Photo credit: LINN Energy.
A typical oil well produces on average just 35% of the original oil in place. If the industry could squeeze only 1% more out of current wells, it would add 6% to global oil reserves. For perspective, that would equate to 80 billion barrels of oil, which would satisfy American oil demand for more than a decade.
One company is leveraging its knowledge to lead the way in revolutionizing the United States' energy position. It's investing massive amounts of capital and literally flooding aging oil fields in an effort to squeeze more oil out. In fact, the company is just one of three that The Motley Fool prepared a comprehensive analysis on because it is set to soar during this transformation in the energy industry. To learn more about those three companies we want you to have a special report we're calling "3 Stocks for the American Energy Bonanza." Don't miss out on this timely opportunity; click here to access your report -- it's absolutely free.
What I'd like to do today is to tell you a bit more about one of the companies in that report. The company is Denbury Resources (DNR), and its primary focus is on an enhanced oil recovery, or EOR, method to unlock more oil out of America's aging oil fields. While Denbury isn't the top EOR producer -- Occidental Petroleum (OXY 1.72%) is No. 1 -- the company is the first pure play on the process, which has provided it with significant competitive advantages. What that means is that its growth potential is simply staggering.
There are literally billions of barrels of oil trapped underneath the United States just waiting to be unlocked. In fact, it's estimated that there are 89 billion barrels of oil trapped in onshore reservoirs, which is substantially more than our total proven reserves of 29 billion barrels of oil. If we could boost our recovery to 60%, then the U.S. would be ranked fifth globally in terms of oil reserves.
Denbury is leading the way to enhancing our recovery. The company is focused on a tertiary recovery process that has it injecting carbon dioxide into an oil field. This can lead Denbury to recover an additional 17% of the original oil in place, which would go a long way toward boosting U.S. oil reserves. The company is currently employing the process on the wells it owns to unlock more than a billion barrels of oil; however, the potential to extend its process just within its two core target areas alone could yield up to 10 billion barrels of recoverable oil. That's a lot of oil, and when combined with the 3 billion barrels of oil that Occidental believes it can pump out of the Permian Basin, it's a big future driver of American oil production.
The problem is that building out the infrastructure necessary to get a carbon dioxide flood project off the ground requires a lot of money up front. It's one reason investors easily pass by this company as an investment. However, the long-term payoff is incredible. When looking at Denbury, it expects to continue investing heavily in its current projects until about 2016, and after that time the capital it's required to spend will steadily decline. At the same time its production will continue to grow for the rest of the decade. That's the recipe for substantial future free cash flow. The following slide shows that future inflection point where cash flow and production will ramp up even as capital expenditures start to head lower.
Source: Denbury Resources investor presentation (link opens a PDF).
The free cash flow potential of an EOR project is one reason income-oriented companies such as LINN Energy (LINEQ) and BreitBurn Energy Partners (BBEPQ) have both acquired toehold acquisitions in the space over the past year. In the case of LINN, it acquired a 23% interest in Anadarko's (APC) Salt Creek field in Wyoming. That field, which is in the same area as some of Denbury's Rockies assets, should continue to produce for another 28 years. One of the main reasons LINN made the deal was in an effort to gain knowledge of EOR methods.
The same can be said for BreitBurn, which recently purchased the Postle assets in the Oklahoma panhandle. One of the important pieces of that deal was that it also included associated midstream assets, including the critical carbon dioxide pipelines required to flood these fields. The company can leverage what it learns from these assets into either its existing asset base or into future acquisitions.
Access to carbon dioxide, along with the infrastructure to get it to the oil wells, is the most critical component to a successful EOR field. That's why Denbury's significant ownership of its carbon dioxide-related infrastructure is such an important competitive advantage. There is quite a lot more to the EOR story, which is why Denbury is one of the companies featured in The Motley Fool's special report on America's energy. To access that important report, click here -- it's absolutely free.
