Denbury Inc.

Welcome to Denver's first quarter 2021 results conference call. My name is Shamali, and I will be your operator for today's call. At this time, all participants are in listen-only mode. Later, we will conduct a question and answer session. To ask a question at that time, please press star 1. I would now like to turn the conference call over to your host for today's call, Brad Widmarsh, Head of Investor Relations. Please proceed, sir.

Good morning, everyone, and thank you for joining us today. I hope you've had a chance to review our earnings release and presentation materials that we released this morning. They're available on our website at denberry.com, and we may reference certain slides as we make our prepared remarks. This morning we will hear from Chris Kendall, President and Chief Executive Officer, Mark Allen, Executive Vice President and Chief Financial Officer, and David Shepherd, Senior Vice President of Operations. Matt Dahan, Senior Vice President of Business Development and Technology, and Nick Wood, Senior Vice President and Head of Denberry Carbon Solutions, are joining us for the live Q&A session. I want to remind everyone that today's call will include forward-looking statements that are based on our best and most reasonable information. There are numerous factors that could cause actual results to differ materially from what is discussed on today's call. You can read our full disclosures on forward-looking statements and the risk factors associated with our business in the slides accompanying today's earnings presentation, our most recent SEC filings, and today's news release. Also, please note that during the course of today's call, we will reference certain non-GAAP measures. Reconciliation and disclosure relative to these measures are provided in today's news release and presentation as well. With that, I'll turn the call over to Chris.

Thanks, Brad, and welcome to the team. Good morning, everyone, and thank you for joining us on today's call. I hope you, your families, and your colleagues are all well. I want to begin by saying thanks to all of our employees, contractors, and vendors for their hard work to kick off 2021. In the midst of continuing to recover from a global pandemic, we also experienced a significant winter weather event in the first quarter in Texas. Despite all of the challenges, the team's sustained effort and focus has delivered strong results, including continued improvements in our record levels of safety performance, and I'm highly encouraged with our overall start to the year. Mark and David will summarize the first quarter results shortly, but I wanted to mention a few key accomplishments. First, Denberry's underlying base performance, enhanced by an improving commodity price environment, delivered strong financial and operating results, including significant free cash flow. Second, we are moving forward with the Cedar Creek Anticline EOR development project, with the installation of the GreenCore CO2 pipeline extension scheduled to begin in the coming weeks. We expect that this multi-phase development will provide significant long-term free cash flow for the business. Third, We closed on the acquisition of our Wind River Basin EOR assets, a transaction that looked robust at fourth quarter oil prices when we announced the deal and has only improved over time. Our teams have done a great job of rapidly integrating these assets into Denberry's business. Finally, we made a great addition to our board through the appointment of Cindy Yielding, Cindy is well known for her leadership of the working team of over 300 global experts from a range of industries, government, academia, and NGOs that created the National Petroleum Council's important 2019 CCUS report. In last quarter's call, I made the comment that I did not believe there was another company in the E&P industry as well positioned as Denberry for continued relevance through the energy transition, and my belief is only growing stronger. I'm very encouraged to see that carbon capture use and storage is now being broadly embraced as a practical and impactful method for reducing atmospheric CO2 emissions. As an example, the IEA projects that CCUS will be behind only wind and solar as a means of reducing CO2 emissions through 2040, accounting for about 11 billion tons of reduced emissions over that period. While current global capture is only 40 million tons per year, the IEA's sustainable development scenario states that to meet the targets set forth in the Paris Climate Agreement, by the end of this decade, we will need to increase global CCUS capacity by 20 times and by 140 times by 2050. Putting the magnitude of that projection in perspective, by 2050, the liquid volume of CO2 being captured on a daily basis is about the same as today's worldwide oil production. That should provide you with a good sense of the size and scale of what this industry can become. Many countries are taking aggressive measures to further incentivize CCUS projects. In the U.S., the recent finalization of the enhanced and expanded 45Q tax credit has opened the door for significant progress in CCUS, which should be the first of many steps that will cement the position of the United States as a global CCUS leader. In light of this huge market opportunity, over a year ago, we formed the Denbury Carbon Solutions Team to identify and secure opportunities for Denbury to build on the advantage of our unique assets and CCUS experience. The Denbury Carbon Solutions Team includes business development, technical, project management, commercial, and government relations experts. Last month, we announced dedicated executive leadership for Denbury Carbon Solutions, with Nick Wood, promoted as Senior Vice President, leading this team and reporting directly to me. Nick has been a high-impact, value-creating leader in our organization for a number of years, most recently heading our Rocky Mountain business unit, which today utilizes 100% captured industrial source CO2. I am thrilled to have Nick lead this team. He brings great energy, technical expertise, and the leadership capabilities needed to make Denbury the industry's leading carbon solutions provider. In a strategy review session earlier this year with our board, we identified five key strategic priorities for Denbury Carbon Solutions to accelerate the expansion of our CCUS business. First, generate new cash flow streams through agreements with existing and new-build industrial emitters for the transport and storage of captured CO2. Second, add significant permanent CO2 storage capacity through development of a geographically diverse portfolio of subsurface storage sites providing scale, reliability, and flexibility. Third, Increase our proportion of carbon-negative blue oil production by seeking to replace the use of naturally sourced CO2 in the company's EOR operations with captured industrial sourced CO2. Fourth, evaluate and prepare for a capital-efficient expansion of up to two to three times the company's existing green pipeline capacity to meet expected rapid growth in demand. And finally, pursue strategic partnerships along the entire CCUS value chain. I previously shared my belief that the scarce resource in the CCUS industry is on the downstream side of the business, that being the ability to provide a high-capacity, highly reliable, flexible CO2 transportation and storage system with significant scale and expandability. Our Gulf Coast system provides exactly that. Denver has the only significant CO2 infrastructure in the Gulf Coast today, and through our EOR operations, we are the only company of scale in the Gulf Coast that is actively engaged in CCUS. Slide 9 in our presentation materials shows an emissions heat map across the U.S. You can see where our 925-mile Gulf Coast CO2 pipeline system runs through the heart of the Gulf Coast Industrial Corridor, which is an area with very high CO2 emissions. In fact, nearly 10% of the US total of 2.6 billion tons per year in stationary emissions originates within 30 miles of our Gulf Coast system. The Green Pipeline alone has the capacity to transport over 16 million metric tons per year of CO2 over a span of 320 miles with about 75% current open capacity. Today, we are in specific discussions with multiple parties for the transportation and storage of captured CO2, representing volumes well in excess of our current capacity on this system. Considering this potential demand, we believe a significant expansion in capacity will be needed. Our CO2 pipeline team is studying an expansion of the green pipeline from 16 million tons to upwards of 30 to even 50 million tons per year. We believe that capacity is achievable and can be staged over time to align with demand through a combination of adding pump stations, looping within our right-of-way, and optimizing the locations and quantity of storage sites. Our NEJD pipeline, which runs north from the east end of the green pipeline all the way to Jackson Dome in Mississippi, provides 11 million tons per year of incremental capacity beyond this potential amount. We believe that access to long-term non-EOR CO2 storage, such as in saline aquifers, is also needed, and we are in discussions to secure agreements for non-EOR storage in multiple locations representing the potential for several hundred million tons of storage along our Gulf Coast infrastructure footprint. These sites would enhance the flexibility and scale of our storage solution. We've previously communicated that we hope to finalize arrangements this year for both storage and for transport of new captured emissions. Progress is moving forward, and I expect that we will be able to announce initial agreements before year end. I'd like to share how we see EOR in Denver's future. CO2 EOR is a fundamental component of CCUS that today provides the only immediate means of storing significant volumes of CO2. Essentially, all of the CO2 injected remains permanently underground. The skills and assets developed for EOR are complementary to the entire CCUS space. Also, where we use industrial source CO2 in Denver's EOR fields, we inject more CO2 into the ground to recover oil than the production of that oil will ever emit, even when including Scope 3 emissions. This carbon negative oil, or blue oil, should become a much sought after commodity that we believe should eventually receive premium pricing as it helps the end user lower their own carbon footprint. Today, around 25% of our total production is blue oil, and we expect that proportion to increase over time on our path to completely offsetting our scope three emissions by the end of this decade. Even as we seek to significantly expand our CCUS business beyond EOR, I believe that EOR will continue to be an important piece of Denbury's business for many years to come. Wrapping up, I've challenged the Denbury Carbon Solutions team to be aggressive in building our business. We have the right strategy, the right assets, and the right people, and now is the time to execute. Mark, I'll now turn it over to you for our financial update.

Thanks, Chris, and good morning to everyone on the call today. Our first quarter results were very positive for most measures, with strong adjusted earnings, cash flow, and free cash flow. In my comments today, I'll provide a summary of our results, particularly as it compares to the fourth quarter, and our outcomes versus expectations. In addition, I'll provide some forward-looking guidance to assist you with your modeling. In looking at performance for the quarter, our results were very consistent with expectations when focusing on key drivers, sales volumes, realizations, differentials, costs, and capital spend. We did have some weather impacts during this quarter, and I'll cover those items as we go. After adjusting for the $77 million mark-to-market charge for our commodity derivatives and the $14 million full-cost ceiling test write-down, adjusted net income was $22 million, or $0.44 per diluted share, as compared to our gap net loss of $70 million. The ceiling test write-down resulted primarily from the difference in all price use to record the value of the assets acquired in the first quarter, which was determined using an early March trip price versus the much lower 12-month look-back price used in the full-cost ceiling test. We generated free cash flow of $59 million in the first quarter as our adjusted cash flow from operations before working capital changes was $81 million. in comparison to only $20 million of development capital during the quarter. Diving into our first quarter operating results, sales volumes averaged 47,357 barrels of oil equivalent, or BOE, per day, which included a negative impact of approximately 1,400 BOE per day due to winter storms and a pickup of 870 BOE per day from the Wind River Basin assets acquired in early March. Excluding these items, our production declined slightly from last quarter. Now, regarding price realizations, WTI prices strengthened about 35% in the first quarter from fourth quarter 2020, driving our pre-hedged realized oil price to more than $56 per barrel. Our oil differential for the quarter also strengthened to $1.54 deduct from WTI, as both our Gulf Coast and Rocky's prices improved relative to WTI. Looking forward, we continue to expect that our overall oil price differential will be in the minus $1.50 to $2 range for the remainder of 2021. Lease operating expenses totaled $82 million in the quarter, which was lower than anticipated as a result of a favorable adjustment to power costs related to winter storm URIE. Under certain of our power agreements, the company has provided compensation for reduced power usage, which resulted in a benefit to the company of approximately $15 million. When we aggregate the impacts of URI on production, revenues, and costs, we estimate the overall impact to be a positive $6 million to earnings in the first quarter. G&A bears mentioning as it had a unique non-recurring item, On last quarter's call, I mentioned that we expected first quarter G&A to be between $30 to $35 million. And of that amount, we expected non-cash stock compensation to be around $17 million due to the full expensing of certain equity performance awards. The amount of non-recurring expense associated with those equity awards is approximately $15 million. So excluding this item, first quarter G&A was right on plan and should trend down into a range of $13 to $17 million per quarter going forward, with stock compensation representing $2 to $3 million of that amount. When you net our pre-hedge revenues and costs, our cash operating margin per BOE increased over $26 for the first quarter of 2021. Moving on to the balance sheet, At the end of the quarter, total debt was $126 million, down $12 million from year-end 2020. If you recall, our NEJD pipeline debt will be paid off in four quarterly installments in 2021, with the reduction reflective of the first quarter payment. Based on current oil prices and forecasts, we anticipate that our total debt will continue to trend down throughout 2021. As expected, our bank group recently reaffirmed our $575 million borrowing base and commitments. As you may recall, under our bank credit facility, we were required to have hedges in place by the end of 2020, covering a certain portion of our production through mid-2022. In this morning's release, we provided an updated hedge table that includes a number of new 2022 oil hedges that we layered in over the last two months at much higher prices. While not required by our credit facility, we plan to continue to add hedges that support our base business objectives while providing market exposure to higher oil prices. Let me wrap up with a few comments on our trajectory through the remainder of the year as we are maintaining all previous 2021 capital spending and production guidance. For the second quarter, we anticipate a step up in both production and capital. Production will benefit from a full quarters impact of the Wind River Basin acquisition and the return of production impacted by the first quarter storms. Production is expected to be relatively consistent through the remaining quarters of the year, with some modest fluctuations across the quarters. LOE is anticipated to increase in the second quarter, both in absolute and on a per BOE basis, as the utility benefit this quarter is a non-recurring item and we will have a full quarter of costs associated with the asset acquisition, as well as the impact of higher oil prices, which increases our cost of CO2. As a reminder, our LOE per BOE for full year 2021 is expected to be in the $22 to $24 per BOE range. We expect capital to increase in the second quarter as our tertiary field developments pick up, including Oyster Bayou and Tinsley, and we begin CCA CO2 construction and facility work. And I expect capital to increase each quarter for the remainder of the year, with fourth quarter being the highest. As a reminder, $150 million of our total $250 to $270 million development budget relates to the CCA tertiary project which is primarily second-half spend. In summary, we are off to a great start for 2021. All prices have moved up nicely from the beginning of the year, and with approximately one-third of our 2021 production unhedged, our free cash flow projections continue to improve, providing additional strength to our financial position. And now I'll turn it over to David to provide an operations update.

Thank you, Mark, and good morning, everyone. Today I will highlight our strong first quarter operating performance, comment on the progress of integrating our new Wind River Basin assets located in Wyoming, and mention some of the things that we're excited about for the remainder of the year. Let me start off by congratulating our teams for continuing to keep their eye on safety as we build upon three consecutive years of Denbury record low recordable incident rates. Maintaining focus on safe operations is particularly important as our activity levels, both expense and capital, increase through the remainder of the year. During the spring and summer seasons, planned maintenance levels typically increase throughout our operations, and 2021 will reflect that approach. Our development capital spend, which I will touch on shortly, will accelerate during this same time period. As Mark mentioned, we had a solid first quarter, meeting expectations across the board in regard to production, capital, and operating costs. I mentioned in the last quarterly call the first quarter impacts of winter storm fury on our business. It certainly is worth noting again that our teams safely restored production in our fields that were shut in due to freezing temperatures and power outages. The first quarter production impact totaled 1,400 BOE per day on average, mainly in the Gulf Coast, all of which was back online by the end of the quarter. From a production standpoint, the first quarter should be our low point for the year. We anticipate two Q production volumes to be higher than one Q, driven by the lack of severe storm impacts, as well as a full quarter's contribution from the recently acquired Beaver Creek and Big Sand draw fields. As a reminder, these fields were producing approximately 2,600 BOE per day when we closed on the acquisition. Both fields fully utilize captured industrial source CO2 in their operations. Now that we have added these assets to our portfolio, our blue oil production as a percent of total volumes is up to 25%. The integration of these assets and field personnel into Denver is going very well. Through an early facilities review, our team has identified multiple potential modifications for both enhanced asset performance and reduced cost in these legacy EOR fields. On the resource side, we have commenced a detailed subsurface review to identify new development potential. Our teams excel at this, and I'm looking forward to the new opportunities they will bring forward for these assets. On the development side of the business, the success of the Orister Bayou A2 project executed in the second quarter of last year opened the potential for additional opportunities in this great field. We recently committed the first phase of tertiary development in a portion of the Orchard Bayou A1 reservoir with conversion of two wells into producers and two other wells into CO2 injectors. We expect a contracted brig to arrive in the field within days to begin drilling operations. Also in 2Q, we began execution of a pilot project for a new CO2 flood in our Tinsley field. Our Tinsley field currently produces from the Woodruff Reservoir, and this CO2 pilot project will target the Perry Reservoir with one horizontal producer and two recompletions. Both the Oyster Bayou A1 development and the Tinsley-Perry CO2 pilot projects provide the potential for incremental production in the second half of the year, and they pave the way for future development projects in these fields. I'm excited to be moving forward with the CCA CO2 EOR development project and can clearly see a high level of enthusiasm across the company as activity levels ramp up. The CCA development is the very essence of CCUS, where captured industrial source CO2 will be transported, injected into an EOR target, and stored indefinitely. This project highlights the value-creating interdependence of Denberry's EOR technology focused business coupled with the industrial captured CO2. Furthermore, these same core project and operations competencies developed over decades by Denbury directly apply to future CCS and CCUS opportunities as well. During the first part of the year, our procurement teams were quite busy finalizing bids for equipment along with the CCA pipeline extension and facilities installation. There has certainly been an extensive level of interest in participating in the project, with bids being very competitive, trending well within our capital budget plans. As a reminder, CCA makes up 55 to 60% of our total development capital budget this year. Most of that capital spend is occurring in the second half of the year, with two-thirds of the CCA capital related to the pipeline, which will extend the Green Corps line to the East Lookout Butte development area. We anticipate to finalize and award critical contracts including the pipeline installation in a matter of days with a facility construction contract to follow soon thereafter. First dirt for the project was moved in late April associated with the infield injection system. The pipeline installation is planned to begin in the middle of June with pipeline construction and CO2 landfill estimated to be complete by the end of the year. The injection of Denbury-owned captured industrial source CO2 into CCA is expected to commence early next year, and we remain on track for anticipated first EOR production in the second half of 2023. There's a lot of excitement around the company as we move forward with the CCA EOR development. When I think about the project and the impact it can have, one, it's a large-scale opportunity, 400 million barrels or so, a potential tertiary resource recovery. Two, CCA EOR barrels are lower operating cost barrels than our average of our current production, so it will drive margin improvement for our business. Three, it provides years, even decades, of free cash flow to our business. And four, CCA is a carbon-negative development. As a fully industrial source CO2 EOR project, CCA will significantly grow our blue oil production. making substantial progress towards our goal to be carbon neutral, including scope one, two, and three emissions by the end of the decade. It's thrilling to get started on it now. With that, I'll turn it back over to Brad.

Thanks, David. I hope you've all picked up on the unique investment opportunity at DenBerry. We've had a great start to the year. We're actively engaged in CCUS today with a strong EOR business, and we're positioned extremely well to lead the industry in the next phases of CCUS. With that, operator, we're ready for questions.

Thank you. And at this time, we'll be conducting a question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the start key. One moment, please, while we poll for questions. And our first question is from Leo Mariani with KeyBank Capital Markets. Please proceed with your questions.

Leo Mariani, KeyBank Capital Markets, Hey, guys. I certainly sensed quite a bit of confidence from you folks that you guys are going to be able to announce, you know, various deals here in 2021. Sounds like you're working on a combination of basically transport and CO2 storage deals with industrial emitters and also procuring sites, I guess, proximate to the green pipeline to store the CO2. Just in general, I wanted to get a sense of what you think the competition is for you folks along the Gulf Coast. just given the fact that you've got, obviously, the pipeline infrastructure, which is a big competitive advantage. And additionally, you clearly talked about expanding the pipeline and kind of laying plans for that. I guess that just tells me it seems like you've got confidence that some deals can happen that are well in excess of the capacity here.

You bet, Leo. Good morning. And this is Chris. I'll take that question. And you raised some really good points in there that I think are worth digging into. Certainly, when we think about the opportunity set, and that's why I talked a bit about just how big we see the prize here. I do think there will be competition. And honestly, I think that the industry will need a lot of participants to really make it be everything that it can be. Good part is I see what Denbury has, where we are, the assets, the expertise. We're in the middle of it, and I think that we'll be integral to many solutions as we kind of look at how this progresses. To your question on the confidence we have in the market, certainly we see that. We are very active with negotiations with multiple different parties. I think you framed it right. There's a transportation piece. There's a storage piece. In many cases, it's a combination of that, and that's something that we think really gives us a place in our strategic focus where we can be a one-stop shop for emitting industries to be able to deliver CO2 to us and to not think about it again. So we think that that's important, and as you also mentioned, we think that getting additional sites, like I said, outside of EOR, non-EOR storage, we think that's important, and we see plenty of opportunities along the line with that. So all in, we see a big opportunity, and that led to us wanting to look at expanding the line. I want to talk about the line a bit because I think it's important to think about what we have as a system that's not the same as a typical pipeline where you have something going into the line on one end and coming out on the other. As an integrated system, I see it as something that we can optimize through segments throughout our footprint to where we can be taking CO2 in certain places, delivering it out in other places that may not be the full length of the line. And by doing that, we can optimize the use of the line. We can also optimize what we do with capital, where we spend capital to meet the need of the transportation, for example, that is needed for that particular segment. And we can match the timing of that in line with those needs. So all in, we're very excited about it, just the volume of what we see, the magnitude of the overall prize, and that's certainly matched by the number of conversations that we're in.

Okay, that's great, Colin. And just as a follow-up to that, do you guys still feel confident here that whatever deals are struck, essentially, Dinbury is going to be effectively paid to basically take the CO2 away? And just given the existing infrastructure, do you guys also think that most of the additional CapEx that's associated with getting CO2 from emitters is going to generally be borne by the emitters going forward? Just trying to get a high-level sense of some of the key economic parts here.

Sure. And the way I see it, Leo, and it's, you know, these negotiations are – ongoing, and this is something that these are, I'd say we're in a new industry, right? We're starting something that really was just fully incentivized with the 45Q rule that was published just a few months ago. But certainly what we see is a path to where Denver in one form or another receives a fee for the transportation and storage of CO2. And that's the focus that we have on how that works. I'm going to actually ask Mark to comment on the second part of your question, just about how that capital is born. But certainly, in my view, it's part of the equation of how this all needs to work. I might ask you to weigh in on that, Mark.

Sure, Chris. Yeah, I think, I mean, it goes along with the various types of agreements, I think, that we will end up with. And I think there's a multitude of different variations, and there could be situations where Emitters may look for us to connect assets together, and there may be other situations where other people may want to do that separately. So, you know, I think these are all very specific situations, and we'll have to address them as they arise.

Okay, thanks.

Thanks, Leo.

And our next question is from Charles Mead with Johnson Rice. Please proceed with your question.

Good morning, Chris and Mark and the whole crew there. Morning, Charles. Yeah, I'd very much like to ask you about how those negotiations are going, but, of course, nobody likes to negotiate in public, so we'll just have to wait on that. But, Chris, I want to go back to something else that is at least new to me in this conversation. And that's your talk about adding saline aquifers or just basically non-EOR sites as a sink for CO2. And I'm curious, is that just a reflection of people wanting CCS without the U? So, in other words, is that kind of a function of what you're hearing from potential –

people who would be delivering uco2 or is this uh is this driven by some other consideration yeah that's a great question charles and there's there's two real drivers there uh the first i'd say is just looking at the sheer volume that that we think will need to be stored uh certainly there's tremendous capacity in our eor fields and you know as i mentioned before we even have capacity right here today to offset are used to natural CO2 and take on new industrial source CO2 and inject that into our EOR fields. And we can do that to the tune of upwards of maybe 6 or 8 million tons a year, so not a small number. But then when we get beyond that, of course, you know, we see the business as something that could be much greater than that. the volumes that we need, I believe, will be greater than what we see in EOR. And so what we've been working, and we've been working this over the course of the past year or so, is identifying those locations, looking at their proximity to our infrastructure, and then working with the landowners to find an agreement that can use those types of structures to store CO2 in. And so that's another area that we're progressing as we go through time here as well. I would add that there are going to be along the way, as you mentioned, some folks who are more interested in a non-EOR option who, for whatever reason, want it to be specific to just sequestration. And so there is an element to that. But for me, I just see the hundreds of millions of tons of storage that can be added and how that can help the business as being a primary driver, and then secondarily being able to provide that alternative solution to certain of the emitters.

Got it. Well, it's hard to imagine what would be a better place to store CO2 than a depleted oil or gas field, even if you don't return it to EOR of it. But then we're learning a lot of new things right now. Let me ask you another question about the CCA pipeline. I really appreciate all the detail you gave, not only on the shape of CapEx through the year, but also on the timeline. So that really lays it out very clearly for us. But can you talk about how, if at all, your – design criteria or intentions have changed in the last year? Because the CCA pipeline has been on the drawing board as a great project for a long time, but because of this whole carbon capture use and storage phenomenon, the ground underneath it has shifted. So have you had to kind of change your design in response to that? And I guess as part of that is, I don't imagine that there's as much need or opportunity to expand up in the Rockies as there is on the Gulf Coast, but maybe that's wrong.

Yeah, Charles, interesting question, and it's one that we asked ourselves actually a couple years ago when we were looking at this design. And, well, certainly I think you're right in that the nature of the emissions and capture opportunities in the Rocky Mountain region is different than what we see in that you know, Gulf Coast hotspot, there is still surprising levels of potential for capture in the longer term there. And so it's something that we have kept our eye on as well. And, in fact, just to put an emphasis on that, when we first scoped out CCA, this pipeline that we're running up from Bell Creek up to the CCA field, To truly service CCA, we needed a 12-inch pipeline to get the CO2 that we saw needed to CCA. But as we looked at these other opportunities along the lines of what you asked, we saw that there was good potential over time that we could add to that with CCUS or additional opportunities along the way there. And so we actually increased the size of that pipeline to 16-inch, which was a fairly nominal capital ad, but a fairly significant capacity ad that we think gives us just some more abilities up there as time goes on.

Thank you, Chris.

Thanks, Charles. And our next question is from Richard Tulis with Capital One Securities. Please proceed with your question. Thanks. Good morning, everyone. Chris, in your team's discussions with the various CO2 emitters, how large of a role does the 45Q tax credit play in the decision-making or appear to play in the decision-making as far as moving forward with, you know, potential carbon capture projects? And also just wanted to get your thoughts on what the current environment could support regarding transportation and storage projects. fees per ton.

You bet, Richard. And so I'd say, honestly, where I think 45Q plays into this, I would say it is the dominant driver in the space right now. And that's why, since January, we've seen such a tailwind in movement towards CCUS. Now, it's not the only driver. You have motivations of many of these emitters to capture their emissions or mitigate their emissions in some manner. either through their own internal commitments or pressure from the public. And so we're seeing an element of that as well. But I think that what 45Q does at its current levels allows the, I'd say, the lower tier of cost of capture types of industries to have a financial basis to make those investments as well. So I think it's very important to, What I do think is that as we see time pass, there's really a need to meet the targets that are out there. There's a need for CCUS to be taken to a much higher level. And so I think that we'll see additional incentives, along the lines of what you see with LCFS in California that are putting a higher price on carbon and are making it that much more straightforward to make some of those investments. And I think over time we'll see something that looks like that in some manner in other places that will further that investment. But at least right now, I think that what you see from just the 45Q levels that are in the IRS program code right now or justifying that kind of investment.

Thank you. That's helpful. And just as a follow-up, your last comment kind of leads to my next question. What is the potential for Denberry to eventually benefit from the low-carbon fuel standard credit revenue streams? You know, not just the West Coast states and Canada, but it looks like several other states are considering LCFS programs themselves.

You bet, Richard. And what I think, and so certainly, and you're right on that we're seeing talk of this in other places. And to me, again, it's just a representation that Ultimately, the incentives to capture carbon will be greater than what we see with 45Q today. And that will roll into the value chain of this entire business. When I think about Denberry's place in that, certainly we think that what we have is an asset base and an expertise that's unique in the industry. and and we want to do the most that we can with it and so we are looking at a range of approaches to agreements that could start on one end of the spectrum that might just be transporting co2 on a pipeline the other end of the spectrum could be a broader participation in a business that is that has access to 45q and lcfs and for denver to be able to participate in that and and what i'd say at this early stage Denver is open to a whole variety of alternatives here, as long as they can drive value for our shareholders. And we think that there are many ways to get there.

That's all for me now, Chris. I'll jump back in the queue. Thanks.

Thank you, Richard.

And our next question is from Brian Kuzma with Thomas Capital. Please proceed with your question.

Hey, guys. Good morning. Brian. Hey, Brian. So just to clarify, do you think that you or any of the emitters that you're partnering with, they're going to be able to stack 45Q and some of these other credit regimes as well?

You bet, Brian. I think that just when we think of the numerous folks that we're talking to, you know, some are not. Some are focused on 45Q specifically. But absolutely, certain of these emitters are looking at what is the entire value piece that they can create with that. And it includes 45Q. It includes LCFS or other premiums they might have on their product. So I do see that. And, you know, it's dependent on who you're talking to and where they are in the space. But absolutely, yes.

I got it. That makes sense. And then is your – you're thinking about structuring all these deals and you've got all of these opportunities out there. I don't know, it'd probably be helpful if you could talk about, we don't know where all the legislation's going. Everything seems to be moving higher. And I'm sure those negotiations are going well. Could you help us put like a lower bound in terms of What are deals that you're not interested in? Because you know that you definitely don't need to do deals like that, for example.

Yeah, you bet, Brian. And so I think you're right on when you talk about the momentum of where this is headed. And I think that there is just a great tailwind that will ultimately increase the levels of incentives for folks to capture CO2. And When we're thinking about the types of agreements that we're in right now, what I'd say is that we are very aware that the basis of 45Q or whatever that is, is likely to change over the life of the contract certainly and probably in the near term even. And we want those agreements to be reflective of that. And honestly, the counterparties would want that as well because They see the same things that we see. So we want to be flexible. We want to be able to get value that would come from increased incentives along those lines. And then to your question of what we would not do, you know, it's early days in this business with what we're seeing here this year. And so it's hard for me to point to anything specific that Denver would not do. I'll tell you what we are focused on is whatever form of agreement that can add value to Denver's shareholders, and I think there are many forms that could get us there. I think that those agreements, they need to be aligned with our strategy, which is, I think, pretty clear. And I can just see many ways of doing some very good things for Denver's shareholders here.

Got it. Well, good luck, Ed.

thank you brian and our next question is from eric c with golden tree asset management please proceed with your question hey guys thanks for the call um good quarter and great to hear all the uh the sell side participation and uh you know hope it it uh continues to grow going forward um a few questions just want to clarify through the loe line item the 15 million utility benefit

Yes, Eric, operating expense line item. That is correct.

OK, great. Thank you. And then a question on slide nine, which is a really neat slide. Thank you for including it. You talked a little bit in the comments about your early planning for efforts to expand the green line.

But use of incremental compression and looping and incremental storage, would there similarly be possibilities in the future to expand the NHD line if you had the demand for it?

You bet, Eric, and that's why I mentioned the NEJD earlier. I mean, we're very focused on the green line, and looking at that slide, you get a sense of why, and you just are going through some incredibly – and I talk about the system quite a bit because, to me, it all needs to work together.

This infrastructure – CO2 out of these high-density emissions areas, and so that's not just along the green line, but we're –

What I see is the potential to move up the NEJD line ultimately into storage sites that could be in Mississippi and open that whole landscape for additional storage to give us the opportunity to make the business that much bigger.

Well, that's great.

But specifically with the green line you talked about, well, it's $16 million. When we think about, you know, I appreciate that this has been something to worry about for a long time. You know, could the NAJD line, could you also think about that 11 million expanding similarly? You bet. And the way I think about it, and it's just the nature of these high-pressure CO2 lines,

is that the first steps of expansion can be just adding compression stations at the right – or pumping stations, rather, at the right locations to keep the CO2 in a – to increase capacity in the – is moving through.

And then, of course, with the green line, able to work within that right-of-way and add loop segments, again, where they're needed and when they're needed.

Okay, great. Thank you. And then my last question is just with respect to blue oil, it's such a compelling concept. You know, it certainly seems like something in the future that ought to be able to command a significant premium versus regular oil or ought to be able to capture some part of some sort of low carbon credit, are there any specific initiatives or things out there that could sort of make that a reality in the near term? Or is this something that is further down the line?

Eric, I think it's a longer term thing here. It's something that, like you said, it just makes perfect sense to me that if a consumer has the ability to to make a choice between oil that's produced in this manner with that very low carbon alternative, we believe that certain consumers will prefer that oil and would pay some reasonable premium to get there. To us, it's a bit more of a process because it's a new concept, and so it's something that we're going to continue to work on longer term, but logic tells me that something along These lines should work over time here.

Okay. And have you guys spent time thinking about ways to tie in the blue oil concept to maybe get the blue oil to states with LCFS credits to, you know, is that a way to sort of capture some of the pie?

Yeah, that's one of the conversations that we're in, and there's some details to work through. But, yeah, just as we've looked through where are the possible paths for this to be a success for us, some of those paths lead you to LCFS and still need to be many discussions there. But, yeah, that's one of the areas that we're thinking about.

Okay. But it sounds like you wouldn't in terms of, expectations of success there. It sounds like you think that's, you know, probably a little further down the road.

That's right, Eric. Okay.

Hey, thanks a lot for the call, guys. All right. Thanks, Eric. And our next question is from Richard Dulles with Capital One Securities. Please proceed with your question. Thanks for allowing me for a follow-up. Just one more question, Chris. Yeah. What are the expected costs related to some of the pipeline expansion projects mentioned earlier? And is Denberry still thinking maybe a late 2023, early 2024 sort of timeframe to begin potentially realizing CCUS revenue?

You bet. So when I think about the costs of pipeline expansion, and it's one of the really nice benefits that we have with this system is on the Gulf Coast is that an expansion is not a big one-time huge ticket capital item, but rather it can be very explicitly tied to new CO2 contracts that need to move CO2 from point A to point B and ensuring that we have that capacity to within those, you know, in between those points. And that can be some very discrete and relatively low capital levels of pumping stations or pipeline loops, for example. And so we see those being discrete, smaller chunks and tied to specific needs that we have over time. And I think that that will be nice because the project themselves, really to get to your second question, The capture projects themselves we see taking time, typically two years or longer, and so that does put you into that 23 and 24 timeframe that you mentioned, but it also allows us that flexibility as we look at the system to match our capital investments along with the pace of that CO2 coming available.

Very good, Chris. Thanks for the update.

Thanks, Richard.

And we have reached the end of the question and answer session, and I'll now turn the call over to Brad Whitmarsh for closing remarks.

Yeah, thanks again. Appreciate everyone joining us today. I want to say a happy Mother's Day, certainly to all the moms who are listening in and all the mothers at Denver, obviously. Susan and I are here and available to have follow-up questions. If you get a chance and want to catch up with us, we're looking forward to it. Hope everyone has a great weekend.

And this concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.