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Denbury 3Q Meets Our Expectation

DNR NFX

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Denbury Resources Inc.’s (DNR - Analyst Report) third-quarter 2012 adjusted earnings of 33 cents per share (excluding one-time items) were on par with the Zacks Consensus Estimate. However, the quarterly results were 10.8% below the year-earlier adjusted earnings of 37 cents. This underperformance was due to the production shut-ins at its several fields for Hurricane Isaac.

Total revenue, at $600.4 million, decreased 4.1% year over year but was almost in line with the Zacks Consensus Estimate of $601.0 million.

Operational Performance

During the quarter, production averaged 72,776 barrels of oil equivalent per day (Boe/d), up 8.9% year over year. The increase was mainly related to the gains in tertiary and Bakken production that were partly tempered by the declines in conventional production and asset divestitures.

Oil production averaged 67,655 barrels per day (up by more than 9% from the year-ago level), representing 93% of the total volume. Natural gas production averaged 30,724 thousand cubic feet (up 5.7%), on a daily basis.

The company’s production from tertiary operations averaged 34,789 barrels per day, which represents a 12% increase year over year. Contributions from new floods at Oyster Bayou and Hastings fields and existing floods at Tinsley, Heidelberg and Delhi fields led to the increase. Again, Denbury’s Bakken production experienced a solid 59% increase in the reported quarter driven by active drilling program in the region.

Oil price realization (including the impact of hedges) averaged $92.99 per barrel in the quarter, showing an improvement of 3.7% year over year, while gas prices increased 24.8% to $5.53 per Mcf. On an oil equivalent basis, the overall price realization was $88.77 per barrel, up 4.3% from the year-earlier level of $92.72 per barrel.

Financials

Cash flow from operations was $350.2 million in the reported quarter versus $357.7 million in the year-ago quarter. Oil & natural gas capital investments were $274.6 million, up from the year-earlier level of $269.7 million. Denbury's 2012 capital expenditure budget remains $1.5 billion. Two-thirds of the budget was apportioned for tertiary projects, while the remaining was for Bakken.

Cash balance as of September 30, 2012 was $24.0 million and long-term debt was $3,080.3 million, representing a debt-to-capitalization ratio of 37.1%.

Guidance

Denbury reaffirmed its 2012 production guidance at 69,775–74,775 Boe/d. The company’s tertiary production target remains unchanged in the 33,000–36,000 Boe/d range, and the Bakken production guidance at 14,350–16,350 Boe/d.

Outlook

We maintain our long-term Neutral recommendation on Denbury Resources — an exploration and production company engaged in the acquisition, development, operation and exploration of oil and natural gas properties in the Gulf Coast and Rocky Mountain regions of the U.S.

With its unique profile, compelling economics and an unmatched infrastructure, Denbury is nicely positioned to deliver long-term sustainable growth.

We believe that the company’s oil-centric niche business model and comfortable financial position will help maintain its growth trajectory. We also believe Denbury will eventually experience a reduced spending profile in tandem with an increasing production trend, which will create an attractive free cash flow structure starting 2016.

The company’s capex will moderate substantially with the completion of an important infrastructure development in the Rockies, which needs $200–$350 million of annual capital outlay till 2015. Meanwhile, many CO2 projects are also expected to fetch consequential production.

However, we maintain our long-term Neutral recommendation to reflect high cost levels associated with the tertiary oil recovery method. Other concerns are its sensitivity to oil and gas price volatility, along with drilling results, geo-political risks and project timing delays.

The company, like its peer Newfield Exploration Co. (NFX - Analyst Report), carries a Zacks #3 Rank (short-term Hold rating).

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