Working in oil fields that historically have had significant production has its advantages. And Texas-based Denbury Resources
Tertiary methods of recovery -- in which drillers inject gas (or chemicals) into the reservoir to displace the otherwise irrecoverable oil inside -- can actually produce up to 60% of the reservoir’s original oil. Not many upstream companies can perform enhanced oil recovery by injecting carbon dioxide into oil wells. But Denbury seems to have done pretty well.
Solid growth
The last five years have seen a steady compounded annual growth of 25% in terms of revenue. This is what I’d call impressive steady growth. What really appeals to me is the business model: Over time, the company has transformed its strategy to focus on tertiary recovery operations, and this is also its long-term growth strategy. In simple terms, management has the long-term investor in mind.
Production currently stands at 65,000 barrels of oil equivalent per day (Boe/d), which has remained more or less flat in the last 12 months. But that shouldn’t worry investors. During the first six months of 2011, the company added 31 million barrels of oil as reserves. This translates into a fantastic reserve replacement ratio of 266%.
Bakken beckons
The company’s foray into the Bakken shale play has played a substantial role in reserves growth. And I believe there are a lot more reserves to be discovered and added. For the record, production there rose 33% in the second quarter over the previous quarter. With five rigs currently operating in this region, the company expects to bring the count up to seven by year-end.
Astute management
Rather than concentrating on a single aspect like increasing production, management has taken a comprehensive approach toward growth. In 2010, the company sold off some of its Mid-Continent and Permian Basin properties, among others, to pocket $1.4 billion.
As a result, cash balances saw a 200% jump in the last 12 months, and long-term debt decreased by half a billion dollars. Debt-to-equity now stands at a manageable 49%.
Earlier this month, the company completed the acquisition of the remaining 57% working interest in Ridley Ridge and another 33% in an adjoining 28,000-acre unit. Management estimates total proven reserves of 435 billion cubic feet (Bcf) of natural gas and 2.4 trillion cubic feet (Tcf) of CO2 at Ridley Ridge. The adjoining unit contains additional probable reserves of up to 300 Bcf of natural gas and up to 2.2 Tcf of CO2 in the company’s interest.
While full-fledged production here may only be realized after a couple of years, it is management’s long-term thinking at the cost of current production that merits applauding.
How is the stock valued?
This is how Denbury stacks up when compared to its peers:
|
Company |
TEV/EBITDA (TTM) |
P/B |
Forward P/E (1 year) |
PEG Ratio (1 year) |
|---|---|---|---|---|
| Denbury Resources | 6.8 | 1.2 | 11.0 | 1.1 |
|
Pioneer Natural Resources
|
9.6 | 1.8 | 17.0 | 1.8 |
|
Newfield Exploration
|
6.4 | 1.7 | 8.2 | 0.7 |
|
Whiting Petroleum
|
5.8 | 1.9 | 9.2 | 0.9 |
|
SM Energy
|
8.0 | 3.2 | 20.5 | 4.7 |
Source: Capital IQ, a Standard & Poor's company. TTM = Trailing 12 months.
The numbers might not look terribly impressive for the company. However, the price-to-book-value, a hard-to-manipulate metric, has caught my attention. The stock looks undervalued given the huge growth prospects. Forward-looking analysis and consensus estimates (as seen in the final two columns) don’t seem to have factored in the opportunities either.
Foolish bottom line
Denbury’s future looks promising. The stock looks underpriced, and management seems to have a solid strategy in place. Tertiary oil recovery has a significant place in the long-term prospects of the company. The Bakken reserves should not be a letdown, either. Foolish investors should dig deeper to see if the stock makes sense for their portfolios.
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