Denbury Resources Inc. (NYSE: DNR - News) has reported second-quarter 2011 earnings of 37 cents per share (excluding one-time items), beating our expectation of 33 cents. The quarterly result was also well above the year-earlier adjusted earnings of 18 cents, attributable to overall higher price realization, partially offset by lower production.
Total revenue jumped 21% to $601.4 million from the year-ago level of $497.2 million and comfortably surpassed the Zacks Consensus Estimate of $550 million.
During the quarter, production averaged 64,919 barrels of oil equivalent per day (Boe/d), down 23% year over year. Oil production averaged 59,538 barrels (down 10% from the year-ago level) and natural gas averaged 32,283 thousand cubic feet (down 70%), on a daily basis.
Tertiary production in the quarter averaged 30.771 thousand barrels per day (MBbl/d), up 8% from the year-earlier level on the back of continued expansion of the tertiary floods in Tinsley, Heidelberg and Delhi Fields.
Oil price realization (including the impact of hedges) averaged $103.17 per barrel in the quarter, showing an impressive 44% year-over-year growth, while gas prices increased 18% to $7.22 per Mcf. On an oil equivalent basis, overall price realization was $98.21 per barrel, up 53% from the year-earlier level of $64.13 per barrel.
Cash flow from operations was $344.1 million in the reported quarter versus $240.9 million in the year-ago quarter. Capital investment was $634.5 million, up from the year-earlier level of $493.9 million.
Cash balance at the end of the six months of 2011 was $121.8 million and long-term debt stood at $2.1 billion, representing a debt-to-capitalization ratio of 30.6% (versus 32.5% in the preceding quarter).
With its own in-house CO2 reserve base, Denbury enjoys a significant competitive advantage in acquiring and exploiting mature oil reservoirs. Tertiary operations remain the company's principal focus with particular emphasis on the Gulf Coast, Rocky Mountains and Bakken Shale holdings.
The company has lowered its overall 2011 production guidance from 8% to 5% on a year-over-year basis. The company reduced its tertiary production target to 31,000 Bbls/d from 32,500 Bbls/d, primarily due to slower-than-expected increase in near-term production at the company’s Heidelberg and Tinsley Fields. Denbury also reduced its Bakken production to 8,400 Boe/d from 8,700 Boe/d for 2011, resulting from bad weather.
For 2011, the company raised its capital expenditure to $1.35 billion from its prior expectation of $1.3 billion. Denbury remains bullish for 2012 on initial oil production expected at Hastings and Oyster Bayou and accelerated drilling in the Bakken area.
However, we are concerned about the growing cost pressure in the company's operations, as its lease operating expenses increased 32% year over year on an absolute basis in the reported quarter. Additionally, competition from Pioneer Natural Resources (NYSE: PXD - News) and Newfield Exploration Co. (NYSE: NFX - News) is also a cause for concern.
We currently reiterate our long-term Neutral rating on Denbury shares. The company carries a Zacks #3 Rank (short-term Hold rating).