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Risk, Reward Balance Denbury

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We have maintained our long-term Neutral recommendation on Denbury Resources Inc. (DNR - Free Report) — 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.

In the first quarter, Denbury posted better-than-expected results given record tertiary oil production and the Bakken output. Its quarterly production rose 12% on an annualized basis and as the company’s production is fairly oil-weighted, we view strong earnings and cash flow visibility in the future.

Denbury raised its 2012 annual production guidance to the range of 69,775–74,775 barrels of oil equivalent per day (Boe/d) fromthe previous expectation of68,325–73,625 Boe/d. The increment in production estimate was made following the closure of its purchase of Thompson Field in Fort Bend County, Texas.

The raised guidance reflects average daily production of about 2,000 barrels of oil from the properties acquired, for the remainder of 2012. Denbury targets total production in the upper half of the estimated range.

With its in-house CO2 reserve base, Denbury has a significant competitive advantage in acquiring and exploiting mature oil reservoirs. Notably, the acquisition of Thompson Field in Fort Bend County, Texas is beneficial to the company. The 8,454 acre oilfield, which produces oil from the Frio zone, is located 18 miles west of the Hastings field, and will be used to enhance oil recovery by pumping CO2. It lies close to the company’s network of the existing CO2pipelines. Hence, Denbury is expected to reap benefits from the vast CO2infrastructure it has built over the last decade.

With its unique profile, compelling economics and unmatched infrastructure, Denbury is nicely positioned to deliver long-term sustainable growth. Denbury has a relatively low-risk business model –– it produces oil by applying tertiary recovery techniques to mature fields that remains its principal focus. The company is continuously expanding its tertiary floods in several CO2projects, namely Tinsley, Hastings, Heidelberg, Bell Creek, and Delhi that are expected to generate meaningful production.

However, we remain on the sidelines due to high cost levels associated with the tertiary oil recovery method. In addition to industry-wide oilfield cost inflation, Denbury’s growing outlays also reflect its exposure to higher energy costs (electrical and fuel charges), resulting from continuing emphasis on CO2 flooding techniques.

Denbury holds a Zacks #3 Rank, which translates to a Hold rating for a period of one to three months. The company competes with Newfield Exploration Co. (NFX - Free Report) and QEP Resources, Inc. (QEP - Free Report) and Plains Exploration & Production Company .

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