Why Denbury Resources, Inc. Might Keep Dropping

While Fools should generally take the opinion of Wall Street with a grain of salt, it's not a bad idea to take a closer look at particularly stock-shaking upgrades and downgrades -- just in case their reasoning behind the call makes sense.

What: Shares of Denbury Resources (NYSE: DNR  ) slipped about 1% this morning after Goldman Sachs downgraded the oil and natural gas company from neutral to sell.

So what: Along with the downgrade, analyst Joseph Stewart planted a price target of $17 on the stock, representing just 6% worth of upside to yesterday's close. While contrarians might be attracted to the stock's recent plunge, Stewart believes Denbury's appreciation potential remains limited given its seemingly weak growth prospects.

Now what: According to Goldman, Denbury's risk/reward trade-off is rather unattractive at this point. "We view DNR as a high quality, slow and steady oil company, but we expect its relatively weak outlook for growth and returns along with a lack of material upcoming positive catalysts to lead to underperformance relative to the rest of our coverage group," noted Stewart. "While DNR is the best pure play on CO2 Enhanced Oil Recovery among US E&Ps, in our view, we project the company to generate a CF/DAS CAGR of only 2% during 2014E-16E, the lowest among the US onshore E&Ps under coverage, which boast an average of 21%." With the stock off more than 15% over just the past three months and sporting a forward P/E in the low teens, however, it's tough to believe that those headwinds aren't already baked into the valuation. 

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