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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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, 1997
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 33-93722
DENBURY RESOURCES INC.
DENBURY MANAGEMENT, INC.
(Exact name of Registrants as specified in its charter)
Canada Not applicable
Texas 75-2294373
(State or other (I.R.S. Employer
jurisdiction Identification No.)
of incorporation or
organization)
17304 Preston Rd.,Suite 200 75252
Dallas, TX
(Address of principal (Zipcode)
executive offices)
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 Shares ( No Par Value) New York Stock Exchange
======================================= =======================================
Securities registered pursuant to Section 12(g) of the Act:
9% Senior Subordinated Notes due 2008
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 ]
As of March 16, 1998, the aggregate market value of the registrant's Common
Shares held by non-affiliates was approximately $272,000,000.
The number of shares outstanding of the registrant's Common Shares as of
March 16, 1998, was 26,598,413.
DOCUMENTS INCORPORATED BY REFERENCE
Document Incorporated as to
1.Notice and Proxy Statement for the 1. Part III, Items 10, 11,
Annual Meeting of Shareholders to be held 12, and 13
May 19, 1998
2.Annual Report to Shareholders for the 2. Part I, Item 1 and Part
year ended December 31, 1997 II, Items 5, 6, 7, 8
PART I
Item 1. Business
The Company
Denbury Resources Inc. ("Denbury" or the "Company") is a Canadian
corporation organized under the Canada Business Corporations Act engaged in the
acquisition, development, operation and exploration of oil and gas properties
primarily in the Gulf Coast region of the United States through its wholly-owned
subsidiary, Denbury Management, Inc., a Texas corporation. Denbury's corporate
headquarters is located at Suite 200, 17304 Preston Road, Dallas, Texas 75252,
U.S.A. and its Canadian office is located at 2550, 140--4th Avenue S.W.,
Calgary, Alberta T2P 3N3. At December 31, 1997, the Company had 157 employees,
66 of which were employed in field operations.
Incorporation and Organization
Denbury was originally incorporated under the laws of Manitoba as a
specially limited company on March 7, 1951, under the name "Kay Lake Mines
Limited (N.P.L.)". In September 1984, the Company was continued under the Canada
Business Corporations Act and changed its name to "Newscope Resources Limited."
The Company has subsequently changed its name three times, including the most
recent change in December, 1995 from "Newscope Resources Ltd." to its current
name of "Denbury Resources Inc.".
The Company has one wholly owned subsidiary, Denbury Management, Inc.
("Denbury Management"). Another wholly owned subsidiary, Denbury Holdings Ltd.,
was merged into the parent company in December 1997. Denbury Management has two
active wholly owned subsidiaries, Denbury Marine, L.L.C. and Denbury Energy
Services. The Company's consolidated financial statements include the accounts
of the parent company and all wholly owned subsidiaries.
History
The Company acquired all of the outstanding shares of Denbury Management in
a multi-step transaction in July 1992, in exchange for 2,771,530 Common Shares
(the "Denbury Acquisition"). Upon completion of the Denbury Acquisition, Mr.
Gareth Roberts, the then president of Denbury Management, was appointed the
President and Chief Executive Officer of the Company and was elected to the
Company's board of directors. He has served in that capacity since that time.
The Denbury Acquisition signaled a new direction for the Company and added a new
geographic area of operation (the states of Texas, Louisiana and Mississippi),
and management expertise to the Company. Subsequent to the merger, in September
1993, Denbury sold all of its remaining Canadian oil and gas operations for
approximately $3.1 million. As a result, 100% of Denbury's oil and gas
operations are now conducted in the Southern United States through its
subsidiary, Denbury Management.
Since 1993, after having disposed of its Canadian oil and natural gas
properties, the Company has focused its operations primarily onshore in
Louisiana and Mississippi. Over the last four years, the Company has achieved
rapid growth in proved reserves, production and cash flow by concentrating on
the acquisition of properties which it believes have significant upside
potential and through the efficient development, enhancement and operation of
those properties.
Business Strategy
Information as to the Company's business strategy is set forth under
"Company Business Strategy", appearing on Page 10 of the Annual Report. Such
information is incorporated herein by reference.
2
Acquisitions of Oil and Gas Properties
Information as to recent acquisitions by the Company is set forth under
"Acquisition of Oil and Natural Gas Properties", appearing on page 9 of the
Annual Report. Such information is incorporated herein by reference.
Oil and Gas Operations
Information regarding selected operating data and a discussion of the Company's
two significant operating areas and the primary properties within those two
areas is set forth under "Selected Operating Data", "Operations in Southern
Louisiana" and "Operations in Mississippi", appearing on pages 6 and 7 and pages
12 through 18 of the Annual Report. Such information is incorporated herein by
reference.
Oil and Gas Acreage
The following table sets forth Denbury's acreage position at December 31,
1997:
Developed Undeveloped
------------------------- ----------------------
Gross Net Gross Net
----------- ----------- ---------- ---------
Louisiana 28,458 19,813 19,859 8,693
Mississippi 17,584 12,913 26,038 10,610
----------- ----------- ---------- ---------
Total 46,042 32,726 45,897 19,303
=========== =========== ========== =========
Productive Wells
This table sets forth both the gross and net productive wells of the
Company at December 31, 1997:
Producing Oil Wells Producing Gas Wells Total
------------------ ------------------ -----------------
Gross Net Gross Net Gross Net
-------- ------- ------- ------- ------- -------
Louisiana 40 25.7 70 43.2 110 68.9
Mississippi 276 247.2 21 7.2 297 254.4
-------- ------- ------- ------- ------- -------
Total 316 272.9 91 50.4 407 323.3
======== ======= ======= ======= ======= =======
Drilling Activity
The following table sets forth the results of drilling activities during
each of the three fiscal years in the period ended December 31, 1997.
Year Ended December 31,
------------------------------------------
1997 1996 1995
------------ ------------- -------------
Gross Net Gross Net Gross Net
----- ----- ------ ----- ----- ------
Exploratory Wells: (1)
Productive (2)........... 2 0.7 - - - -
Nonproductive (3)........ 7 2.3 1 1.0 2 1.0
Development Wells: (1)
Productive (2)........... 33 22.5 9 7.9 2 1.5
Nonproductive (3)........ 2 0.8 - - - -
----- ----- ------ ----- ----- ------
Total............. 44 26.3 10 8.9 4 2.5
===== ===== ====== ===== ===== ======
(1) An exploratory well is a well drilled either in search of a new,
as-yet undiscovered oil or gas reservoir or to greatly extend the
known limits of a previously discovered reservoir. A developmental
well is a well drilled within the presently proved productive area
of an oil or gas reservoir, as indicated by reasonable
interpretation of available data, with the objective of completing
in that reservoir.
(2) A productive well is an exploratory or development well found to be
capable of producing either oil or gas in sufficient quantities to
justify completion as an oil or gas well.
(3) A nonproductive well is an exploratory or development well that is
not a producing well.
There were six wells in the process of drilling at December 31, 1997.
3
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. The Company
believes that it has good title to its oil and natual gas properties, some of
which are subject to minor encumbrances, easements and restrictions.
Production
The following tables summarize sales volume, sales price and production
cost information for the Company's net oil and gas production for each year of
the three-year period ended December 31, 1997. "Net" production is production
that is owned by the Company and produced for its interest after deducting
royalties and other similar interests.
Year Ended December 31,
--------------------------
1997 1996 1995
-------- ------- -------
Net production volume
Crude oil - (MBbls) 2,884 1,500 728
Natural gas - (MMcf) 13,257 8,933 4,844
Equivalent - MBOE (1) 5,094 2,989 1,535
Average sales price
Crude oil - ($/Bbl) $ 17.25 $ 18.98 $14.90
Natural gas - ($/Mcf) 2.68 2.73 1.90
Per equivalent BOE (1) 16.75 17.69 13.05
Average production cost
Per equivalent BOE (1) $ 4.36 $ 4.51 $ 4.42
(1)Based on a 6 Mcf to 1 Bbl gas to oil conversion ratio.
Significant Oil and Gas Purchasers
Oil and gas sales are made on a day-to-day basis under short-term contracts
at the current area market price. The loss of any purchaser would not be
expected to have a material adverse effect upon the Company. For the year ended
December 31, 1997, the Company sold 10% or more of its net production of oil and
gas to the following purchasers: Hunt Refining (42%), Natural Gas Clearinghouse
(22%) and Columbia Energy Services (10%).
4
Geographic Segments
All Canadian oil and gas properties were disposed of in 1993 and thus, all
of the Company's operations are now in the United States.
Competition
The oil and gas industry is highly competitive in all its phases. The
Company encounters strong competition from many other energy companies, in
acquiring economically desirable producing properties and drilling prospects,
and in obtaining equipment and labor to operate and maintain its properties. In
addition, many energy companies possess greater resources than the Company.
Price Volatility
The revenues generated by the Company are highly dependent upon the prices
of oil and natural gas. The marketing of oil and natural gas is affected by
numerous factors beyond the control of the Company. These factors include crude
oil imports, the availability of adequate pipeline and other transportation
facilities, the marketing of competitive fuels, and other factors affecting the
availability of a ready market, such as fluctuating supply and demand.
Product Marketing
Denbury's production is primarily from developed fields close to major
pipelines or refineries and established infrastructure. As a result, Denbury has
not experienced any difficulty in finding a market for all of its product as it
becomes available or in transporting its product to these markets.
Oil Marketing
Denbury markets its oil to a variety of purchasers, most of which are
large, established companies. The oil is generally sold under a short-term
contract with the sales price based on an applicable posted price, plus a
negotiated premium. This price is determined on a well-by-well basis and the
purchaser generally takes delivery at the wellhead. Mississippi oil, which
accounted for approximately 77% of the Company's oil production in 1997, is
primarily light sour crude and sells at a discount to the published West Texas
Intermediate posting. The balance of the oil production, Louisiana oil, is
primarily light sweet crude, which typically sells at a slight premium to the
West Texas Intermediate posting.
The Company is currently selling a majority of its oil under a two-year
contract to Hunt Refining which expires in April 1998 and is currently receiving
a premium to the posted price in this contract. The Company may not be able to
renew this contract in the future or may not be able to obtain terms as
favorable as those in the existing contract.
Natural Gas Marketing
Virtually all of Denbury's natural gas production is close to existing
pipelines and consequently, the Company generally has a variety of options to
market its natural gas. The Company sells the majority of its 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.
Production Price Hedging
For 1995, the Company entered into financial contracts to hedge 75% of the
Company's net natural gas production and 43% of the Company's net oil
production. The net effect of these hedges was to increase oil and natural gas
revenues by approximately $750,000 during 1995. The Company did not enter into
any hedging contracts during 1996 or 1997, although it may enter into such
contracts in the future.
5
Regulations
The availability of a ready market for oil and gas production depends upon
numerous factors beyond the Company's control. These factors include regulation
of natural gas and oil production, federal and state regulations governing
environmental quality and pollution control, state limits on allowable rates of
production by well or proration unit, the amount of natural gas and oil
available for sale, the availability of adequate pipeline and other
transportation and processing facilities and the marketing of competitive fuels.
State and federal regulations generally are intended to prevent waste of natural
gas and oil, protect rights to produce natural gas and oil between owners in a
common reservoir, control the amount of natural gas and oil produced by
assigning allowable rates of production and control contamination of the
environment. Pipelines are subject to the jurisdiction of various federal, state
and local agencies. The following discussion summarizes the regulation of the
United States oil and gas industry and is not intended to constitute a complete
discussion of the various statutes, rules, regulations and governmental orders
to which the Company's operations may be subject.
Regulation of Natural Gas and Oil Exploration and Production
The Company's 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 in
connection with operations. The Company's 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 in 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 the Company can produce from its
wells and may limit the number of wells or the locations at which the Company
can drill. The regulatory burden on the oil and gas industry increases the
Company's costs of doing business and, consequently, affects its profitability.
Inasmuch as such laws and regulations are frequently expanded, amended and
reinterpreted, the Company is unable to predict the future cost or impact of
complying with such regulations.
Federal Regulation of Sales and Transportation of Natural Gas
Federal legislation and regulatory controls in the U.S. have historically
affected the price of the natural gas produced by the Company and the manner in
which such production is marketed. The Federal Energy Regulatory Commission (the
"FERC") regulates the interstate transportation and sale for resale of natural
gas by interstate and intrastate pipelines. The FERC previously regulated the
maximum selling prices of certain categories of gas sold in "first sales" in
interstate and intrastate commerce under the Natural Gas Policy Act. Effective
January 1, 1993, however, the Natural Gas Wellhead Decontrol Act (the "Decontrol
Act") deregulated natural gas prices for all "first sales" of natural gas, which
includes all sales by the Company of its own production. As a result, all sales
of the Company's domestically produced natural gas may be sold at market prices,
unless otherwise committed by contract. The FERC's jurisdiction over natural gas
transportation and gas sales other than first sales was unaffected by the
Decontrol Act.
The Company's natural gas sales are affected by the regulation of
intrastate and interstate gas transportation. In an attempt to restructure the
interstate pipeline industry with the goal of providing enhanced access to, and
competition among, alternative natural gas supplies, the FERC, commencing in
April 1992, issued Order Nos. 636, 636-A and 636-B ("Order No. 636") which have
altered significantly the interstate transportation and sale of natural gas.
Among other things, Order No. 636 required interstate pipelines to unbundle the
various services that they had provided in the past, such as sales, transmission
and storage, and to offer these services individually to their customers. By
requiring interstate pipelines to "unbundle" their services and to provide their
customers with direct access to pipeline capacity held by them, Order No. 636
has enabled pipeline customers to choose the levels of transportation and
storage service they require, as well as to purchase natural gas directly from
third-party merchants other than the pipelines and obtain transportation of such
gas on a non-discriminatory basis. The effect of Order No. 636 has been to
enable the Company to market its natural gas production to a wider variety of
potential purchasers. The Company believes that these changes generally have
improved the Company's access to transportation and have enhanced the
marketability of its natural gas production. To date, Order No. 636 has not had
any material adverse effect on the Company's ability to market and transport its
natural gas production. However, the Company cannot predict what new regulations
may be adopted by the FERC and other regulatory authorities, or what effect
subsequent regulations may have on the Company's activities. In addition, Order
No. 636 and a number of related orders were appealed. Recently, the United
States Court of Appeals for the District of Columbia Circuit issued an opinion
largely upholding the basic features and provision of Order No. 636. However,
even though Order No. 636 itself has been judicially approved, several related
FERC orders remain subject to pending appellate review and further changes could
occur as a result of court order or at the FERC's own initiative.
6
In recent years the FERC also has pursued a number of other important
policy initiatives which could significantly affect the marketing of natural
gas. Some of the more notable of these regulatory initiatives include (i) a
series of orders in individual pipeline proceedings articulating a policy of
generally approving the voluntary divestiture of interstate natural gas
pipeline-owned gathering facilities to pipeline affiliates, (ii) the completion
of a rulemaking involving the regulation of interstate natural gas pipelines
with marketing affiliates under Order No. 497, (iii) FERC's on-going efforts to
promulgate standards for pipeline electronic bulletin boards and electronic data
exchange, (iv) a generic inquiry into the pricing of interstate pipeline
capacity, (v) efforts to refine FERC's regulations controlling the operation of
the secondary market for released interstate natural gas pipeline capacity, and
(vi) a policy statement regarding market-based rates and other non-cost-based
rates for interstate pipeline transmission and storage capacity. Several of
these initiatives are intended to enhance competition in natural gas markets.
While any resulting FERC action would affect the Company only indirectly, the
ongoing, or, in some instances, preliminary evolving nature of these regulatory
initiatives makes it impossible at this time to predict their ultimate impact
upon the Company's activities.
Oil Price Controls and Transportation Rates
Sales of crude oil, condensate and gas liquids by the Company are not
currently regulated and are made at market prices. Commencing in October 1993,
the FERC has modified its regulation of oil pipeline rates and services in order
to comply with the Energy Policy Act of 1992. That Act mandated the FERC to
streamline oil pipeline ratemaking by abandoning its old, cumbersome procedures
and issue new procedures to be effective January 1, 1995. In response, the FERC
issued a series of rules (Order Nos. 561 and 561-A) establishing an indexing
system under which oil pipelines will be able to change their transportation
rates, subject to prescribed ceiling levels. The FERC's new oil pipeline
ratemaking methodology was recently affirmed by the Court. The Company is not
able at this time to predict the effects of Order Nos. 561 and 561-A, if any, on
the transportation costs associated with oil production from the Company's oil
producing operations.
Gathering Regulations
Under the Natural Gas Act (the "NGA"), facilities used for and operations
involving the production and gathering of natural gas are exempt from FERC
jurisdiction, while facilities used for and operations involving interstate
transmission are not. Under current law even facilities which otherwise would
have been classified as gathering may be subject to the FERC's rate and service
jurisdiction when owned by an interstate pipeline company and when such
regulation is necessary in order to effectuate FERC's Order No. 636 open-access
initiatives. FERC has reaffirmed that it does not have jurisdiction over natural
gas gathering facilities and services and that such facilities and services are
properly regulated by state authorities. As a result, natural gas gathering may
receive greater regulatory scrutiny by state agencies. In addition, the FERC has
approved several transfers by interstate pipelines of gathering facilities to
unregulated gathering companies, including affiliates. This could allow such
companies to compete more effectively with independent gatherers.
State regulation of gathering facilities generally includes various safety,
environmental and, in some circumstances, nondiscriminatory take requirements.
While some states provide for the rate regulation of pipelines engaged in the
intrastate transportation of natural gas, such regulation has not generally been
applied against gatherers of natural gas. Natural gas gathering may receive
greater regulatory scrutiny following the pipeline industry restructuring under
Order No. 636. Thus the Company's gathering operations could be adversely
affected should they be subject in the future to the application of state or
federal regulation of rates and services.
7
Environmental Regulations
The Company's operations are subject to numerous laws and regulations
governing the discharge of materials into the environment or otherwise relating
to environmental protection. Public interest in the protection of the
environment has increased dramatically in recent years. The trend of more
expansive and stricter environmental legislation and regulations could continue.
To the extent laws are enacted or other governmental action is taken that
restricts drilling or imposes environmental protection requirements that result
in increased costs to the oil and gas industry in general, the business and
prospects of the Company could be adversely affected.
The EPA and various state agencies have limited the approved methods of
disposal for certain hazardous and nonhazardous wastes. Certain wastes generated
by the Company's oil and natural gas operations that are currently exempt from
treatment as "hazardous wastes" may in the future be designated as "hazardous
wastes," and therefore be subject to more rigorous and costly operating and
disposal requirements.
The Company currently owns or leases numerous properties that for many
years have been used for the exploration and production of oil and gas. Most of
these properties have been operated by prior owners, operators and third parties
whose treatment and disposal or release of hydrocarbons or other wastes was not
under the Company's control. These properties and the wastes disposed thereon
may be subject to Comprehensive Environmental Response, Compensation, and
Liability Act ("CERCLA"), Federal Resource Conservation and Recovery Act and
analogous state laws. Under such laws, the Company could be required to remove
or remediate previously disposed wastes (including wastes disposed of or
released by prior owners or operators) or property contamination (including
groundwater contamination) or to perform remedial plugging operations to prevent
future contamination.
The Company's operations may be subject to the Clean Air Act ("CAA") and
comparable state and local requirements. Certain provisions of CAA may result in
the gradual imposition of certain pollution control requirements with respect to
air emissions from the operations of the Company. The EPA and states have been
developing regulations to implement these requirements. The Company may be
required to incur certain capital expenditures in the next several years for air
pollution control equipment in connection with maintaining or obtaining
operating permits and approvals addressing other air emission-related issues.
However, the Company does not believe its operations will be materially
adversely affected by any such requirements.
Federal regulations require certain owners or operators of facilities that
store or otherwise handle oil, such as the Company, to prepare and implement
spill prevention, control, countermeasure and response plans relating to the
possible discharge of oil into surface waters. The Oil Pollution Act of 1990
("OPA") contains numerous requirements relating to the prevention of and
response to oil spills into waters of the United States. The OPA subjects owners
of facilities to strict joint and several liability for all containment and
cleanup costs and certain other damages arising from a spill, including but not
limited to, the costs of responding to a release of oil to surface waters.
Regulations are currently being developed under the OPA and state laws
concerning oil pollution prevention and other matters that may impose additional
regulatory burdens on the Company.
The Resource Conservation and Recovery Act ("RCRA") is the principal
federal statute governing the treatment, storage and disposal of hazardous
wastes. RCRA imposes stringent operating requirements (and liability for failure
to meet such requirements) on a person who is either a "generator" or
"transporter" of hazardous waste or an "owner" or "operator" of a hazardous
waste treatment, storage or disposal facility. At present, RCRA includes a
statutory exemption that allows most crude oil and natural gas exploration and
production wastes to be classified as nonhazardous waste. A similar exemption is
contained in many of the state counterparts to RCRA. At various times in the
past, proposals have been made to amend RCRA and various state statutes to
rescind the exemption that excludes crude oil and natural gas exploration and
production wastes from regulation as hazardous waste under such statutes. Repeal
or modifications of this exemption by administrative, legislative or judicial
process, or through changes in applicable state statutes, would increase the
volume of hazardous waste to be managed and disposed of by the Company.
Hazardous wastes are subject to more rigorous and costly disposal requirements
than are non-hazardous wastes. Any such change in the applicable statues may
require the Company to make additional capital expenditures or incur increased
operating expenses.
8
Some states have enacted statutes governing the handling, treatment,
storage and disposal of naturally occurring radioactive material ("NORM"). NORM
is present in varying concentrations in subsurface and hydrocarbon reservoirs
around the world and may be concentrated in scale, film and sludge in equipment
that comes in contact with crude oil and natural gas production and processing
streams. Mississippi legislation prohibits the transfer of property for
residential or other unrestricted use if the property contains NORM above
prescribed levels.
The Company also is subject to a variety of federal, state, and local
permitting and registration requirements relating to protection of the
environment. Management believes that the Company is in substantial compliance
with current applicable environmental laws and regulations and that continued
compliance with existing requirements will not have a material adverse impact on
the Company.
Taxation
Since all of the Company's oil and natural gas operations are located in
the United States, the Company's primary tax concerns relate to U.S. tax laws,
rather than Canadian laws. Certain provisions of the United States Internal
Revenue Code of 1986, as amended, are applicable to the petroleum industry.
Current law permits the Company to deduct currently, rather than capitalize,
intangible drilling and development costs ("IDC") incurred or borne by it. The
Company, as an independent producer, is also entitled to a deduction for
percentage depletion with respect to the first 1,000 barrels per day of domestic
crude oil (and/or equivalent units of domestic natural gas) produced by it (if
such percentage of depletion exceeds cost depletion). Generally, this deduction
is 15% of gross income from an oil and natural gas property, without reference
to the taxpayer's basis in the property. Percentage depletion can not exceed the
taxable income from any property (computed without allowance for depletion), and
is limited in the aggregate to 65% of the Company's taxable income. Any
depletion disallowed under the 65% limitation, however, may be carried over
indefinitely. See Note 4 "Income Taxes" of the Consolidated Financial Statements
for additional tax disclosures and such information is incorporated herein by
reference.
Estimated Net Quantities of Proved Oil and Gas Reserves and Present Value of
Estimated Future Net Revenues
Net proved oil and gas reserves as of December 31, 1997, 1996,and 1995 have
been prepared by Netherland, Sewell and Associates, Inc., independent petroleum
engineers located in Dallas, Texas. See Note 11 "Supplemental Reserve
Information" of the Consolidated Financial Statements for disclosure of reserve
amounts and such information is incorporated herein by reference.
Forward-Looking Statements
The statements contained in this Annual Report on Form 10-K ("10-K Report")
that are not historical facts, including, but not limited to, statements found
in this Item 1. "Business" and Item 7. "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 Exchange Act, 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, dispositions, development activities, cost
savings, production efforts and volumes, hydrocarbon reserves, hydrocarbon
prices, liquidity, regulatory matters and competition. Such forward-looking
statements generally are accompanied by words such as "plan," "estimate,"
"expect", "predict," "anticipate," "projected," "should," "assume," "believe,"
or other words that convey the uncertainty of future events or outcomes. Such
forward-looking statements are based upon management's current plans,
expectations, estimates and assumptions and are subject to a number of risks and
uncertainties that could significantly affect current plans, anticipated
actions, the timing of such actions and the Company's financial condition and
results of operations. As a consequence, actual results may differ materially
from expectations, estimates or assumptions expressed in or implied by any
forward-looking statements made by or on behalf of the Company. Among the
factors that could cause actual results to differ materially are: fluctuations
of the prices received or demand for the Company's oil and natural gas, the
uncertainty of drilling results and reserve estimates, operating hazards,
acquisition risks, requirements for capital, general economic conditions,
competition and government regulations, as well as the risks and uncertainties
discussed in this 10-K 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.
Item 2. Properties
See Item 1. "Business - Oil and Gas Operations, Oil and Gas Acreage,
Productive Wells and Estimated Net Quantities of Proved Oil and Gas Reserves and
Present Value of Estimated Future Net Revenues". The Company also has various
operating leases for rental of office space, office equipment, and vehicles. See
Note 7 "Commitments and Contingencies" of the Consolidated Financial Statements
for the future minimum rental payments and such information is incorporated
herein by reference.
Item 3. Legal Proceedings
In June of 1997, a well blow-out occurred at the Lake Chicot Field, for
which the Company is operator, in St. Martin Parish, Louisiana in which four
individuals that were employees of other third party entities were killed, none
of whom were employees or contractors of the Company. In connection with this
blow-out, a lawsuit was filed on July 2, 1997, Barbara Trahan, et al.v. Mallard
Bay Drilling L.L.C., Parker Drilling Company and Denbury Management, Inc., Case
No. 58226-G in the 16th Judicial District court in St. Martin Parish, Louisiana
alleging various defective and dangerous conditions, violation of certain rules
and regulations and acts of negligence. The Company believes that all litigation
to which it is a party is covered by insurance and none of such legal
proceedings can be reasonable expected to have a material adverse effect on the
Company's financial condition, results of operations, or cash flows.
There are no other potentially material pending legal proceedings to which
the Company or any of its subsidiaries is a party or of which any of their
property is the subject. However, due to the nature of its business, certain
legal or administrative proceedings arise from time to time in the ordinary
course of its business.
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 1997.
9
PART II
Item 5. Market for the Common Stock and Related Matters
Information as to the markets in which the Company's Common Stock is
traded, the quarterly high and low prices for such stock, the dividends declared
with respect to the Common Stock during the last two years, and the approximate
number of stockholders of record at February 1, 1998, is set forth under
"Quarterly Stock Information", appearing on page 47 of the Annual Report.
Information as to restrictions on the payment of dividends with respect to the
Company's Common Stock is set forth in Note 5 "Shareholders' Equity" of the
Consolidated Financial Statements. Such information is incorporated herein by
reference. The closing price of the Company's stock on The New York Stock
Exchange and The Toronto Stock Exchange on March 16, 1998 was $17.06 and $24.30
respectively.
Item 6. Selected Financial Data
Selected Financial Data for the Company for each of the last five years are
set forth under "Financial Highlights", appearing on page 1 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 the Company'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 19 through 26 of the Annual Report and is
incorporated herein by reference.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Not applicable
Item 8. Financial Statements and Supplementary Data
The Company's consolidated financial statements, accounting policy
disclosures, notes to financial statements, business segment information and
independent auditors' report are presented on pages 27 through 47 of the Annual
Report. Selected quarterly financial data are set forth under "Unaudited
Quarterly Information" appearing on page 46 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
10
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 will be set forth in the "Election of Directors"
segment of the Proxy Statement for the Annual and Special Meeting of
shareholders to be held May 19, 1998, ("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 1997.
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 the number of shares of Denbury's equity securities
beneficially owned as of March 15, 1998, 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 caption
"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.
11
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Financial Statements and Schedules. Financial statements filed as a
part of this report are presented on pages 27 through 47 of the Annual
Report and are incorporated herein by reference. Footnote 10 "Condensed
Consolidating Financial Information" of the Consolidated Financial
Statements presents seperate condensed financial statements for Denbury
Resources Inc. and Denbury Management, Inc. Additional seperate
disclosures are not considered necessary as they are not material to
investors. The following schedules are filed as part of this report:
Schedule I: Condensed Financial Information of the Registrant.
Exhibits. The following exhibits are filed as a part of this report.
Exhibit No. Exhibit
3(a) Articles of Continuance of the Company, as amended (incorporated
by reference as Exhibits 3(a), 3(b), 3(c), 3(d) of the
Registrant's Registration Statement on Form F-1 dated August 25,
1995, Exhibit 4(e) of the Registrant's Registration Statement on
Form S-8 dated February 2, 1996 and Exhibit 3(a) of the Pre-
effective Amendment No. 2 of the Registrant's Registration
Statement on Form S-1 dated October 22, 1996).
3(b) General By-Law No. 1: A By-Law Relating Generally to the Conduct
of the Affairs of the Company, as amended (incorporated by
reference as Exhibit 3(e) of the Registrant's Registration
Statement on Form F-1 dated August 25, 1995 and Exhibit 4(d) of
the Registrant's Registration Statement on Form S-8 dated
February 2, 1996).
3(c) Restated Articles of Incorporation of Denbury Management, Inc.
(incorporated by reference as Exhibit 3(c) of Registrant's
Registration Statement on Form S-3 dated February 19, 1998)
3(d) Bylaws of Denbury Management, Inc. (incorporated by reference as
Exhibit 3(d) of Registrant's Registration Statement on Form S-3
dated February 19, 1998)
4(a) See Exhibits 3(a), 3(b), 3(c), and 3(d) for provisions of the
Articles of Continuance and General By-Law No. 1 of the Company
defining the rights of the holders of Common Shares.
4(b) Form of Indenture between Denbury Management 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)
10(a) Shelf Registration Agreement dated April 24, 1995, by and among
Newscope Resources Ltd. and holders of Special Warrants
(incorporated by reference as Exhibit 10(a) of the Registrant's
Registration Statement on Form F-1 dated August 25, 1995).
10(b) Common Share Purchase Warrant representing right of
Internationale Nederlanden (U.S.) Capital Corporation to purchase
150,000 Common Shares of Newscope Resources Ltd. (incorporated by
reference as Exhibit 10(c) of the Registrant's Registration
Statement on Form F-1 dated August 25, 1995).
10(c) Registration Rights Agreement dated May 5, 1995, between
Internationale Nederlanden (U.S.) Capital Corporation and
Newscope Resources Ltd. (incorporated by reference as Exhibit
10(d) of the Registrant's Registration Statement on Form F-1
dated August 25, 1995).
10(d) Denbury Resources Inc. Stock Option Plan (incorporated by
reference as Exhibit 4(f) of the Registrant's Registration
Statement on Form S-8 dated February 2, 1996).
12
Exhibit No. Exhibit
10(e) Denbury Resources Inc. Stock Purchase Plan (incorporated by
reference as Exhibit 4(g) of the Registrant's Registration
Statement on Form S-8 dated February 2, 1996).
10(f) Form of indemnification agreement between Newscope Resources Ltd.
and its officers and directors (incorporated by reference as
Exhibit 10(h) of the Registrant's Form 10-K for the year ended
December 31, 1995).
10(g) Securities Purchase Agreement and exhibits between Newscope
Resources Ltd. and TPG Partners, L.P. as of November 13, 1995
(incorporated by reference as Exhibit 10(i) of the Registrant's
Form 10-K for the year ended December 31, 1995).
10(h) First Amendment to the November 13, 1995 Securities Purchase
Agreement between Newscope Resources Ltd. and TPG Partners, L.P.
as of December 21, 1995 (incorporated by reference as Exhibit
10(j) of the Registrant's Form 10-K for the year ended December
31, 1995).
10(i) Stock Purchase Agreement between TPG Partners, L.P. and Denbury
Resources Inc. dated as of October 2, 1996 (incorporated by
reference as Exhibit 10(k) of the Post-effective Amendment No. 2
of the Registrant's Registration Statement on Form S-1 dated
October 22, 1996).
10(j) Form of First Restated Credit Agreement, by and among Denbury
Management, as borrower, Denbury Resources Inc. as guarantor,
NationsBank of Texas, N.A., as administrative agent, Nationsbanc
Montgomery Securities LLC, as syndication agent and arranger and
the financial institutions listed on Schedule I thereto, as
banks, executed on December 29, 1997 (incorporated by reference
as Exhibit 10(a) of the Registrant's Registration Statement on
Form S-3 dated February 19, 1998).
10(k) First Amendment to First Restated Credit Agreement, by and among
Denbury Management, as borrower, Denbury Resources Inc., as
guarantor, NationsBank of Texas, N.A. as administrative agent,
and NationsBank of Texas, N.A. as bank, entered into as of
January 27, 1998 (incorporated by reference as Exhibit 10(b) of
the Registrant's Registration Statement on Form S-3 dated
February 19, 1998).
10(l)* Second Amendment to First Restated Credit Agreement, by and among
Denbury Management, as borrower, Denbury Resources Inc., as
guarantor, NationsBank of Texas, N.A., as administrative agent,
and NationsBank of Texas, N.A., as bank, entered into as of
February 25, 1998.
10(m)* Stock Purchase Agreement and Amendment to Registration Rights
Agreement between TPG Partners, L.P. and Denbury Resources, Inc.
dated as of January 20, 1998.
11* Statement re-computation of per share earnings.
12* Statement of Ratio of Earnings to Fixed Charges.
13* Annual Report to the Security Holders.
21* List of Subsidiaries of Denbury Resources Inc.
23* Consent of Deloitte & Touche.
27* Financial Data Schedule.
* Filed herewith.
(b) Form 8-Ks filed during the fourth quarter of 1997.
On December 8, 1997, the Company filed a Form 8-K to report that it had
entered into an asset sale agreement to purchase producing oil
properties in the Heidelberg Field, Jasper County, Mississippi for $202
million from Chevron U.S.A. Inc. On January 20, 1998, the Company field
an amendmentment No. 1 to this Form 8-K to include audited statements of
revenues and expenses related to the acquired properties and to report
the related pro forma results of operations.
On December 16, 1997, the Company filed a Form 8-K to announce the
election of Wilmot L. Matthews of Toronto, Ontario to the Board of
Directors.
13
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Denbury Resources Inc. (the "Company") has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
DENBURY RESOURCES INC.
DENBURY MANAGEMENT, INC.
March 19, 1998 /s/ Bobby J. Bishop
-------------------------------
Bobby J. Bishop
Chief Accounting Officer and
Controller
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the Company
and in the capacities and on the dates indicated.
March 19, 1998 /s/ Ronald G. Greene
-------------------------------
Ronald G. Greene
Chairman of the Board and
Director
DENBURY RESOURCES INC.
March 19, 1998 /s/ Gareth Roberts
-------------------------------
Gareth Roberts
Director, President and Chief
Executive Officer
(Principal Executive Officer)
DENBURY RESOURCES INC.
March 19, 1998 /s/ Phil Rykhoek
-------------------------------
Phil Rykhoek
Chief Financial Officer and
Secretary
(Principal Financial Officer)
DENBURY RESOURCES INC.
March 19, 1998 /s/ Bobby J. Bishop
-------------------------------
Bobby J. Bishop
Chief Accounting Officer and
Controller
(Principal Accounting Officer)
DENBURY RESOURCES INC.
March 19, 1998 /s/ Wilmot L. Matthews
-------------------------------
Wilmot L. Matthews
Director
DENBURY RESOURCES INC.
March 19, 1998 /s/ Wieland F. Wettstein
-------------------------------
Wieland F. Wettstein
Director
DENBURY RESOURCES INC.
14
March 19, 1998 /s/ Gareth Roberts
-------------------------------
Gareth Roberts
Director, President and Chief
Executive Officer
(Principal Executive Officer)
DENBURY MANAGEMENT, INC.
March 19, 1998 /s/ Phil Rykhoek
-------------------------------
Phil Rykhoek
Director, Chief Financial Officer
and Secretary
(Principal Financial Officer)
DENBURY MANAGEMENT, INC.
March 19, 1998 /s/ Bobby J. Bishop
-------------------------------
Bobby J. Bishop
Chief Accounting Officer and
Controller
(Principal Accounting Officer)
DENBURY MANAGEMENT, INC.
March 19, 1998 /s/ Matthew Deso
-------------------------------
Matthew Deso
Director and Vice President,
Exploration
DENBURY MANAGEMENT, INC.
March 19, 1998 /s/ Mark Worthey
-------------------------------
Mark Worthey
Director and Vice President,
Operations
DENBURY MANAGEMENT, INC.
15
INDEPENDENT AUDITORS' REPORT
To the Shareholders of Denbury Resources Inc.
We have audited the financial statements of Denbury Resources Inc. as of
December 31, 1997 and 1996, and for each of the three years in the period ended
December 31, 1997, and have issued our report thereon dated February 27, 1998,
such financial statements and report are included elsewhere in this Form 10-K.
Our audits also included the financial statement schedule of Denbury Resources
Inc., listed in Item 14. This financial statement schedule is the responsibility
of the Company's management. Our responsibility is to express an opinion based
on our audits. In our opinion, such financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
Deloitte & Touche
Chartered Accountants
Calgary, Alberta
February 27, 1998
1
Schedule 1 - Condensed Financial Information of Registrant
DENBURY RESOURCES INC.
UNCONSOLIDATED BALANCE SHEETS
(Amounts in thousands of U.S. dollars)
December 31,
------------------------
1997 1996
--------- --------
Assets
Current assets
Cash and cash equivalents $ 354 $ 274
Trade and other receivables 9 6
--------- --------
Total current assets 363 280
--------- --------
Investment in subsidiaries (equity method) 159,892 140,763
Loan receivable from subsidiary - 1,558
Other assets 102 2
--------- --------
Total assets $ 160,357 $142,603
========= ========
Liabilities and Shareholders' Equity
Current liabilities
Accounts payable and accrued liabilities $ 134 $ 99
--------- --------
Shareholders' equity
Common shares, no par value
unlimited shares authorized;
outstanding - 20,388,683 shares at
December 31, 1997 and 20,055,757 shares
at December 31, 1996 133,139 130,323
Retained earnings 27,084 12,181
--------- --------
Total shareholders' equity 160,223 142,504
--------- --------
Total liabilities and shareholders' equity $ 160,357 $142,603
========= ========
(See Notes to Condensed Financial Statements)
2
Schedule 1 - Condensed Financial Information of Registrant
DENBURY RESOURCES INC.
UNCONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands except per share amounts)
(U.S. dollars)
Year Ended December 31,
----------------------------------
1997 1996 1995
------- -------- -------
Revenues
Interest income and other $ 150 $ 179 $ 460
------- -------- -------
Expenses
General and administrative 145 161 178
Interest - 304 282
Imputed preferred dividends - 1,281 -
------- -------- -------
Total expenses 145 1,746 460
------- -------- -------
Income (loss) before the following: 5 (1,567) -
Equity in net earnings of subsidiaries 14,898 10,311 714
------- -------- -------
Income before income taxes 14,903 8,744 714
Provision for federal income taxes - - -
------- -------- -------
Net income $14,903 $ 8,744 $ 714
======= ======== =======
Net income per common share
Basic $ 0.74 $ 0.67 $ 0.10
Fully diluted 0.70 0.62 0.10
Average number of common shares
outstanding 20,224 13,104 6,870
======= ======== ========
(See Notes to Condensed Financial Statements)
3
Schedule 1 - Condensed Financial Information of Registrant
DENBURY RESOURCES INC.
UNCONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands of U.S. dollars)
Year Ended December 31,
--------------------------------
1997 1996 1995
-------- -------- --------
Cash flow from operating activities:
Net income $ 14,903 $ 8,744 $ 714
Adjustments needed to reconcile to net cash flow provided by operations:
Imputed preferred dividend -- 1,281 --
Other (163) 114 17
Equity in net earnings of subsidiaries (14,898) (10,311) (714)
-------- -------- --------
(158) (172) 17
Changes in working capital items relating to operations:
Trade and other receivables (3) -- (4)
Accounts payable and accrued liabilities 35 90 (12)
-------- -------- --------
Net cash flow provided by (used by) operations (126) (82) 1
-------- -------- --------
Cash flow from investing activities:
Investments in subsidiaries (2,510) (60,316) (43,569)
Net purchases of other assets (100) -- 7
-------- -------- --------
Net cash used for investing activities (2,610) (60,316) (43,562)
-------- -------- --------
Cash flow from financing activities:
Issuance of subordinated debt -- -- 1,772
Issuance of common stock 2,816 60,664 26,825
Issuance of preferred stock -- -- 15,000
Costs of debt financing -- --
(35)
-------- -------- --------
Net cash provided by financing activities 2,816 60,664 43,562
-------- -------- --------
Net increase in cash and cash equivalents 80 266 1
Cash and cash equivalents at beginning of year 274 8 7
-------- -------- --------
Cash and cash equivalents at end of year $ 354 $ 274 $ 8
======== ======== ========
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ -- $ 277 $ 282
(See Notes to Condensed Financial Statements)
4
DENBURY RESOURCES INC.
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRATION
NOTES TO FINANCIAL STATEMENTS
Note 1. Accounting Policies
Consolidation - The financial statements of Denbury Resources Inc. have
been prepared in accordance with Canadian generally accepted accounting
principles and reflect the investment in subsidiaries using the equity method.
Income Taxes - No provision for income taxes has been made in the Statement
of Income because the Company has losses for Canadian tax purposes.
Note 2. Consolidated Financial Statements
Reference is made to the Consolidated Financial Statements and related
notes of Denbury Resources Inc. and Subsidiaries for additional information.
Note 3. Debt and Guarantees
Information on the long-term debt of Denbury Resources Inc. is disclosed in
Note 3 to the Consolidated Financial Statements. Denbury Resources Inc. has
guaranteed the subsidiaries' bank credit line.
Note 4. Dividends Received
Subsidiaries' of Denbury Resources Inc. do not make formal cash dividend
declarations and distributions to the parent and are currently restricted from
doing so under the subsidiaries bank loan agreement.
5