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Natural Gas | Oil

Bonanza Creek manages to bolster production in DJ Basin despite downturn

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Bonanza Creek manages to bolster production in DJ Basin despite downturn

Highlights

Company's acreage all located in unincorporated areas

Looks well positioned to handle proposed setback rule

Denver — Despite an epic commodity price downturn, and a time of plummeting rig counts and completions in oil-rich basins, Denver-based producer Bonanza Creek Energy managed to set a company oil and gas production record in the Denver-Julesburg Basin last quarter.

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The bulk of the company's wells and permits sit 2,000 feet or more from occupied structures in northern Weld County, leaving it well positioned to continue production gains despite a strict setback rule likely to be passed by state regulators in early November.

"Our focus on delivering efficient, low-cost production resulted in our highest production and lowest unit lease operating expenses in company history," said Bonanza Creek CEO Eric Greager. "The resulting free cash flow generation has us on track to pay down the remaining $20 million of RBL debt in the coming weeks."

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Bonanza's third-quarter 2020 estimated average sales volumes of 26,200 Boe/d were up 6% over second quarter volumes. Lease operating expenses for the quarter are expected to be $2.23/Boe, down 13% from second quarter 2020, and down 24% from the 2019 average.

Bonanza's production increase bucks the trend seen throughout the DJ Basin of lower oil and gas volumes since the crude price collapse in March. Oil production averaged 423,000 b/d in the DJ during the third quarter of 2020, according to data compiled by S&P Global Platts Analytics. It averaged 500,000 b/d over the first six months of the year. Associated gas production has fallen less dramatically, declining to 2.3 Bcf/d in the third quarter after averaging 2.4 Bcf/d over the first half of 2020.

DJ oil and gas production volumes are set to fall much further as rig counts in the basin have averaged five over the past three months, a far cry from the 28 rigs averaged during the entirety of 2019, according to data from Enverus.

According to a projection by Platts Analytics, total dry gas production in major Colorado basins, including the DJ and Piceance, will average 3.07 Bcf/d in 2021 compared with 3.6 Bcf/d in 2020, a decline of more than 500 MMcf/d.

In addition to commodity price woes, operators face a much stricter well permitting process moving forward due to the effects of Senate Bill 181, which are expected to materialize over the coming months. The bill's final regulatory details are currently being hammered out by the Colorado Oil and Gas Conservation Commission.

One of the most significant aspects of the new slate of rules involves drilling setbacks. Currently, new well sites must be at least 500 feet from homes and 1,000 feet from schools, playgrounds, hospitals, etc. However, the COGCC commissioners are expected to approve a 2,000-foot minimum drilling setback in November.

While this presents a problem for operators that own acreage in or near the ever-growing suburbs north of Denver, it presents less of an issue for companies holding more rural acreage. Bonanza Creek, for instance, holds no acreage in a municipality, focusing on rural drilling locations instead.