Denbury Resources (DNR)
Posted: Mon Jul 09, 2018 12:27 pm
During the Rebound Phase of the last major oil price cycle (2008 to 2010), DNR went from $3.00 to over $20.00 per share.
1. It is heavily weighted to oil, primarily from CO2 floods that have very little annual decline curves. They have very long-lived reserves.
2. It is highly leveraged / a lot of debt. Leverage works both ways and can be a plus for equity holders during an extended period of rising oil prices.
DNR is way off of the Wall Street radar screen. The current First Call price target of $3.46 is based on lots of very old forecast models submitted to Reuters.
My valuation is now $7.25 and there is upside to that number; here's why:
1. This year's conservative capital program will be fully funded by cash flows from operations.
2. Thanks to rising oil prices and the fact that DNR sells their oil at a nice premium to WTI, the company should generate over $200 million of free cash flow.
3. Free cash flow and the increased value of its asset base, should make the debt holders very happy.
4. The company is profitable.
> 2017 Actuals were $0.41 EPS and $0.83 CFPS
> 2018 Estimates are $0.57 EPS and $1.28 CFPS < My forecast is above the current FC numbers
> 2019 Estimates are $0.78 EPS and $1.51 CFPS
5. DNR has crossed the $5.00/share threshold, so a lot more hedge funds can buy it.
I have assigned DNR to one of our SMU MBA's and we will be publishing a profile on it next week. To start your due diligence, I recommend you go through the June presentation on their website. My updated forecast/valuation model has been posted to the EPG website, under the Small-Caps tab.
NOTE: Denbury has about 70% of their oil hedged. Like all companies with lots of oil hedged, they will have a large mark-to-market (non-cash) expense during a quarter when oil prices go up. Therefore you need to ignore "Reported Earnings" and focus on "Adjusted Earnings". Actually, the most important number each quarter is Operating Cash Flow Per Share.
1. It is heavily weighted to oil, primarily from CO2 floods that have very little annual decline curves. They have very long-lived reserves.
2. It is highly leveraged / a lot of debt. Leverage works both ways and can be a plus for equity holders during an extended period of rising oil prices.
DNR is way off of the Wall Street radar screen. The current First Call price target of $3.46 is based on lots of very old forecast models submitted to Reuters.
My valuation is now $7.25 and there is upside to that number; here's why:
1. This year's conservative capital program will be fully funded by cash flows from operations.
2. Thanks to rising oil prices and the fact that DNR sells their oil at a nice premium to WTI, the company should generate over $200 million of free cash flow.
3. Free cash flow and the increased value of its asset base, should make the debt holders very happy.
4. The company is profitable.
> 2017 Actuals were $0.41 EPS and $0.83 CFPS
> 2018 Estimates are $0.57 EPS and $1.28 CFPS < My forecast is above the current FC numbers
> 2019 Estimates are $0.78 EPS and $1.51 CFPS
5. DNR has crossed the $5.00/share threshold, so a lot more hedge funds can buy it.
I have assigned DNR to one of our SMU MBA's and we will be publishing a profile on it next week. To start your due diligence, I recommend you go through the June presentation on their website. My updated forecast/valuation model has been posted to the EPG website, under the Small-Caps tab.
NOTE: Denbury has about 70% of their oil hedged. Like all companies with lots of oil hedged, they will have a large mark-to-market (non-cash) expense during a quarter when oil prices go up. Therefore you need to ignore "Reported Earnings" and focus on "Adjusted Earnings". Actually, the most important number each quarter is Operating Cash Flow Per Share.