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Denbury Poised at Neutral

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On Dec 16, 2013, we reiterated our Neutral recommendation on oil and gas exploration and production company Denbury Resources Inc. (DNR - Free Report) . The company currently has a Zacks Rank #3 (Hold).
Why Neutral?

In the third quarter of 2013, Denbury’s earnings per share and revenues beat the Zacks Consensus Estimate. On a year-over-year basis, the company’s top and bottom line were boosted on the back of both higher oil production and realizations.

During the third quarter, continuing production averaged 71,531 barrels of oil equivalent per day (Boe/d) versus 56,024 Boe/d in the prior-year quarter. Of this, oil production averaged 67,705 barrels per day flattish with the year-ago level. However, natural gas production averaged 22,957 thousand cubic feet (down 25.3%), on a daily basis.

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 37,513 barrels per day in the third quarter, which represents a 7.8% increase year over year. Contributions from continued field development and expansion of facilities in Delhi, Hastings, Heidelberg and Oyster Bayou fields led to the increase.

Denbury Resources remains on track to continue its growth momentum. The company, driven by higher contribution from its core tertiary operation, is steadily posting higher production. As the company’s production is fairly oil-weighted, we view strong earnings and cash flow visibility in the future.

Denbury expects its 2013 production to be in the 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 was set at $1.06 billion for the year, of which approximately 85% of the total capital outlay for tertiary projects. The balance will likely be for conventional projects, primarily in the Cedar Creek Anticline (CCA).

Oil price realization (including the impact of hedges) averaged $105.80 per barrel in the quarter, showing a rise of 13.8% year over year, while gas prices contracted 38.9% year over year to $3.38 per Mcf. On an oil equivalent basis, the overall price realization was $101.22 per barrel, up almost 14% from the year-earlier level of $88.77 per barrel.

On the flip side, we remain cautious due to high cost levels associated with the tertiary oil recovery method and harsh weather conditions that might restrict the activity level.

Other Stocks to Consider

Stocks in the sector that are currently performing well include Abraxas Petroleum Corp. (AXAS - Free Report) , Harvest Natural Resources Inc. and Clayton Williams Energy, Inc. , each with a Zacks Rank #1 (Strong Buy).

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