Gathering New Information about Stocks, Health, and Sports

Introduction

Denbury Resources (DNR) is a $7.98 billion company in the oil and gas operation industry. Market capitalization competitors in this industry include Sunoco, Range Resources, and Questar Corporation. The oil and gas industry is up 42.11% over the past year compared to the S&P 500 which is down 2.77% during the same period. Over the past month, the industry has been up 18.07%, while the S&P 500 has been up 1.01%. After a strong sell-off earlier in the past month, there is a strong potential for oil and gas companies to grow. Evidence comes from the continued lowering of interest rates, which boosts lowers the dollar’s value and increases oil exportation. Denbury’s growth and valuation illustrate the potential for a strong earnings report next quarter.

Business

This section describes what Denbury produces. According to Reuters, Denbury “is engaged in the acquisition, development, operation and exploration of oil and natural gas properties in the Gulf Coast region of the United States.” In similar fashion of a private equity corporation, Denbury finds new properties and acquires these areas. Denbury then tries to maximize the value of these regions through exploration and marketing. More information about Denbury’s business can be traced to the company’s business segment: oil and gas operations.

The oil and gas operations business tries to recover crude oil from various locations. Operating in a multitude of areas, including Louisiana, Texas, and Mississippi, the company is very profitable in producing more than 60 million barrels of oil in these locations. As commodity prices continue to rise, some investors may be cautious about investing in companies related directly to this resource. These individuals may claim that prices will eventually fall, as they are too high now. That may be the case in the short term, but futures are still going to be high in the long run. Countries like China and India are continuing to grow rapidly. Therefore, there is a huge possibility that oil will continue to skyrocket and companies like Denbury will benefit.

Growth

Denbury has illustrated solid growth prospects over the past year. According to Reuters, Denbury reported a $0.97 billion revenue product last year. This number is over 32.72% higher than it was the previous year. Compared to the industry’s average of 15.30%, investors will see the high margin between the two numbers. Competitors like Range Resource only grew 15.75% during the same period year over year, and Questar fell 3.84% during that same time period. And these two rivals have similar or lower revenue figures. In terms of EPS growth, Denbury saw growth of over 22.51%. However, market-cap competitor Sunoco only reported a 2.62% decrease in earnings. What’s even more interesting is Denbury’s five year averages for these numbers. Denbury usually averages earnings growth of 27.79%. This Company’s earnings are higher to the competitor Questar’s five year average 22.76%. And the earnings growth average is also higher than Sunoco’s figure as well, which is an excellent attribute. Therefore, there is a significant historical evidence of a strong financial background, which may have implications of further success.

Another way to evaluate Denbury’s growth can come through margins. Over the past year, Denbury has seen gross, operating, and net income margins of 70.59%, 40.48%, and 26.05%. Comparing these numbers to the industry averages of 63.03%, 31.77%, and 18.32% respectively, there is evidence that Denbury is controlling its cost and producing more money for every dollar of revenue. These figures are in line or higher than the company’s five year averages (which show strong precedence), and these figures are also higher than the gross, operating and net income margins of competitors Sunoco and Questar. Therefore, along with strong growth prospects, Denbury illustrates its capability to control both product and period costs.

Combining these bits of information together and ROE emerges. ROE is how much net income is produced for every dollar of shareholder equity. According to Yahoo! Finance, Denbury saw an ROE of 21.31% over the past fiscal year. While this number is below the five year average, the number is significantly higher than the industry average of 17.02% and the competitors’ averages of 11.19% (Range Resources), among others. While investors may be cautious that ROE is dropping year over year, investors need to realize that the past couple of months have been tough for the economy. However, once the economy starts to grow again, there is the potential for Denbury’s continued growth, especially given the company’s historical five year average figures.

Valuation

With fairly high growth estimates and historical data, there should be evidence of an overvalued company. However, this is not strictly the case. It is true that Denbury has a forward P/E ratio of and a forward price to sales ratio of compared to the industry’s respective 21.09 and 4.34, but there is a different picture to consider. Currently Denbury shows a 25.70 P/E ratio and 6.75 price to sales ratio. However, because the company has an above average ROE, the valuation is justified. Investors see the company as a strong, growing corporation that is worth the extra share price level to invest in. They foresee higher earnings and growth and will pay more now to reap the benefits. What makes these remarks even more enticing is that firms that aren’t growing so greatly (Range Resources), have higher multiples. That idea shows overvaluation, not the idea Denbury is currently in. Moreover, Denbury has a low PEG ratio of 1.12, which, compared to other competitors’ numbers of 1.97 (Range Resources) and 2.02 (Questar Corporation), is low and reaffirms the evidence provided above.

Efficiency

Reuters did not provide much information regarding Denbury’s efficiency. However, one report did show that institutional investors own more than 92% of all Denbury shares. Since institutional investors have a higher allocation of shares among large investments, they have more money to lose. Therefore, they are only willing to invest in secure companies, such as Denbury.

Technical Analysis

Denbury performed well in the past year. The company’s share price has increased 116.5% year-to-year. This type of growth is excellent for a recessionary-type economy, especially considering the competition in the oil and gas industry. There seems to be some support at the 25 dollar share price range dating back to earlier January 2008. The last time Denbury reached this amount the company rebounded and appreciated 28%. There is a possibility a similar situation could occur in the future.

More specific to the current month, Denbury illustrates strong technical signals. Parabolic SAR is below and upward trending the current share price. This event usually signals an upturn in share price. The company is a little undervalued compared to the RSI index at 79.52, but it is better to be an advocate of fundamental valuations before technical valuations. Therefore, while now isn't the most ideal time to purchase shares of Denbury according to technical analysis, purchasing shares will still produce strong long terms gains.

Conclusion

Denbury is a great acquisition for any portfolio. The company's business model and fundamental analysis are both strong. It is very rare to find a company that has both strong valuation and growth, so it is wise to take advantage of these situations as they arise.

-Dennis Biray
February 29th, 2008