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 June 30, 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 July 31, 2001
----- ----------------------------
Common Stock, $.001 par value 52,807,534
DENBURY RESOURCES INC.
INDEX
Part I. Financial Information Page
- ------------------------------
Item 1. Financial Statements
Independent Accountants' Report 3
Condensed Consolidated Balance Sheets at June 30, 2001 (Unaudited)
and December 31, 2000 4
Condensed Consolidated Statements of Operations for the Three and
Six Months ended June 30, 2001 and 2000 (Unaudited) 5
Condensed Consolidated Statements of Cash Flows for the Six Months
ended June 30, 2001 and 2000 (Unaudited) 6
Notes to Condensed Consolidated Financial Statements 7-11
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12-23
Item 3. Quantitative and Qualitative Disclosures about Market Risk 23
Part II. Other Information
---------------------------
Item 4. Submission of Matters to a Vote of Security Holders 24
Item 6. Exhibits and Reports on Form 8-K 24
Signatures 25
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 June 30, 2001, and
the related condensed consolidated statements of operations for the three and
six-month periods ended June 30, 2001 and 2000 and cash flows for the six-month
periods ended June 30, 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, and cash flows for
the year then ended (not presented herein); and in our report dated February 22,
2001, 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
August 2, 2001
3
DENBURY RESOURCES INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands of U.S. dollars except share amounts)
June 30, December 31,
2001 2000
------------- ---------------
(Unaudited)
Assets
Current assets
Cash and cash equivalents $ 23,336 $ 22,293
Accrued production receivables 28,224 37,527
Trade and other receivables 20,770 5,739
Derivative assets 18,657 4,305
Deferred tax asset 28,547 28,126
------------ -----------
Total current assets 119,534 97,990
------------ -----------
Property and equipment (using full cost accounting)
Oil and natural gas properties 818,888 746,062
CO2 properties and equipment 42,001 -
Unevaluated oil and natural gas properties 13,208 13,810
Less accumulated depletion and depreciation (476,356) (452,358)
------------ -----------
Net property and equipment 397,741 307,514
------------ -----------
Other assets 27,250 12,149
Noncurrent deferred tax asset 8,905 39,726
------------ -----------
Total assets $ 553,430 $ 457,379
============ ===========
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable and accrued liabilities $ 45,265 $ 26,628
Oil and gas production payable 14,015 12,158
------------ -----------
Total current liabilities 59,280 38,786
------------ -----------
Long-term liabilities
Long-term debt 216,870 199,000
Provision for site reclamation costs 2,976 2,770
Other 666 658
------------ -----------
Total long-term liabilities 220,512 202,428
------------ -----------
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;
46,232,256 and 45,979,981 shares issued and outstanding at June 30,
2001 and December 31, 2000, respectively 46 46
Paid-in capital in excess of par 330,963 329,339
Accumulated deficit (67,140) (113,220)
Accumulated other comprehensive income 9,769 -
------------ -----------
Total stockholders' equity 273,638 216,165
------------ -----------
Total liabilities and stockholders' equity $ 553,430 $ 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 Six Months Ended
June 30, June 30,
--------------------------- ---------------------------
2001 2000 2001 2000
------------ ------------- ------------ ------------
Revenues
Oil, gas and related product sales $ 65,123 $ 37,185 $ 143,438 $ 72,387
CO2 sales 1,424 - 2,283 -
Interest and other income 242 365 248 930
------------ ------------- ------------ ------------
Total revenues 66,789 37,550 145,969 73,317
------------ ------------- ------------ ------------
Expenses
Lease operating costs 12,583 9,104 25,053 18,136
Production taxes 2,366 1,654 4,974 3,311
CO2 operating costs 277 - 335 -
General and administrative 2,004 1,903 4,405 3,875
Interest 4,582 3,610 9,245 7,218
Depletion and depreciation 12,648 7,505 24,993 15,330
Derivative contracts fair value loss 106 - 3,246 -
Franchise taxes 300 151 575 289
------------ ------------- ------------ ------------
Total expenses 34,866 23,927 72,826 48,159
------------ ------------- ------------ ------------
Income before income taxes 31,923 13,623 73,143 25,158
Income tax provision
Current income taxes 400 20 2,400 40
Deferred income taxes 11,412 - 24,663 -
------------ ------------- ------------ ------------
Net income $ 20,111 $ 13,603 $ 46,080 $ 25,118
============ ============= ============ ============
Net income per common share
Basic $ 0.44 $ 0.30 $ 1.00 $ 0.55
Diluted 0.42 0.30 0.97 0.55
Weighted average common shares outstanding
Basic 46,132 45,799 46,072 45,759
Diluted 47,322 46,099 47,262 45,885
(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)
Six Months Ended
June 30,
----------------------------------
2001 2000
------------- ------------
Cash flow from operating activities:
Net income $ 46,080 $ 25,118
Adjustments needed to reconcile to net cash flow provided by operations:
Depreciation, depletion and amortization 24,993 15,330
Fair value loss on hedging contracts 3,865 -
Deferred income taxes 24,663 -
Other 575 454
------------- ------------
100,176 40,902
Changes in operating assets and liabilities:
Accrued production receivable 9,303 (8,760)
Trade and other receivables (15,031) (1,470)
Derivative assets (17,967) -
Accounts payable and accrued liabilities 18,637 7,378
Oil and gas production payable 1,857 4,793
------------- ------------
Net cash flow provided by operations 96,975 42,843
------------- ------------
Cash flow used for investing activities:
Oil and natural gas expenditures (70,469) (36,320)
Acquisitions of oil and gas properties, net (1,755) (1,784)
Acquisitions of CO2 assets and capital expenditures (42,001) -
Proceeds from dispositions of oil and natural gas properties - 901
(Increases) decreases in restricted cash (187) 280
Net purchases of other assets (870) (627)
------------- ------------
Net cash used for investing activities (115,282) (37,550)
------------- ------------
Cash flow from financing activities:
Bank repayments (13,130) (4,000)
Bank borrowings 31,000 -
Issuance of common stock 1,605 627
Other (125) (125)
------------- ------------
Net cash provided by (used for) financing activities 19,350 (3,498)
------------- ------------
Net increase in cash and cash equivalents 1,043 1,795
Cash and cash equivalents at beginning of period 22,293 11,768
------------- ------------
Cash and cash equivalents at end of period $ 23,336 $ 13,563
============= ============
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 8,011 $ 6,762
============= ============
6
(See accompanying notes to Condensed Consolidated Financial Statements)
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 generally accepted accounting principles and pursuant to the rules and
regulations of the Securities and Exchange Commission ("SEC"). 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 Condensed Consolidated
Financial Statements have the same meaning given to them in the Form 10-K.
The financial data for the three and six month periods ended June 30, 2001
and 2000, included herein, have 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 June 30, 2001 and the consolidated results of its operations for
the three and six months ended June 30, 2001 and 2000 and its cash flows for the
six months ended June 30, 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 and any other convertible securities outstanding. For the
three and six month periods ended June 30, 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 and six month periods ended June 30, 2001 and 2000 (shares in
thousands).
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- --------------------------
2001 2000 2001 2000
------------ ------------ ----------- -----------
Weighted average common shares - basic 46,132 45,799 46,072 45,759
Potentially dilutive securities:
Stock options 1,190 300 1,190 126
------------ ------------ ----------- -----------
Weighted average common shares - diluted 47,322 46,099 47,262 45,885
============ ============ =========== ===========
For the three and six months ended June 30, 2001, approximately 1.3 million
of the 4.1 million stock options outstanding were excluded from the diluted net
income per common share calculation as the exercise prices exceeded the average
market price of the Company's common stock for these periods. For the three and
six months ended June 30, 2000, approximately 1.7 million of the 3.8 million
stock options outstanding were excluded from the diluted net income per common
share calculation as the exercise prices 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 tables present comprehensive income for the three and six
months ended June 30, 2001.
Three Months Ended
(Amounts in thousands) June 30, 2001
-------------------------------------
Accumulated other comprehensive income - March 31, 2001 $ 390
Net income $ 20,111
Other comprehensive income - net of tax
Reclassification adjustments related to derivative contracts (234)
Change in fair value of outstanding hedging positions 9,613
---------------
Total other comprehensive income 9,379 9,379
--------------- --------------
Comprehensive income $ 29,490
===============
Accumulated other comprehensive income - June 30, 2001 $ 9,769
==============
Six Months Ended
(Amounts in thousands) June 30, 2001
-------------------------------------
Accumulated other comprehensive income - December 31, 2000 $ -
Net income $ 46,080
Other comprehensive income - net of tax
Cumulative effect of change in accounting principle - January 1, 2001 1,012
Reclassification adjustments related to derivative contracts (856)
Change in fair value of outstanding hedging positions 9,613
--------------- --------------
Total other comprehensive income 9,769 9,769
--------------- --------------
Comprehensive income $ 55,849
===============
Accumulated other comprehensive income - June 30, 2001 $ 9,769
==============
The Company did not have any items that met the criteria of other
comprehensive income, other than net income, for the three and six month periods
ended June 30, 2000.
3. NOTES PAYABLE AND LONG-TERM INDEBTEDNESS
June 30, December 31,
2001 2000
------------- ---------------
(Amounts in thousands)
(Unaudited)
9% Senior Subordinated Notes Due 2008 $ 125,000 $ 125,000
Senior bank loan 91,870 74,000
------------- ---------------
Total long-term debt $ 216,870 $ 199,000
============= ===============
8
DENBURY RESOURCES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The Company's bank 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 $108.1 million as of June 30, 2001. In July 2001, the Company
borrowed an additional $95 million to partially fund the acquisition of Matrix
Oil & Gas, Inc. (see Note 6).
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. These hedge contracts are purchased to either protect the Company's
budget or to protect a rate of return on acquisitions. All of the hedge
contracts acquired for 2001 and beyond have been in the form of price floors
which provide the Company protection if oil and natural gas prices decrease
below the floor contract prices, but do not limit the upside if oil and natural
gas prices remain or increase above the floor prices.
Budget-related price floors
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
anticipated production from the acquisitions made in the fourth quarter of 2000
and the Matrix acquisition. During July 2001, the Company acquired a $21.00
floor on 10,000 Bbls/d for 2002 at an aggregate cost of approximately $4.7
million. This price floor covers approximately 50% of the anticipated oil
production for 2002.
Acquisition-related price floors
For the properties acquired in the fourth quarter of 2000, the Company
purchased puts or floors at the time of acquisition for nearly all of 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. For the Matrix
properties acquired in July 2001 (see also Note 6), the Company has protected
its investment with the purchase of price floors covering nearly all of the
forecasted proven natural gas production through December 2003, with a minimum
price of $4.25 for July 2001 through December 2002 and $3.75 for all of 2003.
The Company paid a total of $18.0 million for these price floors.
The following table lists all of the individual floors in place as of July
31, 2001.
Volume Floor Volume Floor
Period Per Day Price Period Per Day Price
----------------------------------- -------------- ---------------------
Oil Price Floors (Bbls/d): Gas Price Floors (MMBtu/d):
2001 12,800 $22.00 Q1 - 2002 5.3 $3.65
2002 10,000 $21.00 Q1 - 2002 6.7 $3.07
Q2 - 2002 3.8 $3.40
Gas Price Floors (MMBtu/d): Q2 - 2002 4.4 $3.04
2001 37.5 $2.80 Q3 - 2002 2.9 $3.38
2001 44.0 $4.25 Q3 - 2002 3.5 $2.99
Q4 - 2002 2.5 $2.93
Q3 - 2001 10.0 $3.70 Q4 - 2002 2.1 $3.38
Q3 - 2001 13.0 $3.07
Q4 - 2001 7.9 $3.56 2002 41.0 $4.25
Q4 - 2001 10.4 $2.94 2003 33.0 $3.75
9
DENBURY RESOURCES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 as 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 June 30, 2001, the fair value of the Company's derivative contracts was
approximately $34.7 million, an increase of approximately $15.3 million over
their fair value at March 31, 2001, or acquired value for those acquired during
the second quarter of 2001. This increase in fair value was due primarily to the
decrease in natural gas price futures during the second quarter of 2001. The
increase in fair value resulted in an increase to other comprehensive income of
approximately $9.6 million in accordance with the requirements of FAS 133.
During the second quarter and first six months of 2001 the Company reclassified
approximately $234,000 and $856,000, respectively, out of other comprehensive
income and into derivative contracts fair value loss in the condensed
consolidated statements of operations. Approximately $6.4 million of the $9.8
million recorded in other comprehensive income relates to contracts that will
expire within the next twelve months and will be reclassified out of other
comprehensive income. As a result of the adoption of FAS 133, the Company has
recorded the results of all of its hedging activities to derivative contracts
fair value loss in the condensed consolidated statements of operations for the
second quarter and first six months of 2001.
During the first six months 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 second quarter of 2000 the Company paid
approximately $2.9 million on its oil hedge contract, and $1.8 million on the
natural gas hedge contract. Through the first six months of 2000, the Company
paid approximately $5.8 million on the oil hedge contract and $1.8 million on
the 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
by available cash and $21 million borrowed under the 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.
6. ACQUISITION OF MATRIX OIL AND GAS, INC. (SUBSEQUENT EVENT)
On July 10, 2001, the Company completed the acquisition of Matrix Oil &
Gas, Inc.("Matrix"), an independent oil and gas company based in Covington,
Louisiana. Under the merger agreement, Denbury paid a total of $158.0 million,
comprised of $98.8 million (63%) in cash and $59.2 million (37%) in the form of
10
DENBURY RESOURCES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
6.6 million shares of Denbury's common stock. The cash portion of the purchase
was funded with available cash and borrowings of $95.0 million from Denbury's
bank credit facility. The Company plans to record $30.0 million of the purchase
price as unevaluated property to reflect the significant probable and possible
reserves that it has identified. The Company has protected its investment with
the purchase of price floors covering nearly all of the forecasted proven
natural gas production through December 2003, with a minimum price of $4.25 for
July 2001 through December 2002 and $3.75 for all of 2003. The Company paid a
total of $18.0 million for these price floors, which had a market value as of
June 30, 2001 of $31.1 million. The acquired operations of Matrix will be
reflected in the Company's financial statements beginning July 1, 2001.
The following pro forma information shows the consolidated results of
operations for the six months ending June 30, 2001, based upon adjustments to
the historical financial statements of the Company and the historical financial
statements of Matrix to give effect to the acquisition by the Company as if such
acquisition had occurred on January 1, 2001 (in thousands, except per share
data):
Operating revenues $186,018
Net Income 52,344
Income per common share:
Basic $0.99
Diluted 0.97
11
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,
2001, along with Management's Discussion and Analysis of Financial Condition and
Results of Operation 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 energy company engaged in acquisition,
development and exploration activities in the U.S. Gulf Coast region. The
Company has significant reserves and production in Mississippi, where it is the
largest oil and natural gas producer, in onshore Louisiana and in the offshore
Gulf of Mexico. The Company increases the value of acquired properties in its
core areas through a combination of exploitation, drilling and proven
engineering extraction processes.
2001 ACQUISITIONS
Matrix Acquisition
On July 10, 2001, the Company acquired Matrix Oil and Gas, Inc. ("Matrix"),
an independent oil and gas company based in Covington, Louisiana (the "Matrix
Acquisition"). Matrix primarily focuses on the offshore Gulf of Mexico, with an
interest in 19 offshore blocks and two onshore fields. The top five Matrix
fields make up 93% of its proved reserves and 88% of its current production. At
June 30, 2001, based on a report prepared by DeGolyer and MacNaughton, Matrix
had estimated proved reserves of 11.9 MMBOE (71.6 Bcfe), 92% of which was
natural gas and 78% of which was proved developed.
Under the merger agreement with Matrix, the Company paid approximately $158
million, comprised of $98.8 million (63%) in cash and $59.2 million (37%) in the
form of 6.6 million shares of Denbury's common stock. The cash portion of the
purchase was funded with available cash and $95.0 million of debt from the
Company's bank credit facility. The Company plans to record $30.0 million of the
purchase price as unevaluated property costs to reflect the significant probable
and possible reserves identified, resulting in an adjusted purchase price of
approximately $1.79 per Mcfe. The Company has protected its investment with the
purchase of price floors, or puts, covering nearly all of Matrix's forecasted
proven natural gas production through December 2003, with a minimum price of
$4.25 per MMBtu from July 2001 through December 2002 and $3.75 per MMBtu for all
of 2003. These floors assure the Company of $143.0 million of minimum revenue
from these properties from July 2001 through December 2003, assuming production
at forecasted levels. The Company paid a total of $18.0 million for these price
floors, which had a market value as of June 30, 2001 of $31.1 million. The
operations of Matrix will be included in the Company's financial statements
beginning in July 2001.
Carbon Dioxide Acquisition
In February 2001, the Company acquired carbon dioxide ("CO2") reserves,
production and associated assets from a unit of Airgas, Inc. for $42.0 million
(the "CO2 Acquisition"). This 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 the Company's tertiary recovery
operation at Little Creek Field, as well as to other commercial users. The
Company acquired nearly 100% of the working interest in the producing CO2 wells
and operates the properties. As of June 30, 2001, based on a report prepared by
DeGolyer and MacNaughton, the Company estimates that these wells had
approximately 652 billion cubic feet of usable CO2 reserves. Production during
the month of June 2001 averaged approximately 89 million cubic feet of CO2 per
day, of which about 49 million cubic feet per day was used for injection at the
Company's Little Creek Field and the remainder of about 40 million cubic feet
per day was sold under long-term contracts to commercial CO2 users.
12
DENBURY RESOURCES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company estimates that the CO2 production capacity of the acquired
wells is approximately 110 million cubic feet of CO2 per day and estimates that
it could be increased to about 250 million cubic feet of CO2 per day by adding
compression facilities. An associated pipeline purchased in the acquisition is
capable of transporting over 400 million cubic feet of CO2 per day. This
acquisition assures that CO2 will be available when needed at a reasonable and
predictable cost and affords the Company the ability to expand its operations at
Little Creek Field and elsewhere in Mississippi. Ownership of these CO2 reserves
also provides a major strategic advantage in the acquisition of other properties
in Mississippi that could be further exploited through tertiary recovery.
CAPITAL RESOURCES AND LIQUIDITY
As more fully described under "Results of Operations" below, the Company's
results of operations, cash flows and financial position improved significantly
during the second quarter and first six months of 2001, as compared to the
comparable periods of 2000, as a result of increased production and commodity
prices, particularly natural gas prices. Approximately 57% of the
quarter-over-quarter increase in revenues is attributable to the increased
production levels and the balance of 43% is attributable to higher product
prices. Conversely, for the six month comparison, approximately 59% of the
revenue increase is attributable to the higher product prices and approximately
41% attributable to increased production.
During the first six months of 2001 the Company borrowed $31.0 million on
its bank credit facility to partially fund the CO2 Acquisition ($21.0 million)
and purchase floors associated with the Matrix Acquisition ($10.0 million). The
Company repaid $13.1 million of its bank borrowings in the first quarter of 2001
with excess cash flow generated from operations, leaving approximately $108.1
million available under the Company's $200.0 million credit facility as of June
30, 2001. In July 2001, the Company borrowed an additional $95.0 million to
partially fund the Matrix Acquisition, leaving the Company with approximately
$13.1 million available under its credit facility as of August 14, 2001.
The Company's bank 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, primarily as a result of the increase in the Company's
oil and gas reserve quantities and values as of December 31, 2000. The next
scheduled redetermination for the bank credit facility is October 1, 2001. The
Company expects that its borrowing base will increase as a result of the new
reserves and value added in the Matrix Acquisition; however, such
redetermination will depend on the banks' current and expected oil and natural
gas pricing at that time, the Company's development and acquisition results
during the first six months of 2001, the then current level of the Company's
debt and several other factors, some of which are beyond the Company's control.
On August 9, 2001, the Company announced that it had priced a $75 million
private Rule 144A sale of Series B Senior Subordinated Notes due 2008 expected
to close on August 15, 2001. The notes will be issued under a separate indenture
but on terms substantially identical to the Company's existing 9% Senior
Subordinated Notes due 2008. The notes are being sold at 91.371% of their face
amount. The estimated net proceeds of $65.9 million will be used to reduce the
Company's existing bank debt. The adjusted pro forma amount outstanding under
the bank credit facility will be $121.0 million with a total principal
outstanding amount of $200 million in senior subordinated notes. The Company's
availability under its bank credit facility will increase by $28.3 million as a
result of this offering, resulting in a total availability of $41.5 million,
before any adjustment for the acquired Matrix properties.
13
DENBURY RESOURCES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Even if the Company's borrowing base is not increased, the Company
anticipates that it will not require any additional capital for the foreseeable
future in order to continue its planned development program. Since 1999, the
Company's policy has been to budget its development and exploration expenditures
so that they are less than or equal to its cash flow from operations. The
Company plans to continue this policy. The Company's primary use of debt,
including bank debt, has been for acquisitions. Although the Company has a
significant inventory of development and exploration projects in-house, on a
long-term basis the Company will need to make acquisitions in order to continue
its growth and to replace its production. If the Company's borrowing base is not
increased as anticipated, the capital available to the Company may be limited.
The lack of available capital or the inability of the Company to complete
suitable acquisitions over an extended period of time could limit or even
eliminate the Company's future growth.
The Company's capital budget program for the full year 2001, excluding
acquisitions, is budgeted at approximately $180.0 million, which includes
approximately $30.0 million in the second half of 2001 for the properties
acquired in the Matrix Acquisition. The Company has purchased price floors that
cover approximately 80% to 85% of its expected 2001 production (see "Market Risk
Managment"), 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 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 development projects and other
factors, the Company expects that its cash flow from operations for 2001 will
exceed its capital development expenditures, with any excess cash flow used to
reduce bank debt during the year, or to partially fund acquisitions.
SOURCES AND USES OF FUNDS
During the first six months of 2001, the Company spent approximately $70.5
million on oil and gas development expenditures and approximately $1.8 million
on oil and gas acquisitions, net of purchase price adjustments. The oil and gas
exploration and development expenditures included $44.8 million spent on
drilling, $7.7 million on geological, geophysical and acreage expenditures and
$18.0 million on workover costs. Also during the first six months of 2001, the
Company spent approximately $91,000 on CO2 development expenditures and $41.9
million on the CO2 Acquisition. These expenditures were funded by cash flow from
operations and bank debt.
During the first six months of 2000, the Company spent approximately $36.3
million on exploration and development expenditures and approximately $1.8
million on acquisitions. The exploration and development expenditures included
approximately $17.5 million spent on drilling, $4.2 million on geological,
geophysical and acreage expenditures and $14.6 million spent on workover costs.
These expenditures were funded by cash flow from operations.
RESULTS OF OPERATIONS
The Company's operating results for the second quarter and six months ended
June 30, 2001 improved significantly over the comparable prior year periods due
to the improved oil and natural gas prices, increased production and lower costs
on a BOE basis as further set forth below.
14
Three Months Ended Six Months Ended
June 30, June 30,
- --------------------------------------------------------------- ------------------------ -------------------------
2001 2000 2001 2000
- --------------------------------------------------------------- ------------ ----------- ----------- -----------
AVERAGE DAILY PRODUCTION VOLUME:
Bbls 16,454 14,809 16,362 14,595
Mcf 68,685 28,630 65,458 28,535
BOE(1) 27,902 19,580 27,272 19,351
OPERATING REVENUES AND EXPENSES (THOUSANDS)
Oil sales $ 34,355 $ 29,801 $ 69,756 $ 58,190
Natural gas sales 30,768 7,384 73,682 14,197
------------ ----------- ----------- -----------
Total oil and natural gas revenues $ 65,123 $ 37,185 $ 143,438 $ 72,387
------------ ----------- ----------- -----------
CO2 sales $ 1,424 $ - $ 2,283 $ -
------------ ----------- ----------- -----------
Operating costs $ 12,583 $ 9,104 $ 25,053 $ 18,136
Production taxes 2,366 1,654 4,974 3,311
CO2 operating costs 277 - 335 -
------------ ----------- ----------- -----------
Total production expenses $ 15,226 $ 10,758 $ 30,362 $ 21,447
------------ ----------- ----------- -----------
UNIT PRICES-INCLUDING IMPACT OF HEDGES (2)
Oil price per barrel ("Bbl") $ 22.94 $ 22.11 $ 23.55 $ 21.91
Gas price per thousand cubic feet ("Mcf") 4.92 2.83 6.22 2.73
UNIT PRICES-EXCLUDING IMPACT OF HEDGES
Oil price per Bbl $ 22.94 $ 24.26 $ 23.55 $ 24.09
Gas price per Mcf 4.92 3.54 6.22 3.09
OIL AND GAS OPERATING REVENUES AND EXPENSES PER BOE
Oil and natural gas revenues $ 25.65 $ 20.87 $ 29.06 $ 20.55
------------ ------------ ------------- ------------
Oil and gas lease operating costs $ 4.96 $ 5.11 $ 5.07 $ 5.15
Oil and gas production taxes 0.93 0.93 1.01 0.94
------------ ------------ ------------- ------------
Total oil and gas production expenses $ 5.89 $ 6.04 $ 6.08 $ 6.09
- --------------------------------------------------------------- ------------ ------------ ------------- ------------
(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 any of the effects of its hedging activities to oil and
natural gas revenues during 2001 (see "Market Risk Management" below).
PRODUCTION. In the second quarter of 2001, production averaged 27,902
BOE/d, a 43% increase from the second quarter of 2000 and a 5% increase from the
first quarter of 2001 average of 26,635 BOE/d. Production for the six months
ended June 30, 2001 averaged 27,272 BOE/d, a 41% increase over the first six
months of 2000. Approximately half of the production increase in the second
quarter of 2001 and first six months of 2001, as compared to same periods in
2000, is primarily due to internal development at three of the Company's largest
fields, Little Creek, Heidelberg and Lirette, plus its offshore properties. The
Company's acquisitions of Thornwell, Port Barre, and Iberia Fields in the fourth
quarter of 2000 contributed the balance of the increase.
The Little Creek Field began to respond to the fourth phase of tertiary
recovery operations there during the second quarter of 2001, resulting in an
increase of 16% in the field's average daily production over production in the
second quarter of 2000, and an increase of 9% over first quarter of 2001
production there. Production at Little Creek averaged 2,293 BOE/d for the second
quarter of 2001 and is expected to further increase during the next two years,
peaking at estimated rates of 3,500 to 4,500 BOE/d in 2003.
At Heidelberg Field, the Company's largest field, production averaged 7,960
BOE/d in the second quarter of 2001, a 14% increase over production in the
second quarter of 2000 but almost identical to the average production during the
first quarter of 2001. For the first six months of 2001 production from the
Heidelberg Field averaged 7,972 BOE/d, a 17% increase over production there
15
DENBURY RESOURCES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
during the first six months of 2000. This increase is attributable to the
Company's active drilling program and ongoing production enhancement activities.
Production at Lirette Field averaged 2,809 BOE/d in the second quarter of
2001, an increase of 133% over the average BOE/d rate for the second quarter of
2000. For the first six months of 2001, production at Lirette Field averaged
2,957 BOE/d, a 125% increase over production in the first six months of 2000.
The production increase at Lirette Field is primarily attributable to the
discovery well, Leon Hebert Heirs #1, that commenced production in late
September 2000.
Production from the Company's offshore fields was 1,981 BOE/d in the second
quarter of 2001, a 784% increase over production there in the second quarter of
2000 and a 110% increase from production there in the first quarter of 2001. The
Company began to focus on offshore properties during the second quarter of 2000
and has added new properties and wells since that time. During the first quarter
of 2001, production commenced at three of the Company's offshore fields as a
result of wells drilled at Main Pass, High Island 287 and High Island 521.
Production commenced from five additional offshore wells late in the second
quarter and early in the third quarter of 2001, aggregating an additional 10
MMcf/d.
OIL AND NATURAL GAS REVENUES. Oil and natural gas revenues for the second
quarter of 2001 increased 75% from the comparable quarter of 2000, and increased
98% when comparing the first six months periods. Approximately 57% of the
quarter-over-quarter increase is attributable to the increased production levels
(discussed above) and the balance of 43% is attributable to higher product
prices, mainly natural gas prices. Conversely, for the six month comparison,
approximately 59% of the revenue increase is attributable to the higher product
prices and approximately 41% attributable to increased production. The Company's
realized unhedged natural gas prices for the second quarter averaged $4.92 per
Mcf and for the first six months of 2001 averaged $6.22 per Mcf, an increase of
39% and 101% over the respective prior years periods. The Company's realized
unhedged oil prices decreased slightly in the second quarter of 2001 and first
six months of 2001 from the comparable periods in 2000, by approximately 5% and
2%, respectively. Natural gas represented 41% of the Company's second quarter of
2001 production on a BOE basis, compared to 24% in the second quarter of 2000.
In the second quarter of 2000 the Company recorded losses on its oil hedges
of $2.9 million and losses on its natural gas hedges of $1.8 million, reducing
the Company's net average price received during the period by $2.15 per Bbl and
$0.71 per Mcf. For the first six months of 2000, the Company recorded losses on
its oil hedges of $5.8 million and losses on its natural gas hedges of $1.8
million, reducing the Company's net average price received during the period by
$2.18 per Bbl and $0.36 per Mcf. In the first quarter of 2001, the Company
adopted Statement of Financial Accounting Standards 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 and in the second quarter
of 2001 recognized a loss of $106,000. The loss in the second quarter of 2001 is
comprised of $618,000 cash received on the floor contracts offset by
amortization of floor contracts and amounts reclassified out of other
comprehensive income of approximately $724,000. As a result of the adoption of
FAS 133, the Company now records all hedging gains or losses in a separate line
on its income statement whereas in 2000 all hedging gains or losses were
recorded in oil and natural gas income. The Company's hedging activities are
discussed in more detail in "Market Risk Management" herein.
PRODUCTION EXPENSES. Oil and gas production and operating expenses
increased on a gross basis by $4.2 million, or 39%, between the second quarters
of 2000 and 2001 and increased by $8.6 million, or 40%, between the first six
months of 2000 and 2001. However, on a BOE basis, production expenses decreased
16
DENBURY RESOURCES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
by 2% between the respective second quarters and remained flat between the
respective first six months. Approximately $1.3 million of the second quarter of
2001 increase and $2.3 million of the first six months of 2001 increase was
related to fields that were acquired within the last year, including the
Thornwell, Port Barre and Iberia Fields acquired in the fourth quarter of 2000
and the West Mallalieu and Olive Fields acquired in the second quarter of 2001.
Production taxes, excluding the recently acquired fields, increased
approximately $360,000 and $970,000 between the second quarters of 2000 and 2001
and first six months of 2000 and 2001, respectively, as a result of increased
production and higher natural gas prices. The remaining increases of
approximately $2.6 million in the second quarter of 2001 and $5.3 million in the
first six months of 2001 were primarily due to increased operating costs
relating to the increasing costs of goods and services, increased workover
expenses and additional wells added as a result of increased drilling activity
during the last year.
Production expenses were lowered by approximately $750,000 for the second
quarter of 2001 and $1.1 million for the first six months of 2001 as a result of
the CO2 acquisition in February 2001, which lowered the cost of CO2 that the
Company uses in its tertiary recovery operations at Little Creek Field. Prior to
the acquisition, the Company was paying approximately $0.25 per thousand cubic
feet for its CO2. Subsequent to the acquisition, the Company began allocating
the operating expenses of its CO2 field and pipeline between the sales to
commercial users and the CO2 used for its own account. This translates into an
average of approximately $0.06 for each thousand cubic feet of CO2 produced
during the first half of 2001. This resulted in a savings of approximately $0.19
per thousand cubic feet of CO2 used by the Company in its tertiary recovery
operations. The estimated total cost per thousand cubic feet of CO2 to the
Company is approximately $0.11 after inclusion of the depreciation and
amortization expense for the first half of 2001.
CO2 OPERATIONS. Since its acquisition in February 2001, the Company's CO2
operations had net operating cash flow from sales of CO2 to other companies of
$1.1 million for the second quarter of 2001 and $1.9 million for the first six
months of 2001. During the first six months of 2001, the Company used
approximately 50% of the CO2 produced in its tertiary recovery operations and
sold the remainder to other companies for industrial use.
General and Administrative Expenses
General and administrative ("G&A") expenses increased between the
respective quarters and six month periods ended June 30, 2001 and 2000 as set
forth below:
Three Months Ended Six Months Ended
June 30, June 30,
- ----------------------------------------------- -------------------------- --------------------------
2001 2000 2001 2000
- ----------------------------------------------- ------------ ----------- ----------- ----------
NET G&A EXPENSES (THOUSANDS)
Gross expenses $ 7,462 $ 5,977 $ 14,944 $ 12,011
State franchise taxes 300 151 575 289
Operator overhead charges (4,485) (3,291) (8,680) (6,597)
Capitalized exploration expenses (973) (783) (1,859) (1,539)
------------ ----------- ----------- ----------
Net expense $ 2,304 $ 2,054 $ 4,980 $ 4,164
------------ ----------- ----------- ----------
Average G&A cost per BOE $ 0.90 $ 1.15 $ 1.01 $ 1.18
Employees as of June 30 271 239 271 239
- ----------------------------------------------- ------------ ----------- ----------- -----------
Gross G&A expenses increased $1.5 million, or 25%, between the second
quarters of 2001 and 2000 and $2.9 million, or 24%, between the first six months
of 2001 and 2000. The largest components of these increases were salaries, bonus
accruals, and other related employee costs, which accounted for approximately
17
DENBURY RESOURCES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
$750,000 of the increase between the respective quarters and $1.8 million of the
increase between the respective six month periods. The increased employee cost
is due to salary increases and employee related additions resulting from the
Company's growth. The increase in gross G&A is offset in part by an increase in
operator overhead recovery charges and capitalized exploration costs in 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 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 the new wells added as a result of increased drilling activity
during the past year, the amount recovered by the Company as operator overhead
charges increased by 36% between the second quarters of 2000 and 2001 and by 32%
between the first six months of 2000 and 2001. Capitalized exploration costs
increased between the comparable periods in 2000 and 2001 along with the
increase in gross G&A expenses. The net effect of the increase in gross G&A
expenses, operator overhead charges and capitalized exploration costs was a 12%
increase in net G&A expense between the second quarters of 2000 and 2001 and a
20% increase in net G&A expense between the first six months of 2000 and 2001.
On a BOE basis, G&A costs decreased 22% in the second quarter of 2001 as
compared to the second quarter of 2000 and by 14% for the comparable six month
periods, due to a higher percentage increase in production than in net G&A
expense.
Interest and Financing Expenses
Three Months Ended Six Months Ended
June 30, June 30,
- ---------------------------------------------------- ---------------------------- --------------------------
AMOUNTS IN THOUSANDS, EXCEPT PER BOE AMOUNTS 2001 2000 2001 2000
- ---------------------------------------------------- ------------- ----------- ------------ -----------
Interest expense $ 4,582 $ 3,610 $ 9,245 $ 7,218
Non-cash interest expense (283) (234) (548) (456)
------------- ----------- ------------ -----------
Cash interest expense 4,299 3,376 8,697 6,762
Interest and other income (242) (365) (248) (930)
------------- ----------- ------------ -----------
Net cash interest expense $ 4,057 $ 3,011 $ 8,449 $ 5,832
------------- ----------- ------------ -----------
Average net cash interest expense per BOE $ 1.60 $ 1.69 $ 1.71 $ 1.66
Average debt outstanding $ 209,727 $ 152,456 $ 209,564 $ 152,478
- ---------------------------------------------------- ------------- ----------- ------------ -----------
Interest expense for the quarter and six month periods ended June 30, 2001
increased from the comparable prior year periods primarily due to higher average
outstanding debt balances during 2001, offset in part by lower interest rates on
the Company's variable rate bank debt. In the first quarter of 2001, the Company
borrowed $21.0 million to fund a portion of the $42.0 million CO2 Acquisition
and repaid $13.1 million of bank debt with excess cash generated from
operations. In June 2001, the Company borrowed $10.0 million to partially fund
the natural gas floors purchased in conjunction with the Matrix Acquisition.
During the first six months of 2000, the Company's bank debt remained constant
at $27.5 million for most of the period until late June when it repaid $4.0
million of bank debt. The Company's $125 million of 9% Senior Subordinated Notes
Due 2008 was outstanding during both 2000 and 2001. On a BOE basis, net cash
interest expense decreased by 5% between the second quarters of 2000 and 2001
and increased by only 3% between the first six months of 2000 and 2001 due to
the significant increase in production.
18
DENBURY RESOURCES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Depletion, Depreciation and Site Restoration
Three Months Ended Six Months Ended
June 30, June 30,
- ------------------------------------------------------ ---------------------------- -------------------------
AMOUNTS IN THOUSANDS, EXCEPT PER BOE AMOUNTS 2001 2000 2001 2000
- ------------------------------------------------------ ------------- ----------- ----------- -----------
Depletion and depreciation $ 12,254 $ 7,081 $ 23,998 $ 14,536
Site restoration provision 53 145 335 257
Depreciation of other fixed assets 341 279 660 537
------------- ----------- ----------- -----------
Total amortization $ 12,648 $ 7,505 $ 24,993 $ 15,330
------------- ----------- ----------- -----------
Average DD&A cost per BOE $ 4.98 $ 4.21 $ 5.06 $ 4.35
- ------------------------------------------------------ ------------- ----------- ----------- -----------
The Company's depletion, depreciation and amortization ("DD&A") rate on a
BOE basis increased from $4.21 per BOE for the second quarter of 2000 and $4.35
for first six months of 2000 (and an annual average for 2000 of $4.62) to $5.15
per BOE for the first quarter of 2001. After preparation of the Company's June
30, 2001 reserve report and the reserve increases included therein, the Company
lowered its DD&A rate for the second quarter to $4.98 per BOE, resulting in an
average rate for the first six months of 2001 of $5.06 per BOE. The Company's
DD&A rate has generally increased due to acquisitions at a higher than average
cost per BOE and expected increases in finding costs.
Income Taxes
Three Months Ended Six Months Ended
June 30, June 30,
- ------------------------------------------------- ----------------------------- -------------------------
2001 2000 2001 2000
- ------------------------------------------------- ------------ ------------ ----------- -----------
Income tax provision (thousands)
Current income tax expense $ 400 $ 20 $ 2,400 $ 40
Deferred income tax expense 11,412 - 24,663 -
------------ ------------- ----------- ------------
Total income tax expense $ 11,812 $ 20 $ 27,063 $ 40
------------ ------------- ----------- ------------
Average income tax expense per BOE $ 4.65 $ 0.01 $ 5.48 $ 0.01
Effective tax rate 37% 0.1% 37% 0.2%
- ------------------------------------------------- ------------- ------------- ----------- ------------
19
DENBURY RESOURCES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company's tax provision for the second quarter and first six months of
2001 was recorded based on an estimated effective tax rate of 37%. For the
second quarter and first six months of 2000, the Company recorded only its
estimated current alternative minimum tax as the Company's deferred tax asset
was fully reserved and any deferred tax provision resulted in a corresponding
offset to the valuation allowance. In the fourth quarter of 2000 the Company
completely reversed the valuation allowance on its deferred tax assets based on
its projections regarding taxable income and projected utilization of its
deferred tax assets. As a result, for 2001 the Company is recording a full tax
provision.
Results of Operations
Primarily as a result of the increased production and product prices in the
second quarter and first six months of 2001, net income and cash flow from
operations increased on both a gross and per share basis over the comparable
periods.
Three Months Ended Six Months Ended
June 30, June 30,
- -------------------------------------------------------- -------------------------- --------------------------
AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS 2001 2000 2001 2000
- -------------------------------------------------------- ------------ ------------ ----------- ------------
Net income $ 20,111 $ 13,603 $ 46,080 $ 25,118
Net income per common share:
Basic $ 0.44 $ 0.30 $ 1.00 $ 0.55
Diluted 0.42 $ 0.30 $ 0.97 $ 0.55
Cash flow from operations (1) $ 45,194 $ 21,340 $ 100,176 $ 40,902
- -------------------------------------------------------- ------------ ------------ ----------- ------------
(1) Represents cash flow provided by operations, exclusive of the net change in
operating assets and liabilities.
The following table summarizes the cash flow, DD&A and results of
operations on a BOE basis for the comparative periods. Each of the individual
components are discussed above.
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ------------------------
Per BOE Data 2001 2000 2001 2000
- -------------------------------------------------------- ----------- --------- --------- ---------
Revenues $ 25.65 $ 20.87 $ 29.06 $ 20.55
Lease operating costs (4.96) (5.11) (5.07) (5.15)
Production taxes (0.93 (0.93) (1.01) (0.94)
- -------------------------------------------------------- ----------- --------- --------- --------
Production netback 19.76 14.83 22.98 14.46
Operating cash flow from CO2 operations 0.45 - 0.39 -
General and administrative expenses (0.90) (1.15) (1.01) (1.18)
Net cash interest expense (1.60) (1.69) (1.71) (1.66)
Cash hedging gain 0.24 - 0.12 -
Current income taxes and other (0.15) (0.01) (0.48) (0.01)
- -------------------------------------------------------- ----------- --------- --------- --------
Cash flow from operations(1) 17.80 11.98 20.29 11.61
DD&A (4.98) (4.21) (5.06) (4.35)
Deferred income taxes (4.49) - (5.00) -
Non-cash hedging losses (0.29) - (0.78) -
Other non-cash items (0.12) (0.14) (0.11) (0.13)
- -------------------------------------------------------- ----------- --------- --------- --------
Net income $ 7.92 $ 7.63 $ 9.34 $ 7.13
- -------------------------------------------------------- ------------ --------- --------- --------
(1) Represents cash flow provided by operations, exclusive of the net change in
operating assets and liabilities.
20
DENBURY RESOURCES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Market Risk Management
The Company uses fixed and variable rate debt to partially finance budgeted
expenditures. These debt instruments 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.
The Company enters into various financial contracts to hedge its exposure
to commodity price risk associated with anticipated future oil and natural gas
production. These hedge contracts are purchased to either protect the Company's
budget or to protect a rate of return on acquisitions. All of the hedge
contracts acquired for 2001 and beyond have been in the form of price floors
which provide the Company protection if oil and natural gas prices decrease
below the floor contract prices, but do not limit the upside if oil and natural
gas prices remain or increase above the floor prices.
Budget-related price floors
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
anticipated production from the acquisitions made in the fourth quarter of 2000
or the Matrix acquisition. During July 2001, the Company acquired a $21.00 floor
on 10,000 Bbls/d for 2002 at an aggregate cost of approximately $4.7 million.
This price floor covers approximately 50% of the anticipated oil production for
2002.
Acquisition-related price floors
For the properties acquired in the fourth quarter of 2000, the Company
purchased puts or floors at the time of acquisition for nearly all of 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. For the Matrix
properties acquired in July 2001 (see also Note 6), the Company has protected
its investment with the purchase of price floors covering nearly all of the
forecasted proven natural gas production through December 2003, with a minimum
price of $4.25 for July 2001 through December 2002 and $3.75 for all of 2003.
The Company paid a total of $18.0 million for these price floors.
21
The following table lists all of the individual floors in place as of July
31, 2001.
Volume Floor Volume Floor
Period Per Day Price Period Per Day Price
----------------------------------- -------------- ---------------------
Oil Price Floors (Bbls/d): Gas Price Floors (MMBtu/d):
2001 12,800 $22.00 Q1 - 2002 5.3 $3.65
2002 10,000 $21.00 Q1 - 2002 6.7 $3.07
Q2 - 2002 3.8 $3.40
Gas Price Floors (MMBtu/d): Q2 - 2002 4.4 $3.04
2001 37.5 $2.80 Q3 - 2002 2.9 $3.38
2001 44.0 $4.25 Q3 - 2002 3.5 $2.99
Q4 - 2002 2.5 $2.93
Q3 - 2001 10.0 $3.70 Q4 - 2002 2.1 $3.38
Q3 - 2001 13.0 $3.07
Q4 - 2001 7.9 $3.56 2002 41.0 $4.25
Q4 - 2001 10.4 $2.94 2003 33.0 $3.75
Matrix's assets acquired in the July 2001 Matrix Acquisition included
delivery contracts with the various natural gas purchasers containing fixed
prices and no-cost collars. The Company acquired one fixed price delivery
contract which covers a total of 2.0 MMcf/d through August 31, 2001 at a price
of $2.42 per MMBtu. The Company also acquired delivery contracts with no-cost
collars which cover a total of 10.0 MMcf/d until August 31, 2001, and a total of
6.0 MMcf/d through December 31, 2001. These collars have a weighted average
ceiling price of approximately $6.10 per MMBtu and a weighted average floor
price of approximately $4.38 per MMBtu.
On January 1, 2001, the Company adopted Statement of 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 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 June 30, 2001, the fair value of the Company's derivative contracts was
approximately $34.7 million, an increase of approximately $15.3 million over
their fair value at March 31, 2001, or acquired value for those acquired during
the second quarter of 2001. This increase in fair value was due primarily to the
decrease in natural gas price futures during the second quarter of 2001. The
increase in fair value resulted in an increase to other comprehensive income of
approximately $9.6 million in accordance with the requirements of FAS 133.
During the second quarter and first six months of 2001 the Company reclassified
approximately $234,000 and $856,000, respectively, out of other comprehensive
income and into derivative contracts fair value loss in the condensed
consolidated statements of operations. Approximately $6.4 million of the $9.8
million recorded in other comprehensive income relates to contracts that will
expire within the next twelve months and will be reclassified out of other
comprehensive income. As a result of the adoption of FAS 133, the Company has
recorded the results of all of its hedging activities to derivative contracts
fair value loss in the condensed consolidated statements of operations for the
second quarter and first six months of 2001.
22
DENBURY RESOURCES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
During the first six months 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 second quarter of 2000 the Company paid
approximately $2.9 million on its oil hedge contract, and 1.8 million on the
natural gas hedge contract. Through the first six months of 2000, the Company
paid approximately $5.8 million on the oil hedge contract and $1.8 million on
the natural gas hedge contract.
Based on futures market prices at June 30, 2001, the Company would expect
to receive approximately $18.0 million on its natural gas floor contracts
through their expiration dates at the end of 2003 and nothing on its oil floor
contracts. If the natural gas futures market prices were to decline by 10%, the
amount expected to be received under the Company's natural gas floor contracts
would increase to approximately $27.5 million and if natural gas futures market
prices were to increase by 10% the amount expected to be received under the
Company natural gas contracts would decrease to approximately $9.3 million. If
the crude oil futures market prices were to increase or decrease by 10%, the
Company would still expect to receive nothing under its oil 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.
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.
23
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders
Denbury's Annual Meeting of Shareholders was held on May 23, 2001 for the
purpose of 1) the election of eight nominees to serve as Directors of Denbury
for one-year terms to expire at the 2002 Annual Meeting of Shareholders and 2) a
600,000 share increase in the number of shares issuable under the Company's
employee stock option plan. At the record date, April 2, 2001, 46,091,000 shares
of common stock were outstanding and entitled to one vote per share upon all
matters submitted at the meeting.
With respect to the election of directors, the votes were cast as follows:
NOMINEES FOR DIRECTORS FOR WITHHELD
- --------------------------------- ----------------- ----------------
Ronald G. Greene 38,683,384 3,073,661
David Bonderman 36,853,357 4,903,688
David I. Heather 38,848,145 2,908,900
William S. Price, III 37,539,366 4,217,679
Gareth Roberts 37,369,143 4,387,902
Jeffrey Smith 38,684,709 3,072,336
Wieland F. Wettstein 38,848,045 2,909,000
Carrie A. Wheeler 38,846,176 2,910,869
With respect to the increase in the shares issuable under the Company's
employee stock option plan, the votes were cast as follows:
FOR AGAINST ABSTENTIONS
- ----------------- ---------------- -------------------
38,565,678 1,000,202 2,191,165
Item 6. Exhibits and Reports on Form 8-K during the Second Quarter of 2000
- ---------------------------------------------------------------------------
Exhibits:
10(a) Amendment to Denbury Resources Inc. Stock Option Plan to increase
the number of shares issuable under the Plan from 5,145,587 to
5,745,587 shares of common stock (incorporated by reference to
Exhibit 4 of the Registrant's Registration Statement on Form S-8,
No. 333-63198, dated June 15, 2001).
10(b) Agreement and Plan of Merger and Reorganization, by and among
Denbury Resources Inc., Denbury Offshore, Inc., and Matrix Oil &
Gas, Inc., and its shareholders, dated as of June 4, 2001
(incorporated by reference to Exhibit 2 of the Registrant's
Current Report on Form 8-K, dated June 15, 2001).
15* Letter from Independent Accountants as to unaudited interim
financial information.
* Filed herewith
Reports on Form 8-K:
On June 15, 2001, the Company filed a Current Report on Form 8-K that
reported under Item 2, "Acquisition or Disposition of Assets," that on June 4,
2001, the Company entered into a definitive agreement to acquire by merger
privately-held Matrix Oil and Gas, Inc. ("Matrix") for cash and stock.
24
SIGNATURES
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
--------------------------------------
Phil Rykhoek
Chief Financial Officer
By: /s/ Mark C. Allen
--------------------------------------
Mark C. Allen
Chief Accounting Officer & Controller
Date: August 14, 2001
25