What happened

Shares of Denbury Resources Inc. (NYSE:DNR) tumbled more than 14% by 9:45 a.m. EDT on Monday after the company agreed to buy fellow oil producer Penn Virginia Corporation (NASDAQ: PVAC) in a cash-and-stock deal.

So what

Denbury Resources and Penn Virginia Corporation are combining in a $1.7 billion transaction, which includes the assumption of debt. Under the terms of the deal, Denbury will issue up to 191.6 million shares and pay $400 million in cash to acquire the producer, which is focused on the Eagle Ford Shale. Denbury expects the acquisition to be immediately accretive to cash flow per share as well as other key per-share metrics, while improving the combined company's balance sheet and leverage profile.

A drilling rig near some oil pumps with a nice sunset in the background.

Image source: Getty Images.

The transaction will create a diversified oil producer by combining Denbury's Rockies and Gulf Coast assets with Penn Virginia's properties in the Eagle Ford Shale. Those shale assets will provide the company with greater near-term growth potential while Denbury completes work on longer-term projects that it has under development. Meanwhile, Denbury believes that it can eventually apply its expertise in enhanced oil recovery (EOR) to maximize the value of Penn Virginia's position in the Eagle Ford Shale.

Now what

While the transaction will boost the combined company's cash flow and leverage profile, Denbury Resources is taking a notable step away from its core EOR-focused business model. That adds significant execution risk since the company has limited experience in developmental shale drilling as well as in applying EOR techniques to these rock formations. Because of that elevated risk level, investors might want to watch from the sidelines until Denbury demonstrates success with shale drilling. In the meantime, investors could consider buying one of these top oil stocks instead.

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