Denbury Resources Inc. (DNR) is stepping forward to complete the planned divestiture of non-core oil and gas properties of Encore Acquisition Company acquired in March. Yesterday, the company said that it will sell its Haynesville and East Texas natural gas assets to a private oil and gas company for $217.5 million.
The primary goal of this transaction is to reduce Denbury’s $2.46 billion debt (at the end of second quarter) level. The company will also use a part of the sale proceeds in a section 1031-like kind exchange with a previously announced acquisition of reserves in the Rocky Mountain region in order to reduce the estimated taxable gain on the sale.
Production attributable to the properties up for sale averaged 34 million cubic feet equivalent per day in the second quarter. The transaction is expected to close within 30 to 45 days.
Shortly after the Encore acquisition, Denbury also sold some of the acquired assets located in the Permian Basin, southeastern New Mexico, the Mid-continent area and the East Texas Basin to Houston-based Quantum Resources Management LLC for $900 million.
We consider these divestitures as a prudent step, which will allow the company greater liquidity and flexibility to focus on its core tertiary oil operations and the acquired Bakken assets. These are more profitable, carry lower risk and face virtually no competition.
Denbury’s main focus on tertiary oil operations is reflected in its geared up drilling operations. Year-to-date, it has drilled three additional wells in the Jackson Dome area, in an effort to increase deliverability and proved CO2 reserves (CO2 is more effective in extracting oil using tertiary recovery techniques from mature reservoirs).
The company’s initiatives toward containment of debt level is commendable and we also like the company’s niche business model of extracting crude oil from mature fields using tertiary recovery methods.
As all these positives are already reflected in the company’s premium valuation, our Neutral recommendation remains unchanged at this stage with the Zacks #3 Rank (Hold).
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