In May 2008, Encore Acquisition
The $50-per-share merger consideration offered by Denbury Resources
From the perspective of Denbury shareholders, though, I'm not crazy about this deal. On the surface, there is some synergy between these two E&P companies. Both have focused on applying enhanced oil recovery techniques to boost production from old, tired fields. Denbury will build out its opportunity set with this purchase. But is this really the time or the place to be making such a move?
It seems like only yesterday that Denbury, preoccupied with liquidity issues, was digging in its heels. Just over a year ago, the company shelved its $600 million acquisition of the Conroe field, cut its capital expenditures, and largely hedged its 2009 production. These were smart steps that the market initially ignored, as Denbury shares were marked down to the single digits in November.
In the same vein, Denbury's Barnett Shale fire sale seems like only a minute ago. In May of this year, the company was deleveraging right alongside Delta Petroleum
In addition to a nice position in the Bakken, Encore brings some Rockies-based enhanced oil recovery projects to the table. Denbury's self-identified "significant strategic advantage" is its control of a major CO2 deposit and pipeline infrastructure in the Gulf Coast region. These new properties do not play to that strength.
Rather than strategic advantage, the dominant thought processes here appear to be of the "bigger is better" variety. Denbury management points to the deal's accretiveness to cash flow per share, and the likelihood of a lower cost of capital over time. These things may come to pass, but Denbury is also diluting its focus (or enhancing diversification, if you prefer the company line) and saddling itself with fresh debt that could pose challenges.
While I don't expect a repeat of the situation faced by Precision Drilling Trust
Editor's note: A previous version of this article incorrectly spelled out Mcf as "metric cubic feet" when it should have been expressed as "1,000 metric cubic feet." The Fool regrets the error, which was made by the copyeditor and *not* Mr. Shute.