Three Ways to Profit From US Oil Production: Denbury Resources Inc. (DNR), Continental Resources, Inc. (CLR)

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In two separate but related reports, Bloomberg News documented the continuing rise of North American oil production to the detriment of OPEC.  One report detailed how OPEC as an organization may not survive the next decade unless it finds new markets for its oil.  The report also revealed the significant price advantage American refiners have using West Texas Intermediate crude instead of Brent Sea crude.  In a video aired on Bloomberg Surveillance, reporter Scarlet Fu showed a graph of US and Canadian oil production surpassing that of Saudi Arabia.  Having watched Middle East oil heavily influence American foreign policy and economic health for so long, I can only say, “It’s about time.”

Denbury Resources Inc. (NYSE:DNR)Great, so America is shaking free of OPEC.  How can investors make a buck off of all this?  Below are three different oil producing companies with three different ways of producing profits.  All warrant a look.

Gassing for oil

Denbury Resources Inc. (NYSE:DNR) develops oil and gas plays along the Gulf coast and the Rocky Mountains. Denbury’s website proclaims, “Denbury brings old oil fields back to life.”  The ability to enhance oil recovery from mature oil fields represents Denbury’s niche in the oil production business.  Enhanced oil recovery revolves around injecting or flooding carbon dioxide, or CO2, into oil fields thought to be largely depleted.  This process may double the proven reserves in a given oilfield.  The company claims to have the largest reservoirs of CO2 in the eastern part of the country from which to inject oil fields.  They also claim to be the largest producer of oil and gas in Montana and Mississippi.

Denbury stock has traded in a sideways fashion for almost two years.  That may end in 2013.  Bloomberg considers Denbury to have a significant gap between its current price and analyst’s projected price.  And just how is Denbury going to increase its stock price?  Three ways.  First, Denbury has acquired property from Conoco-Phillips that should significantly add to its current portfolio of proven reserves.  Denbury already reported nicely improved production in Q4 2012 and this acquisition from Conoco-Phillips should contribute to 2013 numbers.  Second, Denbury is refinancing debt.  In a nutshell, Denbury will replace 9.75% debt with lower yielding notes.  No word from the company regarding how much this will save the company in financing costs.  Lastly, according to Standard and Poor’s, Denbury is roughly halfway through a planned stock repurchase program.  Denbury pays no dividend.

Hedging old oil fields

Another company actively acquiring mature oil fields is Linn Energy LLC (NASDAQ:LINE).  The company deliberately acquires known stable producing assets.  Production growth may not be stellar, but then, depletion isn’t a problem, either.  In 2012, Linn made over $2.5 billion worth of acquisitions and more are planned for 2013.  Even better, while growing its portfolio of productive assets, Linn generates savings through its gas collection pipelines and water gathering system in its Granite Wash and other fields in the Texas panhandle.  In addition to acquisitions, Linn grows its production organically.  They have drilled 25 wells in the Granite Wash, specifically the Hogshooter Wash and the results were so encouraging, the Hogshooter will be a key focus of production for 2013.  Linn will also partner with Anadarko to bring CO2 enhanced oil recovery to its Wyoming fields.  Time will tell if Linn does as well as Denbury in this activity.

The big key to Linn’s success is hedging its oil and gas production.  Linn CEO, Mark Ellis, has described hedging as “the core of our business model.”  Others have called it Linn’s “secret sauce” for its financial success.  Simply stated, by hedging its production, Linn protects itself from wide fluctuations in energy prices while allowing upside potential.  This helps insure revenue year over year.  This also doesn’t hurt Linn’s dividend, 7.5% for Linn, a little less for its common stock counterpart, LinnCo.

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