NEW YORK (TheStreet) -- Deteriorating crude oil prices could slow down Bonanza CreekEnergy (BCEI) - Get Report , which has been growing its oil and gas production twice as fast as the industry's average. But the company's low-cost asset base puts it in a good position to weather a tough market.
Bonanza Creek increased production at an average annual rate of 84% between 2010 and 2013 and has a production growth target of almost 50% for 2014, says James Masters, investment relations manager at the company.
This growth, which comes mainly from the company's wells at Wattenberg field in Colorado's Niobrara formation, is significantly higher than the industry's average of around 20%, Bonanza Creek said in a November presentation, but it's in line with Colorado peers such as Bill Barrett (BBG) and PDC Energy (PDCE) - Get Report .
Gabriele Sorbara, an analyst at Topeka Capital Markets, projects a 43% increase in the company's production in 2015. This will allow Bonanza Creek to grow its earnings to $2.26 a share in 2015 from $1.71 a share in 2013, Sorbara estimates in a Nov. 7 report.
Prolonged weakness in crude oil prices, which have fallen by more than 20% over the last three months, can hurt Bonanza Creek's performance, however.
Sorbara has said his projections are based on the assumption that the average price of a barrel of West Texas Intermediate crude oil will be $86 in 2015, higher than the current price of about $76.
If the average price is less than $80 next year, Bonanza Creek's management is likely to reduce spending levels in order to maintain its financial strength, Sorbara said. Some oil and gas producers, such as Continental Resources (CLR) - Get Report and ConocoPhillips (COP) - Get Report , already have announced cuts in capital spending for next year, while others, such as Halcon Resources (HK) , are scaling back drilling activity.
For Bonanza Creek, a reduction in spending could result in lower-than-expected growth. This year, Bonanza Creek expects capital expenditures of between $630 million and $680 million, up from $465.2 million last year. Masters did not provide any guidance for next year as the company is in the planning process, but he did say that Bonanza Creek will look to "preserve balance sheet flexibility" and "will adjust capital spending accordingly".
That said, Bonanza Creek is better positioned to weather a tough market in the future, since it is a low-cost oil and gas producer. The company's core operating area, the Wattenberg field at Niobrara, is one of the most economical oil and gas producing regions of the U.S., in terms of internal rate of returns, said a July Credit Suisse research report.
For Bonanza Creek, Niobrara assets could remain profitable even if WTI crude oil prices were to drop to between $60 and $65 a barrel, Sorbara wrote, although no exploration and production company will find it lucrative to drill near break even.
Masters says Bonanza Creek also benefits from having an "efficient operating program," which was reflected in 14% lower lease operating and general and administrative expenses per barrel of oil equivalents in the previous quarter, compared with last year. The company also has access to extensive surface infrastructure, such as pipeline networks, which allows Bonanza Creek to gather, process and transfer its products to the market.
Masters also said that the company's cash costs for production were just over $19 a barrel of oil equivalents, significantly lower than the company's average sales price, excluding the impact of derivatives, of $66.64 a barrel of oil equivalent. This translates into a healthy cash margin of more than 70%. The margin can act as a cushion in the future, softening a blow coming from lower oil prices.
At the time of publication, the author held no positions in any of the stocks mentioned.
This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
TheStreet Ratings team rates BONANZA CREEK ENERGY INC as a Buy with a ratings score of B-. TheStreet Ratings Team has this to say about their recommendation:
"We rate BONANZA CREEK ENERGY INC (BCEI) a BUY. This is driven by several positive factors, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its robust revenue growth, impressive record of earnings per share growth, compelling growth in net income, good cash flow from operations and expanding profit margins. We feel these strengths outweigh the fact that the company has had generally high debt management risk by most measures that we evaluated."
You can view the full analysis from the report here: BCEI Ratings Report