Zacks_Analysts' Blog : Denbury to Get Riley Ridge Unit - Analyst Blog

Denbury Resources Inc. (DNR) has entered into an agreement to acquire working interests in Riley Ridge Federal Unit located in southwestern Wyoming as well as mineral leases adjoining the Unit from Cimarex Energy Co. (XEC). The total consideration of the transaction, which is expected to close in July, is $191 million.

Per the agreement, Denbury plans to take hold of 57.5% working interest in Riley Ridge Federal Unit as well as approximately 33% working interest in 28,000 acres of mineral leases adjoining it. The company plans to fund the deal through borrowings on its existing bank credit facility. Notably, $176 million will be paid at closing and the remaining $15 million when the gas processing facility becomes operational and meets certain performance targets.

Located in the prolific LaBarge Field, the unit has proved reserves of 1.4 trillion cubic feet (Tcf) of carbon dioxide, 250 billion cubic feet (Bcf) of natural gas and 8.9 Bcf of helium. The additional 28,000 acres are estimated to hold probable reserves in the range of 250–300 Bcf of natural gas, 9.5–11.5 Bcf of helium and 1.0–1.2 Tcf of carbon dioxide.

Plano-based Denbury will act as the operator of the Riley Ridge plant, which is under construction, and mineral leases. The company expects natural gas and helium production to commence during the fourth quarter of 2011 and has already initiated engineering and design of the carbon dioxide capture facility. It also aims to plan development of the bordering acreage around the same time.  

The Riley Ridge unit is expected to capture up to 130 million cubic feet (MMcf) of carbon dioxide on a daily basis. The adjoining acreage will likely add 450 to 500 MMcf per day of carbon dioxide upon being fully operational.

Denbury Resources Inc. is a leading carbon dioxide ‘Enhanced Oil Recovery’ focused company targeting a large attractive market. With its unique profile, compelling economics and an unmatched infrastructure, Denbury is nicely positioned to deliver sustainable growth over the long term.

Denbury has a significant competitive advantage in acquiring and exploiting mature oil reservoirs. Carbon dioxide is more effective in extracting oil using tertiary recovery techniques from mature reservoirs.

Hence, we believe the latest agreement will provide the company an added advantage in oil recovery. However, we are concerned about the growing cost pressures in the company’s operations. The deal is expected to tag approximately $50 million to the company’s 2011 capital spending.

We maintain our long-term Neutral recommendation for Denbury, which competes with Pioneer Natural Resources Co. (PXD) and Newfield Exploration Co. (NFX). The company currently retains a Zacks #3 Rank that is equivalent to a short-term Hold rating.