Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended September 30, 2013

or

For the transition period from                to                

Commission File Number:  001-35371

Bonanza Creek Energy, Inc.

(Exact name of registrant as specified in its charter)

(720) 440-6100

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  x Yes  o No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  x Yes  o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  o Yes  x No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. 40,279,049 shares of common stock were outstanding as of September 30, 2013.

Table of Contents

BONANZA CREEK ENERGY, INC.

FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 30, 2013

TABLE OF CONTENTS

Table of Contents

PART I - FINANCIAL INFORMATION

Item 1.   Financial Statements.

BONANZA CREEK ENERGY, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(unaudited)

See accompanying notes to these consolidated financial statements.

2

Table of Contents

BONANZA CREEK ENERGY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

See accompanying notes to these consolidated financial statements.

3

Table of Contents

BONANZA CREEK ENERGY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

See accompanying notes to these consolidated financial statements.

4

Table of Contents

Bonanza Creek Energy, Inc.

Notes to the Consolidated Financial Statements as of September 30, 2013 (unaudited)

1. ORGANIZATION AND BUSINESS:

Bonanza Creek Energy, Inc. (the “Company” or “BCEI”) is engaged primarily in acquiring, developing, exploiting and producing oil and gas properties. As of September 30, 2013, the Company’s assets and operations are concentrated primarily in the Wattenberg Field in the Rocky Mountains and in Southern Arkansas.

2. BASIS OF PRESENTATION:

These statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The quarterly financial statements included herein do not necessarily include all of the disclosures as may be required under generally accepted accounting principles. The readers of these quarterly financial statements should also read the audited consolidated financial statements and related notes of BCEI that were included in BCEI’s Annual Report on Form 10-K filed with the SEC on March 15, 2013. These consolidated financial statements include all of the adjustments, which, in the opinion of management, are necessary for a fair presentation of the financial position and results of operations. All such adjustments are of a normal recurring nature only. The results of operations for the quarterly periods are not necessarily indicative of the results to be expected for the full fiscal year.

Principles of Consolidation—The consolidated balance sheets include the accounts of the Company and its wholly owned subsidiaries, Bonanza Creek Energy Operating Company, LLC, Bonanza Creek Energy Resources, LLC, Holmes Eastern Company, LLC, Bonanza Creek Energy Upstream LLC, and Bonanza Creek Energy Midstream, LLC. All significant intercompany accounts and transactions have been eliminated.

Oil and Gas Producing Activities—The Company follows the successful efforts method of accounting for its oil and gas properties. Under this method of accounting, all property acquisition costs and costs of exploratory and development wells will be capitalized at cost when incurred, pending determination of whether the well has found proved reserves. If an exploratory well has not found proved reserves, the costs of drilling the well and other associated costs will be charged to expense. The costs of development wells will be capitalized whether productive or nonproductive. Costs incurred to maintain wells and related equipment and lease and well operating costs are charged to expense as incurred. Gains and losses arising from sales of properties will be included in income. However, sales that do not significantly affect a field’s unit-of-production depletion rate will be accounted for as normal retirements with no gain or loss recognized. Geological and geophysical costs of exploratory prospects and the costs of carrying and retaining unproved properties are expensed as incurred.

Depletion, depreciation and amortization (“DD&A”) of capitalized costs of proved oil and gas properties are provided for on a field-by-field basis using the units of production method based upon proved reserves. The computation of DD&A takes into consideration the anticipated proceeds from equipment salvage and the Company’s expected cost to abandon its well interests.

The Company assesses its proved oil and gas properties for impairment whenever events or circumstances indicate that the carrying value of the assets may not be recoverable. The impairment test compares undiscounted future net cash flows to the assets’ net book value. If the net capitalized costs exceed future net cash flows, then the cost of the property will be written down to “fair value.” Fair value for oil and natural gas properties is generally determined based on discounted future net cash flows.

3. DISCONTINUED OPERATIONS:

During June of 2012, the Company began marketing, with an intent to sell, all of its oil and gas properties in California. Assets are classified as held for sale when the Company commits to a plan to sell the assets and there is reasonable certainty that the sale will take place within one year. The Company determined that its intent to sell these properties qualifies for discontinued operations. The majority of these assets were sold in 2012, while the carrying amounts of the major classes of assets and liabilities related to the operation of the remaining property that is held for sale as of September 30, 2013 and December 31, 2012 are presented below:

5

Table of Contents

The current assets and liabilities related to the properties are immaterial.  Total revenues and costs and expenses, and the income (loss) associated with the operation of the oil and gas properties held for sale are presented below.

4.  RECENT ACCOUNTING PRONOUNCEMENTS

In July 2013, the FASB issued Update No. 2013-11—Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (a consensus of the FASB Emerging Issues Task Force). The update provides clarification on the presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss or a tax credit carryforward exists. The update is effective for public entities for fiscal years, and interim periods within those years, beginning after December 15, 2013. Early adoption is permitted. The Company has not yet evaluated the impact of the update on its financial statements.

5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES:

Accounts payable and accrued expenses contain the following:

6. LONG-TERM DEBT:

Long-term debt consisted of the following at September 30, 2013 and December 31, 2012:

Revolving Credit Facility—The Company’s senior secured revolving Credit Agreement (the “Revolver”), dated March 29, 2011, as amended, with a syndication of banks, including KeyBank National Association as the administrative agent and issuing lender, provides for borrowings of up to $600 million. The Revolver provides for interest rates plus an applicable margin to be determined based on the London Interbank Offered Rate (“LIBOR”) or a bank base rate (“Base Rate”), at the Company’s election. LIBOR borrowings bear interest at LIBOR plus 1.75% to 2.75% depending on the utilization level, and the Base Rate borrowings bear interest at the “Bank Prime Rate,” as defined plus .75% to 1.75%.

6

Table of Contents

The borrowing base under the Revolver was $330.0 million as of September 30, 2013.  The borrowing base is redetermined semiannually by May 15 and November 15 and may be re-determined up to one additional time between such scheduled determinations upon request by the Company or lenders holding 66 and 2/3% of the aggregate commitments. A letter of credit that was issued to the Colorado State Board of Land Commissioners in connection with the Company’s lease of acreage in the Wattenberg Field (Wattenberg Field Lease Acquisition) reduces the borrowing base under the Revolver by approximately $36 million as of September 30, 2013 and will be paid in equal $12 million increments over the next three years. The Revolver provides for commitment fees ranging from 0.375% to 0.50%, depending on utilization, and restricts, among other items, the payment of dividends, certain additional indebtedness, sale of assets, loans and certain investments and mergers. The Revolver also contains certain financial covenants, which require the maintenance of a minimum current ratio and a minimum debt coverage ratio, as defined. The Company was in compliance with these covenants as of September 30, 2013.  The Revolver is collateralized by substantially all the Company’s assets and matures on September 15, 2016. As of September 30, 2013, there was $38.5 million outstanding and the $36.0 million letter of credit issued under the Revolver, and the Company had $255.5 million available for future borrowings under the Revolver.

Senior Notes—On April 9, 2013, the Company issued $300,000,000 of 6.75% Senior Notes (the “Senior Notes”). Interest on the Senior Notes began accruing on April 9, 2013, and the Company will pay interest on April 15 and October 15 of each year, which began on October 15, 2013. The Senior Notes mature on April 15, 2021. The Senior Notes are guaranteed on a senior unsecured basis by the Company’s existing and future subsidiaries that incur or guarantee certain indebtedness, including indebtedness under the Company’s revolving credit facility.  The Company may redeem the Senior Notes (i) at any time on or after April 15, 2017 at the redemption price equal to 100% together with accrued and unpaid interest, and (ii) prior to April 15, 2017 at the “make-whole” redemption prices described in the indenture together with accrued and unpaid interest. The net proceeds from the sale of the Senior Notes were approximately $292.7 million after deducting $7.3 million of expenses and underwriting discounts and commissions, and a portion of the proceeds were used to repay all of the then outstanding balance of $191,500,000 under our revolving credit facility.

The Company filed a Registration Statement on Form S-4 with the SEC, which became effective June 3, 2013 and registered the offering to exchange unregistered Senior Notes for registered Senior Notes, as well as the guarantees of the Senior Notes by the Company’s subsidiaries.  As of September 30, 2013, all of the existing subsidiaries of the Company are guarantors of the Senior Notes, and all such subsidiaries are 100 percent owned by the Company.  The guarantees by the subsidiaries are full and unconditional (except for customary release provisions) and constitute joint and several obligations of the subsidiaries. The Company has no independent assets or operations unrelated to its investments in its consolidated subsidiaries. There are no significant restrictions on the Company’s ability or the ability of any subsidiary guarantor to obtain funds from its subsidiaries by such means as a dividend or loan.

7. COMMITMENTS AND CONTINGENT LIABILITIES:

Contingent Liabilities—From time to time, the Company is involved in various commercial and regulatory claims, litigation and other legal proceedings that arise in the ordinary course of its business. The Company assesses these claims in an effort to determine the degree of probability and range of possible loss for potential accrual in its consolidated financial statements. In accordance with ASC 450, Contingencies, an accrual is recorded for a loss contingency when its occurrence is probable and damages can be reasonably estimated based on the anticipated most likely outcome or the minimum amount within a range of possible outcomes. Because legal proceedings are inherently unpredictable and unfavorable resolutions could occur, assessing contingencies is highly subjective and requires judgments about uncertain future events. When evaluating contingencies, the Company may be unable to provide a meaningful estimate due to a number of factors, including the procedural status of the matter in question, the presence of complex or novel legal theories, and/or the ongoing discovery and development of information important to the matters. The Company regularly reviews contingencies to determine the adequacy of its accruals and related disclosures.

Environmental—The Company is engaged in oil and gas exploration and production and may become subject to certain liabilities as they relate to environmental cleanup of well sites or other environmental restoration or regulation procedures as they relate to the drilling of oil and gas wells and associated operations. Relative to the Company’s acquisition of existing or previously drilled well bores, the Company may not be aware of what environmental safeguards were taken at the time such wells were drilled or during such time the wells were operated. Should it be determined that a liability exists with respect to any environmental cleanup or restoration, the liability to cure such a violation could fall upon the Company.

Legal Proceedings—From time to time, the Company is subject to legal proceedings and claims that arise in the ordinary course of business. Like other gas and oil producers and marketers, the Company’s operations are subject to extensive and rapidly changing federal and state environmental, health and safety and other laws and regulations governing air emissions, wastewater discharges and solid and hazardous waste management activities. As of the date of this filing, there are no material pending or overtly threatened legal actions against the Company of which it is aware.

Commitments—The Company rents office facilities under various non-cancelable operating lease agreements. The Company’s non-cancelable operating lease agreements result in total future minimum non-cancelable lease payments presented below. The Company also has principal payment requirements for its 6.75% Senior Notes and payments on a portion of the Wattenberg Field Lease Acquisition, all of which are presented below:

7

Table of Contents

8. FAIR VALUE MEASUREMENTS:

The Company follows FASB ASC 820, Fair Value Measurements and Disclosures, which defines fair value, establishes a framework for using fair value to measure assets and liabilities, and expands disclosures about fair value measurements. The statement establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions of what market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The hierarchy is broken down into three levels based on the reliability of the inputs as follows:

Financial assets and liabilities are to be classified based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of the fair value of assets and liabilities and their placement within the fair value hierarchy levels.

The following table presents the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis as of September 30, 2013 by level within the fair value hierarchy:

The following table presents the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis as of December 31, 2012 by level within the fair value hierarchy:

Fair value of all derivative instruments are estimated with industry-standard models that consider various assumptions, including quoted forward prices for commodities, time value, volatility factors and current market and contractual prices for the underlying instruments, as well as other relevant economic measures.  All valuations were compared against counterparty statements to verify the reasonableness of the estimate.  The Company’s commodity swaps are validated by observable transactions for the same or similar commodity options using the NYMEX futures index, and are designated as Level 2 within the valuation hierarchy. The Company’s collars, which are designated as Level 3 within the valuation hierarchy, are not validated by observable transactions with respect to volatility. Presently, all of our hedging arrangements are concentrated with six counterparties, five of which are lenders under our Company’s senior secured revolving credit facility.

8

Table of Contents

The following table reflects the activity for the commodity derivatives measured at fair value using Level 3 inputs during the period from January 1, 2013 through September 30, 2013:

As of September 30, 2013, the Company’s derivative commodity contracts are as follows:

The table below contains a summary of all the Company’s derivative positions reported on the consolidated balance sheet as of September 30, 2013:

Realized gains and losses on commodity derivatives and the unrealized gains or losses are recorded in other income (expense).

9

Table of Contents

Asset Retirement Obligation—Upon completion of wells and natural gas plants, the Company records an asset retirement obligation at fair value using Level 3 assumptions.

Proved Oil and Gas Properties—Proved oil and gas property costs are evaluated for impairment and reduced to fair value when there is an indication that the carrying costs exceed the sum of the undiscounted cash flows. The Company uses Level 3 inputs and the income valuation technique, which converts future amounts to a single present value amount, to measure the fair value of proved properties through an application of discount rates and price forecasts selected by the Company’s management. The calculation of the discount rate is a significant management estimate based on the best information available and estimated to be 10 percent for the nine months ended September 30, 2013. Management believes that the discount rate is representative of current market conditions and reflects the following factors: estimate of future cash payments, expectations of possible variations in the amount and/or timing of cash flows, the risk premium, and nonperformance risk. The price forecast is based on New York Mercantile Exchange (“NYMEX”) strip pricing, adjusted for basis differentials. Future operating costs are also adjusted as deemed appropriate for these estimates.

9. STOCKHOLDERS’ EQUITY:

Management Incentive Plan—On December 23, 2010, the Company established the Management Incentive Plan (the “Plan” or “MIP”) for the benefit of certain employees, officers and other individuals performing services for the Company. Ten thousand shares of Class B common stock were available under the Plan and these shares were converted into 437,787 shares of restricted common stock upon completion of our initial public offering (“IPO”). The conversion rate was determined based on a formula factoring in the rate of return to the pre-IPO common stockholders. The 437,787 shares of common stock that were granted to employees were valued at $17.00 per share on the grant date and vest over a three year period. For the three and nine months ended September 30, 2013, stock-based compensation expense related to the MIP grant was approximately $0.8 million and $1,926,000, respectively, and, as of September 30, 2013, there was approximately $2,690,000 of unrecognized compensation costs related to the unvested restricted common stock granted under the MIP. That cost is expected to be recognized over a period of 1.25 years. The MIP has been terminated such that there will be no future grants thereunder.

BCEC Investment Trust— The BCEC Investment Trust was formed to hold shares of our common stock received by Bonanza Creek Energy Company, LLC, our predecessor, in connection with our December 23, 2010 corporate restructuring. On February 5, 2013, 13,825 previously issued shares of our common stock that were fully vested and held by the BCEC Investment Trust were distributed to former employees. While the shares had been issued in December 2010, for accounting purposes, the date of distribution to former employees was considered the grant date, and these shares were valued at the closing price of our common stock on the grant date, which was $34.18 per share. On February 11, 2013, 59,372 previously issued shares of our common stock that were fully vested and held by the BCEC Investment Trust were distributed to certain current employees. While the shares had been issued in December 2010, for accounting purposes, the date of distribution to employees was considered the grant date, and these shares were valued at the closing price of our common stock on the grant date, which was $34.89 per share. These distributions resulted in a stock-based compensation expense of $— and $2,741,000, respectively, related to the BCEC Investment Trust during the three and nine month periods ended September 30, 2013.

2011 Long Term Incentive Plan. During 2012, the Company granted 703,246 shares of restricted common stock under its 2011 Long Term Incentive Plan (the “LTIP”) to officers and certain key employees. For accounting purposes, these shares are valued at the closing price of our common stock on the grant date and compensation expense is recognized over the vesting period. These shares will vest annually in one-third increments over three years. For the three and nine months ended September 30, 2013, stock-based compensation expense related to the 2012 LTIP grants was approximately $1.0 million and $3,151,000, respectively, and, as of September 30, 2013, there remained $5,877,000 of unrecognized compensation costs related to the unvested restricted common stock granted under the LTIP. That cost is expected to be recognized over the next 2.17 years.

During 2013, the Company granted 265,066 shares of restricted common stock under the LTIP to officers and employees. For accounting purposes, these shares are valued at the closing price of our common stock on the grant date and compensation expense is recognized over the vesting period. These shares will vest annually in one-third increments over three years. For the three and nine months ended September 30, 2013, stock-based compensation expense related to the 2013 LTIP grants was approximately $0.8 million and $1,645,000, respectively, and, as of September 30, 2013, there remained $8,450,000 of unrecognized compensation costs related to the unvested restricted stock granted under the LTIP. That cost is expected to be recognized over the next 3.0 years.

During 2013, the Company granted 41,622 Performance Stock Units (“PSUs”) under the LTIP to certain officers. The number of shares of the Company’s common stock that may be issued to settle PSUs ranges from zero to two times the number of PSUs awarded and is determined based on the Company’s performance over a three-year measurement period. The performance criterion for the PSUs is based on a comparison of the Company’s Total Shareholder Return (“TSR”) for the measurement period compared with the TSRs of a group of peer companies for the measurement period. Expense associated with PSUs is recognized as general and administrative expense over the vesting period.  The fair value of the PSUs was measured at the grant date with a stochastic process method using the Geometric Brownian Motion Model (“GBM Model”).  For the three and nine months ended September 30, 2013, stock-based compensation expense related to the 2013 LTIP PSU grants was approximately $102,000 and $253,000, respectively, and, as of September 30, 2013, there remained $1,094,000 of unrecognized compensation

10

Table of Contents

cost as of September 30, 2013 related to the unvested PSUs granted under the LTIP. That cost is expected to be recognized over the next 2.25 years.

10.  EARNINGS PER SHARE:

The Company computes basic net income per share using the weighted average number of shares of common stock outstanding during the period. Diluted net income per share is computed using the weighted average number of shares of common stock and, if dilutive, potential shares of common stock outstanding during the period. The potentially dilutive shares are related to the 2013 PSU grants to certain officers.  The number of shares of the Company’s common stock that may be issued to settle PSUs ranges from zero to two times the number of PSUs awarded and is determined based on the Company’s performance over a three-year measurement period.  The treasury stock method is used to measure the dilutive impact of potentially dilutive shares.

The following table details the potential weighted average dilutive and anti-dilutive securities for the periods presented.

11.  SUBSEQUENT EVENTS:

On November 6, 2013, the lenders under the Company’s revolving credit facility completed their semi-annual borrowing base redetermination which resulted in an increase of the available borrowing base to $450 million. Pursuant to the corresponding amendment, the Company elected to limit bank commitments at $330 million while reserving the option to access, at the Company’s request, the full $450 million prior to the next semi-annual redetermination. The maturity date of the credit facility was also extended by one year to September 15, 2017.

11

Table of Contents

Item 2.         Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in our Annual Report on Form 10-K for the year ended December 31, 2012 (the “2012 Annual Report”), as well as the unaudited condensed consolidated financial statements and notes thereto included in this Quarterly Report on Form 10-Q (this “Report”).

Executive Summary

Bonanza Creek Energy, Inc. (“BCEI” or, together with our consolidated subsidiaries, the “Company,” “we,” “us,” or “our”) is a Denver-based exploration and production company focused on the extraction of oil and associated liquids-rich natural gas in the United States. Our predecessors were founded in 1999 and we went public in December 2011. Our shares of common stock are listed for trading on the NYSE under the symbol “BCEI.”

Despite the uncertainty surrounding the global economy and volatility in commodity prices, we believe the economic returns and organic growth generated by our portfolio of oil and gas assets positions us well moving forward. Our operations are focused in the Wattenberg Field in Colorado and the Cotton Valley sands of southern Arkansas. The low risk, oily and stable production profile of our Arkansas assets provides a strong cash flow base from which to develop the Niobrara and Codell formations in Colorado. Our corporate strategy is to create shareholder value by increasing production in our current assets, while opportunistically seeking strategic acquisitions in other high return basins across the United States where we can apply our core competencies of horizontal drilling and fracture stimulation. We maintain a high working interest in our properties.

Third Quarter 2013 Financial and Operating Highlights

·          We increased production by 88% to 1,624.3 MBoe in the third quarter of 2013 from 865.0 MBoe in the third quarter of 2012. Oil and NGL production represented 72% of total production, despite negative impacts on production from vertical wells in the Wattenberg Field.  The negative impacts on production from these vertical wells were due to high gas gathering pipeline pressures and curtailment of production to comply with emissions standards.

·          We generated net income of $17.8 million (including approximately $17.9 million from continuing operations), as compared with $3.4 million (including approximately $1.6 million from continuing operations) for the third quarter of 2012.  The increase in net income (including net income from continuing operations) as compared to the third quarter of 2012 was related to an 88% increase in Boe production with a corresponding 15% increase to the average sales price per Boe.

Outlook for 2013

We continue to monitor the outlook for the global economy and numerous critical factors, including the United States federal budget deficit and long-term fiscal situation and the European debt crisis, and their potential impacts on global economic growth and commodity prices. Because the global economic outlook and commodity price environment are uncertain, we have planned a flexible capital spending program. We estimate our total capital expenditures for 2013 to be approximately $460 to $475 million, allocated approximately 80% to the Wattenberg Field and 20% to southern Arkansas. During the nine months ended September 30, 2013, we incurred capital expenditures of $331.4 million. Actual capital expenditures are subject to a number of factors, including economic conditions and commodity prices, and the Company may reduce or augment the budget as appropriate. This capital investment is expected to produce 2013 average sales volumes of 14,500 to 16,000 Boe/d, while maintaining a strong oil and liquids profile.

12

Table of Contents

Results for Continuing Operations

Three Months Ended September 30, 2013 Compared To Three Months Ended September 30, 2012

Revenues

The following table summarizes our revenues and production data for the periods indicated.