Zacks_Analysts' Blog : Denbury Stays Neutral - Analyst Blog

We maintain our long-term Neutral rating on Denbury Resources Inc. (DNR) based on its fundamental growth potential that is likely to support its cash flows.

Denbury reported earnings of 37 cents per share in the second quarter of 2011, beating the Zacks Consensus Estimate of 33 cents. Results were also substantially higher than 18 cents earned in the year-ago quarter. Higher-than-expected price realizations were partially offset by lower production.

Tertiary production in the quarter averaged 30.771 thousand barrels per day (MBbl/d), up 8% from the year-earlier level on the back of continued expansion of the tertiary floods in Tinsley, Heidelberg and Delhi Fields. With two new tertiary floods –– Hastings and Oyster Bayou –– coming online later this year and increased growth expected from accelerated drilling in the Bakken area, the company remains quite optimistic for 2012.

With its in-house CO₂ reserve base, Denbury has a significant competitive advantage in acquiring and exploiting mature oil reservoirs. CO₂ is more effective in extracting oil using tertiary recovery techniques from mature reservoirs. For 2011, the company raised its capital expenditure to $1.35 billion from its prior expectation of $1.3 billion.

In addition to industry-wide oilfield cost inflation, the company’s growing outlays also reflect its exposure to higher energy costs (electrical and fuel charges), resulting from a continued emphasis on CO₂ flooding techniques.

However, we remain apprehensive due to the company’s overall tempered production outlook for 2011. Denbury now expects this year’s production to increase to 5% versus its previous expectation of 8%, on a year-over-year basis, due to drastically lower production at Heidelberg and Tinsley and bad hindrances in Williston. The company reduced its tertiary production target to 31,000 Bbls/d from 32,500 Bbls/d, primarily due to slower-than-expected increase in near-term production at Heidelberg and Tinsley. Denbury also reduced its Bakken production to 8,400 barrels of oil equivalent (Boe/d) from 8,700 Boe/d to account for weather issues.

Denbury holds a Zacks #3 Rank, which translates into a Hold rating for a period of one to three months. The company faces tough competition from Newfield Exploration (NFX) and Pioneer Natural Resources (PXD).