Denbury’s Asset Buy: More Valuable Than You Might Think

When Denbury Resources (NYSE: DNR  ) sold off its Bakken holdings back in September, it signaled that the company wasn't quite ready to compete in the region. Thanks to a small asset it picked up in that sale and a big haul of cash, however, Denbury is diving back into the Williston Basin with authority. Let's take a look at some of the details regarding the acquisition and how it and the September sale bode well for Denbury.

Reshuffling the deck and drawing a winning hand
It only took four months, but Denbury just reupped its position in the Williston Basin by acquiring ConocoPhillips' (NYSE: COP  ) holdings in the Cedar Creek Anticline (CCA) for $1.05 billion in cash. This very mature play has been producing oil since the 1950s and its production using traditional drilling techniques has dwindled in recent years. These assets are valuable to Denbury because they specialize in Enhanced Oil Recovery, or EOR. This is a technique that injects carbon dioxide into the well to extract oil that was previously considered not commercially viable to extract.

Thanks to this technique, the company estimates that it will be able to extract the 140 million to 185 million barrels of oil left behind in the CCA as well as the Hartzog Draw Fields and the Webster Fields it acquired in the sale of its Bakken assets to ExxonMobil (NYSE: XOM  ) . The company claims that through EOR, these assets will more than replace the production it lost in the sale .

The keys to this deal
There are two small points that make this venture into the Williston region so much better than the previous attempt: CO2 and taxes. Much of Denbury's EOR technology is based on injecting CO2 into wells to force out the oil. In the Bakken, though, the company didn't have direct access to its own sources of CO2 and was forced to buy from its competitors, most notably Whiting Petroleum and Kinder Morgan. When the company sold its Bakken assets , it also picked up the rights to purchase interest in the CO2 reserves in southwest Wyoming. This asset helps to reduce CO2 costs for wells in the region, which in turn will help the company's margins.

What also made this a good buy for Denbury was the ability to utilize the like-kind exchange tax exemption. Since the asset buy and sell qualified for this status, the company was able to save about $400 million in taxes that would have been taken out had the company just done a straight sale of its assets .

What a Fool believes
Another major advantage for Denbury is that it stayed in the basin. Since the Bakken region has been such an important center for drilling lately, there has been a large push to improve midstream infrastructure in the region. Takeaway capacity has increased thanks to the two rail projects recently built by EOG Resources (NYSE: EOG  ) and Tesoro (NYSE: TSO  ) . These two projects, which deliver crude directly to hubs on the Pacific and the Gulf Coast, will help keep down oversupply gluts in the region for some time.

From Denbury's standpoint, it is hard to argue against this acquisition. The company avoided a big tax bill, increased its production value, remained in one of the largest growing production basins in the U.S., and refocused its business on EOR fields. A big thumbs-up is in order for management to pull off this shrewd deal. In the long run, the upgrade from Bakken assets to CCA will help to consolidate its CO2 operations, which should provide some cost savings. This kind of move deserves an outperform rating on CAPS.

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