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Morningstar | Denbury Specializes in Tertiary Oil Recovery in the Rockies and Gulf Coast Regions

Denbury's exclusive focus on enhanced oil recovery is unique among exploration and production firms. The company buys mature oilfields and injects them with carbon dioxide, dramatically increasing the current production rate and the potential cumulative recovery. But this fixer-upper model isn't cheap. A CO2 source is required, and the injection process is costly. Denbury's unit production expenses run 2-3 times ahead of its shale-focused peers, which puts the company at the high end of the U.S. supply cost curve. Project economics are further weakened by the long delay between capital investments and production responses.The good news is that the firm has made significant progress repairing its balance sheet since the 2015 downturn in global crude prices, although its leverage ratios are still uncomfortably high (making it vulnerable to falling crude prices). This was accomplished by keeping capital spending under control in the meantime. The company has been blocking and tackling with exploitation projects (drilling producer wells that drain fields the company has already developed). These offer relatively cheap production growth, as the incremental capital requirement is relatively small. But there's a limited number of exploitation opportunities in the portfolio, and the firm's long-term growth will depend on new investments.The biggest new project on management's radar is the conversion of the Cedar Creek Anticline waterflood into an EOR project. Phase 1 is due online by 2022, and will add 30 mmboe resources. Projected development costs equate to roughly $13 per recoverable boe, excluding an upfront charge of $150 million for a CO2 pipeline (which will also serve future phases). That leaves room for a modest profit margin at midcycle prices ($55 WTI), since the firm’s operating expenses currently sum to about $30/boe. But shale economics are superior: development costs are typically $7-$10/boe and operating expenses are $8-$12/boe. In addition, by committing to the CCA project Denbury is locking itself into several years of substantial upfront outflows, making it more difficult to cut spending if it needs to (eg. if oil prices slump again).