As of 11:36 p.m. EST on Nov. 14, shares of independent oil producer Denbury Resources Inc. (NYSE:DNR) are up just under 8%, having retreated from earlier trading, when the stock price was up well over 10%. Looking on the news feeds, there's nothing material out there to report about Denbury; the company issued no press releases or SEC filings, and there aren't any new rumors or reports to be found.
But there's one big thing that's certainly playing a role in today's big jump: Crude oil prices. At this writing, Brent crude futures are up 1.7% to $66.45 after having surged as much as 3% in early trading.
Denbury's stock price tends to correlate pretty heavily with crude oil prices. Here's how that correlation has played out in 2018:
And to a large extent, this makes sense. As an oil producer, a substantial amount of the company's prospects are tied to the selling price of crude oil.
The market can also overemphasize oil prices from one trading day to the next, particularly when crude makes a big swing. This should be made even more apparent if you note how far Denbury's stock price has fallen since the beginning of October. Investors have the stock down more than half since crude peaked early last month.
There's more to the story, of course. In late October, the company announced it was buying Penn Virginia Corporation(NASDAQ:PVAC) in a $1.7 billion cash-and-stock deal, sending its shares down almost 24% on the day of the announcement. In short, investors are concerned about this move, because Penn Virginia's focus on shale is a very different operation than Denbury's core focus on "enhanced oil recovery" from traditional plays.
But within the risk that comes along with this move, management thinks that its EOR techniques could actually help it leverage Penn Virginia's assets and generate even better returns. The jury will be out on that until the company proves otherwise.
Here, however, is something investors can hang their hat on: Denbury can operate within its cash flows in the current oil price environment. The company produced over $27 million in free cash flow in the third quarter, and has generated almost $400 million in operating cash through the first nine months of the year. That's substantially more cash than it will spend on capital expenditures this year.
I'm generally not a big fan of independent oil producers, particularly ones that make big acquisitions outside of their area of expertise to grow. But in the case of Denbury, I'm not so quick to dismiss it. Management has done a decent job of improving its operations, and has prioritized using excess cash flows to improve the balance sheet.
At current prices (even after today's jump), I think the market has priced in most of the risk already. Personally, I want to see how the Penn Virginia acquisition settles before investing, but for investors with a high-risk profile, there's a case to be made for buying.