DNR Highlights from presentation

[dan_s]

My "Fair Value" estimate for DNR is $31/share. - Dan

May 24:
Analyst Meeting Wrap-Up – DNR held an analyst day this morning in New York (with a similar event scheduled tomorrow in Boston). As we expected, there were no major announcements while the company provided an update of its operations. Full year production guidance of 67.4 MBOE/d remains unchanged [Dan: This is in-line with my forecast model], representing a ~8% year-over-year increase (adjusted for acquisitions/divestitures), driven by tertiary growth and Bakken ramp-up, partially offset by natural declines at mature primary recovery fields. Denbury maintained a 2011 capex projection of $1.3bn, but raised the budget for the Bakken and tertiary flood projects by $50mm to $400mm and $25mm to $475mm, respectively, while CO2 pipeline costs dropped (or deferred) by $50mm to $250mm.


Bakken Update – DNR still projects Bakken volumes will average 8.7 MBOE/d in 2011 (13% of total), implying a rapid ramp-up following Q1 output of ~5.8 MBOE/d and weather related delays in Q2 (mgmt noted it wasn’t able to complete any wells in May). However, as noted in our Q1 Earnings Overview , Denbury stated that it may come up short on Bakken guidance if weather issues persist, which we view as an increasingly likely scenario. DNR is running 5 rigs in the region, and expects to add a rig in each Q3 and Q4. DNR now plans to spend $400mm in the Bakken (80% on operated acreage), up 14% due to rising well costs ($6.9-8.7mm gross cost per well).


Tertiary Output – The company projects a ~12% uptick in tertiary output this year to 32.5 MBOE/d driven primarily by the Tinsley and Heidelberg fields. Growth is expected to accelerate to ~20% in 2012 driven by the Delhi and Hastings fields (initial volume by YE’11), and then at a 13-15% CAGR for 2013-20.


Joint Ventures – Denbury announced a joint venture with Elk Petroleum to develop the Grieve EOG project (WY) agreeing to fund all operating costs up to $28.6mm for a 65% stake in the project. DNR estimates net recoverable reserves of ~6MMBbls (~2% of total proven at YE’10) and projects initial CO2 injections to begin in H2’12. As previously announced, it also entered into a JV on its 100K acres in the Tuscaloosa shale, where its position will be carried with a 15% working interest. An undisclosed partner is set to complete one well and drill another one, at which point DNR will have an election to participate in further wells on a unit by unit basis.


Financials – The company recently paid off its $55mm 2013 notes with no additional debt outstanding until 2015. The company also fully paid its $1.6bn credit facility, extended its maturity to May 2016 (from March 2014) and reduced the fee by 15 bps. However, we expect DNR to outspend cash flow by ~$195mm in 2011, drawing on the credit facility to finance the shortfall.


Estimates – Our 2011-13 estimates are unchanged following the analyst day. We reiterate our Hold/High Risk rating with 12-mo PT of $24 based on the stock achieving multiples of 8.8x/8.3x our 2011/2012 EV/DACF estimates based on ‘normalized’ WTI spot oil and composite spot natural gas prices of $100/Bbl and $5.25/MMBtu.

[dan_s]

DNR is now selling 40% of their oil into the Gulf Coast market at more than a $10/bbl premium to WTI.

[mdwitte]

"However, we expect DNR to outspend cash flow by ~$195mm in 2011..."

SHEESH! I've held DNR for several years...really like the "story" of rejuvenating abandoned oil fields...but when do you think the company will return anything to shareholders? They seem to outspend cashflow EVERY year! Yes, they are growing the company, and the execs are doing well...but when do you think they will stop growing and begin paying a divvie? When will shareholders be able to "cash-in"?

[dan_s]

DNR is not a dividend play. Don't count on a dividend anytime soon.

DNR is doing exactly what it should be doing, building high quality long-term proven oil reserves. The real value of any E&P company is its proven reserve base. DNR has production and reserve growth locked in for many years. It is the premier tertiary recovery company.

It also has HUGE upside in the Bakken Shale that is not yet priced into the stock. They hold over 275,000 acres in the Bakken, ramping up to seven operated rigs this year. Their growth in the Bakken will get a lot of attention by year-end.