Denbury Digs In Its Heels

Back in August, I assured readers that Denbury Resources (NYSE: DNR  ) was not drowning. Market participants appear to feel otherwise, having cut the shares from $24 to below $10 earlier today.

This stock has gone from worthy of consideration to worthy of captivation.

Granted, the company doesn't quite have the fortress-like balance sheet of an Occidental Petroleum (NYSE: OXY  ) or an EOG Resources (NYSE: EOG  ) . But the firm's financial position is strong, and it's getting stronger with today's developments.

First, Denbury has more than doubled its bank line to $750 million. The line remains undrawn, which gives the firm a lot of firepower. The terms are also favorable, providing Denbury the flexibility to divest of its Barnett shale assets -- if someone like Devon Energy (NYSE: DVN  ) shows up to buy -- and take on up to $600 million in additional debt if necessary.

That last clause won't be necessary in the near term, because Denbury has indefinitely postponed a recent acquisition. The firm has such a full development pipeline over the next several years that the $30 million hit to break off the arrangement seems well worth taking. Even before oil prices tanked, there were very few companies in the market for tired, old fields requiring enhanced recovery techniques. I suspect this asset will still be available down the road, at a price that more than makes up for the break fee.

But wait, there's even more news!

Denbury has locked in more than 75% of next year's oil production in a very reasonable band of $75 to $115 a barrel. A few months ago, Denbury shareholders would have howled at such a move. But that was when Goldman Sachs (NYSE: GS  ) was calling for $200 oil, and this is now. Everybody's in bunker mode, and this price range will allow Denbury to pursue its production plan no matter where oil prices head in the near term.

Finally, Denbury has cut its capital budget, just like Chesapeake Energy (NYSE: CHK  ) , SandRidge Energy (NYSE: SD  ) , and so many others in the oil/gas patch. This sort of news has by now become a daily occurrence. I wouldn't read it as a sign of weakness. Business models simply have to adapt to a world where lending is lean.

Denbury still has major growth baked in the cake. True, a slice has been removed, but the icing here is that this growth story is now available for purchase at deep-value prices.

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Fool contributor Toby Shute doesn't have a position in any company mentioned. The Motley Fool has a disclosure policy.


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  • Report this Comment On October 14, 2008, at 6:36 AM, landgirl wrote:

    Well Tobi apparently you don't know anything about Conroe Field. It is far from tired and old even without new injection technology. Perhap its previous operator (Exxon) did not fully develope it, but its new owner (Wapiti) has more than doubled production in under 2 years as operator and the rate of production continues to grow. This makes it an attractive prospect for any company. Perhaps you should do a little more research on properties before making these types of comments. Denbury knew it was getting a great asset and would have completed the deal had market conditions been different.

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