Bonanza Creek Energy Likely Touched Bottom


  • Crude oil price may have touched bottom and likely stay near $50 over the next two quarters.
  • US shale producers have a much lower break-even point compared to many OPEC countries
  • Compared to $100 in Saudi Arabia, break-even of BCEI was below $40 in 2014
  • Drilling and completion well cost per shale play in Niobrara shale is the lowest in the United States, which provides BCEI competitive advantage over its local competitors as well.
  • BCEI stock price is set to reach $17.19, which gives investors a 135.5% upside potential

Company Overview

Bonanza Creek Energy Inc (NYSE:BCEI) is involved in the United States energy sector as an explorer and producer of oil and natural gas. Bonanza Creek Energy Inc was founded in 1999 and based in Denver, Colorado.

The bulk of the revenue of Bonanza Creek Energy Inc is generated from its DJ Basin operation in the Wattenberg field in Colorado and the Cotton Valley sands in southern Arkansas.

The DJ Basin is better known as Niobrara-DJ Basin, which is located in Northeast Colorado and Southeast Wyoming and hosts crude oil and liquids rich gas.

According to the Colorado Oil & Gas Conservation Commission, Bonanza Creek Energy Inc ranked as the fifth largest oil & gas producer in Weld County in 2013. Weld County is one of the counties where Bonanza Creek Energy Inc operates in.

The Badly Performing Energy Sector May Have Reached the Bottom

Besides the refiners in the United States, all other companies in the energy sector saw their market capitalization evaporate in the thin air over the last one year. Drilling, equipment and services, oil and gas exploration and production companies were the one who performed really, really badly.

We are not including coal into this equation, actually, we should all pray that coal companies go out of business for all the damage it does to the environment!

BSEI price change

Figure 1: Bonanza Creek Energy Inc Stock Price October 2014 – September 2015

As an explorer and producer of oil & gas, Bonanza Creek Energy Inc was also hit pretty hard by this downturn in the energy sector. Over the last 12-month period, its stock price declined from $45 per share to below $5 per share, representing over 90 percent decline.

Crude Oil Price

Figure 2: Crude Oil Prices
Source: knoema

As we all know, the major reason behind this is the massive decline in oil price around the world, which caused the West Texas Intermediate (WTI) price to fall below $40 per barrel in August 2015.

However, energy sector analysts have become increasingly optimistic that the WTI oil price may have reached the bottom.

Bottom picking is dangerous, as told by our grandmothers, but in this case we believe there are some significant logic behind this hypothesis.

A rough estimate suggests that the average global production cost of crude oil is around $40 per barrel. At the current price range, a lot of the producers are already producing at below their cost, just to minimize losses of fixed cost.

When the WTI price goes below $40, it sharply rebounded to $50, because at this level, what technical analysts would call, a psychological support level. Investors think that around this price level supply will decline, which would spike the price further up. Regardless of the underlying fundamentals, this is how the price of oil unfolded as a demonstration of a self-fulfilling prophecy in August.

Knoema compiled data from IMF, Deutsche Bank, Citi Research, and Reuters and found that the breakeven price of crude oil in Saudi Arabia is currently over $100, which means they are losing a lot of money. So much so that Ambrose Evans-Pritchard from UK based The Telegraph suggested that they “will start running into trouble within two years.”

Even the contract for January 2020 of oil is now selling at $58.52, which translates into a long-term trouble for our Middle Eastern ally, in disguise. Regardless how OPEC is practically dead at the moment, they have to reach an agreement to cap their collective production output. We believe basic economic sense will force Saudi Arabia to cut its production levels in the next few years.

Why Do We Think Bonanza Creek Energy’s Stock Price Will Rebound?

We believe that over the next two quarters, WTI oil price would remain around $50 and it would enable US shale producers to turn a modest profit when the rest of the world’s producers will suffer huge losses.

The game OPEC tried to play in order to shut down and push shale oil out of the market have failed. The higher the price would go, the higher the US based shale producers will increase their production.

According to Rystad Energy, an independent oil and gas consulting services and business intelligence data firm, break-even point of Niobrara-Wattenberg based oil producers, such as Bonanza Creek Energy Inc, were less than $40 in 2014.

Furthermore, drilling and completion well cost per shale play in Niobrara shale is currently the lowest in the United States, around $6 million per well, which provides a competitive advantage to Bonanza Creek Energy Inc over its local competitors operating in other shale plays in Bakken/here Forks, Wolfcamp, Utica, etc.

If the oil price stays around our estimate till the end of the first quarter of 2016, it would benefit companies like Bonanza Creek Energy Inc who are operating in the Niobrara-DJ Basin.

Revenue and EBITDA

Figure 3: Bonanza Creek Energy Inc Revenue is up and EBITDA is down

Since April 2015, the revenue of Bonanza Creek Energy Inc has gone up from around $70 million to $90 million, representing a 28% increase. On the other hand, its EBITDA has gone down from just above $40 million to less than $20 million. During this time the WTI oil price declined from near $63 to below $40.

If Bonanza Creek Energy Inc can increase its revenue during a time when the market price of its product was declining, how its revenue would turn out in a market environment when the price of the product would likely go up? Exactly, its revenue would likely go further up.

According to MFI, 18 analysts are in consensus that Bonanza Creek Energy Inc’s stock price is heading towards $17.19. It is currently trading at $7.3 ((as of October 8)), which would provide investors around 135.5% upside potential.