Denbury Resources Inc. (DNR), Newfield Exploration Co. (NFX): Is This Company’s Competitive Advantage Factored Into the Share Price?

Page 1 of 2

It is every entrepreneur’s dream to convert things that people do not want anymore into hot selling products. I am not talking about a company in the recycling industry, but an oil and natural gas producer. Denbury Resources Inc. (NYSE:DNR) is the largest oil and natural gas producer in both Mississippi and Montana. It is focused on carbon dioxide-enhanced tertiary oil recovery, which produces oil from conventional fields that was previously unrecoverable via primary and secondary recovery methods.

Why other competitors are unable to do the same?

Denbury Resources Inc. (NYSE:DNR)

The key to Denbury Resources Inc. (NYSE:DNR)’ competitive advantage lies in having both a strategic supply source of carbon dioxide and a distribution network of more than a thousand miles of pipelines, allowing it to deliver carbon dioxide to its oil fields at significantly lower costs.

Denbury Resources Inc. (NYSE:DNR) has approximately 6.1 trillion cubic feet (TCF) of carbon dioxide proved reserves in Jackson Dome as of the end of 2012, which represented the largest and purest source of carbon dioxide east of the Mississippi River. Management estimates that it has sufficient carbon dioxide to support its growth in the Gulf Coast region for the next decade until 2022. In late 2012, it added about 1.3 TCF of carbon dioxide proved reserves in the Rocky Mountain region through an asset exchange with Exxon Mobil Corporation (NYSE:XOM), to allay any concerns over any shortage in carbon dioxide. In addition, Denbury Resources Inc. (NYSE:DNR)’ proprietary pipeline network also gives it an edge, given that regulatory approval is needed to build new pipelines. The Federal Energy Regulatory Commission (FERC) and the individual state agencies govern the interstate and intrastate pipelines respectively.

Lower finding & development costs relative to peers

While cost efficiency is important for all companies, it becomes even more critical for companies selling commodity products subject to wild price fluctuations. This is exactly the case for oil & natural gas producers like Denbury Resources Inc. (NYSE:DNR). According to its most recent investor presentation, Denbury Resources Inc. (NYSE:DNR) has the lowest three year average finding and development costs among its peers at about $18.42 per barrel of oil equivalent.

Finding costs are naturally low, as Denbury Resources is targeting mature oil fields with proven reserves, instead of trying its luck with new oil fields with uncertain potential like its peers. Development costs are also manageable, because Denbury Resources is buying from oil field owners who have already maximized the potential of their oil fields with their own recovery methods.

Page 1 of 2