ECONOMIC AND FINANCIAL ANALYSIS

DENBURY CASE STUDY RESTITUTION

CO2- EOR SWOT

Strengths Weaknesses
- High EOR expertise
- Debt doubled in 2010
- Vertical integration (Jackson dome CO2)
- Gulf Coast location for original plays
- Renewed portfolio with New Rockies assets
where expertise can be leveraged
- High profitability (IRR), Strong growth

Opportunities Threats

- Low EOR competition / increasing returns
- CO2 prices & environmental regulations
changes
- Lack of CO2 supplies & pipeline
in the market
- CO2 prices & environmental
regulations changes
Bakken SWOT

Strengths
- High profitability (IRR)
Opportunities
- Attractive asset with High growth potential
- Volatile prices & Environmental regulations
Weaknesses
- Capital intensive resource (lower ROI)
- Insufficient budget to fully explore
Bakken
- No proven Shale management
track record
- Debt doubled in 2010
Threats
- High Shale competition /
decreasing returns
- Lack of Oil services & infrastructure
- Volatile prices & Environmental regulations
#1 Margin analysis

Sales :
- Strong revenues growth overall, despite drop in 2009 due to the impact of the financial
crisis. Step change upwards in 2010 following acquisition. Strong impact of the oil price per
barrel on revenues (see increase in 2008 and recovery from 2009 low of 49$/bbl to 95 $/ bbl
in 2011).

Profit ratios :
- Good profit margins as can be seen from the high level of EBITDA vs Revenues compared
to the sector’s average. 62% to 70% depending on the year vs. a range of 35% to 55% for
the sector average (US petroleum producers non integrated - over the same years).

Scissors effect :
- Overall adequate costs management. Able to cut costs in 2009 when revenues fell. Managed
a positive scissors effect from 2009 to 2012 with costs increasing slower than revenues
(though increasing higher than volume as can be seen from the cost of sales in $/bbl that
increases from 19$/bbl to 33 $/bbl).
FINANCIAL ANALYSIS
 FINANCIAL ANALYSIS

3,000

2,500

2,000

1,500 Total revenues

Cost of Sales
1,000

500

0
2005 2006 2007 2008 2009 2010 2011 2012
6
#2 Working capital and capex

Working Capital Oil & gas production receivables vs. payables :

- Increasing gap between receivables and payables ie more and more credit offered to
customers vs credit given by suppliers.

- This is due to the increasing delay offered to customers for payment, whilst suppliers have
not been offering longer payment terms. Days of credit offered to customers have increased
from a range of 40 to 61 days over 2005 – 2008 to a range of 68 to 78 over 2009 to 2011.
Days of credit given by suppliers have remained roughly in the same bands over the two
periods.
(Calculating more precisely the average days of receivables from 2005/2008 to 2009/2011
has increased from 52 to 74, whereas the average days of payables has only increased from
82 to 89).

- This results in an increase in financing needs for Denbury

FINANCIAL ANALYSIS

8
#2 Working capital and capex
Capex
- The Capex vs Depreciation ratio is most of the years significantly above 1 (apart from 2010),
as can be seen comparing (in absolute terms) the investing cycle line of the Cash flow
statement and the depreciation line of the income statement.
- This shows the company has been having a strong growth policy (and resulted in significant
funding needs)
#3 Financing Analysis
Financing : dynamic analysis
- The company does not generate enough cash to fund its investments for most of the years
(“operating cycle” cash below “investing cycle” cash requirements). As a result the company
has had to bring new financing in, from either shareholders or lenders as can be seen from
the positive “Financin”g cycle line.
- (Only exception is 2010).

Net impact on cash in bank:

(+op. cycle – Inv. cycle + Financing cycle)
#3 Financing Analysis

Financing : static analysis

- The company has funded its investments and working capital needs by debt (net debt line )
and shareholder funds (equity line). It has increased its debt faster than equity as can be
seen through the increasing Net Debt/equity ratio, up to 0.98 vs a sector average of 0.42 at
the time.
- By 2011 it has increased its debt level significantly vs. its EBITDA (used as a proxy for cash
generation). With a ratio of 3.11 (higher than the 2.5 threshold) it is considered to have a
high level of debt and will find it more and more difficult to get new debt if it continues as is.
#4 Profitability analysis

Profitability analysis

- Lower ROCE since the acquisition due to increased capital intensity of the business with the
“shale” acquisition (Bakken) as can be seen by looking at the revenues generated per $ of
capem. (Revenues/capem in 2005= 0.47, reducing to 0.24 in 2011)
Conclusion

Denbury is a profitable growing company which has effectively leveraged its strengths in the
CO-EOR niche. However it has not yet been able to self fund its growth and it has drawn on an
increasing proportion of debt vs. equity to fund its development limiting its possibility to borrow
further to continue to invest as it did before. This is constraining in particular its ability to
develop the capital intensive Shale assets it acquired (per the case study presentation we are
told the company’s budget for drilling in the Bakken is limited).

It could keep the Bakken assets until it has repaid some of its debt and can finance the
development of the assets. However the Company chose a more prudent strategy, from an
investor point of view, accepting the offer of Exxon for the Bakken, generating cash immediately
allowing it to make space for continued investment in its CO2-EOR activities where it has a
proven track record, whereas the company had no experience of Shale assets.

Note: the analysis in the preceding slides is simplified, in line with the limited time dedicated to the topic in the
course . It is intended to provide only a high level understanding of some of the key parameters a finance manager
has to think about at the overall company level when considering individual investment projects.