Bonanza Creek Energy (BCEI) made its first presentation to the public at the BMO conference on Tuesday (January 10th, 2012) and simultaneously provided their first read on the 2012 volumes and cost outlook. It should have been a crowd pleaser, but the market is still not paying attention to this new-to-the-public market name and may not until the Sellside initiates en masse later this month and next.
I wrote a basic book report piece that can be found here just after the name came public. Today's piece adds just a few quick shots at valuation as we move into the new year. BCEI sees 2012 volumes in a range of 8,700 to 10,000 BOEpd, the midpoint of which equates to:
- 208% YoY growth vs 2010 volumes
- 139% growth over the first nine months of 2011 levels,
- and 53% growth over month of November 2011 levels.
- Volumes will be roughly 70% oil going forward.
The Simple Math Thoughts On Valuation:
Based on Production. Looking at valuation from a flowing BOE perspective, BCEI is trading at $93,000 per BOE on November 2011 volumes. As volumes advance to next year's mid point and assuming the stock stands still, this falls to a paltry $60,000 per BOE and would rate a lowly $51,000 per barrel on this year's probable exit rate which should be north of 11,000 BOEpd. This multiple would be lower than even the offshore players with their far shorter RP's and more exploration driven (in the majority of cases) production profiles, let alone your average onshore, rapidly growing, unconventional oily player with an asset base that allows it room to run. In fact, if you look at other rapidly growing onshore small cap names with similar oily profiles it's easy to spot much higher valuations. Pick any small to mid cap pure play Bakken player and you'll see flowing barrel valuations on the order of $200,000 to $400,000 of 3Q11 production levels and $100,000 to $145,000 on estimated 2012 average volumes. Given that the EBITDA per BOE appears to be quite strong here as unit costs decline on higher volumes (more on that below), this disconnect is unlikely to last, but again, investors are still getting to know the name and haven't been told it's a BUY just yet.
Based on Reserves. Based on the stale reserves of year end 2010 BCEI is trading on an "in the ground" multiple of just $17 per proved BOE. Given that we are in unconventional resource land here and that they operate an overwhelming majority of their properties look for strong reserve growth when they announce their 2011 reserves in early February, potentially along lines similar to 2011's production growth rate which would push them into ultra cheap levels on this metric as well.
Based on EBITDA. BCEI provided cost guidance for the coming year as well with cash costs expected to come in at $17.50 per BOE and given our price deck assumptions of $105 oil and $3.50 gas and taking into account their hedges and assuming a relative smooth build in production over the coming quarters we come to a mid point of guidance based estimate for EBITDA closing on $200 mm. This puts them at a TEV to our 2012 EBITDA estimate of roughly 3.0x ... in a word, cheap. Again, expect the Street that brought them at a lower than expected price of $17 due to soft market conditions to highlight value in bold, italicized figures when the initiations come over the next few weeks.
Nutshell: The name came public during a soft market week in December. OPEC was monkeying with production quotas (but not production levels), Eurotrash contagion fear was at a 2011 high, and the Buyside had essentially gone to the beach for the year. Yesterday's operations update was solid with a higher than expected growth target. Were they not top heavy with engineering types I might frown at the ambition of the expected growth rate, but given where they are from in industry and what they've already accomplished in their current incarnation (see that prior report mentioned above), and their asset base, I'm not willing to overly discount their potential.
Look for an 8x increase in their horizontal northeast of core Wattenberg activity this year to provide an ongoing string of catalysts while the activities of offset operators in the rapidly gaining attention Brown Dense play (SWN, COG, DVN, XOM all drilling away now) could provide a new oil play kicker to the story. Lastly, if we put the standard $100,000 per flowing BOE on that year end exit rate we'd be talking about the name moving out of the sub $600 mm TEV camp and into the $1B+ camp over the next 12 months. That’s a good bit of upside for me to sit in the name and watch it unfold without a thought given to the upside the Brown Dense play could eventually provide.