Carbon dioxide might be best known as the fuel some say is responsible for climate change. However, it soon will also be known as the fuel responsible for the dividends that will begin to flow to investors of Denbury Resources (NYSE:DNR).
The company announced today it will adjust its capital spending plans in order to begin paying shareholders a dividend. The first payout won't hit investors' accounts until early next year. However, the company believes it can more than double its payout by 2015 and then grow it at a fairly sustainable rate thereafter.
As the chart below shows, under its revised plan Denbury investors should actually expect to see better returns over the long haul.
As a leader in enhanced oil recovery, Denbury Resources has built its business upon carbon dioxide's unique ability to get more oil out of a depleted field. The company has spent heavily to move the greenhouse gas to these legacy oil fields, and those investments are now finally beginning to pay literal dividends to investors.
It's a process that involves high up-front capital costs that eventually result in outsized cash flow. A great example of this is Occidental Petroleum (NYSE:OXY). The company is the largest oil producer in Texas' Permian Basin, bringing home 16% of total production there. Of that, 60% is produced with the help of carbon dioxide. That is also Occidental Petroleum's most profitable business, which helps fuel the company's dividend.
Carbon dioxide is also key to the dividends and distributions paid by Kinder Morgan (NYSE:KMI) and its affiliate Kinder Morgan Energy Partners (UNKNOWN:KMP.DL). Kinder Morgan is one of North America's leading transporters of carbon dioxide. The company delivers 1.3 billion cubic feet of carbon dioxide per day through 1,300 miles of pipelines. That carbon dioxide is delivered to the Permian Basin for use by Kinder Morgan and others to produce oil.
Denbury Resources has actually shied away from the Permian Basin, which is dominated by those two players. Instead, it has focused all of its carbon efforts on the Gulf Coast and Rocky Mountains. It has now built the business to the point where it's producing an increasing cash flow. Denbury Resources could have continued to reinvest that cash back into its business. However, management sees that it can still provide similar growth while also providing more immediate value to its investors through a dividend.
Not every company has the ability to continue to grow while also paying an increasing dividend. A company needs to have rock-solid current operations with a future filled with opportunities to grow. Denbury has both, which will make it a great dividend stock for years to come.
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Matt DiLallo has the following options: short January 2014 $18 puts on Denbury Resources. The Motley Fool recommends Kinder Morgan. The Motley Fool owns shares of Denbury Resources and Kinder Morgan. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.