Q1 2021 Denbury Inc Earnings Call
Good day, ladies and gentlemen, and welcome to Denver <unk> first quarter 2021 results Conference call. My name is Molly and I will be your operator for today's call. At this time all participants are in a listen only mode.
We will conduct a question and answer session to ask a question at that time. Please press star one now.
Now I'd like to turn the conference call over to your host for today's call Brad with Marsh head of Investor Relations. Please proceed sir.
Good morning, everyone and thank you for joining us today I hope you've had a chance to review our earnings release and presentation materials that we released this morning.
They're available on our website at Danbury Dot Com and we may reference certain slides as we make our prepared remarks.
This morning, we will hear from Chris Kendall, President and Chief Executive Officer.
Allen Executive Vice President and Chief Financial Officer, and David Sheppard Senior Vice President of operations.
Matt Day, Han senior Vice President of business development, and technology, and Nick Wood Senior Vice President and head of Denburg carbon solutions are joining us for the live Q&A session.
I want to remind everyone that today's call will include forward looking statements that are based on our best and most reasonable information.
There are numerous factors that could cause actual results to differ materially from what is discussed on today's call.
You can read our full disclosures on forward looking statements and the risk factors associated with our business in the slides accompanying today's earnings presentation. Our most recent SEC filings and today's news release.
Also please note that during the course of today's call, we will reference certain non-GAAP measures.
Reconciliation and disclosure relative to these measures are provided in today's news release and presentation as well.
With that I'll turn the call over to Chris.
Yeah.
Thanks, Brad and welcome to the team.
Good morning, everyone and thank you for joining us on today's call I Hope you your families and your colleagues are all well.
I want to begin by saying, thanks to all of our employees contractors and vendors for their hard work to kick off 2021.
In the midst of continuing to recover from a global pandemic. We also experienced a significant winter weather event in the first quarter in Texas.
Despite all of the challenges the team sustained effort and focus has delivered strong results, including continued improvements in our record levels of safety performance and I'm highly encouraged with our overall start to the year.
Mark and David will summarize the first quarter results shortly but I wanted to mention a few key accomplishments.
First Danbury is underlying base performance enhanced by an improving commodity price environment delivered strong financial and operating results, including significant free cash flow.
Second we are moving forward with the Cedar Creek Anticline EUR development project with the installation of the Greencore C. O two pipeline extension scheduled to begin in the coming weeks.
We expect that this multi phase development will provide significant long term free cash flow for the business.
Third we closed on the acquisition of our wind River Basin E O. Our assets a transaction that looks robust at fourth quarter oil prices, when we announced the deal and has only improved over time.
Our teams have done a great job of rapidly integrating these assets into Denver Aries business.
Yes.
Finally, we made a great addition to our board through the appointment of Cindy yielding Cindy is well known for her leadership of the working team of over 300 global experts from a range of industries government academia and Ngos that created the National Petroleum Council is important 2019 Cc U S report.
Okay.
In last quarters call I made the comment that I did not believe there was another company in the E&P industry is well positioned to the den Barry for continued relevance through the energy transition and my belief is only growing stronger.
I'm very encouraged to see that carbon capture use and storage is now being broadly embraced as a practical and impactful method for reducing atmospheric C O two emissions.
As an example, the IEA projects that Cc U S will be behind only wind and solar as a means of reducing C. O two emissions through 2040.
Accounting for about 11 billion tonnes of reduced emissions over that period.
Well the current global captures only 40 million tons per year.
I a sustainable development scenario.
<unk> that to meet the targets set forth in the Paris climate agreement by the end of this decade, we will need to increase global C. C. U S capacity by 20 times.
And by 140 times by 2050.
Putting the magnitude of that projection in perspective by 2050, the liquid volume of C. O two being captured on a daily basis is about the same as today's worldwide oil production.
That should provide you with a good sense of the size and scale of what this industry can become.
Many countries are taking aggressive measures to further incentivize C. C. U S projects in the U S. The recent finalization of the enhanced and expanded 45 Q tax credit has opened the door for significant progress in C. C U S.
It should be the first of many steps that will cement the position of the United States as a global C. C U S leader.
Okay.
In light of this huge market opportunity over a year ago, we formed the Denver, a carbon solutions team to identify and secure opportunities for Denver to build on the advantage of our unique assets and C. C U S experience.
The Denver any carbon solutions team includes business development Technical project management commercial and government relations experts.
Last month, we announced dedicated executive leadership for Danbury carbon solutions with Nic would promoted to senior Vice President leading this team and reporting directly to me.
Nick has been a high impact value, creating leader in our organization for a number of years. Most recently heading our Rocky Mountain business unit, which today utilizes 100% captured industrial sourced cotwo.
I am thrilled to have Nick lead. This team he brings great energy technical expertise and the leadership capabilities needed to make Danbury, the internet streets, leading carbon solutions provider.
And our strategy review session earlier this year with our board we identified five key strategic priorities for Denver, a carbon solutions to accelerate the expansion of our Ccs business.
First generate new cash flow streams through agreements with existing and new build industrial emitters for the transport and storage of captured C O two.
Second add significant permanent C O two storage capacity through development of a geographically diverse portfolio of subsurface storage sites, providing scale reliability and flexibility.
Third increase our proportion of carbon negative blue oil production by seeking to replace the use of naturally sourced C O two and the company's EUR operations with captured industrial sourced cotwo.
Fourth evaluate and prepare for a capital efficient expansion of up to two to three times the company's existing green pipeline capacity to meet expected rapid growth in demand.
And finally pursue strategic partnerships along the entire C. C U S value chain.
Okay.
I previously shared my belief that the scarce resource in the U S industry is on the downstream side of the business.
That being the ability to provide a high capacity highly reliable flexible C O two transportation and storage system with significant scale and expand ability.
Our Gulf Coast system provides exactly that Denver has the only significant C O two infrastructure in the Gulf coast today and through our E. Our operations. We are the only company of scale in the Gulf Coast that are actively engaged in C. C U S.
Slide nine in our presentation materials chosen emissions heat map across the U S.
You can see where our 925 mile Gulf Coast T O two pipeline system runs through the heart of the Gulf Coast Industrial corridor, which is an area with very high C. O two emissions in fact.
Nearly 10 per cent of the U S total of $2 6 billion tons per year and stationary emissions.
Originates within 30 miles of our Gulf Coast system.
The Green pipeline alone has the capacity to transport over 16 million metric tons per year of C. O two over a span of 320 miles with.
With about 75 per cent current open capacity.
Okay.
Today, we are in specific discussions with multiple parties for the transportation and storage of captured C. O two representing volumes well in excess of our current capacity on the system considering this.
This potential demand, we believe a significant expansion in capacity will be needed.
Our C O two pipeline team is studying an expansion of the green pipeline from 16 million tonnes to upwards of 30 to even 50 million tons per year.
We believe that that capacity is achievable and can be staged over time to align with demand through a combination of adding pump stations looping within our right away and optimizing the locations in quantity of storage sites.
Are any J D pipeline, which runs north from the east end of the Green pipeline, all the way to Jackson Dome and Mississippi provide.
Provides 11 million tons per year of incremental capacity beyond this potential amount.
We believe that access to long term non E O R. C O two storage such as in Saline aquifers is also needed and we are in discussions to secure agreements for non EUR storage in multiple locations representing the potential for several hundred million tonnes of storage along our Gulf coast.
Infrastructure footprint.
These sites would enhance the flexibility and scale of our storage solution.
Yeah.
We previously communicated that we hope to finalize arrangements this year for both storage and for transport of new captured emissions.
<unk> is moving forward and I expect that we will be able to announce initial agreements before year end.
I'd like to share how we see E O R and denburg future.
C O two E O R is a fundamental component of C. C. U S that today provides the only immediate means of storing significant volume to C O two.
Essentially all of the C. O two injected remains permanently underground the skills and assets developed for E O R or complementary to the entire C. C U S space.
Also where we use industrial sourced cotwo and Denver is EUR fields, we inject more C O two into the ground to recover oil than the production of that oil will every minute, even when including scope three emissions. This carbon negative oil or blue oil should become a much sought after commodity that we believe should eventually received.
Premium pricing as it helps the end user lowered their own carbon footprint today around 25 per cent of our total production is blue oil and we expect that proportion to increase over time on our path to completely offsetting our scope three emissions by the end of this decade.
Even as we seek to significantly expand our Cc U S business beyond E. R. I believe that EUR will continue to be an important piece of Denver as business for many years to come.
Wrapping up I've challenged the Denver, a carbon solutions team to be aggressive in building our business.
We have the right strategy, the right assets and the right people and now is the time to execute.
Mark I'll now turn it over to you for our financial update.
Thanks, Chris and good morning to everyone on the call today, our first quarter results were very positive for most measures with strong adjusted earnings cash flow and free cash flow in my comments today I'll provide a summary of our results, particularly as it compares to the fourth quarter and our outcomes versus expectation.
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In addition, I'll provide some forward looking guidance to assist you with your modeling.
And looking at performance for the quarter.
Our results were very consistent with expectations and focusing on key drivers.
Sales volumes realizations differentials costs and capital spend.
We did have some weather impacts during this quarter and I'll cover those items as we go.
After adjusting for the 77 million mark to market charge for our commodity derivatives and the 14 million full cost ceiling test write down adjusted net income was $22 million or 44 cents per diluted share as compared to our GAAP net loss of $70 million.
The ceiling test write down resulted primarily from the difference in oil price used to record the value of the assets acquired in the first quarter, which was determined using in early March strip price versus the much lower 12 month look back price used in the full cost ceiling test.
We generated free cash flow of 59 million in the first quarter as our adjusted cash flow from operations before working capital changes was $81 million in comparison to only $20 million of development capital during the quarter.
Yeah.
Diving into our first quarter operating results say.
Sales volumes average 47357 barrels of oil equivalent or BOE per day, which included a negative impact of approximately 1400 Boe per day due to winter storms and a pick up 870 per Boe per day from the wind River basin assets acquired in early March.
Excluding these items our production declined slightly from last quarter.
Now regarding price realizations W. T I prices strengthened about 35% in the first quarter from fourth quarter 2020, driving our pre hedged realized oil price to more than $56 per barrel.
Our oil differential for the quarter also strengthen to a dollar and 54 cent deduct from W. T I S.
As both our Gulf Coast, and Rockies price has improved relative to W. P. I.
Looking forward, we continue to expect that our overall oil price differential will be in the minus $1 50 to $2 range for the remainder of 2021.
Lease operating expenses totaled $82 million in the quarter.
Which was lower than anticipated as a result of a favorable adjustment to power costs related to winter storm Yuri.
Under certain of our power agreements. The company has provided compensation for reduced power usage, which resulted in a benefit to the company of approximately $15 million.
When we aggregate the impacts of Purion production revenues and costs, we estimate the overall impact to be a positive $6 million to earnings in the first quarter.
G&A bears mentioning as it had a unique nonrecurring item.
On last quarter's call I mentioned that we expected first quarter G&A to be between $30 million to $35 million and of that amount, we expected noncash stock compensation to be around $17 million due to the full expensing of certain equity performance Awards.
The amount of nonrecurring expense associated with those equity awards is approximately $15 million.
So excluding this item first quarter G&A was right on plan and should trend down into a range of $13 million to $17 million per quarter going forward with stock compensation, representing $2 million to $3 million of that amount.
When you net our pre hedge revenues and costs, our cash operating margin per Boe increased over $26 for the first quarter of 2021.
Moving on to the balance sheet at the end of the quarter total debt was $126 million down 12 million from year end 2020.
If you recall, our any J D pipeline that will be paid off in four quarterly installments in 2021 with the reduction reflective of the first quarter payment.
Based on current oil prices and forecasts, we anticipate that our total debt will continue to trend down throughout 2021.
Also as expected our bank group recently reaffirmed our 575 million borrowing base and commitments.
As you May recall under our bank credit facility, we were required to have hedges in place by the end of 2020, covering a certain portion of our production through mid 2022.
In this morning's release, we provided an updated hedge table that includes a number of new 2022 oil hedges that we layered in over the last two months at much higher prices.
While not required by our credit facility, we plan to continue to add hedges that support our base business objectives, while providing market exposure to higher oil prices.
Let me wrap up with a few comments on our trajectory through the remainder of the year as we are maintaining all previous <unk> 2021 capital spending and production guidance.
For the second quarter, we anticipate a step up in both production and capital.
John will benefit from a full quarter's impact of the wind River basin acquisition and the return of production impacted by the first quarter storms production.
As expected to be relatively consistent through the remaining quarters of the year with some modest fluctuations across the quarters.
L. O P is anticipated to increase in the second quarter, both in absolute and on a per BOE basis as the utility benefit. This quarter is a nonrecurring item and we will have a full quarter of costs associated with the asset acquisition as well as the impact of higher oil prices, which increases our cost of C O two.
As a reminder, our LOE per BOE for full year 2021 is expected to be in the 22 to $24 per Boe range.
We.
<unk> capital to increase in the second quarter as our tertiary field developments pick up including Oyster Bayou and Tinsley and we began CCA C O two construction and facility work and.
And I expect capital to increase each quarter for the remainder of the year with fourth quarter being the highest.
As a reminder.
$150 million of our total 250 to 270 million development budget relates to the CCA tertiary project, which is primarily second half spend.
In summary.
We are off to a great start for 2020, one oil prices have moved up nicely from the beginning of the year and with approximately one third of our 2021 production unhedged, our free cash flow projections continue to improve providing additional strength to our financial position.
And now I'll turn it over to David to provide an operations update.
Yeah.
Thank you Mark and good morning, everyone. Today, I will highlight our strong first quarter operating performance comment on the progress of integrating our new wind River basin assets located in Wyoming and mentioned in some other things that we're excited about for the remainder of the year.
Let me start off by congratulating our teams for continuing to keep their eye on safety as we build upon three consecutive years of Danbury record low recordable incident rates maintaining focus on safe operations is particularly important as our activity levels, both expense and capital increase through the remainder of the year.
Sure.
During the spring and summer seasons planned maintenance levels typically increase throughout our operations in 2020, one will reflect that approach.
Our development capital spend which I will touch on shortly will accelerate during the same time period.
As Mark mentioned, we had a solid first quarter meeting expectations across the board in regard to production capital and operating cost I mentioned in the last quarterly call. The first quarter impacts of winter storm jury on our business.
It certainly it's worth noting again that our teams safely restore production and are fields that were shut in due to freezing temperatures and power outages. The first quarter production impact totaled 1400 Boe's per day on average mainly in the Gulf Coast, all of which was back online by the end of the quarter.
From a production.
<unk> standpoint, the first quarter should be our low point for the year.
We anticipate <unk> production volumes to be higher than <unk>, driven by the lack of severe storm impacts as well as a full quarter's contribution from the recently acquired Beaver Creek, and big saying draw fields.
As a reminder, these fields were producing approximately 2600 Boe per day, when we closed on the acquisition.
Both fields fully utilized captured industrial sourced cotwo or operations.
Now that you've added these assets to our portfolio our blue oil production as a percent of total volumes is up to 25 per cent.
The integration of these assets and field personnel to Danbury is going very well through an early facilities review our team has identified multiple potential modifications for both enhanced asset performance and reduce cost in these legacy you are fields.
On the resource side, we have commenced a detailed subsurface review to identify new development potential.
Our teams excel at this and I'm looking forward to the new opportunities they will bring forward for these assets.
On the development side of the business the success of the Oyster Bayou a two project executed in the second quarter of last year open the potential for additional opportunities in this great field. We recently commenced the first phase of tertiary development in a portion of the Oyster Bayou a one reservoir with conversion of two wells in to producers.
And two other wells into C. O. Two injectors, we expect our contracted brig to arrive in the field within daves to begin drilling operations.
Also into Q, we began execution of a pilot project for a new CEO to flood in our Tinsley field.
Our Tinsley field currently produces from the Woodford reservoir and the C. O. Two pilot project will target the Perry reservoir with one horizontal producer and to Recompete wins.
Both the Oyster Bayou, a one development and the Tinsley Perry P. O two pilot projects provide the potential for incremental production in the second half of the year and they paved the way for future development projects in these fields.
I'm excited to be moving forward with the CCA C. O. Two your development project and can clearly see a high level of enthusiasm across the company as activity levels ramp up.
The CCA development is a very essence of Cc U S were captured industrial sourced cotwo be transported injected into the your target and stored indefinitely.
This project highlights the value, creating interdependence of Danbury is your focus business, coupled with the industrial captured C O two.
Furthermore, these same core project and operations competencies developed over decades by them very directly apply to future C. C. S and C C U S opportunities as well.
During the first part of the year, our procurement teams were quite busy finalizing bids for equipment, along with the CCA pipeline extension and facilities installation. There has certainly been an extensive level of interest in participating in the project with bids being very competitive trending well within our capital budget plans.
As a reminder, CCA makes up 55 to 60 per cent of our total development capital budget. This year.
Most of that capital spend is occurring in the second half of the year with two thirds of the CCA capital related to the pipeline, which will extend the greencore line to the east Lookout Butte development area.
Yeah.
We anticipate to finalize an award critical contracts, including the pop lining installation in a matter of days with a facility construction contract to follow soon thereafter.
Dark for the project was moved in late April associated with the infield injection system.
The pipeline installation is planned to begin in the middle of June with pipeline construction and C. O. Two landfill estimated to be complete by the end of the year.
The injection of Jim Barry owned captured industrial sourced Cotwo into C. C. A is expected to commence early next year and we remain on track for anticipated burst your production in the second half of 2023.
There was a lot of excitement around the company because we're moving forward with the CCA you our development when I think about the project and the impact it can have.
One it's a large scale opportunity 400 million barrels or so a potential tertiary resource recovery.
To CCA you our barrels are lower operating cost barrels that are average of our current production. So it will drive margin improvement for our business.
Three it provides years, even decades of free cash flow to our business and for CCA is a carbon negative development is a fully industrial sourced cotwo. Our project CCA will significantly grow our blue oil production, making substantial progress towards our goal to be carbon neutral.
<unk>, including scope, one two and three emissions by the end of the decade.
It's thrilling to get started on it now.
With that I'll turn it back over to Brad.
Thanks, David I Hope you have all picked up on the unique investment opportunity at Danbury.
We've had a great start to the year.
We're actively engaged in Cc U S. Today with a strong E O our business and we're positioned extremely well to lead the industry in the next phases of Cc U S.
With that operator, we're ready for questions.
Thank you and at this time, we'll be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad.
A confirmation tone will indicate your line is in the question queue.
You May press star two if you'd like to remove your question from the queue for participants using speaker equipment may be necessary to pick up your handset before pressing the star keys.
One moment, please while we poll for questions.
And our first question is from Leo Mariani with Keybanc capital markets. Please proceed with your questions.
Hey, guys. Thanks, certainly quite.
Quite a bit of confidence from you folks are that you guys are going to be able to announce our you know various deals here in 2021, it sounds like you're working on a combination of basically transport and in C. O two storage deals with industrial emitters and also are you know procuring sites are you know.
I guess proximate to the to the Green pipeline to store. The C. O. Two just in general I wanted to get a sense of what you think that the competition is you know for you folks along the Gulf Coast, just given the fact that you've got the obviously the pipeline infrastructure, which is a big competitive advantage in.
And Additionally, you clearly talked about expanding the pipeline and kind of lean plans and before that I guess that just tells me. It seems like you've got confidence that some deals can happen that are well in excess of capacity here.
You bet Leo Good morning. This is Chris I'll take that question and you raised some really good points in there that I think are worth digging into.
Certainly when we think about the opportunity set and that's why I talked a bit about just how big we see the prize here I do think there will be competition and I honestly I think that the industry will need a lot of participants to really make it be everything that it can be.
The good part is I see what Denver has where we are the assets the expertise.
We're in the middle of it and I think that will be integral to many solutions as we as we kind of look at how this how this progresses.
To your question on the confidence we have in our in the market certainly we see that.
We are very active with negotiations with multiple different parties I think you framed it right. There's a there's a transportation piece theres a storage piece in many cases, it's a combination of that and that's something that we think are really gives us a a.
Place in our strategic.
Strategic focus where we can be a one stop shop for emitting industries to be able to deliver C. O two to us in and have to not think about it again.
So we think that that's important and and as he also mentioned we think that getting additional sites are like I like I said outside of EUR nine EUR storage we.
We think that's important and we see plenty of opportunities along the line with that.
So all in we see a big opportunity and that led to us wanting to look at expanding the line.
I want to talk about the line a bit because I think it's important to think about what we have is a system. That's not the same as a typical pipeline, where you have something going into the line on one end and coming out on the other as an integrated system I see it as something that we can optimize through segments throughout.
Our footprint to where we can be taking C. O two in certain places delivering it out in other places that may not be.
The full length of the line and by doing that we can optimize the use of the line. We can also optimize what we do with capital where we spend capital to meet the need of the transportation. For example that has that is needed for that particular segment and.
And we can match the timing of that in line with the with those needs. So all in we're very excited about it just the volume of what we see that the magnitude of the overall price and that's certainly matched by the number of conversations that we're in.
Okay. That's that's great color Ryan just as a follow up to that.
You guys still feel you know company in here that you know whatever deals are struck essentially getting berries are gonna be effectively paid to basically take the C. O two away and just get any existing infrastructure. You guys. Also think that you know most of the additional capex that's associated with getting C O two.
Two from E meters as Guinea generally be borne by the meters going forward, just trying to get a high level sense of some of the key economic parts here.
Sure and then in the way I see it Oh and it's you know these negotiations are ongoing and this is something that these are I'd say, we're in a new industry right, where we're starting something that really was just just fully incentivized with the 45.
Rule that was published just a few months ago, but certainly what we see is a.
A path to wear Danbury in one form or in other receives a fee for the transportation and storage of C O two.
And that's the focus that we have on on how that works I'm going to actually ask Mark to comment on the second part of your question just about about how that capital is born but certainly it's in my view, it's part of the equation of how this all needs to work My day.
Ask you to weigh in on that Mark sure Chris Yeah, I think I mean, it goes along with with the various types of agreements I think that we will end up with in and I think there's a multitude of different variations and <unk>.
And there could be situations, where.
It matters I may look for us to.
<unk> assets together and there may be other situations where they.
They may other people may want to do that separately. So you.
I think these are all very specific situations and we will have to address them as they arise.
Okay. Thanks.
Thanks Leo.
And our next question is from Charles Meade with Johnson Rice. Please proceed with your question.
Good morning, Chris and Mark and the whole crew there.
Morningstar, Inc.
I I I wanted to.
I'd very much like cash you about you know how are those negation that negotiations are going but.
Of course, it nobody likes to negotiate in public. So we'll just have to have to wait on that but Chris I wanted to go back to something else that that is at least new to me and and this conversation and that's Europe, you're talking about.
Adding a saline aquifers are just basic non E O our sites as a as a it's a sink for C. O two and I'm curious is that a is that just a reflection of our of people wanting.
P C S without the U. So in other words is that kind of a function of what you're hearing from a potential P.
People, who would be delivery new C O two or <unk> or is this a.
Is this driven by some other consideration.
Yeah, that's a great question, Charles and there's there's two real drivers there are the <unk>.
First I'd say is just looking at the sheer volume that that we think will need to be stored certainly theres tremendous capacity in our AOR fields and.
And as I've mentioned before we even have capacity right here today to offset our use of natural C O two and take on new new.
Real sore C O to an end and inject that into our AOR fields, and we can do that to the tune of upwards of maybe six or 8 million tons a year, so not a small number.
But then when we get beyond that of course, we see the business as something that could be much greater than that the volumes that we need I believe will be greater than what we see in E. R and so what we've been working and then we've been working this over the course of the past year or so is identifying those.
Locations looking at their proximity to our infrastructure and then working with other landowners to find an agreement that can use those types of structures to two of his store C. O two N and so that's another.
Area that we're progressing as we go through time here as well.
I would add that there are going to be along the way as you mentioned some folks who are more interested in a non E O. Our auction who for whatever reason wanted to be specific to Oh, just a just a <unk> and so there is an element of that but for.
For me I, just see the the hundreds of millions of tons of storage that can be added.
And how that can help the business as being a primary driver and then secondarily being able to provide that alternative solution to certain of the emitters.
Got it well, it's hard to imagine, but what would be a better place to store C. O. Two then a depleted oil and gas deal. Even if you don't turn it to what you are but.
But then we're learning things right now.
Let me let me ask another question about the the CCA pipeline and I really appreciate all the detail you gave not on not only on the shape of Capex for the year, but also on the on the timeline so that that really lays it out very clearly for it but.
Can you.
Can you talk about how if at all.
Your your design criteria or intentions have changed in the last year because you did the CCA pipeline has been on the drawing board. It is a great project for a long time, but but because of this whole carbon capture use and storage.
But I'm not at the ground underneath a day shifting so have you had to kind of change. Your your design are in response to that end up and I guess as part of that is.
I don't imagine that theres as much need or opportunity to expand up in the Rockies is raised on the Gulf coast, but maybe that's wrong.
Yeah, Charles So the interesting question and it's one that we asked ourselves actually a couple of years ago. When we were looking at this design and then well certainly I think you're right in that the nature of the emissions and capture opportunities in the Rocky Mountain region is different than what we see in there.
At Gulf Coast hotspot, there is still a.
Surprising levels of.
The potential for capture in the longer term there and so it's something that we have kept our eye on as well and in fact just to to put an emphasis on that when we first scoped out CCA. This pipeline that we're running up from Bell Creek are up to the CCA field.
To truly service CCA, we needed a 12 inch pipeline to get the C. O. Two that we saw needed to CCA, but as we looked at these other opportunities along the lines of.
What you asked.
We saw that there was good potential overtime that we could add to that with the with Cc U S or additional opportunities along the way there and so we actually increased the size of that pipeline to 16 inch which was a fairly nominal capital add but a fair.
Really significant capacity adds that we think gives us just some more abilities out there as time goes on.
Thank you Chris.
Thanks Charles.
And our next question is from Richard Tullis with capital One Securities. Please proceed with your question.
Thanks, Good morning, everyone Christian and Richard your team.
And your teams' discussions with the various C. O two had bidders how large of a role does the 45 Q tax credit play in the decision, making or or appear to play in the decision, making as far as moving forward with.
Potential carbon capture projects and and also just wanted to get your thoughts on what are the key.
Current environment could support regarding transportation storage.
Fees per per ton.
You bet, Richard and so I'd say honestly, where I think 45 Q plays into this I would say it is the dominant driver in the space right now and that's why since January we've seen such a tailwind and movement towards the U S.
Now it's not the only driver you have.
You have motivations of many of these E meters to capture their emissions.
Mitigate their emissions and some some manner.
Either through through their own internal commitments or pressure from the public and so we're seeing an element of that as well, but I think that what 45 Q does at its current levels allows the I'd say the lower tier of cost of capture types of industries to have a financial.
<unk> to make those investments as well so I think it's very important.
What I do think is that as we see time pass there's really a need to meet the targets that are out there. There's a need for C. C. You have to be taken to a much higher level and so I think that we'll see additional incentives.
Along the lines of what you see with L. CFS in California that are putting a higher price on carbon and or or making it that much more straightforward to make some of those investments. So I think over time, we will see something that looks like that in some manner and in other places that will that will further that investment, but at least right.
Now I think that that what you see from just the 45 Q levels that are in the and the IRS.
Code right now or justify them.
Justifying that kind of investment.
Yeah.
Thank you that's helpful and just as a follow up.
Your your last.
Last comment kind of leads to my next question what is the potential for Danbury to eventually benefit from the low carbon fuel standard credit revenue streams, you know not just the west coast States in Canada, but it looks like several other states are considering L. P F.
S programs themselves.
You bet, Richard and in what I would I think and so certainly in your you're right on that you were seeing talk of this and in other places and to me. It again, it's just a representation that.
Ultimately the incentives to capture carbon will be greater than what we see with 45, Q today and that will roll into the value chain of this entire business well.
When I think about Denver is placing that.
Certainly we think that what we have is an asset base in a in an expertise that's unique in the industry and we wanted to do the most that we can with it and so we are looking at a range of approaches to agreements that could start on one end of the spectrum that might just be.
<unk> C O two on our pipeline.
The other end of the spectrum could be a broader participation in a business that has that has access to a 45, Q and they'll CFS and for <unk> to be able to participate in that and what I'd say at this early stage.
Denver is open to.
A whole variety of alternatives here as long as they can drive value for our shareholders and we think that there are many ways to get there.
That's all for me now Chris I'll jump back in the queue. Thanks.
Thank you Richard.
Yeah.
And our next question is from Brian Who's meant with Thomas Capital. Please proceed with your other question.
Hey, guys good morning.
I'm, Brian Hey, Brian.
So just to clarify do you think that you are or any of the emitters that you're partnering with they're going to be able to stack forty-five cure and some of these other credit regimes as well.
You bet, Brian I think that just when we think of the numerous folks that we're talking to some are not some are some are focused on 45, Q, specifically, but absolutely certain of these emitters are looking at what is the entire value piece that they can create with that and it includes four.
Five Q. It includes L CFS or are other premiums they might have on their product. So I do see that and you know its dependent on who you're talking to and where where they are in the in the space, but absolutely yes.
I got it that makes sense.
And then as you're you're thinking about structuring all these deals and you've got all of these opportunities out there.
I don't know that it would probably be helpful. If you could talk about.
We don't know where other legislations going everything seems to be moving higher.
And I'm sure those negotiations are going well could you.
Could you help us put like a lower bound in terms of.
What are the deals that youre not interested then because you know that right.
You definitely don't need to do deals like that for example.
Yeah, you bet, Brian and so I think you're right on when you talk about the the.
Momentum of where this has had other than and I think that there is it just a great tailwind that will ultimately.
Increase the levels of of incentives for folks to capture C O two.
And when we are thinking about the types of agreements that were in right now what I'd say is that we are.
I'm very aware that the basis 45, Q or whatever that is.
<unk> is likely to change over the life of the contract certainly and probably in the near term even.
And we want those agreements to be reflective of that and honestly the counterparties would want that as well because they see the same things that we see.
So we want to be flexible, we want to be able to to.
Get value that would come from increased increased incentives along those lines and then to your question of what we would not do you know it's early days in this it in this business with with what we're seeing here this year and and so it's it's hard for me to point to anything specific that Denver It would.
Not do I'll tell you what we what we are focused on is whatever form of agreement that can add value to them very shareholders and I think there are many forms that could get us there.
Think that.
Those those agreements they need to be aligned with our strategy, which is I think pretty clear and and I can just see many ways of doing some very good things for them very shareholders here.
Got it well good luck guys.
Thank you Brian.
Okay.
And our next question is from Eric <unk> with Goldentree asset management. Please proceed with your question.
Hey, guys. Thanks for the call good quarter and Eric to hear all the the sell side participation and hope it continues to grow going forward.
Few questions just wanted to clarify it sounded like in the first quarter, there was a $15 million benefit.
She was that to the flow through the L. O E line item day $15 million of utility benefit.
Yeah.
Yes, Eric that that flowed through the lease operating expense line item that is correct.
Okay, great. Thank you.
And then a question on slide nine which is a really neat slide thank you for including it.
You talked a little about in the in the comments about your early planning for efforts to expand the green line, but I'm I'm wondering that.
Through use of incremental compression and looping and incremental storage.
Would there similarly be possibilities in the future to expand the NH J D line, if you had the demand for it.
You bet, Eric and that's why I mentioned in the J D earlier, I mean, we're very focused on the Green line and looking at that slide you get a sense of why and you just are going through some incredibly dense.
Dense emissions areas, but when we think about the system and I talk about the system quite a bit because to me it all needs to work together.
I see waves of using this infrastructure.
To move C O two out of these high density emissions areas and so that's not just along the green line, but what I see as the potential to move up the J D line ultimately into storage sites that could be in Mississippi.
And and open that whole landscape for additional storage additional capacity and just to give us the opportunity to make the business that much bigger.
Well, that's great and Andy.
But specifically with the Green line, you talked about well, it's it's 16 million tonnes now and we're looking at ways that that could 16 could become 30 million or even $50 million.
In terms of when we think about you know I. Appreciate that this is something to worry about for a long time, but.
In the future.
And a J D line could you also think about that 11 million expanding similarly.
You bet and I and the way I think about it and it's just the nature of these as these high pressure C. O. Two lines is that the the first steps of expansion can be just adding compression stations at the right or the pumping stations rather at the right locations to keep the C O two in a liquid.
As as it's moving through the pipeline and so those are very specific and you can locate them, where you need to to increase capacity in the segments that sees this new C. O. Two is moving through and then of course with the pipeline right away just as we have with the Green line able to work within that right away and add loop segments.
Again, where they're needed and when they're needed.
Okay, Great. Thank you and then my last question is just with respect to Blue oil, it's such a compelling concept.
You know and it certainly seems like something in the future that ought to be able to command a significant premium versus other.
Regular oil or oil ought to be.
Yeah Blake.
Capture some part of some sort of low carbon credit are there any specific initiatives or things out there that they could sort of make that a reality in the near term or is this something that is.
Further down the line.
Eric I think it's a longer term.
Longer term thing here are it's something that like you said it just makes perfect sense to me that if a if a consumer has the ability to make a choice between oil thats produced in this matter in this manner with that that very low carbon intensity compared to the alternative we believe that certain consume.
<unk> will prefer that oil and would pay some reasonable premium to get there two assets a bit more of a process because it's a new concept and so it's something that we're going to continue to work on but I think it's a it is a bit longer term, but logic tells me that something along these lines should work overtime here.
Okay, and and and have you guys spent time thinking about ways to.
And the Blue oil concept, maybe if you could get the blue oil to other states with L. P. F S credits too.
Two.
The way to sort of capture some of the.
Hi.
Yeah that that's one of the a.
Conversations that we're in and there's some details to work through but but yeah. Just as we've looked through where are the possible paths for this to be a success for us are some of those pads lead you to L. CFS in.
And.
Still need to be many discussions there, but yeah. That's one of the areas that we're thinking about.
Okay.
It sounds like you're you wouldn't.
In terms of.
Expectations of success there it sounds like you think that's.
M P.
Looking further down the road.
That's right Eric.
Hey, Thanks, a lot for the color guys.
Alright, Thanks, Eric.
And our next question is from Richard Tullis with capital One Securities. Please proceed with your question.
Hey, thanks for a lot of them equal or a follow up just one more question Chris.
What are the expected costs related to some of the pipeline expansion projects mentioned earlier and as is Danbury still thinking maybe a late 'twenty 23, early 2024 sort of timeframe to begin potentially realizing C. C U S revenue.
You bet. So when I think about the costs of pipeline expansion and it's one of the really nice benefits that we have with this system.
On the Gulf Coast as that.
And expansion is not a big one time huge ticket a capital item, but rather it can be very explicitly tied to new.
Oh two contra.
Contracts that need to move C. O two from point, a to point b and ensuring that we have that capacity within those.
In between those points and then that can be some very discrete and relatively low.
Capital levels of pumping stations.
Or or the pipeline loops for example, and so we see those being discrete smaller chunks and tied to specific needs that we have over time and I think that that will be nice because the projects themselves.
To get to your second question.
The capture projects themselves, we see taking time typically two years or longer and so that does put you into that 23 and 'twenty four time frame that you mentioned, but it also allows us that flexibility as we look at the system to match our capital investments along with the.
The pace of that C O two coming available.
Yeah.
Very good Chris Thanks for the update.
Alright, Thanks Richard.
Okay.
And I just.
We have reached the end of the question and answer session I'll now turn the call over to Brad Whitmarsh for closing remarks.
Yeah. Thanks, again, I appreciate everyone joining us today I want to say a happy mother's day, certainly to all the moms, who are listening in and all of the mothers that are Danbury obviously.
Susan and I are here and available to.
Follow up questions, if you get a chance and want to catch up with US. We're looking forward to it hope everyone has a great weekend.
And this concludes today's conference and you may disconnect. Your lines at this time. Thank you for your participation.
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