imaginima
Some of the acquisition chatter around Denbury (NYSE:DEN) has cooled off now and I remain neutral on it at its current share price. Denbury has provided additional information about its carbon capture, utilization and storage (CCUS) business expectations. The CCUS business is expected to be self funding in around 2026 to 2027 and could generate $650 million to $900 million EBITDA by 2030. It is also expected to require around $1.6 billion to $2 billion in total capex from 2023 to 2030.
Denbury’s capital investments in its CCUS business may result in it generating relatively modest overall company free cash flow over the next few years until the CCUS business starts generating EBITDA.
Overall, the added information about the CCUS business doesn’t change my estimate of its value, although I am trimming the estimated value of Denbury’s upstream business by a couple dollars per share due to weaker expectations for 2023 oil prices. I now believe Denbury to be worth around $86 at long-term (after 2023) $70 WTI oil and $94 at long-term $75 WTI oil.
Carbon Solutions Business
Denbury has provided some additional details about its expectations for its carbon capture, utilization and storage (CCUS) business. It mentioned that it expected to average $200 million to $250 million in capital expenditures per year between 2023 and 2030 (total capex of $1.6 billion to $2 billion), with the peak spending taking place in 2024/2025.
Denbury also expects its CCUS business to reach $650 million to $900 million EBITDA in 2030 and estimates that it will become self-funded beginning in 2026/2027. The business may generate around $250 million EBITDA in 2026 and $500 million EBITDA in 2028 based on Denbury’s projections.
Rough estimates suggest that Denbury’s CCUS business may generate close to $1 billion in cumulative free cash flow by the end of 2030 based on its projections.
I’ve previously valued Denbury’s CCUS business at around $20 per share (close to $1 billion). I still believe this is currently reasonable given that it will still take a few years for the CCUS business to start generating positive free cash flow and that there is still a fair bit of variance around its expected EBITDA. The estimated value of the CCUS business may increase over time as it gets closer to generating positive free cash flow and it tightens up EBITDA expectations.
2023 Outlook
At current strip of approximately $74.50 WTI oil, I now estimate that Denbury will generate $1.37 billion in revenues after hedges. Denbury’s 2023 hedges have very close to neutral value, with swaps covering around 7% of its oil production at mid-$70s WTI oil and collars covering around 27% of its oil production with floors in the high-$60s.
| Units |
Price Per Unit |
Revenue ($ Million) |
|
| Oil (Barrels) | 17,702,500 |
$73.50 |
$1,301 |
| Natural Gas [MCF] | 3,285,000 |
$5.50 |
$18 |
| Net Other |
$50 |
||
| Hedge Value | $1 | ||
|
Total |
$1,370 |
The weaker commodity prices (compared to when I looked at Denbury a few month ago) result in me reducing Denbury’s estimated lease operating expense to $27.50 per BOE in 2023.
|
$ Million |
|
|
Lease Operating Expense |
$502 |
|
Transportation and Marketing Expenses |
$23 |
|
Production Tax |
$108 |
|
Cash G&A |
$60 |
|
Capital Expenditures (excluding CCUS spending) |
$360 |
|
Cash Taxes |
$10 |
|
Total |
$1,063 |
This results in a projection that Denbury can now generate $307 million in positive cash flow in 2023 at current strip, before CCUS capex. Denbury is planning on investing heavily into its CCUS business, so its total free cash flow may be fairly limited for now. As noted above, Denbury expects the CCUS business to be self funding in approximately four years.
Notes On Valuation
Weaker near-term cash flow expectations for the upstream business (due to 2023 strip going down to the mid-$70s) trims my estimated value for Denbury’s upstream business to $66 per share at long-term (after 2023) $70 WTI oil and $74 per share at long-term $75 WTI oil.
Adding the estimated value for the CCUS business results in an estimated total value of $86 per share for Denbury in a long-term $70 WTI oil environment, and $94 per share in a long-term $75 WTI oil environment.
Conclusion
Denbury expects to invest heavily in its CCUS business, resulting in relatively limited total company free cash flow generation for the next few years at current strip prices. This could pay off later in the decade though, with the CCUS business potentially generating more free cash flow than its upstream business by 2029/2030.
Denbury’s CCUS business may provide significant long-term upside for it, although for now I am neutral on the company at its current share price since it may take four or five years for the CCUS business to become self funding, and there is a fair bit of uncertainty around long-term projections.
Be the first to comment