EUR 850.00 For Business Accounts Only

Morningstar | DNR Updated Star Rating from 07 Aug 2018

After the second quarter, Denbury remains on track to hit its 2018 guidance for production and capital spending. The firm reported average volumes of 62 mboe/d for the period (3% higher sequentially and 4% higher year over year). Realized prices for crude were above the WTI benchmark for the third straight quarter (since 60% of the firm’s output is tied to Gulf Coast pricing), and unit costs were about $1/boe (3%) lower than our forecast. Consequently, the firm’s financial results were slightly better than expected, with adjusted EBITDA and adjusted earnings per share coming in at $153 million and $0.13 respectively (consensus estimates were $146 million and $0.11).

Denbury’s high financial leverage is still a core tenet of our bearish thesis, as it makes the firm vulnerable to falling crude prices. We believe current prices are unsustainable, despite near-term supply threats in Iran and Venezuela, as the U.S. unconventional rig count has soared to a level well above what’s needed to keep markets well supplied in the next few years. In that environment Denbury is likely to underperform its peers, given that its leverage ratios are still well out of its comfort zone. However, we note that the firm has taken advantage of strengthening crude prices over the past 12 months and utilized the resulting cash flows to pay down debt. Outstanding borrowings currently sum to $2.5 billion, which is 74% of the firm’s total capital and translates to a net debt to EBITDA ratio of 4.7 times. This time last year these data points were $3.1 billion, 86%, and 10.6 times, respectively. Due to this improvement we have raised our fair value estimate to $3.50/share (reflecting a 22% discount to the current price).

To its credit management has not gotten carried away with current prices and is still focusing on a breakeven level of $50/bbl. That was enough to justify the sanctioning of its massive tertiary oil project at Cedar Creek Anticline, which contains recoverable resources in excess of 400 mmboe (150% of the firm’s current proved reserves). 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 $50, since the firm’s operating expenses currently sum to $32/boe and should decline when CCA production begins. But shale economics are far superior: development costs are typically $7-$10/boe and operating expenses are $8-$12/boe. In addition, by committing to the project the firm is locking itself into several years of substantial upfront outflows, making it more difficult to cut spending if it needs to (in the event of another oil downturn, for example).