e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2010
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number: 001-12935
DENBURY RESOURCES INC.
(Exact name of registrant as specified in its charter)
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Delaware
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20-0467835 |
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(State or other jurisdictions of
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(I.R.S. Employer |
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incorporation or organization)
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Identification No.) |
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5100 Tennyson Parkway |
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Suite 1200 |
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Plano, TX
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75024 |
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(Address of principal executive offices)
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(Zip Code) |
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Registrants telephone number, including area code: (972) 673-2000
Not applicable
(Former name, former address and former fiscal year, if changed since last report)
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 þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
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Large accelerated filer þ |
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Accelerated filer o |
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Non-accelerated filer o (Do not check if a smaller reporting company) |
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Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the latest practicable date.
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Class
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Outstanding at July 31, 2010 |
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Common Stock, $.001 par value
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399,274,000 |
DENBURY RESOURCES INC.
INDEX
2
DENBURY RESOURCES INC.
GLOSSARY AND SELECT ABBREVIATIONS
The following are abbreviations and definitions of certain terms used in this report. The
definitions of proved developed reserves, proved reserves, and proved undeveloped reserves have
been summarized from the applicable definitions contained in Rule 4-10(a)(2-4) of Regulation S-X.
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Bbl
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One stock tank barrel, of 42 U.S. gallons liquid volume, used herein in
reference to crude oil or other liquid hydrocarbons. |
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Bbls/d
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Barrels of oil produced per day. |
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Bcf/d
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One billion cubic feet of natural gas or CO2 produced per day. |
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BOE
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One barrel of oil equivalent using the ratio of one barrel of crude oil,
condensate, or natural gas liquids to six Mcf of natural gas. |
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BOE/d
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BOEs produced per day. |
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CO2
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Carbon dioxide. |
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Denbury
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Denbury Resources Inc., a publicly traded Delaware corporation, together
with its subsidiaries. |
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Encore
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Encore Acquisition Company, together with its subsidiaries. Encore
merged with and into Denbury on March 9, 2010. |
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ENP
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Encore Energy Partners LP, a publicly traded Delaware limited
partnership, together with its subsidiaries. |
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EOR
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Enhanced oil recovery. |
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FASB
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Financial Accounting Standards Board. |
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FASC
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FASB Accounting Standards Codification. |
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LIBOR
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London Interbank Offered Rate. |
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MBOE
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One thousand BOEs. |
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Mcf
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One thousand cubic feet of natural gas or CO2. |
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Mcf/d
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One thousand cubic feet of natural gas or CO2 produced per day. |
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MMBOE
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One million BOEs. |
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MMcf/d
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One million cubic feet of natural gas or CO2 per day. |
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NYMEX
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New York Mercantile Exchange. |
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Proved Developed Reserves
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Reserves that can be expected to be recovered through existing wells with
existing equipment and operating methods. |
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Proved Reserves
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The estimated quantities of crude oil, natural gas, and natural gas
liquids that geological and engineering data demonstrate with reasonable
certainty to be recoverable in future years from known reservoirs under
existing economic and operating conditions. |
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Proved Undeveloped Reserves
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Reserves that are expected to be recovered from new wells on undrilled
acreage or from existing wells where a relatively major expenditure is
required. |
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SEC
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The United States Securities and Exchange Commission. |
3
DENBURY RESOURCES INC.
UNAUDITED
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except par value and share data)
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June 30, |
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December 31, |
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2010 |
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2009 |
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ASSETS
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Current assets: |
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Cash and cash equivalents |
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$ |
67,474 |
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$ |
20,591 |
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Accrued production receivable |
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193,086 |
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120,667 |
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Trade and other receivables, net of allowance of $449 and $414, respectively |
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120,100 |
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67,874 |
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Derivatives |
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77,294 |
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309 |
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Deferred taxes |
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46,321 |
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Total current assets |
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457,954 |
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255,762 |
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Property and equipment: |
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Oil and natural gas properties (using full cost accounting): |
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Proved |
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6,834,676 |
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3,595,726 |
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Unevaluated |
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1,185,627 |
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320,356 |
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CO2 properties, equipment, and pipelines |
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1,704,700 |
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1,529,781 |
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Other |
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100,751 |
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82,537 |
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Less accumulated depletion, depreciation, amortization, and impairment |
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(2,033,936 |
) |
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(1,825,528 |
) |
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|
|
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Net property and equipment |
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7,791,818 |
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3,702,872 |
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Derivatives |
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54,855 |
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506 |
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Goodwill |
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1,220,172 |
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169,517 |
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Other |
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221,038 |
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141,321 |
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Total assets |
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$ |
9,745,837 |
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$ |
4,269,978 |
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LIABILITIES AND EQUITY
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Current liabilities: |
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Accounts payable and accrued liabilities |
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$ |
360,058 |
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$ |
169,874 |
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Oil and natural gas production payable |
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151,333 |
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90,218 |
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Derivatives |
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43,943 |
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124,320 |
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Deferred taxes |
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21,883 |
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Current maturities of long-term debt |
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7,464 |
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5,308 |
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Other |
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4,070 |
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4,070 |
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Total current liabilities |
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588,751 |
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393,790 |
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Long-term liabilities: |
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Long-term debt, net of current portion |
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2,704,405 |
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1,301,068 |
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Asset retirement obligations, net of current portion |
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91,742 |
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53,251 |
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Deferred taxes |
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1,483,371 |
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515,516 |
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Derivatives |
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19,582 |
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5,239 |
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Other |
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26,508 |
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28,877 |
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Total long-term liabilities |
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4,325,608 |
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1,903,951 |
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Commitments and contingencies (Note 10) |
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Equity: |
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Preferred stock, $.001 par value, 25,000,000 shares authorized, none issued and outstanding |
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Common stock, $.001 par value, 600,000,000 shares authorized; 399,570,878 and
261,929,292 shares issued, respectively |
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400 |
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262 |
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Paid-in capital in excess of par |
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3,017,576 |
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910,540 |
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Retained earnings |
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1,296,674 |
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1,064,419 |
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Accumulated other comprehensive loss |
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(567 |
) |
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(557 |
) |
Treasury stock, at cost, 240,396 and 156,284 shares, respectively |
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(3,842 |
) |
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(2,427 |
) |
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Total Denbury stockholders equity |
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4,310,241 |
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1,972,237 |
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Noncontrolling interest |
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|
521,237 |
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|
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Total equity |
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4,831,478 |
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1,972,237 |
|
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|
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Total liabilities and equity |
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$ |
9,745,837 |
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|
$ |
4,269,978 |
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|
|
|
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See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
4
DENBURY RESOURCES INC.
UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
|
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Three Months Ended |
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Six Months Ended |
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June 30, |
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June 30, |
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2010 |
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2009 |
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2010 |
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2009 |
|
Revenues and other income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
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Oil, natural gas, and related product sales |
|
$ |
488,028 |
|
|
$ |
211,552 |
|
|
$ |
818,914 |
|
|
$ |
379,621 |
|
CO2 sales and transportation fees |
|
|
4,690 |
|
|
|
2,884 |
|
|
|
9,187 |
|
|
|
6,049 |
|
Gain on sale of interests in Genesis |
|
|
(28 |
) |
|
|
|
|
|
|
101,540 |
|
|
|
|
|
Interest income and other |
|
|
4,520 |
|
|
|
2,956 |
|
|
|
6,390 |
|
|
|
5,481 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
497,210 |
|
|
|
217,392 |
|
|
|
936,031 |
|
|
|
391,151 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease operating expenses |
|
|
127,743 |
|
|
|
83,658 |
|
|
|
223,963 |
|
|
|
158,608 |
|
Production taxes and marketing expenses |
|
|
38,100 |
|
|
|
10,784 |
|
|
|
57,417 |
|
|
|
19,976 |
|
CO2 operating expenses |
|
|
1,681 |
|
|
|
1,095 |
|
|
|
3,049 |
|
|
|
2,395 |
|
General and administrative |
|
|
31,192 |
|
|
|
33,135 |
|
|
|
63,901 |
|
|
|
55,790 |
|
Interest, net of amounts capitalized of $23,850, $15,454,
$45,162, and $27,827, respectively |
|
|
43,483 |
|
|
|
14,904 |
|
|
|
69,899 |
|
|
|
27,101 |
|
Depletion, depreciation, and amortization |
|
|
129,209 |
|
|
|
61,695 |
|
|
|
211,081 |
|
|
|
123,620 |
|
Derivatives expense (income) |
|
|
(128,674 |
) |
|
|
152,789 |
|
|
|
(169,899 |
) |
|
|
173,304 |
|
Transaction costs related to the Encore Merger |
|
|
22,784 |
|
|
|
|
|
|
|
67,783 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses |
|
|
265,518 |
|
|
|
358,060 |
|
|
|
527,194 |
|
|
|
560,794 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
231,692 |
|
|
|
(140,668 |
) |
|
|
408,837 |
|
|
|
(169,643 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax provision (benefit): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current income taxes |
|
|
6,941 |
|
|
|
24,127 |
|
|
|
7,610 |
|
|
|
24,300 |
|
Deferred income taxes |
|
|
74,422 |
|
|
|
(77,555 |
) |
|
|
150,694 |
|
|
|
(88,406 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated net income (loss) |
|
|
150,329 |
|
|
|
(87,240 |
) |
|
|
250,533 |
|
|
|
(105,537 |
) |
Less: net income attributable to noncontrolling interest |
|
|
(14,962 |
) |
|
|
|
|
|
|
(18,278 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Denbury stockholders |
|
$ |
135,367 |
|
|
$ |
(87,240 |
) |
|
$ |
232,255 |
|
|
$ |
(105,537 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.34 |
|
|
$ |
(0.35 |
) |
|
$ |
0.67 |
|
|
$ |
(0.43 |
) |
Diluted |
|
$ |
0.34 |
|
|
$ |
(0.35 |
) |
|
$ |
0.66 |
|
|
$ |
(0.43 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
395,548 |
|
|
|
246,084 |
|
|
|
345,126 |
|
|
|
245,830 |
|
Diluted |
|
|
400,867 |
|
|
|
246,084 |
|
|
|
350,326 |
|
|
|
245,830 |
|
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
5
DENBURY RESOURCES INC.
UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
|
2010 |
|
|
2009 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Consolidated net income (loss) |
|
$ |
250,533 |
|
|
$ |
(105,537 |
) |
Adjustments needed to reconcile consolidated net income (loss) to net cash
provided by operating activities: |
|
|
|
|
|
|
|
|
Depletion, depreciation, and amortization |
|
|
211,081 |
|
|
|
123,620 |
|
Deferred income taxes |
|
|
150,694 |
|
|
|
(88,406 |
) |
Gain on sale of interests in Genesis |
|
|
(101,540 |
) |
|
|
|
|
Stock-based compensation |
|
|
17,130 |
|
|
|
16,566 |
|
Non-cash fair value derivative adjustments |
|
|
(226,899 |
) |
|
|
301,197 |
|
Founders retirement compensation |
|
|
|
|
|
|
6,350 |
|
Other |
|
|
5,871 |
|
|
|
(2,426 |
) |
Changes in operating assets and liabilities, net of effects from acquisitions: |
|
|
|
|
|
|
|
|
Accrued production receivable |
|
|
52,075 |
|
|
|
(33,520 |
) |
Trade and other receivables |
|
|
10,058 |
|
|
|
18,897 |
|
Other assets |
|
|
(3,134 |
) |
|
|
(21 |
) |
Accounts payable and accrued liabilities |
|
|
12,066 |
|
|
|
33,026 |
|
Oil and natural gas production payable |
|
|
11,236 |
|
|
|
(9,574 |
) |
Other liabilities |
|
|
(4,880 |
) |
|
|
617 |
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
384,291 |
|
|
|
260,789 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows used for investing activities: |
|
|
|
|
|
|
|
|
Oil and natural gas capital expenditures |
|
|
(317,173 |
) |
|
|
(215,978 |
) |
Acquisitions of oil and natural gas properties |
|
|
(24,243 |
) |
|
|
(196,274 |
) |
Cash paid in Encore Merger, net of cash acquired |
|
|
(801,489 |
) |
|
|
|
|
CO2 capital expenditures, including pipelines |
|
|
(152,451 |
) |
|
|
(399,406 |
) |
Net proceeds from sales of oil and natural gas properties and equipment |
|
|
881,344 |
|
|
|
240,087 |
|
Net proceeds from sale of interests in Genesis |
|
|
162,622 |
|
|
|
|
|
Other |
|
|
(7,224 |
) |
|
|
(3,269 |
) |
|
|
|
|
|
|
|
Net cash used for investing activities |
|
|
(258,614 |
) |
|
|
(574,840 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Bank repayments |
|
|
(1,514,000 |
) |
|
|
(505,000 |
) |
Bank borrowings |
|
|
1,149,000 |
|
|
|
475,000 |
|
Senior subordinated notes tendered post Encore Merger |
|
|
(616,638 |
) |
|
|
|
|
Net proceeds from issuance of senior subordinated debt |
|
|
1,000,000 |
|
|
|
389,827 |
|
Net proceeds from issuance of common stock |
|
|
5,540 |
|
|
|
7,257 |
|
Costs of debt financing |
|
|
(76,232 |
) |
|
|
(10,080 |
) |
ENP distributions |
|
|
(12,209 |
) |
|
|
|
|
Other |
|
|
(14,255 |
) |
|
|
(63 |
) |
|
|
|
|
|
|
|
Net cash provided by (used for) financing activities |
|
|
(78,794 |
) |
|
|
356,941 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents |
|
|
46,883 |
|
|
|
42,890 |
|
Cash and cash equivalents at beginning of period |
|
|
20,591 |
|
|
|
17,069 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
67,474 |
|
|
$ |
59,959 |
|
|
|
|
|
|
|
|
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
6
DENBURY RESOURCES INC.
UNAUDITED
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
(In thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denbury Stockholders |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paid-In |
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
Common Stock |
|
|
Capital in |
|
|
|
|
|
|
Other |
|
|
Treasury Stock |
|
|
Denbury |
|
|
|
|
|
|
|
|
|
($.001 Par Value) |
|
|
Excess of |
|
|
Retained |
|
|
Comprehensive |
|
|
(at cost) |
|
|
Stockholders |
|
|
Noncontrolling |
|
|
Total |
|
|
|
Shares |
|
|
Amount |
|
|
Par |
|
|
Earnings |
|
|
Loss |
|
|
Shares |
|
|
Amount |
|
|
Equity |
|
|
Interest |
|
|
Equity |
|
Balance December 31, 2009 |
|
|
261,929,292 |
|
|
$ |
262 |
|
|
$ |
910,540 |
|
|
$ |
1,064,419 |
|
|
$ |
(557 |
) |
|
|
156,284 |
|
|
$ |
(2,427 |
) |
|
$ |
1,972,237 |
|
|
$ |
|
|
|
$ |
1,972,237 |
|
Repurchase of common stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
330,122 |
|
|
|
(5,327 |
) |
|
|
(5,327 |
) |
|
|
|
|
|
|
(5,327 |
) |
Issued pursuant to employee stock
purchase plan |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(246,010 |
) |
|
|
3,912 |
|
|
|
3,912 |
|
|
|
|
|
|
|
3,912 |
|
Issued pursuant to employee stock
option plan |
|
|
278,141 |
|
|
|
|
|
|
|
1,595 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,595 |
|
|
|
|
|
|
|
1,595 |
|
Issued pursuant to directors
compensation plan |
|
|
7,960 |
|
|
|
|
|
|
|
125 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
125 |
|
|
|
|
|
|
|
125 |
|
Issued pursuant to Encore
Merger |
|
|
135,170,505 |
|
|
|
135 |
|
|
|
2,085,546 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,085,681 |
|
|
|
|
|
|
|
2,085,681 |
|
Restricted stock grants |
|
|
1,908,450 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2 |
|
|
|
|
|
|
|
2 |
|
Restricted stock grants forfeited |
|
|
(169,963 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance-based
shares issued |
|
|
446,493 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
1 |
|
Stock-based compensation |
|
|
|
|
|
|
|
|
|
|
19,701 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,701 |
|
|
|
|
|
|
|
19,701 |
|
Income tax benefit from equity
awards |
|
|
|
|
|
|
|
|
|
|
69 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
69 |
|
|
|
|
|
|
|
69 |
|
ENP revaluation at Encore Merger |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
515,210 |
|
|
|
515,210 |
|
ENP cash distributions to
noncontrolling interest |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,208 |
) |
|
|
(12,208 |
) |
Derivative contracts, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10 |
) |
|
|
|
|
|
|
|
|
|
|
(10 |
) |
|
|
(43 |
) |
|
|
(53 |
) |
Consolidated net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
232,255 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
232,255 |
|
|
|
18,278 |
|
|
|
250,533 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance June 30, 2010 |
|
|
399,570,878 |
|
|
$ |
400 |
|
|
$ |
3,017,576 |
|
|
$ |
1,296,674 |
|
|
$ |
(567 |
) |
|
|
240,396 |
|
|
$ |
(3,842 |
) |
|
$ |
4,310,241 |
|
|
$ |
521,237 |
|
|
$ |
4,831,478 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
7
DENBURY RESOURCES INC.
UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Consolidated net income (loss) |
|
$ |
150,329 |
|
|
$ |
(87,240 |
) |
|
$ |
250,533 |
|
|
$ |
(105,537 |
) |
Other comprehensive income (loss), net of income tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate lock derivative contracts reclassified to income,
net of tax of $10, $10, $21, and $21, respectively |
|
|
17 |
|
|
|
17 |
|
|
|
34 |
|
|
|
35 |
|
Change in deferred hedge loss on interest rate swaps,
net of tax of
$8, $0, $18, and $0, respectively |
|
|
(60 |
) |
|
|
|
|
|
|
(87 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated comprehensive income (loss) |
|
|
150,286 |
|
|
|
(87,223 |
) |
|
|
250,480 |
|
|
|
(105,502 |
) |
Less: comprehensive income attributable to noncontrolling interest |
|
|
(14,950 |
) |
|
|
|
|
|
|
(18,235 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss) attributable to Denbury stockholders |
|
$ |
135,336 |
|
|
$ |
(87,223 |
) |
|
$ |
232,245 |
|
|
$ |
(105,502 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
8
DENBURY RESOURCES INC.
Notes to Unaudited Condensed Consolidated Financial Statements
Note 1. Description of Business
Organization and Nature of Operations
Denbury is a growing independent oil and natural gas company. Denbury is the largest oil and
natural gas operator in both Mississippi and Montana, owns the largest reserves of CO2
used for tertiary oil recovery east of the Mississippi River, and holds significant operating
acreage in the Rockies, Permian Basin, and Gulf Coast regions. Denburys goal is to
increase the value of its properties through a combination of exploitation, drilling, and proven
engineering extraction practices, with its most significant emphasis relating to tertiary recovery
operations.
Encore Merger
On March 9, 2010, Denbury acquired Encore pursuant to an Agreement and Plan of Merger (the
Encore Merger Agreement) entered into with Encore on October 31, 2009. The Encore Merger
Agreement provided for a stock and cash transaction valued at approximately $4.5 billion at that
time, including the assumption of debt and the value of the noncontrolling interest in Encore
Energy Partners LP (ENP). Under the Encore Merger Agreement, Encore was merged with and into
Denbury (the Encore Merger), with Denbury surviving the Encore Merger. The Encore Merger was
consummated on March 9, 2010, following approval by the stockholders of both Denbury and Encore,
closing of a new revolving credit facility as part of the financing for the Encore Merger, and
satisfaction of conditions precedent.
The results of operations of Encore are included with those of Denbury from March 9, 2010
through June 30, 2010. Please read Note 3. Acquisitions and Divestitures for additional
information.
Strategic
Alternatives and Asset Transaction Processes for ENP
On April 30, 2010, ENP and Denbury announced their intent to explore a broad range of
strategic alternatives (strategic process) to enhance the value of ENPs common units, including,
but not limited to, those alternatives involving a possible merger, sale, or other transaction
involving ENP, Denburys interest in ENPs general partner, or all or part of the ENP common units
that Denbury owns. Additionally, ENP and Denbury also announced their intent to explore a sale or
other transaction involving one or more of ENPs assets (asset process), initiated in light of
the substantial projected capital requirements required to recognize the full potential value of
certain fields owned by ENP which are possible CO2 tertiary projects, such as the Elk
Basin Field. Although either or both of these processes may result in one or more transactions
involving ENP, Denbury, and/or a third party, there is no assurance that a review of strategic
alternatives or consideration of an asset transaction will result in the proposal or completion of
any transaction with acceptable terms.
Note 2. Basis of Presentation
Interim Financial Statements
The accompanying unaudited condensed consolidated financial statements of Denbury Resources
Inc. and its subsidiaries have been prepared in accordance with the instructions to Form 10-Q and
do not include all of the information and footnotes required by accounting principles generally
accepted in the United States for complete financial statements. Unless indicated otherwise or the
context requires, the terms we, our, us, or Denbury, refer to Denbury Resources Inc. and
its subsidiaries. These financial statements and the notes thereto should be read in conjunction
with Denburys Annual Report on Form 10-K for the year ended December 31, 2009.
Accounting measurements at interim dates inherently involve greater reliance on estimates than
at year end and the results of operations for the interim periods shown in this report are not
necessarily indicative of results to be expected for the year. In managements opinion, the
accompanying unaudited condensed consolidated financial statements include all adjustments of a
normal recurring nature necessary for a fair statement of Denburys consolidated financial position
as of June 30, 2010, its consolidated results of operations for the three and six months ended June
30, 2010 and 2009, and its consolidated cash flows for the six months ended June 30, 2010 and 2009.
9
DENBURY RESOURCES INC.
Notes to Unaudited Condensed Consolidated Financial Statements
Certain prior period items have been reclassified to make the classification consistent
with the classification in the most recent quarter.
Noncontrolling Interest
As of June 30, 2010, Denbury owned approximately 46% of ENPs outstanding common units.
Denbury also owns 100% of Encore Energy Partners GP LLC (GP LLC), a Delaware limited liability
company and indirect wholly owned subsidiary of Denbury, which is ENPs general partner.
Considering the presumption of control of GP LLC in accordance with the Consolidations topic of
the FASC, the financial position, results of operations, and cash flows of ENP are consolidated
with those of Denbury from March 9, 2010 through June 30, 2010.
As presented in the accompanying Unaudited Condensed Consolidated Balance Sheets,
Noncontrolling interest as of June 30, 2010 of $521.2 million represents third-party ownership
interests in ENP. As presented in the accompanying Unaudited Condensed Consolidated Statements of
Operations, Net income attributable to noncontrolling interest for the three months ended June
30, 2010 of $15.0 million represents ENPs results of operations attributable to third-party
owners, and Net income attributable to noncontrolling interest for the six months ended June 30,
2010 of $18.3 million represents ENPs results of operations attributable to third-party owners
from March 9, 2010 through June 30, 2010.
Supplemental Cash Flow Information
The following table sets forth supplemental cash flow information for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
June 30, |
In thousands |
|
2010 |
|
2009 |
Cash paid for interest, net of amounts capitalized |
|
$ |
43,296 |
|
|
$ |
5,837 |
|
Interest capitalized |
|
|
45,162 |
|
|
|
27,827 |
|
Cash refunds for income taxes |
|
|
(1,173 |
) |
|
|
(14,416 |
) |
Increase (decrease) in liabilities for capital expenditures |
|
|
46,170 |
|
|
|
(41,612 |
) |
Issuance of Denbury common stock in connection
with the Encore Merger |
|
|
2,085,681 |
|
|
|
|
|
Net Income (Loss) Per Common Share
Basic net income (loss) per common share is computed by dividing net income (loss)
attributable to Denbury stockholders by the weighted average number of shares of common stock
outstanding during the period. Diluted net income (loss) per common share is calculated in the
same manner, but also considers the impact of the potential dilution from stock options, unvested
stock appreciation rights (SARs), unvested restricted stock, and unvested performance equity
awards. For the three and six months ended June 30, 2010 and 2009, there were no adjustments to net
income (loss) attributable to Denbury stockholders for purposes of calculating diluted net income
(loss) per common share. The following is a reconciliation of the weighted average common shares
used in the basic and diluted net income (loss) per common share calculations for the periods
indicated:
10
DENBURY RESOURCES INC.
Notes to Unaudited Condensed Consolidated Financial Statements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
June 30, |
|
June 30, |
In thousands |
|
2010 |
|
2009 |
|
2010 |
|
2009 |
Basic weighted average common shares |
|
|
395,548 |
|
|
|
246,084 |
|
|
|
345,126 |
|
|
|
245,830 |
|
Potentially dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options and SARs |
|
|
3,980 |
|
|
|
|
|
|
|
3,835 |
|
|
|
|
|
Performance equity awards |
|
|
146 |
|
|
|
|
|
|
|
312 |
|
|
|
|
|
Restricted stock |
|
|
1,193 |
|
|
|
|
|
|
|
1,053 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average common shares |
|
|
400,867 |
|
|
|
246,084 |
|
|
|
350,326 |
|
|
|
245,830 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average common shares excludes 3.5 million shares and 2.9 million shares at
June 30, 2010 and 2009, respectively, of unvested restricted stock. As these restricted shares
vest, they will be included in the shares outstanding used to calculate basic net income (loss) per
common share, although all restricted stock is issued and outstanding upon grant. For purposes of
calculating diluted weighted average common shares, unvested restricted stock is included in the
computation using the treasury stock method, with the proceeds equal to the average unrecognized
compensation during the period, adjusted for any estimated future tax consequences recognized
directly in equity. Shares of common stock issued in the Encore Merger were weighted from March 9,
2010 through June 30, 2010. The dilution impact of these shares on Denburys earnings per share
calculations may increase in future periods depending on the market price of Denburys common stock
during those periods.
The following securities could potentially dilute earnings per share in the future, but were
excluded from the computation of diluted net income (loss) per share as their effect would have
been anti-dilutive:
|
|
|
|
|
|
|
|
|
|
|
As of June 30, |
In thousands |
|
2010 |
|
2009 |
Stock options and SARs |
|
|
4,302 |
|
|
|
11,346 |
|
Performance equity awards |
|
|
|
|
|
|
476 |
|
Restricted stock |
|
|
49 |
|
|
|
2,928 |
|
|
|
|
|
|
|
|
|
|
Total |
|
|
4,351 |
|
|
|
14,750 |
|
|
|
|
|
|
|
|
|
|
CO2 Pipelines
CO2 pipelines are used for transportation of CO2 to Denburys tertiary
floods from its CO2 source field located near Jackson, Mississippi. Denbury is
continuing expansion of its CO2 pipeline infrastructure with several pipelines currently
under construction. At June 30, 2010 and December 31, 2009, Denbury had $78.7 million and $779.1
million of costs (including capitalized interest), respectively, related to pipeline construction,
primarily the Green Pipeline, in progress, recorded under CO2 properties, equipment,
and pipelines in the accompanying Unaudited Condensed Consolidated Balance Sheets. These costs of
CO2 pipelines under construction were not being depreciated at June 30, 2010 or
December 31, 2009. For financial accounting purposes, depreciation commences when the pipelines
are placed into service, and each pipeline is depreciated on a straight-line basis over its
estimated useful life, which ranges from 20 to 50 years. During June 2010, Denbury placed the
first phase of the Green Pipeline, a 320-mile CO2 pipeline that runs from southern
Louisiana to near Houston, Texas, in service, at which time it became subject to depreciation for
financial accounting purposes. This first phase runs to
Denburys Oyster Bayou Field in Southeast
Texas. Denbury filled this pipeline with CO2 from its source at Jackson Dome during
June and commenced first injection of CO2 at the Oyster Bayou Field on June 29, 2010.
The remaining $78.7 million of costs related to pipeline construction in progress at June 30, 2010
primarily consists of costs incurred for the remaining portion of the Green Pipeline to the Hastings Field. Denbury includes the net
capitalized cost of pipelines which provide CO2 to the tertiary floods that have proved
tertiary reserves in the oil and natural gas full cost ceiling test.
11
DENBURY RESOURCES INC.
Notes to Unaudited Condensed Consolidated Financial Statements
Goodwill
The following table summarizes the changes in Denburys goodwill for the period indicated:
|
|
|
|
|
|
|
Six Months Ended |
|
In thousands |
|
June 30, 2010 |
|
Balance, beginning of period |
|
$ |
169,517 |
|
Adjustment to goodwill related to the acquisition of
interests in the Conroe Field (1) |
|
|
318 |
|
Goodwill related to the Encore Merger (2) |
|
|
1,050,337 |
|
|
|
|
|
Balance, end of period |
|
$ |
1,220,172 |
|
|
|
|
|
|
|
|
(1) |
|
Goodwill related to the acquisition of interests in the Conroe Field decreased due to a revision
to reserve estimates, offset by closing adjustments. |
|
(2) |
|
See Note 3. Acquisitions and Divestitures. |
Recently Adopted Accounting Pronouncements
Subsequent Events. On February 24, 2010, the FASB issued guidance in the Subsequent Events
topic of the FASC to provide updates including: (1) requiring the company to evaluate subsequent
events through the date in which the financial statements are issued; (2) amending the glossary of
the Subsequent Events topic to include the definition of SEC filer and exclude the definition
of Public entity; and (3) eliminating the requirement to disclose the date through which
subsequent events have been evaluated. This guidance was prospectively effective upon issuance.
The adoption of this guidance did not impact Denburys results of operations or financial
condition.
Note 3. Acquisitions and Divestitures
Merger with Encore Acquisition Company
As previously discussed in Note 1. Description of Business, on March 9, 2010, the Encore
Merger was consummated. The Encore Merger was financed through a
combination of $1.0 billion of 8.25% Senior Subordinated Notes due 2020, which Denbury issued on
February 10, 2010, a new $1.6 billion revolving credit agreement entered into on March 9, 2010, and
the assumption of Encores remaining outstanding senior subordinated notes. Please read Note 5.
Long-Term Debt for additional information.
Encore shareholders received the following consideration for each share of Encore common stock
they owned, depending upon the elections, if any, which they made, and the collar, proration, and
allocation features of the Encore Merger Agreement so that, in the aggregate, 30% of the
consideration for the outstanding shares of Encore common stock would consist of cash, and the
remaining 70% of the consideration would consist of shares of Denbury common stock:
|
|
|
Mixed cash/stock electing (or non-electing) Encore stockholders received $15.00 in cash
and 2.4048 shares of Denbury common stock; |
|
|
|
|
All-cash electing Encore stockholders received $46.48 in cash and 0.2417 shares of
Denbury common stock; and |
|
|
|
|
All-stock electing Encore stockholders (including those whose Encore restricted stock
bonuses were converted into Denbury restricted stock) received 3.4354 shares of Denbury
common stock. |
All Encore stock options fully vested and their intrinsic value was paid in cash. All Encore
restricted stock vested and each holder had the opportunity to make the same elections as other
holders of Encore common stock as described above, except for shares of Encore restricted stock
granted during 2010 as a bonus pursuant to the 2009 Encore annual incentive program, which were
converted into restricted shares of Denbury common stock.
12
DENBURY RESOURCES INC.
Notes to Unaudited Condensed Consolidated Financial Statements
In the Encore Merger, Denbury issued approximately 135.2 million shares of its common stock
and paid approximately $833.9 million in cash to Encore stockholders. The Denbury shares issued to
Encore stockholders represented approximately 34% of Denburys common stock issued and outstanding
immediately after the Encore Merger. The total fair value of the Denbury common stock issued to
Encore stockholders in the Encore Merger was approximately $2.1 billion based upon Denburys
closing price of $15.43 per share on March 9, 2010.
The Encore Merger met the definition of a business combination under the FASC Business
Combinations topic. As such, Denbury estimated the fair value of Encore as of the acquisition
date, which is the date on which Denbury obtained control of Encore. The acquisition date for the
Encore Merger was March 9, 2010. The FASC Fair Value Measurements and Disclosures topic defines
fair value as the price that would be received to sell an asset or paid to transfer a liability in
an orderly transaction between market participants at the measurement date (often referred to as
the exit price). The fair value measurement is based on the assumptions of market participants
and not those of the reporting entity. Therefore, entity-specific intentions should not impact the
measurement of fair value unless those assumptions are consistent with market participant views.
In applying these accounting principles, Denbury estimated the fair value of the Encore assets
acquired less liabilities assumed on the acquisition date to be approximately $2.4 billion. This
measurement resulted in the recognition of goodwill totaling approximately $1.1 billion. The FASC
defines goodwill as an asset representing the future economic benefits arising from other assets
acquired in a business combination that are not individually identified and separately recognized.
For this acquisition, goodwill is the excess of the consideration transferred to acquire Encore
plus the fair value of the noncontrolling interest in ENP, over the acquisition date estimated fair
value of the net assets acquired. Goodwill recorded in the Encore Merger primarily represents the
value of the opportunity to expand Encores CO2 EOR operations in the Rocky Mountain
region, the experience and technical expertise of former Encore employees who have joined Denbury,
and the addition of strategic areas of operations in which Denbury did not previously have a
significant presence.
The fair value of Encore was based on significant inputs not observable in the market, which
FASC Fair Value Measurements and Disclosures topic defines as Level 3 inputs. Key assumptions
include (1) NYMEX oil and natural gas futures (this input is observable), (2) projections of the
estimated quantities of oil and natural gas reserves, including those classified as proved,
probable, and possible, (3) projections of future rates of production, (4) timing and amount of
future development and operating costs, (5) projected cost of CO2 to a market
participant, (6) projected recovery factors, and (7) risk-adjusted discount rates. The fair value
of the oil and natural gas properties was determined using a risk-adjusted after-tax discounted
cash flow analysis. Denbury applies full cost accounting rules, under which the acquisition cost
of oil and natural gas properties are recognized on a cost center basis (country), of which Denbury
has only one cost center (United States). All of the goodwill was assigned to this single reporting
unit. None of the goodwill is deductible for income tax purposes.
Preliminary Purchase Price Allocation in Encore Merger
Based on currently available information, the following table is a preliminary summary of the
consideration issued for the Encore Merger and the fair value of the assets acquired and
liabilities assumed at the acquisition date, as well as the fair value at the acquisition date of
the noncontrolling interest in ENP:
13
DENBURY RESOURCES INC.
Notes to Unaudited Condensed Consolidated Financial Statements
|
|
|
|
|
In thousands |
|
|
|
|
Consideration and noncontrolling interest: |
|
|
|
|
Fair value of Denbury common stock issued (1) |
|
$ |
2,085,681 |
|
Cash payment to Encore stockholders (2) |
|
|
833,909 |
|
Severance payments |
|
|
32,925 |
|
|
|
|
|
Consideration issued |
|
|
2,952,515 |
|
Fair value of noncontrolling interest of ENP (3) |
|
|
515,210 |
|
|
|
|
|
Consideration and noncontrolling interest of ENP (4) |
|
|
3,467,725 |
|
|
|
|
|
Add: fair value of liabilities assumed: |
|
|
|
|
Accounts payable and accrued liabilities |
|
|
116,520 |
|
Oil and natural gas production payable |
|
|
54,201 |
|
Current derivatives |
|
|
65,954 |
|
Other current liabilities |
|
|
32,986 |
|
Long-term debt |
|
|
1,375,149 |
|
Asset retirement obligations, net of current portion |
|
|
42,360 |
|
Long-term derivatives |
|
|
35,631 |
|
Long-term deferred taxes |
|
|
869,387 |
|
Other long-term liabilities |
|
|
2,717 |
|
|
|
|
|
Amount attributable to liabilities assumed |
|
|
2,594,905 |
|
Less: fair value of assets acquired: |
|
|
|
|
Cash and cash equivalents |
|
|
51,850 |
|
Accrued production receivable |
|
|
124,494 |
|
Trade and other receivables |
|
|
49,507 |
|
Current derivatives |
|
|
29,737 |
|
Oil and natural gas properties proved |
|
|
3,340,141 |
|
Oil and natural gas properties unevaluated |
|
|
1,279,000 |
|
CO2 properties, equipment, and pipelines |
|
|
7,254 |
|
Other property, plant, and equipment |
|
|
11,475 |
|
Long-term derivatives |
|
|
35,207 |
|
Other long-term assets |
|
|
83,628 |
|
|
|
|
|
Amount attributable to assets acquired |
|
|
5,012,293 |
|
|
|
|
|
Goodwill |
|
$ |
1,050,337 |
|
|
|
|
|
|
|
|
(1) |
|
135.2 million Denbury common shares at $15.43 per share. |
|
(2) |
|
Based on holders of 55.3 million Encore common shares being paid $15.00 per share plus cash payment
to stock option holders of $4.5 million. |
|
(3) |
|
Represents fair value of the noncontrolling interest of ENP. As of March 9, 2010, there were 45.3
million ENP common units outstanding and the closing price was $21.10 per common unit. As of March
9, 2010, Encore owned approximately 46% of ENPs outstanding common units. |
|
(4) |
|
The sum of the consideration issued, the noncontrolling interest of ENP, and the fair value of
Encores long-term debt assumed totals approximately $4.8 billion, representing the aggregate
purchase price. |
The above purchase price allocation for the Encore Merger is preliminary and subject to
revision as Denbury finalizes the acquisition tax basis of the net assets acquired and other key
assumptions utilized in the fair value models, primarily finalization of the oil and natural gas
reserve analysis.
For the three months ended June 30, 2010 and for the period from March 9, 2010 to June 30,
2010, Denbury recognized $200.6 million and $260.9 million
of oil, natural gas, and related product sales, respectively, related to the Encore Merger. For the three months ended June 30, 2010 and for the
period from March 9, 2010 to June 30, 2010, Denbury
recognized $137.8 million and $180.7 million net field
operating income (oil,
natural
14
DENBURY RESOURCES INC.
Notes to Unaudited Condensed Consolidated Financial Statements
gas and
related product sales less lease operating expenses and
production taxes and marketing expenses),
respectively, related to the Encore Merger. All transaction-related costs (advisory, legal,
accounting, severance, due diligence, integration, etc.) have been expensed as incurred. Denbury recognized a
total of $67.8 million of transaction costs related to the Encore Merger in the six months ended
June 30, 2010.
Conroe Field Acquisition
On December 18, 2009, Denbury acquired a 91.4% interest in the Conroe Field, a significant
potential tertiary flood north of Houston, Texas, for total consideration of approximately $422.9
million comprised of approximately $254.2 million in cash and 11,620,000 shares of Denbury common
stock. The common stock was valued at $168.7 million based on the closing date price of Denburys
stock on December 18, 2009 of $14.52 per share. The effective date of purchase was December 1,
2009. The cash amount paid at closing was $268.5 million, which includes $15.6 million for amounts
in escrow accounts reserved for plugging and abandonment and other adjustments. Denbury recorded
approximately $31.0 million of goodwill related to the acquisition of interests in the Conroe
Field.
Denbury shares issued in a private placement in conjunction with the purchase of interests in
the Conroe Field were subsequently registered for resale with the SEC on February 2, 2010, as
required under a registration rights agreement. The registration rights agreement provides that
the registration statement for the shares remain effective for approximately one year.
Hastings Field Acquisition
During November 2006, Denbury entered into an agreement with a subsidiary of Venoco, Inc.
(Venoco), which gave Denbury an option to purchase Venocos interests in the Hastings Field, a
strategically significant potential tertiary flood candidate located near Houston, Texas. Denbury
exercised the purchase option prior to September 2008, and closed the acquisition during February
2009. As consideration for the option agreement, during 2006 through 2008, Denbury made cash
payments totaling $50 million, which it recorded as a deposit. The remaining purchase price of
approximately $196 million was paid in cash, and was determined as of January 1, 2009 (the
effective date) with closing on February 2, 2009. The final closing adjustments were completed
during the three months ended September 30, 2009. The final closing price, adjusted for interim
net cash flows between the effective date and closing date of the acquisition (including minor
purchase price adjustments), totaled approximately $246.8 million. Denbury recorded approximately
$138.8 million of goodwill related to the acquisition of interests in the Hastings Field.
Barnett Shale Dispositions
In May 2009, Denbury entered into an agreement to sell 60% of its Barnett Shale natural gas
assets to Talon Oil and Gas LLC (Talon), a privately held company, for $270 million (before
closing adjustments). Denbury closed approximately three-quarters of the sale in June 2009 and
closed the remainder of the sale in July 2009. Net proceeds were approximately $259.8 million
(after closing adjustments, and net of $8.1 million for natural gas swaps transferred in the sale).
The effective date under the agreement was June 1, 2009. Denbury did not record a gain or loss on
the sale in accordance with the full cost method of accounting.
In December 2009, Denbury closed the sale of the remaining 40% of its Barnett Shale natural
gas assets to Talon for $210 million (before closing adjustments). Net proceeds were approximately
$209.9 million (after closing adjustments). The effective date under the agreement was December 1,
2009. Denbury did not record a gain or loss on the sale in accordance with the full cost method of
accounting. Further, the sale was structured as a deferred like-kind exchange in conjunction with
Denburys acquisition of interests in the Conroe Field in order to defer most of the tax impacts of
the sale.
15
DENBURY RESOURCES INC.
Notes to Unaudited Condensed Consolidated Financial Statements
Sale of Interests in Genesis Energy, L.P. (Genesis)
In February 2010, Denbury sold its interest in Genesis Energy, LLC, the general partner of
Genesis, for net proceeds of approximately $84 million, after giving effect to the change of
control provision of the incentive compensation agreement with Genesis management, which was
triggered and under which Denbury paid a total of $14.9 million comprised of deferred compensation
of $1.9 million and change of control redemption of $13.0 million. In February 2010, Denbury
recognized general and administrative expense of $1.1 million associated with the $14.9 million
payment. The remainder of the payment had been previously accrued in Denburys financial
statements as of December 31, 2009. In March 2010, Denbury sold all of its Genesis common units in
a secondary public offering for net proceeds of approximately $79 million. As a result, Denbury no
longer holds any interest in Genesis. Denbury recognized a pre-tax gain of approximately $101.5
million ($63.0 million after tax) on these dispositions.
Sale of Southern Properties
On May 14, 2010, Denbury sold certain oil and natural gas properties and related assets
acquired in the Encore Merger, primarily located in the Permian Basin in West Texas and
southeastern New Mexico; the Mid-continent area, which includes the Anadarko Basin in Oklahoma,
Texas, and Kansas; and the East Texas Basin (the Southern Assets) to Quantum Resources
Management, LLC for consideration of $883.9 million after closing adjustments and including a prior
$45 million deposit. The effective date of the sale was May 1, 2010. Denbury did not record a
gain or loss on the sale in accordance with the full cost method of accounting. The properties
acquired in the Encore Merger in the southern part of the United States which were not sold
include the Haynesville Shale, Paradox Basin, Cleveland Sand Play, and Tuscaloosa Marine Shale
properties. Although the sale of the Southern Assets triggered an impairment test of goodwill, no impairment charges were
made or required during the second quarter of 2010.
Pro Forma Information
The following unaudited pro forma condensed financial data for the three and six months ended
June 30, 2010 gives effect to the Encore Merger as if it had occurred on January 1, 2010. The
following unaudited pro forma condensed financial data for the three and six months ended June 30,
2009 gives effect to the Encore Merger, the acquisition of interests in the Conroe Field in December 2009 and the
acquisition of interests in the Hastings Field in February 2009 as if each had occurred on January 1, 2009. The
unaudited pro forma condensed consolidated financial information has been included for comparative purposes only
and is not necessarily indicative of the results that might have occurred had the transactions
taken place on the dates indicated and is not intended to be a projection of future results.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
June 30, |
|
June 30, |
In thousands, except per share amounts |
|
2010 |
|
2009 |
|
2010 |
|
2009 |
Pro forma total revenues |
|
$ |
497,210 |
|
|
$ |
388,865 |
|
|
$ |
1,112,481 |
|
|
$ |
688,856 |
|
Pro forma net income (loss) attributable to Denbury
stockholders |
|
$ |
135,494 |
|
|
$ |
(134,037 |
) |
|
$ |
247,423 |
|
|
$ |
(168,566 |
) |
Pro forma net income (loss) per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.34 |
|
|
$ |
(0.34 |
) |
|
$ |
0.63 |
|
|
$ |
(0.43 |
) |
Diluted |
|
$ |
0.34 |
|
|
$ |
(0.34 |
) |
|
$ |
0.62 |
|
|
$ |
(0.43 |
) |
Note 4. Asset Retirement Obligations
In general, Denburys future asset retirement obligations relate to future costs associated
with plugging and abandonment of its oil, natural gas, and CO2 wells, removal of
equipment and facilities from leased acreage, and land restoration. The fair value of a liability
for an asset retirement is recorded in the period in which it is incurred, discounted to its
present value using Denburys credit-adjusted risk-free interest rate, and a corresponding amount
capitalized by increasing the carrying amount of the related long-lived asset. The liability is
accreted each period, and the capitalized cost is depreciated over the useful life of the related
asset.
16
DENBURY RESOURCES INC.
Notes to Unaudited Condensed Consolidated Financial Statements
The following table summarizes the changes in Denburys asset retirement obligations for the
period indicated:
|
|
|
|
|
|
|
Six Months Ended |
|
In thousands |
|
June 30, 2010 |
|
Balance, beginning of period |
|
$ |
54,338 |
|
Liabilities incurred and assumed during period |
|
|
2,222 |
|
Liabilities assumed in the Encore Merger |
|
|
43,783 |
|
Revisions in estimated retirement obligations |
|
|
1,702 |
|
Liabilities settled during period |
|
|
(3,216 |
) |
Accretion expense |
|
|
2,799 |
|
Sales of properties |
|
|
(7,520 |
) |
|
|
|
|
Balance, end of period |
|
$ |
94,108 |
|
|
|
|
|
At June 30, 2010 and December 31, 2009, approximately $2.4 million and $1.1 million,
respectively, of Denburys asset retirement obligations were classified in Accounts payable and
accrued liabilities under current liabilities in the accompanying Unaudited Condensed Consolidated
Balance Sheets. Denbury has escrow accounts that are legally restricted for certain of its asset
retirement obligations. The balances of these escrow accounts were approximately $32.8 million and
$22.8 million at June 30, 2010 and December 31, 2009, respectively, and are included in Other
assets in the accompanying Unaudited Condensed Consolidated Balance Sheets.
Note 5. Long-Term Debt
The following table shows the components of Denburys long-term debt as of the periods
indicated:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
In thousands, except percentages |
|
2010 |
|
|
2009 |
|
Denbury Credit Agreement |
|
$ |
40,000 |
|
|
$ |
|
|
ENP Credit Agreement |
|
|
245,000 |
|
|
|
|
|
Senior bank loan (replaced with Denbury Credit Agreement) |
|
|
|
|
|
|
125,000 |
|
7.5% Senior Subordinated Notes due 2013, net of discount of $534 and $631, respectively |
|
|
224,466 |
|
|
|
224,369 |
|
6.25% Senior Subordinated Notes due 2014, including premium of $12 |
|
|
1,084 |
|
|
|
|
|
7.5% Senior Subordinated Notes due 2015, including premium of $470 and $513, respectively |
|
|
300,470 |
|
|
|
300,513 |
|
6.0% Senior Subordinated Notes due 2015, including premium of $6 |
|
|
490 |
|
|
|
|
|
9.5% Senior Subordinated Notes due 2016, including premium of $15,957 |
|
|
240,877 |
|
|
|
|
|
9.75% Senior Subordinated Notes due 2016, net of discount of $24,281 and $26,424, respectively |
|
|
402,069 |
|
|
|
399,926 |
|
7.25% Senior Subordinated Notes due 2017, including premium of $27 |
|
|
2,277 |
|
|
|
|
|
8.25% Senior Subordinated Notes due 2020 |
|
|
996,273 |
|
|
|
|
|
Northeast Jackson Dome pipeline financing |
|
|
169,024 |
|
|
|
170,633 |
|
Free State pipeline financing |
|
|
81,822 |
|
|
|
79,987 |
|
Capital lease obligations |
|
|
8,017 |
|
|
|
5,948 |
|
|
|
|
|
|
|
|
Total |
|
|
2,711,869 |
|
|
|
1,306,376 |
|
Less current portion |
|
|
7,464 |
|
|
|
5,308 |
|
|
|
|
|
|
|
|
Long-term debt and capital lease obligations |
|
$ |
2,704,405 |
|
|
$ |
1,301,068 |
|
|
|
|
|
|
|
|
New $1.6 Billion Revolving Credit Agreement
On March 9, 2010, Denbury entered into a new $1.6 billion revolving credit agreement with
JPMorgan Chase Bank, N.A. (JPMorgan), as administrative agent, and 23 other lenders as party
thereto (the Denbury Credit Agreement). Borrowings under the Denbury Credit Agreement, coupled
with the funds from Denburys issuance of $1.0 billion of 8.25% Senior Subordinated Notes due 2020,
were used to:
17
DENBURY RESOURCES INC.
Notes to Unaudited Condensed Consolidated Financial Statements
|
|
|
fund the cash portion of the consideration issued in the Encore Merger (inclusive of
payments made to stock option holders); |
|
|
|
|
repay amounts outstanding under Denburys then existing $750 million revolving credit
agreement, which had $125 million outstanding as of March 9, 2010; |
|
|
|
|
repay amounts outstanding under Encores then existing revolving credit agreement, which
had $265 million outstanding as of March 9, 2010; |
|
|
|
|
pay Encores severance costs; |
|
|
|
|
pay transaction fees and expenses; and |
|
|
|
|
provide additional liquidity. |
Availability under the Denbury Credit Agreement is subject to a borrowing base, which is
redetermined semi-annually on or prior to May 1 and November 1, beginning in November 2010, and
upon requested special redeterminations. The Denbury Credit Agreement provides for a borrowing
base of $1.6 billion. The borrowing base represents the amount that can be borrowed based on the
reserves and certain other oil and natural gas assets of Denbury and its restricted subsidiaries,
as confirmed by the banks, while the commitment amount is the amount the banks have committed to
fund pursuant to the terms of the Denbury Credit Agreement. The borrowing base is adjusted at the
banks discretion and is based in part upon external factors over which Denbury has no control. If
the borrowing base were to be less than outstanding borrowings under the Denbury Credit Agreement,
Denbury would be required to repay the deficit over a period of four months. In conjunction with
the sale of the Southern Assets, lending banks performed a redetermination of the borrowing base
under the Denbury Credit Agreement and left the borrowing base unchanged. Denbury incurs a
commitment fee of 0.5% on the unused portion of the credit facility or if less, the borrowing base.
Loans under the Denbury Credit Agreement mature in March 2014.
The Denbury Credit Agreement is secured by substantially all of the proved oil and natural gas
properties of Denburys restricted subsidiaries and by the equity interests of Denburys restricted
subsidiaries. In addition, Denburys obligations under the Denbury Credit Agreement are guaranteed
by its restricted subsidiaries. The restricted subsidiaries include most of the subsidiaries of
the combined company after the Encore Merger, excluding Denburys non-guarantor subsidiaries.
The Denbury Credit Agreement contains several restrictive covenants including, among others:
|
|
|
a prohibition on the payment of dividends to parties other than Denbury and its
restricted subsidiaries; |
|
|
|
|
a requirement to maintain a current ratio, as determined under the Denbury
Credit Agreement, of not less than 1.0 to 1.0; |
|
|
|
|
a maximum permitted ratio of debt to adjusted EBITDA (as defined in the Denbury Credit
Agreement) of Denbury and its restricted subsidiaries of not more than 4.5 to 1.0 in 2010
and 4.0 to 1.0 in 2011 and thereafter; and |
|
|
|
|
a prohibition against incurring debt, subject to permitted exceptions. |
Additionally, there is a limitation on the aggregate amount of forecasted oil and natural gas
production that can be economically hedged with oil or natural gas derivative contracts.
Loans under the Denbury Credit Agreement are subject to varying rates of interest based on
(1) the total outstanding borrowings in relation to the borrowing base and (2) whether the loan is
a Eurodollar loan or a base rate loan. Eurodollar loans bear interest at the Eurodollar rate plus
the applicable margin of 2.0% to 3.0% based on the ratio of outstanding borrowings to the borrowing
base, and base rate loans bear interest at the base rate plus the applicable margin of 1.0% to 2.0%
based on the ratio of outstanding borrowings to the borrowing base. The Eurodollar rate for any
interest period (either one, two, three, six, nine, or twelve months, as selected by Denbury) is
the rate per year equal to LIBOR, as published by Reuters or another source designated by JPMorgan,
for deposits in dollars for a similar interest period. The base rate is calculated as the
highest of (1) the annual rate of interest announced by and JPMorgan as its prime rate, (2) the
federal funds effective rate plus 0.5%, and (3) the Adjusted Eurodollar Rate (as defined in the
Denbury Credit Agreement) for a one-month interest period plus 1.0%.
18
DENBURY RESOURCES INC.
Notes to Unaudited Condensed Consolidated Financial Statements
Encore Energy Partners Operating LLC Credit Agreement
Encore Energy Partners Operating LLC (OLLC), a wholly-owned subsidiary of ENP, is a party to
a five-year credit agreement dated March 7, 2007 (as amended, the ENP Credit Agreement). The ENP
Credit Agreement matures on March 7, 2012. In November 2009, OLLC amended the ENP Credit
Agreement, effective upon the closing of the Encore Merger, to, among other things, permit the
consummation of the Encore Merger despite its being a Change of Control under the ENP Credit
Agreement.
The ENP Credit Agreement provides for revolving credit loans to be made to OLLC from time to
time and letters of credit to be issued from time to time for the account of OLLC or any of its
restricted subsidiaries. The aggregate amount of the commitments of the lenders under the ENP
Credit Agreement is $475 million. Availability under the ENP Credit Agreement is subject to a
borrowing base, which is redetermined semi-annually and upon requested special redeterminations.
On June 14, 2010, the borrowing base under the ENP Credit Agreement was reaffirmed at $375 million.
As of June 30, 2010, the borrowing base was $375 million and there were $245 million of
outstanding borrowings and $130 million of borrowing capacity under the ENP Credit Agreement.
Obligations under the ENP Credit Agreement are secured by a first-priority security interest
in substantially all of OLLCs proved oil and natural gas reserves and in the equity interests of
OLLC and its restricted subsidiaries. In addition, obligations under the ENP Credit Agreement are
guaranteed by ENP and OLLCs restricted subsidiaries. Denbury consolidates the debt of ENP with
that of its own; however, obligations under the ENP Credit Agreement are non-recourse to Denbury
and its restricted subsidiaries.
Issuance of 8.25% Senior Subordinated Notes due 2020
On February 10, 2010, Denbury issued $1.0 billion of 8.25% Senior Subordinated Notes due 2020
(the 2020 Notes), for net proceeds after underwriting discounts and commissions of $980 million.
The 2020 Notes were sold at par. Upon the closing of the Encore Merger, $400 million of the net
proceeds were used to finance a portion of the Encore Merger consideration. Under the indenture
governing the 2020 Notes, to the extent that fewer than $600 million principal amount of Encores
outstanding senior subordinated notes were repurchased in tender offers or change of control
repurchases under the Encore indentures, Denbury was required to redeem an equal amount of the 2020
Notes, plus accrued and unpaid interest. Denbury redeemed $500.5 million principal amount of
Encores outstanding senior subordinated notes in a tender offer, repurchased an additional $95.7
million principal amount of Encores outstanding senior subordinated notes under change of control
provisions, and redeemed $3.7 million principal amount of the 2020 Notes. Please read Tender
Offers and Consent Solicitations for Encores Senior Subordinated Notes; Supplements to Indentures
Governing Encores Senior Subordinated Notes below.
The 2020 Notes mature on February 15, 2020, and interest is payable on February 15 and August
15 of each year, beginning August 15, 2010. Denbury may redeem the 2020 Notes in whole or in part
at its option beginning February 15, 2015, at the following redemption prices:
|
|
|
104.125% after February 15, 2015; |
|
|
|
|
102.75% after February 15, 2016; |
|
|
|
|
101.375% after February 15, 2017; and |
|
|
|
|
100% after February 15, 2018. |
Prior to February 15, 2013, Denbury may at its option redeem up to an aggregate of 35% of the
principal amount of the 2020 Notes at a price of 108.25% with the proceeds of certain equity
offerings. In addition, at any time prior to February 15, 2015, Denbury may redeem 100% of the
principal amount of the 2020 Notes at a price equal to 100% of the principal amount plus a make
whole premium and accrued and unpaid interest. The indenture contains certain restrictions on
Denburys ability to incur additional debt, pay dividends on its common stock, make investments,
create liens on its assets, engage in transactions with its affiliates, transfer or sell assets,
19
DENBURY RESOURCES INC.
Notes to Unaudited Condensed Consolidated Financial Statements
consolidate or merge, or sell substantially all of its assets. The 2020 Notes are not subject
to any sinking fund requirements. Certain of Denburys subsidiaries fully and unconditionally
guarantee this debt.
Supplements to Indentures Governing Denburys Senior Subordinated Notes
On March 9, 2010, upon closing of the Encore Merger, Denbury became an obligor, as successor
in interest to Encore, with respect to Encore senior subordinated notes, which are governed by four
indentures covering an aggregate original principal amount of $825 million. In conjunction with
the closing of the Encore Merger, Denbury and its subsidiaries entered into supplemental indentures
to add subsidiary guarantors, as required under the Encore indentures as well as the indentures
governing Denburys senior subordinated notes. The Encore legacy subsidiaries, with permitted
exceptions, became guarantors under the Denbury indentures that were in effect prior to the Encore
Merger and the Denbury legacy subsidiaries, with permitted exceptions, became guarantors under the
Encore indentures with respect to which Denbury succeeded Encore.
Tender Offers and Consent Solicitations for Encores Senior Subordinated Notes; Supplements to
Indentures Governing Encores Senior Subordinated Notes
On February 8, 2010, Denbury commenced a cash tender offer to repurchase $600 million
principal amount of Encores $825 million senior subordinated notes which were governed by three of
Encores four indentures and solicited consents to amend each of those three indentures to
eliminate most of the indenture covenants. Those indentures are the indentures to which Encore was
a party prior to the Encore Merger governing their 6.25% Senior Subordinated Notes due 2014 (the
6.25% Notes), their 6.0% Senior Subordinated Notes due 2015 (the 6.0% Notes), and their 7.25%
Senior Subordinated Notes due 2017 (the 7.25% Notes).
On March 10, 2010, upon expiration of the tender offers and consent solicitations, Denbury
accepted for purchase all notes tendered in the tender offer. The total amount of notes that
Denbury purchased was approximately $500.5 million in principal amount of the $600 million in
original principal amount for which tenders were made, leaving outstanding approximately $99.5
million of the $600 million of notes for which Denbury made tender offers.
The tender of the notes also constituted the delivery of consents of holders of the notes to
eliminate or modify certain provisions contained in each of the three indentures governing the
Encore senior subordinated notes for which tender offers were made. Denbury received sufficient
consents in the solicitations to amend these three Encore indentures effective upon the Encore
Merger.
The amendments of the three indentures governing the $600 million of notes subject to the
tender offers eliminated most of the restrictive covenants, including covenants requiring the
filing of SEC reports; restricting certain payments; limiting indebtedness; restricting
distributions from certain restricted subsidiaries, affiliate transactions, and liens; requiring
future subsidiaries to guarantee the applicable notes; requiring the delivery of certificates
concerning compliance with the applicable indenture; certain provisions of covenants relating to
mergers and consolidations; and certain events of default in the indentures. The amendments do not
apply to the 9.50% Senior Subordinated Notes due 2016 (the 9.5% Notes).
On March 12, 2010,
Denbury announced cash change of control offers to purchase, for 101% of the face amount, the
remaining $324.5 million of senior subordinated notes outstanding under the four Encore indentures,
as required by each of the Encore indentures. In April 2010, Denbury purchased approximately $95.7
million of these senior subordinated notes, leaving approximately $228.7 million of former Encore
notes outstanding.
Encore Indentures
In addition to the three indentures that govern the Encore senior subordinated notes for which
Denbury made tender offers, as a result of the Encore Merger, Denbury also became successor in
interest to Encore under the Encore indenture with respect to the 9.5% Notes in the original
principal amount of $225 million (the 9.5% Indenture). Interest on the 9.5% Notes is due
semi-annually on May 1 and November 1. The 9.5% Notes mature on May 1, 2016. The material terms
of the 9.5% Indenture include covenants requiring the filing of SEC reports; restricting certain
payments; limiting indebtedness; restricting distributions from certain restricted subsidiaries,
20
DENBURY RESOURCES INC.
Notes to Unaudited Condensed Consolidated Financial Statements
affiliate transactions, and liens; requiring certain subsidiaries to deliver guarantees of the
notes; requiring the delivery of certificates concerning compliance with the indenture; and
covenants relating to mergers and consolidations.
All of the Encore indentures, including the 9.5% Indenture, also have covenants limiting the
sale of assets and providing a put right by holders upon change of control. The Encore indentures
also contain certain affirmative, negative, and financial covenants, which include a requirement
that Denbury maintain a current ratio (as defined in the Encore indentures) of not less than 1.0 to
1.0 and a requirement that Denbury maintain a ratio of consolidated EBITDA (as defined in the
Encore indentures) to consolidated interest expense of not less than 2.5 to 1.0.
Note 6. Derivative Instruments and Hedging Activities
Derivative Policy
Denbury applies the provisions of the Derivatives topic of the FASC, which requires each
derivative instrument to be recorded in the balance sheet at fair value. If a derivative has not
been designated as a hedge or does not otherwise qualify for hedge accounting, it must be adjusted
to fair value through earnings. However, if a derivative qualifies for hedge accounting, depending
on the nature of the hedge, the effective portion of changes in fair value can be recognized in
accumulated other comprehensive income or loss within equity until such time as the hedged item is
recognized in earnings. In order to qualify for cash flow hedge accounting, the cash flows from
the hedging instrument must be highly effective in offsetting changes in cash flows of the hedged
item. In addition, all hedging relationships must be designated, documented, and reassessed
periodically.
Denbury has elected to designate ENPs outstanding interest rate swaps as cash flow hedges.
The effective portion of the mark-to-market gain or loss on these derivative instruments is
recorded in Accumulated other comprehensive loss on the accompanying Unaudited Condensed
Consolidated Balance Sheets and reclassified into earnings in the same period in which the hedged
transaction affects earnings. Any ineffective portion of the mark-to-market gain or loss is
recognized in earnings and included in Derivatives expense (income) in the accompanying Unaudited
Condensed Consolidated Statements of Operations.
Denbury does not apply hedge accounting treatment to its oil and natural gas derivative
contracts and therefore, the changes in the fair values of these instruments are recognized in
income in the period of change. These fair value changes, along with the cash settlements of
expired contracts, are included in Derivatives expense (income) in the accompanying Unaudited
Condensed Consolidated Statements of Operations.
Oil and Natural Gas Derivative Contracts
From time to time, Denbury enters into various oil and natural gas derivative contracts to
provide an economic hedge of its exposure to commodity price risk associated with anticipated
future oil and natural gas production. Denbury does not hold or issue derivative financial
instruments for trading purposes. These contracts consist of price floors, collars, and fixed
price swaps. Historically, Denbury has hedged up to 80% of its anticipated production for the
following year to provide it with a reasonably certain amount of cash flow to cover most of its
budgeted exploration and development expenditures without incurring significant debt. Also, in
light of the Encore Merger, and Denburys desire to protect its cash flows given the increased debt
levels, in March 2010, Denbury entered into costless collar crude oil contracts covering 17,000
Bbls/d during the first half of 2011 and in June 2010, it entered into costless collar crude oil
contracts covering an additional 8,000 Bbls/d during the third quarter of 2011.
Denbury manages and controls market and counterparty credit risk through established internal
control procedures that are reviewed on an ongoing basis. Denbury attempts to minimize credit risk
exposure to counterparties through formal credit policies, monitoring procedures, and
diversification. All of Denburys and ENPs commodity derivative contracts are with parties that
are lenders under their respective credit agreements. Denbury has included an estimate of
nonperformance risk in the fair value measurement of its commodity derivative contracts as required
by FASC guidance on fair value. At June 30, 2010 and December 31, 2009, the net asset (liability)
of Denburys open commodity derivative contracts of $109.7 million and ($128.7) million,
respectively, included a reduction of $1.1 million and $0.8 million, respectively, for estimated
nonperformance risk.
21
DENBURY RESOURCES INC.
Notes to Unaudited Condensed Consolidated Financial Statements
The following is a summary of Derivatives expense (income) included in the accompanying
Unaudited Condensed Consolidated Statements of Operations for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
In thousands |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Receipts (payments) on settlement of oil derivative contracts |
|
$ |
(13,829 |
) |
|
$ |
42,002 |
|
|
$ |
(77,379 |
) |
|
$ |
127,838 |
|
Receipts on settlement of natural gas derivative contracts |
|
|
16,630 |
|
|
|
|
|
|
|
20,379 |
|
|
|
|
|
Fair value adjustments to derivative contracts income (expense) |
|
|
125,190 |
|
|
|
(194,791 |
) |
|
|
226,029 |
|
|
|
(301,142 |
) |
Ineffectiveness on interest rate swaps |
|
|
683 |
|
|
|
|
|
|
|
870 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives income (expense) |
|
$ |
128,674 |
|
|
$ |
(152,789 |
) |
|
$ |
169,899 |
|
|
$ |
(173,304 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
22
DENBURY RESOURCES INC.
Notes to Unaudited Condensed Consolidated Financial Statements
Fair Value of Commodity Derivative Contracts Not Classified as Hedging Instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Fair Value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NYMEX Contract Prices Per Bbl |
|
|
Asset (Liability) |
|
|
|
|
|
|
|
Type of |
|
|
|
|
|
|
Weighted Average Price |
|
|
June 30, |
|
|
December 31, |
|
Year |
|
Months |
|
|
Contract |
|
|
Bbls/d |
|
|
Swap |
|
|
Floor |
|
|
Ceiling |
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands |
|
Oil Contracts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
Jan Mar |
|
Swap |
|
|
31,635 |
|
|
$ |
55.96 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
(63,525 |
) |
|
|
|
|
|
|
Collar |
|
|
11,440 |
|
|
|
|
|
|
|
67.72 |
|
|
|
85.86 |
|
|
|
|
|
|
|
95 |
|
|
|
|
|
|
|
Put |
|
|
9,325 |
|
|
|
|
|
|
|
67.84 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Jan Mar 2010 |
|
|
52,400 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
(63,430 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Apr June |
|
Swap |
|
|
6,635 |
|
|
$ |
71.45 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
Collar |
|
|
36,440 |
|
|
|
|
|
|
|
55.56 |
|
|
|
78.56 |
|
|
|
|
|
|
|
(24,741 |
) |
|
|
|
|
|
|
Put |
|
|
9,325 |
|
|
|
|
|
|
|
67.84 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Apr June 2010 |
|
|
52,400 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
(24,741 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July Sept |
|
Swap |
|
|
6,635 |
|
|
$ |
71.45 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
(2,916 |
) |
|
$ |
|
|
|
|
|
|
|
|
Collar |
|
|
36,440 |
|
|
|
|
|
|
|
60.71 |
|
|
|
82.67 |
|
|
|
(4,351 |
) |
|
|
(20,761 |
) |
|
|
|
|
|
|
Put |
|
|
9,325 |
|
|
|
|
|
|
|
67.84 |
|
|
|
|
|
|
|
1,502 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total July Sept 2010 |
|
|
52,400 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(5,765 |
) |
|
$ |
(20,761 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oct Dec |
|
Swap |
|
|
6,635 |
|
|
$ |
71.45 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
(3,690 |
) |
|
$ |
|
|
|
|
|
|
|
|
Collar |
|
|
36,440 |
|
|
|
|
|
|
|
62.42 |
|
|
|
88.81 |
|
|
|
(2,653 |
) |
|
|
(13,320 |
) |
|
|
|
|
|
|
Put |
|
|
9,325 |
|
|
|
|
|
|
|
67.84 |
|
|
|
|
|
|
|
3,025 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Oct Dec 2010 |
|
|
52,400 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(3,318 |
) |
|
$ |
(13,320 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011 |
|
Jan Mar |
|
Swap |
|
|
1,635 |
|
|
$ |
77.39 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
(167 |
) |
|
$ |
|
|
|
|
|
|
|
|
Collar |
|
|
44,940 |
|
|
|
|
|
|
|
70.43 |
|
|
|
100.05 |
|
|
|
12,725 |
|
|
|
177 |
|
|
|
|
|
|
|
Put |
|
|
8,825 |
|
|
|
|
|
|
|
70.85 |
|
|
|
|
|
|
|
4,505 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Jan Mar 2011 |
|
|
55,400 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
17,063 |
|
|
$ |
177 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Apr June |
|
Swap |
|
|
1,635 |
|
|
$ |
77.39 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
(297 |
) |
|
$ |
|
|
|
|
|
|
|
|
Collar |
|
|
44,940 |
|
|
|
|
|
|
|
70.43 |
|
|
|
100.05 |
|
|
|
12,537 |
|
|
|
(318 |
) |
|
|
|
|
|
|
Put |
|
|
8,825 |
|
|
|
|
|
|
|
70.85 |
|
|
|
|
|
|
|
5,296 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Apr June 2011 |
|
|
55,400 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
17,536 |
|
|
$ |
(318 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July Sept |
|
Swap |
|
|
1,635 |
|
|
$ |
77.39 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
(380 |
) |
|
$ |
|
|
|
|
|
|
|
|
Collar |
|
|
35,940 |
|
|
|
|
|
|
|
70.54 |
|
|
|
99.79 |
|
|
|
8,897 |
|
|
|
(1,078 |
) |
|
|
|
|
|
|
Put |
|
|
8,825 |
|
|
|
|
|
|
|
70.85 |
|
|
|
|
|
|
|
6,008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total July Sept 2011 |
|
|
46,400 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
14,525 |
|
|
$ |
(1,078 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oct Dec |
|
Swap |
|
|
1,635 |
|
|
$ |
77.39 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
(440 |
) |
|
$ |
|
|
|
|
|
|
|
|
Collar |
|
|
27,940 |
|
|
|
|
|
|
|
70.69 |
|
|
|
101.72 |
|
|
|
7,119 |
|
|
|
(2,533 |
) |
|
|
|
|
|
|
Put |
|
|
8,825 |
|
|
|
|
|
|
|
70.85 |
|
|
|
|
|
|
|
6,408 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Oct Dec 2011 |
|
|
38,400 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
13,087 |
|
|
$ |
(2,533 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012 |
|
Jan Dec |
|
Swap |
|
|
2,135 |
|
|
$ |
78.36 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
(2,120 |
) |
|
$ |
|
|
|
|
|
|
|
|
Collar |
|
|
750 |
|
|
|
|
|
|
|
68.33 |
|
|
|
81.12 |
|
|
|
(1,581 |
) |
|
|
|
|
|
|
|
|
|
|
Put |
|
|
2,135 |
|
|
|
|
|
|
|
65.59 |
|
|
|
|
|
|
|
5,335 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Jan Dec 2012 |
|
|
5,020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,634 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Oil Contracts |
|
$ |
54,762 |
|
|
$ |
(126,004 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23
DENBURY RESOURCES INC.
Notes to Unaudited Condensed Consolidated Financial Statements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Fair Value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract
Prices Per Mcf |
|
|
Asset (Liability) |
|
|
|
|
|
|
|
Type of |
|
|
|
|
|
|
Weighted Average Price |
|
|
June 30, |
|
|
December 31, |
|
Year |
|
Months |
|
|
Contract |
|
|
Mcf/d |
|
|
Swap |
|
|
Floor |
|
|
Ceiling |
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands |
|
Natural Gas Contracts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
Jan Mar |
|
Swap |
|
|
85,002 |
|
|
$ |
5.80 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
92 |
|
|
|
|
|
|
|
Collar |
|
|
3,800 |
|
|
|
|
|
|
|
7.20 |
|
|
|
9.58 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Put |
|
|
4,698 |
|
|
|
|
|
|
|
8.07 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Jan Mar 2010 |
93,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
92 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Apr June |
|
Swap |
|
|
85,002 |
|
|
$ |
5.80 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
397 |
|
|
|
|
|
|
|
Collar |
|
|
3,800 |
|
|
|
|
|
|
|
7.20 |
|
|
|
9.58 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Put |
|
|
4,698 |
|
|
|
|
|
|
|
8.07 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Apr June 2010 |
93,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
397 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July Sept |
|
Swap |
|
|
65,002 |
|
|
$ |
5.98 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
8,338 |
|
|
$ |
(294 |
) |
|
|
|
|
|
|
Collar |
|
|
13,800 |
|
|
|
|
|
|
|
5.70 |
|
|
|
7.17 |
|
|
|
1,573 |
|
|
|
|
|
|
|
|
|
|
|
Put |
|
|
4,698 |
|
|
|
|
|
|
|
8.07 |
|
|
|
|
|
|
|
1,514 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total July Sept 2010 |
83,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
11,425 |
|
|
$ |
(294 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oct Dec |
|
Swap |
|
|
65,002 |
|
|
$ |
5.98 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
6,577 |
|
|
$ |
(1,954 |
) |
|
|
|
|
|
|
Collar |
|
|
13,800 |
|
|
|
|
|
|
|
5.70 |
|
|
|
7.17 |
|
|
|
1,426 |
|
|
|
|
|
|
|
|
|
|
|
Put |
|
|
4,698 |
|
|
|
|
|
|
|
8.07 |
|
|
|
|
|
|
|
1,427 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Oct Dec 2010 |
83,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
9,430 |
|
|
$ |
(1,954 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011 |
|
Jan Dec |
|
Swap |
|
|
55,502 |
|
|
$ |
6.35 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
22,354 |
|
|
$ |
(981 |
) |
|
|
|
|
|
|
Put |
|
|
3,398 |
|
|
|
|
|
|
|
6.31 |
|
|
|
|
|
|
|
1,860 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Jan Dec 2011 |
58,900 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
24,214 |
|
|
$ |
(981 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012 |
|
Jan Dec |
|
Swap |
|
|
26,002 |
|
|
$ |
6.46 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
9,266 |
|
|
$ |
|
|
|
|
|
|
|
|
Put |
|
|
898 |
|
|
|
|
|
|
|
6.76 |
|
|
|
|
|
|
|
575 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Jan Dec 2012 |
26,900 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
9,841 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Natural Gas Contracts |
|
$ |
54,910 |
|
|
$ |
(2,740 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Commodity Derivative Contracts |
|
$ |
109,672 |
|
|
$ |
(128,744 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The table above includes ENP commodity derivative contracts. As of June 30, 2010, ENPs
oil derivative contracts cover 4,650 Bbls/d, 4,650 Bbls/d, and 3,770 Bbls/d during 2010, 2011 and
2012, respectively. As of June 30, 2010, ENPs natural gas derivative contracts cover 14,500
Mcf/d, 11,900 Mcf/d and 6,900 Mcf/d during 2010, 2011 and 2012, respectively. ENPs
commodity derivative contracts include swaps, collars and puts. The fair values of ENPs oil and
natural gas derivative contracts were $8.5 million and $14.8 million, respectively, at June 30, 2010.
As of June 30, 2010, Denbury had $38.1 million of deferred premiums payable, which relate to
various oil and natural gas floor contracts and are payable on a monthly basis from July 2010 to
January 2013. These premiums are excluded from the above tables.
Interest Rate Swaps
ENP uses derivative instruments in the form of interest rate swaps, which hedge risk related
to interest rate fluctuation, whereby it converts the interest due on certain floating rate debt
under its revolving credit agreement to a weighted average fixed rate. The following table
24
DENBURY RESOURCES INC.
Notes to Unaudited Condensed Consolidated Financial Statements
summarizes ENPs open interest rate swaps
as of June 30, 2010, all of which were entered into with Bank of America, N.A.:
|
|
|
|
|
|
|
|
|
|
|
|
|
Term |
|
Notional Amount |
|
Fixed Rate |
|
Floating Rate |
|
|
(In thousands) |
|
|
|
|
|
|
|
|
July 2010 Jan. 2011 |
|
$ |
50,000 |
|
|
|
3.1610 |
% |
|
1-month LIBOR |
July 2010 Jan. 2011 |
|
|
25,000 |
|
|
|
2.9650 |
% |
|
1-month LIBOR |
July 2010 Jan. 2011 |
|
|
25,000 |
|
|
|
2.9613 |
% |
|
1-month LIBOR |
July 2010 Mar. 2012 |
|
|
50,000 |
|
|
|
2.4200 |
% |
|
1-month LIBOR |
Additional Disclosures about Derivative Instruments
At June 30, 2010 and December 31, 2009, Denbury had derivative financial instruments recorded
in the accompanying Unaudited Condensed Consolidated Balance Sheets as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Fair Value |
|
|
|
|
|
|
|
Asset (Liability) |
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
Type of Contract |
|
Balance Sheet Location |
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
(In thousands) |
|
Derivatives not designated as hedging instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
Derivative asset: |
|
|
|
|
|
|
|
|
|
|
|
|
Oil contracts |
|
Derivative assets current |
|
$ |
43,375 |
|
|
$ |
309 |
|
Natural gas contracts |
|
Derivative assets current |
|
|
33,919 |
|
|
|
|
|
Oil contracts |
|
Derivative assets long-term |
|
|
33,864 |
|
|
|
506 |
|
Natural gas contracts |
|
Derivative assets long-term |
|
|
20,991 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liability: |
|
|
|
|
|
|
|
|
|
|
|
|
Oil contracts |
|
Derivative liabilities current |
|
|
(17,858 |
) |
|
|
(122,561 |
) |
Natural gas contracts |
|
Derivative liabilities current |
|
|
|
|
|
|
(1,759 |
) |
Deferred premiums |
|
Derivative liabilities current |
|
|
(23,667 |
) |
|
|
|
|
Oil contracts |
|
Derivative liabilities long-term |
|
|
(4,619 |
) |
|
|
(4,258 |
) |
Natural gas contracts |
|
Derivative liabilities long-term |
|
|
|
|
|
|
(981 |
) |
Deferred premiums |
|
Derivative liabilities long-term |
|
|
(14,429 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives not designated as hedging instruments |
|
|
|
|
|
|
71,576 |
|
|
|
(128,744 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives designated as hedging instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liability: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps |
|
Derivative liabilities current |
|
|
(2,418 |
) |
|
|
|
|
Interest rate swaps |
|
Derivative liabilities long-term |
|
|
(534 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives designated as hedging instruments |
|
|
|
|
|
|
(2,952 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives |
|
|
|
|
|
$ |
68,624 |
|
|
$ |
(128,744 |
) |
|
|
|
|
|
|
|
|
|
|
|
25
DENBURY RESOURCES INC.
Notes to Unaudited Condensed Consolidated Financial Statements
For the three and six months ended June 30, 2010 and 2009, the net effect on income of
derivative instruments not designated as hedges was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain/(Loss) |
|
|
Amount of Gain/(Loss) |
|
|
|
|
|
|
|
Recognized in Income |
|
|
Recognized in Income |
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
Location of Gain/(Loss) |
|
|
June 30, |
|
|
June 30, |
|
Type of Contract |
|
Recognized in Income |
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
(In thousands) |
|
Derivatives not designated as hedging instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity contracts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil contracts |
|
Derivatives income (expense) |
|
$ |
131,270 |
|
|
$ |
(147,316 |
) |
|
$ |
129,541 |
|
|
$ |
(157,341 |
) |
Natural gas contracts |
|
Derivatives income (expense) |
|
|
(3,279 |
) |
|
|
(5,473 |
) |
|
|
39,488 |
|
|
|
(15,963 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives not
designated as hedging instruments |
|
|
|
|
|
$ |
127,991 |
|
|
$ |
(152,789 |
) |
|
$ |
169,029 |
|
|
$ |
(173,304 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Please read Note 7. Fair Value Measurements for additional information regarding Denburys
derivative instruments.
Note 7. Fair Value Measurements
Fair Value Hierarchy
Fair value is the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the measurement date (exit
price). Denbury utilizes market data or assumptions that market participants would use in pricing
the asset or liability, including assumptions about risk and the risks inherent in the inputs to
the valuation technique. These inputs can be readily observable, market corroborated, or generally
unobservable. Denbury primarily applies the market approach for recurring fair value measurements
and endeavors to utilize the best available information. Accordingly, Denbury utilizes valuation
techniques that maximize the use of observable inputs and minimize the use of unobservable inputs.
Denbury is able to classify fair value balances based on the observability of those inputs. The
FASC establishes a fair value hierarchy that prioritizes the inputs used to measure fair value.
The hierarchy gives the highest priority to unadjusted quoted prices in active markets for
identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable
inputs (Level 3 measurement). The three levels of the fair value hierarchy are as follows:
|
|
|
Level 1 Quoted prices in active markets for identical assets or liabilities as of the
reporting date. During 2009 and the first six months of 2010, Denbury had no Level 1
recurring measurements. |
|
|
|
|
Level 2 Pricing inputs are other than quoted prices in active markets included in
Level 1, which are either directly or indirectly observable as of the reported date. Level
2 includes those financial instruments that are valued using models or other valuation
methodologies. These models are primarily industry-standard models that consider various
assumptions, including quoted forward prices for commodities, time value, volatility
factors, and current market and contractual prices for the underlying instruments, as well
as other relevant economic measures. Substantially all of these assumptions are observable
in the marketplace throughout the full term of the instrument, can be derived from
observable data, or are supported by observable levels at which transactions are executed
in the marketplace. |
|
|
|
|
Level 3 Pricing inputs include significant inputs that are generally less observable
from objective sources. These inputs may be used with internally developed methodologies
that result in managements best estimate of fair value. Denburys oil and natural gas
calls, puts, and short puts are average value options, which are not exchangetraded
contracts. Settlement is determined by the average underlying price over a predetermined
period of time. Denbury uses both observable and unobservable inputs in a Black-Scholes
valuation model to determine fair value. Accordingly, these derivative instruments are |
26
DENBURY RESOURCES INC.
Notes to Unaudited Condensed Consolidated Financial Statements
|
|
|
classified within the Level 3 valuation hierarchy. The observable inputs of Denburys
valuation model include: (1) current market and contractual prices for the underlying
instruments; (2) quoted forward prices for oil and natural gas; and (3) interest rates, such
as a LIBOR curve for a term similar to the commodity derivative contract. The unobservable
inputs of Denburys valuation model include volatility. The implied volatilities for
Denburys calls, puts, and short puts with comparable strike prices are based on the
settlement values from certain exchange-traded contracts. The implied volatilities for
calls, puts, and short puts where there are no exchange-traded contracts with the same
strike price are extrapolated from exchange-traded implied volatilities by an independent
party. |
Denbury adjusts the valuations from the valuation model for nonperformance risk, using
managements estimate of the counterpartys credit quality for asset positions and Denburys credit
quality for liability positions. Denbury uses multiple sources of third-party credit data in
determining counterparty nonperformance risk, including credit default swaps.
The following table sets forth by level within the fair value hierarchy Denburys financial
assets and liabilities that were accounted for at fair value on a recurring basis as of the dates
indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using: |
|
|
|
|
|
|
Significant |
|
|
|
|
|
|
|
|
Quoted Prices |
|
|
Other |
|
|
Significant |
|
|
|
|
|
in Active |
|
|
Observable |
|
|
Unobservable |
|
|
|
|
|
Markets |
|
|
Inputs |
|
|
Inputs |
|
|
|
|
In thousands |
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
|
Total |
|
June 30, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil and natural gas derivative contracts |
|
$ |
|
|
|
$ |
86,068 |
|
|
$ |
46,081 |
|
|
$ |
132,149 |
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil and natural gas derivative contracts |
|
|
|
|
|
|
(16,679 |
) |
|
|
(5,798 |
) |
|
|
(22,477 |
) |
Interest rate swaps |
|
|
|
|
|
|
(2,952 |
) |
|
|
|
|
|
|
(2,952 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
|
|
|
$ |
66,437 |
|
|
$ |
40,283 |
|
|
$ |
106,720 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil derivative contracts |
|
$ |
|
|
|
$ |
815 |
|
|
$ |
|
|
|
$ |
815 |
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil and natural gas derivative contracts |
|
|
|
|
|
|
(129,559 |
) |
|
|
|
|
|
|
(129,559 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
|
|
|
$ |
(128,744 |
) |
|
$ |
|
|
|
$ |
(128,744 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
27
DENBURY RESOURCES INC.
Notes to Unaudited Condensed Consolidated Financial Statements
The following table summarizes the changes in the fair value of Denburys Level 3 assets and
liabilities for the six months ended June 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using Significant |
|
|
|
Unobservable Inputs (Level 3) |
|
|
|
Oil |
|
|
Natural Gas |
|
|
|
|
|
|
Derivative |
|
|
Derivative |
|
|
|
|
|
|
Contracts |
|
|
Contracts |
|
|
|
|
In thousands |
|
Floors and Caps |
|
|
Floors and Caps |
|
|
Total |
|
Balance at December 31, 2009 |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Included in earnings |
|
|
20,804 |
|
|
|
2,329 |
|
|
|
23,133 |
|
Commodity derivative contracts acquired in Encore Merger |
|
|
8,942 |
|
|
|
9,645 |
|
|
|
18,587 |
|
Receipts (payments) on settlement of commodity
derivative contracts |
|
|
2,163 |
|
|
|
(3,600 |
) |
|
|
(1,437 |
) |
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2010 |
|
$ |
31,909 |
|
|
$ |
8,374 |
|
|
$ |
40,283 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amount of total gains (losses) for the period included
in earnings attributable to the change in unrealized
gains (losses) relating to assets still held at the reporting date |
|
$ |
20,804 |
|
|
$ |
2,329 |
|
|
$ |
23,133 |
|
|
|
|
|
|
|
|
|
|
|
Since Denbury does not use hedge accounting for its commodity derivative contracts, all
gains and losses on its assets and liabilities are included in Derivatives expense (income) in
the accompanying Unaudited Condensed Consolidated Statements of Operations.
All fair values have been adjusted for nonperformance risk resulting in a decrease of the net
commodity derivative liability of approximately $1.1 million as of June 30, 2010. For commodity
derivative contracts which are in an asset position, Denbury uses the counterpartys credit default
swap rating. For commodity derivative contracts which are in a liability position, Denbury uses
the average credit default swap rating of its peer companies as Denbury does not have its own
credit default swap rating.
28
DENBURY RESOURCES INC.
Notes to Unaudited Condensed Consolidated Financial Statements
The following table sets forth the carrying amount and estimated fair value of financial
instruments as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2010 |
|
December 31, 2009 |
|
|
Carrying |
|
Estimated |
|
Carrying |
|
Estimated |
In thousands, except percentages |
|
Amount |
|
Fair Value |
|
Amount |
|
Fair Value |
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity derivative contracts |
|
$ |
132,149 |
|
|
$ |
132,149 |
|
|
$ |
815 |
|
|
$ |
815 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denbury Credit Agreement |
|
|
40,000 |
|
|
|
38,284 |
|
|
|
|
|
|
|
|
|
ENP Credit Agreement |
|
|
245,000 |
|
|
|
240,485 |
|
|
|
|
|
|
|
|
|
Senior bank loan (replaced with Denbury Credit Agreement) |
|
|
|
|
|
|
|
|
|
|
125,000 |
|
|
|
122,500 |
|
7.5% Senior Subordinated Notes due 2013 |
|
|
224,466 |
|
|
|
228,094 |
|
|
|
224,369 |
|
|
|
226,125 |
|
6.25% Senior Subordinated Notes due 2014 |
|
|
1,084 |
|
|
|
1,072 |
|
|
|
|
|
|
|
|
|
7.5% Senior Subordinated Notes due 2015 |
|
|
300,470 |
|
|
|
303,000 |
|
|
|
300,513 |
|
|
|
299,250 |
|
6.0% Senior Subordinated Notes due 2015 |
|
|
490 |
|
|
|
484 |
|
|
|
|
|
|
|
|
|
9.5% Senior Subordinated Notes due 2016 |
|
|
240,877 |
|
|
|
238,415 |
|
|
|
|
|
|
|
|
|
9.75% Senior Subordinated Notes due 2016 |
|
|
402,069 |
|
|
|
460,458 |
|
|
|
399,926 |
|
|
|
455,129 |
|
7.25% Senior Subordinated Notes due 2017 |
|
|
2,277 |
|
|
|
2,250 |
|
|
|
|
|
|
|
|
|
8.25% Senior Subordinated Notes due 2020 |
|
|
996,273 |
|
|
|
1,041,105 |
|
|
|
|
|
|
|
|
|
Commodity derivative contracts |
|
|
22,477 |
|
|
|
22,477 |
|
|
|
129,559 |
|
|
|
129,559 |
|
Deferred premiums on commodity
derivative contracts |
|
|
38,096 |
|
|
|
38,096 |
|
|
|
|
|
|
|
|
|
Interest rate swaps |
|
|
2,952 |
|
|
|
2,952 |
|
|
|
|
|
|
|
|
|
The book values of cash and cash equivalents, accrued production receivable, trade and
other receivables, net, and accounts payable and accrued liabilities approximate fair value due to
the short-term nature of these instruments. The fair values of the senior subordinated notes were
determined using open market quotes. The difference between book value and fair value of the
senior subordinated notes represents the premium or discount on that date. The carrying values of
Denburys revolving credit agreements approximates fair value since they are subject to short-term
floating interest rates that approximate the rates available to Denbury for those periods; however,
the estimated fair value has been adjusted for estimated
nonperformance risk of approximately $6.2
million and $2.5 million at June 30, 2010 and December 31, 2009, respectively. The nonperformance
risk was determined utilizing industry credit default swaps. Commodity derivative contracts and
interest rate swaps are marked-to-market each period and are thus stated at fair value in the
accompanying Unaudited Condensed Consolidated Balance Sheets. Deferred premiums on commodity
derivative contracts were recorded at their fair value at the time they were acquired from Encore
and Denbury accretes that value to the eventual settlement price by recording interest expense each
period.
Please read Note 6. Derivative Instruments and Hedging Activities for additional information
regarding Denburys derivative instruments.
Note 8. Income Taxes
Denburys effective tax rate has historically been slightly lower than its estimated statutory
rate due to the impact of certain items such as the domestic production activities deduction,
offset in part by certain non-cash stock-based compensation that cannot be deducted for tax
purposes in the same manner as book expense. As a result of the Encore Merger, Denburys statutory
rate increased, which required Denbury to remeasure its deferred tax liabilities resulting in an
additional income tax provision of approximately $10 million. As a result of the sale of the
Southern Assets, Denburys statutory rate decreased, which required Denbury to remeasure its
deferred tax liabilities resulting in an income tax benefit of approximately $3 million. The
combination of these items increased Denburys effective tax rate to 38.7% during the six months
ended June 30, 2010.
29
DENBURY RESOURCES INC.
Notes to Unaudited Condensed Consolidated Financial Statements
In the second quarter of 2008, we obtained approval from the National Office of the Internal
Revenue Service (IRS) to change our method of tax accounting for certain assets used in our
tertiary oilfield recovery operations which led us to apply for refunds of certain amounts related
thereto on our 2004 and 2006 federal income tax returns. In the course of an IRS audit of those
refund claims, the IRS examination team has questioned the change in accounting method and the
ruling received from the National Office of the IRS in 2008. Together with the IRS examination
team, we have submitted a request to the National Office of the IRS for a Technical Advice
Memorandum (TAM) regarding these issues, which is under consideration by the National Office.
Although we have not recorded an uncertain tax position related to these deductions as we expect to
receive those tax refunds, given the existence of the TAM process related to those refunds, the
payment of those tax refunds of approximately $10.6 million for tax years through 2006 is not free
from doubt.
Note 9. Accounts Payable and Accrued Liabilities
The following table summarizes Denburys accounts payable and accrued liabilities as of the
periods indicated:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
In thousands |
|
2010 |
|
|
2009 |
|
Accounts payable |
|
$ |
52,411 |
|
|
$ |
40,140 |
|
Accrued commodity derivative contract settlements |
|
|
1,984 |
|
|
|
|
|
Accrued exploration and development costs |
|
|
140,919 |
|
|
|
40,375 |
|
Accrued compensation |
|
|
22,809 |
|
|
|
35,292 |
|
Accrued lease operating expense |
|
|
28,241 |
|
|
|
14,512 |
|
Accrued interest |
|
|
57,928 |
|
|
|
24,214 |
|
Taxes payable |
|
|
15,944 |
|
|
|
5,358 |
|
Asset retirement obligations |
|
|
2,366 |
|
|
|
1,087 |
|
Other |
|
|
37,456 |
|
|
|
8,896 |
|
|
|
|
|
|
|
|
Total |
|
$ |
360,058 |
|
|
$ |
169,874 |
|
|
|
|
|
|
|
|
Note 10. Commitments and Contingencies
In conjunction with the Encore Merger, Denbury acquired certain commitments, including:
remaining outstanding principal and interest on the 6.5% Notes, the 6.0% Notes, the 9.5% Notes, and
the 7.25% Notes previously issued by Encore, derivative contracts, operating leases, and asset
retirement obligations. The Encore Merger is discussed in Note 3, asset retirement obligations are
discussed in Note 4, long-term debt is discussed in Note 5, and derivative contracts are discussed
in Notes 6 and 7. Operating leases assumed from Encore require payments of approximately $2.0
million in the remainder of 2010, $7.0 million in 2011 through 2012, and $2.6 million in 2013. In
addition, Denbury entered into a new lease for its corporate headquarters with a 12-year term that
has total minimum monthly payments which aggregate approximately $55.6 million.
We are involved in various lawsuits, claims and regulatory proceedings incidental to our
businesses. While we currently believe that the ultimate outcome of these proceedings, individually
and in the aggregate, will not have a material adverse effect on our financial position or overall
trends in results of operations or cash flows, litigation is subject to inherent uncertainties. If
an unfavorable ruling were to occur, there exists the possibility of a material adverse impact on
our net income in the period in which the ruling occurs. We provide accruals for litigation and
claims if we determine that a loss is probable and the amount can be reasonably estimated.
Note 11. Condensed Consolidating Financial Information
Denburys subordinated debt is fully and unconditionally guaranteed jointly and severally by
certain of its subsidiaries, except that with respect to Denburys $225 million of 7.5% Senior
Subordinated Notes due 2013, Denbury Resources Inc. and Denbury Onshore, LLC are co-obligors.
Except as noted in the foregoing sentence, Denbury Resources Inc. is the sole issuer and Denbury
Onshore, LLC is a subsidiary guarantor. In the case of the 6.25% Notes, the 6% Notes, the 7.25%
Notes and the 9.5% Notes previously issued by Encore, Denbury is the sole
30
DENBURY RESOURCES INC.
Notes to Unaudited Condensed Consolidated Financial Statements
issuer by virtue of the fact that it is the successor in interest to Encore with respect to
all such notes. Each subsidiary guarantor and the subsidiary co-obligor are wholly-owned, directly
or indirectly, by Denbury Resources Inc.
All intercompany investments in, loans due to/from, subsidiary equity, revenues, and expenses
between Denbury Resources Inc., Denbury Onshore, LLC, guarantor subsidiaries, and non-guarantor
subsidiaries are shown prior to consolidation with Denbury Resources Inc. and then eliminated to
arrive at consolidated totals per the accompanying Unaudited Condensed Consolidated Financial
Statements.
31
DENBURY RESOURCES INC.
Notes to Unaudited Condensed Consolidated Financial Statements
Condensed Consolidating Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2010 |
|
|
|
Denbury |
|
|
Denbury |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Resources Inc. |
|
|
Onshore, LLC |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Parent and |
|
|
(Issuer and |
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
|
|
|
|
Consolidated |
|
In thousands |
|
Co-Obligor) |
|
|
Co-Obligor) |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Total |
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
1,741 |
|
|
$ |
25,456 |
|
|
$ |
25,573 |
|
|
$ |
14,704 |
|
|
$ |
|
|
|
$ |
67,474 |
|
Other current assets |
|
|
170,846 |
|
|
|
206,382 |
|
|
|
927,305 |
|
|
|
33,005 |
|
|
|
(947,058 |
) |
|
|
390,480 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
172,587 |
|
|
|
231,838 |
|
|
|
952,878 |
|
|
|
47,709 |
|
|
|
(947,058 |
) |
|
|
457,954 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil and natural gas properties (using full cost accounting): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proved |
|
|
|
|
|
|
3,980,060 |
|
|
|
2,078,281 |
|
|
|
776,335 |
|
|
|
|
|
|
|
6,834,676 |
|
Unevaluated |
|
|
|
|
|
|
200,500 |
|
|
|
863,611 |
|
|
|
121,516 |
|
|
|
|
|
|
|
1,185,627 |
|
CO2 properties, equipment, and pipelines |
|
|
|
|
|
|
1,388,524 |
|
|
|
316,176 |
|
|
|
|
|
|
|
|
|
|
|
1,704,700 |
|
Other |
|
|
|
|
|
|
90,487 |
|
|
|
9,900 |
|
|
|
364 |
|
|
|
|
|
|
|
100,751 |
|
Less accumulated depletion, depreciation,
amortization, and impairment |
|
|
|
|
|
|
(1,960,557 |
) |
|
|
(58,407 |
) |
|
|
(14,972 |
) |
|
|
|
|
|
|
(2,033,936 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net property and equipment |
|
|
|
|
|
|
3,699,014 |
|
|
|
3,209,561 |
|
|
|
883,243 |
|
|
|
|
|
|
|
7,791,818 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other assets, net |
|
|
1,907,387 |
|
|
|
243,535 |
|
|
|
103,902 |
|
|
|
18,109 |
|
|
|
(776,868 |
) |
|
|
1,496,065 |
|
Investment in subsidiaries (equity method) |
|
|
4,266,114 |
|
|
|
|
|
|
|
1,472,538 |
|
|
|
|
|
|
|
(5,738,652 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
6,346,088 |
|
|
$ |
4,174,387 |
|
|
$ |
5,738,879 |
|
|
$ |
949,061 |
|
|
$ |
(7,462,578 |
) |
|
$ |
9,745,837 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities |
|
$ |
52,306 |
|
|
$ |
953,012 |
|
|
$ |
503,218 |
|
|
$ |
27,273 |
|
|
$ |
(947,058 |
) |
|
$ |
588,751 |
|
Long-term debt |
|
|
1,983,541 |
|
|
|
475,864 |
|
|
|
|
|
|
|
245,000 |
|
|
|
|
|
|
|
2,704,405 |
|
Deferred taxes |
|
|
|
|
|
|
600,456 |
|
|
|
932,653 |
|
|
|
780 |
|
|
|
(50,518 |
) |
|
|
1,483,371 |
|
Other liabilities |
|
|
|
|
|
|
809,537 |
|
|
|
36,894 |
|
|
|
17,751 |
|
|
|
(726,350 |
) |
|
|
137,832 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
2,035,847 |
|
|
|
2,838,869 |
|
|
|
1,472,765 |
|
|
|
290,804 |
|
|
|
(1,723,926 |
) |
|
|
4,914,359 |
|
Total equity |
|
|
4,310,241 |
|
|
|
1,335,518 |
|
|
|
4,266,114 |
|
|
|
658,257 |
|
|
|
(5,738,652 |
) |
|
|
4,831,478 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity |
|
$ |
6,346,088 |
|
|
$ |
4,174,387 |
|
|
$ |
5,738,879 |
|
|
$ |
949,061 |
|
|
$ |
(7,462,578 |
) |
|
$ |
9,745,837 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
|
|
Denbury |
|
|
Denbury |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Resources Inc. |
|
|
Onshore, LLC |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Parent and |
|
|
(Issuer and |
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
|
|
|
|
Consolidated |
|
In thousands |
|
Co-Obligor) |
|
|
Co-Obligor) |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Total |
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
24 |
|
|
$ |
20,281 |
|
|
$ |
286 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
20,591 |
|
Other current assets |
|
|
637,310 |
|
|
|
233,320 |
|
|
|
20,432 |
|
|
|
|
|
|
|
(655,891 |
) |
|
|
235,171 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
637,334 |
|
|
|
253,601 |
|
|
|
20,718 |
|
|
|
|
|
|
|
(655,891 |
) |
|
|
255,762 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil and natural gas properties (using full cost accounting): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proved |
|
|
|
|
|
|
3,595,726 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,595,726 |
|
Unevaluated |
|
|
|
|
|
|
320,356 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
320,356 |
|
CO2 properties, equipment, and pipelines |
|
|
|
|
|
|
1,309,325 |
|
|
|
220,456 |
|
|
|
|
|
|
|
|
|
|
|
1,529,781 |
|
Other |
|
|
|
|
|
|
82,185 |
|
|
|
352 |
|
|
|
|
|
|
|
|
|
|
|
82,537 |
|
Less accumulated depletion, depreciation,
amortization and impairment |
|
|
|
|
|
|
(1,825,282 |
) |
|
|
(246 |
) |
|
|
|
|
|
|
|
|
|
|
(1,825,528 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net property and equipment |
|
|
|
|
|
|
3,482,310 |
|
|
|
220,562 |
|
|
|
|
|
|
|
|
|
|
|
3,702,872 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other assets, net |
|
|
746,442 |
|
|
|
225,938 |
|
|
|
6,078 |
|
|
|
|
|
|
|
(742,131 |
) |
|
|
236,327 |
|
Investment in subsidiaries (equity method) |
|
|
1,303,728 |
|
|
|
23,792 |
|
|
|
1,299,186 |
|
|
|
|
|
|
|
(2,551,689 |
) |
|
|
75,017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
2,687,504 |
|
|
$ |
3,985,641 |
|
|
$ |
1,546,544 |
|
|
$ |
|
|
|
$ |
(3,949,711 |
) |
|
$ |
4,269,978 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities |
|
$ |
14,827 |
|
|
$ |
795,486 |
|
|
$ |
239,368 |
|
|
$ |
|
|
|
$ |
(655,891 |
) |
|
$ |
393,790 |
|
Long-term debt |
|
|
700,440 |
|
|
|
1,326,978 |
|
|
|
|
|
|
|
|
|
|
|
(726,350 |
) |
|
|
1,301,068 |
|
Deferred taxes |
|
|
|
|
|
|
527,849 |
|
|
|
3,448 |
|
|
|
|
|
|
|
(15,781 |
) |
|
|
515,516 |
|
Other liabilities |
|
|
|
|
|
|
87,367 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
87,367 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
715,267 |
|
|
|
2,737,680 |
|
|
|
242,816 |
|
|
|
|
|
|
|
(1,398,022 |
) |
|
|
2,297,741 |
|
Total equity |
|
|
1,972,237 |
|
|
|
1,247,961 |
|
|
|
1,303,728 |
|
|
|
|
|
|
|
(2,551,689 |
) |
|
|
1,972,237 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity |
|
$ |
2,687,504 |
|
|
$ |
3,985,641 |
|
|
$ |
1,546,544 |
|
|
$ |
|
|
|
$ |
(3,949,711 |
) |
|
$ |
4,269,978 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32
DENBURY RESOURCES INC.
Notes to Unaudited Condensed Consolidated Financial Statements
Condensed Consolidating Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2010 |
|
|
|
Denbury |
|
|
Denbury |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Resources Inc. |
|
|
Onshore, LLC |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Parent and |
|
|
(Issuer and |
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
|
|
|
|
Consolidated |
|
In thousands |
|
Co-Obligor) |
|
|
Co-Obligor) |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Total |
|
Revenues and other income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil, natural gas, and related product sales |
|
$ |
|
|
|
$ |
287,472 |
|
|
$ |
155,697 |
|
|
$ |
44,859 |
|
|
$ |
|
|
|
$ |
488,028 |
|
CO2 sales and transportation fees |
|
|
|
|
|
|
4,690 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,690 |
|
Gain on sale of interests in Genesis |
|
|
|
|
|
|
(67 |
) |
|
|
39 |
|
|
|
|
|
|
|
|
|
|
|
(28 |
) |
Interest income and other |
|
|
16,243 |
|
|
|
2,808 |
|
|
|
821 |
|
|
|
666 |
|
|
|
(16,018 |
) |
|
|
4,520 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
16,243 |
|
|
|
294,903 |
|
|
|
156,557 |
|
|
|
45,525 |
|
|
|
(16,018 |
) |
|
|
497,210 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease operating |
|
|
|
|
|
|
90,475 |
|
|
|
26,792 |
|
|
|
10,476 |
|
|
|
|
|
|
|
127,743 |
|
Production taxes and marketing |
|
|
|
|
|
|
12,605 |
|
|
|
20,817 |
|
|
|
4,678 |
|
|
|
|
|
|
|
38,100 |
|
CO2 operating |
|
|
|
|
|
|
1,689 |
|
|
|
(8 |
) |
|
|
|
|
|
|
|
|
|
|
1,681 |
|
General and administrative |
|
|
205 |
|
|
|
24,008 |
|
|
|
3,436 |
|
|
|
3,543 |
|
|
|
|
|
|
|
31,192 |
|
Interest, net of amounts capitalized |
|
|
51,795 |
|
|
|
16,070 |
|
|
|
(11,259 |
) |
|
|
2,895 |
|
|
|
(16,018 |
) |
|
|
43,483 |
|
Depletion, depreciation, and amortization |
|
|
|
|
|
|
71,622 |
|
|
|
44,758 |
|
|
|
12,829 |
|
|
|
|
|
|
|
129,209 |
|
Derivative income |
|
|
|
|
|
|
(82,212 |
) |
|
|
(29,192 |
) |
|
|
(17,270 |
) |
|
|
|
|
|
|
(128,674 |
) |
Transaction costs related to Encore Merger |
|
|
|
|
|
|
2,125 |
|
|
|
20,659 |
|
|
|
|
|
|
|
|
|
|
|
22,784 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses |
|
|
52,000 |
|
|
|
136,382 |
|
|
|
76,003 |
|
|
|
17,151 |
|
|
|
(16,018 |
) |
|
|
265,518 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in net earnings of subsidiaries |
|
|
153,890 |
|
|
|
|
|
|
|
111,753 |
|
|
|
|
|
|
|
(265,643 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
118,133 |
|
|
|
158,521 |
|
|
|
192,307 |
|
|
|
28,374 |
|
|
|
(265,643 |
) |
|
|
231,692 |
|
Income tax provision (benefit) |
|
|
(13,917 |
) |
|
|
62,808 |
|
|
|
32,233 |
|
|
|
239 |
|
|
|
|
|
|
|
81,363 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated net income |
|
$ |
132,050 |
|
|
$ |
95,713 |
|
|
$ |
160,074 |
|
|
$ |
28,135 |
|
|
$ |
(265,643 |
) |
|
$ |
150,329 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2009 |
|
|
|
Denbury |
|
|
Denbury |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Resources Inc. |
|
|
Onshore, LLC |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Parent and |
|
|
(Issuer and |
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
|
|
|
|
Consolidated |
|
In thousands |
|
Co-Obligor) |
|
|
Co-Obligor) |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Total |
|
Revenues and other income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil, natural gas, and related product sales |
|
$ |
|
|
|
$ |
211,552 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
211,552 |
|
CO2 sales and transportation fees |
|
|
|
|
|
|
2,884 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,884 |
|
Interest income and other |
|
|
15,862 |
|
|
|
1,102 |
|
|
|
1,854 |
|
|
|
|
|
|
|
(15,862 |
) |
|
|
2,956 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
15,862 |
|
|
|
215,538 |
|
|
|
1,854 |
|
|
|
|
|
|
|
(15,862 |
) |
|
|
217,392 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease operating |
|
|
|
|
|
|
83,658 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
83,658 |
|
Production taxes and marketing |
|
|
|
|
|
|
10,784 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,784 |
|
CO2 operating |
|
|
|
|
|
|
1,095 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,095 |
|
General and administrative |
|
|
|
|
|
|
29,056 |
|
|
|
4,079 |
|
|
|
|
|
|
|
|
|
|
|
33,135 |
|
Interest, net of amounts capitalized |
|
|
17,339 |
|
|
|
15,147 |
|
|
|
(1,720 |
) |
|
|
|
|
|
|
(15,862 |
) |
|
|
14,904 |
|
Depletion, depreciation, and amortization |
|
|
|
|
|
|
61,695 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
61,695 |
|
Derivative expense |
|
|
|
|
|
|
152,789 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
152,789 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses |
|
|
17,339 |
|
|
|
354,224 |
|
|
|
2,359 |
|
|
|
|
|
|
|
(15,862 |
) |
|
|
358,060 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in net earnings of subsidiaries |
|
|
(85,763 |
) |
|
|
|
|
|
|
(85,015 |
) |
|
|
|
|
|
|
170,778 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes |
|
|
(87,240 |
) |
|
|
(138,686 |
) |
|
|
(85,520 |
) |
|
|
|
|
|
|
170,778 |
|
|
|
(140,668 |
) |
Income tax provision (benefit) |
|
|
|
|
|
|
(53,671 |
) |
|
|
243 |
|
|
|
|
|
|
|
|
|
|
|
(53,428 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated net loss |
|
$ |
(87,240 |
) |
|
$ |
(85,015 |
) |
|
$ |
(85,763 |
) |
|
$ |
|
|
|
$ |
170,778 |
|
|
$ |
(87,240 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33
DENBURY RESOURCES INC.
Notes to Unaudited Condensed Consolidated Financial Statements
Condensed Consolidating Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2010 |
|
|
|
Denbury |
|
|
Denbury |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Resources Inc. |
|
|
Onshore, LLC |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Parent and |
|
|
(Issuer and |
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
|
|
|
|
Consolidated |
|
In thousands |
|
Co-Obligor) |
|
|
Co-Obligor) |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Total |
|
Revenues and other income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil, natural gas, and related product sales |
|
$ |
|
|
|
$ |
558,043 |
|
|
$ |
203,578 |
|
|
$ |
57,293 |
|
|
$ |
|
|
|
$ |
818,914 |
|
CO2 sales and transportation fees |
|
|
|
|
|
|
9,187 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,187 |
|
Gain on sale of interests in Genesis |
|
|
|
|
|
|
(227 |
) |
|
|
101,767 |
|
|
|
|
|
|
|
|
|
|
|
101,540 |
|
Interest income and other |
|
|
32,265 |
|
|
|
3,635 |
|
|
|
1,855 |
|
|
|
670 |
|
|
|
(32,035 |
) |
|
|
6,390 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
32,265 |
|
|
|
570,638 |
|
|
|
307,200 |
|
|
|
57,963 |
|
|
|
(32,035 |
) |
|
|
936,031 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease operating |
|
|
|
|
|
|
176,359 |
|
|
|
34,344 |
|
|
|
13,260 |
|
|
|
|
|
|
|
223,963 |
|
Production taxes and marketing |
|
|
|
|
|
|
24,882 |
|
|
|
26,470 |
|
|
|
6,065 |
|
|
|
|
|
|
|
57,417 |
|
CO2 operating |
|
|
|
|
|
|
3,049 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,049 |
|
General and administrative |
|
|
323 |
|
|
|
50,691 |
|
|
|
8,663 |
|
|
|
4,224 |
|
|
|
|
|
|
|
63,901 |
|
Interest, net of amounts capitalized |
|
|
85,623 |
|
|
|
30,014 |
|
|
|
(17,677 |
) |
|
|
3,974 |
|
|
|
(32,035 |
) |
|
|
69,899 |
|
Depletion, depreciation, and amortization |
|
|
|
|
|
|
136,647 |
|
|
|
58,506 |
|
|
|
15,928 |
|
|
|
|
|
|
|
211,081 |
|
Derivative income |
|
|
|
|
|
|
(113,850 |
) |
|
|
(35,009 |
) |
|
|
(21,040 |
) |
|
|
|
|
|
|
(169,899 |
) |
Transaction costs related to Encore Merger |
|
|
|
|
|
|
45,934 |
|
|
|
20,911 |
|
|
|
938 |
|
|
|
|
|
|
|
67,783 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses |
|
|
85,946 |
|
|
|
353,726 |
|
|
|
96,208 |
|
|
|
23,349 |
|
|
|
(32,035 |
) |
|
|
527,194 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in net earnings of subsidiaries |
|
|
264,974 |
|
|
|
|
|
|
|
103,273 |
|
|
|
|
|
|
|
(368,247 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
211,293 |
|
|
|
216,912 |
|
|
|
314,265 |
|
|
|
34,614 |
|
|
|
(368,247 |
) |
|
|
408,837 |
|
Income tax provision (benefit) |
|
|
(20,961 |
) |
|
|
129,679 |
|
|
|
49,334 |
|
|
|
252 |
|
|
|
|
|
|
|
158,304 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated net income |
|
$ |
232,254 |
|
|
$ |
87,233 |
|
|
$ |
264,931 |
|
|
$ |
34,362 |
|
|
$ |
(368,247 |
) |
|
$ |
250,533 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2009 |
|
|
|
Denbury |
|
|
Denbury |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Resources Inc. |
|
|
Onshore, LLC |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Parent and |
|
|
(Issuer and |
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
|
|
|
|
Consolidated |
|
In thousands |
|
Co-Obligor) |
|
|
Co-Obligor) |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Total |
|
Revenues and other income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil, natural gas, and related product sales |
|
$ |
|
|
|
$ |
379,621 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
379,621 |
|
CO2 sales and transportation fees |
|
|
|
|
|
|
6,049 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,049 |
|
Interest income and other |
|
|
26,720 |
|
|
|
1,928 |
|
|
|
3,553 |
|
|
|
|
|
|
|
(26,720 |
) |
|
|
5,481 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
26,720 |
|
|
|
387,598 |
|
|
|
3,553 |
|
|
|
|
|
|
|
(26,720 |
) |
|
|
391,151 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease operating |
|
|
|
|
|
|
158,608 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
158,608 |
|
Production taxes and marketing |
|
|
|
|
|
|
19,976 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,976 |
|
CO2 operating |
|
|
|
|
|
|
2,395 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,395 |
|
General and administrative |
|
|
|
|
|
|
47,962 |
|
|
|
7,828 |
|
|
|
|
|
|
|
|
|
|
|
55,790 |
|
Interest, net of amounts capitalized |
|
|
28,971 |
|
|
|
27,323 |
|
|
|
(2,473 |
) |
|
|
|
|
|
|
(26,720 |
) |
|
|
27,101 |
|
Depletion, depreciation, and amortization |
|
|
|
|
|
|
123,620 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
123,620 |
|
Derivative expense |
|
|
|
|
|
|
173,304 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
173,304 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses |
|
|
28,971 |
|
|
|
553,188 |
|
|
|
5,355 |
|
|
|
|
|
|
|
(26,720 |
) |
|
|
560,794 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in net earnings of subsidiaries |
|
|
(103,286 |
) |
|
|
|
|
|
|
(101,345 |
) |
|
|
|
|
|
|
204,631 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes |
|
|
(105,537 |
) |
|
|
(165,590 |
) |
|
|
(103,147 |
) |
|
|
|
|
|
|
204,631 |
|
|
|
(169,643 |
) |
Income tax provision (benefit) |
|
|
|
|
|
|
(64,245 |
) |
|
|
139 |
|
|
|
|
|
|
|
|
|
|
|
(64,106 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated net loss |
|
$ |
(105,537 |
) |
|
$ |
(101,345 |
) |
|
$ |
(103,286 |
) |
|
$ |
|
|
|
$ |
204,631 |
|
|
$ |
(105,537 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34
DENBURY RESOURCES INC.
Notes to Unaudited Condensed Consolidated Financial Statements
Condensed Consolidating Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2010 |
|
|
|
Denbury |
|
|
Denbury |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Resources Inc. |
|
|
Onshore, LLC |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Parent and |
|
|
(Issuer and |
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
|
|
|
|
Consolidated |
|
In thousands |
|
Co-Obligor) |
|
|
Co-Obligor) |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Total |
|
Cash flow from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used for) operating activities |
|
$ |
(21,660 |
) |
|
$ |
426,352 |
|
|
$ |
(539,831 |
) |
|
$ |
41,856 |
|
|
$ |
477,574 |
|
|
$ |
384,291 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow used for investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil and natural gas capital expenditures |
|
|
|
|
|
|
(197,867 |
) |
|
|
(117,241 |
) |
|
|
(2,065 |
) |
|
|
|
|
|
|
(317,173 |
) |
Acquisitions of oil and natural gas properties |
|
|
|
|
|
|
(23,951 |
) |
|
|
(13 |
) |
|
|
(279 |
) |
|
|
|
|
|
|
(24,243 |
) |
Cash paid in the Encore Merger, net of cash acquired |
|
|
(830,310 |
) |
|
|
|
|
|
|
15,705 |
|
|
|
13,116 |
|
|
|
|
|
|
|
(801,489 |
) |
CO2 capital expenditures, including pipelines |
|
|
|
|
|
|
(87,837 |
) |
|
|
(64,614 |
) |
|
|
|
|
|
|
|
|
|
|
(152,451 |
) |
Net proceeds from sale of oil and natural gas properties and equipment |
|
|
|
|
|
|
(2,658 |
) |
|
|
884,002 |
|
|
|
|
|
|
|
|
|
|
|
881,344 |
|
Net proceeds from sale of interests in Genesis |
|
|
|
|
|
|
23,537 |
|
|
|
139,085 |
|
|
|
|
|
|
|
|
|
|
|
162,622 |
|
Investments in subsidiaries (equity method) |
|
|
501,025 |
|
|
|
|
|
|
|
(23,732 |
) |
|
|
|
|
|
|
(477,293 |
) |
|
|
|
|
Other |
|
|
|
|
|
|
(7,102 |
) |
|
|
(122 |
) |
|
|
|
|
|
|
|
|
|
|
(7,224 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used for) investing activities |
|
|
(329,285 |
) |
|
|
(295,878 |
) |
|
|
833,070 |
|
|
|
10,772 |
|
|
|
(477,293 |
) |
|
|
(258,614 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank repayments |
|
|
(879,000 |
) |
|
|
(350,000 |
) |
|
|
(265,000 |
) |
|
|
(20,000 |
) |
|
|
|
|
|
|
(1,514,000 |
) |
Bank borrowings |
|
|
919,000 |
|
|
|
225,000 |
|
|
|
|
|
|
|
5,000 |
|
|
|
|
|
|
|
1,149,000 |
|
Senior subordinated notes tendered post Encore Merger |
|
|
(616,638 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(616,638 |
) |
Net proceeds from issuance of senior subordinated debt |
|
|
1,000,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,000,000 |
|
Costs of debt financing |
|
|
(76,232 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(76,232 |
) |
Other |
|
|
5,532 |
|
|
|
(299 |
) |
|
|
(2,952 |
) |
|
|
(22,924 |
) |
|
|
(281 |
) |
|
|
(20,924 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used for) financing activities |
|
|
352,662 |
|
|
|
(125,299 |
) |
|
|
(267,952 |
) |
|
|
(37,924 |
) |
|
|
(281 |
) |
|
|
(78,794 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents |
|
|
1,717 |
|
|
|
5,175 |
|
|
|
25,287 |
|
|
|
14,704 |
|
|
|
|
|
|
|
46,883 |
|
Cash and cash equivalents at beginning of period |
|
|
24 |
|
|
|
20,281 |
|
|
|
286 |
|
|
|
|
|
|
|
|
|
|
|
20,591 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
1,741 |
|
|
$ |
25,456 |
|
|
$ |
25,573 |
|
|
$ |
14,704 |
|
|
$ |
|
|
|
$ |
67,474 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2009 |
|
|
|
Denbury |
|
|
Denbury |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Resources Inc. |
|
|
Onshore, LLC |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Parent and |
|
|
(Issuer and |
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
|
|
|
|
Consolidated |
|
In thousands |
|
Co-Obligor) |
|
|
Co-Obligor) |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Total |
|
Cash flow from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
$ |
|
|
|
$ |
260,548 |
|
|
$ |
241 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
260,789 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow used for investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil and natural gas capital expenditures |
|
|
|
|
|
|
(215,978 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(215,978 |
) |
Acquisitions of oil and natural gas properties |
|
|
|
|
|
|
(196,274 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(196,274 |
) |
CO2 capital expenditures, including pipelines |
|
|
|
|
|
|
(399,406 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(399,406 |
) |
Net proceeds from sales of oil and gas properties and equipment |
|
|
|
|
|
|
240,087 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
240,087 |
|
Investments in subsidiaries (equity method) |
|
|
(388,391 |
) |
|
|
5,115 |
|
|
|
|
|
|
|
|
|
|
|
388,391 |
|
|
|
5,115 |
|
Other |
|
|
|
|
|
|
(8,384 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,384 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used for investing activities |
|
|
(388,391 |
) |
|
|
(574,840 |
) |
|
|
|
|
|
|
|
|
|
|
388,391 |
|
|
|
(574,840 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank repayments |
|
|
|
|
|
|
(505,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(505,000 |
) |
Bank borrowings |
|
|
|
|
|
|
475,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
475,000 |
|
Net proceeds from issuance of senior subordinated debt |
|
|
389,827 |
|
|
|
389,827 |
|
|
|
|
|
|
|
|
|
|
|
(389,827 |
) |
|
|
389,827 |
|
Net equity contributions |
|
|
7,684 |
|
|
|
7,684 |
|
|
|
|
|
|
|
|
|
|
|
(7,684 |
) |
|
|
7,684 |
|
Other |
|
|
(9,120 |
) |
|
|
(10,570 |
) |
|
|
|
|
|
|
|
|
|
|
9,120 |
|
|
|
(10,570 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
388,391 |
|
|
|
356,941 |
|
|
|
|
|
|
|
|
|
|
|
(388,391 |
) |
|
|
356,941 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents |
|
|
|
|
|
|
42,649 |
|
|
|
241 |
|
|
|
|
|
|
|
|
|
|
|
42,890 |
|
Cash and cash equivalents at beginning of period |
|
|
24 |
|
|
|
16,898 |
|
|
|
147 |
|
|
|
|
|
|
|
|
|
|
|
17,069 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
24 |
|
|
$ |
59,547 |
|
|
$ |
388 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
59,959 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 12. Encore Energy Partners LP
Administrative Services Agreement
ENP does not have any employees. The employees supporting ENPs operations are employees of
Denbury. Encore Operating, L.P. (Encore Operating), a subsidiary of Denbury, performs
administrative services for ENP, such as accounting, corporate development, finance, land, legal,
and engineering, pursuant to an administrative services agreement. In addition, Encore Operating
provides all personnel, facilities, goods, and equipment necessary to perform these services which
are not otherwise provided for by ENP. Encore Operating is not liable to ENP for its performance
of, or failure to perform, services under the administrative services agreement unless its acts or
omissions constitute gross negligence or willful misconduct.
35
DENBURY RESOURCES INC.
Notes to Unaudited Condensed Consolidated Financial Statements
From March 9, 2010 to March 31, 2010, the administrative fee was $2.02 per BOE of ENPs
production. Effective April 1, 2010, the administrative fee increased to $2.06 per BOE of ENPs
production as a result of the COPAS Wage Index Adjustment which occurs every April 1st. ENP also
reimburses Encore Operating for actual third-party expenses incurred on ENPs behalf. Encore
Operating has substantial discretion in determining which third-party expenses to incur on ENPs
behalf. In addition, Encore Operating is entitled to retain any COPAS overhead charges associated
with drilling and operating wells that would otherwise be paid by non-operating interest owners to
the operator.
The administrative fee will increase in the following circumstances:
|
|
|
beginning on the first day of April in each year by an amount equal to the product
of the then-current administrative fee multiplied by the COPAS Wage Index Adjustment
for that year; |
|
|
|
|
if ENP acquires additional assets, Encore Operating may propose an increase in its
administrative fee that covers the provision of services for such additional assets;
however, such proposal must be approved by the board of directors of GP LLC upon the
recommendation of its conflicts committee; and |
|
|
|
|
otherwise as agreed upon by Encore Operating and GP LLC, with the approval of the
conflicts committee of the board of directors of GP LLC. |
ENP reimburses Denbury for any state, income, franchise, or similar tax incurred by Denbury
resulting from the inclusion of ENP in consolidated tax returns with Denbury as required by
applicable law. The amount of any such reimbursement is limited to the tax that ENP would have
incurred had they not been included in a combined group with Denbury.
Note 13. Subsequent Events
On July 29, 2010, the board of directors of GP LLC declared an ENP cash distribution for the
second quarter of 2010 to unitholders of record as of the close of business on August 9, 2010 of
$0.50 per unit or approximately $22.9 million of which $10.7 million is expected to be paid to GP
LLC and its affiliates. The distribution is expected to be paid to unitholders on or about August
13, 2010.
36
DENBURY RESOURCES INC.
Managements Discussion and Analysis of Financial Condition and Results of Operations
Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations
The following discussion and analysis should be read in conjunction with our consolidated
financial statements and notes thereto contained herein and in our Annual Report on Form 10-K for
the year ended December 31, 2009, along with Managements Discussion and Analysis of Financial
Condition and Results of Operations contained in such Form 10-K. Any terms used but not defined in
the following discussion have the same meaning given to them in the Form 10-K. Our discussion and
analysis includes forward-looking information that involves risks and uncertainties and should be
read in conjunction with Risk Factors under Item 1A of this report, along with Forward-Looking
Information at the end of this section for information about the risks and uncertainties that
could cause our actual results to be materially different than our forward-looking statements.
Overview
We are a growing independent oil and natural gas company. We are the largest oil and natural
gas operator in both Mississippi and Montana, own the largest reserves of CO2 used for
tertiary oil recovery east of the Mississippi River, and hold significant operating acreage in the
Rockies, Permian Basin and Gulf Coast regions. Our goal is to increase the value of our properties through a
combination of exploitation, drilling, and proven engineering extraction practices, with our most
significant emphasis relating to tertiary recovery operations.
During the first six months of 2010, we completed several strategic initiatives and achieved
several milestones as follows:
|
|
|
Recognized proved reserve additions totaling 65.4 MMBbls, excluding price revisions,
during the second quarter; |
|
|
|
|
Completed construction of our Green Pipeline to Oyster Bayou Field with first
CO2 injection commencing in June 2010; |
|
|
|
|
Closed the sale of our Southern Assets (acquired in the Encore Merger) in May 2010; |
|
|
|
|
Closed the Encore Merger in March 2010; and |
|
|
|
|
Sold our interests in Genesis in February 2010. |
Details of these items are discussed below.
Second Quarter Operating Highlights. The acquisition of Encore in March 2010 (Encore
Merger) has had a significant impact on nearly every aspect of our business, including oil and
natural gas production, revenues and operating expenses, which is more fully discussed throughout
our discussion and analysis of financial condition and results of operations below. We recognized
net income of $135.4 million, or $0.34 per basic common share, during the second quarter of 2010 as
compared to a net loss of $87.2 million, or $0.35 per basic common share, in the second quarter of
2009. The increase in net income between the periods is primarily due to non-cash fair value
changes of our commodity derivative contracts, a 61% increase in production volumes, and a 20%
increase in realized prices (including derivative settlements), partially offset by an increase in
operating expenses due to the additional properties recently acquired in the Encore Merger and
higher overhead costs, including interest and Encore Merger-related expenses.
During the second quarter of 2010, our oil and natural gas production averaged 84,111 BOE/d
compared to 52,269 BOE/d produced in the second quarter of 2009. The production increases over
levels in the prior year quarter are attributable to (1) the March 2010 Encore Merger, which
contributed average production of 39,636 BOE/d in the second quarter, (2) tertiary production which
increased 4,415 Bbls/d, and (3) the December 2009 acquisition of the Conroe field which contributed
average production of 2,808 BOE/d in the second quarter of 2010. Offsetting these production
increases was a decrease of 13,404 BOE/d due to the 2009 sale of our Barnett Shale properties.
During the quarter, we sold certain oil and natural gas properties acquired in the Encore Merger
(the Southern Assets), which closed on May 14, 2010. Excluding the production attributed to
assets sold in both the 2009 and 2010 periods, our adjusted second quarter 2010 production was
78,545 BOE/d (adjusted to exclude the Southern Assets) an increase of 102% over the adjusted second
quarter 2009 production levels (adjusted to exclude
37
DENBURY RESOURCES INC.
Managements Discussion and Analysis of Financial Condition and Results of Operations
the Barnett Shale properties). See Sale of Southern Assets and Results of
Operations Operating Results Production for more information.
Tertiary oil production averaged 28,507 Bbls/d during the second quarter of 2010, representing
an 18% increase over our average tertiary oil production of 24,092 Bbls/d during the second quarter
of 2009. We had strong production increases during the second quarter of 2010 from several of our
existing tertiary oil fields, including production from Tinsley Field, which increased more than
54% between the comparable periods, and Delhi Field, our newest tertiary flood, which added an
average of 648 Bbls/d of production. Please read Results of Operations CO2
Operations for more information.
Oil prices trended slightly downward during the second quarter of 2010 as compared to prices
in the first quarter of 2010, but oil prices were significantly higher in the second quarter of
2010 as compared to levels in the prior year second quarter. Our average oil and natural gas
revenues per BOE, excluding the impact of commodity derivative contracts, was $63.76 per BOE in the
second quarter of 2010, as compared to $44.48 per BOE in the second quarter of 2009, a 43% increase
between the two periods. The increase in commodity prices increased our oil and natural gas
revenues during the second quarter of 2010 by 70% as compared to levels in the second quarter of
2009. However, our average oil and natural gas revenues per BOE (including commodity derivative
contracts) was $64.13 per BOE in the second quarter of 2010, compared to $53.31 per BOE during the
second quarter of 2009, a 20% increase.
Net cash settlements received on our commodity derivative contracts during the second quarter
of 2010 were $2.8 million, compared to $42.0 million of cash settlements received during the second
quarter of 2009. During the second quarter of 2010, we had a non-cash fair value gain on our
commodity derivative contracts of $125.2 million, compared to a non-cash fair value loss of $194.8
million in the second quarter of 2009. Coupled together, all the adjustments on commodity
derivative contracts increased our pretax income by $280.8 million in the second quarter of 2010 as
compared to the levels of those items in the second quarter of 2009.
Our lease operating expenses increased 53% in the second quarter of 2010 on an absolute basis,
but decreased 5% on a per BOE basis. The increase on an absolute basis is primarily due to the
March 2010 Encore Merger and further expansion of our tertiary operations, partially offset by the
mid-2009 sale of the Barnett Shale properties. When comparing the second quarters of 2010 and
2009, the largest increases in lease operating expenses (excluding the increases associated with
the Encore Merger) were related to CO2 expense and power and utilities, all as a result
of the expansion of our tertiary operations. The overall decrease on a BOE basis was primarily due
to properties acquired in the Encore Merger, which had a lower overall operating cost per BOE. On
a per BOE basis, our tertiary operating expense averaged $21.37 per BOE in the second quarter of
2010, as compared to $20.86 per BOE in the prior year second quarter and $22.67 per BOE in the
first quarter of 2010.
General and administrative (G&A) expenses totaled $31.2 million in the second quarter of
2010, compared to $33.1 million in the prior year quarter. When comparing the two quarters, the
incremental administrative expense from the ownership of Encore incurred during the second quarter
of 2010 was offset by the $10 million charge in the prior year quarter associated with the Founder
Retirement Agreement entered into between Denbury and Gareth Roberts in connection with his
retirement as CEO and President of Denbury. During the quarter, we incurred $22.8 million of
transaction costs associated with the Encore Merger, primarily associated with employee severance,
legal, and other professional fees. These Encore Merger-related fees are included in our income
statement under the caption Transaction costs related to the Encore Merger. Interest expense
also increased during the second quarter of 2010, due primarily to our $1.0 billion issuance of
2020 Notes in February 2010, Encore debt assumed in the Encore Merger, and borrowings under our new
$1.6 billion revolving credit agreement used to finance a portion of the Encore Merger, offset in
part by increased interest capitalization related to our CO2 pipelines under
construction.
Addition of Proved Oil and Natural Gas Reserves. We added 65.4 MMBOE of proved reserves this
quarter, before price revisions. These reserve additions consisted of 30.0 MMBbls of
estimated proved tertiary reserves at Delhi Field, 6.9 MMBbls of other proved tertiary oil
reserves, 15.2 MMBOE of estimated proved reserves at our Bakken
properties (where we have recently reevaluated future reserve potential), and 12.0 MMBOE at
Haynesville Field more than replacing the reserves attributable to the Southern Assets sold on May
14, 2010 (54 MMBOE, 64% natural gas). After considering
38
DENBURY RESOURCES INC.
Managements Discussion and Analysis of Financial Condition and Results of Operations
production and the sale of the Southern Assets, our estimated total proved reserves at June
30, 2010 are approximately the same as our pro forma proved reserves (giving effect to Encores proved reserves) at December 31, 2009 of 427.8
MMBOE.
Completion of Green Pipeline to Oyster Bayou. On June 29, 2010, Denbury placed the first
phase (approximately 260 miles) of the Green Pipeline, a 320-mile CO2 pipeline that runs
from southern Louisiana to near Houston, Texas, in service. This phase runs to Denburys Oyster
Bayou Field in Southeast Texas while the remaining portion, scheduled for completion in 2011, will service Denburys
Hastings field west of Galveston Bay. The Green pipeline is designed to transport both natural and
anthropogenic CO2 and will ultimately service other tertiary operations along the Gulf
Coast.
Sale of Southern Assets. On May 14, 2010, we sold oil and natural gas properties and related
assets, primarily located in the Permian Basin in West Texas and southeastern New Mexico; the
Mid-continent area, which includes the Anadarko Basin in Oklahoma, Texas, and Kansas; and the East
Texas Basin (the Southern Assets) to Quantum Resources Management, LLC for consideration of
$883.9 million after closing adjustments and including a prior
$45 million deposit. The properties acquired in the Encore Merger in the southern part of the United States which were not
sold include our Haynesville Shale, Paradox Basin, Cleveland Sand Play, and Tuscaloosa
Marine Shale properties. Production attributable to the properties
sold was approximately 13,000 BOE/d (approximately 67% natural gas) and the proved reserves
attributable to sold assets was approximately 54 MMBOE (64% natural gas). We used the proceeds
from the divestiture to repay most of the outstanding borrowings under our revolving credit
agreement.
Merger with Encore Acquisition Company. On March 9, 2010, we acquired Encore pursuant to an
Agreement and Plan of Merger (the Encore Merger Agreement) entered into with Encore on October
31, 2009. The Encore Merger Agreement provided for a stock and cash transaction valued at
approximately $4.5 billion at that time, including the assumption of debt and the value of the
noncontrolling interest in ENP. Under the Encore Merger Agreement, Encore was merged with and into
Denbury, with Denbury surviving the Encore Merger. The Encore Merger was consummated on March 9,
2010.
Encore shareholders received the following consideration for each share of Encore common stock
they owned, depending upon the elections, if any, which they made, and the collar, proration, and
allocation features of the Encore Merger Agreement so that, in the aggregate, 30% of the
consideration for the outstanding shares of Encore common stock would consist of cash, and the
remaining 70% of the consideration would consist of shares of Denbury common stock:
|
|
|
Mixed cash/stock electing (or non-electing) Encore stockholders received $15.00 in cash
and 2.4048 shares of our common stock; |
|
|
|
|
All-cash electing Encore stockholders received $46.48 in cash and 0.2417 shares of our
common stock; and |
|
|
|
|
All-stock electing Encore stockholders (including those whose Encore restricted stock
bonuses were converted into Denbury restricted stock) received 3.4354 shares of our common
stock. |
All Encore stock options fully vested and their value was paid in cash. All Encore restricted
stock vested and each holder had the opportunity to make the same elections as other holders of
Encore common stock as described above, except for shares of Encore restricted stock granted during
2010 as a bonus pursuant to the 2009 Encore annual incentive program, which were converted into
restricted shares of Denbury common stock.
In the Encore Merger, we issued approximately 135.2 million shares of our common stock and
paid approximately $833.9 million in cash to Encore stockholders. The Denbury shares issued to
Encore stockholders represented approximately 34% of our common stock issued and outstanding
immediately after the Encore Merger. The total fair value of the Denbury common stock issued to
Encore stockholders pursuant to the Encore Merger was approximately $2.1 billion based upon
Denburys closing price of $15.43 per share on March 9, 2010. Please read Note 3. Acquisitions
and Divestitures for additional information.
The Encore Merger was financed through a combination of $1.0 billion of 8.25% Senior
Subordinated Notes due 2020, (the 2020 Notes), which we issued on February 10, 2010, the new $1.6
billion revolving credit agreement entered into on March 9, 2010, and the assumption of Encores
remaining outstanding senior subordinated notes.
39
DENBURY RESOURCES INC.
Managements Discussion and Analysis of Financial Condition and Results of Operations
Subordinated Debt Issuance. On February 10, 2010, we issued 2020 Notes for net proceeds
(after underwriting discounts and commissions) of $980 million. The 2020 Notes, which carry a
coupon rate of 8.25%, were sold at par. Upon the closing of the Encore Merger, $400 million of the
net proceeds were used to finance a portion of the Encore Merger consideration. In March and April
2010, $580 million was used to fund repurchases of portions of Encores outstanding senior
subordinated notes during March and April 2010.
Sale of Interests in Genesis. On February 5, 2010, we sold our interest in Genesis Energy,
LLC, the general partner of Genesis, to an affiliate of Quintana Capital Group L.P. for net
proceeds of approximately $84 million, after giving effect to the change of control provision of
the incentive compensation agreement with Genesis management under which we paid a total of $14.9
million. During February 2010, we recognized G&A expense of $1.1 million associated with the $14.9
million payment. The remainder of the payment had been previously accrued in our financial
statements as of December 31, 2009. In March 2010, we sold all of our common units in Genesis in a
secondary public offering for net proceeds of approximately $79 million. As a result, we no longer
hold any interest in Genesis. We recognized a pre-tax gain of approximately $101.5 million ($63.0
million after tax) on these dispositions.
Strategic Alternatives and Asset Transaction Processes for ENP. The Southern Assets sale
discussed above includes most of the properties acquired from Encore that could have been potential
dropdown candidates to ENP, given the nature of their reserves and production. As a result of the
sale, they are no longer available for dropdowns. Most of our remaining assets require significant
capital expenditures in order to recognize their potential value, and therefore would not be
appropriate properties to dropdown to ENP. Consequently, on April 30, 2010, ENP and Denbury
announced their intent to explore a broad range of strategic alternatives (strategic process) to
enhance the value of ENPs common units, including, but not limited to, those alternatives
involving a possible merger, sale, or other transaction involving ENP, our interest in ENPs
general partner, or all or part of the ENP common units that we own. We and ENP also announced a process
to explore a way to recognize the full potential value of potential CO2 tertiary
projects that are owned by ENP, the biggest of which is Elk Basin Field, and which require the
substantial capital investment required for a tertiary flood (asset process). We are reviewing
alternative structures or transactions which could be pursued by ENP, Denbury, or a combination of
the two, to allow development of this field without diluting the value of ENPs units or reducing
the ENPs distributions per unit. Although either or both of these processes may result in one or
more transactions involving the Partnership, Denbury and/or a third party, there is no assurance
that a review of strategic alternatives or consideration of an asset transaction will result in the
proposal or completion of any transaction with acceptable terms.
Capital Resources and Liquidity
We currently estimate our pro forma 2010 capital spending (including Encores $46 million of capital
expenditures between January 1, 2010 and March 9, 2010) will be approximately $1.06
billion, excluding capitalized interest, acquisitions, and divestitures, and net of equipment
leases, and also excluding the expenditures related to the Encore Merger. Our current 2010 capital
budget includes the following:
|
|
|
$413 million allocated for tertiary oil field expenditures; |
|
|
|
|
$193 million to be spent on our CO2 pipelines; |
|
|
|
|
$200 million to drill or participate in drilling or refracing of 55 to 75 wells in the
Bakken area of North Dakota; |
|
|
|
|
$115 million on drilling, completion and other development activities in our other
areas; |
|
|
|
|
$65 million to drill and complete 6 to 8 operated wells and participate in 20 to 25
non-operated wells in the Haynesville and other East Texas fields; and |
|
|
|
|
$74 million to be spent in the Jackson Dome area. |
This estimate also assumes that we fund approximately $50 million of budgeted equipment
purchases with operating leases, which is dependent upon securing acceptable financing. If we do
not enter into a total of $50 million of operating leases during 2010, our net capital expenditures
would increase in an equal amount, and we would anticipate funding those additional capital
expenditures under our bank credit line.
40
DENBURY RESOURCES INC.
Managements Discussion and Analysis of Financial Condition and Results of Operations
As discussed above in Overview Merger with Encore Acquisition Company, the primary
sources of cash for the Encore Merger included a new $1.6 billion revolving credit agreement, which
replaced our previously existing $750 million commitment from banks under our prior revolving credit
agreement, and $1.0 billion of new 2020 Notes. We structured the financing of the Encore Merger to
provide $600 million to $700 million of availability on our new $1.6 billion revolving credit
agreement upon closing the transaction in order to provide a level of liquidity similar to that
available to us prior to the Encore Merger. With the proceeds from the Southern Asset sale, we
paid off nearly all of our bank debt and now have nearly the full $1.6 billion credit line
available to us. These funds are available for the capital expenditures discussed above or any
possible acquisitions, which amounts should be sufficient to cover capital expenditures in excess
of cash flow from operations and provide additional liquidity.
During 2009 and the first half of 2010, we also entered into oil derivative contracts through
2011 in order to protect our future cash flows. Please read Notes 6 and 7 to the Unaudited
Condensed Consolidated Financial Statements for further details regarding our commodity derivative
contracts.
Based on oil and natural gas commodity futures prices in early August 2010 and our current
estimated production forecasts, and before any asset sales or acquisitions, our pro forma 2010
capital budget (including Encores $46 million of capital expenditures from January 1, 2010 through March 9, 2010)
is expected to be $200 million to $300 million greater than our anticipated cash
flow from operations assuming a full year of operations of the combined companies. This shortfall
will be funded with borrowings under our bank credit facility, which have been substantially
reduced already during the year from the cash generated from the sale of our interests in Genesis
(see Overview Sale of Interests in Genesis) and from the sale of the Southern Assets acquired
from Encore (see Overview Sale of Southern Assets). In addition, we could potentially receive
additional sales proceeds during 2010 from either (i) a sale of all or part of our interest in ENP (see Strategic
Alternatives and Asset Transaction Processes for ENP above) or (ii) the sale of the Haynesville
assets acquired in the Encore Merger, which are still being marketed, or both. If either of these
potential sales transactions is consummated, there would be minimal need, if any, to borrow funds
during 2010 to fund our budgeted capital expenditure program. As of August 9, 2010, we had $40.0
million of bank debt outstanding on our $1.6 billion revolving credit agreement. This leaves us
significant borrowing capacity to fund any shortfall.
In addition to the sale of the Southern Assets, we have attempted to sell our Haynesville
assets acquired in the Encore Merger, but to date, the prices offered have not been acceptable to
us. Since these are not core assets for us, we may solicit offers for these assets from time to
time in the future, depending in part on future natural gas prices. We are planning to repackage
and remarket these assets in the near future. If any such offers were deemed acceptable and we
sell these assets, our total sales proceeds from sale of properties acquired as part of the Encore
Merger would be greater than our previously forecasted range of $500 million to $1.0 billion from
these sales. Any such Haynesville asset proceeds would be used to retire any existing bank debt at
that time or used for general working capital needs.
We continually monitor our capital spending and anticipated cash flows and believe that we can
adjust our capital spending up or down depending on cash flows; however, any such reduction in
capital spending could reduce our anticipated production levels in future years. For 2010, we have
contracted for certain capital expenditures, including construction of the second phase of the
Green Pipeline already in progress and several drilling rigs, and therefore we cannot eliminate all
of our capital commitments without penalties (refer to Off-Balance Sheet Arrangements
Commitments and Obligations for further information regarding these commitments).
Sources and Uses of Capital Resources
Capital Expenditure Summary
The following table of capital expenditures includes accrued capital for each period. Our
cash expenditures were $46.2 million lower in the 2010 period and $41.6 million higher in the 2009
period than the amounts listed below due to the change in our capital accruals in those periods:
41
DENBURY RESOURCES INC.
Managements Discussion and Analysis of Financial Condition and Results of Operations
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
June 30, |
|
In thousands |
|
2010 |
|
|
2009 |
|
Oil and natural gas exploration and development: |
|
|
|
|
|
|
|
|
Drilling |
|
$ |
155,503 |
|
|
$ |
28,960 |
|
Geological, geophysical, and acreage |
|
|
15,121 |
|
|
|
7,198 |
|
Facilities |
|
|
73,712 |
|
|
|
111,599 |
|
Recompletions |
|
|
91,534 |
|
|
|
35,591 |
|
Capitalized interest |
|
|
13,681 |
|
|
|
6,836 |
|
|
|
|
|
|
|
|
Total oil and natural gas exploration and development expenditures |
|
|
349,551 |
|
|
|
190,184 |
|
Oil and natural gas property acquisitions |
|
|
24,243 |
|
|
|
196,274 |
|
Fair value assigned to oil and natural gas properties acquired from Encore |
|
|
5,626,268 |
|
|
|
|
|
|
|
|
|
|
|
|
Total oil and natural gas capital expenditures |
|
|
6,000,062 |
|
|
|
386,458 |
|
|
|
|
|
|
|
|
CO2 capital expenditures: |
|
|
|
|
|
|
|
|
CO2 pipelines |
|
|
96,477 |
|
|
|
340,143 |
|
Fair value assigned to CO2 assets acquired from Encore |
|
|
7,254 |
|
|
|
|
|
CO2 producing fields |
|
|
39,667 |
|
|
|
22,453 |
|
Capitalized interest |
|
|
31,481 |
|
|
|
20,991 |
|
|
|
|
|
|
|
|
Total CO2 capital expenditures |
|
|
174,879 |
|
|
|
383,587 |
|
|
|
|
|
|
|
|
Total |
|
$ |
6,174,941 |
|
|
$ |
770,045 |
|
|
|
|
|
|
|
|
The amounts shown above for the Encore Merger include approximately $2.1 billion of our common
stock issued to Encore stockholders in the Encore Merger, based upon 135.2 million shares valued at
the closing price of $15.43 per share on March 9, 2010, and approximately $1.1 billion of the total
Encore Merger consideration which was assigned to goodwill. Please read Note 3 to the Unaudited
Condensed Consolidated Financial Statements for additional information regarding the Encore Merger.
Our capital expenditures for the first half of 2010, excluding the Encore Merger, were funded
with $384.3 million of cash flow from operations along with proceeds from the sale of our interests
in Genesis and our Southern Assets. See Overview Merger with Encore Acquisition Company for a
discussion of the financing of the Encore Merger. Our capital expenditures for the first half of
2009 were funded with $260.8 million of cash flow from operations, $197.5 million of net proceeds
from the sale of a portion of our Barnett Shale natural gas assets, and $381.4 million of proceeds
from the February 2009 issuance of the 9.75% Senior Subordinated Notes.
Off-Balance Sheet Arrangements
Commitments and Obligations
Our obligations that are not currently recorded on our balance sheet consist of our operating
leases and various obligations for development and exploratory expenditures arising from purchase
agreements, our capital expenditure program, or other transactions common to our industry. In
addition, in order to recover our proved undeveloped reserves, we must also fund the associated
future development costs as forecasted in our proved reserve reports. Our
derivative contracts, which are recorded at fair value in our balance sheets, are discussed in
Notes 6 and 7 to the Unaudited Condensed Consolidated Financial Statements.
In conjunction with the Encore Merger, we acquired certain of Encores commitments associated
with our acquisition of Encore, including: senior subordinated notes, derivative contracts,
operating leases, and asset retirement obligations. The Encore Merger is discussed in Note 3 to
the Unaudited Condensed Consolidated Financial Statements, asset retirement obligations are
discussed in Note 4 to the Unaudited Condensed Consolidated Financial Statements, long-term debt is
discussed in Note 5 to the Unaudited Condensed Consolidated Financial Statements, and derivative
contracts are discussed in Notes 6 and 7 to the Unaudited Condensed Consolidated Financial
Statements. Operating leases assumed in the Encore Merger require payments of approximately $2.0 million in the remainder of 2010, $7.0 million in 2011 through 2012, and
42
DENBURY RESOURCES INC.
Managements Discussion and Analysis of Financial Condition and Results of Operations
$2.6 million in 2013.
In addition, we have entered into a new lease for our corporate headquarters with a 12-year term
that has total minimum monthly payments which aggregate approximately $55.6 million. Please refer
to Managements Discussion and Analysis of Financial Condition and Results of Operations and the
section entitled Off-Balance Sheet Arrangements Commitments and Obligations contained in our
Annual Report on Form 10-K for the year ended December 31, 2009 for further information regarding
our commitments and obligations.
Results of Operations
CO2 Operations
Our focus on CO2 operations is becoming an ever-increasing part of our
business and operations. We believe that there are significant additional oil reserves and
production that can be obtained through the use of CO2, and we have outlined
certain of this potential in our Annual Report on Form 10-K for the year ended December 31, 2009
and other public disclosures. In addition to its long-term effect, our focus on these types of
operations impacts certain trends in our current and near-term operating results. Please refer to
Managements Discussion and Analysis of Financial Condition and Results of Operations and the
section entitled CO2 Operations contained in our Annual Report on Form 10-K
for the year ended December 31, 2009 for further information regarding these matters.
We recognized CO2 reserve additions of approximately 358 Bcf this quarter at
Jackson Dome. During the second quarter of 2010, we spudded two additional CO2 source
wells at Jackson Dome in the Gluckstadt field to further increase our production capacity and
potentially increase our proved CO2 reserves. We estimated that we are currently capable of producing
between 900 MMcf/d and 1 Bcf/d of CO2. During the second quarter of 2010, our
CO2 production averaged 768 MMcf/d as compared to an average of 581 MMcf/d produced
during the second quarter of 2009 and 802 MMcf/d produced in the first quarter of 2010. We used
86% of this production, or 659 MMcf/d, in our tertiary operations during the second quarter of
2010, and sold the balance to our industrial customers, or to Genesis pursuant to our volumetric
production payments. Our CO2 production at Jackson Dome was lower this quarter compared
to levels in the first quarter of 2010 because our need for CO2 at our tertiary
properties was slightly less at certain fields. During June 2010, we placed in service the first
phase (approximately 260 miles) of the Green Pipeline, a 320-mile CO2 pipeline that runs
from southern Louisiana to near Houston, Texas. This first phase runs to our Oyster Bayou field in
Southeast Texas. We filled this pipeline with CO2 from our source at Jackson Dome during
June and commenced first injection of CO2 at the Oyster Bayou field on June 29, 2010.
Refer to Managements Discussion and Analysis of Financial Condition and Results of Operations in
our Annual Report on Form 10-K for the year ended December 31, 2009 for further discussion on our
CO2 delivery obligations.
We spent approximately $0.21 per Mcf in operating expenses to produce our
CO2 during the first six months of 2010, comprised of $0.20 per Mcf during the
first quarter of 2010 and $0.22 per Mcf during the second quarter of 2010. This rate is up
significantly from our $0.16 per Mcf cost during the first six months of 2009, due primarily to
increased CO2 royalty expense as a result of higher oil prices. Our estimated total
cost per Mcf of CO2 during the first six months of 2010 was approximately $0.31
per Mcf, after inclusion of depletion, depreciation, and amortization (DD&A) expense, up from the
first six months of 2009 average of $0.24 per Mcf. Our estimated total cost per Mcf of
CO2 during the second quarter of 2010 was approximately $0.32 per Mcf, after
inclusion of DD&A expense.
The following table summarizes our tertiary oil production and tertiary lease operating
expense per Bbl for each quarter in 2009 and the first and second quarters of 2010:
43
DENBURY RESOURCES INC.
Managements Discussion and Analysis of Financial Condition and Results of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Daily Production (BOE/d) |
|
|
First |
|
Second |
|
Third |
|
Fourth |
|
|
First |
|
Second |
|
|
Quarter |
|
Quarter |
|
Quarter |
|
Quarter |
|
|
Quarter |
|
Quarter |
Tertiary Oil Field |
|
2009 |
|
2009 |
|
2009 |
|
2009 |
|
|
2010 |
|
2010 |
Phase 1: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brookhaven |
|
|
3,451 |
|
|
|
3,466 |
|
|
|
3,397 |
|
|
|
3,350 |
|
|
|
|
3,416 |
|
|
|
3,277 |
|
Little Creek area |
|
|
1,619 |
|
|
|
1,560 |
|
|
|
1,356 |
|
|
|
1,479 |
|
|
|
|
1,690 |
|
|
|
1,971 |
|
Mallalieu area |
|
|
4,490 |
|
|
|
4,264 |
|
|
|
3,679 |
|
|
|
4,005 |
|
|
|
|
3,443 |
|
|
|
3,628 |
|
McComb area |
|
|
2,246 |
|
|
|
2,429 |
|
|
|
2,473 |
|
|
|
2,412 |
|
|
|
|
2,289 |
|
|
|
2,160 |
|
Lockhart Crossing |
|
|
607 |
|
|
|
698 |
|
|
|
882 |
|
|
|
1,025 |
|
|
|
|
1,127 |
|
|
|
1,311 |
|
Phase 2: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eucutta |
|
|
3,813 |
|
|
|
4,145 |
|
|
|
4,068 |
|
|
|
3,912 |
|
|
|
|
3,792 |
|
|
|
3,625 |
|
Heidelberg |
|
|
|
|
|
|
250 |
|
|
|
829 |
|
|
|
1,506 |
|
|
|
|
1,708 |
|
|
|
1,857 |
|
Martinville |
|
|
1,118 |
|
|
|
951 |
|
|
|
720 |
|
|
|
724 |
|
|
|
|
927 |
|
|
|
764 |
|
Soso |
|
|
2,705 |
|
|
|
2,589 |
|
|
|
2,813 |
|
|
|
3,224 |
|
|
|
|
3,213 |
|
|
|
3,207 |
|
Phase 3: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tinsley |
|
|
2,390 |
|
|
|
3,402 |
|
|
|
3,558 |
|
|
|
3,942 |
|
|
|
|
4,419 |
|
|
|
5,248 |
|
Phase 4: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cranfield |
|
|
144 |
|
|
|
338 |
|
|
|
572 |
|
|
|
728 |
|
|
|
|
936 |
|
|
|
811 |
|
Phase 5: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Delhi |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
63 |
|
|
|
648 |
|
|
|
|
|
|
|
Total tertiary oil production |
|
|
22,583 |
|
|
|
24,092 |
|
|
|
24,347 |
|
|
|
26,307 |
|
|
|
|
27,023 |
|
|
|
28,507 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tertiary operating expense per Bbl |
|
$ |
20.48 |
|
|
$ |
20.86 |
|
|
$ |
23.14 |
|
|
$ |
22.03 |
|
|
|
$ |
22.67 |
|
|
$ |
21.37 |
|
|
|
|
|
|
|
Oil production from our tertiary operations increased to an average of 28,507 Bbls/d in the
second quarter of 2010, an 18% increase over our second quarter of 2009 tertiary production level
of 24,092 Bbls/d, primarily due to production growth in response to continued expansion of the
tertiary floods in our Tinsley, Heidelberg, Delhi, Soso, Cranfield, and Lockhart Crossing Fields.
The Tinsley Field has been one of our top performing tertiary oil fields, and production there is
expected to increase further as we continue to expand the flood. We initiated CO2
injections at the Delhi Field (Phase 5) during November 2009 and saw initial tertiary production
response at the Delhi Field late in the first quarter of 2010. During the second quarter,
production there averaged 648 Bbls/d and we expect this production to continue to increase as we
expand this CO2 flood. Although we commenced injection of CO2 into Oyster
Bayou Field near the end of June 2010, we do not anticipate a production response from this field
until late 2011.
During the second quarter of 2010, operating costs for our tertiary properties averaged $21.37
per Bbl, higher than the second quarter of 2009 average cost of $20.86 per Bbl, primarily due to
the higher cost of CO2. On a per Bbl basis, our cost of CO2 increased by
$1.37 per Bbl, from $3.68 per Bbl in the second quarter of 2009 to $5.05 per Bbl in the second
quarter of 2010, primarily due to the increase in oil prices to which our CO2 costs are
partially tied. The single highest cost for our tertiary operations is our cost for fuel and
utilities, which averaged $5.72 per Bbl in the second quarter of 2009 and $5.82 per Bbl in the
second quarter of 2010. For any specific field, we expect our tertiary lease operating expense per
Bbl to be high initially, then decrease as production increases, ultimately leveling off until
production begins to decline in the latter life of the field, when lease operating expense per Bbl
will again increase.
Operating Results
As summarized in the Overview section above, and discussed in further detail below, our
operating results for the second quarter and first six months of 2010 were significantly higher
than results in the same periods in 2009. The operating results of Encore and ENP from March 9,
2010 through June 30, 2010 are included in these results. As we control the general partner of
ENP, the operating results of ENP are consolidated with our results of
44
DENBURY RESOURCES INC.
Managements Discussion and Analysis of Financial Condition and Results of Operations
operations from our legacy properties, even though we only own approximately 46% of ENPs common units. The
primary factors impacting our operating results were the acquisition of Encore, higher oil and
natural gas prices, changes in the fair value of our commodity derivative contracts, the gain on
the sale of our interests in Genesis, and changes in production, which are all explained in more
detail below.
Certain of our operating results and statistics for the comparative second quarters and first
six months of 2010 and 2009 are included in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
In thousands, except per share and unit data |
|
2010 |
|
|
2009 |
|
|
2010 (1) |
|
|
2009 |
|
Operating results: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Denbury stockholders |
|
$ |
135,367 |
|
|
$ |
(87,240 |
) |
|
$ |
232,255 |
|
|
$ |
(105,537 |
) |
Net income (loss) per common share basic |
|
|
0.34 |
|
|
|
(0.35 |
) |
|
|
0.67 |
|
|
|
(0.43 |
) |
Net income (loss) per common share diluted |
|
|
0.34 |
|
|
|
(0.35 |
) |
|
|
0.66 |
|
|
|
(0.43 |
) |
Cash flow from operations |
|
|
271,123 |
|
|
|
148,170 |
|
|
|
384,291 |
|
|
|
260,789 |
|
Average daily production volumes: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bbls/d |
|
|
65,942 |
|
|
|
37,921 |
|
|
|
55,185 |
|
|
|
37,781 |
|
Mcf/d |
|
|
109,014 |
|
|
|
86,088 |
|
|
|
81,108 |
|
|
|
90,327 |
|
BOE/d |
|
|
84,111 |
|
|
|
52,269 |
|
|
|
68,703 |
|
|
|
52,836 |
|
Operating revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil sales |
|
$ |
443,984 |
|
|
$ |
188,170 |
|
|
$ |
749,188 |
|
|
$ |
321,435 |
|
Natural gas sales |
|
|
44,044 |
|
|
|
23,382 |
|
|
|
69,726 |
|
|
|
58,186 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total oil and natural gas sales |
|
$ |
488,028 |
|
|
$ |
211,552 |
|
|
$ |
818,914 |
|
|
$ |
379,621 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity derivative contracts: (2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash receipt (payment) on settlement of commodity derivative contracts |
|
$ |
2,801 |
|
|
$ |
42,002 |
|
|
$ |
(57,000 |
) |
|
$ |
127,838 |
|
Non-cash fair value adjustment income (expense) |
|
|
125,190 |
|
|
|
(194,791 |
) |
|
|
226,029 |
|
|
|
(301,142 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income (expense) from commodity derivative contracts |
|
$ |
127,991 |
|
|
$ |
(152,789 |
) |
|
$ |
169,029 |
|
|
$ |
(173,304 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease operating |
|
$ |
127,743 |
|
|
$ |
83,658 |
|
|
$ |
223,963 |
|
|
$ |
158,608 |
|
Production taxes and marketing |
|
|
38,100 |
|
|
|
10,784 |
|
|
|
57,417 |
|
|
|
19,976 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total production expenses |
|
$ |
165,843 |
|
|
$ |
94,442 |
|
|
$ |
281,380 |
|
|
$ |
178,584 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-tertiary CO2 operating margin: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CO2 sales and transportation fees |
|
$ |
4,690 |
|
|
$ |
2,884 |
|
|
$ |
9,187 |
|
|
$ |
6,049 |
|
CO2 operating expenses |
|
|
(1,681 |
) |
|
|
(1,095 |
) |
|
|
(3,049 |
) |
|
|
(2,395 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-tertiary CO2 operating margin |
|
$ |
3,009 |
|
|
$ |
1,789 |
|
|
$ |
6,138 |
|
|
$ |
3,654 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unit prices including impact of derivative settlements: (2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil price per Bbl |
|
$ |
71.68 |
|
|
$ |
66.70 |
|
|
$ |
67.26 |
|
|
$ |
65.70 |
|
Natural gas price per Mcf |
|
|
6.12 |
|
|
|
2.98 |
|
|
|
6.14 |
|
|
|
3.56 |
|
Unit prices excluding impact of derivative settlements: (2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil price per Bbl |
|
$ |
73.99 |
|
|
$ |
54.53 |
|
|
$ |
75.00 |
|
|
$ |
47.00 |
|
Natural gas price per Mcf |
|
|
4.44 |
|
|
|
2.98 |
|
|
|
4.75 |
|
|
|
3.56 |
|
Oil and natural gas operating revenues and expenses per BOE: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil and natural gas revenues |
|
$ |
63.76 |
|
|
$ |
44.48 |
|
|
$ |
65.85 |
|
|
$ |
39.70 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil and natural gas lease operating expenses |
|
$ |
16.69 |
|
|
$ |
17.59 |
|
|
$ |
18.01 |
|
|
$ |
16.59 |
|
Oil and natural gas production taxes and marketing expense |
|
|
4.98 |
|
|
|
2.27 |
|
|
|
4.62 |
|
|
|
2.09 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total oil and natural gas production expenses |
|
$ |
21.67 |
|
|
$ |
19.86 |
|
|
$ |
22.63 |
|
|
$ |
18.68 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes the results of operations of Encore and ENP from March 9, 2010 through June 30, 2010. |
|
(2) |
|
Please read Item 3. Qualitative and Quantitative Disclosures about Market Risk for additional information concerning our commodity derivative contracts. |
45
DENBURY RESOURCES INC.
Managements Discussion and Analysis of Financial Condition and Results of Operations
Production. Average daily production by area for each of the four quarters of 2009 and
for the first and second quarters of 2010 are shown below, as well as our estimated pro forma
production for the first quarter of 2010 had production from the properties acquired in the Encore
Merger been included with ours for the entire first quarter of 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Daily Production (BOE/d) |
|
|
First |
|
Second |
|
Third |
|
Fourth |
|
First |
|
|
Pro Forma |
|
Second |
|
|
Quarter |
|
Quarter |
|
Quarter |
|
Quarter |
|
Quarter |
|
|
First Quarter |
|
Quarter |
Operating Area |
|
2009 |
|
2009 |
|
2009 |
|
2009 |
|
2010 (1) |
|
|
2010 (2) |
|
2010 (3) |
Tertiary oil fields |
|
|
22,583 |
|
|
|
24,092 |
|
|
|
24,347 |
|
|
|
26,307 |
|
|
|
27,023 |
|
|
|
|
27,023 |
|
|
|
28,507 |
|
Mississippi non-CO2
floods |
|
|
11,904 |
|
|
|
10,043 |
|
|
|
8,931 |
|
|
|
8,914 |
|
|
|
7,829 |
|
|
|
|
7,829 |
|
|
|
8,967 |
|
Texas |
|
|
17,063 |
|
|
|
16,088 |
|
|
|
7,579 |
|
|
|
8,035 |
|
|
|
5,235 |
|
|
|
|
5,235 |
|
|
|
5,148 |
|
Onshore Louisiana |
|
|
708 |
|
|
|
885 |
|
|
|
699 |
|
|
|
679 |
|
|
|
662 |
|
|
|
|
662 |
|
|
|
775 |
|
Alabama and other |
|
|
1,150 |
|
|
|
1,161 |
|
|
|
1,103 |
|
|
|
1,077 |
|
|
|
997 |
|
|
|
|
997 |
|
|
|
1,078 |
|
Cedar Creek Anticline |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,606 |
|
|
|
|
10,070 |
|
|
|
10,234 |
|
Bakken |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
893 |
|
|
|
|
3,560 |
|
|
|
4,518 |
|
Haynesville |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
838 |
|
|
|
|
3,196 |
|
|
|
3,931 |
|
Permian Basin |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,180 |
|
|
|
|
9,105 |
|
|
|
5,921 |
|
Other Rockies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,429 |
|
|
|
|
9,411 |
|
|
|
9,459 |
|
Mid-Continent |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,433 |
|
|
|
|
9,490 |
|
|
|
5,573 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
53,408 |
|
|
|
52,269 |
|
|
|
42,659 |
|
|
|
45,012 |
|
|
|
53,125 |
|
|
|
|
86,578 |
|
|
|
84,111 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes production of Encore and ENP from March 9, 2010 through March 31, 2010. ENPs production for each area during this period was as
follows: Cedar Creek Anticline 69 BOE/d, Bakken 3 BOE/d, Permian Basin 852 BOE/d, Other Rockies 1,227 BOE/d, and Mid-Continent 120
BOE/d. |
|
(2) |
|
ENPs pro forma production for each area during this period was as follows: Cedar Creek Anticline 240 BOE/d, Bakken 11 BOE/d, Permian
Basin 3,411 BOE/d, Other Rockies 4,845 BOE/d, and Mid-Continent 527 BOE/d. |
|
(3) |
|
ENPs production for each area during this period was as follows: Cedar Creek Anticline 267 BOE/d, Bakken 18 BOE/d, Permian Basin 3,268
BOE/d, Other Rockies 4,816 BOE/d, and Mid-Continent 473 BOE/d. |
As outlined in the above table, production in the three and six months ended June 30, 2010
increased 61% and 30%, respectively, over the respective 2009 production levels. These increases
were primarily due to the additional production from the properties acquired in the Encore Merger,
increased production in our tertiary fields, and the Conroe field acquisition which closed in
December 2009. Offsetting these increases were two asset sales, the Barnett Shale sale which
closed in the second half of 2009 and the Southern Assets sale which closed on May 14, 2010. Our
continuing production excluding production from these sales was 78,545 BOE/d for the second quarter
of 2010 as compared to 38,879 BOE/d for the second quarter of 2009, an increase of 102% (39,691
BOE/d). Production from our Bakken properties averaged 4,518 BOE/d, an increase of 27% as compared
to pro forma first quarter 2010 assuming these properties acquired from Encore had been included
for the entire quarter. The production increases in the Bakken are due to on-going drilling and
hydraulic fracturing in this area. During the second quarter, we had three active rigs in the
Bakken area, and we plan to secure a fourth drilling rig for the late third quarter or early fourth
quarter of 2010. Our production at Cedar Creek Anticline averaged 10,234 BOE/d during the quarter,
comparable to the pro forma production in the first quarter in this area while production at
Haynesville increased 23% compared to pro forma production in the first quarter due to drilling activity.
Our tertiary oil production in the three and six months ended June 30, 2010 increased 18% and
19%, respectively, over the respective 2009 production levels. The increase in our tertiary oil
production is discussed above under Results of Operations CO2 Operations.
Production in our Mississippi non-tertiary operations decreased 11% and 23% from levels in
the three and six months ended June 30, 2009, respectively, partially due to the expected gradual
decline in the Heidelberg Field due to depletion, and the development of the Heidelberg
CO2 flood, which resulted in production being shut-in while portions of the field were
converted to tertiary operations. When production commences from these CO2 floods,
these volumes will be reported as tertiary production for the Heidelberg Field. Another almost
equal factor in the lower production in the three and six months ended June 30, 2010 was the lack
of drilling activity in the Selma
46
DENBURY RESOURCES INC.
Managements Discussion and Analysis of Financial Condition and Results of Operations
Chalk, a natural gas asset characterized by relatively higher decline rates. The sequentially
increased production of approximately 15% over first quarter 2010 levels in our Mississippi
non-tertiary operations is primarily due to a decrease in oil inventory from the first quarter and
increased production at our Sharon field associated with three new drills.
Our production during the three and six months ended June 30, 2010 was 78% and 80% oil,
respectively, as compared to 73% and 72% during the three and six months ended June 30, 2009,
respectively. This increase is due to the sale of our Barnett Shale properties in the second half
of 2009, the acquisition of interests in the Hastings Field in February 2009, the acquisition of
interests in the Conroe Field in December 2009, and the increase in our tertiary operations,
partially offset by the natural gas properties which we acquired in the Encore Merger and sold in
May 2010.
Oil and Natural Gas Revenues. Due to the significant increase in oil and natural gas prices
between the first half of 2009 and 2010, our oil and natural gas revenues increased sharply in the
three and six months ended June 30, 2010 as compared to those in the same periods of 2009. These
changes in oil and natural gas revenues, excluding any impact of our commodity derivative
contracts, are reflected in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
|
|
2010 vs. 2009 |
|
|
2010 vs. 2009 |
|
|
|
|
|
|
|
Percentage |
|
|
|
|
|
|
Percentage |
|
|
|
Increase in |
|
|
Increase in |
|
|
Increase in |
|
|
Increase in |
|
In thousands |
|
Revenues |
|
|
Revenues |
|
|
Revenues |
|
|
Revenues |
|
Change in oil and natural gas revenues due to: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in commodity prices |
|
$ |
147,600 |
|
|
|
70% |
|
|
$ |
325,284 |
|
|
|
86% |
|
Increase in production |
|
|
128,876 |
|
|
|
61% |
|
|
|
114,009 |
|
|
|
30% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total increase in
oil and natural gas
revenues |
|
$ |
276,476 |
|
|
|
131% |
|
|
$ |
439,293 |
|
|
|
116% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Excluding any impact of our commodity derivative contracts, our net realized commodity
prices and NYMEX differentials were as follows during the first and second quarters and first six
month periods of 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Three Months Ended |
|
Six Months Ended |
|
|
March 31, |
|
June 30, |
|
June 30, |
|
|
2010 |
|
2009 |
|
2010 |
|
2009 |
|
2010 |
|
2009 |
Net Realized Prices: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil price per Bbl |
|
$ |
76.53 |
|
|
$ |
39.34 |
|
|
$ |
73.99 |
|
|
$ |
54.53 |
|
|
$ |
75.00 |
|
|
$ |
47.00 |
|
Natural gas price
per Mcf |
|
|
5.40 |
|
|
|
4.09 |
|
|
|
4.44 |
|
|
|
2.98 |
|
|
|
4.75 |
|
|
|
3.56 |
|
Price per BOE |
|
|
69.21 |
|
|
|
34.97 |
|
|
|
63.76 |
|
|
|
44.48 |
|
|
|
65.85 |
|
|
|
39.70 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NYMEX Differentials: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil per Bbl |
|
$ |
(2.08 |
) |
|
$ |
(3.99 |
) |
|
$ |
(4.13 |
) |
|
$ |
(5.30 |
) |
|
$ |
(3.36 |
) |
|
$ |
(4.62 |
) |
Natural gas per Mcf |
|
|
0.37 |
|
|
|
(0.41 |
) |
|
|
0.09 |
|
|
|
(0.82 |
) |
|
|
0.06 |
|
|
|
(0.59 |
) |
Our oil NYMEX differential improved in the three and six months ended June 30, 2010 as
compared to our differential in the comparable periods of 2009, primarily due to the 2009 sale of
our Barnett Shale properties, where the NGL price was significantly below NYMEX oil prices,
partially offset by the Rocky Mountain properties we acquired in the Encore Merger which tend to
have higher oil differentials than our historical corporate average.
Our natural gas NYMEX differentials are generally caused by movement in the NYMEX natural gas
prices during the month, as most of our natural gas is sold on an index price that is set near the
first of each month. While the percentage change in NYMEX natural gas differentials can be quite
large, these differentials are very seldom more than a dollar above or below NYMEX prices.
47
DENBURY RESOURCES INC.
Managements Discussion and Analysis of Financial Condition and Results of Operations
Commodity Derivative Contracts. The following tables summarize the impact that our commodity
derivative contracts had on our operating results for the three and six months ended June 30, 2010
and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
|
Oil Derivative |
|
|
Natural Gas Derivative |
|
|
Oil Derivative |
|
|
Natural Gas Derivative |
|
In thousands |
|
Contracts |
|
|
Contracts |
|
|
Contracts |
|
|
Contracts |
|
Non-cash fair value gain (loss) |
|
$ |
145,099 |
|
|
$ |
(189,318 |
) |
|
$ |
(19,909 |
) |
|
$ |
(5,473 |
) |
|
$ |
206,920 |
|
|
$ |
(285,179 |
) |
|
$ |
19,109 |
|
|
$ |
(15,963 |
) |
Cash settlement receipts (payments) |
|
|
(13,829 |
) |
|
|
42,002 |
|
|
|
16,630 |
|
|
|
|
|
|
|
(77,379 |
) |
|
|
127,838 |
|
|
|
20,379 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
131,270 |
|
|
$ |
(147,316 |
) |
|
$ |
(3,279 |
) |
|
$ |
(5,473 |
) |
|
$ |
129,541 |
|
|
$ |
(157,341 |
) |
|
$ |
39,488 |
|
|
$ |
(15,963 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in commodity prices and the expiration of contracts cause fluctuations in the
estimated fair value of our commodity derivative contracts. Because we do not utilize hedge
accounting for our commodity derivative contracts, the changes in fair value of these contracts, as
outlined above, are recognized currently in the income statement. Please read Notes 6 and 7 to the
Unaudited Condensed Consolidated Financial Statements for additional information regarding our
commodity derivative contracts.
Production Expenses. Our lease operating expenses increased between the three and six months
ended June 30, 2010 and 2009 in absolute dollars but decreased on a per BOE basis. The overall
decrease on a per BOE basis was primarily due to the Encore acquisition as those properties which
were part of the Encore acquisition generally have a lower operating cost per BOE than Denburys
legacy properties. The increase on an absolute basis was primarily a result of:
|
|
|
the completion of the Encore Merger on March 9, 2010, which increased lease operating
expense on an absolute basis, but reduced it on a per BOE basis; |
|
|
|
|
our increasing emphasis on tertiary operations and additional tertiary fields moving
into the productive phase (please read discussion of those expenses under
CO2 Operations); |
|
|
|
|
the acquisition of interests in the Hastings Field in February 2009, which has a higher
operating cost per BOE than most of our other properties; |
|
|
|
|
increased personnel and related costs resulting primarily from the Encore Merger; |
|
|
|
|
higher electrical costs to operate our properties due primarily to the expansion of our
tertiary operations; and |
|
|
|
|
increasing lease payments due to incremental leasing of certain equipment in our
tertiary operating facilities; partially offset by the sale of our Barnett Shale natural
gas properties in the second half of 2009, which reduced lease operating expense on an
absolute basis, but increased it on a per BOE basis as these properties had a lower per
unit operating cost. |
Lease operating expense per BOE averaged $16.69 per BOE and $18.01 per BOE for the three and
six months ended June 30, 2010, respectively, as compared to $17.59 per BOE and $16.59 per BOE for
the same periods of 2009. Our tertiary operating costs, which have historically been higher than
our company-wide operating costs, averaged $21.37 per BOE and $22.00 per BOE during the three and
six months ended June 30, 2010, respectively, as compared to $20.86 per BOE and $20.68 per BOE for
the same periods of 2009. Please read CO2 Operations for a more detailed discussion.
We expect that our operating cost on a per BOE basis will become closer to our tertiary operating
costs as these operations become a larger percentage of our total operations. Costs of electricity
and utilities to operate our tertiary properties have increased on an absolute basis primarily due
to the expansion of our tertiary operations. We expect our tertiary operating costs to partially
correlate with oil prices, as the price we pay for CO2 is partially tied to oil prices.
Production taxes and marketing expenses generally change in proportion to commodity prices and
production volumes, and as such, increased 253% and 187% in the three and six months ended June 30,
2010, respectively, as compared to those for the same periods of 2009. This compares to an
increase in oil and natural gas revenues of 131% and 116% in the three and six months ended June 30,
2010, respectively. The addition of properties in other operating areas acquired in the Encore
Merger also affected these costs. Transportation and plant processing fees decreased approximately $1.8 million and $4.2 million in the three and six months ended June
30, 2010 and 2009, primarily due to the sale of our Barnett Shale properties in the second half of
2009.
48
DENBURY RESOURCES INC.
Managements Discussion and Analysis of Financial Condition and Results of Operations
General and Administrative Expenses
G&A expenses decreased on both a gross basis and on a per BOE basis between the respective
three months ended June 30, 2010 and 2009, while increasing on a gross basis, but decreasing on a
per BOE basis between the respective six months ended June 30, 2010 and 2009 as set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
In thousands, except per BOE data and employees |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Gross cash G&A expense |
|
$ |
57,909 |
|
|
$ |
36,107 |
|
|
$ |
106,183 |
|
|
$ |
71,474 |
|
Gross stock-based compensation |
|
|
7,363 |
|
|
|
6,359 |
|
|
|
16,153 |
|
|
|
12,499 |
|
Founders compensation award |
|
|
|
|
|
|
10,000 |
|
|
|
|
|
|
|
10,000 |
|
Incentive compensation for Genesis management |
|
|
|
|
|
|
2,945 |
|
|
|
1,149 |
|
|
|
5,538 |
|
State franchise taxes |
|
|
965 |
|
|
|
1,124 |
|
|
|
2,035 |
|
|
|
2,239 |
|
Operator labor and overhead recovery charges |
|
|
(29,086 |
) |
|
|
(19,791 |
) |
|
|
(51,131 |
) |
|
|
(38,777 |
) |
Capitalized exploration and development costs |
|
|
(5,959 |
) |
|
|
(3,609 |
) |
|
|
(10,488 |
) |
|
|
(7,183 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net G&A expense |
|
$ |
31,192 |
|
|
$ |
33,135 |
|
|
$ |
63,901 |
|
|
$ |
55,790 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
G&A per BOE: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash G&A expense |
|
$ |
3.15 |
|
|
$ |
2.88 |
|
|
$ |
3.81 |
|
|
$ |
2.87 |
|
Net stock-based compensation |
|
|
0.79 |
|
|
|
1.13 |
|
|
|
1.08 |
|
|
|
1.10 |
|
Founders compensation award |
|
|
|
|
|
|
2.10 |
|
|
|
|
|
|
|
1.05 |
|
Incentive compensation for Genesis
management |
|
|
|
|
|
|
0.62 |
|
|
|
0.09 |
|
|
|
0.58 |
|
State franchise taxes |
|
|
0.13 |
|
|
|
0.24 |
|
|
|
0.16 |
|
|
|
0.23 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net G&A expense |
|
$ |
4.07 |
|
|
$ |
6.97 |
|
|
$ |
5.14 |
|
|
$ |
5.83 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employees as of June 30 |
|
|
1,304 |
|
|
|
859 |
|
|
|
1,304 |
|
|
|
859 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross cash G&A expenses increased $21.8 million (60%) and $34.7 million (49%), respectively,
in the three and six months ended June 30, 2010, as compared to the same periods of 2009, primarily
due to the Encore Merger and higher compensation and personnel-related costs associated with an
increase in the number of employees and higher wages, which we consider necessary in order to
remain competitive in our industry. During the three and six months ended June 30, 2010, we
increased our employee count by 4% and 57%, primarily as a result of the Encore Merger, resulting
in increased personnel-related costs. During the three and six months ended June 30, 2010,
stock-based compensation expense increased $1.0 million and $3.7 million, respectively, when
compared to levels in the same periods of 2009, primarily due to the increase in employees and
changes in the mix of compensation awarded to employees.
During the six months ended June 30, 2010, the increase in personnel-related costs was
partially offset by a $4.4 million decrease in charges relating to incentive compensation awards
for the management of Genesis. As discussed above under Overview Sale of Interests in
Genesis, we sold our interests in Genesis during the first quarter of 2010. As such, the change
of control provision of each members compensation agreement was triggered and the incentive
compensation awards were settled for $14.9 million, with $1.1 million of this being recognized as
expense during February 2010.
In addition to the decrease in expense related to Genesis incentive compensation awards, G&A
expense for the 2010 periods also decreased $10 million because the 2009 period included the
Founders Compensation Award issued June 30, 2009 in association with the retirement of Gareth
Roberts as President and CEO of the Company.
The increase in gross G&A expense in the three and six months ended June 30, 2010, as compared
to those costs in the same period of 2009, was offset in part by an increase in operator overhead
recovery charges. Our well
49
DENBURY RESOURCES INC.
Managements Discussion and Analysis of Financial Condition and Results of Operations
operating agreements allow us, when we are the operator, to charge a well with a specified
overhead rate during the drilling phase and also to charge a monthly fixed overhead rate for each
producing well. Operator labor and overhead recovery charges also include $1.8 million received
from Quantum in payment for our continuing to operate the Southern Asset properties through July
2010. As a result of additional operated wells from acquisitions, additional tertiary operations,
drilling activity during the past year, and increased compensation expense, the amount we recovered
as operator labor and overhead charges increased by 47% and 32%, respectively, in the three and six
months ended June 30, 2010, as compared to the same period of 2009. Capitalized exploration and
development costs also increased between the periods, primarily due to additional personnel and
increased compensation costs.
The net effect of these changes resulted in a 6% decrease (42% on a per BOE basis) in G&A
expense between the comparable second quarters of 2010 and 2009. For the six month periods, G&A
expenses increased 15% on a gross basis, but decreased 12% on a per BOE basis, as our increased
production for the six month period more than offset the increase in expenses.
Interest and Financing Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
In thousands, except per BOE data and interest rates |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Cash interest expense |
|
$ |
60,966 |
|
|
$ |
28,318 |
|
|
$ |
105,940 |
|
|
$ |
51,602 |
|
Non-cash interest expense |
|
|
6,367 |
|
|
|
2,040 |
|
|
|
9,121 |
|
|
|
3,326 |
|
Less: capitalized interest |
|
|
(23,850 |
) |
|
|
(15,454 |
) |
|
|
(45,162 |
) |
|
|
(27,827 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
$ |
43,483 |
|
|
$ |
14,904 |
|
|
$ |
69,899 |
|
|
$ |
27,101 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income and other |
|
$ |
4,520 |
|
|
$ |
2,956 |
|
|
$ |
6,390 |
|
|
$ |
5,481 |
|
Net cash interest expense and other income per BOE (1) |
|
$ |
4.43 |
|
|
$ |
2.52 |
|
|
$ |
4.53 |
|
|
$ |
2.33 |
|
Average debt outstanding |
|
$ |
3,152,564 |
|
|
$ |
1,363,007 |
|
|
$ |
2,689,894 |
|
|
$ |
1,249,030 |
|
Average interest rate (2) |
|
|
7.7% |
|
|
|
8.3% |
|
|
|
7.9% |
|
|
|
8.3% |
|
|
|
|
(1) |
|
Cash interest expense less capitalized interest less interest and other income on a per BOE basis. |
|
(2) |
|
Includes commitment fees but excludes debt issue costs and amortization of discount and premium. |
Interest expense increased $28.6 million (192%) and $42.8 million (158%), respectively,
in the three and six months ended June 30, 2010, as compared to levels in the same periods of 2009,
primarily due to our February 2010 issuance of the 2020 Notes, debt assumed from Encore in the
Encore Merger, and borrowings under our new $1.6 billion revolving credit agreement, which were
used to finance a portion of the Encore Merger. These increases were partially offset by a 54% and
62% increase in our interest capitalization for the three and six months ended June 30, 2010, as
compared to the same periods of 2009, relating mainly to our CO2 pipelines
under construction. The first phase of our Green Pipeline was placed into service on June 29,
2010, and the balance of approximately $815 million (including capitalized interest) was no longer
subject to interest capitalization at that date. A significant amount of our capitalized interest
was related to the construction of this pipeline, and therefore in the near future our capitalized
interest is expected to decline accordingly.
50
DENBURY RESOURCES INC.
Managements Discussion and Analysis of Financial Condition and Results of Operations
Depletion, Depreciation, and Amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
In thousands, except per BOE data |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Depletion, depreciation, and amortization of oil and natural gas
properties |
|
$ |
116,034 |
|
|
$ |
53,504 |
|
|
$ |
187,231 |
|
|
$ |
106,955 |
|
Depletion and depreciation of CO2 assets |
|
|
5,680 |
|
|
|
4,019 |
|
|
|
10,980 |
|
|
|
8,561 |
|
Asset retirement obligations |
|
|
1,692 |
|
|
|
810 |
|
|
|
2,799 |
|
|
|
1,637 |
|
Depreciation of other fixed assets |
|
|
5,803 |
|
|
|
3,362 |
|
|
|
10,071 |
|
|
|
6,467 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total DD&A |
|
$ |
129,209 |
|
|
$ |
61,695 |
|
|
$ |
211,081 |
|
|
$ |
123,620 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DD&A per BOE: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil and natural gas properties |
|
$ |
15.38 |
|
|
$ |
11.42 |
|
|
$ |
15.28 |
|
|
$ |
11.36 |
|
CO2 assets and other fixed assets |
|
|
1.50 |
|
|
|
1.55 |
|
|
|
1.69 |
|
|
|
1.57 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total DD&A cost per BOE |
|
$ |
16.88 |
|
|
$ |
12.97 |
|
|
$ |
16.97 |
|
|
$ |
12.93 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depletion of oil and natural gas properties increased on both a per BOE basis and in absolute
dollars during the three and six months ended June 30, 2010 as compared to the same periods of
2009, primarily due to the increase in our oil and natural gas property balance and the associated
reserve volumes and production from the Encore Merger, reserve additions in our tertiary fields and
our Bakken properties during the second quarter of 2010, and the acquisition of interests in the
Conroe Field in December 2009.
We continually evaluate the performance of our tertiary projects, and if performance indicates
that we are reasonably certain of recovering additional reserves from these floods, we recognize
those incremental reserves in that quarter. Since we adjust our DD&A rate each quarter based on
any changes in our estimates of oil and natural gas reserves and costs, our DD&A rate could change
significantly in the future. We recognized incremental reserves during the second quarter of 2010
related to our tertiary production at Delhi Field and other tertiary fields, where we initiated
CO2 injections during the fourth quarter of 2009, and had first oil production response
to tertiary injections during March 2010.
Our DD&A expense
for our other fixed assets increased on an absolute basis during the three and six month periods ended June
30, 2010 as compared to the comparable periods in 2009. The increase is primarily a result of the
Encore Merger in March 2010 and field office expansion during 2009. Our DD&A expense for our CO2 assets increased on an absolute basis for the three and six months ended June 30, 2010 compared to the prior periods primarily due to increased CO2 production.
On a BOE basis our CO2 assets and other fixed assets decreased for the three months ended June 30, 2010 compared to the prior year quarter due to increased oil and natural gas production volumes as a result of the Encore Merger which closed in March 2010. The first phase of our Green Pipeline was placed into service on June 29, 2010, and became subject
to depreciation. At June 30, 2010, we had $78.7 million of costs (including capitalized interest)
related to CO2 pipelines under construction, principally related to the remaining portion of the Green Pipeline to Hastings Field, which were not being depreciated.
For financial accounting purposes, depreciation of these pipelines will commence as each pipeline
is placed into service.
During the second quarter, we closed on the sale of the Southern Assets. We did not record a
gain in accordance with the full cost method of accounting. Instead, the proceeds from this sale
were recorded as a reduction to the full cost pool.
Under full cost accounting rules, we are required each quarter to perform a ceiling test
calculation. We did not have a ceiling test write-down at June 30, 2010. However, if oil prices
were to decrease significantly in subsequent periods, we may be required to record additional
write-downs under the full cost pool ceiling test in the future. The possibility and amount of any
future write-down is difficult to predict, and will depend upon oil and natural gas prices, the
incremental proved reserves that may be added each period, revisions to previous reserve estimates
and future capital expenditures, and additional capital spent.
51
DENBURY RESOURCES INC.
Managements Discussion and Analysis of Financial Condition and Results of Operations
Encore Transaction Costs
FASC Business Combinations topic requires that all transaction-related costs (advisory,
legal, accounting, due diligence, integration, etc.) be expensed as incurred. We recognized a
total of $22.8 million and $67.8 million, respectively, of transaction costs in the three and six
months ended June 30, 2010 associated with the Encore Merger, including $19.5 million and $20.7
million, respectively, related to severance costs.
Income Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
In thousands, except per BOE amounts and tax rates |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Current income tax provision |
|
$ |
6,941 |
|
|
$ |
24,127 |
|
|
$ |
7,610 |
|
|
$ |
24,300 |
|
Deferred income tax provision (benefit) |
|
|
74,422 |
|
|
|
(77,555 |
) |
|
|
150,694 |
|
|
|
(88,406 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax provision (benefit) |
|
$ |
81,363 |
|
|
$ |
(53,428 |
) |
|
$ |
158,304 |
|
|
$ |
(64,106 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Average income tax provision (benefit) per BOE |
|
$ |
10.63 |
|
|
$ |
(11.23 |
) |
|
$ |
12.73 |
|
|
$ |
(6.70 |
) |
Effective tax rate |
|
|
35.1 |
% |
|
|
38.0 |
% |
|
|
38.7 |
% |
|
|
37.8 |
% |
Our income taxes are based on an estimated statutory rate of approximately 37.7%. Our
effective tax rate has historically been slightly lower than our estimated statutory rate due to
the impact of certain items such as our domestic production activities deduction, offset in part by
certain non-cash stock-based compensation that cannot be deducted for tax purposes in the same
manner as book expense. As a result of the Encore Merger, our statutory rate increased, which
required us to remeasure our deferred tax liabilities in the first quarter of 2010 resulting in an
additional income tax provision of approximately $10 million. As a result of the sale of the
Southern Assets, our statutory rate decreased, which required us to remeasure our deferred tax
liabilities in the second quarter of 2010 resulting in an income tax benefit of approximately $3
million. The combination of these items increased our effective tax rate to 38.7% during the six
months ended June 30, 2010, as compared to 37.8% in the six months ended June 30, 2009.
In the three and six months ended June 30, 2009, the current income tax expense represented
our anticipated alternative minimum cash taxes that we could not offset with enhanced oil recovery
credits. In addition, included in the second quarter of 2009 was approximately $16 million in
current taxes associated with our sale of a portion of our Barnett Shale assets in June 2009. The
current income tax expense for the three and six months ended June 30, 2010 represents state income
taxes, primarily related to the sale of the Southern Assets and the sale of our interests in
Genesis. As of June 30, 2010, we had an estimated $50.3 million of enhanced oil recovery credits,
including $11.4 million related to the Encore Merger, to carry forward that can be utilized to
reduce our current income taxes during 2010 or future years. These enhanced oil recovery credits
do not begin to expire until 2023. Since the ability to earn additional enhanced oil recovery
credits is based upon the level of oil prices, we would not currently expect to earn additional
enhanced oil recovery credits unless oil prices were to significantly deteriorate.
The Encore Merger was treated as a tax-free asset acquisition for tax purposes. Accordingly,
Encores tax basis and tax attributes carried over to us, with the tax attributes being subject to
certain limitations. Upon testing these limitations, it has been determined that the limitations
do not affect our use of Encores tax attributes. The tax attributes that carried over to us
include enhanced oil recovery credits of $11.4 million, alternative minimum tax credits of $2.3
million, and state net operating losses of $0.9 million, tax effected.
In the second quarter of 2008, we obtained approval from the National Office of the Internal
Revenue Service (IRS) to change our method of tax accounting for certain assets used in our
tertiary oilfield recovery operations which led us to apply for refunds of certain amounts related
thereto on our 2004 and 2006 federal income tax returns. In the course of an IRS audit of those
claims for refunds, the IRS examination team has questioned the change in accounting method and the
ruling received from the National Office of the IRS in 2008. Together with the IRS, we have
submitted a request to the National Office of the IRS for a Technical Advice Memorandum (TAM)
regarding these issues, which is under consideration by the National Office. Although we have not
recorded an uncertain tax position related to these deductions as we expect to receive those tax
refunds, given the existence of
52
DENBURY RESOURCES INC.
Managements Discussion and Analysis of Financial Condition and Results of Operations
the TAM process related to those refunds, the payment of those tax refunds of approximately
$10.6 million for tax years through 2006 is not free from doubt. Although this change to our
method of tax accounting is not expected to have a significant impact on our overall tax rate, it
is anticipated that it could defer the amount of cash taxes we might otherwise pay over the next
several years.
Per BOE Data
The following table summarizes our cash flow, DD&A, and results of operations on a per BOE
basis for the comparative periods. Each of the individual components is discussed above.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
Per BOE data |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Oil and natural gas revenues |
|
$ |
63.76 |
|
|
$ |
44.48 |
|
|
$ |
65.85 |
|
|
$ |
39.70 |
|
Settlement payments (receipts) of commodity derivative contracts |
|
|
0.37 |
|
|
|
8.83 |
|
|
|
(4.58 |
) |
|
|
13.36 |
|
Lease operating expenses |
|
|
(16.69 |
) |
|
|
(17.59 |
) |
|
|
(18.01 |
) |
|
|
(16.59 |
) |
Production taxes and marketing expenses |
|
|
(4.98 |
) |
|
|
(2.27 |
) |
|
|
(4.62 |
) |
|
|
(2.09 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Production netback |
|
|
42.46 |
|
|
|
33.45 |
|
|
|
38.64 |
|
|
|
34.38 |
|
Non-tertiary CO2 operating margin |
|
|
0.39 |
|
|
|
0.38 |
|
|
|
0.49 |
|
|
|
0.38 |
|
G&A expenses |
|
|
(4.07 |
) |
|
|
(6.97 |
) |
|
|
(5.14 |
) |
|
|
(5.83 |
) |
Transactions costs related to the Encore Merger |
|
|
(2.98 |
) |
|
|
|
|
|
|
(5.45 |
) |
|
|
|
|
Net cash interest expense and other income |
|
|
(4.43 |
) |
|
|
(2.52 |
) |
|
|
(4.53 |
) |
|
|
(2.33 |
) |
Current income taxes and other |
|
|
0.10 |
|
|
|
(1.59 |
) |
|
|
0.66 |
|
|
|
(0.32 |
) |
Changes in operating assets and liabilities |
|
|
3.95 |
|
|
|
8.40 |
|
|
|
6.23 |
|
|
|
0.99 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow from operations |
|
|
35.42 |
|
|
|
31.15 |
|
|
|
30.90 |
|
|
|
27.27 |
|
DD&A |
|
|
(16.88 |
) |
|
|
(12.97 |
) |
|
|
(16.97 |
) |
|
|
(12.93 |
) |
Deferred income taxes |
|
|
(9.72 |
) |
|
|
16.31 |
|
|
|
(12.12 |
) |
|
|
9.24 |
|
Gain on sale of interests in Genesis |
|
|
|
|
|
|
|
|
|
|
8.17 |
|
|
|
|
|
Non-cash fair value derivative adjustments |
|
|
16.45 |
|
|
|
(40.95 |
) |
|
|
18.25 |
|
|
|
(31.49 |
) |
Net income attributable to noncontrolling interest |
|
|
1.95 |
|
|
|
|
|
|
|
1.47 |
|
|
|
|
|
Changes in operating assets and liabilities and other non-cash items |
|
|
(9.53 |
) |
|
|
(11.88 |
) |
|
|
(11.02 |
) |
|
|
(3.13 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Denbury stockholders |
|
$ |
17.69 |
|
|
$ |
(18.34 |
) |
|
$ |
18.68 |
|
|
$ |
(11.04 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Critical Accounting Policies
For additional discussion of our critical accounting policies, which remain unchanged, please
read Managements Discussion and Analysis of Financial Condition and Results of Operations in our
Annual Report on Form 10-K for the year ended December 31, 2009.
Forward-Looking Information
The statements contained in this Quarterly Report on Form 10-Q that are not historical facts,
including, but not limited to, statements found in this Managements 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, forecasted capital expenditures, drilling activity or methods, acquisition plans and
proposals and dispositions, development activities, cost savings, capital budgets, production rates
and volumes or forecasts thereof, hydrocarbon reserve quantities and values, CO2
reserves, potential reserves from tertiary operations, hydrocarbon prices, pricing or cost
assumptions based on current and projected oil and natural gas prices, liquidity, cash flows,
availability of capital, borrowing capacity, regulatory matters, mark-to-market values,
competition, long-term forecasts of production, finding costs, rates of return, estimated costs, or
changes in costs, future capital expenditures and overall economics and other variables surrounding
our operations and future plans.
53
DENBURY RESOURCES INC.
Managements Discussion and Analysis of Financial Condition and Results of Operations
Such forward-looking statements generally are accompanied by words such as plan, estimate,
expect, predict, anticipate, projected, should, assume, believe, target, or other
words that convey the uncertainty of future events or outcomes. Such forward-looking information
is based upon managements 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 our 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 us or on our behalf. Among the
factors that could cause actual results to differ materially are: fluctuations of the prices
received or demand for our oil and natural gas; unexpected difficulties in integrating the
operations of Denbury and Encore; effects of our indebtedness; success of our risk management
techniques; inaccurate cost estimates; availability of and fluctuations in the prices of goods and
services; the uncertainty of drilling results and reserve estimates; operating hazards; disruption
of operations and damages from hurricanes or tropical storms; acquisition risks; requirements for
capital or its availability; conditions in the financial and credit markets; general economic
conditions; competition and government regulations; and unexpected delays, as well as the risks and
uncertainties inherent in oil and natural gas drilling and production activities or which are
otherwise discussed in this quarterly report, including, without limitation, the portions
referenced above, and the uncertainties set forth from time to time in our other public reports,
filings and public statements.
54
DENBURY RESOURCES INC.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Long-Term Debt and Interest Rate Sensitivity
We finance some of our acquisitions and other expenditures with fixed and variable rate debt.
These debt agreements expose us to market risk related to changes in interest rates. We had $285
million of bank debt outstanding as of June 30, 2010 (primarily ENP bank debt as outlined below),
$135 million of which is subject to floating interest rates after taking into consideration
interest rate swaps. The carrying value of our bank debt is approximately fair value based on the
fact that it is subject to short-term floating interest rates that approximate the rates available
to us for those periods. We adjusted the estimated fair value measurements of our bank debt at
June 30, 2010, for estimated nonperformance risk of approximately $6.2 million, which was
determined utilizing industry credit default swaps. None of our existing debt has any triggers or
covenants regarding our debt ratings with rating agencies. The fair value of the subordinated debt
is based on quoted market prices. The following table presents the carrying and fair values of our
debt, along with average interest rates at June 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected Maturity Dates |
|
Carrying |
|
Fair |
In thousands, except percentages |
|
2012 |
|
2013 |
|
2014 |
|
2015 |
|
2016 |
|
2017 |
|
2020 |
|
Value |
|
Value |
Variable rate debt: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denbury Credit Agreement (weighted average
interest rate
of 2.7% at June 30, 2010) |
|
$ |
|
|
|
$ |
|
|
|
$ |
40,000 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
40,000 |
|
|
$ |
38,284 |
|
ENP Credit Agreement (weighted average
interest rate
of 2.7% at June 30, 2010) |
|
|
245,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
245,000 |
|
|
|
240,485 |
|
Fixed rate debt: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7.5% Senior Subordinated Notes due 2013 |
|
|
|
|
|
|
225,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
224,466 |
|
|
|
228,094 |
|
6.25% Senior Subordinated Notes due 2014 |
|
|
|
|
|
|
|
|
|
|
1,072 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,084 |
|
|
|
1,072 |
|
6.0% Senior Subordinated Notes due 2015 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
484 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
490 |
|
|
|
484 |
|
7.5% Senior Subordinated Notes due 2015 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
300,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
300,470 |
|
|
|
303,000 |
|
9.5% Senior Subordinated Notes due 2016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
224,920 |
|
|
|
|
|
|
|
|
|
|
|
240,877 |
|
|
|
238,415 |
|
9.75% Senior Subordinated Notes due 2016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
426,350 |
|
|
|
|
|
|
|
|
|
|
|
402,069 |
|
|
|
460,458 |
|
7.25% Senior Subordinated Notes due 2017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,250 |
|
|
|
|
|
|
|
2,277 |
|
|
|
2,250 |
|
8.25% Senior Subordinated Notes due 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
996,273 |
|
|
|
996,273 |
|
|
|
1,041,105 |
|
At this level of floating rate debt, if LIBOR increased by 10%, we would incur an
additional $0.4 million of interest expense per year on revolving credit facilities, and if LIBOR
decreased by 10%, we would incur $0.4 million less. Additionally, if the discount rates on our
senior notes increased by 10%, we estimate the fair value of our fixed rate debt at June 30, 2010
would increase by approximately $9.9 million, and if the discount rates on our senior notes
decreased by 10%, we estimate the fair value would decrease by approximately $9.9 million.
As of June 30, 2010, the fair market value of ENPs interest rate swaps was a net liability of
approximately $3.0 million. If the Eurodollar rate increased by 10%, we estimate the liability
would decrease to approximately $2.9 million, and if the Eurodollar rate decreased by 10%, we
estimate the liability would increase to approximately $3.1 million.
Please read Note 5 to the Unaudited Condensed Consolidated Financial Statements for details
regarding our long-term debt.
Commodity Derivative Contracts and Commodity Price Sensitivity
From time to time, we enter into various oil and natural gas derivative contracts to provide
an economic hedge of our exposure to commodity price risk associated with anticipated future oil
and natural gas production. We do not hold or issue derivative financial instruments for trading
purposes. These contracts have consisted of price floors, collars, and fixed price swaps. The
production that we hedge has varied from year to year depending on our levels of debt and financial
strength and expectation of future commodity prices. In early 2009, we began to employ a strategy
to hedge a portion of our production looking out 12 to 15 months from each quarter, as we believe
it is important to protect our future cash flow to provide a level of assurance for our capital
spending in those future periods in light of current worldwide economic uncertainties. However, as
a result of the Encore Merger and the
55
DENBURY RESOURCES INC.
higher debt levels necessary to finance it, we entered into
costless collars in November 2009 and March 2010, to hedge a significant portion of our forecasted
production through 2011. Given the sale of the Southern Assets commencing in May 2010, we returned
to our strategy initiated during early 2009 whereby we hedge a portion of our production for the
next 12 to 15 months, as discussed above. Please read Notes 6 and 7 to the Unaudited Condensed
Consolidated Financial Statements for additional information regarding our commodity derivative
contracts.
All of the mark-to-market valuations used for our oil and natural gas derivatives are provided
by external sources and are based on prices that are actively quoted. We manage and control market
and counterparty credit risk through established internal control procedures that are reviewed on
an ongoing basis. We attempt to minimize credit risk exposure to counterparties through formal
credit policies, monitoring procedures, and diversification. All of our commodity derivative
contracts are with parties that are lenders under our revolving credit agreement and all of ENPs
commodity derivative contracts are with parties that are lenders under its revolving credit
agreement. We have included an estimate of nonperformance risk in the fair value measurement of
our oil and natural gas derivative contracts. We have measured nonperformance risk based upon
credit default swaps or credit spreads. At June 30, 2010 and December 31, 2009, the net asset
(liability) of our open commodity derivative contracts was reduced by $1.1 million and $0.8
million, respectively, for estimated nonperformance risk.
For accounting purposes, we do not apply hedge accounting to our commodity derivative
contracts. This means that any changes in the fair value of these derivative contracts will be
charged to earnings on a quarterly basis instead of charging the effective portion to other
comprehensive income and the ineffective portion to earnings.
At June 30, 2010, our commodity derivative contracts were recorded at their fair value, which
was a net asset of approximately $109.7 million (excluding $38.1 million of deferred premiums that
Denbury is obligated to pay for its derivative contracts, which payments are not subject to changes
in commodity prices), a significant change from the $128.7 million fair value liability recorded at
December 31, 2009. This change is primarily related to the expiration of oil derivative contracts
during the first quarter of 2010 and to the oil and natural gas futures prices as of June 30, 2010
in relation to the new commodity derivative contracts for 2010 and 2011 that we entered into during
the first quarter of 2010.
Based on NYMEX crude oil and natural gas futures prices as of June 30, 2010, and assuming both
a 10% increase and decrease thereon, we would expect to make or receive payments on our crude oil
and natural gas derivative contracts as seen in the following table:
|
|
|
|
|
|
|
|
|
|
|
Crude Oil |
|
Natural Gas |
|
|
Derivative |
|
Derivative |
|
|
Contracts |
|
Contracts |
|
|
Receipt / |
|
|
In thousands |
|
(Payment) |
|
Receipt |
Based on: |
|
|
|
|
|
|
|
|
NYMEX futures prices as of June 30, 2010 |
|
$ |
(14,570 |
) |
|
$ |
54,856 |
|
10% increase in prices |
|
|
(43,384 |
) |
|
|
31,432 |
|
10% decrease in prices |
|
|
31,137 |
|
|
|
78,459 |
|
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures. We maintain disclosure controls and
procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934,
consisting of internal controls designed to ensure that information required to be disclosed in our
filings under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported
within the time periods specified in the SECs rules and forms and that such information is
accumulated and communicated to management, including our Chief Executive Officer and our Chief
Financial Officer. Our Chief Executive Officer and Chief Financial Officer have evaluated our
disclosure controls and procedures as of the end of the period covered by this quarterly report on Form
10-Q and have determined that such disclosure controls and procedures are effective in ensuring
that material information required to be disclosed in this quarterly report is accumulated and
communicated to them and our management to allow
56
DENBURY RESOURCES INC.
timely decisions regarding required disclosure.
Evaluation of Changes in Internal Control Over Financial Reporting. There have been no
changes in our internal control over financial reporting during the most recently completed quarter
that have materially affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
57
DENBURY RESOURCES INC.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Information with respect to this item is incorporated by reference from our Annual Report on Form 10-K
for the year ended December 31, 2009, updated as follows. On June 11, 2010, Judge Womack, the
Presiding Judge in the Israni and Scott class action cases related to the Encore Merger and pending
in Tarrant County District Court, granted the defendants motions striking the merger class action
claims of the Harbor Police Retirement System and Harbor Police efforts to intervene in the Israni
and Scott cases. On August 5, 2010, Judge Womack preliminarily approved the Stipulation of
Settlement dated June 22, 2010, settling the Israni and
Scott cases, permitting Encore
shareholders the right to opt-out of the settlement, appointing representatives of the class and their counsel,
approving the notice of class action which must be mailed to former Encore shareholders by August 26,
2010, and setting a hearing on October 21, 2010 to consider final approval of the settlement, certification of
the class and dismissal of the case with prejudice. The settlement amount agreed upon with the
Israni and Scott plaintiffs is immaterial to us.
Item 1A. Risk Factors
Information with respect to the risk factors has been incorporated by reference from Item 1A
of our Annual Report on Form 10-K for the year ended December 31, 2009. There have been no
material changes to the risk factors since the filing of such Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
The following table summarizes purchases of our common stock during the second quarter of
2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of |
|
|
Approximate Dollar |
|
|
|
Total |
|
|
|
|
|
|
Shares Purchased |
|
|
Value of Shares |
|
|
|
Number of |
|
|
Average |
|
|
as Part of Publicly |
|
|
that May Yet Be |
|
|
|
Shares |
|
|
Price Paid |
|
|
Announced Plans or |
|
|
Purchased Under the |
|
Month |
|
Purchased |
|
|
per Share |
|
|
Programs |
|
|
Plans or Programs |
|
April 2010 |
|
|
25,328 |
|
|
$ |
17.99 |
|
|
|
|
|
|
|
|
|
May 2010 |
|
|
18,959 |
|
|
|
16.47 |
|
|
|
|
|
|
|
|
|
June 2010 |
|
|
18,993 |
|
|
|
15.33 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
63,280 |
|
|
|
16.74 |
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
These shares were purchased from our employees who delivered shares to us to satisfy their tax
withholding requirements related to the vesting of restricted shares.
Item 6. Exhibits
|
|
|
Exhibit |
|
Description |
10.1
|
|
First Amendment to Credit Agreement, dated as of May 13, 2010, among Denbury Resources Inc.,
as Borrower, the financial institutions listed on Schedule 1.1 thereto, as Banks, JPMorgan
Chase Bank, N.A., as Administrative Agent, Banc of America Securities LLC, as Syndication
Agent, and BNP Paribas, The Bank of Nova Scotia, and Credit Suisse Securities (USA) LLC, as
Co-Documentation Agents (incorporated by reference to Exhibit 10.1 of our Current Report on
Form 8-K, filed with the SEC on May 19, 2010). |
|
|
|
10.2
|
|
Purchase and Sale Agreement, dated March 31, 2010, effective May 1, 2010, by and between
Encore Operating, L.P. and Quantum Resources Management, LLC (incorporated by reference to
Exhibit 10.6 of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2010, filed
with the SEC on May 10, 2010). |
|
|
|
10.3+
|
|
2004 Omnibus Stock and Incentive Plan for Denbury Resources Inc. (Updated as of May 19,
2010) (incorporated by reference to Exhibit 99.1 of our Current Report on Form 8-K, filed with
the SEC on May 25, 2010). |
|
|
|
10.4+
|
|
Form of 2010 Performance Stock Award under the 2004 Omnibus Stock and Incentive Plan for
Denbury Resources Inc. (Updated as of May 19, 2010) (incorporated by reference to Exhibit 99.2 |
58
DENBURY RESOURCES INC.
|
|
|
Exhibit |
|
Description |
|
|
of our Current Report on Form 8-K, filed with the SEC on May 25, 2010). |
|
|
|
10.5+
|
|
Form of 2010 Performance Cash Award under the 2004 Omnibus Stock and Incentive Plan for
Denbury Resources Inc. (Updated as of May 19, 2010) (incorporated by reference to Exhibit 99.3
of our Current Report on Form 8-K, filed with the SEC on May 25, 2010). |
|
|
|
31.1*
|
|
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002. |
|
|
|
31.2*
|
|
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002. |
|
|
|
32*
|
|
Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002. |
|
|
|
101*
|
|
The following financial statements from our Quarterly Report on Form 10-Q for the quarter
ended June 30, 2010, formatted in XBRL: (1) Unaudited Condensed Consolidated Balance Sheets,
(2) Unaudited Condensed Consolidated Statements of Operations, (3) Unaudited Condensed
Consolidated Statements of Cash Flows, (4) Unaudited Condensed Consolidated Statement of
Changes in Equity, and (5) Unaudited Condensed Consolidated Statements of Comprehensive
Operations. |
|
|
|
* |
|
Filed herewith. |
|
+ |
|
Compensatory arrangement. |
59
DENBURY RESOURCES INC.
SIGNATURES
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/ Mark C. Allen
|
|
|
|
Mark C. Allen |
|
|
|
Senior Vice President, Chief Financial Officer,
Treasurer, and Assistant Secretary |
|
|
|
|
|
|
By: |
/s/ Alan Rhoades
|
|
|
|
Alan Rhoades |
|
|
|
Vice President, Accounting |
|
|
Date: August 9, 2010
60