Denbury Resources: Carbon Solutions Business May Provide Significant Upside (DEN)

Denbury (NYSE:DEN) is dealing with some inflationary pressure, but still should be able to generate a bit over $300 million in positive cash flow in 2022. Since it only had a small amount of net debt ($31 million) entering 2022, it has the ability to put much of that cash flow towards its $250 million share repurchase program.

Denbury appears to be a reasonably good value at $64 per share. Denbury’s upstream business alone should be worth that much in a long-term mid-to-high $60s WTI oil environment once its CCA EOR Phase 1 production ramps up. Denbury’s Carbon Solutions business should provide upside. It has continued to sign agreements related to that business.

2022 Outlook

Despite the recent decline in oil prices, the current strip for WTI oil is still around $103 to $104 for 2022. Denbury is now projected to generate $1.781 billion in revenues before hedges in 2022 at that oil price, with its hedges having around negative $386 million in value.

	Units	Price Per Unit	Revenue ($ Million)
Oil (Barrels)	16,817,375	$102.00	$1,715
Natural Gas [MCF]	3,120,750	$6.60	$21
Net Other			$45
Hedge Value			-$386
Total			$1,395

Denbury is dealing with continued inflationary pressure. As a result, it has indicated that items such as lease operating expense and capital expenditures are expected to be near the high end of its guidance ranges.

As well, Denbury may have some cash taxes to pay due to higher anticipated income levels with oil prices being significantly stronger than its original $70 WTI assumptions.

	$ Million
Lease Operating Expense	$485
Transportation and Marketing Expenses	$24
Production Tax	$134
Cash G&A	$54
Capital Expenditures	$370
Cash Taxes	$25
Total	$1,092

This results in a projection that Denbury will generate $303 million in positive cash flow in 2022 at current strip.

Share Repurchases And Cash

Denbury had $31 million in net debt at the end of 2021, so it could end up with around $272 million in net cash by the end of 2022 depending on how much it spends on share repurchases. Denbury has authorized a $250 million share repurchase program that could result in it repurchasing around 7% to 8% of its outstanding shares, based on its recent share price.

Developments With Carbon Solutions

Denbury also signed a term sheet for the transportation and storage of around 2 million metric tons of CO₂ per year that will be captured from Nutrien’s (NTR) proposed Louisiana chemicals facility. This brings Denbury’s signed agreement up to 7 million metric tons of CO₂ per year. Nutrien expects to make a final investment decision in 2023 about the facility, which could result in full production by 2027.

Notes On Valuation

Denbury appears to be reasonably cheap now, at around $64 per share. Denbury’s upstream business should be worth around that much by itself in a scenario where Denbury’s CCA EOR production is ramped up to near peak (for Phase 1) levels (potentially in 2024) and WTI oil prices are in the mid-to-high $60s.

That would allow Denbury’s Carbon Solutions business to provide upside, although that business may take at least several years to scale up. Denbury’s Carbon Solutions business provides a large amount of potential upside, although there is a very high amount of uncertainty about what that upside will ultimately end up being.

Conclusion

At around $64 per share, Denbury appears to be a fairly good value now. It may be able to generate a bit over $300 million in positive cash flow in 2022 despite its hedges (which should have significantly less impact in 2023). Once Denbury’s CCA EOR Phase 1 production ramps up, its upstream business could be worth around its current share price in a longer-term mid-to-high $60s WTI environment.

Then Denbury’s Carbon Solutions business could provide significant additional upside, although it may be at least a few years before that business generates a large amount of revenue. For example, the recent agreement Denbury signed with Nutrien involves a facility that is expected to reach full production in 2027 if Nutrien goes ahead with it.

Denbury also has a $250 million share repurchase program which could improve the value of Denbury’s remaining shares depending on what price it repurchases shares at. Repurchasing shares at $64 would be beneficial in a scenario where longer-term oil prices were at $70+ and/or Denbury’s Carbon Solutions business provides significant revenues in the future.