Denbury: Carbon Solutions Business Ramping Up

Summary

• Denbury may be able to generate over $300 million in positive cash flow in 2022 at current strip.
• This is despite over $300 million in estimated hedging losses plus $155 million in investments that won't affect 2022 results.
• It has signed agreements for CO2 transportation storage and utilization covering 5 million tons of CO2 per year, and is aiming to at least double this by the end of 2022.
• Past experience with CO2 and extensive infrastructure should help it carve out a good position in a competitive market.
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Denbury (NYSE:DEN) looks capable of generating over $300 million in positive cash flow (after the impact of hedges) in 2022 while also investing around $155 million in capex for projects that will affect future (but not 2022) results.

It is an interesting longer-term play due to the potential from its Carbon Solutions unit, and it has executed agreements for CO2 transportation storage and utilization covering 5 million tons of CO2 per year, with a target of getting to 10+ million tons of CO2 per year by the end of 2022.

2022 Outlook

Denbury is now expecting to average approximately 47,500 BOEPD in production in 2022, which is a -3% decline from its average 2021 production. Denbury attributes this decline to spending less than the $200 million per year sustaining capex amount (not including spending on the CCA EOR project) over the last couple years. Denbury is budgeting close to the $200 million sustaining capex level for 2022.

This results in a projection that Denbury will generate $1.673 billion in revenues before hedges at current strip (high-$90s WTI oil) for 2022. Denbury estimates that it will realize around $1.50 less than NYMEX for its oil.

Denbury has a bit over 50% of its expected oil production hedged for 2022 at an average swap/ceiling price of $58.71 per barrel. This results in projected hedging losses of $332 million for 2022.

	Units	Price Per Unit	Revenue ($ Million)
Oil (Barrels)	16,817,375	$95.50	$1,606
Natural Gas [MCF]	3,120,750	$5.50	$17
Net Other			$50
Hedge Value			-$332
Total			$1,341

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Due to inflationary pressure on items such as CO2 and fuel costs, Denbury's lease operating expense is expected to be around $27 per BOE in 2022, compared to $24.75 per BOE in 2021 and $18.78 per BOE in 2020.

Denbury's margins should still be quite high though, at $55+ per BOE (before hedges) and $35+ per BOE (after hedges) at current strip.

	$ Million
Lease Operating Expense	$468
Transportation and Marketing Expenses	$24
Production Tax	$125
Cash G&A	$53
Capital Expenditures	$355
Total	$1,025

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Denbury is now expected to generate $316 million in positive cash flow in 2022 at high-$90s WTI oil. It is investing around $165 million in capital expenditure items that won't affect 2022 results, such as $115 million for CCA EOR capex and $50 million for CCUS capex.

First production from the CCA EOR project is expected to start in 2H 2023, and should contribute to overall company production growth in 2024.

Denbury Carbon Solutions

Denbury's Carbon Solutions unit has been making progress. Denbury is allocating approximately $50 million in capital expenditures towards Carbon Solutions in 2022 and has so far signed CO2 transportation storage and utilization agreements for 5 million tons of CO2 per year. This includes 2021 agreements for 2 million tons of CO2 per year and 2022 (as of late February) agreements for an additional 3 million tons of CO2 per year. Denbury is aiming to have transportation and storage agreements covering 10+ million tons of CO2 per year in place by the end of 2022.

Overall, this is a longer-term value add for Denbury, as it expects the first revenue from these agreements to potentially come in 2024, but it will probably take until 2025 or 2026 to see a more substantial revenue impact.

Notes On Valuation

Denbury's upstream business has an estimated value of approximately $73 per share based on long-term (after 2022) $70 WTI oil, increasing to around $81 per share at long-term $75 WTI oil. This is based on Denbury's estimated production once its CCA EOR production ramps up.

Thus Denbury appears roughly fairly valued for a long-term $75 WTI oil scenario before the value of its Carbon Solutions business gets added. Denbury's Carbon Solutions business could provide significant value in the longer-term, although it will likely take a few years before the true value and potential of that business gets firmed out more.

The carbon capture, transportation and storage business is attracting a lot of companies, so there will be plenty of competition. However, Denbury appears to be in a good position with its experience in dealing with CO2, as well as its existing infrastructure (which it estimates it would cost a few billion to replicate these days).

Conclusion

Denbury's long-term upside comes mainly from its Carbon Solutions business, and it has been making good progress there. It has signed agreements for CO2 transportation storage and utilization covering 5 million tons of CO2 per year, and is aiming to at least double that by the end of 2022.

This is a competitive area that many companies are starting to invest money into now, but Denbury's past experience in handling CO2 and its extensive CO2 related infrastructure should allow it to establish a solid position in this market.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such 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.