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 September 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 jurisdictions 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 October 31, 2001
Common Stock, $.001 par value 52,833,227
DENBURY RESOURCES INC.
INDEX
Part I. Financial Information Page
Item 1. Financial Statements
Independent Accountants' Report 3
Condensed Consolidated Balance Sheets at September 30, 2001 (Unaudited)
and December 31, 2000 4
Condensed Consolidated Statements of Operations for the Three and
Nine Months ended September 30, 2001 and 2000 (Unaudited) 5
Condensed Consolidated Statements of Cash Flows for the Nine Months
ended September 30, 2001 and 2000 (Unaudited) 6
Notes to Condensed Consolidated Financial Statements 7-15
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 16-28
Item 3. Quantitative and Qualitative Disclosures about Market Risk 28
Part II. Other Information
Item 2. Changes in Securities and Use of Proceeds 29
Item 4. Submission of Matters to a Vote of Security Holders 29
Item 6. Exhibits and Reports on Form 8-K 29
Signatures 30
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 September 30,
2001, and the related condensed consolidated statements of operations for the
three and nine-month periods ended September 30, 2001 and 2000 and cash flows
for the nine- month periods ended September 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
November 14, 2001
3
DENBURY RESOURCES INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands of U.S. dollars except share amounts)
September 30, December 31,
2001 2000
---------------- ---------------
(Unaudited)
Assets
Current assets
Cash and cash equivalents $ 23,737 $ 22,293
Accrued production receivables 27,800 37,527
Trade and other receivables 31,255 5,255
Derivative assets 32,844 4,305
Deferred income tax asset 11,156 28,126
Other assets 2,952 484
----------- -----------
Total current assets 129,744 97,990
----------- -----------
Property and equipment (using full cost accounting)
Oil and natural gas properties 1,035,688 746,062
CO2 properties and equipment 44,991 --
Unevaluated oil and natural gas properties 47,655 13,810
Less accumulated depletion and depreciation (497,865) (452,358)
----------- -----------
Net property and equipment 630,469 307,514
----------- -----------
Noncurrent derivative assets 17,671 805
Noncurrent deferred income tax asset -- 39,726
Other noncurrent assets 17,881 11,344
----------- -----------
Total assets $ 795,765 $ 457,379
=========== ===========
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable and accrued liabilities $ 66,362 $ 26,628
Oil and gas production payable 11,955 12,158
----------- -----------
Total current liabilities 78,317 38,786
----------- -----------
Long-term liabilities
Long-term debt 314,522 199,000
Provision for site reclamation costs 3,672 2,770
Deferred income tax liability 40,443 --
Other 3,370 658
----------- -----------
Total long-term liabilities 362,007 202,428
----------- -----------
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;
52,820,969 and 45,979,981 shares issued and outstanding at September
30, 2001 and December 31, 2000, respectively 53 46
Paid-in capital in excess of par 390,608 329,339
Accumulated deficit (53,192) (113,220)
Accumulated other comprehensive income 17,972 --
----------- -----------
Total stockholders' equity 355,441 216,165
----------- -----------
Total liabilities and stockholders' equity $ 795,765 $ 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 Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
2001 2000 2001 2000
------------ ------------- ------------ ------------
Revenues
Oil, gas and related product sales $ 65,554 $ 51,591 $ 208,992 $ 131,619
CO2 sales 1,455 - 3,738 -
Gain (loss) on settlements of derivative contracts 7,217 (7,538) 7,835 (15,179)
Interest and other income 92 696 340 1,626
------------ ------------- ------------ ------------
Total revenues 74,318 44,749 220,905 118,066
------------ ------------- ------------ ------------
Expenses
Lease operating costs 15,191 9,737 40,244 27,873
Production taxes 2,772 2,059 7,746 5,370
CO2 operating costs 373 - 708 -
General and administrative 2,519 1,960 6,924 5,835
Interest 6,330 3,545 15,575 10,763
Depletion and depreciation 22,694 8,228 47,687 23,558
Amortization of derivative contracts and other
non-cash hedging adjustments 1,969 - 5,833 -
Franchise taxes 330 100 905 389
------------ ------------- ------------ ------------
Total expenses 52,178 25,629 125,622 73,788
------------ ------------- ------------ ------------
Income before income taxes 22,140 19,120 95,283 44,278
Income tax provision (benefit)
Current income taxes (1,500) 81 900 121
Deferred income taxes 9,692 - 34,355 -
------------ ------------- ------------ ------------
Net income $ 13,948 $ 19,039 $ 60,028 $ 44,157
============ ============= ============ ============
Net income per common share
Basic $ 0.27 $ 0.42 $ 1.25 $ 0.96
Diluted 0.26 0.41 1.22 0.96
Weighted average common shares outstanding
Basic 52,169 45,856 48,127 45,792
Diluted 53,154 46,505 49,244 46,127
(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)
Nine Months Ended
September 30,
----------------------------------
2001 2000
------------- ------------
Cash flow from operating activities:
Net income $ 60,028 $ 44,157
Adjustments needed to reconcile to net cash flow provided by operations:
Depreciation, depletion and amortization 47,687 23,558
Amortization of derivative contracts and other non-cash 5,833 -
heding adjustments
Deferred income taxes 34,355 -
Other 943 689
------------- ------------
148,846 68,404
Changes in assets and liabilities, net of effect of acquisition:
Accrued production receivable 15,613 (10,827)
Trade and other receivables (17,187) (2,709)
Derivative assets (22,712) -
Other assets (1,509) (1,392)
Accounts payable and accrued liabilities 20,276 12,643
Oil and gas production payable (3,705) 3,561
Other liabilities 2,450 -
------------- ------------
Net cash provided by operations 142,072 69,680
------------- ------------
Cash flow used for investing activities:
Oil and natural gas expenditures (113,613) (59,132)
Acquisitions of oil and gas properties and Matrix, net of cash acquired (93,124) (3,300)
Acquisitions of CO2 assets and capital expenditures (44,991) -
Proceeds from dispositions of oil and natural gas properties - 1,390
(Increases) decreases in restricted cash (2,217) 264
Net purchases of other assets (1,330) (841)
------------- ------------
Net cash used for investing activities (255,275) (61,619)
------------- ------------
Cash flow from financing activities:
Bank repayments (79,130) (6,500)
Bank borrowings 126,000 -
Issuance of subordinated debt 68,652 -
Issuance of common stock 2,041 996
Costs of debt financing (2,916) -
Other - (125)
------------- ------------
Net cash provided by (used for) financing activities 114,647 (5,629)
------------- ------------
Net increase in cash and cash equivalents 1,444 2,432
Cash and cash equivalents at beginning of period 22,293 11,768
------------- ------------
Cash and cash equivalents at end of period $ 23,737 $ 14,200
============= ============
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 15,778 $ 12,908
Cash paid during the period for income taxes 1,776 280
Common stock issued in Matrix acquisition (non-cash) 59,195 -
(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 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 nine month periods ended September 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 September 30, 2001 and the consolidated results of
its operations for the three and nine months ended September 30, 2001 and 2000
and its cash flows for the nine months ended September 30, 2001 and 2000.
Certain prior period items have been reclassified to make the classification
consistent with this quarter.
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 nine month periods ended September 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 nine month periods ended September 30, 2001 and 2000 (shares
in thousands).
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
2001 2000 2001 2000
------------ ------------ ----------- -----------
Weighted average common shares - basic 52,169 45,856 48,127 45,792
Potentially dilutive securities:
Stock options 985 649 1,117 335
------------ ------------ ----------- -----------
Weighted average common shares - diluted 53,154 46,505 49,244 46,127
============ ============ =========== ===========
For the three and nine months ended September 30, 2001, outstanding options
to purchase 1.9 million and 1.3 million shares of common stock, respectively,
were excluded from the diluted net income per common share calculations as the
exercise prices of these options exceeded the average market price of the
Company's common stock for these periods. For the three and nine months ended
September 30, 2000, outstanding options to purchase 1.5 million and 1.6 million
shares of common stock, respectively, were excluded from the diluted net income
per common share calculations as the exercise prices of these 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
New Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141, ("SFAS No. 141"), "Business
Combinations." SFAS No. 141 requires that the purchase method of accounting be
used for all business combinations initiated or completed after June 30, 2001.
SFAS No. 141 also specified criteria that intangible assets acquired in a
purchase method business combination must be recognized and reported apart from
goodwill. The adoption of SFAS No. 141 as of July 1, 2001 did not have any
impact on the Company's financial statements.
The Financial Accounting Standards Board has recently issued two new
pronouncemnts, Statement of Financial Accounting Standards No. 143 ("SFAS No.
143"), "Accounting for Asset Retirement Obligations" and Statement of Financial
Accounting Standards No. 144 ("SFAS No. 144"), "Accounting for the Impairment or
Disposal of Long-Lived Assets."
SFAS No. 143 requires that the fair value of a liability for an asset
retirement obligation be recorded in the period in which it is incured and the
corresponding cost capitalized by increasing the carrying amount of the related
long-lived asset. The liability is accreted to its present value each period,
and the capitalized cost is depreciated over the useful life of the related
asset. If the liability is settled for an amount other than the recorded amount,
a gain or loss is recognized. The standard is effective for the Company
beginning in 2003, but earlier adoption is encouraged. Adoption of the standard
will result in recording a cumulative effect of a change in accounting principle
in the period of adoption. The Company has not yet determined the impact of this
new standard or when the Company will adopt this new standard.
SFAS No. 144 addresses the financial accounting and reporting for the
impairment or disposal of long-lived assets. SFAS No. 144 supersedes SFAS No.
121 but retains its fundamental provisions for the (a) recognition/measurement
of impairment of long-lived assets to be held and used and (b) measurement of
long-lived assets to be disposed of by sale. SFAS No. 144 also supersedes other
pronouncements which currently do not affect the Company. SFAS No. 144 is
effective for the Company beginning in 2002. The Company is currently evaluating
the impact of this new standard.
2. COMPREHENSIVE INCOME
The following tables present comprehensive income for the three and nine
months ended September 30, 2001.
Three Months Ended
(Amounts in thousands) September 30, 2001
-----------------------------------
Accumulated other comprehensive income - June 30, 2001 $ 9,769
Net income $ 13,948
Other comprehensive income - net of tax
Reclassification adjustments related to derivative contracts (78)
Change in fair value of outstanding hedging positions 8,281
---------------
Total other comprehensive income 8,203 8,203
--------------- --------------
Comprehensive income $ 22,151
===============
Accumulated other comprehensive income - September 30, 2001 $ 17,972
==============
8
DENBURY RESOURCES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Nine Months Ended
(Amounts in thousands) September 30, 2001
-----------------------------------
Accumulated other comprehensive income - December 31, 2000 $ -
Net income $ 60,028
Other comprehensive income - net of tax
Cumulative effect of change in accounting principle - January 1, 2001 1,012
Reclassification adjustments related to derivative contracts (934)
Change in fair value of outstanding hedging positions 17,894
---------------
Total other comprehensive income 17,972 17,972
--------------- --------------
Comprehensive income $ 78,000
===============
Accumulated other comprehensive income - September 30, 2001 $ 17,972
==============
The Company did not have any items that met the criteria of other
comprehensive income, other than net income, for the three and nine month
periods ended September 30, 2000.
3. NOTES PAYABLE AND LONG-TERM INDEBTEDNESS
September 30, December 31,
2001 2000
--------------- ---------------
(Amounts in thousands)
(Unaudited)
9% Senior Subordinated Notes Due 2008 $ 125,000 $ 125,000
9% Series B Senior Subordinated Notes Due 2008 75,000 -
Discount on 9% Series B Senior Subordinated Notes Due 2008 (6,348) -
Senior bank loan 120,870 74,000
--------------- ---------------
Total long-term debt $ 314,522 $ 199,000
=============== ===============
On August 15, 2001 in a private Rule 144A sale, the Company issued $75
million of Series B Senior Subordinated Notes due 2008 at 91.371% of their face
amount. The notes were issued under a separate indenture but on terms
substantially identical to the Company's existing 9% Senior Subordinated Notes
due 2008. The net proceeds of $65.9 million were used to reduce the Company's
existing bank debt.
The Company's bank credit facility provides for a semi-annual
redetermination of the borrowing base on April 1st and October 1st. At the
October 1, 2001 redetermination, the Company's borrowing base was increased from
$200 million to $220 million leaving the Company with a borrowing capacity of
approximately $99 million as of September 30, 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
9
DENBURY RESOURCES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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
In 2000, the Company acquired floors on 2001 production consisting of a
$22.00 floor on 12,800 Bbls/d and a $2.80 floor on 37,500 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
production 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 per MMBtu for July 2001 through December 2002 and $3.75 per MMBtu
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
September 30, 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 5,269 $3.65
2002 10,000 $21.00 Q1 - 2002 6,700 $3.07
Q2 - 2002 3,775 $3.40
Gas Price Floors (MMBtu/d): Q2 - 2002 4,400 $3.04
2001 37,500 $2.80 Q3 - 2002 2,873 $3.38
2001 44,000 $4.25 Q3 - 2002 3,500 $2.99
Q4 - 2002 2,500 $2.93
Q4 - 2001 7,875 $3.56 Q4 - 2002 2,135 $3.38
Q4 - 2001 10,400 $2.94
2002 41,000 $4.25
2003 33,000 $3.75
On January 1, 2001, the Company adopted Statement of Financial Accounting
Standards No. 133 ("SFAS No. 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.
10
DENBURY RESOURCES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
At September 30, 2001, the fair value of the Company's derivative contracts
was approximately $50.5 million, an increase of approximately $13.1 million over
their fair value at June 30, 2001, due primarily to the reduced price of natural
gas futures during the quarter and additional floors purchased for approximately
$4.7 million during the third quarter. This increase in fair value, net of
related income taxes, resulted in an increase to other comprehensive income of
approximately $8.3 million in accordance with the requirements of SFAS No. 133.
Approximately $12.9 million of the $18.0 million in accumulated other
comprehensive income as of September 30, 2001 relates to contracts that will
expire within the next twelve months and will be reclassified out of other
comprehensive income. During the third quarter and first nine months of 2001 the
Company also reclassified approximately $78,000 and $934,000, respectively, out
of other comprehensive income and into amortization of derivative contracts and
other non-cash hedging adjustments in the condensed consolidated statements of
operations relating to the adjustment made at January 1, 2001 as part of the
adoption of SFAS No. 133. In addition, the Company expensed approximately $2.1
million and $3.2 million during the three and nine months ended September 30,
2001 relating to the amortization of the cost of the price floors.
During the third quarter of 2001, the Company began reporting its cash
receipts from its hedges as a separate line item on the income statement, gain
(loss) on settlements of derivative contracts, and included such gain as an
adjustment to its reported oil and natural gas unit prices, a methodology that
is more consistent with the manner that hedging gains and losses were reported
in prior years. During the three months ended September 30, 2001, the Company
received a total of $7.2 million in cash payments from its natural gas price
floors, resulting in an increase of $0.72 per Mcf. During the nine months ended
September 30, 2001, the Company received a total of $7.8 million in cash
payments from its natural gas price floors, resulting in an increase of $0.36
per Mcf.
During the first nine 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 third quarter of 2000 the Company paid
approximately $3.7 million on its oil hedge contract, and $3.8 million on the
natural gas hedge contract. Through the first nine months of 2000, the Company
paid approximately $9.5 million on the oil hedge contract and $5.7 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.
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 approximately
$159.0 million, comprised of $99.8 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 borrowings of $95.0 million from
Denbury's bank credit facility. The purchase price was allocated to the net
11
DENBURY RESOURCES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
assets acquired based on their estimated fair market values at the date of
acquisition, including $30.0 million of the purchase price recorded as
unevaluated property to reflect the significant probable and possible reserves
identified. Such allocations are based on preliminary information and are
subject to change when final valuations are obtained. 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 per MMBtu for July 2001 through December 2002 and $3.75 per MMBtu
for all of 2003. The acquired operations of Matrix were reflected in the
Company's financial statements beginning July 1, 2001.
The following pro forma information shows the consolidated results of
operations for the nine months ending September 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 $ 260,195
Net income 64,019
Income per common share:
Basic $ 1.21
Diluted 1.19
7. CONDENSED CONSOLIDATING FINANCIAL INFORMATION
As of August 2001, all of the Company's subordinated debt securities are
fully and unconditionally guaranteed by Denbury Resources Inc.'s significant
subsidiaries. Condensed consolidating financial information for Denbury
Resources Inc.'s significant subsidiaries as of September 30, 2001 and December
31, 2000 and for the three and nine months ended September 30, 2001 and 2000 is
as follows:
Condensed Consolidating Balance Sheets
September 30, 2001 (Unaudited)
---------------------------------------------------------------
Denbury Denbury
Resources Resources
Inc. (Parent Guarantor Inc.
Amounts in thousands and Issuer) Subsidiaries Eliminations Consolidated
-------------- ------------- ------------- --------------
ASSETS
Current assets..................................$ 113,946 $ 15,798 $ $ 129,744
Property and equipment (using full cost accounting) 423,578 206,891 - 630,469
Investment in subsidiaries (equity method)...... 167,134 - (167,134) -
Other assets.................................... 32,755 2,797 - 35,552
-------------- ------------- ------------- --------------
Total assets...............................$ 737,413 $ 225,486 $ (167,134) $ 795,765
============== ============= ============= ==============
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities.............................$ 73,882 $ 4,435 $ $ 78,317
Long-term liabilities........................... 308,090 53,917 - 362,007
Stockholders' equity............................ 355,441 167,134 (167,134) 355,441
-------------- ------------- ------------- --------------
Total liabilities and stockholders' equity.$ 737,413 $ 225,486 $ (167,134) $ 795,765
============== ============= ============= ==============
12
DENBURY RESOURCES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000
---------------------------------------------------------------
Denbury Denbury
Resources Resources
Inc. (Parent Guarantor Inc.
Amounts in thousands and Issuer) Subsidiaries Eliminations Consolidated
-------------- ------------- -------------- --------------
ASSETS
Current assets..................................$ 89,235 $ 8,755 $ - $ 97,990
Property and equipment (using full cost accounting) 307,514 - - 307,514
Investment in subsidiaries (equity method)...... 5,671 - (5,671) -
Other assets.................................... 51,080 795 - 51,875
-------------- ------------- -------------- --------------
Total assets...............................$ 453,500 $ 9,550 $ (5,671) $ 457,379
============== ============= ============== ==============
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities.............................$ 34,907 $ 3,879 $ - $ 38,786
Long-term liabilities........................... 202,428 - - 202,428
Stockholders' equity............................ 216,165 5,671 (5,671) 216,165
-------------- ------------- -------------- --------------
Total liabilities and stockholders' equity $ 453,500 $ 9,550 $ (5,671) $ 457,379
============== ============= ============== ==============
Condensed Consolidating Statements of Operations
Three Months Ended September 30, 2001 (Unaudited)
------------------------------------------------------------------
Denbury Denbury
Resources Resources
Inc. (Parent Guarantor Inc.
Amounts in thousands and Issuer) Subsidiaries Eliminations Consolidated
--------------- -------------- -------------- --------------
Revenues.....................................$ 61,191 $ 13,127 $ - $ 74,318
Expenses..................................... 42,931 9,247 - 52,178
--------------- -------------- -------------- --------------
Income before the following: 18,260 3,880 - 22,140
Equity in net earnings of subsidiaries.. 2,804 - (2,804) -
--------------- -------------- -------------- --------------
Income (loss) before income taxes............ 21,064 3,880 (2,804) 22,140
Income tax provision......................... 7,116 1,076 - 8,192
--------------- -------------- -------------- --------------
Net income (loss)............................$ 13,948 $ 2,804 $ (2,804) $ 13,948
=============== ============== ============== ==============
Three Months Ended September 30, 2000 (Unaudited)
------------------------------------------------------------------
Denbury Denbury
Resources Resources
Inc. (Parent Guarantor Inc.
Amounts in thousands and Issuer) Subsidiaries Eliminations Consolidated
--------------- -------------- --------------- --------------
Revenues.....................................$ 44,345 $ 404 $ - $ 44,749
Expenses..................................... 25,671 (42) - 25,629
--------------- -------------- --------------- --------------
Income before the following: 18,674 446 - 19,120
Equity in net earnings of subsidiaries.. 446 - (446) -
--------------- -------------- --------------- --------------
Income before income taxes................... 19,120 446 (446) 19,120
Provision for income taxes................... 81 - - 81
--------------- -------------- --------------- --------------
Net Income (loss)............................$ 19,039 $ 446 $ (446) $ 19,039
=============== ============== =============== ==============
13
DENBURY RESOURCES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Nine Months Ended September 30, 2001 (Unaudited)
------------------------------------------------------------------
Denbury Denbury
Resources Inc. Resources
(Parent and Guarantor Inc.
Amounts in thousands Issuer) Subsidiaries Eliminations Consolidated
---------------- -------------- -------------- --------------
Revenues.....................................$ 208,142 $ 12,763 $ - $ 220,905
Expenses..................................... 116,426 9,196 - 125,622
---------------- -------------- -------------- --------------
Income before the following: 91,716 3,567 - 95,283
Equity in net earnings of subsidiaries.. 2,491 - (2,491) -
---------------- -------------- -------------- --------------
Income (loss) before income taxes............ 94,207 3,567 (2,491) 95,283
Income tax provision......................... 34,179 1,076 - 35,255
---------------- -------------- -------------- --------------
Net income (loss)............................$ 60,028 $ 2,491 $ (2,491) $ 60,028
================ ============== ============== ==============
Nine Months Ended September 30, 2000 (Unaudited)
------------------------------------------------------------------
Denbury Denbury
Resources Inc. Resources
(Parent and Guarantor Inc.
Amounts in thousands Issuer) Subsidiaries Eliminations Consolidated
----------------- -------------- -------------- --------------
Revenues.....................................$ 117,274 $ 792 $ - $ 118,066
Expenses..................................... 73,842 (54) - 73,788
----------------- -------------- -------------- --------------
Income before the following: 43,432 846 - 44,278
Equity in net earnings of subsidiaries.. 846 - (846) -
----------------- -------------- -------------- --------------
Income (loss) before income taxes............ 44,278 846 (846) 44,278
Income tax provision......................... 121 - - 121
----------------- -------------- -------------- --------------
Net income (loss)............................$ 44,157 $ 846 $ (846) $ 44,157
================= ============== ============== ==============
Condensed Consolidating Statements of Cash Flows
Nine Months Ended September 30, 2001 (Unaudited)
------------------------------------------------------------------
Denbury Denbury
Resources Inc. Resources
(Parent and Guarantor Inc.
Amounts in thousands Issuer) Subsidiaries Eliminations Consolidated
----------------- -------------- -------------- --------------
Cash flow from operations....................$ 127,566 $ 14,506 $ - $ 142,072
Cash flow from investing activities.......... (249,293) (5,982) - (255,275)
Cash flow from financing activities.......... 114,647 - - 114,647
----------------- -------------- -------------- --------------
Net increase (decrease) in cash flow......... (7,080) 8,524 - 1,444
Cash, beginning of period.................... 22,286 7 - 22,293
----------------- -------------- -------------- --------------
Cash, end of period..........................$ 15,206 $ 8,531 $ - $ 23,737
================= ============== ============== ==============
14
DENBURY RESOURCES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Nine Months Ended September 30, 2000 (Unaudited)
------------------------------------------------------------------
Denbury Denbury
Resources Inc. Resources
(Parent and Guarantor Inc.
Amounts in thousands Issuer) Subsidiaries Eliminations Consolidated
----------------- -------------- -------------- --------------
Cash flow from operations....................$ 71,640 $ (1,960) $ - $ 69,680
Cash flow from investing activities.......... (61,586) (33) - (61,619)
Cash flow from financing activities.......... (5,629) - - (5,629)
----------------- -------------- -------------- --------------
Net increase (decrease) in cash flow......... 4,425 (1,993) - 2,432
Cash, beginning of period.................... 9,737 2,031 - 11,768
----------------- -------------- -------------- --------------
Cash, end of period..........................$ 14,162 $ 38 $ - $ 14,200
================= ============== ============== ==============
15
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 natural gas 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
The third quarter of 2001 results include for the first time the operations
of Matrix Oil & Gas, Inc. ("Matrix"), an independent oil and gas company based
in Covington, Louisiana (the "Matrix Acquisition") acquired by the Company on
July 10, 2001. 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 $159
million, comprised of $99.8 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 has recorded $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 $1.80 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. With these floors, the Company should receive at least $143.0 million
of 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 and has received $6.5 million in cash payments on these
contracts through September 2001. The price floors had a market value as of
September 30, 2001 of $39.4 million.
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 third quarter of 2001 averaged approximately 92 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 43 million cubic
feet per day was sold under long-term contracts to commercial CO2 users.
16
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 significant strategic advantage in the acquisition of other
properties in Mississippi that could be further exploited through tertiary
recovery.
CAPITAL RESOURCES AND LIQUIDITY
While high oil and natural gas prices early in 2001 have lead to higher
overall prices for the first nine months of 2001 compared to that same period a
year earlier, the effect of falling prices during 2001 is visible in the
comparative third quarters, as third quarter 2001 prices per BOE (excluding the
effect of hedges) were 26% lower than in the third quarter of 2000. As more
fully described under "Results of Operations" below, the Company's results of
operations, cash flows and financial position improved significantly during the
first nine months of 2001, as compared to the comparable period of 2000, as a
result of increased production and the higher commodity prices, particularly
natural gas prices. The Company's pre-tax results of operations and cash flow
also improved between the respective third quarters due to higher production,
the Matrix acquisition and cash receipts from the Company's price floors, even
though the commodity prices decreased between the two quarterly periods.
Oil and natural gas revenues increased $28.7 million between the respective
third quarters. The overall increase in production volumes contributed $36.8
million or 128% of the increase, the incremental cash receipts from derivative
contracts contributed $14.8 million or 52% of the increase, and the decline in
commodity prices reduced revenues by $22.9 million or a negative 80% of the
increase. Between the respective nine month periods, oil and natural gas
revenues increased $100.4 million. The overall increase in production volumes
contributed $61.4 million or 61% of the increase, the incremental cash receipts
from derivative contracts contributed $23.0 million or 23% of the increase, and
the overall increase in commodity prices contributed $16.0 million or 16% of the
increase.
During the first nine months of 2001 the Company borrowed $126.0 million on
its bank credit facility to partially fund three transactions: the Matrix
acquisition ($95.0 million), one-half of the CO2 Acquisition ($21.0 million),
and a portion ($10.0 million) of the $18.0 million purchase of price floors
associated with the Matrix Acquisition. The Company began the year with an
outstanding bank balance of $74.0 million, repaid $13.1 million of its bank
borrowings in the first quarter of 2001 with excess cash flow generated from
operations, and repaid $66.0 million in August 2001 with the net proceeds from
the August 15, 2001 sale of Series B Senior Subordinated Notes due 2008 (see
below), leaving a balance outstanding of $120.9 million as of September 30, 2001
($131 million outstanding as of November 1, 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 October 1, 2001 redetermination, the Company's
borrowing base was increased from $200 million to $220 million, to reflect the
changes during the prior six months relating to the Matrix acquisition and the
issuance of an additional $75 million of subordinated debt. As a result, the
Company had approximately $99 million of borrowing capacity on its existing
credit line as of September 30, 2001 ($89 million as of November 1, 2001). The
next scheduled redetermination for the bank credit facility is April 1, 2002.
On August 15, 2001, the Company closed a $75 million private Rule 144A sale
of Series B Senior Subordinated Notes due 2008 sold at 91.371% of their face
amount. The notes were issued under a separate indenture but on terms
substantially identical to the Company's existing 9% Senior Subordinated Notes
due 2008. The net proceeds of $65.9 million were used to reduce the Company's
existing bank debt. On November 1, 2001, the Company began an offering to
exchange these privately placed notes for a like principal amount of registered
notes.
17
DENBURY RESOURCES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company anticipates that its available credit will be sufficient for
the foreseeable future in order to continue its planned development and
exploration 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,
or for temporary borrowings and repayments for working capital purposes.
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. The
Company's borrowing base is set by its banks at their sole discretion based on
various factors, some of which are out of the Company's control. If the
Company's borrowing base should be reduced in the future, 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 $175.0 million and at $120.0 million
for 2002. The Company's capital budget for 2002 was reduced from 2001 levels to
reflect the lower anticipated commodity prices. If prices, and corresponding
cash flow, should be higher than anticipated, the Company has several projects
in inventory which could be added to the 2002 budget.
The Company has purchased price floors that cover approximately 80% to 85%
of its expected 2001 production and approximately 45% of its expected 2002
production (see "Market Risk Managment"). The Company entered into these price
floors in order to protect the Company's cash flow so that a majority of the
Company's capital program can be implemented and so that the Company may 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 and 2002 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 nine months of 2001, the Company spent approximately
$113.6 million on oil and gas development and exploration expenditures and
approximately $93.1 million on oil and gas property acquisitions, net of
purchase price adjustments. In addition, the Company issued 6.6 million shares
of Denbury's common stock with a value of $59.2 million as part of the Matrix
acquisition. The oil and gas exploration and development expenditures included
$78.4 million spent on drilling, $13.1 million on geological, geophysical and
acreage expenditures and $22.1 million on workover costs. Also during the first
nine months of 2001, the Company spent approximately $555,000 on CO2 development
expenditures and $44.4 million on CO2 acquisitions. These expenditures were
funded by cash flow from operations and bank debt.
During the first nine months of 2000, the Company spent approximately $59.1
million on exploration and development expenditures and approximately $3.3
million on acquisitions. The exploration and development expenditures included
approximately $30.4 million spent on drilling, $6.5 million on geological,
geophysical and acreage expenditures and $22.2 million spent on workover costs.
These expenditures were funded primarily by cash flow from operations.
18
DENBURY RESOURCES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The Company's operating results for the third quarter and nine months ended
September 30, 2001 improved significantly over the comparable prior year periods
due to increased production and lower costs on a BOE basis as further set forth
below. In addition, commodity prices for the comparable nine month periods were
higher in 2001 than in 2000; conversely, when comparing the respective third
quarters, commodity prices were lower in 2001 than 2000.
Three Months Ended Nine Months Ended
September 30, September 30,
- --------------------------------------------------------------- ------------------------ -------------------------
2001 2000 2001 2000
- --------------------------------------------------------------- ------------ ----------- ----------- -----------
AVERAGE DAILY PRODUCTION VOLUME
Bbls 16,877 15,405 16,536 14,867
Mcf 109,406 30,885 80,268 29,324
BOE(1) 35,112 20,553 29,914 19,754
OPERATING REVENUES AND EXPENSES (THOUSANDS)
Oil sales $ 34,442 $ 38,553 $ 104,198 $ 102,543
Natural gas sales 31,112 13,038 104,794 29,076
Gain (loss) on settlement of derivative contracts 7,217 (7,538) 7,835 (15,179)
------------ ----------- ----------- -----------
Total oil and natural gas revenues $ 72,771 $ 44,053 $ 216,827 $ 116,440
------------ ----------- ----------- -----------
CO2 sales $ 1,455 $ - $ 3,738 $ -
------------ ----------- ----------- -----------
Lease operating costs $ 15,191 $ 9,737 $ 40,244 $ 27,873
Production taxes 2,772 2,059 7,746 5,370
CO2 operating costs 373 - 708 -
------------ ----------- ----------- -----------
Total production expenses $ 18,336 $ 11,796 $ 48,698 $ 33,243
------------ ----------- ----------- -----------
UNIT PRICES-INCLUDING IMPACT OF HEDGES
Oil price per barrel ("Bbl") $ 22.18 $ 24.57 $ 23.08 $ 22.83
Gas price per thousand cubic feet ("Mcf") 3.81 3.25 5.14 2.92
UNIT PRICES-EXCLUDING IMPACT OF HEDGES
Oil price per Bbl $ 22.18 $ 27.20 $ 23.08 $ 25.17
Gas price per Mcf 3.09 4.59 4.78 3.62
OIL AND GAS OPERATING REVENUES AND EXPENSES PER BOE (1)
Oil and natural gas revenues $ 22.53 $ 23.30 $ 26.55 $ 21.51
------------ ------------ ------------- ------------
Oil and gas lease operating costs $ 4.70 $ 5.15 $ 4.93 $ 5.15
Oil and gas production taxes 0.86 1.09 0.95 0.99
------------ ------------ ------------- ------------
Total oil and gas production expenses $ 5.56 $ 6.24 $ 5.88 $ 6.14
- --------------------------------------------------------------- ------------ ------------ ------------- ------------
(1) Barrel of oil equivalent using the ratio of one barrel of oil to 6 Mcf of
natural gas ("BOE").
PRODUCTION: In the third quarter of 2001, production averaged 35,112 BOE/d,
a 71% increase from the third quarter of 2000 and a 26% increase from the second
quarter of 2001 average of 27,902 BOE/d. Production for the nine months ended
September 30, 2001 averaged 29,914 BOE/d, a 51% increase over the first nine
19
DENBURY RESOURCES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
months of 2000. Approximately 6,700 BOE/d of the third quarter period over
period increase was attributable to the acquisition of Matrix Oil & Gas, Inc. in
July 2001, approximately 4,100 BOE/d attributable to the acquisition of
Thornwell Field in the fourth quarter of 2000, and the balance of approximately
3,700 BOE/d a result of successful internal development at Thornwell, Lirette
and Little Creek Fields, and the Company's offshore properties, partially offset
by natural overall production declines. For the comparable nine month periods,
the increases related to the same areas. The Matrix and Thornwell Field
acquisitions were both predominately natural gas, contributing to a change in
the overall mix of the Company's oil and natural gas production. For the third
quarter of 2000, approximately 25% of the Company's production was natural gas
as compared to a more balanced 52% in the third quarter of 2001.
Production at Thornwell Field, acquired in the fourth quarter of 2000,
averaged 4,380 BOE/d in the third quarter of 2001, a 14% increase over the
second quarter of 2001 and the highest quarterly average to date. The increase
was a result of successful development and exploration drilling in that field.
Little Creek Field continued to respond to the fourth phase of tertiary recovery
operations, resulting in an average rate of 2,317 BOE/d during the third quarter
of 2001, an increase of 17% over production in the third quarter of 2000, and a
slight increase over the second quarter of 2001 average. Little Creek continued
to increase throughout the quarter, exiting the quarter at approximately 3,000
BOE/d. Production at Little Creek 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 7,876
BOE/d in the third quarter of 2001, a 3% increase over production in the third
quarter of 2000 but slightly less than the average production during the second
quarter of 2001. For the first nine months of 2001, production from the
Heidelberg Field averaged 7,940 BOE/d, a 12% increase over production there
during the first nine months of 2000. This increase is attributable to the
Company's continued drilling program and waterflood response. The Company
believes that production at Heidelberg Field has probably reached a plateau and
does not expect any significant increases at this field in the near future.
Production at Lirette Field averaged 2,394 BOE/d in the third quarter of
2001, an increase of 60% over the average BOE/d rate for the third quarter of
2000. For the first nine months of 2001, production at Lirette Field averaged
2,768 BOE/d, a 101% increase over production in the first nine 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 10,426 BOE/d in the third
quarter of 2001, including 7,361 BOE/d from the Matrix properties, as compared
to only 285 BOE/d for the third quarter of 2000 and 1,981 BOE/d in the second
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. The Matrix
properties were added in July 2001.
OIL AND NATURAL GAS REVENUES: Oil and natural gas revenues for the third
quarter of 2001 increased 65% from the comparable quarter of 2000, and increased
86% when comparing the first nine month periods. Oil and natural gas revenues
increased $28.7 million between the respective third quarters. The overall
increase in production volumes contributed $36.8 million or 128% of the
increase, the incremental cash receipts from derivative contracts contributed
$14.8 million or 52% of the increase, and the decline in commodity prices
reduced revenues by $22.9 million or a negative 80% of the increase. Between the
respective nine month periods, oil and natural gas revenues increased $100.4
million. The overall increase in production volumes contributed $61.4 million or
61% of the increase, the incremental cash receipts from derivative contracts
contributed $23.0 million or 23% of the increase, and the overall increase in
commodity prices contributed $16.0 million or 16% of the increase.
20
DENBURY RESOURCES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company's realized unhedged natural gas prices for the third quarter
averaged $3.09 per Mcf and for the first nine months of 2001 averaged $4.78 per
Mcf, a decrease of 33% and an increase of 32% over the respective prior year
periods. The Company's realized unhedged oil prices decreased in the third
quarter and first nine months of 2001 from the comparable periods in 2000, by
approximately 18% and 8%, respectively. Natural gas represented 52% of the
Company's third quarter of 2001 production on a BOE basis, compared to 25% in
the second quarter of 2000.
During the third quarter of 2001, the Company began reporting its cash
receipts from its hedges as a separate line item on the income statement, as
gain (loss) on settlements of derivative contracts, and included such gain as an
adjustment to its reported oil and natural gas unit prices, a methodology that
is more consistent with the manner that hedging gains and losses were reported
in prior years. During the three months ended September 30, 2001, the Company
received a total of $7.2 million in cash payments from its natural gas price
floors, resulting in an increase of our natural gas price of $0.72 per Mcf.
During the nine months ended September 30, 2001, the Company received a total of
$7.8 million in cash payments from its natural gas price floors, resulting in an
increase of our natural gas price of $0.36 per Mcf.
During the first nine 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 third quarter of 2000 the Company paid
approximately $3.7 million on its oil hedge contract, and $3.8 million on the
natural gas hedge contract, reducing its average oil price by $2.63 per Bbl and
its average natural gas price by $1.34 per Mcf. Through the first nine months of
2000, the Company paid approximately $9.5 million on the oil hedge contract and
$5.7 million on the natural gas hedge contract, reducing its average oil price
by $2.34 per Bbl and its average natural gas price by $0.70 per Mcf.
PRODUCTION EXPENSES: Oil and gas lease operating expenses decreased 9% on a
BOE basis between the respective third quarters, and 4% between the respective
first nine months, as a result of the general increases in production, the
addition of the Matrix natural gas properties in July 2001 and additional
savings resulting from the Company's ownership of CO2 purchased in February
2001. The acquired Matrix properties are predominately natural gas, which
typically have a lower per unit operating cost than oil properties. Operating
expenses per BOE averaged $3.50 for the Matrix properties in the third quarter
of 2001, significantly less than the Company overall average of $4.70. The
Company also realized approximately $900,000 of savings from its ownership of
the CO2 properties (see below). Although expenses were lower on a per BOE basis
between the third quarters of 2000 and 2001, lease operating expenses increased
on a gross basis by $5.5 million, or 56%, and between the first nine months of
2000 and 2001 lease operating expenses increased by $12.4 million, or 44%.
Approximately $3.4 million of the third quarter of 2001 increase and $5.0
million of the first nine 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, West Mallalieu and Olive
Fields acquired in the second quarter of 2001, and the Matrix properties
acquired in early July.
Production taxes increased approximately $713,000 and $2.4 million between
the third quarters of 2000 and 2001 and first nine months of 2000 and 2001,
respectively, as a result of increased production and, for the nine month
periods, higher oil and natural gas prices. On a per BOE basis, however,
production taxes declined 21% between the comparable third quarter periods and
4% between the comparable nine month periods as a result of the addition of the
Matrix properties, a portion of which are tax exempt due to their offshore
location. In addition, lower commodity prices during the third quarter of 2001,
as compared to the third quarter in 2000, further reduced production taxes per
BOE during that period.
21
DENBURY RESOURCES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Production expenses were lowered by approximately $900,000 for the third
quarter of 2001 and $2.0 million for the first nine 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 operating cost of approximately $0.06 for each thousand cubic feet of
CO2 produced during the first nine months 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 nine months of 2001.
CO2 OPERATIONS: The Company's CO2 operations had net operating cash flow
from sales of CO2 to other third parties of $1.1 million for the third quarter
of 2001 and $3.0 million for the first nine months of 2001. During the first
nine months of 2001, the Company used approximately 50% of the CO2 produced in
its tertiary recovery operations and sold the remainder to other third parties
for industrial use.
General and Administrative Expenses
General and administrative ("G&A") expenses decreased on a per BOE basis
between the respective quarters and nine month periods ended September 30, 2001
and 2000, but increased on a gross basis, all as set forth below:
Three Months Ended Nine Months Ended
September 30, September 30,
- ----------------------------------------------- -------------------------- --------------------------
2001 2000 2001 2000
- ----------------------------------------------- ------------ ----------- ----------- -----------
NET G&A EXPENSES (THOUSANDS)
Gross G& A expenses $ 8,875 $ 6,152 $ 23,818 $ 18,164
State franchise taxes 330 100 905 389
Operator overhead charges (5,438) (3,385) (14,117) (9,982)
Capitalized exploration costs (918) (807) (2,777) (2,347)
------------ ----------- ----------- -----------
Net G& A expenses $ 2,849 $ 2,060 $ 7,829 $ 6,224
------------ ----------- ----------- -----------
Average G&A cost per BOE $ 0.88 $ 1.09 $ 0.96 $ 1.15
Employees as of September 30 319 240 319 240
- ----------------------------------------------- ------------- ------------ ------------ ------------
Gross G&A expenses increased $2.7 million, or 44%, between the third
quarters of 2001 and 2000 and $5.7 million, or 31%, between the first nine
months of 2001 and 2000. The largest components of these increases were
salaries, bonus accruals, and other related employee costs, which accounted for
approximately $2.1 million of the increase between the respective quarters and
$3.9 million of the increase between the respective nine month periods. The
increase in employee costs is due to salary increases and employee related
additions resulting from the Company's growth and the Matrix acquisition in July
2001. The increase in gross G&A is offset in part by an increase in operator
22
DENBURY RESOURCES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 61% between the third quarters of 2000 and 2001 and by 41% between
the first nine 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 38% increase in net G&A
expense between the third quarters of 2000 and 2001 and a 26% increase in net
G&A expense between the first nine months of 2000 and 2001.
On a BOE basis, G&A costs decreased 19% in the third quarter of 2001 as
compared to the third quarter of 2000 and by 17% for the comparable nine month
periods, due to a higher percentage increase in production than in net G&A
expense.
Interest and Financing Expenses
Three Months Ended Nine Months Ended
September 30, September 30,
- ---------------------------------------------------- ---------------------------- --------------------------
AMOUNTS IN THOUSANDS, EXCEPT PER BOE AMOUNTS 2001 2000 2001 2000
- ---------------------------------------------------- ------------- ----------- ------------ -----------
Interest expense $ 6,330 $ 3,545 $ 15,575 $ 10,763
Non-cash interest expense (344) (234) (892) (690)
------------- ----------- ------------ -----------
Cash interest expense 5,986 3,311 14,683 10,073
Interest and other income (92) (696) (340) (1,626)
------------- ----------- ------------ -----------
Net cash interest expense $ 5,894 $ 2,615 $ 14,343 $ 8,447
------------- ----------- ------------ -----------
Average net cash interest expense per BOE $ 1.82 $ 1.38 $ 1.76 $ 1.56
Average debt outstanding $ 307,479 $ 148,418 $ 242,561 $ 151,115
- ---------------------------------------------------- ------------- ----------- ------------ -----------
Interest expense for the quarter and nine month periods ended September 30,
2001 increased from the comparable prior year periods primarily due to (i)
higher average outstanding debt balances during 2001 following the CO2 and
Matrix acquisitions in February 2001 and July 2001, respectively, and (ii) the
August 2001 issuance of $75 million Series B Senior Subordinated Notes due 2008
which carries a higher interest rate than bank debt, offset in part by decreases
throughout the year in interest rates on the Company's variable rate bank debt.
During the first nine months of 2001 the Company borrowed $126.0 million on its
bank credit facility to partially fund the Matrix Acquisition ($95.0 million),
the CO2 Acquisition ($21.0 million) and to fund a portion ($10.0 million) of the
$18.0 million purchase price of the price floors associated with the Matrix
Acquisition. The Company repaid $13.1 million of its bank borrowings in the
first quarter of 2001 with excess cash flow generated from operations, and
repaid $66.0 million in August 2001 with the net proceeds from the issuance of
Series B 9% Senior Subordinated Notes due 2008, which closed on August 15, 2001.
These notes were issued at a discount with an estimated yield to maturity of
10-7/8%.
During the first nine 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 and then paid down an additional $2.5 million in
September 2000. The Company's $125 million of 9% Senior Subordinated Notes Due
2008 were outstanding during both 2000 and 2001. On a BOE basis, net cash
interest expense increased by 32% between the third quarters of 2000 and 2001
and increased by 13% between the first nine months of 2000 and 2001, as the
increased cost was partially offset by the significantly higher production
rates.
23
DENBURY RESOURCES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Depletion, Depreciation and Site Restoration
Three Months Ended Nine Months Ended
September 30, September 30,
- ------------------------------------------------------ ---------------------------- -------------------------
AMOUNTS IN THOUSANDS, EXCEPT PER BOE AMOUNTS 2001 2000 2001 2000
- ------------------------------------------------------ ------------- ----------- ----------- -----------
Depletion and depreciation $ 21,509 $ 7,786 $ 45,507 $ 22,322
Site restoration provision 819 160 1,154 417
Depreciation of other fixed assets 366 282 1,026 819
------------- ----------- ----------- -----------
Total DD&A $ 22,694 $ 8,228 $ 47,687 $ 23,558
------------- ----------- ----------- -----------
Average DD&A cost per BOE $ 7.03 $ 4.35 $ 5.84 $ 4.35
- ------------------------------------------------------ ------------- ----------- ----------- -----------
The Company's depletion, depreciation and amortization ("DD&A") rate on a
BOE basis increased from $4.35 per BOE for the third quarter and first nine
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 of 2001 to $4.98 per BOE. In July 2001, the
Company acquired Matrix Oil & Gas, Inc. and as a result, the third quarter 2001
DD&A rate increased to $7.03 per BOE ($5.84 per BOE for the first nine months of
2001).
Income Taxes
Three Months Ended Nine Months Ended
September 30, September 30,
- ------------------------------------------------- ----------------------------- ---------------------------
Amounts in Thousands, Except Per BOE
Amounts and Tax Rates 2001 2000 2001 2000
- ------------------------------------------------- ------------ ------------ ------------ -----------
Income tax provision (thousands)
Current income tax expense (benefit) $ (1,500) $ 81 $ 900 $ 121
Deferred income tax expense 9,692 - 34,355 -
------------ ------------ ------------ -----------
Total income tax expense $ 8,192 $ 81 $ 35,255 $ 121
------------ ------------ ------------ -----------
Average income tax expense per BOE $ 2.54 $ 0.04 $ 4.32 $ 0.02
Effective tax rate 37% 0.4% 37% 0.3%
- ------------------------------------------------- ------------- ------------ ------------- -----------
The Company's tax provision for the third quarter and first nine months of
2001 was based on an estimated effective tax rate of 37%. For the third quarter
and first nine 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.
The Company recorded a credit to its estimated current tax expense in the third
quarter of 2001, as the Company's estimate for 2001 current taxes had decreased
from prior estimates due to the decline in commodity prices during the year.
Results of Operations
Primarily as a result of (i) the increased production in the third quarter
and first nine months of 2001, (ii) higher prices in 2001 for the comparable
nine month periods but lower prices for the comparable third quarters, and (iii)
the recording of a full tax provision in 2001 but not in 2000, net income and
cash flow from operations were affected as follows on both a gross and per share
basis:
24
DENBURY RESOURCES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Three Months Ended Nine Months Ended
September 30, September 30,
- -------------------------------------------------------- -------------------------- --------------------------
AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS 2001 2000 2001 2000
- -------------------------------------------------------- ------------ ------------ ----------- ------------
Net income $ 13,948 $ 19,039 $ 60,028 $ 44,157
Net income per common share:
Basic $ 0.27 $ 0.42 $ 1.25 $ 0.96
Diluted 0.26 0.41 1.22 0.96
Cash flow from operations (1) $ 48,670 $ 27,502 $ 148,846 $ 68,404
- -------------------------------------------------------- ------------ ------------ ----------- ------------
(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 Nine Months Ended
September 30, September 30,
--------------------------- -----------------------
Per BOE Data 2001 2000 2001 2000
- -------------------------------------------------------- ------------ ----------- --------- -----------
Revenues $ 20.29 $ 27.28 $ 25.59 $ 24.31
Gain (loss) on settlement of derivative contracts 2.23 (3.98) 0.96 (2.80)
Lease operating costs (4.70) (5.15) (4.93) (5.15)
Production taxes (0.86) (1.09) (0.95) (0.99)
- -------------------------------------------------------- ------------ ----------- --------- -----------
Production netback 16.96 17.06 20.67 15.37
Operating cash flow from CO2 operations 0.34 - 0.37 -
General and administrative expenses (0.88) (1.09) (0.96) (1.15)
Net cash interest expense (1.82) (1.38) (1.76) (1.56)
Current income taxes and other 0.47 (0.04) (0.10) (0.02)
- -------------------------------------------------------- ------------ ----------- --------- -----------
Cash flow from operations(1) 15.07 14.55 18.22 12.64
DD&A (7.03) (4.35) (5.84) (4.35)
Deferred income taxes (3.00) - (4.21) -
Amortization of derivative contracts and other non-cash
hedging adjustments (0.61) - (0.71) -
Other non-cash items (0.11) (0.13) (0.11) (0.13)
- -------------------------------------------------------- ------------ ----------- --------- -----------
Net income $ 4.32 $ 10.07 $ 7.35 $ 8.16
- -------------------------------------------------------- ------------ ----------- --------- -----------
(1) Represents cash flow provided by operations, exclusive of the net change in
operating assets and liabilities.
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.
25
DENBURY RESOURCES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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
In 2000, the Company acquired floors on 2001 production consisting of a
$22.00 floor on 12,800 Bbls/d and a $2.80 floor on 37,500 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
production 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 "2001 Acquisitions" above), 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 per MMBtu for July 2001 through December
2002 and $3.75 per MMBtu 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
September 30, 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 5,269 $3.65
2002 10,000 $21.00 Q1 - 2002 6,700 $3.07
Q2 - 2002 3,775 $3.40
Gas Price Floors (MMBtu/d): Q2 - 2002 4,400 $3.04
2001 37,500 $2.80 Q3 - 2002 2,873 $3.38
2001 44,000 $4.25 Q3 - 2002 3,500 $2.99
Q4 - 2002 2,500 $2.93
Q4 - 2001 7,875 $3.56 Q4 - 2002 2,135 $3.38
Q4 - 2001 10,400 $2.94
2002 41,000 $4.25
2003 33,000 $3.75
26
DENBURY RESOURCES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 delivery contracts with no-cost
collars that are still in place and that cover a total of 6.0 MMcf/d through
December 31, 2001. These collars have a weighted average ceiling price of
approximately $4.82 per MMBtu and a weighted average floor price of
approximately $6.66 per MMBtu.
On January 1, 2001, the Company adopted Statement of Financial Accounting
Standards No. 133 ("SFAS No. 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 September 30, 2001, the fair value of the Company's derivative contracts
was approximately $50.5 million, an increase of approximately $13.1 million over
their fair value at June 30, 2001, due primarily to reduced prices of natural
gas futures during the quarter and additional floors purchased for approximately
$4.7 million during the third quarter. This increase in fair value, net of
related income taxes, resulted in an increase to other comprehensive income of
approximately $8.3 million in accordance with the requirements of SFAS No. 133.
Approximately $12.9 million of the $18.0 million in accumulated other
comprehensive income as of September 30, 2001 relates to contracts that will
expire within the next twelve months and will be reclassified out of other
comprehensive income. During the third quarter and first nine months of 2001 the
Company also reclassified approximately $78,000 and $934,000, respectively, out
of other comprehensive income and into derivative contracts fair value loss in
the condensed consolidated statements of operations relating to the adjustment
made at January 1, 2001 as part of the adoption of SFAS No. 133. In addition,
the Company expensed approximately $2.1 million and $3.2 million during the
three and nine months ended September 30, 2001 relating to the amortization of
the cost of the price floors.
During the third quarter of 2001, the Company began reporting its cash
receipts from its hedges as a separate line item on the income statement, as
gain (loss) on settlements of derivative contracts, and included such gain or
loss as an adjustment to its reported oil and natural gas unit prices, a
methodology that is more consistent with the manner that hedging gains and
losses were reported in prior years. During the three months ended September 30,
2001, the Company received a total of $7.2 million in cash payments from its
natural gas price floors, resulting in an increase of our natural gas price of
$0.72 per Mcf. During the nine months ended September 30, 2001, the Company
received a total of $7.8 million in cash payments from its natural gas price
floors, resulting in an increase of our natural gas price of $0.36 per Mcf.
During the first nine 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 third quarter of 2000 the Company paid
approximately $3.7 million on its oil hedge contract, and $3.8 million on the
natural gas hedge contract, reducing its average oil price by $2.63 per Bbl and
its average net natural gas price by $1.34 per Mcf. Through the first nine
months of 2000, the Company paid approximately $9.5 million on the oil hedge
contract and $5.7 million on the natural gas hedge contract, reducing its
average oil price by $2.34 per Bbl and its average net natural gas price by
$0.70 per Mcf.
27
DENBURY RESOURCES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Based on futures market prices at September 30, 2001, the Company would
expect to receive approximately $39.4 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 $50.5 million, and if natural gas futures market
prices were to increase by 10%, the amount expected to be received under the
Company's natural gas floor contracts would decrease to approximately $28.7
million. If crude oil prices were to decrease by 10%, the Company would expect
to receive approximately $1.3 million on its oil floor contracts through their
expiration dates at the end of 2002.
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.
28
Part II. Other Information
Item 2. Changes in Securities and Use of Proceeds
On July 10, 2001, the Company closed its acquisition of Matrix Oil & Gas,
Inc. ("Matrix"), an independent oil and gas company based in Covington,
Louisiana. Under the merger agreement with Matrix, the Company paid
approximately $159 million, comprised of $99.8 million (63%) in cash and $59.2
million (37%) in the form of 6,569,930 shares of Denbury's unregistered common
stock. The common stock was issued pursuant to an exemption from registration
under the Securities Act of 1933 contained in Section 4(2) thereof, as
interpreted by Rule 506 and other related rules promulgated by the SEC. The
shares were issued to the Matrix shareholders in exchange for their shares of
Matrix common stock.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 6. Exhibits and Reports on Form 8-K during the Third Quarter of 2001
Exhibits:
15* Letter from Independent Accountants as to unaudited interim
financial information.
* Filed herewith.
Reports on Form 8-K:
On July 24, 2001, the Company filed an amendment to its June 15, 2001
Current Report on Form 8-K that reported that Mr. Miller had joined the Company
Board of Directors as a result of the acquisition of Matrix Oil & Gas, Inc., and
included (i) the financial statements for Matrix Oil & Gas, Inc. for the year
ended December 31, 2000 and three months ended March 31, 2001, (ii) pro forma
results of operations for the Company for the year ended December 31, 2000 and
three months ended March 31, 2001 as if the acquisition had occurred as of the
beginning of each respective period, and (iii) a pro forma balance sheet as of
March 31, 2001.
On July 24, 2001, the Company filed a Current Report on Form 8-K that
announced its private offering of $75 million of Senior Subordinated Notes.
On August 9, 2001, the Company filed a Current Report on Form 8-K that
announced the completion of its private offering of $75 million of 9% Senior
Subordinated Notes due 2008.
29
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: November 14, 2001
30