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How Denbury Resources’ Relative Valuation Compares to Its Peers’



Denbury Resources’ relative valuation

Denbury Resources (DNR) has a forward EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) ratio of ~13x, slightly lower than other bigger players such as Devon Energy (DVN) and Occidental Petroleum (OXY). These companies both have forward EV-to-EBITDA ratios of ~14x.

The above chart shows the different fundamental ratios for upstream companies with similar production mixes and overlapping geographical areas of operation.

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EOG Resources (EOG), which operates in the unconventional resource space, has a forward EV-to-EBITDA ratio of ~18x. DNR’s forward EV-to-EBITDA of ~13x is much lower than that of EOG’s. When compared with smaller crude oil (USO) producer Energen (EGN), DNR’s forward EV-to-EBITDA is also lower. Energen has a forward EV-to-EBITDA ratio of ~16x.

DNR’s valuation appears to be at the lower end of the range compared to its peers’ valuations. The average EV-to-EBITDA ratio for the upstream industry is ~11.1x.

Even when compared using the price-to-book ratio, DNR appears to be at the lower end of the range at~1.27x. On a price-to-sale metric, DNR is much cheaper than its peers at ~1.21x

Is DNR’s multiple justified?

Typically companies with low leverages or high current ratios trade at premiums to their book values or have higher price-to-sales ratios. A possible explanation for this could be the fear of an energy-driven debt crisis if commodity prices stay low or fall for much longer than anticipated.

In 1Q16, DNR had the highest debt-to-equity ratio among its peers at ~301%. Also in 1Q16, DNR had the lowest current ratio of ~0.84x. Given its high debt, much higher leverage, and lower current ratio, DNR’s stock’s trading at lower multiples is justified.


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