UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
--------------------------------
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended March 31, 2001
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission file number 1-12935
----------------------------------------
DENBURY RESOURCES INC.
(Exact name of Registrant as specified in its charter)
Delaware 75-2815171
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5100 Tennyson Parkway
Suite 3000
Plano, TX 75024
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (972) 673-2000
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at April 30, 2001
----- -----------------------------
Common Stock, $.001 par value 46,100,078
DENBURY RESOURCES INC.
INDEX
Page
----
Part I. Financial Information
- ------------------------------
Item 1. Financial Statements
Independent Accountants' Report 3
Condensed Consolidated Balance Sheets at March 31, 2001 (Unaudited)
and December 31, 2000 4
Condensed Consolidated Statements of Operations for the three months
ended March 31, 2001 and 2000 (Unaudited) 5
Condensed Consolidated Statements of Cash Flows for the three months
ended March 31, 2001 and 2000 (Unaudited) 6
Notes to Condensed Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10-18
Item 3. Quantitative and Qualitative Disclosures about Market Risk 19
Part II. Other Information
----------------------------
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
2
Part I. Financial Information
-----------------------------
Item 1. Financial Statements
- -----------------------------
INDEPENDENT ACCOUNTANTS' REPORT
To the Board of Directors of Denbury Resources Inc.:
We have reviewed the accompanying condensed consolidated balance sheet of
Denbury Resources Inc. and subsidiaries (the "Company") as of March 31, 2001,
and the related condensed consolidated statements of operations and cash flows
for the three-month periods ended March 31, 2001 and 2000. These financial
statements are the responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and of making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with auditing standards generally accepted in the United States of
America, the objective of which is the expression of an opinion regarding the
financial statements taken as a whole. Accordingly, we do not express such an
opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to such condensed consolidated financial statements for them to be in
conformity with accounting principles generally accepted in the United States of
America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet of
Denbury Resources Inc. and subsidiaries as of December 31, 2000 and the related
consolidated statements of operations, stockholders' equity (deficit), and cash
flows for the year then ended (not presented herein); and in our report dated
February 22, 2000, we expressed an unqualified opinion on those consolidated
financial statements. In our opinion, the information set forth in the
accompanying condensed consolidated balance sheet as of December 31, 2000 is
fairly stated, in all material respects, in relation to the consolidated balance
sheet from which it has been derived.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Dallas, Texas
May 2, 2001
3
DENBURY RESOURCES INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands of U.S. dollars except share amounts)
March 31, December 31,
2001 2000
------------- ---------------
(Unaudited)
Assets
Current assets
Cash and cash equivalents $ 26,521 $ 22,293
Accrued production receivables 32,042 37,527
Trade and other receivables 13,550 5,739
Derivative assets 2,356 4,305
Deferred tax asset 32,202 28,126
------------- --------------
Total current assets 106,671 97,990
------------- --------------
Property and equipment (using full cost accounting)
Oil and natural gas properties 771,315 746,062
CO2 properties and equipment 41,835 -
Unevaluated oil and natural gas properties 16,730 13,810
Less accumulated depletion and depreciation (464,102) (452,358)
------------- --------------
Net property and equipment 365,778 307,514
------------- --------------
Other assets 11,377 12,149
Noncurrent deferred tax asset 22,170 39,726
------------- --------------
Total assets $ 505,996 $ 457,379
============= ==============
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable and accrued liabilities $ 39,759 $ 26,628
Oil and gas production payable 12,460 12,158
------------- --------------
Total current liabilities 52,219 38,786
------------- --------------
Long-term liabilities
Long-term debt 206,870 199,000
Provision for site reclamation costs 3,053 2,770
Other 662 658
------------- --------------
Total long-term liabilities 210,585 202,428
------------- --------------
Stockholders' equity
Preferred stock, $.001 par value, 25,000,000 shares authorized;
none issued and outstanding - -
Common stock, $.001 par value, 100,000,000 shares authorized;
46,011,784 and 45,979,981 shares issued and outstanding at
March 31, 2001 and December 31, 2000, respectively 46 46
Paid-in capital in excess of par 330,007 329,339
Accumulated deficit (87,251) (113,220)
Accumulated other comprehensive income 390 -
------------- --------------
Total stockholders' equity 243,192 216,165
------------- --------------
Total liabilities and stockholders' equity $ 505,996 $ 457,379
============= ==============
(See accompanying Notes to Condensed Consolidated Financial Statements)
4
DENBURY RESOURCES INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands except per share amounts)
(Unaudited - U.S. dollars)
Three Months Ended
March 31,
-------------------------------------
2001 2000
------------- --------------
Revenues
Oil, natural gas and related product sales $ 78,315 $ 35,202
CO2 sales 859 -
Interest and other income 6 565
------------- --------------
Total revenues 79,180 35,767
------------- --------------
Expenses
Lease operating costs 12,528 9,032
Production taxes 2,608 1,657
General and administrative 2,401 1,972
Interest 4,663 3,608
Depletion and depreciation 12,345 7,825
Franchise taxes 275 138
Fair value loss on hedging contracts 3,140 -
------------- --------------
Total expenses 37,960 24,232
------------- --------------
Income before income taxes 41,220 11,535
Income tax provision
Current 2,000 20
Deferred 13,251 -
------------- --------------
Net income $ 25,969 $ 11,515
============= ==============
Net income (loss) per common share
Basic $ 0.56 $ 0.25
Diluted 0.55 0.25
Weighted average common shares outstanding
Basic 46,012 45,719
Diluted 47,261 45,720
(See accompanying Notes to Condensed Consolidated Financial Statements)
5
DENBURY RESOURCES INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands of U.S. dollars)
(Unaudited)
Three Months Ended
March 31,
-------------------------------
2001 2000
------------- ------------
Cash flow from operating activities:
Net income $ 25,969 $ 11,515
Adjustments needed to reconcile to net cash flow provided by operations:
Depreciation, depletion and amortization 12,345 7,825
Fair value loss on hedging contracts 3,140 -
Deferred income taxes 13,251 -
Other 277 222
------------- ------------
54,982 19,562
Changes in operating assets and liabilities:
Accrued production receivable 5,485 (4,599)
Trade and other receivables (7,811) (955)
Accounts payable and accrued liabilities 13,131 (1,822)
Oil and gas production payable 302 3,015
------------- ------------
Net cash flow provided by operations 66,089 15,201
------------- ------------
Cash flow from investing activities:
Oil and natural gas expenditures (31,113) (14,580)
Acquisitions of properties, net (38,895) (1,650)
Proceeds from dispositions of oil and natural gas properties - 200
(Increase) decrease in restricted cash (145) 294
Net purchases of other assets (238) (352)
------------- ------------
Net cash used for investing activities (70,391) (16,088)
------------- ------------
Cash flow from financing activities:
Bank repayments (13,130) -
Bank borrowings 21,000 -
Issuance of common stock 660 308
------------- ------------
Net cash provided by financing activities 8,530 308
------------- ------------
Net increase (decrease) in cash and cash equivalents 4,228 (579)
Cash and cash equivalents at beginning of period 22,293 11,768
------------- ------------
Cash and cash equivalents at end of period $ 26,521 $ 11,189
============= ============
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 6,480 $ 6,189
(See accompanying Notes to Condensed Consolidated Financial Statements)
6
DENBURY RESOURCES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. ACCOUNTING POLICIES
Interim Financial Statements
The accompanying condensed consolidated financial statements of Denbury
Resources Inc. (the "Company" or "Denbury") have been prepared in accordance
with accounting principles generally accepted in the United States of America
and pursuant to the rules and regulations of the Securities and Exchange
Commission. These financial statements and the notes thereto should be read in
conjunction with the Company's annual report on Form 10-K for the year ended
December 31, 2000. Any capitalized terms used but not defined in these Notes to
Consolidated Financial Statements have the same meaning given to them in the
Form 10-K.
The financial data for the three months ended March 31, 2001 and 2000,
included herein, has been subjected to a limited review by Deloitte & Touche
LLP, Denbury's independent accountants. Accounting measurements at interim dates
inherently involve greater reliance on estimates than at year end and the
results of operations for the interim periods shown in this report are not
necessarily indicative of results to be expected for the fiscal year. In the
opinion of management of Denbury, the accompanying unaudited condensed
consolidated financial statements include all adjustments (of a normal recurring
nature) necessary to present fairly the consolidated financial position of the
Company as of March 31, 2001 and the consolidated results of its operations and
cash flows for the three months ended March 31, 2001 and 2000.
Net Income per Common Share
Basic net income per common share is computed by dividing net income by the
weighted average number of shares of common stock outstanding during the period.
Diluted net income per common share is calculated in the same manner but also
considers the impact on net income and common shares for the potential dilution
from stock options, stock warrants, and any other convertible securities
outstanding. For the three months ended March 31, 2001 and 2000, there were no
adjustments to net income for purposes of calculating diluted net income per
common share. The following is a reconciliation of the weighted average common
shares used in the basic and diluted net income per common share calculations
for the three months ended March 31, 2001 and 2000.
Three Months Ended
March 31,
--------------------------
2001 2000
------------ ------------
(Shares in thousands)
Weighted average common shares - basic 46,012 45,719
Potentially dilutive securities:
Stock options 1,249 1
----------- -----------
Weighted average common shares - diluted 47,261 45,720
============ ============
For the three months ended March 31, 2001 and 2000, approximately 1.3
million and 3.3 million shares under option, respectively, were excluded from
the diluted net income per share calculation as the exercise prices of the
options exceeded the average market price of the Company's common stock for
these periods.
7
DENBURY RESOURCES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
2. COMPREHENSIVE INCOME
The following table presents comprehensive income for the three months
ended March 31, 2001.
Three Months Ended
March 31, 2001
--------------------------------------
(Amounts in thousands)
Accumulated other comprehensive income - December 31, 2000 $ -
Net income $ 25,969
Other comprehensive income - net of tax
Cumulative effect of change in accounting principle - January 1, 2001 1,012
Reclassification adjustments related to derivative contracts (622)
---------------
Total other comprehensive income 390 390
--------------- --------------
Comprehensive income $ 26,359
===============
Accumulated other comprehensive income - March 31, 2001 $ 390
==============
The Company did not have any items that met the criteria of other
comprehensive income, other than net income, for the three months ended March
31, 2000.
3. NOTES PAYABLE AND LONG-TERM INDEBTEDNESS
March 31, December 31,
2001 2000
--------------- ---------------
(Amounts in thousands)
(Unaudited)
9% Senior Subordinated Notes Due 2008 $ 125,000 $ 125,000
Senior bank loan 81,870 74,000
--------------- ---------------
Total long-term debt $ 206,870 $ 199,000
=============== ===============
The Company's credit facility provides for a semi-annual redetermination of
the borrowing base on April 1st and October 1st. At the April 1, 2001
redetermination, the Company's borrowing base was increased from $150 million to
$200 million, leaving the company with a borrowing capacity of approximately
$118 million as of April 1, 2001.
4. PRODUCT PRICE HEDGING CONTRACTS
The Company enters into various financial contracts to hedge its exposure
to commodity price risk associated with anticipated future oil and natural gas
production. For the years 2001 and 2002, the Company acquired "puts" or floors
in 2000 to hedge a portion of its projected oil and natural gas production. The
floors provide the Company protection if oil and natural gas prices decrease
below the floor contract prices, but do not limit the up-side if oil and natural
gas prices remain above the floor prices or increase. For 2001, the Company
acquired a $22.00 floor on 12,800 Bbls/d and a $2.80 floor on 37.5 MMBtu/d for
an aggregate cost of $2.6 million, which together cover approximately 75% of the
Company's anticipated production, excluding the acquisitions made in the fourth
quarter of 2000. For the properties acquired in the fourth quarter of 2000, the
Company purchased puts or floors at the time of acquisition for the anticipated
proven natural gas production from these properties for 2001 and 2002. These
8
DENBURY RESOURCES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
floors were purchased at a total cost of $2.5 million and have varying volume
and price floors each quarter for 2001 and 2002. The following table lists all
of the individual floors in place as of March 31, 2001.
Volume Floor Volume Floor
Period Per Day Price Period Per Day Price
----------------------------------- -------------- ---------------------
Oil Options or "puts" (Bbls/d): Gas Options or "puts" (MMBtu/d):
2001 12,800 $22.00 Q1 - 2002 5.3 $3.65
Q1 - 2002 6.7 $3.07
Gas Options or "puts" (MMBtu/d): Q2 - 2002 3.8 $3.40
2001 37.5 $2.80 Q2 - 2002 4.4 $3.04
Q3 - 2002 2.9 $3.38
Q2 - 2001 10.5 $3.95 Q3 - 2002 3.5 $2.99
Q2 - 2001 13.9 $3.23 Q4 - 2002 2.1 $3.38
Q3 - 2001 10.0 $3.70 Q4 - 2002 2.5 $2.93
Q3 - 2001 13.0 $3.07
Q4 - 2001 7.9 $3.56
Q4 - 2001 10.4 $2.94
On January 1, 2001, the Company adopted Financial Accounting Standard No.
133 ("FAS 133"), "Accounting for Derivative Instruments and Hedging Activities."
This statement requires that every derivative instrument be recorded on the
balance sheet as either an asset or a liability measured at fair value. The
change in the fair value of the derivative contracts is to be recognized either
currently in earnings or accumulated other comprehensive income (equity)
depending on whether specific hedge criteria are met. Upon adoption, the Company
recorded a $1.6 million increase in assets for the fair value of the Company's
floors in place, with a corresponding increase to accumulated other
comprehensive income of approximately $1.0 million, after tax, for the
transition adjustment as of January 1, 2001.
At March 31, 2001, the fair value of the Company's derivative contracts had
decreased from $6.7 million at January 1, 2001 to $2.6 million, of which
approximately $2.4 million is recorded in current assets and $233,000 is
recorded in other noncurrent assets. This decrease in fair value was due
primarily to the increase in the price of oil futures since December 31, 2000
and the expiration of certain contracts in the first quarter of 2001 with a cost
of $1.1 million. The Company recorded the $4.1 million loss in fair value during
the first quarter as a $3.1 million loss in the income statement, with the
remaining loss of $1.0 million ($622,000 net of income taxes) recorded as a
reclassification out of accumulated other comprehensive income. The Company
expects that the remaining balance of accumulated other comprehensive income of
approximately $390,000 (net of income taxes) as of March 31, 2001 will be
reclassified into the income statement as a gain over the remainder of 2001. As
a result of the adoption of FAS 133, in the first quarter of 2001 the Company
did not adjust its oil and natural gas revenues to reflect fair value hedging
adjustments.
During the first quarter of 2000 the Company had zero-cost collars in place
that hedged 3,000 Bbls/d with a price floor of $14.00 per Bbl and a price
ceiling of $18.05 per Bbl and a natural gas contract that hedged 24 million
cubic feet of natural gas per day with a price floor of $1.90 per MMBtu and a
price ceiling of $2.58 per MMBtu. In the first quarter of 2000 the Company paid
approximately $2.9 million on its oil hedge contract, which reduced the net
average price realized by the Company for its oil sold in the first quarter by
$2.23 per Bbl, while the Company paid approximately $2,000 on its natural gas
hedge contract.
5. PURCHASE OF CARBON DIOXIDE (CO2) ASSETS
On January 18, 2001, the Company entered into a purchase and sale agreement
to acquire certain CO2 reserves, production and associated assets from a
division of Airgas, Inc. for $42 million. The cost of the acquisition was funded
9
DENBURY RESOURCES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
by available cash and $21 million borrowed under Company's bank credit facility.
The acquisition included ten producing CO2 wells and production facilities
located near Jackson, Mississippi, and a 183-mile, 20-inch pipeline that is
currently transporting CO2 to Denbury's tertiary recovery operation at Little
Creek Field, as well as to other commercial customers. The Company completed the
purchase of these assets on February 2, 2001.
10
DENBURY RESOURCES INC.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following should be read in conjunction with the Company's financial
statements contained herein and in its Form 10-K for the year ended December 31,
2000, along with Management's Discussion and Analysis of Financial Condition and
Results of Operations contained in such Form 10-K. Any capitalized terms used
but not defined in the following discussion have the same meaning given to them
in the Form 10-K.
Denbury is a growing independent oil and gas company engaged in
acquisition, development and exploration activities in the U.S. Gulf Coast
region. The Company is the largest oil and natural gas producer in Mississippi,
holds key operating acreage onshore Louisiana and has a growing presence in the
offshore Gulf of Mexico areas. The Company increases the value of acquired
properties through a combination of exploitation, drilling, and proven
engineering extraction processes.
Capital Resources and Liquidity
As more fully described under "Results of Operations" below, the Company
posted record quarterly earnings and cash flow from operations (before the
changes in working capital balances) for the first quarter of 2001. The
Company's earnings and cash flow were up significantly from the first quarter of
2000 primarily due to increased natural gas prices and natural gas production.
Natural gas prices increased 192% in the first quarter of 2001, and production
for the first quarter of 2001 increased 119%, both as compared to the prior year
quarter. The Company also had its eighth consecutive quarterly increase in
average daily production in the first quarter of 2001, with 26,635 barrels of
oil equivalent produced per day ("BOE/d"), a 39% increase over the first quarter
of the prior year. The percentage of the Company's production that comes from
natural gas increased to 39% for the first quarter of 2001 as compared to 25% in
the prior year quarter.
During the first quarter of 2001, the Company borrowed $21 million on its
bank credit facility to partially fund a $42 million acquisition of carbon
dioxide reserves, producing wells, facilities and a 183-mile pipeline. This
strategic acquisition gives the Company the ability to control the price and
availability of CO2 which will be used to expand its tertiary recovery
operations at Little Creek Field and the recently acquired West Mallalieu Field,
and gives the Company the ability to expand to other development projects in the
area and elsewhere in Mississippi (see "CO2 Acquisition and Operations" below).
With the excess cash flow generated from operations in the first quarter of
2001, the Company paid back $13.1 million of its bank borrowings, leaving just
under $82 million outstanding on its credit facility at March 31, 2001.
The bank credit facility provides for a semi-annual redetermination of the
borrowing base on April 1st and October 1st. At the April 1st redetermination,
the Company's borrowing base was increased from $150 million to $200 million,
primarily as a result of the increase in the Company's oil and gas reserve
quantities and values as of December 31, 2000. This increase gave the Company
approximately $118 million of available credit on its bank credit line as of
April 1, 2001. The next scheduled redetermination for the bank credit facility
is October 1, 2001. Such redetermination will depend on current and expected oil
and natural gas prices at that time, the Company's development and acquisition
results during 2001, the then current level of debt and several other factors,
some of which are beyond the Company's control, and could result in upward or
downward adjustments to the Company's borrowing base.
During the first quarter of 2001, the Company spent a total of $31.1
million on its capital development program, with a total budgeted capital
program of approximately $150 million for the year, excluding acquisitions. The
Company anticipates that this spending level will be sufficient to increase its
average daily production rate each quarter during 2001, with a 34% overall
increase anticipated for 2001 when compared to the average in 2000. The Company
has purchased "puts" or floors that cover approximately 80% of its expected 2001
production (see "Market Risk Management"), which helps assure that a majority of
the Company's capital program can be implemented and that it can achieve a
minimum rate of return on its recent acquisitions, provided that its other
assumptions related to the acquisitions made in the fourth quarter of 2000 are
correct. Although the level of the Company's projected cash flow is highly
variable and difficult to predict due to the volatility in product prices, the
success of its drilling and developmental work and other factors, the Company
expects 2001 cash flow from operations to exceed its 2001 capital development
expenditures, with any excess cash flow used to reduce bank debt during the
year, or to partially fund acquisitions.
11
DENBURY RESOURCES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The Company is continuing to pursue beneficial acquisitions which, if
identified and accomplished, should be accretive to the Company's operating
results. However, identified and the Company may not be able to identify
suitable acquisitions, and if consummated, such acquisitions may not be
successful in achieving desired profitability objectives. The Company has a
significant inventory of development and exploration projects in-house, but on a
long-term basis the Company will need to make acquisitions in order to replace
its production. The Company's future growth could be limited or even eliminated
if the Company is unable to complete suitable acquisitions or is unable to fund
such acquisitions for an extended period of time.
Sources and Uses of Funds
During the first quarter of 2001, the Company spent approximately $31.1
million on exploration and development expenditures and approximately $38.9
million on acquisitions, net of purchase price adjustments. The exploration and
development expenditures included approximately $21.1 million spent for
drilling, $4.0 million for geological, geophysical and acreage expenditures and
$6.0 million for workover costs. These expenditures were funded by cash flow
from operations.
During the first quarter of 2000, the Company spent approximately $14.6
million on oil and natural gas development expenditures and approximately $1.7
million on acquisitions. The development expenditures included approximately
$6.4 million spent for drilling, $2.0 million for geological, geophysical and
acreage expenditures and $6.2 million for workover costs. These expenditures
were funded by bank debt and cash flow from operations.
Results of Operations
The Company's results of operations for the first quarter of 2001 improved
significantly over the comparable prior year quarter due to a 61% increase in
product prices and a 39% increase in production, both on a BOE basis, offset in
part by a 2% increase in production expense per BOE, as further set forth below.
Three Months Ended
March 31,
- ------------------------------------------------------------------------------------------
2001 2000
- ------------------------------------------------------------------------------------------
AVERAGE DAILY PRODUCTION VOLUME:
Bbls 16,269 14,382
Mcf 62,195 28,439
BOE (1) 26,635 19,121
OPERATING REVENUES AND EXPENSES (THOUSANDS)
Oil sales $ 35,402 $ 28,389
Natural gas sales 42,913 6,813
----------------------------
Total oil and gas revenues $ 78,315 $ 35,202
----------------------------
CO2 sales $ 859 $ -
----------------------------
Oil and gas lease operating costs $ 12,470 $ 9,032
Oil and gas production taxes 2,608 1,657
CO2 operating costs 58 -
----------------------------
Total production expenses $ 15,136 $ 10,689
----------------------------
12
DENBURY RESOURCES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Three Months Ended
March 31,
- ---------------------------------------------------------------------------------------------
2001 2000
- ---------------------------------------------------------------------------------------------
UNIT PRICES - INCLUDING IMPACT OF HEDGES(2)
Oil price per barrel ("Bbl") $ 24.18 $ 21.69
Gas price per thousand cubic feet ("Mcf") 7.67 2.63
UNIT PRICES - EXCLUDING IMPACT OF HEDGES
Oil price per Bbl $ 24.18 $ 23.92
Gas price per Mcf 7.67 2.63
OIL AND GAS OPERATING REVENUES AND EXPENSES PER BOE (1):
Oil and natural gas revenues $ 32.67 $ 20.23
-------------------------------
Oil and gas lease operating costs $ 5.20 $ 5.19
Oil and gas production taxes 1.09 0.95
-------------------------------
Total oil and gas production expenses $ 6.29 $ 6.14
<FN>
(1) Barrel of oil equivalent using the ratio of one barrel of oil to 6 Mcf of
natural gas ("BOE").
(2) As a result of the adoption of FAS No. 133 as of January 1, 2001, the
Company did not record the adjustments to reflect the changes in the fair value
of its hedges as a reduction in revenue during the first quarter of 2001 (see
"Market Risk Management" below).
</FN>
Production: In the first quarter of 2001 production averaged 26,635 BOE/d,
a 39% increase from the first quarter of 2000 and a slight increase from the
fourth quarter of 2000 average of 26,296 BOE/d. The increase in BOE/d for the
first quarter of 2001, as compared to the first quarter of 2000, is a result of
successful development and exploitation work on the Company's largest fields,
combined with strategic acquisitions. Approximately 43% or 3,200 of the 7,514
BOE/d increase between the respective first quarters of 2000 and 2001 came from
internal development at two of the Company's largest fields, Heidelberg and
Lirette Fields. The acquisitions of Thornwell, Port Barre and Iberia Fields in
the fourth quarter of 2000 contributed the balance of the increase of
approximately 4,300 BOE/d.
At Heidelberg Field, the Company's largest field, production increased for
the thirteenth consecutive quarter, averaging 7,985 BOE/d in the first quarter
of 2001, a 21% increase from the first quarter of 2000 and a slight increase
from the fourth quarter of 2000. The daily production increase is attributable
to the Company's active drilling program over the past year and expected
response from the ongoing production enhancement activities. Production
increases at Lirette Field primarily came from the Company's discovery well, the
Leon Hebert Heirs #1 (formerly the Fina Fee No. 1), where production commenced
in late September 2000.
Production also commenced during the first quarter of 2001 at three of the
Company's offshore fields, Main Pass, High Island 287 and High Island 521. As of
April 30, 2001, these fields were producing 12MMcf/d net to the Company's
interest, with a negligible impact on the first quarter's average daily
production rate.
Oil and Natural Gas Revenues: Oil and natural gas revenues increased 122%
in the first quarter of 2001 with approximately 69% of the increase attributable
to improved product prices, particularly natural gas, and approximately 31%
attributable to the 39% increase in average daily production increases discussed
above. The Company's unhedged realized natural gas price increased 192% between
the two quarters, increasing from $2.63 per Mcf in the first quarter of 2000 to
$7.67 per Mcf for the first quarter of 2001. At the end of 2000, natural gas
prices approached $10 per Mcf but have declined since that time to a price as of
May 10, 2001 of approximately $4.20 per Mcf, although this price is still 60%
above the average price per Mcf for the first quarter of 2000. The Company's net
realized unhedged oil price increased slightly between the respective first
quarters, from $23.92 per Bbl in the first quarter of 2000 to $24.18 per Bbl in
the first quarter of 2001.
13
DENBURY RESOURCES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
In the first quarter of 2000, the Company recorded a $2.9 million loss on
its oil hedge contracts, which was included in oil and gas revenues, reducing
the net average price received for production sold by $2.23 per Bbl. In the
first quarter of 2001, the Company adopted Financial Accounting Standard No. 133
("FAS 133"), "Accounting for Derivative Instruments and Hedging Activities." As
a result of this adoption, the Company recognized a $3.1 million charge in the
first quarter of 2001 to record the loss in fair value on its floors since
January 1, 2001. As a result of the adoption of FAS 133, the Company did not
record this charge to oil and gas revenues as was the case in the prior year
when the Company hedged its production with zero-cost collars. See "Market Risk
Management" herein for further information regarding the Company's hedging
contracts and the effects of the adoption of FAS 133 in the first quarter of
2001.
Production Expenses: Oil and gas production and operating expenses
increased by $4.4 million, or 41%, between the first quarters of 2000 and 2001;
however, on a BOE basis the increase in production and operating expenses was
only 2%. Approximately $800,000 of this increase is attributable to acquisitions
made during the last year, $1.0 million due to increased production taxes, which
correlate with the higher natural gas prices and increased production, and
approximately $2.4 million due to increased operating costs, primarily at
Heidelberg Field and Little Creek Field as a result of the increased activity
levels, more producing wells and general increases in the cost of equipment and
services. In particular, the cost of lease use gas and other production related
power costs increased approximately $1.6 million from the prior year quarter due
to the higher well count and higher natural gas prices. As a result of the CO2
Acquisition, the cost of CO2 used in the tertiary recovery activities at Little
Creek Field was reduced by $250,000 for the two months during which the CO2
assets were owned by the Company.
CO2 Acquisition and Operations: On January 18, 2001, the Company entered
into a purchase and sale agreement to acquire certain CO2 reserves, production
and associated assets from a division of Airgas, Inc. for approximately $42
million. The acquisition included ten producing CO2 wells and production
facilities located near Jackson, Mississippi, and a 183- mile, 20-inch pipeline
that is currently transporting CO2 to Denbury's tertiary recovery operation at
Little Creek Field, as well as to other commercial customers. The Company
completed the purchase of these assets on February 2, 2001. The Company realized
$801,000 in operating profit from this acquisition during the first quarter of
2001.
General and Administrative Expenses
14
DENBURY RESOURCES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The net general and administrative ("G&A") expenses increased as set forth
below.
Three Months Ended
March 31,
- ---------------------------------------------------------------------------------------
2001 2000
- ---------------------------------------------------------------------------------------
NET G&A EXPENSES (THOUSANDS)
Gross expenses $ 7,482 $ 6,034
State franchise taxes 275 138
Operator overhead charges (4,195) (3,306)
Capitalized exploration expenses (886) (756)
----------------------------
Net expenses $ 2,676 $ 2,110
----------------------------
Average G&A cost per BOE $ 1.11 $ 1.21
Employees as of March 31 249 228
- ---------------------------------------------------------------------------------------
Gross G&A expenses increased by $1.4 million, or 24%, between the first
quarters of 2000 and 2001 primarily due to increases in employee related
costs resulting from salary increases and personnel additions. The increase in
gross G&A is offset in part by an increase in operator overhead recovery charges
between the first quarters of 2000 and 2001. The Company's well operating
agreements allow the Company, when it is the operator, to charge a well with a
specified overhead rate during the drilling phase and to also charge a monthly
fixed overhead rate for each producing well. As a result of the additional
operated wells acquired in the Company's recent acquisitions and increased
drilling activity in the last three quarters of 2000 and first quarter of 2001,
the amount recovered by the Company as operator overhead charges increased 27%
in the first quarter of 2001 as compared to the first quarter of 2000. The net
effect was a 27% increase in net G&A expense during the first quarter of 2001
but an 8% decrease on a BOE basis because of the increased production on both an
absolute and per well basis.
Interest and Financing Expenses
Three Months Ended
March 31,
- --------------------------------------------------------------------------------------------
AMOUNTS IN THOUSANDS EXCEPT PER UNIT AMOUNTS 2001 2000
- --------------------------------------------------------------------------------------------
Interest expense $ 4,663 $ 3,608
Non-cash interest expense (265) (222)
--------------------------
Cash interest expense 4,398 3,386
Interest and other income (6) (565)
--------------------------
Net cash interest expense $ 4,392 $ 2,821
--------------------------
Average net cash interest expense per BOE $ 1.83 $ 1.62
Average debt outstanding $ 207,493 $ 152,500
- --------------------------------------------------------------------------------------------
The Company's debt level averaged approximately $207.5 million for the
first quarter of 2001 and increased $7.9 million from December 31, 2000. In
February 2001, the Company borrowed $21 million to fund a portion of the $42
million CO2 Acquisition and repaid $13.1 million of bank debt with excess cash
15
DENBURY RESOURCES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
generated from operations. In comparison, in the first quarter of 2000 the
Company's debt level remained constant at $152.5 million. The increase in
average debt levels in 2001 and a decrease in other income as a result of
marketing losses, resulted in a 56% increase in net cash interest expense and a
13% increase on a BOE basis.
Depletion, Depreciation and Site Restoration
Three Months Ended
March 31,
- -------------------------------------------------------------------------------------------
AMOUNTS IN THOUSANDS EXCEPT PER UNIT AMOUNTS 2001 2000
- -------------------------------------------------------------------------------------------
Depletion and depreciation $ 11,744 $ 7,455
Site restoration provision 282 112
Depreciation of other fixed assets 319 258
-------------------------
Total amortization $ 12,345 $ 7,825
-------------------------
Average DD&A cost per BOE $ 5.15 $ 4.50
- -------------------------------------------------------------------------------------------
The Company's depletion, depreciation and amortization ("DD&A") rate
increased from $4.50 per BOE for the first quarter of 2000 (and an average of
$4.62 for fiscal year 2000) to $5.15 per BOE for the first quarter of 2001. This
increase is based on the Company's current estimates regarding production,
reserves and development costs for the year, which assumes that the average
finding cost will be higher than the 2000 average DD&A rate of $4.62, thus
causing the DD&A rate to increase. The Company's acquisition of Thornwell Field
in the fourth quarter of 2000 at a higher than average cost per BOE also caused
an increase in the Company's DD&A rate in 2001. This property was purchased on a
rate of return basis and is likely to payout in less than one year, based on
current prices and production levels.
The Company also provides for the estimated future costs of well
abandonment and site reclamation, net of any anticipated salvage, on a
unit-of-production basis. This provision is included in DD&A expense.
Income Taxes
Three Months Ended
March 31,
- -------------------------------------------------------------------------------------------
2001 2000
- -------------------------------------------------------------------------------------------
Income tax provision (thousands)
Current income tax expense $ 2,000 $ 20
Deferred income tax expense 13,251 -
------------ ----------
Total income tax expense $ 15,251 $ 20
------------ ----------
Average income tax expense per BOE $ 6.36 $ 0.01
Effective tax rate 37% 2%
- -------------------------------------------------------------------------------------------
As a result of the reversal of the valuation allowance on the Company's net
deferred tax asset in the fourth quarter of 2000, the Company recorded income
tax expense for the first quarter of 2001 at its estimated full tax rate of 37%.
In comparison, for the first quarter of 2000, the Company's net deferred tax
asset was fully reserved and was used to offset any taxable income for that
period, except for an estimated minor amount of alternative minimum tax that
could not be offset by net operating losses. Based on current projections and
prices, the Company anticipates that its alternative minimum tax net operating
loss carryforwards will be used up before the end of 2001, resulting in a
significant increase in current income tax expense in 2001 in order to provide
for anticipated alternative minimum taxes.
16
DENBURY RESOURCES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
Primarily as a result of the increased natural gas prices and higher
average daily production levels, net income and cash flow from operations
increased on both a gross and per share basis between the first quarter of 2000
and the first quarter of 2001 as set forth below.
Three Months Ended
March 31,
- -------------------------------------------------------------------------------------------
AMOUNTS IN THOUSAND EXCEPT PER SHARE AMOUNTS 2001 2000
- -------------------------------------------------------------------------------------------
Net income $ 25,969 $ 11,515
Net income per common share:
Basic $ 0.56 $ 0.25
Diluted 0.55 0.25
Cash flow from operations (1) $ 54,982 $ 19,562
- -------------------------------------------------------------------------------------------
(1) Represents cash flow provided by operations, exclusive of the net change in
non-cash working capital balances.
The following table summarizes the cash flow, DD&A and results of
operations on a BOE basis for the comparative periods. Each of the significant
individual components are discussed above.
Three Months Ended
March 31,
- --------------------------------------------------------------------------------------
Per BOE Data 2001 2000
- --------------------------------------------------------------------------------------
Revenue $ 32.67 $ 20.23
Lease operating costs (5.20) (5.19)
Production taxes (1.09) (0.95)
- --------------------------------------------------------------------------------------
Production netback 26.38 14.09
Operating cash flow from CO2 operations 0.33 -
General and administrative expenses (1.11) (1.21)
Net cash interest expense (1.83) (1.62)
Current income taxes and other (0.83) (0.01)
- --------------------------------------------------------------------------------------
Cash flow from operations(1) 22.94 11.25
DD&A (5.15) (4.50)
Deferred income taxes (5.53) -
Fair value loss on hedging contracts (1.31) -
Other non-cash items (0.12) (0.13)
- --------------------------------------------------------------------------------------
Net income $ 10.83 $ 6.62
- --------------------------------------------------------------------------------------
(1) Represents cash flow provided by operations, exclusive of the net change in
non-cash working capital balances.
Market Risk Management
The Company uses fixed and variable rate debt to partially finance budgeted
expenditures. These agreements expose the Company to market risk related to
changes in interest rates. The Company does not hold or issue derivative
financial instruments for trading purposes. The carrying and fair value of these
debt instruments have not changed materially since year-end.
17
DENBURY RESOURCES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The Company also enters into various financial contracts to hedge its
exposure to commodity price risk associated with anticipated future oil and
natural gas production. For the years 2001 and 2002, the Company acquired puts
or floors in 2000 to hedge a portion of its anticipated oil and natural gas
production. The floors provide the Company protection if oil and natural gas
prices decrease below the floor contract prices, but do not limit the up-side if
oil and natural gas prices remain above the floor prices or increase. For 2001,
the Company acquired a $22.00 floor on 12,800 Bbls/d and a $2.80 floor on 37.5
MMBtu/d for an aggregate cost of $2.6 million, which together cover
approximately 75% of the Company's anticipated production, excluding the
acquisitions made in the fourth quarter of 2000. For the properties acquired in
the fourth quarter of 2000, the Company purchased puts or floors at the time of
acquisition for the anticipated proven natural gas production from these
properties for 2001 and 2002. These floors were purchased at a total cost of
$2.5 million and have varying volume and price floors each quarter for 2001 and
2002. The following table lists all of the individual floors in place as of
March 31, 2001.
Volume Floor Volume Floor
Period Per Day Price Period Per Day Price
----------------------------------- -------------- ---------------------
Oil Options or "puts" (Bbls/d): Gas Options or "puts" (MMBtu/d):
2001 12,800 $22.00 Q1 - 2002 5.3 $3.65
Q1 - 2002 6.7 $3.07
Gas Options or "puts" (MMBtu/d): Q2 - 2002 3.8 $3.40
2001 37.5 $2.80 Q2 - 2002 4.4 $3.04
Q3 - 2002 2.9 $3.38
Q2 - 2001 10.5 $3.95 Q3 - 2002 3.5 $2.99
Q2 - 2001 13.9 $3.23 Q4 - 2002 2.1 $3.38
Q3 - 2001 10.0 $3.70 Q4 - 2002 2.5 $2.93
Q3 - 2001 13.0 $3.07
Q4 - 2001 7.9 $3.56
Q4 - 2001 10.4 $2.94
On January 1, 2001, the Company adopted Financial Accounting Standard No.
133 ("FAS 133"), "Accounting for Derivative Instruments and Hedging Activities."
This statement requires that every derivative instrument be recorded on the
balance sheet as either an asset or a liability measured at fair value. The
change in the fair value of the derivative contracts is to be recognized either
currently in earnings or accumulated other comprehensive income (equity)
depending on whether specific hedge criteria are met. Upon adoption, the Company
recorded a $1.6 million increase in assets for the fair value of the Company's
floors in place, with a corresponding increase to comprehensive income of
approximately $1.0 million, after tax, for the transition adjustment as of
January 1, 2001.
At March 31, 2001, the fair value of the Company's derivative contracts had
decreased from $6.7 million at January 1, 2001 to $2.6 million, of which
approximately $2.4 million is recorded in current assets and $233,000 is
recorded in other noncurrent assets. This decrease in fair value was due
primarily to the increase in the price of oil futures since December 31, 2000
and the expiration of certain contracts in the first quarter of 2001 with a cost
of $1.1 million. The Company recorded the $4.1 million loss in fair value during
the first quarter as a $3.1 million loss in the income statement, with the
remaining loss of $1.0 million ($622,000 net of income taxes) recorded as a
reclassification out of accumulated other comprehensive income. The Company
expects that the remaining balance of accumulated other comprehensive income of
approximately $390,000 (net of income taxes) as of March 31, 2001 will be
reclassified into the income statement as a gain over the remainder of 2001. As
a result of the adoption of FAS 133, in the first quarter of 2001 the Company
did not adjust its oil and natural gas revenues to reflect fair value hedging
adjustments.
18
DENBURY RESOURCES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
During the first quarter of 2000 the Company had zero-cost collars in place
that hedged 3,000 Bbls/d with a price floor of $14.00 per Bbl and a price
ceiling of $18.05 per Bbl and a natural gas contract that hedged 24 million
cubic feet of natural gas per day with a price floor of $1.90 per MMBtu and a
price ceiling of $2.58 per MMBtu. In the first quarter of 2000 the Company paid
approximately $2.9 million on its oil hedge contract, which reduced the net
average price realized by the Company for its oil sold in the first quarter by
$2.23 per Bbl, while the Company paid approximately $2,000 on its natural gas
hedge contract.
Based on futures market prices at March 31, 2001, the Company would not
expect to pay or receive any cash on its floor contracts through their
expiration dates at the end of 2002. If the futures market prices were to
decline or increase 10% from those in effect at March 31, 2001, there would be
no cash flow impact to the Company under the existing floor contracts.
Forward-Looking Information
The statements contained in this Quarterly Report on Form 10-Q ("Quarterly
Report") that are not historical facts, including, but not limited to,
statements found in this Management's Discussion and Analysis of Financial
Condition and Results of Operations, are forward-looking statements, as that
term is defined in Section 21E of the Securities and Exchange Act of 1934, as
amended, that involve a number of risks and uncertainties. Such forward-looking
statements may be or may concern, among other things, capital expenditures,
drilling activity, acquisition plans and proposals and dispositions, development
activities, cost savings, production efforts and volumes, hydrocarbon reserves,
hydrocarbon prices, liquidity, regulatory matters and competition. Such
forward-looking statements generally are accompanied by words such as "plan,"
"estimate," "budgeted," "expect," "predict," "anticipate," "projected,"
"should," "assume," "believe" or other words that convey the uncertainty of
future events or outcomes. Such forward-looking information is based upon
management's current plans, expectations, estimates and assumptions and is
subject to a number of risks and uncertainties that could significantly affect
current plans, anticipated actions, the timing of such actions and the Company's
financial condition and results of operations. As a consequence, actual results
may differ materially from expectations, estimates or assumptions expressed in
or implied by any forward-looking statements made by or on behalf of the
Company. Among the factors that could cause actual results to differ materially
are: fluctuations of the prices received or demand for the Company's oil and
natural gas, the uncertainty of drilling results and reserve estimates,
operating hazards, acquisition risks, requirements for capital, general economic
conditions, competition and government regulations, as well as the risks and
uncertainties discussed in this Quarterly Report, including, without limitation,
the portions referenced above, and the uncertainties set forth from time to time
in the Company's other public reports, filings and public statements.
19
Item 3. Quantitative and Qualitative Disclosures about Market Risk
- -------------------------------------------------------------------
The information required by Item 3 is set forth under "Market Risk
Management" in Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Part II. Other Information
--------------------------
Item 6. Exhibits and Reports on Form 8-K during the First Quarter of 2001
- --------------------------------------------------------------------------
Exhibits:
---------
15* Letter from Independent Accountants as to unaudited interim
financial information.
*Filed herewith.
Reports on Form 8-K:
--------------------
On January 26, 2001, the Company filed a Current Report on Form 8-K
that reported under Item 2, "Acquisition or Disposition of Assets,"
that on January 18, 2001, the Company had signed a purchase and sale
agreement to acquire carbon dioxide reserves, production and
associated assets from a unit of Airgas Inc. for $42 million.
20
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DENBURY RESOURCES INC.
(Registrant)
By: /s/ Phil Rykhoek
-------------------------------------
Chief Financial Officer
By: /s/ Mark C. Allen
-------------------------------------
Chief Accounting Officer & Controller
Date: May 14, 2001
21