Denbury Increases CCUS Capex To Approximately $150 Million In 2023

Denbury (NYSE:DEN) is increasing its focus on its carbon capture, utilization and storage (CCUS) business. It is planning on spending approximately $150 million on CCUS capex in 2023, up from $85 million in 2022. This compares to a $360 million capex budget for Denbury's E&P business.

The significant spending on the CCUS business means that Denbury may only generate a modest amount of free cash flow overall, estimated at a bit under $50 million in 2023 at current strip of $76 WTI oil. Denbury only had $29 million in outstanding debt at the end of 2022 though, so the limited near-term free cash flow isn't an issue.

Denbury is a better value now in the low-$80s per share than when I looked at it in December. Denbury will continue to invest in its CCUS business, so it is more of a long-term play with excellent cash flow generation capabilities later in the decade.

Carbon Solutions Update

Denbury is spending approximately $150 million on CCUS capex in 2023 plus another $17 million set aside for CCUS equity investments. This capex is likely to increase further in future years as it mentioned averaging $200 million to $250 million per year in CCUS capex between 2023 and 2030.

Denbury announced that it has now reached CO2 transportation and/or storage agreements covering more than 22 million metric tons per year. It also finalized an agreement for the right to develop a CO2 sequestration site in Wyoming under its Greencore CO2 pipeline. This site is projected to have the capacity to sequester 40 million metric tons of CO2.

Denbury is aiming to reach agreements covering around 30 million metric tons per year of CO2 emissions by the end of 2023.

Updated 2023 Outlook

Denbury expects to average between 46,000 to 49,000 BOEPD (97% oil) in average production during 2023. At guidance midpoint this would be a roughly 1.5% increase in production from 2022 levels, with the CCA EOR development starting to add production in 2H 2023.

Denbury's 2023 production is a bit lower than I previously modeled due to the CCA EOR development only adding a minor amount of production in 2023. Denbury currently estimates a full-year impact to production of 750 BOEPD from CCA EOR, while its exit 2023 rate should be near 2,000 BOEPD.

Denbury believes that production from the CCA EOR development should reach the 7,500 to 12,500 BOEPD Phase 1 peak by late 2024. The impact on overall 2024 production should thus be in the mid-to-high single digit thousands for BOEPD.

The current strip for 2023 is now around $76 WTI oil. At that price Denbury may be able to generate $1.328 billion in revenues net of hedges. Denbury's hedges have a slight amount of positive value at mid-$70s WTI oil.

Denbury expects its operating expenses to be a bit higher in 2023 at approximately $30 per BOE. This is due to the expiration of some legacy 45Q incentives, increased CO2 prices and higher operating expenses per BOE at its CCA EOR development before that starts ramping up to more significant volumes.

Denbury is investing $360 million in E&P capex, including $145 million for its CCA EOR development. It is also putting $150 million towards CCUS capex.

Denbury is now expected to generate $46 million in positive cash flow in 2023 at current strip. This relatively low amount of positive cash flow is largely due to Denbury's investments in its CCUS business, including $150 million capex and $17 million in equity investments.

Notes On Cash Flow

Denbury's E&P cash flow should improve over the next couple years as the production from the CCA EOR development ramps up. At mid-$70s WTI oil, the additional production should add around $100 million to Denbury's EBITDA in 2024 compared to 2023. In 2025, the additional production could add around $175 million to its EBITDA compared to 2023 levels.

This will help offset the increasing CCUS investments and should keep Denbury cash flow positive overall at $70s oil until the CCUS business can start generating significant revenues of its own. Denbury is aiming for the CCUS business to become self-funding by around 2026 to 2027.

Conclusion

Denbury may only be able to generate a modest amount of free cash flow in 2023 as it is planning on investing approximately $167 million into its CCUS business, which isn't generating revenue yet. As well, the CCA EOR development is only going to provide a small amount of production during 2023.

In 2024 and 2025, the CCA EOR development should provide increased production along with lower operating costs per BOE as it ramps up. This will help fund further CCUS investments and get Denbury to the point (in 2026 to 2027) where its CCUS business will become self-funding if things go according to plan.

I was neutral on Denbury stock before at a high-$80s share price, but in the low-$80s Denbury looks more reasonably priced. Denbury is more of a long-term play with its CCUS business expected to ramp up in the second half of this decade.

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