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A Simple Oily Small Cap E&P Story

The Properties -

  • Mid continent – Southwest Arkansas. Bonanza (NYSE:BCEI) has 13,000 net acres located in Columbia and Lafayette counties AR, accounting for 70% of their reserve base and a little over half of their production as November 2011. Production comes primarily from Cotton Valley sands, uphole to the Lower Smackover (Brown Dense) we’ve been chatting about as being the target of COG’s and SWN’s next big exploratory tests, and BCEI thinks 5,672 net acres could be prospective for the Brown Dense.
  • Rockies – Colorado. "Over" 62,000 net acres (DJ Basin and North Park Basin) producing from the Niobrara, Codell, J-Sand and Dakota formations. In 2H11 they completed four Niobrara shale horizontals with IPs ranging from 738 to 887 BOEpd and 30 day average rates of just under 500 bopd in the Wattenberg area which is pretty respectable, especially for a smaller firm in the early days of their program.
  • California. It feels like an afterthought, maybe something to monetize down the road, accounting for 3% of reserves and production from legacy oil fields

The Plan – They plan to continue to operate the majority of their production, accelerate development of and production from their bread and butter Cotton Valley play in Arkansas while adding slightly higher risk/higher reward Niobrara drilling and potentially testing the Brown Dense in 2012. That’s straight forward enough.

Management - I have not run across them but their resumes stack up well with some of the recent market entrants of the last few years. They’e been around the block holding upper level positions at a number of public companies (E&Ps and Majors) and many of them have worked together for a long time. President is ex Unocal, ex BRY (which explains the California stuff); 28 years in the business. EVP of Engineering is ex Unocal, ex Nuevo; 29 years. CFO is former CFO of WLL from 2000 to 2005.

Nutshell: BCEI became public in a flurry of E&P IPOs in mid December. It priced at $17 on December 15th and so far we haven’t missed anything as the name is off 26% through the end of the year. To be fair, much of the fall is market and market timing related. Markets were choppy the week they came to market due to the OPEC quota re-alignment and bringing a small cap E&P IPO this time of year is somewhat dicey as managers are thinking status quo and not wanting to grab new names into year end unless they are pointedly cheap and are big enough to be a readily liquid vehicle (as LPI proved to be). I on the other hand like the fact that people took allocations and sold immediately into a bit of market panic.

Following the deal, Bonanza has no debt and nearly $260 mm in available liquidity. Barring thoughts of acquisitions that are bigger than just bolt-ons they should have enough cash flow (probably on the order of > $85 mm next year) to forestall the need for a secondary offering until late 2012 or early 2013, based on their $250 mm 2012 budget. On a trailing cash flow basis they are not cheap, trading at about 8x TEV / 2011 extrapolated full year EBITDA but that’s to be expected of small, rapidly growing and oilier than not E&Ps. However, it is cheap based on even the stale proved reserves estimate of 2010, trading at only $14.90 per barrel in the ground, and will certainly be trading well below that level (which I see as a very cheap valuation) when proved reserves for 2011 are released.

Similarly, on a value per flowing barrel they appear cheap. On a $100,000 per flowing barrel basis the name would be worth closer to $15.50 per share based on November 2011 production levels. It will be interesting to see what sort of guidance, if any, management puts out for 2012 volumes. Given the 54% bump in their 2012 budget and the sharp ramp in production into year end 2011, 60%+ unit volume growth would seem to be attainable, but that’s very back of the envelope at this point and I haven’t modeled it out completely yet.

In short, I like what I see, and my sense is that with oil prices hovering near $100 per barrel through most of 2012 the Street will wake up to this small, oily, rapidly growing, falling cost name with the turn of the calendar. Should one of the big offset operators score with the Brown Dense then that would probably wake up the Street here as well.

Source: Bonanza Creek Energy: A New Oily Small Cap Player With A Brown Dense Twist