Bonanza Creek Energy (BCEI)
from Energy Strategist
Bonanza Creek Energy (BCEI) looks better placed to make it through the oil crash than most, with plenty of upside in the event of higher prices.
Bonanza Creek is a small-cap shale driller focused primarily on the Wattenberg Field in Colorado’s Niobrara shale play, with secondary interest in legacy Arkansas acreage that generates free cash flow promptly reinvested in the Wattenberg.
The Wattenberg is one of the highest-return unconventional oil plays in the US, with relatively low well costs in the $4 million to $4.5 million range, and the potential to recoup the entire sum within 18 months with crude at $90 for wells in its most attractive pay zone.
Last week new boss, Richard Carty, spent $627,000 to buy 30,000 BCEI shares in the market. An executive in charge of drilling operations purchased 11,000 shares the same day. More intriguingly, Millennium International Management, the $23 billion hedge fund run by noted investor Israel “Izzy” Englander, reported a 6.4% stake in Bonanza Creek last week. This was a fivefold increase over Millennium’s stake in BCEI at the end of September, after the fund cut its position in half over the course of the summer. It’s worth remembering, though, that the expanded $51 million stake still represents roughly 0.2% of the hedge fund’s assets.
Still, insiders and Millennium have good reasons to be optimistic about Bonanza Creek’s prospects at a crude price closer to the long-term supply/demand equilibrium of $75 to $80 a barrel, based on consumption trends and the cost of marginal production.
In its most recent quarter, the company reported a 44% year-over-year production increase coupled with a 14% drop in unit cash operating costs. That translated into a healthy $47 cash margin per barrel of oil equivalent, or 71% of the unhedged sales price. Also, the drilling downturn promises to deliver savings on oilfield services.
With 25 years’ worth of Niobrara drilling inventory following this year’s acquisition, Bonanza Creek has plenty of time to further refine its drilling techniques, prove up the resource potential of the stacked rock layers beneath its turf and map a development plan for the recently acquired acreage.
It can do all that without worrying about going broke even if oil prices stay at their current levels for years. That’s a luxury some other small-cap shale producers don’t have. Buy BCEI below $23.
Robert Rapier & Igor Greenwald, The Energy Strategist, www.energystrategist.com,? 800-832- 2330, December 10, 2014