Oil column: Looking for a bonanza
| Tuesday, Jun 30 2009 07:57 PM
Last Updated Tuesday, Jun 30 2009 07:57 PM
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A rig drills a heavy-oil horizontal well at one of Bonanza Creek Energy Co. LLC’s oil field properties in Kern County. (Photo courtesy of Bonanza Creek)
Its thirst for capital makes Bakersfield-based oil producer Bonanza Creek Energy Co. LLC much like a ... Lamborghini.
No, wait — make that a Corvette, said company President and CEO Mike Starzer, apparently sensitive to the challenges facing General Motors. (Good point: Use more domestic metaphors!)
The bottom line is that Bonanza Creek runs on high-octane fuel/cash. Fair enough. If this column generates enough investor interest to justify the 90 minutes Starzer spent with us one recent morning, more horsepower to him.
But first, where’s he headed with all the fuel?
The answer is, not where he originally expected, thanks to the credit crunch. But that’s not a bad thing.
If capital were easier to come by these days, Starzer said, Bonanza Creek would invest more in drilling and facilities. In fact, it wasn’t until December that the company opted to reduce its development budget to $18 million from the original $48 million, meaning Bonanza Creek is now operating out of cash flow, “which is good,” Starzer said.
(Side note: Only about 15 percent of that $18 million will be invested in the company’s California operations, both because of the slim profit margins here and fears that legislators will impose an oil severance tax to solve the state budget mess. Starzer said 35 percent of the budget will go toward its holdings in the Rockies; the remaining 50 percent is to end up in Arkansas.)
So, rather than pour larger amounts of money into its holdings, Bonanza Creek is looking to buy land from others, as it has in more than a dozen acquisitions since early 2006. In May alone Bonanza Creek spent $21.5 million on two properties near its existing operations, with one in the Rockies and one mid-continent.
Sensing that some companies may want to sell in this economy, Starzer said he was in talks with between six and 12 companies looking to unload real estate.
He has to be careful, though. Bonanza Creek has an investment budget of $323 million. That may sound like a lot, but it has to last through 2016.
Veteran Kern oil producer Fred Holmes, who serves on Bonanza Creek’s advisory committee, said now is indeed the time to buy. Valuations are depressed, Holmes said, and some highly leveraged producers want to consolidate.
Starzer couldn’t agree more.
“In this market right now,” he said, “acquisitions are most attractive investments.”
Whether Bonanza Creek is also a good investment is not for us to say. But in an effort to show that it is, Starzer assured us that he and other managers do have some of their own money tied up in recent investments, or as he put it, they have “skin in the game.”
That’s one way to deal with the credit crunch.
Oil spill crackdown
We never bought the argument that if you’re not doing anything wrong, you have no reason to be nervous around the police. There’s just something about broad authority that keeps us looking over our shoulder.
That’s why we have no problem with Les Clark’s, um, skepticism regarding new oil spill regulations being put together by the state Division of Oil, Gas & Geothermal Resources.
“Suffice to say I think it’s baloney,” Clark, vice president of Bakersfield’s Independent Oil Producers Agency, said of the new law, AB 1960, that begot the proposed regulations that DOGGR plans to release for public comment this month.
Clark went on to say that there are “maybe a couple bad actors and then the industry is branded as an industry that is spilling oil.”
State oil and gas supervisor Hal Bopp understands the industry is anxious — especially since AB 1960 gives DOGGR unprecedented authority to shut down entire oil production facilities. But the man most directly responsible for crafting the new regulations assured us that he doesn’t see everyone as being a bad actor.
“We all recognize it’s a fairly small number of operators” spilling oil, Bopp said.
Be that as it may, the law sets forth new requirements of every single producer in the state. Take a look at some of DOGGR’s new responsibilities under AB 1960:
• get spill contingency plans from all oil field operators
• develop minimum maintenance standards for all oil facilities in California oil fields
Bopp said the most common violation under the new law will likely be a lack of containment measures, such as building berms around production facilities.
“It’s a cost,” he said. “My sense is that’s probably going to be the biggest issue.”
