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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended March 31, 2004
Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Commission file number 1-12935
DENBURY RESOURCES INC.
(Exact name of Registrant as specified in its charter)
Delaware 20-0467835
(State or other jurisdictions of (I.R.S. Employer
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
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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [X] No__
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at April 30, 2004
Common Stock, $.001 par value 54,673,046
INDEX
Page
----
Part I. Financial Information
- ------------------------------
Item 1. Financial Statements
Independent Accountants' Report 3
Unaudited Condensed Consolidated Balance Sheets at March 31, 2004
and December 31, 2003 4
Unaudited Condensed Consolidated Statements of Operations for the Three Months
Ended March 31, 2004 and 2003 5
Unaudited Condensed Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 2004 and 2003 6
Unaudited Condensed Consolidated Statements of Comprehensive Operations for
the Three Months Ended March 31, 2004 and 2003 7
Notes to Unaudited Condensed Consolidated Financial Statements 8-16
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 17-28
Item 3. Quantitative and Qualitative Disclosures about Market Risk 29
Item 4. Controls and Procedures 29
Part II. Other Information
---------------------------
Item 1. Not Applicable
Item 2. Changes in Securities, Use of Proceeds, and Issuer Purchases of Equity Securities 29
Items 3-5. Not Applicable
Item 6. Exhibits and Reports on Form 8-K 30
Signatures 31
2
Part I. Financial Information
Item 1. Financial Statements
- -----------------------------
INDEPENDENT ACCOUNTANTS' REPORT
To the Board of Directors of Denbury Resources Inc.:
We have reviewed the accompanying condensed consolidated balance sheet of
Denbury Resources Inc. and subsidiaries (the "Company") as of March 31, 2004,
and the related condensed consolidated statements of operations, cash flows and
comprehensive operations for the three month periods ended March 31, 2004 and
2003. These financial statements are the responsibility of the Company's
management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and of making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with auditing standards generally accepted in the United States of
America, the objective of which is the expression of an opinion regarding the
financial statements taken as a whole. Accordingly, we do not express such an
opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to such condensed consolidated financial statements for them to be in
conformity with accounting principles generally accepted in the United States of
America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet of
Denbury Resources Inc. and subsidiaries as of December 31, 2003 and the related
consolidated statements of operations, stockholders' equity, cash flows and
comprehensive operations for the year then ended (not presented herein); and in
our report dated March 8, 2004, we expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the information set forth in
the accompanying condensed consolidated balance sheet as of December 31, 2003 is
fairly stated, in all material respects, in relation to the consolidated balance
sheet from which it has been derived.
As discussed in Note 3 to the condensed consolidated financial statements, the
Company adopted Statement of Financial Accounting Standards No. 143, "Accounting
for Asset Retirement Obligations", effective January 1, 2003.
/s/ Deloitte & Touche LLP
Dallas, Texas
May 6, 2004
3
DENBURY RESOURCES INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands except share amounts)
March 31, December 31,
2004 2003
----------- ----------
Assets
Current assets
Cash and cash equivalents $ 17,208 $ 24,188
Accrued production receivables 39,487 33,944
Related party accrued production receivable - Genesis 8,810 6,927
Trade and other receivables 19,307 18,080
Deferred tax asset 39,518 25,016
----------- -----------
Total current assets 124,330 108,155
----------- ----------
Property and equipment
Oil and natural gas properties (using full cost accounting)
Proved 1,456,736 1,409,579
Unevaluated 46,082 46,065
CO2 properties and equipment 105,779 85,467
Less accumulated depletion and depreciation (722,508) (696,366)
----------- ----------
Net property and equipment 886,089 844,745
----------- ----------
Investment in Genesis 7,226 7,450
Other assets 22,185 22,271
----------- ----------
Total assets $ 1,039,830 $ 982,621
=========== ==========
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable and accrued liabilities $ 63,672 $ 62,349
Oil and gas production payable 24,013 22,215
Derivative liabilities 46,791 42,010
----------- ----------
Total current liabilities 134,476 126,574
----------- ----------
Long-term liabilities
Long-term debt 303,251 298,203
Asset retirement obligations 42,199 41,711
Derivative liabilities 2,121 2,603
Deferred revenue - Genesis 20,957 21,468
Deferred tax liability 88,732 68,555
Other 2,077 2,305
----------- ----------
Total long-term liabilities 459,337 434,845
----------- ----------
Stockholders' equity
Preferred stock, $.001 par value, 25,000,000 shares authorized; none
issued and outstanding - -
Common stock, $.001 par value, 100,000,000 shares authorized;
54,681,382 and 54,190,042 shares issued at March 31, 2004 and
December 31, 2003, respectively 55 54
Paid-in capital in excess of par 406,534 401,709
Retained earnings 68,960 46,656
Accumulated other comprehensive loss (29,271) (27,113)
Treasury stock, at cost, 17,921 and 8,162 shares at March 31, 2004 and
December 31, 2003, respectively (261) (104)
----------- ----------
Total stockholders' equity 446,017 421,202
----------- ----------
Total liabilities and stockholders' equity $ 1,039,830 $ 982,621
=========== ==========
(See accompanying Notes to Unaudited Condensed Consolidated Financial Statements)
4
DENBURY RESOURCES INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands except per share amounts)
Three Months Ended
March 31,
---------------------
2004 2003
-------- --------
Revenues
Oil, natural gas and related product sales
Unrelated parties $ 91,274 $ 99,311
Related party - Genesis 18,962 12,413
CO2 sales and transportation fees
Unrelated parties 284 2,189
Related party - Genesis 1,077 -
Loss on settlements of derivative contracts (14,268) (27,685)
Interest income and other 419 204
-------- --------
Total revenues 97,748 86,432
-------- --------
Expenses
Lease operating expenses 22,528 22,402
Production taxes and marketing expenses 4,067 3,896
CO2 operating expenses 144 317
General and administrative expenses 4,748 3,791
Interest 5,081 6,461
Depletion and depreciation 27,324 23,553
Amortization of derivative contracts and other
non-cash hedging adjustments 818 (1,510)
-------- --------
Total expenses 64,710 58,910
-------- --------
Equity in net income (loss) of Genesis (93) 16
-------- --------
Income before income taxes 32,945 27,538
Income tax provision
Current income taxes 2,119 2,730
Deferred income taxes 8,522 6,355
-------- --------
Income before cumulative effect of change in accounting principle 22,304 18,453
Cumulative effect of change in accounting principle, net of income
taxes of $1,600 - 2,612
-------- --------
Net income $ 22,304 $ 21,065
======== ========
Net income per common share - basic
Income before cumulative effect of change in accounting principle $ 0.41 $ 0.34
Cumulative effect of change in accounting principle - 0.05
-------- --------
Net income per common share - basic $ 0.41 $ 0.39
======== ========
Net income per common share - diluted
Income before cumulative effect of change in accounting principle $ 0.40 $ 0.33
Cumulative effect of change in accounting principle - 0.05
-------- --------
Net income per common share - diluted $ 0.40 $ 0.38
======== ========
Weighted average common shares outstanding
Basic 54,388 53,639
Diluted 56,313 55,049
(See accompanying Notes to Unaudited Condensed Consolidated Financial Statements)
5
DENBURY RESOURCES INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
Three Months Ended
March 31,
--------------------------
2004 2003
----------- -----------
Cash flow from operating activities:
Net income $ 22,304 $ 21,065
Adjustments needed to reconcile to net cash flow provided by operations:
Depreciation, depletion and amortization 27,324 23,553
Amortization of derivative contracts and other non-cash hedging adjustments 818 (1,510)
Deferred income taxes 8,522 6,355
Deferred revenue - Genesis (511) -
Amortization of debt issue costs and other 463 515
Cumulative effect of change in accounting principle - (2,612)
Changes in assets and liabilities:
Accrued production receivable (7,426) (15,865)
Trade and other receivables (1,227) (1,233)
Other assets - (330)
Accounts payable and accrued liabilities 1,723 1,653
Oil and gas production payable 1,798 3,870
Other liabilities (793) 48
----------- -----------
Net cash provided by operations 52,995 35,509
----------- -----------
Cash flow used for investing activities:
Oil and natural gas expenditures (47,750) (32,668)
Acquisitions of oil and gas properties (163) (3,693)
Acquisitions of CO2 assets and capital expenditures (20,203) (6,904)
Proceeds from oil and gas property sales 512 26,366
Increase in restricted cash (203) (146)
Net purchases of other assets (304) (1,094)
----------- -----------
Net cash used for investing activities (68,111) (18,139)
----------- -----------
Cash flow from financing activities:
Bank repayments (3,000) (110,000)
Bank borrowings 8,000 10,000
Issuance of subordinated debt - 223,057
Issuance of common stock 3,879 1,325
Purchase of treasury stock (743) -
Costs of debt financing - (4,522)
----------- -----------
Net cash provided by financing activities 8,136 119,860
----------- -----------
Net increase (decrease) in cash and cash equivalents (6,980) 137,230
Cash and cash equivalents at beginning of period 24,188 23,940
----------- -----------
Cash and cash equivalents at end of period $ 17,208 $ 161,170
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 8,950 $ 10,260
Cash paid (refunded) during the period for income taxes (273) -
(See accompanying Notes to Unaudited Condensed Consolidated Financial Statements)
6
DENBURY RESOURCES INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF
COMPREHENSIVE OPERATIONS
(Amounts in thousands)
Three Months Ended
March 31,
----------------------
2004 2003
-------- --------
Net income $ 22,304 $ 21,065
Other comprehensive income (loss), net of income tax:
Change in fair value of derivative contracts, net of tax of
$(6,744) and $(16,069), respectively (11,004) (26,218)
Reclassification adjustments related to settlements of derivative contracts,
net of tax of $5,422 and $10,121, respectively 8,846 16,513
-------- --------
Comprehensive income $ 20,146 $ 11,360
======== ========
(See accompanying Notes to Unaudited Condensed Consolidated Financial Statements)
7
DENBURY RESOURCES INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. 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," "Denbury" or "Company" refer to
Denbury Resources Inc. and its subsidiaries. These financial statements and the
notes thereto should be read in conjunction with our Annual Report on Form 10-K
for the year ended December 31, 2003. Any capitalized terms used but not defined
in these Notes to Unaudited Condensed Consolidated Financial Statements have the
same meaning given to them in the Form 10-K.
Accounting measurements at interim dates inherently involve greater
reliance on estimates 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 fiscal year. In management's opinion, the accompanying
unaudited condensed consolidated financial statements include all adjustments
(of a normal recurring nature) necessary to present fairly the consolidated
financial position of Denbury as of March 31, 2004 and the consolidated results
of its operations and cash flows for the three month periods ended March 31,
2004 and 2003. Certain prior period items have been reclassified to make the
classification consistent with the classification in the most recent quarter.
Strategic Sale of Offshore Operations
In March 2004, we announced that we hired an investment banker to assist us
with the sale of our offshore operations. We have elected to sell this portion
of our business to better focus on our core operations, particularly our
tertiary operations, where we have lower risk, greater predictability, virtually
no competition and greater profitability. As of May 6, 2004, this process was
ongoing, with several companies expected to visit our data room. We anticipate
closing a transaction mid-year, pending negotiation of an acceptable price and
other transaction terms. If we are unable to obtain an acceptable price, we may
withdraw the sales package. Our offshore properties make-up approximately 12.5%
of our proved reserves (approximately 96 Bcfe as of December 31, 2003) and
represented approximately 25% of our first quarter of 2004 production (8,521
BOE/d).
Stock-based Compensation
We issue stock options to all of our employees under our stock option plan,
which we account for utilizing the recognition and measurement principles of
Accounting Principles Board Opinion 25, "Accounting for Stock Issued to
Employees," and its related interpretations. Under these principles we do not
recognize any stock-based employee compensation for stock option grants, as long
as the exercise price is equal to the underlying common stock on the date of
grant. The following table illustrates the effect on net income and net income
per common share if we had applied the fair value recognition and measurement
provisions of Statement of Financial Accounting Standards ("SFAS") No. 123,
"Accounting for Stock-Based Compensation," as amended by SFAS No. 148, in
accounting for our stock option plan.
8
DENBURY RESOURCES INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three Months Ended
March 31,
------------------------
2004 2003
---------- -----------
Net income: (thousands)
Net income, as reported........................................... $ 22,304 $ 21,065
Less: stock-based compensation expense applying fair value
based method, net of related tax effects ..................... 1,676 558
---------- -----------
Pro-forma net income ............................................. $ 20,628 $ 20,507
========== ===========
Net income per common share
As reported:
Basic ........................................................ $ 0.41 $ 0.39
Diluted....................................................... 0.40 0.38
Pro forma:
Basic ........................................................ $ 0.38 $ 0.38
Diluted ...................................................... 0.38 0.38
2. NEW ACCOUNTING STANDARDS
In March 2004, the Emerging Issues Task Force ("EITF") of the Financial
Accounting Standards Board ("FASB") addressed certain issues relative to the
application of standards SFAS No. 141, "Business Combinations," and SFAS No.
142, "Goodwill and Other Intangible Assets," by companies in the extractive
industries, including oil and gas companies. In question was whether acquired
contractual mineral interests, both proved and undeveloped, should be classified
separately as "intangible assets" on the balance sheet apart from other oil and
gas property costs. Denbury and virtually all other companies in the oil and gas
industry have historically included purchased contractual mineral rights in oil
and gas properties on the balance sheet. We understand the EITF has reached a
consensus that mineral rights in oil and gas properties are to be classified as
tangible assets, and that the FASB has ratified that consensus, subject to
amendment of SFAS No. 141 and 142. Based on the limited guidance available at
this time, we estimate that we have approximately $204 million at March 31, 2004
and $196 million at December 31, 2003 (without reduction for depletion,
depreciation, and amortization), of acquisition costs subsequent to July 1, 2001
that would be considered acquired contractual mineral rights. The resolution of
these issues related to SFAS No. 141 and 142 would not impact the Company's
total assets, results of operations or cash flows.
3. ASSET RETIREMENT OBLIGATIONS
On January 1, 2003, we adopted the provisions of SFAS No. 143, "Accounting for
Asset Retirement Obligations." In general, our future asset retirement
obligations relate to future costs associated with plugging and abandonment of
our oil and natural gas wells, dismantling our offshore production platforms,
and removal of equipment and facilities from leased acreage and returning such
land to its original condition. SFAS No. 143 requires that the fair value of a
liability for an asset retirement obligation be recorded in the period in which
it is incurred, discounted to its present value using our 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. Prior to the adoption of this new standard, we recognized a
provision for our asset retirement obligations each period as part of our
depletion and depreciation calculation, based on the unit-of-production method.
The adoption of SFAS No. 143 on January 1, 2003, required us to record (i) a
$41.0 million liability for our future asset retirement obligations (an increase
of $34.1 million in our liability for asset retirement obligations that we had
recorded at December 31, 2002), (ii) a $34.4 million increase in oil and natural
gas properties, (iii) a $3.9 million decrease in accumulated depreciation and
depletion, and (iv) a $2.6 million gain as a cumulative effect adjustment of a
change in accounting principle, net of taxes.
9
DENBURY RESOURCES INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes the changes in our asset retirement
obligations for the three months ended March 31, 2004.
Three Months Ended
March 31, 2004
------------------
(in thousands)
Beginning asset retirement obligation, as of 12/31/2003.... $ 43,812
Liabilities incurred during period......................... 281
Liabilities settled during period.......................... (961)
Accretion expense.......................................... 768
--------
Ending asset retirement obligation......................... $ 43,900
========
At March 31, 2004, $1.7 million of our asset retirement obligation was
classified in "Accounts payable and accrued liabilities" under current
liabilities in our Condensed Consolidated Balance Sheets. We hold cash and
liquid investments in escrow accounts that are legally restricted for certain of
our asset retirement obligations. The balances of these escrow accounts were
$9.7 million at March 31, 2004, and $9.5 million at December 31, 2003 and are
included in "Other assets" in our Condensed Consolidated Balance Sheets.
4. NET INCOME PER COMMON SHARE
Basic net income per common share is computed by dividing net income by the
weighted average number of shares of common stock outstanding during the period.
Diluted net income per common share is calculated in the same manner but also
considers the impact on net income and common shares for the potential dilution
from stock options and any other convertible securities outstanding. For the
three month periods ended March 31, 2004 and 2003, there were no adjustments to
net income for purposes of calculating diluted net income per common share. The
following is a reconciliation of the weighted average common shares used in the
basic and diluted net income per common share calculations for the three month
periods ended March 31, 2004 and 2003.
Three Months Ended
March 31,
---------------------
2004 2003
----- ------
(shares in thousands)
Weighted average common shares - basic....... 54,388 53,639
Potentially dilutive securities:
Stock options................................ 1,925 1,410
------ ------
Weighted average common shares - diluted..... 56,313 55,049
====== ======
For the three months ended March 31, 2004 and 2003, common stock options to
purchase approximately 425,000 and 1.9 million shares of common stock,
respectively, were outstanding but excluded from the diluted net income per
common share calculations, as the exercise prices of the options exceeded the
average market price of the Company's common stock during these periods and
would be anti-dilutive to the calculations.
5. STOCK REPURCHASE PLAN
In August 2003, we adopted a stock repurchase plan ("Plan") to purchase
shares of our common stock on the NYSE in order for such repurchased shares to
be reissued to our employees who participate in Denbury's Employee Stock
Purchase Plan. The Plan provides for purchases through an independent broker of
50,000 shares of Denbury's common stock per fiscal quarter for a period of
approximately twelve months, or a total of 200,000 shares, beginning August 13,
2003 and ending on July 31, 2004. Purchases are to be made at prices and times
determined at the discretion of the independent broker, provided however that no
purchases may be made during the
10
DENBURY RESOURCES INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
last ten business days of a fiscal quarter. During 2003, we purchased 100,000
shares at an average cost of $12.77 per share and from January 1, 2004 through
March 31, 2004, we purchased 50,000 shares at an average cost of $14.87 per
share. Through March 31, 2004, we have reissued 132,079 of these shares under
Denbury's Employee Stock Purchase Plan.
6. RELATED PARTY TRANSACTIONS - GENESIS
Denbury is the general partner and owns an aggregate 9.25% interest in
Genesis Energy, L.P. ("Genesis"), a publicly traded master limited partnership.
Genesis has three primary lines of business: crude oil gathering and marketing,
pipeline transportation, primarily in Mississippi, Texas, Alabama and Florida,
and wholesale marketing of carbon dioxide.
We are accounting for our 9.25% ownership in Genesis under the equity
method of accounting as we have significant influence over the limited
partnership; however, our control is limited under the limited partnership
agreement and therefore we do not consolidate Genesis. Our equity in Genesis'
net income (loss) for the three months ended March 31, 2004 and 2003 was
$(93,000) and $16,000. Genesis Energy, Inc., the general partner of which we own
100%, has guaranteed the bank debt of Genesis, which was $9.9 million as of
March 31, 2004, and which debt also included $13.3 million in letters of credit
of which $3.7 million are for Denbury's benefit to secure purchases of oil from
Denbury. There are no guarantees by Denbury or any of its other subsidiaries of
the debt of Genesis or of Genesis Energy, Inc.
Genesis has historically been a purchaser of our crude oil and we
anticipate future purchases of our crude oil production by Genesis. At March 31,
2004 and December 31, 2003, we had a production receivable from Genesis of $8.8
million and $6.9 million, respectively. For the three months ended March 31,
2004 and 2003, we recorded oil sales to Genesis of $19.0 million and $12.4
million, respectively. Denbury received other miscellaneous payments from
Genesis during the 2004 period, including $30,000 in director fees for certain
executive officers of Denbury that are board members of Genesis, and $125,000 in
pro rata distributions from Genesis.
CO2 Volumetric Production Payment
In November 2003, we sold 167.5 Bcf of CO2 to Genesis for $24.9 million
($23.9 million as adjusted for interim cash flows from the September 1, 2003
effective date, and transaction costs) under a volumetric production payment
("VPP"). This sale included the assignment to Genesis of three of our existing
long-term commercial CO2 supply agreements with our industrial customers, which
represented approximately 60% of our then current industrial CO2 sales volumes.
Pursuant to the VPP, Genesis may take up to 52.5 MMcf/d of CO2 through 2009,
43.0 MMcf/d from 2010 through 2012, and 25.2 MMcf/d to the end of the term. We
have recorded the net proceeds of the sale as deferred revenue and will
recognize such revenue as CO2 is delivered during the term of the VPP. At March
31, 2004, $23.1 million was recorded as deferred revenue ($2.1 million in
current liabilities and $21.0 million long term). During the three months ended
March 31, 2004, we recognized deferred revenue of $511,000 for deliveries under
the VPP. We provide Genesis with certain processing and transportation services
in connection with this agreement for a fee of $0.16 per Mcf of CO2 delivered to
their industrial customers which resulted in $566,000 in revenue to Denbury in
the first quarter of 2004.
11
DENBURY RESOURCES INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Summarized financial information of Genesis Energy, L.P. (amounts in thousands):
Three Months Ended March 31,
-------------------------------
2004 2003
--------- ---------
Revenues............................................ $ 198,912 $ 175,682
Cost of sales....................................... 194,813 171,381
Other expenses ..................................... 5,104 3,422
--------- ---------
Net income (loss) ................................ $ (1,005) $ 879
========= =========
March 31, December 31,
2004 2003
--------- ---------
Current assets..................................... $ 86,232 $ 88,211
Non-current assets................................. 57,664 58,904
--------- ---------
Total assets .................................... $ 143,896 $ 147,115
========= =========
Current liabilities ............................... $ 83,556 $ 87,244
Non-current liabilities............................ 9,900 7,000
Partners' capital.................................. 50,440 52,871
--------- ---------
Total liabilities and partners' capital.......... $ 143,896 $ 147,115
========= =========
7. PRODUCT PRICE 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. We do not hold or issue derivative financial instruments for trading
purposes. These contracts have historically consisted of price floors, collars
and fixed price swaps. We generally attempt to hedge between 50% and 75% of our
anticipated production each year to provide us with a reasonably certain amount
of cash flow to cover most of our budgeted exploration and development
expenditures without incurring significant debt. When we make an acquisition, we
attempt to hedge a large percentage, up to 100%, of the forecasted production
for the subsequent one to three years following the acquisition in order to help
provide us with a minimum return on our investment. All of the mark-to-market
valuations used for our financial derivatives are provided by external sources
and are based on prices that are actively quoted.
The following is a summary of the net loss representing cash payments on
our hedge settlements:
Three Months Ended
March 31,
-------------------------
2004 2003
--------- --------
(Amounts in thousands)
Oil hedge contracts $ (10,521) $ (8,738)
Gas hedge contracts (3,747) (18,947)
--------- --------
Net loss $ (14,268) $(27,685)
========== ========
Some of our derivative contracts require us to pay a premium that we
amortize over the contract periods. This expense is included in "Amortization of
derivative contracts and other non-cash hedging adjustments" in our Condensed
Consolidated Statements of Operations. For the three months ended March 31,
2003, we recorded premium amortization expense of $294,000, and none was
recorded in the first quarter of 2004. For the three months ended March 31, 2004
and 2003, we recognized hedge ineffectiveness gain (loss) of $(818,000) and
$459,000, respectively. Also, for the three months ended March 31, 2003, we
reclassified $1.3 million related to our former Enron hedges out of accumulated
other comprehensive
12
DENBURY RESOURCES INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
income into income which is also included in "Amortization of derivative
contracts and other non-cash hedging adjustments."
Hedging Contracts at March 31, 2004
Crude Oil Contracts:
- -------------------
NYMEX Contract Prices Per Bbl
-----------------------------
Collar Prices
---------------------- Fair Value at
Type of Contract and Period Bbls/d Swap Price Floor Price Floor Ceiling March 31, 2004
- -------------------------------- ----------- ------------ ------------ ---------- ----------- -----------------
Swap Contracts
April 2004 - Dec. 2004 2,500 22.89 - - - (7,381)
April 2004 - Dec. 2004 4,500 23.00 - - - (13,150)
April 2004 - Dec. 2004 2,500 23.08 - - - (7,251)
Natural Gas Contracts:
- ---------------------
NYMEX Contract Prices Per MMBtu
-------------------------------
Collar Prices
---------------------- Fair Value at
Type of Contract and Period MMBtu/d Swap Price Floor Price Floor Ceiling March 31, 2004
- -------------------------------- ----------- ------------ ------------ ---------- ----------- -----------------
Collar Contracts
April 2004 - Dec. 2004 30,000 - - 3.50 4.45 (12,871)
April 2004 - Dec. 2004 15,000 - - 3.00 5.87 (2,186)
April 2004 - Dec. 2004 15,000 - - 3.00 5.82 (2,271)
Jan. 2005 - Dec. 2005 15,000 - - 3.00 5.50 (3,802)
At March 31, 2004, our derivative contracts were recorded at their fair
value, which was a net liability of $48.9 million. To the extent our hedges are
considered effective, this fair value liability, net of income taxes, is
included in "Accumulated other comprehensive loss" reported under Stockholders'
equity in our Condensed Consolidated Balance Sheets. The balance in accumulated
other comprehensive loss of $29.3 million at March 31, 2004, represents the
deficit in the fair market value of our derivative contracts as compared to the
cost of our hedges, net of income taxes. Of the $29.3 million in accumulated
other comprehensive loss as of March 31, 2004, $28.0 million relates to current
hedging contracts that will expire within the next 12 months.
8. CONDENSED CONSOLIDATING FINANCIAL INFORMATION
On December 29, 2003, we amended the indenture for our 7.5% Senior
Subordinated Notes due 2013 to reflect our new holding company organizational
structure. As part of this restructuring our indenture was amended so that both
Denbury Resources Inc. (the new holding company) and Denbury Onshore, LLC
(formerly the parent company and now a wholly-owned subsidiary) became
co-obligors of our subordinated debt. Prior to this restructure, Denbury
Resources Inc., as the parent company, was the sole obligor. Our subordinated
debt is fully and unconditionally guaranteed by Denbury Resources Inc.'s
significant subsidiaries. Genesis Energy, Inc., the subsidiary that holds the
Company's investment in Genesis Energy, L.P., is not a guarantor of our
subordinated debt. Our equity interest in the results of operations of Genesis
is reflected through the equity method by one of our significant subsidiaries,
Denbury Gathering & Marketing. The following is condensed consolidating
financial information for Denbury Resources Inc., Denbury Onshore, LLC, and
significant subsidiaries:
13
DENBURY RESOURCES INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidating Balance Sheets
March 31, 2004
----------------------------------------------------------------------------
Denbury Denbury
Resources Inc. Onshore, LLC Denbury
(Parent and Co- (Issuer and Co- Guarantor Resources Inc.
Obligor) Obligor) Subsidiaries Eliminations Consolidated
--------------- -------------- ------------- -------------- ---------------
Amounts in thousands
ASSETS
Current assets..................................... $ 3,138 $ 97,017 $ 24,175 $ - $ 124,330
Property and equipment ............................ - 584,209 301,880 - 886,089
Investment in subsidiaries (equity method)......... 442,879 - 223,119 (658,772) 7,226
Other assets....................................... - 17,778 4,407 - 22,185
--------- --------- --------- ----------- -----------
Total assets .................................. $ 446,017 $ 699,004 $ 553,581 $ (658,772) $ 1,039,830
========= ========= ========= ========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities................................ $ - $ 126,994 $ 7,482 $ - $ 134,476
Long-term liabilities ............................. - 356,117 103,220 - 459,337
Stockholders' equity .............................. 446,017 215,893 442,879 (658,772) 446,017
--------- --------- --------- ---------- -----------
Total liabilities and stockholders' equity..... $ 446,017 $ 699,004 $ 553,581 $ (658,772) $ 1,039,830
========= ========= ========= ========== ===========
December 31, 2003
----------------------------------------------------------------------------
Denbury Denbury
Resources Inc. Onshore, LLC Denbury
(Parent and Co- (Issuer and Co- Guarantor Resources Inc.
Obligor) Obligor) Subsidiaries Eliminations Consolidated
--------------- -------------- ------------- -------------- ---------------
Amounts in thousands
ASSETS
Current assets..................................... $ 1 $ 85,109 $ 23,045 $ - $ 108,155
Property and equipment ............................ - 553,205 291,540 - 844,745
Investment in subsidiaries (equity method)......... 421,201 - 210,803 (624,554) 7,450
Other assets....................................... - 18,019 4,252 - 22,271
--------- --------- --------- ----------- -----------
Total assets .................................. $ 421,202 $ 656,333 $ 529,640 $ (624,554) $ 982,621
========= ========= ========= ========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities................................ $ - $ 119,364 $ 7,210 $ - $ 126,574
Long-term liabilities ............................. - 333,616 101,229 - 434,845
Stockholders' equity .............................. 421,202 203,353 421,201 (624,554) 421,202
--------- --------- --------- ---------- -----------
Total liabilities and stockholders' equity..... $ 421,202 $ 656,333 $ 529,640 $ (624,554) $ 982,621
========= ========= ========= ========== ===========
14
DENBURY RESOURCES INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidating Statements of Operations
Three Months Ended March 31, 2004
----------------------------------------------------------------------------
Denbury Denbury
Resources Inc. Onshore, LLC Denbury
(Parent and Co- (Issuer and Co- Guarantor Resources Inc.
Obligor) Obligor) Subsidiaries Eliminations Consolidated
--------------- -------------- ------------- -------------- ---------------
Amounts in thousands
Revenues...................................... $ - $ 71,084 $ 26,664 $ - $ 97,748
Expenses ..................................... - 49,553 15,157 - 64,710
--------- -------- -------- --------- --------
Income before the following: - 21,531 11,507 - 33,038
Equity in net earnings of subsidiaries ..... 22,304 - 14,608 (37,005) (93)
--------- -------- -------- --------- --------
Income before income taxes.................... 22,304 21,531 26,115 (37,005) 32,945
Income tax provision ......................... - 6,830 3,811 - 10,641
--------- -------- -------- --------- --------
Net income ................................... $ 22,304 $ 14,701 $ 22,304 $ (37,005) $ 22,304
========= ======== ======== ========= ========
Three Months Ended March 31, 2003
-----------------------------------------------------------
Denbury
Resources Inc. Denbury
(Parent and Guarantor Resources Inc.
Issuer) Subsidiaries Eliminations Consolidated
------------- ------------ ------------ --------------
Amounts in thousands
Revenues................................................... $ 57,285 $ 29,147 $ - $ 86,432
Expenses................................................... 44,320 14,590 - 58,910
-------- -------- -------- -------
Income before the following: 12,965 14,557 - 27,522
Equity in net earnings of subsidiaries .................. 8,495 16 (8,495) 16
-------- -------- -------- --------
Income before income taxes and
cumulative effect of a change in accounting principle.... 21,460 14,573 (8,495) 27,538
Income tax provision....................................... 4,376 4,709 - 9,085
-------- -------- -------- --------
Net income before cumulative effect of a change in
accounting principle..................................... 17,084 9,864 (8,495) 18,453
Cumulative effect of a change in accounting principle,
net of income taxes...................................... 3,981 (1,369) - 2,612
-------- -------- -------- --------
Net income................................................. $ 21,065 $ 8,495 $ (8,495) $ 21,065
======== ======== ======== ========
15
DENBURY RESOURCES INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidating Statements of Cash Flows
Three Months Ended March 31, 2004
----------------------------------------------------------------------------
Denbury Denbury
Resources Inc. Onshore, LLC Denbury
(Parent and Co- (Issuer and Co- Guarantor Resources Inc.
Obligor) Obligor) Subsidiaries Eliminations Consolidated
--------------- -------------- ------------- -------------- ---------------
Amounts in thousands
Cash flow from operations................... $ (3,136) $ 37,741 $ 18,390 $ - $ 52,995
Cash flow from investing activities......... - (49,718) (18,393) - (68,111)
Cash flow from financing activities......... 3,136 5,000 - - 8,136
--------- -------- -------- --------- --------
Net decrease in cash........................ - (6,977) (3) - (6,980)
Cash, beginning of period................... 1 24,174 13 - 24,188
--------- -------- -------- --------- --------
Cash, end of period......................... $ 1 $ 17,197 $ 10 $ - $ 17,208
========= ======== ======== ========= ========
Three Months Ended March 31, 2003
---------------------------------------------------------------
Denbury
Resources Inc. Denbury
(Parent and Guarantor Resources Inc.
Issuer) Subsidiaries Eliminations Consolidated
------------- ------------ ------------ --------------
Amounts in thousands
Cash flow from operations.................................. $ 20,288 $ 15,221 $ - $ 35,509
Cash flow from investing activities........................ (3,701) (14,438) - (18,139)
Cash flow from financing activities........................ 119,860 - - 119,860
--------- -------- -------- ----------
Net increase in cash....................................... 136,447 783 - 137,230
Cash, beginning of period.................................. 20,281 3,659 - 23,940
--------- -------- -------- ----------
Cash, end of period........................................ $ 156,728 $ 4,442 $ - $ 161,170
========= ======== ======== ==========
16
DENBURY RESOURCES INC.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
- --------------------------------------------------------------------------------
You should read the following in conjunction with our financial statements
contained herein and our Form 10-K for the year ended December 31, 2003, along
with Management's 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.
We are a growing independent oil and gas company engaged in acquisition,
development and exploration activities in the U.S. Gulf Coast region. We are the
largest oil and natural gas producer in Mississippi and hold significant
operating acreage onshore Louisiana and in the offshore Gulf of Mexico. Our goal
is to increase the value of acquired properties through a combination of
exploitation, drilling, and proven engineering extraction processes, including
secondary and tertiary recovery operations. Our corporate headquarters are in
Plano, Texas (a suburb of Dallas), and we have three primary field offices
located in Houma and Covington, Louisiana, and Laurel, Mississippi.
Overview
Increased focus on tertiary operations. Since we acquired our first carbon
dioxide ("CO2") tertiary flood in Mississippi four years ago, we have gradually
increased our emphasis on these types of operations. We particularly like this
play because of its risk profile, rate of return and lack of competition in our
operating area. Generally, from East Texas to Florida, there are no significant
natural sources of carbon dioxide except our own, and these large volumes of CO2
that we own drive the play. Please refer to Management's Discussion and Analysis
of Financial Condition and Results of Operations and the sections entitled
"Overview" and "CO2 Operations" contained in our 2003 Form 10-K for further
information regarding these operations, their potential, and the ramifications
of this change in focus.
Sale of offshore operations. In March 2004, we announced that we hired an
investment banker to assist us with the sale of our offshore operations. We have
elected to sell this portion of our business to better focus on our core
operations, particularly our tertiary operations, where we have lower risk,
greater predictability, virtually no competition and greater profitability. As
of May 6, 2004, this process was ongoing, with several companies expected to
visit our data room. We anticipate closing a transaction mid-year, pending
negotiation of an acceptable price and other transaction terms. If we are unable
to obtain an acceptable price, we may withdraw the sales package. Our offshore
properties make-up approximately 12.5% of our proved reserves (approximately 96
Bcfe as of December 31, 2003) and represented approximately 25% of our first
quarter of 2004 production (8,521 BOE/d). See "Capital Resources" below for a
discussion of the potential use of proceeds from this sale.
Operating results. Our cash flow from operations and net income continued
to be strong in the first quarter of 2004. For the first quarter of 2004,
commodity prices remained high, but were 4% lower than the prices in the
comparable period in 2003 on a BOE basis. However, our 2% increase in
production, $13.4 million reduction in hedging payments, slightly lower
operating expenses on a BOE basis, and a smaller net change in working capital
components, resulted in a 49% increase in cash flow from operations. Net income
between the two comparable quarters (before the change in accounting principle
in 2003) increased 21% in the first quarter of 2004 to a near-record quarterly
high of $22.3 million, although less of a percentage increase than the increase
in cash flow from operations. This difference is primarily due to a higher
depreciation and depletion rate in the first quarter of 2004 primarily due to
higher than normal expenditure levels in 2003 and the first part of 2004 in the
offshore Gulf of Mexico, which typically has higher finding costs. See "Results
of Operations" for a more thorough discussion of these factors.
Capital Resources and Liquidity
During the first quarter of 2004, we spent $47.8 million on oil and natural
gas exploration and development expenditures, $12.6 million on CO2 development
expenditures, and approximately $7.7 million on property acquisitions (virtually
all CO2 related), for total capital expenditures of approximately $68.1 million.
We funded the expenditures with $53.0 million of cash flow from operations and
$5.0 million of net bank borrowings, with the balance from cash and other
sources. Adjusted cash flow from operations (a non-GAAP measure defined as cash
flow from operations before the changes in assets and liabilities as discussed
below under "Results of Operations-Operating Results") was $58.9 million, with
the difference of $6.0 million, as compared to the GAAP measure, primarily
relating to higher oil and gas production receivables at March 31, 2004 caused
by the high commodity prices in March 2004 and slightly higher production.
At March 31, 2004, we had total debt of $305 million, consisting of $225
million of 7.5% subordinated notes due in 2013 and $80 million of bank debt. Our
bank borrowing base was reaffirmed as of April 1, 2004 at $220 million, leaving
us $140 million of bank credit availability. Since our 2004 capital budget of
$172 million is currently less than our
17
DENBURY RESOURCES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
anticipated operating cash flow, we should not require any other significant
sources of capital during the year, unless we were to make a significant
acquisition. Assuming the offshore property sale is consummated, we expect the
proceeds from this sale will be sufficient to repay our bank debt and leave us
with a significant amount of cash. Further, we are considering another
transaction with Genesis Energy, L.P. ("Genesis") to sell them another
volumetric production payment of CO2 and assign them most, if not all, of our
remaining long-term CO2 supply agreements with our industrial customers, further
increasing our cash balances. We plan to invest our anticipated excess cash over
the next couple of years by accelerating our development of CO2 reserves and
deliverability at Jackson Dome, accelerating, to the extent possible, our second
phase of tertiary operations planned for East Mississippi, and increasing our
expenditures elsewhere in areas such as the Barnett Shale. We are also
continuing our search for property acquisitions, particularly those that have
future tertiary potential. Although we now control most of the fields along our
CO2 pipeline, there are a few remaining smaller fields with this potential that
we do not control, plus we are continuing to acquire additional interests in the
fields that we currently own. There are also oil fields in other areas, which
may have future tertiary opportunities, as well as conventional development and
exploration possibilities.
Off-Balance Sheet Arrangements
Commitments and Obligations
Our obligations that are not currently recorded on our balance sheet are
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 undeveloped proved reserves, we must also fund the associated future
development costs as forecasted in the proved reserve reports. Further, one of
our subsidiaries, the general partner of Genesis Energy, L.P., has guaranteed
the bank debt of Genesis (which as of March 31, 2004, consisted of $9.9 million
of debt and $13.3 million in letters of credit, $3.7 million of which are for
Denbury's benefit) and we have delivery obligations to deliver CO2 to our
industrial customers. Our hedging obligations are discussed in Note 7 to the
Unaudited Condensed Consolidated Financial Statements. Neither the amounts nor
the terms of these commitments or contingent obligations have changed
significantly from the year-end 2003 amounts reflected in our Form 10-K filed in
March 2004. Please refer to Management's Discussion and Analysis of Financial
Condition and Results of Operations contained in our 2003 Form 10-K for further
information regarding our commitments and obligations.
Results of Operations
CO2 Operations
As described in the "Overview" section above, our CO2 operations are
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 and other public disclosures. In addition to its long-term
effect, this shift in focus impacts certain trends in our current and near-term
operating results. Please refer to Management's Discussion and Analysis of
Financial Condition and Results of Operations and the section entitled "CO2
Operations" contained in our 2003 Form 10-K for further information regarding
these issues.
During the first quarter of 2004, we drilled two additional CO2 wells that
as of May 6, 2004, were in the completion process. During the first quarter, our
CO2 production averaged 206 MMcf/d. We used 77% of this, or 158 MMcf/d, in our
tertiary operations, and sold the balance to our industrial customers or to
Genesis pursuant to our volumetric production payment. We believe that our
current production capacity of CO2 will be approximately 300 MMcf/d with the
connection of our latest well to our pipeline system, and expect to increase
this production capability to as much as 350 MMcf/d by the end of 2004. Two more
CO2 wells are planned for the remainder of 2004, which are intended to not only
increase CO2 production, but increase our CO2 reserves as well. Assuming the
offshore property sale is consummated as planned, we plan to shoot 3-D seismic
over the Jackson Dome area late this year and accelerate our development of the
CO2 production and reserves there in 2005 and beyond.
Our oil production from our CO2 tertiary recovery activities increased 13%
over fourth quarter 2003 levels to 6,318 Bbls/d in the first quarter of 2004,
with almost all of the increase occurring at Mallalieu Field. Production at
Mallalieu averaged 3,105 Bbls/d during the first quarter of 2004, as compared to
2,378 Bbls/d in the prior quarter and 1,148 Bbls/d
18
DENBURY RESOURCES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
during the first quarter of 2003. We expect our tertiary oil production to
further increase during 2004 to an average of over 7,000 Bbls/d for the year,
with additional increases expected at all three of our ongoing operations at
Mallalieu, Little Creek and McComb Fields. We have seen our first minor
production response from McComb Field during the last month as a result of CO2
injections which commenced late in 2003, although we do not expect oil
production from this field to be significant until late in 2004.
We spent approximately $0.11 per Mcf to produce our CO2 during the first
quarter of 2004, less than the 2003 average of $0.15 per Mcf, as we did not have
any significant workover costs on CO2 wells during the first quarter. However,
as a result of continued high oil prices, CO2 royalty expenses increased,
partially offsetting other operating expense savings, as certain of our CO2
royalty payments increase if the price of oil increases beyond a certain
threshold. Our total cost per thousand cubic feet of CO2 during the first
quarter of 2004 was approximately $0.18, after inclusion of depreciation and
amortization expense, still significantly less than the $0.31 per thousand cubic
feet that we would currently be paying if the purchase contract in place at the
time we acquired the CO2 properties in February 2001 were still in place today.
For the first quarter of 2004, our operating costs for our tertiary
properties averaged $10.14 per BOE, less than the prior quarter average of
$11.67 per BOE and our 2003 average of $11.34 per BOE. The savings related to
the lower cost to produce CO2 discussed above, higher oil production levels, and
the realization of approximately $174,000 from the sale of CO2 Kyoto emission
reduction credits generated by the re-injection of CO2. In the first quarter of
2003, we received $232,000 from the sale of emission reduction credits.
Our net operating margin from the sale of CO2 to industrial customers
decreased in the first quarter of 2004 to $1.2 million, down from $1.9 million
during the first quarter of 2003, primarily related to the volumetric production
payment with Genesis at a lower average price per thousand cubic foot than we
recovered from the industrial customers in the prior year. The cash from the
Genesis volumetric production payment was received when the transaction was
consummated in the fourth quarter of 2003, thus $511,000 of the industrial sale
revenue is non-cash recognition of deferred revenue.
Operating Results
As summarized in the "Overview" section above, higher production, reduced
hedge payments, lower cash operating expenses and continued high prices resulted
in near-record quarterly earnings and cash flow from operations. During the
first quarter of 2003, we implemented SFAS No. 143, "Accounting for Asset
Retirement Obligations," as more fully discussed below under "Depletion,
Depreciation and Amortization." The adoption of SFAS No. 143 was recorded as a
cumulative effect adjustment of a change in accounting principle, net of income
taxes, in our Unaudited Condensed Consolidated Statements of Operations and is
listed below on both a gross and per share basis.
19
DENBURY RESOURCES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Three Months Ended
March 31,
- ------------------------------------------------------------- ---------------------
Amounts in thousands, except per share amounts 2004 2003
- ------------------------------------------------------------- -------- --------
Income before cumulative effect of a change in
accounting principle $ 22,304 $ 18,453
Cumulative effect of a change in accounting
principle, net of income tax expense of $1,600 - 2,612
-------- --------
Net income $ 22,304 $ 21,065
- ------------------------------------------------------------- -------- --------
Net income per common share - basic:
Income before cumulative effect of a change
in accounting principle $ 0.41 $ 0.34
Cumulative effect of a change in accounting principle - 0.05
-------- --------
Net income per common share - basic $ 0.41 $ 0.39
- ------------------------------------------------------------- -------- --------
Net income per common share - diluted:
Income before cumulative effect of a change
in accounting principle $ 0.40 $ 0.33
Cumulative effect of a change in accounting principle - 0.05
-------- --------
Net income per common share - diluted $ 0.40 $ 0.38
- ------------------------------------------------------------- -------- --------
Adjusted cash flow from operations (see below) $ 58,920 $ 47,366
Net change in assets and liabilities relating to operations (5,925) (11,857)
- ------------------------------------------------------------- -------- --------
Cash flow from operations (1) $ 52,995 $ 35,509
- ------------------------------------------------------------- -------- --------
(1) Net cash flow provided by operations as per the Unaudited Condensed Consolidated Statements of Cash Flows.
Adjusted cash flow from operations is a non-GAAP measure that represents
cash flow provided by operations before changes in assets and liabilities as
presented in our Unaudited Condensed Consolidated Statements of Cash Flows. Cash
flow from operations is the GAAP measure as presented in our Unaudited Condensed
Consolidated Statements of Cash Flows. In our discussion herein, we have elected
to discuss these two components of cash flow provided by operations separately.
Adjusted cash flow from operations, the non-GAAP measure, measures the cash
flow earned or incurred from operating activities without regard to the
collection or payment of associated receivables or payables. We believe that
this is important to consider separately, as we believe it can often be a better
way to discuss changes in operating trends in our business caused by changes in
production, prices, operating costs, and so forth, without regard to whether the
earned or incurred item was collected or paid during that year. We also use this
measure because the collection of our receivables or payment of our obligations
has not been a significant issue for our business, but merely a timing issue
from one period to the next, with fluctuations generally caused by significant
changes in commodity prices or significant changes in drilling activity.
The net change in assets and liabilities relating to operations is also
important as it does require or provide additional cash for use in our business;
however, we prefer to discuss its effect separately. For instance, as noted
above, during the first quarter of both years, we used cash to fund a net
increase in our working capital. This was primarily caused by an increase in our
accrued production receivables during March caused by unusually high natural gas
prices in March 2003, with natural gas index prices in the $9.28 per MMBtu
range, and unusually high oil prices in March 2004, with NYMEX oil prices
averaging approximately $36.75 per Bbl. We received payment for substantially
all of these accrued production receivables during the following month.
20
DENBURY RESOURCES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Certain of our operating results and statistics for the comparative first
quarters of 2004 and 2003 are included in the following table.
Three Months Ended
March 31,
- ---------------------------------------------------------------------------------------
2004 2003
- ---------------------------------------------------------------------------------------
Average daily production volumes
Bbls/d 19,404 19,565
Mcf/d 103,457 99,170
BOE/d (1) 36,647 36,093
Operating revenues and expenses (thousands)
Oil sales $ 54,525 $ 52,213
Natural gas sales 55,711 59,511
Loss on settlements of derivative contracts (2) (14,268) (27,685)
-------- --------
Total oil and natural gas revenues $ 95,968 $ 84,039
======== ========
Lease operating expenses $ 22,528 $ 22,402
Production taxes and marketing expenses 4,067 3,896
-------- --------
Total production expenses $ 26,595 $ 26,298
======== ========
CO2 sales and transportation fees (3) $ 1,361 $ 2,189
CO2 operating expenses (144) (317)
-------- --------
CO2 operating margin $ 1,217 $ 1,872
======== ========
Unit prices - including impact of hedges
Oil price per Bbl $ 24.92 $ 24.69
Gas price per Mcf 5.52 4.54
Unit prices - excluding impact of hedges
Oil price per Bbl $ 30.88 $ 29.65
Gas price per Mcf 5.92 6.67
Oil and gas operating revenues and expenses per BOE (1):
Oil and natural gas revenues $ 33.06 $ 34.40
======== ========
Oil and gas lease operating expenses $ 6.76 $ 6.90
Oil and gas production taxes and marketing expense 1.22 1.20
-------- --------
Total oil and gas production expenses $ 7.98 $ 8.10
- ---------------------------------------------------------------------------------------
(1) Barrel of oil equivalent using the ratio of one barrel of oil to 6 Mcf of natural gas ("BOE").
(2) See also "Market Risk Management" below for information concerning the Company's hedging transactions.
(3) For 2004, includes deferred revenue of $511,000 associated with a volumetric production payment and
$566,000 of transportation income, both from Genesis.
21
DENBURY RESOURCES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Production: Production by area for each of the quarters of 2003 and the first
- ----------- quarter of 2004 is listed in the following table.
Average Daily Production (BOE/d)
-------------------------------------------------------------
First Second Third Fourth First
Quarter Quarter Quarter Quarter Quarter
Operating Area 2003 2003 2003 2003 2004
- -----------------------------------------------------------------------------------------------
Mississippi - non-CO2 floods 14,537 13,600 13,367 13,066 12,754
Mississippi - CO2 floods 4,345 4,522 4,227 5,579 6,318
Onshore Louisiana 8,700 8,417 8,024 8,812 8,825
Offshore Gulf of Mexico 8,353 8,351 7,186 6,865 8,521
Other 158 160 312 268 229
-------------------------------------------------------------
Total Denbury 36,093 35,050 33,116 34,590 36,647
- -----------------------------------------------------------------------------------------------
While overall production increased only 2% on a BOE/d basis in the first
quarter of 2004 as compared to the first quarter of 2003, several factors that
caused variances between the two periods should be noted. During the first
quarter of 2003 (effective January 31), we sold Laurel Field, a Mississippi
non-CO2 flood property that had averaged between 1,500 and 1,700 BOE/d since we
acquired it in August 2002. The one month of production in 2003 reduces the
quarter over quarter comparison for Mississippi - non-CO2 floods by
approximately 526 BOE/d. The balance of the decline in this area is primarily
related to normal depletion at several of our fields.
As more fully discussed in "CO2 Operations" above, oil production from our
tertiary operations increased 13% in the first quarter of 2004 over production
in the prior quarter and 45% over first quarter of 2003 production. The
increased production from tertiary operations essentially offset the decreases
in other areas. Production at Thornwell, an onshore Louisiana Field, averaged
2,605 BOE/d during the first quarter of 2004, higher than in the fourth quarter
of 2003 due to some recent development work and the processing of liquids for a
portion of the quarter because of higher crude and liquid prices, but a 17%
decrease from the 3,138 BOE/d produced during the first quarter of 2003.
Production from this field is expected to decline throughout 2004 due to
depletion. Incremental production from exploratory discoveries made in the third
quarter of 2003 at Lirette, another onshore Louisiana Field, offset the
production decline at Thornwell. However, this incremental production from
Lirette is expected to begin to decline later in 2004. Offshore production
increased between the respective first quarters as a result of several well
completions made late in the fourth quarter of 2003 and early in 2004.
Production from this area is expected to decline again during the second half of
the year (if the properties are not sold), due to normal depletion and the fact
that most of 2004's offshore development and exploration is scheduled for the
first half of the year.
With regard to specific fields, production at Heidelberg Field, a
Mississippi non-CO2 flood property and our single largest field, decreased
slightly from 7,441 BOE/d in the first quarter of 2003 to 7,336 BOE/d in the
first quarter of 2004, as part of a general decline in production since that
field's peak in 2001. However, first quarter of 2004 natural gas production at
Heidelberg averaged almost 11.0 MMcf/d, the highest quarterly natural gas
production to date at this field, as a result of incremental natural gas
production from several wells drilled at Heidelberg late in 2003 and continuing
into 2004.
22
DENBURY RESOURCES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Oil and Natural Gas Revenues: Oil and natural gas revenues, net of hedge
payments, for the first quarter of 2004 increased $11.9 million, or 14%, from
revenues in the comparable quarter of 2003, almost entirely due to lower
payments on our hedges, as slightly higher overall production was offset by
slightly lower commodity prices. Cash payments on our hedges were $14.3 million
in the first quarter of 2004, down 48% from the $27.7 million paid during the
first quarter of 2003. The higher hedge payments in 2003 were primarily caused
by unusually high natural gas prices, especially during March 2003 when natural
gas index prices were approximately $9.28 per MMBtu. During the first quarter of
2004, hedge payments on oil were $1.8 million higher than those in the first
quarter of 2003, due to higher oil prices. See "Market Risk Management" for
additional information regarding our hedging activities.
The 3% increase in production in the first quarter of 2004 increased oil
and natural gas revenues, when comparing the two first quarters, by $3.0
million, or 4%. This increase was more than offset by a decrease in overall
commodity prices, lowering revenue by $4.5 million, or 5%, in the first quarter
of 2004 as compared to the prior year first quarter. Our realized natural gas
prices (excluding hedges) for the first quarter of 2004 averaged $5.92 per Mcf,
an 11% decrease from the average of $6.67 per Mcf realized during the first
quarter of 2003, while our realized oil prices (excluding hedges) for the first
quarter of 2004 averaged $30.88 per Bbl, a 4% increase from the $29.65 per Bbl
average realized in the first quarter of 2004. On a combined BOE basis,
commodity prices were 4% lower in the first quarter of 2004 as compared to
prices in the first quarter of 2003.
Production Expenses: To date in 2004, we have not had significant workover
expenses. Coupled with slightly higher production, the savings from the lack of
these types of expenses helped us reduce lease operating expenses on a BOE basis
from $6.90 per BOE in the first quarter of 2003 to $6.76 per BOE in the first
quarter of 2004. During the first quarter of 2003, we incurred approximately
$850,000 on two workovers relating to mechanical failures of two onshore
Louisiana wells. While our operating expenses on tertiary operations increased
approximately $1.8 million quarter over quarter, the 45% increase in the related
production more than offset the higher gross costs, lowering the operating cost
per BOE for tertiary operations to $10.14 per Bbl. Slightly lower natural gas
prices also helped reduce operating expenses per BOE between the respective two
quarters, although we have seen some cost inflation in other areas of our
business. In general, we expect our operating costs per BOE to increase
throughout 2004 as the operating costs of our tertiary operations are more
expensive than our other operations and as tertiary operations become more and
more significant, especially if the proposed offshore sale is consummated.
Production taxes and marketing expenses generally change in proportion to
commodity prices and production and were approximately the same on a per BOE
basis between the respective two quarters, as both prices and production had
only minor fluctuations.
General and Administrative Expenses
General and administrative ("G&A") expenses increased 21% on a per BOE
basis between the respective first quarters as set forth below:
Three Months Ended
March 31,
- ------------------------------------------------- ---------------------------
2004 2003
- ------------------------------------------------- -------- --------
Net G&A expense (thousands)
Gross G&A expenses $ 12,680 $ 11,433
State franchise taxes 246 363
Operator overhead charges (6,780) (6,515)
Capitalized exploration costs (1,398) (1,490)
-------- --------
Net G&A expense $ 4,748 $ 3,791
======== ========
Average G&A cost per BOE $ 1.42 $ 1.17
Employees as of March 31 378 360
- ------------------------------------------------- -------- --------
Gross G&A expenses increased $1.2 million, or 11%, between the first
quarters of 2003 and 2004. The single largest component of this increase relates
to approximately $500,000 of severance payments for a portion of the offshore
professional and technical staff that were terminated in March 2004 in
conjunction with the proposed sale of our offshore
23
DENBURY RESOURCES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
properties. The majority of our offshore operational employees have been asked
to remain until the proposed sale is consummated and will receive a retention
bonus in addition to their severance package if they do so; therefore no
severance was recorded for those employees in the first quarter of 2004. We also
incurred additional G&A expenses associated with the recent sale of stock by the
Texas Pacific Group, and experienced overall increases in most categories of G&A
due to general cost inflation. The increase in gross G&A is offset in part by an
increase in operator overhead recovery charges in the first quarter of 2004. Our
well 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. As a result of the
additional operated wells from our recent drilling and development activity
during the past year, the amount we recovered as operator overhead charges
increased by 4% between the respective first quarters of 2003 and 2004.
Capitalized exploration costs decreased slightly between the comparable periods
in 2003 and 2004 as a result of the termination of a portion of our offshore
exploration staff. The net effect was a 25% increase in net G&A expense between
the respective first quarters. On a per BOE basis, G&A costs increased 21% in
the first quarter of 2004 as compared to the first quarter of 2003, as our
production increase was not proportional to our cost increases.
Interest and Financing Expenses
Three Months Ended
March 31,
- -------------------------------------------- ----------------------------
Amounts in thousands, except per BOE amounts 2004 2003
- -------------------------------------------- --------- ---------
Interest expense $ 5,081 $ 6,461
Non-cash interest expense (227) (503)
--------- ---------
Cash interest expense 4,854 5,958
Interest and other income (419) (204)
--------- ---------
Net cash interest expense $ 4,435 $ 5,754
========= =========
Average net cash interest expense per BOE $ 1.33 $ 1.77
Average interest rate (1) 6.3% 6.8%
Average debt outstanding $ 306,121 $ 351,556
- ------------------------------------------- ========= =========
(1) Includes commitment fees but excludes amortization of discount and debt
issue costs.
Interest expense for the first quarter of 2004 decreased from levels in the
comparable prior year period primarily due to (i) lower overall interest rates,
primarily as a result of our subordinated debt refinancing in 2003, and (ii)
lower average debt levels as a result of the $50 million reduction in debt
during 2003. Our non-cash interest expense also decreased as a result of the
subordinated debt refinancing, which eliminated the amortization of discount on
our old subordinated debt, which was higher than the discount on our new
subordinated debt issue. Interest and other income increased in 2004 as compared
to the first quarter of 2003 as a result of higher marketing income.
24
DENBURY RESOURCES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Depletion, Depreciation and Amortization
Three Months Ended
March 31,
- -------------------------------------------- ----------------------
Amounts in thousands, except per BOE amounts 2004 2003
- -------------------------------------------- -------- --------
Depletion and depreciation $ 25,004 $ 21,979
Depletion and depreciation of CO2 assets 1,138 438
Accretion of asset retirement obligations 768 820
Depreciation of other fixed assets 414 316
-------- --------
Total DD&A $ 27,324 $ 23,553
======== ========
DD&A per BOE:
Oil and natural gas properties $ 7.73 $ 7.02
CO2 assets and other fixed assets 0.46 0.23
- -------------------------------------------- -------- --------
Total DD&A cost per BOE $ 8.19 $ 7.25
- -------------------------------------------- ======== ========
In total, our depletion, depreciation and amortization ("DD&A") rate on a
per BOE basis increased 13% between the respective first quarters, primarily due
to the higher percentage of expenditures on offshore properties during 2003 and
the first quarter of 2004, which have higher overall finding and development
costs. Since we only get one independent engineering report a year (at year-end)
and only thoroughly review our reserves internally twice a year (year-end and
mid-year), the first quarter calculation is primarily a roll forward of the
December 31, 2003 reserves adjusted for production and known significant
changes. The first quarter of 2004 rate is more comparable to the DD&A rate of
$8.00 per BOE during the fourth quarter of 2003 than the DD&A rate for the first
quarter of 2003. To date, we have not added any incremental oil reserves that we
expect to add during 2004 from our tertiary operations. As such, our DD&A rate
could change significantly in the future. We also expect our DD&A rate to
decrease if the proposed offshore sale is consummated, although the precise
amount is not determinable until we know the sales price. The increase in DD&A
related to our CO2 assets relates to the higher overall CO2 production volumes
in 2004 as compared to 2003 as there have been only minimal changes in the
overall CO2 proved reserves.
Income Taxes
Three Months Ended
March 31,
- ---------------------------------------------------------- -----------------------
Amounts in thousands, except per BOE amounts and tax rates 2004 2003
- ---------------------------------------------------------- -------- -------
Income tax provision
Current income tax expense $ 2,119 $ 2,730
Deferred income tax expense 8,522 6,355
-------- -------
Total income tax expense $ 10,641 $ 9,085
======== =======
Average income tax expense per BOE $ 3.19 $ 2.80
Effective tax rate 32.3% 33.0%
- ---------------------------------------------------------- -------- -------
Our income tax provision for the respective first quarters was based on an
estimated statutory tax rate of 38%. The net effective tax rate was lower than
the statutory rates, primarily due to the recognition of enhanced oil recovery
credits which lowered our overall tax expense. The current income tax expense
represents our anticipated alternative minimum cash taxes that we cannot offset
with our regular tax net operating loss carryforwards or our enhanced oil
recovery credits.
25
DENBURY RESOURCES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 are discussed above.
Three Months Ended
March 31,
- ---------------------------------------------------------- -------------------
Per BOE data 2004 2003
- ---------------------------------------------------------- ------- -------
Revenues $ 33.06 $ 34.40
Loss on settlements of derivative contracts (4.28) (8.52)
Lease operating expenses (6.76) (6.90)
Production taxes and marketing expenses (1.22) (1.20)
- ---------------------------------------------------------- ------- -------
Production netback 20.80 17.78
CO2 operating margin 0.37 0.58
General and administrative expenses (1.42) (1.17)
Net cash interest expense (1.33) (1.77)
Current income taxes and other (0.75) (0.83)
Changes in assets and liabilities (1.78) (3.66)
- ---------------------------------------------------------- ------- -------
Cash flow from operations 15.89 10.93
DD&A (8.19) (7.25)
Deferred income taxes (2.56) (1.96)
Amortization of derivative contracts and other non-cash
hedging adjustments (0.25) 0.46
Cumulative effect of change in accounting principle - 0.80
Changes in assets and liabilities and other non-cash items 1.80 3.50
- ---------------------------------------------------------- ------- -------
Net income $ 6.69 $ 6.48
- ---------------------------------------------------------- ------- -------
Market Risk Management
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. The following table presents the carrying and fair
values of our debt, along with average interest rates. The fair value of our
bank debt is considered to be the same as the carrying value because the
interest rate is based on floating short-term interest rates. The fair value of
the subordinated debt is based on quoted market prices. None of our debt has any
triggers or covenants regarding our debt ratings with rating agencies.
Expected Maturity Dates
- ------------------------------------- -------------------------------------------------------------------
2004- Carrying Fair
Amounts in thousands 2005 2006 2007 2008 Value Value
- ------------------------------------- ------- -------- ------ ------ -------- --------
Variable rate debt:
Bank debt............................ $ - $ 80,000 $ - $ - $ 80,000 $ 80,000
The weighted-average interest rate on the bank debt at March 31, 2004 is 2.3%.
Fixed rate debt:
7.5% subordinated debt,
net of discount, due 2013......... $ - $ - $ - $ - $223,251 $236,250
The interest rate on the subordinated debt is a fixed rate of 7.5%.
We enter into various financial contracts to hedge 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 historically consisted of price floors, collars
and fixed price swaps. We generally attempt to hedge between 50% and 75% of our
anticipated production each year to provide us with a reasonably certain amount
of cash
26
DENBURY RESOURCES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
flow to cover most of our budgeted exploration and development expenditures
without incurring significant debt, although our hedging percentage may vary
relative to our debt levels. When our debt levels are high, we hedge a higher
percentage of our production than when our debt levels are low. When we make an
acquisition, we attempt to hedge a large percentage, up to 100%, of the
forecasted production for the subsequent one to three years following the
acquisition in order to help provide us with a minimum return on our investment.
Much of our hedging activity has been with collars, although for the 2002 COHO
acquisition, we also used swaps in order to lock in the prices used in our
economic forecasts. In late April 2004, we purchased price floors or puts
relating to a portion of our 2005 oil production, allowing us to retain any
upside from increases in commodity prices. All of the mark-to-market valuations
used for our financial 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 which
are reviewed on an ongoing basis. We attempt to minimize credit risk exposure to
counterparties through formal credit policies, monitoring procedures, and
diversification.
At March 31, 2004, our derivative contracts were recorded at their fair
value, which was a net liability of approximately $48.9 million, an increase of
approximately $4.3 million from the $44.6 million fair value liability recorded
as of December 31, 2003. This change is the result of a decrease in the fair
market value of our hedges due to an increase in oil and natural gas commodity
prices between December 31, 2003 and March 31, 2004. Information regarding our
current hedging positions is included in Note 7 to the Unaudited Condensed
Consolidated Financial Statements.
Although we have hedged less of our production in 2004 than in 2003
(approximately 55% of our total production in 2004 as compared to approximately
80% in 2003), we expect our total hedge payments for 2004 to be about the same
as in 2003 due to the currently higher oil prices in 2004 and lower hedged
prices. To date, the only hedges in place for 2005 that have any ceiling price
are 15.0 MMcf/d of natural gas collars with a floor of $3.00 per MMBtu and a
ceiling of approximately $5.50 per MMBtu. We recently added about 5,000 Bbls/d
of oil hedges for 2005 with the purchase of a put or floor at $27.50 per Bbl, at
a total cost of approximately $2.6 million. Since these most recent hedges are
puts or price floors, the maximum out-of-pocket exposure is the cost of the put.
Based on NYMEX natural gas futures prices at March 31, 2004, we would
expect to make future cash payments of $15.4 million on our natural gas
commodity hedges. If natural gas futures prices were to decline by 10%, the
amount we would expect to pay under our natural gas commodity hedges would
decrease to $8.0 million, and if futures prices were to increase by 10% we would
expect to pay $27.3 million. Based on NYMEX crude oil futures prices at March
31, 2004, we would expect to pay $28.3 million on our crude oil commodity
hedges. If crude oil futures prices were to decline by 10%, we would expect to
pay $19.4 million, and if crude oil futures prices were to increase by 10%, we
would expect to pay $37.1 million under our crude oil commodity hedges.
Critical Accounting Policies
For a discussion of our critical accounting policies, which are related to
property, plant and equipment, depletion and depreciation, oil and natural gas
reserves, asset retirement obligations, income taxes and hedging activities, and
which remain unchanged, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in our annual report on Form 10-K for the
year ended December 31, 2003.
27
DENBURY RESOURCES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Information
The statements contained in this Quarterly Report on Form 10-Q ("Quarterly
Report") that are not historical facts, including, but not limited to,
statements found in this Management's Discussion and Analysis of Financial
Condition and Results of Operations, are forward-looking statements, as that
term is defined in Section 21E of the Securities and Exchange Act of 1934, as
amended, that involve a number of risks and uncertainties. Such forward-looking
statements may be or may concern, among other things, capital expenditures,
drilling activity, acquisition plans and proposals and dispositions, development
activities, cost savings, production efforts and volumes, hydrocarbon reserves,
hydrocarbon prices, CO2 production and deliverability, liquidity, regulatory
matters and competition. Such forward-looking statements generally are
accompanied by words such as "plan," "estimate," "budgeted," "expect,"
"predict," "anticipate," "projected," "should," "assume," "believe" or other
words that convey the uncertainty of future events or outcomes. Such
forward-looking information is based upon management's current plans,
expectations, estimates and assumptions and is subject to a number of risks and
uncertainties that could significantly affect current plans, anticipated
actions, the timing of such actions and 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 or on behalf of the Company. Among the
factors that could cause actual results to differ materially are: fluctuations
of the prices received or demand for our oil and natural gas, the uncertainty of
drilling results and reserve estimates, operating hazards, acquisition risks,
requirements for capital, general economic conditions, competition and
government regulations, as well as the risks and uncertainties discussed in this
Quarterly Report, including, without limitation, the portions referenced above,
and the uncertainties set forth from time to time in the Company's other public
reports, filings and public statements.
28
DENBURY RESOURCES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Item 3. Quantitative and Qualitative Disclosures about Market Risk
- -------------------------------------------------------------------
The information required by Item 3 is set forth under "Market Risk
Management" in Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Item 4. Controls and Procedures
- --------------------------------
Denbury maintains disclosure controls and procedures 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 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 all material respects in providing to
them on a timely basis material information required to be disclosed in this
quarterly report.
There have been no significant changes in internal controls over financial
reporting during the period covered by this Quarterly Report on Form 10-Q that
have materially affected, or are reasonably likely to materially affect,
Denbury's internal controls over financial reporting.
Part II. Other Information
Item 2. Change in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities
- --------------------------------------------------------------------------------
ISSUER PURCHASES OF EQUITY SECURITIES
(c) Total Number of (d) Maximum Number
(a) Total Shares Purchased of Shares that May
Number of (b) Average as Part of Publicly Yet Be Purchased
Shares Price Paid Announced Plans or Under the Plan or
Period Purchased per Share Programs Programs
- --------------------------------------------------------------------------------------------------------------
January 1 through 31, 2004 - - - 100,000
February 1 through 29, 2004 50,000 $14.87 50,000 50,000
March 1 through 31, 2004 - - - 50,000
Total 50,000 $14.87 50,000 50,000
In August 2003, we adopted a stock repurchase plan ("Plan") to purchase
shares of our common stock on the NYSE in order for such repurchased shares to
be reissued to our employees who participate in Denbury's Employee Stock
Purchase Plan. The Plan provides for purchases through an independent broker of
50,000 shares of Denbury's common stock per fiscal quarter for a period of
approximately twelve months, or a total of 200,000 shares, beginning August 13,
2003 and ending on July 31, 2004. Purchases are to be made at prices and times
determined at the discretion of the independent broker, provided however that no
purchases may be made during the last ten business days of a fiscal quarter.
29
Item 6. Exhibits and Reports on Form 8-K during the First Quarter of 2004
- --------------------------------------------------------------------------
Exhibits:
--------
15* Letter from Independent Accountants as to unaudited interim financial information.
31(a)* Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31(b)* 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.
* Filed herewith.
Reports on Form 8-K:
-------------------
On February 19, 2004, we filed a Form 8-K, which included our press
release on our annual earnings.
On March 23, 2004, we filed a Form 8-K, which announced that Denbury
and TPG entered into an underwriting agreement, pursuant to which TPG would
sell 9.3 million shares of Denbury's Common Stock. Denbury did not receive
any proceeds from this transaction.
30
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.
(Registrant)
By: /s/ Phil Rykhoek
---------------------------------------------
Phil Rykhoek
Sr. Vice President and Chief Financial Officer
By: /s/ Mark C. Allen
---------------------------------------------
Mark C. Allen
Vice President and Chief Accounting Officer
Date: May 6, 2004
31