Denbury Resources Inc. (DNR) reported in-line third quarter results, as increased production helped the company to meet estimates. Earnings per share, excluding non-cash fair value adjustments, came in at 16 cents, same as the Zacks Consensus Estimate. Including one-time items, Denbury posted a profit of 11 cents per share.

On a year-over-year basis, the company’s adjusted earnings per share declined 68.0% (from 50 cents to 16 cents), while revenue was down 44.6% to $227.2 million. The year-over-year negative comparisons were due to the steep decline in commodity prices.


Production during the quarter averaged 42.7 thousand oil-equivalent barrels per day (MBOE/d), a decrease of approximately 7.1% year over year. However, after adjusting for the 2009 sale of 60% of the company’s Barnett Shale natural gas assets, Denbury’s volumes rose approximately 10% from the third quarter of 2008.

Of the total quarterly production, approximately 82% was oil. The year-over-year production increase can be attributed to the contribution from the recently acquired Hastings Field and a 23% tertiary oil production increase. Tertiary production for the quarter averaged 24.3 thousand barrels per day (MBbl/d). The Heidelberg, Tinsley, Soso, Lockhart Crossing and Cranfield fields were the main contributors for the tertiary production increase.


Denbury’s realized oil prices (including the impact of hedges) averaged $70.54 per barrel, down 35.1% year over year. Realized natural gas prices for the quarter was $3.09 per Mcf, a decrease of 62.4% from the previous year quarter.


Lease operating expenses on a per BOE basis increased 5.1% year over year to $21.22, primarily on account of the Barnett Shale property sale in mid-2009. G&A expenses per BOE were up significantly (by 72.4%) from the year-earlier period to $6.12, mainly due to higher employee costs. DD&A expenses on a per BOE basis declined slightly year-over-year to $11.66.

Capital Budget & Guidance

Denbury reiterated its 2009 capital budget at $750 million, of which approximately 90% will go to the company’s tertiary operations. As previously announced, due to the Barnett Shale assets divestment, the company decreased its 2009 production guidance to 47.5 MBOE/d. Denbury reaffirmed this guidance. Further, as declared earlier, the company reduced its 2009 tertiary production guidance by 1% to 24.2 MBbl/d (from 24.5 MBbl/d before).


Our Neutral recommendation for Denbury shares reflects the company’s low-risk profile and oil-centric niche business model. With oil representing about three quarters of the total production, the company is experiencing an enviable position in the industry, given the higher realizations and margins that presently exist in oil than gas.

Earlier this week, Denbury entered into a definitive agreement with U.S. onshore oil and gas producer Encore Acquisition Company (EAC) to acquire the company for $4.5 billion. We think that Encore is a good fit for Denbury as both the companies have exposure in tertiary recovery techniques to increase the value of acquired properties. As Denbury had sold its 60% interest in Barnett Shale assets in June to focus on its core tertiary oil operations, the Encore acquisition is another prudent step in this direction.
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