We reaffirmed our Neutral recommendation on
Denbury Resources Inc.
) 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.
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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
Carrizo Oil & Gas Inc.
Whiting Petroleum Corp.
) are expected to perform impressively over the next few months
and carry a Zacks Rank #1 (Strong Buy).