The world of energy exploration and production (E&P) is a large one, with ample room for many different business models. Taking a page from Apache's (NYSE:APA) successful book, Denbury Resources (NYSE:DNR) focuses on acquiring oil fields that other operates consider played out and then actively works them to squeeze out even more oil. While this is a challenging approach, it can work well when properly executed, and investors may want to add this name to their list of energy companies to follow.

Investopedia Broker Guides: Enhance your trading with the tools from today's top online brokers.

Tertiary Recovery
To be clear, Denbury and Apache do not follow identical operating plans. Although Apache has and does take on mature fields, it is more broadly focused on efficient execution in environments that other operators find challenging and less economical.

Denbury, though, focuses extensively on tertiary operations.

While some investors may think that energy exploration means finding a reservoir, drilling a hole and just waiting for the oil and gas to come to the surface, only about 5 to 15% of most reservoirs are accessible this way. Typically, energy companies have to intervene to increase production - injecting fluids, gas or steam to force more petroleum to the surface.

In the case of Denbury, carbon dioxide injection is the name of the game; the company acquires older oil fields, injects carbon dioxide into the reservoir and reaps the resulting production. This can be an expensive process, but Denbury's operating costs are helped both by owning natural CO2 sources (including Jackson Dome) and having experience in these operations.

SEE: Oil And Gas Industry Primer

A Mix of Assets
Denbury's history is in tertiary recovery, but that's not necessarily where the present and future opportunities lie. When the company spent billions to acquire Encore, it also acquired unconventional assets in the Bakken and Rockies. In fact, Denbury has gone from having nearly two-thirds of its reserve base in tertiary recoveries to less than a third today.

What's more, the company has over 300,000 net acres of undeveloped acreage in the Rockies and Bakken regions that could add further reserves to its 462 million barrels of proven reserves (oil-equivalent). That's not a huge acreage compared to the holdings of other Bakken plays like Hess (NYSE:HES), Whiting (NYSE:WLL) or Continental (NYSE:CLR), but it's enough to matter for Denbury.

Will 2012 Show Better Results?
2011 was something of a challenging year for Denbury, as reported production declined 5% (due to asset sales) and organic production rose just 6% as the company saw delays and some disappointments in North Dakota. Despite that, management is still talking of several years of double-digit production growth - production that is very heavily weighted towards oil.

Not only does Denbury own a reasonably long-lived reserve base that is heavily oil-oriented, it also has attractive economics. Though I suspect Denbury's breakeven will change as more Bakken development occurs, it looks to me as though the company can break even below $50 a barrel for oil.

There's also a fighting chance that Denbury could see long-term benefits from ongoing clean(er) coal initiatives. Carbon capture has long been one of the legs of a cleaner coal policy, and if power plants would start to capture their carbon dioxide production in larger amounts, I would think that should reduce the costs of Denbury's tertiary recovery operations further.

SEE: Carbon Trading: Action Or Distraction?

The Bottom Line
E&P companies often carry forward EBITDA/EV multiples of four to eight times, depending upon their size and growth prospects. I'd argue that Denbury's growth prospects and oil-heavy production should put it further on the right side of that range, and I'd assign a multiple of seven and a half times to 2012 EBTIDA. At current estimates, that leads to a target price in the mid-$20s, which is a worthwhile prospect given today's sub-$20 stock price.

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

At the time of writing, Stephen Simpson did not own shares in any of the companies mentioned in this article.

Related Articles
  1. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  2. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
  3. Mutual Funds & ETFs

    ETF Analysis: ProShares Large Cap Core Plus

    Learn information about the ProShares Large Cap Core Plus ETF, and explore detailed analysis of its characteristics, suitability and recommendations.
  4. Mutual Funds & ETFs

    ETF Analysis: iShares Core Growth Allocation

    Find out about the iShares Core Growth Allocation Fund, and learn detailed information about its characteristics, suitability and recommendations.
  5. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI USA Minimum Volatility

    Learn about the iShares MSCI USA Minimum Volatility exchange-traded fund, which invests in low-volatility equities traded on the U.S. stock market.
  6. Stock Analysis

    Should You Follow Millionaires into This Sector?

    Millionaire investors—and those who follow them—should take another look at the current economic situation before making any more investment decisions.
  7. Professionals

    What to do During a Market Correction

    The market has what? Here's what you should consider rather than panicking.
  8. Mutual Funds & ETFs

    ETF Analysis: Vanguard Mid-Cap Value

    Take an in-depth look at the Vanguard Mid-Cap Value ETF, one of the largest and most popular mid-cap funds in the U.S. equity space.
  9. Mutual Funds & ETFs

    ETF Analysis: Schwab US Broad Market

    Take an in-depth look at the Schwab U.S. Broad Market ETF, an incredibly low-cost fund based on a wide selection of the U.S. equity market.
  10. Stock Analysis

    The 3 Energy Stocks You'll Wish You Bought in 2015

    Learn about the energy sector and the types of companies that operate within the sector. Find out about some of the best-performing energy stocks in 2015.
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  3. Sucker Yield

    When an investor has essentially risked all of his capital for ...
  4. Benchmark Crude Oil

    Benchmark crude oil is crude oil that serves as a pricing reference, ...
  5. Unconventional Oil

    A type of petroleum that is produced or obtained through techniques ...
  6. Green collar

    A worker who is employed in an industry in the environmental ...
  1. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  2. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  3. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  4. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  5. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>
  6. What happens to the shares of stock purchased in a tender offer?

    The shares of stock purchased in a tender offer become the property of the purchaser. From that point forward, the purchaser, ... Read Full Answer >>

You May Also Like

Trading Center

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!