DEN - Exxon Mobil Pays A Fair Price For Its $4.9 Billion Acquisition Of Denbury

2023-07-15 03:09:31 ET

Summary

• Exxon Mobil's $4.9 billion acquisition of Denbury appears to be at a fair price and in-line with my prior estimates of Denbury's value in a long-term low-$70s WTI oil environment.
• The deal involves only a slight premium to Denbury's share price, but is likely to be approved by Denbury's shareholders. A large amount of shares is owned by former noteholders.
• Denbury's shareholders will now receive dividends for their shares after the deal closes, and will have a more liquid market to sell their shares if they choose to.
• Denbury shares are also pricing in a closing date in the second-half of Q4 2023.
• Deal is only a minor one for Exxon Mobil given its large size as its share count will increase by approximately 1.1%.

Denbury Inc. (DEN) is being acquired by Exxon Mobil (XOM) in an all-stock deal that was valued at $4.9 billion based on Exxon Mobil's closing share price from July 12, 2023.

Denbury shareholders are getting 0.84 Exxon Mobil shares for each Denbury share they own. This valued Denbury at $89.45 per share at the end of July 12, reduced to $84.79 now based on Exxon Mobil's current $100.94 share price.

This appears to be a roughly fair price for Denbury based on my previous estimates of its value, although at only a modest 1.9% premium to Denbury's share price from July 12.

Although Denbury is now trading at a 2.3% discount to the value of 0.84 XOM shares, this discount will largely be eroded by Exxon Mobil's projected dividend payments before the deal closes. Thus I remain neutral on Denbury at its current share price.

Notes On The Deal

Exxon Mobil is acquiring Denbury for $4.9 billion or $89.45 per Denbury share. Exxon Mobil will issue approximately 46 million XOM shares to Denbury shareholders if the deal goes through. Denbury has around 55 million total shares including restricted stock units and 2.9 million in warrants that are well in-the-money.

The transaction is expected to close in Q4 2023 subject to regulatory approvals and the approval of Denbury's shareholders. I'd assume that Denbury's shareholders will approve the deal. After Denbury's 2020 restructuring, its former noteholders (primarily its second-lien noteholders) ended up with most of Denbury's post-restructuring equity. It appears that those noteholders still own a substantial amount of Denbury's equity.

Although the deal was only at a slight premium to Denbury's share price, the former noteholders benefit from being able to more easily monetize their shares (if they choose to) and collecting a dividend if they choose to hold onto their shares. Exxon Mobil's daily trading volumes average approximately 20x that of Denbury, while it also offers a $0.91 per share quarterly dividend.

Denbury currently has no plans to offer a dividend, as it has been investing in its CCA EOR project and carbon capture, utilization and storage (CCUS) business, limiting its near-term free cash flow generation.

Dividends And Deal Arbitrage

Denbury's stock is currently trading at $82.87 per share, a 2.3% discount compared to the value of the 0.84 XOM shares that each Denbury share is scheduled to receive in the deal.

However, Exxon Mobil currently offers a $0.91 per share quarterly dividend. The record date for Exxon Mobil's Q3 2023 dividend is expected to be in mid-August, while the record date for its Q4 2023 dividend is expected to be in mid-November.

If the deal closes in late November or December, then someone purchasing Denbury shares instead of Exxon Mobil shares would miss out on approximately $1.53 per share in dividends per Denbury share (based on $1.82 per share in XOM dividends multiplied by the 0.84 XOM to Denbury exchange rate). Factoring two quarterly dividend payments in would reduce the discount (of Denbury's current share price to the value of 0.84 share shares) to approximately 0.5%.

Deal Rationale

Exxon Mobil has long been rumored to be interested in acquiring Denbury for its CO ₂ infrastructure. This will help boost Exxon Mobil's Low Carbon Solutions business as Exxon Mobil notes that Denbury has the largest owned and operated CO ₂ pipeline network in the U.S. (at approximately 1,300 miles), along with 10 onshore sequestration sites.

As well, Denbury has around 47,000 BOEPD (97% oil) in current production, which will increase as its CCA EOR project ramps up. That project is expected to add 7,500 to 12,500 barrels per day in production by the end of 2024. Around 30% of Denbury's current oil production is considered carbon-negative Blue Oil, that is generated from the injection of industrial-sourced CO _2. This percentage will increase with higher CCA EOR volumes.

I've previously valued Denbury's CCUS business (at this stage in time) at approximately $20 per Denbury share, while its upstream business was valued in the mid-$60s per share at long-term $70 WTI oil and the low-$70s per share at long-term $75 WTI oil. Exxon Mobil's $89.45 per share offer appears reasonable for a long-term low-$70s WTI oil environment.

Due to Exxon Mobil's size, the deal is a relatively minor one for it, as it increases its share count by approximately 1.1%. Even if Exxon Mobil underpaid or overpaid (relative to Denbury's intrinsic value) by 10%, that should theoretically only affect Exxon Mobil's share value by 0.1%.

Conclusion

Denbury is being acquired by Exxon Mobil for $4.9 billion. This deal was only at a slight premium to Denbury's share price prior to the deal announcement, but I believe it is likely to be approved by shareholders. The deal price is also largely in-line with my previous estimates of Denbury's value.

Denbury's current share price is trading at close (around a 0.5% discount) to the value of 0.84 Exxon Mobil shares plus two quarters of dividends (assuming the deal closes in the second half of Q4 2023). I am currently neutral on Denbury's shares with that limited discount to the deal price.

Exxon Mobil's Low Carbon Solutions business should benefit from this acquisition, although there should be minimal impact on Exxon Mobil's intrinsic value due to the small deal size compared to Exxon Mobil's overall size.

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