Engineering-focused Bonanza Creek aggressively expanding its portfolio

All photos courtesy of Bonanza Creek Energy.

EDITOR'S NOTE: Michael R. Starzer is president and CEO of Bonanza Creek Energy Inc. (NYSE: BCEI) and also a member of the board of directors. He was a co-founder of BCEI's predecessor company. He has more than 28 years' experience in the oil and gas industry and has served in numerous positions evaluating and developing oil, gas, electricity, and geothermal resources. This includes stints with Unocal, Berry Petroleum, and the California State Lands Commission. Starzer holds a degree in petroleum engineering from the Colorado School of Mines and an MS degree in engineering management from the University of Alaska. He is a registered professional engineer in petroleum engineering.

OIL & GAS FINANCIAL JOURNAL: On Dec. 15, 2011, Bonanza Creek Energy entered the public markets and listed its shares on the NYSE – trading under the ticker BCEI. What prompted your decision to go public, especially now, given such challenging markets, and what was the primary use of proceeds?

BONANZA CREEK ENERGY INC.: We get the why question a lot. Bonanza Creek Energy, Inc. is actually our third Bonanza Creek company. In our first Bonanza Creek company we delivered an approximate 11.7x ROI to our investors between 2001 through 2005. In the second Bonanza Creek company, we delivered a 3.1x ROI to our investors, so we know we can deliver attractive returns. Quite frankly, we're excited to now enter the public arena and believe that our top-quartile growth potential and experienced management team makes us an attractive investment. We could have stayed a private company; we didn't need to go public, but with so many internal opportunities, we felt that the infusion of public capital would allow us to aggressively develop our investment portfolio and maximize shareholder value. We have essentially doubled production every year since 2006. With a $250 million capital expenditure budget for 2012, we are confident that we will again double production, ending the year with an average of 8,700 to 10,000 boe/d.

The markets in December certainly were challenging. We took a bit of a haircut to become part of the IPO club, but since then Bonanza Creek Energy is trading at an 11% premium to the IPO price of $17 a share. We sold 10 million shares at $17 and effectively reduced our revolving credit facility to a nominal amount, such that we entered 2012 with very little debt and a borrowing base of $220 million. We forecast to outspend our cash flow this year by approximately $75 million and will use our revolver to fund the difference.

OGFJ: Talk to us a little bit about capital allocation. What thoughts go into your decision-making process when determining how to allocate capital between your operations in the Wattenberg Field and your Cotton Valley play?

STARZER: Bonanza Creek possesses a large organic portfolio of attractive investment opportunities. The Wattenberg Field is Bonanza Creek's main focus going forward. We are fortunate to be an onshore, oil-weighted producer with projects that have very high rates of return. We consider the Cotton Valley play in southern Arkansas to be our company's cash machine; these investments are low-risk proved infill wells that pay-out quickly and produce abundant amounts of cash. This year we forecast over $100 million in cash flow from this region. We use this cash flow to help fund our horizontal Niobrara play in the Wattenberg Field. We drilled four horizontal Niobrara wells in the Wattenberg in 2011 and were very pleased with the results. Based on our data and that of our neighbors, including Noble and Anadarko, we are satisfied that our acreage has been de-risked, and we are commencing a 24-well program in 2012, increasing in 2013 and beyond. So, the decision-making process is not so much what do we drill, as it is how many and how fast?

OGFJ: Companies operating in many of the oil and liquids basins of the Lower 48 are seeing tight competition for services and midstream infrastructure. You mentioned your main operational focus will be the Wattenberg field: Do you anticipate any service or infrastructure issues? And, what tactics or strategies does Bonanza Creek pursue to ensure adequate access to these vital services?

Bonanza Creek Energy allocates $146 million of its 2012 CAPEX budget to drill oily Wattenberg projects.

STARZER: The Wattenberg field is unique in that it has been around for over 40 years. It has been reborn multiple times over the decades thanks to new horizons and new technologies. In addition, Bonanza Creek has been active in the Wattenberg field for over a decade drilling more than 200 wells and has experienced personnel in the area. The benefit, then, is that as an older field, the neighbors and regulators are friendly and the infrastructure is in place. Unlike other rapidly growing resource plays where crews sleep in tents or trailers, our crews go home and sleep in their own beds.

To date, we have not had any problems securing frac crews, sand, or water. That said, going into the year, we thought it better to be safe than sorry and contracted two dedicated rig crews for the drilling of our horizontal wells.

OGFJ: You have more than 43 MMboe in proved reserves in the company, 65% of which is oil and liquids. Will acquisitions be part of your growth strategy or will you pursue an organic growth program?

STARZER: We are long on internal growth opportunities. We have an inventory of over 1,000 drilling locations throughout our portfolio, and approximately 40% of those are proved. So, for the next few years we can keep our nose to the grindstone and really grow this company through the drill bit. That being said, however, we consider acquisitions to be a core competency of ours having made 16 significant acquisitions since 2006. Each acquisition has been predictable to our investors, recognizing Bonanza Creek's strengths. We look for opportunities to apply our expertise in fracture stimulation and horizontal drilling to maximize value. Arkansas is a good example of this. When we bought the position in 2008, it was producing only 800 boe/d. Shortly after acquiring we applied pin-point fracturing technology to the oily Cotton Valley reservoir and breathed new life into an old field. Today it is producing over 4,000 boe/d.

In short, we are focused on drilling what we have, but will be opportunistic going forward. What you won't see us do is buy something that will take effort to explain to the market. When we make an acquisition, people will say "that makes sense – that was predictable." We'll stick to our core competencies of fracture stimulation and horizontal drilling.

OGFJ: It's fair to say that results from the Niobrara have been inconsistent to date, but information from Noble and Anadarko, primarily, suggests that the Wattenberg has been essentially de-risked. It seems that location is everything. Where is your acreage block located in the play and what are your 2012 drilling plans to exploit the resource?

STARZER: I think you've said it perfectly. Location is absolutely key in the Niobrara, and we are fortunate to be in the oily sweet spot. Recent results from Noble and Anadarko have been tremendously encouraging as we evaluate our position, especially since they offset our acreage. We are located in what Noble calls the Wattenberg Extension and the Colorado Oil & Gas Commission calls the Greater Wattenberg field. It's right in the oily window. Think of the Wattenberg field as an oval shape that runs southwest to northeast. As you get further to the northeast, thermal maturity lessens and the reservoir becomes much oilier. Noble's Gemini well, for example, was drilled in the heart of the Wattenberg and produced approximately 70% natural gas. In our area, we see approximately 70% crude oil. So, while the IP rates may not be as eye-catching, the higher oil content gives us very attractive returns.

In 2012, we plan to spend approximately $146 million to drill 92 vertical Niobrara/Codell wells and 24 horizontal Niobrara wells.

OGFJ: What are your completed well costs in the Wattenberg, and do you have any early estimates of EURs?

STARZER: Not many areas in the United States exist where you can drill wells for $4 million and recover over 300 Mboe, 70% of which is oil. Our drilling and completion model is based on what we have seen the industry gravitate toward over the past couple of years. We're comfortable drilling 4,000-foot laterals with 16 frac stages. We have applied our own operational improvements over the course of our development and are seeing over 50 boe/d per frac stage during initial production, a number we are very happy with. This translates to an average IP rate of over 800 boe/d.

We will continue drilling our 4,000-foot horizontal wells, but another opportunity we're excited about and currently evaluating is the application of extended laterals. Noble, for example, has drilled a 9,100-foot lateral with 39 frac stages for $7.5 million just to the north of our acreage and the results have been terrific. Noble brought the well on at over 1,000 boe/d and it has averaged 750 boe/d during its first 90 days. They estimate an EUR of 600 Mboe, or double the recovery for less than double the cost. The increase in returns is tremendous, so we're preparing to drill our own extended reach lateral in the near future. Noble is also experimenting with down-spacing their horizontal wells near our acreage. Since we have historically drilled our vertical Niobrara wells down to 20-acre spacing, the upside of down-spacing our horizontal development is significant. In addition, Anadarko has released the results of two of the over 15 Codell horizontals drilled in the Wattenberg field. These wells came in with equally attractive rates to the Niobrara and we are preparing to also drill a Codell horizontal in the near future.

"We are an engineering-focused company with first class technical and operations people, and our core competencies include horizontal drilling and fracture stimulation. With that expertise, we are well positioned to execute on unconventional resource plays as they develop in the future. We will grow larger and use our balance sheet prudently to become a multi-billion dollar company"

OGFJ: What percentage of your CAPEX will you allocate toward the Wattenberg? How will you fund the program?

STARZER: The Wattenberg Field is our primary focus and we plan to spend approximately $146 million, or 58% of our 2012 capital budget in the field. The $146 million will be invested to drill 92 vertical wells and 24 horizontal wells during 2012, and will be funded through a combination of cash flow and our revolver.

OGFJ: How much leverage do you have in the Wattenberg compared to your peers?

STARZER: Bonanza Creek is the one of the highest levered companies to Niobrara success. There are other companies with large acreage positions in the Niobrara: Noble, Anadarko, and PDC. While each operator is very enthusiastic about the play, it moves the needle for us by the largest margin.

OGFJ: While many investors associate Bonanza Creek as an operator with a large acreage position in the Wattenberg, your company also operates in the oil prone portion of the Cotton Valley in southern Arkansas. What are your development plans in this play? How much capital will you allocate to the Cotton Valley?

STARZER: At year-end 2011, we had 149 PUD infill locations in Arkansas utilizing 10-acre spacing in the Dorcheat Field, leaving us approximately four years of full development in this area. In addition, we have a large recompletion inventory that provides additional volumes at very little cost. We process all of our own gas produced from these fields, further enhancing our economics, from two facilities that have a combined processing capacity of 28 MMcf/d. We are currently expanding, adding an additional 12.5 MMcf/d; we expect this to be online in the first quarter of 2013. Additional upside may include down-spacing the lenticular Cotton Valley sands at Dorcheat to 5-acre spacing, increasing ultimate recovery from the approximate one-half billion barrels equivalent in place.

This asset gives us a solid financial base from which to pursue our high upside projects in the Rocky Mountains. These wells provide long-lived, stable, oily production with high returns. They are predictable and highly profitable. We will spend approximately $56 million to drill 38 wells and approximately $20 million to expand our Dorcheat-Macedonia gas processing facility in 2012.

OGFJ: How are you evaluating your unbooked reserve potential in the greater Wattenberg Field and the Deep Smackover?

CLOCKWISE BOTTOM LEFT: Gary A. Grove, Chief Operating Officer & Executive VP; Patrick A. Graham, Executive VP of Corporate Development; James R. Casperson, Chief Financial Officer & EVP; Michael R. Starzer, CEO & President

STARZER: We like to think of ourselves as "fast followers." It doesn't make much sense for a small company like Bonanza Creek to do a lot of science projects in the areas we operate. We let our neighbors with big budgets figure out what works and doesn't work and we're content to stand on their shoulders. In the Niobrara, we're watching what Noble is doing on its extended reach laterals and also with its down-spacing pilot program, drilling horizontals on less than 80 acre spacing. In southern Arkansas, we're excited to see how Southwestern and others do with their Deep Smackover/Brown Dense wells. The opportunity there could be an additional 30 million barrels for us, so we're very interested to see their results. Together, the horizontal Niobrara program and the Brown Dense potential represent nearly 100 million barrels – two game changing opportunities for Bonanza Creek.

OGFJ: Thank you for speaking with us. In closing, kindly paint a picture for investors of what you believe Bonanza Creek's reserve base, production volumes, and areas of operations will look like in three to five years.

STARZER: The future is as bright for Bonanza Creek as it's ever been. We entered 2012 with a pristine balance sheet and forecasted growth of over 100%. We have years of inventory available to us in the horizontal Niobrara play in the Wattenberg, but also 33,000 net acres of Niobrara potential in the North Park Basin, an area we will test by drilling three horizontal wells this year. Should that work, as we expect it will, we will have even more high upside inventory in the company. In addition, I mentioned the Brown Dense in Arkansas is another exciting play that we're watching very closely. We are primed for top quartile growth for many years to come. We are an engineering-focused company with first class technical and operations people, and our core competencies include horizontal drilling and fracture stimulation. With that expertise, we are well positioned to execute on unconventional resource plays as they develop in the future. We will grow larger and use our balance sheet prudently to become a multi-billion dollar company.