1 Oil Stock I’m Adding to My IRA

Photo credit: Flickr/Jonathan Wheeler.

I don't think there is a better oil stock for an IRA than Denbury Resources (NYSE: DNR  ) . It has the perfect combination of growth and income. The company also offers a certain level of security to investors because it profits from oil even if prices plunge, thanks to a combination of super low-cost production and hedging practices. Finally, I think the company's business model of giving older oil wells a new lease on life fits well with the idea of a good retirement. That's why I'm happy to add shares of the company to my IRA this month.

Breathing new life into old oil wells
Denbury Resources has a unique business model. The company acquires mature U.S. oil fields from companies such as ExxonMobil  (NYSE: XOM  ) and uses carbon dioxide to enhance the recovery of the oil from those locations. It's a process that has been used in America since the 1970s, and one that's likely to become even more important to the country in the future thanks to companies like Denbury Resources.

It takes a fairly large capital commitment to start enhancing the recovery of a conventional oil field. Denbury Resources needs to build a carbon dioxide pipeline to the site, and to drill new wells to inject the gas into the field. However, once those costs are invested into the field, it produces a nice boost to oil production and cash flow.

A prime example of this model is found at Occidental Petroleum (NYSE: OXY  ) , which produces 60% of its oil production from Texas' Permian Basin by using carbon dioxide to enhance recovery. This is Occidental Petroleum's most profitable business and should continue delivering profits for years to come. Denbury Resources is looking to replicate that success in the Gulf Coast and Rocky Mountains.  

Well protected future
These projects are wildly profitable for a number of reasons. Because Denbury already knows the oil is there, it isn't spending extra money on exploration or on infrastructure other than for carbon dioxide. Furthermore, once carbon dioxide flooding begins, production doesn't rapidly decline as it does in places like the Bakken or Eagle Ford. Instead, production actually increases for the first few years before a shallow decline rate sets in. That enables Denbury Resources, Occidental Petroleum, and other companies to earn strong cash flow for years. It also enables these companies to profit even as oil prices plunge, with breakeven prices as low as $50 per barrel at some locations.

Denbury Resources also protects its cash flow by hedging a good portion of its production. In fact, the company recently converted all of its 2014 hedging contracts to fixed price swaps to lock in its cash flow for 2014. By taking the conservative route, Denbury Resources can ensure that cash keeps flowing from its wells even if oil prices do take a dive in 2014.

Solid long-term outlook
This strong combination of high-margin and low-decline oil production leads to a very conservative growth profile for Denbury Resources that works well in an IRA. The company projects to grow production by 4%-8% annually through the end of the decade. Furthermore, it just instituted a dividend that it expects to more than double over the next year, followed by steady growth thereafter.

This is all possible because Denbury Resources continues to make all the right moves, including those unpopular on Wall Street. One of its best long-term moves was a complex deal with ExxonMobil last year. Denbury Resources exchanged its Bakken Shale properties with Exxon's interests in two fields, one each in Texas and Wyoming, that were ideal for future carbon dioxide flooding. In addition, Denbury locked up access to ExxonMobil's carbon dioxide reserves in the Rockies, as well as some cash. It used that cash to buy assets from ConocoPhillips (NYSE: COP  ) that provide near-term production and cash flow, as well as adding future carbon flooding potential.

Denbury Resources isn't like most other companies. It makes plans with the next decade in mind. For example, it doesn't intend to use carbon flooding in the assets acquired from ConocoPhillips until 2021. That long-term focus should serve investors well.

Investor takeaway
Denbury Resources is a great oil stock to buy and hold in an IRA. It will provide investors with solid long-term growth and a growing dividend. That's why I plan on adding more shares of Denbury Resources to my IRA this year.

Learn more about Denbury's role in the American oil boom
Record oil and natural gas production is revolutionizing the United States' energy position. It's also enabling companies like Denbury Resources to snap up depleting oil wells and revive them with carbon dioxide. To learn more about Denbury Resources and two other energy boom stocks, check our special free report, "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. 

 


Read/Post Comments (22) | Recommend This Article (26)

Comments from our Foolish Readers

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 January 16, 2014, at 5:52 PM, GMZ374 wrote:

    I'm confused. You say a growing dividend. It doesn't currently pay a dividend. Are you saying it will begin to pay a dividend? If so, when might that be?

  • Report this Comment On January 16, 2014, at 6:04 PM, TMFrunAMuck wrote:

    @GMZ374 - DNR will begin paying a dividend during the first quarter of 2014. From the Company's press release:

    "Denbury currently expects to pay a regular full-year dividend of $0.25 per share, or $0.0625 per share quarterly, beginning in the first quarter of 2014. Based on its current financial projections and commodity price outlook, Denbury expects to grow its regular annual dividend rate to between $0.50 per share and $0.60 per share in 2015, and at a sustainable rate thereafter. All dividends are subject to declaration by Denbury's Board of Directors."

    Thanks for checking out fool.com.

  • Report this Comment On January 16, 2014, at 7:13 PM, HTown wrote:

    I am retired from the oil business. I read the recommendation on Denbury with great interest. I was glad to read that they got some interest in the carbon dioxide production from ExxonMobil. A real threat to this strategy is the price of CO2. It has skyrocketed in the last two years. Being able to acquire CO2 is no small issue.

  • Report this Comment On January 16, 2014, at 7:25 PM, cmalek wrote:

    Carbon Dioxide is a greenhouse gas. Have you taken into consideration that if the EPA goes after Denby Resources, their business model will be pretty much shot and so will the stock?

  • Report this Comment On January 16, 2014, at 9:06 PM, TMFmd19 wrote:

    @cmalek - Actually, quite the opposite. Denbury injects carbon dioxide into the ground to push more oil out as the CO2 replaces the oil and stays in the ground. Most of the CO2 it uses is from naturally recurring sources like what its acquiring from XOM. However, its also starting to source carbon captured from industrial source and then injecting and sequestering that carbon. You can read a bit more about that here: http://www.fool.com/investing/general/2013/09/14/this-greenh...

    Matt

  • Report this Comment On January 16, 2014, at 10:35 PM, smace1 wrote:

    As In the old TV commercial Wheres the Beef, Wheres the Dividend?

  • Report this Comment On January 17, 2014, at 5:20 AM, masssgt wrote:

    I agree with Matt, not just because of the points he makes in his article but for additional reasons, not the least of which is the fact that It has also been reported that Denbury has constructed over 1100 miles of pipeline connecting its natural source of C02 to its wells.

    I think flooding the wells with CO2 might be a reasonable response to some of the the criticism the fracking process and it will satisfy some of the enviormentalists

  • Report this Comment On January 17, 2014, at 8:25 AM, sevenheart wrote:

    CO2 injection and fracing are two different processes. A well is drilled then fraced, and it is not common to refrac wells. Once the fractures are opened up and propped open with a proppant the procedure is done. CO2 injection is an ongoing process in which the CO2 is injected under pressure into the fraced formation to move oil to the production well. Sorry there is no k in fracturing- I use the industry spelling, but will eventually succumb to the common misspelling.

    Geologically all rock is fractured, frac(K)ing just increases the number of fractures to promote a freer flow of hydrocarbons to the well.

  • Report this Comment On January 17, 2014, at 10:51 AM, mjm3rd wrote:

    Why the heck did I get a recommend from you and a sell alert from Million Dollar Portfolio on same day????? Don't you guys talk??

  • Report this Comment On January 17, 2014, at 11:17 AM, KevinMA2 wrote:

    I'm with mjm3rd. This appears to be a case where the left hand doesn't know what the right is doing and underscores the sometimes bewildering array of overlapping products MF offers, as well as the challenge of managing the barrage of emails coming from MF. Time to simplify, Fools.

  • Report this Comment On January 17, 2014, at 12:27 PM, Birdman153 wrote:

    Motley Fool's Million Dollar Portfolio just told us to sell this.

  • Report this Comment On January 17, 2014, at 4:13 PM, TMFJCar wrote:

    Hey guys,

    Thought you'd consider this helpful:

    We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

    Hope that helps!

    Jamal Carnette

  • Report this Comment On January 17, 2014, at 4:16 PM, swiver wrote:

    I thought water-flood, CO2 flood, and fire-flood were very old ways of getting more oil out of wells as the pressure there-in decreases. Its plays havoc with the steel tubing!

  • Report this Comment On January 17, 2014, at 5:49 PM, TMFmd19 wrote:

    @mjm3rd, KevinMA2 and Birdman153 - For the most part Fool.com writers don't have very much interaction with the Fool's premium products like MDP. Fool.com is investors writing for investors, while MDP is a fully managed portfolio. So, while my article details my reasons for buying more shares of Denbury, its about my personal decision to do so. It's also hopefully helpful idea generation for those looking for an oil stock for their IRA. On the other hand, MDP has the Fool's real money as well as the money of members on the line. In the context of their finite portfolio the move to cut Denbury makes sense.

    Matt

  • Report this Comment On January 17, 2014, at 11:47 PM, Lucaskasan wrote:

    So, If there is "real" money on the line you should sell DNR. Otherwise, you should buy. Sorry, but your explanation did not adequately resolve the contradiction.

  • Report this Comment On January 18, 2014, at 10:00 AM, TMFmd19 wrote:

    @Lucaskasan - All too often Fool members and onlookers see a difference of opinion as a contradiction. That's not always the case. MDP has a different goals and risk tolerances than I do. They see DNR as no longer being as attractive as some other opportunities and given the finite amount of real money at its disposal MDP decided to sell DNR.

    I, on the other hand, have surplus cash in my IRA. I like the conservative growth of DNR and think that it can be great income stock for me over the next few decades. Further, energy is my core area of expertise and it gets more of my investment dollars. So, anyone reading my articles are more than welcome to join me on that adventure.

    MDP on the other hand is looking for stocks to handily beat the market. They see better ways to hit that goal. There is no saying that we can't both be right. I get a conservative income stock for my IRA that over decades ends up beating the market and MDP replaces DNR with something that beats the market too.

    Matt

  • Report this Comment On January 19, 2014, at 3:49 AM, Lucaskasan wrote:

    My question is not about the "contradiction" but about the "real money" comment.

  • Report this Comment On January 20, 2014, at 10:18 AM, KevinMA2 wrote:

    I'm not completely sold on the explanations being offered here by TMFmd19 and TMFjcar. I hear them, I understand them, but they don't resonate. The fact is you are all flying under the TMF banner, hitting our in-boxes under the TMF banner - along with not-so-timely come-on ads - and you're now saying it's up to us to sort out who's communicating about "real money" and who's just offering a personal opinion about one's own portfolio? That's a pretty subtle parsing of objectives from the same source. To me, these seemingly contradictory emails from TMF are representative of the unnecessary complexity that has been created under TMF banner. The Big Fools should consider taking a step back and consider creating a more simplified path through the maze of TMF offerings and resources.

  • Report this Comment On January 24, 2014, at 6:11 PM, masterN17 wrote:

    If you can't make sense of all the buy and sell recommendations offered by all the different appendages of Motley Fool, I have a suggestion.

    Use index funds.

  • Report this Comment On January 26, 2014, at 3:40 PM, cmalek wrote:

    So, if we are using Monopoly money, we should buy DNR, but if we are using good ol' US greenbacks, we should sell DNR (if we are holding it).

    "Further, energy is my core area of expertise and it gets more of my investment dollars"

    Are saying that MDP has no one with energy expertise? Sounds like one of those funds TMF is always warning us to stay away from.

  • Report this Comment On January 27, 2014, at 11:03 PM, jlclayton wrote:

    The explanations for why there can be contradictory buy and sell recommendations from different Fool writers and services make a great deal of sense. Those who are confused or upset just seem to want somebody telling them exactly what to do instead of thinking for themselves about what's good for their own personal portfolio. I agree with masterN17, invest your money in low cost S&P500 index funds, and you should do just fine.

  • Report this Comment On January 28, 2014, at 9:18 PM, drsl wrote:

    Insiders seem to show no interest in buying...

    Is that good for my Roth?

Add your comment.

DocumentId: 2794306, ~/Articles/ArticleHandler.aspx, 4/18/2014 5:41:54 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement