KLR Group Upgrades Denbury Resources

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KLR Group upgraded Denbury Resources Inc. DNR Monday from Accumulate to Buy and maintained a $13 price target.

According to analyst Gail Nicholson, “DNR now has over 95 percent upside...The company generates a ~160 percent '15 capital yield (cash-on-cash recycle ratio/$92.50 oil) vs. the industry median of ~120 percent. At $70 oil, DNR has a 130 percent+ '15 capital yield vs. the industry median of ~100 percent.”

Nicholson cited growth drivers including “enhanced oil recovery (EOR) projects utilizing CO2 with operations focused in the Gulf Coast and Rocky Mountains.”

The firm values “E&P equities based on the net present value of free cash flow over the life of a company using a reasonable discount rate. Denbury’s valuation applies a 15 percent discount rate to determine the net present value of its free cash flow.

 

Our reasoning for using a 15 percent equity return includes the long-term nominal performance of the broader equity market (10-12 percent), the greater inherent volatility of cyclical energy investments and the company’s market capitalization above $2.5 billion but below $7.5 billion (i.e. mid-cap).”

Nicholson concluded that “Denbury shares should appreciate 102 percent to $13 per share assuming a 15 percent equity discount rate. At the December 12, 2014 closing price of $6.43 per share, DNR’s implied equity discount rate was ~35 percent.”

Denbury Resources Inc. recently traded at $6.32, down 1.25 percent.

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Posted In: UpgradesAnalyst RatingsGail NicholsonKLR Group
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