Denbury Resources (DNR)

[dan_s]

A new profile on Denbury has been posted to the website. If you invest for yield you should check it out.

Denbury is well hedged. In fact, in the first quarter their hedges paid $148.5 million in cash.

DNR pays a dividend for annual yield over 6.3% and the stock is grossly oversold. My valuation is $11.00/share. < First Call's price target is $8.29

In July, I have been focused on the small-caps. I am looking for high quality companies that have solid balance sheet, a high percentage of their production hedged at good prices, strong cash flow from operations AND attractive acreage that would make them prime takeover targets. I hope you have been reading the profiles we've sent out this month. DNR is a Prime Takeover Target because they are experts in CO2 Tertiary Recovery projects and they own more than 17 Trillion Cubic Feet of CO2 reserves.

DNR will generate more than $2.00/share cash flow from operations this year even if the price of oil goes to $30/bbl on NYMEX. This is because they have so much of this year's oil at $84.50/bbl and they sell most of their oil in the Gulf Coast market at a premium to NYMEX.

Read the profile. In 2009, DNR tripled off the bottom when oil prices started moving back up. The company is in a lot better shape today than it was in 2009.

[cmm3rd]

Dan,

Does DNR's Q2 report (today) affect your long term view? Today's further selloff implies there was something that some investors were not expecting.

TIA

Scott

[cmm3rd]

Dan,

UBS and Credit Suisse recently downgraded DNR. Any idea as to why?

[dan_s]

Analysts that work for the big Wall Street firms are forced to use very conservative commodity price decks.

DNR's 2nd quarter results beat my forecast. They also have a high percentage of their oil hedged at good prices through 6/30/2016.

I will update my forecast model and get back to this one a bit later.

[dan_s]

I have updated my forecast model for DNR and posted it to the EPG website. My valuation is $9.85, compared to First Call's price target of $5.98.

DNR has VERY long-lived oil reserves. It needs to be looked at much differently than a shale oil company that must keep drilling a lot of wells to maintain production. CO2 floods have steady production for decades.

DNR will generate a lot of FREE CASH FLOW for the next four quarters because it is well hedged through 6-30-2016. If you believe that WTI is going to stay under $50/bbl FOREVER then DNR will have some problems late next year. They have high lifting costs because they must expense the cost of CO2 injected into their oilfields. Their all in cash expenses are about $30/bbl.

My guess is that those analysts you point to are just using a very low oil price in all of their forecast models.

BTW Denbury is one of the easiest companies to forecast. They give very good guidance and everything about them is very predictable.

When you look at the forecast spreadsheet, focus on Row 41. It is the most important line item on the spreadsheet.

[bigtex]

whoever would buy DNR would have to deal with the amount EPM is involved, no??

[dan_s]

Not sure what you mean?

EPM's reversionary interest in the Delhi Field reached payout several months ago. That has been baked into DNR for years.