Denbury Resources (NYSE:DNR) remained stuck in neutral during the first quarter. While the company's focus on operating low-decline oil fields allows it to produce at a relatively steady rate, its enormous debt load is hampering its ability to grow. On a positive note, this year's rebound in oil prices has Denbury on track to produce more free cash flow, which will allow it to chip away at the debt.

Drilling down into the results

Metric

Q1 2019

Q4 2018

Q1 2018

Total production

59,218 BOE/D

59,867 BOE/D

59,876 BOE/D

Adjusted net income

$45 million

$46 million

$54 million

Adjusted earnings per share

$0.10

$0.10

$0.12

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

Denbury's production came in about 1% lower than its rate in both the year-ago period and the fourth quarter. That's mainly because the company isn't investing enough money on new oil projects to maintain its production rate, let alone expand output. Instead, it's keeping a tight lid on spending so it can generate excess cash to reduce debt.

Its oil-focused investments, however, are paying off. Denbury noted that phase five of its Bell Creek carbon dioxide flood expansion delivered strong results. Production from the Bell Creek Field rose 15% year over year to a record 4,560 barrels of oil per day (BPD). Output from the field is up more than 50% in the last two years, as the company has been coaxing out more oil from this legacy reservoir by injecting it with carbon dioxide.

Denbury also delivered positive initial results from its Conroe 2A sand and Tinsley Cotton Valley tests. These results suggest that Denbury can drill several high-return wells in these regions that could help provide a near-term boost to production.

Denbury's relatively steady production, when combined with its oil-price hedges and ability to drive down operating costs, enabled it to generate relatively stable earnings this quarter. The company was also able to produce $27 million of free cash flow, which improved its balance sheet.

Oil pumps and storage tanks with the sun setting in the background

Image source: Getty Images.

A look at what's ahead

Denbury Resources remains on track with its full-year forecast. The company still expects to spend between $240 million and $260 million on oil-related projects this year. That spending level should enable it to produce an average of 56,000 to 60,000 BOE/D this year, which would be about 4% lower at the midpoint than its rate in 2018. However, the uptick in oil prices during the first quarter now has Denbury on track to produce more than $150 million in free cash flow this year, up from its initial outlook that it would generate between $50 million and $100 million in excess cash. That will provide it with even more money to reduce debt, which ended the quarter at $2.5 billion.

After abandoning its controversial merger with Penn Virginia earlier in the year, Denbury Resources' priority in the near term will be to continue strengthening its balance sheet. In addition, the company plans to keep investing capital in high-return oil projects. These investments will include high-upside potential from its exploration activities in places like the Conroe Field.

Denbury will also continue to expand its enhanced oil recovery (EOR) operations, as it's doing at Bell Creek. The biggest growth driver over the long term is an EOR development at the Cedar Creek Anticline in Montana and North Dakota. The company expects the first phase of that project to come online in the second half of 2022, which should add 7,500 to 12,500 BPD of incremental oil production at the peak. In the decades ahead, the field could generate billions of dollars in free cash flow as Denbury develops its EOR potential.

Patience required

Denbury Resources' debt is weighing it down and holding back its ability to grow. It had hoped to reduce some of that debt by acquiring Penn Virginia, but that company wasn't the best fit. So investors need to remain patient as Denbury uses its growing free cash flow to whittle down the debt, while simultaneously investing in high-return opportunities like the EOR project at the Cedar Creek Anticline; those investments have the potential to deliver a big long-term payoff. But the near-term outlook for Denbury remains muted.