In this article, let’s look at how weak energy prices can have a negative effect on one of the most keenly watched metrics for energy companies—Denbury Resources’s (DNR) capital expenditures.
Capital expenditures (or capex) are investments that companies make toward growing their business. A steady or rising trend in this number is usually a good sign for companies, meaning they are investing in their growth.
Denbury Resources last announced its 2015 capex plans in a November 2014 presentation to analysts. Since then, crude oil lost approximately a third of its value. However, the company announced during its 4Q14 and full year 2014 earnings release that these plans have not changed since.
Denbury announced a figure of ~$550 million to be spent on capex, and ~$140 million to be spent on increased dividends at the time.
In comparison, upstream industry giants ConocoPhillips (COP) Occidental Petroleum (OXY), and Apache Corp. (APA) announced plans to spend ~$11.5 billion, ~$5.8 billion, and ~$3.8 billion, respectively, in 2015 on capex. All these are sharply scaled down from 2014 and prior announced levels.
All of these companies are components of the Energy Select Sector SPDR Fund (XLE), accounting for almost 10% of the ETF collectively.
What has changed?
Although Denbury left its capex plans unchanged, its cash earning ability may be compromised by the drop in crude prices. The company estimates that every $10 per barrel drop in crude prices will cause its cash flows to reduce by ~$200 million. This means the company will earn only about $500 million in operating cash flows if crude prices remain near the current $50 level in 2015.
This would call for a curtailment of its expenditures. Toward this scenario, the company has already rescinded its plans for a 60% dividend hike. What remains to be seen is whether the company also cuts its capex plans in light of sustained low crude prices. Those hedges we discussed in the previous part can come in handy in this situation.