I have posted an updated profile and forecast model for DNR to the EPG website. At this point, DNR is more of a "Value Stock" than a "Growth Stock" because they're capex program is designed to keep production flat this year and generate consistent free cash flow from operations.
Denbury is:
> Heavily weighted to oil, which it sells at a premium to WTI. About 60% of their oil is sold into the LLS market at about a $5/bbl premium to WTI. Their realized oil price in Q4, net of cash settlements on their hedges, was $55.75/bbl.
> Generating free cash flow today that continues to deleverage their balance sheet.
> Has very long-lived oil reserves, with 262 MMBoe of Proved Reserves (~97% crude oil).
> Production is stable with only low single digit growth in future plans.
Denbury is an expert in CO2 Floods; a tertiary recovery method.
They own over 6 trillion cubic feet of proven CO2 reserves, primarily in northern Mississippi. CO2 Floods have high operating expenses (over $20/boe), so DNR suffers when oil prices decline. On the flip side, Denbury becomes a "cash flow machine" when oil prices are over $60/bbl. It is actually cash flow positive if WTI stays over $50/bbl. Assuming WTI averages $60/bbl in 2019, DNR should generate over $250 million of free cash flow from operations this year.
First Call's (Reuters) forecast for 2019 is $0.47 EPS and $1.14 operating cash flow per share. Not bad for a company trading at $2.50 today.
Denbury is much different than all of the tight oil producers we follow. Read the profile to see what I mean.
Denbury Resources (DNR) Update - April 11
Denbury Resources (DNR) Update - April 11
Dan Steffens
Energy Prospectus Group
Energy Prospectus Group
Re: Denbury Resources (DNR) Update - April 11
Cas Prewitt is the MBA from SMU that drafted the Denbury profile. He has been helping me with profiles for over three years and he does a fantastic job. Here are his comments.
Dan,
DNR is a very unique company indeed. They are reducing CapEx by 25% YoY and projecting flat production, nearly all of which is oil. We both believe that oil prices are poised for a pop, making that oil weighted production attractive. Debt load is a key concern, but they have been reducing debt since 2014 and are on track to continue that trend even at $50/bbl oil. Hedging has hurt Denbury's realized oil prices over the past year as the spot price trended up on average during the period. That said, most of their assumptions for FCF are based on $50 WTI. If DNR continues to hedge production using the same strategy and prices continue to rise, there is still upside as the realized price will continue to tick up. If WTI falls sharply this year, I would still expect that their average realized price to be well above $50. This means DNR can continue to pay down debt and generate FCF. A few quarters of $65 WTI would drastically improve leverage ratio.
Moral of the story, I believe the market is punishing DNR for its relative debt load and the lack of comparability due to uniqueness of DNR business model. Reserves were up slightly YoY namely due to revisions, but look at the PV-10 in the snip below. PV-10 is up $1.5 billion YoY based on $65 WTI vs $52. If we believe that 2019 will be the same or better on average WTI price, that PV-10 should stay flat or increase. I don't think the market has fully baked in the appreciation of reserve value at current share price of $2.40. With NAV, Revenues, and EBITDA are on the rise, and Total Debt and leverage ratio falling rapidly, I believe the downside risk at current share price is low. It is a cool company for sure. I look forward to seeing how this year plays out for DNR.
Last note. The decision to terminate the acquisition of Penn Virginia appears to be well received by the market. The appetite for acquisition however is still a risk. Diluting equity or increasing debt load in the short term would not bode well for equity holders at current leverage ratio. The longer we go without having another major acquisition announcement, the better. The story may be different in a 6 months if prices rise and leverage ratio falls.
That was probably a longer answer than you were expecting, but I truly believe that DNR is a good bet on rising oil prices on a relative and fundamental basis.
Dan,
DNR is a very unique company indeed. They are reducing CapEx by 25% YoY and projecting flat production, nearly all of which is oil. We both believe that oil prices are poised for a pop, making that oil weighted production attractive. Debt load is a key concern, but they have been reducing debt since 2014 and are on track to continue that trend even at $50/bbl oil. Hedging has hurt Denbury's realized oil prices over the past year as the spot price trended up on average during the period. That said, most of their assumptions for FCF are based on $50 WTI. If DNR continues to hedge production using the same strategy and prices continue to rise, there is still upside as the realized price will continue to tick up. If WTI falls sharply this year, I would still expect that their average realized price to be well above $50. This means DNR can continue to pay down debt and generate FCF. A few quarters of $65 WTI would drastically improve leverage ratio.
Moral of the story, I believe the market is punishing DNR for its relative debt load and the lack of comparability due to uniqueness of DNR business model. Reserves were up slightly YoY namely due to revisions, but look at the PV-10 in the snip below. PV-10 is up $1.5 billion YoY based on $65 WTI vs $52. If we believe that 2019 will be the same or better on average WTI price, that PV-10 should stay flat or increase. I don't think the market has fully baked in the appreciation of reserve value at current share price of $2.40. With NAV, Revenues, and EBITDA are on the rise, and Total Debt and leverage ratio falling rapidly, I believe the downside risk at current share price is low. It is a cool company for sure. I look forward to seeing how this year plays out for DNR.
Last note. The decision to terminate the acquisition of Penn Virginia appears to be well received by the market. The appetite for acquisition however is still a risk. Diluting equity or increasing debt load in the short term would not bode well for equity holders at current leverage ratio. The longer we go without having another major acquisition announcement, the better. The story may be different in a 6 months if prices rise and leverage ratio falls.
That was probably a longer answer than you were expecting, but I truly believe that DNR is a good bet on rising oil prices on a relative and fundamental basis.
Dan Steffens
Energy Prospectus Group
Energy Prospectus Group
Re: Denbury Resources (DNR) Update - April 11
Nice analyses.
As a stockholder well remember that wrong headed DNR merger try for PVA was devastating for the stock price.
Market well knew --DNR should have been paying off debt before they took on more assets way out of their core area of operations.
Even now today, the stock price is way less than half what is was just last October.
https://finviz.com/quote.ashx?t=DNR
That said, still like their assets and cash flow numbers.
Just hope management decides to build the empire way later in the future.
Would be a good question for an analyst to ask on the May conference call.
Hope somebody does.
As a stockholder well remember that wrong headed DNR merger try for PVA was devastating for the stock price.
Market well knew --DNR should have been paying off debt before they took on more assets way out of their core area of operations.
Even now today, the stock price is way less than half what is was just last October.
https://finviz.com/quote.ashx?t=DNR
That said, still like their assets and cash flow numbers.
Just hope management decides to build the empire way later in the future.
Would be a good question for an analyst to ask on the May conference call.
Hope somebody does.