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Denbury Resources: The Misunderstood E&P?

We think the company's approach deserves deeper scrutiny by investors.

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Is  Denbury Resources (DNR) the most misunderstood oil producer on Wall Street? It sure seems that way, as the Street seems to have missed (or ignored) the real rationale behind September's sale of the company's Bakken acreage to ExxonMobil. The transaction gave Denbury access to two new carbon dioxide flood assets--which we think are immensely valuable--and also opened the door to acquire an additional CO2 source in the near future. We're excited by the exploration and production firm's broader opportunity set in the Rockies, since increased control over CO2 reserves and transportation in the region could lead to opportunities to take advantage of scale and increase returns. Aside from the recent deal with Exxon, we believe other misconceptions related to Denbury's assets merit discussion.

Misunderstanding 1: Selling the Bakken Was a Cash-Out
A casual observer could reasonably surmise that the sale of Denbury's Bakken assets to Exxon was driven by Exxon's desire to bolt on to its existing Bakken position, and that Denbury cashed out while the getting was good. (Within two years of the Encore Acquisition deal in which it acquired its Bakken acreage, Denbury had taken a nascent position and expanded it to 15 thousand barrels of oil equivalent per day of production, at a time when Bakken acreage continues to command attractive prices). We are more inclined to believe the opposite, that Denbury used its Bakken acreage as a bargaining chip to enhance its strategic position with new enhanced oil recovery opportunities and CO2 reserves. In addition to $1.6 billion in cash, Denbury will take control of the Webster and Hartzog Draw fields and gain access to (and potentially ownership of) CO2 reserves from Exxon's LaBarge field in Wyoming.

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Robert Bellinski, CFA does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.