What is the background of Bonanza Creek?
Bonanza Creek was first founded in 1999 when the oil prices were at the bottom of the cycle. It allowed the company to acquire properties in the DJ Basin of Colorado at a discount price. The company went through a very profitable period until 2016, when due to the depressed prices of WTI, it entered chapter 11. The company was refunded as Bonanza Creek Energy in 2017 with a clean Balance Sheet which Bonanza has maintained until today.
A key aspect for a company which has gone into bankruptcy in the past is to swear off the tendency to acquire debt. And clearly the Bonanza Creek management has done that.
What does Bonanza Creek do?
Bonanza is an exploration and production company producing oil and natural gas in the United States.
Every well BCEI drills is fracture stimulated. Their strategy is primarily to grow organically by applying advanced technology to extract oil and natural gas resources. On the other way, they also look to make strategic acquisitions in their core areas, as it has recently happened with the acquisition of HighPoint Resources.
Bonanza Creek is based on DJ Basin. The oil that it is extracted in the DJ Basin is quite heavy, consequently, Bonanza usually gets a differential between 4.5 and 5.5 compared to WTI, under normal circumstances.
Why Bonanza Creek is an interesting company?
Because of the low oil prices as a consequence of the pandemic, lots of oil companies have gone bankrupt in the last months. What makes Bonanza different is that it has no debt on its Balance Sheet, and it hedged all the production for 2020 at $48 dollars (approximately, it has 20% with a put option at $32 that in the current environment it
HighPoint Resources acquisition
As the image shows, the acquisition of HighPoint Resources by Bonanza Creek creates perfect synergies.
- Increase scale and compelling industrial logic – From 25Mboe/d to 50Mboe/d
- Significant Free C
ash flowgeneration and potentialreturn to shareholders
- Significant cost and operational synergies
- Low cost / healthy balance sheet
- Accretive on cash flow and NAV financial metrics
- All resource accessible under Colorado siting requirements
Bonanza Creek – HighPoint Resources – Transaction Overview
Last 9th November the merge between Bonanza Creek and HighPoint Resources was announced. It was announced as a merge, but our opinion is that it is an acquisition. HPR was about to fill chapter 11 (bankruptcy) and Bonanza offered HPR noteholders a better option. The terms of the “merge” are the followings:
- Voluntary exchange of HPR bonds or prepackaged bankruptcy as alternative course
- BCEI shareholders to retain 68% of proforma equity
- Participating HPR noteholders to receive 30.4% of proforma equity and up to $100 million of newly issued senior unsecured notes
- HPR shareholders to receive 1.6% of proforma equity
Before the merge, Bonanza held 20.4MM shares before the merge and after the agreement, there will be 30.5MM shares.
Bonanza Creek impeccable Balance Sheet
This acquisition has been financed with $150MM from a revolver facility plus $100MM in bonds. Thanks to the current prices of WTI, it is probable that Bonanza will be able to pay the credit facility within 12-15 months.
These are the current Hedges of Bonanza (pre Merger). It is producing around 23MBoepd, 54% oil so 12.5MBoepd oil. It means that its hedges are around 65% for the present quarter.
Bonanza Creek valuation post-merge
We are assuming a constant differential of $4.5 and only maintenance CAPEX from 2022 on. The decline rates are also aligned with the current behaviour of the wells in operation. We are assuming that Bonanza will pay down the credit facility in the next 18 months and the notes in 2026.