Plano, Texas-based Denbury Resources Inc. (DNR) and Encore Energy Partners LP (ENP) have terminated their previously announced deal related to Elk Basin assets sale. Denbury had initially signed the deal for significant capital requirements for its core CO2 tertiary operations.
 
Both the parties noted that no agreement could be reached on the value of the potential tertiary reserves.
 
Denbury has now shifted its focus to sell its interest in Encore Energy Partners GP LLC, the general partner of ENP, and all or part of the ENP common units owned by the company.
 
In March 2010, Denbury acquired Encore Acquisition Company (“EAC”) and became the owner of the Encore general partner, Encore Energy Partners GP LLC, as well as 46% of ENP common units.
 
Although this transaction has been canceled, Denbury owns the largest reserves of CO2, used for tertiary oil recovery east of the Mississippi River, along with operating acreage in the Barnett Shale play near Fort Worth, Texas. Hence, with its in-house CO2 reserve base, the company has a significant competitive advantage in acquiring and exploiting mature oil reservoirs. CO2 injection is the most effective and latest tertiary oil method that is used to extract oil using tertiary recovery techniques from mature reservoirs.
 
We believe that, going forward, the company’s oil weighted production will augment earnings growth with strong cash flow visibility. We also remain positive on Denbury’s focus on the tertiary CO2 oil production that has historically generated higher rate of returns than those of its traditional oil properties. Additionally, the Encore acquisition will position Denbury as one of the largest crude oil-focused independent North American exploration and production companies.
 
However, we remain concerned about the company’s increasing expenses owing to its exposure to higher energy costs (electrical and fuel charges) for its continuous emphasis on CO2 flooding techniques.
 
Therefore, we maintain our Neutral recommendation for Denbury with Zacks Rank #3 (Hold).
 
DENBURY RES INC (DNR): Free Stock Analysis Report
 
ENCORE EGY PTNR (ENP): Free Stock Analysis Report
 
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