Denbury: High Exposure To Future Oil Prices (NYSE:DEN)

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Denbury’s (DEN) production is mostly (~97%) oil, so it has a lot of exposure to oil prices. Denbury is roughly 47% hedged on oil production in 2022, but it should still be able to generate $340 million in positive cash flow at $80 WTI oil in 2022.

Denbury is currently unhedged beyond 2022 though, and it could see additional production from its CCA EOR Phase 1 project starting in 2H 2023. This could allow it to generate close to $750 million in positive cash flow in an $80 WTI oil scenario in 2024.

Denbury’s share price has decreased by nearly 15% since I looked at it in November 2021, while its projected 2022 cash flow has improved slightly. This makes its stock look more attractive now, with its Carbon Solutions unit providing upside potential.

High Oil Cut

Denbury’s production has a very high oil percentage, so it will benefit considerably if oil prices end up soaring higher. Denbury’s production was 96.9% oil in Q3 2021, while it realized $1.75 less than NYMEX WTI prices for its oil during that quarter. This would result in Denbury realizing around $76.60 per BOE before hedges for its production at $80 WTI oil and around $96 per BOE before hedges for its production at $100 WTI oil.

Denbury has relatively high lease operating expenses per BOE and its lease operating expenses are also likely to increase a bit if oil prices keep going up. However, Denbury’s unhedged margins (before G&A) should still end up around $45 per BOE at $80 WTI oil and $60+ per BOE at $100 WTI oil.

Potential 2022 Outlook

Assuming that Denbury aims for around 50,000 BOEPD in production in 2022, it may be able to generate $1.448 billion in revenues before hedges at current strip of roughly $80 WTI oil. Denbury’s hedges have negative $187 million in value at $80 WTI oil.

Denbury has hedges covering approximately 47% of its 2022 oil production (if it averages 50,000 BOEPD). This includes around 55% of its 1H 2022 oil production and around 39% of its 2H 2022 oil production. At last report, it did not have hedges beyond 2022.

Units

Price Per Unit

Revenue ($ Million)

Oil (Barrels) 17,684,250

$78.25

$1,384

Natural Gas [MCF] 3,394,500

$4.00

$14

Net Other

$50

Hedge Value -$187

Total

$1,261

Source: Author’s work

Denbury’s lease operating expenses have some correlation with commodity prices, so I am now modeling its 2022 lease operating expenses at $26 per BOE given the $80 WTI strip.

This results in a projection of $921 million in cash expenditures for 2022 with a $260 million capital expenditure budget.

$ Million

Lease Operating Expense

$475

Transportation and Marketing Expenses

$25

Production Tax

$108

Cash G&A

$53

Capital Expenditures

$260

Total

$921

Source: Author’s work

This would result in Denbury generating $340 million in positive cash flow in 2022.

Denbury could also potentially generate close to $750 million in positive cash flow per year (before the effect of hedges) in an $80 WTI oil scenario once its CCA EOR Phase 1 production ramps up.

Valuation At Long-Term $70 WTI Oil

I’d now value Denbury’s upstream business at $73.50 at long-term (beyond 2022) $70 WTI oil. This also assumes estimated 2024 production levels of around 60,000 BOEPD, including the ramp up of its CCA EOR Phase 1 production.

Denbury’s stock is around $77 per share currently, so there seems to be a decent amount of upside for its stock in a long-term $70 WTI oil environment assuming that its Carbon Solutions unit can contribute a reasonable amount of future value.

I was neutral on Denbury a couple months ago at $89 per share, but at its current price there is now some upside in a long-term $70 WTI oil scenario. Denbury is now valued at just above the estimated value of its upstream business alone, while its Carbon Solutions unit would provide the potential upside.

Conclusion

Denbury may now be able to generate around $340 million in positive cash flow in 2022 at $80 WTI oil. It is unhedged beyond 2022 currently, so it may be able to generate substantially more cash flow in future years if oil prices stay high. For example, in 2024, it could potentially generate near $750 million in positive cash flow in an $80 WTI oil scenario due to increased production (from its CCA EOR Phase 1) combined with no hedging losses.

Denbury’s share price is a bit above the estimated value of its upstream business at long-term $70 WTI oil. Denbury’s Carbon Solutions unit could provide additional value, although it is uncertain how big that business can get at the moment.

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