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BCEI > SEC Filings for BCEI > Form 10-Q on 9-Nov-2012All Recent SEC Filings

Show all filings for BONANZA CREEK ENERGY, INC.

Form 10-Q for BONANZA CREEK ENERGY, INC.


9-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained in our Annual Report on Form 10-K for the year ended December 31, 2011 (the "2011 Annual Report"), as well as the unaudited condensed consolidated financial statements and notes thereto included in this Quarterly Report on Form 10-Q (this "Report").

This Report contains various statements, including those that express belief, expectation or intention, as well as those that are not statements of historic fact, that are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of 1934, as amended. These forward-looking statements may include projections and estimates concerning our capital expenditures, our liquidity and capital resources, our estimated revenues and losses, the timing and success of specific projects, outcomes and effects of litigation, claims and disputes, our business strategy and other statements concerning our operations, economic performance and financial condition. When used in this Report, the words "could," "believe," "anticipate," "intend," "estimate," "expect," "may," "continue," "predict," "potential," "project" and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain such identifying words. We have based these forward-looking statements on certain assumptions and analyses we have made in light of our experience and our perception of historical trends, current conditions and expected future developments as well as other factors we believe are appropriate under the circumstances. The actual results or developments anticipated by these forward-looking statements are subject to a number of risks and uncertainties, many of which are beyond our control, and may not be realized or, even if substantially realized, may not have the expected consequences.

Forward-looking statements may include statements about:

          our ability to replace oil and natural gas reserves;

          declines or volatility in the prices we receive for our oil and
natural gas;

          our financial position;

          our cash flow and liquidity;

          general economic conditions, whether internationally, nationally or
in the regional and local market areas in which we do business;

          the recent economic slowdown that has and may continue to adversely
affect consumption of oil and natural gas by businesses and consumers;

          our ability to generate sufficient cash flow from operations,

borrowings or other sources to enable us to fully develop our undeveloped acreage positions;

the presence or recoverability of estimated oil and natural gas reserves and the actual future production rates and associated costs;

uncertainties associated with estimates of proved oil and gas reserves and, in particular, probable and possible resources;

the possibility that the industry may be subject to future regulatory or legislative actions (including additional taxes and changes in environmental regulation);

          environmental risks;

          drilling and operating risks;

          exploration and development risks;

          competition in the oil and natural gas industry;

          management's ability to execute our plans to meet our goals;

          our ability to retain key members of our senior management and key
technical employees;

          access to adequate gathering systems and pipeline take-away capacity
to execute our drilling program;

          our ability to secure firm transportation for oil and natural gas we
produce and to sell the oil and natural gas at market prices;

          costs associated with perfecting title for mineral rights in some of
our properties;

          continued hostilities in the Middle East and other sustained military
campaigns or acts of terrorism or sabotage; and

          other economic, competitive, governmental, legislative, regulatory,

geopolitical and technological factors that may negatively impact our businesses, operations or pricing.

All forward-looking statements speak only as of the date of this Report. We disclaim any obligation to update or revise these statements unless required by law, and you should not place undue reliance on these forward-looking statements. Although we believe that our plans, intentions and expectations reflected in or suggested by the forward-looking statements we make in this Report are reasonable, we can give no assurance that these plans, intentions or expectations will be achieved. We disclose important factors that could cause our actual results to differ materially from our expectations below and under "Item 1A. Risk Factors" in our 2011 Annual Report. These cautionary statements qualify all forward-looking statements attributable to us or persons acting on our behalf.


Overview

Bonanza Creek Energy, Inc. ("BCEI" or, together with our consolidated subsidiaries, the "Company," "we," "us," or "our") is an independent oil and natural gas company engaged in the acquisition, exploration, development and production of onshore oil and associated liquids-rich natural gas in the United States. Our assets and operations are concentrated primarily in the Wattenberg Field and North Park Basins in Colorado (Rocky Mountain region) and southern Arkansas (Mid-Continent region). In addition, we own and operate oil producing assets in the San Joaquin Basin (California region), which are currently classified as discontinued operations. Our management team has extensive experience acquiring and operating oil and gas properties, which we believe will contribute to the development of our inventory of projects, including those targeting the oily Cotton Valley sands in our Mid-Continent region and the Niobrara oil shale formation in our Rocky Mountain region. We operate approximately 99.5% and hold an average working interest of approximately 80.7% of our proved reserves, providing us with significant control over the rate of development of our asset base.

As demonstrated by our $165.5 million capital program in 2011 and our amended $298 million capital program in 2012, we are increasingly focused on exploiting our inventory of high-return projects. We also continue to seek acquisitions that will complement our existing core properties.

Our revenue, profitability and future growth rate depend on factors beyond our control, such as economic, political and regulatory developments. Oil and gas prices historically have been volatile and may fluctuate widely in the future. We attempt to protect our capital and operational plans by judiciously hedging our sales of oil and natural gas.

Third Quarter 2012 Highlights:

For the third quarter 2012,

Total production was 865 MBoe (9,403 Boe/d average daily production), a 122% increase over the third quarter 2011 and 9% over the second quarter 2012;

Total revenue was $58.3 million, a 125% increase over the third quarter 2011 and 13% over the second quarter 2012; and

Net income was $3.4 million, or $0.09 per diluted share.

Results for Continuing Operations

Three Months Ended September 30, 2012 Compared To Three Months Ended September 30, 2011

Revenues



The following table summarizes our revenues and production data for the periods
indicated.



                                 Three Months Ended September 30,
                                                                Percent
                               2012         2011      Change    Change
                                (In thousands, except percentages)
Revenues:
Crude oil sales             $    49,755   $ 19,085   $ 30,670       161 %
Natural gas sales                 4,668      3,598      1,070        30 %
Natural gas liquids sales         3,757      3,150        607        19 %
CO2 sales                           148         82         66        80 %
Product revenues            $    58,328   $ 25,915   $ 32,413       125 %




                                    Three Months Ended September 30,
                                                                Percent
                                   2012       2011     Change   Change
Sales volumes:
Crude oil (MBbls)                   567.0     227.3     339.7       149 %
Natural gas (MMcf)                1,388.6     698.3     690.3        99 %
Natural gas liquids (MBbls)          66.6      45.3      21.3        47 %
Crude oil equivalent (MBoe)(1)      865.0     389.0     476.0       122 %



(1) Determined using the ratio of 6 Mcf of natural gas to 1 Bbl of crude oil. Excludes CO2 sales.


                                                 Three Months Ended September 30,
                                                                               Percent
                                              2012         2011      Change    Change
Average Sales Prices (before hedging)(1):
Crude oil (per Bbl)                         $   87.75    $   83.96   $  3.79         5 %
Natural gas (per Mcf)                            3.36         5.15     (1.79 )     (35 )%
Natural gas liquids (per Bbl)                   56.41        69.54    (13.13 )     (19 )%
Crude oil equivalent (per Boe)(2)               67.26        66.41      0.85         1 %




                                                Three Months Ended September 30,
                                                                              Percent
                                             2012         2011      Change    Change
Average Sales Prices (after hedging)(1):
Crude oil (per Bbl)                        $   86.89    $   80.98   $  7.91        10 %
Natural gas (per Mcf)                           3.65         5.38     (1.73 )     (32 )%
Natural gas liquids (per Bbl)                  56.41        69.54    (13.08 )     (19 )%
Crude oil equivalent (per Boe)(2)              67.15        65.07      2.08         3 %



(1) Although we do not designate our derivatives as cash flow hedges for financial statement purposes, the derivatives do economically hedge the price we receive for crude oil and natural gas.

(2) Determined using the ratio of 6 Mcf of natural gas to 1 Bbl of crude oil. Excludes CO2 sales.

Revenues increased by 125%, to $58.3 million for the three months ended September 30, 2012 compared to $25.9 million for the three months ended September 30, 2011. Oil, natural gas and natural gas liquids production increased 149%, 99% and 47%, respectively, during the three months ended September 30, 2012, as compared to the three months ended September 30, 2011. During the period from September 30, 2011 through September 30, 2012, we drilled and completed 108 gross (105.0 net) wells in the Rockies and 45 gross (40.0 net) wells in Southern Arkansas. The increased volumes are a direct result of the $165.5 million expended for drilling and completion during the year ended December 31, 2011, and the $235.5 million expended during the nine months ended September 30, 2012. Oil prices increased from an average of $83.96 in 2011 to a per barrel rate of $87.75 in the comparable three month period that ended September 30, 2012. Increased oil volumes of 149% accounted for $28.5 million of the total $30.7 million increase in revenues for the Company for the three month period ended September 30, 2012 compared to the same period in 2011. Natural gas volumes increased by 99% in 2012, but were offset by a sales price decline of 35% from $5.15 per Mcf to $3.36 per Mcf for these three month periods. Natural gas liquids volumes increased by 47% in 2012 with a 19% decrease in prices period over period. Our Wattenberg field natural gas is sold without processing and sells at a premium due to its very high BTU content. Our production of oil, natural gas and natural gas liquids for the three months ended September 30, 2012 was approximately 66%, 27% and 7%, respectively.

Operating Expenses



The following table summarizes our operating expenses for the periods indicated.



                                                                               Percent
                                              2012         2011      Change    Change
                                               (In thousands, except percentages)
Expenses:
Lease operating                            $    8,444    $  4,686   $  3,758        80 %
Severance and ad valorem taxes                  3,022       1,343      1,679       125 %
General and administrative                      9,335       4,179      5,156       123 %
Depreciation, depletion and amortization       17,716       6,330     11,386       180 %
Impairment of oil and gas properties              269         623       (354 )     (57 )%
Exploration                                     6,359          19      6,340    33,368 %
Operating expenses                         $   45,145    $ 17,180   $ 27,965       163 %




                                               Three Months Ended September 30,
                                                                             Percent
                                             2012         2011     Change    Change
Selected Costs ($ per Boe):
Lease operating                            $    9.76    $  12.05   $ (2.29 )     (19 )%
Severance and ad valorem taxes                  3.49        3.45      0.04         1 %
General and administrative                     10.79       10.74      0.05         0 %
Depreciation, depletion and amortization       20.48       16.27      4.21        26 %
Impairment of oil and gas properties            0.31        1.60     (1.29 )     (80 )%
Exploration                                     7.35        0.05      7.30    14,600 %
Operating expenses                         $   52.18    $  44.16   $  8.02        18 %


Lease Operating Expense. Our lease operating expenses increased $3.8 million, or 80%, to $8.4 million for the three months ended September 30, 2012 from $4.7 million for the three months ended September 30, 2011 and decreased on an equivalent basis from $12.05 per Boe to $9.76 per Boe. The increase in lease operating expense was related to increased production volumes attributable to our drilling program and the operation of an additional gas plant that was constructed during 2011 that came on line during September of 2011. Gas plant operating expense, which is a component of lease operating expense, increased $0.9 million, or 53%, to $2.5 million for the three month period ended September 30, 2012 from $1.6 million for the three month period ended September 30, 2011. The increase in gas plant operating expense was primarily related to the replacement of a heat exchanger which cost approximately $0.7 million to procure and install. During the three months ended September 30, 2012, well servicing, rental equipment and other expenses were $1.5 million, $0.5 million and $0.7 million higher, respectively, than the three months ended September 30, 2011. The decrease in lease operating expense on an equivalent basis was primarily related to the lower per unit operating costs of the wells drilled during the period from September 30, 2011 through September 30, 2012.

Severance and ad valorem taxes. Our severance and ad valorem taxes increased $1.7 million, or 125%, to $3.0 million for the three months ended September 30, 2012 from $1.3 million for the three months ended September 30, 2011. The increase was primarily related to a 122% increase in production volumes which was further increased by a slight increase in realized prices per Boe during the three months ended September 30, 2012 as compared to the three months ended September 30, 2011. The increase in severance and ad valorem taxes for the three months ended September 30, 2012 as compared to the three months ended September 30, 2011 was related to oil severance taxes and ad valorem taxes that were $1.2 million and $0.3 million, respectively, higher than the comparable period in the previous year.

Exploration costs. Our exploration expense increased $6.3 million to $6.4 million in the three months ended September 30, 2012 from $19 thousand in the three months ended September 30, 2011. During the three months ended September 30, 2012, a seismic acquisition project in the North Park Basin of Colorado was completed which resulted in charges of approximately $0.3 million, delay rentals were $0.2 million, and two exploratory locations in the North Park basin were also charged to exploration expense. This resulted in a $5.8 million charge to our statement of operations during the three months ended September 30, 2012.

Depletion, depreciation and amortization. Our depletion, depreciation and amortization expense increased $11.4 million, or 180%, to $17.7 million for the three months ended September 30, 2012 from $6.3 million for the three months ended September 30, 2011. Our depreciation, depletion and amortization expense per Boe produced increased $4.21, or 26% to $20.48 for the three months ended September 30, 2012 as compared to $16.27 for the three months ended September 30, 2011. This increase was primarily the result of a 122% increase in production period over period and the inclusion of additional horizontal Niobrara wells in the depletion base. During the three months ended September 30, 2011 two horizontal Niobrara wells were included in the depletion base as compared to 25 horizontal Niobrara wells that were included in the depletion base during the three months ended September 30, 2012.

Impairment of oil and gas properties. The Company recorded $0.3 million of proved property impairment in one non-core field in Southern Arkansas for the three months ended September 30, 2012. The Company recorded $0.6 million of proved property impairment in one non-core field in Southern Arkansas for the three months ended September 30, 2011.

General and administrative. Our general and administrative expense increased $5.2 million, or 123%, to $9.3 million for the three months ended September 30, 2012 from $4.2 million for the period ended September 30, 2011. During the three months ended September 30, 2012, wages, benefits and employee placement fees were $2.5 million higher than the three month period ended September 30, 2011 due to our increasing headcount as the result of our accelerated drilling program and the addition of accounting, legal and IT positions that were previously outsourced. During the three months ended September 30, 2012, legal fees were $1.0 million higher and non-cash stock compensation charges for officers and certain employees were $1.4 million higher than the three month period ended September 30, 2011. The majority of the increased general and administrative expense is due to hiring a large number of personnel to support our growth and the regulatory compliance obligations of a newly public company.

Interest expense. Our interest expense for the three months ended September 30, 2012 was $1.1 million which was commensurate with the three months ended September 30, 2011. Average debt outstanding for the three months ended September 30, 2012 was $121.1 million as compared to $108.1 million for the three months ended September 30, 2011.

Realized loss on settled commodity derivatives. Realized losses on oil and gas hedging activities decreased by $0.4 million from a loss of $0.5 million for the three months ended September 30, 2011 to a loss of $0.1 million for the three months ended September 30, 2012. The change from a realized loss to a realized gain period over period was primarily related to commodity prices that were 1% higher during the three month period ended September 30, 2012.


Income tax expense. Our estimate for federal and state income taxes for the three months ended September 30, 2012 was $1.2 million from continuing operations, as compared to $8.5 million for the three months ended September 30, 2011. We are allowed to deduct various items for tax reporting purposes that are capitalized for purposes of financial statement presentation. Our estimate of deferred income taxes for the three month period ended September 30, 2012 was $0.6 million and all income taxes for the three month period ended September 30, 2011 were deferred. Our effective tax rates differ from the U.S. statutory income tax rate primarily due to the effects of state income taxes.

Nine Months Ended September 30, 2012 Compared To Nine Months Ended September 30, 2011

Revenues



The following table summarizes our revenues and production data for the periods
indicated.



                                  Nine Months Ended September 30,
                                                                Percent
                               2012         2011      Change    Change
                                (In thousands, except percentages)
Revenues:
Crude oil sales             $   133,880   $ 52,253   $ 81,627       156 %
Natural gas sales                12,238      9,279      2,959        32 %
Natural gas liquids sales        11,315      8,828      2,487        28 %
CO2 sales                           180        249        (68 )     (27 )%
Product revenues            $   157,613   $ 70,609   $ 87,005       123 %




                                    Nine Months Ended September 30,
                                                               Percent
                                  2012      2011     Change    Change
Sales volumes:
Crude oil (MBbls)                1,462.6     584.7     877.9       150 %
Natural gas (MMcf)               3,740.7   1,821.4   1,919.3       105 %
Natural gas liquids (MBbls)        202.4     128.8      73.6        57 %
Crude oil equivalent (MBoe)(1)   2,288.5   1,017.1   1,271.4       125 %



(1) Determined using the ratio of 6 Mcf of natural gas to 1 Bbl of crude oil. Excludes CO2 sales.

                                                 Nine Months Ended September 30,
                                                                              Percent
                                              2012         2011     Change    Change
Average Sales Prices (before hedging)(1):
Crude oil (per Bbl)                         $   91.53    $  89.37   $  2.16         2 %
Natural gas (per Mcf)                            3.27        5.09     (1.82 )     (36 )%
Natural gas liquids (per Bbl)                   55.90       68.54    (12.64 )     (18 )%
Crude oil equivalent (per Boe)(2)               68.79       69.18     (0.39 )      (1 )%




                                                Nine Months Ended September 30,
                                                                             Percent
                                             2012         2011     Change    Change
Average Sales Prices (after hedging)(1):
Crude oil (per Bbl)                        $   90.16    $  84.53   $  5.63         7 %
Natural gas (per Mcf)                           3.49        5.36     (1.87 )     (35 )%
Natural gas liquids (per Bbl)                  55.90       68.54    (12.64 )     (18 )%
Crude oil equivalent (per Boe)(2)              68.28       66.87      1.41         2 %



(1) Although we do not designate our derivatives as cash flow hedges for financial statement purposes, the derivatives do economically hedge the price we receive for crude oil and natural gas.

(2) Determined using the ratio of 6 Mcf of natural gas to 1 Bbl of crude oil. Excludes CO2 sales.


Revenues increased by 123%, to $157.6 million for the nine months ended September 30, 2012 compared to $70.6 million for the nine months ended September 30, 2011. Oil, natural gas and natural gas liquids production increased 156%, 32%, and 28%, respectively, during the nine months ended September 30, 2012, as compared to the nine months ended September 30, 2011. During the period from September 30, 2011 through September 30, 2012, we drilled and completed 108 gross (105.0 net) wells in the Rocky Mountain region and 45 gross (40.0 net) wells in the Mid-Continent region. The increased volumes are a direct result of the $165.5 million expended for drilling and completion during the year ended December 31, 2011, and the $235.5 million expended during the nine months ended September 30, 2012. Oil prices increased from an average of $89.37 in 2011 to a per barrel rate of $91.53 in the comparable nine month period that ended September 30, 2012. The combination of increased oil volumes and prices accounted for $81.6 million of the total $87.0 million increase in revenues for the Company for the nine month period ended September 30, 2012 compared to the same period in 2011. Natural gas volumes increased by 32% in 2012, but were offset by a sales price decline of 36% from $5.09 per Mcf to $3.27 per Mcf for these nine month periods. Natural gas liquid volumes increased by 28% in 2012, but were offset by a sales prices decline of 18% from $68.54 per Bbl to $55.90 per Bbl for these nine month periods. Our Wattenberg field natural gas is sold without processing and sells at a premium due to its very high BTU content. Our production of oil, natural gas and natural gas liquids for the nine months ended September 30, 2012 was approximately 64%, 27% and 9%, respectively.

Operating Expenses



The following table summarizes our operating expenses for the periods indicated.



                                                                               Percent
                                              2012         2011      Change    Change
                                               (In thousands, except percentages)
Expenses:
Lease operating                            $    22,506   $ 12,041   $ 10,465        87 %
Severance and ad valorem taxes                   9,387      3,779      5,608       148 %
General and administrative                      22,410      9,116     13,294       146 %
Depreciation, depletion and amortization        41,751     18,472     23,279       126 %
Impairment of oil and gas properties               269        623       (354 )     (57 )%
Exploration                                      9,564        566      8,998     1,590 %
Operating expenses                         $   105,887   $ 44,597   $ 61,290       137 %




                                               Nine Months Ended September 30,
                                                                            Percent
                                             2012        2011     Change    Change
Selected Costs ($ per Boe):
Lease operating                            $    9.83    $ 11.84   $ (2.01 )     (17 )%
. . .
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