DEN - Denbury: About To Start Production From CCA EOR Project

2023-05-19 11:57:55 ET

Summary

• Denbury has been making longer-term investments into its CCA EOR Project and its CCUS business.
• Denbury allocated over $400 million towards the CCA EOR project over the last few years, and initial production is expected soon.
• Production will ramp up over time, and it is expected to reach peak production around the end of 2024, potentially adding $200 million EBITDA per year at $70s oil.
• The increased cash flow from its upstream business will help fund its CCUS investments.
• Recently, Denbury acquired development rights for a CO2 sequestration site (Dorado) and will spend around $120 million to $240 million on a pipeline to that site.

Denbury Inc. ( DEN ) has been making a lot of longer-term investments, both with its upstream business and its carbon capture, utilization and storage ((CCUS)) business. Denbury's upstream investments in its CCA EOR project should start paying back soon, with initial EOR production expected in Q2 2023 . CCA EOR could contribute around $200 million per year to Denbury's run-rate EBITDA by late 2024 to early 2025 at $70s oil.

Much of Denbury's operational cash flow is getting plowed into its CCUS business, which is expected to require funding for at least several more years before becoming self-sustaining.

I liked Denbury stock in the low-$80s per share back in February , but in the low-$90s I believe it is fairly priced for the long-term $75 WTI oil scenario that I've modeled, including the value added by the potential of its CCUS business.

CCA EOR Project

Denbury's Cedar Creek Anticline ("CCA") EOR (enhanced oil recovery) project is at the point where it will start to bear fruit after years of investments. Denbury mentioned that it was moving forward with the project in mid-2018. It was targeting initial tertiary production for late 2021, but then its heavy pre-restructuring debt burden and the 2020 oil price crash resulted in it delaying the project.

After exiting restructuring with minimal debt (and with rebounding oil prices), Denbury was able to move forward with the CCA EOR project and allocated $150 million to that in 2021. The majority of that went to the 105-mile Greencore CO2 Pipeline extension from the Bell Creek Field to Cedar Creek Anticline.

Denbury allocated another $115 million for CCA EOR investments in 2022 and $145 million in 2023 and is now on the cusp of seeing the rewards for those investments. Denbury recently mentioned that it expects to see the first EOR production in Q2 2023. Initial EOR production is expected to be pretty modest, but it expects to reach around 2,000 barrels per day of production by the end of 2023 and then peak production levels of 7,500 barrels per day to 12,500 barrels per day by the end of 2024.

At peak production levels, the incremental production could add around $200 million per year to Denbury's EBITDA at $70s oil.

Added Hedges

Denbury has added a bit to its hedging position since its February update. Since then, it added swaps covering 4,000 barrels per day of 2H 2023 oil production at an average swap price of approximately $78.69. It also added swaps covering 3,000 barrels per day of 1H 2024 oil production at an average swap price of approximately $75.43 per barrel.

2023 Outlook At Current Strip

Denbury appears to be on track to meet its original production guidance for 2023 so far. At the current strip of $73 WTI oil for 2023 and its updated hedging position, I now expect it to generate around $1.288 billion in revenues after hedges.

Denbury also appears to be tracking to its cost guidance as well. It is now expected to end up with approximately $10 million in free cash flow in 2023 based on $73 WTI oil.

While Denbury's free cash flow in 2023 may be pretty modest, that is due to investments that are expected to pay off in future years. It is budgeting over $300 million combined for its CCA EOR capex for 2023 and its CCUS business capex and equity investments. The revenue resulting from those investments is expected to be only around $20 million in 2023 but will be much greater in future years.

However, Denbury will be continuing to plow most of its operational cash flow back into longer-term investments for a while, with the CCUS business projected to be self-funding in around four years. It mentioned that it acquired exclusive development rights over a dedicated 30,000-acre CO2 sequestration site labeled as Dorado. This site is expected to have the potential to store over 115 million metric tons of CO2 and is located 60 miles away from Denbury's existing CO2 pipeline infrastructure. The pipeline cost is estimated at $2 million to $4 million per mile, resulting in a $120 million to $240 million total pipeline cost.

Conclusion

Denbury Inc. has been making longer-term investments into its CCA EOR project and its CCUS business. The CCA EOR project is expected to show initial production in Q2 2023, ramping up to around 2,000 barrels per day by the end of 2023. It is then expected to reach peak production around the end of 2024, and at $70s oil, it should contribute around $200 million to Denbury's run-rate EBITDA at that peak production level.

This should allow Denbury to invest more into its CCUS business while generating at least a bit of free cash flow. Denbury is unlikely to pay a dividend while it is investing heavily in its CCUS business (with the recently announced Dorado CO2 sequestration site requiring a pipeline that may cost $120 million to $240 million). However, the CCUS business may become self-sustaining in several years.

At the low-$90s per share, I am currently neutral on Denbury Inc. stock based on a long-term $75 WTI oil environment. I'd consider Denbury a buy again if it dipped to the low-to-mid $80s.

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