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Denbury Resources Inc. Message Board

  • rrb1981 rrb1981 Jul 20, 2003 5:34 PM Flag


    Just a quick question, if I may.

    In your opinion, if Denbury was to drop the CO2 assets down into Genesis, do you think they would be likely to accept units rather than cash. There are advantages to both, dropping it down for cash is a clearly defined gain and is locked in, accepting units would give them a large holding in GEL, would obviously strengthen GEL's balance sheet and would create another income stream for DNR. While it may not seem important now, anyone who follows the MLP's will most defintely tell you the beauty of the ever increasing distributions(with little required additional investments) and the incentive distribution rights that eventually make the GP very valuable. I have made a mint on Kinder Morgan Inc.(KMI) which uses Kinder Morgan Energy Partners (KMP) as its vehicle for growth. If it is done conservatively, it can be much more rewarding long term to accept GEL units as opposed to cash. Any ideas.....?

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    • Some more things to ponder on: I believe Gareth has mentioned a cash flow number for the CO2 operations of around 6-7 million. I'm not sure if this is after tax or not and that is very important as MLP's(like GEL) don't pay corporate income tax which means they can realize a greater return on an asset than a c-corp.
      Another thing to ponder is, does Denbury pay itself for the CO2 that it uses? I'm assuming that the 6-7 million figure includes paying for the CO2 that Denbury uses for its tertiary operations. So, when everything is netted out, and lets say the final distributable cash flow(that is cash flow-maintenance capex+dd&A and no taxes)number is 7 million. GEL is willing to pay a multiple of 7 times this number(thats not uncommon as its roughly a 14% return). So that equates about 49 million bucks. Now instead of swamping the balance sheet and taking on debt to buy it, GEL issues units @ the current price of 6.21 which means Denbury gets 7.89 million units of GEL. GEL currently has 8.62 million units out. So the new float is 16.21 million units. GEL already pays out .20 a year in distributions($.2x8.62 million units=$1.74 million) and has the capacity to do a more but they are being conservative and building reserves and paying down debt. So now they have added roughly 7 million in cash flow. Lets be conservative and say that they only want to distribute say 5 million and hold the rest back for exapansion, to pay down debt etc. So add the 5 million to the current 1.74 million they are paying out and get 6.74 million in distributable cash flow. Divide it by the new float of 16.21 million units and arrive at roughly .40 a unit in distributions. It could be a really incredible situation. GEL can double its distribution and that does not take into account that they have the capacity to do more even without acquisitions. Denbury gets 7.89 million units that yield .40 or 3.1 million pre-tax in cash plus it has a claim on any future increases and did I mention the incentive distribution rights.....!!

      One other important thing is that it now aligns Denbury which is the GP and currently has no LP units(which is not a good situation from the view of a common LP holder) with the common holders and Denbury is incentivized to seek more accretive acquisitions that will allow the distribution to be increased and thus benefit the common unit holders as well as Denbury. This may seem rather dull, but give it 4 or 5 years and if they can gun that distribution up to say 2.00 a year a unit or with almost all MLP's, the GP has incentive distribution rights that state as the distribution rises, they get a bigger and bigger cut of the new cash coming in. At say $.80 a unit distribution, the GP gets 2% and the LP's get 98%, at anything over $.8, the GP may get 15% and the LP's 85%, at say anything over $1.5 the GP get 50% and the LP units get 50%. This puts the onus on the GP to grow the distribution for the LP holders and consequently forthemselves.

      Again, if others could chip in some more accurate numbers as far as cash flow from CO2, whether or not that included the CO2 that Denbury uses, and if its before or after tax, I could construct a better model that the current "back of the envelope" one that I havenow.

      • 1 Reply to rrb1981
      • rrb,

        The CEO of DNR has indicated that they are considering a sale of the industrial, i.e. non-tertiary recovery CO2 production CF. They sell CO2 to Praxair and Pepsi, that's what's for sale.

        Industrial CO2 sales (see above) approximate $6 to 7mm/yr CF. This is not only pre-tax it is pre i and pre d d & a. They would have to convey some assets or delivery systems (or the functional equivalents thereof) with it to achieve the increased value.

        Using the useful idea contained in the key sentence of your post:

        "Denbury gets 7.89 million units that yield .40 or 3.1 million pre-tax in cash plus it has a claim on any future increases and did I mention the incentive distribution rights.....!!"

        Therefore, DNR gives up $7mm of CF to get $3.1mm of CF plus any future increases?

        I'm trying to understand where you are coming from. Where are you coming from?

        Incidentally, if you are interested in GEL you should take a look at the current sharing arrangement to the GP and the first right.



    • rrb1981,

      I understand your idea and your approach but I don't think DNR will trade CF for CF. DNR announced last cc they wanted to take good CF which was undervalued as an embedded unrelated business in their CF stream and get the cash (NAV) benefit of such a transaction to an entity that got greater credit (accretive to earns and value) based on a differing idea about market evaluation.

      If they move the CF stream to a partially related entity and then re-incorporate it into their books, they haven't accomplished anything.



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