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Denbury Resources Inc. Jumped 80% in 2016. How Can It Keep Rising in 2017?

DNR Debt To Capital (Quarterly) Chart
DNR Debt To Capital (Quarterly) Chart

DNR Debt to Capital (Quarterly) data by YCharts .

As that chart shows, not only is its debt-to-capital ratio well above these peers, but debt as a percentage of its enterprise value is 67%. That is much higher than those of Anadarko Petroleum (NYSE: APC) , Apache (NYSE: APA) , and Hess (NYSE: HES) , which each has a roughly 30% debt-to-enterprise value, while Occidental Petroleum 's(NYSE: OXY) ratio is just 15%.

Because of its elevated debt level and higher costs, Denbury cannot grow as fast as other producers at current oil prices. While the company has yet to put out 2017 guidance, it is highly unlikely that production will increase very much, if at all, this year. Contrast this with its peers, which forecast healthy growth rates at current oil prices over the next few years, and that is off much larger production bases than Denbury's:

Company Current Growth Outlook
Occidental Petroleum 5% to 8% oil and gas production growth per year over the long term.
Anadarko Petroleum 12% to 14% compound annual oil growth rate over the next five years.
Hess 8% to 12% exit-to-exit production growth in 2017.
Apache Targeting top-tier organic production growth.

Data source: Anadarko Petroleum, Hess, and Occidental Petroleum.

The other crucial differentiator between Denbury and these peers is that each has a growth-focused shale position. That is critical because shale drilling costs have fallen so dramatically during the downturn that these producers can earn excellent returns and deliver robust growth at current oil prices from their shale assets. As a result, most are reinvesting the cash flow produced from conventional and EOR assets into shale wells because the returns are so much better.

Because Denbury does not have the resources to become a high-growth company, its stock rally could fizzle out this year as investors focus on faster-growing producers, especially if oil prices stagnate. To avoid this fate, the company must differentiate itself from other oil companies. One way it could do that is by outlining a clear strategy to grow shareholder value, which could include bringing back the dividend. That way, it would appeal to a different subset of investors that prefer income growth over absolute growth.

Investor takeaway

Denbury Resources rebounded sharply last year, thanks not only to improving oil prices but several self-help efforts that put the company on a more sustainable footing. However, despite the progress, Denbury Resources still has issues to work through, including the need to further reduce costs and debt so that it can start growing again.

That said, the company does not have the ability to grow as rapidly as other producers because EOR projects take more time and money to develop than shale. That means Denbury will need to clearly differentiate itself to appeal to the right investor class who would be willing to pay a premium for the steady growth it could offer in a stable oil price environment.

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Matt DiLallo owns shares of Denbury Resources. The Motley Fool owns shares of Denbury Resources. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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