Denbury Resources Inc. DNR has announced its decision to refinance some of its Senior Subordinated Notes. With this purpose the company started making private offers to holders of its outstanding 6.375% Senior Subordinated Notes, due 2021; 5.5% Senior Subordinated Notes, due 2022; and 4.625% Senior Subordinated Notes, due 2023 in exchange of the newly issued 7.5% Senior Notes, due May 15, 2022. The exchange offers will expire on Jan 20, 2016.
Denbury Resources’ cash flow from operations was $699.4 million at the end of the first nine months of 2015 as against $885.1 million a year ago. The company’s cash balance as of Sep 30, 2015 was $12.2 million and total debt was $3,357.3 million.
Denbury has a relatively low-risk business model as it produces oil by applying tertiary recovery techniques to mature fields. Tertiary operations, therefore, remain the company’s principal focus.
Denbury remains on track to continue its growth momentum. The company, driven by higher contribution from its core tertiary operations, has been witnessing a steady improvement in production. Increased injection of CO2 and completion of the Greencore Pipeline interconnect also contributed to growth. Further, the horizontal wells at Shannon at Hartzog have demonstrated strong results and Riley Ridge is now producing natural gas from its plant. The ramp-up of these projects is likely to bear fruit in the coming years. As the company’s production is fairly oil-weighted, we expect strong earnings and cash flow in the future.
With its in-house CO2 reserve base, Denbury has a significant competitive advantage in acquiring and exploiting mature oil reservoirs. Notably, CO2 is more effective in extracting oil using tertiary recovery techniques from mature reservoirs. Following the Bakken or CCA deals, Denbury has successfully transformed itself into a pure EOR entity associated with stable and highly visible long-term oil growth. This secure, high-margin tertiary growth as well as share buyback plan should continue to enhance the company’s per-share metrics and hence, help it to outperform in 2015.
However, in addition to industry-wide oilfield cost inflation, the company’s growing outlays reflect its exposure to higher energy costs (electrical and fuel charges), resulting from continuing emphasis on CO2 flooding techniques. Lower-than-expected response to CO2 flooding also remains a concern.
Further, Denbury’s project inventory is concentrated mostly on a few tertiary recovery projects. Hence, the total company performance as well as profitability remains exposed to execution and operational risks of these individual projects.
Denbury’s results are directly dependent on oil and gas prices, which are inherently volatile and subject to complex market forces. Realized prices could differ significantly from our estimates, and the company’s revenues, earnings and cash flows could suffer. Denbury’s results are also exposed to oil price differentials – net oil price received compared with NYMEX prices.
Denbury carries a Zacks Rank #3 (Hold). Some better-ranked players from the same space are Energy Transfer Equity, L.P. ETE, Murphy USA Inc. MUSA and Boardwalk Pipeline Partners, LP BWP. All these stocks sport a Zacks Rank #1 (Strong Buy).
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