DNR Highlights from presentation
Posted: Wed May 25, 2011 11:04 am
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.
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.