Should We Buy Denbury After Bakken Sale?

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On the last day of 2012, several insiders, including the CEO, CFO, Chief Accounting Officer and three Senior Vice Presidents of Denbury Resources (NYSE: DNR)purchased shares of the company. They purchased 6,755 shares combined at the average price of $16.12 per share, with the total transaction value of nearly $110,000. Should investors consider this insider purchase as a bullish signal about Denbury?

CO2 EOR Focus

Denbury is considered to be the largest oil and gas producer company in Mississippi and Montana area. As of June 2012, it had the total proved reserves of 516 million BOE with 81% oil. The strategy of Denbury is quite simple. It is to acquire mature oil fields for a cheap price. Then it used CO2 in enhanced oil recovery into “tertiary recovery” to extract incremental oil out of the mature oil fields it has acquired. In fiscal 2011, it has generated nearly 24 MMBOE. The average production cost was around $21.17 per BOE sold in 2011, with the higher cost in Gulf Coast, for $24.51, whereas the average cost in the Rocky Mountain region was only $14.52 per BOE. 

Bakken Sale Could be Beneficial

Last year, Denbury decided to sell its Bakken Shale asset to ExxonMobil (NYSE: XOM) for $1.6 billion in cash and interest in two other oil fields including Webster Field in SE Texas and Hartzog Draw Field in NE Wyoming. The area totaled around 196,000 net acres with the estimated proved reserves of around 96 MMBOE, along with the daily production volume of 15,000 BOE. It was really a decent move for Denbury to divest its non-core asset and to focus on its CO2 enhanced oil recovery strategy. On the other hand, ExxonMobil could also scale up its unconventional oil shale plays with the “fracking” technology.

Denbury expected that with Webster/Hartzog, Riley Ridge Natural Gas and CO2 EOR Potential, Denbury could reach more than 1.11 billion BOE with 90% oil. It also expected that the year-to-date September 2012 operating cash flow was $250 million, and the capital expenditures were $340 million. Thus, with the sale of Bakken, Denbury could focus on long-term growth strategy on CO2 EOR. Denbury expected to generate substantial free cash flow from CO2 EOR operation after upfront infrastructure investment.

Decent Leverage with Positive Operating Cash Flow

Trailing twelve months, Denbury generated $1.18 per share in EPS, with the net income of $463 million. In the same period, the operating cash flow was nearly $1.4 billion. The free cash flow was -$390 million, due to high capital expenditure of more than $1.78 billion. Denbury utilized decent leverage for its operation. As of September 2012, it had more than $5.2 billion in total stockholders’ equity, only $24 million in cash and more than $3 billion in long-term debt. Denbury also had nearly $2.1 billion in deferred tax liabilities, which could be considered the “interest free loan” from the government.  Out of more than $3 billion in long-term debt, the majority were the 8.25% senior sub notes due 2020, of $996 million. The Bank credit facility, matured in May 2016, with the borrowing base of $1.6 billion, was $625 million. Denbury estimated that the debt to total capitalization was only 37%.

Peers Comparison

At the current price of $16.70 per share, Denbury is worth $6.47 billion in the market. It is also valued at 14.1x P/E and 6.61x EV/EBITDA. Newfield Exploration (NYSE: NFX) is valued at a cheaper price, at only 4.35x EV/EBITDA and 13.1x P/E. Newfield is also operating in the Rocky Mountain area. At the end of 2011, it was reported to have around 3.9 trillion cubic feet equivalent in total proved reserves. Another much smaller peer, Swift Energy is also valued cheaper than Denbury, with only 4.44x EV/EBITDA. It had only 159.6 million BOE form three core areas including South Texas, Southeast Louisiana, and Central Louisiana/East Texas.

Foolish Bottom Line

The Bakken Sale could be a decent move for Denbury, creating a lot of cash for financial flexibility and the strategic focus on its core business. However, I would rather wait for the company’s allocation of the cash it would receive and its further growth in its core CO2 EOR operations. 

hoangquocanh has no position in any stocks mentioned. The Motley Fool owns shares of Denbury Resources and ExxonMobil Corp. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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