Can This Unconventional Oil Producer Skyrocket?

For oil and gas companies, there's nothing more important than reserves, rigs, refineries and pipelines. However, to be truly valuable, these assets must be capable of generating profitable returns.

Value for the money
It makes little sense for an exploration and production company to have a lot of reserves but not the ability to pull them out in a profitable manner. In short, you have to understand how valuable these assets are to the company. Today, we'll take a look at Denbury Resources (NYSE: DNR  ) and see how efficiently the company is using its resources.

To help evaluate this, we can look at some important metrics:

  • Return on assets, or net income divided by total assets, indicates how efficiently the company generates profits for every dollar of assets it owns. A higher value indicates that the assets are more valuable. The metric is pretty useful when used as a comparative measure -- against peers and the industry in general. Typically, ROA for Denbury Resources' peer group in the oil exploration and production industry is about 6.3%.
  • Fixed-asset turnover ratio, or revenues divided by total fixed assets, indicates how efficiently the company's refineries are generating revenues. The higher the turnover rate, the better. For these companies, a value above 0.5 times looks pretty good.
  • Total Enterprise Value/TTM EBITDA shows how expensive the company looks when compared against its trailing-qw-month earnings before interest, taxes, depreciation, and amortization.

This is how Denbury Resources stacks up against its peers:

Company

Return on Assets (TTM)

Fixed-Asset Turnover Ratio

P/B

TEV/ TTM EBITDA

Denbury Resources 7.2% 0.3 1.57 6.6
Plains Exploration & Production (NYSE: PXP  ) 4.5% 0.3 1.65 6.2
Linn Energy (Nasdaq: LINE  ) 7.3% 0.2 2.0 8.2

Source: S&P Capital IQ; TTM =Trailing 12 Months; NM=Not Meaningful.

Denbury Resources seems to be doing a great job. Its ROA is among the best, above the industry average of 6.3%. The company specializes in unconventional enhanced oil recovery (EOR) methods using carbon dioxide.

The impressive part about using EOR techniques is that capital spending is much less compared with conventional spending. As result, the return on investment is higher. Denbury, along with Kinder Morgan Energy Partners (NYSE: KMP  ) , owns the largest natural reserves of CO2 in the United States. While Kinder Morgan simply supplies the gas, Denbury has its own acreage in the Gulf Coast and the Rocky Mountains held for production using EOR techniques. Using this method, the company has the potential to recover more around 70,000 barrels of oil equivalent per day.

Denbury's Bakken reserves look equally exciting. Production from this region is expected to grow by 45% to 70%, to 15,000 BOE per day this year. Keeping all these factors in mind, its current price-to-book could be indicating that the company might be undervalued. The industry average, at 1.9, is way above that. Investors must watch out for this stock.

Foolish bottom line
These aren't the only criteria you can use, although assets generally indicate how oil and gas companies have been faring in terms of operations. Investors must dig deeper. However, if you would rather be on the sidelines and study the company for a while before jumping in, add it to your personalized Watchlist. It's free, and it will bring you all the news on the stocks you care about. Get started today.

Fool contributor Isac Simon owns no shares of any of the companies mentioned in this article. The Motley Fool owns shares of Denbury Resources and has a disclosure policy.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 13, 2012, at 4:31 PM, UC71 wrote:

    Kinder Morgan CO2 is one of the largest independent producers in Texas: virtually all co2 tertiary recovery.

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