Bonanza Creek Energy: Significant Potential As It Grows Production

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About: Bonanza Creek Energy, Inc. (BCEI)
by: Elephant Analytics
Summary

Bonanza Creek is valued at only 2.6x projected 2020 EBITDAX.

It's expected to burn cash as it grows production, but leverage should remain below 1.0x by the end of 2020.

Its significant Wattenberg experience should help it avoid the negative cash flow surprises that have affected some other companies that restructured and then attempted to rapidly grow.

Estimated value of $32 to $38 based on 2020 EBITDAX projections.

Bonanza Creek Energy (BCEI) continues to appear undervalued based on its projected future results. It only has a modest amount of debt and should be able to grow production significantly in 2019 and 2020 while keeping its leverage below 1.0x.

Bonanza Creek's enterprise value is only around 2.6x its projected 2020 EBITDAX. This low valuation may be partly due to its cash burn as it grows production. A number of upstream companies that have previously exited bankruptcy are threatening to become bankrupt again due to rapid growth plans that led to cash burn that exceeded expectations.

I do not believe that Bonanza Creek will have similar issues since its growth plans are more modest, and it has a large amount of experience with its Wattenberg assets.

2019 Outlook

At current strip prices of roughly $58 WTI oil, Bonanza Creek is expected to end up with roughly $308 million in oil and gas revenue for 2019. This assumes the midpoint of its production guidance of 20,000 to 24,000 BOEPD and that roughly 62% of its production is oil. Bonanza Creek's production was 65% oil in Q1 2019 and it expects to average in the low-60s for the remainder of the year.

At high-$50s oil, Bonanza Creek's hedges are close to neutral value, so after including its hedge value, Bonanza Creek is projected to reach $310 million in revenue.

Type Units $/Unit $ Million
Oil (Barrels) 4,978,600 $53.25 $265
NGLs (Barrels) 1,204,500 $15.00 $18
Natural Gas [MCF] 11,081,400 $2.25 $25
Hedge Value $2
Total Revenue $310

Bonanza Creek's cash expenditures are estimated at $353 million, resulting in a projection of $43 million in cash burn for 2019. This would put Bonanza Creek's net debt at around $80 million by the end of 2019, or around 0.4x EBITDAX.

Expenses $ Million
Lease Operating Expense $24
RMI (Midstream) Expenses $10
Gathering, Transportation and Processing $16
Production Taxes $26
Cash G&A $32
Cash Interest $3
CapEx $242
Total Expenses $353

2020 Outlook

For 2020, Bonanza Creek is aiming for 20% production growth, which would bring its average production up to 26,400 BOEPD. I am modeling 60% oil production for 2020, and project that it would end up with $366 million in revenues after hedges at current strip prices. The current WTI oil strip for 2020 is a bit over $58, similar to 2019 levels. Bonanza Creek's oil differentials should be slightly lower due to the mid 2019 completion of its oil gathering pipeline to Riverside.

Type Units $/Unit $ Million
Oil (Barrels) 5,781,600 $54.00 $312
NGLs (Barrels) 1,541,760 $15.00 $23
Natural Gas [MCF] 13,875,840 $2.15 $30
Hedge Value $1
Total Revenue $366

If Bonanza Creek has $330 million in capital expenditures in 2020 (to achieve that 20% production growth, it will end up with $458 million in total expenditures and $92 million in cash burn.

Expenses $ Million
Lease Operating Expense $29
RMI (Midstream) Expenses $12
Gathering, Transportation and Processing $19
Production Taxes $31
Cash G&A $33
Cash Interest $4
CapEx $330
Total Expenses $458

This would put Bonanza Creek's net debt at $172 million at the end of 2019, or around 0.7x EBITDAX.

Breakeven Point With Maintenance Capex

Bonanza Creek is burning some cash as it grows production significantly. However, I estimate that it would be able to maintain production (in the low-to-mid 20,000 BOEPD range) with neutral cash flow with low-to-mid $50s WTI oil. This assumes that its base decline rate is fairly high due to the significant growth from Q4 2018 levels. As its base decline rate moderates, Bonanza Creek should be able to lower its breakeven point closer to $50 WTI oil.

Valuation

If we assume that Bonanza Creek has 21 million shares going forward and $172 million in net debt at the end of 2020, its shares would be worth approximately $37.90 each with a 4.0x EV/EBITDAX multiple (based on 2020 EBITDAX at current strip prices). If we use a lower 3.5x multiple instead, its shares would still be worth $32.14 each.

Bonanza Creek's enterprise value using its current share price of $21.73 and $172 million in net debt is only 2.6x its projected 2020 EBITDAX at current strip prices.

There's some market wariness about companies that are burning cash in order to grow production, especially after a number of companies emerged from restructuring (such as Halcon Resources and Roan Resources) are financially troubled again. Those companies burned cash much faster than expected, but I don't believe Bonanza Creek will have the same problem. Halcon and Roan experienced some problems as they attempted to rapidly grow production in areas that they had limited previous development experience. Bonanza Creek has plenty of Wattenberg development experience and more modest growth plans.

Conclusion

Bonanza Creek continues to appear undervalued at it grows production and burns cash in order to do so. However, its cash burn should remain under control and its leverage is projected to remain under 1.0x by the end of 2020. I do not foresee that Bonanza Creek will have issues with excessive cash burn since it has a good idea of what to expect in the Wattenberg. As it proves that it can grow production without incurring too much debt, I believe Bonanza Creek's stock should reach the $30s again.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in BCEI over 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.