Management guided that its fiscal 2013 production should hit the top half of its forecast of between 68.7 and 71.7 million barrels of oil equivalent on better than expected output numbers, according to its most recent earnings conference call. In addition to strong operating data, Denbury Resources also worked hard at rewarding shareholders with capital return initiatives, buying back close to 36 million shares since October 2011. It still has about $229 million remaining from its share repurchase authorization as of the end of April.
Denbury Resources’ peers include Newfield Exploration Co. (NYSE:NFX) and Whiting Petroleum Corp (NYSE:WLL). Denbury Resources is valued at a premium to its peers with a forward P/E of 14. In comparison, Newfield Exploration Co. (NYSE:NFX) and Whiting Petroleum Corp (NYSE:WLL) are valued by the market at 9.8 and 11.8 times forward P/E.
Newfield Exploration Co. (NYSE:NFX) is an independent energy company that primarily operates in the Mid-Continent, the Rocky Mountains and onshore Texas domestically (and in Malaysia and China internationally). The key issue for Newfield Exploration Co. (NYSE:NFX) is its transition from an international natural gas focused company to a domestic oil play. It has been plagued by concerns over lackluster production growth in 2012 and the quality of resources with respect to new investments, but it responded strongly with 30% year-on-year growth in domestic production for the first quarter of fiscal 2013. Despite this, I prefer not to stay invested in a company that is still in transition mode. Management’s fiscal 2013 guidance for production growth of between -6.0% and +0.6% is reflective of my view that it will take some time to see the fruits of the transformation.
Whiting Petroleum Corp (NYSE:WLL) operates primarily in the Rocky Mountain, Permian Basin, Mid-Continent, Michigan and Gulf Coast regions of the U.S. Besides sharing a similar geographic focus, with Denbury Resources having close to half of its proved resources in the Rocky Mountains region, Whiting Petroleum Corp (NYSE:WLL) also operates one of the largest domestic enhanced oil recovery projects at its North Ward Estes field in Texas. While management guided healthy production growth of between 11.9% and 15.9% for fiscal 2013, I am worried about declining inventory levels at its mature Sanish field in the Williston Basin. Furthermore, it might incur significantly higher finding & development costs (compared with the Sanish field), in its efforts to maintain growth in proved reserves with new fields in other parts of the Williston Basin.
The issue with investing in good companies is that they are usually priced to perfection, given that everyone knows that they have a competitive advantage over their peers. I like Denbury Resources for its ownership of a strategic source of carbon dioxide, its proprietary pipeline distribution network and relatively low finding & development costs vis-à-vis peers. But I will have to give this stock a pass at current valuations and wait for a pullback in its share price.
Mark Lin has no position in any stocks mentioned. The Motley Fool owns shares of Denbury Resources. Mark is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
The article Is This Company’s Competitive Advantage Factored Into the Share Price? originally appeared on Fool.com is written by Mark Lin.
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