What's in Store for Denbury Resources?

Over the past several years, the prices of oil and natural gas here in the U.S. have diverged, which has made oily assets much more valuable relative to gas assets. While that has caused the prices of natural gas stocks to plummet, it has obviously been a favorable time for oil-focused companies. One company poised to benefit from sustained high oil prices is Denbury Resources (NYSE: DNR).

Company snapshot:

Source: S&P Capital IQ.

Denbury's core strategy is enhanced oil recovery, or EOR. The company buys oil fields, injects carbon dioxide, and recovers 50% more than what's already been produced to date. As one might expect from a company engaging in EOR, Denbury's production mix is about 90% oil weighted. The company started its EOR production in 1999 at just 1,300 barrels a day, but is now above 30,000 barrels a day. Through just its existing inventory, Denbury believes it can grow its EOR by eight to 10 years at a high rate, as high as 13% to 15% annualized.

That sounds great -- why doesn't everybody do this? It sounds like a low-risk endeavor, and it is. However, the limiting factors are carbon dioxide supply and transportation. Denbury's able to focus on enhanced oil recovery because it owns or controls its own sources of carbon dioxide, and it also controls the associated pipelines. That provides a competitive advantage in terms of cost. Transporting carbon dioxide is expensive, so Denbury's owned pipelines give it an edge.

In the Gulf Coast, Denbury controls Jackson Dome, where the company has proven carbon dioxide resources of almost 7 trillion cubic feet. In addition to Jackson Dome, the company expects additional man-made sources to come online between 2013 and 2015. Again, Denbury is the logical choice because of the pipeline infrastructure it has in place.

In addition to the Gulf Coast, Denbury has been making strides to get infrastructure set up in the Rockies for future EOR purposes. It closed on the final portion of Riley Ridge last August, which gave Denbury control of a solid carbon dioxide asset in the area. Currently, the company is in the process of getting its pipelines in place. When the company's finished, it will have 700 to 800 miles of pipeline in the Rockies in addition to the 830 miles of pipeline it has in the Gulf Coast.

Finally, Denbury has valuable exposure to the Bakken shale, with a top 10 acreage position. Surprisingly enough, however, the company has actually compared the economics of its Gulf Coast EOR to its average producing Bakken well and found that while both areas have high rates of return, the returns from its Gulf Coast EOR are actually higher.

While most companies would consider the Bakken a core asset, it is secondary for Denbury after its EOR assets. The important thing here is that this stable of assets gives Denbury a source of excellent, low-risk production growth for the future.

Foolish bottom line
Through its low-risk enhanced oil recovery, the company has grown production quite a bit since starting out and looks to continue that growth through the Rockies infrastructure that it's building up. Also, having Bakken Shale acreage as a secondary asset is a bonus. As long as oil prices stay high, Denbury should be poised for big increases in production and cash flow in the years to come.

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