We’ve been looking at how Denbury Resources’ (DNR) revenues and operating costs have been trending over the last few years.
Now let’s break down Denbury’s profitability at various levels of its income statement to see how its earnings and costs have been doing over the last few years. We’ll do this through the company’s profit margins at various levels.
Denbury’s profit margins
To make analysis easier, let’s look at Denbury Resources’ profits at various levels by dividing them by corresponding revenues for those years. This gives us the company’s profit margins at these various levels. This is particularly useful because revenues for upstream companies can be volatile on account of volatility in energy prices.
Denbury’s profit margins show a declining trend over the last six years. This is significant since revenues have been rising, while corresponding profits at various levels have been rising at a slower pace or have been volatile.
For example, while Denbury’s revenues rose ~86% between 2008 and 2014, its net profit is up ~63% during this period. This means its net profit margin has come down from ~30% in 2008 to ~26% for 2014.
In comparison, larger peers Continental Resources (CLR), Murphy Oil (MUR), and Marathon Oil (MRO) reported net profit margins of ~23%, ~17%, and ~28%, respectively, for 2014. These four companies account for just less than 2% of the iShares U.S. Energy ETF (IYE).
After looking at Denbury’s profit margin numbers in the above chart, we can say that the largest drag on Denbury’s profitability is likely increasing depletion and depreciation costs. These costs are reflected in increasing costs of finding and developing oil and gas reserves for upstream energy companies.