One of the things that first attracted me to energy as a sector in which to both trade and invest is that it is a rapidly changing industry. It creates opportunities, sometimes in unexpected places. It is changing because global attitudes towards energy are changing as governments begin to take political action against climate change, but the world still needs oil. No matter how many bills are passed or how many speeches are made, electric vehicles currently only make up about 2% of cars on the road. This means that no matter how much electricity we generate from wind, solar or otherwise, we need oil, and we will for decades.
Faced with this reality, but wanting to give the impression that they are doing something about climate change, politicians are increasingly supporting companies that make oil production greener and more efficient, or that mitigate some of the negative impacts. oil on the climate. Projects include things like enhanced oil recovery (EOR) on the efficiency front and carbon capture as mitigation. So it makes sense that energy investors have some exposure to these things in their portfolio. Fortunately, there is a company that does both.
Denbury Inc. (DEN) is based in Texas, like most American oil companies, but it is anything but a traditional oil operation. They specialize in oil recovery from mature fields throughout the country and also have an advanced carbon capture operation on the Gulf Coast. The two things actually work together, because they…
One of the things that first attracted me to energy as a sector in which to both trade and invest is that it is a rapidly changing industry. It creates opportunities, sometimes in unexpected places. It is changing because global attitudes towards energy are changing as governments begin to take political action against climate change, but the world still needs oil. No matter how many bills are passed or how many speeches are made, electric vehicles currently only make up about 2% of cars on the road. This means that no matter how much electricity we generate from wind, solar or otherwise, we need oil, and we will for decades.
Faced with this reality, but wanting to give the impression that they are doing something about climate change, politicians are increasingly supporting companies that make oil production greener and more efficient, or that mitigate some of the negative impacts. oil on the climate. Projects include things like enhanced oil recovery (EOR) on the efficiency front and carbon capture as mitigation. So it makes sense that energy investors have some exposure to these things in their portfolio. Fortunately, there is a company that does both.
Denbury Inc. (DEN) is based in Texas, like most American oil companies, but it is anything but a traditional oil operation. They specialize in oil recovery from mature fields throughout the country and also have an advanced carbon capture operation on the Gulf Coast. The two things actually work together, as they use the CO2 they collect in their carbon capture operations in the extraction process. From an investor’s perspective, however, DEN’s main advantage as a long-term holding is that it is somewhat insulated against a changing political climate. They are not dependent on drilling new wells, which may be limited in the future, and their carbon capture business operates in a favorable political climate, regardless of who is in charge in Washington.
Even so, if they were totally addicted to politics, I wouldn’t be interested. The political winds are just too unpredictable, and today’s darling can become tomorrow’s pariah in the blink of an eye. However, there is much more to Denbury than just political goodwill. This is a company that has proven its ability to make money in a wide range of market conditions and, after falling 15% from its peak in mid-October, the stock is great value from every angle.
Its forward and trailing P/Es are a handful of 9s, which is low even in the traditionally weak oil and gas industry, but the true value becomes clear when you look at these P/Es in light of recent growth. Their latest quarterly results showed revenue growth of over 29% year-over-year and earnings growth of 202% on the same basis! Clearly, this 202% growth in earnings is an anomaly, but they have consistently grown their top line and bottom line since 2020 and, barring an oil price crash, they should continue in this vein. .
And an oil crash seems unlikely. Until this week, oil was falling as China faced another Covid outbreak and central bank rate hikes threatened growth, but there was a major reversal that began on Monday. After briefly flirting with $75, crude rallied to above $81 on Thursday after the Chinese government appeared to reverse its zero Covid policy in the face of protests and Fed Chairman Jay Powell said adamantly. that he expected lower rate hikes from the start of the next year. Add to that an upcoming OPEC meeting, the continuation of the war in Ukraine and the start of EU sanctions against Russian oil, and for now, there is more risk of a new surge in the price. gross than a sharp decline. DEN is one way to play that, but with an added element of protection against something that is a long-term concern for oil investors…the green energy lobby.
A colleague of mine when I worked on a trading floor in London liked to remind us all that, as he said, “you can’t eat value”. However, when the shares of a growing company are available at nine times earnings and operating in a rare and politically beneficial space, they represent a unique combination of value and opportunity that just seems too much. beautiful to be missed.