Denbury Buys CO2 Reserves – Analyst Blog

Denbury Resources Inc. (DNR) purchased a 42.5% non-operated working interest in the Riley Ridge Federal Unit in southwestern Wyoming as well as about 33% carbon dioxide (CO2) rights in an additional 28,000 acres in the vicinity. Total consideration for this deal was $115 million.
 
The purchase marks a significant step toward the company’s keenness to increase its reserves and production volumes.
 
This transaction has given Denbury a second source of CO2 in the Rocky Mountain region. The company is also expecting to cover the purchase consideration with natural gas and helium sales from this field. The deal is expected to close in late October.
 
Denbury produces oil by applying tertiary recovery techniques to mature fields. CO2 is more effective for using this technique. With its in-house CO2 reserve base, Denbury has a significant competitive advantage in acquiring and exploiting mature oil reservoirs.
 
The company anticipates production of natural gas and helium from the Riley Ridge unit to commence in late 2011. The cost to develop this unit will total approximately $56 million.
 
Denbury Resources remains on track to continue its positive growth momentum. Driven by recent acquisitions, the company has been experiencing a significant boost in its production volume.
 
We particularly like the company’s oil-weighted production and its conservative balance sheet and think that the company is under-leveraged than the median of its peer group.
 
Denbury has a relatively low-risk business model and substantial upside potential that can move the needle toward a strong earnings and cash flow visibility.
 
However, all these positives have already been reflected in Denbury’s premium valuation. Our Neutral recommendation remains unchanged at this stage with the Zacks #3 Rank (Hold).