New and improved technologies in the drilling industry are leading oil producers into what some are calling the second oil boom in our nation's history -- the first of which began in the early 20th century. One driller and producer that is taking advantage of new technology to produce oil from wells that had previously been closed or had their production limited based on available technology is Denbury Resources (DNR).
Carbon-Dioxide (CO2) Flooding:
DNR has developed a distinctive competency in carbon-dioxide (CO2) flooding -- an oil extracting process that involves injecting carbon dioxide into oil reservoirs in order to maximize production. Denbury has spent years making capital expenditures in order to become one of the leading producers of oil using carbon-dioxide flooding -- a competency and competitive advantage that cannot and will not be easily replicated by rivals.
Whereas big brother, and competitor, Occidental Petroleum (OXY) has focused on CO2 flooding in Texas' Permian basin, the original location of Spindletop; Denbury, based out of Plano, TX, has turned its attention toward the Gulf Coast and the Rocky Mountains, purchasing older, mature fields from other oil companies.
Denbury's four largest fields are still in their growth phase and the company has stated that their mature fields are still contributing greatly to the firm's overall production output. Also, for investors who are wary of possible dips in the price of crude oil, DNR employs hedging practices on most of its production that have essentially locked in the company's cash flow through 2014.
The company has a bright future and is working hard to ensure its future success and increase returns to investors. DNR trades at approximately a 36% discount of its NAV compared to an approximately 10% discount that DNR's industry competitors trade at according to J.P. Morgan. Part of the reason for the firm's discounted price compared to its peers is that the stock to a significant tumble at the end of 2013 and has yet to recover. The dip in share price occurred when the firm cut its projected annual growth outlook for the next five to six years from 5-10% down to 4-8% and sent the stock from $19.35 of November 8th down to $15.98 on December 13th. DNR's shares remain beaten down, currently trading at $16.26.
DNR is inexpensive compared to its industry competitors when looking at a valuation based on Price to Cash Flow. DNR currently trades at approximately 4.5 times free cash flow while the industry norm is around 6.8. In addition, the company has finished a series of expensive investments leading analysts to project a decrease in capital expenditures from $1.6B in 2012 down to $1.0B for the next several years. This decrease in cash outflow from investment activities will increase cash flow from operating activities and free cash flow. Even if the company continues to trade at a below industry price to free cash flow multiple of 4.5 the stock price will rise, and continued success resulting from fruitful production out of the company's oil fields using traditional and carbon-dioxide flooding methods ought to raise the figure of 4.5 times free cash flow closer to the industry average of 6.8.
Should DNR's price to free cash flow valuation increase to 6.8, all other things constant, the share price would jump to approximately $24.50 -- over an $8 per share or approximately 50% increase.
Initiation of Dividend:
To sweeten the pot for investors, Denbury initiated its first ever quarterly dividend at $0.0625 per share for an annual yield of $0.25. The firm expects to increase the dividend by as much as 100% up to around $0.50 or $0.60 per share.
In addition to initiating quarterly dividends, as of December 31st DNR had $422M authorized for share repurchases.
Denbury's distinctive competency as an oil producer, capable of extracting oil through both traditional and carbon-dioxide flooding methods, along with favorable valuation metrics compared to the firm's industry competitors provide investors with just a couple of reasons out of a multitude to choose from to like both the short and long-term prospects of DNR stock.