Q1 2022 Denbury Inc Earnings Call
Okay.
Good day, ladies and gentlemen, and welcome to the Danville Rais first quarter 2022 results conference call. My name is one and I would we go to the 19 year call today.
At this time all participants are in listen only mode. Later, we'll conduct a question and answer session to ask a question at that time. Please press the star followed by number one on your telephone keypad I would now like to turn the conference call over to your host floats, a baseball bat with smart 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 news releases this morning, and a supplemental materials that are available on our website at Danbury Dot com.
We're certainly very excited to announce not only strong first quarter results, but also a significant new CCA U S transport and storage agreement as well as an authorized share repurchase program.
Want to remind everyone that today's call will include forward looking statements that are based on the 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 presentation. Our most recent SEC filings and today's news releases.
So please note that during the course of today's call we may reference certain non-GAAP measures.
Reconciliation and disclosure relative to these measures are provided in today's earnings release as well.
This morning, our brief prepared comments will come from Chris Kendall President and C E O.
Mark Allen CFO , David Sheppard SVP of operations, Nick Wood, SVP of carbon solutions and Matt They hand, SVP of business development and technology are all here to participate in the Q&A.
With that I'll turn the call over to Chris.
Thanks, Brad.
Morning, everyone and thank you for joining us on today's call.
It would be an understatement to say that the start to this year has been dynamic Russia's activities have created turbulence in the energy markets and combined with demand growth have taken oil and natural gas prices to levels not experienced in many years.
Further increased energy costs are adding to already high levels of inflation and supply chain and services continue to be challenged with rising demand.
Considering that backdrop, I'm, especially proud of what our teams have accomplished to start 2022.
We're making great progress on all of our objectives and most importantly, we have continued to operate safely with our key metrics either at or near record levels.
Well, we are all experiencing the effects of supply chain breakdowns in our daily lives our team's careful planning and diligence have thus far have mitigated any significant impacts on Denver as business keeping us firmly on track with our key development projects.
This morning, I'll focus on four primary topics.
From our first quarter results as well as updates to our annual guidance the $250 million share repurchase program, we announced this morning.
Continued progress on our capital developments as well as increasing momentum in our carbon solutions business.
Denver, we delivered robust financial and operating results in the first quarter enhanced by our high leverage to oil prices.
Operating cash flow before working capital changes totaled 131 million for the quarter, resulting in free cash flow of 51 million.
Sales volumes differentials and operating costs were all in line with our expectations and guidance and we exited the quarter with only $35 million in debt.
Also we concluded an amendment to our bank credit facility that increased the borrowing base by 30% to 750 million well extending the facility's maturity and relaxing various restrictive covenants.
Looking forward, we are maintaining our full year guidance ranges across sales volumes capital and expenses. However, with the increased outlook for commodity prices and recent inflationary pressures, we anticipate that some of our cost items will trend towards the upper half to upper end of those ranges.
Also we have updated our income tax expense outlook for the current oil price environment, which reflects a higher anticipated tax rate and some cash taxes in 2022.
Regarding production, we anticipate that second quarter volumes will be slightly lower than the first quarter due to recent downtime for unplanned maintenance in late winter storms that occurred early in the second quarter.
Production should ramp higher in the second half of the year as we see initial results from our 2022 capital program with fourth quarter volumes being the highest of the year.
As oil prices have continued to strengthen we've added to our hedge positions for 2023, primarily with collars that provide floor protection around $70 or higher while also providing exposure to a significantly higher oil prices.
With an enhanced cash flow outlook, our board recently authorized a $250 million share repurchase program.
As we've emphasized in the past well maintaining a strong balance sheet. Our capital allocation priorities are first to fund our production business at a sustaining to moderate growth level.
Second to fund expected CCA U S investments and third to return capital to our shareholders when generating sufficient free cash flow to do so.
Based on our success to date and our view toward expanding our CCA U S business, we anticipate meaningful capital needs in the future.
At current commodity prices, we expect to have the ability to meet all of those needs as well as to fund the share repurchase program.
Highlighting some of our recent operational accomplishments, our CCA development continues to progress extremely well.
Phase one C O two injection commenced on February one and as of today, we have 55 wells on injection with a total rate of over 115 million cubic feet per day or over 2 million tons of industrial source cotwo on an annual basis.
The project remains on plan for first tertiary production in the second half of 2023.
This extraordinary asset is the largest ear our development, we have undertaken with a total recoverable EUR potential of over 400 million barrels more than twice our current proved reserves.
Based on our exclusive use of industrial source Cotwo, all produced barrels will be carbon negative blue oil and should be some of our highest margin production.
But you know our focus side of our business is fundamental to the execution of our CCA U S vision financially. It drive strong cash flows that allow us to organically fund, our CCA U S investments and new investment opportunities in the energy transition space.
Technically the pipeline project management wells and subsurface skill sets that we have developed in our 20 plus years of V. O. Our operations are the exact same skill sets needed for highly reliable C O two transportation and sequestration.
And operationally.
<unk> is still the only form of CCA U S available at scale in the U S. Today.
Dividing off take certainty for industrial customers to move forward with capture projects.
As I mentioned in our 2022 outlook call. This year will be transformational for Denburg Ccs business, our carbon solutions team continues to make great progress both in building out our sequestration capacity through new horse based agreements as well as reaching agreements with industrial partners for the transportation.
And storage of their C O two emissions.
Multiple agreements are continuing to advance and new opportunities are coming to us virtually every day.
This morning, we announced the execution of a new term sheet for another significant transportation and storage agreements in the Gulf coast, representing an incremental 2 million tonnes of captured C O two per year.
This is a planned chemicals facility intended to be constructed in close proximity to our existing C O two pipeline infrastructure.
With this agreement.
We have now reached an industry, leading 7 million metric tons per year of C. O two for new transportation and storage services.
And based on what I see today in terms of what we're working on I believe we are on track this year to substantially exceed our cumulative annual target of getting to 10 million tons per year.
Well the agreements we have reached to date had been for C. O two transportation and storage, we were offering industrial customers a full suite of service options ranging from transportation and storage to transportation only.
And even providing a full package that includes the implant capture process as well.
Each of these solutions is being tailored to the unique needs of our industrial customers I'm.
I'm looking forward to updating you in the coming weeks and months as more of these agreements are completed and the growing scale of Danbury C. C. U S business becomes more evident.
Our build out plan for Denver as Gulf Coast CCA U S system is to provide a highly reliable and efficient network of sequestration sites located a key points across our pipeline infrastructure.
The team is highly focused on the development of our contracted sequestration sites and is engaging with the various EPA regions in support of our classics permitting process.
As part of that effort, we are planning to drill multiple stratigraphic test wells later this year.
In addition, we are continuing to build out storage capacity further and I expect that we'll complete several more sequestration site agreements in the coming months.
We have great momentum at Danbury, our production business is generating strong cash flow and we are developing an incredible AOR resource with our CCA project that will drive volume growth beginning late in 2023 and into 2024, becoming the foundation of our production for future decades concurrently.
<unk> U S business is making important progress the details of which we plan to further lay out as we go through the year.
As I close I wanted to note that we intend to issue our 2021 corporate responsibility report in the near future.
I encourage you to read through the report to learn more about Denver is focused on sustainability.
As I mentioned at the outset I'm extremely proud of what our teams are doing.
Denver has an incredible and energizing opportunity in front of us not just to redefine the future of our company, but to also provide the energy our world needs, while reducing carbon emissions in a meaningful way.
Thanks for your time today, and we'll now turn the call over for your questions.
Thank you if you would like to ask a question at this point. Please press the star followed by number one on your telephone keypad. If you relate to withdraw your question. Please press the star followed by number two when propane to ask a question. Please send so your phone is on mute it locally.
The first question comes from the line of Doug Leggate from Bank of America. Please do your line is now open.
Hey, Thank you everybody. This is clay. Thanks for taking my question here. My first question just concerned slide number 12, and there's a there's a comment footnote on there and it would indicate that you are considering a two to three times expansion into green pipeline and I think this opens the door to several questions and I apologize.
Because this is Terry but I'm just trying to understand so number one are the right ways already in place.
Number two have you already gotten that critical mass with the C. O D. C O two offtake under to underwrite the expansion and just kind of considering the lead time of construction would you take M. I E. Before the classics permits are granted.
Yes.
No good questions clay and so looking at that expansion of the green pipeline in that that's honestly something that we have.
Been planning for some time and what it's primarily based on is just the incredible volume of demand that we see coming and so it's it's certainly not contracted today as you can see from just our progress towards the goals that we have right now, but as we look at the agreements that we're negotiating.
As we look at what is yet to come.
The potential for what we can do here is enormous and primarily we can start with the line itself and adding pump stations at various locations to enhance the capacity and in line loops within an existing right of way as a part of your question are we can do with an awful lot of expansion just with that.
That.
Ultimately, we expect the expansion to take place over time.
Remember, we have about 16 million tons of capacity in the line right now.
<unk>, which is our only being used at about a quarter of capacity. So we have quite a ways to go with the capacity that we have and what that does is it gives us room to plan and execute that expansion in line with the projects that we think are coming that will ultimately take all of the capacity, we have and require that expansion.
Just kind of looking at the defense.
The pipeline versus the various tour adoption. It seems like this could be a tiered development where.
The storage sites that are closer to the pipeline get developed first and then New Orleans and mobile download argued up later is that the right way to think about it and in that context, how do you see the cadence of spending when does it begin ultimately when do you see it concluding it you had those debridement.
Set by 2025 2026.
Sure and I don't really I don't quite think of it as a tiered development clay I think of it as kind of an all of the above I mean, if you were to look into Nick's team right now you'd see that there.
Steadily churning on the permitting process for every single site that we have.
And the idea is that every one of the sites is going to have a specific.
Region that that it is best suited for for emissions that are there that occur in that region that are captured and and so over time.
We just expect that we can work all of these sites are together and like I mentioned, just a minute ago, we're going to be adding more.
More sites as we go building. This building. This you know over the coming years, but certainly our view is towards matching with the projects that we are aware of that are either being executed or in plans right now to have those sites available when.
When that time comes you asked a question about the cadence of capital and certainly I would think that's hum as we as we ramp this up.
We want to.
Do quite a bit of work next year, So I expect capital to meaningfully increase in 2020 three as we build these sites out along with the pipeline laterals in that connect to the sites as well as to the emitters.
And.
And along the way one thing that we're thinking about clay is just we want to make sure.
Going back to the efficiency of the system that not only do we have.
We have one site that's ideal for any particular emitter, but that we have redundancy in the system and that we can bring emissions to various locations across the system. That's part of the beauty of the system. The way we think about it.
Thanks for the added detail on there Chris.
Follow up question, just trying to understand the value creation opportunity. That's in front of you. As you continue continue to develop how do you think about the incremental value of the contracts that you were adding and ultimately as you noted that scaled. This project is significant are you ultimately the right operator of this project.
And I'll leave it there.
Yeah.
Sure I mean, you know honestly when I just look back at.
What Danbury does you know for 'twenty, one 'twenty two years now we have been primarily focused on enhanced oil recovery using carbon dioxide. So if you were to look inside the company clay you'd see a a suite of technical and operational professionals who have handle.
All things C O two for 20 plus years and so.
You know from that aspect I I can't imagine.
Anybody better qualified to be transporting and injecting C O two even outside of V O R.
And then I take it a step further and I just think about the infrastructure that we have in place we have the.
Longest operated C O two pipeline network in the United States the split between the Gulf Coast region that you've mentioned earlier as well as in our Rockies region. So a great head start on infrastructure as well that I think are really sets a backbone in place that allows us to access storage sites that allows us to.
Close to emissions sites as well and really at the end of the day creates the most economic solution for industrial.
Emitters to to bring their emissions into into the system and captured put them underground permanently.
Thank you our next questions come from the line of Todd Smith from Johnson Rice. Please Joe.
Your line is now open.
Chris Good morning to you and marketing HR and the rest of the Debra crew there.
Yeah, I wanted to ask about the buyback.
Uh huh.
When I look at the and I'm, sorry, I think okay $250 million authorization.
It's a great arrow to have in the quiver.
But it doesn't necessarily mean that you're going to yeah. It's good to have that that option, but having the option is different from committing to do with it. So what I wanted to ask is how are you and you know the management and the board thinking about.
You know the relative attractiveness of of spending free cash buying back your shares versus.
And frankly, you know.
The point, you've already been making on this call really a it seems like a really rich and deep opportunity set in front of you not just on the Ccs side, but even on the the tertiary side. So how how well what are the guidelines. So how you and the board or are thinking about that allocation decision.
You bet, Charles and and I'll just share a couple of thoughts on that and then I'll ask mark to share some of his as well, but like you. We see this abundance of opportunities.
Within within there are EUR business within the CCA U S business and we're focused on executing on all of those we honestly just have the luxury with where prices are today too.
To have cash flow on top of all of that being able to do everything that we want to do and look at this buyback.
And then honestly when we look at where the share price is today compared to what.
What we see as the value of this company and particularly the potential ahead of us with C. C. U S that we are making gains on every single day. It just doesn't look like it's in the right place and so so that all those are my thoughts I might ask mark to just weigh in on some of the other elements of your <unk>.
Western there.
Sure.
Charles This is Chris said, we're obviously not.
Pleased with the share price performance through the first part of this year, we recognize the weakness.
We think the potential here is much much greater than and so as we think about this and look at the free cash flow generation that we see you know we want to be thoughtful about this and we want to consider.
All aspects of of it, but well think about a systematic approach and something that aligns with our free cash flow generation.
And obviously you know our share price will be a factor in and so will all of the legal aspects.
Aspects, we need to take into consideration.
As we execute it but.
But that's how we're thinking about it today.
Got it Okay and then.
A follow up question on the on the CC you asked so you guys with the.
With this south Louisiana Newbuild project, you're at you're at 7 million tonnes per annum, you've signed up and you're like you said you wouldn't be a tangent you have multiple.
Multiple ways to get there.
Should we be thinking more along the same lines of the sorts of deals you guys have had brought to the table, so far or or is there.
Is there a chance that they were going to see something.
New and different and I mean to extent that you could you could kind of a guide our speculation is a bit on that I guess is what I'm looking for.
Hi, there this is Nick I'll take this question so.
To point out that we've we've continued on the progress that we have and we continue to see.
Our pathway to continue to gain more emissions on the same type of suite of services. We provided previously is accurate.
We continue to see new ways of servicing different emitters and different industrial partners, one of which is adding additional capture services to our suite of services.
So that's a new approach relative to what you may have seen in the past and so I would add that to the.
Services, we could provide.
The way I think about it Charles it's just every every one of our industrial customers. It has different needs and preferences and what we're trying to do is just make sure that what we can provide.
<unk> meets that and it may be.
Just transportation and in certain cases, or it may be the the whole kit and others.
Got it that is a that is helpful detail I'll stay tuned to.
To see the news thanks a lot.
Thank you Joe.
Thank you. Our next question comes from the line of free time to lease from capital One Securities. Please reach out your line is now open.
Hey, Thanks, good morning, everyone.
Good morning, Richard.
Continuing with the same.
Discussion I just previously with Charles.
Related to you know, Dan and Barry potentially expand or looking at expanding the suite of services.
Am I hearing you correctly that maybe you would provide.
Provide part of the equipment to capture it.
Oh two at the facility.
That's right Richard and if you think about it there's a whole spectrum of what that looks like a lot of the industry that is incentivized under 45 <unk> today is pre combustion and so in many cases the capture that you're talking about is really limited to C. O two.
Pression and dehydration and of course.
Handling 70 million tons of C O two a year in our E O our operations and I think compressing pretty much all of that we just have a great depth of experience in compression dehydration as well. So that's an easy step and then as you go further anyway, and you start to become more integrated and the the plant's them.
Shelves. That's it that's the those are just decisions you make on a case by case basis, but we can see cases, where it just makes sense and it's the the preference of the preferred solution that the industrial customer is looking for that that all of that would be taken care of.
And allow them to continue to focus on the core business that they've been operating.
And then Chris if you could provide any more.
Details on how are you thinking about this or the team is thinking about it.
What level of investment would.
Be comfortable with in and that you know.
Part of the service portfolio and what sort of volumes would you be looking for a range of volumes from these particular emitters as it's on the lower end of the scale.
It could be it.
It could be a range of volumes that we're looking at and so I don't.
I don't think it's primarily one one end or the other Richard but then you know really what I think about on your initial question as far as our level of investment.
I would say is as we go.
Further upstream.
We would very likely look at partnerships with our with the other other entities that are deal and some of that upstream work in a in a more day to day fashion than we do for example, if it's if it's beyond the compression and dehydration I'd say, so it really depends on our approach there.
Uh huh.
End of the day, what we'd look at in any case here is.
Making sure that we're driving a good return on capital for our investors.
While also providing the best solution for the industrial customer.
Okay, Alright, that's helpful. Chris and just the last question for me, maybe for Nick or maybe for you Chris pipeline conversions, we've been hearing.
Some industry participants discussions plans too.
Possibly convert natural gas pipelines to C. O. Two transporters just wanted to get your take on the expected cost involved there.
The timelines to complete that sort of project it really the effectiveness of converting pipelines to C O two.
Transportation, if I get your thoughts there.
Sure and.
Talk about it a bit in the past and.
Just the nature of the the operating pressure of moving C O two and dense phase.
For us it's typically an anti 900 service, which has a maximum pressure above 2000 psi.
And and the conversions that we've seen have been with them typically natural gas service that that's around 14, or 1500, Psi, which is harder to transport and dense phase.
So we believe that that the the higher pressure is the most efficient economical way to move C O two at scale over distances.
I think that conversions can be done and in fact, we've even had some minor portions of our network converted and so it's even without our own network, we've had a bit of that.
It's just it presents some for US are in our view at least Richard It presents some operational limitations and some costs.
Compression and needing to be sure that you can get to a pressure you can inject a underground.
There and that that works better for us, it's just something it really on a case by case basis, how it works, we strongly prefer going with the system that we've talked about.
Okay. That's all for me thank you.
Thanks Richard.
Thank you as a reminder to ask any further questions. Please press the star followed by number one on your telephone keep up now.
The next question comes from the line of Mike <unk> from Stifel. Please Mike.
He is now open.
Yeah, good morning, everybody.
A question on the classics permitting process on slide 11.
You've given the your estimates on first injection for your four project areas just wanted to.
Gauge your level of confidence in that timeline and would you expect to submit class six permit applications for those projects and maybe any update on <unk>.
Louisiana, receiving primacy over the process.
Hi, Michael This is Nick again, so when I think about the classics permitting timeline and where we're at the permitting process is a continuous permitting process and that we have continuous interaction with the EPA.
That includes downloading our information.
The geologic sequestration data tool, which has been done for all of our sites already.
We continue to progress the interaction on what I'll call. The desktop studies of our different sites that include simulation geologic modeling.
Working through the different fuels and containment factors.
As we get to a point, where we are at a construction permitting process, we will get a construction permit from the EPA were classics construction at that point, we will drill a classics will and start the injection process.
We believe this is a 18 to 24 month process.
We are in that 18 to 24 month timeline right now.
We look forward to getting that first injection hopefully.
Mid 'twenty five.
Yes, Mike This is Chris just on your question on privacy.
That's one.
What we have heard.
Following the EPA is granting a privacy too.
North Dakota, and Wyoming is that Louisiana should be next I will tell you it has taken longer than we expected.
We have great confidence in EPA that just along with what Nick said that we're going to continue to work that I do think that over time.
But we will see primacy granted to Louisiana and other states, but at least right now it's a I wouldn't say it's moving.
It should be close, but it seems to be moving a little bit slower than we expected.
Is it fair to say that the timeline you've built in there assumes that there.
There is a privacy granted to Louisiana or is it more just assuming that the E. P. A.
Controls it and.
There'd be upside if yes.
If Louisiana.
Get control.
Yeah, Mike I think its more the ladder.
We built the plan around E P. A classics process.
And once you do see primacy and you have the folks that are local to the state.
You would expect some acceleration there, but at least everything that we have out right. Now is based on a still working through the EPA and the classics process.
Got it.
And wanted to get your thoughts on the legislative environment now anything in.
In particular beyond 45, Q that you could use to your benefit of new for.
For example, one of your peers plans to receive grants under the infrastructure investment and jobs Act.
Possibility of Denver, you're doing something similar.
You know that's a good question and we've seen a few.
Elements of the infrastructure build that that do some of that in some.
The folks that we're talking to have been working with the Doe toward grants for certain aspects of of what they're doing and so I do see some of that coming along generally the the numbers are are you know they they help but they're not game changers.
For us the legislation that are that we think is interesting is is just ultimately.
I think it's inevitable that the tax credits are the 45 Q tax credit will increase its just that today.
Where the tax credit is we already see a great business.
It needs to increase over time and when it does its just that great business just becomes that much better.
Considering the current political environment I know that Theres. Some forces at work to push that forward, we'll just have to see how it works out here.
Great. Thanks, and one last one for me.
I, just noticed and maybe it's not a big deal at all but on slide five.
You had listed ISO certification for Cedar Hills, South and East Lookout Butte.
Cedar Creek in a client is that something that you've done for all your U U R projects or is that something you need to CCA.
Yeah. Michael This is Matt they hand, we've actually completed ISO certification on Hastings and Oyster Bayou in the Gulf Coast.
Cedar Hills is in process should get that back here in a month or two and we just continue working through the portfolio.
You'll get the bulk of them done within the next year.
Certainly well ahead of any new emissions coming in that's going to require it.
Okay. Thank.
Thank you guys.
Thanks, Mike.
Thank guilt. We currently have no further questions on the line so I'll hand over back to perhaps a week marsh for any final remarks.
Thank you all for joining us today.
Beth and I look forward to talking with many of you over the next several days and we've got several conferences coming up so we hope to see you in person.
Thanks, again, and happy mother's day to all the moms out there.
This concludes today's conference call. Thank you so much for joining you may now disconnect your lines.
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