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Where Will Denbury Resources Be in 5 Years?

Reuben Gregg Brewer, The Motley Fool

In April, energy player Denbury Resources (NYSE: DNR) had to go back to the drawing board, reworking its plans for the future after a deal to merge with Penn Virginia (NASDAQ: PVAC) collapsed. Denbury was more than capable of dealing with the hit, but it materially changed the company's near-term and long-term plans. Here's what management is thinking about now as it looks out five years.

Well, that didn't work

Denbury's focus is on injecting carbon dioxide into the group to enhance the output of oil wells. It's an older technique that works well with traditional oil wells. Penn Virginia was focused on fracking, which involves pumping water, sand, and chemicals into a well to break rock up and free oil. They are very different ways to extract this vital energy source from the ground. 

Two men writing in notebooks with an oil well in the background

Image source: Getty Images.

Denbury's thought in merging with Penn Virginia was twofold. First, it believed it would try using its carbon dioxide techniques with fracked wells. And second, putting the two companies' balance sheets together would improve Denbury's leverage. So when the deal fell apart, Denbury basically had no choice but to keep executing within its portfolio of assets and refocusing on debt reduction to improve its leverage profile. These are the big near-term goals.

It's been several months since the Penn Virginia deal fell apart, and management is now talking about the longer term a bit more. So it's a good time to think about the oil driller's five-year outlook.

The same, but different

The first thing to expect from Denbury is more fiscal prudence. It has been extending maturities, replacing bonds with convertible debt, and modestly trimming its debt levels. Right now the big plan is to buy time, so the next year or so isn't likely to see huge balance sheet improvement. Moves like this, however, are likely to continue, with the ultimate goal of trimming the overall debt load.   

For example, the convertible note move, which has a face value of $245.5 million, could be a big benefit on the debt reduction front at some point in the next five years. It's due in 2024 and represents around 10% of the company's long-term debt. Forcing the conversion of that note would go a long way to trimming Denbury's leverage, though it should be noted that the cost would be increasing the share count. Still, expect cash flow not invested in its upstream drilling efforts to get used, at least in part, for debt reduction.   

DNR Total Long Term Debt (Quarterly) Chart

DNR Total Long Term Debt (Quarterly) data by YCharts

With regard to drilling, Denbury has a number of projects in the works that should get completed and/or built out over the next few years. These efforts will support production and likely lead to higher output over the five-year span. This is, of course, good news, assuming that volatile oil prices don't plummet anew and put a damper on growth plans. That's always a risk with oil -- though it's also possible that oil prices will rise materially, allowing Denbury to speed up its spending. Five years is a long time in the oil patch, with slow and steady the likely path for Denbury today. But market conditions can shift quickly.   

That said, there's another management talking point about which investors should be mindful that could have material long-term implications. Denbury is an expert at using carbon dioxide to enhance well production. That's its core business, using the technique on traditional wells. Although the Penn Virginia deal fell apart, Denbury hasn't given up on the idea of trying to merge carbon dioxide injection with fracking. Over the next five years it's likely to try again on this front, either through another acquisition/merger or simply by partnering with a company that's using fracking. If Denbury is right, combining the two drilling methods could be a big deal. 

On a similar front, management has also been talking about the environmental benefit of injecting carbon dioxide into the ground. Although this process has historically been viewed as an oil extraction technique, Denbury has increasingly been discussing it as a way to sequester a potent greenhouse gas. For example, the company recently highlighted that in 2018 it pumped the equivalent of 690,000 cars' worth of carbon dioxide emissions into the ground. So over the next five years, look for Denbury to try to shift the narrative on its business, attempting to position itself as a "clean" oil driller. That could lead to more opportunities in a world that still needs oil, but that is also working to reduce greenhouse gas emissions. This is a real wild card but one worth monitoring.   

Rolling with the punches

When the deal to merge with Penn Virginia broke apart, Denbury was dealt a blow. It had big long-term plans for the deal, and the tie-up would have helped solidify its financial position. That said, this was not a knockout punch. Denbury is working on its leverage, with reducing its debt a key priority that will just take some time to get done. On the production front, it has plenty of opportunities in its portfolio to support output.

The big stories to watch over the next five years, meanwhile, are probably the company's desire to merge fracking with carbon dioxide injection and its effort to reposition carbon dioxide injection as a "clean" oil production technique. If it can get either of those goals off the ground, there's a lot of opportunity ahead for Denbury Resources. That said, most investors are probably better off waiting to jump aboard until there are tangible results. 

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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

This article was originally published on Fool.com