Shares of Denbury Resources (DEN +0.00%) rocketed in recent weeks. Shares of the oil company focused on utilizing carbon dioxide have spiked more than 60% from their bottom in late July, fueled by acquisition speculation and higher oil prices.
According to a recent Bloomberg report, oil giant ExxonMobil (XOM 1.37%) is among the interested bidders. Here's a look at why Exxon is exploring an acquisition of Denbury.
NYSE: DEN
Key Data Points
The rumor mill
Takeover speculation started swirling around Denbury in August when Bloomberg reported it was exploring strategic options, including a possible sale. More recent reports said that Denbury was in talks with a strategic buyer and was working with banking giant JPMorgan on a potential deal. Bloomberg has since reported that Exxon is one of the companies considering a takeover of Denbury.
The speculation-fueled rise in Denbury's stock price has pushed its market cap toward $5 billion. On the one hand, that's pocket change for ExxonMobil, which expects to report $11 billion of profit in the third quarter. However, it would still be a pretty big splash because of how it could accelerate the company's lower carbon energy strategy.
NYSE: XOM
Key Data Points
Why Exxon is interested in Denbury
The main draw of Denbury isn't its current oil production. Its projected daily output of 46,000 to 49,000 barrels of oil equivalent per day (BOE/D) would be a drop in the bucket for Exxon, which produced 3.7 million BOE/D in the second quarter.
Instead, what Denbury brings to the table is extensive expertise in carbon capture and storage (CCS) and enhanced oil recovery (EOR). CCS is a process of capturing industrial-produced carbon dioxide and sequestering it in underground geologic formations. Meanwhile, EOR is a process that injects carbon dioxide into aging oilfields to increase pressure and boost output. The company has been using industrial-sourced carbon to produce oil for over a decade.
Denbury has extensive infrastructure to support these operations. It built nearly irreplaceable platforms in the Rocky Mountains and Gulf Coast regions to source, transport, and utilize carbon dioxide to produce oil. It has over 1,300 miles of carbon dioxide pipelines, more than 20 oil fields injecting carbon with significant additional sequestration potential, and a growing list of carbon dioxide supply contracts. The company's capture and sequestration activities enable it to offset about a quarter of the emissions produced from its oil output, giving its production much lower carbon intensity.
That aligns with ExxonMobil's lower carbon energy strategy. The company is investing $15 billion over the next six years to reduce emissions by growing its hydrogen, biofuels, and CCS capabilities, and it sees enormous potential in carbon capture. It envisions a $4 trillion global CCS market by 2050, equating to 60% of the worldwide oil and gas market it foresees in the future.
Acquiring Denbury could help Exxon accelerate its carbon capture strategy. It would enhance the company's existing operations while giving it a platform for future expansion.
A potentially solid strategic fit
ExxonMobil believes carbon capture is vital to helping the global economy achieve its climate goals while maintaining an adequate supply of affordable energy. That's leading the company to invest heavily in this technology to build a leading position in what it thinks will be a massive market opportunity over the long term.
Acquiring Denbury could help Exxon accelerate that strategy. It could build off that company's expensive infrastructure and expertise to enhance its lower carbon oil ambitions. This means that if Exxon were to acquire Denbury at a reasonable price, it could bolster the long-term investment thesis for the oil giant.
