DEN - Denbury: Appears Fairly Priced After Shares Jumped In Response To News Of A Potential Sale

Summary

• Reports indicate that Denbury is evaluating various strategic options, including a potential sale of the company.
• Its ability to produce net negative carbon emissions while producing oil using industrial-sourced CO2 is attractive these days.
• The Carbon Solutions business also could generate substantial value, although there is a high amount of uncertainty about exactly how much value.
• I am neutral on Denbury at its current price after its share price jumped on the potential sales news.

Reports indicate that Denbury ( DEN ) is evaluating various strategic options , including potentially putting itself up for sale. Denbury now has no net debt, while the potential for its carbon capture and sequestration business is being highlighted . Denbury may be able to generate approximately $350 million in positive cash flow in 2023 at current strip prices, allowing it to do further share repurchases if it doesn't sell itself before then.

While Denbury's overall situation looks good, I am moving to a neutral outlook on its shares due to valuation. A few months ago , Denbury's stock looked like a good value, with its stock at $64 and 2023 oil strip in the $90s. At that time, I believed Denbury's share price roughly reflected the fair value of its upstream business alone, while valuing the Carbon Solutions business at zero (or less).

Denbury's stock has now risen to $87 on the strategic options news, while 2023 oil strip is in the low-$80s. The Carbon Solutions business is thus being valued at close to $20 per share, which seems reasonable but doesn't leave Denbury noticeably undervalued anymore.

2023 Outlook

I've modeled Denbury's production for 2023 at around 50,000 BOEPD (97% oil). Denbury's production is expected to increase from current levels in Q4 2022, while it expects the production response from its CCA EOR Phase 1 project to start in 2H 2023.

In this scenario, Denbury is projected to generate $1.479 billion in revenues after hedges at current 2023 strip of $81 WTI oil. Most of Denbury's hedges for 2023 are collars with ceilings a bit above $100 WTI oil, so its hedging situation is much improved next year.

I've assumed that Denbury's lease operating expense moderates slightly to $28 per BOE as some of its inputs get a bit cheaper with lower commodity prices in 2023 compared to Q2 to Q4 2022.

If Denbury's 2023 capital expenditure budget is relatively similar to 2022, then it would be projected to generate $351 million in positive cash flow in 2023.

Notes On Share Repurchases

Denbury spent $100 million repurchasing shares through July 2022. It repurchased 1.6 million shares at an average price of $61.92 per share. Denbury has $250 million in remaining authorization for its current share repurchase program.

Denbury had 49.7 million outstanding shares at the end of July 2022 and also has approximately 1.8 million series A warrants outstanding at an exercise price of $32.59 per share along with 1.6 million series B warrants outstanding at an exercise price of $35.41 per share.

Notes On Valuation

I now estimate the value of Denbury's upstream business at approximately $68 based on long-term (after 2023) $70 WTI oil and approximately $76 per share with long-term $75 WTI oil. This is a slight reduction to my earlier estimates of Denbury's upstream business value due to the impact of higher lease operating expenses on its near-term cash flow.

I would also allocate around $20 per share in value for Denbury's Carbon Solutions business, although there is more potential variability in the value of that business compared to Denbury's upstream business.

This results in a total estimated value of $88 for Denbury in a long-term $70 WTI oil environment and a total estimated value of $96 in a long-term $75 WTI oil environment.

Conclusion

I have believed that Denbury's shares were undervalued at various times in the past. Through much of 2022, one could have purchased Denbury's shares for around the value of its upstream business alone, or just a modest amount more than the value of its upstream business.

However, a price of $87 per share includes significant (close to $20 per share) value for Denbury's Carbon Solutions business. There is significant uncertainty about how much its Carbon Solutions business can actually be worth, so Denbury may still be able to attract higher offers if it puts itself up for sale. I am moving to a neutral outlook on Denbury at its current share price though, since there isn't the same margin of safety anymore.

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