Denbury Inc

F:HGJ1

Earnings Call Transcript 2021-Q2

[Operator]

Good day, ladies and gentlemen and welcome to Denbury's Second Quarter 2021 Results Conference Call. My name is Garel, and I will be your operator for today's call. [Operator instructions]

I would now like to turn the conference call over to your host for today's call, Brad Whitmarsh, Head of Investor Relations, you may begin.

[Brad Whitmarsh, Head-Investor Relations]

Good morning, everyone and thank you for joining us today. I hope you've had a chance to review our earnings release and supporting materials that we released this morning. They are available on our website at denbury.com and we may reference certain slides as we make our prepared remarks.

We 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 will reference certain non-GAAP measures. Reconciliation and disclosure relative to these measures is provided in today's news release and supplement as well. With that, I'll turn the call over to Chris.

[Chris Kendall, President and Chief Executive Officer]

Thanks Brad. Good morning everyone and thank you for joining us today’s call. I will start off with an overview of our business and will then be followed by Mark, who will review our second quarter results and provide an update on our outlook for the remainder of the year. I'm excited to have Nik Wood, our Denbury Carbon Solutions leader on the call today to provide an update on the great progress we're making in that business. David Sheppard, our SVP of Operations and Matt Dahan, our SVP of Business Development and Technology are here as well for the Q&A portion of the call.

I want to begin my comments by wishing you all well and hoping that you and your families are healthy. I also want to say thanks to all of the Denbury employees, contractors, and vendors for your hard work this year. You have kept an intense focus on safety and through your efforts, the company remains on track for another year of record performance.

While, Nik will provide a more detailed update on our CCUS business, I would like to provide a few thoughts on CCUS and Denbury’s role in this exciting industry. My confidence in the opportunity we have in CCUS has only grown as the year has progressed. CCUS is recognized as being second only to Linden Solar in its capacity to mitigate carbon emissions. CCUS utilizes technology that exists today. It can be massively scaled and it is particularly important for mitigating industrial emissions.

Recent projections show that CCUS needs to increase nearly 200-fold by 2050, to meet global emissions reduction targets. The potential of CCUS is widely recognized in Congress as well. With bipartisan support, most of the legislation I see working today is targeted to improve the incentives for increased captured industrial CO2 volumes. We are at a very exciting time in this industry and Denbury is extremely well positioned to play a key role.

I’m frequently asked how I see the future role of EOR and CCUS. Over time, I believe that the majority of captured CO2 will be sequestered outside of EOR, primarily because the volume of captured industrial CO2 is likely to be far greater than what can be injected into EOR fields.

As an example, while the CO2 volume that can be injected into Denbury’s EOR fields is a big number estimated that more than 160 million tons, the non-EOR storage volume that we are evaluating for potential sequestration sites along our infrastructure is more than one billion tons. That being said, EOR will be a critical element to the successful development of the CCUS industry in the U.S. especially in these early innings.

First and foremost, EOR is the only pathway today for CCUS projects to be sanctioned with CO2 off-take certainty under existing leases, permits and regulations. I am confident the approval timeframe for Class 6 permitting for sequestration will shorten over time. And we are working to provide flexibility in our offtake agreements that provides for both EOR and non-EOR sequestration. This flexibility gives our partners and customers the confidence to sanction capture projects in the near term while providing them with the option to ultimately transition to non-EOR sequestration.

In our EOR operations, we are injecting more CO2 to produce each barrel of oil, then that barrel’s combined scope one, two and three emissions. These barrels are carbon negative when we utilize industrial source CO2. And I believe that this blue oil, a term that we use to describe our carbon negative oil, will be an important energy transition fuel. In the second quarter, blue oil accounted for 26% of our total oil production.

To help position us to pursue premium pricing and other potential credits for this unique resource, we recently initiated a project with a third-party expert to verify the carbon intensity of this blue oil. Our expertise in managing CO2 for 20 plus years positions Denbury to be a leader and CCUS. Through our extensive CO2 EOR, recycling and injection operations, we currently process close to 70 million metric, tons of CO2 annually, nearly three times the amount of CO2 captured each year in the U.S. I continue to believe that there is not another company in this space as well, positioned as Denbury for continued and sustained relevance through the energy transition.

Next, I'll highlight a few year-to-date accomplishments and our focus for the remainder of the year. First, on the CCUS business, we are on track to reach and announce the deals for transportation and storage, as well as for sequestration sites by the end of the year. You'll hear more color from Nik in a moment, but then number of agreement, drafts crossing my desk makes me incredibly excited about how these negotiations are progressing, and they will highlight both the value and scale of this significant growth opportunity for our company.

Second we're generating strong cash flow through our solid operational execution, which was enhanced by an improved commodity price environment in the second quarter. Our teams have done a great job executing recent projects that Oyster Bayou and Tinsley, which will benefit production in the second half of the year and into next year.

Third, we're making great progress on our flagships CCA development project. This project with a total EOR recovery potential of over 400 million barrels is more than two times Denbury’s total current proved reserves. I expect that the immense CCA resource will generate decades of strong cash flow for our business and our use of industrial source CO2 means that all the production from this development will be carbon negative blue oil.

Installation of the 105 mile Greencore CO2 Pipeline extension is progressing as planned and on budget with completion expected late in the fourth quarter, positioning us for the first CO2 injection in the first half of next year.

Finally, we expect to have our 2019 and 2020 sustainability report out by the end of the quarter. I encourage you to read through the report when available to learn more about what differentiates Denbury as a unique ESG story within the industry.

Mark I'll now turn it over to you.

[Mark Allen]

Thanks, Chris. And good morning, everyone. Today I'll provide a review of Denbury’s results for the quarter and comment on our outlook for the remainder of the year. As Chris mentioned, we've had a very strong start to 2021 with great operational execution assisted by the improvement in oil prices.

After adjusting for the impact of fair value changes, primarily the mark-to-market changes in commodity derivatives our adjusted net income for the quarter was $33 million or $0.61 per diluted share, as compared to a GAAP net loss of $78 million or a $1.52 per diluted share.

Our fully diluted share count used for competing adjusted earnings per share for the quarter totaled 54.3 million shares that's ended up higher than we guided it previously due to the increase in our share price during the second quarter. The dilutive impact our Series A and B warrants, which has exercised prices in the low-to-mid-30s will vary with changes in our share price.

For now, I would recommend that you use a diluted share count in the 54 million to 56 million range for the second half of the year.

Operating cash flow adjusted for working capital changes was $71 million for the quarter, well, in excess of our $54 million of development capital incurred in the second quarter. Approximately one third of our capital spend this quarter was related to the CCA EOR development and the associated Greencore CO2 pipeline extension, with the remaining capital related to various development projects, including the Oyster Bayou and Tinsley projects.

Production volumes averaged 49,133 barrels of oil equivalent per day, up 4% from the first quarter, primarily due to a full quarter's contribution from the Wind River Basin assets acquired in early March this year and the winter storms that reduced first quarter production. Production was slightly behind expectations in the second quarter due to unplanned downtime at Conroe Field and a slower-than-expected production response in Phase 6 at Bell Creek Field. Phase 6 is now progressing nicely and is currently at or above expected levels, and Conroe is producing at its highest rates this year.

Revenues and other income were up $15 million or 20% from the first quarter, supported by strong oil price realizations and higher production volumes. Our pre-hedge realized oil price improved to $64.70 per barrel compared to just over $56 per barrel last quarter. In the second quarter, we paid out $63 million on our oil price hedges, resulting in a post hedge realized oil price of $50 per barrel compared to $47 per barrel last quarter. As you are likely aware, in connection with our new credit facility in September of last year, we were required by our banks to have certain hedges in place for 2021 and the first half of 2022, which has made a significant impact on our cash flow at today's oil price. We do not have ongoing hedging requirements under our credit facility and the additional hedges we have entered into are more favorable and provide upside price participation.

Lease operating expenses for the quarter totaled $110 million or $24.65 per BOE. This was in line with our expectations and about $13 million higher than the first quarter, after considering the nonrecurring $15 million benefit to LOE last quarter as a result of power disruption during the winter storm Uri. Around 40% of the $13 million increase in LOE was due to a full quarter's expense from the Wind River Basin acquisition in March, with the remainder split between higher CO2 costs and workover costs. The increase in CO2 costs is due to both higher CO2 injection volumes as winter storms in the first quarter caused injection curtailment at some fields, and the impact of higher oil prices. As we get into the warmer months, the level of workover activity typically increases, resulting in higher workover costs. Even with the sequential increase in LOE, our pre-hedge cash operating margin increased over $28 per BOE, an uplift of 10% from the first quarter.

Our strong operating cash flow, together with $18 million of cash proceeds from the undeveloped acreage sale of Hartzog Draw field, further strengthened the company's balance sheet in the second quarter. At June 30, our total debt was $69 million, down 45% from the prior quarter. Financial liquidity at the end of the second quarter increased to $531 million, including cash on hand and available credit facility borrowings.

Now I will make a few additional comments on our outlook for the remainder of the year. We are expecting production in the second half of the year to average around 50,000 barrels of oil equivalent per day, with fourth quarter production expected to be slightly higher than the third quarter. Volumes are expected to increase from a variety of projects, including Bell Creek Phase 6 as well as our Oyster Bayou and Tinsley projects. For the second half of the year, we expect all differentials to widen out to an average of $1.50 to $2 below WTI, driven primarily by our Gulf Coast pricing which has been weaker relative to WTI, correlating with the recent tightening of the WTI price spread.

On the capital front, through midyear, we have incurred $74 million of our $250 million to $270 million development budget. Consistent with our plan, we expect capital to increase significantly in the second half of the year, with the third and fourth quarters being relatively equal. As a reminder, approximately 60% of our development budget relates to the CCA EOR project and associated Greencore CO2 pipeline extension, which is primarily second half spend.

Our LOE guidance remains in the range of $22 to $24 per BOE for 2021, although we currently expect to be in the upper half of that range for the full year based on anticipated activity levels and higher commodity prices. At today's oil price, we have many workover projects with great economics. We expect the third quarter LOE to be somewhat higher than the fourth quarter, but the third quarter including more workover and preventative maintenance projects.

Our depletion, depreciation and amortization expense came in lower than projected as our oil reserves increased with the improvement in the trailing 12-month oil price. For the remainder of the year, we expect our DDA expense to be in the range of $37 million to $42 million per quarter. All other cost items are expected to be relatively consistent with second quarter levels going forward. We have an exceptionally strong balance sheet and plenty of available liquidity. This is an attractive place to be as we anticipate the massive growth potential ahead of us with CCUS, including pipeline capacity expansion, CO2 storage development and the potential for various other opportunities to create even more value in CCUS.

I'll now hand it off to Nik for an update on the CCUS business. Nik?

[Nik Wood, Senior Vice President-CCUS]

Thanks, Mark. It's great to be on the call today to share some of our team's exciting progress. Over the past quarter, we have been intensely focused on five strategic priorities that we believe will drive tremendous value for Denbury. I'll spend most of my time today on two of them, first, negotiating transportation and storage service agreements with CO2 emitters. And second, securing sequestration sites along our infrastructure. We have made significant progress on both fronts and are advancing negotiations with multiple parties. I'm confident we will be able to share information about several of these deals by the end of the year, if not sooner.

Chris mentioned the potential for Congress to improve the incentives for carbon capture, and we see the potential capture volumes massively expanding with higher 45Q credits currently being contemplated by many in Congress. Having said that, looking at the scale and pace of our discussions with both current and future remitters, I believe there is an incredible amount of capture that will take place at the current 45Q levels, primarily for lower cost of capture processes like ammonia, hydrogen, ethanol, biofuels and natural gas processing. Many of our potential customers will receive premium pricing or other credits on the products we produce while capturing emissions. We also see significant motivation beyond economics. For some, carbon capture is a necessity to continue to operate, following through on commitments they have made to significantly reduce their carbon footprint.

To provide some color on our discussions, we are currently engaged in negotiations with more than 15 different CO2 emitters representing capture CO2 volumes particularly exceeding 50 million tons per year. These deals are going to be long-term in nature, generally in the 15 to 20-year range. Some of these parties will be installing capture equipment on existing operations, while others are planning greenfield projects with carbon capture.

On the existing facility side, our system provides security of takeaway and immediacy to the customer. We have capability to take emissions as soon as the customer is ready. This is a clear benefit of having significant EOR presence today, where EOR is the only existing storage operation of any scale. And when I think about new build facilities [indiscernible] the optimal solution, where customers can select a plant location with easy access to our existing pipeline system and the ability to get their end products to key markets.

In both cases, Denbury provides security, reliability and diversity in takeaway, along with the expertise in managing and storing CO2. With our combination of assets, skill sets and experience, we believe that we are an ideal strategic partner. We see this advantage opening the door to opportunities to participate in some projects beyond our core transport and storage services, potentially gaining exposure to the significant value that low carbon products can generate in the market.

On the sequestration side, I see an abundance of opportunity. We are focused on building a portfolio of storage sites in close proximity to our infrastructure, thus providing necessary scale, certainty of storage, reliability and diversity to our customers. Our extensive pipeline system will provide multiple storage options while allowing us to optimize the capacity and efficiency of our network. Meanwhile, our team continues to plan for a substantial pipeline expansion in the Gulf Coast, with the goal to ensure that we can match takeaway with future market demand. We are currently engaged in discussions and negotiations on over 15 sequestration sites representing total estimated CO2 storage volumes of more than one billion tons. And combined with over 160 million tons of potential storage in our EOR fields, I am highly confident that we will have significant level of storage to provide our customers.

Wrapping up, I'd like to emphasize what an amazing opportunity I think CCUS is for Denbury. We started from an ideal place with great assets and deep experience in handling, injecting and monitoring CO2 underground. We can build from that ideal start and be great partners with industry in creating win-win solutions to help them safely, reliably reduce their emissions. I'm confident that Denbury Carbon Solutions will grow significantly in the coming years, creating substantial value for our shareholders.

Operator, we'd now like to open the call for questions.

[Operator]

Thank you. [Operator Instructions] Our first question comes from the line of Leo Mariani with KeyBanc. Please proceed with your questions.

[Chris Kendall, President and Chief Executive Officer]

Good morning, Leo.

[Leo Mariani, KeyBanc]

Hey, how are you? As expected, I can move a little bit around carbon capture here. I just wanted to kind of get a sense, I mean it sounds like you have a lot of irons in the fire, sensing a lot of confidence on getting things announced here. Just any indications of kind of sizes on some of these potential deals for transport? Are we talking kind of at least a couple of million tons per annum in terms of what you think is kind of the right size deal for you folks? And could you generally just talk to whether or not a lot of the customers are buying off on the idea of taking the CO2 injected into EOR for a few years and waiting kind of for some of these new sequestration sites to get fully permitted and operational?

Is that something that you think all the customers you're talking to are buying off on? And can you just talk a little bit to kind of the timeline of how that would play out in terms of if you were to sign some deals say later this year, when would you expect to get to first transport of CO2? And then when do you think you can transition those volumes eventually away from EOR into more permanent sequestration?

[Chris Kendall, President and Chief Executive Officer]

You bet, Leo. And I'm going to ask Nik to answer the specifics of that set of questions you asked. I would say your perception is exactly right on just how we're feeling about this and the progression that we're seeing with the agreements. Definitely excited about it. I'll ask Nik to share a bit on his thoughts on your specific questions.

[Nik Wood, Senior Vice President-CCUS]

Sure. Hi, Leo, this is Nik. Thanks for the question. In terms of the CO2 emitters, there's a wide variety of CO2 emissions from each site. But generally, the volumes are ranging from about one million to five million tons per year. When it comes to different sites wanting to go to EOR first or move directly into sequestration, pure sequestration, I would say generally the different sites are open to going to EOR first. And what we see is a lot of groups will have to have a high amount of capital to invest early on. And to get to that final investment decision, it's very good to have this EOR option to bring in early in.

When it comes to the timing on moving into our sequestration sites, we look for about a two or three-year time frame to get to the actual injection into a pure sequestration. And that is generally based on the technical evaluations that will need to be taking place early. Even though we've spent a lot of time going through these sites, evaluating the confidence in our containment in each one of these sites, we want to take some additional steps as we acquire these sites to further verify that containment is very solid. And so we look forward to doing that in parallel with getting the classic permits, which will then lead to us being able to inject in these sites in about two or three years. I hope that answered the questions.

[Leo Mariani, KeyBanc]

No, that was good color for sure. And then maybe could you just talk a little bit to the competitive landscape of what you're seeing in terms of these 15 various parties that you're sort of talking to? I guess really just both on the competition for permanent storage sites as well as the deals that you're in discussions on kind of transport and storage. Do you get a sense that these parties are talking to a lot of different players or are folks really starting to hone in more on Denbury as the right partner of choice just given the obvious infrastructure advantages and the wealth of experience in CO2?

[Chris Kendall, President and Chief Executive Officer]

Yes, Leo, this is Chris. I'll take that one. And certainly, you're right about a level of interest. And I would say that there is plenty of competition out there, although the competition is different in nature, just as you described there. A lot of interest. I'll tell you, I take it as a positive, just the view of the magnitude of what CCUS will be. There will be room for a lot of people to work in this space. I do think that Denbury brings something specifically different to the equation with the combination of experience and assets that we have. And so just a good example is, as you mentioned on storage, when we're talking to potential storage site owners, we're able to bring the infrastructure and the ability to gather CO2 from a big range of geography to bring into their areas.

So I think that there's an advantage there that definitely gives us a leg up. And honestly, I think that advantage plays through on the transportation and storage as well. And not to say that there's not going to be competition, but I think that what we have, the immediacy of being able to put CO2 into EOR and not have to work through the classic permits is another advantage. All of those put together puts us in a good place, but we know we still need to work hard to make this all happen.

[Leo Mariani, KeyBanc]

Okay. That's very helpful, guys. And maybe just lastly, given the strength of the balance sheet, I think you guys are nearing your kind of one-year anniversary of the exit on bankruptcy. Are you starting to give more serious consideration to returning capital which I think you guys would be allowed to do in September now?

[Mark Allen]

Leo, this is Mark. I'll take that. Yes, it's definitely something we're looking at. And as you've noted, our bank credit facility for the first year coming out of restructuring, we're prohibited from doing any dividends or buybacks or those type of things. Beyond that, there's a cash flow accumulator we have to meet, and so we're doing well on that front. And I'd say, as we kind of round out this year and evaluate what the opportunities are for CCUS, what we might be looking at next year, I think if there's some capital on that front, it's likely storage related, and we want to make sure we provide for that as we do see this as a significant growth element. So definitely more to come, and something that's top of mind. But I think as we work through the rest of this year and see how things come together, we'll be able to talk about that a bit more.

[Leo Mariani, KeyBanc]

Thank you.

[Operator]

Thank you. Our next question comes from the line of Michael Scialla with Stifel. Please proceed with your questions.

[Michael Scialla, Stifel]

Hey, good morning, guys.

[Chris Kendall, President and Chief Executive Officer]

Good morning, Mike.

[Michael Scialla, Stifel]

When you're thinking about potential expansion of the Green line, given that you've, at least you are in the negotiation stage for taking on more CO2 than what you have capacity for, what would be the timeframe for doing some expansion on the Green line? And is that going to entail looping of the line, or could that all be done with just more pumping stations?

[Nik Wood, Senior Vice President-CCUS]

Hi, Michael. This is Nik. I'll take that question. Talking about the Green line expansion, the first thing I want to reiterate is that we have ample capacity right now to take on additional CO2 through the Green line, which we see becoming useful here in the next couple of years as we bring on these additional CO2 emitters. When it comes to actually introducing capital to the line, I also want to remind you that the placement of where CO2 comes online and comes off the line, it can add to that capacity just naturally by having those in close proximity.

When it comes to when we will actually have to introduce additional capital to expand the line, it will be mostly through pump stations early on, and we'll be stepping through that in kind of a sequence that lines up with when we add those additional CO2 emissions to our line. So we'll be able to make them in very small chunks I'll call it as we step through the expansion line, which adds to our ability to kind of distribute that capital over time. There will probably be some time where we will have some line loops, but they'll probably be relatively small line loops to get us from where an emitter is to our store sites.

[Michael Scialla, Stifel]

Got it. That's helpful. And you mentioned you're looking at offshore storage sites. What kind of infrastructure would that require? You obviously don't have any offshore pipeline, so I wanted to get a sense of what you guys are thinking about there?

[Chris Kendall, President and Chief Executive Officer]

You bet, Mike. And we're looking at both onshore and offshore, and each one of them has particular advantages and disadvantages. And just as we've looked across the space here, we see good sites onshore and we're progressing those, but also offshore. Generally closer to shore, for example in state waters, and we see some good structures there. Obviously, that from just the past oil and gas development along the coastline. But we see those as being good as well, and so we're going to progress those. We think that there is some additional infrastructure cost, but there's also some simplicity in ownership, for example. And at least at this point, we think pursuing both onshore and offshore options, makes the most sense as we work to build this portfolio along that network that Nik was talking about.

[Michael Scialla, Stifel]

Would that require, Chris, some greenfield pipeline on your part? Or would you be able to I guess would be able to acquire something and convert that to a CO2 transportation line?

[Chris Kendall, President and Chief Executive Officer]

It could be either Mike. Generally, we like to move CO2 enhance the 900 class lines, which run at a higher pressure and keep the CO2 in a super critical phase. If you think about where the green pipeline is, it's not too far from the coastline along most of the Gulf Coast there. And, so jumping out into the, the near shore is not too far. And so I think that that's our primary choice. I do think along the way, you look at other alternatives from any existing infrastructure as well. But we're looking at it both ways.

[Michael Scialla, Stifel]

Okay. And last one for me Mark, you gave us some detail on the LOE, I don’t think it’s going to be higher in third quarter than second quarter. And given that quickly with the workovers, given that fourth quarter are going to be back down to kind of where the first quarter was, or how is that going to – I know you said it's going to step down, but trying to get a little bit more detail on that.

[David Sheppard, Senior Vice President-Operations]

It’s a true thing I appreciate it. Michael this is David Sheppard, I'll take that question. They're looking at the operations. Now, I'll just start out by saying LOE is something that we actively manage, through our business. And if you look back historically through Tom, we've been able to flex LOE calls to up and down as the business may be needs demand, and also, with commodity prices too, as well. Just recently in 2020, obviously we were able to dial down LOE substantially, with the market conditions. And as oil price has as climbed this year, we're able to make active decisions to make investment in some really high value top projects in LOE, you mentioned workovers specifically.

This year, last time we were barely running a work over rig not at all. Right now we're running quite a few upwards of 26 to 28 top rigs once again, making those elective decisions that bring all them good quality barrels there that capture margin that the oil price is presenting us right now.

As we watch oil price ebb and flow there we'll make those active decisions to choose investments or dial it back down as well.

Thinking about in the future a little bit too, as well, even a little bit more long range, no question the much you ask we're in the throes right now of installing our CCA CO2 pipeline project there. And as we complete that project, by the end of the year, we start injection in the first half of 2022. About 18 months later, we're going to see some production start coming into the mix there, back half 2023, those incremental barrels they're coming into our system, they're through our 100% industrial source CO2 injection are going to be at a lower lifting cost. They're going to be $10 to $15 top BOE range. So that will help influence our overall lifting cost for the company in that timeframe.

A lot of focus has been on CCUS business, I'm really excited about that in the out years too, as well. And just that if you look across our business right now, CO2 cost in particular, average about $4 a barrel across the aggregated business. And as we restructured contracts, wind up replacing our naturally sourced CO2 with industrial sourced CO2, I expect to see those prices fall materially throughout time.

[Michael Scialla, Stifel]

Very good. Thank you.

[Operator]

Thank you. Our next question comes from the line of Richard Tullis with Capital One. Please proceed with your questions.

[Richard Tullis, Capital One]

Thank you. Good morning, everyone.

[Chris Kendall, President and Chief Executive Officer]

Good morning, Richard.

[Richard Tullis, Capital One]

Good morning, Chris. Maybe start with Nik or Chris for this one, as you go through your negotiations with the emitters, what's the rough expected breakeven cost range per ton of CO2 captured for the emitters you're speaking with? I know you probably targeted some of the lower cost ranges now, and a lot of those are available along the Gulf Coast. But just trying to get a sense of CapEx plus ongoing OpEx breakeven for some of those projects.

[Chris Kendall, President and Chief Executive Officer]

You bet Richard, I'll start with that. I guess the way, I think, about it, first of all, when we think about even what a breakeven would look like, so certainly we're early days on a lot of this particularly on the storage. But this great advantage that we have of having already made the investment in the pipeline infrastructure is a great start. So, we have that infrastructure in place which really helps when we look forward at how capital and revenues would balance out. But from a breakeven standpoint, I'd say the way that we're looking at it is very much in line with what we've seen in the National Petroleum Council CCUS study. Those are essentially numbers that seem to make sense for the emitters, and for the transporters and stores to have a reasonable rate of return on their investments and cover their OpEx.

But at least what I see now, those MPC numbers that are out there make sense for the business. And we think we think they look good.

[Richard Tullis, Capital One]

Okay. No, that's helpful. And thoughts on Denbury potentially sharing in some of the CapEx costs initially, possibly help move along some of the project decisions, is that a potential option for Denbury at this point?

[Chris Kendall, President and Chief Executive Officer]

Yes, I think as we look into the years ahead Mark talked a bit about potentially needing some capital as we get into next year, even as we start to work towards some of that testing and validation of the storage sites that Nik talked about. So we'll need some capital there. And then as this develops, I can certainly imagine that growing to some pretty healthy levels. One thing I think about is just this base EOR business that that will continue to spin off cash, especially more beginning next year, as these hedges roll off. And in current oil price environment, we see that looking very good.

Along the way, I think, we'll have additional capital needs that we're going to need to think about. When the time comes, what I would say Richard is, I don't think there's any shortage of sources that could help along that when you have these great, very ESG-focused investments, that will help build this business.

[Richard Tullis, Capital One]

Thank you. I know it's still early days, as you mentioned. But how do you kind of see this play and out over the next year or two years as far as agreements go? Do you think it will skew more toward just transportation only, or do you think transportation plus storage will play a significant component in what you're able to capture?

[Chris Kendall, President and Chief Executive Officer]

You bet. For us, I really think Richard that the transportation and storage piece will be the greatest one. If you think about what these emitters are looking for, they want a solution. They want to capture their emissions, they want to have them handled in ways that they can be confident in the security of the storage and the long-term nature and reliability of the storage. And I think we can provide all of that. And so what I see as time goes on that it would be skewed that way. That's not to say that we wouldn't have some transportation-only type agreements, but I'd say my expectation is that the majority would be Denbury be the one that takes the CO2 at the gate of the plant and takes it away to where the emitter never has to think about it again.

[Richard Tullis, Capital One]

All right. And just lastly, for me with the parties you've spoken with already, and it sounds like it's a good number. How many of those, or what percentage roughly do you think are kind of waiting on some sort of decision with 45Q where maybe they require a higher 45Q to actually move forward?

[Chris Kendall, President and Chief Executive Officer]

I'll tell you, Richard, I think, the folks we're talking to today are not waiting. That's why they're talking to us. And so there is a lot of enthusiasm, a lot of focus for all of the reasons that Nik mentioned earlier. And so we're excited about just the magnitude of what that is. I do think that there's a good chance that we'll see 45Q at higher levels. I know it's being talked about extensively in Washington right now. And what I think will happen then Richard is that that just brings a whole new wave of different emitters that we're talking to, whether it's steelmaking, gas fired power, coal power, and so on.

So I think certainly the folks we're talking to now, they're not waiting. And I think that the ones who are in the wings there, it's just bringing more scale to the whole equation.

[Richard Tullis, Capital One]

That's helpful. Thanks a bunch, Chris. I appreciate it.

[Chris Kendall, President and Chief Executive Officer]

Thank you, Richard.

[Operator]

Thank you. There are no further questions at this time. I'd like to hand the call back over to Brad Whitmarsh for any closing comments.

[Brad Whitmarsh, Head-Investor Relations]

Sure. We appreciate everybody joining us today. And hope you are having a great summer. We got through all the questions there. If you have any follow-on, please, don't hesitate to reach out to Susan and myself. We'd love to connect with you. Thanks.

[Operator]

Thank you. That does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time. Have a great day.