1
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, 1996
[ ] 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
DALLAS, TX 75252
(Address of principal (Zipcode)
executive offices)
Registrant's telephone number, including area code: (214) 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 July 31, 1996
----- ----------------------------
Common Stock, no par value 23,685,930
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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 6-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-15
Part II. Other Information 16
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DENBURY RESOURCES INC.
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands of U.S. Dollars)
June 30, December 31,
1996 1995
---------- ----------
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 3,085 $ 6,553
Accrued production receivable 6,307 3,212
Trade and other receivables 2,837 1,160
---------- ----------
Total current assets 12,229 10,925
---------- ----------
PROPERTY AND EQUIPMENT (USING FULL COST ACCOUNTING)
Oil and gas properties 133,442 72,510
Unevaluated oil and gas properties 6,571 7,085
Less accumulated depreciation and depletion (21,140) (13,982)
---------- ----------
Net property and equipment 118,873 65,613
---------- ----------
OTHER ASSETS 1,798 1,103
---------- ----------
TOTAL ASSETS $ 132,900 $ 77,641
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 13,288 $ 3,886
Current portion of long-term debt 125 177
---------- ----------
Total current liabilities 13,413 4,063
---------- ----------
LONG-TERM LIABILITIES
Senior bank debt 40,000 75
Subordinated debt and other notes payable 2,964 3,399
Provision for site reclamation costs 340 242
Deferred income taxes and other 3,166 1,361
---------- ----------
Total long-term liabilities 46,470 5,077
---------- ----------
CONVERTIBLE FIRST PREFERRED SHARES, SERIES A
1,500,000 shares authorized; issued and
outstanding 15,759 15,000
---------- ----------
SHAREHOLDERS' EQUITY
Common shares, no par value
unlimited shares authorized;
outstanding - 23,238,634 shares at June 30, 1996
and 22,857,619 shares at December 31, 1995 51,226 50,064
Retained earnings 6,032 3,437
---------- ----------
Total shareholders' equity 57,258 53,501
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 132,900 $ 77,641
========== ==========
See accompanying notes to Consolidated Financial Statements
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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,
---------------------- ----------------------
1996 1995 1996 1995
--------- -------- --------- --------
REVENUES
Oil, gas and related product sales $ 11,633 $ 4,618 $ 20,650 $ 8,997
Interest income 49 19 124 21
--------- -------- --------- --------
Total revenues 11,682 4,637 20,774 9,018
--------- -------- --------- --------
EXPENSES
Production 3,306 1,591 5,350 3,128
General and administrative 831 627 1,656 935
Interest 576 494 681 927
Imputed preferred dividends 384 - 759 -
Provision for loss on early extinguishment of debt - 200 440 200
Depletion and depreciation 4,457 1,640 7,382 3,075
Franchise taxes 54 32 107 42
--------- -------- --------- --------
Total expenses 9,608 4,584 16,375 8,307
--------- -------- --------- --------
Income before income taxes 2,074 53 4,399 711
Provision for federal income taxes 859 18 1,804 242
--------- -------- --------- --------
NET INCOME $ 1,215 $ 35 $ 2,595 $ 469
========= ======== ========= ========
NET INCOME PER COMMON SHARE $ .05 $ .00 $ .11 $ .04
========= ======== ========= ========
Average number of common shares outstanding 23,110 13,528 23,024 13,071
========= ======== ========= ========
See accompanying notes to Consolidated Financial Statements)
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DENBURY RESOURCES INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
(Amounts in thousands of U.S. dollars)
(Unaudited)
Six Months Ended
-----------------------------
June 30, June 30,
1996 1995
--------- --------
CASH FLOW FROM OPERATING ACTIVITIES:
Net income $ 2,595 $ 469
Adjustments needed to reconcile to net cash flow provided by operations:
Depreciation, depletion and amortization 7,382 3,075
Deferred income taxes 1,804 242
Imputed preferred dividend 759 -
Provision for loss on early extinguishment of debt 440 200
Other 323 39
--------- --------
13,303 4,025
Changes in working capital items relating to operations:
Accrued production receivable (3,096) (481)
Trade and other receivables (702) (261)
Accounts payable and accrued liabilities 8,082 (664)
--------- --------
NET CASH FLOW PROVIDED BY OPERATIONS 17,587 2,619
--------- --------
CASH FLOW USED FOR INVESTING ACTIVITIES:
Oil and gas property expenditures (12,759) (4,001)
Acquisition of oil and gas properties (47,974) (6,505)
Net purchases of other assets (754) (227)
Acquisition of subsidiary, net of cash acquired 209 -
--------- --------
NET CASH USED FOR INVESTING ACTIVITIES (61,278) (10,733)
--------- --------
CASH FLOW FROM FINANCING ACTIVITIES:
Bank borrowings 39,900 5,750
Bank repayments - (2,100)
Issuance of subordinated debt - 1,850
Issuance of common stock 796 2,460
Costs of debt financing (378) (269)
Other (95) (114)
--------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 40,223 7,577
--------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS (3,468) (537)
Cash and cash equivalents at beginning of year 6,553 712
--------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3,085 $ 175
========= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest $ 271 $ 1,009
SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING ACTIVITIES:
Conversion of subordinated debt to common stock 366 -
See accompanying notes to Consolidated Financial Statements
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DENBURY RESOURCES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 1996 AND 1995
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 June 30, 1996, and the results of
operations for the three and six months ended June 30, 1996 and 1995 and cash
flow for the six months ended June 30, 1996 and 1995.
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, 1995.
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. In
accordance with Canadian generally accepted accounting principles ("GAAP"), the
imputed dividend 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 Convertible Preferred and convertible debt were either
anti-dilutive or immaterial and were not included in the calculation of
earnings per share.
2. NOTES PAYABLE AND LONG-TERM INDEBTEDNESS
June 30, December 31,
1996 1995
-------- ------------
(Unaudited)
(Amounts in thousands)
Senior bank loan $40,000 $ 100
6 3/4% Convertible debentures, due March 23, 1999 1,099 1,465
9 1/2% Convertible debentures, due January 17, 2000 1,831 1,831
Other notes payable 159 255
Less portion due within one year (125) (177)
------- ------
Total long-term debt $42,964 $3,474
======= ======
BANK CREDIT AGREEMENT
In the second quarter of 1996, the Company entered into a new $150
million credit facility with NationsBank of Texas, N.A. ("NationsBank"). This
facility currently has a borrowing base of $53 million, a $28 million increase
from the Company's borrowing base of $25 million under its previous credit
agreement. The banks review the borrowing base every six months and are in the
process of evaluating the borrowing base, based on June 30, 1996 oil and gas
reserves. NationsBank is the agent bank with ING Capital Corporation and
Bankers Trust as participating banks. The credit facility is a two year
revolver which then converts to a three year term loan, unless renewed or
extended. The credit facility is secured by virtually all the Company's oil
and gas properties and interest will be
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DENBURY RESOURCES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
JUNE 30, 1996 AND 1995
payable at either the bank's 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 1 3/8%. This 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, and (iv) a prohibition of most debt and corporate
guarantees.
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 differences between Canadian and U.S. GAAP
affecting the Company's 1996 financial statements relate to the presentation of
the early extinguishment of debt and the imputed dividend on the Convertible
Preferred. During the first six months, the Company expensed $759,000 relating
to the imputed preferred dividend, as required under Canadian GAAP. Under U.S.
GAAP, this dividend would be deducted after net income to compute the net
income attributable to the common shareholders. The Company also expensed its
debt issue cost relating to the Company's prior bank credit agreement with ING
Capital Corporation totaling $440,000. Under Canadian GAAP, this is an
operating expense while under U.S. GAAP, a loss on early extinguishment of debt
is an extraordinary item. While net income per common share and all balance
sheet accounts are not affected by these differences in GAAP, the net income
for the first six months of 1996 under U.S. GAAP would be $3,354,000 while
under Canadian GAAP the amount reported was $2,595,000.
In addition, the methodology for computing earnings per common share
is not consistent between the two countries. However, for the first six months
of 1996 the stock options, warrants, convertible debt, and the conversion of
the Convertible Preferred were either anti-dilutive or immaterial and were not
included in the earnings per share under either GAAP calculation. Therefore
the difference in methodology had no effect on the earnings per common share
reported in the Consolidated Financial Statements.
4. COMMITMENTS AND CONTINGENCIES
The Company has operating leases for the rental of office space,
office equipment, and vehicles. At June 30, 1996, long-term commitments for
these items require the following future minimum rental payments:
1996 $320,000
1997 428,000
1998 409,000
1999 166,000
----------
$1,323,000
==========
The Company is subject to various possible contingencies which arise
primarily from interpretation of federal and state laws and regulations
affecting the oil and gas industry. Such contingencies include differing
interpretations as to the prices at which oil and gas sales may be made, the
prices at which royalty owners may be paid for production from their leases and
other matters. Although management believes it has complied with the various
laws and regulations, administrative rulings and interpretations thereof,
adjustments could be required as new interpretations and regulations are
issued. In addition, production rates, marketing and environmental matters are
subject to regulation by various federal and state agencies.
The Company is not currently a party to any litigation which would
have a material impact on its financial statements. However, due to the nature
of its business, certain legal or administrative proceedings may arise in the
ordinary course of its business.
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DENBURY RESOURCES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
JUNE 30, 1996 AND 1995
5. ACQUISITIONS
HESS ACQUISITION
During the second quarter of 1996, Denbury purchased producing oil and
gas properties in Mississippi, Louisiana and Alabama, plus certain over-riding
royalty interests in Ohio, for approximately $37.2 million from Amerada Hess
Corporation. The acquisition includes 439 wells (110 net working interest
wells), of which 129 wells will be Company operated. Denbury will also own an
interest in 124 non-operated working interest wells and 186 royalty interests
wells. Of the 439 total acquired wells, 37 operated, 37 non-operated and 21
royalty interest wells are currently non-producing.
OTTAWA ACQUISITION
Also in the second quarter, Denbury purchased additional working
interests in five Mississippi oil and gas properties in which the Company
already owns an interest, plus certain overriding royalty interests in other
areas for approximately $7.5 million. The properties were acquired from Ottawa
Energy, Inc. a subsidiary of Highridge Exploration Ltd.
PRO FORMA DATA
On a pro forma basis, assuming that both acquisitions had been
effective as of the beginning of the period, the Company's total revenues for
the first six months of 1996 and the first six months of 1995 would increase to
$28,574,000 and $18,892,000 respectively, the net income would increase to
$3,681,000 and $878,000 and the net income per common share would increase to
$.16 for the first six months of 1996 and $.07 per common share for the first
six months of 1995.
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DENBURY RESOURCES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Since 1992, when the Company reorganized and undertook its United
States development strategy beginning with the acquisition of U.S. based
Denbury Management, Inc. ("Denbury Management"), the Company's operations have
grown rapidly through a combination of producing property acquisitions and
development of existing and acquired properties. During the three year period
ended December 31, 1995, the Company has had an average annual growth rate in
excess of 100% in both revenue and production. This trend continued into 1996
as revenue for the first six months of 1996 surpassed revenue for the whole
year of 1995, primarily due to the Company's acquisitions during the first half
of 1996, and specifically, to increases in production and prices.
At July 1, 1996, the Company's proved reserves were independently
estimated by Netherland, Sewell and Associates, Inc. (the "NSA Report") to be
11.7 million barrels ("MMBbls") of oil and 65.8 billion cubic feet of gas
("Bcf") or 22.7 million barrels of oil equivalent on a 6:1 basis ("MMBOE"),
with a discounted present value before income taxes utilizing a 10% discount
rate and July 1, 1996 unescalated prices ("PV10 Value") of $175 million.
Approximately 90% of the reserves were proved developed on both a barrels of
oil equivalent on a 6:1 basis ("BOE") and PV10 Value basis. The twelve largest
fields owned by the Company constitute, according to the NSA Report,
approximately 80% of the total reserves on a BOE basis and approximately 78% of
the total reserves on a PV10 Value basis.
Over the past three and one-half years, proven reserves have grown on
average 109% per annum from 1,725 thousand BOE ("MBOE") as of December 31, 1992
to 22,689 MBOE as of July 1, 1996. Meanwhile, production has grown from a
daily average of 436 BOE per day ("BOE/d") in 1992 to an average for the second
quarter of 1996 of 7,841 BOE/d.
During 1995, the Company raised approximately $43.5 million, the
majority of which was raised through a $40 million private placement with the
Texas Pacific Group ("TPG") which closed in December, 1995. This private
placement consisted of a combination of common stock, warrants and convertible
preferred stock (the "TPG Placement") and allowed the Company to repay
virtually all of its bank debt. The Company also had a $2.75 million private
placement of common stock completed early in 1995. The subsequent registration
of these common shares was the impetus for the Company to be listed on a U.S.
stock exchange (Nasdaq) during August, 1995.
ACQUISITION OF AMERADA HESS PROPERTIES
The TPG Placement allowed the Company to complete several property
acquisitions during the first half of 1996, the largest of which was the
acquisition of producing oil and gas properties in Mississippi, Louisiana, and
Alabama, plus certain overriding royalty interests in Ohio, for approximately
$37.2 million from Amerada Hess Corporation ("Amerada Hess"). These properties
contributed approximately 2.0 million cubic feet of gas per day ("Mmcf/d") and
approximately 650 barrels of oil per day ("bbls/d"), or approximately 1,000
BOE/d, to the Company's average daily production during the first half of 1996.
Average daily production during the first half of 1996 from these properties,
including the periods when they were not owned by the Company, was
approximately 6,630 thousand cubic feet of gas per day ("Mcf/d") of gas and
approximately 2,230 bbls/d of oil, or 3,335 BOE/d, net to the interest acquired
by Denbury. According to the NSA Report, the properties in this acquisition
had net proved reserves of approximately 5.9 MMBOE which consisted of
approximately 5.0 MMbbls of oil and approximately 5.6 Bcf of gas, with a PV10
Value of $42.9 million.
Approximately 90% of the PV10 Value was for wells on which Denbury
assumed operations with an average working interest of approximately 80%. Four
fields, out of a total of 60 fields, make up approximately 73% of the total
Amerada Hess acquisition PV10 Value and include a total of 63 operated wells,
11 non-operated wells and 5 royalty interest wells. The two largest fields in
Mississippi, Eucutta and Quitman Fields, make up approximately 57% of the total
acquisition PV10 Value. Both fields are in the same vicinity as the Company's
existing Mississippi core properties, with the Eucutta Field located in
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DENBURY RESOURCES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Wayne County, Mississippi between the Company's Sandersville and West Yellow
Creek existing production. Quitman Field is located in Clarke County,
Mississippi, adjacent to the Company's Davis and Frances Creek existing
production. The two largest fields in Louisiana are the Atchafalaya Bay and
Bayou Des Allemands Fields which make up approximately 16% of the total
acquisition PV10 Value. These two fields are in adjacent parishes to
Terrebonne Parish where the majority of the Company's existing Louisiana
production is located. Atchafalaya Bay Field is just west of Terrebonne Parish
in St. Mary Parish and Bayou Des Allemands Field is located Northeast of
Terrebonne Parish in St. Charles and LaFourche Parishes.
Denbury assumed certain rights and obligations under Amerada Hess's
existing oil and gas sales contracts. In Mississippi, approximately 400 bbls/d
at Eucutta Field (approximately 25% of current Eucutta production) will remain
dedicated to Amerada Hess, although Amerada Hess will have an obligation to
match any price that Denbury receives on other production from the same field.
The majority of the remaining Mississippi oil production is dedicated to EOTT
Energy Operating Limited Partnership through December 31, 1996. None of the
Louisiana production is dedicated to any significant purchaser and the
Louisiana contracts generally have short-term cancellation clauses.
OTHER ACQUISITIONS
Through the first half of 1996, the Company spent an additional $10.8
million on other acquisitions. The largest of these was the acquisition of
additional working interests in five Mississippi oil and gas properties in
which the Company already owned an interest, and certain overriding royalty
interests in other areas, which were acquired during April, 1996 for
approximately $7.5 million. These properties were acquired from Ottawa Energy,
Inc. ("Ottawa"), a subsidiary of Highridge Exploration Ltd. This acquisition
included 29 producing gross wells (8.8 net working interest wells), and
overriding royalty interests in 65 wells. These properties contributed
approximately 760 Mcf/d and approximately 175 bbls/d, or approximately 300
BOE/d, to the Company's average daily production during the first half of 1996.
Average daily production during the first half of 1996 from these properties,
including the periods when they were not owned by the Company, was
approximately 1,615 Mcf/d of gas and approximately 360 bbls/d of oil, or
approximately 629 BOE/d, net to the interest acquired by Denbury.
In addition to the acquisition from Ottawa, the Company spent an
additional $3.3 million on four other acquisitions. These acquisitions
included interests in 56 wells (18 net working interest wells), primarily in
Louisiana. These properties contributed approximately 1.5 MMcf/d and
approximately 50 bbls/d, or approximately 300 BOE/d, to the Company's average
daily production during the first half of 1996.
As of July 1, 1996, the Company's proved net reserves in the NSA Report
for all of these other acquisitions, including the acquisition from Ottawa,
totaled approximately 1.1 MMbbls of oil and approximately 13.1 Bcf of gas or
3.3 MMBOE, with a PV10 Value of $24 million.
NEW CREDIT FACILITY
In order to fund the Company's capital expenditure program, improve the
terms and increase the size of the previous credit facility, the Company
entered into a new $150 million dollar credit facility with NationsBank of
Texas ("NationsBank"). This refinancing closed during the second quarter of
1996 with an initial borrowing base of $53 million, a $28 million increase from
its previous borrowing base of $25 million, which was part of a $40 million
credit facility. NationsBank is the agent bank in the facility, which also
includes ING Capital Corporation and Bankers Trust as participant banks. The
credit facility is a two year revolver which in 1998 converts to a three year
term loan, unless renewed or extended. The credit facility is secured by
virtually all the Company's oil and gas properties and interest is payable at
either the bank's 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
1 3/8%. This 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, and (iv) a prohibition of most debt and corporate guarantees.
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DENBURY RESOURCES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CAPITAL RESOURCES AND LIQUIDITY
As outlined on the following table, in each of the last three years and
during the first half of 1996, the Company has spent considerably more than its
cash flow from operations, requiring it to raise additional capital through a
combination of debt and equity.
(Amounts in thousands)
Capital Expenditures Cash Flow
--------------------------------------------------------- From
Six Months ended Acquisition Development Exploration Total Operations (1)
- ---------------- ------------ ----------- ----------- --------- --------------
June 30, 1996 $ 48,179 $ 10,713 $ 1,841 $ 60,733 $ 13,303
========= ========= ======== ========= =========
Year ended
- ----------
December 31, 1995 $ 17,198 $ 9,639 $ 1,687 $ 28,524 $ 9,394
December 31, 1994 6,736 8,371 1,796 16,903 6,185
December 31, 1993 21,604 7,643 608 29,855 3,030
--------- --------- -------- --------- ---------
Total $ 45,538 $ 25,653 $ 4,091 $ 75,282 $ 18,609
========= ========= ======== ========= =========
(1) Before changes in current items
During the last three years, the Company has spent on average four
times more than its cash flow from operations and it has continued this trend
into 1996 by spending approximately 4.6 times its cash flow during the first
half of 1996. For the last three years, the Company has financed these
expenditures principally through equity ($57.3 million, including the
Convertible Preferred) and cash from operations ($18.6 million), although it
has historically used debt during interim periods. During 1995 the Company's
capital sources, other than cash flow from operations, were an issue of
subordinated debt ($1.8 million), a private placement of common stock ($2.4
million) and the TPG Placement in December, 1995, of $39.5 million, net of
expenses. During 1996, the Company financed its expenditures with cash flow
from operations and bank debt, beginning the year with $100 thousand of
outstanding bank debt and ending the six month period with $40 million of bank
debt outstanding.
As of June 30, 1996, the Company had negative working capital of $1.2
million and total bank debt of $40 million. The Company has budgeted
development expenditures for the remainder of 1996 which exceeds its projected
cash flow. As of August 12, 1996, the Company had a borrowing base of $53
million with a total of $42 million drawn against the bank credit facility.
The banking group will be reviewing the borrowing base during August and
September, 1996, as part of their mid-year review, but the Company does not
anticipate any significant changes to the borrowing base. With the increased
cash flow from the acquired properties and the undrawn portion of the bank
credit facility, the Company anticipates that it can fund its remaining 1996
development budget of approximately $16 million; however, the Company may seek
additional equity financing in the near future to reduce its debt levels in
order to better position the Company for future opportunities.
Depending on the success of the Company's development program, oil and
gas prices, availability of opportunities and the availability of additional
funding, the capital that the Company requires for acquisition or development
projects is highly variable. There can be no assurance that additional
capital will always be available to the Company in the future or that it will
be available on terms that are acceptable to the Company. Should outside
capital resources be limited, the rate of Company growth would substantially
decline. Numerous factors affect the cost and availability of capital,
including market conditions, the Company's results of operations and the
Company's success in its developmental efforts. There can also be no assurance
that the Company will be able to continue to increase its oil and gas
production or oil and gas reserves or that the Company's exploration and
development activities will continue with the same level of success.
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DENBURY RESOURCES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
COMPARISON OF SIX MONTHS ENDED JUNE 30, 1996 AND JUNE 30, 1995
Denbury continued to increase its daily production with an average of
5,453 BOE/d during the first quarter of 1996 and 7,841 BOE/d during the second
quarter, for an overall average of 6,647 BOE/d during the first half of 1996 as
compared to 3,843 BOE/d for the comparable six month period of 1995 (73%
increase). The combination of the two acquisitions from Amerada Hess and
Ottawa contributed approximately 1,300 BOE/d to the Company's average daily
production during the first half of 1996. The production from these
acquisitions for the first six months of 1996, including the periods when they
were not owned by the Company, was approximately 3,964 BOE/d.
In addition, oil and gas prices improved substantially over 1995
levels during the first half of 1996. Average oil prices were $17.39 per
barrel as compared to $14.92 per barrel for the comparable period in 1995 (17%
increase) and gas prices increased to an average price of $2.80 per Mcf during
the first half of 1996 as compared to $1.85 for the comparable period in 1995
(51% increase). On a BOE basis, the Company averaged a sales price of $17.07
per BOE during the first half of 1996 as compared to $12.94 per BOE during the
first quarter of 1995 (32% increase).
Primarily as a result of increased production and improved product
prices, net income increased 453% to $2.6 million ($.11 per common share) for
the first half of 1996 from $469 thousand ($.04 per common share) during the
first half of 1995. Net income for the first half of 1996 includes a charge of
$759 thousand for the imputed dividend on the convertible preferred stock
issued in December, 1995 and a $440 thousand charge to write-off the debt issue
costs relating to the Company's previous bank credit facility as the Company
entered into a new credit facility with NationsBank. Cash flow from operations
(before the change in working capital balances) also increased 231% over first
half 1995 levels to $13.3 million during the first half of 1996 from $4.0
million during the first half of 1995. This was also primarily due to strong
oil and gas prices as well as increased production.
As a result of the aforementioned production and price increases and
property acquisitions, oil and gas revenue increased 130% to $20.7 million
during the first half of 1996 from $9.0 million for the first half of 1995, of
which approximately $3.7 million of the increase was related to the Amerada
Hess and Ottawa acquisitions. Production expenses also increased 71% to $5.4
million during the first half of 1996 as compared to $3.1 million for the
comparable period in 1995. Production expenses on a BOE basis were $4.42 and
$4.50 for the first half of 1996 and 1995 respectively, a decline of 2% from
first half 1995 levels. The first quarter of 1996 operating expenses were
slightly less on a BOE basis because a larger percentage of the first quarter's
production was gas (62% on a BOE basis), which typically has a lower operating
cost per BOE than oil. However, the second quarter included two months of
expenses relating to the Amerada Hess properties which had higher production
cost per BOE ($6.27 / BOE) than the Company's other properties. In July,
1996, the Company assumed operations of these Amerada Hess properties and will
focus on lowering the production cost during the last half of 1996 to levels
more consistent with the corporate average.
General and administrative expenses increased by 77% to $1.7 million
for the first half of 1996 from $935 thousand for the comparable period in
1995. On a per BOE basis, general and administrative costs remained relatively
consistent at $1.37 per BOE for the first half of 1996 as compared to $1.40 per
BOE for the comparable period in 1995. During the first half of 1996, the
Company conducted a review of salaries and awarded raises and bonuses to its
employees. Bonuses, including related payroll taxes, amounted to approximately
$225 thousand. In addition, the Company began to increase its staff levels
during the second quarter of 1996 to handle the Amerada Hess acquisition, but
was not entitled to any operator's overhead recovery on these properties until
July 15, 1996 as Amerada Hess remained the operator of record until that date.
During the first half of 1995, the Company had non-recurring expenses of
approximately $190 thousand relating to personnel changes. Although the
general and administrative costs were high during the first half of 1996 due to
the aforementioned
12
13
DENBURY RESOURCES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
expenses, the Company's objective is to lower general and administrative costs
for the last half of 1996 on a BOE basis to a level close to the overall
average for 1995 of $1.25 per BOE.
As a result of the $40 million infusion of funds late in 1995 received
from the private placement of securities with TPG and the corresponding
retirement of bank debt, the only interest bearing debt outstanding during the
first quarter of 1996 was approximately $3.3 million of subordinated debt and
minor trade notes payable. During the second quarter, however, the Company
borrowed $40 million on its credit line in order to close the Amerada Hess and
Ottawa acquisitions. The net effect was an overall 27% reduction in interest
expense to $681 thousand for the first half of 1996, from $927 thousand for the
comparable period of 1995. Although bank debt is anticipated to increase
during the third and fourth quarters, the Company's new credit facility with
NationsBank lowered the Company's bank loan interest rate by approximately
1-3/8% over the Company's prior credit facility.
During the first half of 1996, the Company expensed $759 thousand
relating to an imputed dividend on the Company's Convertible First Preferred
Shares, Series A ("Convertible Preferred"). Under Canadian GAAP this is
reported as an operating expense while under U.S. GAAP this would be deducted
after net income to arrive at net income applicable to the common shareholders.
This charge to earnings reflects the increase in the mandatory redemption value
of the Convertible Preferred during the period. The Company has not, nor does
it intend to, pay any dividends on the Convertible Preferred.
Also during the first half of 1996, the Company had a $440 thousand
charge relating to a loss on early extinguishment of debt. These costs relate
to the remaining unamortized debt issue costs of the Company's prior credit
facility with ING Capital Corporation, which was replaced in May, 1996, as
previously discussed. The Company also had a charge of $200 thousand during
the first half of 1995 for the same item relating to another bank refinancing.
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 and depreciation ("DD&A") increased by 140% to $7.4 million
for the first half of 1996 as compared to $3.1 million for the first half of
1995. DD&A per BOE increased 17% to $6.10 per BOE for the first half of 1996
from $5.22 per BOE for the year ended December 31, 1995 due to a large
percentage of the 1995 and 1996 capital expenditures relating to acquisitions,
for which the Company has historically had a higher per unit cost than those
reserves added by development expenditures.
The deferred tax provision for the first half of 1996 was
approximately 41%, which is higher than 1995's provision of approximately 34%.
The 1996 provision is higher than the U.S. statutory rate due to certain
non-deductible Canadian expenses and the non-deductible imputed preferred
dividend expense of $759 thousand.
COMPARISON OF THREE MONTHS ENDED JUNE 30, 1996 AND JUNE 30, 1995
Denbury continued to increase its daily production with an average of
7,841 BOE/d during the second quarter of 1996 as compared to 3,885 BOE/d for
the comparable period of 1995 (102% increase), with the increase primarily due
to the previously discussed acquisitions. The combination of the two
acquisitions from Amerada Hess and Ottawa contributed approximately 2,580 BOE/d
to the Company during the second quarter of 1996. The production from these
acquisitions for the first six months of 1996, including the periods when they
were not owned by the Company, was 3,964 BOE/d.
In addition, oil and gas prices improved substantially during the
second quarter of 1996 over 1995 levels. Average oil prices were $17.78 per
bbl as compared to $15.25 per bbl for the comparable period in 1995 (17%
increase) and gas prices increased to an average price of $2.49 per Mcf during
the second quarter of 1996 as compared to $1.84 for the
13
14
DENBURY RESOURCES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
comparable period in 1995 (35% increase). On a BOE basis, the Company averaged
a sales price of $16.30 per BOE during the second quarter of 1996 as compared
to $13.06 per BOE during the first quarter of 1995 (25% increase).
Primarily as a result of the increased production and improved product
prices, net income increased to $1.2 million ($.05 per common share) for the
second quarter of 1996 from $35 thousand ($-0- per share) during the second
quarter of 1995. Net income for the second quarter of 1996 includes a charge
of $384 thousand for the imputed dividend on the Convertible Preferred issued
in December, 1995, while the net income for the second quarter of 1995 included
a $200 thousand charge relating to a loss on early extinguishment of debt. Cash
flow from operations (before the change in working capital balances) also
increased 278% over second quarter 1995 levels to $7.2 million during the
second quarter of 1996 from $1.9 million during the second quarter of 1995.
This was also primarily due to strong oil and gas prices as well as increased
production.
As a result of the aforementioned production and price increases and
property acquisitions, oil and gas revenue increased 152% to $11.6 million
during the second quarter of 1996 from $4.6 million for the second quarter of
1995, of which approximately $3.7 million of the increase was related to the
Amerada Hess and Ottawa acquisitions. Production expenses also increased 108%
to $3.3 million during the second quarter of 1996 as compared to $1.6 million
for the comparable period in 1995. Production expenses on a BOE basis were
$4.63 for the second quarter of 1996, an increase of 3% from the second quarter
1995 level of $4.50. The second quarter of 1996 included two months of
expenses relating to the Amerada Hess properties which had higher production
cost per BOE ($6.27 / BOE) than the Company's other properties. In July, 1996,
the Company assumed operations of these Amerada Hess properties and will focus
on lowering the production cost during the last half of 1996 to levels more
consistent with the corporate average.
General and administrative expenses increased by 33% to $831 thousand
for the second quarter of 1996 from $627 thousand for the comparable period in
1995. On a per BOE basis, general and administrative costs decreased by 34% to
$1.23 per BOE for the second quarter of 1996 from $1.86 per BOE for the
comparable period in 1995. The Company began to increase its staff levels
during the second quarter of 1996 to handle the Amerada Hess acquisition, but
was not entitled to any operator's overhead recovery on these properties until
July 15, 1996 as Amerada Hess remained the operator of record until that date.
During the second quarter of 1995, the Company had non-recurring expenses of
approximately $190 thousand relating to personnel changes.
During the second quarter, the Company borrowed $40 million on its
credit line in order to close the Amerada Hess and Ottawa acquisitions, causing
an 17% increase in interest expense to $576 thousand for the second quarter of
1996, from $494 thousand for the comparable period of 1995. Although bank
debt is anticipated to increase during the third and fourth quarters, the
Company's new credit facility with NationsBank lowered the Company's bank loan
interest rate by approximately 1-3/8% over the Company's prior credit facility.
During the second quarter of 1996, the Company expensed $384 thousand
relating to an imputed dividend on the Company's Convertible Preferred. Under
Canadian GAAP this is reported as an operating expense while under U.S. GAAP
this would be deducted after net income to arrive at net income applicable to
the common shareholders. This charge to earnings reflects the increase each
period in the mandatory redemption value of the Convertible Preferred. The
Company has not, nor does it intend to, pay any dividends on the Convertible
Preferred.
During the second quarter of 1995, the Company had a $200 thousand
charge relating to a loss on early extinguishment of debt. These costs relate
to the remaining unamortized debt issue costs relating to the Company's prior
credit facility when it refinanced its bank line with ING Capital Corporation.
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.
14
15
DENBURY RESOURCES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Depletion and depreciation ("DD&A") increased by 172% to $4.5 million
for the second quarter of 1996 as compared to $1.6 million for the second
quarter of 1995. DD&A per BOE increased 20% to $6.25 for the second quarter
of 1996 from $5.22 per BOE for the year ended December 31, 1995 due to a large
percentage of the 1995 and 1996 capital expenditures relating to acquisitions,
for which the Company has historically had a higher per unit cost than those
reserves added by development expenditures.
The deferred tax provision for the second quarter of 1996 was
approximately 41%, which is higher than 1995's provision of approximately 34%.
The 1996 provision is higher than the U.S. statutory rate due to certain
non-deductible Canadian expenses and the non-deductible preferred dividend
expense of $384 thousand.
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. The actual results
of the future events described in such forward-looking statements in this
Quarterly Report, including those regarding the Company's financial results,
levels of oil and gas production and revenue, capital expenditures and capital
resource activities, could differ materially from those stated in such
forward-looking statements. Among the factors that could cause actual results
to differ materially are: general economic conditions, competition and
government regulations, as well as the risks and uncertainties set forth from
time to time in the Company's other public reports, filings and public
statements.
15
16
DENBURY RESOURCES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 15, 1996. At
the record date, on April 9, 1996, 23,024,134 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
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(1) An Ordinary Resolution to ratify and approve a new Stock Purchase Plan
for officers and employees of the Company and its subsidiaries; 9,975,626 307,695
(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 10,280,521 2,800
(3) The election of seven nominees as directors 10,283,121 200
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K DURING THE SECOND QUARTER OF 1996
On April 3, 1996, the Company filed a Form 8-K to report that it had entered
into a letter agreement to purchase producing oil and gas properties from
Ottawa Energy, Inc. for approximately $7.5 million. On April 19, 1996, the
Company filed an amendment No. 1 to this Form 8-K to include audited statements
of revenues and expenses related to the acquired properties for the year ended
December 31, 1995, and to report the related pro forma results of operations
for the year ended December 31, 1995, as if the acquisition had occurred on
January 1, 1995.
On April 17, 1996, the Company filed an 8-K to report that it had entered into
a purchase and sale agreement to purchase producing oil and gas properties from
Amerada Hess Corporation for approximately $42.0 million, subject to adjustment
for interim net cash flow from January 1, 1996. On June 7, 1996, the Company
filed amendment No. 1 to this 8-K to include audited statements of revenues and
expenses for the three years ended December 31, 1995, and to report pro forma
results of operations for the year ended December 31, 1995 and the quarter
ended March 31, 1996, as if the acquisition had occurred at beginning of each
respective period.
16
17
DENBURY RESOURCES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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.
By: /s/ Phil Rykhoek
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Phil Rykhoek
Chief Financial Officer
Date: August 14, 1996
17
18
Index to Exhibits
Exhibit
Number Description
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27 Financial Data Schedule