UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
----------------------
(Mark One)
X Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended March 31, 2000
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
(State or other
jurisdiction of 75-2815171
incorporation or (I.R.S. Employer
organization) Identification No.)
5100 Tennyson Parkway
Suite 3000
Plano, TX 75024
(Address of principal (Zip code)
executive offices)
Registrant's telephone number, including area code: (972) 673-2000
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at April 30, 2000
----- -----------------------------
Common Stock, $.001 par value 45,798,827
DENBURY RESOURCES INC.
INDEX
Page
----
Part I. Financial Information
- ------------------------------
Item 1. Financial Statements
Independent Accountants' Report 3
Condensed Consolidated Balance Sheets at March 31, 2000
(Unaudited) and December 31, 1999 4
Condensed Consolidated Statements of Operations for the
three months ended March 31, 2000 and 1999 (Unaudited) 5
Condensed Consolidated Statements of Cash Flows for the
three months ended March 31, 2000 and 1999 (Unaudited) 6
Notes to Condensed Consolidated Financial Statements 7-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-16
Item 3. Quantitative and Qualitative Disclosures about Market Risk 17
Part II. Other Information
- ---------------------------
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
2
Part I. Financial Information
-----------------------------
Item 1. Financial Statements
- -----------------------------
INDEPENDENT ACCOUNTANTS' REPORT
To the Board of Directors of Denbury Resources Inc.:
We have reviewed the accompanying condensed consolidated balance sheet of
Denbury Resources Inc. and subsidiaries (the "Company") as of March 31, 2000,
and the related condensed consolidated statements of operations and cash flows
for the three-month periods ended March 31, 2000 and 1999. These financial
statements are the responsibility of the Company's management.
We conducted our review 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 review, 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, 1999 and the related
consolidated statements of operations, stockholders' equity (deficit), and cash
flows for the year then ended (not presented herein); and in our report dated
February 22, 2000, we expressed an unqualified opinion on those consolidated
financial statements. In our opinion, the information set forth in the
accompanying condensed consolidated balance sheet as of December 31, 1999 is
fairly stated, in all material respects, in relation to the consolidated balance
sheet from which it has been derived.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Dallas, Texas
May 2, 2000
3
DENBURY RESOURCES INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands of U.S. dollars except share amounts)
March 31, December 31,
2000 1999
--------- ---------
(Unaudited)
Assets
Current assets
Cash and cash equivalents $ 11,189 $ 11,768
Accrued production receivable 20,435 15,836
Trade and other receivables 3,897 2,942
--------- ----------
Total current assets 35,521 30,546
--------- ----------
Property and equipment (using full cost accounting)
Oil and natural gas properties 605,138 587,412
Unevaluated oil and natural gas properties 39,675 41,371
Less accumulated depreciation and depletion (425,283) (417,828)
--------- ----------
Net property and equipment 219,530 210,955
--------- ----------
Other assets 10,644 11,065
--------- ----------
Total assets $ 265,695 $ 252,566
========= ==========
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable and accrued liabilities $ 16,220 $ 18,042
Oil and gas production payable 10,135 7,120
--------- ----------
Total current liabilities 26,355 25,162
--------- ----------
Long-term liabilities
Long-term debt 152,500 152,500
Provision for site reclamation costs 1,933 1,820
Other 656 656
--------- ----------
Total long-term liabilities 155,089 154,976
--------- ----------
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; 45,798,827 and 45,718,486 shares
issued and outstanding at march 31, 2000 and 46 46
December 31, 1999, respectively
Paid-in capital in excess of par 328,137 327,829
Accumulated deficit (243,932) (255,447)
--------- ----------
Total stockholders' equity 84,251 72,428
--------- ----------
Total liabilities and stockholders' equity $ 265,695 $ 252,566
========= ==========
(See accompanying Notes to Condensed Consolidated Financial Statements)
4
DENBURY RESOURCES INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands except per share amounts)
(Unaudited - U.S. dollars)
Three Months Ended
March 31,
-------------------------
2000 1999
--------- ---------
Revenues
Oil, natural gas and related product
sales $ 35,202 $ 14,703
Interest and other income 565 361
--------- ---------
Total revenues 35,767 15,064
--------- ---------
Expenses
Production 10,689 5,855
General and administrative 1,972 1,890
Interest 3,608 4,858
Depletion and depreciation 7,825 5,335
Franchise taxes 138 154
--------- ---------
Total expenses 24,232 18,092
--------- ---------
Income (loss) before income taxes 11,535 (3,028)
Income tax provision 20 -
--------- ---------
Net income (loss) $ 11,515 $ (3,028)
========= =========
Net income (loss) per common share
Basic $ 0.25 $ (0.11)
Diluted 0.25 (0.11)
Weighted average common shares outstanding
Basic 45,719 26,802
Diluted 45,720 26,802
(See accompanying Notes to Condensed Consolidated Financial Statements)
5
DENBURY RESOURCES INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands of U.S. dollars)
(Unaudited)
Three Months Ended
March 31,
---------------------
2000 1999
--------- --------
Cash flow from operating activities:
Net income (loss) $ 11,515 $ (3,028)
Adjustments needed to reconcile to net cash flow
provided by operations:
Depreciation, depletion and amortization 7,825 5,335
Other 222 190
--------- --------
19,562 2,497
Changes in working capital items relating to operations:
Accrued production receivable (4,599) (1,660)
Trade and other receivables (955) 5,096
Accounts payable and accrued liabilities (1,822) (4,067)
Oil and gas production payable 3,015 910
--------- --------
Net cash flow provided by operations 15,201 2,776
--------- --------
Cash flow from investing activities:
Oil and natural gas expenditures (14,580) (4,678)
Acquisitions of oil and natural gas properties (1,650) (1,800)
Proceeds from dispositions of oil and natural
gas properties 200 -
Decrease in restricted cash 294 -
Net purchases of other assets (352) (439)
--------- --------
Net cash used for investing activities (16,088) (6,917)
--------- --------
Cash flow from financing activities:
Bank borrowings - 9,630
Issuance of common stock 308 -
Costs of debt financing - (475)
--------- --------
Net cash provided by financing activities 308 9,155
--------- --------
Net increase (decrease) in cash and cash equivalents (579) 5,014
Cash and cash equivalents at beginning of period 11,768 2,049
--------- --------
Cash and cash equivalents at end of period $ 11,189 $ 7,063
========= ========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 6,189 $ 8,183
(See accompanying Notes to Condensed Consolidated Financial Statements)
6
DENBURY RESOURCES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. ACCOUNTING POLICIES
Interim Financial Statements
The accompanying condensed consolidated financial statements of Denbury
Resources Inc. (the "Company" or "Denbury") have been prepared in accordance
with accounting principles generally accepted in the United States of America
and pursuant to the rules and regulations of the Securities and Exchange
Commission. These financial statements and the notes thereto should be read in
conjunction with the Company's annual report on Form 10-K for the year ended
December 31, 1999. Any capitalized terms used but not defined in these Notes to
Consolidated Financial Statements have the same meaning given to them in the
Form 10-K.
The financial data for the three months ended March 31, 2000 and 1999,
included herein, has been subjected to a limited review by Deloitte & Touche
LLP, Denbury's independent accountants. Accounting measurements at interim dates
inherently involve greater reliance on estimates than at year end and the
results of operations for the interim periods shown in this report are not
necessarily indicative of results to be expected for the fiscal year. In the
opinion of management of Denbury, the accompanying unaudited condensed
consolidated financial statements include all adjustments (of a normal recurring
nature) necessary to present fairly the consolidated financial position of the
Company as of March 31, 2000 and the consolidated results of its operations and
cash flows for the three months ended March 31, 2000 and 1999.
Net Income (Loss) per Common Share
Basic net income (loss) per common share is computed by dividing net income
or loss by the weighted average number of shares of common stock outstanding
during the period. Diluted net income (loss) per common share is calculated in
the same manner but also considers the impact on net income and common shares
for the potential dilution from stock options, stock warrants, and any other
convertible securities outstanding. For the three months ended March 31, 2000
and 1999, there were no adjustments to net income for purposes of calculating
diluted net income (loss) per common share. The following is a reconciliation of
the weighted average common shares used in the basic and diluted net income
(loss) per common share calculations for the three months ended March 31, 2000
and 1999.
Three Months Ended
March 31,
------------------
2000 1999
-------- --------
(Shares in thousands)
Weighted average common shares - basic 45,719 26,802
Potentially dilutive securities:
Stock options 1 -
Stock warrants - -
-------- --------
Weighted average common shares - diluted 45,720 26,802
======== ========
For the three months ended March 31, 2000, approximately 3.3 million shares
under option were excluded from the diluted net income per share calculation as
the exercise prices exceeded the average market price of the Company's
7
DENBURY RESOURCES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
common stock. Warrants representing 75,000 shares of common stock were also
excluded from the diluted net income per share computation as the exercise price
exceeded the average market price of the Company's common stock. For the first
quarter of 1999, all potentially dilutive securities were excluded from the
calculation of diluted net loss per share, as their effect would have been
anti-dilutive.
2. NOTES PAYABLE AND LONG-TERM INDEBTEDNESS
March 31, December 31,
2000 1999
----------- ---------
(Amounts in thousands)
(Unaudited)
9% Senior Subordinated Notes Due 2008 $ 125,000 $ 125,000
Senior bank loan 27,500 27,500
----------- ---------
Total long-term debt $ 152,500 $ 152,500
=========== =========
The Company's credit facility provides for a semi-annual redetermination of
the borrowing base on April 1st and October 1st. At the April 1, 2000
redetermination, the conforming borrowing base of $60 million and the total
borrowing base of $110 million were re-affirmed, leaving the Company with a
total borrowing capacity of $82.5 million. The next scheduled borrowing base
redetermination will be as of October 1, 2000.
3. PRODUCT PRICE HEDGING CONTRACTS
The Company has financial contracts that hedge its exposure to commodity
price risk on a portion of its oil and natural gas production. The Company has a
contract on its oil production that hedges 3,000 Bbls/d with a price floor of
$14.00 per Bbl and a price ceiling of $18.05 per Bbl. This contract has been in
effect since April 1999, expires as of December 31, 2000, and hedges
approximately 21% of the Company's oil production based on the first quarter of
2000 average oil production. The Company also has a contract that hedges 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 MMTBtu. This contract has been in effect since
1998, expires as of December 31, 2000, and hedges approximately 84% of the
Company's natural gas production based on the first quarter of 2000 average
natural gas production.
During the first quarter of 2000 the Company paid approximately $2.9
million on the oil hedge contract and $2,000 on the natural gas hedge contract.
Based on futures market prices at March 31, 2000, the Company would expect to
pay approximately $6.1 million on the oil hedge contract and $3.0 million on the
natural gas hedge contract during the remainder of 2000. For further discussion
regarding the Company's derivative financial instruments, see "Market Risk
Management" in Management's Discussion and Analysis of Financial Condition and
Results of Operations.
8
DENBURY RESOURCES INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FIANCIAL 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,
1999, 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 an independent energy company engaged in acquisition,
development and exploration activities in the U.S. Gulf Coast region, primarily
onshore in Louisiana and Mississippi. The Company's growth in proved reserves,
production and cash flow over the years has been achieved by concentrating on
the acquisition of properties which it believes have significant upside
potential and through the efficient development, enhancement and operation of
those properties.
CAPITAL RESOURCES AND LIQUIDITY
As more fully described under "Results of Operations" below, the Company's
results of operations, cash flows and financial position improved throughout
1999 and continued to improve through the first quarter of 2000, primarily as a
result of increasing oil prices. Oil prices improved from the 1998 year-end
NYMEX oil price of approximately $12.00 per Bbl to a first quarter of 2000
average of approximately $28.75 per Bbl. In addition, the Company's average
daily production has increased for the fourth consecutive quarter with average
daily production of 19,121 barrels of oil equivalent produced per day ("BOE/d")
for the first quarter of 2000, a 24% increase from the first quarter of 1999
average of 15,417 BOE/d and a 3.4% increase from the fourth quarter of 1999
average of 18,491 BOE/d. As a result of the improved product prices and
increased production, the Company posted record quarterly earnings and cash flow
generated from operations in the first quarter of 2000, up sharply from the loss
and minimal cash flow in the first quarter of 1999.
During 1999, the Company adopted a fiscal policy whereby its development
and exploration expenditures would be at approximately the same level as cash
flow from operations. Although the level of the Company's projected cash flow is
highly variable and difficult to predict due to volatility in product prices,
the success of its drilling and other developmental work and other factors, the
Company plans to continue this policy in 2000. During the first quarter of 2000,
the Company spent approximately $5.0 million less than cash flow from operations
(before the change in working capital balances). The Company has not borrowed
any additional funds on its bank credit line since the third quarter of 1999
when it acquired the Little Creek Field in Mississippi for approximately $12
million, and continues to reserve its available credit for potential
acquisitions. The Company's minor acquisitions which aggregated $1.7 million in
the first quarter of 2000 were funded by cash flow from operations.
The Company's credit facility provides for a semi-annual redetermination of
the borrowing base on April 1st and October 1st. At the April 1, 2000
redetermination, the conforming borrowing base of $60 million and the total
borrowing base of $110 million were re-affirmed, leaving the Company with a
total borrowing capacity of $82.5 million. The next scheduled borrowing base
redetermination will be as of October 1, 2000. There can be no assurance that
the banks will not reduce the borrowing base at that time, as such
redetermination will depend on current and expected oil and natural gas prices
at that time, the Company's development and acquisition results during 2000, the
then current level of debt and several other factors, some of which are beyond
the Company's control.
During the first quarter of 2000, the Company spent a total of $14.5
million on its capital development program, on track for its total budgeted
capital program of approximately $60 million for the year. The Company expects
that this spending level should be sufficient to cause a slight increase in
production levels throughout the year. The Company is continuing to pursue
acquisitions with capital resources made available by the equity sale to the
Texas Pacific Group ("TPG") in April 1999 and corresponding reduction in debt
levels which, if accomplished, should be accretive to the Company's operating
results. There can be no assurance that suitable acquisitions will be identified
in
9
DENBURY RESOURCES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
the future or that such acquisitions will be successful in achieving desired
profitability objectives. Without suitable acquisitions or the capital to fund
such acquisitions, the Company's future growth could be limited or even
eliminated.
Sources and Uses of Funds
During the first quarter of 2000, the Company spent approximately $14.6
million on exploration and development expenditures and approximately $1.7
million on acquisitions. The exploration and development expenditures included
approximately $6.4 million spent for drilling, $2.0 million for geological,
geophysical and acreage expenditures and $6.2 million for workover costs. These
expenditures were funded by cash flow from operations.
During the first quarter of 1999, the Company spent approximately $4.7
million on oil and natural gas development expenditures and approximately $1.8
million on acquisitions. The development expenditures included approximately
$1.0 million spent for drilling, $1.5 million for geological, geophysical and
acreage expenditures and $2.2 million for workover costs. These expenditures
were funded by bank debt and cash flow from operations.
RESULTS OF OPERATIONS
The Company's results of operations for the first quarter of 2000 improved
significantly over the comparable prior year quarter, due to a 24% increase in
production and a 91% increase in product prices, both on a BOE basis, partially
offset by a 45% increase in production expense per BOE, as further set forth
below.
Three Months Ended
March 31,
- --------------------------------------------------------------
2000 1999
- --------------------------------------------------------------
AVERAGE DAILY PRODUCTION VOLUME:
Bbls 14,382 10,281
Mcf 28,439 30,818
BOE 19,121 15,417
OPERATING REVENUES AND EXPENSES (THOUSANDS)
Oil sales $ 28,389 $ 8,532
Natural gas sales 6,813 6,171
--------------------
Total oil and natural gas revenues $ 35,202 $ 14,703
--------------------
Production taxes 1,657 544
Lease operating expenses 9,032 5,311
--------------------
Total production expenses $ 10,689 $ 5,855
--------------------
UNIT PRICES - INCLUDING IMPACT OF HEDGES
Oil price per barrel ("Bbl") $ 21.69 $ 9.22
Gas price per thousand cubic feet
("Mcf") 2.63 2.23
10
DENBURY RESOURCES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Three Months Ended
March 31,
- --------------------------------------------------------------
2000 1999
- --------------------------------------------------------------
UNIT PRICES - EXCLUDING IMPACT OF HEDGES
Oil price per Bbl $ 23.92 $ 9.22
Gas price per Mcf 2.63 2.04
OPERATING REVENUES AND EXPENSES PER BOE(1):
Oil and natural gas revenues $ 20.23 $ 10.60
--------------------
Production taxes $ 0.95 $ 0.39
Lease operating expenses 5.19 3.83
--------------------
Total production expenses $ 6.14 $ 4.22
- --------------------------------------------------------------
<FN>
(1) Barrel of oil equivalent using the ratio of one barrel of oil to 6 Mcf of
natural gas ("BOE").
</FN>
Production for the first quarter of 2000 averaged 19,121 BOE/d, a 24%
increase from the first quarter of 1999 and a 3% increase from the fourth
quarter of 1999 average of 18,491 BOE/d . The increase in BOE/d for the first
quarter of 2000, as compared to the first quarter of 1999, is due primarily to
the acquisition of King Bee Field and Little Creek Field in the second and third
quarters of 1999, respectively. The average production from these two fields
during the first quarter of 2000 was 2,554 BOE/d, up from approximately 2,100
BOE/d at the time of acquisition. The production increase since the fourth
quarter of 1999 is due to additional development activity and modest production
increases at several of the Company's most significant properties, including
Heidelberg, Eucutta, Little Creek and Lirette Fields, with the largest single
increase occurring at the recently acquired Little Creek Field. Production from
Little Creek increased 13% from an average of 1,699 BOE/d in the fourth quarter
of 1999 to an average of 1,913 BOE/d during the first quarter of 2000.
Production at Heidelberg, the Company's largest field, experienced its ninth
consecutive quarterly increase in production with an average of 6,576 BOE/d for
the first quarter of 2000. This was a slight increase from the fourth quarter
1999 average of 6,500 BOE/d, and a 2,035 BOE/d (45%) increase from the first
quarter of 1999 average. This field continues to see positive response from its
waterflood units and the Company is continuing to expand these waterflood units
with its development spending in 2000.
Oil and natural gas revenues increased as a result of the production
increases and improved product prices. The Company's net average oil price
increased 135% between the respective first quarters, from $9.22 per Bbl in the
first quarter of 1999 to $21.69 per Bbl in the first quarter of 2000. This
increase would have been even larger were it not for a $2.9 million loss on the
Company's oil hedge contracts during the first quarter of 2000 which reduced the
net average price received by $2.23 per Bbl (see also "Market Risk Management"
herein). Natural gas prices increased 18% between the two quarters, from $2.23
per Mcf in the first quarter of 1999 to $2.63 per Mcf for the first quarter of
2000. Without the impact of hedging, this increase would also have been greater,
as the first quarter of 1999 average price increased $0.19 per Mcf as a result
of a $539,000 gain on the Company's gas hedges during that quarter. During the
first quarter of 2000, the impact of the Company's gas hedges was immaterial.
The net effect of the increased production and product prices was a 139%
increase in oil and natural gas revenues between the first quarters of 1999 and
2000.
Production and operating expenses increased by $4.8 million, or 83%,
between the first quarters of 1999 and 2000. Approximately $2.3 million of this
increase is due to the addition of King Bee Field and Little Creek Field (a
tertiary oil recovery operation which has operating expenses higher than the
Company's average), properties acquired in the second and third quarters of
1999, respectively. An additional $1.0 million is due to increased production
taxes resulting from the increase in oil and natural gas prices and increased
production. The remaining increase of approximately $1.5 million is due to
increased operating costs, primarily at the Heidelberg Field, as a result of the
increased activity level
11
DENBURY RESOURCES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
and the incremental cost of returning previously marginal wells to production.
The net effect was a 45% increase in operating expenses on a per BOE basis as
outlined above.
General and Administrative Expenses
The net general and administrative ("G&A") expenses increased as set forth
below.
Three Months Ended
March 31,
- ------------------------------------------------------------
2000 1999
- ------------------------------------------------------------
NET G&A EXPENSES (THOUSANDS)
Gross expenses $ 6,034 $ 4,788
State franchise taxes 138 154
Operator overhead charges (3,306) (2,167)
Capitalized exploration expenses (756) (731)
--------------------
Net expenses $ 2,110 $ 2,044
--------------------
Average G&A cost per BOE $ 1.21 $ 1.47
Employees as of March 31 228 197
- ------------------------------------------------------------
Gross G&A expenses increased by $1.2 million, or 26%, between the first
quarters of 1999 and 2000 due primarily to a $900,000 increase in salaries,
bonuses and other employee related costs. This increase is due to salary
increases that were given for the first time in two years effective January 1,
2000 at an overall average increase of 7%, personnel additions resulting
primarily from the King Bee and Little Creek Field acquisitions in the second
and third quarters of 1999, and an accrual for bonuses in the first quarter of
2000 versus no bonus accrual in the prior year quarter. The increase in gross
G&A is almost entirely offset by the increase in operator overhead recovery
charges between the first quarters of 1999 and 2000. The Company's well
operating agreements allow the Company, when it is the operator, to charge a
well with a specified overhead rate during the drilling phase and to also charge
a monthly fixed overhead rate for each producing well. As a result of the
additional operated wells acquired in the King Bee and Little Creek Field
acquisitions and increased drilling activity in the last three quarters of 1999
and first quarter of 2000, the amount recovered by the Company as operator
overhead charges increased 53% in the first quarter of 2000 as compared to the
first quarter of 1999. During the first quarter of 1999, approximately 45% of
gross G&A was recovered by operator overhead charges, while during the first
quarter of 2000 this recovery increased to 55%. The net effect of the increase
in gross G&A expenses and operator overhead charges was a slight increase (3%)
in net G&A expense during the first quarter of 2000. On a BOE basis, G&A costs
decreased 18% from the first quarter of 1999 to the comparable quarter in 2000
primarily because of increased production on both an absolute and per well
basis.
12
DENBURY RESOURCES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Interest and Financing Expenses
Three Months Ended
March 31,
- ---------------------------------------------------------------
AMOUNTS IN THOUSANDS EXCEPT PER UNIT AMOUNTS 2000 1999
- ---------------------------------------------------------------
Interest expense $ 3,608 $ 4,858
Non-cash interest expense (222) (191)
------------------
Cash interest expense 3,386 4,667
Interest and other income (565) (361)
------------------
Net cash interest expense $ 2,821 $ 4,306
------------------
Average net cash interest expense per BOE $ 1.62 $ 3.10
Average debt outstanding 152,500 229,932
- ---------------------------------------------------------------
The Company's debt level remained constant at $152.5 million during the
first quarter of 2000 as cash flow from operations was adequate to meet the
Company's capital expenditure program. In comparison, in the first quarter of
1999 the Company began the quarter with $225.0 million of total debt and further
increased its debt to $234.6 million by the end of the quarter. The overall debt
level was reduced by approximately $100 million in April 1999 with the proceeds
from the sale of equity to the Texas Pacific Group ("TPG"). As a result of the
reduced debt level after the TPG investment, the Company's net interest expense
decreased 34% between the respective first quarters and was further reduced 48%
on a BOE basis as a result of the increases in production.
Depletion, Depreciation and Site Restoration
Three Months
Ended
March 31,
- --------------------------------------------------------------
AMOUNTS IN THOUSANDS EXCEPT PER UNIT AMOUNTS 2000 1999
- --------------------------------------------------------------
Depletion and depreciation $ 7,455 $ 5,109
Site restoration provision 112 77
Depreciation of other fixed assets 258 149
-----------------
Total amortization $ 7,825 $ 5,335
-----------------
Average DD&A cost per BOE $ 4.50 $ 3.85
- --------------------------------------------------------------
The Company's depletion, depreciation and amortization ("DD&A") rate
increased from $3.85 per BOE for the first quarter of 1999 (an average of $4.17
for fiscal year 1999) to $4.50 per BOE for the comparable period in 2000. This
increase is based on the Company's current estimates regarding production,
reserves and development costs for the year, which assumes that the average
finding cost will be higher than the 1999 average DD&A rate of $4.17, thus
causing the DD&A rate to increase. The Company also provides for the estimated
future costs of well abandonment and site reclamation, net of any anticipated
salvage, on a unit-of-production basis. This provision is included in DD&A
expense.
13
DENBURY RESOURCES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Income Taxes
Three Months
Ended
March 31,
- --------------------------------------------------------------
2000 1999
- --------------------------------------------------------------
Income tax provision (thousands) $ 20 $ -
Average income tax expense per BOE $ 0.01 $ -
Effective tax rate 2% -
- --------------------------------------------------------------
Based on the Company's pre-tax income of $11.5 million for the quarter
ended March 31, 2000, an income tax provision for the quarter using an effective
tax rate of 37% would have resulted in a $4.3 million income tax provision. As
of December 31, 1999, the Company had a fully reserved deferred tax asset of
$95.1 million which is available to offset pre-tax income. As the deferred tax
asset is utilized, the Company makes a corresponding adjustment to its valuation
allowance, resulting in no net deferred tax income or expense. The Company
believes that the remaining deferred tax asset should continue to be fully
impaired at this time, based on projected future profitability at oil and gas
pricing consistent with the Company's long range planning and anticipated levels
of capital spending, a portion of which are intangible drilling costs which are
deducted in the year incurred. The Company's $20,000 current provision for
income taxes in the first quarter of 2000 is for alternative minimum tax, based
on projected taxable income that may not be completely offset by net operating
losses.
Results of Operations
Primarily as a result of the increased production and product prices
between the quarters, net income and cash flow from operations increased on both
a gross and per share basis between the first quarter of 1999 and the first
quarter of 2000 as set forth below.
Three Months
Ended
March 31,
- --------------------------------------------------------------
AMOUNTS IN THOUSAND EXCEPT PER SHARE AMOUNTS 2000 1999
- --------------------------------------------------------------
Net income (loss) $ 11,515 $(3,028)
Net income (loss) per common share:
Basic $ 0.25 $ (0.11)
Diluted 0.25 (0.11)
Cash flow from operations (1) $ 19,562 $ 2,497
- --------------------------------------------------------------
<FN>
(1) Represents cash flow provided by operations, exclusive of the net change in
non-cash working capital balances.
</FN>
The following table summarizes the cash flow, DD&A and results of
operations on a BOE basis for the comparative periods. Each of the significant
individual components are discussed above.
14
DENBURY RESOURCES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Three Months Ended
March 31,
- ---------------------------------------------------------
Per BOE Data 2000 1999
- ---------------------------------------------------------
Revenue $ 20.23 $ 10.60
Production taxes (0.95) (0.39)
Lease operating expenses (5.19) (3.83)
- ---------------------------------------------------------
Production netback 14.09 6.38
General and administrative expenses (1.21) (1.47)
Net cash interest expense (1.62) (3.10)
Other (0.01) -
- ---------------------------------------------------------
Cash flow from operations (1) 11.25 1.81
DD&A (4.50) (3.85)
Other non-cash items (0.13) (0.14)
- ---------------------------------------------------------
Net income (loss) $ 6.62 $ (2.18)
- ---------------------------------------------------------
<FN>
(1) Represents cash flow provided by operations, exclusive of the net change in
non-cash working capital balances.
</FN>
Market Risk Management
The Company uses fixed and variable rate debt to partially finance budgeted
expenditures. These agreements expose the Company to market risk related to
changes in interest rates. The Company does not hold or issue derivative
financial instruments for trading purposes. The carrying and fair value of these
debt instruments have not changed materially since year-end.
The Company also enters into various financial contracts to hedge its
exposure to commodity price risk associated with anticipated future oil and
natural gas production. The Company has a contract on its oil production that
hedges 3,000 Bbls/d with a price floor of $14.00 per Bbl and a price ceiling of
$18.05 per Bbl. This contract has been in effect since April 1999, expires as of
December 31, 2000, and hedges approximately 21% of the Company's oil production
based on the Company's first quarter of 2000 average oil production. The Company
also has a contract that hedges 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 MMTBtu.
This contract has been in effect since 1998, expires as of December 31, 2000,
and hedges approximately 84% of the Company's natural gas production based on
the Company's first quarter of 2000 average natural gas production. During the
first quarter of 2000 the Company paid approximately $2.9 million on its oil
hedge contract, which reduced the net average realized price by $2.23 per Bbl,
and paid approximately $2,000 on its natural gas hedge contract. During the
first quarter of 1999, the Company collected $539,000 on its natural gas hedge
contracts, increasing the net average realized natural gas price by $0.19 per
Mcf.
Gain or loss on these derivative commodity contracts would be offset by a
corresponding gain or loss on the hedged commodity positions. Based on futures
market prices at March 31, 2000, the Company would expect to pay approximately
$6.1 million on the oil hedge contract and $3.0 million on the natural gas hedge
contract through their expiration at the end of 2000. If the futures market
prices were to increase 10% from those in effect at March 31, 2000, the Company
would be required to make additional cash payments under the oil contract of
approximately $2.1 million and additional payments under the natural gas
contract of $2.0 million. If the futures market prices were to decline 10% from
those in effect as March 31, 2000, the Company would reduce cash payments under
the oil contact by approximately $2.1 million and reduce the payments due under
the natural gas contract by $2.0 million.
15
DENBURY RESOURCES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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.
16
Item 3. Quantitative and Qualitative Disclosures about Market Risk
- ------------------------------------------------------------------
The information required by Item 3 is set forth under "Market Risk
Management" in Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Part II. Other Information
--------------------------
Item 6. Exhibits and Reports on Form 8-K during the First Quarter of 2000
- --------------------------------------------------------------------------
Exhibits:
---------
15* Letter from Independent Accountants as to unaudited interim
financial information.
27* Financial Data Schedule (EDGAR version only).
*Filed herewith.
Reports on Form 8-K:
--------------------
None
17
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DENBURY RESOURCES INC.
(Registrant)
By: /s/ Phil Rykhoek
-------------------------------
Phil Rykhoek
Chief Financial Officer
By: /s/ Mark Allen
-------------------------------
Mark Allen
Chief Accounting Officer & Controller
Date: May 10, 2000
18