Zacks_Analysts' Blog : Neutral on Denbury Resources - Analyst Blog

Our Neutral recommendation for Denbury Resources Inc. (DNR) remains unchanged following third quarter results. Production increased a whopping 82% on the back of solid contribution from the acquired Encore properties. 

Plano, Texas-based Denbury Resources is a growing exploration and production (E&P) company engaged in the acquisition, development, operation, and exploration of oil and natural gas properties in the U.S. Gulf Coast region. It is the largest oil and gas producer in Mississippi, with further properties in Louisiana, Alabama and Southeast Texas.

In December 2009, the company acquired a 95% stake in the Conroe oil field for about $430 million. It expects to spend about $750 million to $1 billion to develop Conroeas a tertiary field. In addition, during March 2010, Denbury completed the purchase of  Encore Acquisition Company for $4.5 billion. The transaction will position the combined company as one of the largest crude oil-focused independent North American E&P companies.

Tertiary operations remain the company's principal focus with particular emphasis on the Gulf Coast, Rocky Mountains and Bakken Shale holdings. Approximately two-thirds of the company’s capital budget for 2011 is earmarked for tertiary operations. Denbury has been actively engaged in divesting non-core acquired properties. Recently, it completed the sale of its stake in Encore Energy Partners to Vanguard for $380 million.

With its in-house CO₂ reserve base, Denbury has a significant competitive advantage in acquiring and exploring mature oil reservoirs. Carbon dioxide is more effective in extracting oil using tertiary recovery techniques from mature reservoirs.

However, growing cost pressures in the company’s operations might weigh on the stock. In the third quarter, Denbury’s lease operating expenses increased 58% from the year-earlier level.

However, growing cost pressures in the company’s operations might weigh on the stock. In the third quarter, Denbury’s lease operating expenses increased 58% from the year-earlier level. Competition from Pioneer Natural Resources (PXD) and Atlas Energy (ATLS) is also a cause for concern.