Today’s Daily Alerts brings a summary of Canaccord Genuity’s new research report on a U.S.-based oil and gas company that is involved in acquisition, exploration, development and production of assets in Colorado, Arkansas and California.
“We initiate coverage of Bonanza Creek Energy (BCEI $35 NYSE) with a BUY rating and price target of $49. Our valuation is based on a NAV approach that includes $19 of PDP (proved developed producing) assets and $36 of 2P (proved plus probable) assets, run with long-term commodity price deck of $90 WTI/$5.25 natural gas and discounted at 10%. Our target price implies EBITDA of 7.9x/5.0x for 2013E/14E, respectively. On a debt adjusted cash flow basis (DACF), our price implies 8.1x/5.1x for 2013E/14E, respectively.
“Since its debut as a public company in December 2011, BCEI has doubled production and increased proved reserves by 21%. BCEI has made strategic bolt-on acquisitions to develop a contiguous block of acreage that is oily, prolific and sits right next to those of high-profile operators like Noble Energy. This is critical in a play like the Niobrara where the learning curve is steep and experience is key.
“Further, in our model, BCEI has a double-digit high margin production growth ahead (we estimate 65%, 50%, 15% in 2013, ’14 and ’15, respectively). In addition, the multi-bench asset base provides a substantial drilling inventory that we think is skewed to the upside with subsequent success from testing.
“A strong balance sheet and conservative outlook provide management the headroom to pursue all options of developing B, C and Codell, and drilling extended laterals. We model a net debt/cap of 31%, 32% (2013, 2014) and debt/EBITDAX of 1.5x, 1.1x (2013, 2014), far below management’s self imposed 2x level.
“Finally, BCEI’s management has been operating in the Rockies for decades. BCEI has built a technical team that has extensive experience from working with bigger Niobrara operators and we believe the experience will be critical in implementing drilling, completion and production techniques that improve the bottom line for the company.
“BCEI has a stable, repeatable, low-risk, liquid-rich producing asset base in the Cotton Valley region of south Arkansas. The Dorcheat Macedonia asset provides free cash flow to support rapid growth of Wattenberg assets. Upside potential in the Cotton Valley lies in downspacing from 10 acres to five acres, development of the McKamie-Patton Cotton Valley, and derisking of the Brown Dense by larger E&P operators. We believe, post subsequent development, the Dorcheat Macedonia could provide monetization options to BCEI.
“In summary, BCEI is present in some of the highest-return parts of the Wattenberg play. The company stands to benefit from R&D of adjacent neighbors like Noble Energy and has the management talent to incorporate best practices. With future operating expenses guided down, the recurring investable theme for BCEI, in our opinion, will be to drill, down space and derisk its acreage. Initiate at Buy.”
Ipsit Mohanty, Canaccord Genuity Research, 4/24/13