Is This A Future Proof Oil Company?

One of the things that first attracted me to energy as a sector in which to both trade and invest is that it is an industry in a state of flux. That creates opportunities, sometimes in unexpected places. It is in flux because global attitudes to energy are changing as governments are beginning to take policy action on climate change, but the world still needs oil. No matter how many bills are passed or how many speeches are made, EVs account for only around 2% of cars on the road right now. That means that no matter how much electricity we may produce from wind, solar or whatever, we need oil, and will do for decades to come.

Faced with that reality but wanting to look like they are doing something about climate change, politicians are increasingly getting behind companies that make oil production greener and more efficient, or that mitigate some of the negative impacts of oil in climate terms. Projects include things like enhanced oil recovery (EOR) on the efficiency front, and carbon capture as mitigation. It makes sense, then, for energy investors to have some exposure to those things in their portfolio. Fortunately, there is one company that does both.

Denbury Inc. (DEN) is based in Texas, like most US oil companies, but they are anything but a traditional oil operation. They specialize in recovering oil from mature fields all over 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, though, the main advantage that DEN has as a long-term holding is that they are somewhat protected against a changing political climate. They are not dependent on drilling new wells, something which might be restricted in the future, and their carbon capture business operates in a favorable political climate, whoever is in charge in Washington.

Even so, if they were totally dependent on politics, I wouldn’t be interested. Political winds are just too unpredictable, and today’s darling can become tomorrow’s pariah in a heartbeat. However, there is a lot more to Denbury than just political goodwill. They are a company that has a proven ability to make money through a wide range of market conditions and, after dropping 15% from the high achieved in mid-October, the stock is great value any way you look at it.

Both its forward and trailing P/Es have a 9 handle, which is low even in the traditionally low multiple oil and gas industry, but the real value becomes clear when you look at those P/Es in the light of recent growth. Their last quarterly results showed revenue growth of over 29% year on year, and profit growth of 202% on the same basis! Obviously, that 202% growth in profit is an anomaly, but they have grown both their top and bottom lines consistently since 2020 and, barring a collapse in oil prices, look set to continue in that vein.

And an oil collapse looks unlikely. Until this week, oil was dropping as China dealt with another Covid outbreak and central banks rate hikes threatened growth, but there has been a significant turnaround that started on Monday. After briefly flirting with $75, crude recovered to over $81 by Thursday after the Chinese government seemed to back down on its zero Covid policy in the face of protests and Fed Chair Jay Powell said outright that he expected smaller rate hikes starting from the beginning of next year. Add in an approaching OPEC meeting, continued war in Ukraine, and the beginning of EU sanctions on Russian oil, and for now, there is more risk of another spike in crude than of a big drop. DEN is a way to play that, but with an added element of protection from something that is a long-term concern for oil investors…the green energy lobby.

A colleague of mine when I worked in a dealing room in London was fond of reminding us all that, as he put it, “You can’t eat value”. However, when stock in a company on a growth tear is available at nine times earnings, and it operates in a rare, beneficial space politically, it represents a unique combination of value and opportunity that just looks too good to miss.