Bonanza Creek (BCEI) has now completed its merger with HighPoint Resources (HPR). HighPoint ended up going with a prepackaged restructuring plan to facilitate the merger after the notes exchange offer fell short of the 97.5% minimum participation condition.
Bonanza Creek appears to be fairly valued for a longer-term $50 to $55 WTI oil environment now and should be able to reduce its net debt to below $50 million by the end of 2021.
Q2 2021 To Q4 2021 Outlook
Bonanza Creek expects to produce approximately 42,000 BOEPD (50% oil) in the last three quarters of 2021. This average production was lower than previously expected since some HighPoint completions were rescheduled from Q4 2020 and Q1 2021 until after the merger so that the combined team could work on the design of those completions.
Source: Bonanza Creek
Bonanza Creek believes that it can meaningfully improve the performance of new wells on HighPoint's acreage.
At current strip prices (including roughly $59 WTI oil for the remainder of the year), Bonanza Creek is projected to generate $381 million in revenues (after the impact of hedges) during the last three quarters of the year.
| Type | Units | $/Unit | $ Million |
| Oil (Barrels) | 5,775,000 | $54.50 | $315 |
| NGLs (Barrels) | 2,598,750 | $18.00 | $47 |
| Natural Gas [MCF] | 19,057,500 | $2.10 | $40 |
| Hedge Value | -$21 | ||
| Total Revenue | $381 |
Source: Author's work based on Bonanza Creek guidance and financial reports
Cash costs are estimated at $256 million during this period (including $122 million for capital expenditures), resulting in a projection of $125 million in positive cash flow over this three quarter period.
| Expenses | $ Million |
| Lease Operating Expense | $36 |
| RMI (Midstream) Expenses | $12 |
| Gathering, Transportation and Processing | $28 |
| Production Taxes | $22 |
| Cash G&A | $24 |
| Unused Commitments (Contracts expire July 2021) | $6 |
| Cash Interest | $6 |
| CapEx | $122 |
| Total Expenses | $256 |
Source: Author's work based on Bonanza Creek guidance and financial reports
This would reduce Bonanza Creek's net debt from $169 million at the end of Q1 2021 (proforma for the merger) to around $44 million at the end of 2021.
Source: Bonanza Creek
Valuation
If we assume a 10% increase to Bonanza Creek's Q2 2021 to Q4 2021 average production levels (due to its production increasing later in the year), Bonanza Creek appears capable to generate approximately $325 million in unhedged EBITDAX at $50 WTI oil and around $370 million in unhedged EBITDAX at $55 WTI oil.
A 3.0x EBITDAX multiple to that would result in a total value of $975 million for Bonanza Creek at long-term $50 WTI oil and a total value of $1.11 billion at long-term $55 WTI oil.
Subtracting $44 million in year-end net debt leaves $931 million (at long-term $50 WTI oil) and $1.066 billion (at long-term $55 WTI oil) respectively for Bonanza Creek's market cap.
Bonanza Creek now has 30.6 million outstanding shares, which would make its estimated value of approximately $30.40 per share at long-term $50 WTI oil and approximately $35 at long-term $55 WTI oil.
Notes On HighPoint Stock
There was one last surge in HighPoint's stock before the merger that gave HighPoint shareholders a chance to get more value. Each HighPoint share was exchanged for 0.114 Bonanza Creek shares, which implied a value of approximately $4 per share for HighPoint's stock (at $35 per share for Bonanza Creek). HighPoint's stock went from $5 on March 23 to $12 (briefly) on March 24, before ending at $4.73 per share just before the merger. This illustrates that short squeezes and/or momentum trades can boost the price of a stock well above intrinsic value, but when there is a hard deadline (in this case the merger close date on April 1), the price will tend to converge towards intrinsic value by the deadline.
Conclusion
Bonanza Creek has now completed its merger with HighPoint Resources. It has taken on a bit of debt as a result of the merger, but should be able to reduce its net debt below $50 million by the end of 2021.
Some of HighPoint's completions were deferred from late 2020/early 2021 to post-merger, resulting in Bonanza Creek's 2021 production being lower than expected. Bonanza Creek's production should pick up later in 2021 into 2022 though.
Overall I believe that Bonanza Creek is worth approximately $30 to $35 per share in a $50 to $55 longer-term WTI oil environment, making it fairly valued at its current share price.
Editor's Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.
Free Trial Offer
We are currently offering a free two-week trial to Distressed Value Investing. Join our community to receive exclusive research about various energy companies and other opportunities along with full access to my portfolio of historic research that now includes over 1,000 reports on over 100 companies.
