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, 1997
Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission file number 33-93722
---------------------------
DENBURY RESOURCES INC.
(Exact name of Registrant as specified in its charter)
Canada Not applicable
(State or other jurisdiction (I.R.S. Employer
of incorporation or Identification No.)
organization)
17304 Preston Rd.,
Suite 200 75252
Dallas, TX (Zipcode)
(Address of principal
executive offices)
Registrant's telephone number, including area code: (972)713-3000
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, 1997
Common Stock, no par value 20,120,296
DENBURY RESOURCES INC.
INDEX
Part I. Financial Information
Page
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets 3
Consolidated Statements of Income 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6-7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8-13
Part II. Other Information 14
2
DENBURY RESOURCES INC.
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands of U.S. Dollars)
March 31, December 31,
1997 1996
--------- ---------
(Unaudited)
Assets
Current assets
Cash and cash equivalents $ 17,066 $ 13,453
Accrued production receivable 6,941 11,906
Trade and other receivables 4,676 3,643
--------- ----------
Total current assets 28,683 29,002
--------- ----------
Property and equipment (using full cost accounting)
Oil and gas properties 173,630 159,724
Unevaluated oil and gas properties 7,649 6,413
Less accumulated depreciation and depletion (37,476) (31,141)
--------- ----------
Net property and equipment 143,803 134,996
--------- ----------
Other assets 2,770 2,507
--------- ----------
Total assets $ 175,256 $ 166,505
========= ==========
Liabilities and Shareholders' Equity
Current liabilities
Accounts payable and accrued liabilities $ 12,902 $ 10,903
Oil and gas production payable 3,446 5,550
Current portion of long-term debt 47 67
--------- ----------
Total current liabilities 16,395 16,520
--------- ----------
Long-term liabilities
Long-term debt 121 125
Provision for site reclamation costs 749 613
Deferred income taxes and other 9,799 6,743
--------- ----------
Total long-term liabilities 10,669 7,481
--------- ----------
Shareholders' equity
Common shares, no par value, unlimited shares
authorized; outstanding -
20,118,796 and 20,055,757 shares at March 31, 130,796 130,323
1997 and December 31, 1996, respectively
Retained earnings 17,396 12,181
--------- ----------
Total shareholders' equity 148,192 142,504
--------- ----------
Total liabilities and shareholders' equity $ 175,256 $ 166,505
========= ==========
(See accompanying notes to Consolidated Financial Statements)
3
DENBURY RESOURCES INC.
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands except per share amounts)
(Unaudited - U.S. dollars)
Three Months Ended
March 31,
-------------------------
1997 1996
--------- ---------
Revenues
Oil, gas and related product sales $ 21,141 $ 9,017
Interest and other income 512 75
--------- ---------
Total revenues 21,653 9,092
--------- ---------
Expenses
Production 5,053 2,044
General and administrative 1,521 825
Interest 79 105
Imputed preferred dividends - 375
Provision for loss on early
extinguishment of debt - 440
Depletion and depreciation 6,625 2,925
Franchise taxes 97 53
--------- ---------
Total expenses 13,375 6,767
--------- ---------
Income before income taxes 8,278 2,325
Provision for income taxes (3,063) (945)
--------- ---------
Net income $ 5,215 $ 1,380
========= =========
Net income per common share
Primary $ 0.26 $ 0.12
Fully diluted 0.24 0.12
Average number of common shares outstanding 20,094 11,469
========= =========
(See accompanying notes to Consolidated Financial Statements)
4
DENBURY RESOURCES INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
(Amounts in thousands of U.S. dollars)
(Unaudited)
Three Months Ended
March 31,
------------------------
1997 1996
--------- ---------
Cash flow from operating activities:
Net income $ 5,215 $ 1,380
Adjustments needed to reconcile to net cash flow
provided by operations:
Depreciation, depletion and amortization 6,625 2,925
Deferred income taxes 3,063 945
Imputed preferred dividend - 375
Provision for loss on early extinguishment of debt - 440
Other 19 -
--------- ---------
14,922 6,065
Changes in working capital items relating to operations:
Accrued production receivable 4,965 (1,364)
Trade and other receivables (1,033) (327)
Accounts payable and accrued liabilities 1,999 1,934
Oil and gas production payable (2,104) 1,326
--------- ---------
Net cash flow provided by operations 18,749 7,634
--------- ---------
Cash flow from investing activities:
Oil and gas expenditures (14,965) (4,633)
Acquisition of oil and gas properties (177) (2,540)
Net purchases of other assets (430) (243)
--------- ---------
Net cash used for investing activities (15,572) (7,416)
--------- ---------
Cash flow from financing activities:
Issuance of common stock 473 423
Costs of debt financing (6) (46)
Other (31) (52)
--------- ---------
Net cash provided by financing activities 436 325
--------- ---------
Net increase in cash and cash equivalents 3,613 543
Cash and cash equivalents at beginning of year 13,453 6,553
--------- ---------
Cash and cash equivalents at end of year $ 17,066 $ 7,096
========= =========
Supplemental disclosure of cash flow information:
Cash paid during the quarter for interest $ 60 $ 75
(See accompanying notes to Consolidated Financial Statements)
5
DENBURY RESOURCES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
March 31, 1997 and 1996
1. ACCOUNTING POLICIES
Interim Financial Statements
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 Resources Inc. (the "Company" or "Denbury"),
the accompanying unaudited financial statements contain all adjustments
(consisting of normal recurring accruals) necessary to present fairly the
financial position as of March 31, 1997, and the results of operations for the
three months ended March 31, 1997 and 1996 and cash flow for the three months
ended March 31, 1997 and 1996.
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, 1996.
Net Income per Common Share
Net income per common share is computed by dividing the net income by the
weighted average number of shares of common stock outstanding, after adjusting
for the one-for-two reverse split effective on October 10, 1996. In accordance
with Canadian generally accepted accounting principles ("GAAP"), the imputed
dividend during 1996 on the Convertible First Preferred Shares, Series A
("Convertible Preferred") has been recorded as an operating expense in the
accompanying financial statements and thus is deducted from net income in
computing earnings per common share. The stock options, warrants, and the
conversion of the conversion of the convertible debt were included in the
calculation of fully-diluted earnings per share. The conversion of the
Convertible Preferred was anti-dilutive and was not included in the calculation
of earnings per share.
2. NOTES PAYABLE AND LONG-TERM INDEBTEDNESS
March 31, December 31,
1997 1996
-------- ---------
(Amounts in thousands)
(Unaudited)
Senior bank loan $ 100 $ 100
Other notes payable 68 92
Less portion due within one year (47) (67)
-------- ---------
Total long-term debt $ 121 $ 125
======== =========
Bank Credit Agreement
In April, 1997, the Company amended its bank credit facility (i) to extend
the revolver by one year to May 31, 1999, (ii) to extend the termination date by
one year to May 31, 2002, and (iii) to reduce the commitment fee percentages. As
of March 31, 1997, the Company had $100,000 outstanding on this line of credit
with a borrowing base of $60 million.
6
DENBURY RESOURCES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
March 31, 1997 and 1996
3. DIFFERENCES IN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES BETWEEN CANADA AND
THE UNITED STATES
The consolidated financial statements have been prepared in accordance with
Canadian GAAP. The primary difference between Canadian and U.S. GAAP affecting
the Company's first quarter financial statements result from the different
methodology for computing earnings per common share. Under U.S. GAAP, the
primary and fully-diluted earnings per common share for the first quarter of
1997 would be $.25, as compared to the $.26 and $.24, respectively, as reported
under Canadian GAAP. The earnings per share would be the same under both U.S.
and Canadian GAAP for the first quarter of 1996.
In February 1997 the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 Earnings Per Share, ("SFAS 128"). SFAS
128 simplifies the standards for computing earnings per share ("EPS") and makes
them more comparable to international EPS standards. SFAS 128 replaces the
presentation of primary EPS with a presentation of basic EPS. Basic EPS excludes
dilution and is computed by dividing income available to common shareholders by
the weighted average number of common shares outstanding for the period. Diluted
EPS reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised, converted into common stock or
resulted in the issuance of common shares that then shared in the earnings of
the entity. Diluted EPS is computed similarly to fully diluted EPS pursuant to
Accounting Principles Board Opinion No. 15. SFAS 128 is effective for financial
statements issued for periods ending after December 15, 1997, including interim
periods. Earlier application is not permitted. Basic EPS for the first quarter
of 1997 under SFAS 128 would be $.26 per common share. SFAS 128 does not affect
the computation of EPS for the first quarter of 1996.
During the first quarter of 1996, the Company expensed $440,000 of debt
issue cost relating to the Company's prior bank credit agreement with ING
Capital Corporation and $375,000 relating to the imputed preferred dividend on
the Convertible Preferred. Under U.S. GAAP, a loss on early extinguishment of
debt is reported as an extraordinary item rather than as an operating expense
and the preferred dividend is reported as a deduction from net income to arrive
at the net income attributable to the common shareholders rather than deducted
as an operating expense. While net income per common share and all balance sheet
accounts are not affected by this difference in GAAP, the net income for the
first quarter of 1996 under U.S. GAAP would be $1,755,000 while under Canadian
GAAP the amount reported was $1,380,000. Since the Convertible Preferred was
converted into Common Shares on October 30, 1996, this difference in GAAP did
not affect the first quarter of 1997 financial results.
7
DENBURY RESOURCES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Denbury is an independent energy company engaged in acquisition,
development and exploration activities in the U.S. Gulf Coast region. Since
1993, after having disposed of its Canadian oil and natural gas properties, the
Company has focused its operations primarily onshore in Louisiana and
Mississippi. Over the last three years, the Company has achieved rapid growth in
proved reserves, production and cash flow 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
During the first quarter of 1997, the Company made total capital
expenditures of $15.1 million, which was primarily funded by the cash generated
by operations ($14.9 million). The Company has budgeted capital expenditures for
1997 of between $60 and $70 million. Although the Company's projected cash flow
is highly variable and difficult to predict as it is dependent on product
prices, drilling success, and other factors, these projected expenditures are
expected to exceed the Company's cash flow during 1997. However, as of March 31,
1997, the Company has available working capital of $12.2 million as well as a
virtually unused borrowing base of $60.0 million to fund any potential cash flow
deficits. If external capital resources are limited or reduced in the future,
the Company can also adjust its capital expenditure program accordingly.
However, such adjustments could limit, or even eliminate, the Company's future
growth.
In addition to its internal capital expenditure program, the Company has
historically required capital for the acquisition of producing properties, which
have been a major factor in the Company's rapid growth during recent years.
There can be no assurance that suitable acquisitions will be identified in the
future or that any 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 1997, the Company spent approximately $15.0
million on oil and natural gas development expenditures and approximately
$177,000 on acquisitions. The development expenditures included approximately
$6.2 million spent on drilling, $2.3 million on geological, geophysical and
acreage expenditures and the balance of $6.5 million was spent on workover
costs. These expenditures were funded by available cash and cash flow from
operations.
During the first quarter of 1996, the Company spent approximately $4.6
million on oil and gas development expenditures and $2.5 million on
acquisitions. The development expenditures included approximately $500 thousand
on geological and geophysical expenditures and the balance on drilling and
workover costs. The acquisition expenditures were for an additional working
interest in one of the Company's existing Southern Louisiana fields, plus
interests in two additional fields in the same area. These expenditures were
funded entirely by available cash and cash flow from operations.
8
DENBURY RESOURCES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Operating Income
Operating income increased significantly for the quarter ended March 31,
1997 as compared to the first quarter of 1996 as outlined in the following
chart. Oil and gas revenue increased primarily as a result of the increased oil
and gas production and an increase in oil product prices.
Three Months Ended
March 31,
- --------------------------------------------------------------
1997 1996
- --------------------------------------------------------------
OPERATING INCOME (THOUSANDS)
Oil sales $ 12,877 $ 3,115
Natural gas sales 8,264 5,902
Less production expenses (5,053) (2,044)
--------- --------
Operating income $ 16,088 $ 6,973
--------- --------
UNIT PRICES
Oil price per barrel ("Bbl") $ 20.03 $ 16.67
Gas price per thousand cubic feet 2.99 3.18
("Mcf")
NETBACK PER BOE (1):
Sales price $ 19.17 $ 18.17
Production expenses (4.58) (4.12)
--------- --------
$ 14.59 $ 14.05
--------- --------
AVERAGE DAILY PRODUCTION VOLUME:
Bbls 7,143 2,053
Mcf 30,674 20,397
BOE 12,256 5,453
- --------------------------------------------------------------
<FN>
(1) Barrel of oil equivalent using the ratio of one barrel of oil to 6 Mcf of
natural gas ("BOE").
</FN>
Production increases have been fueled by both internal growth from the
Company's development and exploration programs and from the acquisition of
producing properties during 1996, particularly the $37.2 million acquisition of
producing properties from Amerada Hess in May, 1996 (the "Hess Acquisition").
The properties included in the Hess Acquisition during May and June, 1996, the
first two months of ownership, was approximately 2,945 BOE per day ("BOE/d").
During the first quarter of 1997, the production from these properties averaged
4,385 BOE/d, a 49% increase. Total corporate production on a BOE/d basis
increased 21% from the fourth quarter of 1996 average of 10,132, almost solely
as a result of internal development, as the Company had only $177,000 of
acquisitions during the first quarter of 1997.
9
DENBURY RESOURCES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Oil and gas revenue has increased not only because of the large increase in
production, but also due to improved oil product prices. Between the first
quarter of 1996 and 1997, oil product prices increased 20% while natural gas
product prices declined by 6% between the two periods.
Production expenses increased between the first quarters of 1996 and 1997
along with the increases in production. On a BOE basis, production expenses
increased 11% from the first quarter of 1996 to the comparable quarter in 1997.
The increase was largely attributable to the changes in the mix of properties as
the Mississippi oil properties tend to have a higher operating cost per BOE than
the Louisiana gas properties. During the first quarter of 1996, approximately
38% of the Company's production on a BOE basis was oil while during the first
quarter of 1997, approximately 58% of the Company's production on a BOE basis
was oil.
General and Administrative Expenses
General and administrative ("G&A") expenses have increased as outlined
below along with the Company's growth.
Three months ended
March 31,
- ------------------------------------------------------------
1997 1996
- ------------------------------------------------------------
NET G&A EXPENSES (THOUSANDS)
Gross expenses $3,342 $1,612
State franchise taxes 97 53
Operator recoveries (1,168) (533)
Capitalized exploration expenses (653) (254)
------- --------
Net expenses $1,618 $ 878
------- --------
Average G&A cost per BOE $ 1.47 $ 1.77
Employees as of March 31 129 54
- ------------------------------------------------------------
On a BOE basis, these G&A costs decreased 17% from the first quarter of
1996 to the comparable quarter in 1997. Average production on a BOE/d basis
increased 125% from the first quarter of 1996 to the first quarter of 1997 while
gross G&A expenses increased only 107%. Since the fourth quarter of 1996,
average production on a BOE/d basis increased 21%, while gross G&A expenses
increased only 18% as the Company has made minimal increases to its staff levels
since year-end. Further, as a result of increased drilling activity, the Company
was able to recover a slightly higher percentage of gross G&A through its
operator recoveries during the first quarter of 1997 (36%) as compared to the
first quarter of 1996 (34%).
10
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 1997 1996
- ---------------------------------------------------------------
Interest expense $ 79 $ 105
Non-cash interest expense (19) -
-------- --------
Cash interest expense 60 105
Interest and other income (512) (75)
-------- --------
Net interest expense (income) $ (452) $ 30
- ---------------------------------------------------------------
Average interest cost (income) per BOE $(0.41) $ 0.06
Average debt outstanding $ 180 $ 3,600
- ---------------------------------------------------------------
Imputed preferred dividend $ - $ 375
Loss on early extinguishment of debt - 440
- ---------------------------------------------------------------
During the first quarters of 1996 and 1997, the Company had minimal debt
outstanding as virtually all of the bank debt had been retired during the
previous fourth quarter. In 1995, the bank debt was repaid with proceeds from
the December 1995 private placement of equity with the Texas Pacific Group
("TPG") and in 1996, the debt was repaid with proceeds from a public offering of
Common Shares completed in October, 1996. However, in 1996 the Company did incur
debt during the year in order to fund property acquisitions.
The private placement of equity in December 1995 with TPG included 1.5
million shares of Convertible Preferred. During the first quarter of 1996, the
Company recognized $375,000 of charges representing the imputed preferred
dividend on these shares. On October 30, 1996 the Convertible Preferred was
converted into 2.8 million Common Shares. Under Canadian GAAP, this dividend was
reported as an operating expense, while under U.S. GAAP this would not be an
expense but it would be deducted from net income to arrive at net income
attributable to the common shareholders. In addition to paying off its bank debt
and converting the Convertible Preferred into common equity during the fourth
quarter of 1996, the Company also converted its remaining subordinated debt into
common equity, leaving the Company essentially debt-free as of December 31,
1996.
During the first quarter of 1996, the Company had a $440,000 charge
relating to a loss on early extinguishment of debt. These costs related to the
remaining unamortized debt issue costs of the Company's prior credit facility
which was replaced in May 1996. Under U.S. GAAP, a loss on early extinguishment
of debt would be an extraordinary item rather than a normal operating expense as
required by Canadian GAAP.
Depletion, Depreciation and Site Restoration
Depletion, depreciation and amortization ("DD&A") has increased along with
the additional capitalized cost and increased production. DD&A per BOE has
increased only slightly (2%) from the first quarter of 1996 to the first quarter
of 1997. The Company used the same DD&A rate per BOE for the first quarter of
1997 as was used for the year ended December 31, 1996, as there was insufficient
data to justify any change in the rate.
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 the DD&A expense and has
increased each year along with an increase in the number of properties owned by
the Company.
11
DENBURY RESOURCES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Three Months
Ended
March 31,
- --------------------------------------------------------------
AMOUNTS IN THOUSANDS EXCEPT PER UNIT AMOUNTS 1997 1996
- --------------------------------------------------------------
Depletion and depreciation $ 6,488 $ 2,891
Site restoration provision 137 34
------- -------
Total amortization $ 6,625 $ 2,925
------- -------
Average DD&A cost per BOE $ 6.01 $ 5.89
- --------------------------------------------------------------
Income Taxes
Due to a net operating loss of the U.S. subsidiary each year for tax
purposes, the Company does not have any current tax provision. The deferred tax
provision as a percentage of net income has varied depending on the mix of
Canadian and U.S. expenses. The rate increased slightly in 1996 due to the
non-deductible imputed preferred dividend and interest on the subordinated debt.
Three Months
Ended
March 31,
- --------------------------------------------------------------
1997 1996
- --------------------------------------------------------------
Deferred income taxes (thousands) $3,063 $ 945
Average income tax costs per BOE $ 2.78 $1.90
Effective tax rate 37% 41%
- --------------------------------------------------------------
Net Income
Primarily as a result of increased production and improved oil product
prices, net income and cash flow from operations increased substantially on both
a gross and per share basis between the first quarter of 1996 and the first
quarter of 1997 as outlined below.
Three Months
Ended
March 31,
- --------------------------------------------------------------
AMOUNTS IN THOUSAND EXCEPT PER SHARE AMOUNTS 1997 1996
- --------------------------------------------------------------
Net income $ 5,215 $ 1,380
Net income per common share:
Primary $ 0.26 $0.12
Fully diluted 0.24 0.12
Cash flow from operations (1) $ 14,922 $ 6,065
- --------------------------------------------------------------
<FN>
(1) Represents cash flow provided by operations, exclusive of the net change in
non-cash working capital balances.
</FN>
New Accounting Pronouncement
In February 1997 the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 Earnings Per Share, ("SFAS 128"). SFAS
128 simplifies the standards for computing earnings per share ("EPS") and makes
them comparable to international EPS standards. SFAS 128 replaces the
presentation of primary EPS with a presentation of basic EPS. Basic EPS excludes
dilution and is computed by dividing income available to common shareholders by
the weighted average number of common shares outstanding for the period. Diluted
12
EPS reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised, converted into common stock or
resulted in the issuance of common shares that then shared in the earnings of
the entity. Diluted EPS is computed similarly to fully diluted EPS pursuant to
Accounting Principles Board Opinion No. 15. SFAS 128 is effective for financial
statements issued for periods ending after December 15, 1997, including interim
periods; earlier application is not permitted. Basic EPS for the first quarter
of 1997 under SFAS 128 would be $.26 per common share rather than the $.25 per
common share as computed under U.S. generally accepted accounting principles
("GAAP"). SFAS 128 does not affect the EPS for the first quarter of 1996.
13
Part II. Other Information
Item 5. Other Information.
The Company commenced trading on the New York Stock Exchange on May 8,
1997. The trading symbol changed on that same date from DENRF, as
previously used on NASDAQ, to DNR.
Item 6. Exhibits and Reports on Form 8-K during the First Quarter of 1997
Exhibits:
10 First Amendment to Credit Agreement and Waiver dated
April 1, 1997 to the credit agreement dated May 31, 1996
between the Company and NationsBank of Texas N.A. as
agent.
Reports on Form 8-K:
None
14
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)
/s/ Phil Rykhoek
-------------------------------
By: Phil Rykhoek
Chief Financial Officer
Date: May 12, 1997
15