Friday, September 21, 2012

DNR's Bakken Gold Mine? Serendipity or Planned All Along?


This article is one of the best seen in the past two days on DNR. A must-read. Numerous data points, including:
Denbury's oil weighting shields it from the gas-price slump.  
In addition, 60% of its oil was sold at prices based wholly or partly on the Louisiana Light Sweet, or LLS, benchmark due to the proximity of many of its fields to the Gulf of Mexico Coast.  
This year, LLS has traded at an average premium of $16 a barrel to the more widely known West Texas Intermediate, or WTI, benchmark. This gap will likely narrow next year. But it still represents a competitive advantage, especially against many peers forced to sell their barrels from fields further inland at a discount to WTI.  
According to Sterne Agee & Leach, Denbury made the highest operating margin per barrel of oil equivalent in its peer group in the second quarter.
Did you all catch that? LLS has traded at an average premium of $16 a barrel to WTI. (Note: it may cost $12/bbl to ship Bakken oil to the Gulf coast, but that's still a $4 premium for Bakken light sweet.)

One of the things I've enjoyed about the Bakken is watching the business plans, the strategies of the various Bakken-centric operators evolve.

MDW was one of earliest blogs to talk about the various business plans/strategies; how various Bakken operators separated themselves from the pack:
  • NOG: non-operated rigs; picks and chooses among the best partners; nimble
  • WLL: northern ops; southern ops
  • CLR: everywhere in the Bakken; participated in one out of six wells drilled in the Bakken (operated and non-operated); may know the Williston Basin best
  • BEXP: maximize fast payback; push the envelope on fracking; change the way IPs were reported (despite the grief they got, others followed suit)
  • KOG: maximize the sweet spots in the Bakken; don't buy acreage just to buy acreage
And then you have DNR. I seldom talked about DNR at the blog. DNR never seemed to fit in with the Bakken. I never was excited about DNR as it pertained to the Bakken. It was known for EOR, and EOR in the Bakken is a long way off; further, EOR may not work as well in unconventional shale as in old fields.

And, so this linked WSJ article is just so much music to my ears. I love it. Liam Denning noted the same thing: the Bakken and DNR just don't go together. The question is how much of this was planned, how much was serendipity. (Think EnerVest.)

My hunch: serendipity morphed into opportunity --> change in strategic plan by DNR. Somewhere in the past two years DNR realized it was sitting on a gold mine, but a gold mine not as big as ones in Wyoming and Texas. So, somewhere in the past two years, they made a strategic decision to show what they had in the Bakken and position themselves for a deal to trade the Bakken for older fields farther south, where DNR is establishing a pretty big moat.

[Note: CO2 EOR is not easy. Mixing water and CO2 and you get carbonic acid -- huge challenges with corrosion, and it appears DNR has broken the code.]

Folks like RBN Energy and Liam Denning will be much more articulate than I am, but I think you get the picture.

Go to the linked article (WSJ) -- it's agreat piece of writing. By the way, it's part of the WSJ "Heard on The Street." When I first subscribed to the WSJ (1983, Grand Forks AFB, Spruce Street -- I forget the house number; 107, I believe), the "Heard on the Street" format was different, placed differently in the paper. I think it was on the front page of section C. Regardless, it was my favorite column. On the back page of section C today, the column loses something.

For investors, the best data point in the linked WSJ article? This:
  • If you are betting on a gas rebound in 2013, Denbury isn't for you. 
Readers closely following the oil and gas industry, I'm sure, have noted an increasing number of stories suggesting the price of natural gas will rise nicely in 2013. I have my doubts; the price may rise, but it won't be significant.

2 comments:

  1. Denbury management & shareholders have to feel VERY GOOD about this deal. In 2009 Denbury agreed to buy Encore. That was a company whose business was identical to Denbury's. That is, buying old oil fields then stimulating them via Enhanced Oil Recovery (EOR) methods.

    Denbury paid $4.6 billion for Encore, with Encore's EOR fields as the objective. This extended Denbury into the west and Rocky Mt states. Encore's Bakken acreage was just gravy on the side. Even after writing off some of that acreage (Ward & Burke counties), the remaining 200,000 acres has now generated $1.6 billion, plus the value of two small fields in TX & WY near their existing operations.

    So Denbury recouped 35% & 45% of their Encore acquisition cost by selling the "gravy on the side". Denbury essentially retained all Encore EOR fields which was their original objective. With this sale, Denbury can focus once more on their core EOR business, rather than trying to drill undeveloped acreage. All in all, I'd say your phrase "Gold Mine" is an apt way to describe how it worked out for Denbury.

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    Replies
    1. Thank you for taking time to write. Great comment.

      I had forgotten to mention/factor in Encore. That's right: I did not think of that -- Encore's Bakken was just gravy (or frosting on the cake). I completely missed that, but that fits the timeline (or how this all played out, very, very well).

      On a separate note, it appears, and I could be way wrong, the share price of DNR is still well below its potential. It's just a gut feeling; no serious analysis. Again, this is not an investment site, but it sure seems that DNR share price lags its potential. (I have readers who invest in DNR but I do not.)

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