Denbury Resources (DNR) has struggled mightily since oil prices began slumping from their triple-digit peak in 2014. Shares of the oil producer have plummeted about 90% over the past five years, which has pushed the stock price down to around $1 per share. The main factor weighing on the oil stock is the $2.5 billion of debt on its balance sheet.
The energy company, however, is doing everything it can to address its financial situation so that it can make it through the still challenging oil market environment. That was one of the key takeaways on its third-quarter conference call.
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We're making incremental progress
On the call, Denbury CEO Chris Kendall discussed the steps the company is taking to shore up its financial situation:
We also continue to make great progress on the balance sheet. The recent [debt] exchanges ... helped us reduce our debt by nearly $90 million, continuing a strikingly effective effort that has now reduced our total debt by $1.2 billion since the end of 2014 and reaffirmed my great confidence in our ability to continue to reduce debt to our target levels.
As Kendall notes, the company has been slowly chipping away at its debt over the past several years, reducing it by another $90 million during the third quarter. It did that by using its free cash flow -- which totaled $44 million in the period -- to repurchase its debt on the open market at a steep discount to its face value. The company also made some private exchanges using cash and stock to repurchase debt directly from some creditors.
Moves like these have enabled the company to maintain a leverage ratio of around 4.1 times debt-to-EBITDA over the last year. While that's more than double the comfort level of most oil companies these days, it's an improvement from 4.5 in mid-2018. That's why CFO Mark Allen stated on the call that he's "pleased with [the] continued progress we've made with our leverage metrics over the last couple of years."
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We've got some irons in the fire to accelerate the process
Allen, however, noted that "reducing our leverage and improving our debt maturity profile remain top priorities." As a result, he said, "we will continue to seek appropriate opportunities to further reduce leverage and extend maturities well in advance of our first maturities in mid-2021."
Denbury currently has time to address its balance sheet situation since it doesn't have any debt coming due until the middle of 2021. However, it has nearly $750 million maturing that year, so it needs to make more than incremental progress over the next year and a half.
In discussing how it will address this situation, Allen stated:
In support of this effort we are actively pursuing several initiatives, one of which is the evaluation of JV options for our CCA CO2 pipeline which would mitigate all or a significant portion of our pipeline capital spend in 2020. In addition, we continue to progress noncore asset sales such as our non-productive acreage positions primarily around the Houston area. ... In addition we are open to considering other JV [joint venture] transactions and noncore asset sales that could enhance liquidity and further our debt reduction efforts.
As Allen noted, Denbury is working on several things to tackle its debt problem, including finding a joint-venture partner to help it build a new pipeline to support its CCA development. This project has the potential to generate significant future cash flow for the company. However, it requires a large up-front investment, including building a new pipeline to carry carbon dioxide to the field. That's why the company is looking for a partner to help fund the pipeline, which would then free up those funds for debt reduction. Meanwhile, the company also plans to pursue more non-core asset sales to bring in additional money that it could use to chip away at its debt.
Ultra-high risk, but massive reward potential if it makes it through to CCA's start-up
The next year and a half will make or break Denbury Resources. It needs to find ways to pay off or refinance a large portion of its debt by the middle of 2021. If it fails to do so, it might have to file for bankruptcy protection so it can reorganize its debt. However, if it can successfully manage its 2021 debt maturities while investing in the development of CCA, then it could be a big winner when that low-cost oil project comes online in 2022. That makes it one of the higher-risk, higher-rewarding stocks in the oil patch, making it an intriguing one to keep an eye on over the next year.
