Denbury's Improving Long-Term Outlook

Summary

• I had mentioned that Denbury's long-term prospects would be positive with $60+ oil.
• WTI futures are now averaging around $62 in 2019, allowing Denbury to potentially hedge at favorable prices.
• It doesn't benefit that much from rising 2018 prices due to its current hedges, but has only 10,000 barrels per day in 2019 hedges as of last report.
• Denbury could reduce its debt to around $2.3 billion by the end of 2019 at current strip prices.
• This would result in estimated leverage of approximately 3.2x, putting Denbury into position to deal with its 2021 to 2023 debt maturities.

Denbury Resources (DNR) is a company that will benefit substantially in terms of survival prospects if oil prices continue to remain in the $60s. It is mostly hedged for 2018, so the high oil prices this year only provide partial benefit for the company. However, if oil prices remain strong into 2019 (where the current strip is at $62), Denbury's leverage situation should improve significantly.

Denbury is not out of the woods yet, but the current situation appears favorable for it.

New 2018 Projections

At an average of $66 WTI oil, Denbury's oil and gas revenues are now expected to be around $1.46 billion, which is an improvement of $131 million from $60 WTI oil. However, Denbury's 2018 hedge value is now expected to be negative $188 million, a decline of $96 million from its value at $60 WTI oil. I am assuming that Denbury's oil differential remains at around $0.40 above WTI oil, which appears consistent with LLS oil trading at a several dollar premium to WTI over the rest of the year.

This results in estimated revenues of $1.307 billion net of hedges for Denbury.

	Units	Price Per Unit	Revenue ($ Million)
Oil (Barrels)	21,837,950	$66.40	$1,450
Natural Gas [Mcf]	4,752,300	$2.20	$10
Net Other			$35
Hedge Value			-$188
Total			$1,307

Click to enlarge

Denbury's cash expenditures are estimated at $1.204 billion, resulting in estimated positive cash flow of $103 million during the year.

	$ Million
Lease Operating Expense	$475
Marketing Expenses	$50
Production Tax	$116
Cash G&A	$70
Cash Interest	$180
Capital Expenditures	$313
Total	$1,204

Click to enlarge

This is an improvement of $25 million when I last looked at Denbury at around $60 WTI oil for the year.

Denbury only partially benefits from the improvement in 2018 oil prices though since it has substantial hedges for 2018. The $131 million increase in revenues from the $6 increase in WTI oil prices is offset by a $96 million decrease in hedge value and a $10 million increase in production taxes.

Denbury's 2019 Outlook

Denbury's 2019 situation doesn't look to be significantly affected by hedges at the moment. It has hedged around 10,000 barrels per day in the low to high $50s (and are primarily collars), while 2019 strip prices are currently around $62. Denbury's 2019 hedges are currently estimated to have around negative $3 million in value.

Source: Denbury Resources

If Denbury increases its production by around 5% in 2019 to 65,000 BOEPD, then it could generate around $1.462 billion in revenue at $62 WTI oil. This also assumes that LLS trades for around $2 to $3 above WTI, resulting in no overall oil differential.

	Units	Price Per Unit	Revenue ($ Million)
Oil (Barrels)	22,894,625	$62.00	$1,419
Natural Gas [Mcf]	4,982,250	$2.20	$11
Net Other			$35
Hedge Value			-$3
Total			$1,462

Click to enlarge

In this situation Denbury would have $721 million EBITDA in 2019 after hedges. This is a significant improvement from its estimated $596 million EBITDA in 2018 after hedges since the lower oil prices in 2019 are more than offset by increased production and better hedge value.

	$ Million
Revenue	$1,462
Less: Lease Operating Expense	$500
Less: Marketing Expenses	$52
Less: Production Tax	$116
Less: Cash G&A	$73
EBITDA	$721

Click to enlarge

Denbury had $2.735 billion in debt principal at the end of 2017 pro-forma for its debt exchanges. With the potential for positive cash flow in 2018 and 2019 and the conversion of its convertible notes, perhaps this debt may end up being reduced to around $2.3 billion by the end of 2019. This would result in debt to 2019 EBITDA of approximately 3.2x, which would be much improved for Denbury.

Source: Denbury Resources

Conclusion

While Denbury doesn't benefit that much from increasing 2018 oil prices at the moment, the improved outlook for 2019 could result in significantly reduced leverage. Denbury will be in solid shape if it can average in the low $60s for its oil after hedges. With futures for the first half of 2019 averaging near $64 now, this is probably a good opportunity for Denbury to lock in some additional hedges to help keep it on track to being able to refinance its 2021 to 2023 debt maturities.

Analyst’s 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.