Sunday, June 1, 2014

New addition to my Beating Buffet portfolio

This week I added Denbury Resources (DNR:NYSE) to the Beating Buffet portfolio. Denbury is an oil company with interesting difference in their business model from the average oil company. The company buys or leases into existing mature already produced oil fields and then brings in advanced recovery techniques in order to recover more of the existing oil in place that was left behind after secondary recovery. It does this by pumping CO2 gas down into the oilfield reservoir and as the gas moves through the structure it "sweeps" some of the remaining oil to an existing wellbore. Pretty cool actually.

From the company's first quarter 2014 report:

"We paid our first-ever quarterly cash dividend in March, recently announced our second quarterly dividend and reiterated our plans to grow our dividend to an annualized rate of $0.50 per share to $0.60 per share in 2015. We continued our share repurchase program in the first quarter, spending approximately $200 million to acquire 12.4 million shares, and have now reacquired about 15% of our common shares outstanding at the time we initiated the program in October 2011, at an average price of $15.68 per share, which has meaningfully improved our per-share metrics."

Why Denbury is in the portfolio:

  • No exploration risk as the oil fields are already identified and quite a bit of existing information already exists on each field
  • Existing infrastructure lowers costs
  • Proved and repeatable process that can be used to add additional reserves and production
  • Initiated dividend recently and plans to raise payout to 3% effective yield
  • Buying back stock when price makes for good return on capital
I do not think there is very much interest in Denbury and it is ignored because it is not a sexy business. They are not out striking huge wells and opening up new shale plays. The company has a proved and repeatable business model of getting more oil out of existing and aged oilfields. It is a capital allocation business that works very well at these high oil prices. With the plans for higher dividends and additional share buybacks along with production growth I see Denbury as a stable lower risk way to allow for capital growth and take advantage of the world's insatiable thirst for oil.

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