Denbury Inc.
Q1 2021 Earnings Call Transcript

Published: 6 May 2021

[Operator:]

Good day, ladies and gentlemen, and welcome to Denbury's First Quarter 2021 Results Conference Call. My name is Shamali, and I will be your operator for today's call. . 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 our earnings release and presentation materials that we released this morning. They are available on our website at denbury.com and we may reference certain slides as we make our prepared remarks.

[Christian Kendall:]

Thanks, Brad, and welcome to the team. Good morning, everyone, and thank you for joining us on today's call. I hope you, your families and your colleagues are all well. I want to begin by saying thanks to all of our employees, contractors and vendors for their hard work to kick off 2021. In the midst of continuing to recover from a global pandemic, we also experienced a significant winter weather event in the first quarter in Texas. Despite all of the challenges, the team's sustained effort and focus has delivered strong results, including continued improvements in our record levels of safety performance, and I'm highly encouraged with our overall start to the year. Mark and David will summarize the first quarter results shortly, but I wanted to mention a few key accomplishments. First, Denbury's underlying base performance, enhanced by an improving commodity price environment, delivered strong financial and operating results, including significant free cash flow. Second, we are moving forward with the Cedar Creek Anticline EOR development project, with the installation of the Greencore CO2 Pipeline extension scheduled to begin in the coming weeks. We expect that this multiphase development will provide significant long-term free cash flow for the business. Third, we closed on the acquisition of our Wind River Basin EOR assets, a transaction that looked robust at fourth quarter oil prices when we announced the deal and has only improved over time. Our teams have done a great job of rapidly integrating these assets into Denbury's business.

[Mark Allen:]

Thanks, Chris, and good morning to everyone on the call today. Our first quarter results were very positive for most measures, with strong adjusted earnings, cash flow and free cash flow. In my comments today, I'll provide a summary of our results, particularly as it compares to the fourth quarter and our outcomes versus expectations. In addition, I'll provide some forward-looking guidance to assist you with your modeling.

[David Sheppard:]

Thank you, Mark, and good morning, everyone. Today, I will highlight our strong first quarter operating performance, comment on the progress of integrating our new Wind River Basin assets located in Wyoming and mention some of the things that we're excited about for the remainder of the year. Let me start off by congratulating our teams for continuing to keep their eye on safety as we build upon 3 consecutive years of Denbury record low recordable incident rates. Maintaining focus on safe operations is particularly important as our activity levels, both expense and capital, increased through the remainder of the year. During the spring and summer seasons, planned maintenance levels typically increase throughout our operations and 2021 will reflect that approach. Our development capital spend, which I will touch on shortly, will accelerate during the same time period. As Mark mentioned, we had a solid first quarter, meeting expectations across the board in regard to production, capital and operating cost. I mentioned in the last quarterly call, the first quarter impacts of Winter Storm Uri on our business. It certainly is worth noting again that our teams safely restored production in our fields that were shut in due to freezing temperatures and power outages. The first quarter production impact totaled 1,400 BOE per day on average, mainly in the Gulf Coast, all of which was back online by the end of the quarter. From a production standpoint, the first quarter should be our low point for the year. We anticipate 2Q production volumes to be higher than 1Q, driven by the lack of severe storm impacts as well as a full quarter's contribution from the recently acquired Beaver Creek and Big Sand Draw fields. As a reminder, these fields were producing approximately 2,600 BOE per day when we closed on the acquisition. Both fields fully utilized, captured industrial-sourced CO2 in their operations. Now that we have added these assets to our portfolio, our blue oil production as a percent of total volumes is up to 25%. The integration of these assets and field personnel into Denbury is going very well. Through an early facilities review, our team has identified multiple potential modifications for both enhanced asset performance and reduced cost in these legacy EOR fields. On the resource side, we have commenced a detailed subsurface review to identify new development potential. Our teams excel at this, and I'm looking forward to the new opportunities they will bring forward for these assets. On the development side of the business, the success of the Oyster Bayou A2 project executed in the second quarter of last year, opened the potential for additional opportunities in this great field. We recently commenced the first phase of tertiary development in a portion of the Oyster Bayou A1 reservoir, with conversion of 2 wells into producers and 2 other wells into CO2 injectors. We expect the contracted rig to arrive in the field within days to begin drilling operations. Also in 2Q, we began execution of a pilot project for a new CO2 flood in our Tinsley Field. Our Tinsley Field currently produces from the Woodruff reservoir and the CO2 pilot project will target the Perry reservoir, with one horizontal producer and 3 recompletions. Both the Oyster Bayou A1 development and the Tinsley-Perry CO2 pilot projects provide the potential for incremental production in the second half of the year, and they pave the way for future development projects in these fields. I'm excited to be moving forward with the CCA CO2 EOR development project and can clearly see a high level of enthusiasm across the company as activity levels ramp up. The CCA development is the very essence of CCUS, where captured industrial source CO2 will be transported, injected into an EOR target and stored indefinitely. This project highlights the value-creating interdependence of Denbury's EOR-focused business, coupled with the industrial captured CO2. Furthermore, these same core project and operations competencies developed over decades by Denbury directly apply to future CCS and CCUS. opportunities as well. During the first part of the year, our procurement teams were quite busy finalizing bids for equipment along with the CCA pipeline extension and facilities installation. There has certainly been an extensive level of interest in participating in the project with bids being very competitive, trending well within our capital budget plans. As a reminder, CCA makes up 55% to 60% of our total development capital budget this year. Most of that capital spend is occurring in the second half of the year with 2/3 of the CCA capital related to the pipeline, which will extend the Greencore Line to the East Lookout Butte development area. We anticipate to finalize and award critical contracts, including the pipeline installation in a matter of days with the facility construction contract to follow soon thereafter. First burn for the project was moved in late April associated with the infield injection system. The pipeline installation is planned to begin in the middle of June with pipeline construction and CO2 lines all estimated to be complete by the end of the year. The injection of Denbury-owned captured industrial source CO2 into CCA is expected to commence early next year, and we remain on track for anticipated first EOR production in the second half of 2023. There's a lot of excitement around the company as we move forward with the CCA EOR development. When I think about the project and the impact it can have, one, it's a large-scale opportunity, 400 million barrels or so of potential tertiary resource recovery; two, CCA EOR barrels are lower operating cost barrels than our average of our current production, so it will drive margin improvement for our business; three, it provides years, even decades of free cash flow to our business; and four, CCA is a carbon negative development. As a fully industrial-sourced CO2 EOR project, CCA will significantly grow our blue oil production, making substantial progress towards our goal to be carbon neutral, including Scope 1, 2 and 3 emissions by the end of the decade. It's thrilling to get started on it now. With that, I'll turn it back over to Brad.

[Brad Whitmarsh:]

Thanks, David. I hope you've all picked up on the unique investment opportunity at Denbury. We've had a great start to the year. We're actively engaged in CCUS today with a strong EOR business and we're positioned extremely well to lead the industry in the next phases of CCUS. With that, operator, we're ready for questions.

[Operator:]

. And our first question is from Leo Mariani with KeyBanc Capital Markets.

[Leo Mariani:]

I certainly sensed quite a bit of confidence from you folks that you guys are going to be able to announce various deals here in 2021. It sounds like you're working on a combination of basically transport and CO2 storage deals with industrial emitters and also procuring sites, I guess, proximate to the Green Pipeline to store the CO2. Just in general, I wanted to get a sense of what you think the competition is for you folks along the Gulf Coast, just given the fact that you've got, obviously, the pipeline infrastructure, which is a big competitive advantage. And additionally, you clearly talked about expanding the pipeline and kind of laying plans for that. I guess that just tells me, it seems like you got confidence that some deals can happen that are well in excess of the capacity here.

[Christian Kendall:]

You bet, Leo. This is Chris. I'll take that question, and you raised some really good points in there that I think are worth digging into. Certainly, when we think about the opportunity set, and that's why I talked a bit about just how big we see the prize here. I do think there will be competition. And I -- honestly, I think that the industry will need a lot of participants to really make it be everything that it can be. The good part is, I see what Denbury has, where we are, the assets, the expertise, we're in the middle of it, and I think that we'll be integral to many solutions as we kind of look at how this progresses. To your question on the confidence we have in the market, certainly, we see that. We are very active with negotiations with multiple different parties. I think you framed it right. There's a transportation piece, there's a storage piece. In many cases, it's a combination of that, and that's something that we think really gives us a place in our strategic focus where we can be a one-stop shop for emitting industries to be able to deliver CO2 to us and have to not think about it again. So we think that, that's important. And as you also mentioned, we think that getting additional sites, like I said, outside of EOR, non-EOR storage, we think that's important, and we see plenty of opportunities along the line with that. So all in, we see a big opportunity and that led to us wanting to look at expanding the line. I want to talk about the line a bit because I think it's important to think about what we have as a system that's not the same as a typical pipeline, where you have something going into the line on one end and coming out on the other. As an integrated system, I see it as something that we can optimize through segments throughout our footprint, to where we can be taking CO2 in certain places, delivering it out in other places that may not be the full length of the line and by doing that, we can optimize the use of the line. We can also optimize what we do with capital, where we spend capital to meet the need of the transportation, for example, that is needed for that particular segment. And we can match the timing of that in line with those needs. So all in, we're very excited about it, just the volume of what we see, the magnitude of the overall price, and that's certainly matched by the number of conversations that we're in.

[Leo Mariani:]

Okay. That's great color. And just as a follow-up to that, you guys still feel confident here that whatever deals are struck, essentially, Denbury is going to be effectively paid to basically take the CO2 away? And just given the existing infrastructure, you guys also think that most of the additional CapEx that's associated with getting CO2 from emitters is going to generally be borne by the emitters going forward? Just trying to get a high-level sense of some of the key economic parts here.

[Christian Kendall:]

Sure. And the way I see it, Leo, and it's -- these negotiations are ongoing, and this is something that -- these are -- I'd say, we're in a new industry, right? We're starting something that really was just fully incentivized with the 45Q rule that was published just a few months ago. But certainly, what we see is a path to where Denbury, in one form or another, receives a fee for the transportation and storage of CO2. And that's the focus that we have on how that works. I'm going to actually ask Mark to comment on the second part of your question, just about how that capital is born. But certainly, it's, in my view, it's part of the equation of how this all needs to work. I'd ask you to weigh in on that, Mark.

[Mark Allen:]

Sure, Chris. Yes, I think -- I mean it goes along with the various types of agreements, I think, that we will end up with. And I think there's a multitude of different variations and there could be situations where emitters may look for us to connect assets together, and there may be other situations where they may -- other people may want to do that separately. So I think these are all very specific situations, and we'll have to address them as they arise.

[Operator:]

And our next question is from Charles Meade with Johnson Rice.

[Charles Meade:]

Yes, I want to -- I'd very much like to ask you about how those negotiations are going, but of course, nobody likes to negotiate in public, so we'll just have to wait on that. But Chris, I want to go back to something else that is at least new to me in this conversation. And that's you're talking about adding saving offers or just basically non-EOR sites as a sync for CO2. And I'm curious, is that just a reflection of people wanting CCS without the U? So in other words, is that kind of a function of what you're hearing from potential people who would be delivering you CO2? Or is this is driven by some other consideration?

[Christian Kendall:]

Yes. That's a great question, Charles. And there's two real drivers there. The first I'd say is just looking at the sheer volume that we think will need to be stored. Certainly, there's tremendous capacity in our EOR fields. And as I've mentioned before, we even have capacity right here today to offset our use of natural CO2 and take on new industrial source CO2 and inject that into our EOR fields. And we can do that to the tune of upwards of maybe 6 million or 8 million tons a year, so not a small number. But then when we get beyond that, of course, we see the business as something that could be much greater than that. The volumes that we need, I believe, will be greater than what we see in EOR. And so what we've been working and we've been working this over the course of the past year or so, is identifying those locations, looking at their proximity to our infrastructure and then working with the landowners to find an agreement that can use those types of structures to store CO2 in. And so that's another area that we're progressing as we go through time here as well. I would add that there are going to be, along the way, as you mentioned, some folks who are more interested in a non-EOR option, who, for whatever reason, wanted to be specific to just sequestration. And so there is an element to that. But for me, I just see the hundreds of millions of tons of storage that can be added and how that can help the business as being a primary driver. And then, secondarily, being able to provide that alternative solution to certain of the emitters.

[Charles Meade:]

Got it. Well, it's hard to imagine what would be a better place to store CO2 than a depleted oil and gas field, even if you don't return it to EOR. But then we're learning a lot of these things right now. Let me ask another question about the CCA pipeline. And I really appreciate all the detail you gave, not on -- not only on the shape of CapEx through the year, but also on the time line. So that really lays it out very clearly for us. But can you talk about how, if at all, your design criteria or intentions have changed in the last year? Because the CCA pipeline has been on the drawing board as a great project for a long time. But because of this whole carbon capture use of storage phenomena, the ground underneath it has shifted. So have you had to kind of change your design in response to that? And I guess as part of that is, I don't imagine that there's as much need or opportunity to expand up in the Rockies as there is on the Gulf Coast, but maybe that's wrong.

[Christian Kendall:]

Yes, Charles. So interesting question, and it's one that we asked ourselves actually a couple of years ago when we were looking at this design. And while certainly, I think you're right in that the nature of the emissions and capture opportunities in the Rocky Mountain region is different than what we see in that Gulf Coast hotspot, there is still surprising levels of potential for capture in the longer term there. And so it's something that we have kept our eye on as well. And in fact, just to put an emphasis on that, when we first scoped out CCA, this pipeline that we're running up from Bell Creek up to the CCA field, to truly service CCA, we needed a 12-inch pipeline to get the CO2 that we saw needed to CCA. But as we looked at these other opportunities along the lines of what you asked, we saw that there was good potential over time that we could add to that with CCUS or additional opportunities along the way there. And so we actually increased the size of that pipeline to 16-inch, which was a fairly nominal capital add, but a fairly significant capacity add that we think gives us just some more abilities up there as time goes on.

[Operator:]

And our next question is from Richard Tullis with Capital One Securities.

[Richard Tullis:]

Chris, in your team's discussions with the various CO2 emitters, how large of a role does the 45Q tax credit play in the decision-making or appear to play the decision-making as far as moving forward with potential carbon capture projects? And also just wanted to get your thoughts on what the current environment could support regarding transportation, storage fees per ton.

[Christian Kendall:]

You bet, Richard. And so I'd say, honestly, where I think 45Q plays into this, I would say it is the dominant driver in the space right now. And that's why since January, we've seen such a tailwind in movement towards CCUS. Now it's not the only driver. You have motivations of many of these emitters to capture their emissions or mitigate their emissions in some manner, either through their own internal commitments or pressure from the public. And so we're seeing an element of that as well. But I think that what 45Q does at its current levels allows the, I'd say, the lower tier of cost of capture types of industries to have a financial basis to make those investments as well. So I think it's very important. What I do think is that as we see time pass, there's really a need to meet the targets that are out there. There's a need for CCUS to be taken to a much higher level. And so I think that we'll see additional incentives along the lines of what you see with LCFS in California, that are putting a higher price on carbon and are making it that much more straightforward to make some of those investments. And I think over time, we'll see something that looks like that in some manner, in other places that will further that investment. But at least right now, I think that what you see from just the 45Q levels that are in the IRS code right now are justifying that kind of investment.

[Richard Tullis:]

That's helpful. And just as a follow-up, your last comment kind of leads to my next question. What is the potential for Denbury to eventually benefit from the low carbon fuel standard credit revenue streams? Not just the West Coast states and Canada, but it looks like several other states are considering LCFS programs themselves.

[Christian Kendall:]

You bet, Richard. And what I think -- and so certainly -- and you're right on that we're seeing talk of this in other places. And to me, again, it's just a representation that ultimately, the incentives to capture carbon will be greater than what we see with 45Q today. And that will roll into the value chain of this entire business. When I think about Denbury's place in that, certainly, we think that what we have is an asset base and an expertise that's unique in the industry and we want to do the most that we can with it. And so we are looking at a range of approaches to agreements that could start on one end of the spectrum that might just be transporting CO2 on a pipeline. The other end of the spectrum could be a broader participation in a business that is -- that has access to 45Q and LCFS and for Denbury to be able to participate in that. And what I'd say at this early stage, Denbury is open to a whole variety of alternatives here as long as they can drive value for our shareholders. And we think that there are many ways to get there.

[Operator:]

Our next question is from Brian Kuzma with Thomist Capital.

[Brian Kuzma:]

So just to clarify, do you think that you or any of the emitters that you're partnering with, they're going to be able to stack 45Q and some of these other credit regimes as well?

[Christian Kendall:]

You bet, Brian. I think that just when we think of the numerous folks that we're talking to, some are not, some are focused on 45Q specifically. But absolutely, certain of these emitters are looking at what is the entire value piece that they can create with that. And it includes 45Q, it includes LCFS or other premiums they might have on their product. So I do see that and it's dependent on who you're talking to and where they are in the space, but absolutely, yes.

[Brian Kuzma:]

I got it. That makes sense. And then as you're thinking about structuring all these deals and you've got all of these opportunities out there, I don't know, it would probably be helpful if you could talk about -- we don't know where all the legislation is going, everything seems to be moving higher, and I'm sure those negotiations are going well. Could you help us put like a lower bound in terms of what are deals that you're like not interested in? Because you know that like you definitely don't need to do deals like that, for example.

[Christian Kendall:]

Yes. You bet, Brian. And so I think you're right on when you talk about the momentum of where this is headed. And I think that there is just a great tailwind that will ultimately increase the levels of incentives for folks to capture CO2. And when we're thinking about the types of agreements that we're in right now, what I'd say is that we are very aware that the basis of 45Q or whatever that is, is likely to change over the life of the contract, certainly, and probably in the near term even. And we want those agreements to be reflective of that. And honestly, the counterparties would want that as well because they see the same things that we see. So we want to be flexible. We want to be able to get value that would come from increased incentives along those lines. And then to your question of what we would not do. It's early days in this business with what we're seeing here this year. And so it's hard for me to point to anything specific that Denbury would not do. I'll tell you what we are focused on is whatever form of agreement that can add value to Denbury's shareholders, and I think there are many forms that could get us there. I think that those agreements, they need to be aligned with our strategy, which is, I think, pretty clear. And I can just see many ways of doing some very good things for Denbury shareholders here.

[Operator:]

And our next question is from Eric Seeve with GoldenTree Asset Management.

[Eric Seeve:]

Good quarter and great to hear all the sell-side participation and I hope it continues to grow going forward. A few questions. Just want to clarify, it sounded like in the first quarter, there's a $15 million benefit to -- was that due -- flowing through the LOE line item, the $15 million utility benefit?

[Mark Allen:]

Yes, Eric, that flowed through the lease operating expense line item, that is correct.

[Eric Seeve:]

Okay. Great. And then a question on Slide 9, which is a really neat slide. Thank you for including it. You talked a little bit about in the comments about your early planning for efforts to expand the Green Line, but I'm wondering that through use of incremental compression and looping and incremental storage, would there similarly be possibilities in the future to expand the NEJD line if you have the demand for it?

[Christian Kendall:]

You bet, Eric. And that's why I mentioned the NEJD earlier. I mean we're very focused on the Green Line and looking at that slide, you get a sense of why and you just are going through some incredibly dense emissions areas. But when we think about the system, and I talk about the system quite a bit because to me, it all needs to work together, I see ways of using this infrastructure to move CO2 out of these high-density emissions areas. And so that's not just along the Green Line. But what I see is the potential to move it up the NEJD Line ultimately into storage sites that could be in Mississippi and open that whole landscape for additional storage additional capacity and just to give us the opportunity to make the business that much bigger.

[Eric Seeve:]

Well, that's great. And but specifically with the Green Line you talked about, well, it's 16 million tons now, and we're looking at ways that, that 16 million could become 30 million or even 50 million in terms of when we think about -- I appreciate that this isn't something to worry about for a long time, but in the future, could the NEJD Line, could you also think about that 11 million expanding similarly?

[Christian Kendall:]

You bet. And the way I think about it, and it's just the nature of these high-pressure CO2 lines is that the first steps of expansion can be just adding compression stations at the right -- or the pumping stations rather at the right locations to keep the CO2 in a liquid phase as it's moving through the pipeline. And so those are very specific, and you can locate them where you need to, to increase capacity in the segments that this new CO2 is moving through. And then, of course, with the pipeline right away, just as we have with the Green Line able to work within that right away and add loop segments, again, where they're needed and when they need it.

[Eric Seeve:]

Okay. Great. And then my last question is just with respect to Blue Oil, it's such a compelling concept. And it certainly seems like something in the future that ought to be able to command a significant premium versus regular oil or to be able to capture some part of some sort of low carbon credit. Are there any specific initiatives or things out there that could sort of make that a reality in the near term? Or is this something that is further down the line?

[Christian Kendall:]

Eric, I think it's a longer-term thing here. It's something that, like you said, it just makes perfect sense to me that if a consumer has the ability to make a choice between oil that's produced in this matter -- in this manner with that very low carbon intensity compared to the alternative, we believe that certain consumers will prefer that oil and would pay some reasonable premium to get there. To us, it's a bit more of a process because it's a new concept. And so it's something that we're going to continue to work on. But I think it is a bit longer term. But logic tells me that something along these lines should work over time here.

[Eric Seeve:]

Okay. And have you guys spent time thinking about ways to tie in the blue oil concept to maybe if you can get the blue oil to states with LCFS credits to -- is that a way to sort of capture some of the pie?

[Christian Kendall:]

Yes. That's one of the conversations that we're in and there's some details to work through. But yes, just as we've looked through where are the possible paths for this to be a success for us. Some of those paths lead you to LCFS and still need to be many discussions there. But yes, that's one of the areas that we're thinking about.

[Eric Seeve:]

Okay. But it sounds like you wouldn't -- in terms of expectations of success there, it sounds like you think that's probably a little further down the road?

[Christian Kendall:]

That's right, Eric.

[Operator:]

And our next question is from Richard Tullis with Capital One Securities.

[Richard Tullis:]

Just one more question, Chris. What are the expected costs related to some of the pipeline expansion projects mentioned earlier? And is Denbury still thinking maybe a late 2023, early 2024 sort of time frame to begin potentially realizing CCUS revenue?

[Christian Kendall:]

You bet. So when I think about the cost of pipeline expansion, and it's one of the really nice benefits that we have with this system on the Gulf Coast is that an expansion is not a big onetime huge ticket capital item, but rather, it can be very explicitly tied to new CO2 contracts that need to move CO2 from point A to point B and ensuring that we have that capacity within those -- in between those points. And that can be some very discrete and relatively low capital levels of pumping stations or pipeline loops, for example. And so we see those being discrete smaller chunks and tied to specific needs that we have over time. And I think that, that will be nice because the projects themselves really to get to your second question, the capture projects themselves we see taking time, typically 2 years or longer. And so that does put you into that '23 and '24 time frame that you mentioned. But it also allows us that flexibility as we look at the system to match our capital investments along with the pace of that CO2 coming available.

[Operator:]

And we have reached the end of the question-and-answer session. I'll now turn the call over to Brad Whitmarsh for closing remarks.

[Brad Whitmarsh:]

Yes. Thanks again. Appreciate everyone joining us today. I want to say a Happy Mother's Day, certainly to all the moms who are listening in and all the mothers at Denbury, obviously. Susan and I are here and available to have follow-up questions. If you get a chance and want to catch up with us, we're looking forward to it. Hope everyone has a great weekend.

[Operator:]

And this concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.