Found: An Amazingly Cheap and One-of-a-Kind Oil Company

Denbury Resources (NYSE: DNR  ) is taking an approach to the production of oil that differs from most others in a couple of attractive and environmentally beneficial ways. And what's even more compelling, the company's shares are, in my rarely tentative opinion, distinctly undervalued.

Denbury, based in the Dallas suburb of Plano, Texas, produces black gold through a process that involves the capture of carbon dioxide, and its subsequent injection at high pressure into tired old wells that typically would be considered spent. The result is the containment and useful application of an important member of the greenhouse gas family, along with the freeing up of considerable amounts of oil that otherwise wouldn't be producible.

Using gas to increase oil production
The process is called carbon dioxide enhanced oil recovery (CO2 EOR). It also operates under the moniker "tertiary recovery." Once hydrocarbon production has occurred through the EOR process, the oil and carbon dioxide are separated at an on-site recycling center, and the CO2 is then available for reuse.

The carbon dioxide used in its operations comes from several locations, including sizable deposits in the Rocky Mountains. In addition to its natural CO2 sources, just last month Denbury began using "anthropogenic" --a fancy term for man-made -- carbon dioxide that's being captured in yet another environmentally beneficial manner by Air Products & Chemicals (NYSE: APD  ) at a hydrogen plant in Port Arthur, Texas. Those carbon dioxide deliveries are expected to reach 15 million cubic feet per day, once Air Products adds a second train later this year.

Bigger by the day
Denbury entered 2013 as a rapidly expanding independent oil and gas company that also happens to own the largest reserves of CO2 east of the Mississippi River. In addition, it holds sizable operating acreage positions in the Rocky Mountain and Gulf Coast regions. It also is the largest combined oil and gas operator in both Montana and Mississippi. Management's objective is to increase the value of the company's properties by combining effective exploration and drilling activities, along with the expanded use of effective extraction engineering practices, especially tertiary recovery.

As last week came to an end, Denbury said that it's adjusted fourth-quarter 2012 earnings, sans items, had come to $0.36 per share, easily topping the analysts' consensus forecast of $0.29. On a year-over-year basis, however, with commodity realizations reduced, the company's adjusted EPS figure fell short of the $0.45 per share generated in the fourth quarter of 2011. Amid the same causality, revenues for the quarter, at $609.2 million, were 1.3% below the year-earlier figure.

Doing the beneficial deals
More importantly, the company, which has been steadily buying back its stock, chalked up a number of accomplishments during the past year. For instance, in the second half of 2012 and already in 2013, it's become involved in a pair of sizable buy-sell transactions that have substantially upgraded its developmental prospects and likely cash flows.

First, in late December it completed the second part of a transaction with ExxonMobil (NYSE: XOM  ) . In the process, Denbury sold Bakken assets in exchange for approximately $1.3 billion of cash, along with Exxon's operating interests in the Webster Field in Texas and the Hartzog Draw Field in Wyoming. In addition, Denbury received a portion of ExxonMobil's CO2 reserves in Wyoming's LaBarge Field.

In the second transaction, announced last month, for $1.05 billion, Denbury applied a portion of the funds received from ExxonMobil to a planned acquisition of Cedar Creek Anticline properties in southwestern North Dakota and eastern Montana from ConocoPhillips (NYSE: COP  ) . Denbury management intends to reverse production declines in the acquired fields through the application of its EOR techniques. Denbury CEO Phil Rykhoek said in announcing the acquisition, "Strategically, we are now purely focused on what we do best, CO2 enhanced oil recovery, which we believe offers one of the lowest risk, and most compelling rates of return in the oil and gas industry today."

A Foolish takeaway
There's lots more to be said about this environmentally friendly, one-of-a-kind oil company. But hopefully you've become intrigued by this quick glance at the company. Suffice it to say, however, that, as an aficionado of unusual and financially compelling opportunities in the oil patch, I'm watching Denbury Resources like a proverbial hawk. I urge energy investing Fools to do the same.


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