$BCEI looks interesting. post-bankruptcy oil & gas co ramping production. could see $10-15 EBITDAX/share by 2019/2020. With current price of $36 this could double or triple. PV10 of proven reserves alone worth $37/share— mspacey (@mspacey4415) June 28, 2018
Bonanza went bankrupt in Jan 2017 and emerged late April 2017, which explains the nasty long term chart. But the process also gave them a clean balance sheet. After wiping out one billion of debt, BCEI now has ~$6mm of cash and $15mm of debt.
With its strong balance sheet, the company plans to ramp production aggressively.
Upside: 2-3x
Here's a quick calculation that shows the stock can double or even triple. Stock was at $36 at time of tweet.
Management is guiding to ~18.2 MBoe per day of production in 2018 and 50% growth on top of that exiting 2019. This implies 4Q19 production rate of more than 27 Mboe/d, and annualizes to about 10mm barrels of oil equivalent (mmBoe).
Unit production cost is about $20 a barrel (excluding D&A and exploration costs). Realized price was about $42.5 per barrel in 1Q18. This works out to EBITDAX of ~$22.5 per barrel. WTI oil prices have gone up and unit costs will come down as they achieve scale, so let's call it $20-25 of profit per barrel.
With 10 mmBoe production for 2020, that's $200-250mm EBITDAX. Using 20.5mm shares, we're looking at $10-$12 of EBITDAX per share, maybe more.
Consider stock trades around $36-$38 range, this is plenty cheap! I would not be surprised if stock goes above $100.
The bankruptcy history probably turned away a lot of investors, hurt liquidity and analyst coverage. The latest conference call had 2 analysts asking questions. As earning power gradually resurfaces and new CEO establish credibility, analyst coverage could ramp up, and all the sudden you have value, growth, momentum investors all chasing a relatively thin 20.5mm shares. Anyways that's my upside case.
Unit production cost is about $20 a barrel (excluding D&A and exploration costs). Realized price was about $42.5 per barrel in 1Q18. This works out to EBITDAX of ~$22.5 per barrel. WTI oil prices have gone up and unit costs will come down as they achieve scale, so let's call it $20-25 of profit per barrel.
With 10 mmBoe production for 2020, that's $200-250mm EBITDAX. Using 20.5mm shares, we're looking at $10-$12 of EBITDAX per share, maybe more.
Consider stock trades around $36-$38 range, this is plenty cheap! I would not be surprised if stock goes above $100.
The bankruptcy history probably turned away a lot of investors, hurt liquidity and analyst coverage. The latest conference call had 2 analysts asking questions. As earning power gradually resurfaces and new CEO establish credibility, analyst coverage could ramp up, and all the sudden you have value, growth, momentum investors all chasing a relatively thin 20.5mm shares. Anyways that's my upside case.
Why now? Here's a potential catalyst (from the latest presentation): "Company will turn online its first eight appraisal wells in its French Lake acreage by midyear; positive results from these wells could unlock significant inventory." Anytime now...
Here's another potential catalyst - Bonanza can sell its non-Wattenberg assets which are less productive and use that to fund Wattenberg developments.
Here's another potential catalyst - Bonanza can sell its non-Wattenberg assets which are less productive and use that to fund Wattenberg developments.
Any Downside??
Ok so there's a ton of upside, but what's the downside? Arguably none!! PV10 of reserves is worth $37/share, and that's with $56 WTI! Bonanza also has a midstream asset (Rocky Mountain Infrastructure) that the company values at $103mm, or ~another $5/share.
Of course, that PV10 can swing wildly with oil prices, but as long as oil prices stay above $60 they will be more than fine.
Ok so there's a ton of upside, but what's the downside? Arguably none!! PV10 of reserves is worth $37/share, and that's with $56 WTI! Bonanza also has a midstream asset (Rocky Mountain Infrastructure) that the company values at $103mm, or ~another $5/share.
Of course, that PV10 can swing wildly with oil prices, but as long as oil prices stay above $60 they will be more than fine.
About that failed SandRidge Deal, and SRC's recent purchase of Wattenberg acreage
Back in November and December 2017, Bonanza agreed to be acquired by SandRidge for $36/share, only for its top shareholders FirTree and Icahn, to kill the deal. The main reasons were 1) SandRidge was so cheap itself that the transaction would have been dilutive, 2) no clear synergies, 3) the merger was such a huge departure to SD's plans post bankruptcy that it came as a shock.
FirTree mentioned that Bonanza's DJ Basin assets are Tier II in quality and seemed to think SD's North Park assets are much better. Now, I'm no geologist, but just from googling around, I actually get the sense that North Park assets were inferior to Bonanza's DJ Basin assets. Bonanza itself clearly has no appetite for the North Park basin, as it dumped its acreages there in March 2018 for almost nothing in return.
While we're talking about attractiveness of land positions, there's a nice data point from SRC Energy's purchase of DJ Basin positions back in December 2017.
Here's the press release: SRC Energy Significantly Expands Core Greeley Crescent Development Area Through Strategic Acreage Acquisition
Greeley Crescent is not that far from Bonanza's fields. From what I can find this is around location 5N 67W. Bonanza's fields are around locations like "5N 62W", "6N 61W"...etc. (p8 of presentation here)
SRC Energy bought ~30,000 acres for ~$570mm, or almost $19k per acre, this compares to Bonanza currently being valued at less than $12k per acre.
Notes
- Does it make sense that the company could trade much above PV10 of $37? I think so. The company estimates "all-in finding and development cost of $7.46 per boe". If they can create reserves at $7.5/boe and monetize that at $20-25 per barrel (as shown above), that sounds like good value creation to me!
- For context, Whiting Petroleum also operate in the Rockies and their enterprise value is almost double their PV10 reserve value.
- As a sanity check, in 2017 Bonanza added 15.5 mmBoe to their reserves with $110mm in capex, so the $7.46/boe F&D cost looks reasonable to me.
- Now, they will have to take on debt to implement capex, but that's just for 2018 and 2019, as they become cash flow break even by end of 2019. Management estimate of 2018 year end leverage will be 0.5x debt/EBITDAX. I estimate year end 2019 debt level of ~1.5x EBITDAX. But in any case debt should be well contained.
- Given SandRidge's (failed) offer of $36/share back in November 2017, I would have expected the stock to hit resistance around $36 area. Sure enough, the stock topped out around $35-37 range in May, then went down below $32. Only in the past couple days did the stock seem to get past that resistance. Are we leaving the past behind and moving into a new chapter in the Bonanza story?
