UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 001-12935

DENBURY RESOURCES INC.

(Exact name of registrant as specified in its charter)

Delaware		20-0467835
(State or other jurisdictions of incorporation or organization)		(I.R.S. Employer Identification No.)

5100 Tennyson Parkway
Suite 1200
Plano, TX		75024
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (972) 673-2000

Not applicable

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ  No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ  No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer o		Smaller reporting company o
				(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o  No þ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class		Outstanding at April 30, 2010
Common Stock, $.001 par value		399,247,000

 

 

DENBURY RESOURCES INC.

INDEX

		Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Condensed Consolidated Balance Sheets at March 31, 2010 and December 31, 2009			4
Unaudited Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2010 and 2009			5
Unaudited Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2010 and 2009			6
Unaudited Condensed Consolidated Statement of Changes in Equity for the Three Months Ended March 31, 2010			7
Unaudited Condensed Consolidated Statements of Comprehensive Operations for the Three Months Ended March 31, 2010 and 2009			8
Notes to Unaudited Condensed Consolidated Financial Statements			9
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			34
Item 3. Quantitative and Qualitative Disclosures about Market Risk			51
Item 4. Controls and Procedures			52
PART II. OTHER INFORMATION
Item 1. Legal Proceedings			53
Item 1A. Risk Factors			53
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			53
Item 6. Exhibits			53
Signatures			57
EX-10.3
EX-10.3.1
EX-10.3.2
EX-10.4
EX-10.4.1
EX-10.5
EX-10.6
EX-31.1
EX-31.2
EX-32

DENBURY RESOURCES INC.

GLOSSARY AND SELECT ABBREVIATIONS

     The following are abbreviations and definitions of certain terms used in this report. The definitions of proved developed reserves, proved reserves, and proved undeveloped reserves have been summarized from the applicable definitions contained in Rule 4-10(a)(2-4) of Regulation S-X.

Bbl		One stock tank barrel, of 42 U.S. gallons liquid volume, used herein in reference to crude oil or other liquid hydrocarbons.
Bbls/d		Barrels of oil produced per day.
Bcf/d		One billion cubic feet of natural gas or CO2 produced per day.
BOE		One barrel of oil equivalent using the ratio of one barrel of crude oil, condensate, or natural gas liquids to six Mcf of natural gas.
BOE/d		BOEs produced per day.
CO2		Carbon dioxide.
Denbury		Denbury Resources Inc., a publicly traded Delaware corporation, together with its subsidiaries.
Encore		Encore Acquisition Company, together with its subsidiaries. Encore merged with and into Denbury on March 9, 2010.
ENP		Encore Energy Partners LP, a publicly traded Delaware limited partnership, together with its subsidiaries.
EOR		Enhanced oil recovery.
FASB		Financial Accounting Standards Board.
FASC		FASB Accounting Standards Codification.
LIBOR		London Interbank Offered Rate.
MBOE		One thousand BOEs.
Mcf		One thousand cubic feet of natural gas or CO2.
Mcf/d		One thousand cubic feet of natural gas or CO2 produced per day.
MMBOE		One million BOEs.
MMcf/d		One million cubic feet of natural gas or CO2 per day.
NYMEX		New York Mercantile Exchange.
Proved Developed Reserves		Reserves that can be expected to be recovered through existing wells with existing equipment and operating methods.
Proved Reserves		The estimated quantities of crude oil, natural gas, and natural gas liquids that geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions.
Proved Undeveloped Reserves		Reserves that are expected to be recovered from new wells on undrilled acreage or from existing wells where a relatively major expenditure is required.
SEC		The United States Securities and Exchange Commission.

DENBURY RESOURCES INC.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except par value and share data)

		March 31,				December 31,
		2010				2009
ASSETS
Current assets:
Cash and cash equivalents		$	109,185			$	20,591
Accrued production receivable			236,125				120,667
Trade and other receivables, net of allowance of $429 and $414, respectively			107,832				67,874
Derivatives			56,799				309
Deferred taxes			—				46,321
Other			65,566				—
Total current assets			575,507				255,762
Property and equipment:
Oil and natural gas properties (using full cost accounting):
Proved			7,097,339				3,595,726
Unevaluated			1,573,737				320,356
CO2 properties, equipment, and pipelines			1,607,488				1,529,781
Other			96,067				82,537
Less accumulated depletion, depreciation, amortization, and impairment			(1,907,070	)			(1,825,528	)
Net property and equipment			8,467,561				3,702,872
Derivatives			43,720				506
Goodwill			1,227,324				169,517
Other			225,891				141,321
Total assets		$	10,540,003			$	4,269,978
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable and accrued liabilities		$	396,770			$	169,874
Oil and natural gas production payable			157,813				90,218
Derivatives			125,068				124,320
Deferred taxes			7,588				—
Current maturities of long-term debt			105,931				5,308
Other			4,069				4,070
Total current liabilities			797,239				393,790
Long-term liabilities:
Long-term debt, net of current portion			3,469,182				1,301,068
Asset retirement obligations, net of current portion			97,178				53,251
Deferred taxes			1,431,256				515,516
Derivatives			38,184				5,239
Other			26,453				28,877
Total long-term liabilities			5,062,253				1,903,951
Commitments and contingencies (Note 10)
Equity:
Preferred stock, $.001 par value, 25,000,000 shares authorized, none issued and outstanding			—				—
Common stock, $.001 par value, 600,000,000 shares authorized; 399,068,168 and 261,929,292 shares issued, respectively			399				262
Paid-in capital in excess of par			3,005,615				910,540
Retained earnings			1,161,307				1,064,419
Accumulated other comprehensive loss			(536	)			(557	)
Treasury stock, at cost, 301,382 and 156,284 shares, respectively			(4,769	)			(2,427	)
Total Denbury stockholders’ equity			4,162,016				1,972,237
Noncontrolling interest			518,495				—
Total equity			4,680,511				1,972,237
Total liabilities and equity		$	10,540,003			$	4,269,978

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

DENBURY RESOURCES INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

		Three Months Ended
		March 31,
		2010				2009
Revenues and other income:
Oil, natural gas, and related product sales		$	330,886			$	168,069
CO2 sales and transportation fees			4,497				3,165
Gain on sale of interests in Genesis			101,568				—
Interest income and other			1,870				2,525
Total revenues			438,821				173,759
Expenses:
Lease operating			96,220				74,950
Production taxes and marketing			19,317				9,192
CO2 operating			1,368				1,300
General and administrative			32,709				22,655
Interest, net of amounts capitalized of $21,312 and $12,373, respectively			26,416				12,197
Depletion, depreciation, and amortization			81,872				61,925
Derivatives expense (income)			(41,225	)			20,515
Transaction costs related to Encore acquisition			44,999				—
Total expenses			261,676				202,734
Income (loss) before income taxes			177,145				(28,975	)
Income tax provision (benefit):
Current income taxes			669				173
Deferred income taxes			76,272				(10,851	)
Consolidated net income (loss)			100,204				(18,297	)
Less: net income attributable to noncontrolling interest			(3,316	)			—
Net income (loss) attributable to Denbury stockholders		$	96,888			$	(18,297	)
Net income (loss) per common share:
Basic		$	0.33			$	(0.07	)
Diluted		$	0.32			$	(0.07	)
Weighted average common shares outstanding:
Basic			294,143				245,573
Diluted			299,224				245,573

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

DENBURY RESOURCES INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

		Three Months Ended
		March 31,
		2010				2009
Cash flows from operating activities:
Consolidated net income (loss)		$	100,204			$	(18,297	)
Adjustments needed to reconcile consolidated net income (loss) to net cash provided by operating activities:
Depletion, depreciation, and amortization			81,872				61,925
Deferred income taxes			76,272				(10,851	)
Gain on sale of interests in Genesis			(101,568	)			—
Stock-based compensation			7,806				5,537
Non-cash fair value derivative adjustments			(101,026	)			106,351
Other			2,410				(1,505	)
Changes in operating assets and liabilities, net of effects from acquisitions:
Accrued production receivable			(12,125	)			(7,333	)
Trade and other receivables			30,854				(15,590	)
Other assets			(2,775	)			(26	)
Accounts payable and accrued liabilities			21,971				(10,192	)
Oil and natural gas production payable			13,394				(5	)
Other liabilities			(4,121	)			2,605
Net cash provided by operating activities			113,168				112,619
Cash flows used for investing activities:
Oil and natural gas capital expenditures			(92,647	)			(132,169	)
Acquisitions of oil and natural gas properties			(340	)			(199,163	)
Cash paid in Encore merger, net of cash acquired			(801,489	)			—
CO2 capital expenditures, including pipelines			(72,647	)			(194,733	)
Deposit received on divestiture of Southern Assets			45,000				—
Net proceeds from sale of interests in Genesis			162,622				—
Other			(4,826	)			16,526
Net cash used for investing activities			(764,327	)			(509,539	)
Cash flows from financing activities:
Bank repayments			(625,000	)			(330,000	)
Bank borrowings			1,025,000				345,000
Senior subordinated notes tendered post merger			(514,439	)			—
Net proceeds from issuance of senior subordinated debt			1,000,000				389,827
Escrowed funds for senior subordinated notes redemption			(65,566	)			—
Costs of debt financing			(76,129	)			(9,970	)
Other			(4,113	)			3,201
Net cash provided by financing activities			739,753				398,058
Net increase in cash and cash equivalents			88,594				1,138
Cash and cash equivalents at beginning of period			20,591				17,069
Cash and cash equivalents at end of period		$	109,185			$	18,207

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

DENBURY RESOURCES INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

(In thousands, except share data)

		Denbury Stockholders
										Paid-In								Accumulated												Total
		Common Stock								Capital in								Other				Treasury Stock								Denbury
		($.001 Par Value)								Excess of				Retained				Comprehensive				(at cost)								Stockholders’				Noncontrolling				Total
		Shares				Amount				Par				Earnings				Loss				Shares				Amount				Equity				Interest				Equity
Balance — December 31, 2009			261,929,292			$	262			$	910,540			$	1,064,419			$	(557	)			156,284			$	(2,427	)		$	1,972,237			$	—			$	1,972,237
Repurchase of common stock			—				—				—				—				—				266,842				(4,268	)			(4,268	)			—				(4,268	)
Issued pursuant to employee stock purchase plan			—				—				—				—				—				(121,744	)			1,926				1,926				—				1,926
Issued pursuant to employee stock option plan			120,177				1				638				—				—				—				—				639				—				639
Issued pursuant to directors’ compensation plan			3,743				—				63				—				—				—				—				63				—				63
Issued pursuant to Encore acquisition			135,170,505				135				2,085,546				—				—				—				—				2,085,681				—				2,085,681
Restricted stock grants			1,412,942				1				—				—				—				—				—				1				—				1
Restricted stock grants — forfeited			(14,984	)			—				—				—				—				—				—				—				—				—
Performance-based shares issued			446,493				—				—				—				—				—				—				—				—				—
Stock-based compensation			—				—				8,793				—				—				—				—				8,793				—				8,793
Income tax benefit from equity awards			—				—				35				—				—				—				—				35				—				35
ENP revaluation at merger			—				—				—				—				—				—				—				—				515,210				515,210
Derivative contracts, net			—				—				—				—				21				—				—				21				(31	)			(10	)
Consolidated net income			—				—				—				96,888				—				—				—				96,888				3,316				100,204
Balance — March 31, 2010			399,068,168			$	399			$	3,005,615			$	1,161,307			$	(536	)			301,382			$	(4,769	)		$	4,162,016			$	518,495			$	4,680,511

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

DENBURY RESOURCES INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS

(In thousands)

		Three Months Ended
		March 31,
		2010				2009
Consolidated net income (loss)		$	100,204			$	(18,297	)
Other comprehensive income (loss), net of income tax:
Interest rate lock derivative contracts reclassified to income, net of tax of $11 and $11, respectively			17				18
Change in deferred hedge loss on interest rate swaps, net of tax of $10			(27	)			—
Consolidated comprehensive income (loss)			100,194				(18,279	)
Less: comprehensive income attributable to noncontrolling interest			(3,285	)			—
Comprehensive income (loss) attributable to Denbury stockholders		$	96,909			$	(18,279	)

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

DENBURY RESOURCES INC.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 1. Description of Business

Organization and Nature of Operations

     Denbury is a growing independent oil and natural gas company. Denbury is the largest oil and natural gas operator in Mississippi and Montana, owns the largest reserves of CO₂ used for tertiary oil recovery east of the Mississippi River, and holds significant operating acreage in the Rockies, Permian Basin, Mid-Continent, and Gulf Coast regions. Denbury’s goal is to increase the value of its properties through a combination of exploitation, drilling, and proven engineering extraction practices, with its most significant emphasis relating to tertiary recovery operations.

Encore Merger

     On March 9, 2010, Denbury acquired Encore Acquisition Company (“Encore”) pursuant to an Agreement and Plan of Merger (the “Merger Agreement”) entered into with Encore on October 31, 2009. The Merger Agreement provided for a stock and cash transaction valued at approximately $4.5 billion at that time, including the assumption of debt and the value of the noncontrolling interest in ENP. Under the Merger Agreement, Encore was merged with and into Denbury (the “Merger”), with Denbury surviving the Merger. The Merger was consummated on March 9, 2010, following approval by the stockholders of both Denbury and Encore, closing of a new revolving credit facility as part of the financing for the Merger, and satisfaction of conditions precedent. The combined company continues to be known as Denbury Resources Inc. and is headquartered in Plano, Texas.

     The results of operations of Encore are included with those of Denbury from March 9, 2010 through March 31, 2010. Please read “Note 3. Acquisitions and Divestitures” for additional information.

Note 2. Basis of Presentation

Interim Financial Statements

     The accompanying unaudited condensed consolidated financial statements of Denbury Resources Inc. and its subsidiaries have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. Unless indicated otherwise or the context requires, the terms “we,” “our,” “us,” or “Denbury,” refer to Denbury Resources Inc. and its subsidiaries. These financial statements and the notes thereto should be read in conjunction with Denbury’s Annual Report on Form 10-K for the year ended December 31, 2009.

     Accounting measurements at interim dates inherently involve greater reliance on estimates than at year end and the results of operations for the interim periods shown in this report are not necessarily indicative of results to be expected for the year. In management’s opinion, the accompanying unaudited condensed consolidated financial statements include all adjustments (of a normal recurring nature) necessary to present fairly Denbury’s consolidated financial position as of March 31, 2010 and consolidated results of operations and cash flows for the three months ended March 31, 2010 and 2009. Certain prior period items have been reclassified to make the classification consistent with the classification in the most recent quarter.

Noncontrolling Interest

     As of March 31, 2010, Denbury owned approximately 46 percent of ENP’s common units. Denbury also owns 100 percent of Encore Energy Partners GP LLC (“GP LLC”), a Delaware limited liability company and indirect wholly owned non-guarantor subsidiary of Denbury, which is ENP’s general partner. Considering the presumption of control of GP LLC in accordance with the “Consolidations” topic of the FASC, the financial position, results of operations, and cash flows of ENP are consolidated with those of Denbury from March 9, 2010 through March 31, 2010.

     As presented in the accompanying Unaudited Condensed Consolidated Balance Sheets, “Noncontrolling interest” as of March 31, 2010 of $518.5 million represents third-party ownership interests in ENP. As presented in

DENBURY RESOURCES INC.

Notes to Unaudited Condensed Consolidated Financial Statements

the accompanying Unaudited Condensed Consolidated Statements of Operations, “Net income attributable to noncontrolling interest” for the three months ended March 31, 2010 of $3.3 million represents ENP’s results of operations attributable to third-party owners from March 9, 2010 through March 31, 2010.

Supplemental Cash Flow Information

     The following table sets forth supplemental cash flow information for the periods indicated:

		Three Months Ended
		March 31,
In thousands		2010				2009
Cash paid for interest, net of amounts capitalized		$	21,962			$	7,215
Cash refunds for income taxes			(4,595	)			(3,833	)
Interest capitalized			21,312				12,373
Increase (decrease) in liabilities for capital expenditures			32,399				(64,922	)
Issuance of Denbury common stock in connection with the acquisition of Encore			2,085,681				—

Net Income (Loss) Per Common Share

     Basic net income (loss) per common share is computed by dividing net income (loss) attributable to Denbury stockholders by the weighted average number of shares of common stock outstanding during the period. Diluted net income (loss) per common share is calculated in the same manner, but also considers the impact of the potential dilution from stock options, unvested stock appreciation rights (“SARs”), unvested restricted stock, and unvested performance equity awards. For the three months ended March 31, 2010 and 2009, there were no adjustments to net income (loss) attributable to Denbury stockholders for purposes of calculating diluted net income (loss) per common share. The following is a reconciliation of the weighted average common shares used in the basic and diluted net income (loss) per common share calculations for the periods indicated:

		Three Months Ended
		March 31,
In thousands		2010				2009
Basic weighted average common shares			294,143				245,573
Potentially dilutive securities:
Stock options and SARs			3,690				—
Performance equity awards			477				—
Restricted stock			914				—
Diluted weighted average common shares			299,224				245,573

     Basic weighted average common shares excludes 3.4 million shares and 2.9 million shares at March 31, 2010 and 2009, respectively, of unvested restricted stock. As these restricted shares vest, they will be included in the shares outstanding used to calculate basic net income (loss) per common share, although all restricted stock is issued and outstanding upon grant. For purposes of calculating diluted weighted average common shares, unvested restricted stock is included in the computation using the treasury stock method, with the proceeds equal to the average unrecognized compensation during the period, adjusted for any estimated future tax consequences recognized directly in equity. Shares of common stock issued in the Merger with Encore were only weighted from March 9, 2010 through March 31, 2010. The dilution impact of these shares on Denbury’s earnings per share

DENBURY RESOURCES INC.

Notes to Unaudited Condensed Consolidated Financial Statements

calculations may increase in future periods depending on the market price of Denbury’s common stock during those periods.

     The following securities could potentially dilute earnings per share in the future, but were excluded from the computation of diluted net income (loss) per share as their effect would have been anti-dilutive:

		Three Months Ended
		March 31,
In thousands		2010				2009
Stock options and SARs			5,465				11,619
Performance equity awards			—				485
Restricted stock			1,371				2,888
Total			6,836				14,992

CO₂ Pipelines

     CO₂ pipelines are used for transportation of CO₂ to Denbury’s tertiary floods from its CO₂ source field located near Jackson, Mississippi. Denbury is continuing expansion of its CO₂ pipeline infrastructure with several pipelines currently under construction. At March 31, 2010 and December 31, 2009, Denbury had $832.2 million and $779.1 million of costs (including capitalized interest), respectively, related to pipeline construction in progress, recorded under “CO₂ properties, equipment, and pipelines” in the accompanying Unaudited Condensed Consolidated Balance Sheets. These costs of CO₂ pipelines under construction were not being depreciated at March 31, 2010 or December 31, 2009. For financial accounting purposes, depreciation will commence when the pipelines are placed into service, and each pipeline will be depreciated on a straight-line basis over its estimated useful life, which ranges from 20 to 50 years. Denbury includes the net capitalized cost of pipelines which provide CO₂ to the tertiary floods that have proved tertiary reserves in the oil and natural gas full cost ceiling test.

Goodwill

     The following table summarizes the changes in Denbury’s goodwill for the period indicated:

		Three Months Ended
In thousands		March 31, 2010
Balance, beginning of period		$	169,517
Adjustment to goodwill related to the acquisition of interests in the Conroe Field (1)			(481	)
Goodwill related to the acquisition of Encore (2)			1,058,288
Balance, end of period		$	1,227,324

Recently Adopted Accounting Pronouncements

     Subsequent Events. On February 24, 2010, the FASB issued guidance in the “Subsequent Events” topic of the FASC to provide updates including: (1) requiring the company to evaluate subsequent events through the date in which the financial statements are issued; (2) amending the glossary of the “Subsequent Events” topic to include the definition of “SEC filer” and exclude the definition of “Public entity”; and (3) eliminating the requirement to disclose the date through which subsequent events have been evaluated. This guidance was prospectively effective upon issuance. The adoption of this guidance did not impact Denbury’s results of operations of financial condition.

DENBURY RESOURCES INC.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 3. Acquisitions and Divestitures

Merger with Encore Acquisition Company

     As previously discussed in “Note 1. Description of Business,” on March 9, 2010, the Merger of Encore with and into Denbury was consummated. The Merger was financed through a combination of $1.0 billion of 8.25% Senior Subordinated Notes due 2020, which Denbury issued on February 10, 2010, a new $1.6 billion revolving credit agreement entered into on March 9, 2010, and the assumption of Encore’s remaining outstanding senior subordinated notes. Please read “Note 5. Long-Term Debt” for additional information.

     Encore shareholders received the following consideration for each share of Encore common stock they owned, depending upon the elections, if any, which they made, and the collar, proration, and allocation features of the Merger Agreement so that, in the aggregate, 30 percent of the consideration for the outstanding shares of Encore common stock would consist of cash, and the remaining 70 percent of the consideration would consist of shares of Denbury common stock:

•

Mixed cash/stock electing (or non-electing) Encore stockholders received $15.00 in cash and 2.4048 shares of Denbury common stock;

•

All-cash electing Encore stockholders received $46.48 in cash and 0.2417 shares of Denbury common stock; and

•

All-stock electing Encore stockholders (including those whose Encore restricted stock bonuses were converted into Denbury restricted stock) received 3.4354 shares of Denbury common stock.

     All Encore stock options fully vested and their intrinsic value was paid in cash. All Encore restricted stock vested and each holder had the opportunity to make the same elections as other holders of Encore common stock as described above, except for shares of Encore restricted stock granted during 2010 as a bonus pursuant to the 2009 Encore annual incentive program, which were converted into restricted shares of Denbury common stock.

     In the Merger, Denbury issued approximately 135.2 million shares of its common stock and paid approximately $833.9 million in cash to Encore stockholders. The Denbury shares issued to Encore stockholders represented approximately 34 percent of Denbury’s common stock issued and outstanding immediately after the Merger. The total fair value of the Denbury common stock issued to Encore stockholders pursuant to the Merger was approximately $2.1 billion based upon Denbury’s closing price of $15.43 per share on March 9, 2010.

     The acquisition of Encore met the definition of a business under the FASC “Business Combinations” topic. As such, Denbury estimated the fair value of Encore as of the acquisition date, which is the date on which the acquirer obtains control of the acquiree. The acquisition date for the Merger is March 9, 2010. The FASC “Fair Value Measurements and Disclosures” topic defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (often referred to as the “exit price”). The fair value measurement is based on the assumptions of market participants and not those of the reporting entity. Therefore, entity-specific intentions should not impact the measurement of fair value unless those assumptions are consistent with market participant views.

     In applying these accounting principles, Denbury estimated the fair value of the Encore assets acquired less liabilities assumed on the acquisition date to be approximately $2.4 billion. This measurement resulted in the recognition of goodwill totaling approximately $1.1 billion. The FASC defines goodwill as an asset representing the future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognized. For this acquisition, goodwill is the excess of the consideration transferred to acquire Encore plus the fair value of the noncontrolling interest in ENP, over the acquisition date estimated fair value of the net assets acquired. Goodwill recorded in the Encore acquisition is primarily due to expansion of its CO₂ EOR operations into the Rocky Mountain region, the experience and technical expertise of former Encore employees, and the addition of strategic areas of operations in which Denbury did not previously have a significant presence.

DENBURY RESOURCES INC.

Notes to Unaudited Condensed Consolidated Financial Statements

     The fair value of Encore was based on significant inputs not observable in the market, which FASC “Fair Value Measurements and Disclosures” topic defines as Level 3 inputs. Key assumptions include (1) NYMEX oil and natural gas futures (this input is observable), (2) projections of the estimated quantities of oil and natural gas reserves, including those classified as proved, probable, and possible, (3) projections of future rates of production, (4) timing and amount of future development and operating costs, (5) projected cost of CO₂ to a market participant, (6) projected recovery factors, and (7) risk-adjusted discount rates. The fair value of the oil and natural gas properties was determined using a risk-adjusted after-tax discounted cash flow analysis. Denbury applies full cost accounting rules, under which the acquisition cost of oil and natural gas properties are recognized on a cost center basis (country), of which Denbury has only one cost center (United States). All of the goodwill was assigned to this single reporting unit. None of the goodwill is deductible for income tax purposes.

Preliminary Purchase Price Allocation in Encore Merger

     Based on currently available information, the following table is a preliminary summary of the consideration issued for the Encore Merger and the fair value of the assets acquired and liabilities assumed at the acquisition date, as well as the fair value at the acquisition date of the noncontrolling interest in ENP:

In thousands
Consideration and noncontrolling interest:
Fair value of Denbury common stock issued (1)		$	2,085,681
Cash payment to Encore stockholders (2)			833,909
Severance payments			32,925
Consideration transferred			2,952,515
Fair value of noncontrolling interest of ENP (3)			515,210
Consideration and noncontrolling interest of ENP (4)			3,467,725
Add: fair value of liabilities assumed:
Accounts payable and accrued liabilities			116,541
Oil and natural gas production payable			54,201
Current derivatives			65,954
Other current liabilities			32,986
Long-term debt			1,375,149
Asset retirement obligations, net of current portion			42,360
Long-term derivatives			35,631
Long-term deferred taxes			877,324
Other long-term liabilities			2,717
Amount attributable to liabilities assumed			2,602,863
Less: fair value of assets acquired:
Cash and cash equivalents			51,850
Accrued production receivable			124,494
Trade and other receivables			49,514
Current derivatives			29,737
Oil and natural gas properties — proved			3,340,141
Oil and natural gas properties — unevaluated			1,279,000
CO2 properties, equipment, and pipelines			7,254
Other property, plant, and equipment			11,475
Long-term derivatives			35,207
Other long-term assets			83,628
Amount attributable to assets acquired			5,012,300
Goodwill		$	1,058,288

DENBURY RESOURCES INC.

Notes to Unaudited Condensed Consolidated Financial Statements

     The above purchase price allocation for the Merger with Encore is preliminary and subject to revision as Denbury finalizes the acquisition tax basis of the assets acquired and liabilities assumed and other key assumptions utilized in the fair value models, primarily finalization of the oil and natural gas reserve analysis.

     During the three months ended March 31, 2010, Denbury recognized $59.7 million and $43.9 million of oil and natural gas revenues and net field operating income (oil and natural gas revenues less lease operating expenses and production taxes), respectively, related to the acquisition of Encore. All transaction-related costs (advisory, legal, accounting, due diligence, integration, etc.) have been expensed as incurred. Denbury recognized a total of $45.0 million of transaction costs related to the Merger in the three months ended March 31, 2010.

Conroe Field Acquisition

     On December 18, 2009, Denbury acquired a 91.4 percent interest in the Conroe Field, a significant potential tertiary flood north of Houston, Texas, for total consideration of approximately $422.9 million comprised of approximately $254.2 million in cash and 11,620,000 shares of Denbury common stock. The common stock was valued at $168.7 million based on the closing date price of Denbury’s stock on December 18, 2009 of $14.52 per share. The effective date of purchase was December 1, 2009, and consequently net operating revenues, net of capital expenditures, from December 1, 2009 through December 18, 2009, along with any other purchase price adjustments, were accounted for as adjustments to the purchase price. The cash amount paid at closing was $269.8 million, which reflects $15.6 million for amounts in escrow accounts reserved for plugging and abandonment and other adjustments. Denbury recorded approximately $30.2 million of goodwill related to the acquisition of interests in the Conroe Field. The purchase price allocation for the acquisition of interests in the Conroe Field is preliminary and subject to revision pending finalization of closing adjustments.

     Denbury shares issued in a private placement in conjunction with the purchase of interests in the Conroe Field were subsequently registered for resale with the SEC on February 2, 2010, as required under a registration rights agreement. The registration rights agreement provides that the registration statement for the shares remain effective for approximately one year.

Hastings Field Acquisition

     During November 2006, Denbury entered into an agreement with a subsidiary of Venoco, Inc. (“Veneco”), which gave Denbury an option to purchase Veneco’s interests in Hastings Field, a strategically significant potential tertiary flood candidate located near Houston, Texas. Denbury exercised the purchase option prior to September 2008, and closed the acquisition during February 2009. As consideration for the option agreement, during 2006 through 2008, Denbury made cash payments totaling $50 million which it recorded as a deposit. The remaining purchase price of approximately $196 million was paid in cash, and was determined as of January 1, 2009 (the effective date) with closing on February 2, 2009. The final closing adjustments were completed during the three months ended September 30, 2009. The final closing price, adjusted for interim net cash flows between the effective date and closing date of the acquisition (including minor purchase price adjustments), totaled $246.8 million. Denbury recorded approximately $138.8 million of goodwill related to the acquisition of interests in the Hastings Field.

DENBURY RESOURCES INC.

Notes to Unaudited Condensed Consolidated Financial Statements

Pro Forma Information

     The following unaudited pro forma condensed financial data for the three months ended March 31, 2010 gives effect to the Encore acquisition as if it had occurred on January 1, 2010. The following unaudited pro forma condensed financial data for the three months ended March 31, 2009 gives effect to the Encore acquisition, the acquisition of interests in the Conroe Field, and the acquisition of interests in the Hastings Field as if each had occurred on January 1, 2009. The unaudited pro forma condensed financial information has been included for comparative purposes only and is not necessarily indicative of the results that might have occurred had the transactions taken place on the dates indicated and is not intended to be a projection of future results.

		Three Months Ended March 31,
In thousands, except per share amounts		2010				2009
Pro forma total revenues		$	615,271			$	299,991
Pro forma net income (loss) attributable to Denbury stockholders		$	112,489			$	(31,208	)
Pro forma net income (loss) per common share:
Basic		$	0.28			$	(0.08	)
Diluted		$	0.28			$	(0.08	)

Barnett Shale Dispositions

     In May 2009, Denbury entered into an agreement to sell 60 percent of its Barnett Shale natural gas assets to Talon Oil and Gas LLC (“Talon”), a privately held company, for $270 million (before closing adjustments). Denbury closed on approximately three-quarters of the sale in June 2009 and closed on the remainder of the sale in July 2009. Net proceeds were approximately $259.8 million (after closing adjustments, and net of $8.1 million for natural gas swaps transferred in the sale). The agreement was effective June 1, 2009, and consequently operating net revenues after June 1, net of capital expenditures, along with any other purchase price adjustments, were adjustments to the selling price. Denbury did not record a gain or loss on the sale in accordance with the full cost method of accounting.

     In December 2009, Denbury closed the sale of the remaining 40 percent of its Barnett Shale natural gas assets to Talon for $210 million (before closing adjustments). Net proceeds were approximately $209.9 million (after closing adjustments). The effective date under the agreement was December 1, 2009, and consequently operating net revenues after December 1, net of capital expenditures, along with any other purchase price adjustments, were adjustments to the selling price. Denbury did not record a gain or loss on the sale in accordance with the full cost method of accounting. Further, the sale was structured as a deferred like-kind exchange in conjunction with Denbury’s acquisition of additional interests in the Conroe Field in order to defer most of the tax impacts of the sale.

Sale of Interests in Genesis Energy, L.P. (“Genesis”)

     On February 5, 2010, Denbury sold its interest in Genesis Energy, LLC, the general partner of Genesis, for net proceeds of approximately $84 million, after giving effect to the change of control provision of the incentive compensation agreement with Genesis’ management which was triggered and under which Denbury paid a total of $14.9 million, comprised of deferred compensation of $1.9 million and change of control redemption of $13.0 million. In the first quarter of 2010, Denbury recognized general and administrative expense of $1.1 million associated with the $14.9 million payment. The remainder of the payment had been previously accrued in Denbury’s financial statements as of December 31, 2009. In March 2010, Denbury sold all of its Genesis common units in a secondary public offering for net proceeds of approximately $79 million. As a result, Denbury no longer holds any interest in Genesis. Denbury recognized a pre-tax gain of $101.6 million ($63.0 million after tax) on these dispositions.

Pending Sale of Southern Properties

     On March 31, 2010, Denbury entered into a purchase and sale agreement to sell to Quantum Resources Management, LLC, for a cash sales price of $900 million, certain oil and natural gas properties and related assets

DENBURY RESOURCES INC.

Notes to Unaudited Condensed Consolidated Financial Statements

acquired in the Encore Merger, primarily located in the Permian Basin in West Texas and southeastern New Mexico; the Mid-continent area, which includes the Anadarko Basin in Oklahoma, Texas, and Kansas; and the East Texas Basin (the “Southern Assets”). The pending sale is subject to customary purchase price adjustments and closing conditions and is expected to close in May 2010, with an effective date of May 1, 2010. The sale properties do not include Denbury’s Haynesville Shale, Paradox Basin, Cleveland Sand Play, or Tuscaloosa Marine Shale properties acquired in the Encore Merger.

     On March 31, 2010, Denbury received a deposit of $45 million on the pending sale of the Southern Assets, which is included in “Accounts payable and accrued liabilities” on the accompanying Unaudited Condensed Consolidated Balance Sheet.

Note 4. Asset Retirement Obligations

     In general, Denbury’s future asset retirement obligations relate to future costs associated with plugging and abandonment of its oil, natural gas, and CO₂ wells, removal of equipment and facilities from leased acreage, and land restoration. The fair value of a liability for an asset retirement is recorded in the period in which it is incurred, discounted to its present value using Denbury’s 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.

     The following table summarizes the changes in Denbury’s asset retirement obligations for the period indicated:

		Three Months Ended
In thousands		March 31, 2010
Balance, beginning of period		$	54,338
Liabilities incurred and assumed during period			975
Liabilities assumed in acquisition of Encore			43,783
Revisions in estimated retirement obligations			924
Liabilities settled during period			(1,333	)
Accretion expense			1,107
Balance, end of period		$	99,794

     At March 31, 2010 and December 31, 2009, $2.6 million and $1.1 million, respectively, of Denbury’s asset retirement obligations were classified in “Accounts payable and accrued liabilities” under current liabilities in the accompanying Unaudited Condensed Consolidated Balance Sheets. Denbury has escrow accounts that are legally restricted for certain of its asset retirement obligations. The balances of these escrow accounts were $33.2 million and $22.8 million at March 31, 2010 and December 31, 2009, respectively, and are included in “Other assets” in the accompanying Unaudited Condensed Consolidated Balance Sheets.

DENBURY RESOURCES INC.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 5. Long-Term Debt

     The following table shows the components of Denbury’s long-term debt as of the periods indicated:

		March 31,				December 31,
In thousands, except percentages		2010				2009
Credit Agreement		$	800,000			$	—
OLLC Credit Agreement			250,000				—
Senior bank loan			—				125,000
7.5% Senior Subordinated Notes due 2013, net of discount of $583 and $631, respectively			224,417				224,369
6.25% Senior Subordinated Notes due 2014, including premium of $512			42,296				—
7.5% Senior Subordinated Notes due 2015, including premium of $492 and $513, respectively			300,492				300,513
6.0% Senior Subordinated Notes due 2015, including premium of $384			31,583				—
9.5% Senior Subordinated Notes due 2016, including premium of $16,647			241,647				—
9.75% Senior Subordinated Notes due 2016, net of discount of $25,352 and $26,424, respectively			400,998				399,926
7.25% Senior Subordinated Notes due 2017, including premium of $328			26,813				—
8.25% Senior Subordinated Notes due 2020			1,000,000				—
Northeast Jackson Dome pipeline financing			169,838				170,633
Free State pipeline financing			80,674				79,987
Capital lease obligations			6,355				5,948
Total			3,575,113				1,306,376
Less current obligations			105,931				5,308
Long-term debt and capital lease obligations		$	3,469,182			$	1,301,068

New $1.6 Billion Revolving Credit Agreement

     On March 9, 2010, Denbury entered into a new $1.6 billion revolving credit agreement with JPMorgan Chase Bank, N.A. (“JPMorgan”), as administrative agent, and 23 other lenders as party thereto (the “Credit Agreement”). Borrowings under the Credit Agreement, coupled with the funds from Denbury’s issuance of $1.0 billion of 8.25% Senior Subordinated Notes due 2020, were used to:

•

fund the cash portion of the Merger consideration (inclusive of payments due to Encore stock option holders);

•

repay amounts outstanding under Denbury’s then existing $750 million revolving credit agreement, which had $125 million outstanding as of March 9, 2010;

•

repay amounts outstanding under Encore’s then existing revolving credit agreement, which had $265 million outstanding as of March 9, 2010;

•

pay Encore’s severance costs;

•

pay transaction fees and expenses; and

•

provide additional liquidity.

     Both Denbury’s and Encore’s then existing revolving credit agreements were repaid on March 9, 2010.

     Availability under the Credit Agreement is subject to a borrowing base, which is redetermined semi-annually on or prior to May 1 and November 1, beginning in November 2010, and upon requested special redeterminations. The Credit Agreement provides for an initial borrowing base of $1.6 billion. The borrowing base represents the amount that can be borrowed based on the reserves and certain other oil and natural gas assets of Denbury and its restricted subsidiaries, as confirmed by the banks, while the commitment amount is the amount the banks have committed to fund pursuant to the terms of the Credit Agreement. The borrowing base is adjusted at the banks’ discretion and is based in part upon external factors over which Denbury has no control. Denbury incurs a commitment fee of 0.5 percent on the unused portion of this credit facility. If the borrowing base were to be less than outstanding borrowings under the Credit Agreement, Denbury would be required to repay the deficit over a period of four months. The loans under the Credit Agreement mature in March 2014.

DENBURY RESOURCES INC.

Notes to Unaudited Condensed Consolidated Financial Statements

     The Credit Agreement is secured by substantially all of the proved oil and natural gas properties of Denbury’s restricted subsidiaries and by the equity interests of Denbury’s restricted subsidiaries. In addition, Denbury’s obligations under the Credit Agreement are guaranteed by its restricted subsidiaries. The restricted subsidiaries include most of the subsidiaries of the combined company after the Merger, excluding Denbury’s non-guarantor subsidiaries.

     The Credit Agreement contains several restrictive covenants including, among others:

•

a prohibition on the payment of dividends to parties other than Denbury and its restricted subsidiaries;

•

a requirement to maintain positive working capital, as determined under the Credit Agreement, of not less than 1.0 to 1.0;

•

a maximum permitted ratio of debt to adjusted EBITDA (as defined in the Credit Agreement) of Denbury and its restricted subsidiaries of not more than 4.5 to 1.0 for each Rolling Period (as defined in the Credit Agreement) beginning with the quarter ending June 30, 2010, and ending on or before December 31, 2010, and 4.0 to 1.0 for each Rolling Period ending on March 31, 2011 and thereafter; and

•

a prohibition against incurring debt, subject to permitted exceptions.

     Additionally, there is a limitation on the aggregate amount of forecasted oil and natural gas production that can be economically hedged with oil or natural gas derivative contracts.

     Loans under the Credit Agreement are subject to varying rates of interest based on (1) the total outstanding borrowings in relation to the borrowing base and (2) whether the loan is a Eurodollar loan or a base rate loan. Eurodollar loans bear interest at the Eurodollar rate plus the applicable margin of 2.0 percent to 3.0 percent based on the ratio of outstanding borrowings to the borrowing base, and base rate loans bear interest at the base rate plus the applicable margin of 1.0 percent to 2.0 percent based on the ratio of outstanding borrowings to the borrowing base. The “Eurodollar rate” for any interest period (either one, two, three, six, nine, or twelve months, as selected by Denbury) is the rate per year equal to LIBOR, as published by Reuters or another source designated by JPMorgan, for deposits in dollars for a similar interest period. The “base rate” is calculated as the highest of (1) the annual rate of interest announced by and JPMorgan as its “prime rate,” (2) the federal funds effective rate plus 0.5 percent, and (3) the Adjusted Eurodollar Rate (as defined in the Credit Agreement) for a one-month interest period plus 1.0 percent.

Encore Energy Partners Operating LLC Credit Agreement

     Encore Energy Partners Operating LLC (“OLLC”), a nonguarantor subsidiary of Denbury, is a party to a five-year credit agreement dated March 7, 2007 (as amended, the “OLLC Credit Agreement”). The OLLC Credit Agreement matures on March 7, 2012. In November 2009, OLLC amended the OLLC Credit Agreement, which was effective upon the closing of the Merger, to, among other things, permit the consummation of the Merger from being a “Change of Control” under the OLLC Credit Agreement. In conjunction with this amendment, Denbury paid a fee of approximately $0.9 million to the lenders under the OLLC Credit Agreement, which is included in “General and administrative expense” in the accompanying Unaudited Condensed Consolidated Statement of Operations for the three months ended March 31, 2010.

     The OLLC Credit Agreement provides for revolving credit loans to be made to OLLC from time to time and letters of credit to be issued from time to time for the account of OLLC or any of its restricted subsidiaries. The aggregate amount of the commitments of the lenders under the OLLC Credit Agreement is $475 million. Availability under the OLLC Credit Agreement is subject to a borrowing base, which is redetermined semi-annually and upon requested special redeterminations. As of March 31, 2010, the borrowing base was $375 million and there were $250 million of outstanding borrowings and $125 million of borrowing capacity under the OLLC Credit Agreement.

     Obligations under the OLLC Credit Agreement are secured by a first-priority security interest in substantially all of OLLC’s proved oil and natural gas reserves and in the equity interests of OLLC and its restricted subsidiaries. In addition, obligations under the OLLC Credit Agreement are guaranteed by ENP and OLLC’s restricted subsidiaries. Denbury consolidates the debt of ENP with that of its own; however, obligations under the OLLC Credit Agreement are non-recourse to Denbury and its restricted subsidiaries.

DENBURY RESOURCES INC.

Notes to Unaudited Condensed Consolidated Financial Statements

Issuance of 8.25% Senior Subordinated Notes due 2020

     On February 10, 2010, Denbury issued $1.0 billion of 8.25% Senior Subordinated Notes due 2020 (the “2020 Notes”), for net proceeds after underwriting discounts and commissions of $980 million. The 2020 Notes were sold at par. Upon the closing of the Merger, $400 million of the net proceeds were used to finance a portion of the Merger consideration and as of March 31, 2010, Denbury had redeemed $500.5 million principal amount of Encore’s outstanding senior subordinated notes in a tender offer. Under the indenture governing the 2020 Notes, to the extent that fewer than $600 million principal amount of Encore’s outstanding senior subordinated notes were repurchased in tender offers or change of control repurchases under the Encore indentures, Denbury is required to redeem an equal amount of the 2020 Notes, plus accrued and unpaid interest. Denbury has reclassified $99.5 million of the 2020 Notes as a current liability at March 31, 2010, as it had only redeemed $500.5 million principal amount of Encore’s outstanding senior subordinated notes at that date. In April 2010, Denbury repurchased an additional $95.7 million principal amount of Encore’s outstanding senior subordinated notes under change of control provisions, and redeemed $3.7 million principal amount of the 2020 Notes. Please read “Tender Offers and Consent Solicitations for Encore’s Senior Subordinated Notes; Supplements to Indentures Governing Encore’s Senior Subordinated Notes” below and “Note 13. Subsequent Events” for additional discussion.

     The 2020 Notes mature on February 15, 2020, and interest is payable on February 15 and August 15 of each year, beginning August 15, 2010. Denbury may redeem the 2020 Notes in whole or in part at its option beginning February 15, 2015, at the following redemption prices:

•

104.125 percent after February 15, 2015;

•

102.75 percent after February 15, 2016;

•

101.375 percent after February 15, 2017; and

•

100 percent after February 15, 2018.

     Prior to February 15, 2013, Denbury may at its option redeem up to an aggregate of 35 percent of the principal amount of the 2020 Notes at a price of 108.25 percent with the proceeds of certain equity offerings. In addition, at any time prior to February 15, 2015, Denbury may redeem 100 percent of the principal amount of the 2020 Notes at a price equal to 100 percent of the principal amount plus a “make whole” premium and accrued and unpaid interest. The indenture contains certain restrictions on Denbury’s ability to incur additional debt, pay dividends on its common stock, make investments, create liens on its assets, engage in transactions with its affiliates, transfer or sell assets, consolidate or merge, or sell substantially all of its assets. The 2020 Notes are not subject to any sinking fund requirements. Certain of Denbury’s significant subsidiaries fully and unconditionally guarantee this debt.

Supplements to Indentures Governing Denbury’s Senior Subordinated Notes

     On March 9, 2010, upon closing of the Merger of Encore with and into Denbury, Denbury became an obligor, as successor in interest to Encore, with respect to Encore senior subordinated notes which are governed by four indentures covering an original principal amount of $825 million. In conjunction with the closing of the Merger, Denbury and its subsidiaries entered into supplemental indentures to add subsidiary guarantors, as required under the Encore indentures as well as the indentures governing Denbury’s senior subordinated notes prior to the Merger. The Encore legacy subsidiaries, with permitted exceptions, became guarantors under the Denbury indentures that were in effect prior to the Merger and the Denbury legacy subsidiaries, with permitted exceptions, became guarantors under the Encore indentures with respect to which Denbury succeeded Encore.

Tender Offers and Consent Solicitations for Encore’s Senior Subordinated Notes; Supplements to Indentures Governing Encore’s Senior Subordinated Notes

     On February 8, 2010, Denbury commenced a cash tender offer to repurchase $600 million principal amount of Encore’s $825 million senior subordinated notes which were governed by three of Encore’s four indentures and solicited consents to amend each of those three indentures to eliminate most of the indenture covenants. Those indentures are the indentures to which Encore was a party prior to the Merger governing their 6.25% Senior Subordinated Notes due 2014 (the “6.25% Notes”), their 6.0% Senior Subordinated Notes due 2015 (the “6.0% Notes”), and their 7.25% Senior Subordinated Notes due 2017 (the “7.25% Notes”).

DENBURY RESOURCES INC.

Notes to Unaudited Condensed Consolidated Financial Statements

     On March 10, 2010, upon expiration of the tender offers and consent solicitations, Denbury accepted for purchase all notes tendered in the tender offer. The total amount of notes that Denbury purchased was approximately $500.5 million in principal amount out of $600 million in original principal amount for which tenders were made, leaving outstanding approximately $99.5 million of the $600 million of notes for which Denbury made tender offers.

     The tender of the notes also constituted the delivery of consents of holders of the notes to eliminate or modify certain provisions contained in each of the three indentures governing the Encore senior subordinated notes for which tender offers were made. Denbury received sufficient consents in the solicitations to amend these three Encore indentures effective upon the Merger.

     The amendments of the three indentures governing the $600 million of notes subject to the tender offers eliminated most of the restrictive covenants, including covenants requiring the filing of SEC reports; restricting certain payments; limiting indebtedness, restrictions on distributions from certain restricted subsidiaries, affiliate transactions, and liens; requiring certain subsidiaries to deliver guarantees of the applicable notes; requiring the delivery of certificates concerning compliance with the applicable Indenture; certain provisions of covenants relating to mergers and consolidations; and certain events of default in the indentures. The amendments do not apply to the 9.50% Senior Subordinated Notes due 2016 (the “9.5% Notes”).

Encore Indentures and the Encore Indenture with Respect to the 9.5% Notes

     In addition to the three indentures that govern the Encore senior subordinated notes for which Denbury made tender offers, as a result of the Merger, Denbury also became successor in interest to Encore under the Encore indenture with respect to the 9.5% Notes in the original principal amount of $225 million (the “9.5% Indenture”). Interest on the 9.5% Notes is due semi-annually on May 1 and November 1. The 9.5% Notes mature on May 1, 2016. The material terms of the 9.5% Indenture include covenants requiring the filing of SEC reports; restricting certain payments; limiting indebtedness, restrictions on distributions from certain restricted subsidiaries, affiliate transactions, and liens; requiring certain subsidiaries to deliver guarantees of the notes; requiring the delivery of certificates concerning compliance with the indenture; and covenants relating to mergers and consolidations.

     All of the Encore indentures, including the 9.5% Indenture, also have covenants limiting the sale of assets and providing a put right by holders upon change of control. The Encore indentures also contain certain affirmative, negative, and financial covenants, which include a requirement that Denbury maintain a current ratio (as defined in the Encore indentures) of not less than 1.0 to 1.0 and a requirement that Denbury maintain a ratio of consolidated EBITDA (as defined in the Encore indentures) to consolidated interest expense of not less than 2.5 to 1.0.

Change of Control Offers

     On March 12, 2010, Denbury announced cash change of control offers to purchase, for 101 percent of the face amount, the remaining $324.5 million of senior subordinated notes outstanding under the four Encore indentures, as required by each of the Encore indentures. Subsequent to March 31, 2010, in the change of control offers, Denbury purchased approximately $95.7 million of these senior subordinated notes, leaving approximately $228.7 million of former Encore notes outstanding. Please read “Note 13. Subsequent Events” for additional information.

DENBURY RESOURCES INC.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 6. Derivative Instruments and Hedging Activities

Derivative Policy

     Denbury applies the provisions of the “Derivatives” topic of the FASC, which requires each derivative instrument to be recorded in the balance sheet at fair value. If a derivative has not been designated as a hedge or does not otherwise qualify for hedge accounting, it must be adjusted to fair value through earnings. However, if a derivative qualifies for hedge accounting, depending on the nature of the hedge, the effective portion of changes in fair value can be recognized in accumulated other comprehensive income or loss within equity until such time as the hedged item is recognized in earnings. In order to qualify for cash flow hedge accounting, the cash flows from the hedging instrument must be highly effective in offsetting changes in cash flows of the hedged item. In addition, all hedging relationships must be designated, documented, and reassessed periodically.

     Denbury has elected to designate its outstanding interest rate swaps as cash flow hedges. The effective portion of the mark-to-market gain or loss on these derivative instruments is recorded in “Accumulated other comprehensive loss” on the accompanying Unaudited Condensed Consolidated Balance Sheets and reclassified into earnings in the same period in which the hedged transaction affects earnings. Any ineffective portion of the mark-to-market gain or loss is recognized in earnings and included in “Derivatives expense (income)” in the accompanying Unaudited Condensed Consolidated Statements of Operations.

     Denbury does not apply hedge accounting treatment to its oil and natural gas derivative contracts and therefore, the changes in the fair values of these instruments are recognized in income in the period of change. These fair value changes, along with the cash settlements of expired contracts, are shown under “Derivatives expense (income)” in the accompanying Unaudited Condensed Consolidated Statements of Operations.

Oil and Natural Gas Derivative Contracts

     From time to time, Denbury enters into various oil and natural gas derivative contracts to provide an economic hedge of its exposure to commodity price risk associated with anticipated future oil and natural gas production. Denbury does not hold or issue derivative financial instruments for trading purposes. These contracts consist of price floors, collars, and fixed price swaps. Historically, Denbury has hedged up to 80 percent of its anticipated production for the following year to provide it with a reasonably certain amount of cash flow to cover most of its budgeted exploration and development expenditures without incurring significant debt. Also, in light of the Merger, and Denbury’s desire to protect its cash flows given the increased debt levels, in November 2009, Denbury entered into costless collar crude oil contracts covering 25,000 Bbls/d during 2011 and in March 2010, it entered into costless collar crude oil contracts covering an additional 17,000 Bbls/d during the first half of 2011.

     Denbury manages and controls market and counterparty credit risk through established internal control procedures that are reviewed on an ongoing basis. Denbury attempts to minimize credit risk exposure to counterparties through formal credit policies, monitoring procedures, and diversification. All of Denbury’s commodity derivative contracts are with parties that are lenders under the Credit Agreement and all of ENP’s commodity derivative contracts are with parties that are lenders under the OLLC Credit Agreement. Denbury has included an estimate of nonperformance risk in the fair value measurement of its commodity derivative contracts as required by FASC guidance on fair value. At March 31, 2010 and December 31, 2009, the net liability of Denbury’s open commodity derivative contracts was reduced by $0.2 million and $0.8 million, respectively, for estimated nonperformance risk.

     The following is a summary of “Derivatives expense (income)” included in the accompanying Unaudited Condensed Consolidated Statements of Operations for the periods indicated:

DENBURY RESOURCES INC.

Notes to Unaudited Condensed Consolidated Financial Statements

		Three Months Ended
		March 31,
In thousands		2010				2009
Receipts (payments) on settlement of oil derivative contracts		$	(63,550	)		$	85,836
Receipts on settlement of natural gas derivative contracts			3,749				—
Fair value adjustments to derivative contracts income (expense)			100,839				(106,351	)
Ineffectiveness on interest rate swaps			187				—
Derivatives income (expense)		$	41,225			$	(20,515	)

DENBURY RESOURCES INC.

Notes to Unaudited Condensed Consolidated Financial Statements

Fair Value of Commodity Derivative Contracts Not Classified as Hedging Instruments

								NYMEX Contract Prices Per Bbl												Estimated Fair Value
								Average				Average				Average				Asset (Liability)
		Type of						Swap				Floor				Ceiling				March 31,				December 31,
Period		Contract		Bbls/d				Price				Price				Price				2010				2009
																				(In thousands)
Crude Oil Contracts:
2010
Jan - Mar		Swap			25,000			$	51.85			$	—			$	—			$	—			$	(63,525	)
Jan - Dec		Swap			6,635				71.45				—				—				(24,383	)			—
Jan - Mar		Collar			5,000				—				70.00				92.16				—				95
Apr - Jun		Collar			30,000				—				53.33				78.04				(23,406	)			(24,741	)
Jul - Sept		Collar			30,000				—				59.58				83.03				(19,608	)			(20,761	)
Oct - Dec		Collar			30,000				—				61.67				90.49				(12,406	)			(13,320	)
Jan - Dec		Collar			6,440				—				65.95				80.97				(14,210	)			—
Jan - Dec		Put			9,325				—				67.84				—				3,893				—
2011
Jan - Dec		Swap			1,635				77.39				—				—				(5,119	)			—
Jan - Mar		Collar			17,000				—				70.00				97.30				(1,985	)			—
Apr - Jun		Collar			17,000				—				70.00				97.30				(2,225	)			—
Jan - Dec		Collar			27,940				—				70.69				101.72				(2,122	)			(3,752	)
Jan - Dec		Put			8,825				—				70.85				—				16,493				—
2012
Jan - Dec		Swap			2,135				78.36				—				—				(6,291	)			—
Jan - Dec		Collar			750				—				68.33				81.12				(2,776	)			—
Jan - Dec		Put			2,135				—				65.59				—				3,808				—
Total Crude Oil Contracts																				$	(90,337	)		$	(126,004	)

								Contract Prices per Mcf												Estimated Fair Value
								Average				Average				Average				Asset (Liability)
		Type of						Swap				Floor				Ceiling				March 31,				December 31,
Period		Contract		Mcf/d				Price				Price				Price				2010				2009
																				(In thousands)
Natural Gas Contracts:
2010
Jan - Jun		Swap			20,000			$	5.22			$	—			$	—			$	2,429			$	—
Jan - Dec		Swap			65,002				5.98				—				—				31,110				(1,759	)
Jul - Dec		Collar			10,000				—				5.13				6.25				1,689				—
Jan - Dec		Collar			3,800				—				7.20				9.58				3,103				—
Jan - Dec		Put			4,698				—				8.07				—				4,978				—
2011
Jan - Dec		Swap			55,502				6.35				—				—				21,545				(981	)
Jan - Dec		Put			3,398				—				6.31				—				1,815				—
2012
Jan - Dec		Swap			26,002				6.46				—				—				7,615				—
Jan - Dec		Put			898				—				6.76				—				535				—
Total Natural Gas Contracts																				$	74,819			$	(2,740	)
Total Commodity Derivative Contracts																				$	(15,518	)		$	(128,744	)

DENBURY RESOURCES INC.

Notes to Unaudited Condensed Consolidated Financial Statements

     As of March 31, 2010, Denbury had $43.7 million of deferred premiums payable, which relate to various oil and natural gas floor contracts and are payable on a monthly basis from April 2010 to January 2013. These premiums are excluded from the above table.

Interest Rate Swaps

     ENP uses derivative instruments in the form of interest rate swaps, which hedge risk related to interest rate fluctuation, whereby it converts the interest due on certain floating rate debt under its revolving credit agreement to a weighted average fixed rate. The following table summarizes ENP’s open interest rate swaps as of March 31, 2010, all of which were entered into with Bank of America, N.A.:

Term		Notional Amount				Fixed Rate				Floating Rate
		(In thousands)
Apr. 2010 - Jan. 2011		$	50,000				3.1610	%		1-month LIBOR
Apr. 2010 - Jan. 2011			25,000				2.9650	%		1-month LIBOR
Apr. 2010 - Jan. 2011			25,000				2.9613	%		1-month LIBOR
Apr. 2010 - Mar. 2012			50,000				2.4200	%		1-month LIBOR

Additional Disclosures about Derivative Instruments

     At March 31, 2010 and December 31, 2009, Denbury had derivative financial instruments recorded in the accompanying Unaudited Condensed Consolidated Balance Sheets as follows:

				Estimated Fair Value
				Asset (Liability)
				March 31,				December 31,
Type of Contract		Balance Sheet Location		2010				2009
				(In thousands)
Derivatives not designated as hedging instruments:
Derivative asset:
Oil contracts		Derivative assets - current		$	7,750			$	309
Natural gas contracts		Derivative assets - current			49,049				—
Oil contracts		Derivative assets - long-term			17,950				506
Natural gas contracts		Derivative assets - long-term			25,770				—
Derivative liability:
Oil contracts		Derivative liabilities - current			(97,875	)			(122,561	)
Natural gas contracts		Derivative liabilities - current			—				(1,759	)
Deferred premiums		Derivative liabilities - current			(24,031	)			—
Oil contracts		Derivative liabilities - long-term			(18,162	)			(4,258	)
Natural gas contracts		Derivative liabilities - long-term			—				(981	)
Deferred premiums		Derivative liabilities - long-term			(19,632	)			—
Total derivatives not designated as hedging instruments					(59,181	)			(128,744	)
Derivatives designated as hedging instruments:
Derivative liability:
Interest rate swaps		Derivative liabilities - current			(3,162	)			—
Interest rate swaps		Derivative liabilities - long-term			(390	)			—
Total derivatives designated as hedging instruments					(3,552	)			—
Total derivatives				$	(62,733	)		$	(128,744	)

DENBURY RESOURCES INC.

Notes to Unaudited Condensed Consolidated Financial Statements

     For the three months ended March 31, 2010 and 2009, the net effect on income of derivative instruments not designated as hedges was as follows:

				Amount of Gain/(Loss)
				Recognized in Income
				Three Months Ended
		Location of Gain/(Loss)		March 31,
Type of Contract		Recognized in Income		2010				2009
				(In thousands)
Derivatives not designated as hedging instruments:
Commodity contracts:
Oil contracts		Derivatives expense (income)		$	1,729			$	10,025
Natural gas contracts		Derivatives expense (income)			(42,767	)			10,490
Total derivatives not designated as hedging instruments				$	(41,038	)		$	20,515

     Please read “Note 7. Fair Value Measurements” for additional information regarding Denbury’s derivative instruments.

Note 7. Fair Value Measurements

Fair Value Hierarchy

     Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). Denbury utilizes market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated, or generally unobservable. Denbury primarily applies the market approach for recurring fair value measurements and endeavors to utilize the best available information. Accordingly, Denbury utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. Denbury is able to classify fair value balances based on the observability of those inputs. The FASC establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). The three levels of the fair value hierarchy are as follows:

	•		Level 1 — Quoted prices in active markets for identical assets or liabilities as of the reporting date. During 2009 and the first three months of 2010, Denbury had no Level 1 recurring measurements.
	•		Level 2 — Pricing inputs are other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reported date. Level 2 includes those financial instruments that are valued using models or other valuation methodologies. These models are primarily industry-standard models that consider various assumptions, including quoted forward prices for commodities, time value, volatility factors, and current market and contractual prices for the underlying instruments, as well as other relevant economic measures. Substantially all of these assumptions are observable in the marketplace throughout the full term of the instrument, can be derived from observable data, or are supported by observable levels at which transactions are executed in the marketplace.
	•		Level 3 — Pricing inputs include significant inputs that are generally less observable from objective sources. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value. Denbury’s oil and natural gas calls, puts, and short puts are average value options, which are not exchange–traded contracts. Settlement is determined by the average underlying price over a predetermined period of time. Denbury uses both observable and unobservable inputs in a Black-Scholes valuation model to determine fair value. Accordingly, these derivative instruments are

DENBURY RESOURCES INC.

Notes to Unaudited Condensed Consolidated Financial Statements

classified within the Level 3 valuation hierarchy. The observable inputs of Denbury’s valuation model include: (1) current market and contractual prices for the underlying instruments; (2) quoted forward prices for oil and natural gas; and (3) interest rates, such as a LIBOR curve for a term similar to the commodity derivative contract. The unobservable inputs of Denbury’s valuation model include volatility. The implied volatilities for Denbury’s calls, puts, and short puts with comparable strike prices are based on the settlement values from certain exchange-traded contracts. The implied volatilities for calls, puts, and short puts where there are no exchange-traded contracts with the same strike price are extrapolated from exchange-traded implied volatilities by an independent party.

     Denbury adjusts the valuations from the valuation model for nonperformance risk, using management’s estimate of the counterparty’s credit quality for asset positions and Denbury’s credit quality for liability positions. Denbury uses multiple sources of third-party credit data in determining counterparty nonperformance risk, including credit default swaps.

     The following table sets forth by level within the fair value hierarchy Denbury’s financial assets and liabilities that were accounted for at fair value on a recurring basis as of the periods indicated:

		Fair Value Measurements Using:
						Significant
		Quoted Prices				Other				Significant
		in Active				Observable				Unobservable
		Markets				Inputs				Inputs
In thousands		(Level 1)				(Level 2)				(Level 3)				Total
March 31, 2010
Assets:
Oil and natural gas derivative contracts		$	—			$	63,626			$	36,893			$	100,519
Liabilities:
Oil and natural gas derivative contracts			—				(98,038	)			(17,999	)			(116,037	)
Interest rate swaps			—				(3,552	)			—				(3,552	)
Total		$	—			$	(37,964	)		$	18,894			$	(19,070	)
December 31, 2009
Assets:
Oil derivative contracts		$	—			$	815			$	—			$	815
Liabilities:
Oil and natural gas derivative contracts			—				(129,559	)			—				(129,559	)
Total		$	—			$	(128,744	)		$	—			$	(128,744	)