DENBURY RESOURCES INC.
P R E S S R E L E A S E
Denbury Resources Announces Strong Third Quarter Results;
Anticipates Substantial Organic Production Growth in 2006;
Preliminary Logs Indicate Tcf Discovery of CO2
News Release
Released at 7:30 AM CDT
DALLAS, November 3, 2005 - Denbury Resources Inc. (NYSE symbol: DNR)
("Denbury" or the "Company") today announced its third quarter 2005 financial
and operating results. Despite the negative impact on production of Hurricanes
Katrina and Rita, earnings and cash flow were at near-record quarterly and nine
month levels, primarily as a result of high commodity prices. The two hurricanes
did not cause any significant property damage to the Company's properties.
However, the Company estimates that it lost approximately 350,000 barrels of oil
equivalent ("BOE") of production during the third quarter of 2005, as most of
the Company's fields were shut-in for periods ranging from several days to a few
weeks, principally because of lack of power or flooding. As a result, the
Company's production in the third quarter of 2005 was lower than in the second
quarter, averaging 27,345 BOE per day ("BOE/d").
Higher commodity prices more than offset the lower production levels,
resulting in earnings for the quarter of $38.5 million, or $0.34 per basic
common share (adjusted for the October 31, 2005 two-for-one stock split), as
compared to earnings of $18.3 million, or $0.17 per basic common share (adjusted
for the two-for-one stock split), for the third quarter of 2004. Included in
third quarter 2005 net income is approximately $8.1 million of pre-tax
mark-to-market and other non-cash expense ($5.3 million after tax) related to
the Company's decision to discontinue hedge accounting as of January 1, 2005. Of
this amount, $6.2 million was due to mark-to-market adjustments of the Company's
oil and natural gas derivative contracts at September 30, 2005, and $1.8 million
was due to amortization of deferred hedge mark-to-market value losses that
existed as of December 31, 2004 and which are being amortized as the contracts
expire in 2005.
Adjusted cash flow from operations (cash flow from operations before
changes in assets and liabilities, a non-GAAP measure) for the third quarter of
2005 was $87.3 million, a 194% increase over third quarter 2004 adjusted cash
flow from operations of $29.7 million. Net cash flow provided by operations, the
GAAP measure, totaled $76.3 million during the third quarter of 2005, as
compared to $44.8 million during the third quarter of 2004. The difference
between the adjusted cash flow and cash flow from operations is due to the
changes in receivables, accounts payables and accrued liabilities during the
quarter. (Please see the accompanying schedules for a reconciliation of net cash
flow provided by operations, as defined by generally accepted accounting
principles (GAAP), which is the GAAP measure, as opposed to adjusted cash flow
from operations, which is the non-GAAP measure).
Production
- ----------
Production for the quarter was 27,345 BOE/d, a 10% decrease over the second
quarter of 2005 average of 30,469 BOE/d, the decrease attributable to production
lost as a result of the two hurricanes during the quarter. Third quarter 2005
production was approximately the same as third quarter of 2004 levels, after
adjustment for the offshore properties sold in July 2004. Correspondingly, the
hurricanes caused the Company's tertiary oil production in the third quarter of
2005 to decrease 6% when compared to second quarter levels. However, such
tertiary oil production increased 27% when compared to third quarter 2004
tertiary oil production, averaging 8,850 Bbls/d in 2005's third quarter, the
increase over the prior year quarter resulting from production increases at
Little Creek, Mallalieu and McComb Fields. Natural gas production from the
Barnett Shale increased 168% to 2,150 BOE/d in the third quarter of 2005, up
from 803 BOE/d for the third quarter of 2004, primarily due to our drilling
activity in that area, in spite of minor production losses because of the
hurricane. Production from the Company's other operating areas declined during
the third quarter of 2005 when compared to the production levels a quarter
earlier, also as a result of the hurricanes, averaging 10,998 BOE/d for
Mississippi non-CO2 properties (a 14% decline) and 5,169 BOE/d in Louisiana (a
11% decline).
Third Quarter 2005 Financial Results
- ------------------------------------
Oil and natural gas revenues, excluding hedges, were up 34% between the
respective third quarters, as higher commodity prices more than offset lower
production levels resulting from the hurricanes and the July 2004 sale of
offshore properties. Cash payments on hedges were $3.8 million in the third
quarter of 2005, a significant decrease from the $22.2 million paid in the third
quarter of 2004, as most of the Company's out-of-the-money hedges expired as of
December 31, 2004. In addition to the cash payments, the Company recognized
non-cash pre-tax expense of $8.1 million ($5.3 million after tax) of
mark-to-market and other adjustments in the third quarter of 2005 relating to
the Company's decision to discontinue hedge accounting as of January 1, 2005. As
a result of this accounting change, all future changes in the fair values of the
Company's oil and natural gas derivative instruments will result in income or
expense in the Company's statement of operations.
Oil price differentials (Denbury's net oil price received as compared to
NYMEX prices) deteriorated during 2004, particularly in the fourth quarter, as
the price of heavy, sour crude produced primarily in the Company's East
Mississippi properties dropped significantly relative to NYMEX prices. The
Company's net oil price in the third quarter of 2005 averaged $6.34 below NYMEX
prices, worse than the $5.19 differential during the comparable third quarter of
2004, but slightly better than the Company's fourth quarter of 2004 average
differential of $6.48. The Company's natural gas differentials increased in the
third quarter of 2005 to $0.97 per Mcf below NYMEX prices, while historically
the Company's net natural gas price has generally been approximately the same as
NYMEX prices. This higher variance is due, at least in part, to increasing
natural gas prices during the quarter. Since most of the Company's natural gas
is sold on an index price that is set near the first of each month and fixed for
the entire month, variances increase if the NYMEX natural gas prices rise
throughout the three month period.
Lease operating expenses increased in the third quarter of 2005 on both an
absolute and per BOE basis. On a per BOE basis, operating expenses increased
42%, from $7.25 per BOE in the third quarter of 2004 to $10.33 per BOE in the
third quarter of 2005. These per BOE expenses compare to an average of $9.65 per
BOE incurred in the second quarter of 2005. On an absolute basis, the current
quarter operating expenses were down slightly from the second quarter of 2005
levels as a result of the shut-ins relating to the hurricanes, but the
production lost due to the storms more than offset the savings on an absolute
basis. Further, operating costs are generally increasing as a result of an
increasing emphasis on tertiary operations (operating expenses for tertiary
2
operations averaged $9.90 per BOE during 2004 and $11.95 per BOE during the
third quarter of 2005), higher energy costs to operate Company properties, and
general cost inflation in the industry.
Production taxes and marketing expenses generally change in proportion to
commodity prices and therefore were higher in the third quarter of 2005 than in
the comparable quarter of 2004.
General and administrative expenses increased 44% between the two third
quarter periods, averaging $3.56 per BOE in the third quarter of 2005, up from
$2.27 per BOE in the prior year's third quarter. The increase includes
approximately $1.4 million of expenditures to provide food, water, gasoline,
power generators, and other essential supplies to our employees and charitable
organizations in Mississippi and Louisiana following the hurricanes. General and
administrative costs were also higher because of additional personnel added
during 2005, incremental consultant fees, primarily related to compliance costs
associated with, or audit work related to, the Sarbanes-Oxley Act, incremental
costs to document, test and maintain the new software system that the Company
began using in January 2005, and an incremental $438,000 of non-cash
compensation resulting from the issuance of restricted stock, primarily during
August 2004.
Interest expense decreased 5% between the two third quarter periods
primarily as a result of $415,000 of interest expense that was capitalized
during the third quarter of 2005 relating to the CO2 pipeline being constructed
to East Mississippi.
For the third quarter of 2005, depreciation, depletion and amortization
expense ("DD&A") increased to $9.68 per BOE, as compared to the Company's second
quarter 2005 DD&A rate of $8.80, primarily due to rising costs.
The Company recognized current income tax expense of $7.7 million in the
third quarter of 2005 related to anticipated alternative minimum taxes due that
will not be offset by the Company's enhanced oil recovery credits.
Outlook
- -------
Denbury's 2005 development and exploration budget (excluding acquisitions)
is currently set at $365 million, including the estimated costs of the CO2
pipeline being constructed to East Mississippi. The Company has not yet set its
2006 capital budget, but it is likely to be significantly higher than the 2005
budget, and is preliminarily expected to be between $450 million and $500
million, a level that is reasonably close to its anticipated cash flow from
operations using current prices. Preliminary estimates indicate that
approximately 50% of the budget will relate to tertiary operations,
approximately 25% will be spent in the Barnett Shale area, about 10% on
exploration, and the balance on the Company's other assets in Mississippi and
Louisiana. Any acquisitions made by the Company will increase these capital
budget amounts. Denbury's total debt as of October 31, 2005 was approximately
$235 million, including $10 million borrowed on its bank credit line, with $190
million undrawn on its bank borrowing base.
As a result of the two hurricanes, the Company anticipates that its
production for 2005 will be between 29,500 and 30,000 BOE/d. The forecasted
production from its tertiary oil projects is expected to be between 9,250 to
9,500 BOE/d for the year. Based on the preliminary estimates, pending
finalization of its 2006 capital expenditure budget, the Company anticipates
3
that its average daily production for 2006 will be around 35,000 BOE/d, an
organic production growth rate of approximately 18% over 2005.
The Company updated its progress on the CO2 source well currently drilling
at Jackson Dome. The well has reached total depth and a preliminary review of
the well logs and seismic data would indicate CO2 reserves in excess of 1 Tcf,
subject to confirmation with production tests, gas composition, and delineation
of the reservoir.
Gareth Roberts, Chief Executive Officer, said: "While this quarter's
results are somewhat skewed because of the effect of the hurricanes, our core
operations, the CO2 tertiary floods, are continuing to perform as expected.
Production from our tertiary floods is continuing to increase, the CO2 pipeline
to East Mississippi, while delayed momentarily due to the storms, is still
expected to be completed by the end of the first quarter of 2006, and the latest
CO2 source well initially appears to have added in excess of 1 Tcf of CO2
reserves. Assuming the preliminary indications for this source well prove to be
correct, the incremental CO2 reserves should be sufficient for another phase, or
more, of tertiary operations. We have in inventory two oil fields, Cranfield and
Lake St. John, that we purchased earlier this year that are likely to be part of
a future tertiary phase, and we are actively seeking to acquire additional
properties for other future tertiary phases. Our preliminary estimates indicate
that there may be 25 to 35 million barrels of potential oil reserves from these
two fields using recovery factors similar to those on our existing tertiary
operations.
With our tertiary operations as our core growth engine, supplemented by our
anticipated production growth from the Barnett Shale, we are preliminarily
estimating total production growth next year of about 18%. It is significant to
note that virtually all of this growth will be organic, from
internally-generated projects and inventory. We believe that we are one of a
handful of companies that has a sufficient inventory of projects to deliver
double digit production growth without purchasing incremental production. While
we are experiencing significant cost inflation in our industry, at current
commodity prices, we expect to continue to generate record or near-record cash
flow and earnings and we plan to continue reinvesting all of these profits to
further fuel our growth and build for the future. The outlook continues to be
excellent for our business model."
Conference Call
- ---------------
The public is invited to listen to the Company's conference call set for
today, November 3, 2005 at 10:00 A.M. CDT. The call will be broadcast live over
the Internet at our web site: www.denbury.com. If you are unable to participate
during the live broadcast, the call will be archived on our web site for
approximately 30 days and will also be available for playback for one week by
dialing 888-203-1112 or 719-457-0820, passcode 167128.
Financial and Statistical Data Tables
- -------------------------------------
Following are financial highlights for the comparative three and nine month
periods ended September 30, 2005 and 2004. All production volumes and dollars
are expressed on a net revenue interest basis with gas volumes converted at 6:1.
All per share amounts have been adjusted or restated to give effect to the
two-for-one stock split that was effective on October 31, 2005.
4
THIRD QUARTER FINANCIAL HIGHLIGHTS
(Amounts in thousands of U.S. dollars, except per share and unit data)
Three Months Ended
September 30,
-------------------------------------- Percentage
2005 2004 Change
------------------ ------------------ -------------
Revenues:
Oil sales 95,987 68,144 + 41%
Gas sales 42,561 34,924 + 22%
CO2 sales and transportation fees 2,594 1,681 + 54%
Loss on effective hedge contracts - (17,465) - 100%
Interest and other income 661 664 - 0%
------------------ ------------------
Total revenues 141,803 87,948 + 61%
------------------ ------------------
Expenses:
Lease operating expenses 25,983 19,781 + 31%
Production taxes and marketing expense 7,018 4,900 + 43%
CO2 operating costs 631 255 + > 100%
General and administrative 8,952 6,197 + 44%
Interest, net 4,507 4,768 - 5%
Depletion and depreciation 24,340 20,780 + 17%
Commodity derivative expense 11,818 5,161 + > 100%
------------------ ------------------
Total expenses 83,249 61,842 + 35%
------------------ ------------------
Income before income taxes 58,554 26,106 + > 100%
Income tax provision (benefit)
Current income taxes 7,684 18,949 - 59%
Deferred income taxes 12,324 (11,117) + > 100%
------------------ ------------------
NET INCOME 38,546 18,274 + > 100%
================== ==================
Net income per common share (adjusted for two-for-one split):
Basic 0.34 0.17 + 100%
Diluted 0.32 0.16 + 100%
Weighted average common shares (adjusted for two-for-one split):
Basic 112,159 110,170 + 2%
Diluted 119,487 115,098 + 4%
Production (daily - net of royalties)
Oil (barrels) 18,369 19,206 - 4%
Gas (mcf) 53,854 62,708 - 14%
BOE (6:1) 27,345 29,657 - 8%
Unit sales price (including hedge settlements)
Oil (per barrel) 56.80 28.25 + > 100%
Gas (per mcf) 7.83 5.36 + 46%
Unit sales price (excluding hedges)
Oil (per barrel) 56.80 38.57 + 47%
Gas (per mcf) 8.59 6.05 + 42%
5
Three Months Ended
September 30,
-------------------------------------- Percentage
2005 2004 Change
------------------- ------------------ -------------
Non-GAAP Financial Measure (1)
Adjusted or discretionary cash flow from
operations (non-GAAP measure) 87,346 29,747 + > 100%
Net change in assets and liabilities relating to
operations (11,059) 15,019 - > 100%
------------------- ------------------
Cash flow from operations (GAAP measure) 76,287 44,766 + 70%
=================== ==================
Oil & gas capital investments 74,720 37,644 + 98%
CO2 capital investments 14,751 15,825 - 7%
Proceeds from sales of properties 1,888 187,133 - 99%
BOE data (6:1)
Revenue 55.07 37.78 + 46%
Loss on settlements of derivative contracts (1.50) (8.15) - 82%
Lease operating costs (10.33) (7.25) + 42%
Production taxes and marketing expense (2.79) (1.80) + 55%
------------------- ------------------
Production netback 40.45 20.58 + 97%
CO2 operating cash flow 0.78 0.55 + 42%
General and administrative (3.56) (2.27) + 57%
Net cash interest expense (1.43) (1.38) + 4%
Current income taxes and other (1.52) (6.57) - 77%
Changes in asset and liabilities (4.40) 5.50 - > 100%
------------------- ------------------
Cash flow from operations 30.32 16.41 + 85%
=================== ==================
(1) See "Non-GAAP Measures" at the end of this report.
6
NINE MONTH FINANCIAL HIGHLIGHTS
(Amounts in thousands of U.S. dollars, except per share and unit data)
Nine Months Ended
September 30,
----------------------------------- Percentage
2005 2004 Change
----------------- ---------------- ------------
Revenues:
Oil sales 264,337 181,198 + 46%
Gas sales 110,999 151,177 - 27%
CO2 sales and transportation fees 5,841 4,622 + 26%
Loss on effective hedge contracts - (46,457) - 100%
Interest and other income 2,302 1,422 + 62%
----------------- ----------------
Total revenues 383,479 291,962 + 31%
----------------- ----------------
Expenses:
Lease operating expenses 75,702 66,839 + 13%
Production taxes and marketing expense 19,726 13,481 + 46%
CO2 operating costs 1,422 608 + > 100%
General and administrative 21,439 15,123 + 42%
Interest, net 13,318 14,917 - 11%
Depletion and depreciation 70,273 76,265 - 8%
Commodity derivative expense 18,614 16,640 + 12%
----------------- ----------------
Total expenses 220,494 203,873 + 8%
----------------- ----------------
Income before income taxes 162,985 88,089 + 85%
Income tax provision
Current income taxes 17,320 22,045 - 21%
Deferred income taxes 36,380 6,077 + > 100%
----------------- ----------------
NET INCOME 109,285 59,967 + 82%
================= ================
Net income per common share (adjusted for two-for-one split):
Basic 0.98 0.55 + 78%
Diluted 0.92 0.53 + 74%
Weighted average common shares (adjusted for two-for-one split):
Basic 111,466 109,480 + 2%
Diluted 119,098 114,040 + 4%
Production (daily - net of royalties)
Oil (barrels) 19,745 19,114 + 3%
Gas (mcf) 56,556 91,028 - 38%
BOE (6:1) 29,171 34,285 - 15%
Unit sales price (including hedge settlements)
Oil (per barrel) 49.04 26.58 + 84%
Gas (per mcf) 6.76 5.55 + 22%
Unit sales price (excluding hedges)
Oil (per barrel) 49.04 34.60 + 42%
Gas (per mcf) 7.19 6.06 + 19%
7
Nine Months Ended
September 30,
------------------------------ Percenetage
2005 2004 Change
--------------- -------------- -------------
Non-GAAP Financial Measure: (1)
Adjusted or discretionary cash flow from
operations (non-GAAP measure) 238,708 151,721 + 57%
Net change in assets and liabilities relating to
operations (7,407) (750) + > 100%
--------------- --------------
Cash flow from operations (GAAP measure) 231,301 150,971 + 53%
--------------- --------------
Oil & gas capital investments 282,144 129,606 + > 100%
CO2 capital investments 49,869 42,966 + 16%
Proceeds from sales of properties 1,865 188,279 - 99%
Cash and cash equivalents 36,990 93,142 - 60%
Short-term investments - 31,955 - 100%
Total assets 1,230,175 991,709 + 24%
Total long-term debt (excluding discount) 245,000 225,000 + 9%
Total stockholders' equity 672,281 500,630 + 34%
BOE data (6:1)
Revenue 47.13 35.38 + 33%
Loss on settlements of derivative contracts (0.83) (5.83) - 86%
Lease operating costs (9.51) (7.11) + 34%
Production taxes and marketing expense (2.48) (1.44) + 72%
------------------------------
Production netback 34.31 21.00 + 63%
CO2 operating cash flow 0.55 0.43 + 28%
General and administrative (2.69) (1.61) + 67%
Net cash interest expense (1.34) (1.35) - 1%
Current income taxes and other (0.86) (2.32) - 63%
Changes in asset and liabilities (0.93) (0.08) + > 100%
------------------------------
Cash flow from operations 29.04 16.07 + 81%
==============================
(1) See "Non-GAAP Measures" at the end of this report.
8
Non-GAAP Measures
- -----------------
Adjusted cash flow from operations is a non-GAAP measure that represents
cash flow provided by operations before changes in assets and liabilities, as
summarized from the Company's Consolidated Statements of Cash Flows. Adjusted
cash flow from operations measures the cash flow earned or incurred from
operating activities without regard to the collection or payment of associated
receivables or payables. The Company believes that it is important to consider
this measure separately, as it believes it can often be a better way to discuss
changes in operating trends in its business caused by changes in production,
prices, operating costs and so forth, without regard to whether the earned or
incurred item was collected or paid during that period. For a further
discussion, see "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Operating Results" in our latest Form 10-Q or Form 10-K.
Denbury Resources Inc. (www.denbury.com) is a growing independent oil and
gas company. The Company is the largest oil and natural gas operator in
Mississippi, owns the largest reserves of CO2 used for tertiary oil recovery
east of the Mississippi River, and holds key operating acreage in the onshore
Louisiana and Texas Barnett Shale areas. The Company increases the value of
acquired properties in its core areas through a combination of exploitation
drilling and proven engineering extraction practices.
This press release, other than historical financial information, contains
forward looking statements that involve risks and uncertainties including
expected reserve quantities and values relating to the Company's proved
reserves, the Company's potential reserves from its tertiary operations,
particular fields or potential CO2 reserves, forecasted production levels
relating to the Company's tertiary operations and overall production levels,
estimated capital expenditures for 2005 and 2006, pricing assumptions based on
current and projected oil and natural gas prices, and other risks and
uncertainties detailed in the Company's filings with the Securities and Exchange
Commission, including Denbury's most recent reports on Form 10-K and Form 10-Q.
These risks and uncertainties are incorporated by this reference as though fully
set forth herein. These statements are based on engineering, geological,
financial and operating assumptions that management believes are reasonable
based on currently available information; however, management's assumptions and
the Company's future performance are both subject to a wide range of business
risks, and there is no assurance that these goals and projections can or will be
met. Actual results may vary materially.
Cautionary Note to U.S. Investors - The United States Securities and
Exchange Commission permits oil and gas companies, in their filings with the
SEC, to disclose only proved reserves that a company has demonstrated by actual
production or conclusive formation tests to be economically and legally
producible under existing economic and operating conditions. We use certain
terms in this press release, such as probable and potential reserves, that the
SEC's guidelines strictly prohibit us from including in filings with the SEC.
9
For further information contact:
Gareth Roberts, President and CEO, 972-673-2000
Phil Rykhoek, Sr. VP and Chief Financial Officer, 972-673-2000
www.denbury.com
###