Fresh off of its proposed major merger with Encore Acquisition (NYSE: EAC ) , Denbury Resources (NYSE: DNR ) is further expanding its enhanced oil recovery empire. The company announced today that it's buying a 95% working interest in the Conroe Field in Texas for $431 million.
If the name Conroe rings a bell, that's because this is the same field that Denbury agreed to purchase in August 2008. Back then, oil was over $100 a barrel and Denbury was prepared to pony up $600 million for a slightly smaller interest in this field. As we know, oil proceeded to collapse alongside junk bonds, Denbury's shares, the shares of peers like SandRidge Energy (NYSE: SD ) and Arena Resources (NYSE: ARD ) , sugar futures, Damien Hirst artwork -- you name it! In October, the company dug in its heels and indefinitely postponed the purchase, paying a $30 million penalty.
At the time, I suspected that "this asset will still be available down the road, at a price that more than makes up for the break fee." Denbury is now buying into Conroe at a greater than 30% discount to last year's valuation.
Most metrics on the project remain largely unchanged. Denbury estimates an ultimate CO2 flood recovery of 125 million barrels, versus 130 million last year. The field's proved conventional reserve estimate has ticked a bit higher, though the present value is of course dinged by today's lower oil prices. Denbury's cost estimate of the field development, excluding pipeline construction, remains at $750 million to $1 billion. Note, however, that this figure now includes the cost of constructing a CO2 pipeline. Considerable cost savings are evident here.
As the company said it was keen to do last year, Denbury is selling off the rest of its Barnett Shale stake to cover most of the cost of its Conroe acquisition. Recall that the company sold 60% of its position to a private player at a cut-rate price of $1 per thousand cubic feet equivalent of proved reserves. The other 40% is going to the same outfit at a slightly better price -- about a 17% premium by my math.
Denbury was never going to be a big-time shale player like XTO Energy (NYSE: XTO ) or EnCana (NYSE: ECA ) , so it's not a major loss to be ducking out of the Barnett. The company's pitch to the investment community is that, especially in combination with Encore, this is an oil-focused independent that can't be ignored. Today's acquisition further underlines that case.