Denbury Resources (DNR)

[dan_s]

In the last big oil prices cycles, Denbury Resources (DNR) was a stock that came roaring back when oil prices rebounded. In fact, it went up over 200% in less than 12 months. I think it will do the same if WTI moves back to $60/bbl and at this point in the cycle, the RISK/REWARD on this one is very attractive.

I have been following Denbury for over 20 years. The reason is that I got to know the management team very well when I was at Hess when they acquired all of Hess' Mississippi assets, which is really what launched the company into the Tertiary Recovery Business (CO2 Floods). One of my teams at Hess was responsible for transitioning all of our land records and well files to Denbury, which a the time as a very small company with a market cap under $200 million.

1. There is NO RISK of DNR going bankrupt. They are generating free cash flow from operations and they have paid off a lot of debt.
2. Q1 was the low point for them and they still generated free cash flow in the quarter.
3. They should report positive earnings for Q2 because they are going to book a big gain on retirement of debt. They have been buying back their debt in the market at huge discounts to its face value, so when they retire the debt they will book a big gain. Their balance sheet at 6-30-2016 will look fairly good.
4. Based on my forecast, which you can download from the EPG website, DNR will generate about $80 million in cash flows from operations each quarter in 2016, compared to CapEx of about $50 million per quarter. CO2 floods have very low decline rates, so Denbury can slash CapEx during extended periods of low oil prices. They have more "hunker down ability" than the shale companies and they've done a good job getting operating expenses down.
5. The market gives very little value to DNR's huge CO reserves. Their CO reserves and their extensive CO pipeline network are very valuable assets, which IMO makes DNR a prime takeover target. At 12-31-2015 they had 289 million barrels of proven reserves and higher oil prices at 12-31-2016 should increase those proven reserves by another 100 million barrels.

I've assigned DNR to one of our best interns and we will publish a profile on it this month, but I want to bring it to your attention now so you can start sniffing around. The best place to start is the updated presentation on their website.