Denbury Resources Continues To Tread Water

| About: Denbury Resources (DNR)

Summary

Denbury's survival prospects have improved with the OPEC agreement, but the lack of movement in long-term oil prices will probably leave its stock rangebound for now.

Denbury's unhedged breakeven is now around $51 to $52 oil, significantly improved from last year.

This should allow Denbury to hold production flat at current strip prices in 2017 despite negative value hedges and grow production modestly (~5% per year) thereafter.

With around 70,000 BOEPD in 2020 production, leverage will be around 4x, allowing Denbury to refinance.

With long-term oil prices stuck near $55 though, its stock value is estimated at around $3 to $5.

I think the best way to describe Denbury Resources' (NYSE:DNR) situation after the OPEC agreement is that it is treading water at current strip prices. The improvement in near-term oil prices should allow Denbury to hold production flat in 2017 and thereafter modestly increase production without incurring additional debt. This should bring its leverage down to around 4x by the time it needs to refinance its notes, which should allow it to properly refinance. However, Denbury's significant amount of debt probably will keep its stock in the $3 to $5 range unless long-term oil prices move up. The OPEC agreement has moved near-term oil prices significantly, but longer-term oil prices have been unaffected, with 2020 prices in the mid-$50s still. Denbury's survival prospects have improved, but it isn't in a position where it can outright thrive yet.

Unhedged Breakeven At $51 To $52 Oil

I estimate that Denbury's unhedged breakeven point has come down to around $51.50 WTI oil now. This is based on a negative $2 oil differential and a negative $0.50 natural gas differential, along with a 96% oil production split. Production is assumed to be 61,000 BOEPD which is in line with Denbury's comments that 2016's exit rate is expected to be relatively similar to Q3 2016 production. Denbury would then generate around $1.096 billion in revenue without hedges at $51.50 oil.

Units

Price Per Unit

Revenue ($ Million)

Oil (Barrels)

21,374,400

$49.50

$1,058

Natural Gas [MCF]

5,343,600

$2.50

$13

CO2 and Helium Sales, net of expenses

$25

Total

$1,096

Denbury's cash expenditures are expected to be roughly the same as its revenue with lease operating expenses at approximately $18 per BOE and maintenance capital expenditures estimated at $335 million. Denbury mentioned that $200 million capital expenditures would result in a 5% to 10% decrease in production, while $300 million would result in relatively flat production. I interpret that to mean a minimal decline, so slightly higher capital expenditures of $335 million should hold production absolutely flat.

$ Million

Lease Operating Expense

$401

Marketing Expenses

$44

Production Tax

$82

Cash G&A

$70

Cash Interest

$165

Capital Expenditures

$335

Total

$1,097

This unhedged breakeven number is improved around $10 from what I estimated in 2015, as Denbury has improved its lease operating expenses and reduced its cash G&A and interest costs. The main contributor to lowering the breakeven point is the reduction in Denbury's maintenance capital requirements though. In 2015, $550 million was the estimated amount needed to keep production flat (albeit a higher level of production).

Looking At 2017

With 2017 oil prices at roughly $54, Denbury looks capable of delivering around $1.078 billion in revenue with 60,000 BOEPD in production (based on a $300 million capital expenditure budget). Denbury's hedges have a negative impact since it has hedged just over half its oil production during the first half of 2017 with swaps in the low-to-mid $40s.

Units

Price Per Unit

Revenue ($ Million)

Oil (Barrels)

21,024,000

$52.00

$1,093

Natural Gas [MCF]

5,256,000

$2.50

$13

CO2 and Helium Sales, net of expenses

$25

Hedge Value

-$53

Total

$1,078

With around $1.057 billion in estimated cash expenditures, Denbury would generate approximately $21 million in positive cash flow in 2017, with production falling 1% to 2%. Spending a bit more to hold production flat would probably result in Denbury having roughly neutral cash flow during 2017.

$ Million

Lease Operating Expense

$394

Marketing Expenses

$43

Production Tax

$85

Cash G&A

$70

Cash Interest

$165

Capital Expenditures

$300

Total

$1,057

Beyond 2017

Denbury's situation will improve slightly beyond 2017 since it won't have those negative value hedges anymore. With its current cost structure and oil strip prices mostly flattening out at around $55, Denbury can potential generate a modest amount (around $70 million) of positive cash flow per year if it holds production flat, or otherwise operate at neutral cash flow and attempt to grow production by close to 5% per year.

This would put probably Denbury at around 70,000 BOEPD in production for 2020 if it matches capital expenditures to operating cash flow. Denbury's EBITDA would be roughly $650 million at $55 oil and $765 million at $60 oil and 70,000 BOEPD in production, resulting in roughly 4.2x leverage at $55 oil and 3.6x leverage at $60 oil.

Conclusion

Assuming that oil prices follow current strip prices, Denbury is in decent shape. It will be able to either generate modestly positive cash flow or grow production at a mid-single-digit rate. By the time it needs to refinance its notes, the higher production levels should bring Denbury's leverage down to the point where it can successfully refinance those notes, although its interest rates may end up being a bit higher overall (probably lower than 9% on the refinancing of its secured notes and higher on the subordinated notes that it needs to refinance).

While the OPEC agreement probably allows Denbury to survive long term, the oil futures curve needs to shift upward for Denbury's stock to have significant upside. 2020 oil futures remain stuck in the mid-$50s, not much different than where it has been during most of the last six months. Without movement in the futures curve, Denbury's stock will likely remain stuck at around $3 to $5.

Note From The Author: If you found this article informative, please scroll to the top of the article and click on "Follow" to see my newest articles as they are published.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I may initiate a neutral options strategy in the near future.

About this article:

Expand
Author payment: $35 + $0.01/page view. Authors of PRO articles receive a minimum guaranteed payment of $150-500.
Tagged: , Independent Oil & Gas
Want to share your opinion on this article? Add a comment.
Disagree with this article? .
To report a factual error in this article, click here