Denbury Resources Inc. (DNR) reported better-than-expected second-quarter results. Earnings per share, excluding one-time items, came in at 18 cents, above the Zacks Consensus Estimate of 15 cents and the year-earlier earnings of 16 cents. The positive comparisons were mainly driven by higher production volumes and improved commodity prices. Total revenue from operations more than doubled from the year-earlier level to $493 million.

Operational Performance

Production during the quarter averaged 84,111 oil-equivalent barrels per day (MBOE/d), an increase of 61% year over year. Of the total quarterly production, 78% was oil. The drastic improvement in production volumes was driven by the contribution from the Encore acquisition in the first quarter, last year’s acquisition of Conroe fields as well as higher tertiary production.

Tertiary production in the quarter averaged 28,500 barrels per day (MBbl/d), up 18% from the year-earlier level. The company raised its tertiary production target for this year to 28.0 MBbl/d from the previous guidance of 27.75 MBbl/d.

Denbury’s realized oil prices (including the impact of hedges) averaged $71.68 per barrel, up 7% year over year, while gas prices significantly increased to $6.12 per Mcf. On an oil equivalent basis, realized price was $64.13 per barrel, up 20% from the year-earlier level.

Cash flow from operations was $240.9 million versus $108.2 million in the year-ago quarter. Capital investment in the quarter was $326 million, up 14% from the year-earlier level.

Cash balance at the end of the second quarter was $67.4 million and long-term debt stood at $2.46 billion, representing a debt-to-capitalization ratio of 36.3%.

Outlook

With its own in-house CO2 reserve base, Denbury has a significant competitive advantage in acquiring and exploiting mature oil reservoirs. The company added 65.4 million barrels of oil equivalent of proved reserves this quarter, more than half of which comes from the tertiary fields.

Tertiary operations remain the company’s principal focus area. Denbury’s Conroe acquisition and plans to develop it as a tertiary field is a prudent step, which will aid its fudamentals in the long run.

However, we are concerned about the growing cost pressure in the company’s operations as Denbury’s lease operating expenses in the first six months increased 41%. We are currently Neutral on this Zacks #3 Rank (‘hold’) stock.

 
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