Denbury Inc.

Thank you for your patience, ladies and gentlemen. The Dan Barry Fair College Second 2022 Earnings Week call will begin shortly. During the presentation, you have the opportunity to ask questions by pressing star followed by 1 on a Typhoon keypad. Thank you for your patience. © transcript Emily Beynon Thank you. Good day, ladies and gentlemen, and welcome to Danbury's third quarter 2022 results conference call. My name is Glenn, and I'll be your moderator for today's call. At this time, all participants are in listen-only mode. Later, we will conduct a question and answer sessions. 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 Whitmarsh, Head of Investor Relations. Please proceed, sir.

Good morning, everyone, and thank you for joining us today. Over the last week, we've issued three news releases, two announcing significant CCUS agreements, and this morning, our Q3 earnings release. I hope you've had a chance to review them all and the supporting earnings materials that are available on our website at denberry.com. Results for the third quarter were very strong, as we generated strong cash flow, again, above expectations. 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 presentation, our most recent SEC filings and today's news release. 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 is provided in today's earnings release as well. This morning, our prepared comments will come from Chris Kendall, President and CEO. Mark Allen, CFO, David Shepherd, COO, 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, and good morning. It's hard to believe we're already in November and closing in on the end of 2022. As we began the year, I mentioned that I believe this would be a transformational year for Denbury. And looking back now, I may have underestimated just how impactful 2022 could be. This morning, I'll begin with a brief overview of the quarter and our outlook for the remainder of the year. Then I'll touch on some business highlights and we'll finish by opening the call for questions. Starting with the quarter and our outlook, first and foremost, we've continued to keep our people safe. Our teams are doing a fantastic job of nurturing our great safety culture, and we are tracking very well with last year's record low safety metrics, a testament to the sustained efforts of our team. We delivered robust financial and operating results in the third quarter. With $156 million in operating cash flow, and slightly better than expected sales volumes in both the Gulf Coast and Rocky Mountain regions. Our development projects at So-So and Beaver Creek, along with growing EOR response at Grieve, were key drivers of this outperformance. Fourth quarter production should be somewhat higher than the third quarter, putting us close to the midpoint of our original full year guidance, and we expect to enter 2023 with strong momentum. Due to supply chain challenges, some of our capital projects were pushed to the fourth quarter, but we still expect to be close to our full-year capital guidance. We currently have three drilling rigs and 36 workover rigs operating across the company, the highest level of rig activity we've had in many years. Through the first nine months of this year, we've generated $153 million in free cash after development capital. Consistent with what we've said before, in addition to maintaining a top-tier balance sheet, our priorities on capital allocation are, first, to support our EOR operations and develop our significant EOR resource at CCA, second, to fully fund the capital needs of the CCUS business, which we expect to grow over the next several years as we build out CO2 storage sites and expand our pipeline network, and third, As strong oil prices provide additional cash flow beyond our anticipated near-term needs, we plan to return capital to our shareholders, just as we've done this year. About two-thirds of the free cash we have generated this year has been allocated to our share repurchase program, with the remaining third split evenly between debt reduction and abandonment activities in our more mature fields. Our major EOR project at Cedar Creek Anticline continues to progress nicely. and first oil from that project is expected in less than a year. To handle that production, installation of the first two CO2 recycle facilities is in progress and expected to be completed in the first half of 2023. We've been focused on bringing EOR to the incredible CCA resource for a long time now, and it's very exciting to be so close to first oil there. Denver's EOR business is fundamental to the execution of our CCUS vision, providing the financial, technical, and operational capacity for us to grow substantially in CCUS. Turning to our CCUS activity, we've made tremendous progress on the commercialization of our CCUS business. Earlier this week, we announced our participation with Clean Hydrogen Works in the largest planned blue ammonia complex in the U.S., the Ascension Clean Energy, or ACE project. The ACE project is massive. projected to ultimately produce over 7 million tons of blue ammonia annually. It is expected to capture 6 million tons of CO2 annually by the end of 2027, with plans to expand to 12 million tons shortly thereafter, all of which will be transported and stored by Denbury. The ACE facility location along the Mississippi River is ideal for exporting ammonia and is less than two miles from our CO2 pipeline. With the land secured, and initial offtake agreements in place supporting 75% of the planned ammonia production, we feel very good about this project. We're also excited to continue working with Lake Charles Methanol, whose innovative project is designed to capture a million tons of CO2 per year beginning in 2027, while producing nearly 4 million tons per year of blue methanol. In connection with this new agreement, we plan to extend our pipeline network into a heavy industrial area near Lake Charles with both a high concentration of existing CO2 emissions, which we estimated over 20 million tons per year, and strong potential for new-build projects that would benefit from nearby CO2 infrastructure. Our recent agreements highlight the incredible benefits of our Gulf Coast network. Beginning with the certainty of a 900-mile CO2 pipeline system that is in place and in service today, our customers are joining a unique, expansive network with unmatched reliability and flexibility for transporting CO2 and storing that CO2. The network effect, originating with the broad reach of our Gulf Coast pipeline system, supplemented by more than a dozen EOR injection locations and multiple strategically located sequestration locations, allows us to amplify the capacity of this system far beyond the nameplate capacity. As an example, for the ACE project, we expect to have at least five options, including two nearby planned sequestration sites that are already secured for moving the 12 million tons of annually captured CO2 emissions from the plant. Several of these options would use little, if any, capacity on the existing pipelines. It's this network effect that generates massive scale while providing our customers with unbeatable reliability. You'll recall that for 2022, we set a target to execute CO2 offtake agreements totaling a cumulative 10 million metric tons per year, along with pore space agreements totaling a cumulative 1.2 billion metric tons. With our recent announcements, we now have 20 million metric tons per year under various offtake agreements, double our goal for the year, and we've executed pore space agreements for over 1.5 billion tons, significantly above our annual goal. And our build out of the CCUS business is just getting started. By the end of this year, we expect to start drilling the first well in our stratigraphic test well program supporting our EPA Class 6 permitting process. And we have multiple additional offtake and pore space agreements and detailed negotiations with new opportunities arising every week. The recent increase in 45Q CCUS tax incentives opens up even more carbon capture opportunities in a number of industries that were not previously economic, including cement, steel, certain power generation, industrial heat, and others. And with those new capture opportunities, we see a significant expansion of the potential market, a market that was already very exciting even before the 45Q increases. It's a very exciting time at Denbury. Our EOR business is generating strong cash flow. We have virtually no debt on our balance sheet, and our CCA EOR project is progressing nicely toward first production. At the same time, we're making rapid progress toward building an industry-leading CCUS business. I continue to believe that this company is in the right place at the right time, perfectly positioned to lead in the challenge of delivering the energy we all need today while decarbonizing the future. Thanks again for joining us today, and we'll now open the call for your questions.