Prenutshell: We've owned Bonanza Creek (BCEI) since a few weeks after the IPO during the dark days of the end of 2011, when no one cared and the Street still hadn't picked up official coverage. While the name has only improved relative to our early read, that original piece provided a decent background of this relatively simple, two pronged, oily growth story. We've had a number of follow up pieces since that can be found on Seeking Alpha.
Bonanza Reports Tomorrow. Here are our pre quarter ruminations:
2013 Guidance: Expect Bonanza to reiterate 2013 volume guidance of 14,500 to 16,000 BOEpd, which on the mid will equate to about 60% annual growth. It's probably too early to be thinking "beat and raise" here, but we are pleased with the ongoing ramp as the newer Niobrara "B" bench wells continue to look like slightly better clones of the early wells.
- Wattenberg Field:
- First Long Lateral Niobrara "B" Bench Results: Bonanza will have results from its first long lateral Niobrara B bench well with the 4Q12 press release. We're expecting management to say it's at least as good as they would expect from the combined results of two short lateral Nio "B" bench wells for less than 2x the cost (or at least than 2x the cost going forward after the initial wells). If they mention an EUR here expect it to be close to (NBL)'s thinking at 750 MBOE.
- First Niobrara "C" Bench Results: Bonanza will have results from its first Niobrara "C" bench well and these are expected to look a lot like "B" Bench wells. Favorable results could lead them to eventually double their location count on their acreage, so looking like the "B"'s is a good thing.
- Maybe Another Codell Well. We know Bonanza has drilled a second Codell test but don't know if it has been completed or if they would have had it on long enough to have it cleaned up and have meaningful data. Recall that the first Codell well was a bit lower than expected from an IP standpoint (they expect these to be very similar to their "B" Bench wells), but that it was also oilier than their average Niobrara "B" Bench wells. Codell success won't double locations, but it would be significant (maybe 60% of Niobrara "B" count, assuming 80 acre spacing),
- A Note on Spacing. Look for Bonanza to suggest that it will have enough data by the 1Q13 conference call (or maybe by its Analyst Day in April) to talk about viability of 40 acre spacing in the "B" bench, which again, would be another location count doubling event. It's nice to double up your locations without big leasing expenditures. Ah, how we like stacked pays.
- "A" Bench On Next Year's Agenda. I would not expect any talk about the "A" bench from a delineation standpoint on this call, although defining if it is in or is not in communication with the "B" bench below it is likely to be 2014's million dollar question.
- Wattenberg Getting Busier. As previously noted, look for Bonanza to mention it will step up from 2 rigs to 4 rigs in April in the Wattenberg.
- Other Stuff:
- Brown Dense Not Yet. I would not expect any substantive talk about the Brown Dense from Bonanza other than for it to say it's interesting and its acreage in the area is HBP'd, so there no rush as it watches Southwestern Energy (SWN) and others delineate the play. There is H2S in the area (SW AR), so that will be an issue that may need to be addressed were they to pursue it.
- Cotton Valley Likely Goes Tighter. It's conceivable, though maybe early for Bonanza to decide whether 5 acre spacing tests in Dorcheat Macedonia will work. We had a nice chat with the VP of its Mid-Continent division after a February presentation, and to our surprise, he didn't rule out future testing of horizontal wells in parts of the field or in out SW AR fields where it has acreage. We prefaced the question with "I assume the answer is no but..." and he said that they probably need to do a little work along those lines. We suggested sinusoidal (porpoising) wells, and he didn't outright frown, so that's interesting. Either way, we like the play, as its NGLs (high in natural gasolines so better prices than your average "liquids rich" play at about 2/3rds WTI) kicks off excess cash flow for the Colorado program to deploy.
- Look for Bonanza to point out it will have greater detail available on all of the above at its Analyst Day next month.
- Looking for big step up in proved reserves, which could make it look somewhat cheapish on that basis.
- Balance Sheet: Liquidity should be still pretty good (it had about $100 mm in mid January) and it should hint about expectations for a higher redetermination for the revolver in April. Net debt to cap as of last quarter was only 17%, and all of its debt is on the revolver. We are looking for it to either tap the high yield market for the first time this year or to do an equity offering. Should be no rush on either path under the current capital program, as it will be generating increasing quarterly EBITDA as the year progresses.
- Nutshell: BCEI is trading at ~ 6x 2013 and 4x 2014 EBITDA, which in our view is not expensive given the oily growth and the delineated nature of its two plays. The Street is looking for EBITDA of $46.8 mm tomorrow on Street expected volumes of just under 11,600 BOEpd for the 4Q12. Had the Street gone with the mid of guidance for the full year, the 4Q number would have worked out to a little more conservative production target, so it's possible Bonanza could come in light. Our sense is that long term outweighs any near-term dip potential. We continue to own BCEI as the 3rd largest holding in the aggregated ZLT.
Lastly: We visited briefly with the VP of Mid-Continent in February, and you can find notes on that at zmansenergybrain.com.