Denbury Resources (NYSE:DNR) closed the books on 2018 by reporting solid fourth-quarter results as earnings beat expectations, while production came in at the high end of its guidance range. The oil producer further pleased investors by offering a conservative view of 2019 as it slashed spending so that it can generate free cash flow.
However, the company also reaffirmed its commitment to its controversial merger with Penn Virginia (NASDAQ:PVAC), which remains on track for a shareholder vote in April. That transaction would significantly alter Denbury's 2019 outlook.
Drilling down into the results
Denbury Resources produced an average of 59,867 barrels of oil per day (BOE/D) during the fourth quarter, which was up 1% from the third quarter, helping push its full-year rate to 60,341 BOE/D. That's up slightly from 2017 and near the top of the company's revised guidance range of 60,000 to 60,400 BOE/D. Driving the sequential growth was the continued response of carbon dioxide flooding in Bell Creek and additional Mission Canyon drilling in the Cedar Creek Anticline (CCA).
With production coming in toward the high end of Denbury's forecast, it was able to generate $46.4 million, or $0.10 per share, of adjusted net income, which beat the consensus estimate by $0.01 per share. That slightly better-than-expected profit came even though oil prices crashed during the quarter and operating expenses increased due to higher carbon dioxide costs.
Full-year capital spending, meanwhile, came in at $323 million, which was just below the top end of its $300 million to $325 million budget range. However, the company generated more than enough cash flow to cover that spending. Overall, it produced $81 million in free cash flow for the year, which when further aided by some strategic transactions, helped Denbury reduce its debt by $243 million during the year. That lower debt level, when combined with higher earnings, enabled the company to reduce its leverage ratio from a dangerous 6.6 times at the end of 2017 to a slightly more comfortable 4.2 times by the end of last year.
A look at what's ahead
Denbury Resources plans to spend between $240 million and $260 million on capital projects in 2019, which is 20% to 25% lower than last year's level. One driver of the decline is the decision to spread out spending on a new carbon dioxide pipeline to support a major enhanced oil recovery project in the CCA. Denbury's budget should enable it to produce between 56,000 to 60,000 BOE/D this year, which is a 4% decline from 2018 at the midpoint. The company noted that at its anticipated spending level, it would generate between $50 million to $100 million in excess cash this year.
But Denbury's forecast doesn't assume that it closes the acquisition of Penn Virginia, which the company remains highly focused on completing. Acquiring Penn Virginia would significantly boost Denbury's near-term growth prospects as well as reduce its leverage ratio. That's because Penn Virginia currently expects to grow its production by 30% from last year's average of 21,765 BOE/D even as it lives within the cash flows it can produce at current oil prices. Further, Penn Virginia ended last year with a much lower leverage ratio of 1.7.
Denbury faces an uphill battle in closing that transaction since major shareholders in both companies have spoken out against it. Investors don't see the same strategic fit as Denbury does, given that it focuses on using carbon dioxide to coax more oil out of legacy oil reservoirs while Penn Virginia drills horizontal wells into the Eagle Ford Shale. On top of that, oil prices have declined significantly since the company announced the deal, which has weakened Denbury's financial profile. Because of that, it's unclear whether the company will have enough votes to close the deal.
Lots of uncertainty ahead
Denbury finished well, as its fourth-quarter production came in near the top end of its revised guidance range, which enabled the company to beat analysts' expectations. However, it's unclear what investors can expect in 2019. Denbury currently plans to cut spending so that it can bolster its financial profile, which makes sense given its elevated debt level. That plan will change if the company is successful in acquiring Penn Virginia. Because of that, all eyes will remain on whether Denbury can convince investors that the acquisition is the right move.