Denbury Resources Inc. DNR recently announced that it has downwardly revised 2020 capital budget in the wake of a weak crude pricing scenario.
The company’s 2020 capital budget guidance is now expected within $95-105 million, reflecting a 44% (or $80 million) decline from the original expectation, which was indicating 25% fall from the 2019 level. With oil price now in the bearish territory since the coronavirus pandemic is hurting global energy demand, the outlook for exploration and production business seems gloomy. Thus, upstream energy players are restricting operational activities and thereby reducing capital budget.
Originally, $140-$150 million capital was expected to be allocated for the Cedar Creek Anticline enhanced oil recovery development. In order to reduce cash expenditure and preserve liquidity, Denbury now intends to defer the Cedar Creek Anticline CO2 tertiary flood development project beyond 2020. As of Dec 31, 2019, it had cash balance of only $516,000. The company had total debt of $2,281.7 million, with a debt-to-capitalization ratio of 61.8%, much higher than the broader industry average of 40.3%, depicting balance sheet weakness.
Production is expected to decline by 3,000 barrels of oil equivalent per day (Boe/d) from the 54,500 Boe/d midpoint of its original guidance. While 50% of the production curtailment will likely be triggered by its capital-slashing efforts, the other half might be caused by cost-cutting measures. The company expects shutting down of compressors and well repair delays to affect production.
It has updated its hedging status to navigate through the current low price environment. The company has hedged 39,500 barrels per day (BPD) of production from the second quarter and 35,500 BPD from the second half of the year. Half of the contracts are fixed-price swaps, with the rest being three-way collars.
Reverse Stock Split
The company is planning for a reverse stock split in order to reduce its authorized common stocks in the market. The company has designed several split ratios, which will provide its shareholders with fewer but higher priced shares. The move is not expected to affect the voting rights of its shareholders, but help it regain compliance with listing requirements of the New York Stock Exchange.
With the capex reduction move, Denbury joins the bandwagon of other energy players including Pioneer Natural Resources Company PXD, Apache Corporation APA and Cimarex Energy Co. XEC that have been navigating through this tough phase, while sustaining a solid financial footing and strong operational efficiency. Strikingly, fortifying the companies’ capital position at a time when oil prices are unprofitable for most producers is touted to be a prudent strategy.
Shares of this Zacks Rank #3 (Hold) company have lost 86.9% year to date compared with 65.3% decline of the industry it belongs to. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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