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, 1998
Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission file number 33-93722
---------------------------
DENBURY RESOURCES INC.
DENBURY MANAGEMENT, INC.
(Exact name of Registrants as specified in its charter)
Canada Not applicable
Texas 75-2294373
(State or other (I.R.S. Employer
jurisdiction of incorporation Identification No.)
or organization)
17304 Preston Rd.,
Suite 200 75252
Dallas, TX (Zip code)
(Address of principal
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, 1998
----- -----------------------------
Common Stock, no par value 26,692,104
DENBURY RESOURCES INC.
INDEX
Part I. Financial Information
Page
Consolidated Balance Sheets at March 31, 1998(Unaudited)
and December 31, 1997 3
Consolidated Statements of Operations for the three months
ended March 31, 1998 and 1997 (Unaudited) 4
Consolidated Statements of Cash Flows for the three months
ended March 31, 1998 and 1997 (Unaudited) 5
Notes to Consolidated Financial Statements 6-8
Management's Discussion and Analysis of Financial Condition
and Results of Operations 9-16
Part II. Other Information
Exhibits and Reports on Form 8-K 17
Signatures 18
2
DENBURY RESOURCES INC.
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands of U.S. Dollars)
March 31, December 31,
1998 1997
--------- ---------
(Unaudited)
Assets
Current assets
Cash and cash equivalents........................ $ 3,808 $ 9,326
Accrued production receivable.................... 10,285 8,692
Trade and other receivables...................... 13,285 15,362
--------- ----------
Total current assets.......................... 27,378 33,380
--------- ----------
Property and equipment (using full cost accounting)
Oil and gas properties........................... 411,740 388,766
Unevaluated oil and gas properties............... 86,234 82,798
Less accumulated depreciation and depletion...... (74,800) (62,732)
--------- ----------
Net property and equipment.................... 423,174 408,832
--------- ----------
Other assets........................................ 8,782 5,336
--------- ----------
Total assets............................. $ 459,334 $ 447,548
========= ==========
Liabilities and Shareholders' Equity
Current liabilities
Accounts payable and accrued liabilities......... $ 17,651 $ 24,616
Oil and gas production payable................... 7,423 6,052
Current portion of long-term debt................ 17 20
--------- ----------
Total current liabilities..................... 25,091 30,688
--------- ----------
Long-term liabilities
Long-term debt................................... 165,000 240,000
Provision for site reclamation costs............. 1,106 1,017
Deferred income taxes and other.................. 15,249 15,620
--------- ----------
Total long-term liabilities................... 181,355 256,637
--------- ----------
Shareholders' equity
Common shares, no par value, unlimited shares
authorized; outstanding - 26,642,729 and
20,388,683 shares at March 31, 1998 and
December 31, 1997, respectively............... 226,484 133,139
Retained earnings................................ 26,404 27,084
--------- ----------
Total shareholders' equity.................... 252,888 160,223
--------- ----------
Total liabilities and shareholders' equity.... $ 459,334 $ 447,548
========= ==========
(See accompanying notes to Consolidated Financial Statements)
3
DENBURY RESOURCES INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands except per share amounts)
(Unaudited - U.S. dollars)
Three Months Ended
March 31,
-------------------------
1998 1997
--------- ---------
Revenues
Oil, gas and related product sales $ 25,188 $ 21,141
Interest and other income....... 367 512
--------- ---------
Total revenues............ 25,555 21,653
--------- ---------
Expenses
Production...................... 7,854 5,053
General and administrative...... 1,776 1,521
Interest........................ 4,391 79
Depletion and depreciation...... 12,387 6,625
Franchise taxes................. 200 97
--------- ---------
Total expenses........... 26,608 13,375
--------- ---------
Income (loss) before income taxes.... (1,053) 8,278
Provision for income taxes........... 373 (3,063)
--------- ---------
Net income (loss).................... $ (680) $ 5,215
========= =========
Net income (loss) per common share
Basic .......................... $ (0.03) $ 0.26
Fully diluted .................. (0.03) 0.24
Average number of common shares outstanding 23,425 20,094
========= =========
(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,
------------------------
1998 1997
--------- ---------
Cash flow from operating activities:
Net income (loss) ................................ $ (680) $ 5,215
Adjustments needed to reconcile to net cash flow
provided by operations:
Depreciation, depletion and amortization .... 12,387 6,625
Deferred income taxes ....................... (373) 3,063
Other ....................................... 121 19
-------- --------
11,455 14,922
Changes in working capital items relating to operations:
Accrued production receivable ............... (1,593) 4,965
Trade and other receivables ................. 2,077 (1,033)
Accounts payable and accrued liabilities .... (6,965) 1,999
Oil and gas production payable .............. 1,371 (2,104)
-------- --------
Net cash flow provided by operations ............... 6,345 18,749
--------- --------
Cash flow from investing activities:
Oil and natural gas expenditures ............ (26,163) (14,965)
Acquisition of oil and natural gas properties (247) (177)
Net purchases of other assets ............... (279) (430)
--------- --------
Net cash used for investing activities ............. (26,689) (15,572)
--------- --------
Cash flow from financing activities:
Bank repayments ............................. (200,000) --
Issuance of senior subordinated debt ........ 125,000 --
Issuance of common stock .................... 93,345 473
Costs of debt financing ..................... (3,518) (6)
Other ....................................... (1) (31)
--------- --------
Net cash provided by financing activities .......... 14,826 436
--------- --------
Net increase (decrease) in cash and cash equivalents (5,518) 3,613
Cash and cash equivalents at beginning of year ..... 9,326 13,453
--------- --------
Cash and cash equivalents at end of year ........... $ 3,808 $ 17,066
========= ========
Supplemental disclosure of cash flow information:
Cash paid during the quarter for interest .. $ 3,225 $ 60
(See accompanying notes to Consolidated Financial Statements)
5
DENBURY RESOURCES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
March 31, 1998 and 1997
1. ACCOUNTING POLICIES
Interim Financial Statements
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, 1997. Any capitalized items used but not defined in these Notes to
Consolidated Financial Statements have the same meaning given to them in the
Form 10-K.
Accounting measurements at interim dates inherently involve greater
reliance on estimates then 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
Resources Inc. (the "Company" or "Denbury"), the accompanying unaudited
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, 1998 and the consolidated results of its operations and cash
flow for the three months ended March 31, 1998 and 1997.
Net Income and Loss per Common Share
Net income or loss per common share is computed by dividing the net income
or loss by the weighted average number of shares of common stock outstanding. In
accordance with Canadian generally accepted accounting principles ("GAAP"), the
stock options and warrants were included in the calculation of fully diluted
earnings per share but were anti-dilutive to the calculation of losses per
share.
2. NOTES PAYABLE AND LONG-TERM INDEBTEDNESS
March 31, December 31,
1998 1997
-------- ---------
(Amounts in thousands)
(Unaudited)
9% Senior Subordinated Notes Due 2008 $125,000 $ -
Senior bank loan 40,000 240,000
Other notes payable 17 20
Less portion due within one year (17) (20)
-------- ---------
Total long-term debt $165,000 $ 240,000
======== =========
6
DENBURY RESOURCES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
March 31, 1998 and 1997
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 fully diluted earnings or losses per common share. For
Canadian purposes, the proceeds from dilutive securities are used to reduce debt
in the calculation. Under U.S. GAAP, Statement of Financial Accounting Standards
("SFAS") No. 128 requires the proceeds from such instruments be used to
repurchase Common Shares. Under U.S. GAAP, fully diluted earnings (losses) per
share would be ($0.03) and $0.25 for the quarters ended March 31, 1998 and 1997
as compared to the ($0.03) and $0.24 reported under Canadian GAAP.
In addition, the U.S. full cost accounting rules differ materially from the
Canadian full cost accounting guidelines followed by the Company. In determining
the limitation on carrying values, U.S. accounting rules require the discounting
of estimated future net revenues from its proved reserves at 10% using constant
current prices following the guidelines of the Securities and Exchange
Commission ("SEC") while the Canadian guidelines require the use of the same
future net revenues but on an undiscounted basis and after the deduction of
estimated future administrative and financing costs. The Canadian accounting
guidelines also allow a Company to exclude acquired properties from the ceiling
test calculation for up to two years while the SEC allows an exclusion for only
one year and then only after obtaining approval. The Company obtained approval
for the exclusion from the SEC and believes that based on its success with
similar properties in Mississippi, the value of the properties acquired in
December 1997 from Chevron (the "Chevron Properties") is at least equal to their
carrying cost. As such, the Company has excluded these Chevron Properties from
the ceiling test calculation for both U.S. and Canadian GAAP. If these
properties were included, the Company would have a write-down of the property
carrying costs as of March 31, 1998 of approximately $35 million for both U.S.
and Canadian GAAP.
4. CONDENSED CONSOLIDATING FINANCIAL INFORMATION
Denbury Management, Inc. issued debt securities during February 1998 which
are fully and unconditionally guaranteed by Denbury Resources Inc. Denbury
Holdings Ltd. was merged into Denbury Resources Inc. in December 1997 and is not
a guarantor of the debt. Condensed consolidating financial information for
Denbury Resources Inc. and Subsidiaries as of March 31, 1998 and December 31,
1997 and for the three months ended March 31, 1998 and 1997 is as follows:
DENBURY RESOURCES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEETS
(Amounts in thousands of U.S. dollars)
March 31, 1998
-------------------------------------------
Denbury Denbury Denbury
Management Resources Resources
Inc. Inc. Inc.
(Issuer) (Guarantor)Eliminations Consolidated
-------- -------- ---------- ---------
ASSETS
Current assets.....................$ 27,139 $ 239 $ - $ 27,378
Property and equipment (using full
cost accounting)................. 423,174 - - 423,174
Investment in subsidiaries (equity
method).......................... - 252,744 (252,744) -
Other assets....................... 8,781 1 - 8,782
-------- -------- ---------- ---------
Total assets....................$459,094 $252,984 $ 252,744 $ 459,334
======== ======== ========== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities................$ 24,995 $ 96 $ - $ 25,091
Long-term liabilities.............. 181,355 - - 181,355
Shareholders' equity............... 252,744 252,888 (252,744) 252,888
-------- -------- ---------- ---------
Total liabilities and
shareholders' equity.........$459,094 $252,984 $ (252,744) $ 459,334
======== ======== ========== =========
7
DENBURY RESOURCES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEETS
(Amounts in thousands of U.S. dollars)
December 31, 1997
-------------------------------------------
Denbury Denbury Denbury
Management Resources Resources
Inc. Inc. Inc.
(Issuer) (Guarantor)Eliminations Consolidated
-------- -------- ---------- ---------
ASSETS
Current assets.....................$ 33,017 $ 363 $ - $ 33,380
Property and equipment (using full
cost accounting)................. 408,832 - - 408,832
Investment in subsidiaries (equity
method).......................... - 159,892 (159,892) -
Other assets....................... 5,234 102 - 5,336
-------- -------- ---------- ---------
Total assets....................$447,083 $160,357 $ (159,892) $ 447,548
======== ======== ========== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities................$ 30,554 $ 134 $ - $ 30,688
Long-term liabilities.............. 256,637 - - 256,637
Shareholders' equity............... 159,892 160,223 (159,892) 160,223
-------- -------- ---------- ---------
Total liabilities and
shareholders' equity.........$447,083 $160,357 $ (159,892) $ 447,548
======== ======== ========== =========
DENBURY RESOURCES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
(Amounts in thousands of U.S. dollars)
Three Months Ended March 31, 1998
-------------------------------------------
Denbury Denbury Denbury
Management Resources Resources
Inc. Inc. Inc.
(Issuer) (Guarantor)Eliminations Consolidated
-------- -------- ---------- ---------
Revenues...........................$ 25,554 $ 1 $ - $ 25,555
Expenses........................... 26,563 45 - 26,608
-------- -------- ---------- ---------
Income (loss) before the following: (1,009) (44) - (1,053)
Equity in net earnings
(losses) of subsidiaries...... - (636) 636 -
-------- -------- ---------- ---------
Income (loss) before income taxes.. (1,009) (680) 636 (1,053)
Provision for income taxes......... 373 - - 373
-------- -------- ---------- ---------
Net income (loss)..................$ (636) $ (680) $ 636 $ (680)
======== ======== ========== =========
Three Months Ended March 31, 1997
-----------------------------------------------------------
Denbury Denbury Denbury
Management Denbury Resources Resources
Inc. Holdings Inc. Inc.
(Issuer) Ltd. (Guarantor) Eliminations Consolidated
-------- -------- --------- ------------ ------------
Revenues..........................$ 21,652 $ - $ 31 $ (30) $ 21,653
Expenses ......................... 13,375 - 30 (30) 13,375
-------- -------- --------- ------------ ------------
Income before the following: ..... 8,277 - 1 - 8,278
Equity in net earnings of
subsidiaries................ - 5,214 5,214 (10,428) -
-------- -------- --------- ------------ ------------
Income before income taxes ....... 8,277 5,214 5,215 (10,428) 8,278
Provision for income taxes ....... (3,063) - - - (3,063)
-------- -------- --------- ------------ ------------
Net income........................$ 5,214 $ 5,214 $ 5,215 $ (10,428) $ 5,215
======== ======== ========= ============ ============
8
DENBURY RESOURCES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following should be read in conjunction with the response to Part I,
Item 1 of this Report and Items 7 and 8 of the Form 10-K. Any capitalized terms
used but not defined in this Item 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. Over the last few 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.
1998 Public Debt and Equity Offering
On February 26, 1998, the Company closed its public sale of 5,240,780
Common Shares (which included the underwriter's over-allotment option of 683,580
Common Shares) at a price of $16.75 per share and a net price to the Company of
$15.955 per share (the "Equity Offering"). Concurrently with the Equity
Offering, affiliates of the Texas Pacific Group ("TPG"), the Company's largest
shareholder, purchased 313,400 Common Shares from the Company at $15.955 per
share, equal to the price to the public per share less underwriting discounts
and commissions (the "TPG Purchase"). The net proceeds to the Company from the
Equity Offering and TPG Purchase were approximately $88.6 million, before
offering expenses.
Concurrently with the Equity Offering and TPG Purchase, Denbury Management
Inc., a wholly owned subsidiary of the Company, issued $125 million in aggregate
principal amount of 9% Senior Subordinated Notes Due 2008 (the "Debt Offering"
and the "Notes"). These Notes contain certain debt covenants, including
covenants that limit (i) indebtedness, (ii) certain payments including
dividends, (iii) sale/leaseback transactions, (iv) transactions with affiliates,
(v) liens, (vi) asset sales, and (vii) mergers and consolidations. The net
proceeds to the Company from the Debt Offering were approximately $121.8
million, before offering expenses.
The total net proceeds from the debt and equity offerings (the "Capital
Transactions") were approximately $209.6 million after deducting the total
offering expenses of $850,000. The Company used these proceeds to reduce
outstanding borrowings under the Company's bank credit facility, the majority of
which had been borrowed to fund the December 1997 $202 million acquisition of
properties from Chevron (the "Chevron Acquisition").
Restated Credit Facility
The Company has a credit facility (the "Credit Facility") with NationsBank
of Texas, N.A., as agent for a group of eight other banks. The Credit Facility
was increased in size from $150 million to $300 million in December 1997 and the
borrowing base was increased to $260 million in order to fund the Chevron
Acquisition. The December 31, 1997 outstanding balance of $240 million was
reduced to $40 million as of February 26, 1998 after application of the net
proceeds from the Debt and Equity Offerings and the TPG Purchase (collectively
the "Capital Transactions"), net of $9.8 million of additional borrowings.
The Credit Facility consists of a five-year revolving credit facility with
a borrowing base (after the Capital Transactions) of $165 million. This
borrowing base is subject to review every six months and the Credit Facility is
secured by substantially all of the Company's oil and natural gas properties,
except for those acquired in the Chevron Acquisition. Interest is payable on the
revolving credit facility at either the prime rate or, depending on the
percentage of the borrowing base that is outstanding, at rates ranging from
LIBOR plus 7/8% to LIBOR plus 13/8%. The Credit Facility has several
restrictions, including, among others: (i) a prohibition on the payment of
dividends; (ii) a requirement for a minimum equity balance; (iii) a requirement
to maintain positive working capital (as defined in the
9
DENBURY RESOURCES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Credit Agreement); (iv) a minimum interest coverage test; and (v) a prohibition
on most debt, lien and corporate guarantees.
Capital Resources and Liquidity
Historically, the Company's capital expenditures have required additional
debt and equity capital to supplement cash flow from operations. From January 1,
1995, through December 31, 1997, the Company made total capital expenditures of
$420.8 million. These capital expenditures were funded by the issuance of equity
($105.3 million), bank debt ($225.1 million) and cash generated by operations
($90.4 million). As previously discussed, during the first quarter of 1998 the
Company issued Common Shares and Notes to refinance the majority of its December
31, 1997 bank debt balance of $240 million. During the first quarter of 1998,
the Company's capital expenditures were $26.4 million which exceeded its cash
flow from operations (excluding working capital changes) by approximately $15.0
million. This shortfall was funded primarily with bank debt.
As of March 31, 1998, the Company had minimal working capital with $40
million of bank debt outstanding, $125 million outstanding on its Notes and $125
million available on its bank credit line. Since year-end, oil prices have
dropped significantly with a net average oil price of $12.20 for the Company
during the first quarter of 1998 as compared to the 1997 average price of
$17.25. This has significantly reduced the Company's cash flow and profitability
during the first quarter of 1998, and if these prices continue, will have a
similar effect on the remainder of 1998. In response to the lower oil prices,
the Company has recently reduced its 1998 capital budget from its initial
program of $95 million to approximately $75 million by postponing projects with
lower rates of returns, such as those fields with the heavier gravity oil and
lower than average oil prices. However, the Company hopes to spend this
difference of $20 million on acquisitions around its core properties.
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, the Company's projected expenditures are expected to exceed the
Company's cash flow during 1998 and thus will require some use of the Company's
existing bank line availability. The reduced oil prices are not expected to
cause any violation of debt covenants, nor cause the Company to fail to meet any
of its obligations; however, the reduction of capital expenditures and the
reduced oil prices will have a corresponding reduction in the Company's
production growth and, as previously discussed, the Company's projected income
and cash flow.
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 1998, the Company spent approximately $26.2
million on exploration and development expenditures and approximately $247,000
on acquisitions. The exploration and development expenditures included
approximately $17.6 million spent on drilling, $4.1 million on geological,
geophysical and acreage expenditures and $4.5 million on workover costs. These
expenditures were funded by bank debt and cash flow from operations.
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.
10
DENBURY RESOURCES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Acquisition Updates
On December 30, 1997, the Company acquired oil properties in the Heidelberg
Field, Jasper County, Mississippi, from Chevron for approximately $202 million
(the "Chevron Acquisition"). The Chevron Acquisition represents the largest
acquisition by the Company to date. The average net daily production from these
properties during the fourth quarter of 1997 was approximately 2,800 Bbls/d and
650 Mcf/d. As of January 1, 1998, the Company took over operations on these
properties although limited field work was performed during the quarter at this
field due to the lead time involved to plan, implement and perform any
operations. During the first quarter, the field averaged 2,970 Bbls/d and 135
Mcf/d. The Company's capital budget for this field during the reminder of 1998
is approximately $30 million.
The Company completed several property acquisitions during 1996, the
largest of which was the acquisition of producing oil and natural gas
properties, principally in Mississippi and Louisiana, for approximately $37.2
million from Amerada Hess, effective May 1, 1996 (the "Hess Acquisition"). The
average daily production from the properties included in the Hess Acquisition
during May and June 1996, the first two months of ownership, was approximately
2,945 BOE/d. The average daily production on these properties had increased to
5,969 BOE/d during the fourth quarter of 1997 and 9,390 BOE/d during the first
quarter of 1998.
RESULTS OF OPERATIONS
Operating Income
While production volumes were 75% higher on a BOE basis during the first
quarter of 1998 as compared to the first quarter of 1997, operating income
increased only 8% due to a 32% decline in product prices (on a BOE basis), as
set forth in the following chart.
Three Months Ended
March 31,
- --------------------------------------------------------------
1998 1997
- --------------------------------------------------------------
OPERATING INCOME (THOUSANDS)
Oil sales $ 16,173 $ 12,877
Natural gas sales 9,015 8,264
Less production expenses (7,854) (5,053)
--------------------
Operating income $ 17,334 $ 16,088
--------------------
UNIT PRICES
Oil price per barrel ("Bbl") $ 12.20 $ 20.03
Gas price per thousand cubic feet
("Mcf") 2.49 2.99
NETBACK PER BOE (1):
Sales price $ 13.05 $ 19.17
Production expenses (4.07) (4.58)
--------------------
Production netback $ 8.98 $ 14.59
--------------------
AVERAGE DAILY PRODUCTION VOLUME:
Bbls 14,728 7,143
Mcf 40,275 30,674
BOE 21,441 12,256
- --------------------------------------------------------------
<FN>
(1) Barrel of oil equivalent using the ratio of one barrel of oil to 6 Mcf of
natural gas ("BOE").
</FN>
11
DENBURY RESOURCES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The production increases were fueled by both internal growth from the
Company's development and exploration programs and from the acquisition of
producing properties during 1997, particularly the $202 million Chevron
Acquisition in December 1997. The properties included in the Chevron Acquisition
contributed approximately 2,990 BOE per day ("BOE/d") to the increase during the
first quarter of 1998 with the remainder of the increase almost solely as a
result of internal development, primarily on the properties acquired in the Hess
Acquisition. During the first quarter of 1998, the production from these Hess
properties averaged 9,390 BOE/d, a 114% increase from the average of 4,385 BOE/d
during the first quarter of 1997.
Oil and gas revenue increased as a result of the large increase in
production, although the revenue increase was not proportional to the production
increase due to a substantial decline in both oil and natural gas product
prices. Between the first quarter of 1997 and 1998, oil product prices decreased
39% ($7.83 per Bbl) and natural gas product prices declined by 17% ($0.50 per
Mcf).
Production and operating expenses increased between the first quarters of
1997 and 1998 along with an increase in the number of properties, with the
largest increase coming from the addition of properties acquired in the Chevron
Acquisition. Even though the number of properties increased, production
increased at a faster pace allowing the Company to reduce its production and
operating expenses on a BOE basis by 11% from the first quarter of 1997 to the
comparable quarter in 1998. For the properties acquired in the Hess Acquisition,
the operating expenses declined from the 1996 level of $5.35 per BOE to $4.56
per BOE for 1997 and were further reduced to $3.07 for the first quarter of
1998. This reduction is largely attributable to the Company's recent emphasis on
horizontal drilling on these properties and the resultant previously discussed
increases in production. The Company has been able to achieve these reductions
in operating expenses per BOE even though the Company's production has become
even more weighted towards oil (which has higher operating costs) with
approximately 69% of the Company's first quarter 1998 production coming from oil
as compared to 58% during the first quarter of 1997. The operating expenses per
BOE for the properties acquired in the Chevron Acquisition averaged $6.51 per
BOE, about the same as when the properties were owned by Chevron. The Company
anticipates that these costs will be lower in the future as it expects to
increase the production level on these properties throughout 1998.
General and Administrative Expenses
General and administrative ("G&A") expenses have increased as set forth
below along with the Company's growth.
Three Months ended
March 31,
- ------------------------------------------------------------
1998 1997
- ------------------------------------------------------------
NET G&A EXPENSES (THOUSANDS)
Gross expenses $ 4,902 $ 3,342
State franchise taxes 200 97
Operator overhead charges (2,475) (1,168)
Capitalized exploration expenses (651) (653)
--------------------
Net expenses $ 1,976 $ 1,618
--------------------
Average G&A cost per BOE $ 1.02 $ 1.47
Employees as of March 31 199 129
- ------------------------------------------------------------
12
DENBURY RESOURCES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
On a BOE basis, G&A costs decreased 30% from the first quarter of 1997 to
the comparable quarter in 1998 in part because of increased production on both
an absolute and per well basis. Furthermore, the respective 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 increased
drilling activity in the first quarter of 1998 and the addition of several
producing wells acquired in the Chevron Acquisition, the percentage of gross G&A
recovered through these types of allocations (listed in the above table as
"Operator overhead charges") increased when compared to the corresponding period
in 1997. During the first quarter of 1997, approximately 35% of gross G&A was
recovered by operator overhead charges, while during the first quarter of 1998
this recovery increased to 50%.
Interest and Financing Expenses
Three Months Ended
March 31,
- ---------------------------------------------------------------
AMOUNTS IN THOUSANDS EXCEPT PER UNIT AMOUNTS 1998 1997
- ---------------------------------------------------------------
Interest expense $ 4,391 $ 79
Non-cash interest expense (121) (19)
------------------
Cash interest expense 4,270 60
Interest and other income (367) (512)
------------------
Net interest expense (income) $ 3,903 $ (452)
- ---------------------------------------------------------------
Average interest expense (income) per BOE $ 2.02 $ (0.41)
Average debt outstanding 211,685 180
- ---------------------------------------------------------------
During the first quarter of 1997 the Company had minimal debt outstanding
as virtually all bank debt had been retired during the fourth quarter of 1996
with proceeds from a public offering of Common Shares completed in October 1996.
Conversely, in December 1997, the Company borrowed $202 million to fund the
Chevron Acquisition resulting in $240 million of outstanding bank debt during
January and most of February 1998. On February 26, 1998 this debt was refinanced
with proceeds from the Capital Transactions leaving a bank balance of $40
million for the rest of the first quarter of 1998, plus $125 million of debt
from the issuance of the Notes. These transactions resulted in substantially
higher interest expense for the first quarter of 1998 as compared to the first
quarter of 1997, on both an absolute and BOE basis.
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 increased
7% from the first quarter of 1997 to the fourth quarter of 1997 primarily due to
a drop in oil and gas prices during 1997 which resulted in a loss of reserves.
This loss of reserves due to product price decreases caused DD&A to increase
approximately $0.29 per BOE during 1997. The remaining increase of $0.14 per BOE
during 1997 resulted from rising drilling costs, particularly in Louisiana. The
Company's DD&A rate per BOE for the first quarter of 1998 was the same as the
DD&A rate per BOE for the year ended December 31, 1997, as there was
insufficient data to justify any changes in the rate.
Under full cost accounting rules, each quarter the Company is required to
perform a ceiling test calculation. In determining the limitation on property
carrying values, U.S. accounting rules require the discounting of estimated
future net revenues from its proved reserves at 10% using constant current
prices following the guidelines of the Securities
13
DENBURY RESOURCES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
and Exchange Commission ("SEC"), while the Canadian guidelines require the use
of the same future net revenues but on an undiscounted basis and after the
deduction of estimated future administrative and financing costs. This
limitation is then compared to the property's book basis. The Canadian
accounting guidelines also allow a Company to exclude acquired properties from a
ceiling test calculation for up to two years while the SEC allows an exclusion
for only one year and then only after obtaining approval. The Company obtained
approval for such an exclusion from the SEC and believes that based on its
success with similar properties in Mississippi, the value of the properties
acquired in the Chevron Acquisition is at least equal to their carrying cost. As
such, the Company has excluded these properties from the ceiling test
calculation for both U.S. and Canadian GAAP. If these properties were included,
the Company would have a write-down of the property carrying costs as of March
31, 1998 of approximately $35 million for both U.S. and Canadian GAAP.
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.
Three Months
Ended
March 31,
- --------------------------------------------------------------
AMOUNTS IN THOUSANDS EXCEPT PER UNIT AMOUNTS 1998 1997
- --------------------------------------------------------------
Depletion and depreciation $ 12,298 $ 6,488
Site restoration provision 89 137
-----------------
Total amortization $ 12,387 $ 6,625
-----------------
Average DD&A cost per BOE $ 6.42 $ 6.01
- --------------------------------------------------------------
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
income tax provision as a percentage of net income varies slightly depending on
the mix of Canadian and U.S. expenses.
Three Months
Ended
March 31,
- --------------------------------------------------------------
1998 1997
- --------------------------------------------------------------
Deferred income taxes (thousands) $ (373) $ 3,063
Average income tax costs per BOE $ (0.19) $ 2.78
Effective tax rate 35% 37%
- --------------------------------------------------------------
Results of Operations
Even though production was up 75% between the quarters and most expenses,
other than interest expense, have shown a strong improvement on a BOE basis, as
a result of the decline in product prices net income and cash flow from
operations decreased substantially on both a gross and per share basis between
the first quarter of 1997 and the first quarter of 1998 as set forth below.
14
DENBURY RESOURCES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Three Months
Ended
March 31,
- --------------------------------------------------------------
AMOUNTS IN THOUSAND EXCEPT PER SHARE AMOUNTS 1998 1997
- --------------------------------------------------------------
Net income (loss) $ (680) $ 5,215
Net income (loss) per common share:
Basic $ (0.03) $ 0.26
Fully diluted (0.03) 0.24
Cash flow from operations (1) $ 11,455 $14,922
- --------------------------------------------------------------
<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 individual
components are discussed above.
Three Months Ended
March 31,
- ---------------------------------------------------------
Per BOE Data 1998 1997
- ---------------------------------------------------------
Revenue $ 13.05 $ 19.17
Production expenses (4.07) (4.58)
- ---------------------------------------------------------
Production netback 8.98 14.59
General and administrative (1.02) (1.47)
Interest and other income (expense) (2.02) 0.41
- ---------------------------------------------------------
Cash flow from operations (a) 5.94 13.53
DD&A (6.42) (6.01)
Deferred income taxes 0.19 (2.78)
Other non-cash items (0.06) (0.01)
- ---------------------------------------------------------
Net income (loss) $ (0.35) $ 4.73
- ---------------------------------------------------------
<FN>
(a) Represents cash flow provided by operations, exclusive of the net change in
non-cash working capital balances.
</FN>
Year 2000 Modifications
The Company is currently reviewing its computer systems in order to
evaluate necessary modifications for the year 2000 and is also making inquiries
with regard to the systems used by its oil and natural gas purchasers and other
third parties that the Company relies on as part of its normal business. The
Company does not believe that it will incur any material expenditures, nor
require any significant modifications to make its internal systems year 2000
compliant; however, it has not yet fully evaluated the status of third-party
systems and the effect, if any, on the Company if third-party systems are not
year 2000 compliant.
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," "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
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K during the First Quarter of 1998
Exhibits:
None
Reports on Form 8-K:
On December 8, 1997, the Company filed a Form 8-K to report that it had
entered into an asset sale agreement to purchase producing oil properties
in the Heidelberg Field, Jasper County, Mississippi for $202 million from
Chevron U.S.A. Inc. On January 20, 1998, the Company filed an Amendment
No. 1 to such Form 8-K to include audited statements of revenues and
expenses related to the acquired properties and to report the related pro
forma results of operations.
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)
/s/ Phil Rykhoek
By: -------------------------------
Phil Rykhoek
Chief Financial Officer
/s/ Bobby J. Bishop
By: -------------------------------
Bobby J. Bishop
Chief Accounting Officer & Controller
Date: May 7, 1998
18