Shares of Denbury Resources [stock_market_widget type="inline" template="generic" color="default" assets="DNR" markup="(NYSE: {symbol} {currency_symbol}{price} ({change_pct}))" api="yf"] have retreated to the tune of almost 20% in 2019 thanks to several factors such as the recent weakness in oil prices, the company’s heavy debt load, and operational challenges.
Denbury had closed 2018 on a strong note as its cash flow was on the positive side. The good news is that it delivered on that front once again in the first quarter of 2019, but there were a few red flags that knocked the wind out of the company’s sales.
The Problem at Denbury
Denbury’s first-quarter 2019 results revealed that the company’s production stood flat year over year. The company delivered 59,218 barrels of oil equivalent per day during the quarter, which led to a weak revenue performance thanks to a decline in oil prices.
Denbury’s first-quarter 2019 average realized oil price stood at $56.50 per barrel. This was substantially lower than the year-ago period’s average realized oil price of $64.25 per barrel. As a result of the lower pricing, Denbury’s first-quarter 2019 revenue dipped 13.5% year over year. What’s more, the company’s adjusted net income also fell to $45 million as compared to $54 million a year ago.
However, Denbury did manage to generate adjusted operating cash flow of $119 million during the first quarter. That’s because the company is currently focused on keeping a handle on its spending because of the high level of debt that it has, which has kept it from investing in its assets to increase production.
More specifically, Denbury has a debt load of $2.82 billion. By comparison, the company’s cash position is extremely thin at just under $6 million. As a result, all the excess cash flow that Denbury generates goes towards paying off its debt and keeping its production at a steady level through investments in assets with low base decline rates.
Denbury doesn’t have the liberty of spending money on developing new assets that will boost its production. As a result, the company is completely reliant on a recovery in oil prices to drive financial growth.
This is Going to Be a Difficult Year
Denbury’s production levels will be nearly 4% lower in 2019 as compared to last year’s levels. The company forecasts production between 56,000 and 60,000 barrels of oil equivalent per day in 2019, and this will be achieved at a capital expense of $240 million to $260 million.
The 2019 capex level represents a 20%-25% drop over the 2018 outlay, which clearly tells us that Denbury is cutting corners because of its debt-laden balance sheet. However, the company believes that it can generate more than $150 million in free cash flow this year, which will go towards reducing its debt.
Because of Denbury’s focus on reducing debt, it is not surprising to see that analysts expect the company’s revenue to drop to the tune of 5% in 2019, while earnings will go down from $0.48 last year to $0.47 this year.
So, until and unless there is an improvement in oil prices, it makes sense to stay away from Denbury Resources as the stock doesn’t have much upside potential in the current scenario.
