this offering of approximately $241.5 million, after deducting underwriter’s fees and other expenses of approximately $12.4 million.  During the first quarter of 2013, we borrowed $50 million under our Second Lien Term Credit Agreement.  On May 30, 2013, we borrowed $90 million under our Previous First Lien Credit Agreement. On May 31, 2013, we borrowed $96 million under our First Lien Credit Agreement, and used the proceeds to repay the $90 million borrowed under our Previous First Lien Credit Agreement.  The outstanding borrowings under our First Lien Credit Agreement and Second Lien Term Credit Agreement were repaid during the second quarter of 2013 with proceeds from the offering of the Original Notes.  Other financing costs for the nine months ended September 30, 2013 included $23.1 million for debt issuance costs, $7.6 million paid for preferred dividends and $1.1 million paid for the purchase of common stock to settle taxes on the vesting of employee stock grants.

Off-Balance Sheet Arrangements

At September 30, 2013, we did not have any off-balance sheet arrangements.

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Commitments and Contractual Obligations

At September 30, 2013, our contractual obligations included our Senior Notes, interest expense on our Senior Notes, deferred premiums on our commodity hedging contracts, and asset retirement obligations. The material changes in our contractual obligations during the nine months ended September 30, 2013 included (i) the repayment of all of the approximately $96 million in borrowings outstanding under our First Lien Credit Agreement, (ii) the retirement of our Second Lien Term Credit Agreement by repaying in full the $50 million in borrowings outstanding thereunder, (iii) the issuance of our Senior Notes, and (iv) the recognition of asset retirement obligations related to our properties.  In addition, in connection with the TMS transactions, the Company has committed to carry SR for its 50% working interest in an initial 3 gross (1.5 net) TMS wells to be drilled within the AMI.  At the Company’s election, it may carry SR in an additional 3 gross (1.5 net) TMS wells if it desires to participate in additional drilling within the AMI.  The following table summarizes our contractual obligations as of September 30, 2013 (in thousands):

	Less than 1 year		1 - 3 years		3 - 5 years		More than 5 years		Total
Senior Notes	$	—	$	—	$	—	$	600,000	$	600,000
Interest expense (1)	46,758		93,000		93,000		139,500		372,258
Derivative liabilities (2)	904		478		—		—		1,382
Asset retirement obligations (3)	—		—		—		3,507		3,507
Total	$	47,662	$	93,478	$	93,000	$	743,007	$	977,147

(1) Represents estimated interest payments that will be due under the 7.750% $600 million Senior Notes that will mature on June 15, 2021.

(2) Represents payments due for deferred premiums on our commodity hedging contracts, including amounts due but not yet paid.  See Note 8 - Derivative Instruments in the Notes to the Condensed Consolidated Financial Statements under Item 1 of this Form 10-Q.

(3) Amounts represent our estimate of future asset retirement obligations. Because these costs typically extend many years into the future, estimating these future costs requires management to make estimates and judgments that are subject to future revisions based upon numerous factors, including the rate of inflation, changing technology and the political and regulatory environment. See Note 10 - Asset Retirement Obligations in the Notes to the Condensed Consolidated Financial Statements under Item 1 of this Form 10-Q.

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Non-GAAP Financial Measures

Adjusted EBITDA

We present adjusted EBITDA attributable to common stockholders (“Adjusted EBITDA”) in addition to our reported net income (loss) in accordance with U.S. GAAP.  Adjusted EBITDA is a non-GAAP financial measure that is used as a supplemental financial measure by our management and by external users of our financial statements, such as investors, commercial banks and others, to assess our operating performance as compared to that of other companies in our industry, without regard to financing methods, capital structure or historical costs basis.  It is also used to assess our ability to incur and service debt and fund capital expenditures.  We define Adjusted EBITDA as net income (loss):

Plus:

·Interest expense, including realized and unrealized losses on interest rate derivative contracts;

·Income tax expense;

·Depreciation, depletion and amortization;

·Accretion of asset retirement obligations;

·Loss (gain) on sale of oil and natural gas properties;

·Unrealized losses on derivatives;

·Impairment of oil and natural gas properties;

·Stock-based compensation expense; and

·Other non-recurring items that we deem appropriate.

Less:

·Interest income;

·Income tax benefit;

·Unrealized gains on derivatives; and

·Other non-recurring items that we deem appropriate.

Our Adjusted EBITDA should not be considered an alternative to net income (loss), operating income (loss), cash flows provided by or used in operating activities or any other measure of financial performance or liquidity presented in accordance with U.S. GAAP. Our Adjusted EBITDA may not be comparable to similarly titled measures of another company because all companies may not calculate Adjusted EBITDA in the same manner.

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The following table presents a reconciliation of our net income (loss) to Adjusted EBITDA (in thousands, except per share data):

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2013			2012			2013			2012
Net income (loss)	$	3,880		$	1,667		$	12,696		$	(17,024	)
Plus:
Interest expense	9,460			—			17,613			—
Unrealized (gains) losses on derivative instruments	8,905			2,104			6,820			(1,594		)
Depreciation, depletion, amortization and accretion	38,372			4,580			76,368			9,291
Stock-based compensation	6,657			836			14,369			24,800
Acquisition costs included in G&A	305			—			3,990			—
Less:
Interest income	(91		)	(12		)	(163		)	(31		)
Income tax benefit	(3,668		)	—			(3,668		)	—
Adjusted EBITDA	$	63,820		$	9,175		$	128,025		$	15,442

The following table presents a reconciliation of net cash provided by operating activities to Adjusted EBITDA (in thousands):

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2013		2012			2013		2012
Net cash provided by operating activities	$	39,883	$	12,703		$	108,724	$	26,195
Net change in operating assets and liabilities	15,525		(3,516		)	3,723		(10,722		)
Interest (income) expense, net	8,107		(12		)	11,588		(31		)
Acquisition costs included in G&A	305		—			3,990		—
Adjusted EBITDA	$	63,820	$	9,175		$	128,025	$	15,442

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Adjusted Net Income

We present adjusted net income attributable to common stockholders (“Adjusted Net Income”) in addition to our reported net income (loss) in accordance with U.S. GAAP. This information is provided because management believes exclusion of the impact of our unrealized gains and losses on derivatives not accounted for as cash flow hedges, stock-based compensation expense and non-recurring items will help investors compare results between periods, identify operating trends that could otherwise be masked by these items and highlight the impact that commodity price volatility has on our results. We define Adjusted Net Income as net income (loss):

Plus:

·Unrealized losses on derivatives;

·Stock-based compensation expense; and

·Other non-recurring items that we deem appropriate.

Less:

·Preferred stock dividends

·Unrealized gains on derivatives; and

·Other non-recurring items that we deem appropriate.

The following table presents a reconciliation of our net income (loss) to Adjusted Net Income (in thousands, except per share data):

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	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2013			2012			2013			2012
Net income (loss)	$	3,880		$	1,667		$	12,696		$	(17,024	)
Less: Preferred stock dividends	(5,485		)	(264		)	(13,041		)	(264		)
Net income (loss) attributable to common shares and participating securities	(1,605		)	1,403			(345		)	(17,288		)
Plus:
Unrealized gains on derivative instruments	8,905			2,104			6,820			(1,594		)
Stock-based compensation	6,657			836			14,369			24,800
Acquisition costs included in general and administrative	305			—			3,990			—
Adjusted net income	14,262			4,343			24,834			5,918
Adjusted net income allocable to participating securities	(694		)	(65		)	(1,136		)	(194		)
Adjusted net income attributable to common stockholders	$	13,568		$	4,278		$	23,698		$	5,724
Adjusted net income per common share - basic (1) (2)	$	0.39		$	0.13		$	0.70		$	0.17
Adjusted net income per common share - diluted (1) (2) (3) (4)	$	0.36		$	0.13		$	0.70		$	0.17
Weighted average number of unrestricted outstanding common shares used to calculate adjusted net income per common share - basic	34,737			33,000			33,651			33,000
Dilutive shares (1) (2) (3) (4)	17,492			—			—			—
Denominator for diluted adjusted net income per common share	52,229			33,000			33,651			33,000

(1)The nine months ended September 30, 2013 excludes 625,920 shares of weighted average restricted stock and 14,141,800 shares of common stock, respectively, resulting from an assumed conversion of the Company’s Series A Convertible Preferred Stock and Series B Convertible Preferred Stock from the calculation of the denominator for diluted Adjusted net income per common share as these shares were anti-dilutive.

(2)The three months ended September 30, 2013 includes 17,491,500 shares of common stock resulting from an assumed conversion of the Company’s Series A Convertible Preferred Stock and Series B Convertible Preferred Stock in the calculation of the denominator for diluted Adjusted net income per common share as these shares were dilutive.  In addition, the numerator includes preferred stock dividends during the period in order to arrive at Adjusted net income to calculate diluted earnings per common share.

(3)The three months ended September 30, 2013 excludes 410,779 shares of weighted average restricted stock in the calculation of the denominator for diluted Adjusted net income per common share as these shares were anti-dilutive.

(4)The three and nine months ended September 30, 2012 exclude 71,842 and 254,757 shares of weighted average restricted stock, respectively, and 996,429 and 330,931 shares of common stock, respectively, resulting from an assumed conversion of the Company’s Series A Convertible Preferred Stock and Series B Convertible Preferred Stock from the calculation of the denominator for diluted Adjusted net income per common share as these shares were anti-dilutive.

Adjusted Net Income is not intended to represent cash flows for the period, nor is it presented as a substitute for net income (loss), operating income (loss), cash flows provided by or used in operating activities or any other measure of financial performance or liquidity presented in accordance with U.S. GAAP.

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

We are exposed to market risk, including the effects of adverse changes in commodity prices and, potentially, interest rates as described below.

The primary objective of the following information is to provide quantitative and qualitative information about our potential exposure to market risks. The term “market risk” refers to the risk of loss arising from adverse changes in oil, NGLs and natural gas

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prices and interest rates. The disclosures are not meant to be precise indicators of expected future losses, but rather indicators of reasonably possible losses. All of our market risk sensitive instruments were entered into for purposes other than speculative trading.

Commodity Price Risk

Our major market risk exposure is in the pricing that we receive for our oil, NGL and natural gas production. Realized pricing is primarily driven by the prevailing market prices applicable to our natural gas and oil production. Pricing for oil, NGL and natural gas has been volatile and unpredictable for several years, and this volatility is expected to continue in the future. The prices we receive for our oil, NGL and natural gas production depend on many factors outside of our control, such as the strength of the global economy.

To reduce the impact of fluctuations in oil and natural gas prices on our revenues, or to protect the economics of property acquisitions, we periodically enter into derivative contracts with respect to a portion of our projected oil and natural gas production through various transactions that fix or, through options, modify the future prices realized. These transactions may include price swaps whereby we will receive a fixed price for our production and pay a variable market price to the contract counterparty. Additionally, we may enter into collars, whereby we receive the excess, if any, of the fixed floor over the floating rate or pay the excess, if any, of the floating rate over the fixed ceiling price. In addition, we enter into option transactions, such as puts or put spreads, as a way to manage our exposure to fluctuating prices. These hedging activities are intended to support oil and natural gas prices at targeted levels and to manage exposure to oil and natural gas price fluctuations. We do not enter into derivative contracts for speculative trading purposes.

As of September 30, 2013, we had the following crude oil swaps and put spreads covering anticipated future production as indicated below:

	Derivative
Contract Period	Instrument	Barrels	Purchased		Sold
October 1, 2013 - December 31, 2013	Put Spread	92,000	$	95.00	$	75.00
October 1, 2013 - December 31, 2013	Swap	46,000	$	97.10	n/a
October 1, 2013 - December 31, 2013	Swap	92,000	$	88.90	n/a
October 1, 2013 - December 31, 2013	Put Spread	92,000	$	90.00	$	75.00
October 1, 2013 - December 31, 2013	Swap	69,000	$	94.50	n/a
October 1, 2013 - December 31, 2013	Swap	69,000	$	95.25	n/a
October 1, 2013 - December 31, 2013	Swap	92,000	$	96.80	n/a
October 1, 2013 - December 31, 2013	Swap	46,000	$	103.69	n/a
October 1, 2013 - December 31, 2013	Swap	46,000	$	103.70	n/a
January 1, 2014 - December 31, 2014	Swap	273,750	$	91.35	n/a
January 1, 2014 - December 31, 2014	Swap	273,750	$	92.45	n/a
January 1, 2014 - December 31, 2014	Swap	273,750	$	92.00	n/a
January 1, 2014 - June 30, 2014	Swap	90,500	$	97.19	n/a
January 1, 2014 - December 31, 2014	Swap	365,000	$	95.45	n/a
January 1, 2014 - December 31, 2014	Asian Option	365,000	$	90.00	$	99.10
July 1, 2014 - December 31, 2014	Put Spread	184,000	$	90.00	$	75.00

As of September 30, 2013, we had the following three-way collar crude oil contracts that combine a long and short put with a short call as indicated below:

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Contract Period	Barrels	Short Put		Long Put		Short Call		Pricing Index
January 1, 2014 - December 31, 2014	547,500	$	65.00	$	85.00	$	102.25	NYMEX West Texas Intermediate crude
January 1, 2014 - December 31, 2014	365,000	$	75.00	$	95.00	$	107.50	Louisiana light sweet crude

At September 30, 2013, the fair value of our commodity derivative contracts was a net liability of approximately $7.0 million, including a deferred premium liability of $1.2 million, of which $7.0 million settles during the next twelve months.  A 10% increase in the oil index price above the September 30, 2013 price would result in a decrease in the fair value of our commodity derivative contracts of approximately $31.5 million; conversely, a 10% decrease in the oil index price would result in an increase of approximately $19.0 million.

Interest Rate Risk

There is currently no usage under our First Lien Credit Facility.  Our Senior Notes bear a fixed interest rate of 7.750% with an expected maturity date of June 15, 2021, and we had $600 million outstanding as of September 30, 2013. We currently do not have any interest rate derivative contracts in place.  If we incur significant debt with a risk of fluctuating interest rates in the future, we may enter into interest rate derivative contracts on a portion of our then outstanding debt to mitigate the risk of fluctuating interest rates.

Item 4.  Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report pursuant to Rule 13a-15 promulgated pursuant to the Exchange Act.  Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective to provide reasonable assurance that material information required to be disclosed by us in reports that we file or submit under the Exchange Act is appropriately recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that information required to be disclosed by us in the reports we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal Controls

There was no change in our internal control over financial reporting during the quarter ended September 30, 2013 that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II — OTHER INFORMATION

Item 1.  Legal Proceedings

Although we may, from time to time, be involved in litigation and claims arising out of our operations in the normal course of business, we are not currently a party to any material legal proceeding. In addition, we are not aware of any material legal or governmental proceedings against us or contemplated to be brought against us.

Item 1A.  Risk Factors

Consider carefully the risk factors included below, as well as those under the caption “Risk Factors” under Part I, Item 1A in our 2012 Annual Report, together with all of the other information included in this Quarterly Report on Form 10-Q; in our 2012 Annual Report; and in our other public filings, press releases, and public discussions with our management.

We may not be able to generate sufficient cash flows to service all of our indebtedness and may be forced to take other actions in order to satisfy our obligations under our indebtedness, which may not be successful.

Our ability to make scheduled payments on, or to refinance, our debt obligations will depend on our financial and operating performance, which is subject to prevailing economic and competitive conditions and certain financial, business and other factors beyond our control. We cannot assure you that our business will generate sufficient cash flows from operating activities or that future sources of capital will be available to us in an amount sufficient to permit us to service our indebtedness or to fund our other liquidity needs. If we are unable to generate sufficient cash flows to satisfy our debt obligations, we may have to undertake alternative financing plans, such as refinancing or restructuring our debt, selling assets, reducing or delaying capital investments or seeking to raise additional capital. We cannot assure you that any refinancing would be possible, that any assets could be sold or, if sold, of the timing of the sales and the amount of proceeds that may be realized from those sales, or that additional financing could be obtained on acceptable terms, if at all. Our credit facility and the indenture governing the Senior Notes contain restrictions on our ability to dispose of assets and our use of any of the proceeds. Our inability to generate sufficient cash flows to satisfy our debt obligations, or to refinance our indebtedness on commercially reasonable terms, would materially and adversely affect our financial condition and results of operations.

In addition, if we cannot make scheduled payments on our debt, we will be in default and, as a result:

·our debt holders could declare all outstanding principal and interest to be due and payable;

·the lenders under our revolving credit facility could terminate their commitments to lend us money and foreclose against the assets securing their borrowings; and

·we could be forced into bankruptcy or liquidation.

We may be able to incur substantially more debt. This could exacerbate the risks associated with our indebtedness.

Despite our current level of indebtedness, we and our subsidiaries may be able to incur substantial additional indebtedness in the future, including under our credit facility. As of September 30, 2013, we had $600 million of debt outstanding, all of which was attributable to the Senior Notes, and a borrowing base of $175 million under our credit facility, all of which was available for future revolver borrowings. Our increased indebtedness resulting from the Cotulla acquisition could adversely affect our business. In particular, it could increase our vulnerability to sustained, adverse macroeconomic weakness, limit our ability to obtain further financing and limit our ability to pursue certain operational and strategic opportunities. If new debt is added to our current debt levels, the related risks that we and our subsidiaries now face could intensify.

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Our variable rate indebtedness subjects us to interest rate risk, which could cause our debt service obligations to increase significantly.

We will be subject to interest rate risk in connection with borrowings under our credit facility, which bears interest at variable rates. Interest rate changes will not affect the market value of any debt incurred under such facility, but could affect the amount of our interest payments, and accordingly, our future earnings and cash flows, assuming other factors are held constant. We currently do not have any interest rate hedging arrangements with respect to our credit facilities, nor are any contemplated in the future. A significant increase in prevailing interest rates that results in a substantial increase in the interest rates applicable to our indebtedness could substantially increase our interest expense and have a material adverse effect on our financial condition and results of operations.

Restrictive covenants may adversely affect our operations.

Our credit facility and the indenture governing the Senior Notes contain a number of restrictive covenants that impose significant operating and financial restrictions on us and may limit our ability to engage in acts that may be in our long-term best interest, including our ability, among other things, to:

·incur or assume additional debt or provide guarantees in respect of obligations of other persons;

·issue redeemable stock and preferred stock;

·pay dividends or distributions or redeem or repurchase capital stock;

·prepay, redeem or repurchase certain debt;

·make loans and investments;

·create or incur liens;

·restrict distributions from our subsidiaries;

·sell assets and capital stock of our subsidiaries;

·consolidate or merge with or into another entity, or sell all or substantially all of our assets; and

·enter into new lines of business.

A breach of the covenants under the indenture governing the Senior Notes or under our credit facility could result in an event of default under the applicable indebtedness. An event of default may allow the creditors to accelerate the related debt and may result in an acceleration of any other debt to which a cross-acceleration or cross-default provision applies. In addition, an event of default under our credit facility would permit the lenders under the facility to terminate all commitments to extend further credit. If we were unable to repay those amounts, the lenders under our credit facility could proceed against the collateral granted to them to secure that debt.

We have no experience drilling wells on our TMS acreage, which has a limited operational history and is subject to more uncertainties than our drilling program in more established formations.

Operators have begun drilling wells in the TMS only recently. Accordingly, we have limited information on which we can determine optimum drilling and completion strategies and drilling costs (which may be higher than other trends in which we operate), or estimate production decline rates or recoverable reserves from drilling on our acreage in this trend. Our drilling plans with respect to the TMS are flexible and depend on a number of factors, including the extent to which our initial wells in the trend are commercially successful.

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The TMS and Wycross transactions involve risks associated with acquisitions and integrating acquired assets, including the potential exposure to significant liabilities, and the intended benefits of the TMS and Wycross transactions may not be realized.

The TMS and Wycross transactions each involve risks associated with acquisitions and integrating acquired assets into existing operations, including that:

·our senior management’s attention may be diverted from the management of daily operations to the integration of the assets acquired in the TMS and Wycross transactions;

·we could incur significant unknown and contingent liabilities for which we have limited or no contractual remedies or insurance coverage;

·the assets acquired in the TMS and Wycross transactions may not perform as well as we anticipate; and

·unexpected costs, delays and challenges may arise in integrating the assets acquired in the TMS and Wycross transactions into our existing operations.

Even if we successfully integrate the assets acquired in the TMS and Wycross transactions into our operations, it may not be possible to realize the full benefits we may anticipate or we may not realize these benefits within the expected timeframe. If we fail to realize the benefits we anticipate from the TMS and Wycross transactions, our business, results of operations and financial condition may be adversely affected.

We have a substantial amount of indebtedness, which may adversely affect our cash flow and our ability to operate our business, remain in compliance with debt covenants and make payments on our debt.

The aggregate amount of our outstanding indebtedness could have important consequences for you, including the following:

·any failure to comply with the obligations of any of our debt agreements, including financial and other restrictive covenants, could result in an event of default under the agreements governing such indebtedness;

·the covenants contained in our debt agreements limit our ability to borrow money in the future for acquisitions, capital expenditures or to meet our operating expenses or other general corporate obligations and may limit our flexibility in operating our business;

·we may have a higher level of debt than some of our competitors, which may put us at a competitive disadvantage;

·we may be more vulnerable to economic downturns and adverse developments in our industry or the economy in general, especially extended or further declines in oil and natural gas prices; and

·our debt level could limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate.

Our ability to meet our expenses and debt obligations will depend on our future performance, which will be affected by financial, business, economic, regulatory and other factors. We will not be able to control many of these factors, such as economic conditions and governmental regulation. We cannot be certain that our cash flow from operations will be sufficient to allow us to pay the principal and interest on our debt and meet our other obligations. If we do not have enough cash to service our debt, we may be required to refinance all or part of our existing debt, sell assets, borrow more money or raise equity. We may not be able to refinance our debt, sell assets, borrow more money or raise equity on terms acceptable to us, if at all.

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3.  Defaults Upon Senior Securities

None.

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Item 4.  Mine Safety Disclosures

Not applicable.

Item 5.  Other Information

On November 6, 2013, we made two filings with the Delaware Secretary of State to correct some inadvertent mechanical auto-formatting and resulting errors in one of our certificates of designations and to subsequently file a comprehensive restated certificate of incorporation incorporating therein the terms of our preferred stock.  The filings were effective as of the date the original instruments were filed (September 17, 2012 and May 28, 2013, respectively).  A copy our restated certificate of incorporation is filed as exhibit 3.2 to this Quarterly Report on Form 10-Q.

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Item 6.  Exhibits

EXHIBIT INDEX

Each exhibit identified below is filed or furnished as part of this report.

2.1	Purchase and Sale Agreement by and between Hess Corporation, as Seller, and Sanchez Energy Corporation, as Buyer, dated March 18, 2013 (filed as Exhibit 2.1 to the Company’s Current Report on Form 8-K on June 3, 2013, and incorporated herein by reference).*
2.2	Purchase and Sale Agreement by and between Altpoint Sanchez Holdings LLC, as Seller, and Sanchez Energy Corporation, as Buyer, dated August 7, 2013 (filed as Exhibit 2.1 to the Company’s Current Report on Form 8-K on August 13, 2013 and incorporated herein by reference).*
2.3	Purchase and Sale Agreement by and between Rock Oil Company, LLC, as Seller, and SN Cotulla Assets, LLC, as Buyer, dated as of September 6, 2013 (filed as Exhibit 2.1 to the Company’s Current Report on Form 8-K on September 9, 2013 and incorporated herein by reference).*
3.1	Certificate of Amendment of Amended and Restated Certificate of Incorporation of Sanchez Energy Corporation (filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K on May 28, 2013, and incorporated herein by reference).
3.2 (a)	Restated Certificate of Incorporation of Sanchez Energy Corporation, effective as of May 28, 2013
4.1	Indenture, dated as of June 13, 2013, among Sanchez Energy Corporation, the subsidiary guarantors named therein and U.S. Bank National Association, as trustee (filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K on June 14, 2013, and incorporated herein by reference).
4.2	First Supplemental Indenture, dated as of September 11, 2013, by and among Sanchez Energy Corporation, SN TMS, LLC, the existing guarantors and U.S. Bank National Association as trustee (filed as Exhibit 4.2 to the Company’s Current Report on Form 8-K on September 19, 2013 and incorporated herein by reference).
4.3	Registration Rights Agreement, dated as of June 13, 2013, by and among Sanchez Energy Corporation, the subsidiary guarantors named therein and RBC Capital Markets, LLC, as representative of the several initial purchasers named therein (filed as Exhibit 4.2 to the Company’s Current Report on Form 8-K on June 14, 2013, and incorporated herein by reference).
4.4	Registration Rights Agreement, dated as of September 18, 2013, by and among Sanchez Energy Corporation, the subsidiary guarantors named therein and RBC Capital Markets, LLC and Credit Suisse Securities (USA), LLC, as representatives of the several initial

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		purchasers named therein (filed as Exhibit 4.3 to the Company’s Current Report on Form 8-K on September 13, 2013 and incorporated herein by reference).
10.1		Amended and Restated Credit Agreement dated as of May 31, 2013 among Sanchez Energy Corporation, SEP Holdings III, LLC, SN Marquis LLC, and SN Cotulla Assets, LLC, as borrowers, Royal Bank of Canada, as administrative agent, Capital One, National Association, as syndication agent, RBC Capital Markets, as sole lead arranger and sole book runner, and the lenders party thereto (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K on June 3, 2013, and incorporated herein by reference).
10.2 (a)		First Amendment to Amended and Restated Credit Agreement, dated as of June 30, 2013, among the Borrowers named therein, SN Operating, LLC, the Lenders party thereto and Royal Bank of Canada, as Administrative Agent
10.3		Third Amendment to Amended and Restated Credit Agreement, dated as of September 11, 2013, among the Borrowers named therein, SN Operating, LLC, and SN TMS, LLC, the Lenders party thereto and Royal Bank of Canada, as Administrative Agent (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K on September 12, 2013 and incorporated herein by reference).
10.4 (a)		Waiver Letter and Amendment, dated July 30, 2013, among the Borrowers named therein, the Lenders party thereto and Royal Bank of Canada, as Administrative Agent
10.5		Purchase Agreement, dated June 10, 2013, by and among Sanchez Energy Corporation, the subsidiary guarantors named therein and RBC Capital Markets, LLC, as representative of the several initial purchasers named therein (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K on June 14, 2013, and incorporated herein by reference).
10.6		Purchase Agreement, dated September 13, 2013, by and among Sanchez Energy Corporation, the subsidiary guarantors named therein and RBC Capital Markets, LLC, and Credit Suisse Securities (USA), LLC, as representatives of the several initial purchasers named therein (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K on September 13, 2013, and incorporated herein by reference).
31.1(a)		Sarbanes-Oxley Section 302 certification of Principal Executive Officer.
31.2(a)		Sarbanes-Oxley Section 302 certification of Principal Financial Officer.
32.1(b)		Sarbanes-Oxley Section 906 certification of Principal Executive Officer.
32.2(b)		Sarbanes-Oxley Section 906 certification of Principal Financial Officer.
101.INS(b)	—	XBRL Instance Document.
101.SCH(b)	—	XBRL Taxonomy Extension Schema Document.
101.CAL(b)	—	XBRL Taxonomy Extension Calculation Linkbase Document.

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101.DEF(b)	—	XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB(b)	—	XBRL Taxonomy Extension Labels Linkbase Document.
101.PRE(b)	—	XBRL Taxonomy Extension Presentation Linkbase Document.

(a)Filed herewith.

(b)Furnished herewith.

*The exhibits and schedules to this agreement have been omitted from this filing pursuant to Item 601(b)(2) of Regulation S-K.  The Company will furnish copies of such omitted exhibits and schedules to the SEC upon request. Descriptions of such exhibits and schedules are on pages iv and v of the Purchase and Sale Agreement.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized, on November 8, 2013.

SANCHEZ ENERGY CORPORATION
By:	/s/ Michael G. Long
Michael G. Long
Senior Vice President and Chief Financial Officer

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EX-3.2

EXHIBIT 3.2

RESTATED

CERTIFICATE OF INCORPORATION

OF

SANCHEZ ENERGY CORPORATION

Sanchez Energy Corporation, a corporation organized and existing under the laws of the State of Delaware, DOES HEREBY CERTIFY AS FOLLOWS:

1.The name of the Corporation is “Sanchez Energy Corporation.”  The original Certificate of Incorporation of the Corporation was filed with the Secretary of State of the State of Delaware on August 22, 2011.

2.The Amended and Restated Certificate of Incorporation of the Corporation was filed with the Secretary of State of the State of Delaware on December 13, 2011.

3.On May 22, 2013, the Corporation filed with the Secretary of State of the State of Delaware a Certificate of Amendment to its Amended and Restated Certificate of Incorporation to add Article X (Limitation of Director Liability) to the Amended and Restated Certificate of Incorporation.

4.This Restated Certificate of Incorporation (“Certificate”) was duly adopted by the Board of Directors of the Corporation in accordance with Section 245 of the General Corporation Law of the State of Delaware.

5.This Certificate restates and integrates the provisions of the Amended and Restated Certificate of Incorporation of the Corporation, as amended or supplemented or restated.  This Certificate only restates and integrates and does not further amend the provisions of the Corporation’s Amended and Restated Certificate of Incorporation, as amended or supplemented or restated, and there is no discrepancy between those provisions and this Certificate.

6.The text of the Restated Certificate of Incorporation of the Corporation is hereby restated to read in its entirety as follows:

ARTICLE I
NAME

The name of the corporation is Sanchez Energy Corporation (the “Corporation”).

ARTICLE II
PURPOSE

The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware (the “DGCL”).

ARTICLE III
REGISTERED AGENT

The street address of the registered office of the Corporation in the State of Delaware is Corporation Trust Center, 1209 Orange Street in the City of Wilmington, County of New Castle, postal code 19801, and the name of the Corporation’s registered agent at such address is The Corporation Trust Company.

ARTICLE IV
CAPITALIZATION

Section 4.1Authorized Capital Stock.

The total number of shares of capital stock that the Corporation is authorized to issue is 165,000,000 shares, divided into two classes consisting of (a) 150,000,000 shares of common stock, par value $0.01 per share (“Common Stock”), and (b) 15,000,000 shares of preferred stock, par value $0.01 per share (“Preferred Stock”).

Section 4.2Preferred Stock.

(a)Shares of Preferred Stock may be issued in one or more series from time to time, with each such series to consist of such number of shares and to have such voting powers, full or limited, or no voting powers, and such designations, preferences and relative, participating, optional or other special rights, and the qualifications, limitations or restrictions thereof, as shall be stated in the resolution or resolutions providing for the issuance of such series adopted by the board of directors of the Corporation (the “Board”) and included in a certificate of designations (a “Preferred Stock Designation”) filed pursuant to the DGCL, and the Board is hereby expressly vested with the authority, to the full extent now or hereafter provided by law, to adopt any such resolution or resolutions.  The authority of the Board with respect to each series of Preferred Stock shall include, but not be limited to, determination of the following:

(i)the number of shares constituting that series and the distinctive designation of that series;

(ii)the dividend rate or rates on the shares of that series, the terms and conditions upon which and the periods in respect of which dividends shall be payable, whether dividends shall be cumulative, and, if so, from which date or dates, and the relative rights of priority, if any, of payment of dividends on shares of that series;

(iii)whether that series shall have voting rights, in addition to the voting rights provided by law, and, if so, the terms of such voting rights;

(iv)whether that series shall have conversion privileges, and, if so, the terms and conditions of such conversion, including provision for adjustment of the conversion rate in such events as the Board shall determine;

(v)whether or not the shares of that series shall be redeemable, and, if so, the terms and conditions of such redemption, including the date or dates upon or after which

2

they shall be redeemable, and the amount per share payable in the event of redemption, which amount may vary under different conditions and at different redemption dates;

(vi)whether that series shall have a sinking fund for the redemption or purchase of shares of that series, and, if so, the terms and amount of such sinking fund;

(vii)the rights of the shares of that series in the event of voluntary or involuntary liquidation, distribution of assets, dissolution or winding up of the corporation, and the relative rights of priority, if any, of payment of shares of that series; and

(viii)any other relative rights, powers, and preferences, and the qualifications, limitations and restrictions thereof, of that series.

(b)Subject to the rights of the holders of any series of Preferred Stock pursuant to the terms of this Certificate (including any Preferred Stock Designation), the number of authorized shares of Preferred Stock may be increased or decreased (but not below the number of shares thereof then outstanding) by the affirmative vote of the holders of a majority of the outstanding shares of Common Stock, irrespective of the provisions of Section 242(b)(2) of the DGCL.

(c)Each holder of shares of Common Stock, as such, shall be entitled to one vote for each share of Common Stock held of record by such holder on all matters on which stockholders generally are entitled to vote; provided, however, that except as otherwise required by law or this Certificate (including a Preferred Stock Designation), holders of Common Stock, as such, shall not be entitled to vote on any amendment to this Certificate (including any amendment to any Preferred Stock Designation) that relates solely to the terms of one or more outstanding series of Preferred Stock if the holders of such affected series are entitled, either separately or together with the holders of one or more other such series, to vote thereon pursuant to this Certificate (including any Preferred Stock Designation) or pursuant to the DGCL.

Pursuant to the authority conferred by this Article IV, the following series of Preferred Stock have been designated, each such series consisting of such number of shares, with such voting powers and other relative rights, powers, and preferences, and the qualifications, limitations and restrictions thereof, as are stated and expressed in the annex with respect to such series attached hereto as specified below and incorporated herein by reference (provided, that references therein to (i) the “Company” shall be deemed to refer to the Corporation and (ii) the “Certificate of Incorporation” shall be deemed to refer to the Amended and Restated Certificate of Incorporation of the Corporation filed with the Secretary of State of the State of Delaware on December 13, 2011):

Annex I	4.875% Convertible Perpetual Preferred Stock, Series A
Annex II	6.500% Convertible Perpetual Preferred Stock, Series B

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ARTICLE V
BOARD OF DIRECTORS

Section 5.1Number, Election and Term.

(a)The precise number of directors, other than those who may be elected by the holders of one or more series of Preferred Stock voting separately by class or series, shall be fixed from time to time exclusively pursuant to a resolution adopted by the Board.

(b)Subject to Section 5.4, until the first date on which Sanchez Energy Partners I, LP, a Delaware limited partnership (“SEP I”), Sanchez Oil & Gas Corporation, a Delaware corporation (“SOG”), and their affiliates (other than the Corporation and its subsidiaries) (each a “Specified Party” and collectively, the “Specified Parties”) cease to beneficially own, in the aggregate, shares representing 50% or more of the voting power of all then outstanding shares of the capital stock of the Corporation entitled to vote generally in the election of directors (the “Trigger Date”), a director shall hold office until the annual meeting for the year in which his or her term expires and until his or her successor has been elected and qualified, subject, however, to such director’s earlier death, resignation, retirement, disqualification or removal.  For the purposes of this Section 5.1 and Article IX, “affiliate” means, when used with respect to any person or entity, any person or entity directly or indirectly controlling, controlled by, or under common control with such person or entity.  For the purposes of this definition the term “control” (including the terms “controlling,” “controlled by” and “under common control with”) means the possession, directly or indirectly, of the power to direct or cause the direction of management or policies (whether through ownership of securities or any partnership or other ownership interest, by contract or otherwise) of a person or entity, and includes, without limitation, (i) the general partner of SEP I (the “General Partner”), (ii) any director or officer of (A) the General Partner or (B) SOG or (iii) any person or entity that the Board reasonably and in good faith concludes is an affiliate of SEP I or SOG (such conclusion to be conclusive for the purposes of this Section 5.1 and Article IX).

On and after the Trigger Date, the Board, other than those directors who may be elected by the holders of any series of preferred stock pursuant to Section 5.4, shall be divided into three classes, with the term of office of the first class to expire at the first annual meeting of stockholders following the Trigger Date, the term of office of the second class to expire at the second annual meeting of stockholders following the Trigger Date and the term of office of the third class to expire at the third annual meeting of stockholders following the Trigger Date, with each director to hold office until his or her successor shall have been duly elected and qualified, subject, however, to such director’s earlier death, resignation, retirement, disqualification or removal, and the Board shall be authorized to assign members of the Board, other than those directors who may be elected by the holders of any series of Preferred Stock, to such classes at the time such classification becomes effective.  At each annual meeting of stockholders following the Trigger Date, directors elected to succeed those directors whose terms expire shall be elected for a term of office to expire at the third succeeding annual meeting of stockholders after their election, with each director to hold office until his or her successor shall have been duly elected and qualified, subject, however, to such director’s earlier death, resignation, retirement, disqualification or removal.

(c)Unless and except to the extent that the By-Laws of the Corporation shall so require, the election of directors need not be by written ballot.

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Section 5.2Newly Created Directorships and Vacancies.

Subject to Section 5.4, newly created directorships resulting from an increase in the number of directors and any vacancies on the Board resulting from death, resignation, retirement, disqualification, removal or other cause may be filled solely by a majority vote of the directors then in office, even if less than a quorum, or by a sole remaining director (and not by stockholders), and any director so chosen shall hold office for the remainder of the full term of the class of directors to which the new directorship was added or in which the vacancy occurred and until his or her successor has been elected and qualified, subject, however, to such director’s earlier death, resignation, retirement, disqualification or removal.

Section 5.3Removal.

Subject to Section 5.4, until the Trigger Date, any or all of the directors may be removed from office at any time, with or without cause and only by the affirmative vote of holders of a majority of the voting power of all then outstanding shares of capital stock of the Corporation entitled to vote generally in the election of directors, voting together as a single class; provided, however, that on or after the Trigger Date, any or all of the directors may be removed from office only for cause and only by the affirmative vote of the holders of at least 75% in voting power of all then outstanding shares of capital stock of the Corporation entitled to vote generally in the election of directors, voting together as a single class.

Section 5.4Preferred Stock — Directors.

Notwithstanding any other provision of this Article V, and except as otherwise required by law, whenever the holders of one or more series of Preferred Stock shall have the right, voting separately by class or series, to elect one or more directors, the term of office, the filling of vacancies, the removal from office and other features of such directorships shall be governed by the terms of such series of Preferred Stock as set forth in this Certificate (including any Preferred Stock Designation).

ARTICLE VI
MEETINGS OF STOCKHOLDERS

Section 6.1Action by Written Consent.

Until the Trigger Date, any action required or permitted to be taken by stockholders of the Corporation may be taken without a meeting, without prior notice and without a vote, if a consent or consents in writing, setting forth the action so taken, is signed by the holders of outstanding stock having not less than the minimum number of votes necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted and is delivered to the Corporation to its registered office in the State of Delaware, the Corporation’s principal place of business, or the officer or agent of the Corporation having custody of the book in which proceedings of stockholders are recorded; provided, however, that on or after the Trigger Date, except as may be approved by the Board in advance of the taking of such action by means of a written consent of the stockholders or as otherwise expressly provided by the terms of any series of Preferred Stock permitting the holders of such series of Preferred Stock to act by written consent, any action required or permitted to be taken by stockholders of

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the Corporation must be effected at a duly held meeting of stockholders and may not be effected by written consent in lieu of a meeting by such stockholders.

Section 6.2Special Meetings.

On or after the Trigger Date, except as otherwise required by law or the terms of any one or more series of Preferred Stock, special meetings of stockholders of the Corporation may be called only by the Chairman of the Board, the Chief Executive Officer, the President or the Board pursuant to a resolution adopted by the Board, and, effective on or after the Trigger Date, the ability of the stockholders to call a special meeting is specifically denied; provided, however, at any time prior to the Trigger Date, special meetings of the stockholders of the Corporation shall be called by the Corporation at the request of the holders of not less than a majority in voting power of all then outstanding shares of capital stock of the Corporation entitled to vote generally in the election of directors.  The person(s) authorized to call special meetings may fix the time and place, if any, of the special meeting.

ARTICLE VII
BY-LAWS

In furtherance and not in limitation of the powers conferred upon it by law, the Board shall have the power to adopt, amend, alter or repeal the By-Laws of the Corporation.

ARTICLE VIII
AMENDMENT OF CERTIFICATE OF INCORPORATION

The Corporation reserves the right to amend, alter, change or repeal any provision contained in this Certificate (including any Preferred Stock Designation), and any other provisions authorized by the laws of the State of Delaware at the time in force may be added or inserted, in the manner now or hereafter prescribed by this Certificate, the By-laws of the Corporation or the DGCL; all rights, preferences and privileges herein conferred upon stockholders, directors or any other persons by and pursuant to this Certificate in its present form or as hereafter amended are granted subject to the right reserved in this Article VIII.  Notwithstanding any other provision of this Certificate, and in addition to any other vote that may be required by law or this Certificate (including any Preferred Stock Designation), the affirmative vote of the holders of at least a majority of the voting power of all outstanding shares of capital stock of the Corporation entitled to vote generally in the election of directors, voting together as a single class, shall be required to amend, alter or repeal, or adopt any provision of this Certificate; provided, however, that on or after the Trigger Date, the affirmative vote of the holders of at least 75% in voting power of all then outstanding shares of capital stock of the Corporation entitled to vote generally in the election of directors, voting together as a single class, shall be required to amend, alter or repeal, or adopt any provision as part of this Certificate inconsistent with the purpose and intent of Article V, Article VI, Article VII, this Article VIII, or Article IX.

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ARTICLE IX
CORPORATE OPPORTUNITIES

Section 9.1Purpose.

This Article IX contemplates that (i) certain of the Specified Parties are and may continue to be or become majority or significant stockholders of the Corporation, (ii) that certain officers and/or directors of the Specified Parties may also serve as officers and/or directors of the Corporation, (iii) that certain officers and/or directors of the Corporation may also serve as officers and/or directors of the Specified Parties, (iv) that the Corporation and the Specified Parties may engage in the same or similar activities or lines of business and have an interest in the same areas of corporate opportunities and (v) benefits may be derived by the Corporation through its continued contractual, corporate and business relations with the Specified Parties.  The provisions of this Article IX shall, to the fullest extent permitted by law, define the conduct of certain affairs of the Corporation as they may involve the Specified Parties, and the powers, rights, duties and liabilities of the Corporation and its officers, directors and stockholders in connection therewith.  For purposes of this Article IX only, the term “Corporation” shall mean the Corporation and all of its subsidiaries.

Section 9.2Right to Engage in Business Opportunities.

Except as may be otherwise provided in a written agreement between the Corporation and the Specified Parties, to the fullest extent permitted by law, the Specified Parties shall have the right to engage (and shall have no duty to refrain from engaging) in the same or similar activities or lines of business as the Corporation, and the Corporation shall not be deemed to have an interest or expectancy in any business opportunity, transaction, or other matter (each a “Business Opportunity”) in which the Specified Parties engage or seek to engage merely because the Corporation engages in the same or similar activities or lines of business as that involved in or implicated by such Business Opportunity, even if the Business Opportunity is one that the Corporation might reasonably be deemed to have pursued or had the ability or desire to pursue if granted the opportunity to do so and, except to the extent required by Section 9.3, each such Specified Party shall have no duty to communicate or offer such Business Opportunity to the Corporation.  To the fullest extent permitted by law, the Specified Parties (provided that any Specified Party who is also a director or officer of the Corporation has acted in a manner consistent with the provisions set forth in Section 9.3 below, to the extent it is applicable) shall not be deemed to have acted in bad faith or in a manner inconsistent with the best interests of the Corporation or its stockholders or to have acted in a manner inconsistent with or opposed to any fiduciary duty to the Corporation or its stockholders, as a director, officer, controlling stockholder or otherwise, by reason of the Specified Parties exercising their right to engage in the same or similar activities or lines of business as the Corporation or by reason of any such Specified Parties participation in any such activities or lines of business.  The Corporation hereby renounces any interest or expectancy in, or being offered an opportunity to participate in, any Business Opportunity that may be a corporate opportunity of the Specified Parties and the Corporation except as provided in the proviso of Section 9.3 below.

Section 9.3No Duty of the Specified Parties to Communicate Business Opportunities.

To the fullest extent permitted by law, if the Specified Parties acquire knowledge of a potential Business Opportunity that may be deemed a corporate opportunity of both the Corporation and any of the Specified Parties, then such Specified Party or Specified Parties shall have no duty to communicate or offer such Business Opportunity, or information regarding such Business Opportunity, to the Corporation and shall be permitted to pursue or acquire such

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Business Opportunity for themselves or communicate or offer such Business Opportunity to other Specified Parties or any of the Specified Parties’ affiliates (except as set forth in the proviso below) and as a result of any such actions, shall not, to the fullest extent permitted by law, be deemed to have (i) breached or acted in a manner inconsistent with or opposed to any of their duties (fiduciary or otherwise) to the Corporation and its stockholders with respect to such Business Opportunity; or (ii) acted in bad faith or in a manner inconsistent with the best interests of the Corporation or its stockholders; provided, however, with respect to each of (i) and (ii) above, a Business Opportunity offered to any Specified Party who is also a director or officer of the Corporation shall belong to the Corporation if such opportunity is expressly offered to such person in writing solely in his or her capacity as a director or officer of the Corporation.

Section 9.4Termination.

The provisions of this Article IX shall automatically terminate, expire and have no further force and effect from and after the later of (i) the Trigger Date and (ii) the date that no Specified Party is a director or officer of the Corporation.  From and after such date, any activities relating to corporate opportunities contemplated in this Article IX shall be governed by the laws of the State of Delaware.  No addition to, alteration of or termination of this Article IX or any other provision of this Certificate shall eliminate or impair the effect of this Article IX on any act, omission, right or liability that occurred prior thereto.

Section 9.5Miscellaneous.

(a)If any provision or provisions of this Article IX is held to be invalid, illegal or unenforceable as applied to any circumstance for any reason whatsoever, the validity, legality and enforceability of such provisions in any other circumstance and of the remaining provisions of this Article IX (including, without limitation, each portion of any paragraph of this Article IX containing any such provision held to be invalid, illegal or unenforceable that is not itself held to be invalid, illegal or unenforceable) shall not in any way be affected or impaired thereby.

(b)This Article IX shall not limit any protections or defenses available to, or indemnification rights of, any director or officer of the Corporation under this Certificate, the By-laws of the Corporation, any agreement between the Corporation and such officer or director or applicable law. Any person or entity purchasing or otherwise acquiring any interest in any securities of the Corporation shall be deemed to have notice of and to have consented to the provisions of this Article IX.

ARTICLE X
LIMITATION OF DIRECTOR LIABILITY

To the fullest extent that the DGCL or any other law of the State of Delaware as the same exists or is hereafter amended permits the limitation or elimination of the liability of directors, no person who is or was a director of the Corporation shall be personally liable to the Corporation or any of its stockholders for monetary damages for breach of fiduciary duty as a director.  Any repeal or amendment of this Article X by the stockholders of the Corporation or by changes in law, or the adoption of any other provision of this Certificate inconsistent with this Article X will, unless otherwise required by law, be prospective only (except to the extent such amendment

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or change in law permits the Corporation to further limit or eliminate the liability of directors) and shall not adversely affect any right or protection of a director of the Corporation existing at the time of such repeal or amendment or adoption of such inconsistent provision with respect to acts or omissions occurring prior to such repeal or amendment or adoption of such inconsistent provision.

[Signature page follows]

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IN WITNESS WHEREOF, Sanchez Energy Corporation has caused this Certificate to be duly executed in its name and on its behalf by its duly authorized officer as of May 28, 2013.

Sanchez Energy Corporation
By:	/s/Michael G. Long
Name:	Michael G. Long
Title:	Senior Vice President and Chief Financial Officer

Signature Page to Restated Certificate of Incorporation

ANNEX I

(Attached)

ANNEX I

CERTIFICATE OF DESIGNATIONS OF

4.875% CONVERTIBLE PERPETUAL PREFERRED STOCK, SERIES A

OF SANCHEZ ENERGY CORPORATION

September 17, 2012

1.Designation and Amount; Ranking.  (a) There shall be created from the 15,000,000 shares of preferred stock, par value $0.01 per share, of the Company authorized to be issued pursuant to the Certificate of Incorporation, a series of preferred stock, designated as the “4.875% Convertible Perpetual Preferred Stock, Series A,” par value $0.01 per share (the “Preferred Stock”), and the authorized number of shares of Preferred Stock shall be 3,000,000. Shares of Preferred Stock that are purchased or otherwise acquired by the Company, or that are converted into shares of Common Stock (or, if applicable, a cash payment in lieu of Common Stock pursuant to Section 5(c)), shall be cancelled and shall revert to authorized but unissued shares of Preferred Stock.

(b)The Preferred Stock, with respect to dividend rights and rights upon the liquidation, winding-up or dissolution of the Company, ranks: (i) senior to all Junior Stock; (ii) on a parity, in all respects, with all Parity Stock; and (iii) junior to all Senior Stock, in each case as provided more fully herein.

2.Definitions. As used herein, the following terms shall have the following meanings:

(a)“Accumulated Dividends” shall mean, with respect to any share of Preferred Stock, as of any date, the aggregate accumulated and unpaid dividends on such share from the Issue Date until the most recent Dividend Payment Date on or prior to such date. There shall be no Accumulated Dividends with respect to any share of Preferred Stock prior to the Issue Date.

(b)“Additional Shares” shall have the meaning specified in Section 5(e).

(c)“Affiliate” shall have the meaning ascribed to it, on the date hereof, under Rule 144 of the Securities Act.

(d)“Board of Directors” shall mean the Board of Directors of the Company or, with respect to any action to be taken by the Board of Directors, any committee of the Board of Directors duly authorized to take such action.

(e)“Business Day” shall mean any day other than a Saturday, Sunday or other day on which commercial banks in The City of New York are authorized or required by law or executive order to close.

(f)“Capital Stock” shall mean, for any entity, any and all shares, interests, rights to purchase, warrants, options, participations or other equivalents of or interests in (however designated) stock issued by that entity.

(g)“close of business” means 5:00 p.m. (New York City time).

(h)“Closing Sale Price” of the Common Stock on any date means the closing sale price per share (or if no closing sale price is reported, the average of the closing bid and ask prices or, if more than one in either case, the average of the average closing bid and the average closing ask prices) on such date as reported in composite transactions for the principal United States national or regional securities exchange on which the Common Stock is traded or, if the Common Stock is not listed for trading on a United States national or regional securities exchange on the relevant date, the last quoted bid price for the Common Stock in the over-the-counter market on the relevant date, as reported by OTC Markets Group Inc. or a similar organization. In the absence of such a quotation, the “Closing Sale Price” shall be the average of the mid-point of the last bid and ask prices for the Common Stock on the relevant date from each of at least three nationally recognized independent investment banking firms selected by the Company for this purpose.

(i)“Common Equity” of any Person shall mean Capital Stock of such Person that is generally entitled (a) to vote in the election of directors of such Person or (b) if such Person is not a corporation, to vote or otherwise participate in the selection of the governing body, partners, managers or others that will control the management or policies of such Person.

(j)“Common Stock” shall mean the common stock, par value $0.01 per share, of the Company, subject to Section 8(h).

(k)“Conversion Date” shall have the meaning specified in Section 8(b).

(l)“Conversion Price” shall mean, at any time, $50 divided by the Conversion Rate in effect at such time.

(m)“Conversion Rate” shall have the meaning specified in Section 8(a).

(n)“DTC” or “Depository” shall mean The Depository Trust Company, or any successor depository.

(o)“Dividend Payment Date” shall mean January 1, April 1, July 1 and October 1, of each year, commencing on January 1, 2013.

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(p)“Dividend Rate” shall mean the rate per annum of 4.875% per share of Preferred Stock on the Liquidation Preference, subject to increase pursuant to Section 3(b) and (c).

(q)“Dividend Record Date” shall mean, with respect to any Dividend Payment Date, the December 15, March 15, June 15 and September 15, as the case may be, immediately preceding such Dividend Payment Date.

(r)“Effective Date” shall mean the date on which a Fundamental Change event occurs or becomes effective, except that, as used in Section 8(d), “Effective Date” shall mean the first date on which the shares of the Common Stock trade on the applicable exchange or market, regular way, reflecting the relevant share split or share combination, as applicable.

(s)“Exchange Act” shall mean the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder.

(t)“Ex-Date,” when used with respect to any issuance, dividend or distribution on the Common Stock, means the first date on which the Common Stock trades on the applicable exchange or in the applicable market, regular way, without the right to receive such issuance, dividend or distribution from the Company or, if applicable, from the seller of the Common Stock on such exchange or market (in the form of due bills or otherwise) as determined by such exchange or market.

(u)“Fundamental Change” shall be deemed to have occurred at any time after the Preferred Stock is originally issued if any of the following occurs:

(i)a “person” or “group” within the meaning of Section 13(d) of the Exchange Act, other than the Company, its Subsidiaries and the employee benefit plans of the Company and its Subsidiaries, has become the direct or indirect “beneficial owner,” as defined in Rule 13d-3 under the Exchange Act, of the Company’s Common Equity representing more than 50% of the voting power of the Company’s Common Equity;

(ii)the consummation of (A) any recapitalization, reclassification or change of the Common Stock (other than changes resulting from a subdivision or combination) as a result of which the Common Stock would be converted into, or exchanged for, stock, other securities, other property or assets; (B) any share exchange, consolidation or merger of the Company pursuant to which the Common Stock will be converted into cash, securities or other property; or (C) any sale, lease or other transfer in one transaction or a series of transactions of all or substantially all of the consolidated assets of the Company and its Subsidiaries, taken as a whole, to any Person other than one of the Company’s Subsidiaries; provided, however, that any merger solely for the purpose of changing the Company’s jurisdiction of incorporation to

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the United States of America, any State thereof or the District of Columbia, and resulting in a reclassification, conversion or exchange of outstanding shares of Common Stock solely into shares of common stock of the surviving entity, shall not be a Fundamental Change;

(iii)the Common Stock (or other common stock underlying the Preferred Stock) ceases to be listed or quoted on any of The New York Stock Exchange, The NASDAQ Global Select Market or The NASDAQ Global Market (or any of their respective successors); or

(iv)the stockholders of the Company approve any plan or proposal for the liquidation or dissolution of the Company;

provided, however, that a transaction or transactions described in clause (i) or (ii) above shall not constitute a Fundamental Change, if at least 90% of the consideration received or to be received by the common stockholders of the Company, excluding cash payments for fractional shares and cash payments made pursuant to dissenters’ appraisal rights, in connection with such transaction or transactions consists of shares of common stock that are listed or quoted on any of The New York Stock Exchange, The NASDAQ Global Select Market or The NASDAQ Global Market (or any of their respective successors) or will be so listed or quoted when issued or exchanged in connection with such transaction or transactions and as a result of such transaction or transactions the Preferred Stock becomes convertible into such consideration, excluding cash payments for fractional shares pursuant to the terms hereof.

(v)“Fundamental Change Notice” shall have the meaning specified in Section 5(a).

(w)“Global Preferred Stock” shall have the meaning specified in Section 11(a)(i).

(x)“Holder” or “holder” shall mean a holder of record of the Preferred Stock.

(y)“Issue Date” shall mean September 17, 2012, the original date of issuance of the Preferred Stock.

(z)“Junior Stock” shall mean the Common Stock, all classes of the Company’s common stock and each other class of Capital Stock or series of preferred stock established after the Issue Date the terms of which do not expressly provide that such class or series ranks senior to or on a parity with the Preferred Stock as to dividend rights or rights upon the liquidation, winding-up or dissolution of the Company.

(aa)“Liquidation Preference” shall mean, with respect to each share of Preferred Stock, $50.00.

(bb)“Mandatory Conversion Date” shall have the meaning specified in Section 9(b).

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(cc)“Market Value” shall mean the average of the per share volume-weighted average prices of the Common Stock for each day during a 15 consecutive Trading Day period ending immediately prior to the date of determination, as displayed under the heading “Bloomberg VWAP” on Bloomberg page “SN <equity> AQR” (or its equivalent successor if such page is not available) in respect of the period from the scheduled open of trading until the scheduled close of trading of the primary trading session on each such Trading Day (or if such volume-weighted average price is unavailable on any such Trading Day, the Closing Sale Price shall be used for such Trading Day).  The per share volume-weighted average price on each such Trading Day shall be determined without regard to after hours trading or any other trading outside of the regular trading session trading hours.

(dd)“Officer” shall mean the Chairman of the Board of Directors, the President, any Vice President, the Treasurer, the Secretary or any Assistant Secretary of the Company.

(ee)“Officers’ Certificate” shall mean a certificate signed by two Officers.

(ff)“open of business” means 9:00 a.m. (New York City time).

(gg)“Parity Stock” shall mean any class of Capital Stock or series of preferred stock established after the Issue Date, the terms of which expressly provide that such class or series will rank on a parity with the Preferred Stock as to dividend rights or rights upon the liquidation, winding-up or dissolution of the Company.

(hh)“Person” shall mean any individual, corporation, general partnership, limited partnership, limited liability partnership, joint venture, association, joint-stock company, trust, limited liability company, unincorporated organization or government or any agency or political subdivision thereof.

(ii)“Record Date” shall mean, with respect to any dividend, distribution or other transaction or event in which the holders of the Common Stock (or other applicable security) have the right to receive any cash, securities or other property or in which the Common Stock (or such other security) is exchanged for or converted into any combination of cash, securities or other property, the date fixed for determination of holders of the Common Stock (or such other security) entitled to receive such cash, securities or other property (whether such date is fixed by the Board of Directors, statute, contract or otherwise).

(jj)“Reference Property” shall have the meaning specified in Section 8(h).

(kk)“Reorganization Event” shall have the meaning specified in Section 8(h).

(ll)“Rule 144” shall mean Rule 144 as promulgated under the Securities Act

(mm)“SEC” or “Commission” shall mean the Securities and Exchange Commission.

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(nn)“Securities Act” shall mean the Securities Act of 1933, as amended.

(oo)“Senior Stock” shall mean any class of the Company’s Capital Stock or series of preferred stock established after the Issue Date, the terms of which expressly provide that such class or series will rank senior to the Preferred Stock as to dividend rights or rights upon the liquidation, winding-up or dissolution of the Company.

(pp)“Shelf Registration Statement” shall mean a shelf registration statement filed with the SEC covering resales of Transfer Restricted Securities by holders thereof.

(qq)“Special Rights End Date” shall have the meaning specified in Section 5(e).

(rr)“Spin-Off” shall have the meaning specified in Section 8(d)(iii).

(ss)“Stock Price” shall mean (i) if holders of the Common Stock receive in exchange for their Common Stock only cash in the transaction constituting a Fundamental Change, the cash amount paid per share or (ii) otherwise, the average of the Closing Sale Prices of the Common Stock on the five Trading Days preceding, but excluding the Effective Date of the Fundamental Change.

(tt)“Subsidiary” shall mean, with respect to any Person, any corporation, association, partnership or other business entity of which more than 50% of the total voting power of shares of Capital Stock or other interests (including partnership interests) entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers, general partners or trustees thereof is at the time owned or controlled, directly or indirectly, by (i) such Person; (ii) such Person and one or more Subsidiaries of such Person; or (iii) one or more Subsidiaries of such Person.

(uu)“Trading Day” shall mean a day during which trading in the Common Stock generally occurs on the New York Stock Exchange or, if the Common Stock is not listed on the New York Stock Exchange, on the principal other national or regional securities exchange on which the Common Stock is then listed or, if the Common Stock is not listed on a national or regional securities exchange, on the principal other market on which the Common Stock is then listed or admitted for trading.  If the Common Stock is not so listed or traded, “Trading Day” means a Business Day.

(vv)“Transfer Agent” shall mean Continental Stock Transfer & Trust Company, acting as the Company’s duly appointed transfer agent, registrar, conversion agent and dividend disbursing agent for the Preferred Stock. The Company may, in its sole discretion, remove the Transfer Agent with 10 days’ prior notice to the Transfer Agent and Holders; provided that the Company shall appoint a successor Transfer Agent who shall accept such appointment prior to the effectiveness of such removal.

(ww)“Transfer Restricted Securities” shall mean (i) each share of Preferred Stock or Common Stock into which such share of Preferred Stock is converted required

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to bear the legend set forth in Section 11(c)(vi) and (ii) any shares of Common Stock issued as a dividend on any Transfer Restricted Security.

(xx)“Voting Rights Triggering Event” shall mean dividends on the Preferred Stock being in arrears and unpaid with respect to six or more quarterly dividend periods (whether or not consecutive) and including the dividend period beginning on the Issue Date and ending on January 1, 2013.

3.Dividends.  (a) Holders of shares of Preferred Stock shall be entitled to receive, when, as and if declared by the Board of Directors out of funds of the Company legally available for payment, cumulative dividends at the Dividend Rate.  Dividends on the Preferred Stock shall be payable quarterly in arrears at the Dividend Rate, and shall accumulate, whether or not earned or declared, from the most recent date to which dividends have been paid, or, if no dividends have been paid, from the Issue Date (whether or not in any dividend period or periods there shall be funds of the Company legally available for the payment of such dividends), and may be paid in cash or, where freely transferable by any non-Affiliate recipient thereof, in Common Stock as provided pursuant to Section 4. The Dividend Rate may be increased in the circumstances described in Sections 3(b) and 3(c) below. Dividends shall be payable in arrears on each Dividend Payment Date (commencing on January 1, 2013) to the holders of record of Preferred Stock as they appear on the Company’s stock register at the close of business on the relevant Dividend Record Date. Accumulations of dividends on shares of Preferred Stock shall not bear interest. Dividends payable for any period less than a full dividend period (based upon the number of days elapsed during the period) shall be computed on the basis of a 360-day year consisting of twelve 30-day months.

(b)If, at any time during the six-month period beginning on, and including, the date that is six months after the last date of original issuance of the Preferred Stock, the Company fails to timely file any document or report that the Company is required to file with the SEC pursuant to Section 13 or 15(d) of the Exchange Act, as applicable (other than reports on Form 8-K), or shares of the Preferred Stock are not otherwise freely tradable by Holders other than the Company’s Affiliates (as a result of restrictions pursuant to U.S. securities laws or the terms of the Preferred Stock or this Certificate of Designations), the Dividend Rate on the Preferred Stock shall increase by 0.50% per annum during the period for which the Company’s failure to file continues or shares of the Preferred Stock fail to be so freely tradable, as the case may be; provided, that the Company shall have 14 days, in the aggregate, to cure any such late filings before the Dividend Rate shall be increased.

(c)Further, if, and for so long as:

(i)the restrictive legend contemplated by Section 11(c)(vi) on the Preferred Stock has not been removed,

(ii)the Preferred Stock is assigned a restricted CUSIP number, or

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(iii)the Preferred Stock is not otherwise freely tradable by Holders other than the Company’s Affiliates (without restrictions pursuant to U.S. securities laws or the terms of the Preferred Stock or this Certificate of Designations),

as of the 366th day after the last date of original issuance of the Preferred Stock, the Dividend Rate on the Preferred Stock shall be increased by 0.50% per annum until the restrictive legend is removed, the Preferred Stock is assigned an unrestricted CUSIP number and the Preferred Stock is freely tradable as described above.

(d)The Company shall not, and shall use its commercially reasonable best efforts to cause any of its Affiliates not to, resell any of the Preferred Stock that constitute “restricted securities” under Rule 144 that have been reacquired by any of them.

(e)Any additional dividends paid pursuant to subsections (b) or (c) above shall be payable at the times and in the manner provided for the payment of regular dividends in Section 3(a).

(f)No dividend shall be declared or paid upon, or any sum set apart for the payment of dividends upon, any outstanding share of the Preferred Stock with respect to any dividend period unless all dividends for all preceding dividend periods have been declared and paid, or declared and a sufficient sum has been set apart for the payment of such dividend, upon all outstanding shares of Preferred Stock.

(g)No dividends or other distributions (other than a dividend or distribution payable solely in shares of Parity Stock or Junior Stock (in the case of Parity Stock) or Junior Stock (in the case of Junior Stock) and cash in lieu of fractional shares) may be declared, made or paid, or set apart for payment upon, any Parity Stock or Junior Stock, nor may any Parity Stock or Junior Stock be redeemed, purchased or otherwise acquired for any consideration (or any money paid to or made available for a sinking fund for the redemption of any Parity Stock or Junior Stock) by the Company or on behalf of the Company (except by (i) conversion into or exchange for shares of Parity Stock or Junior Stock (in the case of Parity Stock) or Junior Stock (in the case of Junior Stock) and cash solely in lieu of fractional shares of Parity Stock or Junior Stock (in the case of Parity Stock) or Junior Stock (in the case of Parity Stock) and (ii) payments in connection with the satisfaction of employees’ tax withholding obligations pursuant to employee benefit plans or outstanding awards (and payment of any corresponding requisite amounts to the appropriate governmental authority)), unless all Accumulated Dividends shall have been or contemporaneously are declared and paid, or are declared and a sum sufficient for the payment thereof is set apart for such payment, on the Preferred Stock and any Parity Stock for all dividend payment periods ending on or prior to the date of such declaration, payment, redemption, purchase or acquisition. Notwithstanding the foregoing, if full dividends have not been paid on the Preferred Stock and any Parity Stock, dividends may be declared and paid on the Preferred Stock and such Parity Stock so long as the dividends are declared and paid pro rata so that the amounts of dividends declared per share on the Preferred Stock and such Parity Stock shall in all cases bear to each other the

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same ratio that accumulated and unpaid dividends per share on the shares of Preferred Stock and such Parity Stock bear to each other.

(h)Holders of shares of Preferred Stock shall not be entitled to any dividend, whether payable in cash, property or stock, in excess of full cumulative dividends.

(i)The holders of shares of Preferred Stock at the close of business on a Dividend Record Date shall be entitled to receive the dividend payment on those shares on the corresponding Dividend Payment Date notwithstanding the conversion of such shares in accordance with Section 8 following such Dividend Record Date or the Company’s default in payment of the dividend due on such Dividend Payment Date. However, notwithstanding the foregoing, shares of Preferred Stock surrendered for conversion during the period between the close of business on any Dividend Record Date and the close of business on the Business Day immediately preceding the corresponding Dividend Payment Date must be accompanied by payment of an amount of cash equal to the dividend payable on such shares on that Dividend Payment Date; provided, that no such payment is required in respect of a mandatory conversion pursuant to Section 9 during such period or if the Special Rights End Date occurs during such period. Except as provided in Section 8, the Company shall make no payment or allowance for unpaid dividends, whether or not in arrears, on converted shares of Preferred Stock or for dividends on the shares of Common Stock issued upon conversion.

4.Method of Payment of Dividends.  (a) Subject to the restrictions set forth herein, any dividend on the Preferred Stock may be paid:

(i)in cash;

(ii)by delivery of shares of Common Stock; or

(iii)through any combination of cash and Common Stock.

(b)If the Company elects to make a dividend payment, or any portion thereof, in shares of Common Stock, the number of shares deliverable shall be such dividend payment, or such portion, divided by 97% of the Market Value per share of Common Stock as determined on the second Trading Day immediately prior to the Dividend Record Date for such dividend.

(c)The Company shall make each dividend payment on the Preferred Stock in cash, except to the extent the Company elects to make all or any portion of such payment in shares of the Common Stock as set forth above.  The Company shall give Holders notice of any such election and the portion of such payment that will be made in cash and the portion that will be made in Common Stock 15 scheduled Trading Days prior to the Dividend Record Date for such dividend.

(d)Notwithstanding the foregoing, the Company shall not pay any portion of a dividend on the Preferred Stock by delivery of Common Stock unless (i) the Common

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Stock to be delivered as payment therefor is freely transferable under the United States securities laws or the terms of the Preferred Stock or this Certificate of Designations or otherwise by the recipient without further action on its behalf, other than by reason of the fact that such recipient is the Company’s Affiliate, or (ii) a Shelf Registration Statement relating to that Common Stock has been filed with the SEC and is effective to permit the resale of that Common Stock by the holders thereof.

5.Special Rights Upon a Fundamental Change.

(a)The Company must give notice (a “Fundamental Change Notice”) of each Fundamental Change to all Holders of the Preferred Stock no later than the later of (i) 20 Business Days prior to the anticipated Effective Date (determined in good faith by the Board of Directors) of the Fundamental Change and (ii) the first public disclosure by the Company of the anticipated Fundamental Change.

(b)If a Holder converts its Preferred Stock pursuant to Section 8 below at any time during the period beginning at the open of business on the Trading Day immediately following the Effective Date of a Fundamental Change and ending at the close of business on the 30th Trading Day immediately following such Effective Date (the “Special Rights End Date”), the Company shall increase the Conversion Rate for such Holder by the number of Additional Shares determined pursuant clause (e) below.

(c)In lieu of issuing the number of shares of Common Stock issuable upon conversion pursuant to clause (e), the Company may, at its option, make a cash payment equal to the Stock Price per share of Common Stock otherwise issuable upon conversion.

(d)The Fundamental Change Notice shall be given by first-class mail to each record holder of shares of Preferred Stock, at such Holder’s address as the same appears on the books of the Company. Each such notice shall state (i) the anticipated Effective Date; (ii) that the Special Rights End Date is the 30th Trading Day immediately following the Effective Date; (iii) the name and address of the Transfer Agent; (iv) the procedures that Holders must follow to exercise their conversion right pursuant to this Section 5; and (v) whether the Company will issue shares of Common Stock or pay cash upon conversion in connection with a Fundamental Change as set forth in clause (c) above.

(e)The number of additional shares of Common Stock to be added to the Conversion Rate per share of Preferred Stock (the “Additional Shares”) as set forth above shall be determined by reference to the table below, based on the Effective Date and the Stock Price.

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	Stock Price(1)
Effective Date	$19.55	$22.50	$25.00	$27.50	$30.00	$35.00	$40.00	$50.00	$75.00	$100.00	$150.00	$200.00
September 11, 2012	0.2325	0.2030	0.1830	0.1660	0.1520	0.1310	0.1140	0.0910	0.0610	0.0460	0.0300	0.0230
October 1, 2013	0.2325	0.1897	0.1699	0.1549	0.1421	0.1212	0.1063	0.0854	0.0566	0.0427	0.0288	0.0209
October 1, 2014	0.2325	0.1663	0.1494	0.1355	0.1246	0.1058	0.0929	0.0742	0.0494	0.0376	0.0247	0.0188
October 1, 2015	0.2325	0.1346	0.1197	0.1078	0.0989	0.0842	0.0734	0.0587	0.0391	0.0293	0.0196	0.0147
October 1, 2016	0.2325	0.0907	0.0772	0.0678	0.0606	0.0501	0.0434	0.0349	0.0227	0.0170	0.0113	0.0085
October 1, 2017 and thereafter	0.2325	0.0510	0.0300	0.0140	0.0020	0.0000	0.0000	0.0000	0.0000	0.0000	0.0000	0.0000

(1)  The Stock Prices set forth in the table above shall be adjusted as of any date on which the Conversion Rate is adjusted.  The adjusted Stock Prices shall be equal to the Stock Prices immediately prior to such adjustment, multiplied by a fraction, the numerator of which is the Conversion Rate immediately prior to the adjustment giving rise to the Stock Price adjustment and the denominator of which is the Conversion Rate as so adjusted.  The number of Additional Shares in the table above will be adjusted in the same manner and at the same time as the Conversion Rate as set forth under Section 8.

(f)The exact Stock Price and Effective Date may not be set forth on the table above, in which case:

(i)if the Stock Price is between two Stock Prices on the table or the Effective Date is between two Effective Dates on the table, the number of Additional Shares shall be determined by straight-line interpolation between the number of Additional Shares set forth for the higher and lower Stock Prices or the earlier and later Effective Dates, as applicable, based on a 365-day year;

(ii)if the Stock Price is in excess of $200.00 per share (subject to adjustment in the same manner as the Stock Prices), no Additional Shares will be added to the Conversion Rate; and

(iii)if the Stock Price is less than $19.55 per share (subject to adjustment in the same manner as the Stock Prices), no Additional Shares will be added to the Conversion Rate.

(g)Whenever any provision of this Certificate of Designations requires the Company to calculate the Closing Sale Prices or the Stock Prices for purposes of a Fundamental Change over a span of multiple days, the Board of Directors shall make appropriate adjustments to each to account for any adjustment to the Conversion Rate that becomes effective, or any event requiring an adjustment to the Conversion Rate where the Record Date of the event occurs, at any time during the period when such Closing Sale Prices or Stock Prices are to be calculated.

6.Voting.  (a) The shares of Preferred Stock shall have no voting rights except as set forth below or as otherwise required by Delaware law from time to time:

(i)If and whenever at any time or times a Voting Rights Triggering Event occurs, then the Holders, voting as a single class with any other series of preferred stock or preference securities having similar voting rights that are exercisable (and with voting rights allocated pro rata based on the liquidation preference of the Preferred Stock and each such other series of preferred stock or

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preference securities) (together, the “Voting Rights Class”), shall be entitled at the next regular or special meeting of stockholders of the Company to elect two additional directors to the Board of Directors. Upon the election of any such additional directors, the number of directors that comprise the Board of Directors shall be increased by such number of additional directors.

(ii)Such voting rights may be exercised at a special meeting of the Company’s stockholders, or at any annual meeting of stockholders held for the purpose of electing directors, and thereafter at each such annual meeting until such time as all dividends in arrears on the shares of Preferred Stock shall have been paid in full, at which time or times such voting rights and the term of the directors elected pursuant to Section 6(a)(i) shall terminate.

(iii)At any meeting at which the holders of the Voting Rights Class shall have the right to elect directors as provided herein, the presence in person or by proxy of the holders of shares representing more than fifty percent (50%) in voting power of the then outstanding shares of the Voting Rights Class shall be required and shall be sufficient to constitute a quorum of such class for the election of directors by such class. The affirmative vote of the holders of shares of Preferred Stock constituting a majority of the shares of Preferred Stock present at such meeting, in person or by proxy, shall be sufficient to elect any such director.

(iv)Any director elected pursuant to the voting rights created under this Section 6(a) shall hold office until the next annual meeting of stockholders (unless such term was previously terminated pursuant to Section 6(a)(ii)) and any vacancy in respect of any such director shall be filled only by vote of the remaining director so elected by holders of the Voting Rights Class, or if there be no such remaining director, by the holders of shares of the Voting Rights Class at the next annual meeting of stockholders. Upon any termination of such voting rights, the term of office of all directors elected pursuant to this Section 6 shall terminate.

(v)So long as any shares of Preferred Stock remain outstanding, unless a greater percentage shall then be required by law, the Company shall not, without the affirmative vote or consent of the Holders of at least 66 2/3% of the outstanding Preferred Stock voting or consenting, as the case may be, separately as one class, (A) create, authorize or issue any class or series of Senior Stock (or any security convertible into Senior Stock) or (B) amend the Certificate of Incorporation of the Company by merger or otherwise so as to affect adversely the rights, preferences, privileges or voting rights of Holders of shares of Preferred Stock specified herein.

(vi)In all cases in which Holders of Preferred Stock shall be entitled to vote, each share of Preferred Stock shall be entitled to one vote.

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(b)The Company may authorize, increase the authorized amount of, or issue any class or series of, Parity Stock (including additional Preferred Stock) or Junior Stock, without the consent of the holders of the Preferred Stock, and in taking such actions the Company shall not be deemed to have affected, and any amendment of the Certificate of Incorporation of the Company that effects such actions shall not be deemed to affect, adversely the rights, preferences, privileges or voting rights of Holders of shares of Preferred Stock specified herein.

7.Liquidation Rights.  (a) In the event of any liquidation, winding-up or dissolution of the Company, whether voluntary or involuntary, each Holder of shares of Preferred Stock shall be entitled to receive and to be paid out of the assets of the Company available for distribution to its stockholders the Liquidation Preference plus Accumulated Dividends to the date fixed for liquidation, winding-up or dissolution in preference to the holders of, and before any payment or distribution is made on, any Junior Stock, including, without limitation, the Common Stock.

(b)Neither the sale (for cash, shares of stock, securities or other consideration) of all or substantially all the assets or business of the Company (other than in connection with the liquidation, winding-up or dissolution of the Company) nor the merger or consolidation of the Company into or with any other Person shall be deemed to be a liquidation, winding-up or dissolution, voluntary or involuntary, for the purposes of this Section 7.

(c)After the payment to the Holders of the shares of Preferred Stock of full preferential amounts provided for in this Section 7, the Holders of Preferred Stock as such shall have no right or claim to any of the remaining assets of the Company.

(d)In the event the assets of the Company available for distribution to the Holders of shares of Preferred Stock and holders of shares of Parity Stock upon any liquidation, winding-up or dissolution of the Company, whether voluntary or involuntary, shall be insufficient to pay in full all amounts to which such Holders are entitled pursuant to Section 7, no such distribution shall be made on account of any shares of Parity Stock upon such liquidation, dissolution or winding-up unless proportionate distributable amounts shall be paid on account of the shares of Preferred Stock, equally and ratably, in proportion to the full distributable amounts for which holders of all Preferred Stock and of any Parity Stock are entitled upon such liquidation, winding-up or dissolution.

8.Conversion.  (a) Each Holder of Preferred Stock shall have the right at any time, at its option, to convert, subject to the terms and provisions of this Section 8, any or all of such Holder’s shares of Preferred Stock at an initial conversion rate of 2.3250 shares of fully paid and nonassessable shares of Common Stock (subject to adjustment as provided in this Section 8, the “Conversion Rate”) per share of Preferred Stock.  Upon conversion of any share of Preferred Stock, the Company shall deliver to the converting Holder, in respect of each share of Preferred Stock being converted, a number of shares of Common Stock equal to the Conversion Rate, together with a cash payment or an additional whole share, at the Company’s election, if applicable, in lieu of any fractional

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share of Common Stock in accordance with Section 10, on the third Business Day immediately following the relevant Conversion Date.

(b)Before any Holder shall be entitled to convert a share of Preferred Stock as set forth above, such Holder shall (i) in the case of a beneficial interest in a Global Preferred Stock, comply with the procedures of the Depository in effect at that time and, if required, pay funds equal to interest payable on the next Dividend Payment Date to which such Holder is not entitled as set forth in Section 3(i) and (ii) in the case of Certificated Preferred Stock (1) complete, manually sign and deliver an irrevocable notice to the office of the Conversion Agent as set forth in the Form of Notice of Conversion (or a facsimile thereof) in the form of Exhibit B hereto (a “Notice of Conversion”) and state in writing therein the number of shares of Preferred Stock to be converted and the name or names (with addresses) in which such Holder wishes the certificate or certificates for any shares of Common Stock to be delivered to be registered, (2) surrender such shares of Preferred Stock, at the office of the Conversion Agent, (3) if required, furnish appropriate endorsements and transfer documents and (4) if required, pay funds equal to interest payable on the next Dividend Payment Date to which such Holder is not entitled as set forth in Section 3(i).  The Conversion Agent shall notify the Company of any conversion pursuant to this Section 8 on the Conversion Date for such conversion. The date on which a Holder complies with the procedures in this clause (b) is the “Conversion Date.”  If more than one share of Preferred Stock shall be surrendered for conversion at one time by the same Holder, the number of shares of Common Stock to be delivered upon conversion of such shares of Preferred Stock shall be computed on the basis of the aggregate number of shares of Preferred Stock so surrendered.

(c)Immediately prior to the close of business on the Conversion Date with respect to a conversion, a converting Holder of Preferred Stock shall be deemed to be the holder of record of the Common Stock issuable upon conversion of such Holder’s Preferred Stock notwithstanding that the share register of the Company shall then be closed or that certificates representing such Common Stock shall not then be actually delivered to such Holder. On the date of any conversion, all rights with respect to the shares of Preferred Stock so converted, including the rights, if any, to receive notices, will terminate, except only the rights of holders thereof to (i) receive certificates for the number of whole shares of Common Stock into which such shares of Preferred Stock have been converted (with such adjustment or cash payment for fractional shares as the Company may elect pursuant to Section 10); and (ii) exercise the rights to which they are thereafter entitled as holders of Common Stock.

(d)The Conversion Rate shall be adjusted, without duplication, upon the occurrence of any of the following events:

(i)If the Company exclusively issues shares of Common Stock as a dividend or distribution on all shares of its Common Stock, or if the Company effects a share split or share combination, the Conversion Rate shall be adjusted based on the following formula:

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where,

CR0=the Conversion Rate in effect immediately prior to the close of business on the Record Date for such dividend or distribution, or immediately prior to the open of business on the Effective Date of such share split or share combination, as the case may be;

CR1=the Conversion Rate in effect immediately after the close of business on the Record Date for such dividend or distribution, or immediately after the open of business on the Effective Date of such share split or share combination, as the case may be;

OS0=the number of shares of Common Stock outstanding immediately prior to the close of business on the Record Date for such dividend or distribution, or immediately prior to the open of business on the Effective Date of such share split or share combination, as the case may be; and

OS1=the number of shares of Common Stock outstanding immediately after giving effect to such dividend or distribution, or such share split or share combination, as the case may be.

Any adjustment made under this Section 8(d)(i) shall become effective immediately after the close of business on the Record Date for such dividend or distribution, or immediately after the open of business on the Effective Date for such share split or share combination, as the case may be. If any dividend or distribution of the type described in this Section 8(d)(i) is declared but not so paid or made, the Conversion Rate shall be immediately readjusted, effective as of the date the Board of Directors determines not to pay such dividend or distribution, to the Conversion Rate that would then be in effect if such dividend or distribution had not been declared.

(ii)If the Company distributes to all or substantially all holders of its Common Stock any rights, options or warrants entitling them, for a period expiring not more than 60 days immediately following the announcement date of such distribution, to purchase or subscribe for shares of its Common Stock at a price per share that is less than the average of the Closing Sale Prices of the Common Stock over the 10 consecutive Trading Day period ending on, and including, the Trading Day immediately preceding the Ex-Date of such distribution, the Conversion Rate shall be increased based on the following formula:

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where,

CR0=the Conversion Rate in effect immediately prior to the close of business on the Record Date for such distribution;

CR1=the Conversion Rate in effect immediately after the close of business on the Record Date for such distribution;

OS0=the number of shares of Common Stock outstanding immediately prior to the close of business on the Record Date for such distribution;

X=the total number of shares of Common Stock issuable pursuant to such rights, options or warrants; and

Y=the number of shares of Common Stock equal to the aggregate price payable to exercise such rights, options or warrants, divided by the average of the Closing Sale Prices of the Common Stock over the 10 consecutive Trading Day period ending on, and including, the Trading Day immediately preceding the Ex-Date of such distribution.

Any increase made under this Section 8(d)(ii) shall be made successively whenever any such rights, options or warrants are distributed and shall become effective immediately after the close of business on the Record Date for such distribution. To the extent that shares of Common Stock are not delivered after the expiration of such rights, options or warrants, the Conversion Rate shall be readjusted, effective as of the date of such expiration, to the Conversion Rate that would then be in effect had the increase with respect to the distribution of such rights, options or warrants been made on the basis of delivery of only the number of shares of Common Stock actually delivered. If such rights, options or warrants are not so distributed, the Conversion Rate shall be decreased, effective as of the date the Board of Directors determines not to make such distribution, to be the Conversion Rate that would then be in effect if such Record Date for such distribution had not occurred.

For purposes of this Section 8(d)(ii), in determining whether any rights, options or warrants entitle the holders to subscribe for or purchase shares of Common Stock at less than such average of the Closing Sale Prices of the Common Stock for the 10 consecutive Trading Day period ending on, and including, the Trading Day immediately preceding the Ex-Date of such distribution, and in determining the aggregate offering price of such shares of Common Stock, there shall be taken into account any consideration received by the Company for such rights, options or warrants and any amount payable on

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exercise or conversion thereof, the value of such consideration, if other than cash, to be determined by the Board of Directors.

(iii)If the Company distributes shares of its Capital Stock, evidences of its indebtedness or other assets, securities or property of the Company or rights, options or warrants to acquire its Capital Stock or other securities, to all or substantially all holders of Common Stock, excluding (a) dividends, distributions or issuances as to which an adjustment was effected pursuant to Section  8(d)(i) or Section 8(d)(ii), (b) dividends or distributions paid exclusively in cash as to which an adjustment was effected pursuant to (or a cash amount paid pursuant to the last paragraph of) Section 8(d)(iv) and (c) Spin-Offs as to which the provisions set forth below in this Section 8(d)(iii) shall apply (any of such shares of Capital Stock, evidences of indebtedness, other assets, securities or property or rights, options or warrants to acquire Capital Stock or other securities, the “Distributed Property”), then the Conversion Rate shall be increased based on the following formula:

where,

CR0=the Conversion Rate in effect immediately prior to the close of business on the Record Date for such distribution;

CR1       =the Conversion Rate in effect immediately after the close of business on the Record Date for such distribution;

SP0=the average of the Closing Sale Prices of the Common Stock over the 10 consecutive Trading Day period ending on, and including, the Trading Day immediately preceding the Ex-Date for such distribution; and

FMV=the fair market value as of the Record Date for such distribution (as determined by the Board of Directors) of the Distributed Property with respect to each outstanding share of the Common Stock.

Any increase made under the portion of this Section 8(d)(iii) above shall become effective immediately after the close of business on the Record Date for such distribution. If such distribution is not so paid or made, the Conversion Rate shall be decreased, effective as of the date the Board of Directors determines not to pay the distribution, to be the Conversion Rate that would then be in effect if such distribution had not been declared.

Notwithstanding the foregoing, if “FMV” (as defined above) is equal to or greater than “SP0” (as defined above), in lieu of the foregoing increase, each Holder of Preferred Stock shall receive, for each share of Preferred Stock, at the

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same time and upon the same terms as holders of the Common Stock, the amount and kind of Distributed Property that such Holder would have received as if such Holder owned a number of shares of Common Stock equal to the Conversion Rate in effect on the Record Date for the distribution.

With respect to an adjustment pursuant to this Section 8(d)(iii) where there has been a payment of a dividend or other distribution on the Common Stock consisting solely of shares of Capital Stock of any class or series, or similar equity interests, of or relating to a Subsidiary or other business unit of the Company where such Capital Stock or similar equity interest is, or will be when issued, listed or admitted for trading on a U.S. national securities exchange (a “Spin-Off”), the Conversion Rate will be increased based on the following formula:

where,

CR0=the Conversion Rate in effect immediately prior to the close of business on the 10th Trading Day immediately following, and including, the Ex-Date for the Spin-Off;

CR1=the Conversion Rate in effect immediately after the close of business on the 10th Trading Day immediately following, and including, the Ex-Date for the Spin-Off;

FMV=the average of the Closing Sale Prices of the Capital Stock or similar equity interest distributed to holders of the Common Stock applicable to one share of Common Stock over the 10 consecutive Trading Day period immediately following, and including, the Ex-Date for the Spin-Off; and

MP0      =the average of the Closing Sale Prices of the Common Stock over the 10 consecutive Trading Day period immediately following, and including, the Ex-Date for the Spin-Off.

The adjustment to the Conversion Rate under the preceding paragraph shall become effective at the close of business on the 10th Trading Day immediately following, and including, the Ex-Date for the Spin-Off; provided that, for purposes of determining the Conversion Rate, in respect of any conversion during the 10 Trading Days following, and including, the Ex-Date of any Spin-Off, references within the portion of this Section 8(d)(iii) related to Spin-Offs to 10 consecutive Trading Days shall be deemed to be replaced with such lesser number of consecutive Trading Days as have elapsed between the Ex-Date of such Spin-Off and the relevant Conversion Date.

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(iv)If any cash dividend or distribution is made to all or substantially all holders of the Common Stock, excluding any consideration payable in connection with a tender or exchange offer made by the Company or any of its Subsidiaries, the Conversion Rate shall be increased based on the following formula:

where,

CR0=the Conversion Rate in effect immediately prior to the close of business on the Record Date for such dividend or distribution;

CR1=the Conversion Rate in effect immediately after the close of business on the Record Date for such dividend or distribution;

SP0=the average of the Closing Sale Prices of the Common Stock over the 10 consecutive Trading Day period ending on, and including, the Trading Day immediately preceding the Ex-Date for such dividend or distribution; and

C=the amount in cash per share of Common Stock the Company distributes to all or substantially all holders of its Common Stock.

Any increase pursuant to this Section 8(d)(iv) shall become effective immediately after the close of business on the Record Date for such dividend or distribution. If such dividend or distribution is not so paid, the Conversion Rate shall be decreased, effective as of the date the Board of Directors determines not to pay or make such dividend or distribution, to be the Conversion Rate that would then be in effect if such dividend or distribution had not been declared.

Notwithstanding the foregoing, if “C” (as defined above) is equal to or greater than “SP0” (as defined above), in lieu of the foregoing increase, each Holder of Preferred Stock shall receive, for each share of Preferred Stock, at the same time and upon the same terms as holders of the Common Stock, the amount of cash that such Holder would have received as if such Holder owned a number of shares of Common Stock equal to the Conversion Rate on the Record Date for such cash dividend or distribution.

(v)If the Company or any of its Subsidiaries makes a payment in respect of a tender offer or exchange offer for the Common Stock and the cash and value of any other consideration included in the payment per share of the Common Stock exceeds the average of the Closing Sale Prices of the Common Stock over the 10 consecutive Trading Day period commencing on, and including, the Trading Day next succeeding the last date on which tenders or exchanges may

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be made pursuant to such tender or exchange offer, the Conversion Rate shall be increased based on the following formula:

where,

CR0       =the Conversion Rate in effect immediately prior to the close of business on the last Trading Day of the 10 consecutive Trading Day period commencing on, and including, the Trading Day next succeeding the date such tender or exchange offer expires;

CR1       =the Conversion Rate in effect immediately after the close of business on the last Trading Day of the 10 consecutive Trading Day period commencing on, and including, the Trading Day next succeeding the date such tender or exchange offer expires;

AC=the aggregate value of all cash and any other consideration (as determined by the Board of Directors) paid or payable for shares of Common Stock purchased in such tender or exchange offer;

OS0        =the number of shares of Common Stock outstanding immediately prior to the date such tender or exchange offer expires (prior to giving effect to the purchase of all shares of Common Stock accepted for purchase or exchange in such tender or exchange offer);

OS1        =the number of shares of Common Stock outstanding immediately after the date such tender or exchange offer expires (after giving effect to the purchase of all shares of Common Stock accepted for purchase or exchange in such tender or exchange offer); and

SP1         =the average of the Closing Sale Prices of the Common Stock over the 10 consecutive Trading Day period commencing on, and including, the Trading Day next succeeding the date such tender or exchange offer expires.

The increase to the Conversion Rate under this Section 8(d)(v) shall occur at the close of business on the 10th Trading Day immediately following, and including, the Trading Day next succeeding the date such tender or exchange offer expires; provided that, for purposes of determining the Conversion Rate, in respect of any conversion during the 10 Trading Days immediately following, and including, the Trading Day next succeeding the date that any such tender or exchange offer expires, references within this Section 8(d)(v) to 10 consecutive Trading Days shall be deemed to be replaced with such lesser number of

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consecutive Trading Days as have elapsed between the date such tender or exchange offer expires and the relevant Conversion Date.

In the event that the Company or one of its Subsidiaries is obligated to purchase shares of Common Stock pursuant to any such tender offer or exchange offer, but the Company or such Subsidiary is permanently prevented by applicable law from effecting any such purchases, or all such purchases are rescinded, then the Conversion Rate shall be readjusted to be such Conversion Rate that would then be in effect if such tender offer or exchange offer had not been made.

(vi)All calculations and other determinations under this Section 8(d) shall be made by the Company and shall be made to the nearest one-ten thousandth (1/10,000th) of a share. Notwithstanding anything herein to the contrary, no adjustment under this Section 8(d) shall be made to the Conversion Rate unless such adjustment would result in a change of at least 1% in the Conversion Rate then in effect. Any lesser adjustment shall be carried forward and shall be made at the time of and together with the next subsequent adjustment, if any, which, together with any adjustment or adjustments so carried forward, shall amount to a change of at least 1% in such Conversion Rate; provided, however, that the Company shall make such carried-forward adjustments, regardless of whether the aggregate adjustment is less than 1%, (a) on December 31 of each calendar year, and (b) on the Conversion Date for any conversions of Preferred Stock.  No adjustment to the Conversion Rate shall be made if it results in a Conversion Price that is less than the par value (if any) of the Common Stock.  The Company shall not take any action that would result in the Conversion Price being less than the par value (if any) of the Common Stock pursuant to this Certificate of Designations and without giving effect to the previous sentence.

(vii)In addition to those adjustments required by clauses (i), (ii), (iii), (iv) and (v) of this Section 8(d), and to the extent permitted by applicable law and subject to the applicable rules of The New York Stock Exchange, the Company from time to time may increase the Conversion Rate by any amount for a period of at least 20 Business Days or any longer period permitted or required by law if the increase is irrevocable during that period and the Board of Directors determines that such increase would be in the Company’s best interest.  In addition, the Company may (but is not required to) increase the Conversion Rate to avoid or diminish any income tax to holders of Common Stock or rights to purchase Common Stock in connection with a dividend or distribution of shares (or rights to acquire shares) or similar event.  Whenever the Conversion Rate is increased pursuant to any of the preceding two sentences, the Company shall mail to the Holder of each share of Preferred Stock at its last address appearing on the stock register of the Company a notice of the increase at least 15 days prior to the date the increased Conversion Rate takes effect, and such notice shall state the increased Conversion Rate and the period during which it will be in effect.

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(viii)For purposes of this Section 8(d), the number of shares of Common Stock at any time outstanding shall not include shares held in the treasury of the Company so long as the Company does not pay any dividend or make any distribution on shares of Common Stock held in the treasury of the Company, but shall include shares issuable in respect of scrip certificates issued in lieu of fractions of shares of Common Stock.

(ix)If any applicable law requires the deduction or withholding of any tax from any payment or deemed dividend to a Holder on its Preferred Stock, the Company or an applicable withholding agent may withhold on cash dividends, shares of Common Stock or sale proceeds paid, subsequently paid or credited with respect to such Holder or his successors and assigns.

(e)Notwithstanding anything to the contrary in Section 8(d), no adjustment to the Conversion Rate shall be made with respect to any transaction described in Section 8(d)(ii) through Section 8(d)(iv) (other than for share splits or share combinations) if the Company makes provision for each Holder of the Preferred Stock to participate in such transaction, at the same time as holders of the Common Stock, without conversion, as if such Holder held a number of shares of Common Stock equal to the Conversion Rate in effect on the Record Date or Effective Date, as the case may be, for such transaction, multiplied by the number of shares of Preferred Stock held by such Holder.

(f)If the Company shall take a record of the holders of its Common Stock for the purpose of entitling them to receive a dividend or other distribution, and shall thereafter (and before the dividend or distribution has been paid or delivered to stockholders) legally abandon its plan to pay or deliver such dividend or distribution, then thereafter no adjustment in the Conversion Rate then in effect shall be required by reason of the taking of such record.

(g)Upon any increase in the Conversion Rate, the Company promptly shall deliver to each Holder a certificate signed by an authorized officer of the Company, setting forth in reasonable detail the event requiring the adjustment and the method by which such adjustment was calculated and specifying the increased Conversion Rate then in effect following such adjustment.

(h)In the case of:

(i)any recapitalization, reclassification or change of the Common Stock (other than changes resulting from a subdivision or combination),

(ii)any consolidation, merger or combination involving the Company,

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(iii)any sale, lease or other transfer to a third party of the consolidated assets of the Company and the Company’s Subsidiaries substantially as an entirety, or

(iv)any statutory share exchange,

in each case, as a result of which the Common Stock is converted into, or exchanged for, stock, other securities, other property or assets (including cash or any combination thereof) (any such transaction or event, a “Reorganization Event”), then, at and after the effective time of such Reorganization Event, the right to convert each share of Preferred Stock shall be changed into a right to convert such share into the kind and amount of shares of stock, other securities or other property or assets (including cash or any combination thereof) that a holder of a number of shares of Common Stock equal to the Conversion Rate immediately prior to such Reorganization Event would have owned or been entitled to receive upon such Reorganization Event (such stock, securities or other property or assets, the “Reference Property”).  If the Reorganization Event causes the Common Stock to be converted into, or exchanged for, the right to receive more than a single type of consideration (determined based in part upon any form of stockholder election), then the Reference Property into which the Preferred Stock will be convertible shall be deemed to be the weighted average of the types and amounts of consideration received by the holders of Common Stock that affirmatively make such an election.  The Company shall notify Holders of such weighted average as soon as practicable after such determination is made.  The Company shall not become a party to any Reorganization Event unless its terms are consistent with this Section 8(h).  None of the foregoing provisions shall affect the right of a Holder of Preferred Stock convert its Preferred Stock into shares of Common Stock as set forth in Section 8(a) prior to the effective time of such Reorganization Event.  Notwithstanding Section 8(d), no adjustment to the Conversion Rate shall be made for any Reorganization Event to the extent stock, securities or other property or assets become the Reference Property receivable upon conversion of Preferred Stock.

The Company shall provide, by amendment hereto effective upon any such Reorganization Event, for anti-dilution and other adjustments that shall be as nearly equivalent as is possible to the adjustments provided for in this Section 8.  The provisions of this Section 8 shall apply to successive Reorganization Events.

In this Certificate of Designations, if the Common Stock has been replaced by Reference Property as a result of any such Reorganization Event, references to the Common Stock are intended to refer to such Reference Property.

(i)The Company shall at all times reserve and keep available for issuance upon the conversion of the Preferred Stock such maximum number of its authorized but unissued shares of Common Stock as will from time to time be sufficient to permit the conversion of all outstanding shares of Preferred Stock (including any Additional Shares in connection with a Fundamental Change), and shall take all action required to increase the authorized number of shares of Common Stock if at any time there shall be

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insufficient unissued shares of Common Stock to permit such reservation or to permit the conversion of all outstanding shares of Preferred Stock (including any Additional Shares in connection with a Fundamental Change) or the payment or partial payment of dividends declared on Preferred Stock that are payable in Common Stock.

(j)The issuance or delivery of certificates for Common Stock upon the conversion of shares of Preferred Stock or the payment or partial payment of a dividend  on Preferred Stock in Common Stock, shall be made without charge to the converting holder or recipient of shares of Preferred Stock for such certificates or for any tax in respect of the issuance or delivery of such certificates or the securities represented thereby, and such certificates shall be issued or delivered in the respective names of, or in such names as may be directed by, the holders of the shares of Preferred Stock converted; provided, however, that the Company shall not be required to pay any tax which may be payable in respect of any transfer involved in the issuance and delivery of any such certificate in a name other than that of the holder of the shares of the relevant Preferred Stock and the Company shall not be required to issue or deliver such certificate unless or until the Person or Persons requesting the issuance or delivery thereof shall have paid to the Company the amount of such tax or shall have established to the reasonable satisfaction of the Company that such tax has been paid.

(k)Notwithstanding Sections 8(d)(ii) and 8(d)(iii), the Company’s adoption of a rights plan (including the distribution of rights pursuant thereto to all holders of the Common Stock) shall not result in an adjustment to the Conversion Rate pursuant to this Section 8 and upon conversion of Preferred Stock the Holder will receive, in addition to the Common Stock to which he is entitled, a corresponding number of rights in accordance with the rights plan unless prior to any conversion, such rights have separated from the shares of Common Stock, in which case, and only in such case, the Conversion Rate will be adjusted at the time of separation as if the Company had distributed to all holders of its Common Stock, shares of Capital Stock, evidences of indebtedness, assets, securities, property, rights, options or warrants as described in Section 8(d)(iii) above, subject to readjustment in the event of the expiration, termination or redemption of such rights.

9.Mandatory Conversion.  (a) At any time on or after October 5, 2017, the Company shall have the right, at its option, to cause all outstanding shares of Preferred Stock to be automatically converted into that number of whole shares of Common Stock for each share of Preferred Stock equal the Conversion Rate in effect on the Mandatory Conversion Date, with such adjustment or cash payment for fractional shares as the Company may elect pursuant to Section 10. The Company may exercise its right to cause a mandatory conversion pursuant to this Section 9 only if the Closing Sale Price of the Common Stock equals or exceeds 130% of the Conversion Price for at least 20 Trading Days (whether or not consecutive) in a period of 30 consecutive Trading Days, including the last Trading Day of such 30-day period, ending on, and including, the Trading Day immediately preceding the Business Day on which the Company issues a press release announcing the mandatory conversion as described in Section 9(b).

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(b)To exercise the mandatory conversion right described in Section 9, the Company must issue a press release for publication on the Dow Jones News Service or Bloomberg Business News (or if either such service is not available, another broadly disseminated news or press release service selected by the Company) prior to the open of business on the first Trading Day following any date on which the condition described in Section 9 is met, announcing such a mandatory conversion. The Company shall also give notice by mail or by publication (with subsequent prompt notice by mail) to the Holders of the Preferred Stock (not later than three Business Days after the date of the press release) of the mandatory conversion announcing the Company’s intention to convert the Preferred Stock. The conversion date will be a date selected by the Company (the “Mandatory Conversion Date”) and will be no later than 10 calendar days after the date on which the Company issues the press release described in this Section 9(b).

(c)In addition to any information required by applicable law or regulation, the press release and notice of a mandatory conversion described in Section 9(b) shall state, as appropriate: (i) the Mandatory Conversion Date; (ii) the number of shares of Common Stock to be issued upon conversion of each share of Preferred Stock; and (iii) that dividends on the Preferred Stock to be converted will cease to accrue on the Mandatory Conversion Date.

(d)On and after the Mandatory Conversion Date, dividends shall cease to accrue on the Preferred Stock called for a mandatory conversion pursuant to Section 9 and all rights of Holders of such Preferred Stock shall terminate except for the right to receive the whole shares of Common Stock issuable upon conversion thereof with such adjustment or cash payment for fractional shares as the Company may elect pursuant to Section 10. The full amount of any dividend payment with respect to the Preferred Stock called for a mandatory conversion pursuant to Section 9 on a date during the period beginning at the close of business on any Dividend Record Date and ending on the close of business on the corresponding Dividend Payment Date shall be payable on such Dividend Payment Date to the record holder of such share at the close of business on such Dividend Record Date if such share has been converted after such Dividend Record Date and prior to such Dividend Payment Date. Except as provided in the immediately preceding sentence with respect to a mandatory conversion pursuant to Section 9, no payment or adjustment shall be made upon conversion of Preferred Stock for Accumulated Dividends or dividends with respect to the Common Stock issued upon such conversion thereof.

(e)The Company may not authorize, issue a press release or give notice of any mandatory conversion pursuant to Section 9 unless, prior to giving the conversion notice, all Accumulated Dividends on the Preferred Stock (whether or not declared) for periods ended prior to the date of such conversion notice shall have been paid.

(f)In addition to the mandatory conversion right described in Section 9, if there are fewer than 300,000 shares of Preferred Stock outstanding, the Company shall have the right, at any time on or after October 5, 2017, at its option, to cause each such outstanding share of Preferred Stock to be automatically converted into that number of

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whole shares of Common Stock equal to the quotient of (i) the Liquidation Preference, divided by (ii) the lesser of (A) the Conversion Price as of the Mandatory Conversion Date and (B) the Market Value as determined on the second Trading Day immediately prior to the Mandatory Conversion Date, with such adjustment or cash payment for fractional shares as the Company may elect pursuant to Section 10. The provisions of clauses (b) (other than requirements relating to the conditions in Section 9(a)), (c), (d), and (e) of this Section 9 shall apply to any Mandatory Conversion pursuant to this clause (f); provided, however, that (i) the Mandatory Conversion Date described in Section 9(b) shall not be less than 15 scheduled Trading Days nor more than 30 scheduled Trading Days after the date on which the Company issues a press release pursuant to Section 9(b) announcing such mandatory conversion and (ii) the press release and notice of mandatory conversion described in Section 9(c) shall not state the number of shares of Common Stock to be issued upon conversion of each share of Preferred Stock.

10.No Fractional Shares.  No fractional shares of Common Stock or securities representing fractional shares of Common Stock shall be delivered upon conversion, whether voluntary or mandatory, or in respect of dividend payments on the Preferred Stock made in Common Stock, of the Preferred Stock. Instead, the Company may elect to either make a cash payment to each Holder that would otherwise be entitled to a fractional share based on the Closing Sale Price of the Common Stock on the relevant Conversion Date or, in lieu of such cash payment, the number of shares of Common Stock to be delivered to any particular Holder upon conversion or in respect of dividend payments shall be rounded up to the next whole share of Common Stock.

11.Certificates.  (a) Form and Dating. The Preferred Stock and the Transfer Agent’s certificate of authentication shall be substantially in the form set forth in Exhibit A, which is hereby incorporated in and expressly made a part of this Certificate of Designations. The Preferred Stock certificate may have notations, legends or endorsements required by law or stock exchange rules; provided that any such notation, legend or endorsement is in a form acceptable to the Company. Each Preferred Stock certificate shall be dated the date of its authentication.

(i)Global Preferred Stock. The Preferred Stock shall be issued initially in the form of one or more fully registered global certificates with the global securities legend and restricted securities legend set forth in Exhibit A hereto (the “Global Preferred Stock”), which shall be deposited on behalf of the purchasers represented thereby with the Transfer Agent, as custodian for DTC (or with such other custodian as DTC may direct), and registered in the name of Cede & Co. or other nominee of DTC, duly executed by the Company and authenticated by the Transfer Agent as hereinafter provided. The number of shares of Preferred Stock represented by Global Preferred Stock may from time to time be increased or decreased by adjustments made on the records of the Transfer Agent and DTC or its nominee as hereinafter provided. With respect to shares of Preferred Stock that are not Transfer Restricted Securities on a Conversion Date or Dividend Payment Date, all

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shares of Common Stock issued in respect thereof on such Conversion Date or paid as a dividend on such Dividend Payment Date shall not bear the legend required pursuant to Section 11(c)(vi) below and shall be freely transferable without restriction under the Securities Act (other than by the Company’s Affiliates), and such shares shall be eligible for receipt in global form through the facilities of DTC.

(ii)Book-Entry Provisions. In the event Global Preferred Stock is deposited with or on behalf of DTC, the Company shall execute and the Transfer Agent shall authenticate and deliver initially one or more Global Preferred Stock certificates that (a) shall be registered in the name of Cede & Co. as nominee for DTC as depository for such Global Preferred Stock or the nominee of DTC and (b) shall be delivered by the Transfer Agent to DTC or pursuant to DTC’s instructions or held by the Transfer Agent as custodian for DTC.  Members of, or participants in, DTC (“Agent Members”) shall have no rights under this Certificate of Designations with respect to any Global Preferred Stock held on their behalf by DTC or by the Transfer Agent as the custodian of DTC or under such Global Preferred Stock, and DTC may be treated by the Company, the Transfer Agent and any agent of the Company or the Transfer Agent as the absolute owner of such Global Preferred Stock for all purposes whatsoever. Notwithstanding the foregoing, nothing herein shall prevent the Company, the Transfer Agent or any agent of the Company or the Transfer Agent from giving effect to any written certification, proxy or other authorization furnished by DTC or impair, as between DTC and its Agent Members, the operation of customary practices of DTC governing the exercise of the rights of a holder of a beneficial interest in any Global Preferred Stock.

(iii)Certificated Preferred Stock. Except as provided in this Section 11(a) or in Section 11(c), owners of beneficial interests in Global Preferred Stock will not be entitled to receive physical delivery of Preferred Stock in fully registered certificated form (“Certificated Preferred Stock”). With respect to shares of Preferred Stock that are Transfer Restricted Securities on a Conversion Date, all shares of Common Stock issuable on conversion of such shares on such Conversion Date shall bear the legend required pursuant to Section 11(c)(vi) below and shall be in global form if issued in respect of a Global Preferred Stock.

(b)Execution and Authentication. Two Officers shall sign the Preferred Stock certificate for the Company by manual or facsimile signature.

If an Officer whose signature is on a Preferred Stock certificate no longer holds that office at the time the Transfer Agent authenticates the Preferred Stock certificate, the Preferred Stock certificate shall be valid nevertheless.

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A Preferred Stock certificate shall not be valid until an authorized signatory of the Transfer Agent manually signs the certificate of authentication on the Preferred Stock certificate. The signature shall be conclusive evidence that the Preferred Stock certificate has been authenticated under this Certificate of Designations.

The Transfer Agent shall authenticate and deliver certificates for up to 3,000,000 shares of Preferred Stock for original issue upon a written order of the Company signed by two Officers or by an Officer and an Assistant Treasurer of the Company. Such order shall specify the number of shares of Preferred Stock to be authenticated and the date on which the original issue of the Preferred Stock is to be authenticated.

The Transfer Agent may appoint an authenticating agent reasonably acceptable to the Company to authenticate the certificates for the Preferred Stock. Unless limited by the terms of such appointment, an authenticating agent may authenticate certificates for the Preferred Stock whenever the Transfer Agent may do so. Each reference in this Certificate of Designations to authentication by the Transfer Agent includes authentication by such agent. An authenticating agent has the same rights as the Transfer Agent or agent for service of notices and demands.

(c)Transfer and Exchange.

(i)Transfer and Exchange of Certificated Preferred Stock. When Certificated Preferred Stock is presented to the Transfer Agent with a request to register the transfer of such Certificated Preferred Stock or to exchange such Certificated Preferred Stock for an equal number of shares of Certificated Preferred Stock, the Transfer Agent shall register the transfer or make the exchange as requested if its reasonable requirements for such transaction are met; provided, however, that the Certificated Preferred Stock surrendered for transfer or exchange:

(A)shall be duly endorsed or accompanied by a written instrument of transfer in form reasonably satisfactory to the Company and the Transfer Agent, duly executed by the Holder thereof or its attorney duly authorized in writing; and

(B)if such Certificated Preferred Stock is a Transfer Restricted Security, is being transferred or exchanged in accordance with the transfer restrictions set forth in the legend pursuant to Section 11(c)(vi) below, and is accompanied by, if such Certificated Preferred Stock is being transferred to the Company or to a “qualified institutional buyer” (“QIB”) in accordance with Rule 144A under the Securities Act or pursuant to another exemption from registration under the Securities Act, (i) a certification to that effect and (ii) if the Company so requests, an opinion of counsel or other evidence reasonably satisfactory to

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it as to the compliance with the restrictions set forth in the legend set forth in Section 11(c)(vi).

(ii)Restrictions on Transfer of Certificated Preferred Stock for a Beneficial Interest in Global Preferred Stock. Certificated Preferred Stock may not be exchanged for a beneficial interest in Global Preferred Stock except upon satisfaction of the requirements set forth below. Upon receipt by the Transfer Agent of Certificated Preferred Stock, duly endorsed or accompanied by appropriate instruments of transfer, in form reasonably satisfactory to the Company and the Transfer Agent, together with written instructions directing the Transfer Agent to make, or to direct DTC to make, an adjustment on its books and records with respect to such Global Preferred Stock to reflect an increase in the number of shares of Preferred Stock represented by the Global Preferred Stock, then the Transfer Agent shall cancel such Certificated Preferred Stock and cause, or direct DTC to cause, in accordance with the standing instructions and procedures existing between DTC and the Transfer Agent, the number of shares of Preferred Stock represented by the Global Preferred Stock to be increased accordingly. If no Global Preferred Stock is then outstanding, the Company shall issue and the Transfer Agent shall authenticate, upon written order of the Company in the form of an Officers’ Certificate, a new Global Preferred Stock representing the appropriate number of shares.

(iii)Transfer and Exchange of Global Preferred Stock. The transfer and exchange of Global Preferred Stock or beneficial interests therein shall be effected through DTC, in accordance with this Certificate of Designations (including applicable restrictions on transfer set forth herein, if any) and the procedures of DTC therefor.

(iv)Transfer of a Beneficial Interest in Global Preferred Stock for Certificated Preferred Stock.

(A)If at any time:

(1)DTC notifies the Company that DTC is unwilling or unable to continue as depository for the Global Preferred Stock and a successor depository for the Global Preferred Stock is not appointed by the Company within 90 days after delivery of such notice; or

(2)DTC ceases to be a clearing agency registered under the Exchange Act and a successor depository for the Global Preferred Stock is not appointed by the Company within 90 days,

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then the Company shall execute, and the Transfer Agent, upon receipt of a written order of the Company signed by two Officers or by an Officer and an Assistant Treasurer of the Company requesting the authentication and delivery of Certificated Preferred Stock to the Persons designated by the Company, shall authenticate and deliver Certificated Preferred Stock equal to the number of shares of Preferred Stock represented by the Global Preferred Stock, in exchange for such Global Preferred Stock.  Subject to the foregoing, the beneficial interests in a Global Preferred Stock shall not be exchangeable for Certificated Preferred Stock.

(B)Certificated Preferred Stock issued in exchange for a beneficial interest in a Global Preferred Stock pursuant to this Section 11(c)(iv) shall be registered in such names and in such authorized denominations as DTC, pursuant to instructions from its direct or indirect participants or otherwise, shall instruct the Transfer Agent. The Transfer Agent shall deliver such Certificated Preferred Stock to the Persons in whose names such Preferred Stock are so registered in accordance with the instructions of DTC.

(v)Restrictions on Transfer and Exchange of Global Preferred Stock.

(A)Notwithstanding any other provisions of this Certificate of Designations (other than the provisions set forth in Section 11(c)(iv)), Global Preferred Stock may not be transferred as a whole except by DTC to a nominee of DTC or by a nominee of DTC to DTC or another nominee of DTC or by DTC or any such nominee to a successor depository or a nominee of such successor depository.

(B)In the event that the Global Preferred Stock is exchanged for Preferred Stock in definitive registered form pursuant to Section 11(c)(iv) prior to the effectiveness of a Shelf Registration Statement with respect to such securities, such Preferred Stock may be exchanged only in accordance with such procedures as are substantially consistent with the provisions of this Section 11(c) (including the certification requirements set forth in the Exhibits to this Certificate of Designations intended to ensure that such transfers comply with Rule 144A or such other applicable exemption from registration under the Securities Act, as the case may be) and such other procedures as may from time to time be adopted by the Company.

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(vi)Legend.

(A)Except as permitted by the following paragraph (C), each certificate evidencing the Global Preferred Stock and the Certificated Preferred Stock shall bear a legend in substantially the following form:

“THIS SHARE OF CONVERTIBLE PREFERRED STOCK, THE COMMON STOCK ISSUABLE UPON CONVERSION OF THIS SHARE OF CONVERTIBLE PREFERRED STOCK AND THE SHARES OF COMMON STOCK ISSUABLE AS A DIVIDEND ON THE CONVERTIBLE PREFERRED STOCK, IF ANY, HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), OR ANY STATE SECURITIES LAWS. NEITHER THIS SHARE OF CONVERTIBLE PREFERRED STOCK NOR ANY INTEREST OR PARTICIPATION HEREIN OR THEREIN MAY BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED EXCEPT IN ACCORDANCE WITH THE FOLLOWING SENTENCE.

BY ITS ACQUISITION HEREOF OR OF A BENEFICIAL INTEREST HEREIN, THE ACQUIRER:

1.REPRESENTS THAT IT AND ANY ACCOUNT FOR WHICH IT IS ACTING IS A “QUALIFIED INSTITUTIONAL BUYER” (WITHIN THE MEANING OF RULE 144A UNDER THE SECURITIES ACT) AND THAT IT EXERCISES SOLE INVESTMENT DISCRETION WITH RESPECT TO EACH SUCH ACCOUNT, AND

2.AGREES FOR THE BENEFIT OF SANCHEZ ENERGY CORPORATION (THE “COMPANY”) THAT IT WILL NOT OFFER, SELL, PLEDGE OR OTHERWISE TRANSFER THIS SECURITY OR ANY BENEFICIAL INTEREST HEREIN PRIOR TO THE DATE THAT IS THE LATER OF (X) ONE YEAR AFTER THE LAST DATE OF INITIAL ISSUANCE HEREOF OR SUCH OTHER PERIOD OF TIME AS PERMITTED BY RULE 144 UNDER THE SECURITIES ACT OR ANY SUCCESSOR PROVISION THERETO, AND (Y) SUCH LATER DATE, IF ANY, AS MAY BE REQUIRED BY APPLICABLE LAW, EXCEPT:

(A)TO THE COMPANY OR ANY OF ITS SUBSIDIARIES, OR

(B)PURSUANT TO A REGISTRATION STATEMENT THAT HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT, OR

(C)TO A QUALIFIED INSTITUTIONAL BUYER IN COMPLIANCE WITH RULE 144A UNDER THE SECURITIES ACT, OR

(D)PURSUANT TO AN EXEMPTION FROM REGISTRATION PROVIDED BY RULE 144 UNDER THE SECURITIES ACT OR ANY OTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT.

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PRIOR TO THE REGISTRATION OF ANY TRANSFER IN ACCORDANCE WITH CLAUSE (2)(B) ABOVE, THE COMPANY AND THE TRANSFER AGENT RESERVE THE RIGHT TO REQUIRE THE DELIVERY OF SUCH LEGAL OPINIONS, CERTIFICATIONS OR OTHER EVIDENCE AS MAY REASONABLY BE REQUIRED IN ORDER TO DETERMINE THAT THE PROPOSED TRANSFER IS BEING MADE IN COMPLIANCE WITH THE SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS. NO REPRESENTATION IS MADE AS TO THE AVAILABILITY OF ANY EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT.

NO AFFILIATE (AS DEFINED IN RULE 144 UNDER THE SECURITIES ACT) OF THE COMPANY OR PERSON THAT HAS BEEN AN AFFILIATE (AS DEFINED IN RULE 144 UNDER THE SECURITIES ACT) OF THE COMPANY DURING THE THREE IMMEDIATELY PRECEDING MONTHS MAY PURCHASE OR OTHERWISE ACQUIRE THIS SHARE OF CONVERTIBLE PREFERRED STOCK OR A BENEFICIAL INTEREST HEREIN.”

(B)Except as permitted by the following paragraph (C), each certificate evidencing Common Stock in certificated form shall bear a legend in substantially the following form:

“THIS SHARE OF COMMON STOCK HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), OR ANY STATE SECURITIES LAWS. NEITHER THIS SHARE OF COMMON STOCK NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED EXCEPT IN ACCORDANCE WITH THE FOLLOWING SENTENCE.

BY ITS ACQUISITION HEREOF OR OF A BENEFICIAL INTEREST HEREIN, THE ACQUIRER:

1.REPRESENTS THAT IT AND ANY ACCOUNT FOR WHICH IT IS ACTING IS A “QUALIFIED INSTITUTIONAL BUYER” (WITHIN THE MEANING OF RULE 144A UNDER THE SECURITIES ACT) AND THAT IT EXERCISES SOLE INVESTMENT DISCRETION WITH RESPECT TO EACH SUCH ACCOUNT, AND

2.AGREES FOR THE BENEFIT OF SANCHEZ ENERGY CORPORATION (THE “COMPANY”) THAT IT WILL NOT OFFER, SELL, PLEDGE OR OTHERWISE TRANSFER THIS SECURITY OR ANY BENEFICIAL INTEREST HEREIN PRIOR TO THE DATE THAT IS THE LATER OF (X) ONE YEAR AFTER THE LAST DATE OF INITIAL ISSUANCE HEREOF OR SUCH OTHER PERIOD OF TIME AS PERMITTED BY RULE 144 UNDER THE SECURITIES ACT OR ANY SUCCESSOR PROVISION THERETO, AND (Y) SUCH LATER DATE, IF ANY, AS MAY BE REQUIRED BY APPLICABLE LAW, EXCEPT:

(A)TO THE COMPANY OR ANY OF ITS SUBSIDIARIES, OR

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(B)PURSUANT TO A REGISTRATION STATEMENT THAT HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT, OR

(C)TO A QUALIFIED INSTITUTIONAL BUYER IN COMPLIANCE WITH RULE 144A UNDER THE SECURITIES ACT, OR

(D)PURSUANT TO AN EXEMPTION FROM REGISTRATION PROVIDED BY RULE 144 UNDER THE SECURITIES ACT OR ANY OTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT.

PRIOR TO THE REGISTRATION OF ANY TRANSFER IN ACCORDANCE WITH CLAUSE (2)(B) ABOVE, THE COMPANY AND THE TRANSFER AGENT RESERVE THE RIGHT TO REQUIRE THE DELIVERY OF SUCH LEGAL OPINIONS, CERTIFICATIONS OR OTHER EVIDENCE AS MAY REASONABLY BE REQUIRED IN ORDER TO DETERMINE THAT THE PROPOSED TRANSFER IS BEING MADE IN COMPLIANCE WITH THE SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS. NO REPRESENTATION IS MADE AS TO THE AVAILABILITY OF ANY EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT.

NO AFFILIATE (AS DEFINED IN RULE 144 UNDER THE SECURITIES ACT) OF THE COMPANY OR PERSON THAT HAS BEEN AN AFFILIATE (AS DEFINED IN RULE 144 UNDER THE SECURITIES ACT) OF THE COMPANY DURING THE THREE IMMEDIATELY PRECEDING MONTHS MAY PURCHASE OR OTHERWISE ACQUIRE THIS SHARE OF COMMON STOCK OR A BENEFICIAL INTEREST HEREIN.”

(C)Upon any sale or transfer of a Transfer Restricted Security (including any Transfer Restricted Security represented by Global Preferred Stock) pursuant to Rule 144 under the Securities Act or another similar exemption from registration under the Securities Act or an effective registration statement under the Securities Act:

(1)in the case of any Transfer Restricted Security that is Certificated Preferred Stock or Common Stock in certificated form, the Transfer Agent shall permit the Holder thereof to exchange such Transfer Restricted Security for Certificated Preferred Stock or Common Stock in certificated form that does not bear a restrictive legend and rescind any restriction on the transfer of such Transfer Restricted Security; and

(2)in the case of any Transfer Restricted Security that is in global form, the Transfer Agent, shall

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decrease the amount of shares represented by such global security and increase the amount of shares represented by such global security not otherwise bearing the legend required above, and shall, in accordance with DTC procedures, deliver beneficial interests in such global security not bearing such legend.

Any share Preferred Stock (or security issued in exchange or substitution therefor) as to which the restrictions on transfer set forth above shall have expired in accordance with their terms may, upon surrender of such share of Preferred Stock for exchange to the Transfer Agent, be exchanged for a new share of Preferred Stock, which shall not bear the restrictive legend required above and shall not be assigned a restricted CUSIP number, if any. The Company shall be entitled to instruct the Transfer Agent in writing to so surrender any Global Preferred Stock as to which such restrictions on transfer shall have expired in accordance with their terms for exchange, and, upon such instruction, the Transfer Agent shall so surrender such Global Preferred Stock for exchange; and any new Global Preferred Stock so exchanged therefor shall not bear the restrictive legend specified above and shall not be assigned a restricted CUSIP number.

(vii)Cancellation or Adjustment of Global Preferred Stock. At such time as all beneficial interests in Global Preferred Stock have either been exchanged for Certificated Preferred Stock, converted or canceled, such Global Preferred Stock shall be returned to DTC for cancellation or retained and canceled by the Transfer Agent. At any time prior to such cancellation, if any beneficial interest in Global Preferred Stock is exchanged for Certificated Preferred Stock, converted or canceled, the number of shares of Preferred Stock represented by such Global Preferred Stock shall be reduced and an adjustment shall be made on the books and records of the Transfer Agent with respect to such Global Preferred Stock, by the Transfer Agent or DTC, to reflect such reduction.

(viii)Obligations with Respect to Transfers and Exchanges of Preferred Stock.

(A)To permit registrations of transfers and exchanges, the Company shall execute and the Transfer Agent shall authenticate Certificated Preferred Stock and Global Preferred Stock as required pursuant to the provisions of this Section 11(c).

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(B)All Certificated Preferred Stock and Global Preferred Stock issued upon any registration of transfer or exchange of Certificated Preferred Stock or Global Preferred Stock shall be the valid Capital Stock of the Company, entitled to the same benefits under this Certificate of Designations as the Certificated Preferred Stock or Global Preferred Stock surrendered upon such registration of transfer or exchange.

(C)Prior to due presentment for registration of transfer of any shares of Preferred Stock, the Transfer Agent and the Company may deem and treat the Person in whose name such shares of Preferred Stock are registered as the absolute owner of such Preferred Stock and neither the Transfer Agent nor the Company shall be affected by notice to the contrary.

(D)No service charge shall be made to a Holder for any registration of transfer or exchange upon surrender of any Preferred Stock certificate or Common Stock certificate at the office of the Transfer Agent maintained for that purpose. However, the Company may require payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection with any registration of transfer or exchange of Preferred Stock certificates or Common Stock certificates.

(ix)No Obligation of the Transfer Agent.

(A)The Transfer Agent shall have no responsibility or obligation to any beneficial owner of Global Preferred Stock, a member of or a participant in, DTC or any other Person with respect to the accuracy of the records of DTC or its nominee or of any participant or member thereof, with respect to any ownership interest in the Preferred Stock or with respect to the delivery to any participant, member, beneficial owner or other Person (other than DTC) of any notice or the payment of any amount, under or with respect to such Global Preferred Stock. All notices and communications to be given to the Holders and all payments to be made to Holders under the Preferred Stock shall be given or made only to the Holders (which shall be DTC or its nominee in the case of the Global Preferred Stock). The rights of beneficial owners in any Global Preferred Stock shall be exercised only through DTC subject to the applicable rules and procedures of DTC. The Transfer Agent may rely and shall be fully protected in relying upon information furnished by DTC with respect to its members, participants and any beneficial owners.

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(B)The Transfer Agent shall have no obligation or duty to monitor, determine or inquire as to compliance with any restrictions on transfer imposed under this Certificate of Designations or under applicable law with respect to any transfer of any interest in any Preferred Stock (including any transfers between or among DTC participants, members or beneficial owners in any Global Preferred Stock) other than to require delivery of such certificates and other documentation or evidence as are expressly required by, and to do so if and when expressly required by, the terms of this Certificate of Designations, and to examine the same to determine substantial compliance as to form with the express requirements hereof.

(d)Replacement Certificates. If any of the Preferred Stock certificates shall be mutilated, lost, stolen or destroyed, the Company shall issue, in exchange and in substitution for and upon cancellation of the mutilated Preferred Stock certificate, or in lieu of and substitution for the Preferred Stock certificate lost, stolen or destroyed, a new Preferred Stock certificate of like tenor and representing an equivalent number of shares of Preferred Stock, but only upon receipt of evidence of such loss, theft or destruction of such Convertible Preferred Stock certificate and indemnity, if requested, satisfactory to the Company and the Transfer Agent.

(e)Temporary Certificates. Until definitive Preferred Stock certificates are ready for delivery, the Company may prepare and the Transfer Agent shall authenticate temporary Preferred Stock certificates. Any temporary Preferred Stock certificates shall be substantially in the form of definitive Preferred Stock certificates but may have variations that the Company considers appropriate for temporary Preferred Stock certificates. Without unreasonable delay, the Company shall prepare and the Transfer Agent shall authenticate definitive Preferred Stock certificates and deliver them in exchange for temporary Preferred Stock certificates.

(f)Cancellation. In the event the Company shall purchase or otherwise acquire Certificated Preferred Stock, the same shall thereupon be delivered to the Transfer Agent for cancellation.

(i)At such time as all beneficial interests in Global Preferred Stock have either been exchanged for Certificated Preferred Stock, converted, repurchased or canceled, such Global Preferred Stock shall thereupon be delivered to the Transfer Agent for cancellation.

(ii)The Transfer Agent and no one else shall cancel and destroy all Preferred Stock certificates surrendered for transfer, exchange, replacement or cancellation and deliver a certificate of such destruction to the Company unless the Company directs the Transfer Agent to deliver canceled Preferred Stock certificates to the Company.  The Company may not issue new Preferred Stock certificates to replace Preferred Stock

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certificates to the extent they evidence Preferred Stock which the Company has purchased or otherwise acquired.

12.Other Provisions.  (a) With respect to any notice to a Holder of shares of Preferred Stock required to be provided hereunder, neither failure to mail such notice, nor any defect therein or in the mailing thereof, to any particular Holder shall affect the sufficiency of the notice or the validity of the proceedings referred to in such notice with respect to the other Holders or affect the legality or validity of any distribution, rights, warrant, reclassification, consolidation, merger, conveyance, transfer, dissolution, liquidation or winding-up, or the vote upon any such action. Any notice which was mailed in the manner herein provided shall be conclusively presumed to have been duly given whether or not the Holder receives the notice.

(b)Shares of Preferred Stock that have been issued and reacquired in any manner, including shares of Preferred Stock that are purchased or exchanged or converted, shall (upon compliance with any applicable provisions of the laws of Delaware) have the status of authorized but unissued shares of preferred stock of the Company undesignated as to series and may be designated or redesignated and issued or reissued, as the case may be, as part of any series of preferred stock of the Company; provided that any issuance of such shares as Preferred Stock must be in compliance with the terms hereof.

(c)The shares of Preferred Stock shall be issuable only in whole shares.

(d)All notice periods referred to herein shall commence on the date of the mailing of the applicable notice.  Notice to any Holder shall be given to the registered address set forth in the Company’s records for such Holder, or for Global Preferred Stock, to the Depository in accordance with its procedures.

(e)Any payment required to be made hereunder on any day that is not a Business Day shall be made on the next succeeding Business Day and no interest or dividends on such payment will accrue or accumulate, as the case may be, in respect of such delay.

(f)Holders of Preferred Stock shall not be entitled to any preemptive rights to acquire additional capital stock of the Company.

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EXHIBIT A

FORM OF PREFERRED STOCK

FACE OF SECURITY

[[THIS SHARE OF CONVERTIBLE PREFERRED STOCK, THE COMMON STOCK ISSUABLE UPON CONVERSION OF THIS SHARE OF CONVERTIBLE PREFERRED STOCK AND THE SHARES OF COMMON STOCK ISSUABLE AS A DIVIDEND ON THE CONVERTIBLE PREFERRED STOCK, IF ANY, HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), OR ANY STATE SECURITIES LAWS. NEITHER THIS SHARE OF CONVERTIBLE PREFERRED STOCK NOR ANY INTEREST OR PARTICIPATION HEREIN OR THEREIN MAY BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED EXCEPT IN ACCORDANCE WITH THE FOLLOWING SENTENCE.](1)

[THIS SHARE OF COMMON STOCK HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), OR ANY STATE SECURITIES LAWS. NEITHER THIS SHARE OF COMMON STOCK NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED EXCEPT IN ACCORDANCE WITH THE FOLLOWING SENTENCE.](2)

BY ITS ACQUISITION HEREOF OR OF A BENEFICIAL INTEREST HEREIN, THE ACQUIRER:

1.REPRESENTS THAT IT AND ANY ACCOUNT FOR WHICH IT IS ACTING IS A “QUALIFIED INSTITUTIONAL BUYER” (WITHIN THE MEANING OF RULE 144A UNDER THE SECURITIES ACT) AND THAT IT EXERCISES SOLE INVESTMENT DISCRETION WITH RESPECT TO EACH SUCH ACCOUNT, AND

2.AGREES FOR THE BENEFIT OF SANCHEZ ENERGY CORPORATION (THE “COMPANY”) THAT IT WILL NOT OFFER, SELL, PLEDGE OR OTHERWISE TRANSFER THIS SECURITY OR ANY BENEFICIAL INTEREST HEREIN PRIOR TO THE DATE THAT IS THE LATER OF (X) ONE YEAR AFTER THE LAST DATE OF INITIAL

(1)  Include for Global Preferred Stock.

(2)  Include for Common Stock.

ISSUANCE HEREOF OR SUCH OTHER PERIOD OF TIME AS PERMITTED BY RULE 144 UNDER THE SECURITIES ACT OR ANY SUCCESSOR PROVISION THERETO, AND (Y) SUCH LATER DATE, IF ANY, AS MAY BE REQUIRED BY APPLICABLE LAW, EXCEPT:

(A)TO THE COMPANY OR ANY OF ITS SUBSIDIARIES, OR

(B)PURSUANT TO A REGISTRATION STATEMENT THAT HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT, OR

(C)TO A QUALIFIED INSTITUTIONAL BUYER IN COMPLIANCE WITH RULE 144A UNDER THE SECURITIES ACT, OR

(D)PURSUANT TO AN EXEMPTION FROM REGISTRATION PROVIDED BY RULE 144 UNDER THE SECURITIES ACT OR ANY OTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT.

PRIOR TO THE REGISTRATION OF ANY TRANSFER IN ACCORDANCE WITH CLAUSE (2)(B) ABOVE, THE COMPANY AND THE TRANSFER AGENT RESERVE THE RIGHT TO REQUIRE THE DELIVERY OF SUCH LEGAL OPINIONS, CERTIFICATIONS OR OTHER EVIDENCE AS MAY REASONABLY BE REQUIRED IN ORDER TO DETERMINE THAT THE PROPOSED TRANSFER IS BEING MADE IN COMPLIANCE WITH THE SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS. NO REPRESENTATION IS MADE AS TO THE AVAILABILITY OF ANY EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT.

NO AFFILIATE (AS DEFINED IN RULE 144 UNDER THE SECURITIES ACT) OF THE COMPANY OR PERSON THAT HAS BEEN AN AFFILIATE (AS DEFINED IN RULE 144 UNDER THE SECURITIES ACT) OF THE COMPANY DURING THE THREE IMMEDIATELY PRECEDING MONTHS MAY PURCHASE OR OTHERWISE ACQUIRE THIS SHARE OF [CONVERTIBLE PREFERRED](3)[COMMON](4) STOCK OR A BENEFICIAL INTEREST HEREIN.”](5)

(3)  Include for Preferred Stock.

(4)  Include for Common Stock.

(5)  Subject to removal upon registration under the Securities Act of 1933 or otherwise when the security shall no longer be a Transfer Restricted Security.

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[UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION (“DTC”), NEW YORK, NEW YORK, TO THE COMPANY OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO., OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC) ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO. HAS AN INTEREST HEREIN.]

[TRANSFERS OF THIS GLOBAL SECURITY SHALL BE LIMITED TO TRANSFERS IN WHOLE, BUT NOT IN PART, TO NOMINEES OF DTC OR TO A SUCCESSOR THEREOF OR SUCH SUCCESSOR’S NOMINEE AND TRANSFERS OF PORTIONS OF THIS GLOBAL SECURITY SHALL BE LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE RESTRICTIONS SET FORTH IN THE CERTIFICATE OF DESIGNATIONS REFERRED TO BELOW.](6)

(6)  Subject to removal if not a global security.

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Certificate Number	Number of Shares of
[           ]	Preferred Stock

CUSIP NO.: 799707 204              

4.875% Convertible Perpetual Preferred Stock, Series A

of

SANCHEZ ENERGY CORPORATION

SANCHEZ ENERGY, CORPORATION, a Delaware corporation (the “Company”), hereby certifies that [                      ] (the “Holder”) is the registered owner of [                      ] fully paid and non-assessable shares of preferred stock, par value $0.01 per share, of the Company designated as the 4.875% Convertible Perpetual Preferred Stock, Series A (the “Preferred Stock”). The shares of Preferred Stock are transferable on the books and records of the Transfer Agent, in person or by a duly authorized attorney, upon surrender of this certificate duly endorsed and in proper form for transfer. The designations, rights, privileges, restrictions, preferences and other terms and provisions of the Preferred Stock represented hereby are as specified in, and the shares of the Preferred Stock are issued and shall in all respects be subject to the provisions of, the Certificate of Designations dated September 17, 2012, as the same may be amended from time to time (the “Certificate of Designations”). Capitalized terms used herein but not defined shall have the meaning given them in the Certificate of Designations. The Company will provide a copy of the Certificate of Designations to a Holder without charge upon written request to the Company at its principal place of business.

Reference is hereby made to the Certificate of Designations, which shall for all purposes have the same effect as if set forth at this place.

Upon receipt of this certificate, the Holder is bound by the Certificate of Designations and is entitled to the benefits thereunder.

Unless the Transfer Agent’s Certificate of Authentication hereon has been properly executed, these shares of Preferred Stock shall not be entitled to any benefit under the Certificate of Designations or be valid for any purpose.

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IN WITNESS WHEREOF, the Company has executed this certificate this          day of September, 2012.

SANCHEZ ENERGY CORPORATION
By:
	Name: [     ]
	Title: [     ]
By:
	Name: [     ]
	Title: [     ]

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TRANSFER AGENT’S CERTIFICATE OF AUTHENTICATION

These are shares of the Preferred Stock referred to in the within-mentioned Certificate of Designations.

Dated:
	CONTINENTAL STOCK TRANSFER & TRUST COMPANY, as Transfer Agent,
	By:
		Authorized Signatory

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REVERSE OF SECURITY

The Company will furnish without charge to each Holder who so requests the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock and the qualifications, limitations or restrictions of such preferences and/or rights.

I-A-7

ASSIGNMENT

FOR VALUE RECEIVED, the undersigned assigns and transfers the shares of Preferred Stock evidenced hereby to:

(Insert assignee’s social security or tax identification number)

(Insert address and zip code of assignee)

and irrevocably appoints:

agent to transfer the shares of Preferred Stock evidenced hereby on the books of the Transfer Agent.  The agent may substitute another to act for him or her.

Date:
Signature:
(Sign exactly as your name appears on the other side of this Preferred Stock Certificate)
Signature Guarantee:	(7)

(7)  (Signature must be guaranteed by an “eligible guarantor institution” that is a bank, stockbroker, savings and loan association or credit union meeting the requirements of the Transfer Agent, which requirements include membership or participation in the Securities Transfer Agents Medallion Program (“STAMP”) or such other “signature guarantee program” as may be determined by the Transfer Agent in addition to, or in substitution for, STAMP, all in accordance with the Securities Exchange Act of 1934, as amended.)

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EXHIBIT B

NOTICE OF CONVERSION

(To be Executed by the Holder in order to Convert the Preferred Stock)

The undersigned hereby irrevocably elects to convert (the “Conversion”) shares of 4.875% Convertible Perpetual Preferred Stock, Series A (the “Preferred Stock”) of Sanchez Energy Corporation (the “Company”), represented by stock certificate No(s)                           (the “Preferred Stock Certificates”), into shares of common stock (“Common Stock”) of the Company according to the conditions of the Certificate of Designations of the Preferred Stock (the “Certificate of Designations”). The Company will pay any documentary, stamp or similar issue or transfer tax on the issuance of the shares of our Common Stock upon conversion of the Preferred Stock, unless the tax is due because the Holder requests such shares to be issued in a name other than the Holder’s name, in which case the Holder will pay the tax. A copy of each Preferred Stock Certificate is attached hereto (or evidence of loss, theft or destruction thereof).

Capitalized terms used but not defined herein shall have the meanings ascribed thereto in or pursuant to the Certificate of Designations.

Number of shares of Preferred Stock to be converted:

Name or Names (with addresses) in which the certificate or certificate for any shares of Common Stock to be issued are to be registered:(8)

Signature:

Name of registered Holder:

Fax No.:

Telephone No.:

(8)  The Company is not required to issue shares of Common Stock until you (a) if required, furnish appropriate endorsements and transfer documents and (b) if required, pay funds equal to interest payable on the next Dividend Payment Date to which such Holder is not entitled.

ANNEX II

(Attached)

ANNEX II

CERTIFICATE OF DESIGNATIONS OF

6.500% CONVERTIBLE PERPETUAL PREFERRED STOCK, SERIES B

OF SANCHEZ ENERGY CORPORATION

March 26, 2013

1.Designation and Amount; Ranking.  (a) There shall be created from the 15,000,000 shares of preferred stock, par value $0.01 per share, of the Company authorized to be issued pursuant to the Certificate of Incorporation (from which the series of 3,000,000 shares of such preferred stock designated as the 4.875% Convertible Perpetual Preferred Stock, Series A (the “Convertible Perpetual Preferred Stock, Series A”) has previously been created), a series of preferred stock, designated as the “6.500% Convertible Perpetual Preferred Stock, Series B,” par value $0.01 per share (the “Preferred Stock”), and the authorized number of shares of Preferred Stock shall be 4,500,000. Shares of Preferred Stock that are purchased or otherwise acquired by the Company, or that are converted into shares of Common Stock (or, if applicable, a cash payment in lieu of Common Stock pursuant to Section 5(c)), shall be cancelled and shall revert to authorized but unissued shares of Preferred Stock.

(b)The Preferred Stock, with respect to dividend rights and rights upon the liquidation, winding-up or dissolution of the Company, ranks: (i) senior to all Junior Stock; (ii) on a parity, in all respects, with the Convertible Perpetual Preferred Stock,
Series A and all other Parity Stock; and (iii) junior to all Senior Stock, in each case as provided more fully herein.

2.Definitions. As used herein, the following terms shall have the following meanings:

(a)“Accumulated Dividends” shall mean, with respect to any share of Preferred Stock, as of any date, the aggregate accumulated and unpaid dividends on such share from the Issue Date until the most recent Dividend Payment Date on or prior to such date. There shall be no Accumulated Dividends with respect to any share of Preferred Stock prior to the Issue Date.

(b)“Additional Shares” shall have the meaning specified in Section 5(e).

(c)“Affiliate” shall have the meaning ascribed to it, on the date hereof, under Rule 144 of the Securities Act.

(d)“Board of Directors” shall mean the Board of Directors of the Company or, with respect to any action to be taken by the Board of Directors, any committee of the Board of Directors duly authorized to take such action.

(e)“Business Day” shall mean any day other than a Saturday, Sunday or other day on which commercial banks in The City of New York are authorized or required by law or executive order to close.

(f)“Capital Stock” shall mean, for any entity, any and all shares, interests, rights to purchase, warrants, options, participations or other equivalents of or interests in (however designated) stock issued by that entity.

(g)“close of business” means 5:00 p.m. (New York City time).

(h)“Closing Sale Price” of the Common Stock on any date means the closing sale price per share (or if no closing sale price is reported, the average of the closing bid and ask prices or, if more than one in either case, the average of the average closing bid and the average closing ask prices) on such date as reported in composite transactions for the principal United States national or regional securities exchange on which the Common Stock is traded or, if the Common Stock is not listed for trading on a United States national or regional securities exchange on the relevant date, the last quoted bid price for the Common Stock in the over-the-counter market on the relevant date, as reported by OTC Markets Group Inc. or a similar organization. In the absence of such a quotation, the “Closing Sale Price” shall be the average of the mid-point of the last bid and ask prices for the Common Stock on the relevant date from each of at least three nationally recognized independent investment banking firms selected by the Company for this purpose.

(i)“Common Equity” of any Person shall mean Capital Stock of such Person that is generally entitled (a) to vote in the election of directors of such Person or (b) if such Person is not a corporation, to vote or otherwise participate in the selection of the governing body, partners, managers or others that will control the management or policies of such Person.

(j)“Common Stock” shall mean the common stock, par value $0.01 per share, of the Company, subject to Section 8(h).

(k)“Conversion Date” shall have the meaning specified in Section 8(b).

(l)“Conversion Price” shall mean, at any time, $50 divided by the Conversion Rate in effect at such time.

(m)“Conversion Rate” shall have the meaning specified in Section 8(a).

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(n)“Conversion Restriction” shall have the meaning specified in Section 11(a).

(o)“DTC” or “Depository” shall mean The Depository Trust Company, or any successor depository.

(p)“Dividend Payment Date” shall mean January 1, April 1, July 1 and October 1, of each year, commencing on July 1, 2013.

(q)“Dividend Rate” shall mean the rate per annum of 6.500% per share of Preferred Stock on the Liquidation Preference, subject to increase pursuant to Section 3(b) and (c).

(r)“Dividend Record Date” shall mean, with respect to any Dividend Payment Date, the December 15, March 15, June 15 and September 15, as the case may be, immediately preceding such Dividend Payment Date.

(s)“Effective Date” shall mean the date on which a Fundamental Change event occurs or becomes effective, except that, as used in Section 8(d), “Effective Date” shall mean the first date on which the shares of the Common Stock trade on the applicable exchange or market, regular way, reflecting the relevant share split or share combination, as applicable.

(t)“Exchange Act” shall mean the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder.

(u)“Ex-Date,” when used with respect to any issuance, dividend or distribution on the Common Stock, means the first date on which the Common Stock trades on the applicable exchange or in the applicable market, regular way, without the right to receive such issuance, dividend or distribution from the Company or, if applicable, from the seller of the Common Stock on such exchange or market (in the form of due bills or otherwise) as determined by such exchange or market.

(v)“Fundamental Change” shall be deemed to have occurred at any time after the Preferred Stock is originally issued if any of the following occurs:

(i)a “person” or “group” within the meaning of Section 13(d) of the Exchange Act, other than the Company, its Subsidiaries and the employee benefit plans of the Company and its Subsidiaries, has become the direct or indirect “beneficial owner,” as defined in Rule 13d-3 under the Exchange Act, of the Company’s Common Equity representing more than 50% of the voting power of the Company’s Common Equity;

(ii)the consummation of (A) any recapitalization, reclassification or change of the Common Stock (other than changes

II-3

resulting from a subdivision or combination) as a result of which the Common Stock would be converted into, or exchanged for, stock, other securities, other property or assets; (B) any share exchange, consolidation or merger of the Company pursuant to which the Common Stock will be converted into cash, securities or other property; or (C) any sale, lease or other transfer in one transaction or a series of transactions of all or substantially all of the consolidated assets of the Company and its Subsidiaries, taken as a whole, to any Person other than one of the Company’s Subsidiaries; provided, however, that any merger solely for the purpose of changing the Company’s jurisdiction of incorporation to the United States of America, any State thereof or the District of Columbia, and resulting in a reclassification, conversion or exchange of outstanding shares of Common Stock solely into shares of common stock of the surviving entity, shall not be a Fundamental Change;

(iii)the Common Stock (or other common stock underlying the Preferred Stock) ceases to be listed or quoted on any of The New York Stock Exchange, The NASDAQ Global Select Market or The NASDAQ Global Market (or any of their respective successors); or

(iv)the stockholders of the Company approve any plan or proposal for the liquidation or dissolution of the Company;

provided, however, that a transaction or transactions described in clause (i) or (ii) above shall not constitute a Fundamental Change, if at least 90% of the consideration received or to be received by the common stockholders of the Company, excluding cash payments for fractional shares and cash payments made pursuant to dissenters’ appraisal rights, in connection with such transaction or transactions consists of shares of common stock that are listed or quoted on any of The New York Stock Exchange, The NASDAQ Global Select Market or The NASDAQ Global Market (or any of their respective successors) or will be so listed or quoted when issued or exchanged in connection with such transaction or transactions and as a result of such transaction or transactions the Preferred Stock becomes convertible into such consideration, excluding cash payments for fractional shares pursuant to the terms hereof.

(w)“Fundamental Change Notice” shall have the meaning specified in Section 5(a).

(x)“Global Preferred Stock” shall have the meaning specified in Section 11(a)(i).

(y)“Holder” or “holder” shall mean a holder of record of the Preferred Stock.

(z)“Issue Date” shall mean March 26, 2013, the original date of issuance of the Preferred Stock.

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(aa)“Junior Stock” shall mean the Common Stock, all classes of the Company’s common stock and each other class of Capital Stock or series of preferred stock established after the Issue Date the terms of which do not expressly provide that such class or series ranks senior to or on a parity with the Preferred Stock as to dividend rights or rights upon the liquidation, winding-up or dissolution of the Company.

(bb)“Liquidation Preference” shall mean, with respect to each share of Preferred Stock, $50.00.

(cc)“Mandatory Conversion Date” shall have the meaning specified in Section 9(b).

(dd)“Market Value” shall mean the average of the per share volume-weighted average prices of the Common Stock for each day during a 15 consecutive Trading Day period ending immediately prior to the date of determination, as displayed under the heading “Bloomberg VWAP” on Bloomberg page “SN <equity> AQR” (or its equivalent successor if such page is not available) in respect of the period from the scheduled open of trading until the scheduled close of trading of the primary trading session on each such Trading Day (or if such volume-weighted average price is unavailable on any such Trading Day, the Closing Sale Price shall be used for such Trading Day).  The per share volume-weighted average price on each such Trading Day shall be determined without regard to after hours trading or any other trading outside of the regular trading session trading hours.

(ee)“Officer” shall mean the Chairman of the Board of Directors, the President, any Vice President, the Treasurer, the Secretary or any Assistant Secretary of the Company.

(ff)“Officers’ Certificate” shall mean a certificate signed by two Officers.

(gg)“open of business” means 9:00 a.m. (New York City time).

(hh)“Parity Stock” shall mean the Convertible Perpetual Preferred Stock, Series A and any other class of Capital Stock or series of preferred stock established after the Issue Date, the terms of which expressly provide that such class or series will rank on a parity with the Preferred Stock as to dividend rights or rights upon the liquidation, winding-up or dissolution of the Company.

(ii)“Person” shall mean any individual, corporation, general partnership, limited partnership, limited liability partnership, joint venture, association, joint-stock company, trust, limited liability company, unincorporated organization or government or any agency or political subdivision thereof.

(jj)“Record Date” shall mean, with respect to any dividend, distribution or other transaction or event in which the holders of the Common Stock (or other applicable

II-5

security) have the right to receive any cash, securities or other property or in which the Common Stock (or such other security) is exchanged for or converted into any combination of cash, securities or other property, the date fixed for determination of holders of the Common Stock (or such other security) entitled to receive such cash, securities or other property (whether such date is fixed by the Board of Directors, statute, contract or otherwise).

(kk)“Reference Property” shall have the meaning specified in Section 8(h).

(ll)“Reorganization Event” shall have the meaning specified in Section 8(h).

(mm)“Rule 144” shall mean Rule 144 as promulgated under the Securities Act

(nn)“SEC” or “Commission” shall mean the Securities and Exchange Commission.

(oo)“Securities Act” shall mean the Securities Act of 1933, as amended.

(pp)“Senior Stock” shall mean any class of the Company’s Capital Stock or series of preferred stock established after the Issue Date, the terms of which expressly provide that such class or series will rank senior to the Preferred Stock as to dividend rights or rights upon the liquidation, winding-up or dissolution of the Company.

(qq)“Shelf Registration Statement” shall mean a shelf registration statement filed with the SEC covering resales of Transfer Restricted Securities by holders thereof.

(rr)“Special Rights End Date” shall have the meaning specified in Section 5(e).

(ss)“Spin-Off” shall have the meaning specified in Section 8(d)(iii).

(tt)“Stock Price” shall mean (i) if holders of the Common Stock receive in exchange for their Common Stock only cash in the transaction constituting a Fundamental Change, the cash amount paid per share or (ii) otherwise, the average of the Closing Sale Prices of the Common Stock on the five Trading Days preceding, but excluding the Effective Date of the Fundamental Change.

(uu)“Subsidiary” shall mean, with respect to any Person, any corporation, association, partnership or other business entity of which more than 50% of the total voting power of shares of Capital Stock or other interests (including partnership interests) entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers, general partners or trustees thereof is at the time owned or controlled, directly or indirectly, by (i) such Person; (ii) such Person and one or more Subsidiaries of such Person; or (iii) one or more Subsidiaries of such Person.

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(vv)“Trading Day” shall mean a day during which trading in the Common Stock generally occurs on the New York Stock Exchange or, if the Common Stock is not listed on the New York Stock Exchange, on the principal other national or regional securities exchange on which the Common Stock is then listed or, if the Common Stock is not listed on a national or regional securities exchange, on the principal other market on which the Common Stock is then listed or admitted for trading.  If the Common Stock is not so listed or traded, “Trading Day” means a Business Day.

(ww)“Transfer Agent” shall mean Continental Stock Transfer & Trust Company, acting as the Company’s duly appointed transfer agent, registrar, conversion agent and dividend disbursing agent for the Preferred Stock. The Company may, in its sole discretion, remove the Transfer Agent with 10 days’ prior notice to the Transfer Agent and Holders; provided that the Company shall appoint a successor Transfer Agent who shall accept such appointment prior to the effectiveness of such removal.

(xx)“Transfer Restricted Securities” shall mean (i) each share of Preferred Stock or Common Stock into which such share of Preferred Stock is converted required to bear the legend set forth in Section 11(c)(vi) and (ii) any shares of Common Stock issued as a dividend on any Transfer Restricted Security.

(yy)“Voting Rights Triggering Event” shall mean dividends on the Preferred Stock being in arrears and unpaid with respect to six or more quarterly dividend periods (whether or not consecutive) and including the dividend period beginning on the Issue Date and ending on July 1, 2013.

3.Dividends.  (a) Holders of shares of Preferred Stock shall be entitled to receive, when, as and if declared by the Board of Directors out of funds of the Company legally available for payment, cumulative dividends at the Dividend Rate.  Dividends on the Preferred Stock shall be payable quarterly in arrears at the Dividend Rate, and shall accumulate, whether or not earned or declared, from the most recent date to which dividends have been paid, or, if no dividends have been paid, from the Issue Date (whether or not in any dividend period or periods there shall be funds of the Company legally available for the payment of such dividends), and may be paid in cash or, where freely transferable by any non-Affiliate recipient thereof, in Common Stock as provided pursuant to Section 4. The Dividend Rate may be increased in the circumstances described in Sections 3(b) and 3(c) below. Dividends shall be payable in arrears on each Dividend Payment Date (commencing on July 1, 2013) to the holders of record of Preferred Stock as they appear on the Company’s stock register at the close of business on the relevant Dividend Record Date. Accumulations of dividends on shares of Preferred Stock shall not bear interest. Dividends payable for any period less than a full dividend period (based upon the number of days elapsed during the period) shall be computed on the basis of a 360-day year consisting of twelve 30-day months.

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(b)If, at any time during the six-month period beginning on, and including, the date that is six months after the last date of original issuance of the Preferred Stock, the Company fails to timely file any document or report that the Company is required to file with the SEC pursuant to Section 13 or 15(d) of the Exchange Act, as applicable (other than reports on Form 8-K), or shares of the Preferred Stock are not otherwise freely tradable by Holders other than the Company’s Affiliates (as a result of restrictions pursuant to U.S. securities laws or the terms of the Preferred Stock or this Certificate of Designations), the Dividend Rate on the Preferred Stock shall increase by 0.50% per annum during the period for which the Company’s failure to file continues or shares of the Preferred Stock fail to be so freely tradable, as the case may be; provided, that the Company shall have 14 days, in the aggregate, to cure any such late filings before the Dividend Rate shall be increased.

(c)Further, if, and for so long as:

(i)the restrictive legend contemplated by Section 11(c)(vi) on the Preferred Stock has not been removed,

(ii)the Preferred Stock is assigned a restricted CUSIP number, or

(iii)the Preferred Stock is not otherwise freely tradable by Holders other than the Company’s Affiliates (without restrictions pursuant to U.S. securities laws or the terms of the Preferred Stock or this Certificate of Designations),

as of the 366th day after the last date of original issuance of the Preferred Stock, the Dividend Rate on the Preferred Stock shall be increased by 0.50% per annum until the restrictive legend is removed, the Preferred Stock is assigned an unrestricted CUSIP number and the Preferred Stock is freely tradable as described above.

(d)The Company shall not, and shall use its commercially reasonable best efforts to cause any of its Affiliates not to, resell any of the Preferred Stock that constitute “restricted securities” under Rule 144 that have been reacquired by any of them.

(e)Any additional dividends paid pursuant to subsections (b) or (c) above shall be payable at the times and in the manner provided for the payment of regular dividends in Section 3(a).

(f)No dividend shall be declared or paid upon, or any sum set apart for the payment of dividends upon, any outstanding share of the Preferred Stock with respect to any dividend period unless all dividends for all preceding dividend periods have been declared and paid, or declared and a sufficient sum has been set apart for the payment of such dividend, upon all outstanding shares of Preferred Stock.

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(g)No dividends or other distributions (other than a dividend or distribution payable solely in shares of Parity Stock or Junior Stock (in the case of Parity Stock) or Junior Stock (in the case of Junior Stock) and cash in lieu of fractional shares) may be declared, made or paid, or set apart for payment upon, any Parity Stock or Junior Stock, nor may any Parity Stock or Junior Stock be redeemed, purchased or otherwise acquired for any consideration (or any money paid to or made available for a sinking fund for the redemption of any Parity Stock or Junior Stock) by the Company or on behalf of the Company (except by (i) conversion into or exchange for shares of Parity Stock or Junior Stock (in the case of Parity Stock) or Junior Stock (in the case of Junior Stock) and cash solely in lieu of fractional shares of Parity Stock or Junior Stock (in the case of Parity Stock) or Junior Stock (in the case of Parity Stock) and (ii) payments in connection with the satisfaction of employees’ tax withholding obligations pursuant to employee benefit plans or outstanding awards (and payment of any corresponding requisite amounts to the appropriate governmental authority)), unless all Accumulated Dividends shall have been or contemporaneously are declared and paid, or are declared and a sum sufficient for the payment thereof is set apart for such payment, on the Preferred Stock and any Parity Stock for all dividend payment periods ending on or prior to the date of such declaration, payment, redemption, purchase or acquisition. Notwithstanding the foregoing, if full dividends have not been paid on the Preferred Stock and any Parity Stock, dividends may be declared and paid on the Preferred Stock and such Parity Stock so long as the dividends are declared and paid pro rata so that the amounts of dividends declared per share on the Preferred Stock and such Parity Stock shall in all cases bear to each other the same ratio that accumulated and unpaid dividends per share on the shares of Preferred Stock and such Parity Stock bear to each other.

(h)Holders of shares of Preferred Stock shall not be entitled to any dividend, whether payable in cash, property or stock, in excess of full cumulative dividends.

(i)The holders of shares of Preferred Stock at the close of business on a Dividend Record Date shall be entitled to receive the dividend payment on those shares on the corresponding Dividend Payment Date notwithstanding the conversion of such shares in accordance with Section 8 following such Dividend Record Date or the Company’s default in payment of the dividend due on such Dividend Payment Date. However, notwithstanding the foregoing, shares of Preferred Stock surrendered for conversion during the period between the close of business on any Dividend Record Date and the close of business on the Business Day immediately preceding the corresponding Dividend Payment Date must be accompanied by payment of an amount of cash equal to the dividend payable on such shares on that Dividend Payment Date; provided, that no such payment is required in respect of a mandatory conversion pursuant to Section 9 during such period or if the Special Rights End Date occurs during such period. Except as provided in Section 8, the Company shall make no payment or allowance for unpaid dividends, whether or not in arrears, on converted shares of Preferred Stock or for dividends on the shares of Common Stock issued upon conversion.

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4.Method of Payment of Dividends.  (a) Subject to the restrictions set forth herein, any dividend on the Preferred Stock may be paid:

(i)in cash;

(ii)by delivery of shares of Common Stock; or

(iii)through any combination of cash and Common Stock.

(b)If the Company elects to make a dividend payment, or any portion thereof, in shares of Common Stock, the number of shares deliverable shall be such dividend payment, or such portion, divided by 97% of the Market Value per share of Common Stock as determined on the second Trading Day immediately prior to the Dividend Record Date for such dividend.

(c)The Company shall make each dividend payment on the Preferred Stock in cash, except to the extent the Company elects to make all or any portion of such payment in shares of the Common Stock as set forth above.  The Company shall give Holders notice of any such election and the portion of such payment that will be made in cash and the portion that will be made in Common Stock 15 scheduled Trading Days prior to the Dividend Record Date for such dividend.

(d)Notwithstanding the foregoing, the Company shall not pay any portion of a dividend on the Preferred Stock by delivery of Common Stock unless (i) the Common Stock to be delivered as payment therefor is freely transferable under the United States securities laws or the terms of the Preferred Stock or this Certificate of Designations or otherwise by the recipient without further action on its behalf, other than by reason of the fact that such recipient is the Company’s Affiliate, or (ii) a Shelf Registration Statement relating to that Common Stock has been filed with the SEC and is effective to permit the resale of that Common Stock by the holders thereof.

5.Special Rights Upon a Fundamental Change.

(a)The Company must give notice (a “Fundamental Change Notice”) of each Fundamental Change to all Holders of the Preferred Stock no later than the later of (i) 20 Business Days prior to the anticipated Effective Date (determined in good faith by the Board of Directors) of the Fundamental Change and (ii) the first public disclosure by the Company of the anticipated Fundamental Change.

(b)If a Holder converts its Preferred Stock pursuant to Section 8 below at any time during the period beginning at the open of business on the Trading Day immediately following the Effective Date of a Fundamental Change and ending at the close of business on the 30th Trading Day immediately following such Effective Date (the “Special Rights End Date”), the Company shall increase the Conversion Rate for such Holder by the number of Additional Shares determined pursuant clause (e) below.

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(c)In lieu of issuing the number of shares of Common Stock issuable upon conversion pursuant to clause (e), the Company may, at its option, make a cash payment equal to the Stock Price per share of Common Stock otherwise issuable upon conversion.

(d)The Fundamental Change Notice shall be given by first-class mail to each record holder of shares of Preferred Stock, at such Holder’s address as the same appears on the books of the Company. Each such notice shall state (i) the anticipated Effective Date; (ii) that the Special Rights End Date is the 30th Trading Day immediately following the Effective Date; (iii) the name and address of the Transfer Agent; (iv) the procedures that Holders must follow to exercise their conversion right pursuant to this Section 5; and (v) whether the Company will issue shares of Common Stock or pay cash upon conversion in connection with a Fundamental Change as set forth in clause (c) above.

(e)The number of additional shares of Common Stock to be added to the Conversion Rate per share of Preferred Stock (the “Additional Shares”) as set forth above shall be determined by reference to the table below, based on the Effective Date and the Stock Price.

	Stock Price(1)
Effective Date	$19.45	$20.00	$21.00	$22.00	$25.00	$30.00	$35.00	$40.00	$50.00	$75.00	$100.00	$200.00
March 18, 2013	0.2337	0.2337	0.2337	0.2337	0.2120	0.1760	0.1510	0.1320	0.1060	0.0710	0.0530	0.0260
April 1, 2014	0.2337	0.2337	0.2337	0.2261	0.1992	0.1654	0.1424	0.1245	0.0996	0.0667	0.0498	0.0249
April 1, 2015	0.2337	0.2235	0.2136	0.2036	0.1788	0.1490	0.1271	0.1112	0.0893	0.0596	0.0447	0.0218
April 1, 2016	0.2337	0.1848	0.1759	0.1669	0.1461	0.1213	0.1035	0.0907	0.0720	0.0483	0.0365	0.0178
April 1, 2017	0.2337	0.1739	0.1211	0.1130	0.0956	0.0752	0.0634	0.0557	0.0442	0.0298	0.0221	0.0115
April 1, 2018 and thereafter	0.2337	0.1630	0.0740	0.0640	0.0370	0.0050	0.0000	0.0000	0.0000	0.0000	0.0000	0.0000

(1)  The Stock Prices set forth in the table above shall be adjusted as of any date on which the Conversion Rate is adjusted.  The adjusted Stock Prices shall be equal to the Stock Prices immediately prior to such adjustment, multiplied by a fraction, the numerator of which is the Conversion Rate immediately prior to the adjustment giving rise to the Stock Price adjustment and the denominator of which is the Conversion Rate as so adjusted.  The number of Additional Shares in the table above will be adjusted in the same manner and at the same time as the Conversion Rate as set forth under Section 8.

(f)The exact Stock Price and Effective Date may not be set forth on the table above, in which case:

(i)if the Stock Price is between two Stock Prices on the table or the Effective Date is between two Effective Dates on the table, the number of Additional Shares shall be determined by straight-line interpolation between the number of Additional Shares set forth for the higher and lower Stock Prices or the earlier and later Effective Dates, as applicable, based on a 365-day year;

(ii)if the Stock Price is in excess of $200.00 per share (subject to adjustment in the same manner as the Stock Prices), no Additional Shares will be added to the Conversion Rate; and

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(iii)if the Stock Price is less than $19.45 per share (subject to adjustment in the same manner as the Stock Prices), no Additional Shares will be added to the Conversion Rate.

(g)Whenever any provision of this Certificate of Designations requires the Company to calculate the Closing Sale Prices or the Stock Prices for purposes of a Fundamental Change over a span of multiple days, the Board of Directors shall make appropriate adjustments to each to account for any adjustment to the Conversion Rate that becomes effective, or any event requiring an adjustment to the Conversion Rate where the Record Date of the event occurs, at any time during the period when such Closing Sale Prices or Stock Prices are to be calculated.

6.Voting.  (a) The shares of Preferred Stock shall have no voting rights except as set forth below or as otherwise required by Delaware law from time to time:

(i)If and whenever at any time or times a Voting Rights Triggering Event occurs, then the Holders, voting as a single class with any other series of preferred stock or preference securities having similar voting rights that are exercisable (and with voting rights allocated pro rata based on the liquidation preference of the Preferred Stock and the Convertible Perpetual Preferred Stock, Series A and each such other series of preferred stock or preference securities) (together, the “Voting Rights Class”), shall be entitled at the next regular or special meeting of stockholders of the Company to elect two additional directors to the Board of Directors. Upon the election of any such additional directors, the number of directors that comprise the Board of Directors shall be increased by such number of additional directors.

(ii)Such voting rights may be exercised at a special meeting of the Company’s stockholders, or at any annual meeting of stockholders held for the purpose of electing directors, and thereafter at each such annual meeting until such time as all dividends in arrears on the shares of Preferred Stock shall have been paid in full, at which time or times such voting rights and the term of the directors elected pursuant to Section 6(a)(i) shall terminate.

(iii)At any meeting at which the holders of the Voting Rights Class shall have the right to elect directors as provided herein, the presence in person or by proxy of the holders of shares representing more than fifty percent (50%) in voting power of the then outstanding shares of the Voting Rights Class shall be required and shall be sufficient to constitute a quorum of such class for the election of directors by such class. The affirmative vote of the holders of shares of Preferred Stock constituting a majority of the shares of Preferred Stock present at such meeting, in person or by proxy, shall be sufficient to elect any such director.

(iv)Any director elected pursuant to the voting rights created under this Section 6(a) shall hold office until the next annual meeting of stockholders

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(unless such term was previously terminated pursuant to Section 6(a)(ii)) and any vacancy in respect of any such director shall be filled only by vote of the remaining director so elected by holders of the Voting Rights Class, or if there be no such remaining director, by the holders of shares of the Voting Rights Class at the next annual meeting of stockholders. Upon any termination of such voting rights, the term of office of all directors elected pursuant to this Section 6 shall terminate.

(v)So long as any shares of Preferred Stock remain outstanding, unless a greater percentage shall then be required by law, the Company shall not, without the affirmative vote or consent of the Holders of at least 66 2/3% of the outstanding Preferred Stock voting or consenting, as the case may be, separately as one class, (A) create, authorize or issue any class or series of Senior Stock (or any security convertible into Senior Stock) or (B) amend the Certificate of Incorporation of the Company by merger or otherwise so as to affect adversely the rights, preferences, privileges or voting rights of Holders of shares of Preferred Stock specified herein.

(vi)In all cases in which Holders of Preferred Stock shall be entitled to vote, each share of Preferred Stock shall be entitled to one vote.

(b)The Company may authorize, increase the authorized amount of, or issue any class or series of, Parity Stock (including additional Preferred Stock) or Junior Stock, without the consent of the holders of the Preferred Stock, and in taking such actions the Company shall not be deemed to have affected, and any amendment of the Certificate of Incorporation of the Company that effects such actions shall not be deemed to affect, adversely the rights, preferences, privileges or voting rights of Holders of shares of Preferred Stock specified herein.

7.Liquidation Rights.  (a) In the event of any liquidation, winding-up or dissolution of the Company, whether voluntary or involuntary, each Holder of shares of Preferred Stock shall be entitled to receive and to be paid out of the assets of the Company available for distribution to its stockholders the Liquidation Preference plus Accumulated Dividends to the date fixed for liquidation, winding-up or dissolution in preference to the holders of, and before any payment or distribution is made on, any Junior Stock, including, without limitation, the Common Stock.

(b)Neither the sale (for cash, shares of stock, securities or other consideration) of all or substantially all the assets or business of the Company (other than in connection with the liquidation, winding-up or dissolution of the Company) nor the merger or consolidation of the Company into or with any other Person shall be deemed to be a liquidation, winding-up or dissolution, voluntary or involuntary, for the purposes of this Section 7.

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(c)After the payment to the Holders of the shares of Preferred Stock of full preferential amounts provided for in this Section 7, the Holders of Preferred Stock as such shall have no right or claim to any of the remaining assets of the Company.

(d)In the event the assets of the Company available for distribution to the Holders of shares of Preferred Stock and holders of shares of Parity Stock upon any liquidation, winding-up or dissolution of the Company, whether voluntary or involuntary, shall be insufficient to pay in full all amounts to which such Holders are entitled pursuant to this Section 7, no such distribution shall be made on account of any shares of Parity Stock upon such liquidation, dissolution or winding-up unless proportionate distributable amounts shall be paid on account of the shares of Preferred Stock, equally and ratably, in proportion to the full distributable amounts for which holders of all Preferred Stock and of any Parity Stock are entitled upon such liquidation, winding-up or dissolution.

8.Conversion.  (a) Each Holder of Preferred Stock shall have the right at any time, at its option, to convert, subject to the terms and provisions of this Section 8, any or all of such Holder’s shares of Preferred Stock at an initial conversion rate of 2.3370 shares of fully paid and nonassessable shares of Common Stock (subject to adjustment as provided in this Section 8, the “Conversion Rate”) per share of Preferred Stock.  Upon conversion of any share of Preferred Stock, the Company shall deliver to the converting Holder, in respect of each share of Preferred Stock being converted, a number of shares of Common Stock equal to the Conversion Rate, together with a cash payment or an additional whole share, at the Company’s election, if applicable, in lieu of any fractional share of Common Stock in accordance with Section 10, on the third Business Day immediately following the relevant Conversion Date.

(b)Before any Holder shall be entitled to convert a share of Preferred Stock as set forth above, such Holder shall (i) in the case of a beneficial interest in a Global Preferred Stock, comply with the procedures of the Depository in effect at that time and, if required, pay funds equal to interest payable on the next Dividend Payment Date to which such Holder is not entitled as set forth in Section 3(i) and (ii) in the case of Certificated Preferred Stock (1) complete, manually sign and deliver an irrevocable notice to the office of the Conversion Agent as set forth in the Form of Notice of Conversion (or a facsimile thereof) in the form of Exhibit B hereto (a “Notice of Conversion”) and state in writing therein the number of shares of Preferred Stock to be converted and the name or names (with addresses) in which such Holder wishes the certificate or certificates for any shares of Common Stock to be delivered to be registered, (2) surrender such shares of Preferred Stock, at the office of the Conversion Agent, (3) if required, furnish appropriate endorsements and transfer documents and (4) if required, pay funds equal to interest payable on the next Dividend Payment Date to which such Holder is not entitled as set forth in Section 3(i).  The Conversion Agent shall notify the Company of any conversion pursuant to this Section 8 on the Conversion Date for such conversion. The date on which a Holder complies with the procedures in this clause (b) is the “Conversion Date.”  If more than one share of Preferred Stock shall be surrendered

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for conversion at one time by the same Holder, the number of shares of Common Stock to be delivered upon conversion of such shares of Preferred Stock shall be computed on the basis of the aggregate number of shares of Preferred Stock so surrendered.

(c)Immediately prior to the close of business on the Conversion Date with respect to a conversion, a converting Holder of Preferred Stock shall be deemed to be the holder of record of the Common Stock issuable upon conversion of such Holder’s Preferred Stock notwithstanding that the share register of the Company shall then be closed or that certificates representing such Common Stock shall not then be actually delivered to such Holder. On the date of any conversion, all rights with respect to the shares of Preferred Stock so converted, including the rights, if any, to receive notices, will terminate, except only the rights of holders thereof to (i) receive certificates for the number of whole shares of Common Stock into which such shares of Preferred Stock have been converted (with such adjustment or cash payment for fractional shares as the Company may elect pursuant to Section 10); and (ii) exercise the rights to which they are thereafter entitled as holders of Common Stock.

(d)The Conversion Rate shall be adjusted, without duplication, upon the occurrence of any of the following events:

(i)If the Company exclusively issues shares of Common Stock as a dividend or distribution on all shares of its Common Stock, or if the Company effects a share split or share combination, the Conversion Rate shall be adjusted based on the following formula:

where,

CR0	=	the Conversion Rate in effect immediately prior to the close of business on the Record Date for such dividend or distribution, or immediately prior to the open of business on the Effective Date of such share split or share combination, as the case may be;
CR1	=	the Conversion Rate in effect immediately after the close of business on the Record Date for such dividend or distribution, or immediately after the open of business on the Effective Date of such share split or share combination, as the case may be;
OS0	=	the number of shares of Common Stock outstanding immediately prior to the close of business on the Record Date for such dividend or distribution, or immediately prior to the open of business on the

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		Effective Date of such share split or share combination, as the case may be; and
OS1	=	the number of shares of Common Stock outstanding immediately after giving effect to such dividend or distribution, or such share split or share combination, as the case may be.

Any adjustment made under this Section 8(d)(i) shall become effective immediately after the close of business on the Record Date for such dividend or distribution, or immediately after the open of business on the Effective Date for such share split or share combination, as the case may be. If any dividend or distribution of the type described in this Section 8(d)(i) is declared but not so paid or made, the Conversion Rate shall be immediately readjusted, effective as of the date the Board of Directors determines not to pay such dividend or distribution, to the Conversion Rate that would then be in effect if such dividend or distribution had not been declared.

(ii)If the Company distributes to all or substantially all holders of its Common Stock any rights, options or warrants entitling them, for a period expiring not more than 60 days immediately following the announcement date of such distribution, to purchase or subscribe for shares of its Common Stock at a price per share that is less than the average of the Closing Sale Prices of the Common Stock over the 10 consecutive Trading Day period ending on, and including, the Trading Day immediately preceding the Ex-Date of such distribution, the Conversion Rate shall be increased based on the following formula:

where,

CR0	=	the Conversion Rate in effect immediately prior to the close of business on the Record Date for such distribution;
CR1	=	the Conversion Rate in effect immediately after the close of business on the Record Date for such distribution;
OS0	=	the number of shares of Common Stock outstanding immediately prior to the close of business on the Record Date for such distribution;
X	=	the total number of shares of Common Stock issuable pursuant to such rights, options or warrants; and

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Y = the number of shares of Common Stock equal to the aggregate price payable to exercise such rights, options or warrants, divided by the average of the Closing Sale Prices of the Common Stock over the 10 consecutive Trading Day period ending on, and including, the Trading Day immediately preceding the Ex-Date of such distribution.

Any increase made under this Section 8(d)(ii) shall be made successively whenever any such rights, options or warrants are distributed and shall become effective immediately after the close of business on the Record Date for such distribution. To the extent that shares of Common Stock are not delivered after the expiration of such rights, options or warrants, the Conversion Rate shall be readjusted, effective as of the date of such expiration, to the Conversion Rate that would then be in effect had the increase with respect to the distribution of such rights, options or warrants been made on the basis of delivery of only the number of shares of Common Stock actually delivered. If such rights, options or warrants are not so distributed, the Conversion Rate shall be decreased, effective as of the date the Board of Directors determines not to make such distribution, to be the Conversion Rate that would then be in effect if such Record Date for such distribution had not occurred.

For purposes of this Section 8(d)(ii), in determining whether any rights, options or warrants entitle the holders to subscribe for or purchase shares of Common Stock at less than such average of the Closing Sale Prices of the Common Stock for the 10 consecutive Trading Day period ending on, and including, the Trading Day immediately preceding the Ex-Date of such distribution, and in determining the aggregate offering price of such shares of Common Stock, there shall be taken into account any consideration received by the Company for such rights, options or warrants and any amount payable on exercise or conversion thereof, the value of such consideration, if other than cash, to be determined by the Board of Directors.

(iii)If the Company distributes shares of its Capital Stock, evidences of its indebtedness or other assets, securities or property of the Company or rights, options or warrants to acquire its Capital Stock or other securities, to all or substantially all holders of Common Stock, excluding (a) dividends, distributions or issuances as to which an adjustment was effected pursuant to Section 8(d)(i) or Section 8(d)(ii), (b) dividends or distributions paid exclusively in cash as to which an adjustment was effected pursuant to (or a cash amount paid pursuant to the last paragraph of) Section 8(d)(iv) and (c) Spin-Offs as to which the provisions set forth below in this Section 8(d)(iii) shall apply (any of such shares of Capital Stock, evidences of indebtedness, other assets, securities or property or rights, options or warrants to acquire Capital Stock or other securities, the “Distributed Property”), then the Conversion Rate shall be increased based on the following formula:

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where,

CR0	=	the Conversion Rate in effect immediately prior to the close of business on the Record Date for such distribution;
CR1	=	the Conversion Rate in effect immediately after the close of business on the Record Date for such distribution;
SP0	=	the average of the Closing Sale Prices of the Common Stock over the 10 consecutive Trading Day period ending on, and including, the Trading Day immediately preceding the Ex-Date for such distribution; and
FMV	=	the fair market value as of the Record Date for such distribution (as determined by the Board of Directors) of the Distributed Property with respect to each outstanding share of the Common Stock.

Any increase made under the portion of this Section 8(d)(iii) above shall become effective immediately after the close of business on the Record Date for such distribution. If such distribution is not so paid or made, the Conversion Rate shall be decreased, effective as of the date the Board of Directors determines not to pay the distribution, to be the Conversion Rate that would then be in effect if such distribution had not been declared.

Notwithstanding the foregoing, if “FMV” (as defined above) is equal to or greater than “SP0” (as defined above), in lieu of the foregoing increase, each Holder of Preferred Stock shall receive, for each share of Preferred Stock, at the same time and upon the same terms as holders of the Common Stock, the amount and kind of Distributed Property that such Holder would have received as if such Holder owned a number of shares of Common Stock equal to the Conversion Rate in effect on the Record Date for the distribution.

With respect to an adjustment pursuant to this Section 8(d)(iii) where there has been a payment of a dividend or other distribution on the Common Stock consisting solely of shares of Capital Stock of any class or series, or similar equity interests, of or relating to a Subsidiary or other business unit of the Company where such Capital Stock or similar equity interest is, or will be when issued, listed or admitted for trading on a U.S. national securities exchange (a “Spin-Off”), the Conversion Rate will be increased based on the following formula:

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where,

CR0	=	the Conversion Rate in effect immediately prior to the close of business on the 10th Trading Day immediately following, and including, the Ex-Date for the Spin-Off;
CR1	=	the Conversion Rate in effect immediately after the close of business on the 10th Trading Day immediately following, and including, the Ex-Date for the Spin-Off;
FMV	=	the average of the Closing Sale Prices of the Capital Stock or similar equity interest distributed to holders of the Common Stock applicable to one share of Common Stock over the 10 consecutive Trading Day period immediately following, and including, the Ex-Date for the Spin-Off; and
MP0	=	the average of the Closing Sale Prices of the Common Stock over the 10 consecutive Trading Day period immediately following, and including, the Ex-Date for the Spin-Off.

The adjustment to the Conversion Rate under the preceding paragraph shall become effective at the close of business on the 10th Trading Day immediately following, and including, the Ex-Date for the Spin-Off; provided that, for purposes of determining the Conversion Rate, in respect of any conversion during the 10 Trading Days following, and including, the Ex-Date of any Spin-Off, references within the portion of this Section 8(d)(iii) related to Spin-Offs to 10 consecutive Trading Days shall be deemed to be replaced with such lesser number of consecutive Trading Days as have elapsed between the Ex-Date of such Spin-Off and the relevant Conversion Date.

(iv)If any cash dividend or distribution is made to all or substantially all holders of the Common Stock, excluding any consideration payable in connection with a tender or exchange offer made by the Company or any of its Subsidiaries, the Conversion Rate shall be increased based on the following formula:

where,

CR0	=	the Conversion Rate in effect immediately prior to the close of business on the Record Date for such dividend or distribution;
CR1	=	the Conversion Rate in effect immediately after the close of business on the Record Date for such dividend or distribution;

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SP0	=	the average of the Closing Sale Prices of the Common Stock over the 10 consecutive Trading Day period ending on, and including, the Trading Day immediately preceding the Ex-Date for such dividend or distribution; and
C	=	the amount in cash per share of Common Stock the Company distributes to all or substantially all holders of its Common Stock.

Any increase pursuant to this Section 8(d)(iv) shall become effective immediately after the close of business on the Record Date for such dividend or distribution. If such dividend or distribution is not so paid, the Conversion Rate shall be decreased, effective as of the date the Board of Directors determines not to pay or make such dividend or distribution, to be the Conversion Rate that would then be in effect if such dividend or distribution had not been declared.

Notwithstanding the foregoing, if “C” (as defined above) is equal to or greater than “SP0” (as defined above), in lieu of the foregoing increase, each Holder of Preferred Stock shall receive, for each share of Preferred Stock, at the same time and upon the same terms as holders of the Common Stock, the amount of cash that such Holder would have received as if such Holder owned a number of shares of Common Stock equal to the Conversion Rate on the Record Date for such cash dividend or distribution.

(v)If the Company or any of its Subsidiaries makes a payment in respect of a tender offer or exchange offer for the Common Stock and the cash and value of any other consideration included in the payment per share of the Common Stock exceeds the average of the Closing Sale Prices of the Common Stock over the 10 consecutive Trading Day period commencing on, and including, the Trading Day next succeeding the last date on which tenders or exchanges may be made pursuant to such tender or exchange offer, the Conversion Rate shall be increased based on the following formula:

where,

CR0	=	the Conversion Rate in effect immediately prior to the close of business on the last Trading Day of the 10 consecutive Trading Day period commencing on, and including, the Trading Day next succeeding the date such tender or exchange offer expires;
CR1	=	the Conversion Rate in effect immediately after the close of business on the last Trading Day of the 10 consecutive Trading Day period

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		commencing on, and including, the Trading Day next succeeding the date such tender or exchange offer expires;
AC	=	the aggregate value of all cash and any other consideration (as determined by the Board of Directors) paid or payable for shares of Common Stock purchased in such tender or exchange offer;
OS0	=	the number of shares of Common Stock outstanding immediately prior to the date such tender or exchange offer expires (prior to giving effect to the purchase of all shares of Common Stock accepted for purchase or exchange in such tender or exchange offer);
OS1	=	the number of shares of Common Stock outstanding immediately after the date such tender or exchange offer expires (after giving effect to the purchase of all shares of Common Stock accepted for purchase or exchange in such tender or exchange offer); and
SP1	=	the average of the Closing Sale Prices of the Common Stock over the 10 consecutive Trading Day period commencing on, and including, the Trading Day next succeeding the date such tender or exchange offer expires.

The increase to the Conversion Rate under this Section 8(d)(v) shall occur at the close of business on the 10th Trading Day immediately following, and including, the Trading Day next succeeding the date such tender or exchange offer expires; provided that, for purposes of determining the Conversion Rate, in respect of any conversion during the 10 Trading Days immediately following, and including, the Trading Day next succeeding the date that any such tender or exchange offer expires, references within this Section 8(d)(v) to 10 consecutive Trading Days shall be deemed to be replaced with such lesser number of consecutive Trading Days as have elapsed between the date such tender or exchange offer expires and the relevant Conversion Date.

In the event that the Company or one of its Subsidiaries is obligated to purchase shares of Common Stock pursuant to any such tender offer or exchange offer, but the Company or such Subsidiary is permanently prevented by applicable law from effecting any such purchases, or all such purchases are rescinded, then the Conversion Rate shall be readjusted to be such Conversion Rate that would then be in effect if such tender offer or exchange offer had not been made.

(vi)All calculations and other determinations under this Section 8(d) shall be made by the Company and shall be made to the nearest one-ten thousandth (1/10,000th) of a share. Notwithstanding anything herein to the contrary, no adjustment under this Section 8(d) shall be made to the Conversion Rate unless such adjustment would result in a change of at least 1% in the

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Conversion Rate then in effect. Any lesser adjustment shall be carried forward and shall be made at the time of and together with the next subsequent adjustment, if any, which, together with any adjustment or adjustments so carried forward, shall amount to a change of at least 1% in such Conversion Rate; provided, however, that the Company shall make such carried-forward adjustments, regardless of whether the aggregate adjustment is less than 1%, (a) on December 31 of each calendar year, and (b) on the Conversion Date for any conversions of Preferred Stock.  No adjustment to the Conversion Rate shall be made if it results in a Conversion Price that is less than the par value (if any) of the Common Stock.  The Company shall not take any action that would result in the Conversion Price being less than the par value (if any) of the Common Stock pursuant to this Certificate of Designations and without giving effect to the previous sentence.

(vii)In addition to those adjustments required by clauses (i), (ii), (iii), (iv) and (v) of this Section 8(d), and to the extent permitted by applicable law and subject to the applicable rules of The New York Stock Exchange, the Company from time to time may increase the Conversion Rate by any amount for a period of at least 20 Business Days or any longer period permitted or required by law if the increase is irrevocable during that period and the Board of Directors determines that such increase would be in the Company’s best interest.  In addition, the Company may (but is not required to) increase the Conversion Rate to avoid or diminish any income tax to holders of Common Stock or rights to purchase Common Stock in connection with a dividend or distribution of shares (or rights to acquire shares) or similar event.  Whenever the Conversion Rate is increased pursuant to any of the preceding two sentences, the Company shall mail to the Holder of each share of Preferred Stock at its last address appearing on the stock register of the Company a notice of the increase at least 15 days prior to the date the increased Conversion Rate takes effect, and such notice shall state the increased Conversion Rate and the period during which it will be in effect.

(viii)For purposes of this Section 8(d), the number of shares of Common Stock at any time outstanding shall not include shares held in the treasury of the Company so long as the Company does not pay any dividend or make any distribution on shares of Common Stock held in the treasury of the Company, but shall include shares issuable in respect of scrip certificates issued in lieu of fractions of shares of Common Stock.

(ix)If any applicable law requires the deduction or withholding of any tax from any payment or deemed dividend to a Holder on its Preferred Stock, the Company or an applicable withholding agent may withhold on cash dividends, shares of Common Stock or sale proceeds paid, subsequently paid or credited with respect to such Holder or his successors and assigns.

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(e)Notwithstanding anything to the contrary in Section 8(d), no adjustment to the Conversion Rate shall be made with respect to any transaction described in Section 8(d)(ii) through Section 8(d)(iv) (other than for share splits or share combinations) if the Company makes provision for each Holder of the Preferred Stock to participate in such transaction, at the same time as holders of the Common Stock, without conversion, as if such Holder held a number of shares of Common Stock equal to the Conversion Rate in effect on the Record Date or Effective Date, as the case may be, for such transaction, multiplied by the number of shares of Preferred Stock held by such Holder.

(f)If the Company shall take a record of the holders of its Common Stock for the purpose of entitling them to receive a dividend or other distribution, and shall thereafter (and before the dividend or distribution has been paid or delivered to stockholders) legally abandon its plan to pay or deliver such dividend or distribution, then thereafter no adjustment in the Conversion Rate then in effect shall be required by reason of the taking of such record.

(g)Upon any increase in the Conversion Rate, the Company promptly shall deliver to each Holder a certificate signed by an authorized officer of the Company, setting forth in reasonable detail the event requiring the adjustment and the method by which such adjustment was calculated and specifying the increased Conversion Rate then in effect following such adjustment.

(h)In the case of:

(i)any recapitalization, reclassification or change of the Common Stock (other than changes resulting from a subdivision or combination),

(ii)any consolidation, merger or combination involving the Company,

(iii)any sale, lease or other transfer to a third party of the consolidated assets of the Company and the Company’s Subsidiaries substantially as an entirety, or

(iv)any statutory share exchange,

in each case, as a result of which the Common Stock is converted into, or exchanged for, stock, other securities, other property or assets (including cash or any combination thereof) (any such transaction or event, a “Reorganization Event”), then, at and after the effective time of such Reorganization Event, the right to convert each share of Preferred Stock shall be changed into a right to convert such share into the kind and amount of shares of stock, other securities or other property or assets (including cash or any combination thereof) that a holder of a number of shares of Common Stock equal to the Conversion Rate immediately prior to such Reorganization Event would have owned or

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been entitled to receive upon such Reorganization Event (such stock, securities or other property or assets, the “Reference Property”).  If the Reorganization Event causes the Common Stock to be converted into, or exchanged for, the right to receive more than a single type of consideration (determined based in part upon any form of stockholder election), then the Reference Property into which the Preferred Stock will be convertible shall be deemed to be the weighted average of the types and amounts of consideration received by the holders of Common Stock that affirmatively make such an election.  The Company shall notify Holders of such weighted average as soon as practicable after such determination is made.  The Company shall not become a party to any Reorganization Event unless its terms are consistent with this Section 8(h).  None of the foregoing provisions shall affect the right of a Holder of Preferred Stock to convert its Preferred Stock into shares of Common Stock as set forth in Section 8(a) prior to the effective time of such Reorganization Event.  Notwithstanding Section 8(d), no adjustment to the Conversion Rate shall be made for any Reorganization Event to the extent stock, securities or other property or assets become the Reference Property receivable upon conversion of Preferred Stock.

The Company shall provide, by amendment hereto effective upon any such Reorganization Event, for anti-dilution and other adjustments that shall be as nearly equivalent as is possible to the adjustments provided for in this Section 8. The provisions of this Section 8 shall apply to successive Reorganization Events.

In this Certificate of Designations, if the Common Stock has been replaced by Reference Property as a result of any such Reorganization Event, references to the Common Stock are intended to refer to such Reference Property.

(i)The Company shall at all times reserve and keep available for issuance upon the conversion of the Preferred Stock such maximum number of its authorized but unissued shares of Common Stock as will from time to time be sufficient to permit the conversion of all outstanding shares of Preferred Stock (including any Additional Shares in connection with a Fundamental Change), and shall take all action required to increase the authorized number of shares of Common Stock if at any time there shall be insufficient unissued shares of Common Stock to permit such reservation or to permit the conversion of all outstanding shares of Preferred Stock (including any Additional Shares in connection with a Fundamental Change) or the payment or partial payment of dividends declared on Preferred Stock that are payable in Common Stock.

(j)The issuance or delivery of certificates for Common Stock upon the conversion of shares of Preferred Stock or the payment or partial payment of a dividend on Preferred Stock in Common Stock, shall be made without charge to the converting holder or recipient of shares of Preferred Stock for such certificates or for any tax in respect of the issuance or delivery of such certificates or the securities represented thereby, and such certificates shall be issued or delivered in the respective names of, or in such names as may be directed by, the holders of the shares of Preferred Stock converted;

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provided, however, that the Company shall not be required to pay any tax which may be payable in respect of any transfer involved in the issuance and delivery of any such certificate in a name other than that of the holder of the shares of the relevant Preferred Stock and the Company shall not be required to issue or deliver such certificate unless or until the Person or Persons requesting the issuance or delivery thereof shall have paid to the Company the amount of such tax or shall have established to the reasonable satisfaction of the Company that such tax has been paid.

(k)Notwithstanding Sections 8(d)(ii) and 8(d)(iii), the Company’s adoption of a rights plan (including the distribution of rights pursuant thereto to all holders of the Common Stock) shall not result in an adjustment to the Conversion Rate pursuant to this Section 8 and upon conversion of Preferred Stock the Holder will receive, in addition to the Common Stock to which he is entitled, a corresponding number of rights in accordance with the rights plan unless prior to any conversion, such rights have separated from the shares of Common Stock, in which case, and only in such case, the Conversion Rate will be adjusted at the time of separation as if the Company had distributed to all holders of its Common Stock, shares of Capital Stock, evidences of indebtedness, assets, securities, property, rights, options or warrants as described in Section 8(d)(iii) above, subject to readjustment in the event of the expiration, termination or redemption of such rights.

9.Mandatory Conversion.  (a) At any time on or after April 6, 2018, the Company shall have the right, at its option, to cause all outstanding shares of Preferred Stock to be automatically converted into that number of whole shares of Common Stock for each share of Preferred Stock equal the Conversion Rate in effect on the Mandatory Conversion Date, with such adjustment or cash payment for fractional shares as the Company may elect pursuant to Section 10. The Company may exercise its right to cause a mandatory conversion pursuant to this Section 9 only if the Closing Sale Price of the Common Stock equals or exceeds 130% of the Conversion Price for at least 20 Trading Days (whether or not consecutive) in a period of 30 consecutive Trading Days, including the last Trading Day of such 30-day period, ending on, and including, the Trading Day immediately preceding the Business Day on which the Company issues a press release announcing the mandatory conversion as described in Section 9(b).

(b)To exercise the mandatory conversion right described in Section 9(a), the Company must issue a press release for publication on the Dow Jones News Service or Bloomberg Business News (or if either such service is not available, another broadly disseminated news or press release service selected by the Company) prior to the open of business on the first Trading Day following any date on which the condition described in Section 9(a) is met, announcing such a mandatory conversion. The Company shall also give notice by mail or by publication (with subsequent prompt notice by mail) to the Holders of the Preferred Stock (not later than three Business Days after the date of the press release) of the mandatory conversion announcing the Company’s intention to convert the Preferred Stock. The conversion date will be a date selected by the Company

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(the “Mandatory Conversion Date”) and will be no later than 10 calendar days after the date on which the Company issues the press release described in this Section 9(b).

(c)In addition to any information required by applicable law or regulation, the press release and notice of a mandatory conversion described in Section 9(b) shall state, as appropriate: (i) the Mandatory Conversion Date; (ii) the number of shares of Common Stock to be issued upon conversion of each share of Preferred Stock; and (iii) that dividends on the Preferred Stock to be converted will cease to accrue on the Mandatory Conversion Date.

(d)On and after the Mandatory Conversion Date, dividends shall cease to accrue on the Preferred Stock called for a mandatory conversion pursuant to Section 9 and all rights of Holders of such Preferred Stock shall terminate except for the right to receive the whole shares of Common Stock issuable upon conversion thereof with such adjustment or cash payment for fractional shares as the Company may elect pursuant to Section 10. The full amount of any dividend payment with respect to the Preferred Stock called for a mandatory conversion pursuant to Section 9 on a date during the period beginning at the close of business on any Dividend Record Date and ending on the close of business on the corresponding Dividend Payment Date shall be payable on such Dividend Payment Date to the record holder of such share at the close of business on such Dividend Record Date if such share has been converted after such Dividend Record Date and prior to such Dividend Payment Date. Except as provided in the immediately preceding sentence with respect to a mandatory conversion pursuant to Section 9, no payment or adjustment shall be made upon conversion of Preferred Stock for Accumulated Dividends or dividends with respect to the Common Stock issued upon such conversion thereof.

(e)The Company may not authorize, issue a press release or give notice of any mandatory conversion pursuant to Section 9 unless, prior to giving the conversion notice, all Accumulated Dividends on the Preferred Stock (whether or not declared) for periods ended prior to the date of such conversion notice shall have been paid.

(f)In addition to the mandatory conversion right described in Section 9, if there are fewer than 450,000 shares of Preferred Stock outstanding, the Company shall have the right, at any time on or after April 6, 2018, at its option, to cause each such outstanding share of Preferred Stock to be automatically converted into that number of whole shares of Common Stock equal to the quotient of (i) the Liquidation Preference, divided by (ii) the lesser of (A) the Conversion Price as of the Mandatory Conversion Date and (B) the Market Value as determined on the second Trading Day immediately prior to the Mandatory Conversion Date, with such adjustment or cash payment for fractional shares as the Company may elect pursuant to Section 10. The provisions of clauses (b) (other than requirements relating to the conditions in Section 9(a)), (c), (d), and (e) of this Section 9 shall apply to any Mandatory Conversion pursuant to this clause (f); provided, however, that (i) the Mandatory Conversion Date described in Section 9(b) shall not be

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less than 15 scheduled Trading Days nor more than 30 scheduled Trading Days after the date on which the Company issues a press release pursuant to Section 9(b) announcing such mandatory conversion and (ii) the press release and notice of mandatory conversion described in Section 9(c) shall not state the number of shares of Common Stock to be issued upon conversion of each share of Preferred Stock.

10.No Fractional Shares.  No fractional shares of Common Stock or securities representing fractional shares of Common Stock shall be delivered upon conversion, whether voluntary or mandatory, or in respect of dividend payments on the Preferred Stock made in Common Stock, of the Preferred Stock. Instead, the Company may elect to either make a cash payment to each Holder that would otherwise be entitled to a fractional share based on the Closing Sale Price of the Common Stock on the relevant Conversion Date or, in lieu of such cash payment, the number of shares of Common Stock to be delivered to any particular Holder upon conversion or in respect of dividend payments shall be rounded up to the next whole share of Common Stock.

11.Limitations on Beneficial Ownership.  (a) No holder of Preferred Stock will be entitled to receive, and the Company will not deliver, shares of Common Stock (including any additional shares of Common Stock receivable upon a conversion with respect to a Fundamental Change as described in Section 5) upon conversion of Preferred Stock (whether at such holder’s election to convert or upon a mandatory conversion pursuant to Section 9), and no mandatory conversion as described in Section 9 will occur, to the extent, but only to the extent, that such receipt would cause such holder to become, directly or indirectly, a “beneficial owner” (within the meaning of Section 13(d) of the Exchange Act and the rules and regulations promulgated thereunder) of more than 4.9% of the shares of Common Stock outstanding at such time, unless the Company obtains the requisite shareholder approval under Section 312 of The New York Stock Exchange Listed Company Manual, in which case, this Section 11 (the “Conversion Restriction”) shall no longer apply to any holder. The Company shall have no obligation to obtain (or attempt to obtain) such requisite shareholder approval.

(b)Without limiting the foregoing, if shares of Preferred Stock are tendered for conversion, or if the Company designates a Mandatory Conversion Date, and the Company does not deliver shares of Common Stock, in whole or in part, to a holder as a result of this Section 11, such conversion will not be effected, and no “Conversion Date” or “Mandatory Conversion Date” will occur, with respect to such holder as to any unconverted shares of Preferred Stock.  The Company will return any unconverted shares of Preferred Stock to such holder, and such holder’s right to convert such shares will not be extinguished but will continue in effect as set forth in Section 8 subject to the adjustments described in Section 8(d) and to all other provisions described herein.  Any subsequent conversion of such shares, whether by such holder or a transferee thereof, will be subject to the Conversion Restriction.

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(c)By complying with the procedures for conversion described above, any converting holder shall be deemed to have represented to the Company that upon such conversion such converting holder will not be the beneficial owner of more than 4.9% of the shares of Common Stock then outstanding, unless such converting holder notifies the Company otherwise.  For the avoidance of doubt, this Section 11 applies to any exercise of a conversion right by a holder of shares of Preferred Stock, but in the case of Global Preferred Stock (as defined in Section (a)(i)), only to the extent that this Section 11 applies to the owners of beneficial interests in such Global Preferred Stock other than participants of DTC to the extent holding beneficial interests in the Preferred Stock on behalf of other beneficial owners owning the Preferred Stock through such participants.

12.Certificates.  (a) Form and Dating. The Preferred Stock and the Transfer Agent’s certificate of authentication shall be substantially in the form set forth in Exhibit A, which is hereby incorporated in and expressly made a part of this Certificate of Designations. The Preferred Stock certificate may have notations, legends or endorsements required by law or stock exchange rules; provided that any such notation, legend or endorsement is in a form acceptable to the Company. Each Preferred Stock certificate shall be dated the date of its authentication.

(i)Global Preferred Stock. The Preferred Stock shall be issued initially in the form of one or more fully registered global certificates with the global securities legend and restricted securities legend set forth in Exhibit A hereto (the “Global Preferred Stock”), which shall be deposited on behalf of the purchasers represented thereby with the Transfer Agent, as custodian for DTC (or with such other custodian as DTC may direct), and registered in the name of Cede & Co. or other nominee of DTC, duly executed by the Company and authenticated by the Transfer Agent as hereinafter provided. The number of shares of Preferred Stock represented by Global Preferred Stock may from time to time be increased or decreased by adjustments made on the records of the Transfer Agent and DTC or its nominee as hereinafter provided. With respect to shares of Preferred Stock that are not Transfer Restricted Securities on a Conversion Date or Dividend Payment Date, all shares of Common Stock issued in respect thereof on such Conversion Date or paid as a dividend on such Dividend Payment Date shall not bear the legend required pursuant to Section 11(c)(vi) below and shall be freely transferable without restriction under the Securities Act (other than by the Company’s Affiliates), and such shares shall be eligible for receipt in global form through the facilities of DTC.

(ii)Book-Entry Provisions. In the event Global Preferred Stock is deposited with or on behalf of DTC, the Company shall execute and the Transfer Agent shall authenticate and deliver initially one or more Global Preferred Stock certificates that (a) shall be registered in the name

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of Cede & Co. as nominee for DTC as depository for such Global Preferred Stock or the nominee of DTC and (b) shall be delivered by the Transfer Agent to DTC or pursuant to DTC’s instructions or held by the Transfer Agent as custodian for DTC.  Members of, or participants in, DTC (“Agent Members”) shall have no rights under this Certificate of Designations with respect to any Global Preferred Stock held on their behalf by DTC or by the Transfer Agent as the custodian of DTC or under such Global Preferred Stock, and DTC may be treated by the Company, the Transfer Agent and any agent of the Company or the Transfer Agent as the absolute owner of such Global Preferred Stock for all purposes whatsoever. Notwithstanding the foregoing, nothing herein shall prevent the Company, the Transfer Agent or any agent of the Company or the Transfer Agent from giving effect to any written certification, proxy or other authorization furnished by DTC or impair, as between DTC and its Agent Members, the operation of customary practices of DTC governing the exercise of the rights of a holder of a beneficial interest in any Global Preferred Stock.

(iii)Certificated Preferred Stock. Except as provided in this Section 11(a) or in Section 11(c), owners of beneficial interests in Global Preferred Stock will not be entitled to receive physical delivery of Preferred Stock in fully registered certificated form (“Certificated Preferred Stock”). With respect to shares of Preferred Stock that are Transfer Restricted Securities on a Conversion Date, all shares of Common Stock issuable on conversion of such shares on such Conversion Date shall bear the legend required pursuant to Section 11(c)(vi) below and shall be in global form if issued in respect of a Global Preferred Stock.

(b)Execution and Authentication. Two Officers shall sign the Preferred Stock certificate for the Company by manual or facsimile signature.

If an Officer whose signature is on a Preferred Stock certificate no longer holds that office at the time the Transfer Agent authenticates the Preferred Stock certificate, the Preferred Stock certificate shall be valid nevertheless.

A Preferred Stock certificate shall not be valid until an authorized signatory of the Transfer Agent manually signs the certificate of authentication on the Preferred Stock certificate. The signature shall be conclusive evidence that the Preferred Stock certificate has been authenticated under this Certificate of Designations.

The Transfer Agent shall authenticate and deliver certificates for up to 3,000,000 shares of Preferred Stock for original issue upon a written order of the Company signed by two Officers or by an Officer and an Assistant Treasurer of the Company. Such order

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shall specify the number of shares of Preferred Stock to be authenticated and the date on which the original issue of the Preferred Stock is to be authenticated.

The Transfer Agent may appoint an authenticating agent reasonably acceptable to the Company to authenticate the certificates for the Preferred Stock. Unless limited by the terms of such appointment, an authenticating agent may authenticate certificates for the Preferred Stock whenever the Transfer Agent may do so. Each reference in this Certificate of Designations to authentication by the Transfer Agent includes authentication by such agent. An authenticating agent has the same rights as the Transfer Agent or agent for service of notices and demands.

(c)Transfer and Exchange.

(i)Transfer and Exchange of Certificated Preferred Stock. When Certificated Preferred Stock is presented to the Transfer Agent with a request to register the transfer of such Certificated Preferred Stock or to exchange such Certificated Preferred Stock for an equal number of shares of Certificated Preferred Stock, the Transfer Agent shall register the transfer or make the exchange as requested if its reasonable requirements for such transaction are met; provided, however, that the Certificated Preferred Stock surrendered for transfer or exchange:

(A)shall be duly endorsed or accompanied by a written instrument of transfer in form reasonably satisfactory to the Company and the Transfer Agent, duly executed by the Holder thereof or its attorney duly authorized in writing; and

(B)if such Certificated Preferred Stock is a Transfer Restricted Security, is being transferred or exchanged in accordance with the transfer restrictions set forth in the legend pursuant to Section 11(c)(vi) below, and is accompanied by, if such Certificated Preferred Stock is being transferred to the Company or to a “qualified institutional buyer” (“QIB”) in accordance with Rule 144A under the Securities Act or pursuant to another exemption from registration under the Securities Act, (i) a certification to that effect and (ii) if the Company so requests, an opinion of counsel or other evidence reasonably satisfactory to it as to the compliance with the restrictions set forth in the legend set forth in Section 11(c)(vi).

(ii)Restrictions on Transfer of Certificated Preferred Stock for a Beneficial Interest in Global Preferred Stock. Certificated Preferred Stock may not be exchanged for a beneficial interest in Global Preferred Stock except upon satisfaction of the requirements set forth below. Upon receipt by the Transfer Agent of Certificated Preferred Stock, duly

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endorsed or accompanied by appropriate instruments of transfer, in form reasonably satisfactory to the Company and the Transfer Agent, together with written instructions directing the Transfer Agent to make, or to direct DTC to make, an adjustment on its books and records with respect to such Global Preferred Stock to reflect an increase in the number of shares of Preferred Stock represented by the Global Preferred Stock, then the Transfer Agent shall cancel such Certificated Preferred Stock and cause, or direct DTC to cause, in accordance with the standing instructions and procedures existing between DTC and the Transfer Agent, the number of shares of Preferred Stock represented by the Global Preferred Stock to be increased accordingly. If no Global Preferred Stock is then outstanding, the Company shall issue and the Transfer Agent shall authenticate, upon written order of the Company in the form of an Officers’ Certificate, a new Global Preferred Stock representing the appropriate number of shares.

(iii)Transfer and Exchange of Global Preferred Stock. The transfer and exchange of Global Preferred Stock or beneficial interests therein shall be effected through DTC, in accordance with this Certificate of Designations (including applicable restrictions on transfer set forth herein, if any) and the procedures of DTC therefor.

(iv)Transfer of a Beneficial Interest in Global Preferred Stock for Certificated Preferred Stock.

(A)If at any time:

(1)      DTC notifies the Company that DTC is unwilling or unable to continue as depository for the Global Preferred Stock and a successor depository for the Global Preferred Stock is not appointed by the Company within 90 days after delivery of such notice; or

(2)      DTC ceases to be a clearing agency registered under the Exchange Act and a successor depository for the Global Preferred Stock is not appointed by the Company within 90 days,

then the Company shall execute, and the Transfer Agent, upon receipt of a written order of the Company signed by two Officers or by an Officer and an Assistant Treasurer of the Company requesting the authentication and delivery of Certificated Preferred Stock to the Persons designated by the Company, shall authenticate and deliver Certificated Preferred Stock equal to the number of shares of Preferred Stock represented by the Global

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Preferred Stock, in exchange for such Global Preferred Stock.  Subject to the foregoing, the beneficial interests in a Global Preferred Stock shall not be exchangeable for Certificated Preferred Stock.

(B)Certificated Preferred Stock issued in exchange for a beneficial interest in a Global Preferred Stock pursuant to this Section 11(c)(iv) shall be registered in such names and in such authorized denominations as DTC, pursuant to instructions from its direct or indirect participants or otherwise, shall instruct the Transfer Agent. The Transfer Agent shall deliver such Certificated Preferred Stock to the Persons in whose names such Preferred Stock are so registered in accordance with the instructions of DTC.

(v)Restrictions on Transfer and Exchange of Global Preferred Stock.

(A)Notwithstanding any other provisions of this Certificate of Designations (other than the provisions set forth in Section 11(c)(iv)), Global Preferred Stock may not be transferred as a whole except by DTC to a nominee of DTC or by a nominee of DTC to DTC or another nominee of DTC or by DTC or any such nominee to a successor depository or a nominee of such successor depository.

(B)In the event that the Global Preferred Stock is exchanged for Preferred Stock in definitive registered form pursuant to Section 11(c)(iv) prior to the effectiveness of a Shelf Registration Statement with respect to such securities, such Preferred Stock may be exchanged only in accordance with such procedures as are substantially consistent with the provisions of this Section 11(c) (including the certification requirements set forth in the Exhibits to this Certificate of Designations intended to ensure that such transfers comply with Rule 144A or such other applicable exemption from registration under the Securities Act, as the case may be) and such other procedures as may from time to time be adopted by the Company.

(vi)Legend.

(A)Except as permitted by the following paragraph (C), each certificate evidencing the Global Preferred Stock and the Certificated Preferred Stock shall bear a legend in substantially the following form:

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“THIS SHARE OF CONVERTIBLE PREFERRED STOCK, THE COMMON STOCK ISSUABLE UPON CONVERSION OF THIS SHARE OF CONVERTIBLE PREFERRED STOCK AND THE SHARES OF COMMON STOCK ISSUABLE AS A DIVIDEND ON THE CONVERTIBLE PREFERRED STOCK, IF ANY, HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), OR ANY STATE SECURITIES LAWS. NEITHER THIS SHARE OF CONVERTIBLE PREFERRED STOCK NOR ANY INTEREST OR PARTICIPATION HEREIN OR THEREIN MAY BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED EXCEPT IN ACCORDANCE WITH THE FOLLOWING SENTENCE.

BY ITS ACQUISITION HEREOF OR OF A BENEFICIAL INTEREST HEREIN, THE ACQUIRER:

3.REPRESENTS THAT IT AND ANY ACCOUNT FOR WHICH IT IS ACTING IS A “QUALIFIED INSTITUTIONAL BUYER” (WITHIN THE MEANING OF RULE 144A UNDER THE SECURITIES ACT) AND THAT IT EXERCISES SOLE INVESTMENT DISCRETION WITH RESPECT TO EACH SUCH ACCOUNT, AND

4.AGREES FOR THE BENEFIT OF SANCHEZ ENERGY CORPORATION (THE “COMPANY”) THAT IT WILL NOT OFFER, SELL, PLEDGE OR OTHERWISE TRANSFER THIS SECURITY OR ANY BENEFICIAL INTEREST HEREIN PRIOR TO THE DATE THAT IS THE LATER OF (X) ONE YEAR AFTER THE LAST DATE OF INITIAL ISSUANCE HEREOF OR SUCH OTHER PERIOD OF TIME AS PERMITTED BY RULE 144 UNDER THE SECURITIES ACT OR ANY SUCCESSOR PROVISION THERETO, AND (Y) SUCH LATER DATE, IF ANY, AS MAY BE REQUIRED BY APPLICABLE LAW, EXCEPT:

(E)TO THE COMPANY OR ANY OF ITS SUBSIDIARIES, OR

(F)PURSUANT TO A REGISTRATION STATEMENT THAT HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT, OR

(G)TO A QUALIFIED INSTITUTIONAL BUYER IN COMPLIANCE WITH RULE 144A UNDER THE SECURITIES ACT, OR

(H)PURSUANT TO AN EXEMPTION FROM REGISTRATION PROVIDED BY RULE 144 UNDER THE SECURITIES ACT OR ANY OTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT.

PRIOR TO THE REGISTRATION OF ANY TRANSFER IN ACCORDANCE WITH CLAUSE (2)(B) ABOVE, THE COMPANY AND THE TRANSFER AGENT RESERVE THE RIGHT TO REQUIRE THE DELIVERY OF SUCH LEGAL OPINIONS, CERTIFICATIONS OR OTHER EVIDENCE AS MAY REASONABLY

II-33

BE REQUIRED IN ORDER TO DETERMINE THAT THE PROPOSED TRANSFER IS BEING MADE IN COMPLIANCE WITH THE SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS. NO REPRESENTATION IS MADE AS TO THE AVAILABILITY OF ANY EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT.

NO AFFILIATE (AS DEFINED IN RULE 144 UNDER THE SECURITIES ACT) OF THE COMPANY OR PERSON THAT HAS BEEN AN AFFILIATE (AS DEFINED IN RULE 144 UNDER THE SECURITIES ACT) OF THE COMPANY DURING THE THREE IMMEDIATELY PRECEDING MONTHS MAY PURCHASE OR OTHERWISE ACQUIRE THIS SHARE OF CONVERTIBLE PREFERRED STOCK OR A BENEFICIAL INTEREST HEREIN.”

(B)Except as permitted by the following paragraph (C), each certificate evidencing Common Stock in certificated form shall bear a legend in substantially the following form:

“THIS SHARE OF COMMON STOCK HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), OR ANY STATE SECURITIES LAWS. NEITHER THIS SHARE OF COMMON STOCK NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED EXCEPT IN ACCORDANCE WITH THE FOLLOWING SENTENCE.

BY ITS ACQUISITION HEREOF OR OF A BENEFICIAL INTEREST HEREIN, THE ACQUIRER:

3.REPRESENTS THAT IT AND ANY ACCOUNT FOR WHICH IT IS ACTING IS A “QUALIFIED INSTITUTIONAL BUYER” (WITHIN THE MEANING OF RULE 144A UNDER THE SECURITIES ACT) AND THAT IT EXERCISES SOLE INVESTMENT DISCRETION WITH RESPECT TO EACH SUCH ACCOUNT, AND

4.AGREES FOR THE BENEFIT OF SANCHEZ ENERGY CORPORATION (THE “COMPANY”) THAT IT WILL NOT OFFER, SELL, PLEDGE OR OTHERWISE TRANSFER THIS SECURITY OR ANY BENEFICIAL INTEREST HEREIN PRIOR TO THE DATE THAT IS THE LATER OF (X) ONE YEAR AFTER THE LAST DATE OF INITIAL ISSUANCE HEREOF OR SUCH OTHER PERIOD OF TIME AS PERMITTED BY RULE 144 UNDER THE SECURITIES ACT OR ANY SUCCESSOR PROVISION THERETO, AND (Y) SUCH LATER DATE, IF ANY, AS MAY BE REQUIRED BY APPLICABLE LAW, EXCEPT:

(E)TO THE COMPANY OR ANY OF ITS SUBSIDIARIES, OR

(F)PURSUANT TO A REGISTRATION STATEMENT THAT HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT, OR

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(G)TO A QUALIFIED INSTITUTIONAL BUYER IN COMPLIANCE WITH RULE 144A UNDER THE SECURITIES ACT, OR

(H)PURSUANT TO AN EXEMPTION FROM REGISTRATION PROVIDED BY RULE 144 UNDER THE SECURITIES ACT OR ANY OTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT.

PRIOR TO THE REGISTRATION OF ANY TRANSFER IN ACCORDANCE WITH CLAUSE (2)(B) ABOVE, THE COMPANY AND THE TRANSFER AGENT RESERVE THE RIGHT TO REQUIRE THE DELIVERY OF SUCH LEGAL OPINIONS, CERTIFICATIONS OR OTHER EVIDENCE AS MAY REASONABLY BE REQUIRED IN ORDER TO DETERMINE THAT THE PROPOSED TRANSFER IS BEING MADE IN COMPLIANCE WITH THE SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS. NO REPRESENTATION IS MADE AS TO THE AVAILABILITY OF ANY EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT.

NO AFFILIATE (AS DEFINED IN RULE 144 UNDER THE SECURITIES ACT) OF THE COMPANY OR PERSON THAT HAS BEEN AN AFFILIATE (AS DEFINED IN RULE 144 UNDER THE SECURITIES ACT) OF THE COMPANY DURING THE THREE IMMEDIATELY PRECEDING MONTHS MAY PURCHASE OR OTHERWISE ACQUIRE THIS SHARE OF COMMON STOCK OR A BENEFICIAL INTEREST HEREIN.”

(C)Upon any sale or transfer of a Transfer Restricted Security (including any Transfer Restricted Security represented by Global Preferred Stock) pursuant to Rule 144 under the Securities Act or another similar exemption from registration under the Securities Act or an effective registration statement under the Securities Act:

(1)in the case of any Transfer Restricted Security that is Certificated Preferred Stock or Common Stock in certificated form, the Transfer Agent shall permit the Holder thereof to exchange such Transfer Restricted Security for Certificated Preferred Stock or Common Stock in certificated form that does not bear a restrictive legend and rescind any restriction on the transfer of such Transfer Restricted Security; and

(2)in the case of any Transfer Restricted Security that is in global form, the Transfer Agent, shall decrease the amount of shares represented by such global security and increase the amount of shares represented by

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such global security not otherwise bearing the legend required above, and shall, in accordance with DTC procedures, deliver beneficial interests in such global security not bearing such legend.

Any share of Preferred Stock (or security issued in exchange or substitution therefor) as to which the restrictions on transfer set forth above shall have expired in accordance with their terms may, upon surrender of such share of Preferred Stock for exchange to the Transfer Agent, be exchanged for a new share of Preferred Stock, which shall not bear the restrictive legend required above and shall not be assigned a restricted CUSIP number, if any. The Company shall be entitled to instruct the Transfer Agent in writing to so surrender any Global Preferred Stock as to which such restrictions on transfer shall have expired in accordance with their terms for exchange, and, upon such instruction, the Transfer Agent shall so surrender such Global Preferred Stock for exchange; and any new Global Preferred Stock so exchanged therefor shall not bear the restrictive legend specified above and shall not be assigned a restricted CUSIP number.

(vii)Cancellation or Adjustment of Global Preferred Stock. At such time as all beneficial interests in Global Preferred Stock have either been exchanged for Certificated Preferred Stock, converted or canceled, such Global Preferred Stock shall be returned to DTC for cancellation or retained and canceled by the Transfer Agent. At any time prior to such cancellation, if any beneficial interest in Global Preferred Stock is exchanged for Certificated Preferred Stock, converted or canceled, the number of shares of Preferred Stock represented by such Global Preferred Stock shall be reduced and an adjustment shall be made on the books and records of the Transfer Agent with respect to such Global Preferred Stock, by the Transfer Agent or DTC, to reflect such reduction.

(viii)Obligations with Respect to Transfers and Exchanges of Preferred Stock.

(A)To permit registrations of transfers and exchanges, the Company shall execute and the Transfer Agent shall authenticate Certificated Preferred Stock and Global Preferred Stock as required pursuant to the provisions of this Section 11(c).

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(B)All Certificated Preferred Stock and Global Preferred Stock issued upon any registration of transfer or exchange of Certificated Preferred Stock or Global Preferred Stock shall be the valid Capital Stock of the Company, entitled to the same benefits under this Certificate of Designations as the Certificated Preferred Stock or Global Preferred Stock surrendered upon such registration of transfer or exchange.

(C)Prior to due presentment for registration of transfer of any shares of Preferred Stock, the Transfer Agent and the Company may deem and treat the Person in whose name such shares of Preferred Stock are registered as the absolute owner of such Preferred Stock and neither the Transfer Agent nor the Company shall be affected by notice to the contrary.

(D)No service charge shall be made to a Holder for any registration of transfer or exchange upon surrender of any Preferred Stock certificate or Common Stock certificate at the office of the Transfer Agent maintained for that purpose. However, the Company may require payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection with any registration of transfer or exchange of Preferred Stock certificates or Common Stock certificates.

(ix)No Obligation of the Transfer Agent.

(A)The Transfer Agent shall have no responsibility or obligation to any beneficial owner of Global Preferred Stock, a member of or a participant in, DTC or any other Person with respect to the accuracy of the records of DTC or its nominee or of any participant or member thereof, with respect to any ownership interest in the Preferred Stock or with respect to the delivery to any participant, member, beneficial owner or other Person (other than DTC) of any notice or the payment of any amount, under or with respect to such Global Preferred Stock. All notices and communications to be given to the Holders and all payments to be made to Holders under the Preferred Stock shall be given or made only to the Holders (which shall be DTC or its nominee in the case of the Global Preferred Stock). The rights of beneficial owners in any Global Preferred Stock shall be exercised only through DTC subject to the applicable rules and procedures of DTC. The Transfer Agent may rely and shall be fully protected in

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relying upon information furnished by DTC with respect to its members, participants and any beneficial owners.

(B)The Transfer Agent shall have no obligation or duty to monitor, determine or inquire as to compliance with any restrictions on transfer imposed under this Certificate of Designations or under applicable law with respect to any transfer of any interest in any Preferred Stock (including any transfers between or among DTC participants, members or beneficial owners in any Global Preferred Stock) other than to require delivery of such certificates and other documentation or evidence as are expressly required by, and to do so if and when expressly required by, the terms of this Certificate of Designations, and to examine the same to determine substantial compliance as to form with the express requirements hereof.

(d)Replacement Certificates. If any of the Preferred Stock certificates shall be mutilated, lost, stolen or destroyed, the Company shall issue, in exchange and in substitution for and upon cancellation of the mutilated Preferred Stock certificate, or in lieu of and substitution for the Preferred Stock certificate lost, stolen or destroyed, a new Preferred Stock certificate of like tenor and representing an equivalent number of shares of Preferred Stock, but only upon receipt of evidence of such loss, theft or destruction of such Convertible Preferred Stock certificate and indemnity, if requested, satisfactory to the Company and the Transfer Agent.

(e)Temporary Certificates. Until definitive Preferred Stock certificates are ready for delivery, the Company may prepare and the Transfer Agent shall authenticate temporary Preferred Stock certificates. Any temporary Preferred Stock certificates shall be substantially in the form of definitive Preferred Stock certificates but may have variations that the Company considers appropriate for temporary Preferred Stock certificates. Without unreasonable delay, the Company shall prepare and the Transfer Agent shall authenticate definitive Preferred Stock certificates and deliver them in exchange for temporary Preferred Stock certificates.

(f)Cancellation. In the event the Company shall purchase or otherwise acquire Certificated Preferred Stock, the same shall thereupon be delivered to the Transfer Agent for cancellation.

(i)At such time as all beneficial interests in Global Preferred Stock have either been exchanged for Certificated Preferred Stock, converted, repurchased or canceled, such Global Preferred Stock shall thereupon be delivered to the Transfer Agent for cancellation.

(ii)The Transfer Agent and no one else shall cancel and destroy all Preferred Stock certificates surrendered for transfer, exchange,

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replacement or cancellation and deliver a certificate of such destruction to the Company unless the Company directs the Transfer Agent to deliver canceled Preferred Stock certificates to the Company.  The Company may not issue new Preferred Stock certificates to replace Preferred Stock certificates to the extent they evidence Preferred Stock which the Company has purchased or otherwise acquired.

13.Other Provisions.  (a) With respect to any notice to a Holder of shares of Preferred Stock required to be provided hereunder, neither failure to mail such notice, nor any defect therein or in the mailing thereof, to any particular Holder shall affect the sufficiency of the notice or the validity of the proceedings referred to in such notice with respect to the other Holders or affect the legality or validity of any distribution, rights, warrant, reclassification, consolidation, merger, conveyance, transfer, dissolution, liquidation or winding-up, or the vote upon any such action. Any notice which was mailed in the manner herein provided shall be conclusively presumed to have been duly given whether or not the Holder receives the notice.

(b)Shares of Preferred Stock that have been issued and reacquired in any manner, including shares of Preferred Stock that are purchased or exchanged or converted, shall (upon compliance with any applicable provisions of the laws of Delaware) have the status of authorized but unissued shares of preferred stock of the Company undesignated as to series and may be designated or redesignated and issued or reissued, as the case may be, as part of any series of preferred stock of the Company; provided that any issuance of such shares as Preferred Stock must be in compliance with the terms hereof.

(c)The shares of Preferred Stock shall be issuable only in whole shares.

(d)All notice periods referred to herein shall commence on the date of the mailing of the applicable notice.  Notice to any Holder shall be given to the registered address set forth in the Company’s records for such Holder, or for Global Preferred Stock, to the Depository in accordance with its procedures.

(e)Any payment required to be made hereunder on any day that is not a Business Day shall be made on the next succeeding Business Day and no interest or dividends on such payment will accrue or accumulate, as the case may be, in respect of such delay.

(f)Holders of Preferred Stock shall not be entitled to any preemptive rights to acquire additional capital stock of the Company.

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EXHIBIT A

FORM OF PREFERRED STOCK

FACE OF SECURITY

[[THIS SHARE OF CONVERTIBLE PREFERRED STOCK, THE COMMON STOCK ISSUABLE UPON CONVERSION OF THIS SHARE OF CONVERTIBLE PREFERRED STOCK AND THE SHARES OF COMMON STOCK ISSUABLE AS A DIVIDEND ON THE CONVERTIBLE PREFERRED STOCK, IF ANY, HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), OR ANY STATE SECURITIES LAWS. NEITHER THIS SHARE OF CONVERTIBLE PREFERRED STOCK NOR ANY INTEREST OR PARTICIPATION HEREIN OR THEREIN MAY BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED EXCEPT IN ACCORDANCE WITH THE FOLLOWING SENTENCE.](9)

[THIS SHARE OF COMMON STOCK HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), OR ANY STATE SECURITIES LAWS. NEITHER THIS SHARE OF COMMON STOCK NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED EXCEPT IN ACCORDANCE WITH THE FOLLOWING SENTENCE.](10)

BY ITS ACQUISITION HEREOF OR OF A BENEFICIAL INTEREST HEREIN, THE ACQUIRER:

3.REPRESENTS THAT IT AND ANY ACCOUNT FOR WHICH IT IS ACTING IS A “QUALIFIED INSTITUTIONAL BUYER” (WITHIN THE MEANING OF RULE 144A UNDER THE SECURITIES ACT) AND AN “ACCREDITED INVESTOR” (WITHIN THE MEANING OF RULE 501(a) UNDER THE SECURITIES ACT) AND THAT IT EXERCISES SOLE INVESTMENT DISCRETION WITH RESPECT TO EACH SUCH ACCOUNT, AND

4.AGREES FOR THE BENEFIT OF SANCHEZ ENERGY CORPORATION (THE “COMPANY”) THAT IT WILL NOT OFFER, SELL, PLEDGE OR OTHERWISE TRANSFER THIS SECURITY OR ANY

(9)  Include for Global Preferred Stock.

(10)  Include for Common Stock.

BENEFICIAL INTEREST HEREIN PRIOR TO THE DATE THAT IS THE LATER OF (X) ONE YEAR AFTER THE LAST DATE OF INITIAL ISSUANCE HEREOF OR SUCH OTHER PERIOD OF TIME AS PERMITTED BY RULE 144 UNDER THE SECURITIES ACT OR ANY SUCCESSOR PROVISION THERETO, AND (Y) SUCH LATER DATE, IF ANY, AS MAY BE REQUIRED BY APPLICABLE LAW, EXCEPT:

(E)TO THE COMPANY OR ANY OF ITS SUBSIDIARIES, OR

(F)PURSUANT TO A REGISTRATION STATEMENT THAT HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT, OR

(G)TO A QUALIFIED INSTITUTIONAL BUYER IN COMPLIANCE WITH RULE 144A UNDER THE SECURITIES ACT, OR

(H)PURSUANT TO AN EXEMPTION FROM REGISTRATION PROVIDED BY RULE 144 UNDER THE SECURITIES ACT OR ANY OTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT.

PRIOR TO THE REGISTRATION OF ANY TRANSFER IN ACCORDANCE WITH CLAUSE (2)(B) ABOVE, THE COMPANY AND THE TRANSFER AGENT RESERVE THE RIGHT TO REQUIRE THE DELIVERY OF SUCH LEGAL OPINIONS, CERTIFICATIONS OR OTHER EVIDENCE AS MAY REASONABLY BE REQUIRED IN ORDER TO DETERMINE THAT THE PROPOSED TRANSFER IS BEING MADE IN COMPLIANCE WITH THE SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS. NO REPRESENTATION IS MADE AS TO THE AVAILABILITY OF ANY EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT.

NO AFFILIATE (AS DEFINED IN RULE 144 UNDER THE SECURITIES ACT) OF THE COMPANY OR PERSON THAT HAS BEEN AN AFFILIATE (AS DEFINED IN RULE 144 UNDER THE SECURITIES ACT) OF THE COMPANY DURING THE THREE IMMEDIATELY PRECEDING MONTHS MAY PURCHASE OR OTHERWISE ACQUIRE THIS SHARE OF [CONVERTIBLE PREFERRED](11)[COMMON](12) STOCK OR A BENEFICIAL INTEREST HEREIN.”](13)

(11)  Include for Preferred Stock.

II-A-2

[UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION (“DTC”), NEW YORK, NEW YORK, TO THE COMPANY OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO., OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC) ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO. HAS AN INTEREST HEREIN.]

[TRANSFERS OF THIS GLOBAL SECURITY SHALL BE LIMITED TO TRANSFERS IN WHOLE, BUT NOT IN PART, TO NOMINEES OF DTC OR TO A SUCCESSOR THEREOF OR SUCH SUCCESSOR’S NOMINEE AND TRANSFERS OF PORTIONS OF THIS GLOBAL SECURITY SHALL BE LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE RESTRICTIONS SET FORTH IN THE CERTIFICATE OF DESIGNATIONS REFERRED TO BELOW.](14)

(12)  Include for Common Stock.

(13)  Subject to removal upon registration under the Securities Act of 1933 or otherwise when the security shall no longer be a Transfer Restricted Security.

(14)  Subject to removal if not a global security.

II-A-3

Certificate Number	Number of Shares of
[           ]	Preferred Stock
	CUSIP NO.: 79970Y501

6.500% Convertible Perpetual Preferred Stock, Series B

of

SANCHEZ ENERGY CORPORATION

SANCHEZ ENERGY, CORPORATION, a Delaware corporation (the “Company”), hereby certifies that [                      ] (the “Holder”) is the registered owner of [                      ] fully paid and non-assessable shares of preferred stock, par value $0.01 per share, of the Company designated as the 6.500% Convertible Perpetual Preferred Stock, Series B (the “Preferred Stock”). The shares of Preferred Stock are transferable on the books and records of the Transfer Agent, in person or by a duly authorized attorney, upon surrender of this certificate duly endorsed and in proper form for transfer. The designations, rights, privileges, restrictions, preferences and other terms and provisions of the Preferred Stock represented hereby are as specified in, and the shares of the Preferred Stock are issued and shall in all respects be subject to the provisions of, the Certificate of Designations dated March 26, 2013, as the same may be amended from time to time (the “Certificate of Designations”). Capitalized terms used herein but not defined shall have the meaning given them in the Certificate of Designations. The Company will provide a copy of the Certificate of Designations to a Holder without charge upon written request to the Company at its principal place of business.

Reference is hereby made to the Certificate of Designations, which shall for all purposes have the same effect as if set forth at this place.

Upon receipt of this certificate, the Holder is bound by the Certificate of Designations and is entitled to the benefits thereunder.

Unless the Transfer Agent’s Certificate of Authentication hereon has been properly executed, these shares of Preferred Stock shall not be entitled to any benefit under the Certificate of Designations or be valid for any purpose.

II-A-4

IN WITNESS WHEREOF, the Company has executed this certificate this          day of March, 2013.

SANCHEZ ENERGY CORPORATION
By:
	Name: [     ]
	Title: [     ]
By:
	Name: [     ]
	Title: [     ]

II-A-5

TRANSFER AGENT’S CERTIFICATE OF AUTHENTICATION

These are shares of the Preferred Stock referred to in the within-mentioned Certificate of Designations.

Dated:
	CONTINENTAL STOCK TRANSFER & TRUST COMPANY, as Transfer Agent,
	By:
		Authorized Signatory

II-A-6

REVERSE OF SECURITY

The Company will furnish without charge to each Holder who so requests the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock and the qualifications, limitations or restrictions of such preferences and/or rights.

II-A-7

ASSIGNMENT

FOR VALUE RECEIVED, the undersigned assigns and transfers the shares of Preferred Stock evidenced hereby to:

(Insert assignee’s social security or tax identification number)
(Insert address and zip code of assignee)
and irrevocably appoints:
agent to transfer the shares of Preferred Stock evidenced hereby on the books of the Transfer Agent. The agent may substitute another to act for him or her.
Date:
Signature:
(Sign exactly as your name appears on the other side of this Preferred Stock Certificate)
Signature Guarantee:	(15)

(15)  (Signature must be guaranteed by an “eligible guarantor institution” that is a bank, stockbroker, savings and loan association or credit union meeting the requirements of the Transfer Agent, which requirements include membership or participation in the Securities Transfer Agents Medallion Program (“STAMP”) or such other “signature guarantee program” as may be determined by the Transfer Agent in addition to, or in substitution for, STAMP, all in accordance with the Securities Exchange Act of 1934, as amended.)

II-A-8

EXHIBIT B

NOTICE OF CONVERSION

(To be Executed by the Holder in order to Convert the Preferred Stock)

The undersigned hereby irrevocably elects to convert (the “Conversion”) shares of 6.500% Convertible Perpetual Preferred Stock, Series B (the “Preferred Stock”) of Sanchez Energy Corporation (the “Company”), represented by stock certificate No(s)                            (the “Preferred Stock Certificates”), into shares of common stock (“Common Stock”) of the Company according to the conditions of the Certificate of Designations of the Preferred Stock (the “Certificate of Designations”). The Company will pay any documentary, stamp or similar issue or transfer tax on the issuance of the shares of our Common Stock upon conversion of the Preferred Stock, unless the tax is due because the Holder requests such shares to be issued in a name other than the Holder’s name, in which case the Holder will pay the tax. A copy of each Preferred Stock Certificate is attached hereto (or evidence of loss, theft or destruction thereof).

Capitalized terms used but not defined herein shall have the meanings ascribed thereto in or pursuant to the Certificate of Designations.

Number of shares of Preferred Stock to be converted:

Name or Names (with addresses) in which the certificate or certificate for any shares of Common Stock to be issued are to be registered:(16)

Signature:

Name of registered Holder:

Fax No.:

Telephone No.:

(16)  The Company is not required to issue shares of Common Stock until you (a) if required, furnish appropriate endorsements and transfer documents and (b) if required, pay funds equal to interest payable on the next Dividend Payment Date to which such Holder is not entitled.

EX-10.2

Exhibit 10.2

EXECUTION

FIRST AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT

THIS FIRST AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT (this “First Amendment”), dated as of June 30, 2013, is entered into by and among SANCHEZ ENERGY CORPORATION, a Delaware corporation (“Sanchez”), SEP HOLDINGS III, LLC, a Delaware limited liability company (“SEP”), SN MARQUIS LLC, a Delaware limited liability company (“SN Marquis”), and SN COTULLA ASSETS, LLC, a Texas limited liability company (“SN Cotulla”; together with Sanchez, SEP and SN Marquis, collectively, the “Borrowers” and each, a “Borrower”), the Lenders party hereto, ROYAL BANK OF CANADA, as Administrative Agent for the Lenders (in such capacity, together with its successors in such capacity, the “Administrative Agent”), and ROYAL BANK OF CANADA, as letter of credit issuing bank (in such capacity, together with its successors in such capacity, the “Issuing Bank”).

RECITALS

A.The Borrowers, the Lenders, the Issuing Bank and the Administrative Agent previously entered into that certain Amended and Restated Credit Agreement dated as of May 31, 2013 (as amended, restated, supplemented or modified from time to time, the “Credit Agreement”) and certain other Loan Documents (as defined in the Credit Agreement) in connection therewith.

B.The Borrowers have repaid the Second Lien Loan (as defined in the Credit Agreement) in full.

C.The Borrowers have requested that the Administrative Agent, Issuing Bank and the Required Lenders amend the Credit Agreement and the Administrative Agent, Issuing Bank and the Lenders party hereto are willing to amend the Credit Agreement on the terms and conditions contained in this First Amendment.

AGREEMENT

NOW, THEREFORE, in consideration of the foregoing and the mutual covenants set forth in this First Amendment and other good and valuable consideration, the receipt and sufficiency of which are acknowledged by the parties hereto, the Borrowers, the Required Lenders, the Issuing Bank and the Administrative Agent agree as follows:

1.Defined Terms.  Unless otherwise defined herein, capitalized terms used herein have the meanings assigned to them in the Credit Agreement.

2.Specific Amendments to Credit Agreement.The Credit Agreement is hereby amended as follows:

(i)The following defined terms are hereby added to Section 1.02 of the Credit Agreement in the proper alphabetical order:

First Amendment to Sanchez

Amended and Restated Credit Agreement

1

“First Amendment” means that certain First Amendment to Amended and Restated Credit Agreement dated the First Amendment Effective Date among the Borrowers, the Required Lenders, the Issuing Bank and the Administrative Agent.

“First Amendment Effective Date” means June 30, 2013.

“Norstra” means Norstra Energy Inc., a Nevada corporation.

“Norstra Equity Interests” means (i) Equity Interests in Norstra received as consideration in the Norstra Transaction and (ii) any Equity Interests received in respect of such Equity Interests from Norstra or any successor thereto.

“Norstra Transaction” means the sale by SEP of Hydrocarbon Interests located in central Montana comprised of leases on approximately 105,000 gross (82,000 net) acres to Norstra in exchange for shares of Norstra common stock, which shares have not been registered under the Securities Act.

“Repayment Notice” means a notice of repayment of a Borrowing pursuant to Section 2.6 or Section 2.7, substantially in the form of Exhibit I or any other form approved by the Administrative Agent.

“Securities Act” means the Securities Act of 1933, as amended.

(ii)The defined term “Agreement” in Section 1.02 of the Credit Agreement is hereby deleted and the following is substituted therefor:

“Agreement” means this Credit Agreement, as amended by the First Amendment, and as the same may from time to time be amended, modified, supplemented or restated.

(iii)Section 3.04(b) of the Credit Agreement is hereby amended by deleting the parenthetical in the first sentence thereof and substituting therefor the following:

“(confirmed by telecopy of a signed Repayment Notice)”

(iv)Section 9.05 of the Credit Agreement is hereby amended by deleting the word “and” at the end of subsection 9.05(l), adding the word “and” after the semi colon at the end of subsection 9.05(m) and inserting a new subsection 9.05(n) to read as follows:

“(n)  The Investment consisting of the Norstra Equity Interests; provided, that the Borrowers shall use commercially reasonable efforts, subject to applicable law, including any applicable minimum holding period and any

2

applicable volume limitations on dispositions, to dispose of the Norstra Equity Interest as soon as reasonably practicable after the acquisition thereof;”

(v)Section 9.11 of the Credit Agreement is amended by adding a new clause (ii) to the introductory clause of Section 9.11 and designating what had been clause (ii) as clause (iii):

“, (ii) the sale of Oil and Gas Properties contemplated by the Norstra Transaction and the sale of the Norstra Equity Interests in accordance with Section 9.05(n),”

3.Amendment to Exhibits.  A new Exhibit I (Form of Repayment Notice) in the form of Exhibit I to this First Amendment is hereby added to the Credit Agreement.

4.Borrowers’ Ratification.  Each of the Borrowers hereby ratifies all of its Obligations under the Credit Agreement and each of the Loan Documents to which it is a party, and agrees and acknowledges that the Credit Agreement and each of the Loan Documents to which it is a party are and shall continue to be in full force and effect. Nothing in this First Amendment extinguishes, novates or releases any right, claim, Lien, security interest or entitlement of any of the Lenders, the Issuing Bank or the Administrative Agent created by or contained in any of such documents nor is any Borrower released from any covenant, warranty or obligation created by or contained herein or therein.

5.Guarantors’ Ratification.  Each Guarantor by its execution in the space provided below under “ACKNOWLEDGED for purposes of Section 5” hereby ratifies, confirms, acknowledges and agrees that its obligations under the Guaranty are in full force and effect and that such Guarantor continues to unconditionally and irrevocably guarantee the full and punctual payment, when due, whether at stated maturity or earlier by acceleration or otherwise, of the Obligations, and its execution and delivery of this First Amendment does not indicate or establish an approval or consent requirement by any Guarantor under the Guaranty in connection with the execution and delivery of amendments to the Credit Agreement, the Notes or any of the other Loan Documents (other than the Guaranty or any other Loan Document to which a Guarantor is a party).

6.Conditions to Effectiveness of First Amendment.  This First Amendment shall be effective upon the satisfaction, in the Administrative Agent’s sole discretion, of the following conditions precedent:

(i)The Administrative Agent shall have executed, and shall have received from each of the Borrowers, the Issuing Bank and the Required Lenders duly executed signature pages to, this First Amendment, and shall have received a duly executed acknowledgement of Section 5 of this First Amendment from each Guarantor;

3

(ii)the Administrative Agent shall have executed, and shall have received from Sanchez Oil & Gas Corporation a duly executed counterparty of the Acknowledgement and Agreement Regarding Undertaking to Pay Directly in the form attached as Exhibit X to this First Amendment (the “Acknowledgement and Agreement”);

(iii)the Administrative Agent shall have received such other documents as the Administrative Agent or its counsel may reasonably request; and

(iv)the Administrative Agent and the Lenders shall have received all fees and other amounts due and payable, including, to the extent invoiced, reimbursement or payment of all out-of-pocket expenses required to be reimbursed or paid by the Borrowers hereunder.

7.No Implied Amendment, Waiver or Consent. This First Amendment shall not constitute an amendment or waiver of any provision not expressly referred to herein and shall not be construed as a consent to any action on the part of the Borrowers that would require a waiver or consent of the Lenders or Required Lenders, as applicable, or an amendment or modification to any term of the Loan Documents except as expressly stated herein.

8.Miscellaneous.  This First Amendment is a Loan Document.  Except as affected by this First Amendment and the Acknowledgement and Agreement, the Loan Documents are unchanged and continue in full force and effect.  However, in the event of any inconsistency between the terms of the Credit Agreement, as amended by this First Amendment, and any other Loan Document, the terms of the Credit Agreement will control and the other document will be deemed to be amended to conform to the terms of the Credit Agreement.  All references to the Credit Agreement will refer to the Credit Agreement as amended by this First Amendment and any other amendments properly executed among the parties.  Borrowers agree that all Loan Documents to which they are a party (whether as an original signatory or by assumption of the Obligations) remain in full force and effect and continue to evidence their respective legal, valid and binding obligations enforceable in accordance with their terms (as the same are affected by this First Amendment or are amended in connection with this First Amendment).  AS A MATERIAL INDUCEMENT TO THE ADMINISTRATIVE AGENT, ISSUING BANK AND LENDERS PARTY HERETO TO ENTER INTO THIS FIRST AMENDMENT, BORROWERS RELEASE THE ADMINISTRATIVE AGENT, THE ISSUING BANK, THE LENDERS AND THEIR RESPECTIVE PREDECESSORS, SUCCESSORS, ASSIGNS, DIRECTORS, OFFICERS, EMPLOYEES, TRUSTEES, AGENTS AND ATTORNEYS FROM ANY LIABILITY FOR ACTIONS OR FAILURES TO ACT IN CONNECTION WITH THE LOAN DOCUMENTS PRIOR TO THE FIRST AMENDMENT EFFECTIVE DATE.  NO COURSE OF DEALING BETWEEN BORROWERS OR ANY OTHER PERSON, ON THE ONE HAND, AND THE ADMINISTRATIVE AGENT, ISSUING BANK AND THE LENDERS, ON THE OTHER, WILL BE DEEMED TO HAVE ALTERED OR AMENDED THE CREDIT AGREEMENT OR AFFECTED EITHER BORROWERS’, THE ADMINISTRATIVE AGENT’S, THE ISSUING BANK’S OR THE LENDERS’ RIGHT TO ENFORCE THE CREDIT AGREEMENT AS WRITTEN.  This First Amendment will be binding upon and inure to the benefit of each of the undersigned and their respective successors and permitted assigns.

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9.Form.  Each agreement, document, instrument or other writing to be furnished to the Administrative Agent and/or the Lenders under any provision of this instrument must be in form and substance satisfactory to the Administrative Agent and its counsel.

10.Headings. The headings and captions used in this First Amendment are for convenience only and will not be deemed to limit, amplify or modify the terms of this First Amendment, the Credit Agreement, or the other Loan Documents.

11.Interpretation. Wherever possible each provision of this First Amendment shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this First Amendment shall be prohibited by or invalid under such law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this First Amendment.

12.Multiple Counterparts.  This First Amendment may be separately executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to constitute one and the same agreement.  This First Amendment shall become effective when it shall have been executed by Administrative Agent and when Administrative Agent shall have received counterparts hereof that, when taken together, bear the signatures of each of the Loan Parties and Required Lenders.  This First Amendment may be transmitted and/or signed by facsimile, telecopy or electronic mail.  The effectiveness of any such documents and signatures shall, subject to applicable law, have the same force and effect as manually-signed originals and shall be binding on all Loan Parties, all Lenders, the Administrative Agent and the Issuing Bank.  The Administrative Agent may also require that any such documents and signatures be confirmed by a manually-signed original thereof; provided, however, that the failure to request or deliver the same shall not limit the effectiveness of any facsimile document or signature.

13.Execution by Issuing Bank.  The Issuing Bank has executed this First Amendment merely for purposes of consistency since the Issuing Bank signed the Credit Agreement.  However, since neither the rights nor duties of the Issuing Bank are affected by this First Amendment, the execution of this First Amendment by the Issuing Bank was not necessary for this First Amendment to be effective.  For the avoidance of doubt, the parties agree and understand that, unless the rights or duties of the Issuing Bank are affected by any future amendment, it will not be necessary for the Issuing Bank to execute any such future amendment.

14.Governing Law.  THIS FIRST AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO ANY CHOICE-OF-LAW PROVISIONS THAT WOULD REQUIRE THE APPLICATION OF THE LAW OF ANOTHER JURISDICTION.

[Signature Pages Follow]

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IN WITNESS WHEREOF, the parties hereto have caused this First Amendment to be executed by their respective officers thereunto duly authorized as of the date first above written.

BORROWERS:
SANCHEZ ENERGY CORPORATION,
a Delaware corporation
By:	/s/ Michael G. Long
Name:	Michael G. Long
Title:	Senior Vice President — Chief Financial Officer
SEP HOLDINGS III, LLC,
a Delaware limited liability company
By:	/s/ Michael G. Long
Name:	Michael G. Long
Title:	Senior Vice President — Chief Financial Officer
SN MARQUIS LLC,
a Delaware limited liability company
By:	/s/ Michael G. Long
Name:	Michael G. Long
Title:	Senior Vice President — Chief Financial Officer
SN COTULLA ASSETS, LLC,
a Texas limited liability company
By:	/s/ Michael G. Long
Name:	Michael G. Long
Title:	Senior Vice President — Chief Financial Officer

Signature Page 1 to First Amendment

ACKNOWLEDGED for the purposes stated in Section 5:
GUARANTOR:
SN OPERATING, LLC,
a Texas limited liability company
By:	/s/ Michael G. Long
Name:	Michael G. Long
Title:	Senior Vice President — Chief Financial Officer

Signature Page 2 to First Amendment

ADMINISTRATIVE AGENT:
ROYAL BANK OF CANADA, as
Administrative Agent
By:	/s/ Ann Hurley
Name:	Ann Hurley
Title:	Manager, Agency
LENDERS:
ISSUING BANK AND LENDER:
ROYAL BANK OF CANADA
By:	/s/ Jay Sartain
Name:	Jay Sartain
Title:	Authorized Signatory
CAPITAL ONE, NATIONAL ASSOCIATION
By:	/s/ Michael Higgins
Name:	Michael Higgins
Title:	Vice President
CREDIT SUISSE AG, CAYMAN ISLANDS BRANCH
By:	/s/ Michael Spaight, /s/ Kevin Buddhdew
Name:	Michael Spaight, Kevin Buddhdew
Title:	Authorized Signatory, Authorized Signatory
COMPASS BANK
By:	/s/ Ian Payne
Name:	Ian Payne
Title:	Vice President

Signature Page 3 to First Amendment

SUNTRUST BANK
By:	/s/ Yann Pirio
Name:	Yann Pirio
Title:	Director
ING CAPITAL LLC
By:	/s/ Charles Hall
Name:	Charles Hall
Title:	Managing Director
BRANCH BANKING AND TRUST COMPANY
By:	/s/ Ryan K. Michael
Name:	Ryan K. Michael
Title:	Senior Vice President
IBERIABANK
By:	/s/ W. Bryan Chapman
Name:	W. Bryan Chapman
Title:	Executive Vice President
UNION BANK, N.A.
By:	/s/ Haylee Dallas
Name:	Haylee Dallas
Title:	Vice President
SOCIÉTÉ GENÉRALÉ
By:	/s/ Elena Robciuc
Name:	Elena Robciuc
Title:	Managing Director

Signature Page 4 to First Amendment

EXHIBIT I

FORM OF REPAYMENT NOTICE

[                            ], 201[    ]

Reference is made to that certain Amended and Restated Credit Agreement dated as of May 31, 2013 by and among SANCHEZ ENERGY CORPORATION, a Delaware corporation, SEP HOLDINGS III, LLC, a Delaware limited liability company, SN MARQUIS LLC, a Delaware limited liability company, and SN COTULLA ASSETS, LLC, a Texas limited liability company (collectively, the “Borrowers”), Royal Bank of Canada, as Administrative Agent and the lenders (the “Lenders”) which are or become parties thereto (unless otherwise defined herein, each capitalized term used herein is defined in the Credit Agreement) (together with all amendments, restatements, supplements or other modifications thereto, the “Credit Agreement”).

The Borrowers are repaying Borrowings as follows:

1.Borrowings outstanding prior to the repayment referred to herein: $

2.Amount of repayment: $

3.Date of repayment:                               , 201_.

4.Type of Borrowing and amount to which repayment applies:

(a)ABR Borrowing for $

(b)Eurodollar Borrowing(s) with Interest Period(s) ending on                         (1)

(i)one month$

(ii)three months$

(iii)six months$                    ]

(1)  If more than one Interest Period ends on a particular date, or if necessary to allocate repayment among Interest Periods, Borrower shall specify how such repayment is to be allocated.

[Exhibit I to First Amendment Page 1]

The repayment referred to herein is being made pursuant to and complies with [Section 3.04(a) — Optional Prepayments] OR [Section 3.04(c) — Mandatory Prepayments] of the Credit Agreement.

[Signature Page follows]

[Exhibit I to First Amendment Page 2]

IN WITNESS WHEREOF this instrument is executed as of                             , 201  .

SANCHEZ ENERGY CORPORATION,
a Delaware corporation
By:	/s/ Michael G. Long
Name:	Michael G. Long
Title:	Senior Vice President — Chief Financial Officer
SEP HOLDINGS III, LLC,
a Delaware limited liability company
By:	/s/ Michael G. Long
Name:	Michael G. Long
Title:	Senior Vice President — Chief Financial Officer
SN MARQUIS LLC,
a Delaware limited liability company
By:	/s/ Michael G. Long
Name:	Michael G. Long
Title:	Senior Vice President — Chief Financial Officer
SN COTULLA ASSETS, LLC,
a Texas limited liability company
By:	/s/ Michael G. Long
Name:	Michael G. Long
Title:	Senior Vice President — Chief Financial Officer

[Exhibit I to First Amendment Page 3]

EXHIBIT X

[Exhibit X to First Amendment Page 1]

[Exhibit X to First Amendment Page 2]

[Exhibit X to First Amendment Page 3]

[Exhibit X to First Amendment Page 4]

[Exhibit X to First Amendment Page 5]

[Exhibit X to First Amendment Page 6]

[Exhibit X to First Amendment Page 7]

[Exhibit X to First Amendment Page 8]

[Exhibit X to First Amendment Page 9]

[Exhibit X to First Amendment Page 10]

[Exhibit X to First Amendment Page 11]

[Exhibit X to First Amendment Page 12]

[Exhibit X to First Amendment Page 13]

[Exhibit X to First Amendment Page 14]

[Exhibit X to First Amendment Page 15]

[Exhibit X to First Amendment Page 16]

[Exhibit X to First Amendment Page 17]

[Exhibit X to First Amendment Page 18]

[Exhibit X to First Amendment Page 19]

[Exhibit X to First Amendment Page 20]

[Exhibit X to First Amendment Page 21]

[Exhibit X to First Amendment Page 22]

[Exhibit X to First Amendment Page 23]

[Exhibit X to First Amendment Page 24]

[Exhibit X to First Amendment Page 25]

[Exhibit X to First Amendment Page 26]

[Exhibit X to First Amendment Page 27]

[Exhibit X to First Amendment Page 28]

[Exhibit X to First Amendment Page 29]

[Exhibit X to First Amendment Page 30]

[Exhibit X to First Amendment Page 31]

[Exhibit X to First Amendment Page 32]

[Exhibit X to First Amendment Page 33]

[Exhibit X to First Amendment Page 34]

[Exhibit X to First Amendment Page 35]

[Exhibit X to First Amendment Page 36]

[Exhibit X to First Amendment Page 37]

[Exhibit X to First Amendment Page 38]

[Exhibit X to First Amendment Page 39]

[Exhibit X to First Amendment Page 40]

[Exhibit X to First Amendment Page 41]

EX-10.4

Exhibit 10.4

July 30, 2013

Sanchez Energy Corporation

SEP Holdings III, LLC

SN Marquis, LLC

SN Cotulla Assets, LLC

1111 Bagby Street, Suite 1800

Houston, Texas 77002

Attention: Alfredo Gutierrez

Re:Waiver and Amendment for Amended and Restated Credit Agreement dated as of May 31, 2013 (as amended, supplemented or otherwise modified to date, the “Credit Agreement”), among Sanchez Energy Corporation, SEP Holdings III, LLC, SN Marquis, LLC and SN Cotulla Assets, LLC (collectively, the “Borrowers”), each of the Lenders from time to time party thereto (the “Lenders”), and Royal Bank of Canada, as administrative agent for the Lenders (in such capacity, together with its successors in such capacity, the “Administrative Agent”)

Ladies and Gentlemen:

This letter (this “Letter”) relates to the Credit Agreement.  Each capitalized term not defined herein shall have the meaning assigned to such term in the Credit Agreement.  All references to sections in this Letter shall be to sections of the Credit Agreement unless otherwise indicated.

Waiver

The Borrowers have informed the Administrative Agent that the Borrowers recently entered into certain oil Swap Agreements which, when aggregated with existing oil Swap Agreements, bring total oil Swap Agreements for the six month period ending on June 30, 2014 to 5,750 barrels per day (the “Specified Swaps”).  This results in oil Swap Agreement volumes of 50.8% of total Proved Reserves based off of the 6/30/13 Reserve Report.  This exceeds the maximum allowed limit of 50% of total Proved Reserves specified in Section 9.17 of the Credit Agreement (the “Specified Event”).

The Borrowers have requested, and the Required Lenders hereby consent to, a waiver with regard to the Specified Event as it relates to the Specified Swaps.

Amendments

A.            The Credit Agreement currently defines “Unrestricted Cash” to include Investments described in Section 9.05(c) (accounts receivable arising in the ordinary course of business) and excludes Investments described in Section 9.05(g) (deposits in money market funds).  The definition of “Unrestricted Cash” in the Credit Agreement is hereby amended to read as follows:

“Unrestricted Cash” means Investments of the Borrowers and their Unrestricted Subsidiaries described in Section 9.05(d), Section 9.05(e), Section 9.05(f) and Section 9.05(g) which are subject to no Liens other than Liens in favor of the Lenders and Secured Swap Providers.”

B.            The Credit Agreement, in relevant part, currently limits commodity hedging through Swap Agreements to no more than the greater of (i) 90% of the value of proved developed producing reserves and (ii) 50% of total proved reserves during the first two years of the Agreement and to no more than the greater of (y) 85% of the value of proved developed producing reserves and (z) 50% of total proved reserves during the third and fourth years of the Agreement.  However, it is desired to have the 90% and 50% limits apply on a rolling 2-year basis from the testing date and the 85% and 50% limits apply on a rolling 2-year basis to the third and fourth years from the testing date.  It is also desired to make more explicit that certain types of Swap Agreements, specifically floor and put options, are permissible if entered into with an Approved Counterparty but are not subject to the percentage limits otherwise applicable to Swap Agreements.  Therefore, Section 9.17 of the Agreement is hereby amended to read in its entirety as follows:

“Section 9.17. Swap Agreements.  The Borrowers will not, and will not permit any Restricted Subsidiary to, enter into any Swap Agreements with any Person other than (a) Swap Agreements constituting floor or put options in respect of commodities with an Approved Counterparty, (b) Swap Agreements (other than floor or put options) in respect of commodities with an Approved Counterparty that are limited to notional quantities at any time no more than (i) during the first two years following such time the greater of (x) ninety percent (90%) of the value of proved developed producing reserves included in the then most recently delivered Reserve Report and (y) fifty percent (50%) of Borrowers’ total Proved Reserves (such amounts computed on a semi-annual basis and calculated on a product-by-product basis), (ii) during the third and fourth years following such time the greater of (x) eighty-five percent (85%) of the value of proved developed producing reserves included in the then most recently delivered Reserve Report and (y) fifty percent (50%) of Borrowers’ total Proved Reserves (such amounts computed on a semi-annual basis and calculated on a product-by-product basis), and (iii) after the fourth year following such time, zero (no commodity Swap Agreements other than floor or put options); provided that the aggregate amount of all such commodity Swap Agreements (other than floor or put options) shall not exceed the most recent month’s actual production, calculated separately on a product-by-product basis, in any given month, (c) Swap Agreements in respect of interest rates with an Approved Counterparty, as follows: (i) Swap Agreements effectively converting interest rates from fixed to floating, the notional amounts of which (when aggregated with all other Swap Agreements of the Borrowers and their Restricted Subsidiaries then in effect effectively converting interest rates from fixed to floating) do not exceed 75% of the then outstanding principal amount of the Borrowers’ Debt for borrowed money which bears interest at a fixed rate and (ii) Swap Agreements effectively converting interest rates from floating to fixed, the notional amounts of which

2

(when aggregated with all other Swap Agreements of the Borrowers and their respective Restricted Subsidiaries then in effect effectively converting interest rates from floating to fixed) do not exceed 75% of the then outstanding principal amount of the Borrowers’ Debt for borrowed money which bears interest at a floating rate and (d) those certain Swap Agreements existing on the date hereof and described on Schedule 9.17 between SEP and Shell Energy North America (US), L.P. and between SEP and Macquarie Bank Limited. The Borrowers will not, and will not permit any other Loan Party to, Liquidate any Swap Agreement in respect of commodities unless (x) if such Swap Liquidation would result in an automatic redetermination of the Borrowing Base pursuant to Section 2.07(b)(iv), the Borrowers deliver reasonable prior written notice thereof to the Administrative Agent, and (y) if a Borrowing Base Deficiency would result from such Swap Liquidation as a result of an automatic redetermination of the Borrowing Base pursuant to Section 2.07(b)(iv), the Borrowers prepay Borrowings, prior to or contemporaneously with the consummation of such Swap Liquidation to the extent that such prepayment would have been required under Section 3.04(c)(i) after giving effect to such automatic redetermination of the Borrowing Base.”

Agreements and Acknowledgements

This Letter is a Loan Document.  Except as affected by this Letter, the Loan Documents are unchanged and continue in full force and effect.  However, in the event of any inconsistency between the terms of the Credit Agreement, as amended by this Letter, and any other Loan Document, the terms of the Credit Agreement will control and the other document will be deemed to be amended to conform to the terms of the Credit Agreement.  All references to the Credit Agreement will refer to the Credit Agreement as amended by this Letter and any other amendments properly executed among the parties.  Borrowers agree that all Loan Documents to which they are a party (whether as an original signatory or by assumption of the Obligations) remain in full force and effect and continue to evidence their respective legal, valid and binding obligations enforceable in accordance with their terms (as the same are affected by this Letter or are amended in connection with this Letter).  AS A MATERIAL INDUCEMENT TO THE ADMINISTRATIVE AGENT AND LENDERS PARTY HERETO TO ENTER INTO THIS LETTER, BORROWERS RELEASE THE ADMINISTRATIVE AGENT, THE ISSUING BANK, THE LENDERS AND THEIR RESPECTIVE PREDECESSORS, SUCCESSORS, ASSIGNS, DIRECTORS, OFFICERS, EMPLOYEES, TRUSTEES, AGENTS AND ATTORNEYS FROM ANY LIABILITY FOR ACTIONS OR FAILURES TO ACT IN CONNECTION WITH THE LOAN DOCUMENTS PRIOR TO THE DATE OF THIS LETTER.  NO COURSE OF DEALING BETWEEN BORROWERS OR ANY OTHER PERSON, ON THE ONE HAND, AND THE ADMINISTRATIVE AGENT, ISSUING BANK AND THE LENDERS, ON THE OTHER, WILL BE DEEMED TO HAVE ALTERED OR AMENDED THE CREDIT AGREEMENT OR AFFECTED EITHER BORROWERS’, THE ADMINISTRATIVE AGENT’S, THE ISSUING BANK’S OR THE LENDERS’ RIGHT TO ENFORCE THE CREDIT AGREEMENT AS WRITTEN.  This Letter will be binding upon and inure to the benefit of each of the undersigned and their respective successors and permitted assigns.

3

Neither the execution by the Administrative Agent or the Lenders of this Letter, nor any other act or omission by the Administrative Agent or the Lenders or their officers in connection herewith, shall be deemed a waiver by the Administrative Agent or the Lenders of any other defaults which may exist or which may occur in the future under the Credit Agreement and/or the other Loan Documents, or any future defaults of the same provision waived hereunder (collectively “Other Violations”).  Similarly, nothing contained in this Letter shall directly or indirectly in any way whatsoever either: (i) impair, prejudice or otherwise adversely affect the Administrative Agent’s or the Lenders’ right at any time to exercise any right, privilege or remedy in connection with the Loan Documents with respect to any Other Violations, (ii) except for the Amendment herein provided, amend or alter any provision of the Credit Agreement, the other Loan Documents, or any other contract or instrument, or (iii) constitute any course of dealing or other basis for altering any obligation of the Borrowers and/or the Guarantors or any right, privilege or remedy of the Administrative Agent or the Lenders under the Credit Agreement, the other Loan Documents, or any other contract or instrument.  Nothing in this Letter shall be construed to be a consent by the Administrative Agent or the Lenders to any Other Violations.

This Letter shall be governed by, and construed in accordance with, the laws of the State of New York without regard to any choice of law provisions that would require the application of the law of another jurisdiction.

This Letter may be separately executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to constitute one and the same agreement.  This Letter shall become effective when it shall have been executed by Administrative Agent and when Administrative Agent shall have received counterparts hereof that, when taken together, bear the signatures of each of the Loan Parties and Required Lenders.  This Letter may be transmitted and/or signed by facsimile, telecopy or electronic mail.  The effectiveness of any such documents and signatures shall, subject to applicable law, have the same force and effect as manually signed originals and shall be binding on all Loan Parties, all Lenders and the Administrative Agent.  The Administrative Agent may also require that any such documents and signatures be confirmed by a manually signed original thereof; provided, however, that the failure to request or deliver the same shall not limit the effectiveness of any facsimile document or signature

THIS LETTER, THE CREDIT AGREEMENT AND THE OTHER LOAN DOCUMENTS EXECUTED IN CONNECTION HEREWITH AND THEREWITH REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR UNWRITTEN ORAL AGREEMENTS OF THE PARTIES.  THERE ARE NO SUBSEQUENT ORAL AGREEMENTS AMONG THE PARTIES.

Guarantor’s Acknowledgment

Each Guarantor by its execution in the space provided below under “ACKNOWLEDGED for purposes of ‘Guarantor’s Acknowledgment’” hereby ratifies, confirms, acknowledges and agrees that its obligations under the Guaranty are in full force and effect and that such Guarantor continues to unconditionally and irrevocably guarantee the full

4

and punctual payment, when due, whether at stated maturity or earlier by acceleration or otherwise, of the Obligations, and its execution and delivery of this Letter does not indicate or establish an approval or consent requirement by any Guarantor under the Guaranty in connection with the execution and delivery of amendments to the Credit Agreement, the Notes or any of the other Loan Documents (other than the Guaranty or any other Loan Document to which a Guarantor is a party).

[Signature Pages Follow]

5

If the foregoing correctly states your understanding with respect to the matters stated in this Letter, please acknowledge by signing in the space provided below.

IN WITNESS WHEREOF, the parties hereto have caused this Letter to be duly executed effective as of the date first written above.

		Very truly yours,
		ROYAL BANK OF CANADA,
		as Administrative Agent
		By:	/s/ Ann Hurley
		Name:	Ann Hurley
		Title	Manager, Agency
		ROYAL BANK OF CANADA,
		as a Lender
		By:	/s/ Mark Lumpkin, Jr.
		Name:	Mark Lumpkin, Jr.
		Title	Authorized Signatory
cc:	Akin Gump Strauss Hauer & Feld LLP
	1111 Louisiana Street, 44th Floor
	Houston, Texas 77002
	Attn: David Elder

Signature Page 1 to Sanchez Energy, et al

CAPITAL ONE, NATIONAL ASSOCIATION,
as a Lender
By:	/s/ Michael Higgins
Name:	Michael Higgins
Title:	Vice President
CREDIT SUISSE AG, CAYMAN ISLANDS BRANCH, as a Lender
By:	/s/ Michael Spaight	/s/ Kevin Buddhdew
Name:	Michael Spaight	Kevin Buddhdew
Title:	Authorized Signatory	Authorized Signatory
COMPASS BANK,
as a Lender
By:	/s/ Dorothy Marchand
Name:	Dorothy Marchand
Title:	Executive Vice President
SUNTRUST BANK,
as a Lender
By:	/s/ Shannon Inhan
Name:	Shannon Inhan
Title:	Vice President
ING CAPITAL LLC,
as a Lender
By:	/s/ Charles Hall
Name:	Charles Hall
Title:	Managing Director

Signature Page 2 to Sanchez Energy, et al

BRANCH BANKING AND TRUST COMPANY, as a Lender
By:	/s/ Ryan K. Michael
Name:	Ryan K. Michael
Title:	Senior Vice President
IBERIABANK, as a Lender
By:	/s/ W. Bryan Chapman
Name:	W. Bryan Chapman
Title:	Executive Vice President
UNION BANK, N.A., as a Lender
By:	/s/ Haylee Dallas
Name:	Haylee Dallas
Title:	Vice President
SOCIÉTÉ GENÉRALÉ, as a Lender
By:	/s/ Graeme Bullen
Name:	Graeme Bullen
Title:	Managing Director

Signature Page 3 to Sanchez Energy, et al

Accepted and Agreed to as of the date first written above by:

BORROWERS:	SANCHEZ ENERGY CORPORATION,
	a Delaware corporation
	By:	/s/ Michael G. Long
	Michael G. Long
	Senior Vice President — Chief Financial Officer
	SEP HOLDINGS III, LLC,
	a Delaware limited liability company
	By:	/s/ Michael G. Long
	Michael G. Long
	Senior Vice President — Chief Financial Officer
	SN MARQUIS LLC,
	a Delaware limited liability company
	By:	/s/ Michael G. Long
	Michael G. Long
	Senior Vice President — Chief Financial Officer
	SN COTULLA ASSETS, LLC,
	a Texas limited liability company
	By:	/s/ Michael G. Long
	Michael G. Long
	Senior Vice President — Chief Financial Officer

Signature Page 4 to Sanchez Energy, et al

Acknowledged for Purposes of Guarantor’s Acknowledgment
GUARANTOR:	SN OPERATING, LLC, a Texas limited liability company
	By:	/s/ Michael G. Long
	Michael G. Long
	Senior Vice President — Chief Financial Officer

Signature Page 5 to Sanchez Energy, et al

EX-31.1

Exhibit 31.1

CERTIFICATION

I, Antonio R. Sanchez, III, certify that:

1.I have reviewed this quarterly report on Form 10-Q of Sanchez Energy Corporation;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a.Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b.Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c.Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d.Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a.All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b.Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

	/s/ Antonio R. Sanchez, III
	Antonio R. Sanchez, III
	President, Chief Executive Officer and Director
	(Principal Executive Officer)
Date: November 8, 2013

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EX-31.2

Exhibit 31.2

CERTIFICATION

I, Michael G. Long, certify that:

1.I have reviewed this quarterly report on Form 10-Q of Sanchez Energy Corporation;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a.Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b.Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c.Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d.Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a.All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b.Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

	/s/ Michael G. Long
	Michael G. Long
	Senior Vice President, Chief Financial Officer and Secretary
	(Principal Financial Officer)
Date: November 8, 2013

1

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the accompanying quarterly report of Sanchez Energy Corporation (the “Company”) on Form 10-Q for the quarterly period ended September 30, 2013 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Antonio R. Sanchez, III, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:

(1)The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

	/s/ Antonio R. Sanchez, III
	Antonio R. Sanchez, III
	President, Chief Executive Officer and Director
	(Principal Executive Officer)
Date: November 8, 2013

1

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the accompanying quarterly report of Sanchez Energy Corporation (the “Company”) on Form 10-Q for the quarterly period ended September 30, 2013 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Michael G. Long, Senior Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:

(1)The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Michael G. Long

Michael G. Long

Senior Vice President, Chief Financial Officer and Secretary

(Principal Financial Officer)

Date: November 8, 2013

1

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Fair Value of Financial Instruments

9 Months Ended

Sep. 30, 2013

Fair Value of Financial Instruments

Fair Value of Financial Instruments

Note 9. Fair Value of Financial Instruments

Measurements of fair value of derivative instruments are classified according to the fair value hierarchy, which prioritizes the inputs to the valuation techniques used to measure fair value. Fair value is the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements are classified and disclosed in one of the following categories:

Level 1: Measured based on unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. Active markets are considered those in which transactions for the assets or liabilities occur in sufficient frequency and volume to provide pricing information on an ongoing basis.

Level 2: Measured based on quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability. This category includes those derivative instruments that can be valued using observable market data. Substantially all of these inputs are observable in the marketplace throughout the term of the derivative instrument, can be derived from observable data, or supported by observable levels at which transactions are executed in the marketplace.

Level 3: Measured based on prices or valuation models that require inputs that are both significant to the fair value measurement and less observable from objective sources (i.e. supported by little or no market activity). The valuation models used to value derivatives associated with the Company’s oil and natural gas production are primarily industry standard models that consider various inputs including: (a) quoted forward prices for commodities, (b) time value, and (c) current market and contractual prices for the underlying instruments, as well as other relevant economic measures. Although third party quotes are utilized to assess the reasonableness of the prices and valuation techniques, there is not sufficient corroborating evidence to support classifying these assets and liabilities as Level 2.

Financial assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurement. Management’s assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of the fair value of assets and liabilities and their placement within the fair value hierarchy levels.

Fair Value on a Recurring Basis

The following tables set forth, by level within the fair value hierarchy, the Company’s financial assets and liabilities that were accounted for or disclosed at fair value on a recurring basis as of September 30, 2013 and December 31, 2012 (in thousands):

	As of September 30, 2013
	Active Market
	for Identical		Observable			Unobservable			Total
	Assets		Inputs			Inputs			Carrying
	(Level 1)		(Level 2)			(Level 3)			Value
Cash and cash equivalents:
Money market funds	$	170,173	$	—		$	—		$	170,173
Investments:
Corporate notes and bonds	—		10,000			—			10,000
Oil derivative instruments:
Swaps	—		(5,245		)	—			(5,245		)
Three-way collars	—		—			(138		)	(138		)
Asian Options	—		—			(32		)	(32		)
Puts	—		—			(414		)	(414		)
Debt:
Senior Notes	—		586,500			—			586,500
Total	$	170,173	$	591,255		$	(584	)	$	760,844

	As of December 31, 2012
	Active Market
	for Identical		Observable			Unobservable		Total
	Assets		Inputs			Inputs		Carrying
	(Level 1)		(Level 2)			(Level 3)		Value
Cash and cash equivalents:
Commercial paper	$	—	$	45,000		$	—	$	45,000
Money market funds	82		—			—		82
Investments:
Commercial paper	—		7,500			—		7,500
Corporate notes and bonds	—		4,091			—		4,091
Oil derivative instruments:
Swaps	—		(870		)	—		(870		)
Puts	—		—			3,015		3,015
Total	$	82	$	55,721		$	3,015	$	58,818

The Level 1 instruments presented in the table above consist of money market funds included in cash and cash equivalents on the Company’s condensed consolidated balance sheets at September 30, 2013 and December 31, 2012. The Company’s money market funds represent cash equivalents backed by the assets of high-quality banks and financial institutions.  The Company identified the money market funds as Level 1 instruments due to the fact that the money market funds have daily liquidity, quoted prices for the underlying investments can be obtained and there are active markets for the underlying investments.

The Level 2 instruments presented in the table above include commercial paper and corporate notes and bonds included in cash and cash equivalents and investments on the Company’s condensed consolidated balance sheet at September 30, 2013 and December 31, 2012.  The Company identified the commercial paper and corporate notes and bonds as Level 2 instruments due to the fact that although the assets do not have regular market pricing, their fair value can be readily determined based on other data values or market prices. These asset values can be closely approximated using simple models and extrapolation methods using known, observable prices as parameters.

The Company uses a market approach to determine fair value of its Senior Notes using observable market data, which results in a Level 2 fair value measurement.  The estimated fair value of the Company’s Senior Notes was $586.5 million at September 30, 2013.

The Company’s oil derivative instruments, which consist of oil swaps, options, and puts, are classified as either Level 2 or Level 3 in the table above.  The fair value of the Company’s derivatives is based on third-party pricing models which utilize inputs that are either readily available in the public market, such as oil forward curves, or can be corroborated from active markets of broker quotes.  These values are then compared to the values given by the Company’s counterparties for reasonableness.  Since oil swaps do not include optionality and therefore generally have no unobservable inputs, they are classified as Level 2.  The Company’s oil puts, Asian options and three-way collars include some level of unobservable input, such as volatility curves, and are therefore classified as Level 3.   Derivative instruments are also subject to the risk that counterparties will be unable to meet their obligations. Such non-performance risk is considered in the valuation of the Company’s derivative instruments, but to date has not had a material impact on estimates of fair values. Significant changes in the quoted forward prices for commodities and changes in market volatility generally lead to corresponding changes in the fair value measurement of the Company’s oil derivative instruments.

The fair values of the Company’s oil derivative instruments classified as Level 3 at September 30, 2013 and December 31, 2012 were ($0.6) million and $3.0 million, respectively.  The significant unobservable inputs for Level 3 contracts include unpublished forward prices of oil, market volatility and credit risk of counterparties.  Changes in these inputs will impact the fair value measurement of the Company’s derivative contracts.

The following table sets forth a reconciliation of changes in the fair value of the Company’s oil derivative instruments classified as Level 3 in the fair value hierarchy (in thousands):

	Significant Unobservable Inputs
	(Level 3)
	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2013			2012			2013			2012
Beginning balance	$	3,003		$	7,369		$	3,015		$	1,461
Realized and unrealized gains (losses) included in earnings	(4,305		)	(2,191		)	(4,154		)	809
Settlements	—			(962		)	(163		)	(1,190		)
Purchase of derivative contracts	718			—			718			2,952
Buy out of derivative contracts	—			—			—			184
Ending balance	$	(584	)	$	4,216		$	(584	)	$	4,216
Change in unrealized gains (losses) included in earnings related to derivatives still held as of September 30, 2013 and 2012	$	(3,338	)	$	(1,994	)	$	(2,445	)	$	1,523

Fair Value on a Non-Recurring Basis

The Company follows the provisions of ASC 820-10 for nonfinancial assets and liabilities measured at fair value on a non-recurring basis.  Fair-value measurements of assets acquired and liabilities assumed are based on inputs that are not observable in the market and thus represent Level 3 inputs. The fair value of acquired properties is based on market and cost approaches. Our purchase price allocation for the Cotulla acquisition is presented in Note 3.  Liabilities assumed include asset retirement obligations existing at the date of acquisition.  The asset retirement obligation estimates are derived from historical costs as well as management’s expectation of future cost environments.  As there is no corroborating market activity to support the assumptions, the Company has designated these liabilities as Level 3.  A reconciliation of the beginning and ending balances of the Company’s asset retirement obligations is presented in Note 10.

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Accrued Liabilities (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2013	Dec. 31, 2012
Accrued Liabilities
Capital expenditures	$ 82,402	$ 43,560
General and administrative costs	3,401	268
Production taxes	1,942	471
Ad valorem taxes	2,153	114
Lease operating expenses	6,365	415
Interest payable	13,821
Total accrued liabilities	$ 110,084	$ 44,828

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Condensed Consolidated Statements of Operations (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012
REVENUES:
Oil sales	$ 87,436	$ 12,308	$ 171,635	$ 25,858
Natural gas liquids sales	3,190	3	6,166	10
Natural gas sales	3,574	182	6,520	594
Total revenues	94,200	12,493	184,321	26,462
OPERATING COSTS AND EXPENSES:
Oil and natural gas production expenses	11,026	610	21,098	2,015
Production and ad valorem taxes	5,531	613	10,942	1,569
Depreciation, depletion, amortization and accretion	38,372	4,580	76,368	9,291
General and administrative (inclusive of stock-based compensation expense of $6,657 and $836, respectively, for the three months ended September 30, 2013 and 2012, and $14,369 and $24,800, respectively, for the nine months ended September 30, 2013 and 2012)	15,195	2,844	35,564	31,451
Total operating costs and expenses	70,124	8,647	143,972	44,326
Operating income (loss)	24,076	3,846	40,349	(17,864)
Other income (expense):
Interest and other income	32	12	104	31
Interest expense	(9,460)		(17,613)
Realized and unrealized gains (losses) on derivative instruments	(14,436)	(2,191)	(13,812)	809
Income (loss) before income taxes	212	1,667	9,028	(17,024)
Income tax benefit	3,668		3,668
Net income (loss)	3,880	1,667	12,696	(17,024)
Less:
Preferred stock dividends	(5,485)	(264)	(13,041)	(264)
Net income allocable to participating securities		(21)
Net income (loss) attributable to common stockholders	$ (1,605)	$ 1,382	$ (345)	$ (17,288)
Net income (loss) per common share - basic and diluted (in dollars per share)	$ (0.05)	$ 0.04	$ (0.01)	$ (0.52)
Weighted average number of shares used to calculate net income (loss) attributable to common stockholders - basic and diluted (in shares)	34,737	33,000	33,651	33,000

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Summary of Significant Accounting Policies

9 Months Ended

Sep. 30, 2013

Summary of Significant Accounting Policies

Summary of Significant Accounting Policies

Note 2.   Summary of Significant Accounting Policies

The accompanying condensed consolidated financial statements are unaudited and were prepared from the Company’s records.  The condensed consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP” or “U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.  The Company derived the condensed consolidated balance sheet as of December 31, 2012 from the audited financial statements filed in its Annual Report on Form 10-K for the fiscal year ended December 31, 2012 (the “2012 Annual Report”).  Because this is an interim period filing presented using a condensed format, it does not include all of the disclosures required by U.S. GAAP.  These condensed consolidated financial statements should be read in connection with the consolidated financial statements and notes thereto included in the 2012 Annual Report, which contains a summary of the Company’s significant accounting policies and other disclosures.  In the opinion of management, these financial statements include the adjustments and accruals, all of which are of a normal recurring nature, which are necessary for a fair presentation of the results for the interim periods.  These interim results are not necessarily indicative of results to be expected for the entire year.

As of September 30, 2013, the Company’s significant accounting policies are consistent with those discussed in Note 2 in the notes to the Company’s consolidated financial statements contained in its 2012 Annual Report, as supplemented by the significant accounting policy set forth below.

Our acquisitions, except those acquisitions made between entities under common control, are accounted for under the acquisition method of accounting in accordance with ASC Topic 805, “Business Combinations” (“ASC Topic 805”). An acquisition may result in the recognition of a gain or goodwill based on the measurement of the fair value of the assets acquired at the acquisition date as compared to the fair value of consideration transferred, adjusted for purchase price adjustments. Any such gain or any loss resulting from the impairment of goodwill is recognized in current period earnings and classified in operating costs and expenses in the accompanying condensed consolidated statements of operations. The initial accounting for acquisitions may not be complete and adjustments to provisional amounts, or recognition of additional assets acquired or liabilities assumed, may occur as more detailed analyses are completed and additional information is obtained about the facts and circumstances that existed as of the acquisition dates. The results of operations of the properties acquired in our acquisitions have been included in the condensed consolidated financial statements since the closing dates of the acquisitions.

Basis of Presentation

The acquisition of oil and natural gas properties from SEP I was a transaction among entities under common control and accordingly, the Company recorded the assets and liabilities acquired at their historical carrying values and has presented the historical accounts of the SEP I Assets on a retrospective basis for all periods prior to the IPO presented in the consolidated financial statements.

SOG is a private oil and gas company engaged in the exploration for and development of oil and natural gas. SOG has historically acted as the operator of a significant portion of SEP I’s oil and natural gas properties. SOG provided all employee, management, and administrative support to SEP I and, for periods prior to December 19, 2011, a proportionate share of SOG’s general and administrative costs were allocated to the SEP I Assets. The costs of these services associated with the SEP I Assets were allocated to the SEP I Assets primarily based on the ratio of capital expenditures between the entities to which SOG provides services and the SEP I Assets. However, other factors, such as time spent on general management services and producing property activities, were also considered in the allocation of these costs. Management believes such allocations were reasonable; however, they may not be indicative of the actual expense that would have been incurred had the SEP I Assets been operated as an independent company for periods prior to December 19, 2011. On December 19, 2011, SOG began providing similar types of services to the Company under the services agreement as described below (Note 11).

Principles of Consolidation

The Company’s condensed consolidated financial statements include the accounts of the Company and its subsidiaries.  All intercompany balances and transactions have been eliminated.

Use of Estimates

The condensed consolidated financial statements are prepared in conformity with U.S. GAAP, which requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The most significant estimates pertain to proved oil and natural gas reserves and related cash flow estimates used in the depletion and impairment of oil and natural gas properties, fair value accounting for acquisitions, the evaluation of unproved properties for impairment, the fair value of commodity derivative contracts and asset retirement obligations, accrued oil and natural gas revenues and expenses and the allocation of general and administrative expenses. Actual results could differ materially from those estimates.

Reclassifications

Certain reclassifications have been made to the 2012 condensed consolidated financial statements to conform to the 2013 presentation.  These reclassifications were not material to the accompanying condensed consolidated financial statements.

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Commitments and Contingencies

9 Months Ended

Sep. 30, 2013

Commitments and Contingencies

Commitments and Contingencies

Note 16. Commitments and Contingencies

From time to time, the Company may be involved in lawsuits that arise in the normal course of its business. It is the opinion of management and counsel that the outcome of any such lawsuits will not materially affect the financial position and operations of the Company.

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Stockholders' Equity (Details 3) (USD $)	3 Months Ended		9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012
Restricted stock
Anti-dilutive common stock
Anti-dilutive common stock	410,779	71,842	625,920	254,757
Net income allocable to participating securities	$ 0		$ 0
Convertible Preferred Stock
Anti-dilutive common stock
Anti-dilutive common stock	17,491,500	996,429	14,141,800	330,931

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Asset Retirement Obligations

9 Months Ended

Sep. 30, 2013

Asset Retirement Obligations

Asset Retirement Obligations

Note 10. Asset Retirement Obligations

Asset retirement obligations represent the present value of the estimated cash flows expected to be incurred to plug, abandon and remediate producing properties, excluding salvage values, at the end of their productive lives in accordance with applicable laws. The significant unobservable inputs to this fair value measurement include estimates of plugging, abandonment and remediation costs, well life, inflation and credit-adjusted risk-free rate. The inputs are calculated based on historical data as well as current estimates. When the liability is initially recorded, the carrying amount of the related long-lived asset is increased. Over time, accretion of the liability is recognized each period, and the capitalized cost is amortized over the useful life of the related asset. Upon settlement of the liability, any gain or loss is treated as an adjustment to the full cost pool.

The changes in the asset retirement obligation for the nine months ended September 30, 2013 and 2012 were as follows (in thousands):

	2013		2012
Abandonment liability as of January 1,	$	546	$	83
Liabilities incurred during period	727		205
Acquisitions	1,138		—
Revisions	968		—
Accretion expense	128		9
Abandonment liability as of September 30,	$	3,507	$	297

During the first quarter of 2013, the Company reviewed its asset retirement obligation estimates. A quote was obtained from a third party that indicated anticipated costs for future abandonment had increased from previous estimates.  As a result, the Company increased its estimates of future asset retirement obligations by $1.0 million to reflect anticipated increased costs for plugging and abandonment.

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Derivative Instruments (Details 3) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012
Gain (Loss) on Derivatives
Unrealized gains (losses) on derivative instruments			$ (6,820)	$ 1,594
Total realized and unrealized gains (losses) on derivative instruments	(14,436)	(2,191)	(13,812)	809
Not designated as hedges | Commodity derivative contract
Gain (Loss) on Derivatives
Realized losses on derivative instruments	(5,531)	(87)	(6,992)	(785)
Unrealized gains (losses) on derivative instruments	(8,905)	(2,104)	(6,820)	1,594
Total realized and unrealized gains (losses) on derivative instruments	$ (14,436)	$ (2,191)	$ (13,812)	$ 809

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Stock-Based Compensation (Details) (USD $)	3 Months Ended		9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012
Restricted common stock
Stock-Based Compensation
Total stock-based compensation expense	$ 6,657,000	$ 836,000	$ 14,369,000	$ 24,800,000
Additional disclosure related to compensation cost
Closing price of common stock (in dollars per share)	$ 26.41		$ 26.41
Unrecognized compensation costs related to non-vested restricted shares outstanding	34,500,000		34,500,000
Expected average period for recognition of unrecognized compensation costs related to non-vested shares			2 years
Number of Non-Vested Shares
Non-vested common stock at the beginning of the period (in shares)			762,000
Granted (in shares)			1,329,000
Vested (in shares)			(185,000)
Forfeited (in shares)			(71,000)
Non-vested common stock at the end of the period (in shares)	1,835,000		1,835,000
Shares available for future issuance to participants	4,700,000		4,700,000
Restricted common stock | Directors
Stock-Based Compensation
Total stock-based compensation expense	242,000	91,000	473,000	184,000
Restricted common stock, not rescinded and cancelled | Non-employees
Stock-Based Compensation
Total stock-based compensation expense	6,415,000	745,000	13,896,000	2,308,000
Restricted common stock, rescinded and cancelled | Non-employees
Stock-Based Compensation
Total stock-based compensation expense				$ 22,308,000
Maximum
Stock-Based Compensation
Common stock available for incentive awards, as a percentage of the issued and outstanding shares of common stock	15.00%		15.00%

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Income Taxes (Tables)

9 Months Ended

Sep. 30, 2013

Income Taxes

Summary of difference between the statutory federal income taxes calculated using U.S. Federal statutory corporate income tax rate of 35% and company's effective tax rate

The difference between the statutory federal income taxes calculated using a U.S. federal statutory corporate income tax rate of 35% and the Company’s effective tax rate is summarized as follows (in thousands):

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2013			2012			2013			2012
Income tax expense (benefit) at the statutory rate	$	74		$	584		$	3,160		$	(5,958	)
Rescission of restricted stock	—			—			—			7,808
Change in valuation allowance	(3,742		)	(584		)	(6,828		)	(1,850		)
Net income tax (benefit)	$	(3,668	)	$	—		$	(3,668	)	$	—

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Summary of Significant Accounting Policies (Policies)

9 Months Ended

Sep. 30, 2013

Summary of Significant Accounting Policies

Basis of Presentation

Basis of Presentation

The acquisition of oil and natural gas properties from SEP I was a transaction among entities under common control and accordingly, the Company recorded the assets and liabilities acquired at their historical carrying values and has presented the historical accounts of the SEP I Assets on a retrospective basis for all periods prior to the IPO presented in the consolidated financial statements.

SOG is a private oil and gas company engaged in the exploration for and development of oil and natural gas. SOG has historically acted as the operator of a significant portion of SEP I’s oil and natural gas properties. SOG provided all employee, management, and administrative support to SEP I and, for periods prior to December 19, 2011, a proportionate share of SOG’s general and administrative costs were allocated to the SEP I Assets. The costs of these services associated with the SEP I Assets were allocated to the SEP I Assets primarily based on the ratio of capital expenditures between the entities to which SOG provides services and the SEP I Assets. However, other factors, such as time spent on general management services and producing property activities, were also considered in the allocation of these costs. Management believes such allocations were reasonable; however, they may not be indicative of the actual expense that would have been incurred had the SEP I Assets been operated as an independent company for periods prior to December 19, 2011. On December 19, 2011, SOG began providing similar types of services to the Company under the services agreement as described below (Note 11).

Principles of Consolidation

Principles of Consolidation

The Company’s condensed consolidated financial statements include the accounts of the Company and its subsidiaries.  All intercompany balances and transactions have been eliminated.

Use of Estimates

Use of Estimates

The condensed consolidated financial statements are prepared in conformity with U.S. GAAP, which requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The most significant estimates pertain to proved oil and natural gas reserves and related cash flow estimates used in the depletion and impairment of oil and natural gas properties, fair value accounting for acquisitions, the evaluation of unproved properties for impairment, the fair value of commodity derivative contracts and asset retirement obligations, accrued oil and natural gas revenues and expenses and the allocation of general and administrative expenses. Actual results could differ materially from those estimates.

Reclassifications

Reclassifications

Certain reclassifications have been made to the 2012 condensed consolidated financial statements to conform to the 2013 presentation.  These reclassifications were not material to the accompanying condensed consolidated financial statements.

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Subsequent Events

9 Months Ended

Sep. 30, 2013

Subsequent Events

Subsequent Events

Note 18. Subsequent Events

On October 4, 2013, the Company completed the Wycross acquisition, consisting of operated assets with an average working interest of approximately 60% in net contiguous acres in McMullen County, Texas, with an effective date of July 1, 2013, for approximately $230.1 million, subject to further customary post-closing adjustments.

In October 2013, the Company entered into the following crude oil swap contracts using WTI prices:

	Derivative
Contract Period	Instrument	Barrels	Purchased		Sold
January 1, 2015 - December 31, 2015	Swap	365,000	$	90.05	n/a
January 1, 2015 - December 31, 2015	Swap	365,000	$	89.65	n/a

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Derivative Instruments (Details) (USD $) In Millions, unless otherwise specified	9 Months Ended
	Sep. 30, 2013
Commodity derivative contract
Derivative contract covering anticipated future production
Deferred payment of premiums	$ 1.2
Not designated as hedges | Commodity derivative contract | First period from October 1, 2013 - December 31, 2013
Derivative contract covering anticipated future production
Barrels	92,000
Not designated as hedges | Commodity derivative contract | Second period from October 1, 2013 - December 31, 2013
Derivative contract covering anticipated future production
Barrels	46,000
Not designated as hedges | Commodity derivative contract | Third period from October 1, 2013 - December 31, 2013
Derivative contract covering anticipated future production
Barrels	92,000
Not designated as hedges | Commodity derivative contract | Fourth period from October 1, 2013 - December 31, 2013
Derivative contract covering anticipated future production
Barrels	92,000
Not designated as hedges | Commodity derivative contract | Fifth period from October 1, 2013 - December 31, 2013
Derivative contract covering anticipated future production
Barrels	69,000
Not designated as hedges | Commodity derivative contract | Sixth period from October 1, 2013 - December 31, 2013
Derivative contract covering anticipated future production
Barrels	69,000
Not designated as hedges | Commodity derivative contract | Seventh period from October 1, 2013 - December 31, 2013
Derivative contract covering anticipated future production
Barrels	92,000
Not designated as hedges | Commodity derivative contract | Eighth period from October 1, 2013 - December 31, 2013
Derivative contract covering anticipated future production
Barrels	46,000
Not designated as hedges | Commodity derivative contract | Ninth period from October 1, 2013 - December 31, 2013
Derivative contract covering anticipated future production
Barrels	46,000
Not designated as hedges | Commodity derivative contract | First period from January 1, 2014 - December 31, 2014
Derivative contract covering anticipated future production
Barrels	273,750
Not designated as hedges | Commodity derivative contract | Second period from January 1, 2014 - December 31, 2014
Derivative contract covering anticipated future production
Barrels	273,750
Not designated as hedges | Commodity derivative contract | Third period from January 1, 2014 - December 31, 2014
Derivative contract covering anticipated future production
Barrels	273,750
Not designated as hedges | Commodity derivative contract | Period from January 1, 2014 - June 30, 2014
Derivative contract covering anticipated future production
Barrels	90,500
Not designated as hedges | Commodity derivative contract | Fifth period from January 1, 2014 - December 31, 2014
Derivative contract covering anticipated future production
Barrels	365,000
Not designated as hedges | Commodity derivative contract | Sixth period from January 1, 2014 - December 31, 2014
Derivative contract covering anticipated future production
Barrels	365,000
Not designated as hedges | Commodity derivative contract | Period from July 1, 2014 - December 31, 2014
Derivative contract covering anticipated future production
Barrels	184,000
Not designated as hedges | Commodity derivative contract | Put | Short | First period from October 1, 2013 - December 31, 2013
Derivative contract covering anticipated future production
Price per barrel	75.00
Not designated as hedges | Commodity derivative contract | Put | Short | Fourth period from October 1, 2013 - December 31, 2013
Derivative contract covering anticipated future production
Price per barrel	75.00
Not designated as hedges | Commodity derivative contract | Put | Short | Period from July 1, 2014 - December 31, 2014
Derivative contract covering anticipated future production
Price per barrel	75.00
Not designated as hedges | Commodity derivative contract | Put | Long | First period from October 1, 2013 - December 31, 2013
Derivative contract covering anticipated future production
Price per barrel	95.00
Not designated as hedges | Commodity derivative contract | Put | Long | Fourth period from October 1, 2013 - December 31, 2013
Derivative contract covering anticipated future production
Price per barrel	90.00
Not designated as hedges | Commodity derivative contract | Put | Long | Period from July 1, 2014 - December 31, 2014
Derivative contract covering anticipated future production
Price per barrel	90.00
Not designated as hedges | Commodity derivative contract | Swap Purchased | Second period from October 1, 2013 - December 31, 2013
Derivative contract covering anticipated future production
Price per barrel	97.10
Not designated as hedges | Commodity derivative contract | Swap Purchased | Third period from October 1, 2013 - December 31, 2013
Derivative contract covering anticipated future production
Price per barrel	88.90
Not designated as hedges | Commodity derivative contract | Swap Purchased | Fifth period from October 1, 2013 - December 31, 2013
Derivative contract covering anticipated future production
Price per barrel	94.50
Not designated as hedges | Commodity derivative contract | Swap Purchased | Sixth period from October 1, 2013 - December 31, 2013
Derivative contract covering anticipated future production
Price per barrel	95.25
Not designated as hedges | Commodity derivative contract | Swap Purchased | Seventh period from October 1, 2013 - December 31, 2013
Derivative contract covering anticipated future production
Price per barrel	96.80
Not designated as hedges | Commodity derivative contract | Swap Purchased | Eighth period from October 1, 2013 - December 31, 2013
Derivative contract covering anticipated future production
Price per barrel	103.69
Not designated as hedges | Commodity derivative contract | Swap Purchased | Ninth period from October 1, 2013 - December 31, 2013
Derivative contract covering anticipated future production
Price per barrel	103.70
Not designated as hedges | Commodity derivative contract | Swap Purchased | First period from January 1, 2014 - December 31, 2014
Derivative contract covering anticipated future production
Price per barrel	91.35
Not designated as hedges | Commodity derivative contract | Swap Purchased | Second period from January 1, 2014 - December 31, 2014
Derivative contract covering anticipated future production
Price per barrel	92.45
Not designated as hedges | Commodity derivative contract | Swap Purchased | Third period from January 1, 2014 - December 31, 2014
Derivative contract covering anticipated future production
Price per barrel	92.00
Not designated as hedges | Commodity derivative contract | Swap Purchased | Fourth period from January 1, 2014 - December 31, 2014
Derivative contract covering anticipated future production
Price per barrel	97.19
Not designated as hedges | Commodity derivative contract | Swap Purchased | Fifth period from January 1, 2014 - December 31, 2014
Derivative contract covering anticipated future production
Price per barrel	95.45
Not designated as hedges | Commodity derivative contract | Asian Options | Short | Sixth period from January 1, 2014 - December 31, 2014
Derivative contract covering anticipated future production
Price per barrel	99.10
Not designated as hedges | Commodity derivative contract | Asian Options | Long | Sixth period from January 1, 2014 - December 31, 2014
Derivative contract covering anticipated future production
Price per barrel	90.00
Not designated as hedges | Three-way crude oil collar contracts | First period from January 1, 2014 - December 31, 2014
Derivative contract covering anticipated future production
Barrels	547,500
Not designated as hedges | Three-way crude oil collar contracts | Second period from January 1, 2014 - December 31, 2014
Derivative contract covering anticipated future production
Barrels	365,000
Not designated as hedges | Three-way crude oil collar contracts | Call | Short | First period from January 1, 2014 - December 31, 2014
Derivative contract covering anticipated future production
Price per barrel	102.25
Not designated as hedges | Three-way crude oil collar contracts | Call | Short | Second period from January 1, 2014 - December 31, 2014
Derivative contract covering anticipated future production
Price per barrel	107.50
Not designated as hedges | Three-way crude oil collar contracts | Put | Short | First period from January 1, 2014 - December 31, 2014
Derivative contract covering anticipated future production
Price per barrel	65.00
Not designated as hedges | Three-way crude oil collar contracts | Put | Short | Second period from January 1, 2014 - December 31, 2014
Derivative contract covering anticipated future production
Price per barrel	75.00
Not designated as hedges | Three-way crude oil collar contracts | Put | Long | First period from January 1, 2014 - December 31, 2014
Derivative contract covering anticipated future production
Price per barrel	85.00
Not designated as hedges | Three-way crude oil collar contracts | Put | Long | Second period from January 1, 2014 - December 31, 2014
Derivative contract covering anticipated future production
Price per barrel	95.00

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Related Party Transactions (Tables)

9 Months Ended

Sep. 30, 2013

Related Party Transactions

Schedule of expenses allocated to the Company for general and administrative expenses

Expenses allocated to the Company for general and administrative expenses for the three and nine months ended September 30, 2013 and 2012 are as follows (in thousands):

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2013		2012		2013		2012
Administrative fees	$	4,638	$	1,341	$	10,540	$	3,586
Third-party expenses	2,287		667		4,571		3,065
Total included in general and administrative expenses	$	6,925	$	2,008	$	15,111	$	6,651

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Organization (Details) (USD $)			0 Months Ended
	Sep. 30, 2013	Dec. 31, 2012	Jun. 19, 2012 SEP I	Dec. 19, 2011 SEP I	Dec. 19, 2011 SEP Holdings III SEP I	Dec. 19, 2011 Marquis LLC	Sep. 18, 2013 Common Stock	Dec. 19, 2011 Common Stock
Organization and Business
Number of shares issued							11,040,000	10,000,000
Common stock, par value (in dollars per share)	$ 0.01	$ 0.01						$ 0.01
Issue price (in dollars per share)							$ 23.00	$ 22.00
Net proceeds from initial public offering								$ 203,300,000
Ownership interest (as a percent)					100.00%	100.00%
Shares of the Company's common stock issued in acquisition					22,100,000	909,091
Cash paid					50,000,000	89,000,000
Acquisition payment reflected as a distribution to SEP I				50,000,000
Value of shares of the Company's common stock issued in acquisition						20,000,000
Company's common stock owned, distributed to partners (in shares)			21,932,659
Company's common stock owned, distributed to partners, as a percentage of the issued and outstanding shares			66.50%
Consideration paid on common stock distributed to partners			$ 0

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Fair Value of Financial Instruments (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2013	Dec. 31, 2012	Sep. 30, 2012	Dec. 31, 2011
Fair Value of Financial Instruments
Cash and cash equivalents	$ 479,999	$ 50,347	$ 133,367	$ 63,041
Debt	(593,032)
Commercial paper
Fair Value of Financial Instruments
Total investments		7,500
Recurring basis | Total Carrying Value
Fair Value of Financial Instruments
Total	760,844	58,818
Recurring basis | Total Carrying Value | Swaps
Fair Value of Financial Instruments
Oil derivative instruments	(5,245)	(870)
Recurring basis | Total Carrying Value | Three-way collar contracts
Fair Value of Financial Instruments
Oil derivative instruments	(138)
Recurring basis | Total Carrying Value | Asian Options
Fair Value of Financial Instruments
Oil derivative instruments	(32)
Recurring basis | Total Carrying Value | Puts
Fair Value of Financial Instruments
Oil derivative instruments	(414)	3,015
Recurring basis | Total Carrying Value | Commercial paper
Fair Value of Financial Instruments
Cash and cash equivalents		45,000
Total investments		7,500
Recurring basis | Total Carrying Value | Money market funds
Fair Value of Financial Instruments
Cash and cash equivalents	170,173	82
Recurring basis | Total Carrying Value | Corporate notes and bonds
Fair Value of Financial Instruments
Investments	10,000	4,091
Recurring basis | Active Market for Identical Assets (Level 1)
Fair Value of Financial Instruments
Total	170,173	82
Recurring basis | Active Market for Identical Assets (Level 1) | Money market funds
Fair Value of Financial Instruments
Cash and cash equivalents	170,173	82
Recurring basis | Observable Inputs (Level 2)
Fair Value of Financial Instruments
Total	591,255	55,721
Recurring basis | Observable Inputs (Level 2) | Swaps
Fair Value of Financial Instruments
Oil derivative instruments	(5,245)	(870)
Recurring basis | Observable Inputs (Level 2) | Commercial paper
Fair Value of Financial Instruments
Cash and cash equivalents		45,000
Total investments		7,500
Recurring basis | Observable Inputs (Level 2) | Corporate notes and bonds
Fair Value of Financial Instruments
Investments	10,000	4,091
Recurring basis | Unobservable Inputs (Level 3)
Fair Value of Financial Instruments
Total	(584)	3,015
Recurring basis | Unobservable Inputs (Level 3) | Three-way collar contracts
Fair Value of Financial Instruments
Oil derivative instruments	(138)
Recurring basis | Unobservable Inputs (Level 3) | Asian Options
Fair Value of Financial Instruments
Oil derivative instruments	(32)
Recurring basis | Unobservable Inputs (Level 3) | Puts
Fair Value of Financial Instruments
Oil derivative instruments	(414)	3,015
Senior Notes
Fair Value of Financial Instruments
Debt	(600,000)
Senior Notes | Observable Inputs (Level 2) | Estimated fair value
Fair Value of Financial Instruments
Debt	(586,500)
Senior Notes | Recurring basis | Total Carrying Value
Fair Value of Financial Instruments
Debt	586,500
Senior Notes | Recurring basis | Observable Inputs (Level 2)
Fair Value of Financial Instruments
Debt	$ 586,500

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Derivative Instruments (Tables)

9 Months Ended

Sep. 30, 2013

Derivative Instruments

Schedule of oil derivative instruments covering the entity's anticipated future production

As of September 30, 2013, the Company had the following crude oil swaps, options, and put spreads covering anticipated future production as indicated below:

	Derivative
Contract Period	Instrument	Barrels	Purchased		Sold
October 1, 2013 - December 31, 2013	Put Spread	92,000	$	95.00	$	75.00
October 1, 2013 - December 31, 2013	Swap	46,000	$	97.10	n/a
October 1, 2013 - December 31, 2013	Swap	92,000	$	88.90	n/a
October 1, 2013 - December 31, 2013	Put Spread	92,000	$	90.00	$	75.00
October 1, 2013 - December 31, 2013	Swap	69,000	$	94.50	n/a
October 1, 2013 - December 31, 2013	Swap	69,000	$	95.25	n/a
October 1, 2013 - December 31, 2013	Swap	92,000	$	96.80	n/a
October 1, 2013 - December 31, 2013	Swap	46,000	$	103.69	n/a
October 1, 2013 - December 31, 2013	Swap	46,000	$	103.70	n/a
January 1, 2014 - December 31, 2014	Swap	273,750	$	91.35	n/a
January 1, 2014 - December 31, 2014	Swap	273,750	$	92.45	n/a
January 1, 2014 - December 31, 2014	Swap	273,750	$	92.00	n/a
January 1, 2014 - June 30, 2014	Swap	90,500	$	97.19	n/a
January 1, 2014 - December 31, 2014	Swap	365,000	$	95.45	n/a
January 1, 2014 - December 31, 2014	Asian Option	365,000	$	90.00	$	99.10
July 1, 2014 - December 31, 2014	Put Spread	184,000	$	90.00	$	75.00

Schedule of three-way crude oil collar contracts that combine a long and short put with a short call

As of September 30, 2013, the Company had the following three-way crude oil collar contracts that combine a long and short put with a short call as indicated below:

Contract Period	Barrels	Short Put		Long Put		Short Call		Pricing Index
January 1, 2014 - December 31, 2014	547,500	$	65.00	$	85.00	$	102.25	NYMEX West Texas Intermediate crude
January 1, 2014 - December 31, 2014	365,000	$	75.00	$	95.00	$	107.50	Louisiana light sweet crude

Summary of gross fair values of derivative instruments, presenting the impact of offsetting the derivative assets and liabilities on the condensed consolidated balance sheets

The following table summarizes the gross fair values of derivative instruments, presenting the impact of offsetting the derivative assets and liabilities on the Company’s condensed consolidated balance sheets for the periods indicated (in thousands):

	September 30, 2013
				Gross Amounts			Net Amounts
				Offset in the			Presented in
	Gross Amount			Condensed			the Condensed
	of Recognized			Consolidated			Consolidated
	Assets			Balance Sheets			Balance Sheets
Offsetting Derivative Assets:
Current asset	$	3,396		$	(3,356	)	$	40
Long-term asset	1,860			(1,437		)	423
Total asset	$	5,256		$	(4,793	)	$	463
Offsetting Derivative Liabilities:
Current liability	$	(10,389	)	$	3,356		$	(7,033	)
Long-term liability	(1,915		)	1,437			(478		)
Total liability	$	(12,304	)	$	4,793		$	(7,511	)

	December 31, 2012
				Gross Amounts			Net Amounts
				Offset in the			Presented in
	Gross Amount			Condensed			the Condensed
	of Recognized			Consolidated			Consolidated
	Assets			Balance Sheets			Balance Sheets
Offsetting Derivative Assets:
Current asset	$	37,012		$	(34,867	)	$	2,145
Long-term asset	—			—			—
Total asset	$	37,012		$	(34,867	)	$	2,145
Offsetting Derivative Liabilities:
Current liability	$	(34,867	)	$	34,867		$	—
Long-term liability	—			—			—
Total liability	$	(34,867	)	$	34,867		$	—

Schedule of entity's realized and unrealized gains (losses) on derivative instruments

The following summarizes the Company’s realized and unrealized gains (losses) on derivative instruments for the three and nine months ended September 30, 2013 and 2012 (in thousands):

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2013			2012			2013			2012
Realized losses on derivative instruments	$	(5,531	)	$	(87	)	$	(6,992	)	$	(785	)
Unrealized gains (losses) on derivative instruments	(8,905		)	(2,104		)	(6,820		)	1,594
Total realized and unrealized gains (losses) on derivative instruments	$	(14,436	)	$	(2,191	)	$	(13,812	)	$	809

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Investments (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2013	Dec. 31, 2012
Investments in marketable securities
Total investments	$ 10,000	$ 11,591
Gains or losses recorded in accumulated other comprehensive income	100	0
Commercial paper
Investments in marketable securities
Investments		7,500
Corporate notes and bonds
Investments in marketable securities
Total investments	$ 10,000	$ 4,091

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Subsidiary Guarantors

9 Months Ended

Sep. 30, 2013

Subsidiary Guarantors

Subsidiary Guarantors

Note 17.  Subsidiary Guarantors

The Company has filed a registration statement on Form S-3 with the SEC, which became effective January 14, 2013 and registered, among other securities, debt securities.  The subsidiaries of the Company (the “Subsidiaries”) are co-registrants with the Company, and the registration statement registers guarantees of debt securities by the Subsidiaries. As of September 30, 2013, the Subsidiaries are 100 percent owned by the Company and any guarantees by the Subsidiaries will be full and unconditional (except for customary release provisions). The Company has no assets or operations independent of the Subsidiaries and there are no significant restrictions upon the ability of the Subsidiaries to distribute funds to the Company. In the event that more than one of the Subsidiaries provide guarantees of any debt securities issued by the Company, such guarantees will constitute joint and several obligations.

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Condensed Consolidated Statement of Stockholders' Equity (USD $) In Thousands, unless otherwise specified	Total	Common Stock	Additional Paid-in Capital	Accumulated Deficit	Series A Preferred Stock	Series B Preferred Stock
BALANCE at Dec. 31, 2012	$ 366,743	$ 338	$ 385,086	$ (18,711)	$ 30
BALANCE (in shares) at Dec. 31, 2012		33,762			3,000
Increase (Decrease) in Stockholders' Equity
Common shares issued, net of offering costs of $12,422	241,498	111	241,387
Common shares issued, net of offering costs (in shares)		11,040
Issuance of Series B Preferred Stock, net of offering costs of $8,439	216,561		216,516			45
Issuance of Series B Preferred Stock, net of offering costs (in shares)						4,500
Preferred stock dividends	(13,041)			(13,041)
Purchase of oil and natural gas properties for common stock	7,520	3	7,517
Purchase of oil and natural gas properties for common stock (in shares)		343
Restricted stock awards, net of forfeitures		13	(13)
Restricted stock awards, net of forfeitures (in shares)		1,257
Purchases of common stock	(1,058)	(1)	(1,057)
Purchases of common stock (in shares)		(52)
Stock-based compensation	14,369		14,369
Net income	12,696			12,696
BALANCE at Sep. 30, 2013	$ 845,288	$ 464	$ 863,805	$ (19,056)	$ 30	$ 45
BALANCE (in shares) at Sep. 30, 2013		46,350			3,000	4,500

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Condensed Consolidated Statements of Cash Flows (USD $) In Thousands, unless otherwise specified	9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$ 12,696	$ (17,024)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation, depletion, amortization and accretion	76,368	9,291
Stock-based compensation	14,369	24,800
Unrealized losses (gains) on derivative instruments	6,820	(1,594)
Amortization of deferred financing costs and debt discount	5,862
Deferred taxes	(3,668)
Changes in operating assets and liabilities:
Accounts receivable	(29,903)	(3,114)
Other current assets	(301)	(214)
Price risk management activities, net	3,484	(618)
Accounts payable	8,427
Accounts payable - related entities	(12,672)	13,402
Other payables	829
Accrued liabilities	26,413	1,266
Net cash provided by operating activities	108,724	26,195
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for oil and natural gas properties	(295,670)	(88,798)
Payments for other property and equipment	(1,665)
Acquisitions of oil and natural gas properties	(402,669)
Purchases of investments	(10,000)	(11,583)
Sale of investments	11,591
Net cash used in investing activities	(698,413)	(100,381)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings	236,000
Repayment of borrowings	(236,000)
Issuance of senior notes, net of discount	593,000
Issuance of common stock	253,920
Issuance of preferred stock	225,000	150,000
Payments for stock offering costs	(20,861)	(5,488)
Financing costs	(23,104)
Preferred dividends paid	(7,556)
Purchase of common stock	(1,058)
Net cash provided by financing activities	1,019,341	144,512
Increase in cash and cash equivalents	429,652	70,326
Cash and cash equivalents, beginning of period	50,347	63,041
Cash and cash equivalents, end of period	479,999	133,367
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Asset retirement obligations	2,833	205
Change in accrued capital expenditures	38,842	23,207
Capital expenditures in accounts payable	18,352
Deferred premium liabilities	718	563
Purchase of oil and natural gas properties in exchange for common stock	7,520
Accrued preferred stock dividends	5,485
SUPPLEMENTAL DISCLOSURE:
Cash paid for interest	$ 2,020

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Acquisitions

9 Months Ended

Sep. 30, 2013

Acquisitions

Acquisitions

Note 3. Acquisitions

Our acquisitions, except those acquisitions made between entities under common control, are accounted for under the acquisition method of accounting in accordance with ASC Topic 805, “Business Combinations” (“ASC Topic 805”). An acquisition may result in the recognition of a gain or goodwill based on the measurement of the fair value of the assets acquired at the acquisition date as compared to the fair value of consideration transferred, adjusted for purchase price adjustments. Any such gain or any loss resulting from the impairment of goodwill is recognized in current period earnings and classified in operating costs and expenses in the accompanying condensed consolidated statements of operations. The initial accounting for acquisitions may not be complete and adjustments to provisional amounts, or recognition of additional assets acquired or liabilities assumed, may occur as more detailed analyses are completed and additional information is obtained about the facts and circumstances that existed as of the acquisition dates. The results of operations of the properties acquired in our acquisitions have been included in the condensed consolidated financial statements since the closing dates of the acquisitions.

Tuscaloosa Marine Shale (“TMS”) Asset Purchase

In August 2013, the Company completed its acquisition of assets, which consisted of undeveloped acreage in Mississippi and Louisiana covering the emerging TMS trend, from three sellers (two third parties and one related party of the Company) for total consideration of approximately $70 million in cash and the issuance of 342,760 common shares of the Company, valued at approximately $7.5 million.  The total consideration provided to SR Acquisition I, LLC (together with its parent company Sanchez Resources, LLC, where applicable, “SR”), an affiliate of the Company, was $14.4 million, and included $0.9 million in customary closing adjustments.  The acquisitions were accounted for as the purchase of assets at cost at the acquisition date.

Pursuant to the terms of the agreements, the Company established an Area of Mutual Interest (“AMI”) with SR in the TMS.  As part of the transactions, the Company acquired all of the working interests in the AMI owned by the third party plus a portion of SR’s working interests, resulting in the Company owning an undivided 50% working interest across the AMI through the TMS. The Company has further committed, as a part of the total consideration, to carry SR for its 50% working interest in an initial 3 gross (1.5 net) TMS wells to be drilled within the AMI and, at the Company’s election, it may carry SR in an additional 3 gross (1.5 net) TMS wells if it desires to participate in additional drilling within the AMI.

Cotulla Acquisition

On May 31, 2013, the Company completed the Cotulla acquisition for an aggregate adjusted purchase price of $281.6 million.  The effective date of the transaction was March 1, 2013.

The purchase price was funded with borrowings under the Company’s First Lien Credit Agreement, cash on hand, and proceeds from the Company’s private placement of the Series B Convertible Preferred Stock. The preliminary purchase price allocation for the Cotulla acquisition has been finalized except for the settlement of certain post-closing adjustments with the seller.  The total purchase price was allocated to the assets purchased and liabilities assumed in the Cotulla acquisition based upon fair values on the date of acquisition as follows (in thousands):

Proved oil and natural gas properties	$	265,468
Unproved properties	16,745
Other assets acquired	856
Fair value of assets acquired	283,069
Asset retirement obligations	(1,138		)
Other liabilities assumed	(351		)
Fair value of net assets acquired	$	281,580

The following unaudited pro forma combined results for each of the three and nine months ended September 30, 2013 and 2012 reflect the consolidated results of operations of the Company as if the Cotulla acquisition and related financings had occurred on January 1, 2012.  The pro forma information includes adjustments primarily for revenues and expenses from the acquired properties, depreciation, depletion, amortization and accretion, interest expense and debt issuance cost amortization for acquisition debt, and stock dividends for the issuance of preferred stock.

The unaudited pro forma combined financial statements give effect to the events set forth below:

· The Cotulla acquisition completed May 31, 2013.

· The increase in borrowings under the First Lien Credit Agreement to finance a portion of the acquisition, and the related adjustments to interest expense.

· Issuance of Series B Convertible Preferred Stock and related adjustments to preferred dividends (in thousands, except per share amounts):

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2013			2012			2013		2012
Revenues	$	94,200		$	42,228		$	237,926	$	96,819
Net income (loss) attributable to common stockholders	$	(1,669	)	$	(2,747	)	$	407	$	(23,127	)
Net income (loss) per common share, basic and diluted	$	(0.05	)	$	(0.08	)	$	0.01	$	(0.70	)

The unaudited pro forma combined financial information is for informational purposes only and is not intended to represent or to be indicative of the combined results of operations that the Company would have reported had the Cotulla acquisition been completed as of the dates set forth in this unaudited pro forma combined financial information and should not be taken as indicative of the Company’s future combined results of operations. The actual results may differ significantly from that reflected in the unaudited pro forma combined financial information for a number of reasons, including, but not limited to, differences in assumptions used to prepare the unaudited pro forma combined financial information and actual results.

The amounts of revenue and revenues in excess of direct operating expenses included in the Company’s condensed consolidated statements of operations for the Cotulla acquisition are shown in the table that follows.  Direct operating expenses include lease operating expenses and production and ad valorem taxes (in thousands):

	Three Months Ended		Nine Months Ended
	September 30, 2013		September 30, 2013
Revenues	$	40,267	$	48,741
Excess of revenues over direct operating expenses	$	29,890	$	34,819

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Organization

9 Months Ended

Sep. 30, 2013

Organization

Organization

Note 1.   Organization

Sanchez Energy Corporation (together with its consolidated subsidiaries, the “Company,” “we,” “our,” “us” or similar terms) is an independent exploration and production company focused on the acquisition, exploration, and development of unconventional oil and natural gas resources onshore along the U.S. Gulf Coast, primarily in the Eagle Ford Shale in South Texas. As of September 30, 2013, the Company had accumulated acreage in the Eagle Ford Shale in Gonzales, Zavala, Frio, Fayette, Lavaca, Atascosa, Webb, DeWitt, Dimmit and LaSalle Counties of South Texas.  In August 2013, the Company added undeveloped acreage targeting the Tuscaloosa Marine Shale (“TMS”) located in Southwest Mississippi and Southeast Louisiana.  In addition, the Company has some minor property interests located in the Haynesville Shale in north central Louisiana.

The Company was formed in August 2011 to acquire, explore and develop unconventional oil and natural gas assets.  On December 19, 2011, the Company completed its IPO of 10.0 million shares of common stock, par value $0.01 per share, at a price to the public of $22.00 per share and received net proceeds of approximately $203.3 million in cash (net of expenses and underwriting discounts and commissions).

In connection with its IPO, on December 19, 2011, the Company entered into a contribution, conveyance and assumption agreement whereby Sanchez Energy Partners I, LP (“SEP I”), an affiliate of the Company, contributed to the Company 100% of the limited liability company interests in SEP Holdings III, LLC (“SEP Holdings III”), which owns interests in unconventional oil and natural gas assets consisting of undeveloped leasehold, proved oil and natural gas reserves and related equipment and other assets (the “SEP I Assets”) in exchange for approximately 22.1 million shares of the Company’s common stock and $50.0 million in cash.  The acquisition of oil and natural gas properties from SEP I was a transaction among entities under common control and, accordingly, the Company recorded the assets and liabilities acquired at their historical carrying values and presented the historical operations of the SEP I Assets on a retrospective basis for all periods prior to the IPO presented in its financial statements.  In addition, the $50.0 million payment was reflected as a distribution to SEP I in the financial statements.

Also in connection with its IPO, the Company entered into a contribution agreement whereby it acquired 100% of the limited liability company interests in Marquis LLC, which owns evaluated and unevaluated properties in Fayette, Lavaca, Atascosa, Webb and DeWitt Counties of South Texas (the “Marquis Assets”) in exchange for 909,091 shares of the Company’s common stock, valued at $20.0 million, and approximately $89.0 million in cash from the proceeds of the IPO. The acquisition was accounted for as a purchase of assets and recorded at cost at the acquisition date.

Also in connection with its IPO, on December 19, 2011, the Company entered into a services agreement and other related agreements with Sanchez Oil & Gas Corporation (“SOG” and together with its affiliates (excluding the Company but including SEP I) collectively referred to as members of the “Sanchez Group”), an affiliate of the Company, pursuant to which SOG (directly or through its subsidiaries) agreed to provide the Company with the services and data that the Company believes are necessary to manage, operate and grow its business, and the Company agreed to reimburse SOG for all direct and indirect costs incurred on its behalf.

On June 19, 2012 and September 17, 2012, SEP I distributed substantially all of the approximately 22.1 million shares of the Company’s common stock that SEP I owned to the partners of SEP I (the “Distribution”).  The 21,932,659 shares of common stock distributed to SEP I’s partners constituted 66.5% of the then issued and outstanding shares of the Company’s common stock.  The Distribution was a return on SEP I’s partners’ capital contributions to SEP I, thus no consideration was paid to SEP I for the shares of the Company’s common stock distributed.  Since June 19, 2012, the Company has not been under common control with SEP I.

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Acquisitions (Details) (USD $)	3 Months Ended		9 Months Ended		1 Months Ended		3 Months Ended		9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012	Aug. 31, 2013 Area of property acquired in Mississippi and Louisiana (in acres) item	Aug. 31, 2013 Area of property acquired in Mississippi and Louisiana (in acres) SR item	Sep. 30, 2013 Cotulla	Sep. 30, 2012 Cotulla	Sep. 30, 2013 Cotulla	Sep. 30, 2012 Cotulla	May 31, 2013 Cotulla
Acquisitions
Number of sellers					3
Number of third parties					2
Number of related parties					1
Cash paid					$ 70,000,000
Shares of the Company's common stock issued in acquisition					342,760
Company valued					7,500,000
Approximate cash payment to purchase assets						14,400,000
Consideration as result of customary closing adjustments						900,000
Ownership interest in total area of property (as a percent)					50.00%
Obligation for working interest for partner's portion of the completed well costs, on the initial wells to be drilled within the AMI (as a percent)						50.00%
Number of wells to be drilled within Area of Mutual Interest for which the entity has obligation in working interest in well costs, gross						3
Number of wells to be drilled within Area of Mutual Interest for which the entity has obligation in working interest in well costs, net						1.5
Additional number of wells to be drilled within Area of Mutual Interest for which the entity has obligation in working interest in well costs, gross						3
Additional number of wells to be drilled within Area of Mutual Interest for which the entity has obligation in working interest in well costs, net						1.5
Unaudited pro forma combined statements of operations
Revenue							94,200,000	42,228,000	237,926,000	96,819,000
Net income (loss) attributable to common stockholders							(1,669,000)	(2,747,000)	(407,000)	(23,127,000)
Net income (loss) per common share, basic and diluted (in dollars per share)							$ (0.05)	$ (0.08)	$ (0.01)	$ (0.70)
Total purchase price allocated to assets purchased and liabilities assumed
Proved oil and natural gas properties											265,468,000
Unproved properties											16,745,000
Other assets acquired											856,000
Fair value of assets acquired											283,069,000
Asset retirement obligation	(1,138,000)		(1,138,000)								(1,138,000)
Other liabilities assumed											(351,000)
Fair value of net assets acquired											281,580,000
Revenue and revenues in excess of direct operating expenses
Revenues	94,200,000	12,493,000	184,321,000	26,462,000			40,267,000		48,741,000
Excess of revenues over direct operating expenses	$ 24,076,000	$ 3,846,000	$ 40,349,000	$ (17,864,000)			$ 29,890,000		$ 34,819,000

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Acquisitions (Tables)

9 Months Ended

Sep. 30, 2013

Acquisitions

Schedule of total purchase price allocated to assets purchased and liabilities assumed in Hess acquisition based upon preliminary fair values on the date of acquisition

The total purchase price was allocated to the assets purchased and liabilities assumed in the Cotulla acquisition based upon fair values on the date of acquisition as follows (in thousands):

Proved oil and natural gas properties	$	265,468
Unproved properties	16,745
Other assets acquired	856
Fair value of assets acquired	283,069
Asset retirement obligations	(1,138		)
Other liabilities assumed	(351		)
Fair value of net assets acquired	$	281,580

Schedule of unaudited pro forma combined statements of operations

(in thousands, except per share amounts):

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2013			2012			2013		2012
Revenues	$	94,200		$	42,228		$	237,926	$	96,819
Net income (loss) attributable to common stockholders	$	(1,669	)	$	(2,747	)	$	407	$	(23,127	)
Net income (loss) per common share, basic and diluted	$	(0.05	)	$	(0.08	)	$	0.01	$	(0.70	)

Schedule of revenue and revenues in excess of direct operating expenses

Direct operating expenses include lease operating expenses and production and ad valorem taxes (in thousands):

	Three Months Ended		Nine Months Ended
	September 30, 2013		September 30, 2013
Revenues	$	40,267	$	48,741
Excess of revenues over direct operating expenses	$	29,890	$	34,819

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Fair Value of Financial Instruments (Tables)

9 Months Ended

Sep. 30, 2013

Fair Value of Financial Instruments

Schedule of financial assets and liabilities measured at fair value on a recurring basis

The following tables set forth, by level within the fair value hierarchy, the Company’s financial assets and liabilities that were accounted for or disclosed at fair value on a recurring basis as of September 30, 2013 and December 31, 2012 (in thousands):

	As of September 30, 2013
	Active Market
	for Identical		Observable			Unobservable			Total
	Assets		Inputs			Inputs			Carrying
	(Level 1)		(Level 2)			(Level 3)			Value
Cash and cash equivalents:
Money market funds	$	170,173	$	—		$	—		$	170,173
Investments:
Corporate notes and bonds	—		10,000			—			10,000
Oil derivative instruments:
Swaps	—		(5,245		)	—			(5,245		)
Three-way collars	—		—			(138		)	(138		)
Asian Options	—		—			(32		)	(32		)
Puts	—		—			(414		)	(414		)
Debt:
Senior Notes	—		586,500			—			586,500
Total	$	170,173	$	591,255		$	(584	)	$	760,844

	As of December 31, 2012
	Active Market
	for Identical		Observable			Unobservable		Total
	Assets		Inputs			Inputs		Carrying
	(Level 1)		(Level 2)			(Level 3)		Value
Cash and cash equivalents:
Commercial paper	$	—	$	45,000		$	—	$	45,000
Money market funds	82		—			—		82
Investments:
Commercial paper	—		7,500			—		7,500
Corporate notes and bonds	—		4,091			—		4,091
Oil derivative instruments:
Swaps	—		(870		)	—		(870		)
Puts	—		—			3,015		3,015
Total	$	82	$	55,721		$	3,015	$	58,818

Reconciliation of changes in the fair value of the oil derivative instruments classified as Level 3 in the fair value hierarchy

The following table sets forth a reconciliation of changes in the fair value of the Company’s oil derivative instruments classified as Level 3 in the fair value hierarchy (in thousands):

	Significant Unobservable Inputs
	(Level 3)
	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2013			2012			2013			2012
Beginning balance	$	3,003		$	7,369		$	3,015		$	1,461
Realized and unrealized gains (losses) included in earnings	(4,305		)	(2,191		)	(4,154		)	809
Settlements	—			(962		)	(163		)	(1,190		)
Purchase of derivative contracts	718			—			718			2,952
Buy out of derivative contracts	—			—			—			184
Ending balance	$	(584	)	$	4,216		$	(584	)	$	4,216
Change in unrealized gains (losses) included in earnings related to derivatives still held as of September 30, 2013 and 2012	$	(3,338	)	$	(1,994	)	$	(2,445	)	$	1,523

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Stock-Based Compensation (Tables)

9 Months Ended

Sep. 30, 2013

Stock-Based Compensation

Schedule of stock-based compensation expense

The Company recognized the following stock-based compensation expense for the periods indicated which is reflected as general and administrative expense in the consolidated statements of operations (in thousands):

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2013		2012		2013		2012
Restricted stock awards, directors	$	242	$	91	$	473	$	184
Restricted stock awards, non-employees	6,415		745		13,896		2,308
Restricted stock awards, cancelled	—		—		—		22,308
Total stock-based compensation expense	$	6,657	$	836	$	14,369	$	24,800

Summary of the status of the non-vested shares

A summary of the status of the non-vested shares as of September 30, 2013 is presented below (in thousands):

	Number of Non-Vested Shares
Non-vested common stock at January 1,	762
Granted	1,329
Vested	(185	)
Forfeited	(71	)
Non-vested common stock at September 30,	1,835

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Stockholders' Equity (Details 2) (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012
Earnings (Loss) Per Share
Net income (loss)	$ 3,880	$ 1,667	$ 12,696	$ (17,024)
Preferred stock dividends	(5,485)	(264)	(13,041)	(264)
Net income allocable to participating securities		(21)
Net income (loss) attributable to common stockholders	$ (1,605)	$ 1,382	$ (345)	$ (17,288)
Weighted average number of unrestricted outstanding common shares used to calculate basic net income (loss) per share	34,737	33,000	33,651	33,000
Denominator for diluted net income (loss) per common share (in shares)	34,737	33,000	33,651	33,000
Net income (loss) per common share - basic and diluted (in dollars per share)	$ (0.05)	$ 0.04	$ (0.01)	$ (0.52)

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Fair Value of Financial Instruments (Details 2) (Oil derivative instruments, USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012
Oil derivative instruments
Changes in the fair value of the company s oil derivative instruments classified as Level 3 in the fair value hierarchy
Beginning balance	$ 3,003	$ 7,369	$ 3,015	$ 1,461
Realized and unrealized gains (losses) included in earnings	(4,305)	(2,191)	(4,154)	809
Settlements		(962)	(163)	(1,190)
Purchase of derivative contracts	718		718	2,952
Buy out of derivative contracts				184
Ending balance	(584)	4,216	(584)	4,216
Change in unrealized gains (losses) included in earnings related to derivatives still held	$ (3,338)	$ (1,994)	$ (2,445)	$ 1,523

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Long-Term Debt (Details) (USD $)	9 Months Ended	0 Months Ended		3 Months Ended			1 Months Ended	0 Months Ended																0 Months Ended		0 Months Ended
	Sep. 30, 2013	Sep. 18, 2013 7.75 % Senior Notes due 2021	Jun. 14, 2013 7.75 % Senior Notes due 2021	Sep. 18, 2013 7.75 % Senior Notes due 2021	Sep. 30, 2013 7.75 % Senior Notes due 2021	Jun. 13, 2013 7.75 % Senior Notes due 2021	Jun. 30, 2013 7.75 % Senior Notes due 2021 Prior to June 15, 2017	Mar. 18, 2013 First Lien Credit Agreement	May 31, 2013 First Lien Credit Agreement	Sep. 30, 2013 First Lien Credit Agreement 7.75 % Senior Notes due 2021	May 31, 2013 First Lien Credit Agreement Revolving credit facility	Feb. 21, 2013 First Lien Credit Agreement Revolving credit facility	Nov. 16, 2012 First Lien Credit Agreement Revolving credit facility	Sep. 30, 2013 First Lien Credit Agreement Revolving credit facility Minimum	Sep. 30, 2013 First Lien Credit Agreement Revolving credit facility Maximum	Jun. 13, 2013 Second Lien Credit Agreement	Jun. 13, 2013 Second Lien Credit Agreement Term loan facility	Jan. 31, 2013 Second Lien Credit Agreement Term loan facility	Nov. 16, 2012 Second Lien Credit Agreement Term loan facility	Mar. 18, 2013 Bridge loan	Sep. 30, 2013 Previous First Lien Credit Agreement	Jun. 13, 2013 Previous First Lien Credit Agreement	May 31, 2013 Previous First Lien Credit Agreement Letters of credit	May 31, 2013 Previous First Lien Credit Agreement Revolving credit facility	Sep. 30, 2013 Previous First Lien Credit Agreement Revolving credit facility	May 31, 2013 Previous First Lien Credit Agreement Revolving credit facility Minimum	May 31, 2013 Previous First Lien Credit Agreement Revolving credit facility Maximum	May 31, 2013 Previous First Lien Credit Agreement Revolving credit facility Alternate base rate	May 31, 2013 Previous First Lien Credit Agreement Revolving credit facility Alternate base rate Minimum	May 31, 2013 Previous First Lien Credit Agreement Revolving credit facility Alternate base rate Maximum	May 31, 2013 Previous First Lien Credit Agreement Revolving credit facility Alternate base rate calculated based on prime rate	May 31, 2013 Previous First Lien Credit Agreement Revolving credit facility Alternate base rate calculated based on federal funds effective rate	May 31, 2013 Previous First Lien Credit Agreement Revolving credit facility Alternate base rate calculated based on LIBO rate	May 31, 2013 Previous First Lien Credit Agreement Revolving credit facility Eurodollar rate	May 31, 2013 Previous First Lien Credit Agreement Revolving credit facility Eurodollar rate Minimum	May 31, 2013 Previous First Lien Credit Agreement Revolving credit facility Eurodollar rate Maximum
Long-Term Debt
Total Long Term Debt	$ 593,032,000				$ 600,000,000
Interest rate (as a percent)					7.75%
Percentage value of Additional Notes at which they are offered in private offering					96.50%
Maximum borrowing capacity								175,000,000	96,000,000	175,000,000			250,000,000						250,000,000	150,000,000	175,000,000		20,000,000	500,000,000
Initial borrowing base												95,000,000	27,500,000						50,000,000		175,000,000	87,500,000
Percentage of increased net debt used to calculate reduction in borrowing base																								25.00%
Variable rate basis																												alternate base rate			Administrative Agent's U.S. "prime rate"	federal funds effective rate	one-month LIBO Rate multiplied by the statutory reserve rate	eurodollar rate
Variable rate basis, spread percentage																																0.50%	1.00%
Applicable margin percentage																													1.00%	1.75%					2.00%	2.75%
Percentage of commitment fee on the unused committed amount																										0.375%	0.50%
Current ratio														100.00%
Ratio of total debt outstanding to consolidated EBITDA															400.00%
Percentage applied on the conditions that are used to calculate accelerated amount due upon event of default																									50.00%
Commitments secured for debt financing								325,000,000
Additional debt						400,000,000																		96,000,000
Proceeds from Issuance of Debt	236,000,000		400,000,000
Repayment of debt using proceeds from senior note offering											90,000,000					50,000,000	50,000,000					96,000,000
Original discount and related offering expenses		4,200,000
Proceeds for issuance of notes, net of original discount and related offering expenses		188,800,000	388,000,000
Redemption price of debt instrument (as a percent)							100.00%
Percentage of debt instrument redeem under certain circumstances							35.00%
Amount outstanding																					0
Credit facility used											90,000,000							50,000,000
Initial purchasers' discounts		7,000,000		7,000,000
Accrued interest				$ 4,100,000

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Condensed Consolidated Balance Sheets (Parenthetical) (USD $)	9 Months Ended	12 Months Ended
	Sep. 30, 2013	Dec. 31, 2012
Preferred stock, par value (in dollars per share)	$ 0.01	$ 0.01
Preferred stock, shares authorized	15,000,000	15,000,000
Common stock, par value (in dollars per share)	$ 0.01	$ 0.01
Common stock, shares authorized	150,000,000	150,000,000
Common stock, shares issued	46,350,513	33,762,400
Common stock, shares outstanding	46,350,513	33,762,400
Preferred stock, Cumulative Perpetual Convertible, Series A
Dividend rate (as a percent)	4.875%	4.875%
Preferred stock, shares issued	3,000,000	3,000,000
Preferred stock, shares outstanding	3,000,000	3,000,000
Preferred stock, Cumulative Perpetual Convertible, Series B
Dividend rate (as a percent)	6.50%	6.50%
Preferred stock, shares issued	4,500,000	0
Preferred stock, shares outstanding	4,500,000	0

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Oil and Natural Gas Properties

9 Months Ended

Sep. 30, 2013

Oil and Natural Gas Properties

Oil and Natural Gas Properties

Note 6.  Oil and Natural Gas Properties

The Company’s oil and natural gas properties are accounted for using the full cost method of accounting.  All direct costs and certain indirect costs associated with the acquisition, exploration and development of oil and natural gas properties are capitalized. Once evaluated, these costs, as well as the estimated costs to retire the assets, are included in the amortization base and amortized to depletion expense using the units-of-production method.  Depletion is calculated based on estimated proved oil and natural gas reserves.  Proceeds from the sale or disposition of oil and natural gas properties are applied to reduce net capitalized costs unless the sale or disposition causes a significant change in the relationship between costs and the estimated quantity of proved reserves.

Capitalized costs (net of accumulated depreciation, depletion and amortization and deferred income taxes) of proved oil and natural gas properties are subject to a full cost ceiling limitation.  The ceiling limits these costs to an amount equal to the present value, discounted at 10%, of estimated future net cash flows from estimated proved reserves less estimated future operating and development costs, abandonment costs (net of salvage value) and estimated related future income taxes.  In accordance with SEC rules, the oil and natural gas prices used to calculate the full cost ceiling are the 12-month average prices, calculated as the unweighted arithmetic average of the first-day-of-the-month price for each month within the 12-month period prior to the end of the reporting period, unless prices are defined by contractual arrangements. Prices are adjusted for “basis” or location differentials.  Prices are held constant over the life of the reserves.  If unamortized costs capitalized within the cost pool exceed the ceiling, the excess is charged to expense and separately disclosed during the period in which the excess occurs. Amounts thus required to be written off are not reinstated for any subsequent increase in the cost center ceiling.  No impairment expense was recorded for the three and nine month periods ended September 30, 2013 or 2012.

Investments in unproved properties and major development projects are capitalized and excluded from the amortization base until proved reserves associated with the projects can be determined or until impairment occurs.  Once the assessment of unproved properties is complete and when major development projects are evaluated, the costs previously excluded from amortization are transferred to the full cost pool subject to periodic amortization.  The Company assesses the carrying value of its unproved properties that are not subject to amortization for impairment periodically.  If the results of an assessment indicate that the properties are impaired, the amount of the asset impaired is added to the full cost pool subject to both periodic amortization and the ceiling test.

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Condensed Consolidated Statements of Operations (Parenthetical) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012
Condensed Consolidated Statements of Operations
General and administrative, stock-based compensation expense (in dollars)	$ 6,657	$ 836	$ 14,369	$ 24,800

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Income Taxes (Details) (USD $)	3 Months Ended		9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012
Income Taxes
Federal statutory corporate income tax rate (as a percent)			35.00%
Reconciliation of the statutory federal income tax with the income tax provision
Income tax expense (benefit) at the statutory rate	$ 74,000	$ 584,000	$ 3,160,000	$ (5,958,000)
Rescission of restricted stock				7,808,000
Change in Valuation allowance	(3,742,000)	(584,000)	(6,828,000)	(1,850,000)
Net income tax (benefit)	(3,668,000)		(3,668,000)
Net operating loss carryforwards	348,200,000		348,200,000
Uncertain tax positions	$ 0		$ 0

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Condensed Consolidated Balance Sheets (USD $) In Thousands, unless otherwise specified	Sep. 30, 2013	Dec. 31, 2012
Current assets:
Cash and cash equivalents	$ 479,999	$ 50,347
Investments	10,000	11,591
Oil and natural gas receivables	36,565	10,435
Joint interest billing receivables	3,452
Fair value of derivative instruments	40	2,145
Deferred tax asset	7,520
Other current assets	739	438
Total current assets	538,315	74,956
Oil and natural gas properties, at cost, using the full cost method:
Unproved oil and natural gas properties	268,556	138,937
Proved oil and natural gas properties	868,284	232,523
Total oil and natural gas properties	1,136,840	371,460
Less: Accumulated depreciation, depletion, amortization and impairment	(98,729)	(22,605)
Total oil and natural gas properties, net	1,038,111	348,855
Other assets:
Debt issuance costs, net	19,869	2,595
Fair value of derivative instruments	423
Other assets	2,575	168
Total assets	1,599,293	426,574
Current liabilities:
Accounts payable	26,779
Accounts payable - related entities	782	13,454
Other payables	2,973
Accrued liabilities	110,084	44,828
Dividends payable	5,485
Fair value of derivative instruments	7,033	1,003
Total current liabilities	153,136	59,285
Long term debt, net of discount	593,032
Asset retirement obligations	3,507	546
Deferred tax liability	3,852
Other non-current liabilities	478
Total liabilities	754,005	59,831
Commitments and contingencies (Note 16)
Stockholders' equity:
Preferred stock ($0.01 par value, 15,000,000 shares authorized; 3,000,000 shares of 4.875% Cumulative Perpetual Convertible, Series A, issued and outstanding as of each of September 30, 2013 and December 31, 2012, respectively; 4,500,000 and zero shares of 6.500% Cumulative Perpetual Convertible, Series B, issued and outstanding as of September 30, 2013 and December 31, 2012, respectively)	75	30
Common stock ($0.01 par value, 150,000,000 shares authorized; 46,350,513 and 33,762,400 shares issued and outstanding as of September 30, 2013 and December 31, 2012, respectively)	464	338
Additional paid-in capital	863,805	385,086
Accumulated deficit	(19,056)	(18,711)
Total stockholders' equity	845,288	366,743
Total liabilities and stockholders' equity	$ 1,599,293	$ 426,574

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Asset Retirement Obligations (Details) (USD $) In Thousands, unless otherwise specified	9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012
Changes in the asset retirement obligation
Abandonment liability at the beginning of the period	$ 546	$ 83
Liabilities incurred during period	727	205
Acquisitions	1,138
Revisions	968
Accretion expense	128	9
Abandonment liability at the end of the period	$ 3,507	$ 297

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Cash and Cash Equivalents (Tables)

9 Months Ended

Sep. 30, 2013

Cash and Cash Equivalents

Schedule of cash and cash equivalents

As of September 30, 2013 and December 31, 2012, cash and cash equivalents consisted of the following (in thousands):

	September 30,		December 31,
	2013		2012
Cash at banks	$	309,826	$	5,265
Money market funds	170,173		82
Commercial paper (1)	—		45,000
Total cash and cash equivalents	$	479,999	$	50,347

(1) These securities matured three months or less from date of purchase.

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Income Taxes

9 Months Ended

Sep. 30, 2013

Income Taxes

Income Taxes

Note 15. Income Taxes

The SEP I Assets contributed by SEP I were historically owned by a limited partnership that is not a taxable entity and is a disregarded entity for federal income tax purposes.  SEP I’s taxable income or loss was allocated to the limited and general partners of SEP I.  With the transfer of the properties to the Company, the SEP I Assets’ operations are now subject to federal and state income taxes.

The Company’s estimated annual effective income tax rates are used to allocate expected annual income tax expense to interim periods. The rates are determined based on the ratio of estimated annual income tax expense to estimated annual income before income taxes by taxing jurisdiction, except for discrete items, which are significant, unusual or infrequent items for which income taxes are computed and recorded in the interim period in which the specific transaction occurs. The estimated annual effective income tax rates are applied to the year-to-date income before income taxes by taxing jurisdiction to determine the income tax expense allocated to the interim period. The Company updates its estimated annual effective income tax rate at the end of each quarterly period considering the geographic mix of income based on the tax jurisdictions in which the Company operates. Actual results that are different from the assumptions used in estimating the annual effective income tax rate will impact future income tax expense. The difference between the statutory federal income taxes calculated using a U.S. federal statutory corporate income tax rate of 35% and the Company’s effective tax rate is summarized as follows (in thousands):

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2013			2012			2013			2012
Income tax expense (benefit) at the statutory rate	$	74		$	584		$	3,160		$	(5,958	)
Rescission of restricted stock	—			—			—			7,808
Change in valuation allowance	(3,742		)	(584		)	(6,828		)	(1,850		)
Net income tax (benefit)	$	(3,668	)	$	—		$	(3,668	)	$	—

At September 30, 2013, the Company had estimated net operating loss carryforwards of $348.2 million which begin to expire in 2031.

In recording deferred income tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred income tax assets will be realized.  The ultimate realization of deferred income tax assets is dependent upon the generation of future taxable income during the periods in which those deferred income tax assets would be deductible.  The Company believes that after considering all the available objective evidence, both positive and negative, historical and prospective, with greater weight given to historical evidence, management has determined that it is more likely than not that the deferred tax assets will be realized and therefore has released the valuation allowance against its net deferred tax asset in the third quarter of 2013.  The Company will continue to assess the valuation allowance against deferred tax assets considering all available information obtained in future reporting periods.

At September 30, 2013, the Company had no material uncertain tax positions.

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Oil and Natural Gas Properties (Details) (USD $)	3 Months Ended		9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012
Oil and Natural Gas Properties
Discount rate used to compute present value of estimated proved reserves (as a percent)			10.00%
Impairment expense	$ 0	$ 0	$ 0	$ 0

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Stockholders' Equity (Details) (USD $)	9 Months Ended			0 Months Ended				9 Months Ended	12 Months Ended	9 Months Ended	0 Months Ended	9 Months Ended	12 Months Ended	9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Dec. 31, 2012	Sep. 18, 2013 Common Stock	Sep. 17, 2012 Common Stock	Dec. 19, 2011 Common Stock	Sep. 17, 2012 Series A Preferred Stock	Sep. 30, 2013 Series A Preferred Stock item	Dec. 31, 2012 Series A Preferred Stock	Sep. 30, 2013 Series A Preferred Stock Minimum	Mar. 26, 2013 Series B Convertible Preferred Stock	Sep. 30, 2013 Series B Convertible Preferred Stock item	Dec. 31, 2012 Series B Convertible Preferred Stock	Sep. 30, 2013 Series B Convertible Preferred Stock Minimum
Stockholders' Equity
Number of shares issued				11,040,000		10,000,000	3,000,000				4,500,000
Number of shares issued pursuant to the exercise of over-allotment option by underwriters				1,440,000
Common stock, par value (in dollars per share)	$ 0.01		$ 0.01			$ 0.01
Issue price (in dollars per share)				$ 23.00		$ 22.00	$ 50.00				$ 50.00
Net proceeds from public offering of shares of common stock	$ 216,561,000			$ 241,500,000
Net proceeds from initial public offering						203,300,000
Proceeds from the private placement of preferred stock	225,000,000	150,000,000					144,500,000				216,600,000
Initial purchasers' discounts and commissions and offering costs	20,861,000	5,488,000		12,400,000			5,500,000				8,400,000	8,439,000
Conversion ratio (in shares)							2.3250				2.3370
Conversion price (in dollars per share)							$ 21.51				$ 21.40
Number of shares of common stock to be issued if all preferred shares are converted					6,975,000						10,516,500
Annual dividend (as a percent)								4.875%	4.875%		6.50%	6.50%	6.50%
Liquidation preference (in dollars per share)							$ 50.00				$ 50
Dividends accrued or accumulated							$ 0	$ 1,800,000			$ 0	$ 3,700,000
Period of failure to pay dividend, resulting into appointment of board of directors										1 year 6 months				1 year 6 months
Number of directors who can be elected upon failure to pay dividend for six or more quarters								2				2
Condition for automatic conversion: Closing sale price of common stock as a percentage of conversion price for specified period prior to conversion										130.00%				130.00%

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Subsequent Events (Tables)

9 Months Ended

Sep. 30, 2013

Subsequent Events

Schedule of crude oil swap contracts using WTI prices notional amount

In October 2013, the Company entered into the following crude oil swap contracts using WTI prices:

	Derivative
Contract Period	Instrument	Barrels	Purchased		Sold
January 1, 2015 - December 31, 2015	Swap	365,000	$	90.05	n/a
January 1, 2015 - December 31, 2015	Swap	365,000	$	89.65	n/a

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Accrued Liabilities (Tables)

9 Months Ended

Sep. 30, 2013

Accrued Liabilities

Summary of accrued liabilities

The following information summarizes accrued liabilities as of September 30, 2013 and December 31, 2012 (in thousands):

	September 30,		December 31,
	2013		2012
Capital expenditures	$	82,402	$	43,560
General and administrative costs	3,401		268
Production taxes	1,942		471
Ad valorem taxes	2,153		114
Lease operating expenses	6,365		415
Interest payable	13,821		—
Total accrued liabilities	$	110,084	$	44,828

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Stockholders' Equity (Tables)

9 Months Ended

Sep. 30, 2013

Stockholders' Equity

Schedule of computation of basic and diluted net earnings (loss) per share

The following table shows the computation of basic and diluted net earnings (loss) per share for the three and nine months ended September 30, 2013 and 2012 (in thousands, except per share amounts):

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2013			2012			2013			2012
Net income (loss)	$	3,880		$	1,667		$	12,696		$	(17,024	)
Less:
Preferred stock dividends	(5,485		)	(264		)	(13,041		)	(264		)
Net income allocable to participating securities(1)	—			(21		)	—			—
Net income (loss) attributable to common stockholders	$	(1,605	)	$	1,382		$	(345	)	$	(17,288	)
Weighted average number of unrestricted outstanding common shares used to calculate basic net income (loss) per share	34,737			33,000			33,651			33,000
Dilutive shares (2)(3)(4)	—			—			—			—
Denominator for diluted net income (loss) per common share	34,737			33,000			33,651			33,000
Net income (loss) per common share - basic and diluted	$	(0.05	)	$	0.04		$	(0.01	)	$	(0.52	)

(1) For the three and nine months ended September 30, 2013, no losses were allocated to participating restricted stock because such securities do not have a contractual obligation to share in the Company’s losses.

(2) The three and nine months ended September 30, 2013 excludes 410,779 and 625,920 shares of weighted average restricted stock and 17,491,500 and 14,141,800 shares of common stock, respectively, resulting from an assumed conversion of the Company’s Series A Convertible Preferred Stock and Series B Convertible Preferred Stock from the calculation of the denominator for diluted earnings per common share as we were in a loss position.

(3) The three months ended September 30, 2012 excludes 71,842 shares of weighted average restricted stock from the calculation of the denominator for diluted earnings per common share as these shares were anti-dilutive. The nine months ended September 30, 2012, excludes 254,757 shares of weighted average restricted stock from the calculation of the denominator for diluted earnings per common share as we were in a loss position.

(4) The three and nine months ended September 30, 2012 exclude 996,429 and 330,931 shares of common stock, respectively, resulting from an assumed conversion of the Company’s Series A Convertible Preferred Stock and Series B Convertible Preferred Stock from the calculation of the denominator for diluted earnings per common share as these shares were anti-dilutive.

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Investments

9 Months Ended

Sep. 30, 2013

Investments

Investments

Note 5. Investments

At September 30, 2013, the Company held certain investments in marketable securities as a means of temporarily investing the proceeds from its offering of the Senior Notes (defined below).  The Company classified these securities as held-to-maturity investments on the condensed consolidated balance sheet.  At December 31, 2012, the Company held certain investments in marketable securities as a means of temporarily investing the proceeds from its Series A Convertible Preferred Stock offering until the funds were needed for operating purposes.  At the time of acquisition, the Company classified these securities as “available-for-sale” due primarily to the Company’s potential liquidity requirements that could result in these securities being sold prior to maturity.

The Company’s investments as of September 30, 2013 and December 31, 2012 consisted of the following (in thousands):

	September 30,		December 31,
	2013		2012
Commercial paper	$	—	$	7,500
Corporate notes and bonds	10,000		4,091
Total investments	$	10,000	$	11,591

The Company’s investments as of September 30, 2013 consisted of held-to-maturity securities, and accordingly are to be measured at their amortized cost basis on the condensed consolidated balance sheet.  The Company purchased its existing investments at an immaterial discount and therefore has not reflected that discount or the subsequent amortization separately in the condensed consolidated financial statements.  As of September 30, 2013, we recorded a $0.1 million loss on the sale of investments during the period.  There were no gains or losses recorded on investments held as of September 30, 2013 and December 31, 2012 due to the fact that the fair value of these investments approximated the costs paid for these securities.

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Investments (Tables)

9 Months Ended

Sep. 30, 2013

Investments

Schedule of investments

The Company’s investments as of September 30, 2013 and December 31, 2012 consisted of the following (in thousands):

	September 30,		December 31,
	2013		2012
Commercial paper	$	—	$	7,500
Corporate notes and bonds	10,000		4,091
Total investments	$	10,000	$	11,591

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Cash and Cash Equivalents (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2013	Dec. 31, 2012	Sep. 30, 2012	Dec. 31, 2011
Cash and cash equivalents
Total cash and cash equivalents	$ 479,999	$ 50,347	$ 133,367	$ 63,041
Cash at banks
Cash and cash equivalents
Total cash and cash equivalents	309,826	5,265
Money market funds
Cash and cash equivalents
Total cash and cash equivalents	170,173	82
Commercial paper
Cash and cash equivalents
Total cash and cash equivalents		$ 45,000

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Derivative Instruments

9 Months Ended

Sep. 30, 2013

Derivative Instruments

Derivative Instruments

Note 8.  Derivative Instruments

To reduce the impact of fluctuations in oil and natural gas prices on the Company’s revenues, or to protect the economics of property acquisitions, the Company periodically enters into derivative contracts with respect to a portion of its projected oil and natural gas production through various transactions that fix or, through options, modify the future prices to be realized. These transactions may include price swaps whereby the Company will receive a fixed price for its production and pay a variable market price to the contract counterparty. Additionally, the Company may enter into collars, whereby it receives the excess, if any, of the fixed floor over the floating rate or pays the excess, if any, of the floating rate over the fixed ceiling price. In addition, the Company enters into option transactions, such as puts or put spreads, as a way to manage its exposure to fluctuating prices. These hedging activities are intended to support oil and natural gas prices at targeted levels and to manage exposure to oil and natural gas price fluctuations. It is never the Company’s intention to enter into derivative contracts for speculative trading purposes.

Under Accounting Standards Codification (“ASC”) Topic 815, “Derivatives and Hedging,” all derivative instruments are recorded on the condensed consolidated balance sheets at fair value as either short-term or long-term assets or liabilities based on their anticipated settlement date. The Company will net derivative assets and liabilities for counterparties where it has a legal right of offset.  Changes in the derivatives’ fair values are recognized currently in earnings unless specific hedge accounting criteria are met.  The Company has elected not to designate its current derivative contracts as hedges.  Therefore, changes in the fair value of these instruments are recognized in earnings and included as realized and unrealized gains (losses) on derivative instruments in the condensed consolidated statements of operations.

As of September 30, 2013, the Company had the following crude oil swaps, options, and put spreads covering anticipated future production as indicated below:

	Derivative
Contract Period	Instrument	Barrels	Purchased		Sold
October 1, 2013 - December 31, 2013	Put Spread	92,000	$	95.00	$	75.00
October 1, 2013 - December 31, 2013	Swap	46,000	$	97.10	n/a
October 1, 2013 - December 31, 2013	Swap	92,000	$	88.90	n/a
October 1, 2013 - December 31, 2013	Put Spread	92,000	$	90.00	$	75.00
October 1, 2013 - December 31, 2013	Swap	69,000	$	94.50	n/a
October 1, 2013 - December 31, 2013	Swap	69,000	$	95.25	n/a
October 1, 2013 - December 31, 2013	Swap	92,000	$	96.80	n/a
October 1, 2013 - December 31, 2013	Swap	46,000	$	103.69	n/a
October 1, 2013 - December 31, 2013	Swap	46,000	$	103.70	n/a
January 1, 2014 - December 31, 2014	Swap	273,750	$	91.35	n/a
January 1, 2014 - December 31, 2014	Swap	273,750	$	92.45	n/a
January 1, 2014 - December 31, 2014	Swap	273,750	$	92.00	n/a
January 1, 2014 - June 30, 2014	Swap	90,500	$	97.19	n/a
January 1, 2014 - December 31, 2014	Swap	365,000	$	95.45	n/a
January 1, 2014 - December 31, 2014	Asian Option	365,000	$	90.00	$	99.10
July 1, 2014 - December 31, 2014	Put Spread	184,000	$	90.00	$	75.00

As of September 30, 2013, the Company had the following three-way crude oil collar contracts that combine a long and short put with a short call as indicated below:

Contract Period	Barrels	Short Put		Long Put		Short Call		Pricing Index
January 1, 2014 - December 31, 2014	547,500	$	65.00	$	85.00	$	102.25	NYMEX West Texas Intermediate crude
January 1, 2014 - December 31, 2014	365,000	$	75.00	$	95.00	$	107.50	Louisiana light sweet crude

The Company deferred the payment of premiums associated with certain of its oil derivative instruments.  At September 30, 2013, the balance of deferred payments totaled approximately $1.2 million. These premiums are being paid to the counterparty with each monthly settlement beginning July 2013.

Balance Sheet Presentation

The Company’s derivatives are presented on a net basis as “Fair value of derivative instruments” on the condensed consolidated balance sheets.  The following table summarizes the gross fair values of derivative instruments, presenting the impact of offsetting the derivative assets and liabilities on the Company’s condensed consolidated balance sheets for the periods indicated (in thousands):

	September 30, 2013
				Gross Amounts			Net Amounts
				Offset in the			Presented in
	Gross Amount			Condensed			the Condensed
	of Recognized			Consolidated			Consolidated
	Assets			Balance Sheets			Balance Sheets
Offsetting Derivative Assets:
Current asset	$	3,396		$	(3,356	)	$	40
Long-term asset	1,860			(1,437		)	423
Total asset	$	5,256		$	(4,793	)	$	463
Offsetting Derivative Liabilities:
Current liability	$	(10,389	)	$	3,356		$	(7,033	)
Long-term liability	(1,915		)	1,437			(478		)
Total liability	$	(12,304	)	$	4,793		$	(7,511	)

	December 31, 2012
				Gross Amounts			Net Amounts
				Offset in the			Presented in
	Gross Amount			Condensed			the Condensed
	of Recognized			Consolidated			Consolidated
	Assets			Balance Sheets			Balance Sheets
Offsetting Derivative Assets:
Current asset	$	37,012		$	(34,867	)	$	2,145
Long-term asset	—			—			—
Total asset	$	37,012		$	(34,867	)	$	2,145
Offsetting Derivative Liabilities:
Current liability	$	(34,867	)	$	34,867		$	—
Long-term liability	—			—			—
Total liability	$	(34,867	)	$	34,867		$	—

Gain (Loss) on Derivatives

Gains and losses on derivatives are reported on the condensed consolidated statements of operations as “Realized and unrealized gains (losses) on derivative instruments.”  Realized gains (losses) represent amounts related to the settlement of derivative instruments or the expiration of contracts.  Unrealized gains (losses) represent the change in fair value of the derivative instruments to be settled in the future and are non-cash items which fluctuate in value as commodity prices change.  The following summarizes the Company’s realized and unrealized gains (losses) on derivative instruments for the three and nine months ended September 30, 2013 and 2012 (in thousands):

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2013			2012			2013			2012
Realized losses on derivative instruments	$	(5,531	)	$	(87	)	$	(6,992	)	$	(785	)
Unrealized gains (losses) on derivative instruments	(8,905		)	(2,104		)	(6,820		)	1,594
Total realized and unrealized gains (losses) on derivative instruments	$	(14,436	)	$	(2,191	)	$	(13,812	)	$	809

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Cash and Cash Equivalents

9 Months Ended

Sep. 30, 2013

Cash and Cash Equivalents

Cash and Cash Equivalents

Note 4. Cash and Cash Equivalents

As of September 30, 2013 and December 31, 2012, cash and cash equivalents consisted of the following (in thousands):

	September 30,		December 31,
	2013		2012
Cash at banks	$	309,826	$	5,265
Money market funds	170,173		82
Commercial paper (1)	—		45,000
Total cash and cash equivalents	$	479,999	$	50,347

(1) These securities matured three months or less from date of purchase.

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Condensed Consolidated Statement of Stockholders' Equity (Parenthetical) (USD $) In Thousands, unless otherwise specified	9 Months Ended
	Sep. 30, 2013 Common Stock
Payments for offering costs	$ 12,422

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Related Party Transactions (Details) (USD $)			1 Months Ended	3 Months Ended		9 Months Ended		1 Months Ended
	Sep. 30, 2013	Dec. 31, 2012	Aug. 31, 2013 Area of property acquired in Mississippi and Louisiana (in acres) item	Sep. 30, 2013 SOG	Sep. 30, 2012 SOG	Sep. 30, 2013 SOG	Sep. 30, 2012 SOG	Aug. 31, 2013 SR Area of property acquired in Mississippi and Louisiana (in acres)
Related Party Transactions
Initial term of the administrative services agreement						5 years
Period for which agreement will extend automatically						12 months
Written notice period for termination of administrative services agreement						180 days
Costs, fees or other expenses payable				$ 0		$ 0
Administrative fees				4,638,000	1,341,000	10,540,000	3,586,000
Third-party expenses				2,287,000	667,000	4,571,000	3,065,000
Total included in general and administrative expenses				6,925,000	2,008,000	15,111,000	6,651,000
Accounts payable - related entities	782,000	13,454,000		600,000		600,000
Number of third parties			2
Number of related parties			1
Total consideration								14,400,000
Consideration as result of customary closing adjustments								$ 900,000

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Derivative Instruments (Details 2) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2013	Dec. 31, 2012
Offsetting Derivative Assets:
Gross Amount of Recognized Assets	$ 5,256	$ 37,012
Gross Amounts Offset in the Condensed Consolidated Balance Sheets	(4,793)	(34,867)
Net Amounts Presented in the Condensed Consolidated Balance Sheets	463	2,145
Offsetting Derivative Liabilities:
Gross Amount of Recognized Assets	(12,304)	(34,867)
Gross Amounts Offset in the Condensed Consolidated Balance Sheets	4,793	34,867
Net Amounts Presented in the Condensed Consolidated Balance Sheets	(7,511)
Current asset
Offsetting Derivative Assets:
Gross Amount of Recognized Assets	3,396	37,012
Gross Amounts Offset in the Condensed Consolidated Balance Sheets	(3,356)	(34,867)
Net Amounts Presented in the Condensed Consolidated Balance Sheets	40	2,145
Long-term asset
Offsetting Derivative Assets:
Gross Amount of Recognized Assets	1,860
Gross Amounts Offset in the Condensed Consolidated Balance Sheets	(1,437)
Net Amounts Presented in the Condensed Consolidated Balance Sheets	423
Current liability
Offsetting Derivative Liabilities:
Gross Amount of Recognized Assets	(10,389)	(34,867)
Gross Amounts Offset in the Condensed Consolidated Balance Sheets	3,356	34,867
Net Amounts Presented in the Condensed Consolidated Balance Sheets	(7,033)
Long-term liability
Offsetting Derivative Liabilities:
Gross Amount of Recognized Assets	(1,915)
Gross Amounts Offset in the Condensed Consolidated Balance Sheets	1,437
Net Amounts Presented in the Condensed Consolidated Balance Sheets	$ (478)

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Asset Retirement Obligations (Tables)

9 Months Ended

Sep. 30, 2013

Asset Retirement Obligations

Schedule of changes in asset retirement obligation

The changes in the asset retirement obligation for the nine months ended September 30, 2013 and 2012 were as follows (in thousands):

	2013		2012
Abandonment liability as of January 1,	$	546	$	83
Liabilities incurred during period	727		205
Acquisitions	1,138		—
Revisions	968		—
Accretion expense	128		9
Abandonment liability as of September 30,	$	3,507	$	297

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Subsidiary Guarantors (Details) (USD $)	9 Months Ended
	Sep. 30, 2013
Subsidiary Guarantors
Ownership interest in Subsidiaries (as a percent)	100.00%
Amount of independent assets	$ 0
Amount of independent operations	$ 0

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Related Party Transactions

9 Months Ended

Sep. 30, 2013

Related Party Transactions

Related Party Transactions

Note 11.   Related Party Transactions

SOG, headquartered in Houston, Texas, is a private full service oil and natural gas company engaged in the exploration and development of oil and natural gas primarily in the South Texas and onshore Gulf Coast areas on behalf of its affiliates.   The Company refers to SOG, SEP I, and their affiliates (but excluding the Company) collectively as the “Sanchez Group.”

The Company does not have any employees.  On December 19, 2011 it entered into a services agreement with SOG pursuant to which specified employees of SOG provide certain services with respect to the Company’s business under the direction, supervision and control of SOG. Pursuant to this arrangement, SOG performs centralized corporate functions for the Company, such as general and administrative services, geological, geophysical and reserve engineering, lease and land administration, marketing, accounting, operational services, information technology services, compliance, insurance maintenance and management of outside professionals. The Company compensates SOG for the services at a price equal to SOG’s cost of providing such services, including all direct costs and indirect administrative and overhead costs (including the allocable portion of salary, bonus, incentive compensation and other amounts paid to persons that provide the services on SOG’s behalf) allocated in accordance with SOG’s regular and consistent accounting practices, including for any such costs arising from amounts paid directly by other members of the Sanchez Group on SOG’s behalf or borrowed by SOG from other members of the Sanchez Group, in each case, in connection with the performance by SOG of services on the Company’s behalf. The Company also reimburses SOG for sales, use or other taxes, or other fees or assessments imposed by law in connection with the provision of services to the Company (other than income, franchise or margin taxes measured by SOG’s net income or margin and other than any gross receipts or other privilege taxes imposed on SOG) and for any costs and expenses arising from or related to the engagement or retention of third party service providers.

The initial term of the services agreement is five years. The term will automatically extend for additional 12-month periods unless either party provides 180 days written notice otherwise prior to the expiration of the applicable 12-month period. Either party may terminate the agreement at any time upon 180 days written notice.

In connection with the services agreement, SOG also entered into a licensing agreement with the Company pursuant to which it granted to the Company a license to the unrestricted use of proprietary seismic, geological and geophysical information related to the Company’s properties owned by SOG, and all such information related to the Company’s properties not otherwise licensed to the Company will be interpreted and used by SOG for the Company’s benefit under the services agreement. In addition, SOG entered into a contract operating agreement with the Company under which SOG agreed to develop, manage and operate the Company’s properties or engage a responsible unaffiliated industry operator and joint owner for such development, management and operation.  No costs, fees or other expenses are payable by the Company under these agreements. The licensing agreement and contract operating agreement will terminate concurrently with the termination or expiration of the services agreement.

Prior to entering into the services agreement, SOG incurred general and administrative expenses that were allocated to the Company based on the ratio of capital expenditures between the entities to which SOG provided services and the SEP I Assets.  Other factors, such as time spent on general management services and producing property activities, were also considered in the allocation of these costs.  Beginning December 19, 2011, the costs were allocated to the Company according to the terms of the services agreement.  Salaries and associated benefit costs of SOG employees are allocated to the Company based on the actual time spent by the professional staff on the properties and business activities of the Company. General and administrative costs, such as office rent, utilities, supplies, and other overhead costs, are allocated to the Company based on a fixed percentage that is reviewed quarterly and adjusted, if needed, based on the activity levels of services provided to the Company. General and administrative costs that are specifically incurred by or for the specific benefit of the Company are charged directly to the Company.  Expenses allocated to the Company for general and administrative expenses for the three and nine months ended September 30, 2013 and 2012 are as follows (in thousands):

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2013		2012		2013		2012
Administrative fees	$	4,638	$	1,341	$	10,540	$	3,586
Third-party expenses	2,287		667		4,571		3,065
Total included in general and administrative expenses	$	6,925	$	2,008	$	15,111	$	6,651

As of September 30, 2013 and December 31, 2012, the Company had a net payable to SOG and other members of the Sanchez Group of $0.8 million and $13.5 million, respectively, which is reflected as “Accounts payable — related entities” in the condensed consolidated balance sheets.  This amount consists primarily of obligations for general and administrative costs due to SOG and revenue payable to affiliated entities.

In August 2013, the Company completed its acquisition of undeveloped acreage in the TMS trend from two third parties, and one related party of the Company, SR.  The total consideration paid to SR was approximately $14.4 million, and included $0.9 million in customary closing adjustments.  Because the transactions included a related party, our audit committee, which is comprised entirely of independent directors, reviewed and approved these transactions.  In connection with the approval of these transactions, our audit committee received a fairness opinion from an independent financial advisor selected by the committee.

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Long-Term Debt

9 Months Ended

Sep. 30, 2013

Long-Term Debt

Long-Term Debt

Note 7. Long-Term Debt

Long-term debt at September 30, 2013 consisted of $600 million principal amount under the 7.75% Senior Notes (as defined below), including the Additional Notes (as defined below) which were issued at a discount to face value of $7.0 million, maturing on June 15, 2021.  The Company did not have any long-term debt outstanding at December 31, 2012.

Credit Facility

Previous Credit Agreements:  On November 16, 2012, we and our subsidiaries, SEP Holdings III and Marquis LLC (collectively referred to with us as the “Original Borrowers”), entered into the Previous First Lien Credit Agreement, dated as of November 15, 2012, among the Original Borrowers, as borrowers, Capital One, National Association, as administrative agent, sole lead arranger and sole book runner, and each of the other lenders party thereto. The Previous First Lien Credit Agreement provided for a $250 million revolving credit facility which was to mature November 16, 2015 and was secured by a senior lien on substantially all of the assets of the Original Borrowers. The borrowing base under the Previous First Lien Credit Agreement, initially set at $27.5 million, was increased to $95 million on February 21, 2013.

Also on November 16, 2012, we entered into the Second Lien Term Credit Agreement (the “Second Lien Term Credit Agreement”), dated as of November 15, 2012, among the Original Borrowers, as borrowers, Macquarie Bank Limited, as administrative agent, sole lead arranger and sole book runner, and the other lenders party thereto. The Second Lien Term Credit Agreement provided for a $250 million term loan facility which was to mature May 16, 2016 and was secured by a lien on substantially all of the assets of the Original Borrowers that was junior to the liens on such assets under the Previous First Lien Credit Agreement. The Second Lien Term Credit Agreement provided for an initial commitment of $50 million, subject to customary conditions, with the remaining commitments subject to the approval of the lenders and other customary conditions.  We borrowed $50 million under the Second Lien Term Credit Agreement in January 2013.

In connection with the purchase and sale agreement to purchase the Cotulla assets (Note 3), the Company entered into commitment letters for $325 million in debt financing and issued the Series B Convertible Preferred Stock.  The $325 million in debt financing contemplated by the commitment letters consisted of an amendment and restatement of the Company’s Previous First Lien Credit Agreement to increase the borrowing base from $95 million to $175 million and a $150 million bridge loan credit facility.  Availability of the debt financing was conditioned upon, and was intended to be available concurrently with, the closing of the Cotulla acquisition and was subject to the satisfaction of various customary closing conditions, including the execution and delivery of definitive documents. On May 30, 2013, the Company borrowed $90 million under its Previous First Lien Credit Agreement.  The Company did not enter into a definitive agreement for the bridge loan credit facility and it was never activated.

Current Credit Agreement:  On May 31, 2013, the Original Borrowers and a new subsidiary of the Company, SN Cotulla Assets, LLC (“SN Cotulla”) (collectively, the “Borrowers”) entered into the First Lien Credit Agreement with Royal Bank of Canada as the administrative agent, Capital One, National Association as the syndication agent and RBC Capital Markets as sole lead arranger and sole book runner and each of the other lenders party thereto.

The First Lien Credit Agreement amended and restated the Previous First Lien Credit Agreement in its entirety to renew, extend and rearrange the debt outstanding under the Previous First Lien Credit Agreement (but not to repay or pay off such debt) and to, among other things, (i) replace Capital One with Royal Bank of Canada as administrative agent and issuing bank, (ii) increase the maximum credit amount to $500 million, (iii) increase the borrowing base to $175 million, and (iv) make certain other amendments.   The Borrowers’ obligations under the First Lien Credit Agreement are secured by a first priority lien on substantially all of their assets and the assets of the Company’s existing and future subsidiaries not designated as “unrestricted subsidiaries,” including a first priority lien on all ownership interests in existing and future subsidiaries. Availability under the First Lien Credit Agreement is at all times subject to customary conditions and the then applicable borrowing base, which was initially set at $175 million and is subject to periodic redetermination. The borrowing base was also subject to reduction by 25% of the amount of the increase in the Borrowers’ net debt (taking into consideration any required repayment of debt) resulting from the issuance of certain debt, including pursuant to the issuance of the Senior Notes (as defined below). The borrowing base can be redetermined up or down by the lenders based on, among other things, their evaluation of the Company’s oil and natural gas reserves.  All borrowings under the First Lien Credit Agreement bear interest, at the option of the Borrowers, either at an alternate base rate or a eurodollar rate.  The alternate base rate of interest is equal to the sum of (a) the greatest of (i) the administrative agent’s U.S. “prime rate”, (ii) the federal funds effective rate plus ½ of 1% and (iii) the one-month LIBO Rate multiplied by the statutory reserve rate, plus 1% and (b) the applicable margin.  The eurodollar rate of interest is equal to the sum of (x) the LIBO Rate for the applicable interest period multiplied by the statutory reserve rate and (y) the applicable margin.  The applicable margin varies from 1.00% to 1.75% for alternate base rate borrowings and from 2.00% to 2.75% for eurodollar borrowings, depending on the utilization of the borrowing base.  Furthermore, the Borrowers are required to pay a commitment fee on the unused committed amount at a rate varying from 0.375% to 0.50% per annum, depending on the utilization of the borrowing base. Additionally, the First Lien Credit Agreement provides for the issuance of letters of credit, limited in the aggregate to the lesser of $20 million and the total availability thereunder. As of September 30, 2013, there were no letters of credit outstanding.

The First Lien Credit Agreement contains various affirmative and negative covenants and events of default that limit the Borrowers’ ability to, among other things, incur indebtedness, make restricted payments, grant liens, consolidate or merge, dispose of certain assets, make certain investments, engage in transactions with affiliates and hedge transactions and make certain acquisitions. Furthermore, the First Lien Credit Agreement contains financial covenants that require the Borrowers to satisfy certain specified financial ratios, including (i) current assets to current liabilities of at least 1.0 to 1.0 and (ii) net debt to consolidated EBITDA of not greater than 4.0 to 1.0. Upon an event of default, the administrative agent may, at its election or at the direction of lenders holding, as applicable, at least 50% of (i) the maximum committed amounts (if no borrowings or letters of credit are outstanding) or (ii) the outstanding borrowings and letter of credit exposure (if borrowings or letters of credit are outstanding) thereunder, accelerate the amounts due under the First Lien Credit Agreement. The obligations under the First Lien Credit Facility are guaranteed by all of the Company’s existing and future subsidiaries not designated as ‘‘unrestricted subsidiaries.” As of September 30, 2013, the Company was in compliance with the covenants of the First Lien Credit Agreement.

On May 31, 2013, the Borrowers entered into several conforming and technical amendments to the Second Lien Term Credit Agreement.  Pursuant to its terms, the First Lien Credit Agreement matures on May 31, 2018.  However, the First Lien Credit Agreement would mature on November 16, 2015 if the Second Lien Term Credit Agreement were not repaid in full on or before November 16, 2015.  On May 31, 2013, the Company borrowed $96 million under its First Lien Credit Agreement.  The Company used proceeds from this borrowing to repay the $90 million outstanding under the Previous First Lien Credit Agreement.  On June 13, 2013, the Company used proceeds from its Senior Notes (as defined below) offering described below to repay the $96 million outstanding under the First Lien Credit Agreement and the $50 million outstanding under the Second Lien Term Credit Agreement.  The Second Lien Term Credit Agreement was retired with no further availability.  On July 3, 2013, Macquarie Bank Limited novated its rights and obligations under hedging agreements with the Company to Société Générale, a lender under the First Lien Credit Agreement.  The borrowing base on the First Lien Credit Agreement was increased to $175 million as a result of the redetermination conducted by the banks based upon the Company’s June 30, 2013 updated reserves and remains $175 million as of September 30, 2013. The next redetermination of the borrowing base was scheduled to occur on or before October 1, 2013 and that process is currently underway, with other redeterminations scheduled to occur quarterly through July 1, 2014 and then semi-annually thereafter on April 1 and October 1 of each year.

From time to time, the agents and lenders under the First Lien Credit Agreement and their affiliates have provided, and may provide in the future, investment banking, commercial lending, hedging and financial advisory services to the Company and its affiliates in the ordinary course of business, for which they have received, or may in the future receive, customary fees and commissions for these transactions.

7.75% Senior Notes Due 2021

On June 13, 2013, the Company completed a private offering to eligible purchasers of $400 million in aggregate principal amount of the Company’s 7.75% senior notes that will mature on June 15, 2021 (the “Original Notes”).  Interest is payable on each June 15 and December 15, commencing December 15, 2013.  The Company received net proceeds from this offering of approximately $388 million, after deducting initial purchasers’ discounts and estimated offering expenses, which the Company used to repay all of the approximately $96 million in borrowings outstanding under its First Lien Credit Agreement and to retire the Second Lien Term Credit Agreement by repaying in full the $50 million in borrowings outstanding.  The Original Notes are the senior unsecured obligations of the Company and are guaranteed on a joint and several senior unsecured basis by, with certain exceptions, substantially all of the Company’s existing and future subsidiaries.   The borrowing base under the Company’s First Lien Credit Agreement was reduced to $87.5 million upon issuance of the Original Notes, and was later increased to $175 million, all of which is available for future revolver borrowings as of September 30, 2013.

On September 18, 2013, the Company issued an additional $200 million in aggregate principal amount of its 7.750% senior notes due 2021 (the “Additional Notes” and, together with the Original Notes, the “Senior Notes”) in a private offering to eligible purchasers at a price to the purchasers of 96.5% of the Additional Notes.  The Company received net proceeds from this offering of approximately $188.8 million, after deducting the initial purchasers’ discounts and estimated offering expenses of approximately $4.2 million.  The Company also received cash for accrued interest from June 13, 2013 through the date of issuance of $4.1 million.  The Additional Notes were issued under the same indenture as the Original Notes, and are therefore treated as a single class of debt securities under the indenture.  The Company used the net proceeds from the offering to partially fund the acquisition of Wycross properties (the “Wycross acquisition”), completed in October 2013, and intends to use the remaining proceeds to fund a portion of the 2013 capital budget, a portion of the preliminary 2014 capital budget, and for general corporate purposes.

The Senior Notes are the senior unsecured obligations of the Company and rank equally in right of payment with all of the Company’s existing and future senior unsecured indebtedness. The Senior Notes rank senior in right of payment to the Company’s future subordinated indebtedness. The Senior Notes are effectively junior in right of payment to all of the Company’s existing and future secured debt (including under the First Lien Credit Agreement) to the extent of the value of the assets securing such debt. The Senior Notes are fully and unconditionally guaranteed on a joint and several senior unsecured basis by the subsidiary guarantors party to the indenture governing the Senior Notes (collectively, the “Subsidiary Guarantors”). To the extent set forth in the indenture governing the Senior Notes, certain subsidiaries of the Company will be required to fully and unconditionally guarantee the Senior Notes on a joint and several senior unsecured basis in the future.

The indenture governing the Senior Notes, among other things, restricts the Company’s ability and the ability of the Company’s restricted subsidiaries to: (i) incur additional indebtedness or issue preferred stock; (ii) pay dividends or make other distributions; (iii) make other restricted payments and investments; (iv) create liens on their assets; (v) incur restrictions on the ability of restricted subsidiaries to pay dividends or make certain other payments; (vi) sell assets, including capital stock of restricted subsidiaries; (vii) merge or consolidate with other entities; and (viii) enter into transactions with affiliates.

The Company has the option to redeem all or a portion of the Senior Notes, at any time on or after June 15, 2017 at the applicable redemption prices specified in the indenture plus accrued and unpaid interest. The Company may also redeem the Senior Notes, in whole or in part, at a redemption price equal to 100% of their principal amount plus a make whole premium, together with accrued and unpaid interest and additional interest, if any, to the redemption date, at any time prior to June 15, 2017. In addition, the Company may redeem up to 35% of the Senior Notes prior to June 15, 2016 under certain circumstances with the net cash proceeds from certain equity offerings at the redemption price specified in the indenture. The Company may also be required to repurchase the Senior Notes upon a change of control.

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Stock-Based Compensation

9 Months Ended

Sep. 30, 2013

Stock-Based Compensation

Stock-Based Compensation

Note 14. Stock-Based Compensation

At the Annual Meeting of Stockholders of the Company held on May 23, 2012, the Company’s stockholders approved the Sanchez Energy Corporation Amended and Restated 2011 Long Term Incentive Plan (the “LTIP”). The Company’s Board had previously approved the amendment of the Sanchez Energy Corporation 2011 Long Term Incentive Plan on April 16, 2012, subject to stockholder approval.

The LTIP provides for the award of stock options, stock appreciation rights, restricted stock, phantom stock, other stock-based awards or stock awards, or any combination thereof.  Any director or consultant of the Company or any employee of the Company, a subsidiary of the Company or a Sanchez Group Member (as defined in the LTIP) is eligible to participate in the LTIP. The LTIP provides that the maximum number of shares of the Company’s common stock available for incentive awards shall be no more than 15% of the issued and outstanding shares of common stock.

The Company records stock-based compensation expense for awards granted to its directors (for their services as directors) in accordance with the provisions of ASC 718, “Compensation — Stock Compensation.”  Stock-based compensation expense for these awards is based on the grant-date fair value and recognized over the vesting period using the straight-line method. The fair value of restricted stock awards is based on the closing sales price of the Company’s common stock on the grant date.

Awards granted to employees of the Sanchez Group (including those employees of the Sanchez Group who also serve as the Company’s officers) and consultants in exchange for services are considered awards to non-employees and the Company records stock-based compensation expense for these awards at fair value in accordance with the provisions of ASC 505-50, “Equity-Based Payments to Non-Employees.”   For awards granted to non-employees, the Company records compensation expenses equal to the fair value of the stock-based award at the measurement date, which is determined to be the earlier of the performance commitment date or the service completion date.  Compensation expense for unvested awards to non-employees is revalued at each period end and is amortized over the vesting period of the stock-based award.  Stock-based payments are measured based on the fair value of goods or services received or the equity instruments granted, whichever is more determinable.

For the restricted stock awards granted to non-employees, stock-based compensation expense is based on fair value remeasured at each reporting period and recognized over the vesting period using the straight-line method.  Compensation expense for these awards will be revalued at each period end until vested.

The Company recognized the following stock-based compensation expense for the periods indicated which is reflected as general and administrative expense in the consolidated statements of operations (in thousands):

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2013		2012		2013		2012
Restricted stock awards, directors	$	242	$	91	$	473	$	184
Restricted stock awards, non-employees	6,415		745		13,896		2,308
Restricted stock awards, cancelled	—		—		—		22,308
Total stock-based compensation expense	$	6,657	$	836	$	14,369	$	24,800

Based on the $26.41 per share closing price of the Company’s common stock on September 30, 2013, there was approximately $34.5 million of unrecognized compensation cost related to these non-vested restricted shares outstanding.  The cost is expected to be recognized over an average period of approximately 2.0 years.

A summary of the status of the non-vested shares as of September 30, 2013 is presented below (in thousands):

	Number of Non-Vested Shares
Non-vested common stock at January 1,	762
Granted	1,329
Vested	(185	)
Forfeited	(71	)
Non-vested common stock at September 30,	1,835

As of September 30, 2013, approximately 4.7 million shares remain available for future issuance to participants.

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Accrued Liabilities

9 Months Ended

Sep. 30, 2013

Accrued Liabilities

Accrued Liabilities

Note 12. Accrued Liabilities

The following information summarizes accrued liabilities as of September 30, 2013 and December 31, 2012 (in thousands):

	September 30,		December 31,
	2013		2012
Capital expenditures	$	82,402	$	43,560
General and administrative costs	3,401		268
Production taxes	1,942		471
Ad valorem taxes	2,153		114
Lease operating expenses	6,365		415
Interest payable	13,821		—
Total accrued liabilities	$	110,084	$	44,828

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Document and Entity Information	9 Months Ended
	Sep. 30, 2013	Nov. 06, 2013
Document and Entity Information
Entity Registrant Name	Sanchez Energy Corp
Entity Central Index Key	0001528837
Document Type	10-Q
Document Period End Date	Sep. 30, 2013
Amendment Flag	false
Current Fiscal Year End Date	--12-31
Entity Current Reporting Status	Yes
Entity Filer Category	Accelerated Filer
Entity Common Stock, Shares Outstanding		46,359,613
Document Fiscal Year Focus	2013
Document Fiscal Period Focus	Q3

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Stockholders' Equity

9 Months Ended

Sep. 30, 2013

Stockholders' Equity

Stockholders' Equity

Note 13. Stockholders’ Equity

Common Stock Offerings - On December 19, 2011, the Company completed its IPO of 10.0 million shares of common stock, par value $0.01 per share, at a price to the public of $22.00 per share.  The Company received net proceeds of approximately $203.3 million from the sale of the shares of common stock (net of expenses and underwriting discounts and commissions).

On September 18, 2013, the Company completed a public offering of 11,040,000 shares of common stock (including 1,440,000 shares purchased pursuant to the full exercise of the underwriters’ overallotment option), at an issue price of $23.00 per share.  The Company received net proceeds from this offering of approximately $241.5 million, after deducting underwriters’ fees and offering expenses of approximately $12.4 million.  The Company used the net proceeds from the offering to partially fund the Wycross acquisition, completed in October 2013, and intends to use the remaining proceeds to fund a portion of the 2013 capital budget, a portion of the preliminary 2014 capital budget, and for general corporate purposes.

Series A Convertible Preferred Stock Offering- On September 17, 2012, the Company completed a private placement of 3,000,000 shares of Series A Convertible Preferred Stock, which were sold to a group of qualified institutional buyers pursuant to the Rule 144A exemption from registration under the Securities Act. The issue price of each share of the Series A Convertible Preferred Stock was $50.00. The Company received net proceeds from the private placement of approximately $144.5 million, after deducting initial purchasers’ discounts and commissions and offering costs payable by the Company of approximately $5.5 million.

Pursuant to the Certificate of Designations for the Series A Convertible Preferred Stock, each share of Series A Convertible Preferred Stock is convertible at any time at the option of the holder thereof at an initial conversion rate of 2.3250 shares of common stock per share of Series A Convertible Preferred Stock (which is equal to an initial conversion price of approximately $21.51 per share of common stock) and is subject to specified adjustments. Based on the initial conversion price, approximately 6,975,000 shares of common stock would be issuable upon conversion of all of the outstanding shares of the Series A Convertible Preferred Stock.

The annual dividend on each share of Series A Convertible Preferred Stock is 4.875% on the liquidation preference of $50 per share and is payable quarterly, in arrears, on each January 1, April 1, July 1 and October 1, commencing on January 1, 2013, when, as and if declared by the Company’s Board of Directors (the “Board”). No dividends were accrued or accumulated prior to September 17, 2012. The Company may, at its option, pay dividends in cash and, subject to certain conditions, common stock or any combination thereof.  As of September 30, 2013, there were $1.8 million in accrued dividends that had been declared but had not yet been paid.

Except as required by law or the Company’s Amended and Restated Certificate of Incorporation, holders of the Series A Convertible Preferred Stock will have no voting rights unless dividends fall into arrears for six or more quarterly periods (whether or not consecutive). In that event and until such arrearage is paid in full, the holders of the Series A Convertible Preferred Stock and the holders of the Series B Convertible Preferred Stock, voting as a single class, will be entitled to elect two directors and the number of directors on the Company’s Board will increase by that same number.

At any time on or after October 5, 2017, the Company may at its option cause all outstanding shares of the Series A Convertible Preferred Stock to be automatically converted into common stock at the then-prevailing conversion price, if, among other conditions, the closing sale price (as defined) of the Company’s common stock equals or exceeds 130% of the then-prevailing conversion price for a specified period prior to the conversion.

If a holder elects to convert shares of Series A Convertible Preferred Stock upon the occurrence of certain specified fundamental changes, the Company will be obligated to deliver an additional number of shares above the applicable conversion rate to compensate the holder for lost option time value of the shares of Series A Convertible Preferred Stock as a result of the fundamental change.

Series B Convertible Preferred StockOffering - On March 26, 2013, the Company completed a private placement of 4,500,000 shares of Series B Convertible Preferred Stock, which were sold in a private offering to eligible purchasers. The issue price of each share of the Series B Convertible Preferred Stock was $50.00. The Company received net proceeds from the private placement of approximately $216.6 million, after deducting placement agent’s fees and offering costs payable by the Company of approximately $8.4 million.

Pursuant to the Certificate of Designations for the Series B Convertible Preferred Stock, each share of Series B Convertible Preferred Stock is convertible at any time at the option of the holder thereof at an initial conversion rate of 2.3370 shares of common stock per share of Series B Convertible Preferred Stock (which is equal to an initial conversion price of approximately $21.40 per share of common stock) and is subject to specified adjustments. Based on the initial conversion price, approximately 10,516,500 shares of common stock would be issuable upon conversion of all of the outstanding shares of the Series B Convertible Preferred Stock.

The annual dividend on each share of Series B Convertible Preferred Stock is 6.500% on the liquidation preference of $50 per share and is payable quarterly, in arrears, on each January 1, April 1, July 1 and October 1, commencing on July 1, 2013, when, as and if declared by the Company’s Board. No dividends were accrued or accumulated prior to March 27, 2013. The Company may, at its option, pay dividends in cash and, subject to certain conditions, common stock or any combination thereof.  As of September 30, 2013, there were $3.7 million in accrued dividends that had been declared but had not yet been paid.

Except as required by law or the Company’s Amended and Restated Certificate of Incorporation, holders of the Series B Convertible Preferred Stock will have no voting rights unless dividends fall into arrears for six or more quarterly periods (whether or not consecutive). In that event and until such arrearage is paid in full, the holders of the Series B Convertible Preferred Stock and the holders of the Series A Convertible Preferred Stock, voting as a single class, will be entitled to elect two directors and the number of directors on the Company’s Board will increase by that same number.

At any time on or after April 6, 2018, the Company may at its option cause all outstanding shares of the Series B Convertible Preferred Stock to be automatically converted into common stock at the then-prevailing conversion price, if, among other conditions, the closing sale price (as defined) of the Company’s common stock equals or exceeds 130% of the then-prevailing conversion price for a specified period prior to the conversion.

If a holder elects to convert shares of Series B Convertible Preferred Stock upon the occurrence of certain specified fundamental changes, the Company will be obligated to deliver an additional number of shares above the applicable conversion rate to compensate the holder for lost option time value of the shares of Series B Convertible Preferred Stock as a result of the fundamental change.

Earnings (Loss) Per Share - The following table shows the computation of basic and diluted net earnings (loss) per share for the three and nine months ended September 30, 2013 and 2012 (in thousands, except per share amounts):

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2013			2012			2013			2012
Net income (loss)	$	3,880		$	1,667		$	12,696		$	(17,024	)
Less:
Preferred stock dividends	(5,485		)	(264		)	(13,041		)	(264		)
Net income allocable to participating securities(1)	—			(21		)	—			—
Net income (loss) attributable to common stockholders	$	(1,605	)	$	1,382		$	(345	)	$	(17,288	)
Weighted average number of unrestricted outstanding common shares used to calculate basic net income (loss) per share	34,737			33,000			33,651			33,000
Dilutive shares (2)(3)(4)	—			—			—			—
Denominator for diluted net income (loss) per common share	34,737			33,000			33,651			33,000
Net income (loss) per common share - basic and diluted	$	(0.05	)	$	0.04		$	(0.01	)	$	(0.52	)

(1) For the three and nine months ended September 30, 2013, no losses were allocated to participating restricted stock because such securities do not have a contractual obligation to share in the Company’s losses.

(2) The three and nine months ended September 30, 2013 excludes 410,779 and 625,920 shares of weighted average restricted stock and 17,491,500 and 14,141,800 shares of common stock, respectively, resulting from an assumed conversion of the Company’s Series A Convertible Preferred Stock and Series B Convertible Preferred Stock from the calculation of the denominator for diluted earnings per common share as we were in a loss position.

(3) The three months ended September 30, 2012 excludes 71,842 shares of weighted average restricted stock from the calculation of the denominator for diluted earnings per common share as these shares were anti-dilutive. The nine months ended September 30, 2012, excludes 254,757 shares of weighted average restricted stock from the calculation of the denominator for diluted earnings per common share as we were in a loss position.

(4) The three and nine months ended September 30, 2012 exclude 996,429 and 330,931 shares of common stock, respectively, resulting from an assumed conversion of the Company’s Series A Convertible Preferred Stock and Series B Convertible Preferred Stock from the calculation of the denominator for diluted earnings per common share as these shares were anti-dilutive.

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Subsequent Events (Details) (USD $) In Millions, unless otherwise specified	1 Months Ended			0 Months Ended
	Oct. 31, 2013 Oil derivative instruments Swaps First period from January 1, 2015 - December 31, 2015 bbl	Oct. 31, 2013 Oil derivative instruments Swaps Second period from January 1, 2015 - December 31, 2015 bbl	Aug. 31, 2013 Area of property acquired in Mississippi and Louisiana (in acres)	Oct. 04, 2013 Subsequent event Area of property acquired in McMullen County, Texas
Subsequent Events
Ownership interest in total area of property (as a percent)			50.00%	60.00%
Total consideration				$ 230.1
Barrels	365,000	365,000
Price per barrel	90.05	89.65