Bellatrix Exploration: Some Improvement In AECO Prices, But Debt Remains A Challenge – Bellatrix Exploration Ltd. (OTCMKTS:BXEFF)

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Bellatrix Exploration’s (OTCPK:BXEFF) future remains challenging despite its recapitalization transaction and some improvement in AECO futures. At current 2020 strip prices, its debt may end up at over 6.0x EBITDAX, and even with a realistic best case scenario (with realized prices that are 20% above the strip scenario), it would end up with leverage of around 3.6x for now.

AECO Prices

AECO futures have improved a bit, and are now at around $1.40 USD per MMBTU for 2020, up close to 20% from this time last year. However, even during the winter months there isn’t an expectation that AECO will sustain over $2.00 USD per MMBTU for any prolonged period of time.

Source: Gas Alberta

Deloitte mentioned that AECO spot prices have often ended up above forecast futures, but even allowing for that, Bellatrix probably would only realize $1.50 USD per Mcf for its natural gas in 2020 given the still relatively weak prices in the US markets. This factors in Bellatrix’s higher than average heat content.

2020 Outlook

If Bellatrix maintains production at around 35,000 BOEPD in 2020, it would now generate around $164 million USD in revenues. There have been modest improvements in 2020 pricing expectations for AECO and the relevant regional US natural gas markets.

Bellatrix also has achieved strong recoveries of NGLs at its Alder Flats Plant, resulting in NGL sales yields of around 66 barrels per MMcf in 1H 2019 compared to 55 barrels per MMcf in 1H 2018. This has pushed its corporate liquids weighting up to 29% from 28%.

Unfortunately for Bellatrix, prices for NGLs have been weak, and it realized only approximately $10 USD for its NGLs in Q2 2019 and approximately $12 USD for its NGLs in 1H 2019. Roughly 24% of Bellatrix’s production is NGLs compared to 5% for crude oil and condensate, so changes in NGL prices have a significant impact on Bellatrix’s finances. I’ve assumed a decent recovery in NGL prices for 2020 (to $15 USD per barrel) but there may be some downside risk there.

Type Units $USD/Unit $ Million [USD]
Crude Oil & Condensate (Barrels) 617,458 $51.00 $31
NGLs (Barrels) 3,087,292 $15.00 $46
Natural Gas [MCF] 54,421,500 $1.50 $82
Other Income $5
Total Revenue $164

Despite the modest improvement in natural gas price, Bellatrix is still projected to have around $13 million USD in cash burn in 2020, while its outstanding balance of Third Lien notes would increase by $5 million USD due to PIK interest.

Some of Bellatrix’s expenses (mainly from production) have been reclassified as repayment of lease obligations due to its adoption of IFRS 16 Leases.

Expenses $ Million [USD]
Production $64
Transportation $20
Royalties $16
Cash G&A $12
Cash Interest $18
CapEx $34
Repayment Of Lease Obligations $13
Total Expenses $177

This would result in Bellatrix delivering around $39 million USD in EBITDAX (including subtracting the repayment of lease obligations). Bellatrix’s debt is still over 6x this amount despite its recapitalization transaction, leaving its common shares out of the money. This scenario may leave Bellatrix in violation of the Senior Debt covenant on its credit facility.

A Realistic Best Case Scenario

A realistic best-case scenario in terms of prices would see Bellatrix realize around $55 USD for its oil, $19 USD for its NGLs and $1.80 USD for its natural gas. This would result in it generating around $196 million USD in revenue.

Type Units $USD/Unit $ Million [USD]
Crude Oil & Condensate (Barrels) 617,458 $55.00 $34
NGLs (Barrels) 3,087,292 $19.00 $59
Natural Gas [MCF] 54,421,500 $1.80 $98
Other Income $5
Total Revenue $196

In this scenario, Bellatrix would generate around $15 million USD in positive cash flow if it wanted to maintain production levels. It would also generate $67 million USD EBITDAX.

Expenses $ Million [USD]
Production $64
Transportation $20
Royalties $20
Cash G&A $12
Cash Interest $18
CapEx $34
Repayment Of Lease Obligations $13
Total Expenses $181

Bellatrix’s debt would be around 3.6x EBITDAX in this improved pricing scenario. This is a significant improvement from the 6x or greater EBITDAX debt level mentioned before, but also still probably too high to achieve a refinancing of its debt.

Several years of similar prices might help Bellatrix by allowing it to spend enough to grow production. This could result in Bellatrix generating $90+ million USD EBITDAX by 2022 which would reduce its leverage to around 2.6x or so. Bellatrix would have a decent chance of refinancing its debt in that scenario. However, this would require Bellatrix from 2020 to 2022 to realize prices (for each of oil, NGLs and natural gas) that are at least slightly higher than what it has realized in any full year from 2016 until now.

Conclusion

Despite some improvement in AECO natural gas prices, Bellatrix’s leverage is still expected to be very high by the end of 2020 at current strip prices. Bellatrix needs a further 20% improvement in realized prices (above 2020 strip) in order to get its leverage down to around 3.6x by the end of 2020. It then needs similar prices in 2021 and 2022 in order to allow it to grow production and deleverage further ahead of its 2023 note maturities. While not impossible, this does show that Bellatrix has a relatively narrow path to be able to refinance its 2023 maturities and avoid restructuring. In the near term, Bellatrix could potentially end up in violation of the Senior Debt covenant for its credit facility as well, which could result in its debt becoming due unless the covenant is relaxed.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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