Denbury Resources (NYSE:DEN) appears to be trading at roughly fair value post-restructuring. It appears to be worth approximately $16.44 to $18.90 per share now that it has shed most of its debt. Denbury’s post-restructuring debt level is acceptable (at under 1.0x EBITDAX with low-$40s WTI oil) and should not be a problem as long as the company acts conservatively. Denbury’s estimated breakeven point is in the mid-$40s for WTI oil now that it has removed $9 per BOE in interest costs.
Denbury previously forecast that it would generate approximately $230 million EBITDAX in 2021, post-restructuring. This assumed slightly lower oil and gas prices than current strip.
Source: Denbury Resources – Disclosure Statement
At current strip prices instead, it appears that Denbury would generate approximately $245 million EBITDAX after hedges. I’ve previously valued Denbury at a 4.0x to a 4.5x EV/EBITDAX multiple, which would result in an enterprise value of $980 million to $1.103 billion.
The company estimated that it would have around $158 million in net debt at the end of 2020. This is a fair bit less than its post-restructuring debt at emergence, but it did expect to generate $68 million in positive cash flow (including $8 million from surface land sales) in Q4 2020 with sub-$40 WTI oil.
Source: Denbury Resources
Using the $158 million in net debt number leaves $822 million to $945 million for Denbury’s market cap using the 4.0x to 4.5x EV/EBITDAX multiple. With 50 million shares outstanding, this would be $16.44 to $18.90 per share.
Denbury’s Series B warrants have a strike price of $35.41 per share. Using a similar 4.0x to 4.5x EV/EBITDAX multiple would result in the warrants starting to be in the money at around mid-$50s WTI oil.
One thing to note is that Denbury is required to hedge 65% of its August 2020 to July 2021 PDP production and 35% of its August 2021 to July 2022 PDP production by the end of 2020.
Source: Denbury Resources
Denbury’s PDP oil production may average around 50,000 barrels per day for the first period and 45,000 barrels per day for the second period. It currently has hedges on approximately 35% of that production for the first period and around 9% for the second period, and thus may need to add an average of around 15,000 barrels per day in hedges for August 2020 to July 2021 and 11,700 barrels per day in hedges for August 2021 to July 2022.
If it can add further hedges in the mid-$40s (for WTI oil), that would be acceptable for Denbury given that its breakeven point appears to be around there.
Surface Land Sales
Surface land sales may add a slight amount of value to Denbury and help it to pay down its debt further. Denbury sold $34 million in surface acreage up to July 2020 and expects another $28 million in surface acreage sales in Q4 2020 through to the end of 2021. Beyond that, Denbury may have a modest amount of additional surface land value as it previously estimated that it could generate a total of $80 million to $100 million from surface acreage sales.
Denbury has emerged from restructuring quickly and now has a healthy balance sheet and a breakeven point in the mid-$40s for WTI oil. The current oil pricing situation is manageable for it, although $50s oil would be better for it, as that would allow it to both generate positive cash flow and maintain or moderately grow production.
Denbury is currently trading in its estimated fair valuation range and could be considered a good value if its shares drop a bit further. Denbury’s warrants are likely to remain well out of the money for now, but could become in the money with mid-$50s WTI oil.
Free Trial Offer
We are currently offering a free two-week trial to Distressed Value Investing. Join our community to receive exclusive research about various energy companies and other opportunities along with full access to my portfolio of historic research that now includes over 1,000 reports on over 100 companies.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.