An Impressive 3Q by Denbury

Denbury Resources Inc. (DNR - Analyst Report) has reported third-quarter 2011 earnings of 37 cents per share (excluding one-time items), beating our expectation of 29 cents. The quarterly results were also well above the year-earlier adjusted earnings of 13 cents, attributable to overall higher price realization and production growth.

Total revenue jumped 24% to $576.5 million from the year-ago level of $466.7 million and comfortably surpassed the Zacks Consensus Estimate of $540 million.

Operational Performance

During the quarter, production averaged 66,830 barrels of oil equivalent per day (Boe/d), up 6% year over year, attributable to higher production from Bakken and tertiary properties, partially offset by natural declines in production from other non-tertiary properties. Oil production averaged 61,984 barrels (up 4% from the year-ago level) and natural gas averaged 29,079 thousand cubic feet (up 64%), on a daily basis.

Tertiary production in the quarter averaged 31.091 thousand barrels per day (MBbl/d), up 5% from the year-earlier level on the back of continued expansion of the tertiary floods in Tinsley, Heidelberg and Delhi Fields.

Oil price realization (including the impact of hedges) averaged $96.52 per barrel in the quarter, showing an improvement of 35% year over year, while gas prices increased 15% to $7.35 per Mcf. On an oil equivalent basis, the overall price realization was $92.72 per barrel, up 41% from the year-earlier level of $65.84 per barrel.

Financials

Cash flow from operations was $357.7 million in the reported quarter versus $219.9 million in the year-ago quarter. Capital investment was $349.3 million, up from the year-earlier level of $267.1 million.

Cash balance at the end of the first nine months of 2011 was $24.4 million and long-term debt was $2.2 billion, representing a debt-to-capitalization ratio of 30.4% (versus 30.6% in the preceding quarter).

Outlook

With its own in-house CO2 reserve base, Denbury enjoys a significant competitive advantage in acquiring and exploiting mature oil reservoirs. Tertiary operations remain the company's principal focus with particular emphasis on the Gulf Coast, Rocky Mountains and Bakken Shale holdings.

The company reaffirmed its overall 2011 production growth of 5% on a year-over-year basis. Denbury’s tertiary production target was 31,000 Bbls/d, Bakken production was 8,400 Boe/d and 65,600 Boe/d for total company production.

For 2011, the company maintained its capital expenditure budget at $1.35 billion. Denbury remains bullish for 2012 on initial oil production expected at Hastings and Oyster Bayou and accelerated drilling in the Bakken area.

However, we see limited upside potential for shares due to its sensitivity to oil price volatility, along with drilling results, costs, geo-political risks and project timing delays. Additionally, competition from Pioneer Natural Resources (PXD - Analyst Report) and Newfield Exploration Co. (NFX - Analyst Report) is also a cause for concern.

We currently reiterate our long-term Neutral rating on Denbury shares. The company carries a Zacks #3 Rank (short-term Hold rating).

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