September 21, 2015 / 4:18 PM / in 2 years

UPDATE 1-Denbury suspends dividend as hedging contracts set to expire

(Adds analysts' comments, context, background)

By Amrutha Gayathri

Sept 21 (Reuters) - Oil and gas producer Denbury Resources Inc said it would suspend dividend payments from the fourth quarter, ahead of the expiry of its hedging contracts, as it seeks to shore up its finances in the face of weak oil prices.

Denbury shares were up 7 percent at $3.11 in afternoon trading on the New York Stock Exchange.

Denbury, a producer focused more on enhanced oil recovery than on drilling wells like shale drillers, said it expected to save about $88 million annually by suspending its payout.

Nearly a year of sub-$60 a barrel oil prices is forcing higher-cost and debt-laden companies to rein in spending.

"Although our oil commodity hedges and proactive reduction in capital spending have buffered us to a large degree from this oil price downturn, the benefit from our hedges will begin to diminish in the fourth quarter of 2015," Chief Executive Phil Rykhoek said in a statement on Monday.

As old hedges begin to expire and banks begin to squeeze lending lines due to the fall in oil prices, more producers may face financial distress, triggering further consolidation that may quicken the decline in once-surging U.S. oil production.

Chesapeake Energy Corp, the second-largest U.S. natural gas producer, said in July it would suspend dividend payments. Canada's Penn West Petroleum Ltd followed suit this month.

"Every company has hedges that effectively lose their coverage at the end of this year, because no one had the opportunity back (in 2014) to put on significant hedges into 2016," Keybanc Capital Markets analyst David Deckelbaum said.

"Denbury can't sustain the dividend without hedging north of $75 per barrel," Deckelbaum said.

The company also reinstated a previously authorized share repurchase program, which was suspended in November last year, and has $222 million in authorized buybacks.

"Denbury's strategy was to be a total-returns kind of company because they are not drilling wells the same way shale players were," Raymond James analyst Andrew Coleman said.

However, the dividend elimination did not change the "complexion of things", and it was a "tactical response" to free up capital, Coleman said.

Denbury, which operates in the U.S. Gulf Coast and Rocky Mountain region, said it would pay a cash dividend of 6.25 cents per share for the third quarter.

The company said the timeline for reinstating a dividend was uncertain and would depend on oil prices. (Reporting by Amrutha Gayathri in Bengaluru; Editing by Anil D'Silva)

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