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Denbury Inc. First Quarter 2022 Results

Share Print Bookmark    |    Thursday,May 05,2022

Denbury Inc. provided its first quarter 2022 financial and operating results.

1Q Highlights:

• First quarter 2022 cash flows provided by operating activities totaled $90 million. Adjusted cash flows from operations⁽¹⁾ of nearly $131 million represent a 62% increase from the first quarter of 2021.

• Generated $51 million in free cash flow⁽¹⁾ during the first quarter of 2022.

• Commenced carbon dioxide ("CO₂") injection at the Cedar Creek Anticline ("CCA") enhanced oil recovery ("EOR") project, with 55 wells currently injecting more than 115 million cubic feet per day of industrial-sourced CO₂.

• Signed a new term sheet for transportation and dedicated storage of approximately 2 million metric tons per year ("mmtpa") of CO₂ captured from a chemicals facility to be constructed in southeast Louisiana. The facility is anticipated to be built in close proximity to Denbury's CO₂ infrastructure and the arrangement covers a 12-year period.

• Amended the Company's senior secured bank credit facility, increasing the borrowing base and lender commitments to $750 million, extending the maturity to 2027, and relaxing various covenants.

• Authorized a $250 million share repurchase program.

Chris Kendall, the Company's President and CEO, commented, "Denbury made strong progress on our key 2022 objectives during the first quarter, with CO₂ injection ahead of plan at the Cedar Creek Anticline EOR project and continued advancements in support of our CCUS business. The CCA EOR development, which will produce carbon-negative blue oil through 100% utilization of industrial-sourced CO₂, provides the Company with a deep inventory of resource development opportunities and decades of significant cash flow."

"I am extremely excited about our successes in the Carbon Solutions business so far this year, and I believe we are on track to substantially exceed our goals for CO₂ offtake and storage agreements established at the beginning of the year. Denbury's proven track record in providing highly reliable transportation and secure underground injection of CO₂ emissions from our industrial partners, combined with our ideally positioned infrastructure, is unmatched in the industry and positions us well for continued success and growth in CCUS."

"I am also pleased that Denbury's Board of Directors has authorized a $250 million share repurchase program. At current oil price levels, we believe that our cash flow generation will be more than sufficient to meet our anticipated capital needs, providing the opportunity to return meaningful capital to shareholders in this manner."

Financial Results

Total revenues and other income in the first quarter of 2022 were $412 million, a 64% increase over first quarter 2021 levels, supported predominantly by higher oil price realizations. Denbury's first quarter 2022 average pre-hedge realized oil price was $93.17 per barrel ("Bbl"), which was $1.37 per Bbl below the daily average NYMEX WTI oil price for the period. The Company's average oil price differential in both the Rocky Mountain and Gulf Coast regions has remained relatively consistent over the last several quarters, despite the significant increase in NYMEX oil prices.

Denbury's oil and natural gas sales volumes averaged 46,925 barrels of oil equivalent per day ("BOE/d") during the first quarter of 2022, generally in line with expectations. Oil represented 97% of the Company's first quarter 2022 volumes, and approximately 25% of the Company's oil was attributable to the injection of industrial-sourced CO₂ in its EOR operations, resulting in carbon-negative or blue oil. As compared to the fourth quarter of 2021, sales volumes were lower as a result of natural production declines due to lower levels of capital spending in prior years and severe winter weather impacts. In addition, the conversion of wells from water injection to CO₂ injection as part of the CCA tertiary EOR project impacted first quarter 2022 volumes.

Lease operating expenses ("LOE") in the first quarter of 2022 totaled $118 million, or $27.90 per BOE, within the Company's annual guidance range. LOE per BOE increased slightly from the fourth quarter of 2021 as service costs and crude oil and natural gas prices have increased, which have raised power and fuel, CO₂, and workover costs. The increase in LOE from the first quarter 2021 was more significant as first quarter 2021 LOE included a $15 million benefit resulting from a favorable adjustment for reduced power usage during winter storm Uri.

Transportation and marketing expenses totaled $5 million, and General and administrative expenses were $19 million in the first quarter of 2022, both in line with expectations. Depletion, depreciation, and amortization was $35 million, or $8.37 per BOE for the quarter.

Commodity derivatives expense totaled $193 million in the first quarter of the year, driven by the significant increase in the crude oil price outlook from the end of 2021 to March 31, 2022. Cash payments on hedges that settled in the first quarter of 2022 totaled $93 million.

The Company's first quarter 2022 income tax benefit of $7 million is primarily related to the release of a valuation allowance on certain state tax benefits that the Company now expects to realize based on the outlook for higher commodity prices. As a result of the unique nature of the first quarter valuation allowance release, the Company has adjusted out of earnings the first quarter 2022 valuation allowance reversal in its net loss (GAAP) to adjusted net income (non-GAAP) reconciliation.

Investing Activities

First quarter 2022 oil & gas development capital expenditures totaled $58 million. Approximately 35% of the first quarter total was incurred on the CCA EOR project, including field work to convert water wells to CO₂ injection and pre-production tertiary injection costs. First tertiary production response at CCA is expected during the second half of 2023. Non-CCA oil & gas development capital during the first quarter included tertiary projects at the Beaver Creek and Soso fields, among others. During the first quarter, the Company also incurred $21 million in capital expenditures related to its CCUS business, primarily consisting of lease acquisition costs and other storage-related expenditures.

Financial Position & Liquidity

Denbury's total debt at the end of the first quarter 2022 was $35 million, consistent with year-end 2021. The Company had $529 million of financial liquidity (cash on hand and borrowing capacity under the Company's credit facility) at the end of the period. Denbury's leverage ratio is less than 0.1X.

On May 4, 2022, the Company amended its bank credit agreement, which among other things: (i) increased the borrowing base and lender commitments from $575 million to $750 million, (ii) extended the maturity date from January 30, 2024, to May 4, 2027, and (iii) relaxed certain covenants, such as permitting the Company to pay dividends on its common stock and make other unlimited restricted payments and investments so long as certain leverage and availability requirements are met. Financial liquidity, including the Company's increased credit facility capacity, would have been $704 million at the end of the first quarter 2022.

As separately announced today, Denbury's Board of Directors has authorized a share repurchase program under which the Company may repurchase up to $250 million of its outstanding shares of common stock (which represent more than 7% of Denbury's current market capitalization). The timing and amount of any share repurchases will be determined by Denbury's management at its discretion based on ongoing assessments of the capital needs of the business, the market price of Denbury's common stock and general market conditions.

Recent CCUS Highlights

Inclusive of the new term sheet announced today, Denbury has now executed various agreements or term sheets in 2022 for CO₂ transportation, storage and/or utilization covering a total of approximately 5 mmtpa. Cumulative CO₂ volumes under transportation, storage and utilization agreements now total approximately 7 mmtpa (2022 goal - cumulative 10 mmtpa). In addition, the Company has previously announced the acquisition of multiple potential CO₂ sequestration sites along the U.S. Gulf Coast in Texas, Louisiana, and Alabama. Cumulative potential CO₂ sequestration capacity is more than 1.4 billion metric tons (2022 goal - in excess of 1.2 billion metric tons). The Company has commenced the Class VI permitting process on all of its operated potential CO₂ sequestration sites.

Outlook

As a result of the increased outlook for commodity prices and recent inflationary pressures (in comparison to the Company's originally-provided guidance at $70 per barrel WTI), Denbury anticipates full-year 2022 oil & gas capital expenditures, lease operating expense, and G&A to be in the upper half to upper end of their respective annual ranges for the year. The Company's full-year 2022 production guidance range is unchanged.

For the second quarter, the Company anticipates sales volumes to be slightly lower than the first quarter of 2022 as a result of the timing of workover and development activities, with production volumes anticipated to grow through the second half of 2022. LOE per BOE is anticipated to increase in the second quarter primarily as a result of higher commodity prices and increased seasonal workover operations. Oil & gas development capital expenditures are anticipated to increase in the second quarter over the first quarter, driven by continued activity at CCA, including purchase of equipment for the EOR recycle facilities, as well as additional drilling and development activities across the Company's Rocky Mountain and Gulf Coast regions.

The Company has determined that it expects to fully utilize all of its federal and certain of its state tax benefits and therefore a valuation allowance against these tax benefits is no longer necessary. Approximately $6 million of the valuation allowance was reversed in the first quarter of 2022 and the remaining portion of the valuation allowance reversal will occur over the remaining quarters in 2022, resulting in an estimated effective tax rate for the second through fourth quarters of approximately 15% based on the Company's currently anticipated 2022 level of pre-tax income. Future increases or decreases in the Company's anticipated income level will likely increase or decrease the Company's effective tax rate for the year. In addition, with the anticipated higher levels of income, the Company now expects approximately 30% of its total taxes will be current, or cash taxes.