Tickers in this Article: DNR, GMXR, PVA, XEC
Several exploration and production companies cut production estimates for 2011, while also announcing an increase in capital expenditures. This is an unpardonable sin for some energy investors, and usually leads to heavy selling pressure. TUTORIAL: Commodity Investing 101

The Offenders?
Denbury Resources (NYSE:DNR) is a leader in enhanced oil recovery and is also ramping up development in the Bakken formation. The company just reduced its guidance on production growth for 2011 to 5% from the previous estimate of 8% growth.

Most of the reduction was caused by a slower increase in production at the Heidelberg and Tinsley Fields, where the company injects carbon dioxide into older wells to stimulate additional production. Denbury Resources was also impacted by weather delays in the Williston Basin, an issue that has plagued many operators that are working on the Bakken.

Denbury Resources also bumped up its capital budget by $50 million for 2011, with the funds allocated to development at the Riley Ridge Federal Unit in Wyoming. This project consists of mineral leases and a gas plant and contains sizable reserves of carbon dioxide. Denbury Resources acquired a partial ownership here in September 2010, and recently bought out the stake held Cimarex Energy (NYSE:XEC).

Adding Acreage
GMX Resources (NYSE:GMXR) is active mostly in the Haynesville Shale in Texas, while also building positions in several other onshore plays that produce oil and other liquids. These new areas include the Bakken and Niobrara formations.


GMX Resources announced in early August 2011 that the company was suspending all of its Haynesville Shale development until the play becomes more economic to develop either through lower well costs or higher natural gas prices.

This suspension led the company to cut production guidance for 2011 to a range of 23.8 Bcfe to 24.2 Bcfe, down from the previous guidance of 25.5 Bcfe. The company also expects to spend $287 million in capital in 2011, up from the previous budget of $230 million. More than half these extra funds will be used to acquire additional acreage in the Bakken play.

Eagle Ford Spending
Penn Virginia (NYSE:PVA) reduced production guidance to a range of 48.5 to 50.5 Bcfe for 2011, down from the previous level of 50.0 to 54.0 Bcfe. Most of the reduction resulted from issues that the company experienced with wells in the Mid Continent area, where Penn Virginia is developing the Granite Wash.


Penn Virginia followed up this production cut with an increase in capital spending, and now plans to spend between $360 million and $380 million in 2011, up from the previous guidance range of $320 million to $370 million. The extra funds will be used to develop additional wells into the Eagle Ford Shale in Texas.

The Bottom Line
An exploration and production company that spends more to get less oil and gas is usually punished by the market. However, this usually reflects a trader's instinct rather than a long term view of a company. This overreaction can be used to build or add to a position as others flee. (For additional reading, take a look at What Determines Oil Prices?)

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