You know the old joke about two campers and a bear? As the bear approaches, one starts frantically putting on sneakers. “You can’t outrun a bear in those,” the other one says. “I just need to outrun you,” his friend replies.

That’s a lot like the situation in which shale drillers find themselves with West Texas Intermediate fetching less than $60 a barrel. Higher oil prices are likely in the offing once supply has been cut enough and the goal is to survive the process, which is likely to claim some victims.

The bear for the shale types is the specter of insolvency, and the sneakers are the defensive charms — a strong balance sheet, high margins, good hedges — that can separate them from the pack and buy the needed time.

Bonanza Creek Energy (NYSE: BCEI) looks better placed to make it through the oil crash than most, with plenty of upside in the event of higher prices. Today we’re adding Bonanza Creek to our Aggressive Portfolio. Buy BCEI below $23.

Bonanza Creek is (by now) a small-cap shale driller focused primarily on the Wattenberg Field in Colorado’s Niobrara shale play, with secondary interest in legacy Arkansas acreage that generates free cash flow promptly reinvested in the Wattenberg.

But Bonanza Creek does have a relatively resilient balance sheet with some $800 million in debt costing it a shade under 6.4% annually, none of it maturing before 2021. Cash flow from operations totaled $276 million over the first nine months of 2014, but Bonanza Creek sank $449 million into its wells and other infrastructure over the same span, which made a lot of sense with crude at $90.

In July, the company also paid $175 million in cash and $49 million in stock (the latter now depreciated almost exactly by two-thirds) for some 35,000 net acres adjacent to its own leaseholds, doubling its Wattenberg holdings.

This was a transition year in terms of leadership as well. In February, BCEI abruptly announced the immediate retirement of its founder and CEO Michael Starzer, 52, for reasons that were never explained. He was replaced by an interim CEO drafted from the company’s board. A month ago, after an “extensive nationwide search,” Bonanza Creek named as its permanent new CEO the man who’d chaired its board since the company’s founding.

Last week the new boss, Richard Carty, spent $627,000 to buy 30,000 BCEI shares in the market. An executive in charge of drilling operations purchased 11,000 shares the same day.

More intriguingly, Millennium International Management, the $23 billion hedge fund run by noted investor Israel “Izzy” Englander, reported a 6.4% stake in Bonanza Creek last week. This was a fivefold increase over Millennium’s stake in BCEI at the end of September, after the fund cut its position in half over the course of the summer. It’s worth remembering, though, that the expanded $51 million stake still represents roughly 0.2% of the hedge fund’s assets.

Still, insiders and Millennium have good reasons to be optimistic about Bonanza Creek’s prospects at a crude price closer to the long-term supply/demand equilibrium of $75 to $80 a barrel, based on consumption trends and the cost of marginal production.

In its most recent quarter, the company reported a 44% year-over-year production increase coupled with a 14% drop in unit cash operating costs. That translated into a healthy $47 cash margin per barrel of oil equivalent, or 71% of the unhedged sales price.


Source: Bonanza Creek Energy presentation

In the third quarter, BCEI was still selling its crude at an unhedged $86 per barrel. It has hedged as much as 60% of its recent daily crude production at a comparable price for 2015, though a lot of that was via three-way collars that are looking more than a little leaky at this point.

Bonanza Creek does have a $600 million untapped credit line that, together with the cash on hand, could finance the entirety of next year’s capital spending even if the company opted not to cut its capex. Given current oil prices, however, spending cuts are a certainty. Yet the company is still very likely to generate more than $400 million in operating cash flow next year.

Successful recent experiments with longer laterals, more fracking stages and tighter downspacing suggest production will likely increase and unit costs drop even if capital spending declines.

BCEI is benefiting from the development of midstream infrastructure in the basin that is helping it produce more gas and to sell crude at a lower discount to WTI. The regional crude discount is likely to shrink from the recent average of $12 or so a barrel to less than $10 as pipeline takeaway capacity expands. And the drilling downturn promises to deliver savings on oilfield services.

With 25 years’ worth of Niobrara drilling inventory following this year’s acquisition, Bonanza Creek has plenty of time to further refine its drilling techniques, prove up the resource potential of the stacked rock layers beneath its turf and map a development plan for the recently acquired acreage.

It can do all that without worrying about going broke even if oil prices stay at their current levels for years. That’s a luxury some other small-cap shale producers don’t have. With grizzlies on the prowl, time is a very valuable asset these days.