Investors are getting a little spoiled for choice when it comes to E&P companies with impressive production growth outlooks, attractive internal economics, and discounted valuations. The same sector-wide pullback that has hit names like PDC Energy (NASDAQ:PDCE) and Noble (NYSE:NBL) has also taken Bonanza Creek (NYSE:BCEI) with it. While the possibility of lower oil prices or regulations that impact fracking are a sector-wide risk, Bonanza looks pretty appealing at today's prices.
A Five-Way Play On The Niobrara?
Bonanza Creek controls close to 55,000 net acres in the DJ Basin, with a strong core of just over 30,000 acres in the Wattenberg field in Weld County. This is popular real estate, with PDC Energy, Noble, and Bill Barrett (BBG) holding acreage in the neighborhood.
Part of what makes this acreage interesting to me is the potential for five plays. The core Wattenberg offers the high-potential "Niobrara B" and "Niobrara C" benches, as well as access to Codell on about half of that Wattenberg acreage (Codell thins out to the east). Bonanza is also looking to test out the A bench and Greenhorn benches, though these are thinner on the company's acreage and most likely not terrifically high-potential opportunities.
So far the company's Niobrara B wells have shown 30-day initial production rates in the neighborhood of 460boepd, suggesting more than 300M boe of recoverable resources with well costs of about $4.2 million. These results are basically similar to what Noble has managed, and with a slightly lower well cost.
While initial tests on 40-acre spacing offered a couple of disappointing IP results, it looks like those were aberrations and 40-acre spacing will be worthwhile. I also find it interesting that the company installs artificial lift equipment during completion, allowing these wells to transition as soon as the natural pressure abates.
Bonanza Creek's Niobrara C and Codell results have also been quite good. The initial production rates for C are in the same ballbark as the B's, and the extended-reach laterals have shown enough incremental production to justify the added cost (over $7 million per well). While only about half of the company's Wattenberg acreage is going to have viable Codell play, the IP rates here too suggest very worthwhile IRRs.
In order to more economically exploit these opportunities, management is doing a pilot test of "super-section" stacking and downspacing, with results due in the second quarter. So far it doesn't sound as if these zones communicate, so this could be an interesting option for the company.
The opportunities in Niobrara A and Grenhorn are still largely unknown, though the company plans to start testing the A in 2014.
Not Just A Single-Play Story
Bonanza has additional opportunities outside of that core Wattenberg acreage. The company holds 25,000 net acres in Jackson County (North Park Basin) as well as acreage in Arkanas.
The North Park Basin is something of a wild card. I know EOG (NYSE:EOG) has some acreage in this area and a privately-held operator (EE3 LLC) reported some very encouraging initial production rates (685boepd), but my understanding is that there is a fault between that area and Bonanza Creek's acreage, so the results may well not be comparable. I know that in the past Bonanza has talked about estimated recovers of 211Mboe and well costs of $5M based on prior EOG information, so there could be some upside.
Bonanza Creek's Mid-Continent assets in Arkansas (Cotton Valley) aren't as exciting as the Wattenberg property, but they do generate cash flow to help fund the company's aggressive drilling program. Estimated recoveries are in the vicinity of 150Mboe, with well costs below $2 million and downspacing could still provide some additional kick here.
Expect Ups And Downs
Even if Niobrara B is basically a de-risked play, there are still inherent challenges to being an E&P company. The company has seen differentials widen from their 2013 $8/bbl level, and recent pricing has suggested the spread could widen to $11 or as much as $15 per barrel. Production is going to be bumpy in the first half of 2014 as the company evaluates the super-section results and won't complete any new wells until March of this year. As I said before, the company will also be drilling test wells for Niobrara A and North Park Basin and I'd expect the results to move the stock.
The company also guided for $575 million to $625 million in capex for 2014, 50% production growth, and 100 net well completions for the year. This capex guidance doesn't really have a significant on my valuation, given the current well economics. Were the well production rates to drop, well costs rise, or the company to pursue marginal properties (say if Niobrara A or North Park Basin doesn't really work out), that might be a different story.
Estimating The Value
I expect ongoing drilling activity in B, C, and Codell to unlock more 2P reserves in the coming years. I currently value the company's proved assets at around $22 per share. The risked assets total more than $45 per share, with close to half of that from B, $10 from C, and $5 from Codell. I am including a very small per-share value for A and North Park, but nothing for Greenhorn at this point. Net of liabilities, I come up with a net asset value of almost $57 for Bonanza Creek.
There is 0.75-to-1 relationship between my NAV calculation for Bonanza creek and my oil price assumption, so if differentials would go to $15 permanently it would drop my value estimate to about $50. If the extra-wide differential would persist for a year, it would take about $0.40 to $0.50 out of my NAV. There is also a relationship with well costs; each $1M in Wattenberg well costs (on average) is worth about $12 in NAV, so there's value to be gained (or at risk) if the company can find a way to reduce well costs without hurting productivity. Estimated well recoveries also impact the NAV, with every 10Mboe (on an overall average) altering NAV by around $2 to $3 per share.
Looking at EV/EBITDA, I come up with a similar result. At six times the average 2014 sell-side EBITDA estimate, Bonanza Creek would be worth about $57.50.
The Bottom Line
Comparing PDC Energy and Bonanza Creek, PDC Energy looks cheaper on a NAV basis, but either could be a good buy here. Noble, too, is an interesting opportunity for those willing to accept less potential return for a lower risk profile. As Bonanza Creek has been generating well production numbers on par with its neighbors at attractive well prices, I think this is another solid E&P company to consider during this downturn, but as I said in the beginning investors have more than a couple of choices right now.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.