Denbury Onshore, LLC, a wholly owned subsidiary of Denbury Resources Inc. (DNR), has clinched two carbon dioxide (CO2) purchase contracts from anthropogenic sources in the Gulf Coast and Rocky Mountain regions. The cost of CO2 from these plants is priced competitively with other likely anthropogenic supplies of the gas.
The company intends to buy 100% CO2 that is being captured from the industrial gasification and liquefaction facility of Medicine Bow Fuel and Power LLC in Medicine Bow, Wyoming. Additionally, Denbury will also purchase 70% of the CO2 captured from an Integrated Gasification Combined Cycle project of Mississippi Power Co. in Kemper County, Mississippi.
The gasification and liquefaction facility is expected to capture about 200 million cubic feet (MMcf) of CO2 on a daily basis. Subsequently, the facility will clean, compress and transport it for Enhanced Oil Recovery (EOR) in Denbury’s oil fields in the Rocky Mountain Region and sequestration in the CO2-EOR reservoirs. Although the company expects its first CO2 deliveries in late 2014 or early 2015, the construction of the plant is yet to begin.
Further, Mississippi Power Co., a wholly owned subsidiary of Southern Company (SO) has commenced construction of a power plant in Mississippi’s Kemper County and intends to distribute an estimated 115 MMcf per day of CO2 to Denbury’s Heidelberg Field. The company expects first CO2 deliveries in 2014.
With its in-house CO2 reserve base, Denbury has a significant competitive advantage in acquiring and exploiting mature oil reservoirs. Tertiary operations remain the company’s principal focus with particular emphasis on the Gulf Coast, Rocky Mountains and Bakken Shale holdings.
For 2011, the company expects its total capital outlay to be around $1.1 billion. Including capitalized interest and tertiary start-up costs at Hastings and Oyster Bayou Fields, this amount could go up to $1.2 billion.
We believe the present deal will provide a boost in the company’s CO2 requirements in the Rocky Mountain and Gulf Coast regions, enabling it to recover substantial oil volumes from the matured fields.
However, we remain concerned about the growing cost pressure in Denbury’s operations as its lease operating expenses increased 56% year over year in the last quarter.
We currently reiterate our long-term Neutral rating on Denbury shares. The company carries a Zacks #3 Rank (short-term Hold rating).
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