DNR's Current Corporate Presentation

Disclaimer: this is for my use only to help me understand this company. Feel free to read it but do so at your own risk; it is better if you go to the source document (linked below). I have a tendency to misread things and misunderstand things. I go through this exercise purely for my own benefit to try to get a better understanding of the oil and gas industry and to put the Bakken into perspective. 

Don sent me this link earlier: DNR's current corporate presentation (linked below).

Disclaimer: this is not an investment site. Do not make any investment decisions based on what you read her or what you think you may have read here.

Take a look at the presentation. I'm curious if readers, from an investment point of view, see the same thing that jumped out at me.


Here's the link to the pdf: http://www.denbury.com/files/2014-06%20UPLOADS/June%20Corporate%20Presentation%20V2_v001_u5q7m7.pdf

Some general observations and comments before I get to the point I eventually hope to make.

Denbury has an interesting niche in the oil and gas industry. I associate the name, right or wrong, predominantly with CO2 enhanced oil recovery, also known as tertiary recovery. I consider Denbury to be in a somewhat unique niche because I honestly cannot think of any "direct competitor" with Denbury. Fortunately, YahooFinance provides some (?) help. If the list is accurate, the list is short and unremarkable: Newfield; privately held Occidental Permian; Swift; and, .... that's it.

In a second database, YahooFinance lists a number of energy companies ranked by sales, but the list seems somewhat irrelevant.

So, now back to the presentation. 

I have looked at DNR presentations for the past couple of years. Maybe this was here all the time and I missed it. Maybe not; I don't know.

For investors, look at slide 4, the right side: income. "Estimated dividend yield of 1.5% for 2014 (this year) and 3.3% for 2015 (next year)." And the small print provides the details. The "mid-point" of guidance for the dividend is 55 cents. That suggests a $16.78 share price (which is stated in the small print). The company paid its first dividend in its history in February, 2014, (6.3 cents/share), and guidance suggests this will remain the quarterly dividend through 2014 (annual: 25 cents). That six cents/share per quarter represents a payout ratio of .... drum roll .... 6%. On slide 18, the company says that the company anticipates "sustained [dividend] growth thereafter]" following the huge dividend increase in 2015.

Oil companies are extremely capital intensive. When I see an oil company initiate a dividend it catches my eye, not from an investor's point of view, but simply as another data point as I try to understand the Bakken.

One could write quite a bit what it means when a company in a capital-intensive industry starts paying a dividend for the first time in its history, and what it means to double that dividend the following year. But I won't (write what I think it means.) It just seems fairly obvious.

I generally don't follow "payout ratios" (dividends) and operating cash flow / enterprise value, so I thought it would be interesting to compare a very small operator, some small to medium side operators and the three large operators.

The numbers below: operating cash flow/enterprise value; payout ratio

• XOM: 10%; 34%
• CVX: 15%; 39%
• COP: 16%; 37%

• EOG: 13%; 9%

• KOG: 10%; N/A
• OAS: 10%; N/A

• TPLM: 7%/ N/A

And then compare those numbers with DNR's current numbers:

• DNR: 14%; 6%

Again, this is not an investment site. Don't make any investment decisions based on anything you read here. In addition, I often make simple mathematical errors, and data from sources may be old or inaccurate.

Now, back to the presentation.

Slide 6: how does tertiary recovery compare to primary and secondary (waterfloods) recovery.
Of the original oil in place,

• primary recovery typically recovers 20% (compare with what they say about tight oil, like the Bakken)
• secondary recovery: 18%
• tertiary recovery: 17%

For round numbers, each of the "components" recover about 20% of the OOIP. That speaks volumes about the potential of the Bakken.

Slide 7: EOR has targets in the Gulf Coast region; Wyoming; and, extreme southwest North Dakota extending into east-central/southeast Montana.

Slide 9:

• the DNR target in North Dakota/Montana is the Cedar Creek anticline area, with an estimated slightly less than 300 million bbls through tertiary recovery 
• all other DNR prospects in the Rocky Mountain region pale by comparison to the amount of recoverable oil in the Cedar Creek anticline
• but they won't have their pipeline in place until 2021

Slide 20: DNR compares its 3.3% dividend with dividend of other oil companies (numbers rounded):

• OXY: 3%
• MRO: 2%
• MUR: 2%
• S&P 500: 2%
• CHK: 1%

Slide 22:

• the company will spend about $1 billion on CAPEX in 2014
• the company will pay about $90 million in dividends in 2014

Slide 27 has too much detail to explain, but it provides the company's peak production rate in its various plays and the estimated time lines.

It appears that much of the tertiary production is yet to come; the peak years for much of this new production will be from 2020 to 2030, with one exception: Denbury does not expect to see first tertiary production in Montana/North Dakota (Cedar Creek anticline) until after 2020. Of all its prospects, the Cedar Creek anticline will also have a significantly longer lifetime of producing oil than any of the other DNR plays. It's a hard slide to understand at first, but if you spend some time with it, it suggests just how long the oil industry is going to be active in North Dakota/Montana.

There are some additional points I would like to make but they would be a bit beyond the scope of the original purpose for going through this exercise. For example, I purposely did not discuss the company's share repurchase program.

But there are many, many story lines that come out of this presentation that apply across the market in general and not just DNR or the oil and gas industry. They are "good news stories" for investors.