Denbury Resources: A Look At 2020

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About: Denbury Resources Inc. (DNR)
by: Elephant Analytics
Summary

Denbury may operate at around neutral cash flow in 2020 at $55 WTI oil.

This assumes that it continues with plans to spend around $155 million on advancing its Cedar Creek Anticline project in 2020.

This project appears to have solid economics at $50 WTI oil, but requires a decent amount of upfront investment.

Denbury has around $1.2 billion in debt maturing before first production is expected from the Cedar Creek Anticline project, so there is a risk that current shareholders may not benefit from the project.

Refinancing the debt will largely depend on oil prices, which likely need to average in the $60s.

It appears that Denbury Resources (DNR) may operate at around neutral cash flow in 2020 with current strip prices (around $55 WTI oil) assuming that it continues with its planned investment in the Cedar Creek Anticline [CCA] EOR project. This project appears to have solid economics at $50 WTI oil, but requires around $300 million in upfront investment (including $150 million for the CO2 pipeline) before first production. The first production is expected to occur in 2H 2022 to Q1 2023, while Denbury has around $1.2 billion in debt maturing before then.

Cedar Creek Anticline

Denbury currently forecasts $145 million to $170 million in 2020 capital expenditures for the Cedar Creek Anticline project. The 2020 spend is primarily related to the CO2 pipeline that will service the development over several decades.

Source: Denbury Resources

Denbury believes that the project still has attractive economics at $50 oil, and that it could produce $3 billion in cumulative net cash flow at $60 oil (although this would be generated over several decades). The projected cumulative net cash flow would appear to be around $2 billion at $50 oil.

Source: Denbury Resources

With first production expected in 2H 2022 to Q1 2023, there is a risk that current common shareholders may not benefit from this project though. Denbury has over $1.2 billion in debt maturing by 1H 2022, and it may generate around $100 million in positive cash flow in 2020 and 2021 at $55 WTI oil, so it would need to refinance most of that debt.

Notes About Oil Prices

Denbury has been able to realize a couple of dollars above WTI prices for its oil during the first half of 2019 as its Gulf Coast (representing around 60% of Denbury's production) oil production has averaged $4 to $6 above WTI.

The futures strip suggests that the Gulf Coast premium may be closer to $2 in 2020 though, so at this point, I would model Denbury as receiving around WTI for its oil in 2020.

Source: Denbury Resources

Denbury's 2020 Outlook

I've assumed that Denbury will end up with 58,500 BOEPD in production in 2020 with a $375 million capex budget ($220 million to maintain production at around that level and $155 million for the CCA project).

WTI strip prices in 2020 are currently around $55, which would result in Denbury generating around $1.15 billion in oil and gas revenue. Its hedges add another $33 million in value based on 2020 strip, while it could generate another $30 million from other items such as CO2 sales (net of expenses).

Units

Price Per Unit

Revenue ($ Million)

Oil (Barrels) 20,754,630

$55.00

$1,142

Natural Gas [MCF] 3,587,220

$2.10

$8

Net Other

$30

Hedge Value

$33

Total

$1,213

Denbury has made strides in reducing its lease operating expenses, so I am assuming that it can average around $22 per BOE in 2020. Denbury had previously indicated a range of $22 to $24 per BOE for 2019 LOE, but now expects to come in at the lower end of that range, and reported lease operating expenses of $21.70 per BOE in Q2 2019.

With a $375 million capital expenditure budget, Denbury would have around $4 million in negative cash flow at $55 WTI oil in 2020. This includes $155 million in capital expenditures for the CCA project, which would have initial production in 2H 2022 to 1H 2023.

$ Million

Lease Operating Expense

$470

Marketing Expenses

$44

Production Tax

$85

Cash G&A

$58

Cash Interest

$185

Capital Expenditures

$375

Total

$1,217

Conclusion

After generating a fair amount of positive cash flow in 2019, Denbury may operate at around neutral cash flow in 2020 at $55 WTI oil (current strip prices). This is due to the 2020 WTI strip being a couple of dollars lower than 2019 strip, along with the expectation that the Gulf Coast premium will narrow in 2020. As well, Denbury may spend $155 million on the CCA project in 2020, compared to around $30 million in 2019.

The CCA project appears to have solid economics even at $50 WTI oil, but requires a significant amount of investment in the years prior to initial production. Denbury probably needs to refinance close to $1.1 billion in debt by 1H 2022, assuming that it generates a bit over $100 million in positive cash flow in 2021 at $55 WTI oil. The CCA investment makes sense for Denbury's long-term outlook, but there is a risk that current common shareholders will not benefit from the project.

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.