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Why Denbury Resources Stock Sank Almost 14% in June

Matthew DiLallo, The Motley Fool

What happened

Shares of Denbury Resources (NYSE: DNR) tumbled 13.8% in June, according to data provided by S&P Global Market Intelligence. That continued the roller coaster ride for the oil stock. After being up more than 50% at one point in 2019, shares are now down nearly 30% for the year.

The culprit last month was the short bear market slump in oil prices. That decline revived investors' concerns about Denbury's balance sheet, which forced it to take some actions to shore up its financial situation.

Barrels of oil rising in height with an upward pointing red arrow in the background.

Image source: Getty Images.

So what

Oil prices bounced around quite a bit in June. Crude began the month by continuing its plunge into another bear market, which kept the pressure on the shares of financially weak oil producers like Denbury. While oil would go on to partially bounce back, rebounding more than 8% for the month, Denbury's stock didn't rally with crude prices.

That was due to worries about its balance sheet. The oil producer, which ended the first quarter with $2.5 billion in debt, took additional steps to improve its financial profile last month. First, it exchanged cash and new convertible notes due in 2024 for a portion of its legacy debt in a private agreement with some creditors. In addition, it offered other creditors the ability to exchange some of their holdings for the new convertible notes. These moves help reduce some of Denbury's outstanding principal while also pushing its debt maturities further into the future.

These exchanges, however, could come at a high price since its creditors have the right to eventually convert this debt into new shares in Denbury. That potential dilution, which could be considerable, led Imperial Capital to reduce its price target on Denbury's stock from $3 to $2 per share last month. While the conversion price is well above where Denbury's stock currently trades, the potential dilution could hold the company's share price down in the coming years.

Now what

Denbury Resources is working hard to address its debt problem. In addition to the moves discussed above, it has been keeping a lid on spending this year so that it can generate excess cash, with which it can chip away at its debt. But its tactics could eventually dilute its shareholders, which is why this oil stock continues to swoon. That slump could continue unless the price of crude oil rebounds further, which is why investors will want to steer clear of Denbury's stock until its finances are back on solid ground. 

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Matthew DiLallo owns shares of Denbury Resources. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.