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Tickers in this Article: DNR
Denbury Resources Inc. (DNR) has reported second-quarter 2012 adjusted earnings of 35 cents per share (excluding one-time items), beating the Zacks Consensus Estimate expectation of 33 cents, on the back of record tertiary oil production. However, the quarterly results were marginally below the year-earlier adjusted earnings of 36 cents. This underperformance was due to lower realized oil and natural gas prices.

Total revenue mainly remained almost unchanged year over year at $601.8 million and failed to meet the Zacks Consensus Estimate of $612.0 million.

Operational Performance

During the quarter, production averaged 72,337 barrels of oil equivalent per day (Boe/d), up 11% year over year, attributable to increased Bakken and tertiary output. Oil production averaged 67,476 barrels (up 13% from the year-ago level) and natural gas averaged 29,163 thousand cubic feet (down 10%), on a daily basis.

The company's production from tertiary operations averaged 35,208 barrels per day, which represents a 14% increase year over year. Contributions from new floods at Oyster Bayou and Hastings fields and existing floods at Tinsley and Heidelberg fields led to the increase. Again, Denbury's Bakken production experienced a solid 99% increase in the reported quarter driven by active drilling program in the region.

Oil price realization (including the impact of hedges) averaged $95.51 per barrel in the quarter, showing a deterioration of 7% year over year, while gas prices decreased 32% to $4.88 per Mcf. On an oil equivalent basis, the overall price realization was $91.06 per barrel, down 7% from the year-earlier level of $98.21 per barrel.

Financials

Cash flow from operations was $361.8 million in the reported quarter versus $344.1 million in the year-ago quarter. Oil & natural gas capital investments were $271.8 million, down from the year-earlier level of $281.3 million. Denbury's 2012 capital expenditure budget remains $1.5 billion. Two-third of the budget was apportioned for tertiary projects, while the remaining was for Bakken.

Cash balance as of June 30, 2012 was $28.1 million and long-term debt was $2,983.4 million, representing a debt-to-capitalization ratio of 36.7%.

Guidance

Denbury reaffirmed its 2012 production guidance at 69,775-74,775 Boe/d. The company's tertiary production target remains unchanged in the 33,000-36,000 Boe/d range, and the Bakken production guidance at 14,350-16,350 Boe/d.

Outlook

We have maintained our long-term Neutral recommendation on Denbury Resources - an exploration and production company engaged in the acquisition, development, operation, and exploration of oil and natural gas properties in the Gulf Coast and Rocky Mountain regions of the U.S.

With its in-house CO2 reserve base, Denbury has a significant competitive advantage in acquiring and exploiting mature oil reservoirs. Notably, the acquisition of Thompson Field in Fort Bend County, Texas would be beneficial to the company. The 8,454 acre oilfield, which produces oil from the Frio zone, is located 18 miles west of the Hastings field, and will be used to enhance oil recovery by pumping CO2. It lies close to the company's network of the existing CO2 pipelines. Hence, Denbury is expected to reap benefits from the vast CO2 infrastructure it has built over the last decade.

However, we see limited upside potential for Denbury shares due to its sensitivity to oil and gas price volatility, along with drilling results, costs, geo-political risks and project timing delays.

The company carries a Zacks #3 Rank (short-term Hold rating).

 

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