Denbury Inc. (NYSE:DEN) Q1 2023 Earnings Call Transcript May 5, 2023

Operator: Good day, ladies and gentlemen, and welcome to Denbury’s First Quarter 2023 Results Webcast. My name is Layla, and I will be your operator for today’s call. [Operator Instructions]. I would now like to turn the conference call over to your host for today’s call, Brad Whitmarsh, Head of Investor Relations. Please proceed, sir.

Brad Whitmarsh: Good morning, everyone, and thank you for joining us today. I hope you’ve had a chance to review the earnings release and the supporting materials that were issued yesterday afternoon. These items are available on our website at denbury.com. I want to remind everyone that today’s call will include forward-looking statements that are based on our best and most reasonable information. There are numerous factors that could cause actual results to differ materially from what is discussed on today’s call. You can read our full disclosures on forward-looking statements and the risk factors associated with our business in the slides accompanying today’s presentation, our most recent SEC filing, and yesterday’s news release.

Also, please note that, during the course of today’s event, we may reference certain non-GAAP measures. Reconciliation and disclosure relative to these measures is provided in today’s earnings release as well. This morning, our prepared comments, which are estimated at approximately 10 minutes, will come from Chris Kendall, our President and CEO; Mark Allen, CFO; David Sheppard, COO; Nick Wood, SVP of Carbon Solutions; and Matt Dahan, SVP of Business Development and Technology are all here to participate in the Q&A. With that, I’ll turn the call over to Chris.

Christian Kendall: Thanks, Brad, and good morning to all of you are joining us today. I’ll make a few opening comments, and then we’ll open the call for your questions. Looking back, it’s now been 3 years since the enhanced 45Q CCUS tax credit was published in the Federal Register. Our vision at the time was that Denbury’s deep CO2 expertise and our extensive [indiscernible] our CCUS strategy. We’ve had a great start to the year. Denbury delivered strong first quarter operating and financial results across the board. Our safety performance continued near record levels, and production, pricing and all of our cost items were in line with our annual guidance. Operating cash flow before working capital changes totaled $140 million for the quarter, exceeding our development capital expenditures by $20 million.

We also spent nearly $9 million in our asset retirement program for our most mature fields and invested $7 million through equity investments in 2 carbon capture technologies, ION and Aqualung. We ended the first quarter with $672 million in liquidity and $68 million in debt, with a modest increase in debt from year-end primarily due to annual working capital outflows for bonus and ad valorum tax payments. Sales volumes in the first quarter averaged around 47,700 BOE per day, up more than 1,000 BOE per day sequentially, with the various ins and outs described in more detail in our earnings release. Bottom line, we are on track with our plan, and we see production relatively flat in the second quarter. On the capital front, $510 million remains our midpoint for the year, and we expect capital to be modestly higher in the second quarter with CCUS being the primary driver, including anticipated storage site acquisitions, such as the one we just announced and other predevelopment spend.

In early April, we took advantage of strong oil prices to round out our hedge portfolio in the second half of 2023 and to layer in additional hedges in 2024. Turning to the Cedar Creek Anticline. We are very pleased with what we’ve seen so far on the CCA EOR project. With our first recycle facility online at Cedar Hills South, we are monitoring production performance associated with this facility and now expect to see first EOR production this quarter from this game-changer asset. Our team is now commissioning the second CO2 recycle facility, and 2 more are scheduled to be brought online late in the third quarter. We still anticipate incremental EOR production to ramp to around 2,000 barrels per day by the end of this year and to peak in a range of 7,500 to 12,500 barrels per day in the latter part of 2024.

I’m extremely proud of the work our team is doing at CCA. As a reminder, CCA is the largest EOR project we’ve ever worked on, with 400 million barrels of potential recovery. It will drive 2024 and 2025 production growth for our company. And as it ramps, it will also improve our cash margins. In addition, the CO2 we’re injecting is 100% industrial source, so all of the new volumes are expanding the scope of our carbon-negative blue oil operations. CCA will be a significant contributor to our overall goal of being Scope 3 net 0 by the end of this decade. As the CCA project highlights, the EOR side of our business is fundamental to the execution of our CCUS vision. Denbury has the near-term ability to take upwards of 10 million tons of captured industrial CO2 per year into EOR.

Our EOR business provides strong cash flow that can be deployed in CCUS investments, and it supports the development of the technical and operating capabilities, as well as the pipeline infrastructure necessary for CCUS. The unique combination of these competencies, capabilities and assets sets Denbury apart in the industry. Our 2023 CCUS activities are highly focused on both expanding our dedicated CO2 storage network and continuing to build the scale and diversity of our CO2 transportation and storage agreement portfolio. During the first quarter, we drilled our first stratigraphic test well at the Orion site in Alabama in support of our Class VI process. We were pleased to see reservoir characteristics very consistent with our expectations.

We should receive detailed core analysis later this year, which will further confirm our understanding of the subsurface as we progress the storage site with the EPA. We expect to continue to drill stratigraphic test wells on our lease storage sites to support the Class VI process with at least 2 additional wells planned this year. Since quarter-end, we finalized an agreement for a 30,000-acre 115 million metric ton dedicated CO2 storage site in Matagorda County, Texas. Adding this site to our network provides additional flexibility and redundancy in removing CO2 from the high emissions Houston area. In addition, it facilitates access to multiple emission sources, e-fuels customer plant sites, and EOR development opportunities while serving as a stepping stone to additional opportunities further along the Texas Gulf Coast.

Last week, we submitted 6 well permit applications to the EPA for Class VI CO2 injection at our Leo site in Mississippi. LEO is directly underneath our NEJD pipeline, an example of the great advantages afforded by our over 900-mile Gulf Coast CO2 pipeline network. The Leo site, leased from Weyerhaeuser, provides tremendous competitive advantage and flexibility for our CO2 network, leveraging our infrastructure footprint in Mississippi. We expect to submit Class VI permits for additional sites at a cadence of about 1 site per quarter over the next several quarters. Nick and his team are in extensive discussions and negotiations to provide CCUS services for multiple customers with both Brownfield and Greenfield projects, and my confidence level in reaching our cumulative 30 million metric ton per year target by the end of the year is high.

As a reminder, these agreements can be for combined transportation and storage, transportation only, or even the complete chain of capture through storage. With the industry’s only dedicated CO2 pipeline network in the Gulf Coast, we remain ideally positioned to service the growing market for CCUS solutions. We believe that Denbury’s vast CO2 pipeline network, combined with multiple strategically located dedicated storage sites, and reinforced by over a dozen EOR CO2 injection sites, will provide customers the most efficient, the most diverse and the most reliable CO2 transportation and storage service in the Gulf Coast. As I mentioned at the outset, it’s a very exciting time here at Denbury. Our EOR business is generating strong cash flow, and we expect to see incremental production from our CCA EOR project this quarter.

At the same time, we’re making rapid progress on building the industry’s leading CO2 transportation and storage network. I can’t think of a company better positioned to deliver the energy we all need today while decarbonize in the future. Thanks again for joining us today, and we’ll now open the call for your questions.

Q&A Session

Operator: [Operator Instructions]. Our first question will come from Scott Gruber from Citi.

Operator: Our next question comes from Nate Pendleton from Stifel.

Operator: Next question comes from Tim Rezvan from KeyBanc.

Operator: [Operator Instructions]. And our next question will come from Sam Burwell from Jefferies.

Operator: Our next question comes from Charles Meade from Johnson Rice.

Operator: We can take a question from Brian Velie from Capital One.

Operator: And there are no further questions on the line at this time.

Brad Whitmarsh : This is Brad. Again, I just want to thank everyone for joining us today. Should you have any follow-up over the coming days, please don’t hesitate to reach out to Beth or myself, and we look forward to connecting with you all. Thanks again.