Bonanza Creek: On Track To Eliminate Its Debt By The End Of 2020 (NYSE:BCEI)

Bonanza Creek (NYSE:BCEI) is expected to eliminate its net debt by the end of 2020 and may also be able to build a significant amount of cash on hand in 2021 by drawing down its DUCs. Bonanza Creek’s maintenance capex requirements are expected to rise after 2021 though, and its share price is around the top end of my valuation range for it though.

Updated 2020 Outlook

The current WTI strip for 2020 is now approximately $39. That oil price would result in Bonanza Creek generating around $255 million in revenue including hedges. Bonanza Creek increased its 2020 production guidance by approximately 500 BOEPD by acquiring an increased working interest in over 25 operated wells for approximately $8 million.

Type Units $/Unit $ Million
Oil (Barrels) 5,007,800 $34.00 $170
NGLs (Barrels) 1,788,500 $6.50 $12
Natural Gas [MCF] 12,877,200 $1.50 $19
Hedge Value $54
Total Revenue $255

With a projection of $84 million in positive cash flow in 2020, the company remains on track to end 2020 with zero credit facility borrowings. As of early August, it had less than $50 million in net debt, and a strong second-half cash flow should eliminate its net debt.

Expenses $ Million
Lease Operating Expense $24
Net RMI (Midstream) Expenses $10
Gathering, Transportation and Processing $14
Production Taxes $17
Cash G&A $28
Cash Interest $3
CapEx $65
Total Expenses $161

2021 Outlook

For 2021, Bonanza Creek is looking at drawing down its inventory of 30 DUCs, which would help it maintain production approximately flat with 2020 production levels for relatively low capital costs.

At current 2021 strip of around $43 WTI oil, Bonanza Creek may end up with $245 million in revenue after hedges.

Type Units $/Unit $ Million
Oil (Barrels) 5,007,800 $38.00 $190
NGLs (Barrels) 1,788,500 $7.00 $13
Natural Gas [MCF] 12,877,200 $2.40 $31
Hedge Value $11
Total Revenue $245

If it spends $70 million on capex (mostly on completing DUCs), it may end up with $166 million in cash expenditures in 2021. This would lead to it having $79 million in positive cash flow in 2021.

Expenses $ Million
Lease Operating Expense $24
Net RMI (Midstream) Expenses $10
Gathering, Transportation and Processing $14
Production Taxes $20
Cash G&A $28
Cash Interest $0
CapEx $70
Total Expenses $166

Thus Bonanza Creek could end up with $80+ million in cash on hand and no debt at the end of 2021. However, going with a relatively low $70 million capex budget would likely lead to lower production levels towards the end of 2021 and into 2022. If oil prices improve beyond the low-$40s, Bonanza may add to its development program and drill wells that would mostly impact 2022 production.

Beyond 2021

Beyond 2021, Bonanza Creek will likely require a significantly higher capex budget if it wants to maintain production levels as it can’t rely on drawing down DUCs. Bonanza Creek may still be able to reach breakeven at mid-$40s WTI oil, given that it will have no interest costs by that point.

The company appears to have limited exposure to regulatory risks due to its rural acreage. The increase to 2,000 foot setbacks may only affect less than 5% of its surface acreage. As well, it mentioned that less than 3% of its acreage involved Federal land, resulting in relatively minimal exposure to any potential changes to federal governmental policies after the 2020 election.

Source: Bonanza Creek

Conclusion

Bonanza Creek is on track to pay down its credit facility by the end of 2020 and has the potential to generate a significant amount of positive cash flow in 2021 as well, depending on how much it draws down its inventory of DUCs.

It does face a modest amount of regulatory risk. Colorado setbacks may increase to 2,000 feet, while the ability to do oil and gas development on federal lands may be affected by results of the 2020 election. That being said, over 90% of Bonanza Creek’s acreage should be unaffected by those potential regulatory changes.

The $20 per share price for Bonanza Creek appears justifiable based on its projected financial situation at the end of 2021. However, it is getting to the high end of $17 to $20 range that I value it at.

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Disclosure: I/we 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.

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