Bonanza Creek Energy Is Keeping It Simple

Bonanza Creek Energy is a small domestic oil producer with huge scope for growth.

Jul 13, 2014 at 3:28PM

Forbes recently praised Bonanza Creek Energy (NYSE:BCEI) for running a simple business. The magazine argues that simplicity benefits both management and shareholders of a company, as a simple business is easy to manage. What's more, performance is easy to track.

Simple is best
With a market capitalization of $2.4 billion Bonanza Creek is hardly a small business, but it is simple. The company is focused on oil and natural gas exploration and production, with assets in the Niobrara Oil Shale in Colorado and the oily Cotton Valley sands in Arkansas. Around 70% of the company's production is high-margin oil, and production is expected to expand 48% during 2014.

When it comes to growth, Bonanza is also keeping it simple. The company's plan is to ramp up production on existing acreage and acquire more acreage for the right price to boost exposure and production. A recent deal saw the company acquire 35,000 net acres in Colorado for $226 million, adding 700 new drilling locations.

Still, at nearly 35 times historic earnings and 16 time forward earnings, Bonanza is not cheap, but the Niobrara region is an exciting place for the company to operate.

Lucrative assets
Noble Energy (NYSE:NBL) is also investing heavily in the Niobrara region, which has become an integral part of the company's development strategy.

Around 40% of Noble's annual capex this year is being devoted to Niobrara development, around $2 billion.

Noble owns 609,000 acres within the region, containing 2.6 billion barrels of risked resources, and some of the figures the company is predicting for this region are astounding. For example, Noble expects oil production from the region to grow at a compounded annual rate of 23% during the next five years. Noble will be driving this growth with aggressive drilling activity, Noble is aiming to be drilling around 700 equivalent wells per year by 2018.

Further, during 2014 alone Noble expects production from its acreage within the region to expand 28%. Management has also implemented an integrated development, or IDP plan, for the region. The IDP plan is designed to cut drilling costs by drilling several wells at once within a set time frame.

As a consequence of this cost optimization, Noble's well development costs are expected to fall by around $0.4 million to $0.8 million per well. Well operating costs will fall by $0.1 million to $0.3 million per well. Hopefully, these plans should shave around $3 bbl off production costs.

Back to Bonanza
Bonanza Creek itself has similarly ambitious plans for its Wattenberg/Niobrara acreage.

The company plans to increase production within the region by 48% this year, to around 25,000 boe/d; production hit 19,700 boe/d during the first quarter. Bonanza will drill 140 wells this year, 121 operated by the company, 19 non-operated, spending around $600 million in the process.

And this hefty capital outlay should pay off, as according to Bonanza's information, the Wattenberg Niobrara region has the fourth highest internal rate of return for oil well development within the country, trailing the Utica and Marcellus regions. The average internal rate of return for a well within the Wattenberg region is 63%. Within the Eagle Ford the average rate is down at a lowly 46%.

After this year's development plans are over, Bonanza has plenty of potential to continue growing. Based on data supplied during the first quarter the company had 25 years of Wattenberg inventory with 3,500 gross drilling locations. Of course this excludes any additional acreage acquired by the company over the next few years.

The bottom line
Bonanza is keeping things simple and it is easy to see how the company will be able to drive value from its acreage within the Niobrara region. The company's production is set to surge this year, most of which is high-margin oil production, and earnings should follow suit. Bonanza could be a company worthy of further research.

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Rupert Hargreaves has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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