We reaffirmed our Neutral recommendation on Denbury Resources Inc. (DNR) on Sep 10, 2013. With its unique profile, compelling economics and an strong infrastructure, Denbury is nicely positioned to deliver long-term sustainable growth. However, we remain cautious due to high cost levels associated with the tertiary oil recovery method and harsh weather conditions that may restrict the activity level. The company holds a Zacks Rank #3, which is equivalent to a short-term Hold rating.
Plano, Texas-based Denbury Resources is an oil and gas company engaged in the exploration, production and development of natural gas properties in the Gulf Coast region located in Mississippi, Texas, Louisiana, and Alabama. It also has properties located in Montana, North Dakota, Utah, and Wyoming.
Denbury has a relatively low-risk business model as it produces oil by applying tertiary recovery techniques to mature fields. Tertiary operations remain the company’s principal focus. The company’s production from tertiary operations averaged 38,752 barrels per day in the second quarter, which represents more than 10% increase year over year. Contributions from continued field development and expansion of facilities in Delhi, Hastings and Oyster Bayou fields led to the increase.
Denbury Resources’ growth momentum is likely to remain intact. Driven by higher contribution from its core tertiary operation, the company’s yield is showing steady growth. As the company’s production is fairly oil-weighted, we view strong earnings and cash flow visibility in the future.
Denbury reaffirmed its 2013 production range of 68,700–71,700 barrels of oil equivalent per day (Boe/d). Strong growth from the company's high-growth projects at Delhi, Hastings and Oyster Bayou should drive production toward the higher end of the guided range. This will aid the company in effectively replacing all of the sold Bakken production. The tertiary production growth was set at 6–14%, reflecting normal year-to-year variability. Capital expenditure budget for the year is $1.06 billion, of which approximately 85% is for tertiary projects. The balance will likely be allotted to conventional projects, primarily in the Cedar Creek Anticline (CCA).
However, we remain apprehensive as Denbury’s project inventory is concentrated mostly within a few number of tertiary recovery projects. Hence, total company performance as well as profitability remain particularly exposed to execution and operational risks of individual projects.
Also, Denbury’s results are directly exposed to oil and gas prices, which are inherently volatile and subject to complex market forces. Realized prices could differ significantly from our estimates, thereby affecting the company’s revenues, earnings and cash flows. Denbury’s results are also exposed to oil price differentials between its net oil price and NYMEX prices.
Other Stocks to Consider
While we prefer to remain on the sidelines for Denbury, there are other stocks in the sector that appear rewarding. Among these, Range Resources Corporation (RRC), Carrizo Oil & Gas Inc. (CRZO) and Whiting Petroleum Corp. (WLL) are expected to perform impressively over the next few months and carry a Zacks Rank #1 (Strong Buy).
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