While gold may technically be the most valuable natural resource, last time we checked it doesn’t generate power or prevent people from driving around if it goes too high. In our mind, the greatest natural resource remains oil. It’s in every facet of human civilization; in order to excavate gold, one needs power and that means oil is needed. We continue to like oil over the long-term, given that alternative energy infrastructure hurdles remain in place, nationwide scalability is still an issue, and classic political gridlock continues to be an ever-present reality.
When we started searching for new energy names we came across Denbury Resources (DNR) and liked what we saw. Sure we like names like Transocean (RIG) and Prudhoe Bay Energy Trust (BPT), but we wanted something more unique in nature. DNR fits the profile of what we were seeking, given that it holds both the “classic” oil assets and the “sexy” new energy asset shale oil. In our view, DNR is a Buy, given the firm’s diverse energy portfolio, superior extraction technology for shale oil, and oil trading below $100 a barrel.
What makes DNR’s shale oil assets truly interesting to us deals with the extraction technology employed. On a high level it involves the use of CO2 (carbon dioxide) that allows DNR to extract a higher percentage of proven oil assets relative to other extraction technologies. Furthermore, this technology reduces the amount of potential environment damage. This kills two birds with one stone by increasing shale oil production and simultaneously reducing the probability that it gets sucked into the politically-charged shale oil debate.
Cheaper Oil Today Makes No Difference Tomorrow
With oil continuing to trade below $100, taking on additional energy exposure doesn’t look like a bad idea. Given the firm’s current energy portfolio, it should be able to increase its sizeable profit margins if the US economy picks up faster than expected. DNR looks poised to win no matter which way oil prices go in the short term.
DNR is a great name for investors looking for protection against inflationary pressures, gaining exposure to oil, and a company that holds an interesting technology catalyst. As well, we are willing to be lenient on the topic of negative cash flow, given that it relates to the acquisition of Encore and capital expenditures. If oil really takes off in a few years, DNR is going to be a great name to own and sell down the line for a handsome profit when CNBC starts touting the name all day long.