Bonanza Creek Energy Inc. (NYSE: BCEI) is in a pinch after the company said Feb. 29 that a deal to sell its Rocky Mountain Infrastructure (RMI) asset fell through.

Bonanza expected about $255 million from the sale but was unable to come to terms with Meritage Midstream Services IV LLC, which is backed by private equity firm Riverstone Holdings LLC. The company likely would have seen $175 million in cash on closing, said Mike Kelly, analyst with Seaport Global Securities LLC. The remainder would have been paid in drilling incentives through 2017.

Though 2015 saw a number of E&Ps sell midstream assets, Bonanza may be one of the few left holding the bag. The company will remarket the RMI midstream assets as well as continue shopping its Midcontinent assets. However, Bonanza may find it difficult to get a fair price in the environment.

The question now is how long Bonanza can hold on before its debt begins to bite at its heels. The company could have used the cash infusion to strengthen its balance sheet.

Liquidity stood at $405 million at year-end 2015, including:

  • $21 million in cash;
  • $384 million available under the revolver; and
  • A $475 million borrowing base with $79 million drawn.

“At current strip prices and without a liquidity event, our model calls for its 2.5x senior secured debt covenant to be breached in fourth-quarter 2016,” said Gabriele Sorbrara, analyst for Topeka Capital Markets.

Bonanza had a mixed fourth-quarter 2015 report. It reported a net loss of $574 million compared to a net loss of $43.2 million in the fourth quarter of 2014. The fourth-quarter 2015 loss was impacted by total property impairments of $586 million.

“In addition to mixed fourth-quarter 2015 results, BCEI provided disappointing first quarter 2016 production guidance down 16.5% sequentially at the mid-point and deferred 2016 capex and production guidance to a later date, given its balance sheet stress,” Sorbara said.

Richard Carty, Bonanza president and CEO, said that the RMI deal fell through after both sides couldn't to agree on terms.

“We have terminated the agreement and are released from exclusivity terms allowing us to resume talks with other interested parties," he said.

However, the pressure now falls on Bonanza to sell an asset that another eager private equity company walked away from.

“BCEI expects to receive the $6 million break-up fee from Meritage,” Sorbara said. “BCEI indicated that it has resumed talks with other interested parties; however, we believe the company has lost its leverage in negotiating.”

Bonanza Creek Energy is an independent E&P firm focused on assets in the Wattenberg Field of Colorado and the Dorcheat Macedonia Field of southern Arkansas.

Contact Darren Barbee at dbarbee@hartenergy.com.

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