Denbury Resources Inc. Rebound Hit a Speed Bump in Q3

Denbury Resources' (DNR) recovery from the impact of the oil market downturn stalled out during the third quarter due to some anticipated production issues at several of its fields. Because of that, earnings flattened out even though oil prices were stronger during the quarter. However, the company believes that this is just a temporary slowdown. That's because it recently made a move to accelerate its recovery by agreeing to acquire Penn Virginia Corp (ROCC), which will provide it with a near-term growth engine.

Drilling down into the numbers

Data source: Denbury Resources. BOE/D = barrels of oil equivalent per day.

Denbury's production declined 4.5% from the second quarter, which it expected heading into the period. Several factors contributed to the drop, including a scheduled pause in its Mission Canyon drilling program, production downtime at its Cedar Creek Anticline and Oyster Bayou fields, and the seasonal impact of summer temperatures at some of its oil fields along the Gulf Coast.

Despite the slump in production, adjusted earnings were roughly flat sequentially, which was $0.01 per share ahead of analysts' expectations. The main driver was an improvement in oil prices as Denbury realized $58.41 per BOE during the quarter, up from $56.86 per BOE in the second quarter and $47.80 per BOE in the year-ago period. That improved pricing also helped offset a 2% sequential increase in lease operating expenses, which rose thanks to the higher level of maintenance activities on its fields during the quarter.

Denbury generated $27.3 million in free cash flow during the quarter, which brought its year-to-date total to $114.1 million. The company used that money to continue chipping away at its debt, which has fallen from $2.78 billion at the beginning of the year to $2.54 billion at the end of the quarter. The company also further strengthened its balance sheet by issuing new debt that it used to repay its credit facility and bolster its liquidity.

Image source: Getty Images.

A look at what's ahead

Denbury Resources reaffirmed that it expects its 2018 results to be within its guidance range. However, the company did note that capital spending would likely be in the upper half of its $300 million to $325 million range, which it can fully fund with cash flow since it has already generated $394 million in cash through the third quarter. Meanwhile, it anticipates that production will range between 60,100 to 60,600 BOE/D, which is within its original guidance of 60,000 to 64,000 BOE/D. One factor pushing production toward the lower end of the forecast is that the company sold its Lockhart Crossing field during the third quarter, which averaged 420 BOE/D in 2018.

Denbury's production should get a jolt in 2019 given its recent agreement to buy Penn Virginia, which should close early next year. The pro-forma company should produce 84,000 BOE/D starting in next year's second quarter while growing production at a faster pace given that Penn Virginia focuses on drilling shale wells that come online quickly. That fast-paced growth was evident during the third quarter, when Penn Virginia's oil production increased 9% compared to the second quarter. In addition to that accelerated growth rate, Denbury also expects the deal to boost its free cash flow while also improving its leverage profile.

Getting ready to hit the accelerator

Denbury Resources anticipated that its rebound would hit a speed bump during the third quarter, which is exactly how things played out. However, the company expects to speed things up in 2019, fueled by its pending acquisition of Penn Virginia. While that deal isn't without risk since Penn Virginia's focus area is quite different from Denbury's, the acquisition has the potential to accelerate the company's rebound, which makes it an interesting oil stock to watch in 2019.