Phil Rykhoek - President and Chief Executive Officer
Denbury Resources Inc. (DNR) IPAA OGIS San Francisco Conference September 30, 2013 5:40 PM ET
All right, we are going to continue with Denbury Resources. Presenting for the Company is President and CEO, Phil Rykhoek; EOR pure play with floods in -- on the Gulf Coast and now in the Rockies. And with that, I will turn it over to Phil.
All right. Welcome to Denbury. Sorry we weren't in one-on-ones. This building is not the fastest in the world to get around in, is it?
All right. So we have forward-looking statements. I know you've seen those slides before.
So those of you that aren't familiar with Denbury, we are a different kind of play. We are a pure play. What that means is everything we do relates to enhanced oil recovery with CO2. So we buy old oil fields. We flood them with carbon-di-oxide and we produce additional oil. That quite simply is what we do.
We've shown that we can produce as much as 50% more oil than what's been produced today. And so it's a very attractive process. I will show you the value that we are creating. It's a very value accretive business. We have growth for the next 10 years or so with existing inventory and then we have a lot of fields that we can buy over and beyond that. So it's a very repeatable and sustainable process.
So it's very unique. We have a very strong competitive advantage because we own and control the sources of CO2. And we own the pipeline infrastructure that transports CO2 to the oil fields. So we have very minimal competition in the two areas that we operate in.
And one other one is kind of interesting what [since I would love] to talk today about capturing CO2 is we also offer a viable economic method of storing carbon underground. So, that’s why you see environmentally responsible here, little unique for an oil company be talking about that, but we do use some anthropogenic carbon or CO2, and we do store that as part of the process of producing oil.
So Denbury at a glance, you can see some of the numbers. These are just all statistics, obviously of everything we do relates to enhanced oil recovery. We either have current EOR floods or future EOR floods or we have assets that produce CO2, and those are basically that’s our portfolio.
So, because it all relates to EOR as you would expect or highly weighted toward oil, 94% oil and you can see various numbers now. The PV-10 here on this slide has not been adjusted for the acquisition we closed on end of March, the ConocoPhillips purchase of Cedar Creek Anticline. So, that was about a $1 billion transaction. So you could add about a $1 billion to that number.
And we’d now have to add debt for that because the money was set aside as part of the trade from last year. We obviously own a lot of CO2, 17 TCF pipelines and so forth.
This is second quarter, so it’s a little bit abated, but we had a strong quarter. And one of the other things I kind of use this, second quarter was the first quarter where we kind of got back to normal after the flurry of trades that we did in the last 12 months.
If you’re not familiar with Denbury, we basically traded the Bakken to Exxon for cash, two oilfields we could flood and some of the CO2 assets and then we took that cash and the like kind of exchanged and purchased ConocoPhillips Cedar Creek Anticline assets. So, it was about $4 billion of transactions, about $2 billion of sales and about $2 billion of purchases.
So we closed on the last piece of that March 31st and so therefore the second quarter was the first full quarter where you had a production contribution from the assets that we traded. And if you look at it, we ended up roughly in the same place on a production basis after you get through all the trades. But there were a couple of quarters there was a little different.
So second quarter was strong. We had record revenue. LOE was good. We added some CO2 reserves from drilling Jackson Dome. Our first -- a field that we acquired from Encore, Bell Creek, we had our first EOR production in the third quarter, so that's good.
The one thing that wasn’t quite so good is we had to expense about $70 million from Delhi. So what happened at Delhi we will go quickly, you’re probably familiar with this if you follow us, but we had some fluids come to the surface relating to one of our floods and what happened is if you look at this kind of cartoon, CO2 would have been injected into the targeted oil zone, it came to this -- in this cartoon, the wellbore there in the center that says old abandoned well, we believe that, that plug either was faulty or gave away or didn’t exist.
And so this -- the fluid gotten into the shallow zones and travelled through it. Note that the casing had been poured on this P&A well at about 1,000 feet. And so the CO2 moves through the shallow zones and basically came to the surface.
So we had fluids, mainly water and CO2 come to the surface. We were able to stop the fluid flow fairly quickly by pumping brine into to the target oil zone but we’ve had to stop the real source of the leak which we have. We drilled an intercept well down beside this old abandoned well, pursue through both wells and got to pour cement. We feel like we stopped that one. So that was the kind of news we had at the Barclays a couple of weeks ago.
We are -- there is another well there that looks a little bit similar to this one. So we’re not 100% sure that we have stopped all the flows from the target oil zone up to the shallow sands. And so we’re drilling now on the second well and going to test and make sure that it's plugged. We know we’ve made a significant reduction and so we’re making progress. We’re not sure it’s 100% complete.
So that’s where it’s at today. We are also doing remediation. The areas are getting cleaned up. We expect to have that finished in two or three weeks and so it will look at as new.
Going forward, the ramifications for one, currently this will have an impact on third quarter production. We announced that Delhi would probably be down 1,000 to 1,500 barrels a day Q3 to Q2. We do expect Delhi to resume production growth in Q4. And we are starting to re-inject CO2 in other parts of the field and also kind of down to this area although we are not re-injecting right around those P&A wells yet.
As such that will also, as we previously announced that would also impact our third quarter production. We expect actually Q3 production to be a little less than Q2.
Going forward we are looking at our remediation process and we are going to tighten up, make it a bit more stringent and we will review P&A wells around fields that we are also working on and try to plug these before they leak.
EOR, I mentioned this already, so we produced it from a natural source or manmade source, shipped it down the pipeline, inject in the field and we can produce as much as 50% more than what’s been produced today. These are actually recovery rates at Little Creek, so these are historical.
I mentioned that EOR is repeatable, sustainable kind of based on this slide we estimate this was a DOE report that said you could produce up to 10 billion barrels of oil in the two areas we operate in with CO2. So at some -- that’s why we say that we can do this for a long time. We probably have may be a billion barrels of that in inventory, so a lot of running room beyond what we own.
Some of those additional fields are indicated here on this map and also the one that’s coming after this with green dots, those are fields that -- oil fields that we do not own. We own the ones in blue. Those are current EOR floods. The ones in orange are future EOR floods.
As you can see we have nearly a 1,000 miles of CO2 pipe on this map and it’s basically transporting CO2, from the most part, most of our CO2 comes from Jackson Dome, which is up here in the far kind of upper right corner. That’s our big natural source and our knowledge is the only big natural source on this map, that’s what gives us that strategic advantage.
So we are continuing to expand the fields that are growing are mainly the newer ones, Hastings down by Houston, Oyster Bayou down by Houston. Heidelberg is growing. We expect some good growth from Heidelberg this fourth quarter and going into '14 and '15, Delhi should resume its growth as we already talked about and then we have some new floods that are coming; Webster is the one we got from Exxon, that should be flooded in, sorry in ’15 Conroe is on the agenda for '17, [tops] in '19.
So that’s the Gulf Coast. In the Rockies it's a similar story except it's just not as far along. We just moved into the Rockies about three and half years ago with the purchase of Encore. And here our big source of CO2 that we control is Riley Ridge in the LaBarge area. You see in the lower left part of the map. So we own firstly all of Riley Ridge and we have a third of Exxon CO2 that produces from that same formation.
And then the solid red line is in place that’s taking CO2 from ConocoPhillips Lost Cabin planned up to Bell Creek and then we plan to supplement that with CO2 from Exxon and Riley Ridge when we build the dotted red line over there scheduled over the next three or four years.
And so Bell Creek is producing, that’s our first EOR flood in the area and it’s also the first EOR production in Montana. So we had a little celebration there about a month ago and the Governor came out, we did a little touring and so it’s a good thing for Denbury and good thing for the state.
We picked up Hartzog from the Exxon trade. We picked up additional interest at Cedar Creek Anticline from ConocoPhillips. So Cedar Creek Anticline is our single biggest flood that we plan to do and it’s also our biggest current producer. Like sometimes people kind of overlook that but CCA is producing 19,000 barrels a day of conventional oil production, so it is by far our biggest field.
This just in summary shows our potential. We have 450 million barrels pro forma for the ConocoPhillips deal; another 700 million or 800 million of upside virtually all EOR. We’ve been doing this since 1999, so we feel like we are becoming quite proficient at it and you can see the growth rate this is EOR only, but we started about 1,300 barrels a day and the most recent quarter was 38, 39.
Talking about value just a little bit, this is a very value accretive process. I had two or three slides on this. It all starts with operating margin. It’s kind of interesting because people look at it and say we have high operating cost and that would be a true statement. But we also because we have a very high percentage of oil, we still have the highest margin at the peer group. This is second quarter, but you can go back and look at the first half of ’13 and also look at 2012, you will see the same answer and operating margin is revenue less -- operating expenses less severance tax.
So, it all starts with strong margins. We have one of the highest on a per BOE basis in the peer group. We also have relatively low finding and development cost because of the nature of our program. And we’re not -- there are several kind of clustered around us, but we’re still very competitive as you can see in one of the lower -- one of the peers that [Betus] is pretty much a natural gas company.
So you put strong cash flow over F&D and you end up with a very strong capital efficiency ratio and so that obviously is kind of one major possibility, so strong margins in EOR.
We also get a much better return on our money. It’s not quite the same treadmill as some of our peers. For every dollar we spend, we probably get about $4 to $4.5 back as opposed to maybe the Bakken, which is what we compare to here where it's probably about half of that.
So this has taken the same spending pattern, using both. We did have the Bakken and held just about I guess 9-12 months ago and you can see, you get quite a different production profile from EOR and a lot more dollars back for your investment.
If you’re looking at concerned about prices slipping, we also can do quite well in a downturn. This was put together -- the numbers in green were put together by KeyBanc, but it shows the breakeven, maybe find as a 20% before tax before any corporate items. And you can see all the popular oil plays in North America. This was done early this year, and we believe our EOR is very competitive with that.
We think in the Gulf Coast we can probably make money down to nearly $50 on that same basis. It’s probably a little higher. It’s probably around 60 in the Rockies because of that oil priced differential. The Rockies does not get quite as good oil price as we do in the Gulf Coast.
It all relates to having that CO2. This is our Gulf Coast supply, Jackson Dome is the anchor. We had over 6 TCF approved and at year end we added 350 BCF in the second quarter, but basically it moved from the kind of brownish gray color, the drilling program from less probable down to proved. And then the anthropogenic, the green or the anthropogenic supplies that are either currently producing or under construction, the orange are the ones that we expect to occur but not yet under construction.
So, we feel like we have plenty of the supply that we need for the -- or the demand that we need for the existing properties as shown there in red. And you can see we have a little bit of accretion. But basically, the swing is the drilling program and we will ratchet that drilling program up or down depending on our results.
As an example, we had the 350 BCF add in the second quarter. And so we took a well or two out of the Jackson Dome drilling program for 2013. But we’ll continue to monitor that depending on the well results and that’s kind of our swing. But we feel like we have that more than covered and this relates to the prior slide the kind of greenish slide relates to the green slides from the prior the orange slide corresponding and as I mentioned, two of these three Air Products and PCS are already producing. They are going into the green pipeline and going to Hastings, that’s about 60 million to 70 million a day.
Mississippi Power is under construction. We expect that to start producing in about a year from now. That would be an additional 115 million a day.
In the Rockies, it’s kind of a similar story. It’s a little bit more diverse there but Riley Ridge is kind of our anchor source. Rile Ridge produces out of the same formation that Exxon does at Shute Creek. And that’s a very, very large reservoir estimated to be 100 TCF. So we own virtually all of Riley Ridge. We have a third of Exxon CO2 and both of those will ultimately be our anchor source of CO2 in the Rocky Mountains when the pipeline is connected.
In this case though, Jackson Dome is nearly pure CO2. In this case we have to build a plant or a facility to separate the products because this is CO2, [coming] with natural gas Helium and other things. And so I guess the negative is you have to go to plant; the positive is you have methane and helium that you can sell to help pay for the plant. So, the net cost of CO2 is an essence depending on natural gas prices. So, that’s about the pluses we are to be dependent on natural gas.
Riley Ridge is -- we expect the plant to come on production late this year. Initially we will just produce methane, helium and where we inject CO2 and then once the pipeline is finished we’ll separate the CO2 and take it to the oil fields.
Strong financial position, this just shows debt to cap and so forth. So we are in great shape. Plenty of credit line and that credit line could be much higher if we wanted to. Summary guidance, we are about to come out with 2014 guidance that will be at the Analyst Meeting in November 11, but it probably won’t be too dissimilar from the 2013 capital budget and probably several people have asked, they don’t think we will have too much in pipelines spend next year either. Most of the pipeline spend would be in ’15 and ’16.
So we have our guidance. We expect we’ve announced that we expect to be in that median or the upper half of that guidance even with the Delhi incident. It will affect the third quarter, but it doesn’t -- it's still we were far enough ahead that we feel we can still be in the upper half of the range for 2013.
We’ve repurchased quite a bit of stock. This number is of the Barclays presentation about two weeks ago, three weeks ago. But today we’ve repurchased about 11% at an average price of about $15.50; probably purchased about 250 million I believe this year. So that’s been very accretive and adds to our growth per share.
Hedging, we use the hedge for about two years out and we’ve been doing collars with a floor of 80 and assuming this is as high as we can get, which you can see it ranges from low 100's to upper 90's. The reasons some of these in 2015 show 82 is we’ve done a few that are our mix of LLS hedging and WTI hedging. LLS is generally about $85 floor, WTI is $80, kind of an assumed $5 differential going out into the future. We try to keep two years hedge as kind of our insurance policy to let us weather any economic downturns.
This has kind of turned into one of our kind of key slides I guess. We’ve shown -- this is our current plan. We expect to grow for the next roughly ten years, another ten years. Strong production growth, steady production growth. This is EOR. We said it would be in the low teens, total company growth is probably between 5 and 10 because there would be some slippage on that conventional asset.
But we expect the production or the CapEx to peak in 2016 so in 2017, we would expect to have free cash flow and become a dividend payer or distribute cash. So two things that have been talked about that we said we would answer kind of give more guidance and color at the Analyst Meeting, it came up what we consider an MLP as part of that process and we said well we’ll tell you in November.
And the second one is could you may be accelerate that free cash prior to 2017 and we said, well we’ll work on that and we’ll tell you that in November. So we are trying to generate interest to come to our Analyst Meeting in November in St. Houston. If you want to come at Hastings, we will tour Hastings in the morning. We will have presentation in the afternoon and then we’ll follow that up with conferences in New York and also I think we are doing some splitting up in two teams and one’s going East and one’s going West.
But the key note of this is that Denbury does expect to become an income and growth company and I think that will really distinguish us from our peers and add to the total shareholder return. This slide is to show that the Gulf Coast is basically already a free cash flow generator. The prior one had all the EOR program in it North and South and in essence, the North is a user of cash today, the South is a generator of cash and it’s just where it’s at in its lifecycle.
The Gulf Coast has most of the infrastructure already in place. Of course the Rockies has very little of the infrastructure in place. It just has the one 200 mile pipeline and that needs to be supplemented. So the Gulf Coast actually the tertiary program has been throwing our free cash starting in 2011, this is cumulative, so just make sure you understand, but you can see since 2011 and by 2013 actually expects to pay out so strong economics in the Gulf Coast.
So we use this slide, it largely helps with the models and so forth, but it gives you a nice picture where we are going. So we list them all the fields except for the ones that are peaked -- that’s labelled in the mature area, but all the others are listed the date of first production, or the date of expected first production for the ones that have not yet started producing. We give you an idea when the peak rate, what that’s going to be and roughly when it's going to happen.
So you can see most of these fields grow for five to ten years from the initial production. Lot of them are in the 5,000 barrel to 10,000 barrel range. We do have Hastings, which is bigger; Webster is coming up, CCA is coming up. So a lot of the bigger fields are just on the horizon and these are just larger fields. They have more oil potential and that’s why you get a better bump.
We also have the proved and probable barrels thereto for reference. While we are on reserves, in 2013, we won’t -- we may be able to book Bell Creek. We are hoping we can and that would be our big add of proved reserves in 2013. Normally you have to have a little bit of a production response and normally we book about 75% of what we think is there. And so we’re hoping that we can book Bell Creek. And then part of the next big add for EOR would be 2015, hopefully there will be production from Webster.
So our proved reserves tend to be a bit lumpier because they tend to follow when you get the field on production. And you get the initial booking when you get that first response and then over time, you hopefully can book the other 25% of what you think is there to get to the 3P number.
So in summary, we feel like EOR is a great process. It’s a -- we have -- it’s very nice to be in business. We have a strong strategic advantage. And that’s the CO2 in the pipelines give us that. And so our results are within our own destiny for the most part. We think we can grow for many years. For the next eight to ten years with existing inventory and we think we can continue to buy fields over and beyond that. So this is a very long term growth study -- growth story.
I think I’ve shown you the valuation. We get strong margins. We get strong -- we have a strong capital efficiency. We’re making money as a very profitable business and in the next few years, we expect to have free cash flow as we get some of this infrastructure behind us. So we’re excited about Denbury and do we take questions?
Okay. Well, thank you very much. If you have questions for Denbury, feel free to contact Investor Relations. We have Ernesto here or myself and we’d be happy to answer those for you later. Thank you much.