Denbury Inc.

Good day, ladies and gentlemen, and welcome to the Denbury's first quarter 2022 results conference call. My name is Juan, and I will be coordinating your call today. 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 a star followed by number one on your telephone keypad. I would now like to turn the conference call over to your host for today's call. Brad Whitmarsh, 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 news releases this morning and the supplemental materials that are available on our website at denberry.com. We're certainly very excited to announce not only strong first quarter results, but also a significant new CCUS transport and storage agreement, as well as an authorized share repurchase program. I want to remind everyone that today's call will include forward-looking statements that are based on the 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 presentation, our most recent SEC filings, and today's news releases. Also, please note that during the course of today's call, we may reference certain non-GAAP measures. Reconciliation and disclosure relative to these measures are provided in today's earnings release as well. This morning, our brief prepared comments will come from Chris Kendall, President and CEO, Mark Allen, CFO, David Shepard, SVP of Operations, Nick Wood, SVP of Carbon Solutions, and Matt Dahan, SVP of Business Development and Technology, are all here to participate in the Q&A. With that, I'll turn the call over to Chris.

Thanks, Brad. Good morning, everyone, and thank you for joining us on today's call. It would be an understatement to say that the start to this year has been dynamic. Russia's activities have created turbulence in the energy markets and, combined with demand growth, have taken oil and natural gas prices to levels not experienced in many years. Increased energy costs are adding to already high levels of inflation, and supply chains and services continue to be challenged with rising demand. Considering that backdrop, I'm especially proud of what our teams have accomplished to start 2022. We are making great progress on all of our objectives, and most importantly, we have continued to operate safely with our key metrics either at or near record levels. While we are all experiencing the effects of supply chain breakdowns in our daily lives, our team's careful planning and diligence have thus far mitigated any significant impacts on Denbury's business, keeping us firmly on track with our key development projects. This morning, I'll focus on four primary topics. Highlights from our first quarter results, as well as updates to our annual guidance, the $250 million share repurchase program we announced this morning, continued progress on our capital developments, as well as increasing momentum in our carbon solutions business. Denbury delivered robust financial and operating results in the first quarter, enhanced by our high leverage to oil prices. Operating cash flow before working capital changes totaled $131 million for the quarter, resulting in free cash flow of $51 million. Sales volumes, differentials, and operating costs were all in line with our expectations and guidance and we exited the quarter with only $35 million in debt. Also, we concluded an amendment to our bank credit facility that increased the borrowing base by 30% to $750 million while extending the facility's maturity and relaxing various restrictive covenants. Looking forward, we are maintaining our full-year guidance ranges across sales volumes, capital, and expenses. With the increased outlook for commodity prices and recent inflationary pressures, we anticipate that some of our cost items will trend toward the upper half to upper end of those ranges. Also, we have updated our income tax expense outlook for the current oil price environment, which reflects a higher anticipated tax rate and some cash taxes in 2022. Regarding production, we anticipate that second quarter volumes will be slightly lower than the first quarter, due to recent downtime for unplanned maintenance and late winter storms that occurred early in the second quarter. Production should ramp higher in the second half of the year as we see initial results from our 2022 capital program with fourth quarter volumes being the highest of the year. As oil prices have continued to strengthen, we've added to our hedge positions for 2023, primarily with collars that provide floor protection around $70 or higher while also providing exposure to significantly higher oil prices. With an enhanced cash flow outlook, our board recently authorized the $250 million share repurchase program. As we've emphasized in the past, while maintaining a strong balance sheet, our capital allocation priorities are first, to fund our production business at a sustaining to moderate growth level, second, to fund expected CCUS investments, And third, to return capital to our shareholders when generating sufficient free cash flow to do so. Based on our success to date and our view toward expanding our CCUS business, we anticipate meaningful capital needs in the future. However, at current commodity prices, we expect to have the ability to meet all of those needs as well as to fund the share repurchase program. Highlighting some of our recent operational accomplishments, Our CCA development continues to progress extremely well. Phase one CO2 injection commenced on February 1st, and as of today, we have 55 wells on injection with a total rate of over 115 million cubic feet per day or over 2 million tons of industrial source CO2 on an annual basis. The project remains on plan for first tertiary production in the second half of 2023. This extraordinary asset, is the largest EOR development we have undertaken with a total recoverable EOR potential of over 400 million barrels, more than twice our current proved reserves. Based on our exclusive use of industrial source CO2, all produced barrels will be carbon negative blue oil and should be some of our highest margin production. The EOR focused side of our business is fundamental to the execution of our CCUS vision. Financially, it drives strong cash flows that allow us to organically fund our CCUS investments and new investment opportunities in the energy transition space. Technically, the pipeline, project management, wells, and subsurface skill sets that we have developed in our 20-plus years of EOR operations are the exact same skill sets needed for highly reliable CO2 transportation and sequestration. And operationally, EOR is still the only form of CCUS available at scale in the U.S. today, providing offtake certainty for industrial customers to move forward with capture projects. As I mentioned in our 2022 Outlook call, this year will be transformational for Denbury's CCUS business. Our Carbon Solutions team continues to make great progress, both in building out our sequestration capacity through new pore space agreements, as well as reaching agreements with industrial partners for the transportation and storage of their CO2 emissions. Multiple agreements are continuing to advance, and new opportunities are coming to us virtually every day. This morning, we announced the execution of a new term sheet for another significant transportation and storage agreement in the Gulf Coast, representing an incremental 2 million tons of captured CO2 per year. This is a planned chemicals facility intended to be constructed in close proximity to our existing CO2 pipeline infrastructure. With this agreement, we have now reached an industry-leading 7 million metric tons per year of CO2 for new transportation and storage services. And based on what I see today in terms of what we're working on, I believe we're on track this year to substantially exceed our cumulative annual target of getting to 10 million tons per year. While the agreements we have reached to date have been for CO2 transportation and storage, we're offering industrial customers a full suite of service options ranging from transportation and storage to transportation only and even providing a full package that includes the implant capture process as well. Each of these solutions is being tailored to the unique needs of our industrial customers. I'm looking forward to updating you in the coming weeks and months as more of these agreements are completed and the growing scale of Denbury's CCUS business becomes more evident. Our build-out plan for Denbury's Gulf Coast CCUS system is to provide a highly reliable and efficient network of sequestration sites located at key points across our pipeline infrastructure. The team is highly focused on the development of our contracted sequestration sites and is engaging with the various EPA regions in support of our Class 6 permitting process. As part of that effort, we are planning to drill multiple stratigraphic test wells later this year. In addition, we are continuing to build out storage capacity further, and I expect that we'll complete several more sequestration site agreements in the coming months. We have great momentum at Denbury. Our production business is generating strong cash flow, and we are developing an incredible EOR resource with our CCA project, that will drive volume growth beginning late in 2023 and into 2024, becoming the foundation of our production for future decades. Concurrently, our CCUS business is making important progress, the details of which we plan to further lay out as we go through the year. As I close, I wanted to note that we intend to issue our 2021 Corporate Responsibility Report in the near future. I encourage you to read through the report to learn more about Denbury's focus on sustainability. As I mentioned at the outset, I am extremely proud of what our teams are doing. Denver has an incredible and energizing opportunity in front of us, not just to redefine the future of our company, but to also provide the energy our world needs while reducing carbon emissions in a meaningful way. Thanks for your time today, and we'll now turn the call over for your questions.