Bellatrix Exploration - Q1 Results Sealed Its Survival

| About: Bellatrix Exploration (BXE)
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Facilities sold for C$75 million with the option to repurchase.

BXE used the proceeds to reduce bank line.

Credit analysis indicates that BXE will survive the downturn without equity dilution or other shareholder-dilutive actions.

The big news out of Bellatrix Exploration's (NYSE:BXE) Q1 earnings update was the facilities transaction of C$75 million. This effectively reduced the bank debt down to C$285 million. The credit line is divided into two different lines. One is a C$65 million operated facility and the other is a syndicated facility of C$395 million. Prior to the facilities sale, total credit line capacity was C$540 million. Subsequent to the asset sale, the effective borrowing capacity decreased to C$460 million, or a C$80 million decrease.

None of the Alder Flats plant was sold in this transaction:

Funds from operations were a dismal C$12.876 thanks to a combination of low oil, NGL and AECO gas prices. This is probably the worst quarter BXE has ever experienced. Capex spending for the quarter was C$28.9 million, reflecting the higher-weighted capex spending in Q1 vs. Q2. Capex guidance for H1 was C$46 million, and so the bulk of the spending happened in Q1. I expect capex spending to be C$40 million for the first half, rather than the C$46 million guided.

Production estimates came in at the low end of BXE's guidance at ~38.5k boe/d, as the company curtailed 800 boe/d of production from NGL back into the natural gas stream to receive a higher heating content value. I think that was the right move as it allowed BXE to realize a higher overall value on a boe basis.

Production expenses remained essentially unchanged from Q4 2015 to Q1 2016, but the decrease from 41k boe/d to 38.5k boe/d resulted in the increase in opex/boe from C$6.87/boe to C$7.37/boe. One item of importance here is that third-party processing income for Q4 2015 came in at C$1.531 million, while Q1 2016 came in at C$4.324 million. If one was to net out the processing income (which I haven't modeled into the spreadsheet), opex/boe decreases to C$6.13/boe. This analysis might seem arbitrary, but as BXE reduces production, the availability of the processing capacity increases for third-party processing -- so it does offset the volume decrease. This apples-to-apples comparison gives us a better view of what's going on.

Net G&A increased from C$1.18/boe in Q4 2015 to C$1.29/boe. Most of the increase is attributed to the decrease in production. On a nominal basis, net G&A increased from C$4.402 million to C$4.522 million. Royalties increased slightly to 7%. Overall net debt down C$3.8 million compared to year end 2015. Transportation expenses increased from C$2.703 million to C$3.226 million and C$0.72/boe to C$0.92/boe, respectively. Going forward, BXE eliminated all of its AECO basis hedges for the rest of 2016.

Q2 funds from operations should come in around C$15 million with second-half 2016 funds from operations to come in around C$45 million. The management team continues to actively de-risk the capital structure by paying down the bank line. Total capacity is now reduced to C$460 million, leaving BXE with C$178 million left in liquidity. I think the bank line will likely be cut around 15%, leaving BXE with C$100 million left in liquidity going into November redetermination.

Give our expectation that AECO and NGL prices will improve dramatically from current levels, the bank line will likely be increased as a result. For the time being and until the end of 2016, BXE won't have any liquidity issues and no equity dilution or covenant breaches will occur. Overall, the facility sale is bullish for the stock as market's concern of liquidity and bank covenant issues subside. Low oil and gas prices are already priced into the stock, and I think the outlook is much more favorable. The team at BXE continues to mitigate risk and live within cash flow, and the debt situation seems to be getting better. And I expect BXE to hold production around 38k boe/d for the rest of 2016.

Disclosure: I am/we are long BXE.

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.