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Bonanza Creek Energy Inc (NYSE: BCEI) Is A Smart Turnaround Play

Bonanza Creek Energy Inc (NYSE: BCEI) Is A Smart Turnaround Play
Written by
Jarrod Wesson
Published on
April 13, 2017
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Bonanza Creek Energy Inc (NYSE: BCEI) is an extremely interesting oil and gas play that many institutional investors, such as hedge funds, are buying at this point in time. In this article, you will see that this stock does not only provide exposure to rise in oil prices, but it also has improving fundamentals. First of all, take a look at the chart:SourceOil and gas outlookWe provided an outlook of oil prices in a recent article. We recommend investors read this article. As mentioned in that piece, oil prices started an uptrend due to the recent decision to cut production of oil by the OPEC at the end of last year. Saudi Arabia and other members of the OPEC decided to not only cut output to 1.2 million barrels a day, but also contacted other countries such as Russia, Mexico, Kazakhstan and other non-OPEC members and made them cut output by about 600,000 barrels a day.Some oil traders were very reluctant to believe the OPEC decision since most of the time some members cheat and produce more barrels than agreed. However, we all should conclude that the production cut worked out since the WTI futures went trading from close to $45 last year to $53 only because of the agreement.The next OPEC meeting will be held on May 25, 2017, and we all expect that the production cut will be maintained. Several OPEC members, such as Kuwait, have expressed publicly that they will accept to maintain the cut. Additionally, maybe other members that were very reluctant to cut production, such as Iran, will be able to reduce production a little bit right now. If other members decide to cut too, the oil price should go even higher.In any case, we expect that the oil price will keep rising after the OPEC meeting in May. Since production decreases, the total amount of supply decreases step by step and consumers will need to pay more to get the same amount of crude oil. This is simple application of the supply and demand law that everyone studied in college.Bonanza Creek EnergyBonanza is an independent energy company that acquires, explores, develops, and produces onshore oil and associated liquids-rich natural gas in the United States. It was founded in Delaware on December 2, 2010 and went public in December 2011. The company has operations in Wattenberg Field in Colorado and the Dorcheat Macedonia Field in southern Arkansas as well as in North Park Basin in Colorado and the McKamie Patton Field in southern Arkansas.The company entered into a Restructuring Support Agreement ("RSA") on December 23, 2016 with the owners of 51% in aggregate principal amount of the Company’s 5.75% Senior Notes due 2023, 6.75% Senior Notes due 2021, and the following companies: NGL Energy Partners, LP and NGL Crude Logistics, LLC. Under the agreement, the company will convert some of the Company’s unsecured obligations to equity, offer rights to purchase common stock and entry into new crude oil purchase agreement with NGL Crude Logistics, LLC.Bonanza filed for chapter 11 on January 4, 2017 and mentioned in the annual report that it would reach an agreement with debtors on April 3, 2017. On April 7, 2017, the company filed a SEC filing, wherein it disclosed the agreement with debt holders. The same day, the market celebrated this news since the share price went from $0.9 to $1.18 in a few hours.The opportunity - Valuation of the companyCompanies exiting bankruptcy are most of the times targeted by sophisticated value investors that assess the value hidden in the balance sheet. This is obviously the case of Bonanza. The amount of institutional investors in this name is quite important. According to Yahoo Finance, the percentage of the free float held by institutions is 115%, which means that some traders are holding tremendous amount of shares as well as some derivatives. The existence of these derivatives is the only way to explain the percentage, which is higher than 100%. Additionally, the amount of insiders is relevant to 6.44%. But, let's focus on the fundamentals of the company.The share price of the company is $0.9155 as of April 13, 2017. We are going to compare it with the assets per share standing in the balance sheet. The book value per share is $0.38 and the company holds $1.62 cash per share. These are good figures as compared to the current share price. Some traders may dislike that the company had a large amount of debt; fair enough. But, these investors need to remember that according to the plan, with the debt holders, a large amount of debt will soon become equity. When this happens, the financial risk of the company will be diminished sharply and the share price may finally jump. This is what bankruptcy traders always look for.On the top of it, if the first investment thesis is correct, and the oil price finally rises, the fixed assets of the company will be much more valuable. Thus, the share price will run up the charts because of it.Savvy institutional investors investing here too You want to have a look at other sophisticated investors that invested millions here, have a look:

  • Alberta Investment Managament Corp (15.28%)
  • Hutchin Hill Capital, LP (8.29%)
  • Fir Tree Inc. (7.68%)
  • JVL Advisors, L.L.C. (4.84%)
  • Shaw D.E. & Co., Inc. (2.40%)
  • BlackRock Institutional Trust Company (2.38%)

ConclusionBonanza Creek seems like a very interesting pick. It is a company that recently received the approval from debt holders to continue its operations after filing for chapter 11. Additionally, if the oil price keeps rising thanks to OPEC cuts, it will be very beneficial for the share price of the company. Finally, we identified a large amount of institutional shareholders that invested here. As we always say, everybody cannot be wrong.We will be updating our subscribers as soon as we know more. For the latest updates on BCEI, sign up below!Disclosure: We have no position in BCEI and have not been compensated for this article.

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