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Denbury Resources' Earnings Hint at a Company That Will Survive the Downturn

By Tyler Crowe - Feb 26, 2016 at 7:15AM

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An $800 million loss this quarter doesn't sound like a sign of resilient earnings, but the numbers beneath Denbury Resources' net income suggest otherwise.

Image source: Denbury Resources.

Denbury Resources (DNR) posted some earnings results in the previous quarter that may have disappointed investors, but those who took the time to dig into the numbers would have found a company that was otherwise doing better than some expected. This past quarter was much of the same as the headline income numbers don't reflect the company's true performance.

Let's take a look at the most recent results, what it has planned for 2016, and how much confidence investors should have in Denbury's ability to make it to the eventual market recovery. 

By the numbers


Q4 2015Q3 2015Q4 2014


$269.3 $303.6 $483.7

Net Income

($885.1) ($2,244.1) $363.6

Earnings Per Share

($2.56) ($6.41) $1.04

Cash Flows From Operations

$164.9 $272.7 $337.7

*In millions, except per share. Data source: Denbury Resources.

Like the previous quarter, Denbury took some sizable writedowns of its assets. This quarter, it took a $1.3 billion pretax writedown of its oil and gas properties. If we were to pull out this charge to the income statement, the loss for the quarter was a much more palatable $2.57 million, or less than $0.01 per share. So, as in previous quarters, don't get too caught up looking at the net income numbers.

One thing that was a bit of a positive from this result, though, was that the $164 million in operational cash flow in the quarter was more than the $129 million spent on capital expenditures. An oil and gas producer that isn't outspending its cash flows is a bit of a rarity in the oil patch these days, and that otherwise small amount of cash coming in the door is a godsend that has kept Denbury from having to access the debt market like so many of its peers have done recently. 

The highlights

  • Despite spending only $400 million in capital expenditures in all of 2015 -- down from $1 billion in 2014 -- total production slipped only 2.1%.
  • Over the past two years, lease operating costs per barrel have declined 26% and stand at $19.31 per barrel today. 
  • The company was able to secure some covenant relief from its lenders related to its credit facility. The new covenants are slightly less strict in terms of debt to EBITDA and interest coverage in exchange for a lower credit limit and higher rates. At the end of the quarter, Denbury had $175 million drawn on a $1.5 billion credit line. 
  • In 2015, it paid down $220 million in debt from excess operational cash flow.
  • It bought additional hedges for 27,000 barrels per day in the third and fourth quarters of 2016 at an average price of $40 per barrel.

The lowlights

  • The asset writedowns related to its oil and gas properties led to a 35% decline in total proved reserves. Granted, if oil prices recover, those reserves may be economical again, but it does give a picture of the various price points these oil and gas properties are considered economical.
  • Proved reserves are currently evaluated at a price per barrel of $50, so there is a very good chance that we will see even further cuts to the company's proved reserves in the coming months if oil prices do not recover significantly.

Denbury's future
There are some reasons to be hopeful about Denbury's ability to get out of this oil price slump alive. The company expects to cut its capital expenditures to $200 million for the year and anticipate a production decline rate of 4%-8%. This suggests that, with the hedges in place, it should be able to scrape together enough cash flow from operations to cover its spending needs for the year and possibly pay down even more debt. Beyond production and spending, though, it gave no other guidance, which is expected since nobody has a clue where the oil market could go in 2016. 

What a Fool believes
Denbury Resources' stock has been dragged down with the rest of America's highly leveraged oil and gas producers, but the company's earnings results over the past few quarters suggest that it is in much better financial position. It's hard to say whether taking out oil hedges at $40 a barrel for the second half of the year will pay off, but with so much uncertainty in the market, it's best to take the insurance just in case things do get worse. If it can remain cash flow positive in this oil market and potentially pay down a little debt this year, then Denbury should be in decent shape when the recovery comes. 

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