The first thing that will grab anyone's attention when looking at Denbury Resources (NYSE:DNR) earnings is that the company posted a jaw dropping loss of $2.24 billion in the third quarter. Like so many other oil and gas company's earnings recently, that number doesn't really tell the whole story. Below that big loss is actually a company that seems to be well suited to handle low oil prices for quite a while, especially compared to its peers. Let's take a quick look at the important numbers below that big loss and why Denbury may be in better shape that it lets on.
By the numbers
|(Figures in millions except for EPS)||Q3 2015||Q3 2014|
|One time Charges (asset writedowns & goodwill impairments)||($3,022.1)||--|
Here's something you need to remember when looking at these numbers. When it comes to oil and gas producers, they are all price takers. There are simply too many different companies playing in the sandbox for a singe entity to dictate prices. So for Denbury and any other producer, the only thing they can control is their costs. In the case of Denbury, it is doing a rather commendable job in containing its expenses. Compared to this time last year, it has reduced cash operating expenses by 19%.
What is even more surprising is if we were to strip out the asset write downs, the goodwill impairments, and the income generated from its hedging profile, Denbury would have only posted a loss of about $30 million this quarter. That may not sound great, but the unhedged price for its production this quarter was $44.20 per barrel of oil equivalent. So even at that low of a price, the company was surprisingly close to breakeven.
Furthermore, the company is still generating cash flow in excess of its capital spending right now, and is using that excess to pay down debt. So far this year, the company has been able to reduce bank debt and capital leases by more than $200 million. Considering that these are the only debts that are due before 2021, that seems to suggest the company is in pretty good financial shape for the long term.
Can Denbury keep it up?
One question that gets raised when an oil and gas producer reduces expenses and capital spending is how much its production down the road will suffer. Compared to many of its peers, Denbury is in much better shape because of its asset base. The mature oil reservoirs that Denbury juices with CO2 to extract the remaining oil have much lower decline rates than both traditional and shale wells.
This gives Denbury a unique advantage over shale focused compnies such as Pioneer Nautural Resources (NYSE:PXD) or Chesapeake Energy (NYSE:CHK). Lower decline rates for Denbury means it doesn't have to spend as much on replacing existing production, and instead can focus on developing assets within its cash flows.
|Company||Cash from Operations (YTD 2015)||Capital Expenditures (YTD 2015)||Free Cash Flow|
|Denbury Resources||$698 million||$433 million||$265 million|
|Hess (NYSE:HES)||$1,351 million||$3,386 million||($2,035 million)|
|Pioneer Nautral Resources||$789 million||$1,573 million||($784 million)|
|Chesapeake Energy||$1,055 million||$3,217 million||($2162 million)|
This is a very valuable trait to have if prices remain lower for longer like many oil executives claim they will. The one trade off to this situation, though, is that once the market does turn, companies like Pioneer and Hess will be able to ramp production up faster than Denbury can since the CO2 injection process is much longer than fracking a well. Since we have no real way of knowing when the market will turn, it's probably better that a company live within its means.
What a Fool Believes
Denbury has posted some massive losses over the past several quarters. Below those massive non-cash writedowns to income, though, is a company that is close to break-even at today's prices and one that isn't in need of any financing any time soon. With so much uncertainty surrounding oil prices, Denbury appears to have a leg up over some of its larger peers that are still spending money like drunken sailors. If the company can maintain its operational cost reductions and keep capital spending at a minimum through the rest of the year and through 2016, Denbury should be in fine shape over the long term.
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