This article was originally published by TheStreet on November 18, 2014.
By Sarfaraz A. Khan
NEW YORK (TheStreet) -- Denbury Resources (DNR) is the latest oil producer to cut its spending plans for next year in the face of deteriorating crude oil prices, and this could bring an end to the company's production and earnings growth.
On Friday, the Plano, Texas-based company, which generates a majority of oil and gas from theGulf Coast region of Mississippi, Texas, Louisiana and Alabama, said it will cut its capital spending next year by 50% to $550 million. Further, Denbury said its production will largely be flat in 2015 as compared to 2014, at around 74,500 barrels of oil equivalents a day.
Denbury is not the first oil producer to slash capital spending in response to the more than 20% slide in prices of benchmark West Texas Intermediate and Brent crude oil. ConocoPhillips (COP) plans to reduce annual spending to less than $16 billion in 2015 from an expected $16.7 billion in 2014. Elsewhere, Continental Resources (CLR) will avoid adding new rigs, and on Monday, Halcon Resources (HK) said it would almost halve the number of rigs it planned to operate in 2015.
No other oil producer has made a bigger cut in percentage terms than Denbury, however. In a press release, Denbury's CEO Phil Rykhoek said the reduction will allow the company to maintain existing levels of production and strengthen its liquidity. A Denbury representative was not available to comment before this article was published.
That said, the lack of any meaningful increase in production next year, coupled with declining crude prices, can hit Denbury's profits. It also doesn't help that Denbury is a high-cost producer, wrote Sterne Agee's analyst Tim Rezvan. Unlike most of the other shale oil producers that grow production by digging new wells, Denbury buys and then exploits older wells that are more expensive to develop.
In a Nov. 17 report, Rezvan predicted gradual drop in Denbury's earnings from $1.11 a share last year to $1.04 a share this year, $1.01 a share in 2015 and finally 97 cents a share in 2016. And that's assuming WTI crude prices of $90 a barrel over the next two years, significantly higher than current levels of around $75 a barrel.
On a slightly positive note, Denbury has managed to increase its dividends by 60% to 40 cents a share for 2015. With the stock closing at $10 a share on Monday, depicting a decline of 39% for the year-to-date, a yield of 4% about twice the industry's average of nearly 2%, as per Nov. 14 report by Raymond James analyst Andrew Coleman.
That said, above-average yield from a high-cost oil producer with shrinking earnings might not be enough to lure investors. Rezvan has said that there are several other oil producers, such asBP (BP) , Royal Dutch Shell (RDS.A) , ConocoPhillips and Chevron (CVX) that not only yield more than 2.5%, but also are bigger, with superior balance sheet and have set out a clear strategy for production and dividend growth. As such, Denbury's shares won't be compelling fordividend hunters unless the "yield materially improves," Rezvan wrote.
It is worth mentioning here that last year, the company promised to double its dividends to between 50 cents and 60 cents a share.
Further, Rezvan has said it is also unlikely that the company will buy back additional shares as part of its current repurchase program in the near term since its financial health is not ideal. The company will likely preserve cash flow to meet the existing dividends and reduce debt, Rezvan predicted.
Denbury's long term debt to 2015 earnings (EBITDA) ratio, which is commonly used to measure leverage, is 2.5 times greater than the industry's average, as per data compiled by Raymond James analyst.
Sterne Agee and UBS have a neutral while Raymond James has awarded market perform rating on Denbury stock.
At the time of publication, the author held no positions in any of the stocks mentioned.
This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
