UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
2002 FORM 10-K
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
OR
|_| 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 1-12935
DENBURY RESOURCES INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 75-2815171
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
5100 TENNYSON PARKWAY,
SUITE 3000, PLANO, TX 75024
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (972) 673-2000
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
- ---------------------------------------------------------- ---------------------------------------------------------
Common Stock $.001 Par Value New York Stock Exchange
========================================================== =========================================================
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: None
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). [X]
As of March 18, 2003, the aggregate market value of the registrant's Common
Stock held by non-affiliates was approximately $376,852,000.
The number of shares outstanding of the registrant's Common Stock as of
March 18, 2003, was 53,682,038.
DOCUMENTS INCORPORATED BY REFERENCE
DOCUMENT INCORPORATED AS TO
1. Notice and Proxy Statement for the Annual Meeting of 1. Part III, Items 10, 11, 12, and 13
Shareholders to be held May 20, 2003.
2. Annual Report to Shareholders for the year ended 2. Part I, Item 1 and Part II, Items 5, 6, 7, 8
December 31, 2002.
DENBURY RESOURCES INC.
2002 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
ITEM PAGE
PART I
1. Business............................................................................ 3
2. Properties..........................................................................10
3. Legal Proceedings.................................................................. 10
4. Submission of Matters to a Vote of Security Holders................................ 10
PART II
5. Market for the Common Stock and Related Matters.................................... 11
6. Selected Financial Data............................................................ 11
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations......................................................................... 11
7A. Quantitative and Qualitative Disclosures About Market Risk......................... 11
8. Financial Statements and Supplementary Data........................................ 11
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure....................................................... 11
PART III
10. Directors and Executive Officers of the Company.................................... 12
11. Executive Compensation............................................................. 12
12. Security Ownership of Certain Beneficial Owners and Management..................... 12
13. Certain Relationships and Related Transactions..................................... 12
14. Controls and Procedures............................................................ 12
PART IV
15. Exhibits, Financial Statement Schedules and Reports on Form 8-K ................... 13
Signatures ........................................................................ 15
Certifications..................................................................... 16
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PART I
ITEM 1. BUSINESS
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WEBSITE ACCESS TO REPORTS
We make our annual report on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K, and amendments to those reports, filed or furnished
pursuant to section 13(a) or 15(d) of the Securities Exchange Act of 1934
available free of charge on our internet website, www.denbury.com, as soon as
reasonably practicable after we electronically file such material with, or
furnish it to, the SEC. In addition, we have adopted a Code of Ethics for Senior
Financial Officers and the Principal Executive Officer. We have posted this Code
of Ethics on our website, where we also intend to post any waivers from or
amendments to this Code of Ethics.
THE COMPANY
Denbury Resources Inc. is a Delaware corporation, organized under Delaware
General Corporation Law, engaged in the acquisition, development, operation and
exploration of oil and natural gas properties in the Gulf Coast region of the
United States, primarily in Louisiana, Mississippi and in the Gulf of Mexico.
Our corporate headquarters is located at 5100 Tennyson Parkway, Suite 3000,
Plano, Texas 75024, and our phone number is 972-673-2000. At December 31, 2002,
we have 356 employees, 239 of which were employed in field operations or at the
field offices.
Incorporation and Organization
Denbury was originally incorporated in Canada in 1951. In 1992, we acquired
all of the shares of a United States operating company, Denbury Management, Inc.
("DMI"), and subsequent to the merger we sold all of its Canadian assets. Since
that time, all of our operations have been in the United States.
In April 1999, our stockholders approved a move of our corporate domicile
from Canada to the United States as a Delaware corporation. Along with the move,
our wholly owned subsidiary, DMI, was merged into the new Delaware parent
company, Denbury Resources Inc. This move of domicile did not have any effect on
our operations or assets.
BUSINESS STRATEGY
As part of our business strategy, we seek to:
o achieve attractive returns on capital through prudent acquisitions and
subsequent exploitation of those acquired reserves;
o maintain a balanced portfolio of quality assets;
o maintain a conservative balance sheet to ensure maximum financial and
operational flexibility; and
o create strong employee incentives through equity ownership throughout
our company.
We believe that our growth to date in proved reserves, production, net
asset value and cash flow is a direct result of our adherence to several
fundamental principles that are at the core of our long-term growth strategy.
During the last few years, by remaining focused in our core areas and through
several small but strategic acquisitions, we have developed a unique competitive
advantage in Mississippi with our carbon dioxide tertiary recovery program. Our
position gives us the opportunity to increase reserves in our tertiary recovery
program at attractive finding costs in a relatively low risk manner. At the same
time, we have balanced our portfolio and improved the overall quality of our
production by acquiring offshore Gulf of Mexico natural gas properties through
our acquisition of Matrix Oil & Gas, Inc. in July 2001.
ACQUISITIONS
Information as to recent acquisitions by us is set forth under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - 2002 Acquisitions," appearing on page 27 of the Annual Report and
under Note 2, "Acquisitions," to the Consolidated Financial Statements. Such
information is incorporated herein by reference.
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OIL AND GAS OPERATIONS
Information regarding selected operating data and a discussion of our
significant operating areas and the primary properties within those three areas
are set forth under "Selected Operating Data," appearing on pages 8 through 11
of the Annual Report, and the "Operations Report" appearing on pages 14 through
24 of the Annual Report. Such information is incorporated herein by reference.
OIL AND GAS ACREAGE, PRODUCTIVE WELLS, DRILLING ACTIVITY
Information regarding oil and gas acreage, productive wells and drilling
activity are set forth under "Selected Operating Data," appearing on page 11 of
the Annual Report.
TITLE TO PROPERTIES
Customarily in the oil and gas industry, only a perfunctory title
examination is conducted at the time properties believed to be suitable for
drilling operations are first acquired. Prior to commencement of drilling
operations, a thorough drill site title examination is normally conducted, and
curative work is performed with respect to significant defects. During
acquisitions, title reviews are performed on all properties; however, formal
title opinions are obtained on only the higher value properties. We believe that
taken as a whole we have good title to our oil and natural gas properties, some
of which are subject to minor encumbrances, easements and restrictions.
PRODUCTION
Information regarding average production rates, unit sale prices and unit
costs per BOE are set forth under "Management's Discussion and Analysis of
Financial Condition and Results of Operations" appearing on pages 33 through 36
of the Annual Report.
GEOGRAPHIC SEGMENTS
All of our operations are in the United States.
SIGNIFICANT OIL AND GAS PURCHASERS AND PRODUCT MARKETING
Oil and gas sales are made on a day-to-day basis under short-term contracts
at the current area market price. We would not expect the loss of any single
purchaser to have a material adverse effect upon our operations; however, the
loss of a large single purchaser could potentially reduce the competition for
our oil and natural gas production, which in turn could negatively impact the
prices we receive. For the year ended December 31, 2002, we had two significant
purchasers that each accounted for more than 10% of our total oil and natural
gas revenues: Hunt Refining (14%) and Genesis (11%). For the year ended December
31, 2001, four purchasers each accounted for 10% or more of our oil and natural
gas revenues: Conoco (14%), Hunt Refining (13%), EOTT Energy (12%), and Dynegy
(12%). For the year ended December 31, 2000, four purchasers each accounted for
10% or more of our oil and natural gas revenues: Hunt Refining (24%), Southland
Refining (17%), EOTT Energy (16%), and Dynegy (10%).
Our ability to market oil and natural gas depends on many factors beyond
our control, including the extent of domestic production and imports of oil and
gas, the proximity of our gas production to pipelines, the available capacity in
such pipelines, the demand for oil and natural gas, the effects of weather, and
the effects of state and federal regulation. Our production is primarily from
developed fields close to major pipelines or refineries and established
infrastructure. As a result, we have not experienced any difficulty to date in
finding a market for all of our production as it becomes available or in
transporting our production to those markets; however, there is no assurance
that we will always be able to market all of our production or obtain favorable
prices.
Oil Marketing
The quality of our crude oil varies by area as well as the corresponding
price received. In Heidelberg Field, our single largest field, and our other
non-CO2 flood properties in Mississippi, our oil production is primarily light
to medium sour crude and sells at a significant discount to the NYMEX prices. In
Western Mississippi, our CO2 flood properties, and in Louisiana, our oil
production is primarily light sweet crude, which typically sells at a small
discount to NYMEX. For the
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year ended December 31, 2002, the discount for our oil production from
Heidelberg Field and our other non-CO2 flood properties in Mississippi
properties averaged a discount of $4.37 per Bbl. For our CO2 flood properties in
Western Mississippi, our discount in 2002 averaged $0.72 per Bbl.
Natural Gas Marketing
Virtually all of our natural gas production is close to existing pipelines
and consequently, we generally have a variety of options to market our natural
gas. We sell the majority of our natural gas on one year contracts with prices
fluctuating month-to-month based on published pipeline indices with slight
premiums or discounts to the index.
Product Price Derivative Hedging Contracts
We enter into various financial contracts to hedge our exposure to
commodity price risk associated with anticipated future oil and natural gas
production. Information as to these activities is set forth under "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Market Risk Management," appearing on pages 40 through 41 of the Annual Report
and in Note 7, "Derivative Hedging Contracts," to the Consolidated Financial
Statements. Such information is incorporated herein by reference.
RISKS OF OUR BUSINESS
Oil and Natural Gas Price Volatility
Our future financial condition, results of operations and the carrying
value of our oil and natural gas properties depends primarily upon the prices we
receive for our oil and natural gas production. Oil and natural gas prices
historically have been volatile and likely will continue to be volatile in the
future. This price volatility also affects the amount of cash flow available to
us for capital expenditures and impacts our ability to borrow money or raise
additional capital. The amount we can borrow or have outstanding under our bank
credit facility is subject to semi-annual redeterminations based on current
prices at the time of redetermination. In the short-term, our production is
balanced between oil and natural gas, but longer-term, oil prices are likely to
have a greater impact on us because 74% of our reserves are oil, although for
2002 our production was 53% oil and 47% natural gas.
Over the last four years oil prices have gone from near historic low prices
to higher prices not experienced for over ten years. At the end of 1998, NYMEX
oil prices were at historic lows of approximately $12.00 per Bbl, but during
1999 and 2000 NYMEX oil prices increased to an average of approximately $19.30
and $30.25 per Bbl, respectively. During 2001, NYMEX oil prices declined to an
average of approximately $26.00 per Bbl and were at $19.84 per Bbl at the end of
2001. Throughout 2002, NYMEX oil prices increased to average approximately
$26.10 per Bbl and ended the year at $31.20 per Bbl.
Natural gas prices have experienced even more volatility over the same four
year period. During 1999 natural gas prices averaged approximately $2.35 per Mcf
and increased to an average of approximately $4.00 per Mcf during 2000,
primarily due to low storage levels. At December 31, 2000, NYMEX natural gas
prices were almost $10.00 per Mcf but declined steadily during 2001 as supplies
of natural gas increased and as of year-end 2001, were $2.57 per Mcf. For 2002,
natural gas prices generally increased throughout the year and averaged
approximately $3.35 per Mcf and ended 2002 at $4.79 per Mcf.
Oil and natural gas prices are subject to wide fluctuations that result
from a variety of factors, most of which are beyond our control. These factors
include:
o relatively minor changes in the supply of and demand for oil and
natural gas;
o weather conditions;
o market uncertainty;
o domestic and foreign governmental regulations and taxes;
o the availability and cost of alternative fuel sources;
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o the domestic and foreign supply of oil and natural gas;
o the price of foreign oil and natural gas;
o the ability of the members of the Organization of Petroleum Exporting
Countries to agree to and maintain oil price and production controls;
o political conditions in oil and natural gas producing regions,
including the Middle East and South America; and
o worldwide economic conditions.
These factors and the volatility of the energy markets generally make it
extremely difficult to predict future oil and natural gas price movements with
any certainty. Declines in oil and natural gas prices would not only reduce
revenue, but could reduce the amount of oil and natural gas that we can produce
economically and, as a result, could have a material adverse effect upon our
financial condition, results of operations and oil and natural gas reserves.
Further, oil and natural gas prices do not necessarily move in tandem.
Oil and Natural Gas Drilling and Producing Operations
Drilling activities are subject to many risks, including the risk that no
commercially productive reservoirs will be discovered. There can be no assurance
that new wells drilled by us will be productive or that we will recover all or
any portion of our investment in such wells. Drilling for oil and natural gas
may involve unprofitable efforts, not only from dry wells but also from wells
that are productive but do not produce sufficient net reserves to return a
profit after deducting drilling, operating and other costs. The seismic data and
other technologies used by us do not provide conclusive knowledge, prior to
drilling a well, that oil or natural gas is present or may be produced
economically. The cost of drilling, completing and operating a well is often
uncertain, and cost factors can adversely affect the economics of a project.
Further, our drilling operations may be curtailed, delayed or canceled as a
result of numerous factors, including:
o unexpected drilling conditions;
o title problems;
o pressure or irregularities in formations;
o equipment failures or accidents;
o adverse weather conditions;
o compliance with environmental and other governmental requirements; and
o cost of, or shortages or delays in the availability of, drilling rigs,
equipment and services.
The crude oil production from our tertiary recovery projects depends on
having access to sufficient amounts of carbon dioxide ("CO2"). Our ability to
produce this oil would be hindered if our supply of carbon dioxide were limited
due to problems with our current CO2 producing wells and facilities, including
compression equipment, or catastrophic pipeline failure. Our anticipated future
production is also dependent on our ability to increase the production volumes
of CO2. If our crude oil production were to decline, it could have a material
adverse effect on our financial condition and results of operations. Our CO2
tertiary recovery projects require a significant amount of electricity to
operate the facilities. If these costs were to increase significantly, it could
have a material adverse effect upon the profitability of these operations.
Our operations are subject to all the risks normally incident to the
operation and development of oil and natural gas properties and the drilling of
oil and natural gas wells, including encountering well blowouts, cratering and
explosions, pipe failure, fires, formations with abnormal pressures,
uncontrollable flows of oil, natural gas, brine or well fluids, release of
contaminants into the environment and other environmental hazards and risks.
In accordance with industry practice, we maintain insurance against some,
but not all, of the risks described above in an amount we believe is adequate.
However, the nature of these risks is such that some liabilities could exceed
our policy
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limits, or, as in the case of environmental fines and penalties, cannot be
insured. We could incur significant costs, related to these risks, that could
have a material adverse effect on our results of operations and financial
condition.
Future Performance and Acquisitions
Unless we can successfully replace the reserves that we produce, our
reserves will decline, resulting eventually in a decrease in oil and natural gas
production and lower revenues and cash flows from operations. We have
historically replaced reserves through both drilling and acquisitions. In the
future we may not be able to continue to replace reserves at acceptable costs.
The business of exploring for, developing or acquiring reserves is capital
intensive. We may not be able to make the necessary capital investment to
maintain or expand our oil and natural gas reserves if our cash flows from
operations are reduced, due to lower oil or natural gas prices or otherwise, or
if external sources of capital become limited or unavailable. If we do not
continue to make significant capital expenditures, or if outside capital
resources become limited, we may not be able to maintain our growth rate. In
addition, our drilling activities are subject to numerous risks, including the
risk that no commercially productive oil or natural gas reserves will be
encountered. Exploratory drilling involves more risk than development drilling
because exploratory drilling is designed to test formations for which proved
reserves have not been discovered.
Our long-term business strategy includes growing our reserve base through
acquisitions. We are continually identifying and evaluating acquisition
opportunities and we have successfully completed acquisitions over the last
several years. Estimating the reserves and forecasted production from acquired
properties is inherently difficult and may result in our inability to achieve or
maintain targeted production levels. In that case, our ability to realize the
total economic benefit from the acquisition may be reduced or eliminated. There
can be no assurance that we will successfully consummate any future acquisitions
or that such acquisitions of oil and natural gas properties will contain
economically recoverable reserves or that any future acquisition will be
profitably integrated into our operations.
COMPETITION AND MARKETS
We face competition from other oil and natural gas companies in all aspects
of its business, including acquisition of producing properties and oil and gas
leases, marketing of oil and gas, and obtaining goods, services and labor. Many
of our competitors have substantially larger financial and other resources.
Factors that affect our ability to acquire producing properties include
available funds, available information about prospective properties and our
standards established for minimum projected return on investment. Gathering
systems are the only practical method for the intermediate transportation of
natural gas. Therefore, competition for natural gas delivery is presented by
other pipelines and gas gathering systems. Competition is also presented by
alternative fuel sources, including heating oil and other fossil fuels. Because
of the balanced nature of our properties and reserves with regard to risk and
commodity mix, our inventory of projects, and management's experience and
expertise in exploiting these reserves, we believe that we are effective in
competing in the market.
FEDERAL AND STATE REGULATIONS
Numerous federal, state and local laws and regulations govern the oil and
gas industry. These laws and regulations are often changed in response to the
current political or economic environment. Compliance with this regulatory
burden increases our cost of doing business and affects our profitability.
Changes in any of these laws and regulations could have a material adverse
effect on our business. In view of the many uncertainties with respect to
current and future laws and regulations, including their applicability to us, we
cannot predict the overall effect of such laws and regulations on our future
operations or profitability.
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Proposals and proceedings that might affect the oil and gas industry are
pending before Congress, the Federal Energy Regulatory Commission, or "FERC",
the Minerals Management Service, or "MMS", state legislatures and commissions
and the courts. We cannot predict when or whether any such proposals may become
effective. In the past, the natural gas industry has been heavily regulated.
There is no assurance that the regulatory approach currently pursued by various
agencies will continue indefinitely. Notwithstanding the foregoing, we do not
anticipate that compliance with existing federal, state and local laws, rules
and regulations will have a material or significantly adverse effect upon our
capital expenditures, earnings or competitive position. No material portion of
our business is subject to re-negotiation of profits or termination of contracts
or subcontracts at the election of the federal government.
The following discussion contains summaries of certain laws and regulations
and is qualified in its entirety by the foregoing.
Regulation of Natural Gas and Oil Exploration and Production
Our operations are subject to various types of regulation at the federal,
state and local levels. Such regulation includes requiring permits for drilling
wells, maintaining bonding requirements in order to drill or operate wells and
regulating the location of wells, the method of drilling and casing wells, the
surface use and restoration of properties upon which wells are drilled, the
plugging and abandoning of wells and the disposal of fluids used or generated in
connection with operations. Our operations are also subject to various
conservation laws and regulations. These include the regulation of the size of
drilling and spacing units or proration units and the density of wells which may
be drilled and the unitization or pooling of oil and gas properties. In
addition, state conservation laws establish maximum rates of production from oil
and gas wells, generally prohibit the venting or flaring of gas and impose
certain requirements regarding the ratability of production. The effect of these
regulations may limit the amount of oil and gas we can produce from our wells in
a given state and may limit the number of wells or the locations at which we can
drill.
Federal Regulation of Sales Prices and Transportation
Currently, there are no federal, state or local laws that regulate the
price for our sales of natural gas, NGLs, crude oil or condensate. However, the
rates charged and terms and conditions for the movement of gas in interstate
commerce through certain intrastate pipelines and production area hubs are
subject to regulation under the Natural Gas Policy Act of 1978 ("NGPA").
Pipeline and hub construction activities are, to a limited extent, also subject
to regulations under the Natural Gas Act of 1938 ("NGA"). While these controls
do not apply directly to us, their effect on natural gas markets can be
significant in terms of competition and cost of transportation services, which
in turn can have a substantial impact on our profitability and costs of doing
business. Additional proposals and proceedings that might affect the natural gas
industry are considered from time to time by Congress, FERC, state regulatory
bodies and the courts. We cannot predict when or if any such proposals might
become effective and their effect, if any, on our operations. We do not believe
that we will be affected by any action taken in any materially different respect
from other natural gas producers, gatherers and marketers with whom we compete.
Gathering Regulations
State regulation of gathering facilities generally includes various safety,
environmental and, in some circumstances, nondiscriminatory take requirements.
Such regulation has not generally been applied against gatherers of natural gas,
although natural gas gathering may receive greater regulatory scrutiny in the
future.
Federal, State or Indian Leases
Our operations on federal, state or Indian oil and gas leases are subject
to numerous restrictions, including nondiscrimination statutes. Such operations
must be conducted pursuant to certain on-site security regulations and other
permits and authorizations issued by the Bureau of Land Management, MMS and
other agencies.
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Environmental Regulations
Public interest in the protection of the environment has increased
dramatically in recent years. In addition, over the last two years we have
acquired significant assets offshore in the Gulf of Mexico which are regulated
by the MMS. Department of the Interior. Our oil and natural gas production and
saltwater disposal operations and our processing, handling and disposal of
hazardous materials, such as hydrocarbons and naturally occurring radioactive
materials are subject to stringent regulation. We could incur significant costs,
including cleanup costs resulting from a release of hazardous material,
third-party claims for property damage and personal injuries fines and
sanctions, as a result of any violations or liabilities under environmental or
other laws. Changes in or more stringent enforcement of environmental laws could
also result in additional operating costs and capital expenditures.
Various federal, state and local laws regulating the discharge of materials
into the environment, or otherwise relating to the protection of the
environment, directly impact oil and gas exploration, development and production
operations, and consequently may impact the Company's operations and costs.
These regulations include, among others, (i) regulations by the EPA and various
state agencies regarding approved methods of disposal for certain hazardous and
nonhazardous wastes; (ii) the Comprehensive Environmental Response,
Compensation, and Liability Act, Federal Resource Conservation and Recovery Act
and analogous state laws which regulate the removal or remediation of previously
disposed wastes (including wastes disposed of or released by prior owners or
operators), property contamination (including groundwater contamination), and
remedial plugging operations to prevent future contamination; (iii) the Clean
Air Act and comparable state and local requirements which may result in the
gradual imposition of certain pollution control requirements with respect to air
emissions from the operations of the Company; (iv) the Oil Pollution Act of 1990
which contains numerous requirements relating to the prevention of and response
to oil spills into waters of the United States; (v) the Resource Conservation
and Recovery Act which is the principal federal statute governing the treatment,
storage and disposal of hazardous wastes; and (vi) state regulations and
statutes governing the handling, treatment, storage and disposal of naturally
occurring radioactive material ("NORM").
In the course of our routine oil and natural gas operations, surface spills
and leaks, including casing leaks, of oil or other materials occur, and we incur
costs for waste handling and environmental compliance. It is also possible that
our oil and natural gas operations may require us to manage NORM. NORM is
present in varying concentrations in sub-surface formations, including
hydrocarbon reservoirs, and may become concentrated in scale, film and sludge in
equipment that comes in contact with crude oil and natural gas production and
processing streams. Some states, including Texas, have enacted regulations
governing the handling, treatment, storage and disposal of NORM. Moreover, we
are able to control directly the operations of only those wells for which we act
as the operator. Despite our lack of control over wells owned by us but operated
by others, the failure of the operator to comply with the applicable
environmental regulations may, in certain circumstances, be attributed to us
under applicable state, federal or local laws or regulations.
Management believes that we are in substantial compliance with all
currently applicable environmental laws and regulations. To date, compliance
with such laws and regulations has not required the expenditure of any material
amounts, and management does not currently anticipate that future compliance
will have a materially adverse effect on our consolidated financial position or
results of operations. Since these laws and regulations are periodically
amended, we are unable to predict the ultimate cost of compliance. To our
knowledge, there are currently no material adverse environmental conditions that
exist on any of our properties and there are no current or threatened actions or
claims by any local, state or federal agency or by any private landowner against
us pertaining to such a condition. Further, we are not aware of any currently
existing condition or circumstance that may give rise to such actions or claims
in the future.
We maintain insurance against some, but not all, potential risks and losses
associated with our industry and operations. We do not carry business
interruption insurance. For some risks, we may not obtain insurance if we
believe the cost of available insurance is excessive relative to the risks
presented. In addition, pollution and environmental risks generally are not
fully insurable. If a significant accident or other event occurs and is not
fully covered by insurance, it could adversely affect us.
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ESTIMATED NET QUANTITIES OF PROVED OIL AND GAS RESERVES AND PRESENT VALUE OF
ESTIMATED FUTURE NET REVENUES
Estimates of net proved oil and gas reserves as of December 31, 2002, 2001
and 2000 have been prepared by DeGolyer and MacNaughton, independent petroleum
engineers located in Dallas, Texas. See Note 10, "Supplemental Oil and Natural
Gas Disclosures," to the Consolidated Financial Statements and pages 8 and 9 of
the Annual Report for disclosure of reserve data. Such information is
incorporated herein by reference.
There are numerous uncertainties inherent in estimating quantities of
proved oil and natural gas reserves and their values, including many factors
beyond our control. The reserve data included herein represents only estimates.
Reserve engineering is a subjective process of estimating underground
accumulations of oil and natural gas that cannot be measured in an exact manner.
The accuracy of any reserve estimate is a function of the quality of available
geological, geophysical, engineering and economic data, the precision of the
engineering and judgment. As a result, estimates of different engineers often
vary. The estimates of reserves, future cash flows and present value are based
on various assumptions, including those prescribed by the SEC relating to oil
and natural gas prices, drilling and operating expenses, capital expenditures,
taxes and availability of funds, and are inherently imprecise. Actual future
production, cash flows, taxes, development expenditures, operating expenses and
quantities of recoverable oil and natural gas reserves may vary substantially
from our estimates. Such variations may be significant and could materially
affect estimated quantities and the present value of our proved reserves. Also,
the use of a 10% discount factor for reporting purposes may not necessarily
represent the most appropriate discount factor, given actual interest rates and
risks to which Denbury or the oil and natural gas industry in general are
subject.
You should not assume that the present values referred to herein represents
the current market value of our estimated oil and natural gas reserves. In
accordance with requirements of the SEC, the estimates of present values are
based on prices and costs as of the date of the estimates. Actual future prices
and costs may be materially higher or lower than the prices and cost as of the
date of the estimate. A change in price of $0.10 per Mcf and $1.00 per Bbl would
result in a change in our December 31, 2002 PV-10 Value of proved reserves of
approximately 1.0% and 3.3%, respectively. The estimates of future net revenues
and their present value differ in this respect from the standardized measure of
discounted future net cash flows set forth in the Notes to Consolidated
Financial Statements, which is calculated after provision for future income tax.
Quantities of proved reserves are estimated based on economic conditions,
including oil and natural gas prices in existence at the date of assessment. Our
reserves and future cash flows may be subject to revisions based upon changes in
economic conditions, including oil and natural gas prices, as well as due to
production results, results of future development, operating and development
costs and other factors. Downward revisions of our reserves could have an
adverse affect on our financial condition and operating results. Selected
information on our reserves on properties we operate is filed with the DOE in
its Annual Survey of Domestic Oil and Gas Reserves.
ITEM 2. PROPERTIES
See Item 1. Business - "Oil and Gas Operations." We also have various
operating leases for rental of office space, office equipment, and vehicles. See
Note 8, "Commitments and Contingencies," to the Consolidated Financial
Statements for the future minimum rental payments. Such information is
incorporated herein by reference.
ITEM 3. LEGAL PROCEEDINGS
Due to the nature of our business, we are involved in various legal or
administrative proceedings that arise from time to time in the ordinary course
of our business. In the opinion of management, there are no material pending
legal proceedings to which Denbury or any of our subsidiaries is a party or of
which any of their property is the subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted for a vote of security holders during the fourth
quarter of 2002.
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PART II
ITEM 5. MARKET FOR THE COMMON STOCK AND RELATED MATTERS
Information as to the markets in which Denbury's common stock is traded,
the quarterly high and low prices for such stock during the last two years, the
restriction on the payment of dividends with respect to the common stock, and
the approximate number of stockholders of record at February 1, 2003, is set
forth under "Common Stock Trading Summary" appearing on page 70 of the Annual
Report. Such information is incorporated herein by reference.
Affiliates of the Texas Pacific Group beneficially own approximately 32% of
the Company's outstanding common stock and their representatives hold four of
nine seats on Denbury's Board of Directors. As a result of its ownership, the
Texas Pacific Group has the effective ability to elect all of Denbury's
directors and to control its business and affairs, including decisions with
respect to the acquisition or disposition of assets, the future issuance of our
common stock or other securities, dividend policy and decisions with respect to
the Company's drilling, operating and acquisition expenditure plans. Although
the Company's articles of incorporation require a two-thirds majority vote by
the board of directors on most significant transactions, such as significant
asset purchases and sales, issuances of equity and debt, changes in the board of
directors and other matters, there is no agreement that would prevent the Texas
Pacific Group from replacing all directors of the Company by calling a meeting
of Denbury's shareholders.
ITEM 6. SELECTED FINANCIAL DATA
Selected Financial Data for Denbury for each of the last five years are set
forth under "Financial Highlights" appearing on page 2 of the Annual Report. All
such information is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Information as to Denbury's financial condition, changes in financial
condition and results of operations and other matters is set forth in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," appearing on pages 27 through 43 of the Annual Report and is
incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by Item 7A is set forth under "Market Risk
Management" in "Management's Discussion and Analysis of Financial Condition and
Results of Operations," appearing on pages 40 through 41 of the Annual Report
and is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Denbury's consolidated financial statements, accounting policy disclosures,
notes to financial statements, business segment information, unaudited quarterly
information and independent auditors' report are presented on pages 27 through
69 of the Annual Report. All such information is incorporated herein by
reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
DIRECTORS OF THE COMPANY
Information as to the names, ages, positions and offices with Denbury,
terms of office, periods of service, business experience during the past five
years and certain other directorships held by each director or person nominated
to become a director of Denbury and related information will be set forth in the
"Election of Directors" segment of the Proxy Statement ("Proxy Statement") for
the Annual Meeting of Shareholders to be held May 20, 2003, ("Annual Meeting")
and is incorporated herein by reference.
EXECUTIVE OFFICERS OF THE COMPANY
Information concerning the executive officers of Denbury will be set forth
in the "Management" section of the Proxy Statement for the Annual Meeting and is
incorporated herein by reference.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 and the rules
thereunder require the Company's executive officers and directors, and persons
who beneficially own more than ten percent (10%) of a registered class of the
Company's equity securities, to file reports of ownership and changes in
ownership with the Securities and Exchange Commission and exchanges and to
furnish the Company with copies. Based solely on its review of the copies of
such forms received by it, or written representations from such persons, the
Company is not aware of any person who failed to file any reports required by
Section 16(a) to be filed for fiscal 2002.
ITEM 11. EXECUTIVE COMPENSATION
Information concerning remuneration received by Denbury's executive
officers and directors will be presented under the caption "Statement of
Executive Compensation" in the Proxy Statement for the Annual Meeting and is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information as to Denbury's common stock that may be issued under our
equity compensation plans and the number of shares of Denbury's common stock
beneficially owned as of March 18, 2003, by each of its directors and nominees
for director, its five most highly compensated executive officers and its
directors and executive officers as a group will be presented under the captions
"Equity Compensation Plan Information" and "Security Ownership of Certain
Beneficial Owners and Management" in the Proxy Statement for the Annual Meeting
and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information on related transactions will be presented under the caption
"Compensation Committee Interlocks and Insider Participation" and "Interests of
Insiders in Material Transactions" in the Proxy Statement for the Annual Meeting
and is incorporated herein by reference.
ITEM 14. CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures and 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 Securities and Exchange
Commission's rules and forms. Our chief executive officer and chief financial
officer have evaluated our disclosure controls and procedures within 90 days
prior to the filing of this Annual Report on Form 10-K and have determined that
such disclosure controls and procedures are effective.
Subsequent to their evaluation, there were no significant changes in
internal controls that could significantly affect such controls subsequent to
the date of their evaluation.
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PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) FINANCIAL STATEMENTS AND SCHEDULES. Financial statements and schedules
filed as a part of this report are presented on pages 27 through 69 of
the Annual Report and are incorporated herein by reference.
EXHIBITS. The following exhibits are filed as a part of this report.
EXHIBIT NO. EXHIBIT
3(a) Certificate of Incorporation of Denbury Resources Inc. filed
with the Delaware Secretary of State on April 20, 1999
(incorporated by reference as Exhibit 3(a) of the
Registrant's Form 10-Q for the quarter ended March 31,
1999).
3(b) Bylaws of Denbury Resources Inc., a Delaware corporation,
adopted April 20, 1999 (incorporated by reference as Exhibit
3(b) of the Registrant's Form 10-Q for the quarter ended
March 31, 1999).
4(a) Form of Indenture between Denbury Management Inc. and Chase
Bank of Texas, National Association, as trustee
(incorporated by reference as Exhibit 4(b) of Registrant's
Registration Statement on Form S-3 dated February 19, 1998).
4(b) First Supplemental Indenture dated as of April 21, 1999,
between Denbury Resources Inc., a Delaware corporation, and
Chase Bank of Texas, National Association, as Trustee,
relating to Denbury Management, Inc.'s 9% Senior
Subordinated Notes due 2008 (incorporated by reference to
Exhibit 4(a) of the Registrant's Form 10-Q for the quarter
ended March 31, 1999).
4(c) Indenture dated as of August 15, 2001, among Denbury
Resources Inc., certain of its subsidiaries, and the Chase
Manhattan Bank (incorporated by reference as Exhibit 4(c) of
the Registrant's Registration Statement on Form S-4 dated
October 23, 2001).
4(d) Registration Rights Agreement dated August 8, 2001
(incorporated by reference as Exhibit 4(d) of the
Registrant's Registration Statement on Form S-4 dated
October 23, 2001).
10(a) Third Amended and Restated Credit Agreement, dated September
12, 2002 between the Company and Bank One, as Administrative
Agent, and the financial institutions listed on Schedule 2.1
therein (incorporated by reference to Exhibit 10 of the
Registrant's Form 10-Q for the quarter ended September 30,
2002).
10(b)** Denbury Resources Inc. Stock Option Plan (incorporated by
reference as Exhibit 4(f) of the Registrant's Registration
Statement on Form S-8, No. 333-1006, dated February 2, 1996,
and as amended by the Registrant's Registration Statements
on Forms S-8, Nos. 333-27995, dated May 29, 1997, 333-55999,
dated June 4, 1998, 333-70485, dated July 12, 1999,
333-63198, dated June 15, 2001, and 333-90398, dated June
13, 2002).
10(c)** Denbury Resources Inc. Stock Purchase Plan (incorporated by
reference as Exhibit 4(g) of the Registrant's Registration
Statement on Form S-8, No. 333-1006, dated February 2, 1996,
and as amended by the Registrant's Registration Statements
on Forms S-8, No. 333-70485, dated January 12, 1999, No.
333-39218, dated June 13, 2000 and No. 333-90398, dated June
13, 2002).
10(d) Form of indemnification agreement between Denbury Resources
Inc. and its officers and directors (incorporated by
reference as Exhibit 10 of the Registrant's Form 10-Q for
the quarter ended June 30, 1999).
10(e)** Denbury Resources Inc. Directors Compensation Plan
(incorporated by reference as Exhibit 4 of the Registrant's
Registration Statement on Form S-8, No. 333-39172, dated
June 13, 2000 and amended March 2, 2001).
-13-
EXHIBIT NO. EXHIBIT
10(f)** Denbury Resources Severance Protection Plan, dated December
6, 2000 (incorporated by reference as Exhibit 10(f) of the
Registrant's Form 10-K for the year ended December 31,
2000).
10(g) Stock Purchase Agreement between TPG Partners II, L.L.C. and
the Company dated as of December 16, 1998 (incorporated by
reference as Exhibit 99.1 of the Registrant's Form 8-K dated
December 17, 1998).
10(h) Agreement and Plan of Merger and Reorganization, by and
among Denbury Resources Inc., Denbury Offshore, Inc., and
Matrix Oil & Gas, Inc., and its shareholders, as of June 4,
2001 (incorporated by reference as Exhibit 2 of the
Registrant's Current Report on Form 8-K, dated June 15,
2001).
13* Annual Report to Shareholders.
21* List of Subsidiaries of Denbury Resources Inc.
23.1* Consent of Deloitte & Touche LLP.
23.2* Consent of DeGolyer and MacNaughton.
99.1* Certification of Chief Executive Officer and Chief Financial
Officer pursuant to section 906 of the Sarbanes-Oxley Act of
2002.
99.2* The summary of DeGolyer and MacNaughton's Report as of
December 31, 2002, on oil and gas reserves (SEC Case) dated
March 19, 2003.
* Filed herewith.
** Compensation arrangements.
(b) REPORTS ON FORM 8-K.
On November 15, 2002, we filed a consent issued by DeGolyer and MacNaughton
that consents to references to its firm and to its report effective December 31,
2001 in Denbury's Registration Statement on Form S-3 declared effective by the
Securities and Exchange Commission on March 21, 2001, and in the Prospectus
Supplement thereto.
On November 22, 2002, we announced that Denbury and the Texas Pacific Group
("TPG") entered into an underwriting agreement, pursuant to which TPG would sell
up to 7.5 million shares of Denbury's common stock. Denbury did not receive any
proceeds from this transaction.
-14-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Denbury Resources Inc. has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
DENBURY RESOURCES INC.
March 20, 2003 /s/ Phil Rykhoek
------------------------------------------------
Phil Rykhoek
Sr. Vice President and Chief Financial Officer
March 20, 2003 /s/ Mark C. Allen
------------------------------------------------
Mark C. Allen
Vice President and Chief Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of Denbury
Resources Inc. and in the capacities and on the dates indicated.
March 20, 2003 /s/ Ronald G. Greene
------------------------------------------------
Ronald G. Greene
Chairman of the Board and Director
March 20, 2003 /s/ Gareth Roberts
------------------------------------------------
Gareth Roberts
Director, President and Chief Executive Officer
(Principal Executive Officer)
March 20, 2003 /s/ Phil Rykhoek
------------------------------------------------
Phil Rykhoek
Sr. Vice President and Chief Financial Officer
(Principal Financial Officer)
March 20, 2003 /s/ Mark C. Allen
------------------------------------------------
Mark C. Allen
Vice President and Chief Accounting Officer
(Principal Accounting Officer)
March 20, 2003 /s/ David I. Heather
------------------------------------------------
David I. Heather
Director
March 20, 2003 /s/ Wieland F. Wettstein
------------------------------------------------
Wieland F. Wettstein
Director
March 20, 2003 /s/ David B. Miller
------------------------------------------------
David B. Miller
Director
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CERTIFICATIONS
I, Gareth Roberts, certify that:
1. I have reviewed this annual report on Form 10-K of Denbury Resources Inc.
(the "registrant");
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
March 20, 2003 /s/ Gareth Roberts
------------------------------------------------
Gareth Roberts
President and Chief Executive Officer
-16-
I, Phil Rykhoek, certify that:
1. I have reviewed this annual report on Form 10-K of Denbury Resources Inc.
(the "registrant");
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
March 20, 2003 /s/ Phil Rykhoek
------------------------------------------------
Phil Rykhoek
Sr. Vice President and Chief Financial Officer
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