SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
----------------------
(Mark One)
X Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended June 30, 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 (972)713-3000 area code:
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding at July 31, 1997
------- ----------------------------
Common Stock, no par value 20,260,678
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
3
DENBURY RESOURCES INC.
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands of U.S. Dollars)
June 30, December 31,
1997 1996
--------- ---------
(Unaudited)
Assets
Current assets
Cash and cash equivalents $ 5,996 $ 13,453
Accrued production receivable 6,596 11,906
Trade and other receivables 5,100 3,643
--------- ----------
Total current assets 17,692 29,002
--------- ----------
Property and equipment (using full cost accounting)
Oil and gas properties 193,198 159,724
Unevaluated oil and gas properties 9,095 6,413
Less accumulated depreciation and depletion (45,662) (31,141)
--------- ----------
Net property and equipment 156,631 134,996
--------- ----------
Other assets 3,010 2,507
--------- ----------
Total assets $ 177,333 $ 166,505
========= ==========
Liabilities and Shareholders' Equity
Current liabilities
Accounts payable and accrued liabilities $ 10,100 $ 10,903
Oil and gas production payable 3,653 5,550
Current portion of long-term debt 30 67
--------- ----------
Total current liabilities 13,783 16,520
--------- ----------
Long-term liabilities
Long-term debt 117 125
Provision for site reclamation costs 861 613
Deferred income taxes and other 11,095 6,743
--------- ----------
Total long-term liabilities 12,073 7,481
--------- ----------
Shareholders' equity
Common shares, no par value, unlimited shares
authorized; outstanding - 20,256,678 and 20,055,757
shares at June 30, 1997 and December 31, 1996,
respectively 131,874 130,323
Retained earnings 19,603 12,181
--------- ----------
Total shareholders' equity 151,477 142,504
--------- ----------
Total liabilities and shareholders' equity $ 177,333 $ 166,505
========= ==========
(See accompanying notes to Consolidated Financial Statements)
4
DENBURY RESOURCES INC.
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands except per share amounts)
(Unaudited - U.S. dollars)
Three Months Ended Six Months Ended
June 30, June 30,
------------------ -----------------
1997 1996 1997 1996
-------- ------- ------- --------
Revenues
Oil, gas and related product sales $ 18,762 $11,633 $39,903 $ 20,650
Interest and other income 253 49 765 124
-------- ------- ------- --------
Total revenues 19,015 11,682 40,668 20,774
-------- ------- ------- --------
Expenses
Production 5,259 3,306 10,312 5,350
General and administrative 1,599 831 3,120 1,656
Interest 73 576 152 681
Imputed preferred dividends - 384 - 759
Provision for loss on early
extinguishment of debt - - - 440
Depletion and depreciation 8,473 4,457 15,098 7,382
Franchise taxes 108 54 205 107
-------- ------- ------- --------
Total expenses 15,512 9,608 28,887 16,375
-------- ------- ------- --------
Income before income taxes 3,503 2,074 11,781 4,399
Provision for income taxes (1,296) (859) (4,359) (1,804)
-------- ------- ------- --------
Net income $ 2,207 $ 1,215 $ 7,422 $ 2,595
======== ======= ======= ========
Net income per common share
Primary $ 0.11 $ 0.11 $ 0.37 $ 0.23
Fully diluted 0.11 0.11 0.35 0.23
Average number of common shares
outstanding 20,156 11,555 20,125 11,512
======== ======= ======= ========
(See accompanying notes to Consolidated Financial Statements)
5
DENBURY RESOURCES INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
(Amounts in thousands of U.S. dollars)
(Unaudited)
Six Months Ended
June 30,
-----------------------
1997 1996
--------- --------
Cash flow from operating activities:
Net income $ 7,422 $ 2,595
Adjustments needed to reconcile to net cash flow
provided by operations:
Depreciation, depletion and amortization 15,098 7,382
Deferred income taxes 4,359 1,804
Imputed preferred dividend - 759
Provision for loss on early extinguishment of
debt - 440
Other 44 323
-------- --------
26,923 13,303
Changes in working capital items relating to operations:
Accrued production receivable 5,310 (3,096)
Trade and other receivables (1,457) (702)
Accounts payable and accrued liabilities (803) 5,210
Oil and gas production payable (1,897) 2,872
--------- --------
Net cash flow provided by operations 28,076 17,587
--------- --------
Cash flow from investing activities:
Oil and gas expenditures (32,608) (12,759)
Acquisition of oil and gas properties (3,548) (47,974)
Net purchases of other assets (843) (754)
Acquisition of subsidiary, net of cash acquired - 209
--------- --------
Net cash used for investing activities (36,999) (61,278)
--------- --------
Cash flow from financing activities:
Bank borrowings - 39,900
Issuance of common stock 1,551 796
Costs of debt financing (33) (378)
Other (52) (95)
--------- --------
Net cash provided by financing activities 1,466 40,223
--------- --------
Net decrease in cash and cash equivalents (7,457) (3,468)
Cash and cash equivalents at beginning of year 13,453 6,553
--------- --------
Cash and cash equivalents at end of period $ 5,996 $ 3,085
========= ========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 108 $ 271
Supplemental schedule of noncash financing activities:
Conversion of subordinated debt to common stock - 366
(See accompanying notes to Consolidated Financial Statements)
6
DENBURY RESOURCES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 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
consolidated financial position of the Company as of June 30, 1997, and the
results of its operations for the three and six months ended June 30, 1997 and
1996 and its cash flow for the six months ended June 30, 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 and warrants were
included in the calculation of fully-diluted earnings per share. The conversion
of the Convertible Preferred and the convertible debt were either anti-dilutive
or immaterial and were not included in the calculation of earnings per share for
the three and six months ended June 30, 1996. All of the Convertible Preferred
and the convertible debt were converted into common shares during 1996 and thus
were not relevant to the calculation of earnings per share during 1997.
2. NOTES PAYABLE AND LONG-TERM INDEBTEDNESS
June 30, December 31,
1997 1996
-------- ---------
(Amounts in thousands)
(Unaudited)
Senior bank loan $ 100 $ 100
Other notes payable 47 92
Less portion due within one year (30) (67)
-------- ---------
Total long-term debt $ 117 $ 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 June 30, 1997, the Company had $100,000 outstanding on this line of credit
with a borrowing base of $60 million.
7
DENBURY RESOURCES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 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 1997 financial statements result from the different methodologies
for computing earnings per common share. Under U.S. GAAP, the primary and
fully-diluted earnings per common share for the first six months of 1997 would
be $0.35, as compared to the $0.37 and $0.35, respectively, as reported under
Canadian GAAP. For the three months ended June 30, 1997, the primary and
fully-diluted earnings per common share under U.S. GAAP would be $0.10, as
compared to the $0.11, as reported under Canadian GAAP. The earnings per share
would be the same under both U.S. and Canadian GAAP for the three and six months
ended June 30, 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 three and six
months ended June 30, 1997 of 1997 under SFAS 128 would be $0.11 and $0.37 per
common share respectively. SFAS 128 does not affect the computation of EPS for
the three and six months ended June 30, 1996.
During the first half 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 $759,000 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 half of 1996 under U.S. GAAP would be $3,354,000 while under Canadian GAAP
the amount reported was $2,595,000. For the three months ended June 30, 1996,
net income under U.S. GAAP would be $1,599,000 while under Canadian GAAP the
amount reported was $1,215,000. Since the Convertible Preferred was converted
into Common Shares on October 30, 1996, this difference in GAAP did not affect
the comparable 1997 financial results.
4. COMMITMENTS
On August 6, 1997, the Company entered into a ten year office lease for its
corporate headquarters which is expected to commence on November 1, 1998. The
estimated minimum annual rental payments for the first five years of the lease
are projected to be $1.15 million per year and the minimum annual rental
payments during the remaining five years of the lease are projected to be $1.25
million per year.
8
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 half of 1997, the Company made total capital expenditures
of $36.1 million, which was primarily funded by the cash generated by operations
($26.9 million) and its available cash. 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 June 30, 1997, the Company had available working capital of
$3.9 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.
During 1996, the Company spent approximately $48.2 million on property
acquisitions, while only $3.5 million was spent during the first six months of
1997. As of August 8, 1997, the Company had committed to an additional $12
million of acquisitions which had either closed or are expected to close during
the third quarter. These additional acquisitions will be financed primarily by
bank debt. There can be no assurance that additional 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 half of 1997, the Company spent approximately $32.6
million on oil and natural gas exploration and development expenditures and
approximately $3.5 million on acquisitions. The exploration and development
expenditures included approximately $18.5 million spent on drilling, $4.3
million on geological, geophysical and acreage expenditures and the balance of
$9.8 million was spent on workover costs. These expenditures were funded by
available cash and cash flow from operations.
During the first half of 1996, the Company spent approximately $60.7
million of which approximately $48.2 million was spent on acquisitions. The
acquisition expenditures included approximately $37.2 million for producing
properties acquired from Amerada Hess Corporation (the "Hess Acquisition"),
approximately $7.5 million for properties acquired from Ottawa Energy, Inc. plus
four other minor acquisitions. These expenditures were funded primarily by bank
debt, plus the Company's available cash and cash flow from operations.
9
DENBURY RESOURCES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Operating Income
Operating income increased significantly during 1997 as compared to 1996 as
outlined in the following chart. Oil and gas revenue increased primarily as a
result of the increased oil and gas production.
Three Months Ended Six Months Ended
June 30, June 30,
- ----------------------------------- ------------------- ------------------
1997 1996 1997 1996
- ----------------------------------- ------- -------- ------- -------
OPERATING INCOME (THOUSANDS)
Oil sales $11,474 $ 6,044 $24,351 $ 9,158
Natural gas sales 7,288 5,589 15,552 11,492
Less production expenses (5,259) (3,306) (10,312) (5,350)
------- -------- ------- -------
Operating income $13,503 $ 8,327 $29,591 $15,300
------- -------- ------- -------
UNIT PRICES
Oil price per barrel ("Bbl") $ 16.71 $ 17.78 $ 18.32 $ 17.39
Gas price per thousand cubic
feet ("Mcf") 2.28 2.49 2.61 2.80
NETBACK PER BOE (1):
Sales price $ 15.38 $ 16.30 $ 17.18 $ 17.07
Production expenses (4.31) (4.63) (4.44) (4.42)
------- -------- ------- -------
$ 11.07 $ 11.67 $ 12.74 $ 12.65
------- -------- ------- -------
AVERAGE DAILY PRODUCTION VOLUME:
Bbls 7,543 3,735 7,345 2,894
Mcf 35,166 24,638 32,933 22,518
BOE 13,405 7,841 12,833 6,647
- ----------------------------------- ------- -------- ------- -------
<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 Hess Acquisition. During May
and June, 1996, the first two months of ownership, the properties included in
the Hess Acquisition averaged approximately 2,945 BOE per day ("BOE/d"). During
the first and second quarters of 1997, the production from these same properties
averaged approximately 4,385 BOE/d and 4,613 BOE/d respectively, a 49% and 57%
increase respectively from initial production levels. Total corporate production
on a BOE/d basis increased 21% from the fourth quarter of 1996 average of 10,132
to the first quarter of 1997 average of 12,256 BOE/d, plus an additional
increase of 9% to 13,405 BOE/d for the second quarter of 1997. These increases
were almost solely as a result of internal development, as the Company had only
$3.5 million of acquisitions during the first half of 1997.
Oil and gas revenue has increased primarily because of the large increase
in production. Between the second quarters of 1996 and 1997, oil product prices
decreased 6% and natural gas product prices declined by 8% partially offsetting
the revenue gains from the improved production levels. When comparing the two
six month periods of 1996 and 1997, oil product prices increased by 5% while
natural gas product prices declined 7%. Since the 1997 production is more
heavily weighted toward oil than gas when compared to 1996, prices on a BOE
basis improved slightly (1%) between these two periods. During the first half of
1996, approximately 44% of the Company's production on a BOE basis was oil while
during the first half of 1997, approximately 57% of the Company's production on
a BOE basis was oil.
10
DENBURY RESOURCES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Production expenses on an absolute basis increased between the relative
periods of 1996 and 1997 along with the increases in production. On a BOE basis,
production expenses decreased 7% from the second quarter of 1996 to the
comparable period in 1997 and were almost identical when comparing the first
half of 1996 to the first half of 1997. This improvement was a result of
efficiencies achieved from higher production volumes despite the Company having
a higher percentage of oil production in 1997 as compared to 1996, which
typically has a higher operating cost per BOE.
General and Administrative Expenses
General and administrative ("G&A") expenses have increased as outlined
below along with the Company's growth.
Three Months Ended Six Months Ended
June 30, June 30,
- ------------------------------- -------------------- --------------------
1997 1996 1997 1996
- ------------------------------- -------- ------- -------- --------
NET G&A EXPENSES (THOUSANDS)
Gross expenses $ 3,329 $ 1,638 $ 6,671 $ 3,249
State franchise taxes 108 54 205 107
Operator recoveries (1,223) (545) (2,391) (1,077)
Capitalized exploration
expenses (507) (262) (1,160) (516)
-------- ------- -------- --------
Net expenses $ 1,707 $ 885 $ 3,325 $ 1,763
-------- ------- -------- --------
Average G&A expense per BOE $ 1.40 $ 1.23 $ 1.43 $ 1.46
Employees as of June 30 131 81 131 81
- ------------------------------- -------- ------- -------- --------
On a BOE basis, these G&A costs were almost identical when comparing the
first half of 1996 to the comparable period in 1997. When comparing the second
quarter of 1996 to the second quarter of 1997, G&A costs increased 14% on a BOE
basis. This increase was primarily due to fees and expenses associated with the
move to the New York Stock Exchange from NASDAQ in May, 1997.
Interest and Financing Expenses
Three Months Ended Six Months Ended
June 30, June 30,
- ----------------------------------- ------------------- ------------------
AMOUNTS IN THOUSANDS EXCEPT PER 1997 1996 1997 1996
UNIT AMOUNTS
- ----------------------------------- ------- -------- -------- -------
Interest expense $ 73 $ 576 $ 152 $ 681
Non-cash interest expense (25) (321) (44) (321)
------- -------- -------- -------
Cash interest expense 48 255 108 360
Interest and other income (253) (49) (765) (124)
------- -------- -------- -------
Net interest expense (income) $ (205) $ 206 $ (657) $ 236
- ----------------------------------- ------- -------- -------- -------
Average interest expense (income) $ (0.17) $ 0.29 $ (0.28) $ 0.19
per BOE
Average debt outstanding 158 13,187 170 8,392
- ----------------------------------- ------- -------- -------- -------
Imputed preferred dividend - $ 384 - $ 759
Loss on early extinguishment of debt - - - 440
- ----------------------------------- ------- -------- -------- -------
DENBURY RESOURCES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
During the first half 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 late in the second quarter 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 half of 1996, the
Company recognized $759,000 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
and June 30,1997.
During the first half 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. The Company increased
the DD&A rate per BOE for the first half of 1997 to $6.50 per BOE to provide for
the estimated effect of reduced oil prices on reserve quantities, the estimated
effect of rising drilling costs on certain proved undeveloped locations, and
higher than anticipated costs on wells drilled in Louisiana that were proved
undeveloped locations at December 31, 1996. The oil prices used in the December
31, 1996 reserve report were based on a West Texas Intermediate ("WTI") posting
price of $23.39 per bbl while the comparable WTI price at June 30, 1997 was
$17.15 per bbl. This reduction in oil prices reduced the June 30, 1997 estimated
reserves by approximately 1.3 million barrels. The revised DD&A rate of $6.50
per BOE was applied to the entire six month period with the difference booked in
the second quarter, causing the second quarter rate to be $6.95 per BOE. During
the first quarter of 1997, the Company's DD&A rate was $5.99 per BOE (the DD&A
rate for the year ended December 31, 1996).
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.
Three Months Ended Six Months Ended
June 30, June 30,
- --------------------------------- ------------------- -------------------
AMOUNTS IN THOUSANDS EXCEPT PER 1997 1996 1997 1996
UNIT AMOUNTS
- --------------------------------- -------- ------- -------- --------
Depletion and depreciation $ 8,355 $ 4,393 $ 14,843 $ 7,285
Site restoration provision 118 64 255 97
-------- ------- -------- --------
Total amortization $ 8,473 $ 4,457 $ 15,098 $ 7,382
-------- ------- -------- --------
Average DD&A cost per BOE $ 6.95 $ 6.25 $ 6.50 $ 6.10
- --------------------------------- -------- ------- -------- --------
11
DENBURY RESOURCES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Income Taxes
Due to a net operating loss of the U.S. subsidiary 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 was slightly higher in 1996 due to the non-deductible imputed
preferred dividend and interest on the subordinated debt.
Three Months Ended Six Months Ended
June 30, June 30
- -------------------------------------- ---------------- -----------------
1997 1996 1997 1996
- -------------------------------------- ------- ------ ------- -------
Deferred income taxes (thousands) $ 1,296 $ 859 $ 4,359 $ 1,804
Average income tax costs per BOE $ 1.06 $ 1.20 $ 1.88 $ 1.49
Effective tax rate 37% 41% 37% 41%
- -------------------------------------- ------- ------ ------- -------
Net Income
Primarily as a result of increased production, net income and cash flow
from operations increased substantially on both a gross and per share basis
between the first half of 1996 and the first half of 1997 as outlined below.
However, net income on a per share basis was the same for the second quarter of
1996 and the second quarter of 1997 even though production and cash flow
increased, primarily as a result of the adjustments to the DD&A rate as
previously discussed and the significant increase in the number of common shares
outstanding since June 30, 1996.
Three Months Ended Six Months Ended
June 30, June 30
- --------------------------------------- ---------------- -----------------
AMOUNTS IN THOUSANDS EXCEPT PER SHARE 1997 1996 1997 1996
AMOUNTS
- --------------------------------------- ------- ------ ------- -------
Net income $ 2,207 $1,215 $ 7,422 $ 2,595
Net income per common share:
Primary $ 0.11 $ 0.11 $ 0.37 $ 0.23
Fully diluted 0.11 0.11 0.35 0.23
Average number of common shares 20,156 11,555 20,125 11,512
outstanding
Cash flow from operations (1) $12,001 $7,238 $26,923 $13,303
- --------------------------------------- ------- ------ ------- -------
<FN>
(1) Represents cash flow provided by operations, exclusive of the net change in
non-cash working capital balances.
</FN>
12
DENBURY RESOURCES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table summarizes the cash flow, DD&A and net income on a BOE
basis for the comparative periods. Each of the individual components are
discussed above.
Three Months Ended Six Months Ended
June 30, June 30,
- -------------------------------------- ---------------- ----------------
PER BOE (6:1 BASIS) 1997 1996 1997 1996
- -------------------------------------- ------- ------ ------- ------
Revenue $ 15.38 $16.30 $ 17.18 $17.07
Production expenses (4.31) (4.63) (4.44) (4.42)
------- ------ ------- ------
Production netback 11.07 11.67 12.74 12.65
General and administrative (1.40) (1.23) (1.43) (1.46)
Interest 0.17 (0.29) 0.28 (0.19)
------- ------ ------- ------
Cash flow (1) 9.84 10.15 11.59 11.00
DD&A (6.95) (6.25) (6.50) (6.10)
Deferred income taxes (1.06) (1.20) (1.88) (1.49)
Other non-cash items (0.02) (1.00) (0.01) (1.26)
- -------------------------------------- ------- ------ ------- ------
Net income $ 1.81 $ 1.70 $ 3.20 $ 2.15
- -------------------------------------- ------- ------ ------- ------
<FN>
(1) Represents cash flow provided by operations, exclusive of the net change in
non-cash working capital balances.
</FN>
New U.S. GAAP 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 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 three and six
months ended June 30, 1997 of 1997 under SFAS 128 would be $0.11 and $0.37 per
common share respectively. SFAS 128 does not affect the computation of EPS for
the three and six months ended June 30, 1996.
13
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders
The Company's Annual and Special Meeting was held on May 21, 1997. At the
record date, on April 9, 1997, 20,101,607 Common Shares were issued and
outstanding and entitled to vote on all matters submitted at the meeting. The
common shareholders of the Company approved the following (as allowed under
Canadian regulations, abstentions were not counted.
For Against
--------- ---------
(1) An Ordinary Resolution to approve an increase in
the number of Common Shares reserved for issuance
under the Company's Stock Option Plan; 12,177,173 308,590
(2) The appointment of Deloitte & Touche, Chartered
Accountants, to serve as auditors until the next
annual meeting and to authorize the directors to
fix their renumeration as such; and 12,499,575 4,320
(3) The election of six nominees as directors 12,500,025 4,920
Item 6. Exhibits and Reports on Form 8-K during the Second Quarter of 1997
Exhibits:
10 Office lease by and between Sandler Legacy, Ltd. as Landlord
and Denbury Management, Inc.,
as Tenant.
27 Financial Data Shedule
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)
By: /s/ Phil Rykhoek
-------------------------------
Phil Rykhoek
Chief Financial Officer
Date: August 12, 1997
15