Following Bakken swap, Denbury appears committed to convey value with buybacks

Last week, Exxon Mobil Corp. and Denbury Resources signed an agreement that saw the companies swap assets. Exxon increases its production acreage in the Bakken Shale and Denbury increases its CO2 enhanced oil recovery efforts.

The deal was positively received by the market, and the framework is understood, noted Tim Rezvan, an analyst with Sterne Agee, but uncertainties remain.

“In exchange for selling its Williston Basin properties to ExxonMobil, Denbury is receiving $1.6 billion of cash (pretax) and two EOR properties. The company may also purchase a minority interest in ExxonMobil's CO2 reserves from the LaBarge Field in Wyoming. However, uncertainties remain. If Denbury purchases CO2 reserves, it will pay for them from the $1.6 billion in cash, reducing the cash in the door and the cash leakage to taxes. If Denbury can find other assets that qualify as a like-kind exchange, it would swap into those to further reduce its cash proceeds and tax leakage, although this option appears unlikely to materially impact the cash received,” he said in a note to investors Monday.

“Denbury has not yet allocated cash it is likely to receive at year-end. However, the company appears committed to re-initiate a share buyback program of at least $300 million (4.4% of shares outstanding), and may pay down a portion of the $520 million of borrowings on its credit facility. With net debt/book cap of 37% as of June 30, we believe Denbury is at the upper end of, but not above, its comfort zone, and we believe the buybacks convey a powerful message to investors about value,” Rezvan noted.

The Plano, TX-based company has $305 million outstanding on its $500 million buyback authorization, and with an enterprise value of $9.7 billion ( 92% of year-end 2011 PV-10 of $10.6 billion), Rezvan believes additional buybacks make sense.

“We believe share buybacks are still warranted on a pro forma PV-10 basis, with the Bakken sale impact (-$1.5 billion) more than offset by reserve additions at Hastings (+$1.05 billion), Oyster Bayou ($0.5 billion) and the new properties,” he continued.

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