-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EFi4nnMsLqy9TLEtOH1LVvN9TLbFxlS3fltqHYTibzFlOAAM38U67zbkSeOcVye0 RcHLyOHY5Y9G8oiL/VYybA== 0000899078-04-000220.txt : 20040312 0000899078-04-000220.hdr.sgml : 20040312 20040312172709 ACCESSION NUMBER: 0000899078-04-000220 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 20031231 FILED AS OF DATE: 20040312 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DENBURY RESOURCES INC CENTRAL INDEX KEY: 0000945764 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 752815171 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-12935 FILM NUMBER: 04667092 BUSINESS ADDRESS: STREET 1: 5100 TENNYSON PARKWAY STREET 2: SUITE 3000 CITY: PLANO STATE: TX ZIP: 75024 BUSINESS PHONE: 9726732000 MAIL ADDRESS: STREET 1: 5100 TENNYSON PARKWAY STREET 2: SUITE 3000 CITY: PLANO STATE: TX ZIP: 75024 FORMER COMPANY: FORMER CONFORMED NAME: NEWSCOPE RESOURCES LTD DATE OF NAME CHANGE: 19950627 10-K 1 denbury200310k.txt FORM 10-K FOR THE YEAR 2003 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 2003 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, 2003 OR [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from _________ to________ Commission file number 1-12935 DENBURY RESOURCES INC. (Exact name of Registrant as specified in its charter) Delaware 20-0467835 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 5100 Tennyson Parkway, Suite 3000, Plano, TX 75024 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (972) 673-2000 Securities registered pursuant to Section 12(b) of the Act:
================================================================================ Title of Each Class Name of Each Exchange on Which Registered - -------------------------------------------------------------------------------- Common Stock $.001 Par Value New York Stock Exchange ================================================================================
Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No__ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). [X] As of June 30, 2003, the aggregate market value of the registrant's Common Stock held by non-affiliates was approximately $466,620,000. The number of shares outstanding of the registrant's Common Stock as of March 1, 2004, was 54,460,365.
DOCUMENTS INCORPORATED BY REFERENCE Document Incorporated as to 1. Notice and Proxy Statement for the Annual Meeting of 1. Part III, Items 10, 11, 12, 13, 14 Shareholders to be held May 12, 2004. 2. Annual Report to Shareholders for the year 2. Part I, Item 1 and Part II, Items 5, 6, ended December 31, 2003. 7, 7A, 8
Denbury Resources Inc. 2003 Annual Report on Form 10-K Table of Contents Item Page - ---- ---- PART I 1. Business..................................................................... 3 2. Properties................................................................... 11 3. Legal Proceedings............................................................ 11 4. Submission of Matters to a Vote of Security Holders.......................... 11 PART II 5. Market for the Common Stock and Related Matters.............................. 11 6. Selected Financial Data...................................................... 12 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................................. 12 7A. Quantitative and Qualitative Disclosures About Market Risk................... 12 8. Financial Statements and Supplementary Data.................................. 12 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................................................. 12 9A. Controls and Procedures...................................................... 12 PART III 10. Directors and Executive Officers of the Company.............................. 12 11. Executive Compensation ...................................................... 13 12. Security Ownership of Certain Beneficial Owners and Management............... 13 13. Certain Relationships and Related Transactions............................... 13 14. Principal Accountant Fees and Services....................................... 13 PART IV 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K.............. 14 Signatures....................................................................16
2 Denbury Resources Inc. PART I Item 1. Business - ---------------- Website Access to Reports We make our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports, filed or furnished pursuant to section 13(a) or 15(d) of the Securities Exchange Act of 1934 available free of charge on or through our internet website, www.denbury.com, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. The Company Denbury Resources Inc. is a Delaware corporation, organized under Delaware General Corporation Law ("DGCL") engaged in the acquisition, development, operation and exploration of oil and natural gas properties in the Gulf Coast region of the United States, primarily in Louisiana, Mississippi and in the Gulf of Mexico. Our corporate headquarters is located at 5100 Tennyson Parkway, Suite 3000, Plano, Texas 75024, and our phone number is 972-673-2000. At December 31, 2003, we had 374 employees, 249 of which were employed in field operations or at the field offices. Our employee count does not include 200 employees of Genesis Energy, Inc. as of December 31, 2003 as its employees exclusively carry out the business activities of Genesis Energy, L.P., which we do not consolidate in our financial statements (See Note 1 to the Consolidated Financial Statements). Incorporation and Organization Denbury was originally incorporated in Canada in 1951. In 1992, we acquired all of the shares of a United States operating company, Denbury Management, Inc. ("DMI"), and subsequent to the merger we sold all of its Canadian assets. Since that time, all of our operations have been in the United States. In April 1999, our stockholders approved a move of our corporate domicile from Canada to the United States as a Delaware corporation. Along with the move, our wholly owned subsidiary, DMI, was merged into the new Delaware parent company, Denbury Resources Inc. This move of domicile did not have any effect on our operations or assets. Effective December 29, 2003, Denbury Resources Inc. changed its corporate structure to a holding company format. The purposes of creating the holding company structure were to better reflect the operating practices and methods of Denbury, to improve its economics, and to provide greater administrative and operational flexibility. As part of this restructure, Denbury Resources Inc. (predecessor entity) merged into a newly formed limited liability company, and survived as, Denbury Onshore, LLC, a Delaware limited liability company and an indirect subsidiary of the newly formed holding company, Denbury Holdings, Inc. Denbury Holdings, Inc. subsequently assumed the name Denbury Resources Inc. (new entity). The reorganization was structured as a tax free reorganization to Denbury's stockholders and all outstanding capital stock of the original public company was automatically converted into the identical number of and type of shares of the new public holding company. Stockholders' ownership interests in the business did not change as a result of the new structure and shares of the Company remain publicly traded under the same symbol (DNR) on the New York Stock Exchange. The new parent holding company is co-obligor (or guarantor, as appropriate) regarding the payment of principal and interest on Denbury's outstanding debt securities. Business Strategy As part of our corporate strategy, we believe in the following fundamental principles: o remain focused in specific regions; o acquire properties where we believe additional value can be created through a combination of exploitation, development, exploration and marketing; 3 Denbury Resources Inc. o acquire properties that give us a majority working interest and operational control or where we believe we can ultimately obtain it; o maximize the value of our properties by increasing production and reserves while reducing cost; and o maintain a highly competitive team of experienced and incentivized personnel. Acquisitions Information as to recent acquisitions by Denbury is set forth under Note 2, "Acquisitions," to the Consolidated Financial Statements. Such information is incorporated herein by reference. Oil and Gas Operations Information regarding selected operating data and a discussion of our significant operating areas and the primary properties within those three areas are set forth under "Selected Operating Data," appearing on pages 9 through 13 of the Annual Report to Shareholders and the Operations Sections appearing on pages 17 through 30 of the Annual Report. Such information is incorporated herein by reference. Oil and Gas Acreage, Productive Wells, Drilling Activity Information regarding oil and gas acreage, productive wells and drilling activity are set forth under "Selected Operating Data," appearing on page 13 of the Annual Report. Title to Properties Customarily in the oil and gas industry, only a perfunctory title examination is conducted at the time properties believed to be suitable for drilling operations are first acquired. Prior to commencement of drilling operations, a thorough drill site title examination is normally conducted, and curative work is performed with respect to significant defects. During acquisitions, title reviews are performed on all properties; however, formal title opinions are obtained on only the higher value properties. We believe that we have good title to our oil and natural gas properties, some of which are subject to minor encumbrances, easements and restrictions. Production Information regarding average production rates, unit sale prices and unit costs per BOE are set forth under "Management's Discussion and Analysis of Financial Condition and Results of Operations" appearing on pages 43 through 46 of the Annual Report. Geographic Segments All of our operations are in the United States. Significant Oil and Gas Purchasers and Product Marketing Oil and gas sales are made on a day-to-day basis under short-term contracts at the current area market price. The loss of any single purchaser would not be expected to have a material adverse effect upon our operations; however, the loss of a large single purchaser could potentially reduce the competition for our oil and natural gas production, which in turn could negatively impact the prices we receive. For the year ended December 31, 2003, we had two significant purchasers that each accounted for more than 10% of our total oil and natural gas revenues: Hunt Refining (15%) and Genesis Energy, L.P. (12%). For the year ended December 31, 2002, two purchasers each accounted for 10% or more of our oil and natural gas revenues: Hunt Refining (14%) and Genesis Energy, L.P. (11%). For the year ended December 31, 2001, four purchasers each accounted for 10% or more of our oil and natural gas revenues: Conoco (14%), Hunt Refining (13%), EOTT Energy (12%), and Dynegy (12%). 4 Denbury Resources Inc. Our ability to market oil and natural gas depends on many factors beyond our control, including the extent of domestic production and imports of oil and gas, the proximity of our gas production to pipelines, the available capacity in such pipelines, the demand for oil and natural gas, the effects of weather, and the effects of state and federal regulation. Our production is primarily from developed fields close to major pipelines or refineries and established infrastructure. As a result, we have not experienced any difficulty to date in finding a market for all of our production as it becomes available or in transporting our production to those markets; however, there is no assurance that we will always be able to market all of our production or obtain favorable prices. Oil Marketing The quality of our crude oil varies by area as well as the corresponding price received. In Heidelberg Field, our single largest field, and our other Eastern Mississippi properties, our oil production is primarily light to medium sour crude and sells at a significant discount to the NYMEX prices. In Western Mississippi, our CO2 operations, and in Louisiana, our oil production is primarily light sweet crude, which typically sells at a small discount or even at a premium to NYMEX. For the year ended December 31, 2003, the discount for our oil production from Heidelberg Field averaged $5.92 per Bbl and for our Eastern Mississippi properties as a whole the discount averaged $5.50 per Bbl relative to NYMEX oil prices. For Little Creek Field, the largest of our CO2 properties in Western Mississippi, we averaged a premium of $0.70 per Bbl over NYMEX oil prices, and for our Western Mississippi properties and Louisiana properties as a whole, we averaged a discount of $0.29 per Bbl relative to NYMEX oil prices. Natural Gas Marketing Virtually all of our natural gas production is close to existing pipelines and consequently, we generally have a variety of options to market our natural gas. We sell the majority of our natural gas on one year contracts with prices fluctuating month-to-month based on published pipeline indices with slight premiums or discounts to the index. Product Price Derivative Hedging Contracts To reduce our exposure to fluctuations in the prices of oil and natural gas, we currently and may in the future enter into hedging arrangements for a portion of our oil and natural gas production. Hedging arrangements expose us to risk of financial loss in some circumstances, including when: o production is less than expected; o the counter-party to the hedging contract defaults on its contract obligations (as was the case with respect to our hedges placed in 2001 with an Enron subsidiary as counterparty, which resulted in our suffering a loss); or o there is a change in the expected differential between the underlying price in the hedging agreement and actual prices received. In addition, these hedging arrangements may limit the benefit we would receive from increases in the prices for oil and natural gas. Information as to these activities is set forth under "Management's Discussion and Analysis of Financial Condition and Results of Operations - Market Risk Management," appearing on pages 51 through 52 of the Annual Report and in Note 9, "Derivative Hedging Contracts," to the Consolidated Financial Statements. Such information is incorporated herein by reference. 5 Denbury Resources Inc. Operating Environment Risk Factors Oil and Natural Gas Price Volatility Our future financial condition, results of operations and the carrying value of our oil and natural gas properties depends primarily upon the prices we receive for our oil and natural gas production. Oil and natural gas prices historically have been volatile and likely will continue to be volatile in the future, especially given current world geopolitical conditions. Our cash flow from operations is highly dependent on the prices that we receive for oil and natural gas. This price volatility also affects the amount of our cash flow available for capital expenditures and our ability to borrow money or raise additional capital. The amount we can borrow or have outstanding under our bank credit facility is subject to semi-annual redeterminations. In the short-term, our production is relatively balanced between oil and natural gas, but long-term, oil prices are likely to affect us more than natural gas prices because approximately 71% of our reserves are oil. The prices for oil and natural gas are subject to a variety of additional factors that are beyond our control. These factors include: o the level of consumer demand for oil and natural gas; o the domestic and foreign supply of oil and natural gas; o the ability of the members of the Organization of Petroleum Exporting Countries to agree to and maintain oil price and production controls; o the price of foreign oil and natural gas; o domestic governmental regulations and taxes; o the price and availability of alternative fuel sources; o weather conditions; o market uncertainty; o political conditions in oil and natural gas producing regions, including the Middle East; and o worldwide economic conditions. These factors and the volatility of the energy markets generally make it extremely difficult to predict future oil and natural gas price movements with any certainty. Also, oil and natural gas prices do not necessarily move in tandem. Declines in oil and natural gas prices would not only reduce revenue, but could reduce the amount of oil and natural gas that we can produce economically and, as a result, could have a material adverse effect upon our financial condition, results of operations, oil and natural gas reserves and the carrying values of our oil and natural gas properties. If the oil and natural gas industry experiences significant price declines, we may, among other things, be unable to meet our financial obligations or make planned expenditures. Since the end of 1998, oil prices have gone from near historic low prices to higher prices not experienced for over ten years. At the end of 1998, NYMEX oil prices were at historic lows of approximately $12.00 per Bbl, but during 1999 and 2000 NYMEX oil prices increased to an average of approximately $19.30 and $30.25 per Bbl, respectively. During 2001, NYMEX oil prices declined to an average of approximately $26.00 per Bbl and were at $19.84 per Bbl at the end of 2001. In 2002, NYMEX oil prices increased to average approximately $26.10 per Bbl and ended the year at $31.20 per Bbl. Throughout 2003, NYMEX oil prices remained at these higher prices, averaging approximately $31.00 per Bbl and ending the year at $32.52 per Bbl. Natural gas prices have experienced even more volatility over the same five year period. During 1999 natural gas prices averaged approximately $2.35 per Mcf and increased to an average of approximately $4.05 per Mcf during 2001, 6 Denbury Resources Inc. primarily due to low storage levels. At December 31, 2000, NYMEX natural gas prices were almost $10.00 per Mcf but declined steadily during 2001 as supplies of natural gas increased. As of year-end 2001, natural gas prices declined to $2.57 per Mcf. For 2002 and 2003, natural gas prices generally increased, averaging approximately $3.35 and $5.45 per Mcf, respectively, and ending 2002 at $4.79 per Mcf, and ending 2003 at $6.19 per Mcf. Oil and Natural Gas Drilling and Producing Operations Drilling activities are subject to many risks, including the risk that no commercially productive reservoirs will be discovered. There can be no assurance that new wells drilled by us will be productive or that we will recover all or any portion of our investment in such wells. Drilling for oil and natural gas may involve unprofitable efforts, not only from dry wells but also from wells that are productive but do not produce sufficient net reserves to return a profit after deducting drilling, operating and other costs. The seismic data and other technologies used by us do not provide conclusive knowledge, prior to drilling a well, that oil or natural gas is present or may be produced economically. The cost of drilling, completing and operating a well is often uncertain, and cost factors can adversely affect the economics of a project. Further, our drilling operations may be curtailed, delayed or canceled as a result of numerous factors, including: o unexpected drilling conditions; o title problems; o pressure or irregularities in formations; o equipment failures or accidents; o adverse weather conditions; o compliance with environmental and other governmental requirements; and o cost of, or shortages or delays in the availability of, drilling rigs, equipment and services. Our operations are subject to all the risks normally incident to the operation and development of oil and natural gas properties and the drilling of oil and natural gas wells, including encountering well blowouts, cratering and explosions, pipe failure, fires, formations with abnormal pressures, uncontrollable flows of oil, natural gas, brine or well fluids, release of contaminants into the environment and other environmental hazards and risks. In accordance with industry practice, we maintain insurance against some, but not all, of the risks described above in an amount we believe is adequate. However, the nature of these risks is such that some liabilities could exceed our policy limits, or, as in the case of environmental fines and penalties, cannot be insured. We could incur significant costs, related to these risks, that could have a material adverse effect on our results of operations and financial condition. Use of Carbon Dioxide in Tertiary Recovery Operations The crude oil production from our tertiary recovery projects depends on having access to sufficient amounts of carbon dioxide. Our ability to produce this oil would be hindered if our supply of carbon dioxide were limited due to problems with our current CO2 producing wells and facilities, including compression equipment, or catastrophic pipeline failure. Our anticipated future production is also dependent on our ability to increase the production volumes of CO2. If our crude oil production were to decline, it could have a material adverse effect on our financial condition and results of operations. Our CO2 tertiary recovery projects require a significant amount of electricity to operate the facilities. If these costs were to increase significantly, it could have a material adverse effect upon the profitability of these operations. 7 Denbury Resources Inc. Future Performance and Acquisitions Unless we can successfully replace the reserves that we produce, our reserves will decline, resulting eventually in a decrease in oil and natural gas production and lower revenues and cash flows from operations. We have historically replaced reserves through both drilling and acquisitions. In the future we may not be able to continue to replace reserves at acceptable costs. The business of exploring for, developing or acquiring reserves is capital intensive. We may not be able to make the necessary capital investment to maintain or expand our oil and natural gas reserves if our cash flows from operations are reduced, due to lower oil or natural gas prices or otherwise, or if external sources of capital become limited or unavailable. Further, the process of using CO2 for tertiary recovery and the related infrastructure requires significant capital investment, often one to two years prior to any resulting production and cash flows from these projects, heightening potential capital constraints. If we do not continue to make significant capital expenditures, or if outside capital resources become limited, we may not be able to maintain our growth rate. In addition, our drilling activities are subject to numerous risks, including the risk that no commercially productive oil or natural gas reserves will be encountered. Exploratory drilling involves more risk than development drilling because exploratory drilling is designed to test formations for which proved reserves have not been discovered. We are continually identifying and evaluating acquisition opportunities and we have successfully completed acquisitions throughout our history. Estimating the reserves and forecasted production from acquired properties is inherently difficult and may result in our inability to achieve or maintain targeted production levels. In that case, our ability to realize the total economic benefit from the acquisition may be reduced or eliminated. There can be no assurance that we will successfully consummate any future acquisitions or that such acquisitions of oil and natural gas properties will contain economically recoverable reserves or that any future acquisition will be profitably integrated into our operations. Competition and Markets We face competition from other oil and natural gas companies in all aspects of its business, including acquisition of producing properties and oil and gas leases, marketing of oil and gas, and obtaining goods, services and labor. Many of our competitors have substantially larger financial and other resources. Factors that affect our ability to acquire producing properties include available funds, available information about prospective properties and our standards established for minimum projected return on investment. Gathering systems are the only practical method for the intermediate transportation of natural gas. Therefore, competition for natural gas delivery is presented by other pipelines and gas gathering systems. Competition is also presented by alternative fuel sources, including heating oil and other fossil fuels. Because of the long-lived, high margin nature of our oil and gas reserves and management's experience and expertise in exploiting these reserves, we believe that we are effective in competing in the market. The demand for qualified and experienced field personnel to drill wells and conduct field operations, geologists, geophysicists, engineers and other professionals in the oil and natural gas industry can fluctuate significantly, often in correlation with oil and natural gas prices, causing periodic shortages. There have also been shortages of drilling rigs and other equipment, as demand for rigs and equipment has increased along with the number of wells being drilled. These factors also cause significant increases in costs for equipment, services and personnel. Higher oil and natural gas prices generally stimulate increased demand and result in increased prices for drilling rigs, crews and associated supplies, equipment and services. We cannot be certain when we will experience these issues and these types of shortages or price increases could significantly decrease our profit margin, cash flow and operating results or restrict our ability to drill those wells and conduct those operations that we currently have planned and budgeted. Federal and State Regulations Numerous federal and state laws and regulations govern the oil and gas industry. These laws and regulations are often changed in response to changes in the political or economic environment. Compliance with this evolving regulatory burden is often difficult and costly, and substantial penalties may be incurred for noncompliance. The following section describes some specific laws and regulations that may affect us. We cannot predict the impact of these or future legislative or regulatory initiatives. 8 Denbury Resources Inc. Management believes that we are in substantial compliance with all laws and regulations applicable to our operations and that continued compliance with existing requirements will not have a material adverse impact on us. The future annual capital costs of complying with the regulations applicable to our operations is uncertain and will be governed by several factors, including future changes to regulatory requirements. However, management does not currently anticipate that future compliance will have a materially adverse effect on our consolidated financial position or results of operations. Regulation of Natural Gas and Oil Exploration and Production Our operations are subject to various types of regulation at the federal, state and local levels. Such regulation includes requiring permits for drilling wells, maintaining bonding requirements in order to drill or operate wells and regulating the location of wells, the method of drilling and casing wells, the surface use and restoration of properties upon which wells are drilled, the plugging and abandoning of wells and the disposal of fluids used in connection with operations. Our operations are also subject to various conservation laws and regulations. These include the regulation of the size of drilling and spacing units or proration units and the density of wells which may be drilled in those units and the unitization or pooling of oil and gas properties. In addition, state conservation laws establish maximum rates of production from oil and gas wells, generally prohibit the venting or flaring of gas and impose certain requirements regarding the ratability of production. The effect of these regulations may limit the amount of oil and gas we can produce from its wells and may limit the number of wells or the locations at which we can drill. The regulatory burden on the oil and gas industry increases our costs of doing business and, consequently, affects its profitability. Federal Regulation of Sales Prices and Transportation The transportation and certain sales of natural gas in interstate commerce are heavily regulated by agencies of the U.S. federal government and are affected by the availability, terms and cost of transportation. In particular, the price and terms of access to pipeline transportation are subject to extensive U.S. federal and state regulation. The Federal Energy Regulatory Commission ("FERC") is continually proposing and implementing new rules and regulations affecting the natural gas industry. The stated purpose of many of these regulatory changes is to promote competition among the various sectors of the natural gas industry. The ultimate impact of the complex rules and regulations issued by FERC cannot be predicted. Some of FERC's proposals may, however, adversely affect the availability and reliability of interruptible transportation service on interstate pipelines. While our sales of crude oil, condensate and natural gas liquids are not currently subject to FERC regulation, our ability to transport and sell such products is dependent on certain pipelines whose rates, terms and conditions of service are subject to FERC regulation. Additional proposals and proceedings that might affect the natural gas industry are considered from time to time by Congress, FERC, state regulatory bodies and the courts. We cannot predict when or if any such proposals might become effective and their effect, if any, on our operations. Historically, the natural gas industry has been heavily regulated; therefore, there is no assurance that the less stringent regulatory approach recently pursued by FERC, Congress and the states will continue indefinitely into the future. Natural Gas Gathering Regulations State regulation of natural gas gathering facilities generally includes various safety, environmental and, in some circumstances, nondiscriminatory-take requirements. Although such regulation has not generally been affirmatively applied by state agencies, natural gas gathering may receive greater regulatory scrutiny in the future. Federal, State or Indian Leases Our operations on federal, state or Indian oil and gas leases are subject to numerous restrictions, including nondiscrimination statutes. Such operations must be conducted pursuant to certain on-site security regulations and other permits and authorizations issued by the Bureau of Land Management, Minerals Management Service ("MMS") and other agencies. 9 Denbury Resources Inc. Environmental Regulations Public interest in the protection of the environment has increased dramatically in recent years. In addition, over the last two years we have acquired significant assets offshore in the Gulf of Mexico which are regulated by the MMS. Our oil and natural gas production and saltwater disposal operations and our processing, handling and disposal of hazardous materials, such as hydrocarbons and naturally occurring radioactive materials are subject to stringent regulation. We could incur significant costs, including cleanup costs resulting from a release of hazardous material, third-party claims for property damage and personal injuries fines and sanctions, as a result of any violations or liabilities under environmental or other laws. Changes in or more stringent enforcement of environmental laws could also result in additional operating costs and capital expenditures. Various federal, state and local laws regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, directly impact oil and gas exploration, development and production operations, and consequently may impact the Company's operations and costs. These regulations include, among others, (i) regulations by the EPA and various state agencies regarding approved methods of disposal for certain hazardous and nonhazardous wastes; (ii) the Comprehensive Environmental Response, Compensation, and Liability Act, Federal Resource Conservation and Recovery Act and analogous state laws which regulate the removal or remediation of previously disposed wastes (including wastes disposed of or released by prior owners or operators), property contamination (including groundwater contamination), and remedial plugging operations to prevent future contamination; (iii) the Clean Air Act and comparable state and local requirements which may result in the gradual imposition of certain pollution control requirements with respect to air emissions from the operations of the Company; (iv) the Oil Pollution Act of 1990 which contains numerous requirements relating to the prevention of and response to oil spills into waters of the United States; (v) the Resource Conservation and Recovery Act which is the principal federal statute governing the treatment, storage and disposal of hazardous wastes; and (vi) state regulations and statutes governing the handling, treatment, storage and disposal of naturally occurring radioactive material ("NORM"). Management believes that we are in substantial compliance with applicable environmental laws and regulations. To date, we have not expended any material amounts to comply with such regulations, and management does not currently anticipate that future compliance will have a materially adverse effect on our consolidated financial position or results of operations. Estimated Net Quantities of Proved Oil and Gas Reserves and Present Value of Estimated Future Net Revenues Estimates of net proved oil and gas reserves as of December 31, 2003, 2002 and 2001 have been prepared by DeGolyer and MacNaughton, independent petroleum engineers located in Dallas, Texas. See Note 12, "Supplemental Oil and Natural Gas Disclosures," to the Consolidated Financial Statements and pages 9 and 10 of the Annual Report for disclosure of reserve data. Such information is incorporated herein by reference. There are numerous uncertainties inherent in estimating quantities of proved oil and natural gas reserves and their values, including many factors beyond our control. The reserve data included herein represents only estimates. Reserve engineering is a subjective process of estimating underground accumulations of oil and natural gas that cannot be measured in an exact manner. The accuracy of any reserve estimate is a function of the quality of available geological, geophysical, engineering and economic data, the precision of the engineering and judgment. As a result, estimates of different engineers often vary. The estimates of reserves, future cash flows and present value are based on various assumptions, including those prescribed by the SEC relating to oil and natural gas prices, drilling and operating expenses, capital expenditures, taxes and availability of funds, and are inherently imprecise. Actual future production, cash flows, taxes, development expenditures, operating expenses and quantities of recoverable oil and natural gas reserves may vary substantially from our estimates. Such variations may be significant and could materially affect estimated quantities and the present value of our proved reserves. Also, the use of a 10% discount factor for reporting purposes may not necessarily represent the most appropriate discount factor, given actual interest rates and risks to which Denbury or the oil and natural gas industry in general are subject. 10 Denbury Resources Inc. You should not assume that the present values referred to herein represent the current market value of our estimated oil and natural gas reserves. In accordance with requirements of the SEC, the estimates of present values are based on prices and costs as of the date of the estimates. Actual future prices and costs may be materially higher or lower than the prices and cost as of the date of the estimate. At December 31, 2003, approximately 39% of our estimated proved reserves are undeveloped. Recovery of undeveloped reserves requires significant capital expenditures and may require successful drilling operations. The reserve data assumes that we can and will make these expenditures and conduct these operations successfully, but these assumptions may not be accurate, and this may not occur. Quantities of proved reserves are estimated based on economic conditions, including oil and natural gas prices in existence at the date of assessment. Our reserves and future cash flows may be subject to revisions based upon changes in economic conditions, including oil and natural gas prices, as well as due to production results, results of future development, operating and development costs and other factors. Downward revisions of our reserves could have an adverse affect on its financial condition and operating results. Item 2. Properties - ------------------- See Item 1. Business - "Oil and Gas Operations." We also have various operating leases for rental of office space, office and field equipment, and vehicles. See Note "Off-Balance Sheet Arrangements-Commitments and Obligations" in Management's Discussion and Analysis of Financial Condition and 10, "Commitments and Contingencies," to the Consolidated Financial Statements for the future minimum rental payments. Such information is incorporated herein by reference. Item 3. Legal Proceedings - -------------------------- In the opinion of management, there are no material pending legal proceedings in the ordinary course of business to which Denbury or any of our 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. See Note 10, "Commitments and Contingencies," to the Consolidated Financial Statements for further disclosure regarding legal proceedings and contingencies. Such information is incorporated herein by reference. 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 2003. PART II Item 5. Market for the Common Stock and Related Matters - -------------------------------------------------------- Information as to the markets in which Denbury's common stock is traded, the quarterly high and low prices for such stock during the last two years, the restriction on the payment of dividends with respect to the common stock, and the approximate number of stockholders of record at March 1, 2004, is set forth under "Common Stock Trading Summary" appearing on page 86 of the Annual Report. Such information is incorporated herein by reference. As of March 1, 2004, affiliates of the Texas Pacific Group beneficially own approximately 17% of the Company's outstanding common stock and their representatives hold three of eight seats on Denbury's Board of Directors. As a result of its ownership and provisions of our certificate of incorporation and bylaws, the Texas Pacific Group has historically had the effective ability to elect all our directors and to control our business and affairs, including decisions with respect to the acquisition or disposition of assets, the future issuance of our common stock or other securities, dividend policy and decisions with respect to our drilling, operating and acquisition expenditure plans. While the Texas Pacific Group owns less than 50% of our outstanding common stock, they still are our largest single stockholder and still control such a large portion of our stock that their effective control will not be significantly diminished. Since our certificate of incorporation requires a two-thirds majority vote by the board of directors on most significant transactions, such as significant asset purchases and sales, issuances of equity and debt, changes in the board of directors and other matters, assuming that representatives of the Texas 11 Denbury Resources Inc. Pacific Group continue to hold over one-third of the board seats as they currently do, they will still be able to veto any decisions on these matters solely by themselves. Item 6. Selected Financial Data - -------------------------------- Selected Financial Data for Denbury for each of the last five years are set forth under "Financial Highlights" appearing on page 2 of the Annual Report. All such information is incorporated herein by reference. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - -------------------------------------------------------------------------------- Information as to Denbury's financial condition, changes in financial condition and results of operations and other matters is set forth in "Management's Discussion and Analysis of Financial Condition and Results of Operations," appearing on pages 33 through 55 of the Annual Report and is incorporated herein by reference. Item 7A. Quantitative and Qualitative Disclosures About Market Risk - ------------------------------------------------------------------- The information required by Item 7A is set forth under "Market Risk Management" in "Management's Discussion and Analysis of Financial Condition and Results of Operations," appearing on pages 51 through 52 of the Annual Report and is incorporated herein by reference. Item 8. Financial Statements and Supplementary Data - --------------------------------------------------- Denbury's consolidated financial statements, accounting policy disclosures, notes to financial statements, business segment information, unaudited quarterly information and independent auditors' report are presented on pages 56 through 86 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. Item 9A. Controls and Procedures - -------------------------------- We maintain disclosure controls and procedures and internal controls designed to ensure that information required to be disclosed in our filings under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. Our chief executive officer and chief financial officer have evaluated our disclosure controls and procedures as of the end of the period covered by this annual report on Form 10-K and have determined that such disclosure controls and procedures are effective in all material respects in providing to them on a timely basis material information required to be disclosed in this annual report. There have been no changes in internal controls over financial reporting during the period covered by this annual report on Form 10-K that have materially affected, or are reasonably likely to materially affect, Denbury's internal controls over financial reporting. 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 12 Denbury Resources Inc. a director of Denbury will be set forth in the "Election of Directors" segment of the Proxy Statement ("Proxy Statement") for the Annual Meeting of Shareholders to be held May 12, 2004, ("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 2003. Code of Ethics We have adopted a Code of Ethics for Senior Financial Officers and Principal Executive Officer. This Code of Ethics, including any amendments or waivers, is posted on our website at www.denbury.com. Item 11. Executive Compensation - ------------------------------- Information concerning remuneration received by Denbury's executive officers and directors will be presented under the caption "Statement of Executive Compensation" in the Proxy Statement for the Annual Meeting and is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management - ----------------------------------------------------------------------- Information as to Denbury's common stock that may be issued under our equity compensation plans, which plans have been approved by shareholders, and the number of shares of Denbury's common stock beneficially owned as of March 1, 2004, by each of its directors and nominees for director, its five most highly compensated executive officers and its directors and executive officers as a group will be presented under the captions "Equity Compensation Plan Information" and "Security Ownership of Certain Beneficial Owners and Management" in the Proxy Statement for the Annual Meeting and is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions - ------------------------------------------------------- Information on related transactions will be presented under the caption "Compensation Committee Interlocks and Insider Participation" and "Interests of Insiders in Material Transactions" in the Proxy Statement for the Annual Meeting and is incorporated herein by reference. Item 14. Principal Accountant Fees and Services - ----------------------------------------------- Information required to be presented on principal accountant fees and services will be presented under the caption "Relationship with Independent Accountants" in the Proxy Statement for the Annual Meeting and is incorporated herein by reference. 13 Denbury Resources Inc. PART IV Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K - ------------------------------------------------------------------------ (a) Financial Statements and Schedules. Financial statements and schedules filed as a part of this report are presented on pages 33 through 86 of the Annual Report and are incorporated herein by reference. Exhibits. The following exhibits are filed as a part of this report.
Exhibit No. Exhibit ----------- ------- 2(a) Agreement and Plan of Merger to Form Holding Company, dated as of December 22, 2003, but effective December 29, 2003 at 9:00 a.m. EST, by and among the Registrant, the Predecessor and Denbury Onshore, LLC (incorporated by reference as Exhibit 2.1 of the Registrant's Form 8-K filed December 29, 2003). 2(b) Agreement and Plan of Merger and Reorganization, by and among Denbury Resources Inc., Denbury Offshore, Inc., and Matrix Oil & Gas, Inc., and its shareholders, as of June 4, 2001 (incorporated by reference as Exhibit 2 of the Registrant's Current Report on Form 8-K, dated June 15, 2001). 3(a) Restated Certificate of Incorporation of Denbury Resources Inc. filed with the Delaware Secretary of State on December 29, 2003 (incorporated by reference as Exhibit 3.1 of the Registrant's Form 8-K filed December 29, 2003). 3(b) Bylaws of Denbury Resources Inc., a Delaware corporation, adopted December 29, 2003 (incorporated by reference as Exhibit 3.2 of the Registrant's Form 8-K filed December 29, 2003). 4(a) Indenture for $225 million of 7.5% Senior Subordinated Notes due 2013 among Denbury Resources Inc., certain of its subsidiaries and JP Morgan Chase Bank as trustee, dated March 25, 2003 (incorporated by reference from Exhibit 4(a) to the Registration Statement No. 333-105233-04 on Form S-4, dated May 14, 2003). 4(b) First Supplemental Indenture for $225 million of 7.5% Senior Subordinated Notes due 2013 dated as of December 29, 2003, among Denbury Resources Inc., certain of its subsidiaries, and the JP Morgan Chase Bank, as trustee (incorporated by reference as Exhibit 4.1 of the Registrant's Form 8-K dated December 29, 2003). 10(a)* Fourth Amended and Restated Credit Agreement, dated December 30, 2003 between the Company and Bank One, as Administrative Agent, and the financial institutions listed on Schedule 2.1 therein. 10(b)** Denbury Resources Inc. Amended and Restated Stock Option Plan (incorporated by reference as Exhibit 99 of our Registration Statement No. 333-106253 on Form S-8, dated June 18, 2003). 10(c)** Denbury Resources Inc. Stock Purchase Plan (incorporated by reference as Exhibit 4(g) of the Registrant's Registration Statement on Form S-8, No. 333-1006, dated February 2, 1996, with amendments incorporated by reference as exhibits of the Registrant's Registration Statements on Forms S-8, No. 333-70485, dated January 12, 1999, No. 333-39218, dated June 13, 2000 and No. 333-90398, dated June 13, 2002). 10(d)** Form of indemnification agreement between Denbury Resources Inc. and its officers and directors (incorporated by reference as Exhibit 10 of the Registrant's Form 10-Q for the quarter ended June 30, 1999).
14 Denbury Resources Inc.
Exhibit No. Exhibit ----------- ------- 10(e)** Denbury Resources Inc. Directors Compensation Plan (incorporated by reference as Exhibit 4 of the Registrant's Registration Statement on Form S-8, No. 333-39172, dated June 13, 2000 and amended March 2, 2001). 10(f)** Denbury Resources Severance Protection Plan, dated December 6, 2001 (incorporated by reference as Exhibit 10(f) of the Registrant's Form 10-K for the year ended December 31, 2000). 13* Annual Report to Shareholders. 21* List of Subsidiaries of Denbury Resources Inc. 23(a)* Consent of Deloitte & Touche LLP. 23(b)* Consent of DeGolyer and MacNaughton. 31(a)* Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31(b)* Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32* Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99* The summary of DeGolyer and MacNaughton's Report as of December 31, 2003, on oil and gas reserves (SEC Case) dated March 9, 2004.
* Filed herewith. ** Compensation arrangements. (b) Reports on Form 8-K. On November 3, 2003 we filed a Form 8-K, which included our press release on our third quarter earnings. On December 19, 2003 we filed a Form 8-K, which announced that Denbury and TPG entered into an underwriting agreement, pursuant to which TPG would sell 8 million shares of Denbury's common stock. Denbury did not receive any proceeds from this transaction. On December 29, 2003 we filed a Form 8-K, which announced that Denbury had completed an internal reorganization to a holding-company-organizational structure. 15 Denbury Resources Inc. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Denbury Resources Inc. has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. DENBURY RESOURCES INC. March 10, 2004 /s/ Phil Rykhoek ----------------------------------------------- Phil Rykhoek Sr. Vice President and Chief Financial Officer March 10, 2004 /s/ Mark C. Allen ----------------------------------------------- Mark C. Allen Vice President and Chief Accounting Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of Denbury Resources Inc. and in the capacities and on the dates indicated. March 10, 2004 /s/ Gareth Roberts ----------------------------------------------- Gareth Roberts Director, President and Chief Executive Officer (Principal Executive Officer) March 10, 2004 /s/ Phil Rykhoek ----------------------------------------------- Phil Rykhoek Sr. Vice President and Chief Financial Officer (Principal Financial Officer) March 10, 2004 /s/ Mark C. Allen ----------------------------------------------- Mark C. Allen Vice President and Chief Accounting Officer (Principal Accounting Officer) March 10, 2004 /s/ Wieland F. Wettstein ----------------------------------------------- Wieland F. Wettstein Director March 10, 2004 /s/ David I. Heather ----------------------------------------------- David I. Heather Director March 10, 2004 /s/ Carrie A. Wheeler ----------------------------------------------- Carrie A. Wheeler Director March 10, 2004 /s/ David B. Miller ----------------------------------------------- David B. Miller Director 16 EX-10 3 fourthamendcreditagt.txt EXHIBIT 10(A) EXHIBIT 10(a) FOURTH AMENDED AND RESTATED CREDIT AGREEMENT among DENBURY ONSHORE, LLC, as Borrower, DENBURY RESOURCES INC., as Parent Guarantor, The Financial Institutions Listed on Schedule 2.1 Hereto, as Banks, BANK ONE, NA, as Administrative Agent, CREDIT LYONNAIS NEW YORK BRANCH and FORTIS CAPITAL CORP., as Syndication Agents, and UNION BANK OF CALIFORNIA, N.A. and COMERICA BANK, as Documentation Agents $300,000,000 dated as of December 30, 2003 BANC ONE CAPITAL MARKETS, INC., as Sole Lead Arranger and Book Manager TABLE OF CONTENTS
Page No. Article I AMENDMENT AND RESTATEMENT...................................................................................2 Article II TERMS DEFINED..............................................................................................2 Section 2.1 Definitions.....................................................................................2 Section 2.2 Accounting Terms and Determinations............................................................24 Section 2.3 Petroleum Terms................................................................................25 Section 2.4 Money..........................................................................................25 Article III THE CREDIT...............................................................................................25 Section 3.1 Commitments....................................................................................25 Section 3.2 Method of Borrowing............................................................................28 Section 3.3 Method of Requesting Letters of Credit.........................................................29 Section 3.4 Notes..........................................................................................30 Section 3.5 Interest Rates; Payments.......................................................................30 Section 3.6 Mandatory Prepayments..........................................................................32 Section 3.7 Voluntary Prepayments..........................................................................32 Section 3.8 Voluntary Reduction of Commitments.............................................................32 Section 3.9 Termination of Commitments; Final Maturity of Revolving Loan...................................32 Section 3.10 Application of Payments........................................................................32 Section 3.11 Commitment Fee.................................................................................32 Section 3.12 Agency and other Fees..........................................................................32 Article IV GENERAL PROVISIONS........................................................................................33 Section 4.1 Delivery and Endorsement of Notes..............................................................33 Section 4.2 General Provisions as to Payments..............................................................33 Article V BORROWING BASE.............................................................................................34 Section 5.1 Reserve Report; Proposed Borrowing Base and Conforming Borrowing Base..........................34 Section 5.2 Scheduled Redeterminations of the Borrowing Base and the Conforming Borrowing Base; Procedures and Standards.....................................................................34 Section 5.3 Special Redetermination........................................................................35 Section 5.4 Borrowing Base Deficiency......................................................................36 Section 5.5 Initial Borrowing Base and Initial Conforming Borrowing Base...................................36 Article VI COLLATERAL AND GUARANTEES.................................................................................36 Section 6.1 Security.......................................................................................36 Section 6.2 Guarantees.....................................................................................38 Article VII CONDITIONS PRECEDENT.....................................................................................38 Section 7.1 Conditions to Amendment and Restatement and Initial Borrowing and Participation in Letter of Credit Exposure....................................................................38 Section 7.2 Conditions to Each Borrowing and each Letter of Credit.........................................41 Section 7.3 Agreements Regarding Initial Borrowing.........................................................42 Section 7.4 Materiality of Conditions......................................................................42
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Article VIII REPRESENTATIONS AND WARRANTIES..........................................................................43 Section 8.1 Corporate Existence and Power..................................................................43 Section 8.2 Credit Party and Governmental Authorization; Contravention.....................................43 Section 8.3 Binding Effect.................................................................................43 Section 8.4 Financial Information..........................................................................44 Section 8.5 Litigation.....................................................................................44 Section 8.6 ERISA..........................................................................................44 Section 8.7 Taxes and Filing of Tax Returns................................................................45 Section 8.8 Ownership of Properties Generally..............................................................45 Section 8.9 Mineral Interests..............................................................................45 Section 8.10 Licenses, Permits, Etc.........................................................................46 Section 8.11 Compliance with Law............................................................................46 Section 8.12 Full Disclosure................................................................................46 Section 8.13 Organizational Structure; Nature of Business...................................................46 Section 8.14 Environmental Matters..........................................................................47 Section 8.15 Burdensome Obligations.........................................................................47 Section 8.16 Fiscal Year....................................................................................48 Section 8.17 No Default.....................................................................................48 Section 8.18 Government Regulation..........................................................................48 Section 8.19 Insider........................................................................................48 Section 8.20 Gas Balancing Agreements and Advance Payment Contracts.........................................48 Section 8.21 Bond Documents.................................................................................48 Section 8.22 Closing Documents..............................................................................49 Article IX AFFIRMATIVE COVENANTS.....................................................................................49 Section 9.1 Information....................................................................................49 Section 9.2 Business of Credit Parties.....................................................................51 Section 9.3 Maintenance of Existence.......................................................................52 Section 9.4 Title Data.....................................................................................52 Section 9.5 Right of Inspection............................................................................52 Section 9.6 Maintenance of Insurance.......................................................................52 Section 9.7 Payment of Taxes and Claims....................................................................53 Section 9.8 Compliance with Laws and Documents.............................................................53 Section 9.9 Operation of Properties and Equipment..........................................................53 Section 9.10 Environmental Law Compliance...................................................................54 Section 9.11 ERISA Reporting Requirements...................................................................54 Section 9.12 Additional Documents...........................................................................54 Section 9.13 Environmental Review...........................................................................55 Section 9.14 Post-Closing Transactions......................................................................55 Article X NEGATIVE COVENANTS.........................................................................................55 Section 10.1 Incurrence of Debt.............................................................................55 Section 10.2 Restricted Payments............................................................................56 Section 10.3 Negative Pledge................................................................................56 Section 10.4 Consolidations and Mergers.....................................................................56 Section 10.5 Asset Dispositions.............................................................................56 Section 10.6 Amendments to Organizational and Other Documents...............................................57 Section 10.7 Use of Proceeds...............................................................................57 Section 10.8 Investments....................................................................................57
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Section 10.9 Transactions with Affiliates...................................................................57 Section 10.10 ERISA..........................................................................................57 Section 10.11 Hedge Transactions.............................................................................58 Section 10.12 Fiscal Year....................................................................................59 Section 10.13 Change in Business.............................................................................59 Section 10.14 Qualified Purpose..............................................................................59 Section 10.15 Obligations of Unrestricted Subsidiaries.......................................................59 Section 10.16 Borrowings Related to Bond Offering............................................................59 Article XI FINANCIAL COVENANTS.......................................................................................60 Section 11.1 Current Ratio of Borrower......................................................................60 Section 11.2 Minimum Consolidated Tangible Net Worth........................................................60 Section 11.3 Consolidated EBITDA to Consolidated Net Interest Expense.......................................60 Article XII DEFAULTS.................................................................................................60 Section 12.1 Events of Default..............................................................................60 Article XIII AGENTS..................................................................................................62 Section 13.1 Appointment; Nature of Relationship............................................................62 Section 13.2 Powers.........................................................................................62 Section 13.3 General Immunity...............................................................................63 Section 13.4 No Responsibility for Loans, Recitals, etc.....................................................63 Section 13.5 Action on Instructions of Banks................................................................63 Section 13.6 Employment of Agents and Counsel...............................................................63 Section 13.7 Reliance on Documents; Counsel.................................................................64 Section 13.8 Administrative Agent's Reimbursement and Indemnification.......................................64 Section 13.9 Notice of Default..............................................................................64 Section 13.10 Rights as a Bank...............................................................................64 Section 13.11 Bank Credit Decision...........................................................................65 Section 13.12 Successor Administrative Agent.................................................................65 Section 13.13 Delegation to Affiliates.......................................................................66 Section 13.14 Execution of Collateral Documents..............................................................66 Section 13.15 Collateral Releases............................................................................66 Section 13.16 Agents.........................................................................................66 Section 13.17 Bond Documents.................................................................................66 Article XIV CHANGE IN CIRCUMSTANCES..................................................................................67 Section 14.1 Increased Cost and Reduced Return..............................................................67 Section 14.2 Limitation on Type of Loans....................................................................68 Section 14.3 Illegality.....................................................................................68 Section 14.4 Treatment of Affected Loans....................................................................69 Section 14.5 Compensation...................................................................................69 Section 14.6 Taxes..........................................................................................70 Section 14.7 Discretion of Banks as to Manner of Funding....................................................71 Article XV MISCELLANEOUS.............................................................................................71 Section 15.1 Notices........................................................................................71 Section 15.2 No Waivers.....................................................................................72 Section 15.3 Expenses; Indemnification......................................................................72
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Section 15.4 Right of Set-off; Adjustments..................................................................73 Section 15.5 Amendments and Waivers.........................................................................74 Section 15.6 Survival.......................................................................................74 Section 15.7 Limitation on Interest.........................................................................74 Section 15.8 Invalid Provisions.............................................................................75 Section 15.9 Waiver of Consumer Credit Laws.................................................................75 Section 15.10 Assignments and Participations.................................................................75 Section 15.11 TEXAS LAW......................................................................................78 Section 15.12 Consent to Jurisdiction; Waiver of Immunities..................................................79 Section 15.13 Counterparts; Effectiveness....................................................................79 Section 15.14 No Third Party Beneficiaries...................................................................79 Section 15.15 COMPLETE AGREEMENT.............................................................................79 Section 15.16 WAIVER OF JURY TRIAL...........................................................................80 Section 15.17 Confidentiality................................................................................80
iv EXHIBITS -------- EXHIBIT A FORM OF AMENDMENT TO MORTGAGES EXHIBIT B FORM OF FACILITY GUARANTY EXHIBIT C FORM OF PROMISSORY NOTE EXHIBIT D FORM OF PARENT PLEDGE AGREEMENT EXHIBIT E FORM OF SUBSIDIARY PLEDGE AGREEMENT EXHIBIT F FORM OF REQUEST FOR BORROWING EXHIBIT G FORM OF REQUEST FOR LETTER OF CREDIT EXHIBIT H FORM OF NOTICE OF CONTINUATION OR CONVERSION EXHIBIT I FORM OF CERTIFICATE OF OWNERSHIP INTERESTS EXHIBIT J FORM OF CERTIFICATE OF PRINCIPAL EXECUTIVE AND FINANCIAL OFFICER EXHIBIT K FORM OF ASSIGNMENT AND ACCEPTANCE AGREEMENT EXHIBIT L FORM OF CERTIFICATE OF EFFECTIVENESS SCHEDULES --------- SCHEDULE 2.1 FINANCIAL INSTITUTIONS SCHEDULE 2.2 EXISTING MORTGAGES SCHEDULE 2.3 RESTRUCTURING TRANSACTIONS/POST-CLOSING TRANSACTIONS SCHEDULE 8.5 LITIGATION SCHEDULE 8.10 LICENSES, PERMITS, ETC. SCHEDULE 8.13 JURISDICTIONS, ETC. SCHEDULE 9.10 ENVIRONMENTAL DISCLOSURE v FOURTH AMENDED AND RESTATED CREDIT AGREEMENT -------------------------------------------- THIS FOURTH AMENDED AND RESTATED CREDIT AGREEMENT (this "Agreement") is entered into effective as of the 30th day of December, 2003, among DENBURY ONSHORE, LLC (successor by merger to Former Borrower (as hereinafter defined)), a Delaware limited liability company ("Borrower"), DENBURY RESOURCES INC., a newly formed Delaware corporation ("Parent"), BANK ONE, NA, with its main office in Chicago, Illinois, as Administrative Agent ("Administrative Agent"), CREDIT LYONNAIS NEW YORK BRANCH and FORTIS CAPITAL CORP., as Syndication Agents ("Syndication Agents"), UNION BANK OF CALIFORNIA, N.A. and COMERICA BANK, as Documentation Agents ("Documentation Agents") and the financial institutions listed on Schedule 2.1 hereto as Banks (individually a "Bank" and collectively "Banks"). W I T N E S S E T H: ------------------- WHEREAS, Borrower (as defined in the Existing Credit Agreement (as defined below) and referred to herein as "Former Borrower"), Administrative Agent, and each of the financial institutions named and defined therein as Banks (the "Existing Banks") and agents, are parties to that certain Third Amended and Restated Credit Agreement dated as of September 12, 2002, pursuant to which Existing Banks provided certain loans and extensions of credit to Former Borrower (as heretofore amended, the "Existing Credit Agreement"); and WHEREAS, Parent and its Subsidiaries have effected the Restructuring Transactions (as hereinafter defined), including, without limitation, the Borrower Merger (as hereinafter defined); and WHEREAS, as soon as practical upon obtaining regulatory approval, Parent and certain of its Subsidiaries intend to effect the Post-Closing Transactions (as hereinafter defined); and WHEREAS, concurrently with the closing and consummation of the Closing Transactions (as hereinafter defined), the parties hereto desire to amend and restate the Existing Credit Agreement in its entirety in the form of this Agreement, and Borrower desires to obtain Borrowings (as herein defined) (a) to refinance the indebtedness under the Existing Credit Agreement, and (b) for other purposes permitted herein; and WHEREAS, after giving effect to the Closing Transactions and the amendment and restatement of the Existing Credit Agreement pursuant to the terms hereof, the Commitment Percentage (as herein defined) of each Bank hereunder will be as set forth on Schedule 2.1 hereto; and WHEREAS, Banc One Capital Markets, Inc. has been appointed Sole Lead Arranger and Book Manager for the credit facility provided herein. NOW, THEREFORE, in consideration of the premises, the representations, warranties, covenants and agreements contained herein, and other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, Parent, Borrower, Administrative Agent and Banks agree as follows: 1 Article I AMENDMENT AND RESTATEMENT ------------------------- Subject to the satisfaction of each condition precedent contained in Section 7.1 hereof, the satisfaction of which shall be evidenced by the execution by Parent, Borrower and Administrative Agent of the Certificate of Effectiveness (as herein defined), the Existing Credit Agreement shall be amended and restated as of the Closing Date in the form of this Agreement. It is the intention of Parent, Borrower, Administrative Agent and Banks that this Agreement supersedes and replaces the Existing Credit Agreement in its entirety; provided that, (a) such amendment and restatement shall operate to renew, amend and modify certain of the rights and obligations of the parties under the Existing Credit Agreement as provided herein, but shall not act as a novation thereof, and (b) the Liens securing the Obligations under and as defined in the Existing Credit Agreement shall not be extinguished, but shall be carried forward and shall secure such obligations and indebtedness as renewed, amended, restated and modified hereby. Borrower hereby acknowledges, agrees and confirms that it has assumed (by operation of law or otherwise) all debt, liabilities and obligations, and agreed to perform, as primary obligor, all obligations, of Former Borrower under the Existing Credit Agreement and the other Loan Papers (therein defined and to the extent a party thereto), as renewed, amended, restated and modified hereby. Article II TERMS DEFINED ------------- Section 2.1 Definitions. The following terms, as used herein, have the following meanings: "Adjusted Eurodollar Rate" means, for any Eurodollar Loan for any Interest Period therefor, the rate per annum (rounded upwards, if necessary, to the nearest 1/100 of 1%) determined by Administrative Agent to be equal to the quotient obtained by dividing (a) the Eurodollar Rate for such Eurodollar Loan for such Interest Period by (b) 1 minus the Reserve Requirement for such Eurodollar Loan for such Interest Period. "Administrative Agent" means Bank One, NA, in its capacity as Administrative Agent for Banks hereunder or any successor thereto. "Advance Payment Contract" means any contract whereby any Credit Party either (a) receives or becomes entitled to receive (either directly or indirectly) any payment (an "Advance Payment") to be applied toward payment of the purchase price of Hydrocarbons produced or to be produced from Mineral Interests owned by any Credit Party and which Advance Payment is, or is to be, paid in advance of actual delivery of such production to or for the account of the purchaser regardless of such production, or (b) grants an option or right of refusal to the purchaser to take delivery of such production in lieu of payment, and, in either of the foregoing instances, the Advance Payment is, or is to be, applied as payment in full for such production when sold and delivered or is, or is to be, applied as payment for a portion only of the purchase price thereof or of a percentage or share of such production; provided that inclusion of the standard "take or pay" provision in any gas sales or purchase contract or any other similar contract shall not, in and of itself, constitute such contract as an Advance Payment Contract for the purposes hereof. 2 "Affiliate" means, as to any Person, any Subsidiary of such Person, or any other Person which, directly or indirectly, controls, is controlled by, or is under common control with, such Person and, with respect to any Credit Party, means, any director, executive officer, general partner or manager of such Credit Party and any Person who holds ten percent (10%) or more of the voting stock, partnership interests, membership interests or other ownership interests of such Credit Party. For the purposes of this definition, "control" (including, with correlative meanings, the terms "controlled by" and "under common control with"), as used with respect to any Person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities, membership interests or partnership interests, or by contract or otherwise. "Agent" means Administrative Agent, each Syndication Agent, each Documentation Agent, Sole Lead Arranger or Book Manager, and "Agents" means Administrative Agent, each Syndication Agent, each Documentation Agent, Sole Lead Arranger and Book Manager, collectively. "Agreement" means this Fourth Amended and Restated Credit Agreement as the same may hereafter be modified, amended, restated or supplemented from time to time. "Amendment to Mortgages" means an Amendment to and Ratification of Mortgages to be entered into between Borrower and Administrative Agent, substantially in the form of Exhibit A attached hereto, pursuant to which, among other things, the Existing Mortgages shall be amended to reflect the Restructuring Transactions (including, without limitation, the Borrower Merger) and the amendment and restatement of the Existing Credit Agreement pursuant hereto. "Applicable Environmental Law" means any federal, state or local law, common law, ordinance, regulation or policy, as well as order, decree, permit, judgment or injunction issued, promulgated, approved, or entered thereunder, relating to the environment, health and safety, or Hazardous Substances (including, without limitation, the use, handling, transportation, production, disposal, discharge or storage thereof) or to industrial hygiene or the environmental conditions on, under, or about any real property owned, leased or operated at any time by any Credit Party or any real property owned, leased or operated by any other party including, without limitation, soil, groundwater, and indoor and ambient air conditions. "Applicable Lending Office" means, for each Bank and for each Type of Loan, the "Lending Office" of such Bank (or of an affiliate of such Bank) designated for such Type of Loan on the signature pages hereof or such other office of such Bank (or an affiliate of such Bank) as such Bank may from time to time specify to Administrative Agent and Borrower by written notice in accordance with the terms hereof as the office by which Loans of such Type are to be made and maintained. 3 "Applicable Margin" means, on any date, with respect to each Type of Loan, an amount determined by reference to the ratio of Outstanding Credit to the Conforming Borrowing Base on such date in accordance with the table below:
==================================== ============================ ============================== Ratio of Outstanding Credit to Applicable Margin for Applicable Margin for Conforming Borrowing Base Eurodollar Loans Base Rate Loans ------------------------------------ ---------------------------- ------------------------------ <= .50 to 1 1.250% 0% --------------------------------- ---------------------------- ------------------------------ > .50 to 1 and <= .75 to 1 1.500% 0% ------------------------------------ ---------------------------- ------------------------------ > .75 to 1 and <= .90 to 1 1.750% .250% ------------------------------------ ---------------------------- ------------------------------ > .90 to 1 and <= 1.0 to 1 2.000% .500% ------------------------------------ ---------------------------- ------------------------------ > 1.0 to 1 2.375% .750% ==================================== ============================ ==============================
"Approved Fund" means any Fund that is administered or managed by (a) a Bank, (b) an Affiliate of a Bank, or (c) an entity or an Affiliate of an entity that administers or manages a Bank. "Approved Petroleum Engineer" means DeGolyer and MacNaughton or any other reputable firm of independent petroleum engineers as shall be selected by Borrower and approved by Required Banks, such approval not to be unreasonably withheld. "Assignment and Acceptance Agreement" has the meaning given such term in Section 15.10(c)(i). "Authorized Officer" means, as to any Person, its Chief Executive Officer, its President, its Chief Financial Officer, its Chief Accounting Officer, any of its Vice Presidents, its Treasurer or its corporate Secretary. "Availability" means, as of any date, the remainder of (a) the Borrowing Base in effect on such date, minus (b) the Outstanding Credit on such date. "Bank" means any financial institution reflected on Schedule 2.1 hereto as having a Commitment and its successors and permitted Assignees, and "Banks" shall mean all Banks. "Bank One" means Bank One, NA, a national banking association, with its main office in Chicago, Illinois, in its capacity as a Bank. "Base Rate" means, for any day, the rate per annum equal to the higher of (a) the Federal Funds Rate for such day plus one-half of one percent (.5%) and (b) the Prime Rate for such day. Any change in the Base Rate due to a change in the Prime Rate or the Federal Funds Rate shall be effective automatically and without notice to Borrower or any Bank on the effective date of such change in the Prime Rate or Federal Funds Rate. "Base Rate Loan" means the portion of the principal of the Revolving Loan bearing interest with reference to the Base Rate. "BOCM" means Banc One Capital Markets, Inc. 4 "Bond Disbursement" means an advance of proceeds of the Bonds by the Bond Purchaser to the Bond Trustee pursuant to the Bond Documents. "Bond Documents" means, collectively, the Bonds, the Bond Loan Agreement, the Bond Note, the Bond Purchase Agreement, the Bond Indenture and all other agreements, documents and instruments now or hereafter executed and/or delivered by, between or among any Credit Party, Bond Issuer, Bond Trustee and/or Bond Purchaser pursuant to the Bonds, the Bond Loan Agreement, the Bond Purchase Agreement, the Bond Indenture or otherwise in connection with the Bond Offering, each of which agreements, documents and instruments shall be in form and substance acceptable to Administrative Agent in its sole discretion. "Bond Exposure" means, at any time, without duplication, the aggregate amount of proceeds of the Bonds which have not been advanced at such time by the Bond Purchaser. The Bond Exposure of any Bank at any time shall be its Commitment Percentage of the total Bond Exposure at such time. "Bond Indenture" means that certain Indenture, dated as of May 1, 2003, between Bond Issuer and Bond Trustee. "Bond Issuer" means Mississippi Business Finance Corporation, a public corporation organized and existing under the laws of the State of Mississippi. "Bond Loan Agreement" means that certain Loan Agreement, dated as of May 1, 2003, by and between Bond Issuer and Borrower. "Bond Note" means that certain promissory note of Former Borrower, dated of even date with the Bond Loan Agreement, payable to the order of Bond Issuer, which promissory note has been pledged and assigned to Bond Trustee to secure the obligations of Bond Issuer under the Bond Indenture and the Bonds. "Bond Offering" means the issuance and sale by Bond Issuer of the Bonds to Bond Purchaser, the proceeds of which are to be advanced, from time to time, by Bond Purchaser to Bond Trustee to fund the "Project Fund" as created under, and defined in, the Bond Indenture, which Project Fund will be utilized to finance the Cost of the Project (as defined in the Bond Loan Agreement) located in the State of Mississippi. Upon the date of the issuance of the Bonds, Bond Purchaser shall be deemed to have sold to each Bank, and each Bank shall be deemed to have unconditionally and irrevocably purchased from Bond Purchaser, a participation in the Bonds and Bond Exposure equal to such Bank's Commitment Percentage of such Bonds and Bond Exposure. "Bond Purchase Agreement" means that certain Bond Purchase Agreement, dated as of May 1, 2003, among Bond Purchaser, Bond Issuer and Former Borrower. "Bond Purchaser" means Administrative Agent, as "Purchaser" of the Bonds under the Bond Purchase Agreement. "Bond Trustee" means JPMorgan Illinois Trust, successor trustee to Bank One, NA, in its capacity as "Trustee" under the Bond Indenture. 5 "Bonds" means, whether one or more, Bond Issuer's Taxable Industrial Development Revenue Bonds, Series 2003 (Denbury Resources Inc. Project), which Bonds shall (a) be in a maximum aggregate principal amount of $20,000,000, (b) bear interest at rates identical to the interest rates set forth in this Agreement, (c) have a maturity date of April 30, 2006, and (d) provide that Bond Purchaser's obligation to make advances of the proceeds thereof shall expire two (2) years from the date of issuance of such Bonds. "Book Manager" means BOCM, in its capacity as book manager for the credit facility hereunder or any successor thereto. "Borrower" means Denbury Onshore, LLC, a Delaware limited liability company, successor by merger to Former Borrower. "Borrower Merger" means the merger of Former Borrower with and into Borrower pursuant to, and in accordance with, the Borrower Merger Documents, with Borrower being the surviving entity of such merger. "Borrower Merger Agreement" means that certain Agreement and Plan of Merger to Form Holding Company, dated as of December 22, 2003. "Borrower Merger Certificate" means that certain Certificate of Agreement of Merger dated December 23, 2003, to be filed on or prior to the Closing Date, with the Secretary of State of Delaware, relating to the Borrower Merger, certified copies of which shall subsequently be filed in such jurisdictions as Administrative Agent shall require. "Borrower Merger Documents" means, collectively, the Borrower Merger Agreement, the Borrower Merger Certificate and all other material documents, instruments and agreements executed or delivered by Former Borrower or any Credit Party pursuant to the Borrower Merger Certificate or the Borrower Merger. "Borrowing" means any disbursement to Borrower under, or to satisfy the obligations of any Credit Party under, any of the Loan Papers. Any Borrowing which will constitute a part of the Base Rate Loan is referred to herein as a "Base Rate Borrowing," and any Borrowing which will constitute a Eurodollar Loan, is referred to herein as a "Eurodollar Borrowing." "Borrowing Base" has the meaning set forth in Section 5.1 hereof. "Borrowing Base Deficiency" means, as of any date, the amount, if any, by which the Outstanding Credit on such date exceeds the Borrowing Base in effect on such date; provided, that, for purposes of determining the existence and amount of any Borrowing Base Deficiency, Letter of Credit Exposure will not be deemed to be outstanding to the extent it is secured by cash in the manner contemplated by Section 3.1(b). "Borrowing Base Properties" means all Mineral Interests evaluated by Banks for purposes of establishing the Borrowing Base. 6 "Borrowing Date" means the Eurodollar Business Day or the Domestic Business Day, as the case may be, upon which the proceeds of any Borrowing are made available to Borrower or to satisfy any obligation of any Credit Party. "Certificate of Effectiveness" means a Certificate of Effectiveness in the form of Exhibit L attached hereto to be executed by Parent, Borrower and Administrative Agent upon the satisfaction of each of the conditions precedent contained in Section 7.1 hereof. "Certificate of Ownership Interests" means a Certificate of Ownership Interests in the form of Exhibit I attached hereto to be executed and delivered by an Authorized Officer of Borrower (after giving effect to the Closing Transactions) pursuant to Section 7.1(a)(xvi) hereof. "Change of Control" means the occurrence of any of the following, whether voluntary or involuntary, including by operation of law: (a) any Credit Party (other than Parent) shall cease to be a wholly owned direct or indirect Subsidiary of Parent, or (b) for any reason, any Person or group (as defined in Section 13(d)(3) or 14(d)(2) of the Exchange Act) other than the Texas Pacific Group shall become (i) the direct or indirect beneficial owner (as defined in Rule 13(d)(3) of the Exchange Act) of greater than thirty percent (30%) of the total voting power of all classes of capital stock then outstanding of Parent entitled (without regard to the occurrence of any contingency) to vote in elections of directors of Parent, and (ii) the largest shareholder of the total voting power of all classes of capital stock then outstanding of Parent entitled (without regard to the occurrence of any contingency) to vote in elections of directors of Parent. "Closing Date" means the date upon which all of the conditions precedent set forth in Section 7.1 have been satisfied, and Parent, Borrower and Administrative Agent have executed and delivered the Certificate of Effectiveness; provided, that, in no event shall such date be later than December 31, 2003. "Closing Documents" means all material documents, instruments and agreements executed or delivered by any Credit Party in connection with, or otherwise pertaining to, the Closing Transactions. "Closing Transactions" means the transactions to occur on or prior to the Closing Date, including, without limitation: (a) the completion of all of the Restructuring Transactions, (b) the assumption by Parent, as primary obligor, of the Permitted Subordinate Debt, (c) the refinancing in full, with proceeds of a Borrowing under this Agreement, of all Obligations accrued and outstanding under the Existing Credit Agreement as of the Closing Date, including, without limitation, (i) the entire outstanding principal balance of the "Revolving Loans" made (and as defined) thereunder, (ii) all accrued but unpaid interest, and (iii) all accrued but unpaid commitment and other fees, and (d) the payment of all fees and expenses of Administrative Agent in connection with the credit facilities provided herein. "Code" means the Internal Revenue Code of 1986, as amended. "Commitment" means, with respect to any Bank, the commitment of such Bank to lend its Commitment Percentage of the Total Commitment to Borrower pursuant to Section 3.1 hereof, as such Commitment may be terminated or reduced from time to time in accordance with the provisions hereof. On the Closing Date, the amount of each Bank's Commitment is the amount set forth opposite such Bank's 7 name on Schedule 2.1 hereto; provided, that after giving effect to any Assignment and Acceptance Agreement, the Commitment of each Bank shall be the amount set forth in the Register maintained by Administrative Agent pursuant to Section 15.10(c)(iv) hereof. "Commitment Fee Percentage" means, on any date, the percentage determined by reference to the ratio of Outstanding Credit to the Conforming Borrowing Base on such date in accordance with the table below:
===================================== ======================================= Ratio of Outstanding Credit to Commitment Fee Conforming Borrowing Base Percentage ------------------------------------- --------------------------------------- <= .50 to 1 .350% ------------------------------------- --------------------------------------- > .50 to 1 and <= .75 to 1 .375% ------------------------------------- --------------------------------------- > .75 to 1 and <= .90 to 1 .500% ----------------------------------- --------------------------------------- > .90 to 1 and <= 1.0 to 1 .500% ------------------------------------- --------------------------------------- > 1.0 to 1 .500% ===================================== =======================================
"Commitment Percentage" means, with respect to each Bank, the Commitment Percentage for such Bank set forth on Schedule 2.1 hereto; provided, that after giving effect to any Assignment and Acceptance Agreement, the Commitment Percentage of each Bank shall be the amount set forth in the Register maintained by Administrative Agent pursuant to Section 15.10(c)(iv) hereof. "Conforming Borrowing Base" has the meaning set forth in Section 5.1 hereof. "Consolidated Current Assets" means, for any Person at any time, the current assets of such Person and its Consolidated Subsidiaries at such time, plus, in the case of Borrower, the Availability at such time. For purposes of this definition, any non-cash gains on any Hedge Agreement resulting from the requirements of SFAS 133 for any period of determination shall be excluded from the determination of current assets of such Person and its Consolidated Subsidiaries. "Consolidated Current Liabilities" means, for any Person at any time, the current liabilities of such Person and its Consolidated Subsidiaries at such time, but, in the case of Borrower, excluding the current portion (if any) of the outstanding principal balance of the Revolving Loan. For purposes of this definition, any non-cash losses or charges on any Hedge Agreement resulting from the requirements of SFAS 133 for any period of determination shall be excluded from the determination of current liabilities of such Person and its Consolidated Subsidiaries. "Consolidated EBITDA" means, for any Person for any period: (a) Consolidated Net Income of such Person for such period; plus, to the extent deducted in the calculation of Consolidated Net Income, (b) the sum of (i) income or franchise Taxes paid or accrued; (ii) Consolidated Net Interest Expense; (iii) amortization, depletion and depreciation expense; (iv) any non-cash losses or charges on any Hedge Agreement resulting from the requirements of SFAS 133 for that period; and (v) other non-cash charges 8 (excluding accruals for cash expenses made in the ordinary course of business); less, to the extent included in the calculation of Consolidated Net Income, (c) the sum of (i) the income of any Person (other than wholly-owned Subsidiaries of such Person) unless such income is received by such Person in a cash distribution; (ii) gains or losses from sales or other dispositions of assets (other than Hydrocarbons produced in the normal course of business); (iii) any non-cash gains on any Hedge Agreement resulting from the requirements of SFAS 133 for that period; and (iv) extraordinary or non-recurring gains, but not net of extraordinary or non-recurring "cash" losses. "Consolidated Net Income" means, for any Person for any period, the net income (or loss) of such Person and its Consolidated Subsidiaries for such period. "Consolidated Net Interest Expense" means, for any Person for any period, the remainder of the following for such Person and its Consolidated Subsidiaries for such period: (a) interest expense, minus (b) interest income. "Consolidated Subsidiary" or "Consolidated Subsidiaries" means, for any Person, any Subsidiary or other entity the accounts of which would be consolidated with those of such Person in its consolidated financial statements. "Consolidated Tangible Net Worth" means, with respect to any Person at any time, (a) the consolidated shareholder's equity of such Person at such time, less (b) the consolidated Intangible Assets of such Person at such time. For purposes of this definition, (i) any non-cash gains, losses or charges on any Hedge Agreement resulting from the requirements of SFAS 133 for any period of determination shall be excluded from the determination of such shareholder's equity, and (ii) "Intangible Assets" means the amount (to the extent reflected in determining such consolidated shareholder's equity) of all unamortized debt discount and expense, unamortized deferred charges, goodwill, patents, trademarks, service marks, trade names, copyrights, organization expenses and other intangible items. "Continue," "Continuation" and "Continued" shall refer to the continuation pursuant to Section 3.5 hereof and/or Article XIV hereof of a Eurodollar Loan from one Interest Period to the next Interest Period. "Convert," "Conversion" and "Converted" shall refer to a conversion pursuant to Section 3.5 and/or Article XIV hereof of all or a portion of one Type of Revolving Loan into another Type of Revolving Loan. "Credit Parties" means, collectively, Parent, Borrower and each Restricted Subsidiary, and "Credit Party" means any one of the foregoing. "Current Financials" means (a) the annual audited consolidated balance sheet of Former Borrower and the related consolidated statements of operations and cash flows for the Fiscal Year ended December 31, 2002, and (b) the quarterly unaudited consolidated balance sheet of Former Borrower for the Fiscal Quarter ended September 30, 2003, and the related unaudited consolidated statements of operations and cash flows for the portion of Former Borrower's Fiscal Year ended September 30, 2003. 9 "Debt" means, for any Person at any time, without duplication, (a) all obligations of such Person for borrowed money, (b) all obligations of such Person evidenced by bonds, debentures, notes or other similar instruments, (c) all other indebtedness (including capitalized lease obligations, other than usual and customary oil and gas leases) of such Person on which interest charges are customarily paid or accrued, (d) all Guarantees by such Person, (e) the unfunded or unreimbursed portion of all letters of credit issued for the account of such Person, (f) any amount owed by such Person representing the deferred purchase price of property or services other than accounts payable incurred in the ordinary course of business and in accordance with customary trade terms and which are not more than one hundred twenty (120) days past the invoice date, and (g) all liability of such Person as a general partner of a partnership for obligations of such partnership of the nature described in (a) through (f) preceding. "Default" means any condition or event which constitutes an Event of Default or which with the giving of notice, lapse of time or both would, unless cured or waived, become an Event of Default. "Default Rate" means, in respect of any principal of the Revolving Loan or any other amount payable by Borrower under any Loan Paper which is not paid when due (whether at stated maturity, by acceleration, or otherwise), a rate per annum during the period commencing on the due date until such amount is paid in full equal to the sum of (i) three percent (3%), plus (ii) the Applicable Margin, plus (iii) the Base Rate as in effect from time to time (provided, that if such amount in default is principal of a Eurodollar Borrowing and the due date is a day other than the last day of an Interest Period therefor, the "Default Rate" for such principal shall be, for the period from and including the due date and to but excluding the last day of the Interest period therefor, the sum of (a) three percent (3%), plus (b) the Applicable Margin, plus (c) the Eurodollar Rate for such Borrowing for such Interest Period as provided in Section 3.5 hereof, and thereafter, the rate provided for above in this definition). "DG&M" means Denbury Gathering & Marketing, Inc., a Delaware corporation, which is a wholly owned Subsidiary of Parent. "Distribution" by any Person, means (a) with respect to any stock issued by such Person or any partnership, joint venture, limited liability company, membership or other interest of such Person, the retirement, redemption, purchase, or other acquisition for value of any such stock or partnership, joint venture, limited liability company, membership or other interest, (b) the declaration or payment of any dividend or other distribution on or with respect to any stock, partnership, joint venture, limited liability company, membership or other interest of any Person, and (c) any other payment by such Person with respect to such stock, partnership, joint venture, limited liability company, membership or other interest of such Person. "Documentation Agent" means Union Bank of California, N.A. or Comerica Bank in its capacity as Documentation Agent for Banks hereunder or any successor thereto, and "Documentation Agents" means Union Bank of California, N.A. and Comerica Bank, collectively, in their capacities as Documentation Agents for Banks hereunder. "Domestic Business Day" means any day except a Saturday, Sunday or other day on which national banks in Chicago, Illinois or Dallas, Texas, are authorized by Law to close. 9 "Domestic Lending Office" means, as to each Bank, (a) its office located at its address identified on Schedule 2.1 hereto as its Domestic Lending Office, (b) its office located at its address identified on the Register as its Domestic Lending Office, or (c) such other office as such Bank may hereafter designate as its Domestic Lending Office by notice to Borrower and Administrative Agent. "Environmental Complaint" means any complaint, summons, citation, notice, directive, order, claim, litigation, investigation, proceeding, judgment, letter or other communication from any federal, state or municipal authority or any other party against any Credit Party involving (a) a Hazardous Discharge from, onto or about any real property owned, leased or operated at any time by any Credit Party, (b) a Hazardous Discharge caused, in whole or in part, by any Credit Party or by any Person acting on behalf of or at the instruction of any Credit Party, or (c) any violation of any Applicable Environmental Law by any Credit Party. "Equity" means shares of capital stock or a partnership, profits, capital, member or other equity interest, or options, warrants or any other rights to substitute for or otherwise acquire the capital stock or a partnership, profits, capital, member or other equity interest of any Person. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. "ERISA Affiliate" means any corporation or trade or business under common control with any Credit Party as determined under section 4001(a)(14) of ERISA. "Eurodollar Business Day" means any Domestic Business Day on which commercial banks are open for international business (including dealings in dollar deposits) in the applicable Eurodollar interbank market. "Eurodollar Lending Office" means, as to each Bank, (a) its office, branch or affiliate located at its address identified on Schedule 2.1 hereto as its Eurodollar Lending Office, (b) its office, branch or affiliate located at its address identified on the Register as its Eurodollar Lending Office, or (c) such other office, branch or affiliate of such Bank as it may hereafter designate as its Eurodollar Lending Office by notice to Borrower and Administrative Agent. "Eurodollar Loans" means Revolving Loans that bear interest at rates based upon the Adjusted Eurodollar Rate. "Eurodollar Rate" means, for any Eurodollar Loan for any Interest Period therefor, the applicable British Bankers' Association LIBOR rate for deposits in Dollars as reported by any generally recognized financial information service as of 11:00 a.m. (London time) two (2) Eurodollar Business Days prior to the first day of such Interest Period, and having a maturity equal to such Interest Period; provided, that, if no such British Bankers' Association LIBOR rate is available to Administrative Agent, the applicable Eurodollar Rate for the relevant Interest Period shall instead be the rate determined by Administrative Agent to be the rate at which Bank One or one of its Affiliate banks offers to place deposits in Dollars with first-class banks in the London interbank market at approximately 11:00 a.m. (London time) two (2) Eurodollar Business Days prior to the first day of such Interest Period, in the appropriate amount of Bank One's relevant Eurodollar Loan and having a maturity equal to such Interest Period. 10 "Events of Default" has the meaning set forth in Section 12.1. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Exhibit" refers to an exhibit attached to this Agreement and incorporated herein by reference, unless specifically provided otherwise. "Existing Banks" has the meaning assigned to such term in the recitals hereto. "Existing Credit Agreement" has the meaning assigned to such term in the recitals hereto. "Existing Mortgages" means the mortgages, deeds of trust, security agreements, assignments, pledges, assignments and amendments to mortgages, amendments to mortgages and other documents, instruments and agreements described on Schedule 2.2 hereto, which establish Liens on certain Mineral Interests to secure the Obligations under and as defined in the Existing Credit Agreement. "Existing Reserve Report" means, collectively, (i) an engineering and economic analysis of certain of the Borrowing Base Properties prepared as of December 31, 2002, by DeGolyer and MacNaughton, and (ii) an engineering and economic analysis of all Borrowing Base Properties not covered by the Reserve Report described in clause (i), prepared as of June 30, 2003, by Former Borrower's in-house staff. "Facility Guaranty" means a Guaranty substantially in the form of Exhibit B attached hereto to be executed by Parent and (as applicable) each Subsidiary of Parent (other than Borrower) in favor of Banks, pursuant to which Parent and/or such Subsidiary of Parent guarantees payment and performance in full of the Obligations. "Federal Funds Rate" means, for any day, the rate per annum (rounded upwards, if necessary, to the nearest 1/100 of 1%) equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers on such day, as published by the Federal Reserve Bank of New York on the Domestic Business Day next succeeding such day; provided that (a) if the day for which such rate is to be determined is not a Domestic Business Day, the Federal Funds Rate for such day shall be such rate on such transactions on the next preceding Domestic Business Day as so published on the next succeeding Domestic Business Day, and (b) if such rate is not so published on such next succeeding Domestic Business Day, the Federal Funds Rate for any day shall be the average rate charged to Administrative Agent on such day on such transactions as determined by Administrative Agent. "Financial Officer" of any Person means its Chief Financial Officer; provided, that if no Person serves in such capacity, "Financial Officer" shall mean the highest ranking executive officer of such Person with responsibility for accounting, financial reporting, cash management and similar functions. "Fiscal Quarter" means the three (3) month periods ending on March 31, June 30, September 30 and December 31 of each Fiscal Year. 12 "Fiscal Year" means a twelve (12) month period ending December 31. "Fund" means any Person (other than a natural person) that is (or will be) engaged in making, purchasing, holding or otherwise investing in commercial loans and similar extensions of credit in the ordinary course of its business. "GAAP" means those generally accepted accounting principles and practices which are recognized as such by the Securities and Exchange Commission, the American Institute of Certified Public Accountants acting through its Accounting Principles Board or by the Financial Accounting Standards Board or through other appropriate boards or committees thereof and which are consistently applied for all periods after the Closing Date so as to properly reflect the financial condition, and the results of operations and changes in financial position, of Parent and its Consolidated Subsidiaries, except that any accounting principle or practice required to be changed by the said Securities and Exchange Commission, Accounting Principles Board or Financial Accounting Standards Board (or other appropriate board or committee thereof) in order to continue as a generally accepted accounting principle or practice may be so changed. "Gas Balancing Agreement" means any agreement or arrangement whereby any Credit Party, or any other party having an interest in any Hydrocarbons to be produced from Mineral Interests in which any Credit Party owns an interest, has a right to take more than its proportionate share of production therefrom. "Genesis Energy" means Genesis Energy, Inc., a Delaware corporation, which is a wholly owned Subsidiary of DG&M. "Genesis Transaction Documents" means the "Transaction Documents" as defined in that certain letter agreement (the "Genesis Letter Agreement"), dated as of October 28, 2003, by and among Former Borrower, Administrative Agent and Existing Banks. "Genesis VPP Transaction" has the meaning set forth in the Genesis Letter Agreement. "Governmental Authority" means any court or governmental department, commission, board, bureau, agency, or instrumentality of any nation or of any province, state, commonwealth, nation, territory, possession, county, parish, or municipality, whether now or hereafter constituted or existing. "Guarantee" by any Person means any obligation, contingent or otherwise, of such Person directly or indirectly guaranteeing any Debt or other obligation of any other Person and, without limiting the generality of the foregoing, any obligation, direct or indirect, contingent or otherwise, of such Person (a) to purchase or pay (or advance or supply funds for the purchase or payment of) such Debt or other obligation (whether arising by virtue of partnership arrangements, by agreement to keep-well, to purchase assets, goods, securities or services, to take-or-pay, or to maintain financial statement conditions, by "comfort letter" or other similar undertaking of support or otherwise) or (b) entered into for the purpose of assuring in any other manner the obligee of such Debt or other obligation of the payment thereof or to protect such obligee against loss in respect thereof (in whole or in part), provided, that the term "Guarantee" shall not include endorsements for collection or deposit in the ordinary course of business. 13 "Hazardous Discharge" means any releasing, spilling, leaking, pumping, pouring, emitting, emptying, discharging, injecting, escaping, leaching, disposing or dumping of any Hazardous Substance from or onto any real property owned, leased or operated at any time by any Credit Party or any real property owned, leased or operated by any other party. "Hazardous Substance" means any pollutant, toxic substance, hazardous waste, compound, element or chemical that is defined as hazardous, toxic, noxious, dangerous or infectious pursuant to any Applicable Environmental Law or which is otherwise regulated by any Applicable Environmental Law or is required to be investigated and/or remediated by or pursuant to any Applicable Environmental Law. "Hedge Agreements" means, collectively, any agreement, instrument, arrangement or schedule or supplement thereto evidencing any Hedge Transaction. "Hedge Transaction" means any commodity, interest rate, currency or other swap, option, collar, futures contract or other contract pursuant to which a Person hedges risks related to commodity prices, interest rates, currency exchange rates, securities prices or financial market conditions. Hedge Transactions expressly includes Oil and Gas Hedge Transactions. "Hydrocarbons" means oil, gas, casinghead gas, drip gasolines, natural gasoline, condensate, distillate, and all other liquid and gaseous hydrocarbons produced or to be produced in conjunction therewith, and all products, by-products and all other substances derived therefrom or the processing thereof, and all other minerals and substances, including, but not limited to, sulphur, lignite, coal, uranium, thorium, iron, geothermal steam, water, carbon dioxide, helium, and any and all other minerals, ores, or substances of value, and the products and proceeds therefrom, including, without limitation, all gas resulting from the in-situ combustion of coal or lignite. "Immaterial Title Deficiencies" means, with respect to Borrowing Base Properties, defects or clouds on title, discrepancies in reported net revenue and working interest ownership percentages and other Liens, defects, discrepancies and similar matters which do not, individually or in the aggregate, affect Borrowing Base Properties with a Recognized Value greater than five percent (5%) of the Recognized Value of all of such Borrowing Base Properties. "Indirect Subsidiary" has the meaning given such term in the definition of "Subsidiary Pledge Agreement." "Initial Borrowing Base" means a Borrowing Base in the amount of $220,000,000, which shall be in effect during the period commencing on the Closing Date and continuing until the first Redetermination after the Closing Date. "Initial Conforming Borrowing Base" means a Conforming Borrowing Base in the amount of $220,000,000, which shall be in effect during the period commencing on the Closing Date and continuing until the first Redetermination after the Closing Date. "Interest Period" means, with respect to each Eurodollar Borrowing and each Continuation of Eurodollar Loans and each Conversion of all or part of the Base Rate Loan to Eurodollar Loans, the period commencing on the date of such Borrowing, Continuation or Conversion and ending one (1), two (2), three (3) or 14 six (6), and, if available to all Banks, nine (9) or twelve (12) months thereafter, as Borrower may elect in the applicable Request for Borrowing or Notice of Continuation or Conversion; provided, that: (a) any Interest Period which would otherwise end on a day which is not a Eurodollar Business Day shall be extended to the next succeeding Eurodollar Business Day unless such Eurodollar Business Day falls in another calendar month, in which case such Interest Period shall end on the next preceding Eurodollar Business Day; (b) any Interest Period which begins on the last Eurodollar Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall, subject to clause (c) below, end on the last Eurodollar Business Day of a calendar month; (c) if any Interest Period includes a date on which any payment of principal of the Eurodollar Loans which are the subject of such Borrowing, Continuation or Conversion is required to be made hereunder, but does not end on such date, then (i) the principal amount of such Eurodollar Loans required to be repaid on such date shall have an Interest Period ending on such date, and (ii) the remainder of each such Eurodollar Loans shall have an Interest Period determined as set forth above; and (d) no Interest Period shall extend past the Termination Date. "Investment" means, with respect to any Person, any loan, advance, extension of credit, capital contribution to, investment in or purchase of the stock or other securities of, or interests in, any other Person; provided, that, "Investment" shall not include current customer and trade accounts which are payable in accordance with customary trade terms. "Laws" means all applicable statutes, laws, ordinances, regulations, orders, writs, injunctions, or decrees of any state, commonwealth, nation, territory, possession, county, township, parish, municipality or Governmental Authority. "Lending Office" means, as to any Bank, its Domestic Lending Office or its Eurodollar Lending Office, as the context may require. "Letter of Credit Exposure" of any Bank means such Bank's aggregate participation in the unfunded portion and the funded but unreimbursed portion of Letters of Credit outstanding at any time. "Letter of Credit Fee" means, with respect to any Letter of Credit issued hereunder, a fee in an amount equal to the greater of (a) $500, or (b) a percentage of the stated amount of such Letter of Credit (calculated on a per annum basis based on the stated term of such Letter of Credit) determined by reference to the ratio of the Outstanding Credit to the Conforming Borrowing Base in effect on the date such Letter of Credit is issued in accordance with the table below: 15
===================================== ======================================= Ratio of Outstanding Credit to Per Annum Letter of Credit Fee Conforming Borrowing Base Percentage ------------------------------------- --------------------------------------- <=. 50 to 1 1.250% ------------------------------------- --------------------------------------- >. 50 to 1 and <= .75 to 1 1.500% ------------------------------------- --------------------------------------- >. 75 to 1 and <= .90 to 1 1.750% ------------------------------------- --------------------------------------- > .90 to 1 and <= 1.0 to 1 2.000% ------------------------------------- --------------------------------------- > 1.0 to 1 2.375% ===================================== =======================================
"Letter of Credit Fronting Fee" means, with respect to any Letter of Credit issued hereunder, a fee equal to one eighth of one percent (.125%) per annum of the stated amount of such Letter of Credit. "Letter of Credit Issuer" has the meaning set forth in Section 3.1(b). "Letters of Credit" means letters of credit issued for the account of Borrower pursuant to Section 3.1(b). "Lien" means, with respect to any asset, any mortgage, lien, pledge, charge, security interest, financing statement or encumbrance of any kind in respect of such asset. For the purposes of this Agreement, the Credit Parties shall be deemed to own subject to a Lien any asset which is acquired or held subject to the interest of a vendor or lessor under any conditional sale agreement, capital lease or other title retention agreement relating to such asset. "Loan Papers" means this Agreement, the Notes, each Facility Guaranty which may now or hereafter be executed, each Parent Pledge Agreement which may now or hereafter be executed, each Subsidiary Pledge Agreement which may now or hereafter be executed, the Existing Mortgages (as amended by the Amendments to Mortgages), all Mortgages now or at any time hereafter delivered pursuant to Section 6.1, the Amendments to Mortgages, and all other certificates, documents or instruments delivered in connection with this Agreement, as the foregoing may be amended from time to time. "Margin Regulations" means Regulations T, U and X of the Board of Governors of the Federal Reserve System, as in effect from time to time. "Margin Stock" means "margin stock" as defined in Regulation U. "Marine" means Denbury Marine, L.L.C., a Louisiana limited liability company, which is a wholly owned Subsidiary of Operating. "Material Adverse Change" means any circumstance or event that has or would reasonably be expected to have a Material Adverse Effect. "Material Adverse Effect" means a material adverse effect on (a) the assets, liabilities, financial condition, results of operations or prospects of any Credit Party, or the Credit Parties taken as a whole, (b) the right or ability of any Credit Party to fully, completely and timely perform its obligations under the Loan Papers, (c) the validity or enforceability of any Loan Paper against any Credit Party which is a party thereto, or (d) the 16 validity, perfection or priority of any material Lien intended to be created under or pursuant to any Loan Paper to secure the Obligations. "Material Agreement" means any material written or oral agreement, contract, commitment, or understanding to which a Person is a party, by which such Person is directly or indirectly bound, or to which any assets of such Person may be subject, which is not cancelable by such Person upon notice of thirty (30) days or less without liability for further payment other than nominal penalty. "Material Gas Imbalance" means, with respect to all Gas Balancing Agreements to which any Credit Party is a party or by which any Mineral Interest owned by any Credit Party is bound, a net gas imbalance to any Credit Party in excess of $2,000,000. "Maximum Lawful Rate" means, for each Bank, the maximum rate (or, if the context so permits or requires, an amount calculated at such rate) of interest which, at the time in question would not cause the interest charged on the portion of the Revolving Loan owed to such Bank at such time to exceed the maximum amount which such Bank would be allowed to contract for, charge, take, reserve, or receive under applicable Laws after taking into account, to the extent required by applicable Laws, any and all relevant payments or charges under the Loan Papers. To the extent the Laws of the State of Texas are applicable for purposes of determining the "Maximum Lawful Rate," such term shall mean the "indicated rate ceiling" from time to time in effect under Chapter 303 of the Texas Finance Code, as amended, substituted for or restated, or, if permitted by applicable Law and effective upon the giving of the notices required by such Chapter 303 (or effective upon any other date otherwise specified by applicable Law), the "quarterly ceiling" or "annualized ceiling" from time to time in effect under such Chapter 303, whichever Administrative Agent (with the approval of Required Banks) shall elect to substitute for the "indicated rate ceiling," and vice versa, each such substitution to have the effect provided in such Chapter 303, and Administrative Agent (with the approval of Required Banks) shall be entitled to make such election from time to time and one or more times and, without notice to Borrower, to leave any such substitute rate in effect for subsequent periods in accordance with such Chapter 303. "Mineral Interests" means rights, estates, titles, and interests in and to oil and gas leases and any oil and gas interests, royalty and overriding royalty interest, production payment, net profits interests, oil and gas fee interests, and other rights therein, including, without limitation, any reversionary or carried interests relating to the foregoing, together with rights, titles, and interests created by or arising under the terms of any unitization, communization, and pooling agreements or arrangements, and all properties, rights and interests covered thereby, whether arising by contract, by order, or by operation of Laws, which now or hereafter include all or any part of the foregoing. "Mortgages" means all mortgages, deeds of trust, amendments to mortgages, security agreements, assignments of production, pledge agreements, collateral mortgages, collateral chattel mortgages, collateral assignments, financing statements and other documents, instruments and agreements evidencing, creating, perfecting or otherwise establishing the Liens required by Section 6.1 hereof. All Mortgages shall be in form and substance satisfactory to Administrative 17 Agent in its sole discretion. The term "Mortgages" shall include, without limitation, the Existing Mortgages, as amended pursuant to the Amendments to Mortgages. "Note" means a promissory note of Borrower payable to the order of a Bank, in substantially the form of Exhibit C hereto, in the amount of such Bank's Commitment, evidencing the obligation of Borrower to repay to such Bank its Commitment Percentage of the Revolving Loan, together with all modifications, extensions, renewals, and rearrangements thereof, and "Notes" means all of such Notes collectively. "Notice of Continuation or Conversion" has the meaning set forth in Section 3.5(c). "Obligations" means all present and future indebtedness, obligations and liabilities, and all renewals and extensions thereof, or any part thereof, of each Credit Party to Administrative Agent or to any Bank or any Affiliate of any Bank arising pursuant to the Loan Papers or pursuant to any Hedge Agreement or Hedge Transaction entered into with any Bank or any Affiliate of any Bank, and all interest accrued thereon and costs, expenses, and attorneys' fees incurred in the enforcement or collection thereof, regardless of whether such indebtedness, obligations and liabilities are direct, indirect, fixed, contingent, liquidated, unliquidated, joint, several or joint and several. "Oil & Gas Hedge Transaction" means a Hedge Transaction pursuant to which any Person hedges the price to be received by it for future production of Hydrocarbons. "Offshore" means (a) prior to the consummation of the Post-Closing Transactions pursuant to, and in accordance with, the terms and conditions set forth in Section 9.14, Denbury Offshore, Inc., a Delaware corporation, which is a wholly owned Subsidiary of Parent, and (b) from and after the consummation of the Post-Closing Transactions pursuant to, and in accordance with, the terms of conditions set forth in Section 9.14, Denbury Offshore LLC, a Delaware limited liability company, which is a wholly owned Subsidiary of Operating. "Operating" means Denbury Operating Company, a Delaware corporation, which is a wholly owned Subsidiary of Parent. "Outstanding Credit" means, on any date, the sum of (a) the aggregate outstanding Letter of Credit Exposure on such date including the Letter of Credit Exposure attributable to Letters of Credit to be issued on such date, plus (b) the aggregate outstanding principal balance of the Revolving Loan on such date, including the amount of any Borrowing to be made on such date. "Parent" means Denbury Resources Inc., a Delaware corporation formed in connection with the Restructuring Transactions. "Parent Pledge Agreement" means a Pledge Agreement substantially in the form of Exhibit D attached hereto (with applicable conforming changes) to be executed by Parent pursuant to which Parent shall pledge to Administrative Agent, for the ratable benefit of Banks, all of the issued and outstanding Equity owned by Parent of each Subsidiary of Parent described therein to secure the Obligations. 18 "Participant" has the meaning given such term in Section 15.10(b). "PBGC" means the Pension Benefit Guaranty Corporation or any entity succeeding to any or all of its functions under ERISA. "Permitted Encumbrances" means with respect to any asset: (a) Liens securing the Obligations; (b) minor defects in title which do not secure the payment of money and otherwise have no material adverse effect on the value or the operation of the subject property, and for the purposes of this Agreement, a minor defect in title shall include, but not be limited to, easements, rights-of-way, servitudes, permits, surface leases and other similar rights in respect of surface operations, and easements for pipelines, streets, alleys, highways, telephone lines, power lines, railways and other easements and rights-of-way, on, over or in respect of any of the properties of any Credit Party that are customarily granted in the oil and gas industry; (c) inchoate statutory or operators' Liens securing obligations for labor, services, materials and supplies furnished to Mineral Interests which are not delinquent (except to the extent permitted by Section 9.7); (d) mechanic's, materialmen's, warehouseman's, journeyman's and carrier's Liens and other similar Liens arising by operation of Law in the ordinary course of business which are not delinquent (except to the extent permitted by Section 9.7); (e) Liens for Taxes or assessments not yet due or not yet delinquent, or, if delinquent, that are being contested in good faith in the normal course of business by appropriate action, as permitted by Section 9.7; (f) lease burdens payable to third parties which are deducted in the calculation of discounted present value in the Reserve Report including, without limitation, any royalty, overriding royalty, net profits interest, production payment, carried interest or reversionary working interest; (g) "Permitted Encumbrances" as that term is defined in the Existing Mortgages; and (h) Liens, charges and encumbrances upon Borrower's assets, other than Proved Mineral Interests, which in the aggregate, do not have a value in excess of $1,000,000. "Permitted Investments" means (a) readily marketable direct obligations of the United States of America (or investments in mutual funds or similar funds which invest solely in such obligations), (b) fully insured time deposits and certificates of deposit with maturities of one year or less of any commercial bank operating in the United States having capital and surplus in excess of 19 $500,000,000, (c) commercial paper of a domestic issuer if at the time of purchase such paper is rated in one of the two highest ratings categories of Standard and Poor's Corporation or Moody's Investors Service, (d) Investments by any Credit Party in a Subsidiary of Parent that has provided a Facility Guaranty and the Equity of which has been pledged to Administrative Agent pursuant to a Parent Pledge Agreement or a Subsidiary Pledge Agreement, and (e) other Investments; provided, that, the aggregate amount of all other Investments made pursuant to this clause (e) outstanding at any time shall not exceed $5,000,000 (measured on a cost basis). "Permitted Subordinate Debt" means Debt of Borrower resulting from a single issue of Borrower's 7.5% Senior Subordinated Notes Due 2013 in an aggregate outstanding principal balance of not greater than $225,000,000, and which (a) is fully subordinated to the Obligations pursuant to subordination provisions which have been approved by the Existing Banks prior to the date hereof, (b) is not subject to negative covenants or events of default (or other provisions which have the same effect as negative covenants or events of default) which have not been approved by the Existing Banks prior to the date hereof, and (c) Debt has been assumed by Parent as a co-obligor with Borrower pursuant to that certain First Supplemental Indenture, dated as of December 29, 2003. "Person" means an individual, a corporation, a partnership, a limited liability company, an association, a trust or any other entity or organization, including a Government Authority. "Plan" means an employee benefit plan within the meaning of section 3(3) of ERISA, and any other similar plan, policy or arrangement, including an employment contract, whether formal or informal and whether legally binding or not, under which any Credit Party or an ERISA Affiliate of a Credit Party has any current or future obligation or liability or under which any present or former employee of any Credit Party or an ERISA Affiliate of a Credit Party, or such present or former employee's dependents or beneficiaries, has any current or future right to benefits resulting from the present or former employee's employment relationship with any Credit Party or an ERISA Affiliate of a Credit Party. "Post-Closing Transactions" means those transactions more particularly described on Part II of Schedule 2.3 attached hereto, which transactions may be consummated, at the sole option of Borrower, at any time on or prior to March 31, 2004. "Prime Rate" means the per annum rate of interest established from time to time by Administrative Agent as its prime rate, which rate may not be the lowest rate of interest charged by Administrative Agent to its customers. "Proved Mineral Interests" means, collectively, Proved Producing Mineral Interests, Proved Nonproducing Mineral Interests, and Proved Undeveloped Mineral Interests. "Proved Nonproducing Mineral Interests" means all Mineral Interests which constitute proved developed nonproducing reserves. "Proved Producing Mineral Interests" means all Mineral Interests which constitute proved developed producing reserves. 20 "Proved Undeveloped Mineral Interests" means all Mineral Interests which constitute proved undeveloped reserves. "Purchasers" has the meaning given such term in Section 15.10(c). "Qualified Purpose" means (i) the purchase by any Credit Party of Proved Mineral Interests, or (ii) capital expenditures made by any Credit Party to maintain, enhance or develop Proved Mineral Interests owned by any Credit Party; provided, that, the portion of the aggregate amount of all Borrowings made during any period during which Section 10.14 is in effect hereunder which is utilized to purchase Proved Mineral Interests which is in excess of the "qualified amount" will not be deemed to be utilized for a "Qualified Purpose." As used herein, "qualified amount" means, with respect to Proved Mineral Interests acquired with the proceeds of Borrowings made during any period during which Section 10.14 is in effect hereunder, an amount equal to two hundred percent (200%) of the Recognized Value of that portion of such Proved Mineral Interests which constitute Proved Producing Mineral Interests. "Quarterly Date" means the last day of each March, June, September and December. "Recognized Value" means, with respect to Mineral Interests, the portion of the Borrowing Base which Bank One attributes to such Mineral Interests for purposes of the most recent redetermination of the Borrowing Base pursuant to Article V hereof (or for purposes of determining the initial Borrowing Base in the event no such redetermination has occurred), based upon the discounted present value of the estimated net cash flow to be realized from the production of Hydrocarbons from such Mineral Interests. "Redetermination" means any Scheduled Redetermination or Special Redetermination. "Redetermination Date" means (a) with respect to any Scheduled Redetermination, each October 1 and April 1, commencing April 1, 2004, and (b) with respect to any Special Redetermination, the first day of the first month which is not less than twenty (20) Domestic Business Days following the date of a request for a Special Redetermination. "Register" has the meaning given such term in Section 15.10(c)(iv). "Regulation A" means Regulation A of the Board of Governors of the Federal Reserve System, 12 C.F.R. Part 221, as in effect from time to time. "Regulation D" means Regulation D of the Board of Governors of the Federal Reserve System, 12 C.F.R. Part 221, as in effect from time to time. "Regulation U" means Regulation U of the Board of Governors of the Federal Reserve System, 12 C.F.R. Part 221, as in effect from time to time. "Request for Borrowing" has the meaning set forth in Section 3.2(a). "Request for Letter of Credit" has the meaning set forth in Section 3.3(a). 21 "Required Banks" means Banks holding at least sixty-six and two-thirds percent (66 2/3%) of the Total Commitment. "Required Consolidated Tangible Net Worth" means, initially, $325,000,000; provided, that, the Required Consolidated Tangible Net Worth shall increase (but not decrease) above the Required Consolidated Tangible Net Worth previously in effect pursuant to this definition (i) on each Quarterly Date (commencing December 31, 2003) by an amount equal to fifty percent (50%) of Parent's Consolidated Net Income for the Fiscal Quarter then ended, and (ii) on the date of any issuance by Parent of its equity securities by an amount equal to fifty percent (50%) of the net proceeds received by Parent from the issuance of such securities. "Required Reserve Value" means Proved Mineral Interests that have a Recognized Value of not less than eighty-five percent (85%) of the Recognized Value of all Proved Mineral Interests held by Borrower and its Subsidiaries. "Reserve Report" means an unsuperseded engineering analysis of the Mineral Interests owned by any Credit Party, in form and substance reasonably acceptable to Required Banks, prepared in accordance with customary and prudent practices in the petroleum engineering industry and Financial Accounting Standards Board Statement 69. Each Reserve Report required to be delivered by February 28 of each year pursuant to Section 5.1 shall be prepared by the Approved Petroleum Engineer. Each other Reserve Report shall be prepared by either (i) the Approved Petroleum Engineer, or (ii) Borrower's in-house staff. Notwithstanding the foregoing, in connection with any Special Redetermination requested by Borrower, the Reserve Report shall be in form and scope mutually acceptable to Borrower and Required Banks. Until superseded, the Existing Reserve Report shall be considered the Reserve Report. "Reserve Requirement" means, at any time, the maximum rate at which reserves (including, without limitation, any marginal, special, supplemental, or emergency reserves) are required to be maintained under regulations issued from time to time by the Board of Governors of the Federal Reserve System (or any successor) by member banks of the Federal Reserve System against in the case of Eurodollar Loans, "Eurocurrency liabilities" (as such term is used in Regulation D). Without limiting the effect of the foregoing, the Reserve Requirement shall reflect any other reserves required to be maintained by such member banks with respect to (i) any category of liabilities which includes deposits by reference to which the Adjusted Eurodollar Rate is to be determined, or (ii) any category of extensions of credit or other assets which include Eurodollar Loans. The Adjusted Eurodollar Rate shall be adjusted automatically on and as of the effective date of any change in the Reserve Requirement. "Restricted Payment" means, with respect to any Person, (a) any Distribution by such Person, (b) any capital contribution, loan or advance by any Credit Party to any Unrestricted Subsidiary, (c) the issuance of a Guarantee by any Credit Party with respect to any Debt or other obligation of any Unrestricted Subsidiary, (d) the retirement, redemption, defeasance, repurchase or prepayment prior to scheduled maturity by such Person or any Affiliate of such Person of any Debt of such Person, or (e) except as otherwise approved by Required Banks, the retirement, redemption or payment by Parent, Borrower or any affiliate of Parent of any part of the principal of the Permitted Subordinate Debt at any time prior to the termination of all Commitments and the payment and performance in full of the Obligations. 22 "Restricted Subsidiary" means, as of the date hereof, Operating, Marine, Offshore, TRF and DG&M. "Restricted Subsidiary" shall also refer to any other Subsidiary or Indirect Subsidiary of Parent which Parent and Borrower hereafter designate as a "Restricted Subsidiary;" provided, that no Subsidiary or Indirect Subsidiary of Parent will be a Restricted Subsidiary unless (a) one hundred percent (100%) of its issued and outstanding Equity has been pledged to Administrative Agent to secure the Obligations pursuant to a Parent Pledge Agreement or a Subsidiary Pledge Agreement, and (b) it has executed a Facility Guaranty. "Restructuring Transactions" means those transactions more particularly described on Part I of Schedule 2.3 attached hereto, and shall include, without limitation, the Borrower Merger. "Revolving Loan" means the revolving credit loan in an amount outstanding at any time not to exceed the amount of the Total Commitment then in effect less the amount of the Letter Credit Exposure then outstanding to be made by Banks to Borrower in accordance with Section 3.1 hereof. The Revolving Loan may be comprised of the Base Rate Loan and one or more Eurodollar Loans as Borrower may select in a Request for Borrowing or a Notice of Continuation or Conversion. "Schedule" means a "schedule" attached to this Agreement and incorporated herein by reference, unless specifically indicated otherwise. "Scheduled Redetermination" means any Redetermination of the Borrowing Base and the Conforming Borrowing Base pursuant to Section 5.2. "Section" refers to a "section" or "subsection" of this Agreement unless specifically indicated otherwise. "Sole Lead Arranger" means BOCM, in its capacity as sole lead arranger for the credit facility hereunder or any successor thereto. "Special Redetermination" means any Redetermination of the Borrowing Base pursuant to Section 5.3. "Subsidiary" means, for any Person, any corporation or other entity of which securities or other ownership interests having ordinary voting power to elect a majority of the board of directors or other persons performing similar functions (including that of a general partner) are at the time directly or indirectly owned, collectively, by such Person and any Subsidiaries of such Person. The term "Subsidiary" shall include Subsidiaries of Subsidiaries (and so on). "Subsidiary Pledge Agreement" means a Pledge Agreement substantially in the form of Exhibit E attached hereto (with applicable conforming changes) which may be executed by each existing and/or future Subsidiary of Parent to the extent such Subsidiary owns any outstanding Equity of any other Subsidiary (for purposes of this definition and Section 6.1(d) hereof, such Subsidiary is referred to herein and therein as an "Indirect Subsidiary"), pursuant to which such Indirect Subsidiary shall pledge to Administrative Agent, for the ratable benefit of Banks, all of the issued and outstanding Equity owned by such Indirect Subsidiary of each Subsidiary of such Indirect Subsidiary described therein to secure the Obligations. 23 "Syndication Agent" means Credit Lyonnais New York Branch or Fortis Capital Corp., in its capacity as Syndication Agent for Banks hereunder or any successor thereto, and "Syndication Agents" means Credit Lyonnais New York Branch and Fortis Capital Corp., collectively, in their capacities as Syndication Agents for Banks hereunder. "Taxes" means all taxes, assessments, filing or other fees, levies, imposts, duties, deductions, withholdings, stamp taxes, capital transaction taxes, foreign exchange taxes or other charges, or other charges of any nature whatsoever, from time to time or at any time imposed by Law or any Governmental Authority. "Tax" means any one of the foregoing. "Termination Date" means April 30, 2006. "Texas Pacific Group" means, collectively, TGP Partners, L.P., T.G.P. Parallel, L.P., and any of their Affiliates. "Total Commitment" means the Commitments of all Banks in an initial aggregate amount of $300,000,000 as such amount shall be reduced from time to time pursuant to Section 3.8 and Section 3.9. "Transferee" has the meaning given such term in Section 15.10(d). "TRF" means Tuscaloosa Royalty Fund LLC, a Mississippi limited liability company, which is a wholly owned Subsidiary of Operating. "Type" means, with reference to a Revolving Loan, the characterization of such Revolving Loan as the Base Rate Loan or a Eurodollar Loan based on the method by which the accrual of interest on such Revolving Loan is calculated. "Unproved Reserves" means Mineral Interests which do not constitute Proved Mineral Interests. "Unrestricted Subsidiary" means any Subsidiary or Indirect Subsidiary of Parent which is not a Restricted Subsidiary, and shall include, without limitation, Genesis Energy. Section 2.2 Accounting Terms and Determinations. Unless otherwise specified herein, all accounting terms used herein shall be interpreted, all accounting determinations hereunder shall be made, and all financial statements required to be delivered hereunder shall be expressed in U.S. dollars and shall be prepared in accordance with GAAP, applied on a basis consistent with the most recent audited consolidated financial statements of Parent and its Consolidated Subsidiaries delivered to Banks except for changes concurred in by Parent's independent certified public accountants and which are disclosed to Administrative Agent on the next date on which financial statements are required to be delivered to Banks pursuant to Section 9.1(a) or Section 9.1(b); provided, that, unless Required Banks shall otherwise agree in writing, no such change shall modify or affect the manner in which compliance with the covenants contained in Article XI are computed such that all such computations shall be conducted utilizing financial information presented consistently with prior periods. 24 Section 2.3 Petroleum Terms. As used herein, the terms "proved reserves," "proved developed reserves," "proved developed producing reserves," "proved developed nonproducing reserves," and "proved undeveloped reserves" have the meaning given such terms from time to time and at the time in question by the Society of Petroleum Engineers of the American Institute of Mining Engineers. Section 2.4 Money. Unless expressly stipulated otherwise, all references herein to "dollars," "money," "funds," "payments," "prepayments" or similar financial or monetary terms, are references to currency of the United States of America. Article III THE CREDIT Section 3.1 Commitments. (a) Each Bank severally agrees, subject to Section 3.1(c), Section 7.1 and Section 7.2 and the other terms and conditions set forth in this Agreement, to lend to Borrower from time to time prior to the Termination Date amounts requested by Borrower not to exceed in the aggregate at any one time outstanding, the amount of such Bank's Commitment reduced by an amount equal to such Bank's Letter of Credit Exposure. Each Borrowing shall be (i) in an aggregate principal amount of $1,000,000 or any larger integral multiple of $100,000 (except that any Base Rate Borrowing may be in an amount equal to the Availability at such time), and (ii) made from the Banks ratably in accordance with their respective Commitment Percentages. Subject to the foregoing limitations and the other provisions of this Agreement, prior to the Termination Date Borrower may borrow under this Section 3.1(a), repay amounts borrowed and request new Borrowings to be made under this Section 3.1(a). (b) Administrative Agent, or such Bank designated by Administrative Agent which (without obligation to do so) consents to the same ("Letter of Credit Issuer") will, from time to time prior to the date which is five (5) Domestic Business Days prior to the Termination Date, upon request by Borrower, issue Letters of Credit for the account of Borrower or any Restricted Subsidiary designated by Borrower, so long as (i) the sum of (A) the total Letter of Credit Exposure then existing, and (B) the amount of the requested Letter of Credit does not exceed ten percent (10%) of the lesser of (y) the Total Commitment, and (z) the Conforming Borrowing Base, and (ii) Borrower would be entitled to a Borrowing under Section 3.1(a) and Section 3.1(c) in the amount of the requested Letter of Credit. Not less than three (3) Domestic Business Days prior to the requested date of issuance of any such Letter of Credit, Borrower (and any Restricted Subsidiary for whose account such Letter of Credit is being issued) shall execute and deliver to Letter of Credit Issuer, Letter of Credit Issuer's customary letter of credit application. Each Letter of Credit shall be in the minimum amount of $10,000 and shall be in form and substance acceptable to Letter of Credit Issuer. No Letter of Credit shall have an expiration date later than the earlier of (A) one (1) year after the Termination Date, or (B) one (1) year from the date of issuance (or, in the case of any renewal or extension thereof, one (1) year after such renewal or extension). Upon the date of issuance of a Letter of Credit, Letter of Credit Issuer shall be deemed to have sold to each other Bank, and each other Bank shall be deemed to have unconditionally and irrevocably purchased from Letter of Credit Issuer, a non recourse participation in the 25 related Letter of Credit and Letter of Credit Exposure equal to such Bank's Commitment Percentage of such Letter of Credit and Letter of Credit Exposure. Upon request of any Bank, but not less often than quarterly, Administrative Agent shall provide notice to each Bank by telephone, teletransmission or telex setting forth each Letter of Credit issued and outstanding pursuant to the terms hereof and specifying the beneficiary and expiration date of each such Letter of Credit, each Bank's percentage of each such Letter of Credit and the actual dollar amount of each Bank's participation held by Letter of Credit Issuer thereof for such Bank's account and risk. At the time of issuance of each Letter of Credit, Borrower shall pay to Administrative Agent in respect of such Letter of Credit (1) the applicable Letter of Credit Fee, and (2) the applicable Letter of Credit Fronting Fee. Administrative Agent shall distribute the Letter of Credit Fee payable upon the issuance of each Letter of Credit to Banks in accordance with their respective Commitment Percentages, and Administrative Agent shall distribute the Letter of Credit Fronting Fee to Letter of Credit Issuer for its own account. Any (y) material amendment or modification, or (z) renewal or extension of any Letter of Credit shall be deemed to be the issuance of a new Letter of Credit for purposes of this Section 3.1(b). Notwithstanding anything to the contrary contained herein, Borrower shall pay to Administrative Agent in connection with the issuance of each Letter of Credit and/or any amendment or modification of any nature to any existing Letter of Credit, Administrative Agent's usual and customary fees for the issuance of, amendments or modifications to, and processing of, Letters of Credit. Immediately upon the occurrence of an Event of Default and the acceleration of the Obligations hereunder, and also on the date which is five (5) Domestic Business Days prior to the Termination Date, Borrower shall deposit with Administrative Agent cash in such amounts as Administrative Agent may request, up to a maximum amount equal to the aggregate existing Letter of Credit Exposure of all Banks; provided, that, in the case of any of the Events of Default specified in Section 12.1(g) or Section 12.1(h), an amount equal to the aggregate existing Letter of Credit Exposure of all Banks shall be due and payable without any notice to Borrower or any other act by Administrative Agent or any Bank. Any amounts so deposited shall be held by Administrative Agent for the ratable benefit of all Banks as security for the outstanding Letter of Credit Exposure and the other Obligations, and Borrower will, in connection therewith, execute and deliver (and cause each other Credit Party to execute and deliver) such security agreements in form and substance satisfactory to Administrative Agent which Administrative Agent may, in its discretion, require. As drafts or demands for payment are presented under any Letter of Credit, Administrative Agent shall apply such cash to satisfy such drafts or demands. When all Letters of Credit have expired and the Obligations have been repaid in full (and no Bank has any obligation to lend or issue Letters of Credit hereunder) or such Event of Default has been cured to the satisfaction of Required Banks, Administrative Agent shall release to Borrower any remaining cash deposited under this Section 3.1(b). Whenever Borrower is required to make deposits under this Section 3.1(b) and fails to do so on the day such deposit is due, Administrative Agent or any Bank may, without notice to Borrower, make such deposit (whether by application of proceeds of any collateral for the Obligations, by transfers from other accounts maintained with any Bank or otherwise) using any funds then available to any Bank of any Credit Party, any guarantor or any other party liable for repayment of the Obligations. Notwithstanding anything to the contrary contained herein, Borrower hereby agrees to reimburse each Letter of Credit Issuer immediately upon demand by such Letter of Credit Issuer, and in immediately available funds, for any payment or disbursement made by such Letter of Credit Issuer under any Letter of Credit issued by it. Payment shall be made by Borrower with 26 interest on the amount so paid or disbursed by Letter of Credit Issuer from and including the date payment is made under any Letter of Credit to and including the date of payment, at the lesser of (i) the Maximum Lawful Rate, or (ii) the Default Rate. The obligations of Borrower under this paragraph will continue until all Letters of Credit have expired and all reimbursement obligations with respect thereto have been paid in full by Borrower and until all other Obligations shall have been paid in full. Borrower shall be obligated to reimburse Letter of Credit Issuer upon demand for all amounts paid under Letters of Credit as set forth in the immediately preceding paragraph hereof; provided, however, if Borrower for any reason fails to reimburse Letter of Credit Issuer in full upon demand, Banks shall reimburse Letter of Credit Issuer in accordance with each Banks' Commitment Percentage for amounts due and unpaid from Borrower as set forth hereinbelow; provided, however, that no such reimbursement made by Banks shall discharge Borrower's obligations to reimburse Letter of Credit Issuer. All reimbursement amounts payable by any Bank under this Section 3.1(b) shall include interest thereon at the Federal Funds Rate, from the date of the payment of such amounts by Letter of Credit Issuer to the date of reimbursement by such Bank. No Bank shall be liable for the performance or nonperformance of the obligations of any other Bank under this paragraph. The reimbursement obligations of Banks under this paragraph shall continue after the Termination Date and shall survive termination of this Agreement and the other Loan Papers. Borrower shall indemnify and hold Administrative Agent, Letter of Credit Issuer and each Bank, and their respective officers, directors, representatives and employees harmless from loss for any claim, demand or liability which may be asserted against any or such indemnified party in connection with actions taken under Letters of Credit or in connection therewith (including losses resulting from the negligence of any or such indemnified party), and shall pay each indemnified party for reasonable fees of attorneys and legal costs paid or incurred by each indemnified party in connection with any matter related to Letters of Credit, except for losses and liabilities incurred as a direct result of the gross negligence or willful misconduct of such indemnified party, IT BEING THE EXPRESS INTENTION OF THE PARTIES THAT EACH INDEMNIFIED PARTY SHALL BE INDEMNIFIED FOR THE CONSEQUENCES OF ITS OWN ORDINARY NEGLIGENCE. If Borrower for any reason fails to indemnify or pay such indemnified party as set forth herein in full, Banks shall indemnify and pay such indemnified party upon demand, in accordance with each Bank's Commitment Percentage of such amounts due and unpaid from Borrower; provided, however, that, no such payment made by Banks shall discharge Borrower's obligation to indemnify or pay such indemnified party in accordance with the terms hereof. The provisions of this paragraph shall survive the termination of this Agreement. Neither Administrative Agent nor any other Letter of Credit Issuer makes any representation or warranty, nor assumes any responsibility with respect to the validity, legality, sufficiency or enforceability of any letter of credit application executed and delivered in connection with any Letter of Credit issued hereunder or any document relative thereto or to the collectibility thereunder. Neither Administrative Agent nor any other Letter of Credit Issuer assumes any responsibility for the financial condition of Borrower or for the performance of any obligation of Borrower. Administrative Agent and each other Letter of Credit Issuer may use its discretion with respect to exercising or refraining from exercising any 27 rights, or taking or refraining from taking any action which may be vested in it or which it may be entitled to take or assert with respect to any Letter of Credit or any letter of credit application. FURTHERMORE, EXCEPT AS SET FORTH HEREIN, NEITHER ADMINISTRATIVE AGENT NOR ANY OTHER LETTER OF CREDIT ISSUER SHALL BE UNDER ANY LIABILITY TO ANY BANK, WITH RESPECT TO ANYTHING ADMINISTRATIVE AGENT OR ANY SUCH LETTER OF CREDIT ISSUER MAY DO OR REFRAIN FROM DOING IN THE EXERCISE OF ITS JUDGMENT, THE SOLE LIABILITY AND RESPONSIBILITY OF ADMINISTRATIVE AGENT AND SUCH LETTER OF CREDIT ISSUER BEING TO HANDLE EACH BANK'S SHARE ON AS FAVORABLE A BASIS AS ADMINISTRATIVE AGENT OR SUCH LETTER OF CREDIT ISSUER HANDLES ITS OWN SHARE. NEITHER ADMINISTRATIVE AGENT NOR ANY OTHER LETTER OF CREDIT ISSUER SHALL HAVE ANY DUTIES OR RESPONSIBILITIES EXCEPT THOSE EXPRESSLY SET FORTH HEREIN AND THOSE DUTIES AND LIABILITIES SHALL BE SUBJECT TO THE LIMITATIONS AND QUALIFICATIONS SET FORTH HEREIN. FURTHERMORE, NEITHER ADMINISTRATIVE AGENT, ANY LETTER OF CREDIT ISSUER, NOR ANY OF THEIR DIRECTORS, OFFICERS, OR EMPLOYEES SHALL BE LIABLE FOR ANY ACTION TAKEN OR OMITTED (WHETHER OR NOT SUCH ACTION TAKEN OR OMITTED IS EXPRESSLY SET FORTH HEREIN) UNDER OR IN CONNECTION HEREWITH OR UNDER ANY OTHER INSTRUMENT OR DOCUMENT IN CONNECTION HEREWITH, EXCEPT FOR GROSS NEGLIGENCE OR WILLFUL MISCONDUCT. Neither Administrative Agent nor any other Letter of Credit Issuer shall incur any liability to any Bank, Borrower, or any Affiliate of any Bank or Borrower, in acting upon any notice, document, order, consent, certificate, warrant or other instrument reasonably believed by Administrative Agent or such Letter of Credit Issuer to be genuine or authentic and to be signed by the proper party. (c) No Bank will be obligated to lend to Borrower hereunder or incur Letter of Credit Exposure, and Borrower shall not be entitled to borrow hereunder or obtain Letters of Credit hereunder, in an amount which would cause the Outstanding Credit to exceed the Borrowing Base then in effect. No Bank shall be obligated to fund Borrowings hereunder and Borrower shall not be entitled to Borrowings hereunder during the existence of a Borrowing Base Deficiency. Nothing in this Section 3.1(c) shall be deemed to limit any Bank's obligation to reimburse any Letter of Credit Issuer with respect to its participation in Letters of Credit as a result of the drawing under any Letter of Credit pursuant to Section 3.1(b). Section 3.2 Method of Borrowing. (a) In order to request any Borrowing under Section 3.1, Borrower shall hand deliver, telex or telecopy to Administrative Agent a duly completed Request for Borrowing (herein so called) prior to 11:00 a.m. (Chicago, Illinois time), (i) on the Borrowing Date specified for a proposed Base Rate Borrowing, and (ii) at least three (3) Eurodollar Business Days before the Borrowing Date of a proposed Eurodollar Borrowing. Each such Request for Borrowing shall be substantially in the form of Exhibit F attached hereto, and shall specify: (A) the Borrowing Date of such Borrowing, which shall be a Domestic Business Day in the case of a Base Rate Borrowing or a Eurodollar Business Day in the case of a Eurodollar Borrowing; 28 (B) the aggregate amount of such Borrowing; (C) whether such Borrowing is to be a Base Rate Borrowing or a Eurodollar Borrowing; and (D) in the case of a Eurodollar Borrowing, the duration of the Interest Period applicable thereto, subject to the provisions of the definition of Interest Period. (b) Upon receipt of a Request for Borrowing, Administrative Agent shall promptly notify each Bank of the contents thereof and the amount of the Borrowing to be loaned by such Bank pursuant thereto, and such Request for Borrowing shall not thereafter be revocable by Borrower. (c) Not later than 12:00 noon (Chicago, Illinois time) on the date of each Borrowing, each Bank shall make available its Commitment Percentage of such Borrowing, in Federal or other funds immediately available in Chicago, Illinois to Administrative Agent at its address set forth on Schedule 2.1 hereto. Unless Administrative Agent determines that any applicable condition specified in Section 7.2 has not been satisfied, Administrative Agent will make the funds so received from Banks available to Borrower at Administrative Agent's aforesaid address. Section 3.3 Method of Requesting Letters of Credit. (a) In order to request any Letter of Credit hereunder, Borrower shall hand deliver, telex or telecopy to Administrative Agent a duly completed Request for Letter of Credit (herein so called) prior to 12:00 noon (Chicago, Illinois time) at least three (3) Domestic Business Days before the date specified for issuance of such Letter of Credit. Each Request for Letter of Credit shall be substantially in the form of Exhibit G attached hereto, shall be accompanied by the applicable Letter of Credit Issuer's duly completed and executed letter of credit application and agreement and shall specify: (i) the requested date for issuance of such Letter of Credit; (ii) the terms of such requested Letter of Credit, including the name and address of the beneficiary, the stated amount, the expiration date and the conditions under which drafts under such Letter of Credit are to be available; and (iii) the purpose of such Letter of Credit. (b) Upon receipt of a Request for Letter of Credit, Administrative Agent shall promptly notify each Bank and the proposed Letter of Credit Issuer of the contents thereof, including the amount of the requested Letter of Credit, and such Request for Letter of Credit shall not thereafter be revocable by Borrower. (c) No later than 12:00 noon (Chicago, Illinois time) on the date each Letter of Credit is requested, unless Administrative Agent or the applicable Letter of Credit Issuer determines that any applicable condition precedent set forth in Section 7.2 hereof has not been satisfied, 29 Administrative Agent or such other applicable Letter of Credit Issuer will issue and deliver such Letter of Credit pursuant to the instructions of Borrower. Section 3.4 Notes. Each Bank's Commitment Percentage of the Revolving Loan shall be evidenced by a single Note payable to the order of such Bank in an amount equal to such Bank's Commitment. Section 3.5 Interest Rates; Payments. (a) The principal amount of the Base Rate Loan outstanding from day to day shall bear interest at a rate per annum equal to the sum of (i) the Applicable Margin plus (ii) the applicable Base Rate in effect from day to day; provided that in no event shall the rate charged hereunder or under the Notes exceed the Maximum Lawful Rate. Interest on the Base Rate Loan shall be payable as it accrues on each Quarterly Date, and on the Termination Date. (b) The principal amount of each Eurodollar Loan outstanding from day to day shall bear interest for the Interest Period applicable thereto at a rate per annum equal to the sum of (i) the Applicable Margin plus (ii) the applicable Adjusted Eurodollar Rate; provided that in no event shall the rate charged hereunder or under the Notes exceed the Maximum Lawful Rate. Interest on any portion of the principal of each Eurodollar Loan subject to an Interest Period of one (1), two (2) or three (3) months shall be payable on the last day of the Interest Period applicable thereto. Interest on any portion of the principal of each Eurodollar Loan subject to an Interest Period of six (6), nine (9), or twelve (12) months shall be payable on the last day of the Interest Period applicable thereto and on each Quarterly Date. (c) So long as no Default or Event of Default shall be continuing, subject to the provisions of this Section 3.5, Borrower shall have the option of having all or any portion of the principal outstanding under the Revolving Loan be a Base Rate Loan or one (1) or more Eurodollar Loans, which shall bear interest at rates determined by reference to the Base Rate and the Adjusted Eurodollar Rate, respectively; provided, that each Eurodollar Loan shall be in a minimum amount of $2,000,000 and shall be in an amount which is an integral multiple of $500,000. Prior to the termination of each Interest Period with respect to each Eurodollar Loan, Borrower shall give written notice (a "Notice of Continuation or Conversion") in the form of Exhibit H attached hereto to Administrative Agent of the Type of Loan which shall be applicable to the principal of such Eurodollar Loan upon the expiration of such Interest Period. Such Notice of Continuation or Conversion shall be given to Administrative Agent at least one (1) Domestic Business Day, in the case of a Base Rate Loan selection and three (3) Eurodollar Business Days, in the case of a Eurodollar Loan selection, prior to the termination of the Interest Period then expiring. If Borrower shall specify a Eurodollar Loan, such Notice of Continuation or Conversion shall also specify the length of the succeeding Interest Period (subject to the provisions of the definition of such term) selected by Borrower. Each Notice of Continuation or Conversion shall be irrevocable and effective upon notification thereof to Administrative Agent. If the required Notice of Continuation or Conversion shall not have been timely received by Administrative Agent, Borrower shall be deemed to have elected that the principal of the Eurodollar Loan subject to the Interest Period then expiring be Converted to the Base Rate Loan upon the expiration of such Interest Period and Borrower will be deemed to have given Administrative Agent notice of such election. Subject to the limitations set forth in this Section 3.5(c) on the amount and number of 30 Eurodollar Loans, Borrower shall have the right to Convert all or any part of the Base Rate Loan to a Eurodollar Loan by giving Administrative Agent a Notice of Continuation or Conversion of such election at least three (3) Eurodollar Business Days prior to the date on which Borrower elects to make such Conversion (a "Conversion Date"). The Conversion Date selected by Borrower shall be a Eurodollar Business Day. Notwithstanding anything in this Section 3.5 to the contrary, no portion of the principal of the Base Rate Loan may be Converted to a Eurodollar Loan and no Eurodollar Loan may be Continued as such when any Default or Event of Default has occurred and is continuing, but each such Eurodollar Loan shall be automatically Converted to the Base Rate Loan on the last day of each applicable Interest Period. Borrower shall not be permitted to have more than seven (7) Eurodollar Loans in effect at any time. (d) Notwithstanding anything to the contrary set forth in Section 3.5(a) or Section 3.5(b) above, after the occurrence of an Event of Default, interest shall accrue on the outstanding principal balance of the Revolving Loan, and to the extent permitted by Law, on the accrued but unpaid interest on the Revolving Loan and all other Obligations from the period from and including the occurrence of such Event of Default to but excluding the date the same is remedied at a rate per annum equal to the lesser of (i) the Default Rate, and (ii) the Maximum Lawful Rate. (e) Administrative Agent shall determine each interest rate applicable to the Revolving Loan in accordance with the terms hereof. Administrative Agent shall promptly notify Borrower and Banks by telex, telecopy or cable of each rate of interest so determined, and its determination thereof shall be conclusive in the absence of manifest error. (f) Notwithstanding the foregoing, if at any time the rate of interest calculated with reference to the Base Rate or the Eurodollar Rate hereunder (the "contract rate") is limited to the Maximum Lawful Rate, any subsequent reductions in the contract rate shall not reduce the rate of interest on the Revolving Loan below the Maximum Lawful Rate until the total amount of interest accrued equals the amount of interest which would have accrued if the contract rate had at all times been in effect. In the event that at maturity (stated or by acceleration), or at final payment of any Note, the total amount of interest paid or accrued on such Note is less than the amount of interest which would have accrued if the contract rate had at all times been in effect with respect thereto, then at such time, to the extent permitted by law, Borrower shall pay to the holder of such Note an amount equal to the difference between (i) the lesser of the amount of interest which would have accrued if the contract rate had at all times been in effect and the amount of interest which would have accrued if the Maximum Lawful Rate had at all times been in effect, and (ii) the amount of interest actually paid on such Note. (g) Interest payable hereunder on each Eurodollar Loan shall be computed based on the number of actual days elapsed assuming that each calendar year consisted of 360 days. Interest payable hereunder on the Base Rate Loan shall be computed based on the actual number of days elapsed assuming that each calendar year consisted of 365 days (or 366 days in a leap year). 31 Section 3.6 Mandatory Prepayments. Upon the occurrence of any Borrowing Base Deficiency, Borrower shall make the mandatory prepayments of the Revolving Loan required by Section 5.4 hereof. Section 3.7 Voluntary Prepayments. Borrower may, subject to Section 14.5 and the other provisions of this Agreement, prepay the principal of the Revolving Loan in whole or in part. Any partial prepayment shall be in a minimum amount of $500,000 and shall be in an integral multiple of $100,000. Section 3.8 Voluntary Reduction of Commitments. Borrower may, by notice to Administrative Agent five (5) Domestic Business Days prior to the effective date of any such reduction, reduce the Total Commitment (and thereby reduce the Commitment of each Bank ratably) in amounts not less than $5,000,000 and in an amount which is an integral multiple of $1,000,000. On the effective date of any such reduction, Borrower shall, to the extent required as a result of such reduction, make a principal payment on the Revolving Loan in an amount sufficient to cause the principal balance of the Revolving Loan then outstanding to be equal to or less than the Total Commitment as thereby reduced. Notwithstanding the foregoing, Borrower shall not be permitted to voluntarily reduce the Total Commitment to an amount less than the aggregate Letter of Credit Exposure of all Banks. Section 3.9 Termination of Commitments; Final Maturity of Revolving Loan. The Total Commitment (and the Commitment of each Bank) shall terminate, and the entire outstanding principal balance of the Revolving Loan, all interest accrued thereon, all accrued but unpaid fees hereunder and all other outstanding Obligations shall be due and payable in full on the Termination Date. Section 3.10 Application of Payments. Each repayment pursuant to Section 3.6, Section 3.7, Section 3.8, Section 3.9 and Section 5.4 shall be made together with accrued interest on the amount repaid to the date of payment, and shall be applied in accordance with Section 4.2 and the other provisions of this Agreement. Section 3.11 Commitment Fee. On the Termination Date, on each Quarterly Date prior to the Termination Date, and, in the event the Commitments are terminated in their entirety prior to the Termination Date, on the date of such termination, Borrower shall pay to Administrative Agent, for the ratable benefit of each Bank based on each Bank's Commitment Percentage, a commitment fee equal to the Commitment Fee Percentage in effect from day to day (applied on a per annum basis and computed on the basis of actual days elapsed and as if each calendar year consisted of 365 days (or 366 days in a leap year)) of the average daily Availability for the Fiscal Quarter (or portion thereof) ending on the date such payment is due. Section 3.12 Agency and other Fees. Borrower shall pay to Administrative Agent and its Affiliates such other fees and amounts as Borrower shall be required to pay to Administrative Agent and its Affiliates from time to time pursuant to any separate agreement between Borrower and Administrative Agent or such Affiliates. Such fees and other amounts shall be retained by Administrative Agent and its Affiliates, and no Bank (other than Bank One) shall have any 32 interest therein. Administrative Agent may disburse any fees paid to Administrative Agent and its Affiliates pursuant to this Section 3.12 in any manner Administrative Agent desires in its sole discretion. Article IV GENERAL PROVISIONS Section 4.1 Delivery and Endorsement of Notes. On the Closing Date, Administrative Agent shall deliver to each Bank the Note payable to such Bank. Each Bank may endorse (and prior to any transfer of its Note shall endorse) on the schedules attached and forming a part thereof appropriate notations to evidence the date and amount of its Commitment Percentage of each Borrowing, the Interest Period applicable thereto, and the date and amount of each payment of principal made by Borrower with respect thereto; provided that the failure by any Bank to so endorse its Note shall not affect the liability of Borrower for the repayment of all amounts outstanding under such Note together with interest thereon. Each Bank is hereby irrevocably authorized by Borrower to endorse its Note and to attach to and make a part of any such Note a continuation of any such schedule as required. Section 4.2 General Provisions as to Payments. (a) Borrower shall make each payment of principal of, and interest on, the Revolving Loan, and all fees payable hereunder shall be paid, not later than 12:00 noon (Chicago, Illinois time) on the date when due, in Federal or other funds immediately available in Chicago, Illinois, to Administrative Agent at its address set forth on Schedule 2.1 hereto, without defense, set-off, deduction or counterclaim. Administrative Agent will promptly (and if such payment is received by Administrative Agent by 10:00 a.m. (Chicago, Illinois time), and otherwise if reasonably possible, on the same Domestic Business Day) distribute to each Bank its Commitment Percentage of each such payment received by Administrative Agent for the account of Banks. Whenever any payment of principal of, or interest on, the Base Rate Loan or of fees shall be due on a day which is not a Domestic Business Day, the date for payment thereof shall be extended to the next succeeding Domestic Business Day. Whenever any payment of principal of, or interest on, any portion of any Eurodollar Loan shall be due on a day which is not a Eurodollar Business Day, the date for payment thereof shall be extended to the next succeeding Eurodollar Business Day (subject to the provisions of the definition of Interest Period). If the date for any payment of principal is extended by operation of Law or otherwise, interest thereon shall be payable for such extended time. Borrower hereby authorizes Administrative Agent to charge from time to time against Borrower's accounts with Administrative Agent any amount then due. (b) Prior to the occurrence of an Event of Default, all principal payments received by Banks with respect to the Revolving Loan shall be applied first to Eurodollar Loans outstanding with Interest Periods ending on the date of such payment, then to the Base Rate Loan, and then to Eurodollar Loans next maturing until such principal payment is fully applied. (c) After the occurrence of an Event of Default, all amounts collected or received by Administrative Agent or any Bank shall be applied first to the payment of all proper costs incurred by Administrative Agent in connection with the collection thereof (including reasonable expenses and 33 disbursements of Administrative Agent), second to the payment of all proper costs incurred by Banks in connection with the collection thereof (including reasonable expenses and disbursements of Banks), third to the reimbursement of any advances made by Banks to effect performance of any unperformed covenants of any Credit Party under any of the Loan Papers, fourth to the payment of any unpaid fees required pursuant to Section 3.11, fifth to the payment of any unpaid fees required pursuant to Section 3.1(b) and Section 3.10, sixth, to the payment of all accrued but unpaid interest, seventh, to the payment to each Bank of its Commitment Percentage of the outstanding principal of the Revolving Loan and to satisfy all obligations and liabilities then due under Hedge Agreements, such payments to be made pro rata to each Bank owed such Obligations in proportion to all such payments owed to all Banks in respect of such Obligations, and eighth, to establish the deposits required in Section 3.1(b). All payments received by a Bank after the occurrence of an Event of Default for application to the principal of the Revolving Loan shall be applied by such Bank in the manner provided in Section 4.2(b). Article V BORROWING BASE Section 5.1 Reserve Report; Proposed Borrowing Base and Conforming Borrowing Base. The aggregate amount of credit available to Borrower under this Agreement shall be limited by a Borrowing Base (herein so called) which shall be determined by Banks at the times and in accordance with the standards and procedures set forth in this Article V. As soon as available and in any event by February 28 and August 31 of each year commencing February 28, 2004, Borrower shall deliver to Administrative Agent and each Bank a Reserve Report prepared as of the immediately preceding December 31 and June 30 respectively. Simultaneously with the delivery to Administrative Agent and each Bank of each Reserve Report, Borrower shall notify Administrative Agent and each Bank of the amount of the Borrowing Base which Borrower requests become effective on the next Redetermination Date (or such date promptly following such Redetermination Date as Required Banks shall elect). Banks may, in their sole discretion, establish a Borrowing Base which is higher than the Borrowing Base that would otherwise be in effect if Banks determined the Borrowing Base based on each Bank's application of the credit standards and other criteria customarily applied by such Bank in the determination of credit limitations for companies similar to Borrower ("Conforming Credit Criteria"). At the time of each Redetermination, Banks shall also determine what the Borrowing Base would be if they applied Conforming Credit Criteria (the "Conforming Borrowing Base"). If Banks do not determine a Conforming Borrowing Base, the Borrowing Base as redetermined shall also be the Conforming Borrowing Base for purposes of this Agreement. Section 5.2 Scheduled Redeterminations of the Borrowing Base and the Conforming Borrowing Base; Procedures and Standards. Based in part on the Reserve Reports made available to Banks pursuant to Section 5.1, Banks shall redetermine the Borrowing Base and the Conforming Borrowing Base on or prior to the next Redetermination Date (or such date promptly thereafter as reasonably possible based on the engineering and other information available to Banks). Any Borrowing Base or Conforming Borrowing Base which becomes effective as a result of any Redetermination of the Borrowing Base or Conforming Borrowing Base shall be subject to the following restrictions: (a) such Borrowing Base or Conforming 34 Borrowing Base shall not exceed the Borrowing Base requested by Borrower pursuant to Section 5.1 or Section 5.3 (as applicable), (b) such Borrowing Base or Conforming Borrowing Base shall not exceed the Total Commitment then in effect, (c) to the extent such Borrowing Base or Conforming Borrowing Base represents an increase from the Borrowing Base or the Conforming Borrowing Base (as applicable) in effect prior to such Redetermination, such Borrowing Base or Conforming Borrowing Base shall be approved by all Banks, and (d) to the extent such Borrowing Base or Conforming Borrowing Base represents a decrease in the Borrowing Base or the Conforming Borrowing Base (as applicable) in effect prior to such Redetermination, or a reaffirmation of such prior Borrowing Base or Conforming Borrowing Base, such Borrowing Base or Conforming Borrowing Base shall be approved by Required Banks. Each Redetermination shall be made by Banks in their sole discretion. Without limiting such discretion, Parent and Borrower acknowledge and agree that Banks (i) may make such assumptions regarding appropriate existing and projected pricing for Hydrocarbons as they deem appropriate in their sole discretion, (ii) may make such assumptions regarding projected rates and quantities of future production of Hydrocarbons from the Mineral Interests owned by Borrower as they deem appropriate in their sole discretion, (iii) may consider the projected cash requirements of the Credit Parties, (iv) are not required to consider any asset other than Proved Mineral Interests owned by Borrower which are subject to first and prior Liens in favor of Administrative Agent for the ratable benefit of Banks to the extent required by Section 6.1 hereof, and (v) may make such other assumptions, considerations and exclusions as Banks deem appropriate in the exercise of their sole discretion. It is further acknowledged and agreed that each Bank may consider such other credit factors as it deems appropriate in the exercise of its sole discretion and shall have no obligation in connection with any Redetermination to approve any increase from the Borrowing Base or the Conforming Borrowing Base in effect prior to such Redetermination. The Conforming Borrowing Base shall also be determined by Banks in their sole discretion, and in determining the amount of the Conforming Borrowing Base, each Bank may make the assumptions and consider the factors and criteria set forth in subclauses (a) through (d) and (i) through (v) above; provided, that each Bank shall apply Conforming Credit Criteria. Promptly following any Redetermination of the Borrowing Base and the Conforming Borrowing Base, Administrative Agent shall notify Borrower of the amount of the Borrowing Base and the Conforming Borrowing Base as redetermined, which Borrowing Base and Conforming Borrowing Base shall be effective as of the date specified in such notice, and shall remain in effect for all purposes of this Agreement until the next Redetermination. Section 5.3 Special Redetermination. (a) In addition to Scheduled Redeterminations, Borrower and Required Banks shall each be permitted to request a Special Redetermination of the Borrowing Base and the Conforming Borrowing Base once in each Fiscal Year. Any request by Required Banks pursuant to this Section 5.3(a) shall be submitted to Administrative Agent and Borrower. Any request by Borrower pursuant to this Section 5.3(a) shall be submitted to Administrative Agent and each Bank and at the time of such request Borrower shall (i) deliver to Administrative Agent and each Bank a Reserve Report, and (ii) also notify Administrative Agent and each Bank of the Borrowing Base requested by Borrower in connection with such Special Redetermination. (b) Any Special Redetermination shall be made by Banks in accordance with the procedures and standards set forth in Section 5.2; provided, that, 35 no Reserve Report will be required to be delivered to Administrative Agent and Banks in connection with any Special Redetermination requested by Required Banks pursuant to Section 5.3(a) above. Section 5.4 Borrowing Base Deficiency. To the extent a Borrowing Base Deficiency exists after giving effect to any Redetermination, Borrower shall be obligated to eliminate such Borrowing Base Deficiency over a period not to exceed six (6) months from the effective date of such Redetermination by making six (6) mandatory, equal, consecutive, monthly payments of principal on the Revolving Loan, each of which shall be in the amount of one sixth (1/6th) of such Borrowing Base Deficiency, or in the event that the remaining principal outstanding under the Revolving Loan is less than the Borrowing Base Deficiency, then in the amount of one sixth (1/6th) of the remaining principal outstanding under the Revolving Loan. The first of such six (6) payments shall be due on the thirtieth (30th) day following the effective date of each such Redetermination and each subsequent payment shall be due on the same day of each month thereafter (or if there is no corresponding day of any subsequent month, then on the last day of such month) (each such date is referred to herein as a "borrowing base deficiency payment date"). If a Borrowing Base Deficiency cannot be eliminated pursuant to this Section 5.4 by prepayment of the Revolving Loan in full (as a result of outstanding Letter of Credit Exposure), on each borrowing base deficiency payment date, Borrower shall also deposit cash with Administrative Agent, to be held by Administrative Agent to secure outstanding Letter of Credit Exposure in the manner contemplated by Section 3.1(b), an amount at least equal to one sixth (1/6th) of the balance of such Borrowing Base Deficiency (i.e., one-sixth of the difference between the Borrowing Base Deficiency and the remaining outstanding principal under the Revolving Loan on the effective date of such Redetermination). Section 5.5 Initial Borrowing Base and Initial Conforming Borrowing Base. Notwithstanding anything to the contrary contained herein, the Borrowing Base and the Conforming Borrowing Base in effect during the period commencing on the Closing Date and ending on the effective date of the first Redetermination after the Closing Date shall be the Initial Borrowing Base and the Initial Conforming Borrowing Base, respectively. Article VI COLLATERAL AND GUARANTEES Section 6.1 Security. (a) The Obligations shall be secured by first and prior Liens (subject only to Permitted Encumbrances) covering and encumbering (i) one hundred percent (100%) of all Borrowing Base Properties, and prior to any Distributions being permitted to be made to any Restricted Subsidiary pursuant to the terms of Section 10.2(b) and/or the definition of "Permitted Investments," all of the issued and outstanding Equity owned by Parent, Borrower and each Restricted Subsidiary of Borrower and each such Restricted Subsidiary. On the Closing Date, the Credit Parties (as applicable) shall deliver to Administrative Agent for the ratable benefit of each Bank, the Mortgages and Amendments to Mortgages in form and substance acceptable to Administrative Agent and duly executed by each such Credit Party (as applicable), together with such other assignments, conveyances, amendments, agreements and other writings, including, without limitation, UCC-1 and UCC-3 financing statements (each duly authorized and executed, as applicable) as Administrative Agent shall deem necessary or 36 appropriate to grant, evidence and perfect first and prior Liens in all Borrowing Base Properties and other interests of any Credit Party required by this Section 6.1(a). Parent and Borrower hereby authorize Administrative Agent, and its agents, successors and assigns, to file any and all necessary financing statements under the Uniform Commercial Code, assignments or continuation statements as necessary from time to time (in Administrative Agent's discretion) to perfect (or continue perfection of) the Liens granted pursuant to the Loan Papers. (b) On or before each Redetermination Date after the Closing Date and at such other times as Administrative Agent or Required Banks shall request, Parent, Borrower and each Restricted Subsidiary shall execute and deliver to Administrative Agent, for the ratable benefit of each Bank, Mortgages in form and substance acceptable to Administrative Agent and duly executed by Parent, Borrower and any such Restricted Subsidiary (as applicable) together with such other assignments, conveyances, amendments, agreements and other writings, including, without limitation, UCC-1 financing statements (each duly authorized and executed) as Administrative Agent shall deem necessary or appropriate to grant, evidence and perfect the Liens required by Section 6.1(a) preceding with respect to Borrowing Base Properties acquired by Parent, Borrower and each Restricted Subsidiary subsequent to the last date on which Parent, Borrower or any such Restricted Subsidiary was required to execute and deliver Mortgages pursuant to this Section 6.1(b), or which, for any other reason are not the subject of valid, enforceable, perfected first priority Liens (subject only to Permitted Encumbrances) in favor of Administrative Agent for the ratable benefit of Banks. (c) At any time Parent, Borrower or any of their Subsidiaries are required to execute and deliver Mortgages and/or Amendments to Mortgages to Administrative Agent pursuant to this Section 6.1, Borrower shall also deliver to Administrative Agent such opinions of counsel (including, if so requested, title opinions, and in each case addressed to Administrative Agent) and other evidence of title as Administrative Agent shall deem necessary or appropriate to verify (i) Parent's, Borrower's or such Subsidiary's title to the Required Reserve Value of the Proved Mineral Interests which are subject to such Mortgages, and (ii) the validity, perfection and priority of the Liens created by such Mortgages (as amended by the Amendments to Mortgages, as applicable) and such other matters regarding such Mortgages as Administrative Agent shall reasonably request. (d) To the extent required or contemplated by the terms of Section 6.1(a)(ii), Section 10.2 and the definition of "Permitted Investments," and, as applicable, upon the consummation of the Post-Closing Transactions, Parent, Operating, Borrower or any Indirect Subsidiary (as applicable) shall execute and deliver to Administrative Agent a Parent Pledge Agreement or a Subsidiary Pledge Agreement (as applicable) together with (i) all certificates (or other evidence acceptable to Administrative Agent) evidencing the issued and outstanding Equity of Operating, Borrower and any such Restricted Subsidiary of every class owned by Parent or such Indirect Subsidiary (as applicable) which shall be duly endorsed or accompanied by stock powers executed in blank (as applicable), and (ii) such UCC-1 financing statements as Administrative Agent shall deem necessary or appropriate to grant, evidence and perfect the Liens required by Section 6.1(a)(ii) and Section 10.2 in the issued and outstanding Equity of Operating, Borrower and each such Restricted Subsidiary. 37 Section 6.2 Guarantees. Payment and performance of the Obligations shall be fully guaranteed by Parent and, prior to any Distributions being permitted to be made to any Restricted Subsidiary pursuant to the terms of Section 10.2(b), and, as applicable, upon the consummation of the Post-Closing Transactions, each Restricted Subsidiary pursuant to a Facility Guaranty, and Parent and Borrower shall cause any such applicable Restricted Subsidiary to execute and deliver to Administrative Agent such Facility Guaranty. Article VII CONDITIONS PRECEDENT Section 7.1 Conditions to Amendment and Restatement and Initial Borrowing and Participation in Letter of Credit Exposure. The amendment and restatement of the Existing Credit Agreement on the terms set forth herein, and the obligation of each Bank to loan its Commitment Percentage of the initial Borrowing hereunder and the obligation of Administrative Agent to issue (or cause another Bank to issue) any Letter of Credit issued hereunder is subject to the satisfaction of each of the following conditions: (a) Closing Deliveries. Administrative Agent shall have received each of the following documents, instruments and agreements, each of which shall be in form and substance and executed in such counterparts as shall be acceptable to Administrative Agent and each Bank and each of which shall, unless otherwise indicated, be dated the Closing Date: (i) a Note payable to the order of each Bank, each in the amount of such Bank's Commitment, duly executed by Borrower; (ii) the Mortgages and Amendments to Mortgages to be executed on the Closing Date pursuant to Section 6.1(a), duly executed and delivered by each Credit Party (as applicable), together with certified copies (in such number as Administrative Agent shall request) of the Borrower Merger Certificate, and such other assignments, conveyances, amendments, agreements and other writings, including, without limitation, UCC-1 and UCC-3 financing statements, in form and substance satisfactory to Administrative Agent, creating first and prior Liens in all Borrowing Base Properties; (iii) a Parent Pledge Agreement duly executed and delivered by Parent, together with (A) all certificates (or other evidence acceptable to Administrative Agent) evidencing one hundred percent (100%) of the issued and outstanding Equity of Operating, Offshore and DG&M of every class, which certificates shall be duly endorsed or accompanied by appropriate stock powers (as applicable) executed in blank, and (B) such other agreements and writings, including, without limitation, UCC-1 financing statements, in form and substance satisfactory to Administrative Agent; (iv) a Subsidiary Pledge Agreement duly executed and delivered by Operating, together with (A) all certificates (or other evidence acceptable to Administrative Agent) evidencing one hundred percent (100%) of the issued and outstanding Equity of Borrower, Marine and TRF of every class, which certificates shall be duly endorsed or accompanied by appropriate stock powers (as applicable) executed in 38 blank, and (B) such other agreements and writings, including, without limitation, UCC-1 financing statements, in form and substance satisfactory to Administrative Agent; (v) Facility Guarantees duly executed and delivered by Parent and each Restricted Subsidiary; (vi) such financing statements (including, without limitation, the financing statements referenced in subclause (ii) above) in form and substance acceptable to Administrative Agent and executed by each Credit Party (as applicable) as Administrative Agent shall specify to fully evidence and perfect all Liens contemplated by the Loan Papers, all of which shall be filed of record in such jurisdictions as Administrative Agent shall require in its sole discretion; (vii) a copy of the articles or certificate of incorporation, certificate of organization, or comparable charter documents, and all amendments thereto, of each Credit Party (after giving effect to the Restructuring Transactions) accompanied by a certificate that such copy is true, correct and complete, and dated within ten (10) days of the Closing Date (or within such other period as acceptable to Administrative Agent), issued by the appropriate Governmental Authority of the jurisdiction of incorporation of each such Credit Party, and accompanied by a certificate of the Secretary or comparable Authorized Officer of each such Credit Party that such copy is true, correct and complete on the Closing Date; (viii) a copy of the bylaws, regulations or comparable charter documents, and all amendments thereto, of each Credit Party (after giving effect to the Restructuring Transactions) accompanied by a certificate of the Secretary or comparable Authorized Officer of each such Credit Party that such copy is true, correct and complete as of Closing Date; (ix) certain certificates and other documents issued by the appropriate Governmental Authorities of such jurisdictions as Administrative Agent has requested (or such other evidence satisfactory to Administrative Agent) relating to the existence of each Credit Party and to the effect that each such Credit Party is in good standing with respect to the payment of franchise and similar Taxes and is duly qualified to transact business in such jurisdictions (in each case after giving effect to the Restructuring Transactions); (x) a certificate of incumbency of all officers of each Credit Party who will be authorized to execute or attest to any Loan Paper, dated the Closing Date, executed by the Secretary or comparable Authorized Officer of each such Credit Party; (xi) copies of resolutions or comparable authorizations approving the Closing Transactions, Closing Documents and Loan Papers, and authorizing the transactions contemplated by this Agreement, the other Loan Papers and the Closing Documents, duly adopted by the Board of Directors (or comparable authority) of each Credit Party accompanied by certificates of the Secretary or comparable officer of each such Credit Party that such copies are true and correct copies of resolutions duly adopted at a meeting of or (if permitted by 39 applicable Law and, if required by such Law, by the bylaws or comparable charter documents of each such Credit Party, as applicable) by the unanimous written consent of the Board of Directors (or comparable authority) of each such Credit Party, as applicable, and that such resolutions constitute all the resolutions adopted with respect to such transactions, have not been amended, modified, or revoked in any respect, and are in full force and effect as of the Closing Date; (xii) an opinion of Jenkens & Gilchrist, P.C., special counsel for the Credit Parties dated the Closing Date, favorably opining as to the enforceability of each of the Loan Papers and otherwise in form and substance satisfactory to Administrative Agent and Banks; (xiii) an opinion of Casten & Pearce, special Louisiana counsel for Administrative Agent dated the Closing Date, favorably opining as to the enforceability of the Existing Mortgages (as amended by the Amendments to Mortgages), the Mortgages and the Amendments to Mortgages in Louisiana and otherwise in form and substance satisfactory to Administrative Agent and Banks; (xiv) an opinion of Young, Williams, Henderson & Fuselier, P.A., special Mississippi counsel for Administrative Agent dated the Closing Date, favorably opining as to the enforceability of the Existing Mortgages (as amended by the Amendments to Mortgages), the Mortgages and the Amendments to Mortgages in Mississippi and otherwise in form and substance satisfactory to Administrative Agent and Banks; (xv) a certificate signed by an Authorized Officer of Borrower stating that (A) the representations and warranties contained in this Agreement and the other Loan Papers are true and correct in all respects, (B) no Default or Event of Default has occurred and is continuing, and (C) all conditions set forth in this Section 7.1 and Section 7.2 have been satisfied; (xvi) a Certificate of Ownership Interests signed by an Authorized Officer of Borrower (after giving effect to the Closing Transactions) in the form of Exhibit I attached hereto; (xvii) certificates from Borrower's insurance broker setting forth the insurance maintained by Borrower, stating that such insurance is in full force and effect, that all premiums due have been paid and stating that such insurance is adequate and complies with the requirements of Section 9.6; and (xviii) a copy of each Closing Document and all other material documents, instruments and agreements executed and/or delivered by any Credit Party in connection with the Closing Transactions, together with a certificate from an Authorized Officer of Borrower certifying that such copies are accurate and complete and represent the complete understanding and agreement of the parties with respect to the subject matter thereof. 40 (b) Closing Transactions. Subject only to the disbursement and application of the initial Borrowing, the Closing Transactions shall have occurred (or Administrative Agent shall be satisfied that such transactions will occur simultaneously with the Closing Date). (c) No Material Adverse Change. In the sole discretion of each Bank, no Material Adverse Change shall have occurred. (d) No Legal Prohibition. The transactions contemplated by this Agreement shall be permitted by applicable Law and regulation and shall not subject any Agent or any Bank to any material adverse change in its assets, liabilities, financial condition, operations or prospects or subject any Credit Party to a Material Adverse Change. (e) No Litigation. No litigation, arbitration or similar proceeding shall be pending or threatened which calls into question the validity or enforceability of this Agreement, the other Loan Papers or the transactions contemplated hereby or thereby. (f) Closing Fees. Borrower shall have paid to Administrative Agent for the ratable benefit of each Bank, and shall have paid to Administrative Agent and its Affiliates (for its own account), the fees to be paid on the Closing Date pursuant to Section 3.12. (g) Organizational Structure. Each Bank shall be satisfied in its sole judgment with the organizational, capital, legal and management structure and tax liabilities of each Credit Party both before and after giving effect to the Restructuring Transactions. (h) Other Matters. All matters related to this Agreement, the other Loan Papers, the Credit Parties, the Closing Documents and the Closing Transactions shall be acceptable to each Bank in its sole discretion, and each Credit Party shall have delivered to Administrative Agent and each Bank such evidence as they shall request to substantiate any matters related to this Agreement, the other Loan Papers, the Credit Parties, the Closing Documents and the Closing Transactions as Administrative Agent or any Bank shall request. Upon satisfaction of each of the conditions set forth in this Section 7.1, Parent, Borrower and Administrative Agent shall execute the Certificate of Effectiveness. Upon the execution and delivery of the Certificate of Effectiveness, the Existing Credit Agreement shall automatically and completely be amended and restated on the terms set forth herein without necessity of any other action on the part of any Bank, any Agent, Parent or Borrower. Until execution and delivery of the Certificate of Effectiveness, the Existing Credit Agreement shall remain in full force and effect in accordance with its terms. Each Bank hereby authorizes Administrative Agent to execute the Certificate of Effectiveness on its behalf and acknowledges and agrees that the execution of the Certificate of Effectiveness by Administrative Agent shall be binding on each such Bank. Section 7.2 Conditions to Each Borrowing and each Letter of Credit. The obligation of each Bank to loan its Commitment Percentage of each Borrowing and the obligation of any Letter of Credit Issuer to issue, extend, amend or renew any Letter of Credit on the date such Letter of Credit is to be issued, extended, amended or renewed is subject to the further satisfaction of the following conditions: 41 (a) timely receipt by Administrative Agent of a Request for Borrowing or a Request for Letter of Credit (as applicable); (b) immediately before and after giving effect to such Borrowing or issuance of such Letter of Credit, no Default or Event of Default shall have occurred and be continuing and the funding of such Borrowing or the issuance of the requested Letter of Credit (as applicable) shall not cause a Default or Event of Default; (c) the representations and warranties of each Credit Party contained in this Agreement and the other Loan Papers shall be true and correct on and as of the date of such Borrowing or issuance of such Letter of Credit (as applicable); (d) the amount of the requested Borrowing or the amount of the requested Letter of Credit (as applicable) shall not exceed the Availability; (e) no Material Adverse Change shall have occurred; and (f) the funding of such Borrowing or the issuance of such Letter of Credit (as applicable) shall be permitted by applicable Law. The funding of each Borrowing and the issuance of each Letter of Credit hereunder shall be deemed to be a representation and warranty by Borrower on the date of such Borrowing and the date of issuance of each Letter of Credit as to the facts specified in Section 7.2(b) through Section 7.2(e). Section 7.3 Agreements Regarding Initial Borrowing. Parent, Borrower, Administrative Agent and each Bank acknowledge that all the proceeds of the initial Borrowing to be made on the Closing Date are to be applied to refinance in full all Obligations outstanding under and as defined in the Existing Credit Agreement (the "Refinancing Borrowing"). Administrative Agent and each Bank hereby waive the requirements of Section 3.2(a) and Section 7.2(a) with respect to the Refinancing Borrowing to the extent, but only to the extent, such Sections require the delivery of a Request for Borrowing as a condition precedent to the obligation of each Bank to loan its Commitment Percentage of each Borrowing. Each Bank, Administrative Agent, Parent and Borrower further acknowledge and agree that, notwithstanding the contrary provisions of Section 3.2(c), each Bank shall only be required to fund as part of such Refinancing Borrowing the remainder, if any (and as applicable), of (a) its Commitment Percentage of such Refinancing Borrowing, minus (b) the amount it is to receive as a result of the application of the proceeds of the Refinancing Borrowing to refinance all obligations outstanding under and as defined in the Existing Credit Agreement. Section 7.4 Materiality of Conditions. Each condition precedent herein is material to the transactions contemplated herein, and time is of the essence in respect of each thereof. 42 Article VIII REPRESENTATIONS AND WARRANTIES Parent and Borrower jointly and severally represent and warrant to Administrative Agent and each Bank that each of the following statements is true and correct on the date hereof (and after giving effect to the Closing Transactions), and will be true and correct on the occasion of each Borrowing, the issuance of each Letter of Credit and the consummation of the Post-Closing Transactions (except to the extent such representations and warranties are expressly made as of a particular date, in which event such representations and warranties shall be true and correct as of such date): Section 8.1 Corporate Existence and Power. Each Credit Party (a) is a corporation, partnership or limited liability company duly incorporated or organized (as applicable), validly existing and in good standing under the Laws of its jurisdiction of incorporation or organization, (b) has all corporate, partnership or limited liability company power (as applicable) and all material governmental licenses, authorizations, consents and approvals required to carry on its businesses as now conducted and as proposed to be conducted, and (c) is duly qualified to transact business as a foreign corporation, partnership or limited liability company (as applicable) in each jurisdiction where a failure to be so qualified could have a Material Adverse Effect. Section 8.2 Credit Party and Governmental Authorization; Contravention. The execution, delivery and performance of this Agreement and the other Loan Papers by each Credit Party (to the extent each Credit Party is a party to this Agreement and such Loan Papers) are within such Credit Party's corporate, partnership or limited liability company powers (as applicable), when executed will be duly authorized by all necessary corporate, partnership or limited liability company action (as applicable), require no action by or in respect of, or filing with, any Governmental Authority (including, without limitation, Bond Issuer) and do not contravene, or constitute a default under, any provision of applicable Law (including, without limitation, the Margin Regulations) or of the articles or certificate of incorporation, bylaws, regulations, partnership agreement or comparable charter documents of any Credit Party or of any agreement, judgment, injunction, order, decree or other instrument (including, without limitation, the Bond Documents) binding upon any Credit Party or result in the creation or imposition of any Lien on any asset of any Credit Party other than the Liens securing the Obligations. Section 8.3 Binding Effect. This Agreement constitutes a valid and binding agreement of Parent and Borrower; the other Loan Papers when executed and delivered in accordance with this Agreement, will constitute valid and binding obligations of each Credit Party executing the same; and each Loan Paper is, or when executed and delivered, will be, enforceable against each Credit Party which executes the same in accordance with its terms except as (a) the enforceability thereof may be limited by bankruptcy, insolvency or similar Laws affecting creditors rights generally, and (b) the availability of equitable remedies may be limited by equitable principles of general applicability. 43 Section 8.4 Financial Information (a) The Current Financials fairly present, in conformity with GAAP, the consolidated financial position of Former Borrower and its consolidated results of operations and cash flows as of the dates and for the periods covered thereby. (b) The most recent annual audited consolidated balance sheet of Parent and the related consolidated statements of operations and cash flows for the Fiscal Year then ended, copies of which have been delivered to each Bank, fairly present, in conformity with GAAP, the consolidated financial position of Parent as of the end of such Fiscal Year and its consolidated results of operations and cash flows for such Fiscal Year. (c) The most recent quarterly unaudited consolidated balance sheet of Parent delivered to Banks, and the related unaudited consolidated statements of operations and cash flows for the portion of Parent's Fiscal Year then ended, fairly present, in conformity with GAAP applied on a basis consistent with the financial statements referred to in Section 8.4(a), the consolidated financial position of Parent as of such date and its consolidated results of operations and cash flows for such portion of Parent's Fiscal Year. (d) Except as disclosed in writing to Banks prior to the execution and delivery of this Agreement, since the date of Former Borrower's most recent annual and quarterly consolidated balance sheet and consolidated statements of operations and cash flow delivered to Banks, there has been no material adverse change in the assets, liabilities, financial position, results of operations or prospects of any Credit Party. Section 8.5 Litigation. Except for matters disclosed on Schedule 8.5 attached hereto, there is no action, suit or proceeding pending against, or to the knowledge of any Credit Party, threatened against or affecting any Credit Party before any Governmental Authority in which there is a reasonable possibility of an adverse decision which could have a Material Adverse Effect or which could in any manner draw into question the validity of the Loan Papers. Section 8.6 ERISA. No Credit Party nor any ERISA Affiliate of any Credit Party maintains or has ever maintained or been obligated to contribute to any Plan covered by Title IV of ERISA or subject to the funding requirements of section 412 of the Code or section 302 of ERISA. Each Plan maintained by any Credit Party or any ERISA Affiliate of any Credit Party is in compliance in all material respects with all applicable Laws. Except in such instances where an omission or failure would not have a Material Adverse Effect, (a) all returns, reports and notices required to be filed with any regulatory agency with respect to any Plan have been filed timely, and (b) no Credit Party nor any ERISA Affiliate of any Credit Party has failed to make any contribution or pay any amount due or owing as required by the terms of any Plan. There are no pending or, to the best of Parent's or Borrower's knowledge, threatened claims, lawsuits, investigations or actions (other than routine claims for benefits in the ordinary course) asserted or instituted against, and no Credit Party nor any ERISA Affiliate of any Credit Party has knowledge of any threatened litigation or claims against, the assets of any Plan or its related trust or against any fiduciary of a Plan with respect to the operation of such Plan that are likely to result in liability of any Credit Party having a Material Adverse Effect. 44 Except in such instances where an omission or failure would not have a Material Adverse Effect, each Plan that is intended to be "qualified" within the meaning of section 401(a) of the Code is, and has been during the period from its adoption to date, so qualified, both as to form and operation and all necessary governmental approvals, including a favorable determination as to the qualification under the Code of such Plan and each amendment thereto, have been or will be timely obtained. No Credit Party nor any ERISA Affiliate of any Credit Party has engaged in any prohibited transactions, within the meaning of section 406 of ERISA or section 4975 of the Code, in connection with any Plan which would result in liability of any Credit Party having a Material Adverse Effect. No Credit Party nor any ERISA Affiliate of any Credit Party maintains or contributes to any Plan that provides a post-employment health benefit, other than a benefit required under section 601 of ERISA, or maintains or contributes to a Plan that provides health benefits that is not fully funded except where the failure to fully fund such Plan would not have a Material Adverse Effect. No Credit Party nor any ERISA Affiliate of any Credit Party maintains, has established or has ever participated in a multiple employer welfare benefit arrangement within the meaning of section 3(40)(A) of ERISA. Section 8.7 Taxes and Filing of Tax Returns. Each Credit Party has filed all tax returns required to have been filed and has paid all Taxes shown to be due and payable on such returns, including interest and penalties, and all other Taxes which are payable by such party, to the extent the same have become due and payable, other than Taxes with respect to which a failure to pay would not have a Material Adverse Effect. No Credit Party knows of any proposed material Tax assessment against it and all Tax liabilities of each Credit Party are adequately provided for. Except as disclosed in writing to Banks prior to the date hereof, no income tax liability in excess of $50,000 of any Credit Party has been asserted by the Internal Revenue Service or other Governmental Authority for Taxes in excess of those already paid. Section 8.8 Ownership of Properties Generally. Each Credit Party has good and valid fee simple or leasehold title to all material properties and assets purported to be owned by it, including, without limitation, all assets reflected in the balance sheets referred to in Section 8.4(a), Section 8.4(b) and Section 8.4(c) and all assets which are used by the Credit Parties in the operation of their respective businesses, and none of such properties or assets is subject to any Lien other than Permitted Encumbrances. Section 8.9 Mineral Interests. Each Credit Party (as applicable) has good and defensible title to all Mineral Interests described in the Reserve Report, including, without limitation, all Borrowing Base Properties, free and clear of all Liens except Permitted Encumbrances and Immaterial Title Deficiencies. With the exception of Immaterial Title Deficiencies, all such Mineral Interests are valid, subsisting, and in full force and effect, and all rentals, royalties, and other amounts due and payable in respect thereof have been duly paid. Without regard to any consent or non-consent provisions of any joint operating agreement covering any of such Credit Party's Proved Mineral Interests, and with the exception of Immaterial Title Deficiencies, each Credit Party's (as applicable) share of (a) the costs for each Proved Mineral Interest described in the Reserve Report is not greater than the decimal fraction set forth in the Reserve Report, before and after payout, as the case may be, and described therein by the respective designations "working interests," "WI," "gross working interest," "GWI," or similar terms, and (b) production from, allocated to, or attributed to each such Proved Mineral Interest is not less than the decimal fraction set forth in the Reserve Report, before and after payout, as the case may be, and 45 described therein by the designations "net revenue interest," "NRI," or similar terms. Except in the case of wells which, in the aggregate, represent less than two percent (2%) of the production from the Proved Producing Mineral Interests described in the Reserve Report, each well drilled in respect of each Proved Producing Mineral Interest described in the Reserve Report (y) is capable of, and is presently, producing hydrocarbons in commercially profitable quantities, and each Credit Party (as applicable) is currently receiving payments for its share of production, with no funds in respect of any thereof being presently held in suspense, other than any such funds being held in suspense pending delivery of appropriate division orders, and (z) has been drilled, bottomed, completed, and operated in compliance with all applicable Laws and no such well which is currently producing Hydrocarbons is subject to any penalty in production by reason of such well having produced in excess of its allowable production. Section 8.10 Licenses, Permits, Etc. Except as disclosed on Schedule 8.10 attached hereto, each Credit Party possesses such valid franchises, certificates of convenience and necessity, operating rights, licenses, permits, consents, authorizations, exemptions and orders of Governmental Authorities, as are necessary to carry on its business as now conducted and as proposed to be conducted, except to the extent a failure to obtain any such item would not have a Material Adverse Effect. Section 8.11 Compliance with Law. The business and operations of each Credit Party have been and are being conducted in accordance with all applicable Laws other than violations of Laws which do not (either individually or collectively) have a Material Adverse Effect. Section 8.12 Full Disclosure. All information heretofore furnished by each Credit Party to Administrative Agent or any Bank for purposes of or in connection with this Agreement, any Loan Paper, any transaction contemplated hereby or thereby, or the Closing Transactions or the Post-Closing Transactions is, and all such information hereafter furnished by or on behalf of any Credit Party to Administrative Agent or any Bank will be, true, complete and accurate in every material respect. The Credit Parties have disclosed or have caused to be disclosed to Banks in writing any and all facts (other than facts of general public knowledge) which might reasonably be expected to result in a Material Adverse Change. Section 8.13 Organizational Structure; Nature of Business. Parent is a holding company owning one hundred percent (100%) of the issued and outstanding Equity in Offshore (prior to the consummation of the Post-Closing Transactions), Operating and DG&M. Parent has no direct, wholly-owned Subsidiaries other than Offshore (prior to the consummation of the Post-Closing Transactions), Operating and DG&M. Marine, Offshore, Borrower and TRF have no Subsidiaries. Operating is a holding company owning one hundred percent (100%) of the Equity in Marine, Borrower and TRF (and, from and after consummation of the Post-Closing Transactions, Offshore). Operating has no direct, wholly-owned Subsidiaries other than Marine, Borrower and TRF (and, from and after consummation of the Post-Closing Transactions, Offshore). Borrower and Offshore are engaged only in the business of acquiring, exploring, developing and operating Mineral Interests and the production and marketing of hydrocarbons therefrom. Marine is engaged only in the business of marine oil field services. DG&M is a holding company 46 owning one hundred percent (100%) of the issued and outstanding Equity in Genesis Energy. TRF temporarily holds unproved Mineral Interests which will be transferred and conveyed to Borrower after the Closing Date. Schedule 8.13 attached hereto accurately reflects (a) the jurisdiction of incorporation or organization of each Credit Party, (b) each jurisdiction in which each Credit Party is qualified to transact business as a foreign corporation, foreign partnership or foreign limited liability company, (c) the authorized, issued and outstanding Equity of each Credit Party, and (d) all outstanding warrants, options, subscription rights, convertible securities or other rights to purchase Equity of each Credit Party. Section 8.14 Environmental Matters. Except for matters disclosed on Schedule 9.10 attached hereto, no operation conducted by any Credit Party and no real or personal property now or previously owned or leased by any Credit Party (including, without limitation, any Credit Party's Mineral Interests) and no operations conducted thereon, and to any Credit Parties' knowledge, no operations of any prior owner, lessee or operator of any such properties, is or has been in violation of any Applicable Environmental Law other than violations which neither individually nor in the aggregate will have a Material Adverse Effect. Except for matters disclosed on Schedule 9.10 attached hereto, no Credit Party, nor any such property nor operation is the subject of any existing, pending or, to any Credit Parties' knowledge, threatened Environmental Complaint which could, individually or in the aggregate, have a Material Adverse Effect. All notices, permits, licenses, and similar authorizations, required to be obtained or filed in connection with the ownership of each tract of real property or operations of any Credit Party thereon and each item of personal property owned, leased or operated by any Credit Party, including, without limitation, notices, licenses, permits and authorizations required in connection with any past or present treatment, storage, disposal, or release of Hazardous Substances into the environment, have been duly obtained or filed except to the extent the failure to obtain or file such notices, licenses, permits and authorizations would not have a Material Adverse Effect. All Hazardous Substances, generated at each tract of real property and by each item of personal property owned, leased or operated by any Credit Party have been transported, treated, and disposed of only by carriers or facilities maintaining valid permits under RCRA (as hereinafter defined) and all other Applicable Environmental Laws for the conduct of such activities except in such cases where the failure to obtain such permits would not, individually or in the aggregate, have a Material Adverse Effect. Except for matters disclosed on Schedule 9.10 attached hereto, there have been no Hazardous Discharges which were not in compliance with Applicable Environmental Laws other than Hazardous Discharge which would not, individually or in the aggregate, have a Material Adverse Effect. Except for matters disclosed on Schedule 9.10 attached hereto, no Credit Party has any contingent liability in connection with any Hazardous Discharge which could reasonably be expected to have a Material Adverse Effect. As used in this Section 8.14, the term "RCRA" shall mean the Resource Conservation and Recovery Act of 1976, as amended by the Used Oil Recycling Act of 1980, the Solid Waste Recovery Act of 1976, as amended by the Solid Waste Disposal Act of 1980, and the Hazardous and Solid Waste Amendments of 1984, as the same may be further amended and in effect from time to time. Section 8.15 Burdensome Obligations. No Credit Party, nor any of the properties of any Credit Party, is subject to any Law or any pending or threatened change of Law or subject to any restriction under its articles (or certificate) of incorporation, bylaws, regulations, partnership agreement or comparable charter documents or under any agreement or instrument to which any Credit Party or by which any Credit Party or any of their properties may be subject or bound, which is so unusual or burdensome as to be likely in the foreseeable future to have a Material Adverse Effect. Without limiting the 47 foregoing, no Credit Party is a party to or bound by any agreement (other than the Loan Papers) or subject to any order of any Governmental Authority which prohibits or restricts in any way the right of such Credit Party or any Restricted Subsidiary of any Credit Party to make Distributions. Section 8.16 Fiscal Year. Each of Parent's and Borrower's Fiscal Year is January 1 through December 31. Section 8.17 No Default. Neither a Default nor an Event of Default has occurred or will exist after giving effect to the transactions contemplated by this Agreement, the other Loan Papers, the Closing Transactions or the Post-Closing Transactions. Section 8.18 Government Regulation. No Credit Party is subject to regulation under the Public Utility Holding Company Act of 1935, the Federal Power Act, the Interstate Commerce Act (as any of the preceding acts have been amended), the Investment Company Act of 1940 or any other Law which regulates the incurring by such Credit Party of Debt, including, but not limited to Laws relating to common contract carriers or the sale of electricity, gas, steam, water or other public utility services. Section 8.19 Insider. No Credit Party is, and no Person having "control" (as that term is defined in 12 U.S.C. section 375(b) or regulations promulgated thereunder) of any Credit Party is an "executive officer," "director" or "shareholder" of any Bank or any bank holding company of which any Bank is a Subsidiary or of any Subsidiary of such bank holding company. Section 8.20 Gas Balancing Agreements and Advance Payment Contracts. On the date of this Agreement, (a) there is no Material Gas Imbalance, and (b) the aggregate amount of all Advance Payments received by any Credit Party under Advance Payment Contracts (excluding the advance payment of carbon dioxide pursuant to the Genesis VPP Transactions) which have not been satisfied by delivery of production does not exceed $2,000,000. Section 8.21 Bond Documents. Borrower (or Former Borrower) has provided to Administrative Agent a true and correct copy of each of the Bond Documents, including all amendments and modifications thereto (whether characterized as an amendment, modification, waiver, consent or similar document). No material rights or obligations of any party to any of the Bond Documents have been waived and no party to any of the Bond Documents is in default of its obligations or in breach of any representations or warranties made thereunder. Each of the Bond Documents is a valid, binding and enforceable obligation of Borrower and each other party thereto in accordance with its terms and is in full force and effect. As used in this Agreement, the term "Obligations" shall include, without limitation, any and all obligations, indebtedness and liabilities owed by Borrower or any other Credit Party to Bond Purchaser (whether directly or as assignee of Bond Issuer) under the Bond Documents, which obligations, indebtedness and liabilities shall be secured by Liens on all property described as collateral security for the Obligations in accordance with and pursuant to the Mortgages and the other Loan Papers. Each representation and warranty made by Borrower and each other party in the Bond Documents will be true and correct on the date of each Borrowing or issuance of a Letter of Credit. Borrower hereby acknowledges, agrees and confirms that it has assumed (by operation of law or otherwise) all debt, liabilities and obligations, and agreed to perform, as sole and primary obligor, all obligations, of Former Borrower under the Bond Documents. 48 Section 8.22 Closing Documents. Borrower has provided to Administrative Agent a true and correct copy of each of the Closing Documents, including all amendments and modifications thereto (whether characterized as an amendment, modification, waiver, consent or similar document). No material rights or obligations of any party to any of the Closing Documents have been waived and no party to any of the Closing Documents is in default of its obligations or in breach of any representations or warranties made thereunder. Each of the Closing Documents is a valid, binding and enforceable obligation of each party thereto in accordance with its terms and is in full force and effect. Article IX AFFIRMATIVE COVENANTS Parent and Borrower jointly and severally covenant and agree that, so long as any Bank has any commitment to lend or participate in Letter of Credit Exposure hereunder or any amount payable under any Note remains unpaid or any Letter of Credit remains outstanding: Section 9.1 Information. Parent will deliver, or cause to be delivered, to each Bank: (a) as soon as available and in any event within (i) seventy-five (75) days after the end of the Fiscal Year ending December 31, 2003, and (ii) sixty (60) days after the end of each Fiscal Year thereafter, consolidated balance sheets of Parent as of the end of such Fiscal Year and the related consolidated statements of income and statements of cash flow for such Fiscal Year, setting forth in each case in comparative form the figures for the previous Fiscal Year, all reported by Parent in accordance with GAAP and audited by a firm of independent public accountants of nationally recognized standing and acceptable to Administrative Agent; to the extent Parent's Form of 10-K filed with the Securities and Exchange Commission for each Fiscal Year contains all information required by this Section 9.1(a), Parent may satisfy its obligations under this Section 9.1(a) for each Fiscal Year by delivering to Banks a copy of such Form 10-K for such Fiscal Year; (b) as soon as available and in any event within (i) forty (40) days after the end of each of the first three (3) Fiscal Quarters of the Fiscal Year ending December 31, 2004, and (ii) thirty-five (35) days after the end of each of the first three (3) Fiscal Quarters of each Fiscal Year thereafter, consolidated balance sheets of Parent as of the end of such Fiscal Quarter and the related consolidated statements of income and statements of cash flow for such quarter and for the portion of Parent's Fiscal Year ended at the end of such Fiscal Quarter, setting forth in each case in comparative form the figures for the corresponding quarter and the corresponding portion of Parent's previous Fiscal Year; to the extent Parent's Form 10-Q filed with the Securities and Exchange Commission for each Fiscal Quarter contains all information required by this Section 9.1(b), Parent may satisfy its obligations under this Section 9.1(b) for each Fiscal Quarter by delivering to Banks a copy of such Form 10-Q for such Fiscal Quarter. All financial statements delivered pursuant to this Section 9.1(b) shall be certified as to fairness of presentation, GAAP and consistency by a Financial Officer of Parent; (c) simultaneously with the delivery of each set of financial statements referred to in Section 9.1(a) and Section 9.1(b) a certificate 49 of the principal executive and Financial Officer of Parent in the form of Exhibit J attached hereto, (i) setting forth in reasonable detail the calculations required to establish whether Parent was in compliance with the requirements of Article XI on the date of such financial statements, (ii) stating whether there exists on the date of such certificate any Default and, if any Default then exists, setting forth the details thereof and the action which Parent or Borrower is taking or proposes to take with respect thereto, (iii) stating whether or not such financial statements fairly reflect in all material respects the results of operations and financial condition of Parent as of the date of the delivery of such financial statements and for the period covered thereby, (iv) setting forth (A) whether as of such date there is a Material Gas Imbalance and, if so, setting forth the amount of net gas imbalances under Gas Balancing Agreements to which any Credit Party is a party or by which any Mineral Interests owned by any Credit Party is bound, and (B) the aggregate amount of all Advance Payments received under Advance Payment Contracts to which any Credit Party is a party or by which any Mineral Interests owned by any Credit Party is bound which have not been satisfied by delivery of production, if any, (v) setting forth a summary of the Hedge Transactions to which any Credit Party is a party on such date, and (vi) setting forth the other information described in Exhibit J attached hereto; (d) promptly upon the mailing thereof to the stockholders of any Credit Party generally, copies of all financial statements, reports and proxy statements so mailed; (e) promptly upon the filing thereof, copies of all final registration statements, post effective amendments thereto and annual, quarterly or special reports which any Credit Party shall have filed with the Securities and Exchange Commission; provided, that Parent must deliver, or cause to be delivered, (i) any annual reports which any Credit Party shall have filed with the Securities and Exchange Commission, within (A) seventy-five (75) days after the end of the Fiscal Year of such Credit Party ending December 31, 2003, and (B) sixty (60) days after the end of each Fiscal Year of each Credit Party thereafter, and (ii) any quarterly reports which any Credit Party shall have filed with the Securities and Exchange Commission, within (A) forty (40) days after the end of each of the first three (3) Fiscal Quarters of the Fiscal Year of such Credit Party ending December 31, 2004, and (B) thirty-five (35) days after the end of the first three (3) Fiscal Quarters of each Fiscal Year of such Credit Party thereafter; (f) promptly upon receipt of same, any notice or other information received by any Credit Party indicating (i) any potential, actual or alleged non-compliance with or violation of the requirements of any Applicable Environmental Law which could result in liability to any Credit Party for fines, clean up or any other remediation obligations or any other liability in excess of $1,000,000 in the aggregate; (ii) any threatened Hazardous Discharge which Hazardous Discharge would impose on any Credit Party a duty to report to a Governmental Authority or to pay cleanup costs or to take remedial action under any Applicable Environmental Law which could result in liability to any Credit Party for fines, clean up and other remediation obligations or any other liability in excess of $1,000,000 in the aggregate; or (iii) the existence of any Lien arising under any Applicable Environmental Law securing any obligation to pay fines, clean up or other remediation costs or any other liability in excess of $1,000,000 in the aggregate. Without limiting the foregoing, each Credit Party shall provide to Banks promptly upon receipt of same by any Credit Party copies of all environmental consultants or engineers reports received by any Credit Party which would render the representation and warranty contained in Section 8.14 untrue or inaccurate in any respect; 50 (g) in the event any notification is provided to any Bank or Administrative Agent pursuant to Section 9.1(f) hereof or Administrative Agent or any Bank otherwise learns of any event or condition under which any such notice would be required, then, upon request of Required Banks, Borrower shall within thirty (30) days of such request, cause to be furnished to Administrative Agent and each Bank a report by an environmental consulting firm acceptable to Administrative Agent and Required Banks, stating that a review of such event, condition or circumstance has been undertaken (the scope of which shall be acceptable to Administrative Agent and Required Banks) and detailing the findings, conclusions and recommendations of such consultant. Borrower shall bear all expenses and costs associated with such review and updates thereof; (h) immediately upon any Authorized Officer of any Credit Party becoming aware of the occurrence of any Default, a certificate of an Authorized Officer of Borrower setting forth the details thereof and the action which Borrower is taking or proposes to take with respect thereto; (i) no later than February 28 and August 31 of each year, commencing February 28, 2004, reports of production volumes, revenue, expenses and product prices for all oil and gas properties owned by any Credit Party with a Recognized Value of $500,000 or more for the periods of six (6) months ending the preceding December 31 and June 30, respectively. Such reports shall be prepared on an accrual basis and shall be reported on a field by field basis; (j) promptly notify Banks of any Material Adverse Change; (k) promptly notify Banks of any material litigation involving any Credit Party; and (l) from time to time such additional information regarding the financial position or business of any Credit Party as Administrative Agent, at the request of any Bank, may reasonably request. Section 9.2 Business of Credit Parties. The sole business of Parent will continue to be (a) the issuance of equity and debt securities not prohibited pursuant to the provisions of this Agreement, (b) the ownership of one hundred percent (100%) of the issued and outstanding Equity of Offshore (prior to the consummation of the Post-Closing Transactions), Operating and DG&M, and (c) activities reasonably related to the businesses of Parent described in the foregoing clauses (a) and (b), including, without limitation, activities necessary to comply with the reporting requirements of the Exchange Act, and with rules and regulations of applicable securities exchanges or which are otherwise incident to being a publicly traded company. The sole business of Operating will continue to be the ownership of one hundred percent (100%) of the 51 issued and outstanding Equity of Marine, Borrower and TRF (and, from and after the consummation of the Post-Closing Transactions, Offshore), and activities reasonably related thereto. The sole business of Borrower and Offshore will continue to be the acquisition, exploration, development and operation of offshore Mineral Interests, the production and marketing of Hydrocarbons therefrom, and activities reasonably related thereto. The sole business of Marine will continue to be marine oil field services. DG&M will remain a holding company owning one hundred percent (100%) of the issued and outstanding Equity in Genesis Energy. TRF will temporarily hold unproved Mineral Interests which will be transferred and conveyed to Borrower after the Closing Date. Section 9.3 Maintenance of Existence. Parent and Borrower shall, and shall cause each other Credit Party to, at all times (a) except in connection with the consummation of the Post-Closing Transactions, maintain its corporate, partnership or limited liability company existence in its state of incorporation or organization, and (b) maintain its good standing and qualification to transact business in all jurisdictions where the failure to maintain good standing or qualification to transact business could have a Material Adverse Effect; provided, that, TRF may dissolve at any time. Section 9.4 Title Data. In addition to the title information required by Section 6.1(c) hereof, Borrower shall, upon the request of Required Banks, cause to be delivered to Administrative Agent such title opinions and other information regarding title to Mineral Interests owned by any Credit Party as are appropriate to determine the status thereof; provided, however, that, Banks may not require the Credit Parties to furnish title opinions (except pursuant to Section 6.1(c)) unless (a) an Event of Default shall have occurred and be continuing, or (b) Required Banks have reason to believe that there is a defect in or encumbrance upon any such Credit Party's title to such Mineral Interests that is not a Permitted Encumbrance. Section 9.5 Right of Inspection. Parent and Borrower will permit, and will cause each other Credit Party to permit, any officer, employee or agent of Administrative Agent or of any Bank to visit and inspect any of the assets of any Credit Party, examine each Credit Party's books of record and accounts, take copies and extracts therefrom, and discuss the affairs, finances and accounts of each Credit Party with such Credit Party's officers, accountants and auditors, all at such reasonable times and as often as Administrative Agent or any Bank may desire, all at the expense of Borrower. Section 9.6 Maintenance of Insurance. Parent and Borrower will, and will cause each other Credit Party to, at all times maintain or cause to be maintained insurance covering such risks as are customarily carried by businesses similarly situated, including, without limitation, the following: (a) workmen's compensation insurance; (b) employer's liability insurance; (c) comprehensive general public liability and property damage insurance; (d) insurance against (other than losses or damage to property owned by any Credit Party which is self insured) losses customarily insured against as a result of damage by fire, lightning, hail, tornado, explosion and other similar risk; and (e) comprehensive automobile liability insurance. All loss payable clauses or provisions in all policies of insurance maintained by any Credit Party pursuant to this Section 9.6 shall be endorsed in favor of and made payable to Administrative Agent for the ratable benefit of Banks, as their interests may appear. Administrative Agent shall have the right, for the ratable benefit of Banks, to collect, and Parent and Borrower hereby assign to Administrative Agent for the ratable benefit of Banks (and hereby agrees to cause each other Credit Party to assign), any and all monies that may become payable under any such policies of insurance by reason of damage, loss or destruction of any of property which stands as security for the Obligations or any part thereof, and Administrative Agent may, at its election, either apply for the ratable benefit of Banks all or any part of the sums so collected toward payment of the Obligations, whether or not such Obligations are then due and payable, in such manner as Administrative Agent may elect or release same to the applicable Credit Party. 52 Section 9.7 Payment of Taxes and Claims. Parent and Borrower will, and will cause each other Credit Party to, pay (a) all Taxes imposed upon it or any of its assets or with respect to any of its franchises, business, income or profits before any material penalty or interest accrues thereon, and (b) all material claims (including, without limitation, claims for labor, services, materials and supplies) for sums which have become due and payable and which by Law have or might become a Lien (other than a Permitted Encumbrance) on any of its assets; provided, however, no payment of Taxes or claims shall be required if (i) the amount, applicability or validity thereof is currently being contested in good faith by appropriate action promptly initiated and diligently conducted in accordance with good business practices and no material part of the property or assets of Parent or Borrower, and no part of the assets of any Restricted Subsidiary which would be material to Parent or Borrower, is subject to any pending levy or execution, (ii) Parent, Borrower, and any Restricted Subsidiary, as and to the extent required in accordance with GAAP, shall have set aside on their books reserves (segregated to the extent required by GAAP) deemed by them to be adequate with respect thereto, and (iii) Parent and Borrower have notified Administrative Agent of such circumstances, in detail satisfactory to Administrative Agent. Section 9.8 Compliance with Laws and Documents. Parent and Borrower will, and will cause each other Credit Party to, comply with (a) all Laws, their respective certificates (or articles) of incorporation, bylaws, regulations and similar organizational documents and all Material Agreements to which any Credit Party is a party, if a violation, alone or when combined with all other such violations, could have a Material Adverse Effect, and (b) all Bond Documents to which any Credit Party is a party. Section 9.9 Operation of Properties and Equipment. (a) Parent and Borrower will, and will cause each other Credit Party to, maintain, develop and operate its Mineral Interests in a good and workmanlike manner, and observe and comply with all of the terms and provisions, express or implied, of all oil and gas leases relating to such Mineral Interests so long as such Mineral Interests are capable of producing Hydrocarbons and accompanying elements in paying quantities, except where such failure to comply would not have a Material Adverse Effect. (b) Parent and Borrower will, and will cause each other Credit Party to, comply in all respects with all contracts and agreements applicable to or relating to its Mineral Interest or the production and sale of Hydrocarbons and accompanying elements therefrom, except to the extent a failure to so comply would not have a Material Adverse Effect. (c) Parent and Borrower will, and will cause each other Credit Party to, at all times maintain, preserve and keep all operating equipment used with respect to its Mineral Interests in proper repair, working order and condition, and make all necessary or appropriate repairs, renewals, replacements, additions and improvements thereto so that the efficiency of such operating equipment shall at all times be properly preserved and maintained, except where such failure to comply would not have a Material Adverse Effect; provided, further that, no item of operating equipment need be so repaired, renewed, replaced, added to or improved, if Borrower shall in good faith determine that such action is not necessary or desirable for the continued efficient and profitable operation of the business of such Credit Party. 53 Section 9.10 Environmental Law Compliance. Except to the extent a failure to comply would not have a Material Adverse Effect, Parent and Borrower will, and will cause each other Credit Party to, comply with all Applicable Environmental Laws, including, without limitation, (a) all licensing, permitting, notification and similar requirements of Applicable Environmental Laws, and (b) all provisions of all Applicable Environmental Laws regarding storage, discharge, release, transportation, treatment and disposal of Hazardous Substances. Parent and Borrower will, and will cause each other Credit Party to, promptly pay and discharge when due all legal debts, claims, liabilities and obligations with respect to any clean-up or remediation measures necessary to comply with Applicable Environmental Laws. Section 9.11 ERISA Reporting Requirements. Parent and Borrower shall furnish, or cause to be furnished, to Administrative Agent: (a) promptly and in any event (i) within thirty (30) days after Parent, Borrower or any ERISA Affiliate receives notice from any regulatory agency of the commencement of an audit, investigation or similar proceeding with respect to a Plan, and (ii) within ten (10) days after Parent, Borrower or any ERISA Affiliate contacts the Internal Revenue Service for the purpose of participation in a closing agreement or any voluntary resolution program with respect to a Plan which could have a Material Adverse Effect or knows or has reason to know that any event with respect to any Plan of Parent, Borrower or any ERISA Affiliate has occurred that is reasonably believed by Parent or Borrower to potentially have a Material Adverse Effect, a written notice describing such event and describing what action is being taken or is proposed to be taken with respect thereto, together with a copy of any notice of such event that is given to the PBGC; (b) promptly and in any event within thirty (30) days after the receipt by Borrower of a request therefor by a Bank, copies of any annual and other report (including Schedule B thereto) with respect to a Plan filed by Parent, Borrower or any ERISA Affiliate with the United States Department of Labor, the Internal Revenue Service or the PBGC; (c) notification within thirty (30) days of the effective date thereof of any material increases in the benefits, or material change in the funding method, of any existing Plan which is not a multiemployer plan (as defined in section 4001(a)(3) of ERISA), or the establishment of any material new Plans, or the commencement of contributions to any Plan to which Parent, Borrower or any ERISA Affiliate was not previously contributing; and (d) promptly after receipt of written notice of commencement thereof, notice of all (i) claims made by participants or beneficiaries with respect to any Plan, and (ii) actions, suits and proceedings before any court or governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, affecting Parent, Borrower or any ERISA Affiliate with respect to any Plan, except those which, in the aggregate, if adversely determined could not have a Material Adverse Effect. Section 9.12 Additional Documents. Parent and Borrower will, and will cause each other Credit Party to, cure promptly any defects in the creation and issuance of each Note, and the execution and delivery of this Agreement and the other Loan Papers and, at Borrower's expense, Parent and Borrower shall promptly and duly execute and deliver to each Bank, and cause each other Credit Party to 54 promptly and duly execute and deliver to each Bank, upon reasonable request, all such other and further documents, agreements and instruments in compliance with or accomplishment of the covenants and agreements of the Credit Parties in this Agreement and the other Loan Papers as may be reasonably necessary or appropriate in connection therewith. Section 9.13 Environmental Review. Parent and Borrower shall deliver to Administrative Agent prior to the completion by any Credit Party of any material acquisition of Mineral Interests or related assets, other than an acquisition of additional interests in Mineral Interests in which a Credit Party previously held an interest, a report or reports obtained by Parent or Borrower in the course of such acquisition, which report or reports shall set forth the results of a Phase I environmental review of such Mineral Interests and related assets. Additionally, if requested by Administrative Agent or Required Banks in writing in connection with any such material acquisition, Parent or Borrower shall deliver to Administrative Agent, within forty-five (45) days of Administrative Agent's or Required Banks' written request, a report or reports related to any such material acquisition which shall be in form, scope and detail acceptable to Administrative Agent from environmental engineering firms acceptable to Administrative Agent, and which shall set forth the results of a Phase I environmental review of the Mineral Interests and related assets the subject of such material acquisition. All of the reports delivered to Administrative Agent pursuant to this Section 9.13 shall not reflect the existence of facts or circumstances which would constitute a material violation of any Applicable Environmental Law or which are likely to result in a material liability to any Credit Party. Section 9.14 Post-Closing Transactions. Upon obtaining regulatory approval and consummating the Post-Closing Transactions, Parent and Borrower shall (a) immediately notify Administrative Agent of such occurrence, (b) promptly thereafter deliver to Administrative Agent all agreements, documents and instruments evidencing such Post-Closing Transactions, including, without limitation, such organizational, existence, good standing and other certificates, together with such resolutions, consents and authorizations, as Administrative Agent or any Bank may request, and (c) comply, and cause each other Credit Party to comply, with the applicable terms and provisions of Article VI hereof. Article X NEGATIVE COVENANTS Parent and Borrower jointly and severally agree that, so long as any Bank has any commitment to lend or participate in Letter of Credit Exposure hereunder or any amount payable under any Note remains unpaid or any Letter of Credit remains outstanding: Section 10.1 Incurrence of Debt. Parent and Borrower will not, nor will Parent and/or Borrower permit any other Credit Party to, incur, become or remain liable for any Debt; provided, that (a) Borrower may incur, become or remain liable for (i) the Obligations, (ii) without duplication, Debt evidenced by the Bond Loan Agreement, (iii) Permitted Subordinate Debt and (iv) other unsecured Debt in an aggregate amount outstanding at any time not to exceed $10,000,000, (b) Parent may assume and remain liable for Permitted Subordinate Debt, and (c) any Restricted Subsidiary may incur, become and remain liable for Permitted Subordinate Debt as a guarantor; provided, that (i) such Guarantees of Permitted 55 Subordinate Debt shall be subordinated to the Obligations pursuant to subordination provisions approved by Required Banks, such approval to not be unreasonably withheld, and (ii) prior to the execution and delivery by any Restricted Subsidiary of any Guaranty of Permitted Subordinate Debt, such Restricted Subsidiary shall have executed and delivered to Administrative Agent for the ratable benefit of Banks a Facility Guaranty, and all the Equity of such Restricted Subsidiary owned by any Credit Party shall have been pledged to Administrative Agent pursuant to a Parent Pledge Agreement or a Subsidiary Pledge Agreement. Section 10.2 Restricted Payments. Parent and Borrower will not, nor will Parent and/or Borrower permit any other Credit Party to, directly or indirectly, declare or pay, or incur any liability to declare or pay, any Restricted Payment; provided, that (a) any Subsidiary of Parent may make Distributions to Borrower, any Credit Party may make Distributions to any other Credit Party that has provided a Facility Guaranty, and all of the Equity of which owned by Parent or any Indirect Subsidiary which is a Restricted Subsidiary (as applicable) has been pledged to Administrative Agent pursuant to a Parent Pledge Agreement or a Subsidiary Pledge Agreement (as applicable), (c) so long as (i) no Default or Borrowing Base Deficiency exists on the date any such Distribution is declared or paid and no Default or Event of Default would result therefrom, and (ii) the Borrowing Base does not exceed the Conforming Borrowing Base on the date such Restricted Payments are declared or paid, in addition to Distributions permitted under the preceding clauses (a) and (b), Borrower may make Restricted Payments up to $5,000,000 in the aggregate in any Fiscal Year, and (d) Borrower may make payments under and pursuant to the Bond Loan Agreement and the Bond Note in accordance with the terms thereof. Section 10.3 Negative Pledge. Parent and Borrower will not, nor will Parent and/or Borrower permit any other Credit Party to, create, assume or suffer to exist any Lien on any of their respective assets, other than Permitted Encumbrances. Parent and Borrower will not, nor will Parent and/or Borrower permit any other Credit Party to, enter into or become bound by any agreement (other than this Agreement) that prohibits or otherwise restricts the right of Parent, Borrower or any other Credit Party to create, assume or suffer to exist any Lien on any of their respective assets in favor of Administrative Agent for the ratable benefit of Banks. Section 10.4 Consolidations and Mergers. Parent and Borrower will not, nor will Parent and/or Borrower permit any other Credit Party to, consolidate or merge with or into any other Person; provided, that, so long as no Default or Event of Default exists or will result, any Restricted Subsidiary may merge or consolidate with any other Person so long as such Restricted Subsidiary is the surviving Person and a wholly owned direct or indirect Subsidiary of Parent. Section 10.5 Asset Dispositions. Parent and Borrower will not, nor will Parent and/or Borrower permit any other Credit Party to, sell, lease, transfer, abandon or otherwise dispose of any asset other than (a) the sale in the ordinary course of business of Hydrocarbons produced from Borrower's Mineral Interests, (b) the sale, lease, transfer, abandonment, exchange or other disposition of other assets, provided, that the aggregate value (which, in the case of assets consisting of Mineral Interests, shall be the Recognized Value of such Mineral Interests and in the case of any exchange, shall be the net value or net Recognized Value realized or resulting from such exchange) of all assets sold, leased, transferred or disposed of pursuant to this clause (b) in any period between Scheduled Redeterminations shall not exceed five percent (5%) of 56 the Conforming Borrowing Base then in effect (for purposes of this clause (b) the Closing Date will be deemed to be a Scheduled Redetermination), and (c) the sale, lease, transfer, abandonment or disposition of Unproved Reserves. In no event will Parent, Borrower or any other Credit Party sell, transfer or dispose of any Equity in any Restricted Subsidiary nor will any Credit Party (other than Parent) issue or sell any Equity or any option, warrant or other right to acquire such Equity or security convertible into such Equity to any Person other than the Credit Party which is the direct parent of such issuer on the Closing Date. Section 10.6 Amendments to Organizational and Other Documents. Parent and Borrower will not, nor will Parent and/or Borrower permit any other Credit Party to, enter into or permit any modification or amendment of, or waive any material right or obligation of any Person under (a) its certificate or articles of incorporation, bylaws, partnership agreement, regulations or other organizational documents other than amendments, modifications and waivers which will not, individually or in the aggregate, have a Material Adverse Effect, and/or (b) any Bond Document. Section 10.7 Use of Proceeds. The proceeds of Borrowings will not be used for any purpose other than (a) working capital, (b) to finance the acquisition, exploration and development of Mineral Interests, (c) for general corporate purposes, (d) to refinance the obligations outstanding under the Existing Credit Agreement, and (e) with respect to any Borrowings made or deemed made hereunder through advances to Borrower pursuant to the Bond Documents, solely for the purposes set forth in the Bond Documents. None of such proceeds (including, without limitation, proceeds of Letters of Credit issued hereunder) will be used, directly or indirectly, for the purpose, whether immediate, incidental or ultimate, of purchasing or carrying any Margin Stock, and none of such proceeds will be used in violation of applicable Law (including, without limitation, the Margin Regulations). Letters of Credit will be issued hereunder only for the purpose of securing bids, tenders, bonds, contracts and other obligations entered into in the ordinary course of Borrower's business. Without limiting the foregoing, no Letters of Credit will be issued hereunder for the purpose of or providing credit enhancement with respect to any Debt or equity security of any Credit Party or to secure any Credit Party's obligations with respect to Hedge Transactions other than Hedge Transactions with a Bank or an Affiliate of such Bank. Section 10.8 Investments. Parent and Borrower will not, nor will Parent and/or Borrower permit any other Credit Party to, directly or indirectly, make or have outstanding any Investment other than Permitted Investments. Section 10.9 Transactions with Affiliates. Parent and Borrower will not, nor will Parent and/or Borrower permit any of their Subsidiaries to, engage in any transaction with an Affiliate unless such transaction is as favorable to such party as could be obtained in an arm's length transaction with an unaffiliated Person in accordance with prevailing industry customs and practices. Section 10.10 ERISA. Except in such instances where an omission or failure would not have a Material Adverse Effect, Parent and Borrower will not, nor will Parent and/or Borrower permit any other Credit Party to (a) take any action or fail to take any action which would result in a violation of ERISA, the Code or other Laws applicable to the Plans maintained or contributed to by it or any ERISA Affiliate, or (b) modify the term of, or the funding obligations or 57 contribution requirements under any existing Plan, establish a new Plan, or become obligated or incur any liability under a Plan that is not maintained or contributed to by Parent, Borrower or any ERISA Affiliate as of the Closing Date. Section 10.11 Hedge Transactions. (a) Parent and Borrower will not, nor will Parent and/or Borrower permit any other Credit Party to, hedge (which hedges shall not have a tenor of greater four (4) years) more than the following percentages of its "forecasted production from Proved Mineral Interests" (as defined below) during any applicable calendar year (a "measurement period"), as measured from the current date (a "measurement date"):
Calendar Year Hedged Percentage Limitation -------------------- --------------------- (relative to measurement date) Oil Gas ----------------------------------------- -------------- --------------- Current Year 85% 85% ----------------------------------------- -------------- --------------- First Subsequent Year 70% 70% ----------------------------------------- -------------- --------------- Second Subsequent Year 55% 55% ----------------------------------------- -------------- --------------- Third Subsequent Year 40% 40% ----------------------------------------- -------------- ---------------
provided, that, and notwithstanding anything to the contrary contained herein, with respect to, but only with respect to, the last Fiscal Quarter of the Fiscal Year ending December 31, 2003, the percentage limitation with respect to oil shall be deemed to be 90%; provided, further, that, if any measurement date occurs in the final two Fiscal Quarters of any measurement period, for the purpose of determining the appropriate percentage limitation from the table above (which determination shall be made without giving effect to the first proviso above (i.e. the current year limitation for oil shall be deemed to be 85%)), the limitations of the current year shall apply to both the remaining portion of that current year and the entire subsequent year, and the limitations of the first subsequent year shall apply to the second subsequent year (as an example only, and for the avoidance of doubt, for any measurement date occurring during the first two Fiscal Quarters of 2004, an Oil and Gas Hedge Transaction for 2005 would have a 70% limitation; provided, however, for any measurement date occurring during the last two Fiscal Quarters of 2004, an Oil and Gas Hedge Transaction for 2005 would have an 85% limitation); provided, further, that, Borrower may enter into Hedge Transactions consisting solely of a floor price (i.e. floor, put or option) so long as the amount of Hydrocarbons which are the subject of any such Hedge Transaction in existence at any such time do not exceed one-hundred percent (100%) of Borrower's anticipated production from Proved Mineral Interests during the term of any such existing Hedge Transaction; and (b) Borrower will not permit its (i) production of oil during any Fiscal Quarter to be less than the aggregate amount of oil which is the subject of Oil and Gas Hedge Transactions during such Fiscal Quarter, or (ii) production of gas during any Fiscal Quarter to be less than the aggregate amount of gas which is the subject of Oil and Gas Hedge Transactions during such Fiscal Quarter. 58 As used in Section 10.11(a) above, "forecasted production from Proved Mineral Interests" shall mean the forecasted production for oil and gas, each taken individually, for the applicable calendar year as reflected in the most recent Reserve Report delivered to Administrative Agent pursuant to Section 5.1 hereof, after giving effect to any pro forma adjustments for the consummation of any "material acquisitions or dispositions" between the effective date of such Reserve Report and the measurement date. "Material acquisitions or dispositions" means any acquisition or disposition of any asset with a Recognized Value in excess of $10,000,000, or any cumulative total of all immaterial acquisitions or dispositions which in the aggregate have a Recognized Value in excess of $10,000,000. Section 10.12 Fiscal Year. Parent and Borrower will not, nor will Parent and/or Borrower permit any other Credit Party to, change its Fiscal Year. Section 10.13 Change in Business. Parent and Borrower will not, nor will Parent and/or Borrower permit any other Credit Party to, engage in any business other than the businesses engaged in by such parties on the date hereof as described in Section 8.13 hereof. Section 10.14 Qualified Purpose. Borrower will not request or receive any Borrowing hereunder if, after giving effect thereto and the use of the proceeds thereof, that portion of the principal balance of the Revolving Loan which is outstanding at such time and was utilized for any purpose other than a Qualified Purpose exceeds twenty five percent (25%) of the Conforming Borrowing Base in effect at such time. Borrower agrees that each Request for Borrowing will include in addition to the information described in Section 3.2 hereof, a certification from an Authorized Officer of Borrower as to the purpose and utilization of the proceeds of such Borrowing. Additionally, notwithstanding anything to the contrary contained in Section 4.2 hereof, all principal payments received by Banks with respect to the Revolving Loan shall be applied first to that portion of the outstanding principal balance of the Revolving Loan utilized for purposes other than Qualified Purposes. Notwithstanding the foregoing, Borrower shall not be required to comply with this Section 10.14 at any time that the Borrowing Base is equal to the Conforming Borrowing Base. Section 10.15 Obligations of Unrestricted Subsidiaries. Except in connection with the Genesis VPP Transaction, and to the extent approved in writing by Administrative Agent and Existing Banks pursuant to the terms of the Genesis Letter Agreement, Parent and Borrower will not, nor will Parent and/or Borrower permit any other Credit Party to, incur any liability, Debt or obligation to any Unrestricted Subsidiary of any nature, or have any liability (whether by operation of law or otherwise) for any liability, Debt or obligation of any Unrestricted Subsidiary. Section 10.16 Borrowings Related to Bond Offering. Borrower will not request or receive any Borrowing hereunder, the proceeds of which are to be used to fund advances under the Bonds, except in accordance and in compliance with the terms of the Bond Documents. Borrower agrees that each Request for Borrowing, the proceeds of which are to be used to fund advances under the Bonds, will include, in addition to the information described in Section 3.2 hereof, a certification from an Authorized Officer as to the purpose and utilization of the proceeds of such Borrowing. Additionally, notwithstanding 59 anything to the contrary contained in the Loan Papers or Bond Documents, each payment of principal and interest received by Bond Purchaser on the Bonds shall be deemed to be and considered as, without duplication, a payment of principal and interest on the Revolving Loan, and any borrowing by Borrower under the Bond Loan Agreement or on any Bond Note shall also be deemed to be and considered as, without duplication, a Borrowing of a Revolving Loan hereunder (the outstanding principal of which shall be and be deemed to be included in the Outstanding Credit for all purposes hereunder). Article XI FINANCIAL COVENANTS Parent and Borrower agree that so long as any Bank has any commitment to lend or participate in Letter of Credit Exposure hereunder or any amount payable under any Note remains unpaid or any Letter of Credit remains outstanding: Section 11.1 Current Ratio of Borrower. Parent will not permit its ratio of Consolidated Current Assets to its Consolidated Current Liabilities as of the end of any Fiscal Quarter to be less than 1.0 to 1.0. Section 11.2 Minimum Consolidated Tangible Net Worth. Parent will not permit its Consolidated Tangible Net Worth to be less than the Required Consolidated Tangible Net Worth on any Quarterly Date. Section 11.3 Consolidated EBITDA to Consolidated Net Interest Expense. Parent will not permit its ratio of Consolidated EBITDA to Consolidated Net Interest Expense to be less than 2.50 to 1.0 for any period of four (4) consecutive Fiscal Quarters. Article XII DEFAULTS Section 12.1 Events of Default. If one or more of the following events (collectively "Events of Default" and individually an "Event of Default") shall have occurred and be continuing: (a) Borrower shall fail to pay when due any principal on any Note; (b) Borrower shall fail to pay when due accrued interest on any Note or any fees or any other amount payable hereunder and such failure shall continue for a period of three (3) days following the due date; (c) Parent or Borrower shall fail to observe or perform any covenant or agreement contained in Section 5.4, Section 9.3, Article X or Article XI of this Agreement; (d) any Credit Party shall fail to observe or perform any covenant or agreement contained in this Agreement or the other Loan Papers (other than those referenced in Section 12.1(a), Section 12.1(b) and Section 12.1(c)) and such failure continues for a period of thirty (30) days after the earlier of (i) the date any Authorized Officer of any Credit Party acquires knowledge of such failure, or (ii) written notice of such failure has been given to any Credit Party by Administrative Agent or any Bank; 60 (e) any representation, warranty, certification or statement made or deemed to have been made by any Credit Party in any certificate, financial statement or other document delivered pursuant to this Agreement shall prove to have been incorrect in any material respect when made; (f) any Credit Party shall fail to make any payment when due on any Debt of such Person in a principal amount equal to or greater than $500,000, or any other event or condition shall occur which (i) results in the acceleration of the maturity of any such Debt, or (ii) entitles the holder of such Debt to accelerate the maturity thereof; (g) any Credit Party shall commence a voluntary case or other proceeding seeking liquidation, reorganization or other relief with respect to itself or its debts under any bankruptcy, insolvency or other similar Law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, or shall consent to any such relief or to the appointment of or taking possession by any such official in an involuntary case or other proceeding commenced against it, or shall make a general assignment for the benefit of creditors, or shall fail generally to pay its debts as they become due, or shall take any corporate, partnership or limited liability company action to authorize any of the foregoing; (h) an involuntary case or other proceeding shall be commenced against any Credit Party seeking liquidation, reorganization or other relief with respect to it or its debts under any bankruptcy, insolvency or other similar Law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, and such involuntary case or other proceeding shall remain undismissed and unstayed for a period of sixty (60) days; or an order for relief shall be entered against any Credit Party under the federal bankruptcy Laws as now or hereafter in effect; (i) one (1) or more final judgments or orders for the payment of money aggregating in excess of $500,000 shall be rendered against any Credit Party and such judgment or order shall continue unsatisfied and unstayed for thirty (30) days; (j) (i) any event occurs with respect to any Plan or Plans pursuant to which any Credit Party and/or any ERISA Affiliate incur a liability due and owing at the time of such event, without existing funding therefor, for benefit payments under such Plan or Plans in excess of $500,000; or (ii) any Credit Party, any ERISA Affiliate, or any other "party-in-interest" or "disqualified person," as such terms are defined in section 3(14) of ERISA and section 4975(e)(2) of the Code, shall engage in transactions which in the aggregate results in a direct or indirect liability to any Credit Party or any ERISA Affiliate in excess of $500,000 under section 409 or 502 of ERISA or section 4975 of the Code which either (A) results in a Lien on any Credit Party's assets which is not a Permitted Encumbrance, or (B) continues unsatisfied for a period of thirty (30) days after any Authorized Officer of any Credit Party first acquires knowledge of such liability; (k) a Change of Control shall occur; 61 (l) this Agreement or any other Loan Paper shall cease to be in full force and effect or shall be declared null and void or the validity or enforceability thereof shall be contested or challenged by any Credit Party, or any Credit Party shall deny that it has any further liability or obligation under any of the Loan Papers, or any Lien created by the Loan Papers shall for any reason (other than the release thereof in accordance with the Loan Papers) cease to be a valid, first priority, perfected Lien upon any of the Proved Mineral Interests purported to be covered thereby; or (m) any Credit Party or Bond Issuer shall fail to observe or perform any covenant or agreement contained in any Bond Document after any applicable cure period; then, and in every such event, Administrative Agent shall without presentment, notice or demand (unless expressly provided for herein) of any kind (including, without limitation, notice of intention to accelerate and acceleration), all of which are hereby waived, (a) if requested by Required Banks, terminate the Commitments and they shall thereupon terminate, and (b) if requested by Required Banks, take such other actions as may be permitted by the Loan Papers including, declaring the Notes (together with accrued interest thereon) to be, and the Notes shall thereupon become, immediately due and payable; provided that, in the case of any of the Events of Default specified in Section 12.1(g) or Section 12.1(h), without any notice to any Credit Party or any other act by Administrative Agent or Banks, the Commitments shall thereupon terminate and the Notes (together with accrued interest thereon) shall become immediately due and payable. Article XIII AGENTS Section 13.1 Appointment; Nature of Relationship. Bank One, NA is hereby appointed by each of the Banks as its contractual representative and Administrative Agent hereunder and under each other Loan Paper, and each Bank irrevocably authorizes Administrative Agent to act as the contractual representative of such Bank with the rights and duties expressly set forth herein and in the other Loan Papers. Administrative Agent agrees to act as such contractual representative and Administrative Agent upon the express conditions contained in this Article XIII. Notwithstanding the use of the defined term "Administrative Agent," it is expressly understood and agreed that Administrative Agent shall not have any fiduciary responsibilities to any Bank by reason of this Agreement or any other Loan Paper and that Administrative Agent is merely acting as the contractual representative of the Banks with only those duties as are expressly set forth in this Agreement and the other Loan Papers. In its capacity as the Banks' contractual representative, Administrative Agent (i) does not hereby assume any fiduciary duties to any of the Banks, (ii) is a "representative" of the Banks within the meaning of the term "secured party" as defined in the Illinois Uniform Commercial Code, and (iii) is acting as an independent contractor, the rights and duties of which are limited to those expressly set forth in this Agreement and the other Loan Papers. Each of the Banks hereby agrees to assert no claim against Administrative Agent on any theory of liability for breach of fiduciary duty, any and all of which claims each Bank hereby waives. Section 13.2 Powers. Administrative Agent shall have and may exercise such powers under the Loan Papers as are specifically delegated to Administrative 62 Agent by the terms of each thereof, together with such powers as are reasonably incidental thereto. Administrative Agent shall have no implied duties to the Banks, or any obligation to the Banks to take any action thereunder except any action specifically provided by the Loan Papers to be taken by Administrative Agent. Section 13.3 General Immunity. Neither Administrative Agent nor any of its directors, officers, agents or employees shall be liable to Parent, Borrower or any Bank for any action taken or omitted to be taken by it or them hereunder or under any other Loan Paper or in connection herewith or therewith except to the extent such action or inaction is determined in a final non-appealable judgment by a court of competent jurisdiction to have arisen from the gross negligence or willful misconduct of such Person. Section 13.4 No Responsibility for Loans, Recitals, etc. Neither Administrative Agent nor any of its directors, officers, agents or employees shall be responsible for or have any duty to ascertain, inquire into, or verify (a) any statement, warranty or representation made in connection with any Loan Paper or any Borrowing hereunder; (b) the performance or observance of any of the covenants or agreements of any obligor under any Loan Paper, including, without limitation, any agreement by an obligor to furnish information directly to each Bank; (c) the satisfaction of any condition specified in Article VII, except receipt of items required to be delivered solely to Administrative Agent; (d) the existence or possible existence of any Default or Event of Default; (e) the validity, enforceability, effectiveness, sufficiency or genuineness of any Loan Paper or any other instrument or writing furnished in connection therewith; (f) the value, sufficiency, creation, perfection or priority of any Lien in any collateral security; or (g) the financial condition of Parent, Borrower or any guarantor of any of the Obligations or of any of Parent's, Borrower's or any such guarantor's respective Subsidiaries. Administrative Agent shall have no duty to disclose to the Banks information that is not required to be furnished by Parent or Borrower to Administrative Agent at such time, but is voluntarily furnished by Parent or Borrower to Bank One (either in its capacity as Administrative Agent or in its individual capacity). Section 13.5 Action on Instructions of Banks. Administrative Agent shall in all cases be fully protected in acting, or in refraining from acting, hereunder and under any other Loan Paper in accordance with written instructions signed by the Required Banks, and such instructions and any action taken or failure to act pursuant thereto shall be binding on all of the Banks. The Banks hereby acknowledge that Administrative Agent shall be under no duty to take any discretionary action permitted to be taken by it pursuant to the provisions of this Agreement or any other Loan Paper unless it shall be requested in writing to do so by Required Banks. Administrative Agent shall be fully justified in failing or refusing to take any action hereunder and under any other Loan Paper unless it shall first be indemnified to its satisfaction by the Banks pro rata against any and all liability, cost and expense that it may incur by reason of taking or continuing to take any such action. Section 13.6 Employment of Agents and Counsel. Administrative Agent may execute any of its duties as Administrative Agent hereunder and under any other Loan Paper by or through employees, agents, and attorneys-in-fact and shall not be answerable to the Banks, except as to money or securities received by it or 63 its authorized agents, for the default or misconduct of any such agents or attorneys-in-fact selected by it with reasonable care. Administrative Agent shall be entitled to advice of counsel concerning the contractual arrangement between Administrative Agent and the Banks and all matters pertaining to Administrative Agent's duties hereunder and under any other Loan Paper. Section 13.7 Reliance on Documents; Counsel. Administrative Agent shall be entitled to rely upon any Note, notice, consent, certificate, affidavit, letter, telegram, statement, paper or document believed by it to be genuine and correct and to have been signed or sent by the proper Person or Persons, and, in respect to legal matters, upon the opinion of counsel selected by Administrative Agent, which counsel may be employees of Administrative Agent. Section 13.8 Administrative Agent's Reimbursement and Indemnification. Banks agree to reimburse and indemnify Administrative Agent ratably in proportion to their respective Commitments (or, if the Commitments have been terminated, in proportion to their Commitments immediately prior to such termination) (i) for any amounts not reimbursed by Parent or Borrower for which Administrative Agent is entitled to reimbursement by Parent or Borrower under the Loan Papers, (ii) for any other expenses incurred by Administrative Agent on behalf of the Banks, in connection with the preparation, execution, delivery, administration and enforcement of the Loan Papers (including, without limitation, for any expenses incurred by Administrative Agent in connection with any dispute between Administrative Agent and any Bank or between two or more of the Banks) and (iii) for any liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind and nature whatsoever which may be imposed on, incurred by or asserted against Administrative Agent in any way relating to or arising out of the Loan Papers or any other document delivered in connection therewith or the transactions contemplated thereby (including, without limitation, for any such amounts incurred by or asserted against Administrative Agent in connection with any dispute between Administrative Agent and any Bank or between two or more of the Banks), or the enforcement of any of the terms of the Loan Papers or of any such other documents; provided that no Bank shall be liable for any of the foregoing to the extent any of the foregoing is found in a final non-appealable judgment by a court of competent jurisdiction to have resulted from the gross negligence or willful misconduct of Administrative Agent. The obligations of the Banks under this Section 13.8 shall survive payment of the Obligations and termination of this Agreement. Section 13.9 Notice of Default. Administrative Agent shall not be deemed to have knowledge or notice of the occurrence of any Default or Event of Default hereunder unless Administrative Agent has received written notice from a Bank, Parent or Borrower referring to this Agreement describing such Default or Event of Default and stating that such notice is a "notice of default". In the event that Administrative Agent receives such a notice, Administrative Agent shall give prompt notice thereof to the Banks. Section 13.10 Rights as a Bank. In the event Administrative Agent is a Bank, Administrative Agent shall have the same rights and powers hereunder and under any other Loan Paper with respect to its Commitment and its Revolving Loans as any Bank and may exercise the same as though it were not Administrative Agent, and the term "Bank" or "Banks" shall, at any time when Administrative Agent is a Bank, unless the context otherwise indicates, include in its individual capacity. Administrative Agent and its Affiliates may accept deposits from, lend money to, and generally engage in any kind of trust, debt, equity or 64 other transaction, in addition to those contemplated by this Agreement or any other Loan Paper, with Parent, Borrower or any of their Subsidiaries in which Parent, Borrower or such Subsidiary is not restricted hereby from engaging with any other Person. Section 13.11 Bank Credit Decision. Each Bank acknowledges that it has, independently and without reliance upon Administrative Agent, Sole Lead Arranger, Book Manager or any other Agent or Bank and based on the financial statements prepared by Parent and/or Borrower and such other documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement and the other Loan Papers. Each Bank also acknowledges that it will, independently and without reliance upon Administrative Agent, Sole Lead Arranger, Book Manager or any other Agent or Bank and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement and the other Loan Papers. Section 13.12 Successor Administrative Agent. Administrative Agent may resign at any time by giving written notice thereof to Banks and Borrower, such resignation to be effective upon the appointment of a successor Administrative Agent or, if no successor Administrative Agent has been appointed, forty-five (45) days after the retiring Administrative Agent gives notice of its intention to resign. Administrative Agent may be removed at any time with or without cause by written notice received by Administrative Agent from Required Banks, such removal to be effective on the date specified by Required Banks. Upon any such resignation or removal, Required Banks shall have the right to appoint, on behalf of Parent, Borrower and the Banks, a successor Administrative Agent, which shall be approved by Parent and Borrower, such approval not to be unreasonably withheld; provided, that, Parent and Borrower shall not have the right to approve any successor Administrative Agent appointed during the continuance of any Default. If no successor Administrative Agent shall have been so appointed by Required Banks within thirty (30) days after the resigning Administrative Agent's giving notice of its intention to resign, then the resigning Administrative Agent may appoint, on behalf of Parent, Borrower and Banks, a successor Administrative Agent which shall be approved by Parent and Borrower, such approval not to be unreasonably withheld; provided, that, Parent and Borrower shall not have the right to approve any successor Administrative Agent appointed during the continuance of any Default. If Administrative Agent has resigned or been removed and no successor Administrative Agent has been appointed, Banks may perform all the duties of Administrative Agent hereunder and Borrower shall make all payments in respect of the Obligations to the applicable Bank and for all other purposes Parent and Borrower shall deal directly with the Banks. No successor Administrative Agent shall be deemed to be appointed hereunder until such successor Administrative Agent has accepted the appointment. Any such successor Administrative Agent shall be a commercial bank having capital and retained earnings of at least $100,000,000. Upon the acceptance of any appointment as Administrative Agent hereunder by a successor Administrative Agent, such successor Administrative Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the resigning or removed Administrative Agent. Upon the effectiveness of the resignation or removal of Administrative Agent, the resigning or removed Administrative Agent shall be discharged from its duties and obligations hereunder and under the Loan Papers. After the effectiveness of the resignation or removal of an Administrative Agent, the provisions of this Article XIII shall 65 continue in effect for the benefit of such Administrative Agent in respect of any actions taken or omitted to be taken by it while it was acting as Administrative Agent hereunder and under the other Loan Papers. In the event that there is a successor to Administrative Agent by merger, or Administrative Agent assigns its duties and obligations to an Affiliate pursuant to this Section 13.12, then the term "Prime Rate" as used in this Agreement shall mean the prime rate, base rate or other analogous rate of the new Administrative Agent. Section 13.13 Delegation to Affiliates. Parent, Borrower and Banks agree that Administrative Agent may delegate any of its duties under this Agreement to any of its Affiliates. Any such Affiliate (and such Affiliate's directors, officers, agents and employees) which performs duties in connection with this Agreement shall be entitled to the same benefits of the indemnification, waiver and other protective provisions to which Administrative Agent is entitled under Article XIII and Article XIV. Section 13.14 Execution of Collateral Documents. Without limiting the powers and authority of Administrative Agent described herein, the Banks hereby empower and authorize Administrative Agent to execute and deliver to Parent and Borrower (as applicable) on their behalf the Mortgages, the Amendments to Mortgages, the Parent Pledge Agreements, the Subsidiary Pledge Agreements and all related financing statements and any other financing statements, agreements, documents or instruments as shall be necessary or appropriate to effect the purposes of the foregoing instruments. Section 13.15 Collateral Releases. Banks hereby empower and authorize Administrative Agent to execute and deliver to Parent and Borrower (as applicable) on their behalf any agreements, documents or instruments as shall be necessary or appropriate to effect any releases of collateral which shall be permitted by the terms hereof or of any other Loan Paper or which shall otherwise have been approved by Required Banks (or, if required by the terms of Section 15.5, all of the Banks) in writing. Section 13.16 Agents. None of the Banks identified in this Agreement as a "Documentation Agent" and/or a "Syndication Agent" shall have any right, power, obligation, liability, responsibility or duty under this Agreement other than those applicable to all Banks as such. Without limiting the foregoing, none of such Documentation Agents or Syndication Agents shall have or be deemed to have a fiduciary relationship with any Bank. Each Bank hereby makes the same acknowledgments with respect to such Documentation Agents and Syndication Agents as it makes with respect to Administrative Agent in Section 13.11. Section 13.17 Bond Documents. Without limiting the power and authority of Administrative Agent described herein, Banks hereby: (a) appoint Administrative Agent, as Bond Purchaser, as its contractual representative under the Bond Documents and irrevocably authorize Administrative Agent to act as the contractual representative of each Bank under the Bond Documents with the rights and duties expressly set forth therein, and to hold the Bonds on behalf of the Banks, it being expressly understood and agreed, however, that Administrative Agent shall not have any fiduciary responsibilities to any Bank by reason of the Bond Documents; 66 (b) empower and authorize Administrative Agent to execute and deliver the Bond Documents to which it is a party; and (c) agree that all references in this Article XIII to "Loan Papers," shall be deemed to include, without limitation, the Bond Documents. Article XIV CHANGE IN CIRCUMSTANCES Section 14.1 Increased Cost and Reduced Return. (a) If, after the date hereof, the adoption of any applicable law, rule, or regulation, or any change in any applicable law, rule, or regulation, or any change in the interpretation or administration thereof by any Governmental Authority, central bank, or comparable agency charged with the interpretation or administration thereof, or compliance by any Bank (or its Applicable Lending Office) with any request or directive (whether or not having the force of law) of any such Governmental Authority, central bank, or comparable agency: (i) shall subject such Bank (or its Applicable Lending Office) to any tax, duty, or other charge with respect to any Eurodollar Loans, its Note, or its obligation to make Eurodollar Loans, or change the basis of taxation of any amounts payable to such Bank (or its Applicable Lending Office) under this Agreement or its Note in respect of any Eurodollar Loans (other than taxes imposed on the overall net income of such Bank or such Applicable Lending Office); (ii) shall impose, modify, or deem applicable any reserve, special deposit, assessment, compulsory loan, or similar requirement (other than the Reserve Requirement utilized in the determination of the Adjusted Eurodollar Rate) relating to any extensions of credit or other assets of, or any deposits with or other liabilities or commitments of, such Bank (or its Applicable Lending Office), including the Commitment of such Bank hereunder; or (iii) shall impose on such Bank (or its Applicable Lending Office) or on the London interbank market any other condition affecting this Agreement or its Note or any of such extensions of credit or liabilities or commitments; and the result of any of the foregoing is to increase the cost to such Bank (or its Applicable Lending Office) of making, Converting into, Continuing, or maintaining any Eurodollar Loans or to reduce any sum received or receivable by such Bank (or its Applicable Lending Office) under this Agreement or its Note with respect to any Eurodollar Loans, then the Borrower shall pay to such Bank on demand such amount or amounts as will compensate such Bank for such increased cost or reduction. If any Bank requests compensation by Borrower under this Section 14.1(a), the Borrower may, by notice to such Bank (with a copy to Administrative Agent), suspend the obligation of such Bank to make or Continue Eurodollar Loans or to Convert all or part of the Base Rate Loan owing to such Bank into Eurodollar Loans, until the event or condition giving rise to such request ceases to be in effect (in which case the provisions of Section 14.4 shall be applicable); provided, that such suspension shall not affect the right of such Bank to receive the compensation so requested. 67 (b) If, after the date hereof, any Bank shall have determined that the adoption of any applicable law, rule, or regulation regarding capital adequacy or any change therein or in the interpretation or administration thereof by any Governmental Authority, central bank, or comparable agency charged with the interpretation or administration thereof, or any request or directive regarding capital adequacy (whether or not having the force of law) of any such Governmental Authority, central bank, or comparable agency, has or would have the effect of reducing the rate of return on the capital of such Bank or any corporation controlling such Bank as a consequence of such Bank's obligations hereunder to a level below that which such Bank or such corporation could have achieved but for such adoption, change, request, or directive (taking into consideration its policies with respect to capital adequacy), then, from time to time upon demand, Borrower shall pay to such Bank such additional amount or amounts as will compensate such Bank for such reduction. (c) Each Bank shall promptly notify Borrower and Administrative Agent of any event of which it has knowledge, occurring after the date hereof, which will entitle such Bank to compensation pursuant to this Section 14.1 and will designate a different Applicable Lending Office if such designation will avoid the need for, or reduce the amount of, such compensation and will not, in the judgment of such Bank, be otherwise disadvantageous to it. Any Bank claiming compensation under this Section 14.1 shall furnish to Borrower and Administrative Agent a statement setting forth the additional amount or amounts to be paid to it hereunder which shall be conclusive in the absence of manifest error. In determining such amount, such Bank may use any reasonable averaging and attribution methods. Section 14.2 Limitation on Type of Loans. If on or prior to the first day of any Interest Period for any Eurodollar Loan: (a) Administrative Agent determines (which determination shall be conclusive) that by reason of circumstances affecting the relevant market, adequate and reasonable means do not exist for ascertaining the Eurodollar Rate for such Interest Period; or (b) Required Banks determine (which determination shall be conclusive) and notify Administrative Agent that the Adjusted Eurodollar Rate will not adequately and fairly reflect the cost to Banks of funding Eurodollar Loans for such Interest Period; then Administrative Agent shall give Borrower prompt notice thereof specifying the relevant Type of Revolving Loans and the relevant amounts or periods, and so long as such condition remains in effect, Banks shall be under no obligation to make additional Revolving Loans of such Type, Continue Revolving Loans of such Type, or to Convert Revolving Loans of any other Type into Revolving Loans of such Type, and Borrower shall, on the last day(s) of the then current Interest Period(s) for the outstanding Revolving Loans of the affected Type, either prepay such Revolving Loans or Convert such Revolving Loans into another Type of Revolving Loan in accordance with the terms of this Agreement. Section 14.3 Illegality. Notwithstanding any other provision of this Agreement, in the event that it becomes unlawful for any Bank or its Applicable Lending Office to make, maintain, or fund Eurodollar Loans hereunder, then such 68 Bank shall promptly notify Borrower thereof and such Bank's obligation to make or Continue Eurodollar Loans and to Convert other Types of Revolving Loans into Eurodollar Loans shall be suspended until such time as such Bank may again make, maintain, and fund Eurodollar Loans (in which case the provisions of Section 14.4 shall be applicable). Section 14.4 Treatment of Affected Loans. If the obligation of any Bank to make particular Eurodollar Loans or to Continue Revolving Loans, or to Convert Revolving Loans of another Type into Revolving Loans of a particular Type shall be suspended pursuant to Section 14.1 or Section 14.3 hereof (Revolving Loans of such Type being herein called "Affected Loans" and such Type being herein called the "Affected Type"), such Bank's Affected Loans shall be automatically Converted into the Base Rate Loan on the last day(s) of the then current Interest Period(s) for Affected Loans (or, in the case of a Conversion required by Section 14.3 hereof, on such earlier date as such Bank may specify to Borrower with a copy to Administrative Agent) and, unless and until such Bank gives notice as provided below that the circumstances specified in Section 14.1 or Section 14.3 hereof that gave rise to such Conversion no longer exist: (a) to the extent that such Bank's Affected Loans have been so Converted, all payments and prepayments of principal that would otherwise be applied to such Bank's Affected Loans shall be applied instead to the Base Rate Loan; and (b) all Revolving Loans that would otherwise be made or Continued by such Bank as Revolving Loans of the Affected Type shall be made or Continued instead as part of the Base Rate Loan, and all Revolving Loans of such Bank that would otherwise be Converted into Revolving Loans of the Affected Type shall be Converted instead into (or shall remain) as part of the Base Rate Loan. If such Bank gives notice to Borrower (with a copy to Administrative Agent) that the circumstances specified in Section 14.1 or Section 14.3 hereof that gave rise to the Conversion of such Bank's Affected Loans pursuant to this Section 14.4 no longer exist (which such Bank agrees to do promptly upon such circumstances ceasing to exist) at a time when Revolving Loans of the Affected Type made by other Banks are outstanding, such Bank's portion of the Base Rate Loan shall be automatically Converted, on the first day(s) of the next succeeding Interest Period(s) for such outstanding Revolving Loans of the Affected Type, to the extent necessary so that, after giving effect thereto, all Revolving Loans held by Banks holding Revolving Loans of the Affected Type and by such Bank are held pro rata (as to principal amounts, Types and Interest Periods) in accordance with their respective Commitments. Section 14.5 Compensation. Upon the request of any Bank, Borrower shall pay to such Bank such amount or amounts as shall be sufficient (in the reasonable opinion of such Bank) to compensate it for any loss, cost, or expense (including loss of anticipated profits) incurred by it as a result of: (a) any payment, prepayment, or Conversion of a Eurodollar Loan for any reason (including, without limitation, the acceleration of the Revolving Loan) on a date other than the last day of the Interest Period for such Loan; or 69 (b) any failure by the Borrower for any reason (including, without limitation, the failure of any condition precedent specified in Article VII to be satisfied) to borrow, Convert, Continue, or prepay a Eurodollar Loan on the date for such Borrowing, Conversion, Continuation, or prepayment specified in the relevant Request for Borrowing, Notice of Continuation or Conversion, or other notice of Borrowing, prepayment, Continuation, or Conversion under this Agreement. Section 14.6 Taxes. (a) Any and all payments by Borrower to or for the account of any Bank or Administrative Agent hereunder or under any other Loan Paper shall be made free and clear of and without deduction for any and all present or future Taxes, duties, levies, imposts, deductions, charges or withholdings, and all liabilities with respect thereto, excluding, in the case of each Bank and Administrative Agent, Taxes imposed on its income, and franchise Taxes imposed on it, by the jurisdiction under the Laws of which such Bank (or its Applicable Lending Office) or Administrative Agent (as the case may be) is organized or any political subdivision thereof (all such non-excluded Taxes, duties, levies, imposts, deductions, charges, withholdings, and liabilities being hereinafter referred to in this Section 14.6 as "Non-Excluded Taxes"). If Borrower shall be required by Law to deduct any Non-Excluded Taxes from or in respect of any sum payable under this Agreement or any other Loan Paper to any Bank or Administrative Agent, (i) the sum payable shall be increased as necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section 14.6) such Bank or Administrative Agent receives an amount equal to the sum it would have received had no such deductions been made, (ii) Borrower shall make such deductions, (iii) Borrower shall pay the full amount deducted to the relevant taxation authority or other authority in accordance with applicable Law, and (iv) Borrower shall furnish to Administrative Agent, at its address set forth on Schedule 2.1 hereto, the original or a certified copy of a receipt evidencing payment thereof. (b) In addition, Borrower agrees to pay any and all present or future stamp or documentary Taxes and any other excise or property Taxes or charges or similar levies which arise from any payment made under this Agreement or any other Loan Paper or from the execution or delivery of, or otherwise with respect to, this Agreement or any other Loan Paper (hereinafter referred to as "Other Taxes"). (c) Borrower agrees to indemnify each Bank and Administrative Agent for the full amount of Taxes and Other Taxes (including, without limitation, any Non-Excluded Taxes or Other Taxes imposed or asserted by any jurisdiction on amounts payable under this Section 14.6) paid by such Bank or Administrative Agent (as the case may be) and any liability (including penalties, interest, and expenses) arising therefrom or with respect thereto. (d) Each Bank organized under the Laws of a jurisdiction outside the United States, on or prior to the date of its execution and delivery of this Agreement in the case of each Bank listed on Schedule 2.1 hereto and on or prior to the date on which it becomes a Bank in the case of each other Bank, and from time to time thereafter if requested in writing by Borrower or Administrative Agent (but only so long as such Bank remains lawfully able to do so), shall provide Borrower and Administrative Agent, 70 at the time or times prescribed by applicable Law, with such properly completed and executed documentation prescribed by applicable Law (or reasonably requested by Borrower) certifying that such Bank is entitled to benefits under an income tax treaty to which the United States is a party which reduces the rate of withholding tax on payments of interest or certifying that the income receivable pursuant to this Agreement is effectively connected with the conduct of a trade or business in the United States, and certifying that such Bank is entitled to an exemption from or a reduced rate of tax on payments pursuant to this Agreement or any of the other Loan Papers. (e) For any period with respect to which a Bank has failed to provide Borrower and Administrative Agent with the appropriate form pursuant to Section 14.6(d) (unless such failure is due to a change in treaty, law, or regulation occurring subsequent to the date on which a form originally was required to be provided), such Bank shall not be entitled to indemnification under Section 14.6(a) or Section 14.6(b) with respect to Non-Excluded Taxes imposed by the United States; provided, however, that should a Bank, which is otherwise exempt from or subject to a reduced rate of withholding Tax, become subject to Non-Excluded Taxes because of its failure to deliver a form required hereunder, Borrower shall take such steps as such Bank shall reasonably request to assist such Bank to recover such Non-Excluded Taxes. (f) If Borrower is required to pay additional amounts to or for the account of any Bank pursuant to this Section 14.6, then such Bank will agree to use reasonable efforts to change the jurisdiction of its Applicable Lending Office so as to eliminate or reduce any such additional payment which may thereafter accrue if such change, in the judgment of such Bank, is not otherwise disadvantageous to such Bank. (g) Within thirty (30) days after the date of any payment of Non-Excluded Taxes, Borrower shall furnish to Administrative Agent the original or a certified copy of a receipt evidencing such payment. (h) Without prejudice to the survival of any other agreement of Borrower hereunder, the agreements and obligations of Borrower contained in this Section 14.6 shall survive the termination of the Commitments and the payment in full of the Notes. Section 14.7 Discretion of Banks as to Manner of Funding. Notwithstanding any provisions of this Agreement to the contrary, each Bank shall be entitled to fund and maintain its funding of all or any part of its Commitment in any manner it sees fit, it being understood, however, that for the purposes of this Agreement all determinations hereunder shall be made as if such Bank had actually funded and maintained each Eurodollar Loan during the Interest Period for such Eurodollar Loan through the purchase of deposits having a maturity corresponding to the last day of such Interest Period and bearing an interest rate equal to the Adjusted Eurodollar Rate for such Interest Period. Article XV MISCELLANEOUS Section 15.1 Notices. All notices, requests and other communications to any party hereunder shall be in writing (including bank wire, telecopy or similar writing) and shall be given, if to Administrative Agent or any Bank, at its address or telecopier number set forth on Schedule 2.1 hereto, and if given to 71 Parent or Borrower, at its address or telecopy number set forth on the signature pages hereof (or in either case, at such other address or telecopy number as such party may hereafter specify for the purpose by notice to the other parties hereto). Each such notice, request or other communication shall be effective (a) if given by telecopy, when such telecopy is transmitted to the telecopy number specified in this Section 15.1 and the appropriate answerback is received or receipt is otherwise confirmed, (b) if given by mail, three (3) Domestic Business Days after deposit in the mails with first class postage prepaid, addressed as aforesaid, or (c) if given by any other means, when delivered at the address specified in this Section 15.1; provided that notices to Administrative Agent under Article III or Article IV shall not be effective until received. Section 15.2 No Waivers. No failure or delay by Administrative Agent or any Bank in exercising any right, power or privilege hereunder or under any Note or other Loan Paper shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies herein provided shall be cumulative and not exclusive of any rights or remedies provided by Law or in any of the other Loan Papers. Section 15.3 Expenses; Indemnification. (a) Parent and Borrower jointly and severally agree to pay on demand all reasonable costs and expenses of each Agent (other than any Documentation Agent or Syndication Agent) in connection with the syndication, preparation, execution, delivery, modification, and amendment of this Agreement, the other Loan Papers, and the other documents to be delivered hereunder, including, without limitation, the reasonable fees and expenses of counsel for Administrative Agent with respect thereto and with respect to advising Administrative Agent as to its rights and responsibilities under the Loan Papers. Parent and Borrower further jointly and severally agree to pay on demand all costs and expenses of Administrative Agent and Banks, if any (including, without limitation, reasonable attorneys' fees and expenses), in connection with the enforcement (whether through negotiations, legal proceedings, or otherwise) of the Loan Papers and the other documents to be delivered hereunder. (b) PARENT AND BORROWER JOINTLY AND SEVERALLY AGREE TO INDEMNIFY AND HOLD HARMLESS EACH AGENT AND EACH BANK AND EACH OF THEIR AFFILIATES AND THEIR RESPECTIVE OFFICERS, DIRECTORS, EMPLOYEES, AGENTS, AND ADVISORS (EACH, AN "INDEMNIFIED PARTY") FROM AND AGAINST ANY AND ALL CLAIMS, DAMAGES, LOSSES, LIABILITIES, COSTS, AND EXPENSES (INCLUDING, WITHOUT LIMITATION, REASONABLE ATTORNEYS' FEES) THAT MAY BE INCURRED BY OR ASSERTED OR AWARDED AGAINST ANY INDEMNIFIED PARTY, IN EACH CASE ARISING OUT OF OR IN CONNECTION WITH OR BY REASON OF (INCLUDING, WITHOUT LIMITATION, IN CONNECTION WITH ANY INVESTIGATION, LITIGATION, OR PROCEEDING OR PREPARATION OF DEFENSE IN CONNECTION THEREWITH) THE LOAN PAPERS, ANY OF THE TRANSACTIONS CONTEMPLATED HEREIN OR THE ACTUAL OR PROPOSED USE OF THE 72 PROCEEDS OF THE REVOLVING LOAN (INCLUDING ANY OF THE FOREGOING ARISING FROM THE NEGLIGENCE OF THE INDEMNIFIED PARTY), EXCEPT TO THE EXTENT SUCH CLAIM, DAMAGE, LOSS, LIABILITY, COST, OR EXPENSE IS FOUND IN A FINAL, NON-APPEALABLE JUDGMENT BY A COURT OF COMPETENT JURISDICTION TO HAVE RESULTED FROM SUCH INDEMNIFIED PARTY'S GROSS NEGLIGENCE OR WILLFUL MISCONDUCT. IN THE CASE OF AN INVESTIGATION, LITIGATION OR OTHER PROCEEDING TO WHICH THE INDEMNITY IN THIS SECTION 15.3 APPLIES, SUCH INDEMNITY SHALL BE EFFECTIVE WHETHER OR NOT SUCH INVESTIGATION, LITIGATION OR PROCEEDING IS BROUGHT BY CREDIT PARTIES, ITS DIRECTORS, SHAREHOLDERS OR CREDITORS OR AN INDEMNIFIED PARTY OR ANY OTHER PERSON OR ANY INDEMNIFIED PARTY IS OTHERWISE A PARTY THERETO AND WHETHER OR NOT THE TRANSACTIONS CONTEMPLATED HEREBY ARE CONSUMMATED. PARENT AND BORROWER JOINTLY AND SEVERALLY AGREE NOT TO ASSERT ANY CLAIM AGAINST ANY AGENT, ANY BANK, ANY OF THEIR AFFILIATES, OR ANY OF THEIR RESPECTIVE DIRECTORS, OFFICERS, EMPLOYEES, ATTORNEYS, AGENTS, AND ADVISERS, ON ANY THEORY OF LIABILITY, FOR SPECIAL, INDIRECT, CONSEQUENTIAL, OR PUNITIVE DAMAGES ARISING OUT OF OR OTHERWISE RELATING TO THE LOAN PAPERS, ANY OF THE TRANSACTIONS CONTEMPLATED HEREIN OR THE ACTUAL OR PROPOSED USE OF THE PROCEEDS OF THE REVOLVING LOAN. (c) Without prejudice to the survival of any other agreement of Parent or Borrower hereunder, the agreements and obligations of Parent and Borrower contained in this Section 15.3 shall survive the payment in full of the Revolving Loan and all other amounts payable under this Agreement. Section 15.4 Right of Set-off; Adjustments. (a) Upon the occurrence and during the continuance of any Event of Default, each Bank (and each of its Affiliates) is hereby authorized at any time and from time to time, to the fullest extent permitted by Law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by such Bank (or any of its Affiliates) to or for the credit or the account of any Credit Party against any and all of the Obligations, irrespective of whether such Bank shall have made any demand under this Agreement or Note held by such and although such obligations may be unmatured. Each Bank agrees promptly to notify the affected Credit Party after any such set-off and application made by such Bank; provided, however, that the failure to give such notice shall not affect the validity of such set-off and application. The rights of each Bank under this Section 15.4 are in addition to other rights and remedies (including, without limitation, other rights of set-off) that such Bank may have. (b) If any Bank (a "benefitted Bank") shall at any time receive any payment of all or part of the amounts owing to it, or interest thereon, or receive any collateral in respect thereof (whether voluntarily or involuntarily, by set-off, or otherwise), in a greater proportion than any such payment to or collateral received by any other Bank, if any, in respect of such other Bank's amounts owing to it, or interest thereon, such 73 benefitted Bank shall purchase for cash from the other Banks a participating interest in such portion of each such other Bank's amounts owing to it, or shall provide such other Banks with the benefits of any such collateral, or the proceeds thereof, as shall be necessary to cause such benefitted Bank to share the excess payment or benefits of such collateral or proceeds ratably with each other Bank; provided, however, that if all or any portion of such excess payment or benefits is thereafter recovered from such benefitted Bank, such purchase shall be rescinded, and the purchase price and benefits returned, to the extent of such recovery, but without interest. Borrower agrees that any Bank so purchasing a participation from a Bank pursuant to this Section 15.4 may, to the fullest extent permitted by Law, exercise all of its rights of payment (including the right of set-off) with respect to such participation as fully as if such Person were the direct creditor of Borrower in the amount of such participation. Section 15.5 Amendments and Waivers. Any provision of this Agreement, the Notes or any other Loan Paper may be amended or waived if, but only if, such amendment or waiver is in writing and is signed by Parent, Borrower and Required Banks (and, if the rights or duties of any Agent are affected thereby, by such Agent); provided that no such amendment or waiver shall, unless signed by all Banks, (a) increase the Commitment of any Bank, (b) reduce the principal of or rate of interest on any Revolving Loan or any fees or other amounts payable hereunder or for termination of any Commitment, (c) change the percentage of the Total Commitment, or the number of Banks which shall be required for Banks or any of them to take any action under this Section 15.5 or any other provision of this Agreement, (d) extend the due date for, or forgive any principal, interest, fees or reimbursement obligations due hereunder, (e) release any material guarantor or other material party liable for all or any part of the Obligations or release any material part of the collateral for the Obligations or any part thereof other than releases required pursuant to sales of collateral which are expressly permitted by Section 10.5 hereof, or (f) amend or modify any of the provisions of Article V hereof or the definitions of any terms defined therein. Section 15.6 Survival. All representations, warranties and covenants made by any Credit Party herein or in any certificate or other instrument delivered by it or in its behalf under the Loan Papers shall be considered to have been relied upon by Banks and shall survive the delivery to Banks of such Loan Papers or the extension of the Revolving Loan (or any part thereof), regardless of any investigation made by or on behalf of Banks. The indemnity provided in Section 15.3(b) herein shall survive the repayment of all credit advances hereunder and/or the discharge or release of any Lien granted hereunder or in any other Loan Paper, contract or agreement between Borrower or any other Credit Party and any Agent or any Bank. Section 15.7 Limitation on Interest. Regardless of any provision contained in the Loan Papers, Banks shall never be entitled to receive, collect, or apply, as interest on the Revolving Loan, any amount in excess of the Maximum Lawful Rate, and in the event any Bank ever receives, collects or applies as interest any such excess, such amount which would be deemed excessive interest shall be deemed a partial prepayment of principal and treated hereunder as such; and if the Revolving Loan is paid in full, any remaining excess shall promptly be paid to Borrower. In determining whether or not the interest paid or payable under any specific contingency exceeds the Maximum Lawful Rate, Parent, Borrower and Banks shall, to the extent permitted under applicable Law, (a) characterize any non-principal payment as an expense, fee or premium rather than as interest, (b) exclude voluntary prepayments and the effects thereof and (c) amortize, prorate, 74 allocate and spread, in equal parts, the total amount of the interest throughout the entire contemplated term of the Notes, so that the interest rate is the Maximum Lawful Rate throughout the entire term of the Notes; provided, however, that if the unpaid principal balance thereof is paid and performed in full prior to the end of the full contemplated term thereof, and if the interest received for the actual period of existence thereof exceeds the Maximum Lawful Rate, Banks shall refund to Borrower the amount of such excess and, in such event, Banks shall not be subject to any penalties provided by any Laws for contracting for, charging, taking, reserving or receiving interest in excess of the Maximum Lawful Rate. Section 15.8 Invalid Provisions. If any provision of the Loan Papers is held to be illegal, invalid, or unenforceable under present or future Laws effective during the term thereof, such provision shall be fully severable, the Loan Papers shall be construed and enforced as if such illegal, invalid, or unenforceable provision had never comprised a part thereof, and the remaining provisions thereof shall remain in full force and effect and shall not be affected by the illegal, invalid, or unenforceable provision or by its severance therefrom. Furthermore, in lieu of such illegal, invalid, or unenforceable provision there shall be added automatically as a part of the Loan Papers a provision as similar in terms to such illegal, invalid, or unenforceable provision as may be possible and be legal, valid and enforceable. Section 15.9 Waiver of Consumer Credit Laws. Pursuant to Chapter 346 of the Texas Finance Code, as amended, Parent and Borrower agree that such Chapter 346 shall not govern or in any manner apply to the Revolving Loan. Section 15.10 Assignments and Participations. (a) Successors and Assigns. The terms and provisions of the Loan Papers shall be binding upon and inure to the benefit of Parent, Borrower and Banks and their respective successors and assigns permitted hereby, except that (i) neither Parent nor Borrower shall have the right to assign its rights or obligations under the Loan Papers without the prior written consent of each Bank, (ii) any assignment by any Bank must be made in compliance with Section 15.10(c), and (iii) any transfer by participation must be made in compliance with Section 15.10(b). Any attempted assignment or transfer by any party not made in compliance with this Section 15.10(a) shall be null and void, unless such attempted assignment or transfer is treated as a participation in accordance with Section 15.10(b). The parties to this Agreement acknowledge that clause (ii) of this Section 15.10(a) relates only to absolute assignments and this Section 15.10(a) does not prohibit assignments creating security interests, including, without limitation, (x) any pledge or assignment by any Bank of all or any portion of its rights under this Agreement and any Note to a Federal Reserve Bank or (y) in the case of a Bank which is a Fund, any pledge or assignment of all or any portion of its rights under this Agreement and any Note to its trustee in support of its obligations to its trustee; provided, however, that no such pledge or assignment creating a security interest shall release the transferor Bank from its obligations hereunder unless and until the parties thereto have complied with the provisions of Section 15.10(c). Administrative Agent may treat the Person which made any Revolving Loan or which holds any Note as the owner thereof for all purposes hereof unless and until such Person complies with Section 15.10(c); provided, however, that Administrative Agent may in its discretion (but shall not be required 75 to) follow instructions from the Person which made any Revolving Loan or which holds any Note to direct payments relating to such Revolving Loan or Note to another Person. Any assignee of the rights to any Revolving Loan or any Note agrees by acceptance of such assignment to be bound by all the terms and provisions of the Loan Papers. Any request, authority or consent of any Person, who at the time of making such request or giving such authority or consent is the owner of the rights to any Revolving Loan (whether or not a Note has been issued in evidence thereof), shall be conclusive and binding on any subsequent holder or assignee of the rights to such Revolving Loan. (b) Participations. (i) Any Bank may at any time sell to one or more banks or other entities ("Participants") participating interests in any Revolving Loan owing to such Bank, any Note held by such Bank, any Commitment of such Bank or any other interest of such Bank under the Loan Papers. In the event of any such sale by a Bank of participating interests to a Participant, such Bank's obligations under the Loan Papers shall remain unchanged, such Bank shall remain solely responsible to the other parties hereto for the performance of such obligations, such Bank shall remain the owner of its Revolving Loans and the holder of any Note issued to it in evidence thereof for all purposes under the Loan Papers, all amounts payable by Borrower under this Agreement shall be determined as if such Bank had not sold such participating interests, and Parent, Borrower and Administrative Agent shall continue to deal solely and directly with such Bank in connection with such Bank's rights and obligations under the Loan Papers. (ii) Each Bank shall retain the sole right to approve, without the consent of any Participant, any amendment, modification or waiver of any provision of the Loan Papers other than any amendment, modification or waiver with respect to any Revolving Loan or Commitment in which such Participant has an interest which would require consent of all of the Banks pursuant to the terms of Section 15.5 or of any other Loan Paper. (iii) Parent and Borrower agree that each Participant shall be deemed to have the right of setoff provided in Section 15.4 in respect of its participating interest in amounts owing under the Loan Papers to the same extent as if the amount of its participating interest were owing directly to it as a Bank under the Loan Papers; provided, that each Bank shall retain the right of setoff provided in Section 15.4 with respect to the amount of participating interests sold to each Participant. Banks agree to share with each Participant, and each Participant, by exercising the right of setoff provided in Section 15.4, agrees to share with each Bank, any amount received pursuant to the exercise of its right of setoff, such amounts to be shared in accordance with Section 15.4 as if each Participant were a Bank. Parent and Borrower further agree that each Participant shall be entitled to the yield protection provisions contained in Article XIV to the same extent as if it were a Bank and had acquired its interest by assignment pursuant to Section 15.10(c); provided, that (A) a Participant shall not be entitled to receive any greater payment under Article XIV than the Bank who sold the participating interest to such Participant would have received had it retained such interest for its own account, unless the sale of such interest to such Participant is made with the prior written consent of Parent and Borrower, and (B) 76 any Participant not incorporated under the laws of the United States of America or any State thereof agrees to comply with the provisions of Section 14.6 to the same extent as if it were a Bank. (c) Assignments. (i) Any Bank may at any time assign to one or more banks or other entities ("Purchasers") all or any part of its rights and obligations under the Loan Papers. The parties to such assignment shall execute and deliver an Assignment and Acceptance Agreement (herein so called) which shall be substantially in the form of Exhibit K or in such other form as may be agreed to by the parties thereto. Each such assignment with respect to a Purchaser which is not a Bank or an Affiliate of a Bank or an Approved Fund shall either be in an amount equal to the entire applicable Commitment and Revolving Loans of the assigning Bank or (unless each of Parent, Borrower and Administrative Agent otherwise consents) be in an aggregate amount not less than $5,000,000. The amount of the assignment shall be based on the Commitment or outstanding Revolving Loans (if the Commitment has been terminated) subject to the assignment, determined as of the date of such assignment or as of the "Effective Date," if the "Effective Date" is specified in the Assignment and Acceptance Agreement. (ii) The consent of Parent and Borrower shall be required prior to an assignment becoming effective unless Purchaser is a Bank, an Affiliate of a Bank or an Approved Fund, provided that neither the consent of Parent nor Borrower shall be required if a Default has occurred and is continuing. The consent of Administrative Agent shall be required prior to an assignment becoming effective unless the Purchaser is a Bank, an Affiliate of a Bank or an Approved Fund. The consent of Letter of Credit Issuer shall be required prior to an assignment of a Commitment becoming effective unless Purchaser is a Bank, an Affiliate of a Bank or an Approved Fund. Any consent required under this Section 15.10(c)(ii) shall not be unreasonably withheld or delayed. (iii) Upon (A) delivery to Administrative Agent of an Assignment and Acceptance Agreement, together with any consents required by Section 15.10(c)(i) and (ii), and (B) payment of a $3,500 fee to Administrative Agent for processing such assignment (unless such fee is waived by Administrative Agent), such assignment shall become effective on the effective date specified in such Assignment and Acceptance Agreement. On and after the effective date of such assignment, such Purchaser shall for all purposes be a Bank party to this Agreement and any other Loan Paper executed by or on behalf of Banks and shall have all the rights and obligations of a Bank under the Loan Papers, to the same extent as if it were an original party thereto, and the transferor Bank shall be released with respect to the Commitment and Revolving Loans assigned to such Purchaser without any further consent or action by Parent, Borrower, Banks or Administrative Agent. In the case of an assignment covering all of the assigning Bank's rights and obligations under this Agreement, such Bank shall cease to be a Bank hereunder but shall continue to be entitled to the benefits of, and subject to, those provisions of this Agreement and the other Loan Papers which survive payment of the Obligations and termination of the applicable agreement. Any assignment or transfer by a Bank of rights or obligations under this Agreement that does not comply with this Section 15.10(c) shall be treated for purposes of this Agreement as a sale by such Bank of a participation in such 77 rights and obligations in accordance with Section 15.10(b). Upon the consummation of any assignment to a Purchaser pursuant to this Section 15.10(c), the transferor Bank, Administrative Agent and Borrower shall make appropriate arrangements so that new Notes or, as appropriate, replacement Notes are issued to such transferor Bank and new Notes or, as appropriate, replacement Notes, are issued to such Purchaser, in each case in principal amounts reflecting their respective Commitments, as adjusted pursuant to such assignment. (iv) Administrative Agent, acting solely for this purpose as an agent of Borrower, shall maintain at one of its offices in Chicago, Illinois or Dallas, Texas a copy of each Assignment and Acceptance Agreement delivered to it and a register for the recordation of the names and addresses of the Banks, and the Commitments of, and principal amounts of the Revolving Loans owing to, each Bank pursuant to the terms hereof from time to time (the "Register"). The entries in the Register shall be conclusive, and Borrower, Administrative Agent and Banks may treat each Person whose name is recorded in the Register pursuant to the terms hereof as a Bank hereunder for all purposes of this Agreement, notwithstanding notice to the contrary. The Register shall be available for inspection by Parent, Borrower and any Bank, at any reasonable time and from time to time upon reasonable prior notice. (d) Dissemination of Information. Parent and Borrower authorize each Bank to disclose to any Participant or Purchaser or any other Person acquiring an interest in the Loan Papers by operation of law (each a "Transferee") and any prospective Transferee any and all information in such Bank's possession concerning the creditworthiness of Parent, Borrower and their Subsidiaries, including, without limitation, any information contained in any financial reports; provided, that, each Transferee and prospective Transferee agrees to be bound by Section 15.17 of this Agreement. (e) Tax Treatment. If any interest in any Loan Paper is transferred to any Transferee which is not incorporated under the laws of the United States or any State thereof, the transferor Bank shall cause such Transferee, concurrently with the effectiveness of such transfer, to comply with the provisions of Section 14.6(d). Section 15.11 TEXAS LAW. THIS AGREEMENT, EACH NOTE AND THE OTHER LOAN PAPERS HAVE BEEN EXECUTED AND DELIVERED IN THE STATE OF TEXAS AND SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF TEXAS AND THE LAWS OF THE UNITED STATES OF AMERICA, EXCEPT TO THE EXTENT THAT THE LAWS OF ANY STATE IN WHICH ANY PROPERTY INTENDED AS SECURITY FOR THE OBLIGATIONS IS LOCATED NECESSARILY GOVERN (A) THE PERFECTION AND PRIORITY OF THE LIENS IN FAVOR OF ADMINISTRATIVE AGENT AND BANKS WITH RESPECT TO SUCH PROPERTY, AND (B) THE EXERCISE OF ANY REMEDIES (INCLUDING FORECLOSURE) WITH RESPECT TO SUCH PROPERTY. 78 Section 15.12 Consent to Jurisdiction; Waiver of Immunities. (a) Parent and Borrower hereby irrevocably submit to the jurisdiction of any Texas State or Federal court sitting in the Northern District of Texas over any action or proceeding arising out of or relating to this Agreement or any other Loan Papers, and Parent and Borrower hereby irrevocably agree that all claims in respect of such action or proceeding may be heard and determined in such Texas State or Federal court. As an alternative, Parent and Borrower irrevocably consent to the service of any and all process in any such action or proceeding by the mailing (which shall be by registered mail) of copies of such process to such Person at its address specified in Section 15.1. Parent and Borrower agree that a final judgment on any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by Law. (b) Nothing in this Section 15.12 shall affect any right of Banks to serve legal process in any other manner permitted by Law or affect the right of any Bank to bring any action or proceeding against any Credit Party or their properties in the courts of any other jurisdictions. (c) To the extent that Parent or Borrower has or hereafter may acquire any immunity from jurisdiction of any court or from any legal process (whether through service or notice, attachment prior to judgment, attachment in aid of execution, execution or otherwise) with respect to itself or its property, such Person hereby irrevocably waives such immunity in respect of its obligations under this Agreement and the other Loan Papers. Section 15.13 Counterparts; Effectiveness. This Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. Subject to the terms and conditions herein set forth (including, without limitation, the execution and delivery of the Certificate of Effectiveness), this Agreement shall become effective when Administrative Agent shall have received counterparts hereof signed by all of the parties hereto or, in the case of any Bank as to which an executed counterpart shall not have been received, Administrative Agent shall have received telegraphic or other written confirmation from such Bank of execution of a counterpart hereof by such Bank. Section 15.14 No Third Party Beneficiaries. Except for the provisions hereof inuring to the benefit of Agents not a party to this Agreement, it is expressly intended that there shall be no third party beneficiaries of the covenants, agreements, representations or warranties herein contained other than third party beneficiaries permitted pursuant to Section 15.10. Section 15.15 COMPLETE AGREEMENT. THIS AGREEMENT AND THE OTHER LOAN PAPERS COLLECTIVELY REPRESENT THE FINAL AGREEMENT BY AND AMONG BANKS, AGENTS AND THE CREDIT PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF BANKS, AGENTS, AND THE CREDIT PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG BANKS, AGENTS, AND THE CREDIT PARTIES. 79 Section 15.16 WAIVER OF JURY TRIAL. PARENT, BORROWER, ADMINISTRATIVE AGENT AND BANKS HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVE TRIAL BY JURY IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS AGREEMENT OR ANY OF THE OTHER LOAN PAPERS AND FOR ANY COUNTERCLAIM THEREIN. Section 15.17 Confidentiality. Administrative Agent and each Bank (each, a "Lending Party") agrees to keep confidential any information furnished or made available to it by any Credit Party pursuant to this Agreement that is marked confidential; provided, that nothing herein shall prevent any Lending Party from disclosing such information (a) to any other Lending Party or any Affiliate of any Lending Party, or any officer, director, employee, agent, or advisor of any Lending Party or any Affiliate of any Lending Party, (b) to any other Person if reasonably incidental to the administration of the credit facility provided herein, (c) as required by any Law, rule or regulation, (d) upon the order of any court or administrative agency, (e) upon the request or demand of any regulatory agency or authority, (f) that is or becomes available to the public or that is or becomes available to any Lending Party other than as a result of a disclosure by any Lending Party prohibited by this Agreement, (g) in connection with any litigation to which such Lending Party or any of its affiliates may be a party, (h) to the extent necessary in connection with the exercise of any remedy under this Agreement or any other Loan Paper, and (i) subject to provisions substantially similar to those contained in this Section 15.17, to any actual or proposed participant or assignee. Notwithstanding anything herein to the contrary, confidential information shall not include, and each party to any of the Loan Papers and their respective Affiliates (and the respective partners, directors, officers, employees, advisors, representatives and other agents of each of the foregoing and their Affiliates) may disclose to any and all Persons, without limitation of any kind (i) any information with respect to the U.S. federal and state income tax treatment of the transactions contemplated hereby and any facts that may be relevant to understanding such tax treatment, which facts shall not include for this purpose the names of the parties or any other Person named herein, or information that would permit identification of the parties or such other Persons, or any pricing terms or other nonpublic business or financial information that is unrelated to such tax treatment or facts, and (ii) all materials of any kind (including opinions or other tax analyses) relating to such tax treatment or facts that are provided to any of the Persons referred to above, and it is hereby confirmed that each of the Persons referred to above has been authorized to make such disclosures since the commencement of discussions regarding the transactions contemplated hereby. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective Authorized Officers on the day and year first above written. [signature pages to follow] 80 SIGNATURE PAGE TO FOURTH AMENDED AND RESTATED CREDIT AGREEMENT BY AND AMONG DENBURY RESOURCES INC., AS PARENT GUARANTOR, DENBURY ONSHORE, LLC, AS BORROWER, BANK ONE, NA, AS ADMINISTRATIVE AGENT, THE OTHER AGENTS A PARTY THERETO, AND THE FINANCIAL INSTITUTIONS LISTED ON SCHEDULE 2.1 THERETO, AS BANKS Signature Page BORROWER: DENBURY ONSHORE, LLC, a Delaware limited liability company By: ----------------------------------------------------------------------- Phil Rykhoek, Senior Vice President and Chief Financial Officer Address for Notice: 5100 Tennyson Parkway Suite 3000 Plano, Texas 75024 Fax No. (972) 673-2150 PARENT: DENBURY RESOURCES INC., a Delaware corporation By: ----------------------------------------------------------------------- Phil Rykhoek, Senior Vice President and Chief Financial Officer Address for Notice: 5100 Tennyson Parkway Suite 3000 Plano, Texas 75024 Fax No. (972) 673-2150 Signature Page SIGNATURE PAGE TO FOURTH AMENDED AND RESTATED CREDIT AGREEMENT BY AND AMONG DENBURY RESOURCES INC., AS PARENT GUARANTOR, DENBURY ONSHORE, LLC, AS BORROWER, BANK ONE, NA, AS ADMINISTRATIVE AGENT, THE OTHER AGENTS A PARTY THERETO, AND THE FINANCIAL INSTITUTIONS LISTED ON SCHEDULE 2.1 THERETO, AS BANKS ADMINISTRATIVE AGENT: - -------------------- BANK ONE, NA, as Administrative Agent By: -------------------------------------------- J. Scott Fowler, Director, Capital Markets BANKS: BANK ONE, NA By: -------------------------------------------- J. Scott Fowler, Director, Capital Markets Signature Page SIGNATURE PAGE TO FOURTH AMENDED AND RESTATED CREDIT AGREEMENT BY AND AMONG DENBURY RESOURCES INC., AS PARENT GUARANTOR, DENBURY ONSHORE, LLC, AS BORROWER, BANK ONE, NA, AS ADMINISTRATIVE AGENT, THE OTHER AGENTS A PARTY THERETO, AND THE FINANCIAL INSTITUTIONS LISTED ON SCHEDULE 2.1 THERETO, AS BANKS SYNDICATION AGENT: - ----------------- CREDIT LYONNAIS NEW YORK BRANCH, as Syndication Agent By: -------------------------------------------- Name: -------------------------------------------- Title: -------------------------------------------- BANKS: CREDIT LYONNAIS NEW YORK BRANCH By: -------------------------------------------- Name: -------------------------------------------- Title: -------------------------------------------- Signature Page SIGNATURE PAGE TO FOURTH AMENDED AND RESTATED CREDIT AGREEMENT BY AND AMONG DENBURY RESOURCES INC., AS PARENT GUARANTOR, DENBURY ONSHORE, LLC, AS BORROWER, BANK ONE, NA, AS ADMINISTRATIVE AGENT, THE OTHER AGENTS A PARTY THERETO, AND THE FINANCIAL INSTITUTIONS LISTED ON SCHEDULE 2.1 THERETO, AS BANKS SYNDICATION AGENT: - ----------------- FORTIS CAPITAL CORP., as Syndication Agent By: -------------------------------------------- Name: -------------------------------------------- Title: -------------------------------------------- By: -------------------------------------------- Name: -------------------------------------------- Title: -------------------------------------------- BANKS: FORTIS CAPITAL CORP. By: -------------------------------------------- Name: -------------------------------------------- Title: -------------------------------------------- By: -------------------------------------------- Name: -------------------------------------------- Title: -------------------------------------------- Signature Page SIGNATURE PAGE TO FOURTH AMENDED AND RESTATED CREDIT AGREEMENT BY AND AMONG DENBURY RESOURCES INC., AS PARENT GUARANTOR, DENBURY ONSHORE, LLC, AS BORROWER, BANK ONE, NA, AS ADMINISTRATIVE AGENT, THE OTHER AGENTS A PARTY THERETO, AND THE FINANCIAL INSTITUTIONS LISTED ON SCHEDULE 2.1 THERETO, AS BANKS DOCUMENTATION AGENT: - ------------------- UNION BANK OF CALIFORNIA, N.A., as Documentation Agent By: -------------------------------------------- Name: -------------------------------------------- Title: -------------------------------------------- By: -------------------------------------------- Name: -------------------------------------------- Title: -------------------------------------------- BANKS: UNION BANK OF CALIFORNIA, N.A. By: -------------------------------------------- Name: -------------------------------------------- Title: -------------------------------------------- By: -------------------------------------------- Name: -------------------------------------------- Title: -------------------------------------------- Signature Page SIGNATURE PAGE TO FOURTH AMENDED AND RESTATED CREDIT AGREEMENT BY AND AMONG DENBURY RESOURCES INC., AS PARENT GUARANTOR, DENBURY ONSHORE, LLC, AS BORROWER, BANK ONE, NA, AS ADMINISTRATIVE AGENT, THE OTHER AGENTS A PARTY THERETO, AND THE FINANCIAL INSTITUTIONS LISTED ON SCHEDULE 2.1 THERETO, AS BANKS DOCUMENTATION AGENT: - ------------------- COMERICA BANK, as Documentation Agent By: -------------------------------------------- Name: -------------------------------------------- Title: -------------------------------------------- BANKS: COMERICA BANK By: -------------------------------------------- Name: -------------------------------------------- Title: -------------------------------------------- Signature Page SIGNATURE PAGE TO FOURTH AMENDED AND RESTATED CREDIT AGREEMENT BY AND AMONG DENBURY RESOURCES INC., AS PARENT GUARANTOR, DENBURY ONSHORE, LLC, AS BORROWER, BANK ONE, NA, AS ADMINISTRATIVE AGENT, THE OTHER AGENTS A PARTY THERETO, AND THE FINANCIAL INSTITUTIONS LISTED ON SCHEDULE 2.1 THERETO, AS BANKS BANKS: FLEET NATIONAL BANK By: -------------------------------------------- Name: -------------------------------------------- Title: -------------------------------------------- Signature Page SIGNATURE PAGE TO FOURTH AMENDED AND RESTATED CREDIT AGREEMENT BY AND AMONG DENBURY RESOURCES INC., AS PARENT GUARANTOR, DENBURY ONSHORE, LLC, AS BORROWER, BANK ONE, NA, AS ADMINISTRATIVE AGENT, THE OTHER AGENTS A PARTY THERETO, AND THE FINANCIAL INSTITUTIONS LISTED ON SCHEDULE 2.1 THERETO, AS BANKS BANKS: WELLS FARGO BANK, N.A. By: -------------------------------------------- Name: -------------------------------------------- Title: -------------------------------------------- Signature Page SIGNATURE PAGE TO FOURTH AMENDED AND RESTATED CREDIT AGREEMENT BY AND AMONG DENBURY RESOURCES INC., AS PARENT GUARANTOR, DENBURY ONSHORE, LLC, AS BORROWER, BANK ONE, NA, AS ADMINISTRATIVE AGENT, THE OTHER AGENTS A PARTY THERETO, AND THE FINANCIAL INSTITUTIONS LISTED ON SCHEDULE 2.1 THERETO, AS BANKS BANKS: BANK OF SCOTLAND By: -------------------------------------------- Name: -------------------------------------------- Title: -------------------------------------------- Signature Page SIGNATURE PAGE TO FOURTH AMENDED AND RESTATED CREDIT AGREEMENT BY AND AMONG DENBURY RESOURCES INC., AS PARENT GUARANTOR, DENBURY ONSHORE, LLC, AS BORROWER, BANK ONE, NA, AS ADMINISTRATIVE AGENT, THE OTHER AGENTS A PARTY THERETO, AND THE FINANCIAL INSTITUTIONS LISTED ON SCHEDULE 2.1 THERETO, AS BANKS BANKS: COMPASS BANK By: -------------------------------------------- Name: -------------------------------------------- Title: -------------------------------------------- Signature Page SIGNATURE PAGE TO FOURTH AMENDED AND RESTATED CREDIT AGREEMENT BY AND AMONG DENBURY RESOURCES INC., AS PARENT GUARANTOR, DENBURY ONSHORE, LLC, AS BORROWER, BANK ONE, NA, AS ADMINISTRATIVE AGENT, THE OTHER AGENTS A PARTY THERETO, AND THE FINANCIAL INSTITUTIONS LISTED ON SCHEDULE 2.1 THERETO, AS BANKS BANKS: BANK OF AMERICA, N.A. By: -------------------------------------------- Name: -------------------------------------------- Title: -------------------------------------------- Signature Page SCHEDULE 2.1 Financial Institutions ======================================== ========================= =========================== Banks Commitment Amount Commitment Percentage - ---------------------------------------- ------------------------- --------------------------- Bank One, NA $35,454,545.45 11.8181818182% - ---------------------------------------- ------------------------- --------------------------- Credit Lyonnais New York Branch $35,454,545.45 11.8181818182% - ---------------------------------------- ------------------------- --------------------------- Fortis Capital Corp. $35,454,545.45 11.8181818182% - ---------------------------------------- ------------------------- --------------------------- Union Bank of California, N.A. $35,454,545.45 11.8181818182% - ---------------------------------------- ------------------------- --------------------------- Comerica Bank $35,454,545.45 11.8181818182% - ---------------------------------------- ------------------------- --------------------------- Fleet National Bank $28,636,363.64 9.5454545454% - ---------------------------------------- ------------------------- --------------------------- Wells Fargo Bank, N.A. $28,636,363.64 9.5454545454% - ---------------------------------------- ------------------------- --------------------------- Bank of Scotland $28,636,363.64 9.5454545454% - ---------------------------------------- ------------------------- --------------------------- Bank of America, N.A. $18,409,090.91 6.1363636364% - ---------------------------------------- ------------------------- --------------------------- Compass Bank $18,409,090.91 6.1363636364% - ---------------------------------------- ------------------------- --------------------------- Totals: $300,000,000.00 100.00% ======================================== ========================= ===========================
=============================== ============================== =============================== ================================ Banks Domestic Lending Office Eurodollar Lending Office Address for Notice - ----- ----------------------- ------------------ - ------------------------------- ------------------------------ ------------------------------- -------------------------------- Bank One, NA One Bank One Plaza One Bank One Plaza 1717 Main Street Mail Code IL1-0634 Mail Code IL1-0634 4th Floor Chicago, Illinois 60670 Chicago, Illinois 60670 Mail Code TX1-2448 Attn: Ken Fecko Attn: Ken Fecko Dallas, Texas 75201 Tel. No. (312) 732-4616 Tel. No. (312) 732-4616 Attn: J. Scott Fowler Fax No. (312) 732-4840 Fax No. (312) 732-4840 Tel. No. (214) 290-2162 Fax No. (214) 290-2332 - ------------------------------- ------------------------------ ------------------------------- -------------------------------- Credit Lyonnais New York 1301 Avenue of the Americas 1301 Avenue of the Americas 1000 Louisiana, Suite 5360 Branch New York, New York 10019 New York, New York 10019 Houston, Texas 77002 Attn: Gener David Attn: Gener David Attn: John Grandstaff Tel. No. (212) 261-7747 Tel. No. (212) 261-7747 Tel. No. (713) 890-8617 Fax No. (917) 849-5440 Fax No. (917) 849-5440 Fax No. (713) 890-8668 - ------------------------------- ------------------------------ ------------------------------- -------------------------------- Fortis Capital Corp. Three Stamford Plaza Three Stamford Plaza 15455 North Dallas Parkway 301 Tressa Blvd. 301 Tressa Blvd. Suite 1400 Stamford, CT 06901 Stamford, CT 06901 Addison, Texas 75001 Attn: Tony Lopez Attn: Tony Lopez Attn: David Montgomery Tel. No. (203) 705-5864 Tel. No. (203) 705-5864 Tel. No. (214) 953-9311 Fax No. (203) 795-5888 Fax No. (203) 795-5888 Fax No. (214) 754-5982 - ------------------------------- ------------------------------ ------------------------------- -------------------------------- Union Bank of California, N.A. 1980 Saturn Street, V03-251 1980 Saturn Street, V03-251 500 North Akard, Suite 4200 Monterey Park, CA 91755 Monterey Park, CA 91755 Dallas, TX 75201 Attn: Shirley Davis Attn: Shirley Davis Attn: Ali Ahmed Tel. No. (323) 720-2870 Tel. No. (323) 720-2870 Tel. No. (214) 922-4207 Fax No. (323) 720-2252 / 51 Fax No. (323) 720-2252 / 51 Fax No. (214) 922-4209 - ------------------------------- ------------------------------ ------------------------------- -------------------------------- Comerica Bank 39200 West 6 Mile Road 39200 West 6 Mile Road 1601 Elm Street, 2nd Floor, Lavonia, MI 48152 Lavonia, MI 48152 MC6593 Attn: Debralyn Brown Attn: Debralyn Brown Dallas, TX 75201 Tel. No. (734) 632-7021 Tel. No. (734) 632-7021 Attn: Michele L. Jones Fax No. (734) 632-7021 Fax No. (734) 632-7021 Tel. No. (214) 969-6563 Fax No. (214) 969-6561 - ------------------------------- ------------------------------ ------------------------------- -------------------------------- Fleet National Bank 100 Federal Street 100 Federal Street 100 Federal Street MA DE 10008A MA DE 10008A MA DE 10008A Boston, MA 02110 Boston, MA 02110 Boston, MA 02110 Attn: Cassandra Roberson Attn: Cassandra Roberson Attn: Cassandra Roberson Tel. No. (617) 434-3936 Tel. No. (617) 434-3936 Tel. No. (617) 434-3936 Fax No. (617) 434-0201 Fax No. (617) 434-0201 Fax No. (617) 434-0201 - ------------------------------- ------------------------------ ------------------------------- --------------------------------
Schedule 2.1-1
Wells Fargo Bank, N.A. 1740 Broadway 1740 Broadway 1445 Ross Avenue, Suite 2360 MAC# C7300-034 MAC# C7300-034 MAC# T5303-233 Denver, CO 80274 Denver, CO 80274 Dallas, Texas 75202 Attn: Tanya Ivie Attn: Tanya Ivie Attn: J. Alan Alexander, Jr. Tel. No. (303) 863-6102 Tel. No. (303) 863-6102 Tel. No. (214) 661-1237 Fax No. (303) 863-2729 Fax No. (303) 863-2729 Fax No. (214) 661-1242 - ------------------------------- ------------------------------ ------------------------------- -------------------------------- Bank of Scotland 565 Fifth Avenue, 5th Floor 565 Fifth Avenue, 5th Floor 565 Fifth Avenue, 5th Floor New York, NY 10017 New York, NY 10017 New York, NY 10017 Attn. Karen Workman Attn. Karen Workman Attn. Karen Workman Tel. No. (212) 450-0877 Tel. No. (212) 450-0877 Tel. No. (212) 450-0877 Fax No. (212) 687-4412 Fax No. (212) 687-4412 Fax No. (212) 687-4412 - ------------------------------- ------------------------------ ------------------------------- -------------------------------- Bank of America, N.A. 901 Main Street, 67th Floor 901 Main Street, 67th Floor 901 Main Street, 67th Floor Dallas, Texas 75202 Dallas, Texas 75202 Dallas, Texas 75202 Attn: Sharlette Wright Attn: Sharlette Wright Attn: Steven Mackenzie Tel. No. (214) 209-1150 Tel. No. (214) 209-1150 Tel. No. (214) 209-3680 Fax No. (214) 209-3140 Fax No. (214) 209-3140 Fax No. (214) 209-3140 - ------------------------------- ------------------------------ ------------------------------- -------------------------------- Compass Bank 24 Greeway Plaza, Suite 1400A 24 Greeway Plaza, Suite 1400A 24 Greeway Plaza, Suite 1400A Houston, TX 77046 Houston, TX 77046 Houston, TX 77046 Attn: Stacey R. Box Attn: Stacey R. Box Attn: Dorothy Marchand Tel. No. (713) 993-8580 Tel. No. (713) 993-8580 Tel. No. (713) 968-8272 Fax No. (713) 968-8292 Fax No. (713) 968-8292 Fax No. (713) 968-8292 - ------------------------------- ------------------------------ ------------------------------- --------------------------------
Administrative Agent - Address: 1717 Main Street, 4th Floor Mail Code TX1-2448 Dallas, Texas 75202 Tel. No. (214) 290-2162 Fax No. (214) 290-2332 Schedule 2.2-2 SCHEDULE 2.2 Existing Mortgages MINERALS MANAGEMENT SERVICE 1. Deed of Trust, Mortgage, Assignment, Security Agreement, Fixture Filing and Financing Statement dated March 24, 2000, executed by Matrix Oil & Gas, Inc. in favor of Union Bank of California, filed on March 30, 2000, with the Minerals Management Service, as amended by that certain First Supplement and Amendment to Deed of Trust, Mortgage, Assignment, Security Agreement, Fixture Filing and Financing Statement dated March 28, 2000, executed by Matrix Oil & Gas, Inc. and Union Bank of California, filed on April 4, 2000, as File Number 00691, with the Minerals Management Service, as amended by that certain Second Supplement and Amendment to Deed of Trust, Mortgage, Assignment, Security Agreement, Fixture Filing and Financing Statement dated as of September 25, 2000, executed by Matrix Oil & Gas, Inc. and Union Bank of California, filed on September 28, 2000, with the Minerals Management Service and assigned by that certain Assignment of Note and Liens dated July 10, 2001, executed by Union Bank of California in favor of Bank of America, N.A., as administrative agent, filed on October 9, 2001, as File Number OCS-00190, with the Minerals Management Service, as assigned and amended by that certain Assignment and Amendment to Mortgages dated as of September 12, 2002, among Bank of America, N.A., as administrative agent, Administrative Agent and Former Borrower, filed in the office of the Minerals Management Service Adjudication Unit, on January 21, 2003, as Filing Number G22269. 2. Mortgage, Deed of Trust, Security Agreement, Financing Statement and Assignment of Production dated as of September 12, 2002, from Former Borrower to Administrative Agent, filed in the office of the Minerals Management Service Adjudication Unit, on January 21, 2003, as Filing Number G22269. 3. UCC Assignment by Bank of America, N.A., as administrative agent, in favor of Administrative Agent, filed in the office of the Minerals Management Service Adjudication Unit, on January 21, 2003, in connection with original File Number OCS-0787. UCC Assignment in connection with original File Number OCS-0787, executed by Union Bank of California in favor of Bank of America, N.A., as administrative agent, filed with the Minerals Management Service. 4. UCC Assignment by Bank of America, N.A., as administrative agent, in favor of Administrative Agent, filed in the office of the Minerals Management Service Adjudication Unit, on January 21, 2003, in connection with original File Number OCS-00691. Schedule 2.2-1 UCC Assignment in connection with original File Number OCS-00691, executed by Union Bank of California in favor of Bank of America, N.A., as administrative agent, filed with the Minerals Management Service. 5. UCC Assignment by Bank of America, N.A., as administrative agent, in favor of Administrative Agent, filed in the office of the Minerals Management Service Adjudication Unit, on January 21, 2003, in connection with original File Number G03386. 6. UCC Assignment in connection with original File Number G03386, executed by Union Bank of California in favor of Bank of America, N.A., as administrative agent, filed with the Minerals Management Service. LOUISIANA Acadia Parish, Louisiana 7. Mortgage, Deed of Trust, Security Agreement, Financing Statement and Assignment of Production from Denbury Management, Inc. ("DMI") to Bank of America, N.A., as administrative agent, recorded on July 15, 1996, as File Number 625353, in Mortgage Book 520, Folio 442, with the Parish Clerk of Acadia Parish, Louisiana, as amended by that certain Amendment to Mortgages dated December 29, 1997, executed DMI and Bank of America, N.A., as administrative agent, filed on January 12, 1998, as File Number 643480, with the Parish Clerk of Acadia Parish, Louisiana., as assigned and amended by that certain Assignment and Amendment to Mortgages dated as of September 12, 2002, among Bank of America, N.A., as administrative agent, Administrative Agent and Former Borrower, filed with the Parish Clerk of Acadia Parish, Louisiana, on October 10, 2002, as File Number 704964. 8. Mortgage, Deed of Trust, Security Agreement, Financing Statement and Assignment of Production dated as of March 1, 1999, from Former Borrower to Bank of America, N.A., as administrative agent, recorded on March 12, 1999 as Document Number 658835 in MOB 562, Page 36 and COB N56, Page 91, with the Parish Clerk of Acadia Parish, Louisiana, as amended by that certain Amendment to Mortgages dated October 13, 2000, executed by Former Borrower and Bank of America, N.A., as administrative agent, filed on November 9, 2000, as Instrument Number 680055, in Mortgage Book 593, Page 744, with the Parish Clerk of Acadia Parish, Louisiana, as assigned and amended by that certain Schedule 2.2-2 Assignment and Amendment to Mortgages dated as of September 12, 2002, among Bank of America, N.A., as administrative agent, Administrative Agent and Former Borrower, filed with the Parish Clerk of Acadia Parish, Louisiana, on October 10, 2002, as File Number 704964. 9. UCC-1 Financing Statement executed by Former Borrower in favor of Bank of America, N.A., as administrative agent, filed on March 12, 1999, as File Number 658835, with the Parish Clerk of Acadia Parish, Louisiana. Ascension Parish, Louisiana 10. Mortgage, Assignment, Security Agreement, Fixture Filing and Financing Statement executed by DMI to Bank of America, N.A., as administrative agent, filed on November 27, 1995, as File Number 361787, in Conveyance Book 549 and Mortgage Book 643, with the Parish Clerk of Ascension Parish, Louisiana, as assigned and amended by that certain Assignment and Amendment to Mortgage filed June 12, 1996, as File Number 372807, in MOB Book 667, with the Parish Clerk of Ascension Parish, Louisiana, as amended by that certain Amendment to Mortgages executed by DMI and Bank of America, N.A., as administrative agent, filed January 12 ,1998, as File Number 405042, in MOB Book 746, with the Parish Clerk of Ascension Parish, Louisiana, as assigned and amended by that certain Assignment and Amendment to Mortgages dated as of September 12, 2002, among Bank of America, N.A., as administrative agent, Administrative Agent and Former Borrower, filed with the Parish Clerk of Ascension Parish, Louisiana, on October 10, 2002, as File Number 526769. 11. Mortgage, Deed of Trust, Security Agreement, Financing Statement and Assignment of Production dated as of September 12, 2002, from Former Borrower, to Administrative Agent, filed with the Parish Clerk of Ascension Parish, Louisiana, on October 10, 2002, as Document Number 526770. Avoyelles Parish, Louisiana 12. Mortgage, Deed of Trust, Security Agreement, Financing Statement and Assignment of Production from DMI to Bank of America, N.A., as administrative agent, filed July 15, 1996, as File Number 96-6252, in Mortgage Book 424, with the Parish Clerk of Avoyelles Parish, Louisiana; as amended by that certain Amendment to Mortgages dated December 29, 1997, executed by DMI and Bank of America, N.A., as administrative agent, filed January 9, 1998, as File Number 9800208, in MOB Book 438, with the Parish Clerk of Avoyelles Parish, Louisiana, as assigned and amended by that certain Schedule 2.2-3 Assignment and Amendment to Mortgages dated as of September 12, 2002, among Bank of America, N.A., as administrative agent, Administrative Agent and Former Borrower, filed with the Parish Clerk of Avoyelles Parish, Louisiana, on October 11, 2002, as File Number 02008095, in Book 483. 13. Mortgage, Deed of Trust, Security Agreement, Financing Statement and Assignment of Production dated as of March 1, 1999, from Former Borrower to Bank of America, N.A., as administrative agent, recorded on March 12, 1999, as Clerk's File Number 9901907, MOB Book Number 450 and MIN Book Number 194, with the Parish Clerk of Avoyelles Parish, Louisiana, as amended by that certain Amendment to Mortgages dated October 13, 2000, executed by Former Borrower and Bank of America, N.A., as administrative agent, filed on November 9, 2000, as Instrument Number 00008196, in Mortgage Book 465, with the Parish Clerk of Avoyelles Parish, Louisiana, as amended and assigned by that certain Assignment and Amendment to Mortgages dated as of September 12, 2002, among Bank of America, N.A., as administrative agent, Administrative Agent and Former Borrower, filed with the Parish Clerk of Avoyelles Parish, Louisiana, on October 11, 2002, as File Number 02008095, in Book 483. 14. UCC-1 Financing Statement executed by Former Borrower in favor of Bank of America, N.A., as administrative agent, filed on March 12, 1999, as File Number 990581, with the Parish Clerk of Avoyelles Parish, Louisiana. Cameron Parish, Louisiana 15. Deed of Trust, Mortgage, Assignment, Security Agreement and Financing Statement executed by DMI in favor of Bank of America, N.A., as administrative agent, filed May 12, 1995, as File Number 240755, in Conveyance Book 815 and Mortgage Book 209, with the Parish Clerk of Cameron Parish, Louisiana; as assigned and amended by that certain Assignment and Amendment to Mortgage filed June 11, 1996, as File Number 245936, in Conveyance Book 836 and Mortgage Book 218, with the Parish Clerk of Cameron Parish, Louisiana, and as amended by that certain Amendment to Mortgages dated December 29, 1997, executed by DMI and Bank of America, N.A., as administrative agent, filed January 12, 1998, as File Number 253512, in Conveyance Book 869 and Mortgage Book 230, with the Parish Clerk of Cameron Parish, Louisiana, as assigned and amended by that certain Assignment and Amendment to Mortgages dated as of September 12, 2002, among Bank of America, N.A., as administrative agent, Administrative Agent and Former Borrower, filed with the Parish Clerk of Cameron Parish, Louisiana, on October 15, 2002, as File Number 277920, in Book 956, Page 273. Schedule 2.2-4 16. Mortgage, Deed of Trust, Security Agreement, Financing Statement and Assignment of Production from DMI to Bank of America, N.A., as administrative agent, filed July 12, 1996, as File Number 246389, in Mortgage Book 219, with the Parish Clerk of Cameron Parish, Louisiana, as amended by that certain Amendment to Mortgages dated December 29, 1997, executed by DMI and Bank of America, N.A., as administrative agent, filed January 12, 1998, as File Number 253512, in Conveyance Book 869 and Mortgage Book 230, with the Parish Clerk of Cameron Parish, Louisiana, as assigned and amended by that certain Assignment and Amendment to Mortgages dated as of September 12, 2002, among Bank of America, N.A., as administrative agent, Administrative Agent and Former Borrower, filed with the Parish Clerk of Cameron Parish, Louisiana, on October 15, 2002, as File Number 277920, in Book 956, Page 273. 17. Mortgage, Deed of Trust, Security Agreement, Financing Statement and Assignment of Production dated as of March 1, 1999, from Former Borrower to Bank of America, N.A., as administrative agent, recorded on March 12, 1999, as Clerk File's Number 259143 and Conveyance Book Number 892 and Mortgage Book Number 239, with the Parish Clerk of Cameron Parish, Louisiana, as amended by that certain Amendment to Mortgages dated October 13, 2000, executed by Former Borrower and Bank of America, N.A., as administrative agent, filed on November 13, 2000, as Instrument Number 267490, in Mortgage Book 255, with the Parish Clerk of Cameron Parish, Louisiana, as assigned and amended by that certain Assignment and Amendment to Mortgages dated as of September 12, 2002, among Bank of America, N.A., as administrative agent, Administrative Agent and Former Borrower, filed with the Parish Clerk of Cameron Parish, Louisiana, on October 15, 2002, as File Number 277920, in Book 956, Page 273. 18. UCC-1 Financing Statement executed by Former Borrower in favor of Bank of America, N.A., as administrative agent, filed on March 12, 1999, as File Number 259144, with the Parish Clerk of Cameron Parish, Louisiana. 19. Deed of Trust, Mortgage, Assignment, Security Agreement, Fixture Filing and Financing Statement dated March 24, 2000, executed by Matrix Oil & Gas, Inc. in favor of Union Bank of California, recorded on March 30, 2000, as File Number 264321, in M.O.B. 250, with the Parish Clerk of Cameron Parish, Louisiana, as assigned by that certain Assignment of Note and Liens dated July 10, 2001, executed by Union Bank of California in favor of Bank of America, N.A., as administrative agent, filed on July 20, 2001, as File Number 271336, in Mortgage Book 261, with the Parish Clerk of Cameron Parish, Louisiana, as assigned and amended by that certain Assignment and Amendment to Mortgages dated as of September 12, 2002, among Bank of America, N.A., as administrative agent, Administrative Agent and Former Borrower, filed with the Parish Clerk of Cameron Parish, Louisiana, on October 15, 2002, as File Number 277920, in Book 956, Page 273. Schedule 2.2-5 20. Mortgage, Deed of Trust, Security Agreement, Financing Statement and Assignment of Production dated January 12, 2001, executed by Former Borrower in favor of Bank of America, N.A., as administrative agent, filed on February 6, 2001, as MOB Number 257, COB Number 923, File Number 268674, with the Parish Clerk of Cameron Parish, Louisiana, as assigned and amended by that certain Assignment and Amendment to Mortgages dated as of September 12, 2002, among Bank of America, N.A., as administrative agent, Administrative Agent and Former Borrower, filed with the Parish Clerk of Cameron Parish, Louisiana, on October 15, 2002, as File Number 277920, in Book 956, Page 273. 21. UCC Financing Statement executed by Former Borrower in favor of Bank of America, N.A., as administrative agent, filed on February 6, 2001 as File Number 268675, with the Parish Clerk of Cameron Parish, Louisiana. 22. Mortgage, Deed of Trust, Security Agreement, Financing Statement and Assignment of Production dated as of September 12, 2002, from Former Borrower to Administrative Agent, filed with the Parish Clerk of Cameron Parish, Louisiana, on October 15, 2002, as File Number 277921, in Book 273. Concordia Parish, Louisiana 23. Deed of Trust, Mortgage, Assignment, Security Agreement and Financing Statement executed by DMI in favor of Bank of America, N.A., as administrative agent, filed May 12, 1995, as Document Number 208248, in COB 347, Folio 595 and MOB 270, Folio 436, with the Parish Clerk of Concordia Parish, Louisiana; as assigned and amended by that certain Assignment and Amendment to Mortgage filed June 10, 1996, as File Number 212988, in MOB Book 280, Folio 147, with the Parish Clerk of Concordia Parish, Louisiana; and as amended by that certain Amendment to Mortgages dated December 29, 1997, executed by DMI and Bank of America, N.A., as administrative agent, filed January 9, 1998, as File Number 220142, in MOB Book 293, with the Parish Clerk of Concordia Parish, Louisiana, as assigned and amended by that certain Assignment and Amendment to Mortgages dated as of September 12, 2002, among Bank of America, N.A., as administrative agent, Administrative Agent and Former Borrower, filed with the Parish Clerk of Concordia Parish, Louisiana, on October 10, 2002, in Book 398, Page 344, Folio 344. 24. Mortgage, Deed of Trust, Security Agreement, Financing Statement and Assignment of Production dated as of March 1, 1999, from Former Borrower to Bank of America, N.A., as administrative agent, recorded on March 12, 1999, in COB Book Number 377, Folio 508 and MOB Book Number 305, Folio 679 as Document Number 225538, with the Parish Clerk of Concordia Parish, Louisiana, as amended by that certain Schedule 2.2-6 Amendment to Mortgages dated October 13, 2000, executed by Former Borrower and Bank of America, N.A., as administrative agent, filed on November 9, 2000, as Instrument Number 233325, in Mortgage Book 322, Folio 716, with the Parish Clerk of Concordia Parish, Louisiana, as assigned and amended by that certain Assignment and Amendment to Mortgages dated as of September 12, 2002, among Bank of America, N.A., as administrative agent, Administrative Agent and Former Borrower, filed with the Parish Clerk of Concordia Parish, Louisiana, on October 10, 2002, in Book 398, Page 344, Folio 344. 25. UCC-1 Financing Statement executed by Former Borrower in favor of Bank of America, N.A., as administrative agent, filed on March 12, 1999, as File Number 15-177729, UCC Book 1, Page 1, with the Parish Clerk of Concordia Parish, Louisiana. Desoto Parish, Louisiana 26. Mortgage, Deed of Trust, Security Agreement, Financing Statement and Assignment of Production from DMI to Bank of America, N.A., as administrative agent, filed July 11, 1996, as File Number 551694, with the Parish Clerk of Desoto Parish, Louisiana, as amended by that certain Amendment to Mortgages dated December 29, 1997, executed by DMI and Bank of America, N.A., as administrative agent, filed January 9, 1998, as File Number 562934, with the Parish Clerk of Desoto Parish, Louisiana, as assigned and amended by that certain Assignment and Amendment to Mortgages dated as of September 12, 2002, among Bank of America, N.A., as administrative agent, Administrative Agent and Former Borrower, filed with the Parish Clerk of Iberia Parish, Louisiana, on October 10, 2002, in Mortgage Book A915, Entry Number 0214624, Conveyance Book 1250. 27. Mortgage, Deed of Trust, Security Agreement, Financing Statement and Assignment of Production dated as of March 1, 1999, from Former Borrower to Bank of America, N.A., as administrative agent, recorded on March 12, 1999, as Clerk's File Number 571636, with the Parish Clerk of Desoto Parish, Louisiana, as amended by that certain Amendment to Mortgages dated October 13, 2000, executed by Former Borrower and Bank of America, N.A., as administrative agent, filed on November 10, 2000, as Instrument Number 583500 with the Parish Clerk of Desoto Parish, Louisiana, as assigned and amended by that certain Assignment and Amendment to Mortgages dated as of September 12, 2002, among Bank of America, N.A., as administrative agent, Administrative Agent and Former Borrower, filed with the Parish Clerk of Iberia Parish, Louisiana, on October 10, 2002, in Mortgage Book A915, Entry Number 0214624, Conveyance Book 1250. Schedule 2.2-7 28. UCC-1 Financing Statement executed by Former Borrower in favor of Bank of America, N.A., as administrative agent, filed on March 12, 1999, as File Number 57163, with the Parish Clerk of Desoto Parish, Louisiana. Iberia Parish, Louisiana 29. Mortgage, Deed of Trust, Security Agreement, Financing Statement and Assignment of Production from DMI to Bank of America, N.A., as administrative agent, filed July 12, 1996, as File Number 96-6664, in Mortgage Book A682, with the Parish Clerk of Iberia Parish, Louisiana, as amended by that certain Amendment to Mortgages dated December 29, 1997, executed by DMI and Bank of America, N.A., as administrative agent, filed January 12, 1998, as File Number 98-241, in Mortgage Book A717, with the Parish Clerk of Iberia Parish, Louisiana, as assigned and amended by that certain Assignment and Amendment to Mortgages dated as of September 12, 2002, among Bank of America, N.A., as administrative agent, Administrative Agent and Former Borrower, filed with the Parish Clerk of Iberia Parish, Louisiana, on November 5, 2002, File Number 596212. 30. Mortgage, Deed of Trust, Security Agreement, Financing Statement and Assignment of Production dated as of March 1, 1999, from Former Borrower to Bank of America, N.A., as administrative agent, recorded on March 16, 1999, in Mortgage Book Number A753, Entry Number 99-3310, with the Parish Clerk of Iberia Parish, Louisiana, as amended by that certain Amendment to Mortgages dated October 13, 2000, executed by Former Borrower and Bank of America, N.A., as administrative agent, filed on November 9, 2000, as Instrument Number 00-13589, in Mortgage Book A816, with the Parish Clerk of Iberia Parish, Louisiana, as assigned and amended by that certain Assignment and Amendment to Mortgages dated as of September 12, 2002, among Bank of America, N.A., as administrative agent, Administrative Agent and Former Borrower, filed with the Parish Clerk of Iberia Parish, Louisiana, on November 5, 2002, File Number 596212. 31. UCC-1 Financing Statement executed by Former Borrower in favor of Bank of America, N.A., as administrative agent, filed on March 16, 1999, as File Number 99-649, with the Parish Clerk of Iberia Parish, Louisiana. 32. Deed of Trust, Mortgage, Assignment, Security Agreement, Fixture Filing and Financing Statement dated March 24, 2000, executed by Matrix Oil & Gas, Inc. in favor of Union Bank of California, recorded on March 30, 2000, in Book A793, Entry Number 00-3894, with the Parish Clerk of Iberia Parish, Louisiana, as amended by that certain Second Supplement and Amendment to Deed of Trust, Mortgage, Assignment, Security Agreement, Fixture Filing and Financing Statement dated September 25, 2000, executed by Matrix Oil & Gas, Inc. and Union Bank of California, recorded on September 28, 2000, in Mortgage Book A812, Entry Number 00-11990, with the Parish Clerk of Iberia Parish, Louisiana, and as assigned by that certain Schedule 2.2-8 Assignment of Note and Liens dated July 10, 2001, executed by Union Bank of California in favor of Bank of America, N.A., as administrative agent, filed on July 20, 2001, as entry number 01-8622, in Mortgage Book A846, with the Parish Clerk of Iberia Parish, Louisiana, as assigned and amended by that certain Assignment and Amendment to Mortgages dated as of September 12, 2002, among Bank of America, N.A., as administrative agent, Administrative Agent and Former Borrower, filed with the Parish Clerk of Iberia Parish, Louisiana, on November 5, 2002, File Number 596212. 33. UCC Financing Statement executed by Matrix Oil & Gas, Inc. in favor of Union Bank of California, filed on September 28, 2000, as File Number 002566, with the Parish Clerk of Iberia Parish, Louisiana, as assigned by that certain UCC-3 Financing Statement Assignment executed by Union Bank of California in favor of Bank of America, N.A., as administrative agent, filed on July 20, 2001, as File Number 01-2243, with the Parish Clerk of Iberia Parish, Louisiana. 34. Mortgage, Deed of Trust, Security Agreement, Financing Statement and Assignment of Production dated January 12, 2001, executed by Former Borrower in favor of Bank of America, N.A., as administrative agent, filed on February 13, 2001, as MOB Number A825, COB Number 1212, and Entry Number 01-1705, with the Parish Clerk of Iberia Parish, Louisiana, as assigned and amended by that certain Assignment and Amendment to Mortgages dated as of September 12, 2002, among Bank of America, N.A., as administrative agent, Administrative Agent and Former Borrower, filed with the Parish Clerk of Iberia Parish, Louisiana, on November 5, 2002, File Number 596212. 35. UCC Financing Statement executed by Former Borrower in favor of Bank of America, N.A., as administrative agent, filed on February 6, 2001 as File Number 01 354, with the Parish Clerk of Iberia Parish, Louisiana. Jackson Parish, Louisiana 36. Mortgage, Deed of Trust, Security Agreement, Financing Statement and Assignment of Production from DMI to Bank of America, N.A., as administrative agent, filed July 15, 1996, as File Number 318867, in Mortgage Book 170, Folio 694, with the Parish Clerk of Jackson Parish, Louisiana, as amended by that certain Amendment to Mortgages dated December 29, 1997, executed by DMI and Bank of America, N.A., as administrative agent, filed January 9, 1998, as File Number 324795, in Mortgage Book 177, Page 834, with the Parish Clerk of Jackson Parish, Louisiana, as assigned and amended by that certain Schedule 2.2-9 Assignment and Amendment to Mortgages dated as of September 12, 2002, among Bank of America, N.A., as administrative agent, Administrative Agent and Former Borrower, filed with the Parish Clerk of Jackson Parish, Louisiana, on October 10, 2002, as File Number 346209, in Book 212, Page 169. 37. Mortgage, Deed of Trust, Security Agreement, Financing Statement and Assignment of Production dated as of March 1, 1999, from Former Borrower to Bank of America, N.A., as administrative agent, recorded on March 12, 1999, as Clerk's File Number 328899 in Conveyance Book Number 306, Page 71 and Mortgage Book Number 184, Page 721, with the Parish Clerk of Jackson Parish, Louisiana, as amended by that certain Amendment to Mortgages dated October 13, 2000, executed by Former Borrower and Bank of America, N.A., as administrative agent, filed on November 13, 2000, as Instrument Number 335841, in Mortgage Book 195, Page 613, with the Parish Clerk of Jackson Parish, Louisiana, as assigned and amended by that certain Assignment and Amendment to Mortgages dated as of September 12, 2002, among Bank of America, N.A., as administrative agent, Administrative Agent and Former Borrower, filed with the Parish Clerk of Jackson Parish, Louisiana, on October 10, 2002, as File Number 346209, in Book 212, Page 169. 38. UCC-1 Financing Statement executed by Former Borrower in favor of Bank of America, N.A., as administrative agent, filed on March 12, 1999, as File Number 25023906, with the Parish Clerk of Jackson Parish, Louisiana. Jefferson Davis Parish, Louisiana 39. Mortgage, Deed of Trust, Security Agreement, Financing Statement and Assignment of Production from DMI to Bank of America, N.A., as administrative agent, filed July 16, 1996, as File Number 535475, in Mortgage Book 378, Folio 403, with the Parish Clerk of Jefferson Davis Parish, Louisiana, as amended by that certain Amendment to Mortgages dated December 29, 1997, executed by DMI and Bank of America, N.A., as administrative agent, filed January 26, 1998, as File Number 550009, in Mortgage Book 397, Page 759, with the Parish Clerk of Jefferson Davis Parish, Louisiana, as assigned and amended by that certain Assignment and Amendment to Mortgages dated as of September 12, 2002, among Bank of America, N.A., as administrative agent, Administrative Agent and Former Borrower, filed with the Parish Clerk of Jefferson Davis Parish, Louisiana, on October 18, 2002, as File Number 591374, in Book 768, Page 290. 40. Mortgage, Deed of Trust, Security Agreement, Financing Statement and Assignment of Production dated as of March 1, 1999, from Former Borrower to Bank of America, N.A., as administrative agent, recorded on March 15, 1999, as Clerk's File Number 560349 in MOB Book Number 413, Page 299, with the Parish Clerk of Jefferson Davis Parish, Louisiana, as amended by that certain Schedule 2.2-10 Amendment to Mortgages dated October 13, 2000, executed by Former Borrower and Bank of America, N.A., as administrative agent, filed on November 9, 2000, as Instrument Number 575430, in Mortgage Book 435, Page 410, with the Parish Clerk of Jefferson Davis Parish, Louisiana, as assigned and amended by that certain Assignment and Amendment to Mortgages dated as of September 12, 2002, among Bank of America, N.A., as administrative agent, Administrative Agent and Former Borrower, filed with the Parish Clerk of Jefferson Davis Parish, Louisiana, on October 18, 2002, as File Number 591374, in Book 768, Page 290. 41. UCC-1 Financing Statement executed by Former Borrower in favor of Bank of America, N.A., as administrative agent, filed on March 15, 1999, as File Number 279900330, with the Parish Clerk of Jefferson Davis Parish, Louisiana. 42. Mortgage, Deed of Trust, Security Agreement, Financing Statement and Assignment of Production dated January 12, 2001, executed by Former Borrower in favor of Bank of America, N.A., as administrative agent, filed on February 9, 2001, as MOB Number 438, Page 609, and File Number 577381, with the Parish Clerk of Jefferson Davis Parish, Louisiana, as assigned and amended by that certain Assignment and Amendment to Mortgages dated as of September 12, 2002, among Bank of America, N.A., as administrative agent, Administrative Agent and Former Borrower, filed with the Parish Clerk of Jefferson Davis Parish, Louisiana, on October 18, 2002, as File Number 591374, in Book 768, Page 290. 43. UCC Financing Statement executed by Former Borrower in favor of Bank of America, N.A., as administrative agent, filed on February 9, 2001, as File Number 01-00146, with the Parish Clerk of Jefferson Davis Parish, Louisiana. 44. Mortgage, Deed of Trust, Security Agreement, Financing Statement and Assignment of Production dated as of September 12, 2002, from Former Borrower to Administrative Agent, filed with the Parish Clerk of Jefferson Davis Parish, Louisiana, on October 18, 2002, as File Number 591373, in Book M-468/C-934, Page M-258/C-254. LaFourche Parish, Louisiana 45. Deed of Trust, Mortgage, Assignment, Security Agreement and Financing Statement executed by DMI in favor of Bank of America, N.A., as administrative agent, filed May 12, 1995, as Entry Number 781497, in Conveyance Book 1242, Folio 612 and Mortgage Book 691, Folio 648, with the Parish Clerk of LaFourche Parish, Louisiana; as assigned and amended by that certain Assignment and Amendment to Mortgages filed July 1, 1996, as Entry Number 799606, in Conveyance Book 1277, Folio 736 and Miscellaneous Book 77, Folio 861, with the Parish Clerk of LaFourche Parish, Louisiana, and as amended by that certain Amendment to Mortgages dated December 29, 1997, executed by DMI and Bank of America, N.A., as administrative agent, filed February 27, 1998, as File Number 828742, in Mortgage Book 767, Page 330, with the Parish Clerk of LaFourche Parish, Louisiana, as assigned and amended by that certain Schedule 2.2-11 Assignment and Amendment to Mortgages dated as of September 12, 2002, among Bank of America, N.A., as administrative agent, Administrative Agent and Former Borrower, filed with the Parish Clerk of LaFourche Parish, Louisiana, on October 21, 2002, as File Number 924507. 46. Mortgage, Deed of Trust, Security Agreement, Financing Statement and Assignment of Production from DMI to Bank of America, N.A., as administrative agent, filed July 12, 1996, as File Number 800203, in Mortgage Book 719, Folio 211, with the Parish Clerk of LaFourche Parish, Louisiana, as amended by that certain Amendment to Mortgages dated December 29, 1997, executed by DMI in favor of Bank of America, N.A., as administrative agent, filed February 27, 1998, as File Number 828742, in Mortgage Book 767, Page 330, with the Parish Clerk of LaFourche Parish, Louisiana, as assigned and amended by that certain Assignment and Amendment to Mortgages dated as of September 12, 2002, among Bank of America, N.A., as administrative agent, Administrative Agent and Former Borrower, filed with the Parish Clerk of LaFourche Parish, Louisiana, on October 21, 2002, as File Number 924507. 47. Mortgage, Deed of Trust, Security Agreement, Financing Statement and Assignment of Production dated as of March 1, 1999, from Former Borrower to Bank of America, N.A., as administrative agent, recorded on March 17, 1999, in Mortgage Book Number 806, Folio Number 30, as Entry Number 849538 with the office of the Parish Clerk of LaFourche Parish, Louisiana as amended by that certain Amendment to Mortgages dated October 13, 2000, executed by Former Borrower and Bank of America, N.A., as administrative agent, filed on December 1, 2000, as Instrument Number 884017, in Mortgage Book 869, Folio 49 with the office of the Parish Clerk of LaFourche Parish, Louisiana, as assigned and amended by that certain Assignment and Amendment to Mortgages dated as of September 12, 2002, among Bank of America, N.A., as administrative agent, Administrative Agent and Former Borrower, filed with the Parish Clerk of LaFourche Parish, Louisiana, on October 21, 2002, as File Number 924507. 48. UCC-1 Financing Statement executed by Former Borrower in favor of Bank of America, N.A., as administrative agent, filed on March 17, 1999, as File Number 29-849539, with the Parish Clerk of LaFourche Parish, Louisiana. Livingston Parish, Louisiana 49. Mortgage, Deed of Trust, Security Agreement, Financing Statement and Assignment of Production dated as of September 12, 2002, from Former Borrower, to Administrative Agent, filed with the Parish Clerk of Livingston Parish, Louisiana, on October 10, 2002, as Entry Number 00504867, in Book 826, Page 68. Schedule 2.2-12 Plaquemines Parish, Louisiana 50. Mortgage, Deed of Trust, Security Agreement, Financing Statement and Assignment of Production dated October 13, 2000, executed by Former Borrower in favor of Bank of America, N.A., as administrative agent, filed on November 13, 2000, as MOB Number 310, Folio 204 and COB Number 988, Folio 44, with the Parish Clerk of Plaquemines Parish, Louisiana, as assigned and amended by that certain Assignment and Amendment to Mortgages dated as of September 12, 2002, among Bank of America, N.A., as administrative agent, Administrative Agent and Former Borrower, filed with the Parish Clerk of Plaquamines Parish, Louisiana, on October 21, 2002, as File Number 02006357, in Book 1033, Page 572. 51. UCC Financing Statement executed by Former Borrower in favor of Bank of America, N.A., as administrative agent, filed on November 13, 2000, as File Number 38-001663, with the Parish Clerk of Plaquemines Parish, Louisiana. 52. Deed of Trust, Mortgage, Assignment, Security Agreement, Fixture Filing and Financing Statement dated March 24, 2000, executed by Matrix Oil & Gas, Inc. in favor of Union Bank of California, recorded on March 30, 2000, in M.O.B. 302, Folio 580, with the Parish Clerk of Plaquemines Parish, Louisiana, as amended by that certain First Supplement and Amendment to Deed of Trust, Mortgage, Assignment, Security Agreement, Fixture Filing and Financing Statement dated March 28, 2000, executed by Matrix Oil & Gas, Inc. and Union Bank of California, recorded on March 30, 2000, in M.O.B. 302, Folio 649, with the Parish Clerk of Plaquemines Parish, Louisiana, and as assigned by that certain Assignment of Note and Liens dated July 10, 2001, executed by Union Bank of California in favor of Bank of America, N.A., as administrative agent, filed on July 24, 2001, in M.O.B. 319, Folio 885, with the Clerk of Court of Plaquemines Parish, Louisiana, as further assigned and amended by that certain Assignment and Amendment to Mortgages dated as of September 12, 2002, among Bank of America, N.A., as administrative agent, Administrative Agent and Former Borrower, filed with the Parish Clerk of Plaquamines Parish, Louisiana, on October 21, 2002, as File Number 02006357, in Book 1033, Page 572. Pointe Coupee Parish, Louisiana 53. Mortgage, Deed of Trust, Security Agreement, Financing Statement and Assignment of Production from DMI to Bank of America, N.A., as administrative agent, filed July 12, 1996, as File MB245, Number 70, in Mortgage Book 415, Folio 132, with the Parish Clerk of Pointe Coupee Parish, Louisiana, as amended by that certain Schedule 2.2-13 Amendment to Mortgages dated December 29, 1997, executed by DMI and Bank of America, N.A., as administrative agent, filed January 9, 1998, in Mortgage Book 257, Number 140 and Conveyance Book 440, Number 106, with the Parish Clerk of Pointe Coupee Parish, Louisiana, as assigned and amended by that certain Assignment and Amendment to Mortgages dated as of September 12, 2002, among Bank of America, N.A., as administrative agent, Administrative Agent and Former Borrower, filed with the Parish Clerk of Pointe Coupee Parish, Louisiana, on October 10, 2002, in Book 318, Page 112. 54. Mortgage, Deed of Trust, Security Agreement, Financing Statement and Assignment of Production dated as of March 1, 1999, from Former Borrower to Bank of America, N.A., as administrative agent, recorded on March 12, 1999, in MB Book 269 as Clerk's Number 82, with the Parish Clerk of Pointe Coupee Parish, Louisiana, as amended by that certain Amendment to Mortgages dated October 13, 2000, executed by Former Borrower and Bank of America, N.A., as administrative agent, filed on November 9, 2000, in Mortgage Book 287, Number 43, with the Parish Clerk of Pointe Coupee Parish, Louisiana, as assigned and amended by that certain Assignment and Amendment to Mortgages dated as of September 12, 2002, among Bank of America, N.A., as administrative agent, Administrative Agent and Former Borrower, filed with the Parish Clerk of Pointe Coupee Parish, Louisiana, on October 10, 2002, in Book 318, Page 112. 55. UCC-1 Financing Statement executed by Former Borrower in favor of Bank of America, N.A., as administrative agent, filed on March 12, 1999, as File Number 10401, in CM Book 26, with the Parish Clerk of Pointe Coupee Parish, Louisiana. Rapides Parish, Louisiana 56. Mortgage, Deed of Trust, Security Agreement, Financing Statement and Assignment of Production from DMI to Bank of America, N.A., as administrative agent, filed July 12, 1996, as File Number 1028847, in Mortgage Book 1416, Folio 519, with the Parish Clerk of Rapides Parish, Louisiana, as amended by that certain Amendment to Mortgages dated December 29, 1997, executed by DMI and Bank of America, N.A., as administrative agent, filed January 9, 1998, in Mortgage Book 1483, Number 915, with the Parish Clerk of Rapides Parish, Louisiana, as assigned and amended by that certain Assignment and Amendment to Mortgages dated as of September 12, 2002, among Bank of America, N.A., as administrative agent, Administrative Agent and Former Borrower, filed with the Parish Clerk of Rapides Parish, Louisiana, on October 10, 2002. Schedule 2.2-14 57. Mortgage, Deed of Trust, Security Agreement, Financing Statement and Assignment of Production dated as of March 1, 1999, from Former Borrower to Bank of America, N.A., as administrative agent, recorded on March 12, 1999, in Mortgage Book 1556, Page 153, and Conveyance Book 1553, Page 897 and as Clerk's File Number 1097748, with the Parish Clerk of Rapides Parish, Louisiana as amended by that certain Amendment to Mortgages dated October 13, 2000, executed by Former Borrower and Bank of America, N.A., as administrative agent, filed on November 9, 2000, as Instrument Number 1144063, in Mortgage Book 1658, Page 406, with the Parish Clerk of Rapides Parish, Louisiana, as assigned and amended by that certain Assignment and Amendment to Mortgages dated as of September 12, 2002, among Bank of America, N.A., as administrative agent, Administrative Agent and Former Borrower, filed with the Parish Clerk of Rapides Parish, Louisiana, on October 10, 2002. 58. UCC-1 Financing Statement executed by Former Borrower in favor of Bank of America, N.A., as administrative agent, filed on March 12, 1999, as File Number 40-043994, with the Parish Clerk of Rapides Parish, Louisiana. Red River Parish, Louisiana 59. Mortgage, Deed of Trust, Security Agreement, Financing Statement and Assignment of Production from DMI to Bank of America, N.A., as administrative agent, filed July 11, 1996, as File Number 186073, in Mortgage Book 142, Folio 149, with the Parish Clerk of Red River Parish, Louisiana, as amended by that certain Amendment to Mortgages dated December 29, 1997, executed by DMI and Bank of America, N.A., as administrative agent, filed January 13, 1998, as File Number 189198, with the Parish Clerk of Red River Parish, Louisiana, as assigned and amended by that certain Assignment and Amendment to Mortgages dated as of September 12, 2002, among Bank of America, N.A., as administrative agent, Administrative Agent and Former Borrower, filed with the Parish Clerk of Red River Parish, Louisiana, on October 10, 2002, as Instrument Number 198,394. 60. Mortgage, Deed of Trust, Security Agreement, Financing Statement and Assignment of Production dated as of March 1, 1999, from Former Borrower to Bank of America, N.A., as administrative agent, recorded on March 15, 1999, as Instrument Number 191,356, with the Parish Clerk of Red River Parish, Louisiana as amended by that certain Amendment to Mortgages dated October 13, 2000, executed by Former Borrower and Bank of America, N.A., as administrative agent, filed on November 9, 2000, in Mortgage Book 152, with the Parish Clerk of Red River Parish, Louisiana, as assigned and amended by that certain Assignment and Amendment to Mortgages dated as of September 12, 2002, among Bank of America, N.A., as administrative agent, Administrative Agent and Former Borrower, filed with the Parish Clerk of Red River Parish, Louisiana, on October 10, 2002, as Instrument Number 198,394. Schedule 2.2-15 61. UCC-1 Financing Statement executed by Former Borrower in favor of Bank of America, N.A., as administrative agent, filed on March 15, 1999, as File Number 191357, with the Parish Clerk of Red River Parish, Louisiana. Richland Parish, Louisiana 62. Mortgage, Deed of Trust, Security Agreement, Financing Statement and Assignment of Production from DMI to Bank of America, N.A., as administrative agent, filed July 12, 1996, as File Number 296206, in Mortgage Book 306, with the Parish Clerk of Richland Parish, Louisiana, as amended by that certain Amendment to Mortgages dated December 29, 1997, executed by DMI and Bank of America, N.A., as administrative agent, filed January 20, 1998, as File Number 301316, with the Parish Clerk of Richland Parish, Louisiana, as assigned and amended by that certain Assignment and Amendment to Mortgages dated as of September 12, 2002, among Bank of America, N.A., as administrative agent, Administrative Agent and Former Borrower, filed with the Parish Clerk of Richland Parish, Louisiana, on October 10, 2002, as File Number 319726, in Book 354. St. Bernard Parish, Louisiana 63. Mortgage, Deed of Trust, Security Agreement, Financing Statement and Assignment of Production dated October 13, 2000, executed by Former Borrower in favor of Bank of America, N.A., as administrative agent, filed on November 13, 2000, as File Number MOB 995, Page 281, with the Parish Clerk of St. Bernard Parish, Louisiana, as assigned and amended by that certain Assignment and Amendment to Mortgages dated as of September 12, 2002, among Bank of America, N.A., as administrative agent, Administrative Agent and Former Borrower, filed with the Parish Clerk of St. Bernard Parish, Louisiana, on October 18, 2002, as File Number 403762, in Book 1107, Folio 4. 64. UCC Financing Statement executed by Former Borrower in favor of Bank of America, N.A., as administrative agent, filed on November 13, 2000, as File Number 4435330, with the Parish Clerk of St. Bernard Parish, Louisiana. St. Charles Parish, Louisiana 65. Mortgage, Deed of Trust, Security Agreement, Financing Statement and Assignment of Production from DMI to Bank of America, N.A., as administrative agent, filed July 12, 1996, as File Number 203836, in Mortgage Book 614, Folio 372, with the Parish Clerk of St. Charles Parish, Louisiana, as amended by that certain Schedule 2.2-16 Amendment to Mortgages dated December 29, 1997, executed by DMI and Bank of America, N.A., as administrative agent, filed January 9, 1998, as File Number 216906, in Book 653, Page 608, with the Parish Clerk of St. Charles Parish, Louisiana, as assigned and amended by that certain Assignment and Amendment to Mortgages dated as of September 12, 2002, among Bank of America, N.A., as administrative agent, Administrative Agent and Former Borrower, filed with the Parish Clerk of St. Charles Parish, Louisiana, on October 10, 2002, as File Number 45077079A. 66. Mortgage, Deed of Trust, Security Agreement, Financing Statement and Assignment of Production dated as of March 1, 1999, from Former Borrower to Bank of America, N.A., as administrative agent, recorded on March 12, 1999, in Mortgage Book Number 703, Folio Number 20, as Clerk's File Number 230509, with the Parish Clerk of St. Charles Parish, Louisiana. Amendment to Mortgages dated October 13, 2000, executed by Former Borrower and Bank of America, N.A., as administrative agent, filed on November 9, 2000, as Instrument Number 248717, in Book 771, Folio 255, with the Parish Clerk of St. Charles Parish, Louisiana, as assigned and amended by that certain Assignment and Amendment to Mortgages dated as of September 12, 2002, among Bank of America, N.A., as administrative agent, Administrative Agent and Former Borrower, filed with the Parish Clerk of St. Charles Parish, Louisiana, on October 10, 2002, as File Number 45077079A. 67. UCC-1 Financing Statement executed by Former Borrower in favor of Bank of America, N.A., as administrative agent, filed on March 12, 1999, as File Number 45-074384, with the Parish Clerk of St. Charles Parish, Louisiana. St. Helena Parish, Louisiana 68. Mortgage, Deed of Trust, Security Agreement, Financing Statement and Assignment of Production dated as of September 12, 2002, from Former Borrower to Administrative Agent, filed with the Parish Clerk of St. Helena Parish, Louisiana, on October 10, 2002, as File Number 085385. St. Landry Parish, Louisiana 69. Mortgage, Deed of Trust, Security Agreement, Financing Statement and Assignment of Production dated January 12, 2001, executed by Former Borrower in favor of Bank of America, N.A., as administrative agent, filed on February 5, 2001, as MOB Number 1051, Page 58, and as Entry Number 865415, with the Parish Clerk of St. Landry Parish, Louisiana, as assigned and amended by that certain Assignment and Amendment to Mortgages dated as of September 12, 2002, among Bank of America, N.A., as administrative agent, Administrative Agent and Former Borrower, filed with the Parish Clerk of St. Landry Parish, Louisiana, on October 14, 2002, as File Number 895249, in Book 1123, Page 133. Schedule 2.2-17 70. UCC Financing Statement executed by Former Borrower in favor of Bank of America, N.A., as administrative agent, filed on February 5, 2001, as File Number 49-255460, with the Parish Clerk of St. Landry Parish, Louisiana. St. Martin Parish, Louisiana 71. Mortgage, Deed of Trust, Security Agreement, Financing Statement and Assignment of Production from DMI to Bank of America, N.A., as administrative agent, filed July 17, 1996, as File Number 155143, in Mortgage Book 730, Folio 229, with the Parish Clerk of St. Martin Parish, Louisiana, as amended by that certain Amendment to Mortgages dated December 29, 1997, executed by DMI and Bank of America, N.A., as administrative agent, filed January 12, 1998, File Number 289325, in Book 781, Page 468, with the Parish Clerk of St. Martin Parish, Louisiana, as assigned and amended by that certain Assignment and Amendment to Mortgages dated as of September 12, 2002, among Bank of America, N.A., as administrative agent, Administrative Agent and Former Borrower, filed with the Parish Clerk of St. Martin Parish, Louisiana, on October 15, 2002, as File Number 344322, in Book 918, Folio 336. 72. Mortgage, Deed of Trust, Security Agreement, Financing Statement and Assignment of Production dated as of March 1, 1999, from Former Borrower to Bank of America, N.A., as administrative agent, recorded on March 12, 1999, in Mortgage Book Number 809, Folio Number 423, and as Clerk's File Number 001623 with the Parish Clerk of St. Martin Parish, Louisiana as amended by that certain Amendment to Mortgages dated October 13, 2000, executed by Former Borrower and Bank of America, N.A., as administrative agent, filed on November 9, 2000, as Instrument Number 321176, in Book 853, Page 524, with the Parish Clerk of St. Martin Parish, Louisiana, as assigned and amended by that certain Assignment and Amendment to Mortgages dated as of September 12, 2002, among Bank of America, N.A., as administrative agent, Administrative Agent and Former Borrower, filed with the Parish Clerk of St. Martin Parish, Louisiana, on October 15, 2002, as File Number 344322, in Book 918, Folio 336. 73. UCC-1 Financing Statement executed by Former Borrower in favor of Bank of America, N.A., as administrative agent, filed on March 12, 1999, as File Number 99-323, with the Parish Clerk of St. Martin Parish, Louisiana. St. Mary Parish, Louisiana 74. Mortgage, Deed of Trust, Security Agreement, Financing Statement and Assignment of Production from DMI to Bank of America, N.A., as administrative agent, filed July 12, 1996, as File Number 218194, in Mortgage Book 734, Folio 35, with the Parish Clerk of St. Mary Parish, Louisiana, as amended by that certain Schedule 2.2-18 Amendment to Mortgages dated December 29, 1997, executed by DMI and Bank of America, N.A., as administrative agent, filed January 12, 1998, as File Number 226303, in Mortgage Book 774, Page 1, with the Parish Clerk of St. Mary Parish, Louisiana, as assigned and amended by that certain Assignment and Amendment to Mortgages dated as of September 12, 2002, among Bank of America, N.A., as administrative agent, Administrative Agent and Former Borrower, filed with the Parish Clerk of St. Mary Parish, Louisiana, on October 15, 2002, as Entry Number 253364, in Book 927, Page 266. 75. Mortgage, Deed of Trust, Security Agreement, Financing Statement and Assignment of Production dated as of March 1, 1999, from Former Borrower to Bank of America, N.A., as administrative agent, recorded on March 12, 1999, in Mortgage Book Number 807, Entry Number 232,984, Page Number 477, with the Parish Clerk of St. Mary Parish, Louisiana, as amended by that certain Amendment to Mortgages dated October 13, 2000, executed by Former Borrower and Bank of America, N.A., as administrative agent, filed on November 9, 2000, as Instrument Number 242451, in Mortgage Book 856, Folio 325, with the Parish Clerk of St. Mary Parish, Louisiana, as assigned and amended by that certain Assignment and Amendment to Mortgages dated as of September 12, 2002, among Bank of America, N.A., as administrative agent, Administrative Agent and Former Borrower, filed with the Parish Clerk of St. Mary Parish, Louisiana, on October 15, 2002, as Entry Number 253364, in Book 927, Page 266. 76. UCC-1 Financing Statement executed by Former Borrower in favor of Bank of America, N.A., as administrative agent, filed on March 12, 1999, as File Number 51-15324, with the Parish Clerk of St. Mary Parish, Louisiana. 77. Mortgage, Deed of Trust, Security Agreement, Financing Statement and Assignment of Production dated January 12, 2001, from Former Borrower to Bank of America, N.A., as administrative agent, filed on February 5, 2001, as MOB Number 862, Page Number 473, and as Entry Number 243,683, with the Parish Clerk of St. Mary Parish, Louisiana, as assigned and amended by that certain Assignment and Amendment to Mortgages dated as of September 12, 2002, among Bank of America, N.A., as administrative agent, Administrative Agent and Former Borrower, filed with the Parish Clerk of St. Mary Parish, Louisiana, on October 15, 2002, as Entry Number 253364, in Book 927, Page 266. 78. UCC Financing Statement executed by Former Borrower in favor of Bank of America, N.A., as administrative agent, filed on February 5, 2001, as Entry Number 51-20884, with the Parish Clerk of St. Mary Parish, Louisiana. 79. Second Supplement and Amendment to Deed of Trust, Mortgage, Assignment, Security Agreement, Fixture Filing and Financing Statement dated September 25, 2000, executed by Matrix Oil & Gas, Inc. and Union Bank of California, recorded on September 28, 2000, in M.O.B. 853, Page 258, as Entry Number 241833, with the Parish Clerk of St. Mary Parish, Louisiana, as assigned by that certain Schedule 2.2-19 Assignment of Note and Liens dated July 10, 2001, executed by Union Bank of California in favor of Bank of America, N.A., as administrative agent, filed on July 20, 2001, as Entry Number 246324, in Mortgage Book 879, Page 193, with the Parish Clerk of St. Mary Parish, Louisiana, as assigned and amended by that certain Assignment and Amendment to Mortgages dated as of September 12, 2002, among Bank of America, N.A., as administrative agent, Administrative Agent and Former Borrower, filed with the Parish Clerk of St. Mary Parish, Louisiana, on October 15, 2002, as Entry Number 253364, in Book 927, Page 266. Terrebonne Parish, Louisiana 80. Deed of Trust, Mortgage, Assignment, Security Agreement and Financing Statement executed by DMI in favor of Bank of America, N.A., as administrative agent, filed May 16, 1995, as Entry Number 955603, in Mortgage Book 1016 and COB 1461, with the Parish Clerk of Terrebonne Parish, Louisiana, as assigned and amended by that certain Assignment and Amendment to Mortgage filed June 10, 1996, as Entry Number 977283, in Mortgage Book 1061, and on June 12 ,1996, as Entry Number 977426, in Mortgage Book 1061, with the Parish Clerk of Terrebonne Parish, Louisiana, and as amended by that certain Amendment to Mortgages dated December 29, 1997, executed by DMI and Bank of America, N.A., as administrative agent, filed January 15, 1998, as File Number 1013268, with the Parish Clerk of Terrebonne Parish, Louisiana, as assigned and amended by that certain Assignment and Amendment to Mortgages dated as of September 12, 2002, among Bank of America, N.A., as administrative agent, Administrative Agent and Former Borrower, filed with the Parish Clerk of Terrebonne Parish, Louisiana, on October 14, 2002, as File Number 1130499. 81. Mortgage, Assignment, Security Agreement, Fixture Filing and Financing Statement filed November 22, 1995, as Entry Number 966504, in Mortgage Book 1038 and COB 1486, with the Parish Clerk of Terrebonne Parish, Louisiana, as assigned and amended by that certain Assignment and Amendment to Mortgage filed June 10, 1996, as Entry Number 977283, in Mortgage Book 1061, and on June 12 ,1996, as Entry Number 977426, in Mortgage Book 1061, with the Parish Clerk of Terrebonne Parish, Louisiana, and as amended by that certain Amendment to Mortgages dated December 29, 1997, executed by DMI and Bank of America, N.A., as administrative agent, filed January 15, 1998, as File Number 1013268, with the Parish Clerk of Terrebonne Parish, Louisiana, as assigned and amended by that certain Schedule 2.2-20 Assignment and Amendment to Mortgages dated as of September 12, 2002, among Bank of America, N.A., as administrative agent, Administrative Agent and Former Borrower, filed with the Parish Clerk of Terrebonne Parish, Louisiana, on October 14, 2002, as File Number 1130499. 82. Mortgage, Deed of Trust, Security Agreement, Financing Statement and Assignment of Production from DMI to Bank of America, N.A., as administrative agent, filed July 17, 1996, as File Number 979550, in Mortgage Book 1065, with the Parish Clerk of Terrebonne Parish, Louisiana, as amended by that certain Amendment to Mortgages dated December 29, 1997, executed by DMI and Bank of America, N.A., as administrative agent, filed January 15, 1998, as File Number 1013268, with the Parish Clerk of Terrebonne Parish, Louisiana, as assigned and amended by that certain Assignment and Amendment to Mortgages dated as of September 12, 2002, among Bank of America, N.A., as administrative agent, Administrative Agent and Former Borrower, filed with the Parish Clerk of Terrebonne Parish, Louisiana, on October 14, 2002, as File Number 1130499. 83. Mortgage, Deed of Trust, Security Agreement, Financing Statement and Assignment of Production dated as of March 1, 1999, from Former Borrower to Bank of America, N.A., as administrative agent, recorded on March 12, 1999, as Clerk's File Number 1041400, with the Parish Clerk of Terrebonne Parish, Louisiana, as amended by that certain Amendment to Mortgages dated October 13, 2000, executed by Former Borrower and Bank of America, N.A., as administrative agent, filed on November 9, 2000, as Instrument Number 1083164, in Mortgage Book 1323, with the Parish Clerk of Terrebonne Parish, Louisiana, as assigned and amended by that certain Assignment and Amendment to Mortgages dated as of September 12, 2002, among Bank of America, N.A., as administrative agent, Administrative Agent and Former Borrower, filed with the Parish Clerk of Terrebonne Parish, Louisiana, on October 14, 2002, as File Number 1130499. 84. UCC-1 Financing Statement executed by Former Borrower in favor of Bank of America, N.A., as administrative agent, filed on March 12, 1999, as File Number 55-1041401, with the Parish Clerk of Terrebonne Parish, Louisiana. 85. Mortgage, Deed of Trust, Security Agreement, Financing Statement and Assignment of Production dated January 12, 2001, from Former Borrower to Bank of America, N.A., as administrative agent, filed on February 7, 2001, as MOB Number 1338, Entry Number 1088528, with the Parish Clerk of Terrebonne Parish, Louisiana, as assigned and amended by that certain Schedule 2.2-21 Assignment and Amendment to Mortgages dated as of September 12, 2002, among Bank of America, N.A., as administrative agent, Administrative Agent and Former Borrower, filed with the Parish Clerk of Terrebonne Parish, Louisiana, on October 14, 2002, as File Number 1130499. 86. UCC Financing Statement executed by Former Borrower in favor of Bank of America, N.A., as administrative agent, filed on February 7, 2001, as Entry Number 55-1088529, with the Parish Clerk of Terrebonne Parish, Louisiana. 87. Mortgage, Deed of Trust, Security Agreement, Financing Statement and Assignment of Production dated as of September 12, 2002, from Former Borrower to Administrative Agent, filed with the Parish Clerk of Terrebonne Parish, Louisiana, on October 14, 2002, as File Number 1130498. Vermilion Parish, Louisiana 88. Mortgage, Deed of Trust, Security Agreement, Financing Statement and Assignment of Production from DMI to Bank of America, N.A., as administrative agent, filed July 12, 1996, as File Number 9608707, with the Parish Clerk of Vermilion Parish, Louisiana, as amended by that certain Amendment to Mortgages dated December 29, 1997, executed by DMI and Bank of America, N.A., as administrative agent, filed January 14, 1998, as File Number 9800407, with the Parish Clerk of Vermilion Parish, Louisiana, as assigned and amended by that certain Assignment and Amendment to Mortgages dated as of September 12, 2002, among Bank of America, N.A., as administrative agent, Administrative Agent and Former Borrower, filed with the Parish Clerk of Vermilion Parish, Louisiana, on October 25, 2002, as File Number 20212559. 89. Mortgage, Deed of Trust, Security Agreement, Financing Statement and Assignment of Production dated as of March 1, 1999, from Former Borrower to Bank of America, N.A., as administrative agent, recorded on March 16, 1999, as Clerk's File Number 9902951, with the Parish Clerk of Vermilion Parish, Louisiana, as amended by that certain Amendment to Mortgages dated October 13, 2000, executed by Former Borrower and Bank of America, N.A., as administrative agent, filed on November 9, 2000, as Instrument Number 20011619, with the Parish Clerk of Vermilion Parish, Louisiana, as assigned and amended by that certain Assignment and Amendment to Mortgages dated as of September 12, 2002, among Bank of America, N.A., as administrative agent, Administrative Agent and Former Borrower, filed with the Parish Clerk of Vermilion Parish, Louisiana, on October 25, 2002, as File Number 20212559. Schedule 2.2-22 90. UCC-1 Financing Statement executed by Former Borrower in favor of Bank of America, N.A., as administrative agent, filed on March 16, 1999, as File Number 57-990505, with the Parish Clerk of Vermilion Parish, Louisiana. 91. Mortgage, Deed of Trust, Security Agreement, Financing Statement and Assignment of Production dated January 12, 2001, from Former Borrower to Bank of America, N.A., as administrative agent, filed on February 9, 2001, as Entry Number 20101575, with the Parish Clerk of Vermilion Parish, Louisiana, as assigned and amended by that certain Assignment and Amendment to Mortgages dated as of September 12, 2002, among Bank of America, N.A., as administrative agent, Administrative Agent and Former Borrower, filed with the Parish Clerk of Vermilion Parish, Louisiana, on October 25, 2002, as File Number 20212559. 92. UCC Financing Statement executed by Former Borrower in favor of Bank of America, N.A., as administrative agent, filed on February 9, 2001, as Entry Number 57 2010196, with the Parish Clerk of Vermilion Parish, Louisiana. Webster Parish, Louisiana 93. Mortgage, Deed of Trust, Security Agreement, Financing Statement and Assignment of Production from DMI to Bank of America, N.A., as administrative agent, filed July 18, 1996, as File Number 404112, in Mortgage Book 426, Folio 369, with the Parish Clerk of Webster Parish, Louisiana, as amended by that certain Amendment to Mortgages dated December 29, 1997, executed by DMI and Bank of America, N.A., as administrative agent, filed January 20, 1998, as File Number 416774, with the Parish Clerk of Webster Parish, Louisiana, as assigned and amended by that certain Assignment and Amendment to Mortgages dated as of September 12, 2002, among Bank of America, N.A., as administrative agent, Administrative Agent and Former Borrower, filed with the Parish Clerk of Webster Parish, Louisiana, on October 10, 2002, as File Number 456360. 94. Mortgage, Deed of Trust, Security Agreement, Financing Statement and Assignment of Production dated as of March 1, 1999, from Former Borrower to Bank of America, N.A., as administrative agent, recorded on March 16, 1999, as Registry Number 427114, with the Parish Clerk of Webster Parish, Louisiana, as amended by that certain Amendment to Mortgages dated October 13, 2000, executed by Former Borrower and Bank of America, N.A., as administrative agent, filed on November 13, 2000, as Instrument Number 441186, in Mortgage Book 488, Page 780, with the Parish Clerk of Webster Parish, Louisiana, as assigned and amended by that certain Assignment and Amendment to Mortgages dated as of September 12, 2002, among Bank of America, N.A., as administrative agent, Administrative Agent and Former Borrower, filed with the Parish Clerk of Webster Parish, Louisiana, on October 10, 2002, as File Number 456360. Schedule 2.2-23 95. UCC-1 Financing Statement executed by Former Borrower in favor of Bank of America, N.A., as administrative agent, filed on March 16, 1999, as File Number 307204, with the Parish Clerk of Webster Parish, Louisiana. MISSISSIPPI Amite County, Mississippi 96. Mortgage, Deed of Trust, Security Agreement, Financing Statement and Assignment of Production dated January 12, 2001, from Former Borrower to Bank of America, N.A., as administrative agent, filed on February 7, 2001, as MOB Number 271, Page 618, Entry Number 0100303, with the Parish Clerk of Amite County, Mississippi, as assigned and amended by that certain Assignment and Amendment to Mortgages dated as of September 12, 2002, among Bank of America, N.A., as administrative agent, Administrative Agent and Former Borrower, filed with the County Clerk of Amite County, Mississippi, on October 10, 2002, as File Number 0202942, in Book 288, Page 92. 97. UCC Financing Statement executed by Former Borrower in favor of Bank of America, N.A., as administrative agent, filed on February 7, 2001, as Entry Number 23522, with the Parish Clerk of Amite County, Mississippi. Clarke County, Mississippi 98. Deed of Trust, Mortgage, Assignment, Security Agreement and Financing Statement executed by DMI in favor of Bank of America, N.A., as administrative agent, filed May 12, 1995, in Deed of Trust Records Book 184, Page 318, with the County Clerk of Clarke County, Mississippi, as assigned and amended by that certain Assignment and Amendment to Mortgage filed June 10, 1996, in Deed of Trust Records Book 193, Page 523, with the County Clerk of Clarke County, Mississippi, and as amended by that certain Amendment to Mortgages dated December 29, 1997, executed by DMI and Bank of America, N.A., as administrative agent, filed January 15, 1998, as File Number 9450, in Deed of Trust Records Book 208, Page 338, with the County Clerk of Clarke County, Mississippi, and as assigned and amended by that certain Assignment and Amendment to Mortgages dated as of September 12, 2002, among Bank of America, N.A., as administrative agent, Administrative Agent and Former Borrower, filed with the County Clerk of Clarke County, Mississippi, on October 21, 2002, in Book DT254, Page 568-608. Schedule 2.2-24 99. Mortgage, Deed of Trust, Security Agreement, Financing Statement and Assignment of Production from DMI to Bank of America, N.A., as administrative agent, filed July 11, 1996, in Deed of Trust Records Book 194, Page 359, with the County Clerk of Clarke County, Mississippi, as amended by that certain Amendment to Mortgages dated December 29, 1997, executed by DMI and Bank of America, N.A., as administrative agent, filed January 15, 1998, as File Number 9450, in Deed of Trust Records Book 208, Page 338, with the County Clerk of Clarke County, Mississippi, as assigned and amended by that certain Assignment and Amendment to Mortgages dated as of September 12, 2002, among Bank of America, N.A., as administrative agent, Administrative Agent and Former Borrower, filed with the County Clerk of Clarke County, Mississippi, on October 21, 2002, in Book DT254, Page 568-608. 100. Mortgage, Deed of Trust, Security Agreement, Financing Statement and Assignment of Production dated as of March 1, 1999, from Former Borrower to Bank of America, N.A., as administrative agent, filed on April 8, 1999 at Book DT220, Page(s) 732-810, in the office of the County Clerk of Clarke County, Mississippi, as amended by that certain Amendment to Mortgages dated October 13, 2000, executed by Former Borrower and Bank of America, N.A., as administrative agent, filed on November 9, 2000, in Deed of Trust Book 234, Page 790, with the County Clerk of Clarke County, Mississippi, and as assigned and amended by that certain Assignment and Amendment to Mortgages dated as of September 12, 2002, among Bank of America, N.A., as administrative agent, Administrative Agent and Former Borrower, filed with the County Clerk of Clarke County, Mississippi, on October 21, 2002, in Book DT254, Page 568-608. 101. UCC-1 Financing Statement executed by Former Borrower in favor of Bank of America, N.A., as administrative agent, filed on April 6 1999, as File Number 1208B, with the County Clerk of Clarke County, Mississippi. Franklin County, Mississippi 102. Mortgage, Deed of Trust, Security Agreement, Financing Statement and Assignment of Production from DMI to Bank of America, N.A., as administrative agent, filed July 11, 1996, as File Number 017594, in Mortgage Book 202, Page 636, with the County Clerk of Franklin County, Mississippi, as amended by that certain Amendment to Mortgages dated December 29, 1997, executed by DMI and Bank of America, N.A., as administrative agent, filed January 13, 1998, as File Number 021021, in Book 208, Page 29, with the County Clerk of Franklin County, Mississippi, and as assigned and amended by that certain Assignment and Amendment to Mortgages dated as of September 12, 2002, among Bank of America, N.A., as administrative agent, Administrative Agent and Former Borrower, filed with the County Clerk of Franklin County, Mississippi, on November 18, 2002, as File Number 032045, in Book 233, Page 304. Schedule 2.2-25 103. Mortgage, Deed of Trust, Security Agreement, Financing Statement and Assignment of Production dated as of March 1, 1999, from Former Borrower to Bank of America, N.A., as administrative agent, filed on March 12, 1999, as File Number 024152 in Book 214, Page(s) 231-263, with the County Clerk of Franklin County, Mississippi, as amended by that certain Amendment to Mortgages dated October 13, 2000, executed by Former Borrower and Bank of America, N.A., as administrative agent, filed on November 9, 2000, as Instrument Number 027963, in Book 223, Page 115, with the County Clerk of Franklin County, Mississippi, and as assigned and amended by that certain Assignment and Amendment to Mortgages dated as of September 12, 2002, among Bank of America, N.A., as administrative agent, Administrative Agent and Former Borrower, filed with the County Clerk of Franklin County, Mississippi, on November 18, 2002, as File Number 032045, in Book 233, Page 304. 104. UCC-1 Financing Statement executed by Former Borrower in favor of Bank of America, N.A., as administrative agent, filed on March 12, 1999, as File Number 098-03-99, with the County Clerk of Franklin County, Mississippi. Hinds County, Mississippi 105. Mortgage, Deed of Trust, Security Agreement, Financing Statement and Assignment of Production from DMI to Bank of America, N.A., as administrative agent, filed July 12, 1996, as File Number 87931, in Mortgage Book 295, Page 686, with the County Clerk of Hinds County, Mississippi, as amended by that certain Amendment to Mortgages dated December 29, 1997, executed by DMI and Bank of America, N.A., as administrative agent, filed January 12, 1998, as File Number 97849, in Book 316, Page 85, with the County Clerk of Hinds County, Mississippi, as assigned and amended by that certain Assignment and Amendment to Mortgages dated as of September 12, 2002, among Bank of America, N.A., as administrative agent, Administrative Agent and Former Borrower, filed with the County Clerk of Hinds County, Mississippi, on November 15, 2002, as File Number 133714, in Book 404, Page 228. 106. Mortgage, Deed of Trust, Security Agreement, Financing Statement and Assignment of Production dated as of March 1, 1999, from Former Borrower to Bank of America, N.A., as administrative agent, filed on March 18, 1999, as File Number 106313 in Book 334, Page 525, with the County Clerk of Hinds County, Mississippi, as amended by that certain Amendment to Mortgages dated October 13, 2000, executed by Former Borrower and Bank of America, N.A., as administrative agent, filed on November 10, 2000, as Instrument Number 118484, in Book 360, Page 67, with the County Clerk of Hinds County, Mississippi, and as assigned and amended by that certain Schedule 2.2-26 Assignment and Amendment to Mortgages dated as of September 12, 2002, among Bank of America, N.A., as administrative agent, Administrative Agent and Former Borrower, filed with the County Clerk of Hinds County, Mississippi, on November 15, 2002, as File Number 133714, in Book 404, Page 228. 107. UCC-1 Financing Statement executed by Former Borrower in favor of Bank of America, N.A., as administrative agent, filed on March 18, 1999, as File Number 033238, with the County Clerk of Hinds County, Mississippi. Jasper County, Mississippi, 1st Judicial District 108. Deed of Trust, Mortgage, Assignment, Security Agreement and Financing Statement executed by DMI in favor of Bank of America, N.A., as administrative agent, filed May 12, 1995, in Deed of Trust Records Book 92, Page 175, with the County Clerk of Jasper County, Mississippi, as amended by that certain Amendment to Mortgages dated December 29, 1997, executed by DMI and Bank of America, N.A., as administrative agent, filed January 16, 1998, in Deed of Trust Records Book 102, Page 247, with the County Clerk of Jasper County, Mississippi, as assigned and amended by that certain Assignment and Amendment to Mortgages dated as of September 12, 2002, among Bank of America, N.A., as administrative agent, Administrative Agent and Former Borrower, filed with the County Clerk of Jasper County, Mississippi, on October 14, 2002, in Book 121, Page 358-397. 109. Mortgage, Deed of Trust, Security Agreement, Financing Statement and Assignment of Production dated as of March 1, 1999, from Former Borrower to Bank of America, N.A., as administrative agent, recorded on March 15, 1999, in Book 106, Page(s) 586-663, with the County Clerk of Jasper County, Mississippi First Judicial District, as amended by that certain Amendment to Mortgages dated October 13, 2000, executed by Former Borrower and Bank of America, N.A., as administrative agent, filed on November 9, 2000, in Deed of Trust Book 112, Page 249, with the County Clerk of Jasper County, Mississippi First Judicial District, and as assigned and amended by that certain Assignment and Amendment to Mortgages dated as of September 12, 2002, among Bank of America, N.A., as administrative agent, Administrative Agent and Former Borrower, filed with the County Clerk of Jasper County, Mississippi, on October 14, 2002, in Book 121, Page 358-397. 110. UCC-1 Financing Statement executed by Former Borrower in favor of Bank of America, N.A., as administrative agent, filed on March 15, 1999, in Book 20, Page 612, with the County Clerk of Jasper County, Mississippi First Judicial District. Schedule 2.2-27 111. Mortgage, Deed of Trust, Security Agreement, Financing Statement and Assignment of Production dated January 12 ,2001, from Former Borrower to Bank of America, N.A., as administrative agent, filed on February 12, 2001, as DTB Number 113, Page 76, with the County Clerk of Jasper County, Mississippi, as assigned and amended by that certain Assignment and Amendment to Mortgages dated as of September 12, 2002, among Bank of America, N.A., as administrative agent, Administrative Agent and Former Borrower, filed with the County Clerk of Jasper County, Mississippi, on October 14, 2002, in Book 121, Page 358-397. 112. UCC-1 Financing Statement executed by Former Borrower in favor of Bank of America, N.A., as administrative agent, filed on February 12, 2001, as File Number 64078, in Book 24-1, with the County Clerk of Jasper County, Mississippi. 113. Mortgage, Deed of Trust, Security Agreement, Financing Statement and Assignment of Production dated as of September 12, 2002, from Former Borrower to Administrative Agent, filed with the County Clerk of Jasper County, Mississippi, on October 14, 2002, in Book 121, Page 239-357. Jefferson Davis County, Mississippi 114. Mortgage, Deed of Trust, Security Agreement, Financing Statement and Assignment of Production from DMI to Bank of America, N.A., as administrative agent, filed July 12, 1996, as File Number 9601950, in Mortgage Book 431, Page 465, with the County Clerk of Jefferson Davis County, Mississippi, as amended by that certain Amendment to Mortgages dated December 29, 1997, executed by DMI and Bank of America, N.A., as administrative agent, filed January 12, 1998, as File Number 9800082, in Book 441, Page 484, with the County Clerk of Jefferson Davis County, Mississippi, and as assigned and amended by that certain Assignment and Amendment to Mortgages dated as of September 12, 2002, among Bank of America, N.A., as administrative agent, Administrative Agent and Former Borrower, filed with the County Clerk of Jefferson Davis County, Mississippi, on November 4, 2002, as File Number 0204280 in Book 478, Page 666. 115. Mortgage, Deed of Trust, Security Agreement, Financing Statement and Assignment of Production dated as of March 1, 1999, from Former Borrower to Bank of America, N.A., as administrative agent, recorded on March 18, 1999, in Book 450, Page 296 as Document Number 9900823, with the County Clerk of Jefferson Davis County, Mississippi, as amended by that certain Amendment to Mortgages dated October 13, 2000, executed by Former Borrower and Bank of America, N.A., as administrative agent, filed on November 14, 2000, as Instrument Number 0003787, in Book 462, Page 511, with the County Clerk of Jefferson Davis County, Mississippi, and as assigned and amended by that certain Schedule 2.2-28 Assignment and Amendment to Mortgages dated as of September 12, 2002, among Bank of America, N.A., as administrative agent, Administrative Agent and Former Borrower, filed with the County Clerk of Jefferson Davis County, Mississippi, on November 4, 2002, as File Number 0204280 in Book 478, Page 666. 116. UCC-1 Financing Statement executed by Former Borrower in favor of Bank of America, N.A., as administrative agent, filed on March 18, 1999, as File Number 99-0373, with the County Clerk of Jefferson Davis County, Mississippi. Jones County, Mississippi, 1st Judicial District 117. Mortgage, Deed of Trust, Security Agreement, Financing Statement and Assignment of Production from DMI to Bank of America, N.A., as administrative agent, filed July 18, 1996, in Mortgage Book 436, Page 434, with the County Clerk of Jones County, Mississippi, as amended by that certain Amendment to Mortgages dated December 29, 1997, executed by DMI and Bank of America, N.A., as administrative agent, filed January 12, 1998, Deed of Trust Records Book 464, Page 608, with the County Clerk of Jones County, Mississippi, and as assigned and amended by that certain Assignment and Amendment to Mortgages dated as of September 12, 2002, among Bank of America, N.A., as administrative agent, Administrative Agent and Former Borrower, filed with the County Clerk of Jones County, Mississippi, on October 11, 2002, in Book 560, Page 562. 118. Mortgage, Deed of Trust, Security Agreement, Financing Statement and Assignment of Production dated January 12, 2001, from Former Borrower to Bank of America, N.A., as administrative agent, filed on February 7, 2001, as DTB Number 525, Page 195, with the County Clerk of Jones County, Mississippi First Judicial District, as assigned and amended by that certain Assignment and Amendment to Mortgages dated as of September 12, 2002, among Bank of America, N.A., as administrative agent, Administrative Agent and Former Borrower, filed with the County Clerk of Jones County, Mississippi, on October 11, 2002, in Book 560, Page 562. 119. UCC Financing Statement executed by Former Borrower in favor of Bank of America, N.A., as administrative agent, filed on February 7, 2001, as File Number 10,693, with the County Clerk of Jones County, Mississippi First Judicial District. Jones County, Mississippi, 2nd Judicial District 120. Deed of Trust, Mortgage, Assignment, Security Agreement and Financing Statement executed by DMI in favor of Bank of America, N.A., as administrative agent, filed May 12, 1995, in Deed of Trust Records Book 1044, Page 538, with the County Clerk of Jones County, Mississippi Second Judicial District, as assigned and amended by that certain Schedule 2.2-29 Assignment and Amendment to Mortgages dated as of September 12, 2002, among Bank of America, N.A., as administrative agent, Administrative Agent and Former Borrower, filed with the County Clerk of Jones County, Mississippi Second Judicial District, on November 1, 2002 in Book 1367, Page 59. 121. Mortgage, Deed of Trust, Security Agreement, Financing Statement and Assignment of Production dated as of March 1, 1999, from Former Borrower to Bank of America, N.A., as administrative agent, recorded on March 19, 1999, in Book 1192, Page 521, with the County Clerk of Jones County, Mississippi Second Judicial District as amended by that certain Amendment to Mortgages dated October 13, 2000, executed by Former Borrower and Bank of America, N.A., as administrative agent, filed on November 9, 2000, in Deed of Trust Book 1260, Page 676, with the County Clerk of Jones County, Mississippi Second Judicial District, and as assigned and amended by that certain Assignment and Amendment to Mortgages dated as of September 12, 2002, among Bank of America, N.A., as administrative agent, Administrative Agent and Former Borrower, filed with the County Clerk of Jones County, Mississippi Second Judicial District, on November 1, 2002 in Book 1367, Page 59. 122. UCC-1 Financing Statement executed by Former Borrower in favor of Bank of America, N.A., as administrative agent, filed on March 19, 1999, in Book 1192, Page 521, with the County Clerk of Jones County, Mississippi Second Judicial District. 123. Mortgage, Deed of Trust, Security Agreement, Financing Statement and Assignment of Production dated January 12, 2001, from Former Borrower to Bank of America, N.A., as administrative agent, filed on February 7, 2001, as DTB Number 1269, Page 334, with the County Clerk of Jones County, Mississippi Second Judicial District, as assigned and amended by that certain Assignment and Amendment to Mortgages dated as of September 12, 2002, among Bank of America, N.A., as administrative agent, Administrative Agent and Former Borrower, filed with the County Clerk of Jones County, Mississippi Second Judicial District, on November 1, 2002 in Book 1367, Page 59. 124. UCC Financing Statement executed by Former Borrower in favor of Bank of America, N.A., as administrative agent, filed on February 7, 2001, as File Number 111,382, with the County Clerk of Jones County, Mississippi Second Judicial District. Lincoln County, Mississippi 125. Mortgage, Deed of Trust, Security Agreement, Financing Statement and Assignment of Production dated January 12, 2001, from Former Borrower to Administrative Agent, filed on February 13, 2001, as MOB Number 1086, Page 439, with the County Clerk of Lincoln County, Mississippi, as assigned and amended by that certain Schedule 2.2-30 Assignment and Amendment to Mortgages dated as of September 12, 2002, among Bank of America, N.A., as administrative agent, Administrative Agent and Former Borrower, filed with the County Clerk of Lincoln County, Mississippi, on October 16, 2002, as File Number 20028441, in Book 1137, Page 0681. 126. UCC Financing Statement executed by Former Borrower in favor of Bank of America, N.A., as administrative agent, filed on February 13, 2001, as Entry Number 035001, with the County Clerk of Lincoln County, Mississippi. 127. Mortgage, Deed of Trust, Security Agreement, Financing Statement and Assignment of Production dated as of September 12, 2002, from Former Borrower, to Administrative Agent, filed with the County Clerk of Lincoln County, Mississippi, on October 16, 2002, as File Number 20028440, in Book 1137, Page 0542. Lowndes County, Mississippi 128. Mortgage, Deed of Trust, Security Agreement, Financing Statement and Assignment of Production from DMI to Bank of America, N.A., as administrative agent, filed July 16, 1996, in Mortgage Book 1165, Page 310, with the County Clerk of Lowndes County, Mississippi, as amended by that certain Amendment to Mortgages dated December 29, 1997, executed by DMI and Bank of America, N.A., as administrative agent, filed January 12, 1998, in Deed of Trust Records Book 1219, Page 419, with the County Clerk of Lowndes County, Mississippi, as assigned and amended by that certain Assignment and Amendment to Mortgages dated as of September 12, 2002, among Bank of America, N.A., as administrative agent, Administrative Agent and Former Borrower, filed with the County Clerk of Lowndes County, Mississippi, on October 15, 2002, in Book 2002, on Page 25860. 129. Mortgage, Deed of Trust, Security Agreement, Financing Statement and Assignment of Production dated as of March 1, 1999, from Former Borrower to Bank of America, N.A., as administrative agent, filed on March 15, 1999, as Trust Deed Number 1270, Page(s) 417-449, with the County Clerk of Lowndes County, Mississippi, as amended by that certain Amendment to Mortgages dated October 13, 2000, executed by Former Borrower and Bank of America, N.A., as administrative agent, filed on November 14, 2000, Trust Deed Book 1345, Page 344, with the County Clerk of Lowndes County, Mississippi, as assigned and amended by that certain Assignment and Amendment to Mortgages dated as of September 12, 2002, among Bank of America, N.A., as administrative agent, Administrative Agent and Former Borrower, filed with the County Clerk of Lowndes County, Mississippi, on October 15, 2002, in Book 2002, on Page 25860. Schedule 2.2-31 130. UCC-1 Financing Statement executed by Former Borrower in favor of Bank of America, N.A., as administrative agent, filed on March 15, 1999, as File Number 123697, Trust Deed Number 1270, Page 450, with the County Clerk of Lowndes County, Mississippi. Madison County, Mississippi 131. Mortgage, Deed of Trust, Security Agreement, Financing Statement and Assignment of Production from DMI to Bank of America, N.A., as administrative agent, filed July 17, 1996, as File Number 197658, in Book 991, Page 386, with the County Clerk of Madison County, Mississippi, as amended by that certain Amendment to Mortgages dated December 29, 1997, executed by DMI and Bank of America, N.A., as administrative agent, filed January 9, 1998, in Book 1074, Page 535, with the County Clerk of Madison County, Mississippi, as assigned and amended by that certain Assignment and Amendment to Mortgages dated as of September 12, 2002, among Bank of America, N.A., as administrative agent, Administrative Agent and Former Borrower, filed with the County Clerk of Madison County, Mississippi, on October 11, 2002, in Book 1456, Page 397. 132. Mortgage, Deed of Trust, Security Agreement, Financing Statement and Assignment of Production dated as of March 1, 1999, from Former Borrower to Bank of America, N.A., as administrative agent, recorded on March 12, 1999, in Book 1159, Page 738, as Document Number 276499, with the County Clerk of Madison County, Mississippi, as amended by that certain Amendment to Mortgages dated October 13, 2000, executed by Former Borrower and Bank of America, N.A., as administrative agent, filed on November 13, 2000, as Instrument Number 323455, in Book 1265, Page 406, with the County Clerk of Madison County, Mississippi, as assigned and amended by that certain Assignment and Amendment to Mortgages dated as of September 12, 2002, among Bank of America, N.A., as administrative agent, Administrative Agent and Former Borrower, filed with the County Clerk of Madison County, Mississippi, on October 11, 2002, in Book 1456, Page 397. 133. UCC-1 Financing Statement executed by Former Borrower in favor of Bank of America, N.A., as administrative agent, filed on March 12, 1999, as File Number 998292, with the County Clerk of Madison County, Mississippi. Monroe County, Mississippi 134. Mortgage, Deed of Trust, Security Agreement, Financing Statement and Assignment of Production dated as of September 12, 2002, from Former Borrower to Administrative Agent, filed with the County Clerk of Monroe County, Mississippi, on November 7, 2002, as File Number 20027483. Schedule 2.2-32 Perry County, Mississippi 135. Mortgage, Deed of Trust, Security Agreement, Financing Statement and Assignment of Production dated October 13, 2000, executed by Former Borrower in favor of Bank of America, N.A., as administrative agent, filed on November 13, 2000, in Book 158, Page 488, with the County Clerk of Perry County, Mississippi, as assigned and amended by that certain Assignment and Amendment to Mortgages dated as of September 12, 2002, among Bank of America, N.A., as administrative agent, Administrative Agent and Former Borrower, filed with the County Clerk of Perry County, Mississippi, on October 11, 2002, in Book 172, Page 54. 136. UCC Financing Statement executed by Former Borrower in favor of Bank of America, N.A., as administrative agent, filed on November 13, 2000, as File Number 00-11-1,050, with the County Clerk of Perry County, Mississippi. 137. Mortgage, Deed of Trust, Security Agreement, Financing Statement and Assignment of Production dated January 12, 2001, from Former Borrower to Bank of America, N.A., as administrative agent, filed on February 7, 2001, as DTB Number 160, Page 1, with the County Clerk of Perry County, Mississippi, as assigned and amended by that certain Assignment and Amendment to Mortgages dated as of September 12, 2002, among Bank of America, N.A., as administrative agent, Administrative Agent and Former Borrower, filed with the County Clerk of Perry County, Mississippi, on October 11, 2002, in Book 172, Page 54. 138. UCC Financing Statement executed by Former Borrower in favor of Bank of America, N.A., as administrative agent, filed on February 7, 2001, as Entry Number 01-02-1,298, with the County Clerk of Perry County, Mississippi. 139. Mortgage, Deed of Trust, Security Agreement, Financing Statement and Assignment of Production dated as of September 12, 2002, from Former Borrower to Administrative Agent, filed with the County Clerk of Perry County, Mississippi, on October 10, 2002, in Book 172, Page 94. Pike County, Mississippi 140. Mortgage, Deed of Trust, Security Agreement, Financing Statement and Assignment of Production dated October 13, 2000, executed by Former Borrower in favor of Bank of America, N.A., as administrative agent, filed on November 14, 2000, as Instrument Number 134782, Book 0599, Page 0121, with the County Clerk of Pike County, Mississippi, as assigned and amended by that certain Assignment and Amendment to Mortgages dated as of September 12, 2002, among Bank of America, N.A., as administrative agent, Administrative Agent and Former Borrower, filed with the County Clerk of Perry County, Mississippi, on October 11, 2002, as File Number 153291, in Book 064, on Page 0739. Schedule 2.2-33 141. UCC Financing Statement executed by Former Borrower in favor of Bank of America, N.A., as administrative agent, filed on November 14, 2000, as File Number 5607, with the County Clerk of Pike County, Mississippi. 142. Mortgage, Deed of Trust, Security Agreement, Financing Statement and Assignment of Production dated January 12, 2001, from Former Borrower to Bank of America, N.A., as administrative agent, filed on February 7, 2001, as DTB Number 0602, Page 0914, with the County Clerk of Pike County, Mississippi, as assigned and amended by that certain Assignment and Amendment to Mortgages dated as of September 12, 2002, among Bank of America, N.A., as administrative agent, Administrative Agent and Former Borrower, filed with the County Clerk of Perry County, Mississippi, on October 11, 2002, as File Number 153291, in Book 064, on Page 0739. 143. UCC Financing Statement executed by Former Borrower in favor of Bank of America, N.A., as administrative agent, filed on February 7, 2001, as File Number 7060, with the County Clerk of Pike County, Mississippi. 144. Mortgage, Deed of Trust, Security Agreement, Financing Statement and Assignment of Production dated as of September 12, 2002, from Former Borrower, to Administrative Agent, filed with the County Clerk of Perry County, Mississippi, on October 11, 2002, as File Number 153292, in Book 064, Page 0779. Rankin County, Mississippi 145. Deed of Trust, Mortgage, Assignment, Security Agreement and Financing Statement executed by DMI in favor of Bank of America, N.A., as administrative agent, filed May 22, 1995, in Book 1043, Page 498, with the County Clerk of Rankin County, Mississippi, as assigned and amended by that certain Assignment and Amendment to Mortgage filed June 11, 1996, in Book 1125, Page 662, with the County Clerk of Rankin County, Mississippi, and as amended by that certain Amendment to Mortgages dated December 29, 1997, executed by DMI and Bank of America, N.A., as administrative agent, filed January 15, 1998, in Book 1262, Page 513, with the County Clerk of Rankin County, Mississippi, and as assigned and amended by that certain Assignment and Amendment to Mortgages dated as of September 12, 2002, among Bank of America, N.A., as administrative agent, Administrative Agent and Former Borrower, filed with the County Clerk of Rankin County, Mississippi, on October 14, 2002, in Book 1891, Page 321. 146. Mortgage, Deed of Trust, Security Agreement, Financing Statement and Assignment of Production dated as of March 1, 1999, from Former Borrower to Bank of America, N.A., as administrative agent, filed on March 12, 1999, in Book 1394, Page 560, with the County Clerk of Rankin County, Mississippi, as amended by that certain Schedule 2.2-34 Amendment to Mortgages dated October 13, 2000, executed by Former Borrower and Bank of America, N.A., as administrative agent, filed on November 9, 2000, in Book 1566, Page 416, with the County Clerk of Rankin County, Mississippi, and as assigned and amended by that certain Assignment and Amendment to Mortgages dated as of September 12, 2002, among Bank of America, N.A., as administrative agent, Administrative Agent and Former Borrower, filed with the County Clerk of Rankin County, Mississippi, on October 14, 2002, in Book 1891, Page 321. 147. UCC-1 Financing Statement executed by Former Borrower in favor of Bank of America, N.A., as administrative agent, filed on March 16, 1999, as File Number 99-000-1082, with the County Clerk of Rankin County, Mississippi. 148. Mortgage, Deed of Trust, Security Agreement, Financing Statement and Assignment of Production dated as of September 12, 2002, from Former Borrower to Administrative Agent, filed with the County Clerk of Rankin County, Mississippi, on October 14, 2002, in Book 1891, Page 98. 149. Supplement to Mortgage, Deed of Trust, Security Agreement, Financing Statement and Assignment of Production dated effective as of October 22, 2003, between Former Borrower and Administrative Agent filed on October 28, 2003, in Book 2170, Page 476, with the County Clerk of Rankin County, Mississippi. Scott County, Mississippi 150. Mortgage, Deed of Trust, Security Agreement, Financing Statement and Assignment of Production dated as of September 12, 2002, from Former Borrower to Administrative Agent, filed with the County Clerk of Scott County, Mississippi, on October 11, 2002, in Book 65, Page 624. Smith County, Mississippi 151. Deed of Trust, Mortgage, Assignment, Security Agreement and Financing Statement executed by DMI in favor of Bank of America, N.A., as administrative agent, filed May 12, 1995, in Deed of Trust Records Book 404, Page 556, with the County Clerk of Smith County, Mississippi, as assigned and amended by that certain Assignment and Amendment to Mortgage filed June 12, 1996, in Deed of Trust Records Book 415, Page 166, with the County Clerk of Smith County, Mississippi, and as amended by that certain Amendment to Mortgages dated December 29, 1997, executed by DMI and Bank of America, N.A., as administrative agent, filed January 12, 1998, LDT Book 431, Page 1, with the County Clerk of Smith County, Mississippi, and as assigned and amended by that certain Schedule 2.2-35 Assignment and Amendment to Mortgages dated as of September 12, 2002, among Bank of America, N.A., as administrative agent, Administrative Agent and Former Borrower, filed with the County Clerk of Smith County, Mississippi, on October 11, 2002 in Book 477, on Page 471-510. 152. Mortgage, Deed of Trust, Security Agreement, Financing Statement and Assignment of Production from DMI to Bank of America, N.A., as administrative agent, filed July 11, 1996, as File Number 3022, in Book 416, Page 85, with the County Clerk of Smith County, Mississippi, as amended by that certain Amendment to Mortgages dated December 29, 1997, executed by DMI and Bank of America, N.A., as administrative agent, filed January 12, 1998, in LDT Book 431, Page 1, with the County Clerk of Smith County, Mississippi, and as assigned and amended by that certain Assignment and Amendment to Mortgages dated as of September 12, 2002, among Bank of America, N.A., as administrative agent, Administrative Agent and Former Borrower, filed with the County Clerk of Smith County, Mississippi, on October 11, 2002 in Book 477, on Page 471-510. 153. Mortgage, Deed of Trust, Security Agreement, Financing Statement and Assignment of Production dated as of March 1, 1999, from Former Borrower to Bank of America, N.A., as administrative agent, filed on March 12, 1999, in OGL Book 404, Page(s) 405-439, with the County Clerk of Smith County, Mississippi, as amended by that certain Amendment to Mortgages dated October 13, 2000, executed by Former Borrower and Bank of America, N.A., as administrative agent, filed on November 9, 2000, in O&G Book 410, Page 400, with the County Clerk of Smith County, Mississippi, and as assigned and amended by that certain Assignment and Amendment to Mortgages dated as of September 12, 2002, among Bank of America, N.A., as administrative agent, Administrative Agent and Former Borrower, filed with the County Clerk of Smith County, Mississippi, on October 11, 2002 in Book 477, on Page 471-510. 154. UCC-1 Financing Statement executed by Former Borrower in favor of Bank of America, N.A., as administrative agent, filed on March 16, 1999, as File Number 39665, with the County Clerk of Smith County, Mississippi. Walthall County, Mississippi 155. Deed of Trust, Mortgage, Assignment, Security Agreement and Financing Statement executed by DMI in favor of Bank of America, N.A., as administrative agent, filed May 12, 1995, in Book 231, Page 568, with the County Clerk of Walthall County, Mississippi, as assigned and amended by that certain Assignment and Amendment to Mortgage filed June 10, 1996, in Book 239, Page 14, with the County Clerk of Walthall County, Mississippi, and as amended by that certain Schedule 2.2-36 Amendment to Mortgages dated December 29, 1997, executed by DMI and Bank of America, N.A., as administrative agent, filed January 12, 1998, in Deed of Trust Book 248, Page 768, with the County Clerk of Walthall County, Mississippi, and as assigned and amended by that certain Assignment and Amendment to Mortgages dated as of September 12, 2002, among Bank of America, N.A., as administrative agent, Administrative Agent and Former Borrower, filed with the County Clerk of Walthall County, Mississippi, on October 15, 2002, in Book 0284, Page 714. 156. Mortgage, Deed of Trust, Security Agreement, Financing Statement and Assignment of Production from DMI to Bank of America, N.A., as administrative agent, filed July 12, 1996, in Mortgage Book 239, Page 467, with the County Clerk of Walthall County, Mississippi, as amended by that certain Amendment to Mortgages dated December 29, 1997, executed by DMI and Bank of America, N.A., as administrative agent, filed January 12, 1998, in Deed of Trust Book 248, Page 768, with the County Clerk of Walthall County, Mississippi, and as assigned and amended by that certain Assignment and Amendment to Mortgages dated as of September 12, 2002, among Bank of America, N.A., as administrative agent, Administrative Agent and Former Borrower, filed with the County Clerk of Walthall County, Mississippi, on October 15, 2002, in Book 0284, Page 714. 157. Mortgage, Deed of Trust, Security Agreement, Financing Statement and Assignment of Production dated as of March 1, 1999, from Former Borrower to Bank of America, N.A., as administrative agent, filed on March 12, 1999, in Land Deed Trust Book 258, Page 224, with the County Clerk of Walthall County, Mississippi, as amended by that certain Amendment to Mortgages dated October 13, 2000, executed by Former Borrower and Bank of America, N.A., as administrative agent, filed on November 9, 2000, in Book 268, Page 814, with the County Clerk of Walthall County, Mississippi, and as assigned and amended by that certain Assignment and Amendment to Mortgages dated as of September 12, 2002, among Bank of America, N.A., as administrative agent, Administrative Agent and Former Borrower, filed with the County Clerk of Walthall County, Mississippi, on October 15, 2002, in Book 0284, Page 714. 158. UCC-1 Financing Statement executed by Former Borrower in favor of Bank of America, N.A., as administrative agent, filed on March 12, 1999, as File Number 210-3-99, Book 8, with the County Clerk of Walthall County, Mississippi. Wayne County, Mississippi 159. Deed of Trust, Mortgage, Assignment, Security Agreement and Financing Statement executed by DMI in favor of Bank of America, N.A., as administrative agent, filed May 12, 1995, in Deed of Trust Records Book 860, Page 531, with the County Clerk of Wayne County, Mississippi, as assigned and amended by that certain Schedule 2.2-37 Assignment and Amendment to Mortgage filed June 10, 1996, in OT Deed Book 890, Page 448, with the County Clerk of Wayne County, Mississippi, and as amended by that certain Amendment to Mortgages dated December 29, 1997, executed by DMI and Bank of America, N.A., as administrative agent, filed January 12, 1998, in Deed of Trust Book 932, Page 179, with the County Clerk of Wayne County, Mississippi, and as assigned and amended by that certain Assignment and Amendment to Mortgages dated as of September 12, 2002, among Bank of America, N.A., as administrative agent, Administrative Agent and Former Borrower, filed with the County Clerk of Walthall County, Mississippi, on October 11, 2002 in Book 1093, Page 243. 160. Mortgage, Deed of Trust, Security Agreement, Financing Statement and Assignment of Production from DMI to Bank of America, N.A., as administrative agent, filed July 11, 1996, in Mortgage Book 892, Page 321, with the County Clerk of Wayne County, Mississippi, as amended by that certain Amendment to Mortgages dated December 29, 1997, executed by DMI and Bank of America, N.A., as administrative agent, filed January 12, 1998, in Deed of Trust Book 932, Page 179, with the County Clerk of Wayne County, Mississippi, and as assigned and amended by that certain Assignment and Amendment to Mortgages dated as of September 12, 2002, among Bank of America, N.A., as administrative agent, Administrative Agent and Former Borrower, filed with the County Clerk of Walthall County, Mississippi, on October 11, 2002 in Book 1093, Page 243. 161. Mortgage, Deed of Trust, Security Agreement, Financing Statement and Assignment of Production dated as of March 1, 1999, from Former Borrower to Bank of America, N.A., as administrative agent, filed on March 12, 1999, in Deed Book 975, Page 365, with the County Clerk of Wayne County, Mississippi, as amended by that certain Amendment to Mortgages dated October 13, 2000, executed by Former Borrower and Bank of America, N.A., as administrative agent, filed on November 9, 2000, in Deed of Trust Book 1032, Page 481, with the County Clerk of Wayne County, Mississippi, and as assigned and amended by that certain Assignment and Amendment to Mortgages dated as of September 12, 2002, among Bank of America, N.A., as administrative agent, Administrative Agent and Former Borrower, filed with the County Clerk of Walthall County, Mississippi, on October 11, 2002 in Book 1093, Page 243. Schedule 2.2-38 162. UCC-1 Financing Statement executed by Former Borrower in favor of Bank of America, N.A., as administrative agent, filed on March 12, 1999, as File Number 99-322, with the County Clerk of Wayne County, Mississippi. 163. Mortgage, Deed of Trust, Security Agreement, Financing Statement and Assignment of Production dated January 12, 2001, from Former Borrower to Bank of America, N.A., as administrative agent, filed on February 7, 2001, as DTB Number 1038, Page 390, with the County Clerk of Wayne County, Mississippi, as assigned and amended by that certain 164. Assignment and Amendment to Mortgages dated as of September 12, 2002, among Bank of America, N.A., as administrative agent, Administrative Agent and Former Borrower, filed with the County Clerk of Walthall County, Mississippi, on October 11, 2002 in Book 1093, Page 243. 165. UCC-1 Financing Statement executed by Former Borrower in favor of Bank of America, N.A., as administrative agent, filed on February 7, 2001, as File Number 01-186, with the County Clerk of Wayne County, Mississippi. 166. Mortgage, Deed of Trust, Security Agreement, Financing Statement and Assignment of Production dated as of September 12, 2002, from Former Borrower to Administrative Agent, filed with the County Clerk of Wayne County, Mississippi, on Ocotber 11, 2002, as File Number 000283, in Book 1093, Page 283. TEXAS Archer County, Texas 167. Mortgage, Deed of Trust, Security Agreement, Financing Statement and Assignment of Production dated January 12, 2001, from Former Borrower to Bank of America, N.A., as administrative agent, filed on February 7, 2001, as File Number 100533, Volume 0602, Page 664, with the County Clerk of Archer County, Texas, as assigned and amended by that certain Assignment and Amendment to Mortgages dated as of September 12, 2002, among Bank of America, N.A., as administrative agent, Administrative Agent and Former Borrower, filed with the County Clerk of Archer County, Texas, on October 10, 2002, as File Number 104822, in Volume 916, Page 620. 168. UCC Financing Statement executed by Former Borrower in favor of Bank of America, N.A., as administrative agent, filed on February 7, 2001, as File Number 9283, with the County Clerk of Archer County, Texas. Brazoria County, Texas 169. Mortgage, Deed of Trust, Security Agreement, Financing Statement and Assignment of Production dated January 12, 2001, from Former Borrower to Bank of America, N.A., as administrative agent, filed on February 7, 2001, as File Number 01-005055, with the County Clerk of Brazoria County, Texas, as assigned and amended by that certain Schedule 2.2-39 Assignment and Amendment to Mortgages dated as of September 12, 2002, among Bank of America, N.A., as administrative agent, Administrative Agent and Former Borrower, filed with the County Clerk of Brazoria County, Texas, on October 10, 2002, as File Number 02052534. 170. UCC Financing Statement executed by Former Borrower in favor of Bank of America, N.A., as administrative agent, filed on February 7, 2001, as File Number 00112, with the County Clerk of Brazoria County, Texas. Ector County, Texas 171. Mortgage, Deed of Trust, Security Agreement, Financing Statement and Assignment of Production dated January 12, 2001, from Former Borrower to Bank of America, N.A., as administrative agent, filed on February 13, 2001, as File Number 1728, Volume 1572, Page 0312, with the County Clerk of Ector County, Texas, as amended and assigned by that certain Assignment and Amendment to Mortgages dated as of September 12, 2002, among Bank of America, N.A., as administrative agent, Administrative Agent and Former Borrower, filed with the County Clerk of Ector County, Texas, on October 10, 2002, as File Number 13682, in Volume 1692, Page 0513. 172. UCC Financing Statement executed by Former Borrower in favor of Bank of America, N.A., as administrative agent, filed on February 13, 2001, as File Number 416, with the County Clerk of Ector County, Texas. Jack County, Texas 173. Mortgage, Deed of Trust, Security Agreement, Financing Statement and Assignment of Production dated as of September 12, 2002, from Former Borrower to Administrative Agent, filed with the County Clerk of Jack County, Texas, on October 10, 2002, in Book 0695, Page 0041. Jefferson County, Texas 174. Mortgage, Deed of Trust, Security Agreement, Financing Statement and Assignment of Production dated as of September 12, 2002, from Former Borrower to Administrative Agent, filed with the County Clerk of Jefferson County, Texas, on October 10, 2002, as File Number 2002037955. Johnson County, Texas 175. Mortgage, Deed of Trust, Security Agreement, Financing Statement and Assignment of Production dated as of September 12, 2002, from Former Borrower, to Administrative Agent, filed with the County Clerk of Johnson County, Texas, on October 9, 2002, as File Number 029189, in Book 2908, Page 0203. Schedule 2.2-40 Kenedy County, Texas 176. Mortgage, Deed of Trust, Security Agreement, Financing Statement and Assignment of Production dated as of September 12, 2002, from Former Borrower, to Administrative Agent, filed with the County Clerk of Kenedy County, Texas, on October 23, 2002, in Volume 25, Page 206. Marion County, Texas 177. Mortgage, Deed of Trust, Security Agreement, Financing Statement and Assignment of Production dated January 12, 2001, from Former Borrower to Bank of America, N.A., as administrative agent, filed on February 7, 2001, as File Number 249, Volume 629, Page 159, with the County Clerk of Marion County, Texas, as amended and assigned by that certain Assignment and Amendment to Mortgages dated as of September 12, 2002, among Bank of America, N.A., as administrative agent, Administrative Agent and Former Borrower, filed with the County Clerk of Marion County, Texas, on October 10, 2002, as File Number 3249, in Volume 654, Page 173. 178. UCC Financing Statement executed by Former Borrower in favor of Bank of America, N.A., as administrative agent, filed on February 7, 2001, as File Number 6, with the County Clerk of Marion County, Texas. Matagorda County, Texas 179. Deed of Trust, Mortgage, Assignment, Security Agreement, Fixture Filing and Financing Statement dated March 24, 2000, executed by Matrix Oil & Gas, Inc. in favor of Union Bank of California, recorded on March 31, 2000, as File Number 002022, in Volume 575, Page 957, with the County Clerk of Matagorda County, Texas, as assigned by that certain Assignment of Note and Liens dated July 10, 2001, executed by Union Bank of California in favor of Bank of America, N.A., as administrative agent, filed on July 19, 2001, as Entry Number 014959, in Book 625, Page 906, with the County Clerk of Matagorda County, Texas, and as assigned and amended by that certain Assignment and Amendment to Mortgages dated as of September 12, 2002, among Bank of America, N.A., as administrative agent, Administrative Agent and Former Borrower, filed with the County Clerk of Matagorda County, Texas, on October 10, 2002, as File Number 026889. Midland County, Texas 180. Mortgage, Deed of Trust, Security Agreement, Financing Statement and Assignment of Production dated January 12, 2001, from Former Borrower to Bank of America, N.A., as administrative agent, filed on February 7, 2001, as File Number 2014, Volume 1839, Page 67, with the County Clerk of Midland County, Texas, as assigned and amended by that certain Schedule 2.2-41 Assignment and Amendment to Mortgages dated as of September 12, 2002, among Bank of America, N.A., as administrative agent, Administrative Agent and Former Borrower, filed with the County Clerk of Midland County, Texas, on October 10, 2002, as Document Number 20584, in Volume 2057, Page 470. 181. UCC Financing Statement executed by Former Borrower in favor of Bank of America, N.A., as administrative agent, filed on February 7, 2001, as File Number 386, with the County Clerk of Midland County, Texas. Parker County, Texas 182. Mortgage, Deed of Trust, Security Agreement, Financing Statement and Assignment of Production dated as of September 12, 2002, from Former Borrower to Administrative Agent, filed with the County Clerk of Parker County, Texas, on October 10, 2002, as Document Number 00459669, in Volume 2047, Page 1903. Tarrant County, Texas 183. Mortgage, Deed of Trust, Security Agreement, Financing Statement and Assignment of Production dated as of September 12, 2002, from Former Borrower to Administrative Agent, filed with the County Clerk of Tarrant County, Texas, on October 10, 2002, as Document Number 16048, In Book 0498, Page 001. Wise County, Texas 184. Mortgage, Deed of Trust, Security Agreement, Financing Statement and Assignment of Production dated as of September 12, 2002, from Former Borrower to Administrative Agent, filed with the County Clerk of Wise County, Texas, on October 8, 2002, as Document No. 316009, in Book 1210, Page 622. Wood County, Texas 185. Mortgage, Deed of Trust, Security Agreement, Financing Statement and Assignment of Production dated January 12, 2001, from Former Borrower to Bank of America, N.A., as administrative agent, filed on February 7, 2001, as File Number 0064322, Book 1768, Page 82, with the County Clerk of Wood County, Texas, as assigned and amended by that certain Assignment and Amendment to Mortgages dated as of September 12, 2002, among Bank of America, N.A., as administrative agent, Administrative Agent and Former Borrower, filed with the County Clerk of Wood County, Texas, on October 10, 2002 as Document Number 00091212, in Book 01874, Page 00377. 186. UCC Financing Statement executed by Former Borrower in favor of Bank of America, N.A., as administrative agent, filed on February 7, 2001, as File Number 26353, with the Clerk of Court of Wood County, Texas. Schedule 2.2-42 SCHEDULE 2.3 Restructuring Transactions/Post-Closing Transactions Part I Restructuring Transactions FORMATION OF NEWCOS 1. Former Borrower forms Parent through the contribution of nominal assets in exchange for Parent stock. 2. Parent forms Borrower through the contribution of nominal assets in exchange for Borrower membership interests. MERGERS 3. Denbury Energy Service Inc. merges with and into Former Borrower with Former Borrower surviving. 4. Former Borrower merges with and into Borrower with Borrower surviving. The Former Borrower stock will convert into Parent Stock and Former Borrower's stock in Parent will be cancelled. MOVEMENT OF DEBT 5. Parent becomes a co-obligor of Borrower's public debt. INTERNAL SPINS OF DG&M AND OFFSHORE 6. Borrower will distribute the stock of both DG&M and Offshore to Parent. formation of operating and contribution of borrower 7. Parent forms Operating for nominal consideration in exchange for Operating stock. 8. Parent contributes the membership interests in Borrower to Operating. DISSOLUTION OF SUBSIDIARIES 9. Tallahatchie Resources Inc. will be dissolved or merged with and into Borrower. DISTRIBUTION OF LLCS 10. Borrower distributes its membership interests in TRF to Operating. 11. Borrower distributes its membership interests in Marine to Operating. Schedule 2.3-1 Part II Post-Closing Transactions 1. Parent contributes the stock of Offshore to Operating. 2. Offshore converts into a single member limited liability company. 3. Offshore changes its name to Denbury Offshore LLC. Schedule 2.3-2 SCHEDULE 8.5 Litigation None. Schedule 8.5-1 SCHEDULE 8.10 Licenses, Permits, Etc. None. Schedule 8.10-1 SCHEDULE 8.13 Jurisdictions, Etc. Schedule 8.13-1 SCHEDULE 9.10 Environmental Disclosure None. Schedule 9.10-1 EX-13 4 denbury200310kex13.txt EXHIBIT 13 Denbury Resources Inc. EXHIBIT 13 PAGE 2, PAGES 9 THROUGH 10 INCLUSIVE, PAGES 12 THROUGH 13 INCLUSIVE, PAGES 17 THROUGH 18 INCLUSIVE, PAGES 20 THROUGH 21 INCLUSIVE, PAGES 23 THROUGH 25 INCLUSIVE, PAGES 27 THROUGH 31 INCLUSIVE, AND PAGES 33 THROUGH 86 INCLUSIVE, OF THE COMPANY'S ANNUAL REPORT TO SHAREHOLDERS FOR THE YEAR ENDED DECEMBER 31, 2003, BUT EXCLUDING PHOTOGRAPHS AND ILLUSTRATIONS SET FORTH ON THESE PAGES, NONE OF WHICH SUPPLEMENTS THE TEXT AND WHICH ARE NOT OTHERWISE REQUIRED TO BE DISCLOSED IN THIS ANNUAL REPORT ON FORM 10-K. Denbury Resources Inc. Financial Highlights
Year ended December 31, ----------------------------------------------------- AVERAGE ANNUAL Amounts in thousands of U.S. dollars unless noted 2003 2002 2001(1) 2000 1999 GROWTH(2) - ------------------------------------------------------------------------------------------------------------------------ Production (daily) Oil (Bbls) 18,894 18,833 16,978 15,219 12,090 12% Natural Gas (Mcf) 94,858 100,443 85,238 37,078 27,948 36% BOE (6:1) 34,704 35,573 31,185 21,399 16,748 20% Revenues 333,014 285,152 285,111 181,651 82,990 42% Unit sales price (excluding hedges) Oil (per Bbl) 27.47 22.36 21.34 25.89 15.03 16% Natural Gas (per Mcf) 5.66 3.31 4.12 4.45 2.42 24% Unit sales price (including hedges) Oil (per Bbl) 24.52 22.27 21.65 23.50 13.08 17% Natural Gas (per Mcf) 4.45 3.35 4.66 3.57 2.34 17% Cash flow from operations 197,615 159,600 185,047 95,972 41,200 48% Income before accounting change (3) 53,941 46,795 56,550 142,227 4,614 85% Net income (3) 56,553 46,795 56,550 142,227 4,614 87% Average common shares outstanding Basic 53,881 53,243 49,325 45,823 39,928 8% Diluted 55,464 54,365 50,361 46,352 39,987 9% Income per share before accounting change Basic 1.00 0.88 1.15 3.10 0.12 70% Diluted 0.97 0.86 1.12 3.07 0.12 69% Net income per share Basic 1.05 0.88 1.15 3.10 0.12 72% Diluted 1.02 0.86 1.12 3.07 0.12 71% Oil and gas capital investments 158,444 155,637 327,175 134,021 54,967 30% CO2 capital investments 22,673 16,445 45,555 - - - Total assets 982,621 895,292 789,988 457,379 252,566 40% Long-term liabilities 434,845 432,616 360,882 202,428 154,976 29% Stockholders' equity (4) 421,202 366,797 349,168 216,165 72,428 55% Proved reserves Oil (MBbls) 91,266 97,203 76,490 70,667 51,832 15% Natural Gas (MMcf) 221,887 200,947 198,277 100,550 50,438 45% MBOE (6:1) 128,247 130,694 109,536 87,425 60,238 21% Discounted future cash flow before tax - 10% 1,566,371 1,426,220 574,328 1,158,969 462,870 36% Standard measure of discounted future net cash flows 1,124,127 1,028,976 505,795 841,299 488,374 23% Per BOE data (6:1) Oil and natural gas revenues 30.43 21.17 22.88 26.13 14.88 20% Gain (loss) on settlements of derivative contracts (4.91) 0.07 1.64 (3.23) (1.54) 34% Lease operating costs (7.06) (5.48) (4.84) (4.94) (4.25) 14% Production taxes and marketing expenses (1.17) (0.92) (0.96) (1.02) (0.60) 18% - ---------------------------------------------------------------------------------------------------------------------- Production netback 17.29 14.84 18.72 16.94 8.49 19% Operating margin from CO2 operations 0.51 0.48 0.38 - - - General and administrative expense (1.20) (0.96) (0.89) (1.09) (1.21) - Net cash interest expense (1.61) (1.73) (1.74) (1.54) (2.22) -8% Current income taxes and other (0.01) 0.04 (0.06) (0.07) 0.11 - Changes in assets and liabilities 0.62 (0.38) (0.15) (1.99) 1.57 -21% - ---------------------------------------------------------------------------------------------------------------------- Cash flow from operations 15.60 12.29 16.26 12.25 6.74 23% ====================================================================================================================== (1) We acquired Matrix Oil and Gas, Inc., in July 2001. See Note 2 to the Consolidated Financial Statements. (2) Four-year compounded annual growth rate computed using 1999 as a base year. (3) In 2003, we recognized a gain of $2.6 million for the cumulative effect adoption of SFAS No. 143, "Accounting for Asset Retirement Obligations," (see Note 4 to the Consolidated Financial Statements). In 2000, we recorded a deferred income tax benefit of $67.9 million related to the reversal of the valuation allowance on our net deferred tax assets at December 31, 2000. (4) We have never paid any dividends on our common stock.
2 Denbury Resources Inc. Reporting Format Unless otherwise noted, the disclosures in this report have (i) production volumes expressed on a net revenue interest basis, and (ii) gas volumes converted to equivalent barrels at 6:1. Selected Operating Data Oil and Gas Reserves DeGolyer and MacNaughton, independent petroleum engineers located in Dallas, Texas, prepared estimates of our net proved oil and natural gas reserves as of December 31, 2003, 2002 and 2001. The reserve estimates were prepared using constant prices and costs in accordance with the guidelines of the Securities and Exchange Commission ("SEC"). The prices used in preparation of the reserve estimates were based on the market prices in effect as of December 31 of each year, with the appropriate historical adjustments (transportation, gravity, basic sediment and water "BS&W," purchasers' bonuses, Btu, etc.) applied to each field. The reserve estimates do not include any value for probable or possible reserves that may exist, nor do they include any value for undeveloped acreage. The reserve estimates represent our net revenue interests in our properties. As is the case with our independent accountants, our independent petroleum engineers are retained and their work reviewed by the audit committee of our board of directors. In addition, one of our audit committee members is a petroleum engineer who monitors the entire reserve reporting process. We do not book proved undeveloped reserves until we have committed to perform the required operations, the majority of which are expected to commence within the next year. Our proved nonproducing reserves primarily relate to reserves that are to be recovered from productive zones that are currently behind pipe. Since a majority of our properties are in areas with multiple pay zones, these properties typically have both proved producing and proved nonproducing reserves. Proved undeveloped reserves associated with our CO2 tertiary operations in West Mississippi and our Heidelberg waterfloods in East Mississippi account for approximately 90% of our proved undeveloped oil reserves. We consider these reserves to be lower risk than other proved undeveloped reserves that require drilling at locations offsetting existing production because all of these proved undeveloped reserves are associated with secondary recovery or tertiary recovery operations in fields and reservoirs that historically produced substantial volumes of oil under primary production. The main reason these reserves are classified as undeveloped is because they require significant additional capital associated with drilling/re-entering wells or additional facilities in order to produce the reserves and/or are waiting for a production response to the water or CO2 injections. Our proved undeveloped natural gas reserves are not as concentrated as our proved undeveloped oil reserves. The offshore properties we acquired in the 2001 Matrix acquisition account for approximately 48% of our proved undeveloped natural gas reserves. These reserves are typically located up-dip to existing 9 Denbury Resources Inc. wells or up-dip to wells that previously ceased producing due to water encroachment. These natural gas reserves are confirmed not only by subsurface geology but also by 3D seismic that covers these areas. An additional 24% of our proved undeveloped natural gas reserves are located in Heidelberg Field, where we continue to have success in-fill drilling the Selma Chalk formation. Our remaining undeveloped natural gas reserves are located within our currently producing reservoirs. Our current plans for 2004 include development of approximately 27% of our proved undeveloped natural gas reserves.
Year Ended December 31, ------------------------------------------- 2003 2002 2001 ------------ ------------- ------------- Estimated proved reserves: Oil (MBbls)................................................ 91,266 97,203 76,490 Natural gas (MMcf)......................................... 221,887 200,947 198,277 Oil equivalent (MBOE)...................................... 128,247 130,694 109,536 Percentage of total MBOE: Proved producing........................................... 43% 43% 53% Proved non-producing....................................... 18% 23% 23% Proved undeveloped......................................... 39% 34% 24% Representative oil and gas prices: (1) Oil - NYMEX................................................ $ 32.52 $ 31.20 $ 19.84 Natural gas - NYMEX Henry Hub.............................. 6.19 4.79 2.57 Present Values:(2) Discounted estimated future net cash flow before income taxes ("PV-10 Value") (thousands)............... $ 1,566,371 $ 1,426,220 $ 574,328 Standardized measure of discounted estimated future net cash flow after income taxes (thousands)............... $ 1,124,127 $ 1,028,976 $ 505,795 (1) The prices as of each year-end were based on market prices in effect as of December 31 of each year, NYMEX prices per Bbl and NYMEX Henry Hub prices per MMBtu, with the appropriate historical adjustments (transportation, gravity, BS&W, purchasers' bonuses, Btu, etc.) applied to each field to arrive at the appropriate corporate net price. (2) Determined based on year-end unescalated prices and costs in accordance with the guidelines of the SEC, discounted at 10% per annum.
10 Denbury Resources Inc. Field Summaries Denbury operates in four primary areas: Louisiana, offshore Gulf of Mexico, Eastern Mississippi and Western Mississippi. Our 18 largest fields (listed below) constitute approximately 85% of our total proved reserves on a BOE basis and 80% on a PV-10 Value basis. Within these 18 fields we own a weighted average 91% working interest and operate all of these fields. The concentration of value in a relatively small number of fields allows us to benefit substantially from any operating cost reductions or production enhancements we achieve and allows us to effectively manage the properties from our three primary field offices in Houma and Covington, Louisiana, and Laurel, Mississippi.
2003 Average Proved Reserves as of December 31, 2003(1) Daily Production ------------------------------------------------------ ---------------- Natural Average Net Oil Natural Gas MBOE's BOE PV-10 Value Oil Gas Revenue (MBbls) (MMcf) (000's) % of Total (000's) (Bbls/d) (Mcf/d) Interest(2) ---------------------------------------------------------------------------------------------------------------------------------- Mississippi - CO2 floods Mallalieu (East & West)................. 16,026 - 16,026 12.5% 218,041 1,578 - 81% McComb................ ................. 11,853 - 11,853 9.2% 103,887 - - 83% Little Creek & Lazy Creek............... 7,432 - 7,432 5.8% 112,666 3,093 - 83% ------ -------- ------- ----- --------- ------ ------ -- Total Mississippi - CO2 floods ... 35,311 - 35,311 27.5% 434,594 4,671 - 82% ------ -------- ------- ----- --------- ------ ------ -- Offshore Gulf of Mexico Brazos A-22............................. 173 21,345 3,731 2.9% 44,864 13 1,069 72% South Marsh Island...................... 211 21,072 3,723 2.9% 86,657 72 7,652 83% W.Delta 27.............................. 622 8,984 2,119 1.7% 41,193 417 8,322 56% N. Padre A-9............................ 8 10,804 1,809 1.4% 34,751 - 259 39% Other offshore.......................... 60 27,500 4,643 3.6% 105,990 152 26,465 31% ------ -------- ------- ----- --------- ------ ------ -- Total offshore.................... 1,074 89,705 16,025 12.5% 313,455 654 43,767 48% ------ -------- ------- ----- --------- ------ ------ -- Other Mississippi Heidelberg (East & West)................ 35,226 51,853 43,868 34.2% 341,133 5,824 10,265 78% Eucutta................................. 4,691 - 4,691 3.7% 43,878 1,252 159 69% King Bee................................ 2,853 - 2,853 2.2% 26,958 554 - 81% Brookhaven ............................ 1,687 - 1,687 1.3% 20,381 452 - 77% Other Mississippi....................... 8,421 6,104 9,438 7.4% 89,610 3,600 1,309 27% ------ -------- ------- ----- --------- ------ ------ -- Total Other Mississippi........... 52,878 57,957 62,537 48.8% 521,960 11,682 11,733 60% ------ -------- ------- ----- --------- ------ ------ -- Louisiana Lirette................................. 167 12,276 2,213 1.7% 59,410 288 12,379 58% S.Chauvin............................... 367 10,663 2,144 1.7% 45,163 155 3,335 37% Thornwell............................... 177 11,026 2,015 1.6% 62,368 507 12,343 65% Other Louisiana......................... 1,292 22,176 4,988 3.9% 107,640 878 10,306 39% ------ -------- ------- ----- --------- ------ ------ -- Total Louisiana................... 2,003 56,141 11,360 8.9% 274,581 1,828 38,363 41% ------ -------- ------- ----- --------- ------ ------ -- Texas Newark (Barnett Shale).................. - 18,084 3,014 2.3% 21,781 59 995 71% ------ -------- ------- ----- --------- ------ ------ -- Company Total.............................. 91,266 221,887 128,247 100% 1,566,371 18,894 94,858 61% ====== ======== ======= ===== ========= ====== ====== == (1) The reserves were prepared using constant prices and costs in accordance with the guidelines of the SEC based on the prices received on a field-by-field basis as of December 31, 2003. The prices at that date were a NYMEX oil price of $32.52 per Bbl adjusted by field and a NYMEX natural gas price average of $6.19 per MMBtu also adjusted by field. (2) Only includes wells in which the Company has a working interest as of December 31, 2003.
12 Denbury Resources Inc. Oil and Gas Acreage The following table sets forth Denbury's acreage position at December 31, 2003:
Developed Undeveloped Total ------------------------- ------------------------- ------------------------- Gross Net Gross Net Gross Net ------------ ---------- ----------- ----------- ----------- ----------- Louisiana................ 24,473 16,693 26,025 18,857 50,498 35,550 Mississippi.............. 84,942 69,374 242,397 33,663 327,339 103,037 Offshore Gulf Coast...... 122,301 68,782 58,580 52,010 180,881 120,792 Texas, other............. 5,698 4,405 73,887 16,899 79,585 21,304 ------- ------- ------- ------- ------- ------- Total........ 237,414 159,254 400,889 121,429 638,303 280,683 ======== ======== ======= ======= ======= =======
Productive Wells This table sets forth our gross and net productive oil and natural gas wells at December 31, 2003:
Producing Natural Producing Oil Wells Gas Wells Total ------------------------ ------------------------ ------------------------ Gross Net Gross Net Gross Net --------------------------- ----------- --------- ---------- ---------- --------- ---------- Louisiana................ 28 23.2 59 39.1 87 62.3 Mississippi.............. 410 379.9 94 76.6 504 456.5 Offshore Gulf Coast...... 5 3.4 76 45.3 81 48.7 Texas, other............. 52 1.6 13 12.0 65 13.6 --- ----- --- ----- --- ----- Total............ 495 408.1 242 173.0 737 581.1 === ===== === ===== === =====
Drilling Activity The following table sets forth the results of our drilling activities over the last three years:
Year Ended December 31, --------------------------------------------------------------- 2003 2002 2001 -------------------- -------------------- ------------------- Gross Net Gross Net Gross Net ---------- --------- --------- --------- -------- --------- Exploratory Wells: (1) Productive (2)........................ 7 5.3 7 4.9 15 9.7 Nonproductive (3)..................... 7 4.8 4 3.2 3 1.4 Development Wells: (1) Productive (2)........................ 37 31.3 33 27.1 60 49.9 Nonproductive (3)(4).................. 3 1.2 2 1.9 - - -- ---- -- ----- -- ---- Total........................... 54 42.6 46 37.1 78 61.0 == ==== == ==== == ==== (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 natural 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 natural gas in sufficient quantities to justify completion as an oil or natural gas well. (3) A nonproductive well is an exploratory or development well that is not a producing well. (4) During 2003, 2002 and 2001, an additional 5, 9 and 24 wells, respectively, were drilled for water or CO2 injection purposes.
13 Denbury Resources Inc. Operations Report Our CO2 Assets Just over four years ago, we started a new focus area through an acquisition of a carbon dioxide ("CO2") tertiary flood in an area very familiar to us, Mississippi. We have subsequently acquired other related assets and are making that focus area a major part of our business. In summary, we are gradually becoming more of a tertiary exploitation company than a traditional acquire, drill and exploit type of exploration and production company. We particularly like this play as (i) it is lower risk and more predictable than most traditional exploration and development activities, (ii) it provides a reasonable rate of return at relatively low oil prices (upper teens to low twenties), and (iii) we have virtually no competition for this type of activity in our geographic area. Generally, from East Texas to Florida, there are no natural sources of carbon dioxide except our own, and these large volumes of CO2 that we own drive the play. Our CO2 comes from an old volcano located near Jackson, Mississippi, discovered in the 1960s while companies were drilling for oil and natural gas. Instead they found CO2, which at the time was of little use. These CO2 reserves are found in structural traps in the Buckner, Smackover and Norphlet formations at depths of about 16,000 feet. Some estimates have suggested that there are 12 Tcf of usable CO2 in this general area. CO2 injection is one of the most efficient tertiary recovery mechanisms for producing crude oil; however, because it requires large quantities of CO2, its use has been restricted to West Texas, Mississippi and other isolated areas where large quantities of CO2 are available. The CO2 (in liquid form) acts as a type of solvent for the oil, causing the oil to expand and become mobile, allowing the oil to be recovered along with the CO2 as it is produced. The CO2 is then extracted from the oil, compressed back into a liquid state, and re-injected into the reservoir, with this recycling process occurring several times during the life of the tertiary operations. In a typical oil field up to 50% of the oil in place can be extracted during primary and secondary (waterflooding) recovery operations. Through the use of CO2 in tertiary operations, it is possible to recover additional oil (for example, 17% based on historical results at Little Creek), almost as much oil as initially recovered during the primary production phase. We started this play in August 1999, when we acquired our first CO2 tertiary recovery project, Little Creek Field in Mississippi, a project originally developed by Shell Oil Company. Since our acquisition of this field, we have increased oil production here from 1,350 Bbls/d to an average of 3,201 Bbls/d during the fourth quarter of 2003. Following our success at Little Creek, we embarked upon a strategic program to build a dominant position in this niche play. We recognized that several other fields in the area would also be excellent CO2 flood candidates because they produced from the same Lower Tuscaloosa formation, shared very similar reservoir characteristics and were in close proximity to each other. Following are highlights of our activities over the last three years: o In February 2001, we acquired approximately 800 Bcf of proved producing CO2 reserves for $42.0 million, a purchase that gave us control of most of the CO2 supply in Mississippi, as well as ownership and control of a critical 183-mile CO2 pipeline. This acquisition provided the platform to significantly expand our CO2 tertiary recovery operations because it assured us that CO2 would 17 Denbury Resources Inc. be available to us on a reliable basis and at a reasonable and predictable cost. Since February 2001, we have acquired two and drilled three additional CO2 producing wells, doubling our estimated proved CO2 reserves to approximately 1.6 Tcf as of December 31, 2003 (including approximately 162.6 Bcf of reserves dedicated to a volumetric production payment to Genesis). Today, we own every producing CO2 well in the region. Although our current proven and potential CO2 reserves are quite large, in order to continue our tertiary development of oil fields in the area, incremental deliverability of CO2 is needed. In order to obtain the additional CO2 deliverability, we plan to drill several additional CO2 wells in the future, including up to four more wells during 2004, including one side-track operation. o During 2001 and 2002, we acquired several oil fields in our CO2 operating area, including the West Mallalieu and McComb Fields. Typical of mature properties in this area, the acquisition costs of both of these fields were relatively low in comparison to their significant reserve potential as tertiary recovery projects. As an example, we acquired West Mallalieu Field in May 2001 for $4.0 million, and by year-end 2001 had recognized 10.4 MMBOE of proved reserves, with additional future reserve potential in this field. We acquired McComb Field in 2002 for $2.3 million, and by year-end 2002 had recognized 8.3 MMBOE of proved reserves with additional future reserve potential here also. We expect the all-in finding and development costs at these fields to average between $4.00 and $5.00 per BOE. o In May 2002, we acquired the 2.0% general partner interest in Genesis Energy, L.P. ("Genesis"). Genesis is engaged in crude oil gathering, marketing and transportation with three primary pipeline systems in Texas, Alabama/Florida and Mississippi. Genesis' Mississippi pipeline runs near several of our tertiary recovery operations in southwest Mississippi and within 25 miles of our Heidelberg Field and several of our other East Mississippi fields. This acquisition has enhanced our marketing position for our Mississippi oil production. Genesis may also function as a financier and operator of new pipelines and gathering systems that are required in order for us to develop these fields. o In August 2002, we acquired COHO Energy Inc.'s Gulf Coast properties for $48.2 million, which as of year-end 2002 contained an estimated 15.0 MMBOE (excluding any potential reserves from tertiary recovery). Brookhaven Field, another significant tertiary flood candidate along our CO2 pipeline, was included in the properties acquired from COHO. By exploiting our scale, regional 18 Denbury Resources Inc. competitive advantage and strategic ownership of the general partner interest in Genesis, we were able to increase the average realized price for post-acquisition production from these properties by approximately $3.40 per barrel (relative to NYMEX prices) over the prices that COHO realized earlier in 2002. This translates into a 50% increase in the PV-10 Value of the acquisition, using constant prices and the future price strip as of the time of acquisition. Initial development of the Brookhaven CO2 flood is expected to begin in late 2004. While we have not currently recorded any proved reserves associated with the CO2 flood at Brookhaven, we believe that this field contains one of the area's most significant opportunities for potential oil reserves using CO2 tertiary recovery. o During the fourth quarter of 2003, we sold an average of 64 MMcf/d of CO2 to commercial users and we used an average of 145 MMcf/d for our tertiary activities. With the acquisition of our latest well, we estimate our current daily CO2 deliverability is over 250 MMcf/d, and by year-end 2004 we hope to further increase our CO2 deliverability to approximately 350 MMcf/d. We plan to continue our CO2 drilling in 2004 and beyond, as we estimate that we will need to be producing around 400 MMcf/d by 2006 in order to meet the projected timetable for our tertiary projects in Southwest Mississippi. During 2004, two of the CO2 wells we expect to drill will be testing new structures, which if successful, will increase our CO2 reserves and provide additional deliverability. We believe that it is prudent to add additional reserves and deliverability before we commence with our tentative plans to expand our CO2 operations into East Mississippi and/or other regions. We expect to use almost all of the anticipated 20 Denbury Resources Inc. incremental CO2 production in our own tertiary recovery operations. Our CO2 sales to industrial customers are expected to provide us with between five and six million dollars of net cash flow per year, approximately 85 % of the 2003 level. The decrease is a result of our 2003 sale of 167.5 Bcf of CO2 to Genesis pursuant to a volumetric production payment (see discussion below). As of December 31, 2003, the present value of the remaining industrial sales contracts (using pricing provided in the contracts) discounted at 10% per year was approximately $33 million based on the current life of each contract. We believe the majority of these contracts will be extended beyond their current terms, which would result in additional value. o In October 2003, we sold 167.5 Bcf of CO2 to Genesis for $24.9 million under a volumetric production payment. In conjunction with the sale, we included the assignment of three of our existing long-term commercial CO2 supply agreements with our industrial customers. Pursuant to the terms of the volumetric production payment, Genesis has specific maximums on the amount of CO2 they are allowed to take each year, which generally relate to the anticipated volumes of the three industrial customers. We will continue to provide Genesis with certain processing and transportation services in connection with this agreement for a fee of $0.16 per Mcf of CO2 delivered to their industrial customers. In a separate transaction, we purchased approximately 689,000 partnership common units of Genesis for $7.15 per unit, an aggregate purchase price of $4.9 million, giving us approximately 9.25% total ownership (2.0% general partner and 7.25% limited partner ownership) of Genesis. o In February 2004, we disclosed the results of our preliminary study to determine the feasibility of implementing tertiary recovery operations in East Mississippi, in addition to the development of fields along our CO2 pipeline. We reviewed five fields that we expect to be part of the first phase of operations in this area. While the study is preliminary and requires significant additional work and review, including a determination of the precise costs and best location for a CO2 pipeline to this part of the state and further refinement of the economics, preliminarily this project appears to have reasonable economics at NYMEX prices in the low to mid twenties. These five fields also appear to have aggregate potential oil reserves of about 80 MMBbls that could be developed through tertiary operations, approximately the same magnitude of potential as those fields along our existing CO2 pipeline. To be considered proven reserves, these potential tertiary floods must (i) have evidence of a response to CO2 injections, from either a pilot test, actual response, or by analogy, and (ii) have a commitment from the company to do the project. Our preliminary projections of forecast production for both East and West Mississippi indicate that oil production from tertiary operations could peak at rates of almost 32,000 Bbls/d by 2013. While it is extremely difficult to accurately forecast that far into the future, we do believe that our tertiary recovery operations provide significant long-term production growth potential at reasonable rates of return with relatively low risk. With anticipated all-in finding and development costs of between $4.00 and $5.00 per BOE and anticipated operating costs of around $10.00 per BOE over the life of each field, these tertiary recovery operations in 21 Denbury Resources Inc. West Mississippi along our pipeline should prove to be profitable, even at $18 oil prices, as they produce light sweet oil that receives near NYMEX pricing. As noted above, we believe there is also significant potential in the future to extend our pipeline to eastern Mississippi and/or southern Louisiana to exploit the use of CO2 in tertiary recovery operations in these areas. However, there are a few differences that we have noted when comparing these two areas: (i) operating cost in East Mississippi is likely to be one to three dollars per BOE higher than it is for those fields along our CO2 pipeline, primarily because of the incremental cost of transporting the CO2 to this new area, (ii) the incremental operating cost may be partially offset by an anticipated lower finding cost, as these East Mississippi fields may not require as many wells to be drilled or re-entered, as more wells are currently active, (iii) there are reservoir related differences, which although not exactly quantified, are expected to improve the overall economics in the eastern area, and (iv) the quality of the oil is different in the two areas. In the eastern part of the state, the oil is generally heavier and usually sour, and thus has a higher negative differential to NYMEX, ranging from one to six dollars per barrel worse than West Mississippi light sweet oil. In summary, while the fields in West Mississippi along our pipeline provide a satisfactory rate of return at NYMEX oil prices of around $18, our preliminary study indicates that it takes NYMEX oil prices in the low to mid twenties to achieve the same rate of return in East Mississippi. The western part of Mississippi has produced over 245 MMBbls of light sweet crude oil from Tuscaloosa sandstones at a depth of about 10,000 feet. The application of a theoretical recovery factor of 17% of original oil in place suggests that about 80-100 MMBbls of additional gross reserves may be recovered from fields in this part of the state as a result of CO2 flooding. To date, we have recognized approximately 49.4 MMBbls (gross) of this potential as proven reserves, of which 6.2 MMBbls (gross) has been produced to date. Obviously, a great deal of work is required before these additional reserves can be recorded as proved reserves, such as additional leasing, reworking/reentering wells and installing production facilities. We plan to spend around $80 million in this area during 2004, almost one-half of our current $172 million 2004 exploration and development budget. Little Creek, Mallalieu and McComb Fields Little Creek Field was discovered in 1958, and by 1962 the field had been unitized and waterflooding had commenced. The pilot phase of CO2 flooding began in 1974 and the first two phases (each in a distinct area of the field) began in 1985. When we acquired the field in 1999, the first two phases were complete and Phase III was in process. We have completed development of Phase III, Phase IV and Phase V and most of the currently planned development work at this field, although we will continue to modify existing patterns and drill wells as necessary to recover the maximum amount of oil or to extend the field into areas which have not benefited from CO2 injection. Currently there are 29 producing wells and 28 injection wells at Little Creek. Based on the results of the two earliest phases of CO2 flooding at Little Creek, tertiary recovery has increased the ultimate recovery factor in the flooded portion of the field by approximately 17%, as compared to recoveries of approximately 20% for primary recovery and 18% for secondary recovery. The field has produced a cumulative 63.2 MMBbls (gross) of light sweet crude and we currently estimate that an additional 7.2 MMBbls (gross) can be recovered. 23 Denbury Resources Inc. Production from Little Creek Field was approximately 1,350 Bbls/d when we acquired it in 1999. During the fourth quarter of 2003, production had increased to an average of 3,201 BOE/d. Although we experienced a temporary shortage of CO2 deliverability for several months during 2003, our oil production at Little Creek has now recovered and has recently been increasing again. We expect the production from Little Creek to increase further during 2004 by another 500 to 750 BOE/d. At December 31, 2003, we had proved reserves of 35.3 MMBbls relating to our tertiary recovery operations. From inception through December 31, 2003, we had net positive cash flow from Little Creek (including Lazy Creek) of $17.8 million (at the field level), plus the fields have a PV-10 Value, using December 31,2003 SEC NYMEX pricing, of $112.7 million. We purchased West Mallalieu Field in May 2001. Shell Oil Company unitized West Mallalieu Field and commenced a pilot project in 1986. The pilot project, consisting of four 5-spot patterns, has cumulatively produced approximately 2.1 MMBbls of oil as a result of CO2 flooding. We have expanded the pilot project by adding an additional four patterns during 2001, four patterns in 2002 and three patterns in 2003, in addition to an injection well in the East Mallalieu Unit added during 2003. During 2002 we began to see initial response to CO2 injection as the West Mallalieu Field Unit averaged 778 Bbls/d during the fourth quarter of 2002. Response in 2003 has continued as production increased to 2,378 Bbls/d during the fourth quarter of 2003. In contrast to Little Creek Field, West Mallalieu Field was not waterflooded prior to CO2 injection. Therefore, we believe that the tertiary recovery of oil from West Mallalieu Field Unit as a result of CO2 injection could exceed the 17% of original oil in place that we expect from Little Creek Field. We purchased McComb Field in 2002, a field with no pilot programs or tertiary operations at that time and virtually no current oil production. McComb is very close in proximity and analogous to Little Creek and Mallalieu Fields. We commenced tertiary recovery operations in 2003 by substantially completing two patterns, and by November 2003 had started injecting CO2. We do not expect any oil production response until late 2004 from this activity. As of December 31, 2003, we had 11.9 MMBbls of proven reserves at McComb Field. During 2004, we expect to add five patterns within McComb field and expand the production facilities. In addition, we also plan on starting an additional CO2 flood at nearby Smithdale Field during 2004 utilizing the same facilities. We believe that the total potential at McComb and Smithdale Fields is significantly higher than the current proved reserves (at McComb only), and therefore expect to have upward reserve additions here over the next several years as we fully develop these fields. 24 Denbury Resources Inc. At December 31, 2003, we have proved reserves of 35.3 MMBbls relating to our tertiary recovery operations. Through December 31, 2003, we have spent a total of $104.8 million on fields in this area, and have received $83.0 million in net operating income, leaving us a balance of $21.8 million to recover for payout. The proved oil reserves in our CO2 fields have a PV-10 Value, using December 31, 2003 SEC NYMEX pricing, of $434.6 million. Heidelberg and East Mississippi We own interests in 504 wells in the eastern part of the Mississippi salt basin and operate 472 of these wells (94%) from our regional office in Laurel, Mississippi. These fields produced an average of 11,028 Bbls/d and 12.2 MMcf/d during the fourth quarter of 2003. The largest field in the region, and our largest field corporately, is Heidelberg Field, which for the fourth quarter of 2003 produced an average of 7,568 BOE/d. We have been active in this area since Denbury was founded in 1990 and are by far the largest producer in the basin, as well as in the state of Mississippi. Since we have generally owned these eastern Mississippi properties longer than properties in our other regions, they tend to be more fully developed and thus require less capital spending. During 2003, we spent a total of approximately $24.6 million (excluding acquisitions), drilling 29 wells and performing various workovers, recompletions and other maintenance type projects. Even with the relatively low level of spending here, our production in eastern Mississippi averaged 13,638 BOE/d during 2003, slightly higher than the 2002 average of 13,378 BOE/d. For 2004, we expect our budget in this region to be a little higher than it was in 2003, approximately $32.4 million, or 19% of our current $172 million 2004 exploration and development budget. The fields in this region are characterized by structural traps that generate prolific production from stacked or multiple pay sands. As such, they provide opportunities to increase reserves through infield drilling, recompleting wells, improving production efficiency, and in some cases, by water flooding producing reservoirs. Most of our wells in this area produce large amounts of saltwater and require large pumps, which increase the operating costs per barrel relative to our properties in Louisiana that are predominantly natural gas producers. We plan to continue our basic strategy in this region, supplemented by additional waterflooding (secondary recovery). Our biggest future upside in this area will likely be from CO2 flooding (tertiary recovery). We initiated a study of the feasibility of implementing tertiary recovery operations in East Mississippi during 2003, evaluating several of our existing fields, plus a few other fields in the general area that we do not own. The preliminary results of our study indicate that there are significant volumes of oil reserves that can be recovered in this area through CO2 tertiary recovery 25 Denbury Resources Inc. operations that should provide a reasonable rate of return at NYMEX oil prices in the low to mid twenties. As such, we will be taking steps to increase our CO2 reserves during 2004 (see Our CO2 Assets above), which if successful, could be used for an expansion of tertiary activities to this area. Heidelberg Field was acquired from Chevron in December 1997. This field was discovered in 1944 and has produced an estimated 198 MMBbls of oil and 43 Bcf of gas since its discovery. The field is a large salt-cored anticline that is divided into western and eastern segments due to subsequent faulting. There are 11 producing formations in Heidelberg Field containing 40 individual reservoirs, with the majority of the past and current production coming from the Eutaw, Selma Chalk and Christmas sands at depths of 3,500 to 5,000 feet. When we acquired the property, production was approximately 2,800 BOE/d. As a result of our subsequent development work, production for 2003 averaged 7,535 BOE/d. The primary oil production at Heidelberg is from five waterflood units that produce from the Eutaw formation (at approximately 4,400 feet). These units are generally developed although they will require additional work and capital for the next few years. In addition, Heidelberg is our single largest gas field. We began extensive development of the Selma Chalk natural gas reservoir at a depth of 3,700 feet in 2000 and 2001. Previous operators had only partially developed this formation in order to provide fuel gas for the rest of the field. We drilled 13 natural gas wells in 2001, 13 natural gas wells in 2002 and 15 natural gas wells in 2003, increasing the natural gas production at Heidelberg to an average for 2003 of around 10.3 MMcf/d. We believe that there are opportunities to further reduce the well spacing here and we plan to drill up to 16 additional Selma Chalk wells during 2004. In addition, we have determined additional natural gas reserves can be recovered from the Upper Selma Chalk and recently have increased our fracture stimulation size in one well with positive results. Our 2004 projects include performing the larger fracture treatments on new wells and additional completions in the Upper Selma Chalk in seven wells. Offshore Gulf of Mexico During 2003, another area of focus for us was the federal offshore waters of the Gulf of Mexico. Employing the latest 3D seismic techniques and interpretations has allowed us to better understand the complexities of these offshore areas. We own an interest in 81 wells and operate 63 of these wells (78%) from our regional office in Covington, Louisiana. This area became a more significant part of our business in 2001 with the purchase of Matrix Oil & Gas, Inc. Due to the downturn in natural gas prices that occurred late in 2001, we budgeted little drilling activity offshore during 2002, with spending primarily limited to workovers, recompletions and other maintenance type projects. We drilled only two offshore wells late in 2002, both successful exploration wells at North Padre Island A-9. During 2003, we spent approximately $54.0 million (excluding acquisitions), significantly higher than the $13.6 million incurred here (excluding acquisitions) during 2002. We drilled six wells during 2003 (including two wells drilling as of year-end) and completed the platform and production facilities at North Padre A-9, our late 2002 discovery. As is typical of the shorter-life natural gas production in this area, a high level of activity must be maintained or production will decline. Since our spending was reduced during 27 Denbury Resources Inc. 2002 and most of the 2003 wells were not completed until late in the year, our 2003 production averaged only 47.7 MMcfe/d, a decline from our 2002 average of 59.9 MMcfe/d. Late in the fourth quarter of 2003, we made 15 well completions, four at Brazos A-21, three at North Padre A-9, three at Chandeleur Sound 69, two at West Cameron 192 and three at West Cameron 427. Although most of these were not completed until the latter half of the fourth quarter, the incremental production was sufficient to at least temporarily arrest the overall production decline in this area. During 2004, with the gradual shifting of our emphasis to our CO2 play (see above), we have reduced our budgeted offshore spending to approximately $28.7 million, or about 17% of our $172 million 2004 exploration and development budget. During 2004, we expect to drill three to six offshore wells, with unrisked potential target objectives ranging from 5 Bcf to 55 Bcf, net to our interest. These projects are supported with 3D seismic that is enhanced by modern acquisition techniques and the latest processing techniques and seismic modeling. The application of these techniques allows our geoscientists to better image deeper reservoirs and recognize hydrocarbon indicators in and around these mature prolific fields. Our scheduled wells include both development and exploration prospects at Brazos A-21, South Marsh Island 49, and North Padre A-9. As is the case with all oil and natural gas activity, but perhaps to an even more pronounced degree in the Gulf of Mexico, the timing and drilling of individual wells is subject to, among other things, working interest owner approvals, farm-out agreements, solicitation of participating entities, rig availability and our continual process of upgrading our prospect inventory. In March 2004 we hired an investment banker to assist us with the sale of our offshore operations. No buyer has been identified as yet, and if the sales price is less than anticipated, we may withdraw the sales package. South Louisiana We own interests in 87 wells in the land and marshes of south Louisiana and operate 74 of these wells (85%) from our regional office in Houma, Louisiana. This region produces primarily natural gas, averaging 39.2 MMcf/d net to our interest in the fourth quarter of 2003, approximately 42% of our total natural gas production. During 2003, we spent approximately $33.1 million (excluding acquisitions) in this region, approximately 20% of our total exploration and development expenditures, drilling approximately 16 wells, primarily in the Thornwell and Terrebonne Parish areas (Lirette, Bay Baptiste, Bayou Sauveur, Gibson and Lake Gero Fields). For 2004, our spending is expected to be about the same, with a budget of $22.7 million, or 13% of our $172 million exploration and development budget. The majority of our onshore Louisiana fields lie in the Houma embayment area of Terrebonne Parish, including Lirette, Bayou Rambio and South Chauvin Fields, and recent shallow natural gas plays at Lake Gero and Gibson Fields. The advent of 3D seismic data in these geologically complex areas has become a valuable tool in exploration and development. We currently own or have a license covering over 650 square miles of 3D data, and plan to expand our data ownership. During 2003, we expanded our seismic holdings in this area by acquiring an additional 165 square miles of 3D data. We drilled nine wells in Terrebonne Parish during 2003, seven of which were discoveries. In 2004, we plan to drill approximately six wells: three exploratory wells in or around Lirette Field and three wells that are planned to further exploit shallow gas plays. We have had good success with a shallow natural gas play in the Lake Gero area of Terrebonne Parish, although our 2003 results were not as good as we had hoped. At Lake Gero, we drilled two successful wells during 2002, another successful well in 2003, followed 28 Denbury Resources Inc. by one marginal well and one dry hole. These shallow gas reservoirs are approximately 3,000 feet deep, but have the ability to produce from 1.0 to 4.0 Mmcf/d. During the fourth quarter of 2003, we drilled similar anomalies in Gibson Field and Bayou Sauveur Fields. As of January 2004, our Gibson well was producing at around 1.7 MMcf/d, with several additional prospects in the area, and our Bayou Sauveur well is producing approximately 1.0 MMcf/d. We plan to drill an additional three shallow gas prospects in Terrebonne Parish during 2004, with another 5 to 15 additional shallow gas prospects in the Terrebonne Parish under review. We purchased Thornwell Field, located in Cameron and Jeff Davis parishes, in late 2000. Our primary interest in purchasing this field was the substantial upside potential that we believed existed in the continued development of the existing producing zones (Bol Perc), and the exploration potential of the deeper zones (Marg howei and Camerina). All of these prospects were defined by a 110 square mile 3D seismic survey. We had significant activity at this field during 2001 and 2002, with positive results, but reduced our activity during 2003 as the field became more fully developed. During 2003, we drilled one successful Bol Perc well, drilled our first dry hole in the field, and a third well was unsuccessful in the Bol Perc but found pay in a shallower sand. During 2003, we also successfully drilled our first Marg howei test in the field. We also recompleted a well that averaged just under 1.0 MMcfe/d during the fourth quarter of 2003. Our plans for 2004 are more limited, but do include a Marg howei well and further leasing for future potential exploration prospects. Thornwell Field is characterized by short-life natural gas properties that have high initial production rates 29 Denbury Resources Inc. with a good rate of return, but are depleted in two to three years. The high rates of decline have dramatically impacted our overall production rates the last two years, and are expected to continue to do so throughout 2004. Production at Thornwell Field averaged 4,275 BOE/d in 2001, 3,910 BOE/d in 2002 and 2,564 BOE/d in 2003, and is expected to average approximately 1,100 BOE/d during 2004. Even though this field is negatively affecting our overall production growth, the purchase and development of this field has been profitable. From inception through December 31, 2003, we have net positive cash flow (at the field level) to date of $18.9 million from our activities at this field. Furthermore, we have remaining proved reserves with a PV-10 Value, using December 31, 2003 constant SEC NYMEX pricing, of $62.4 million. Barnett Shale We own about 20,000 acres of leases in the Fort Worth Basin in North Central Texas that are prospective for natural gas in the Barnett Shale. Six wells were drilled in 2001, two in 2002 and an additional five in 2003. In addition to our own drilling during 2003, we entered into a joint venture with another entity to drill up to 60 wells in this area over a 36-month time frame. During 2003, the joint venture partner drilled 10 wells on our acreage and is expected to drill an additional 10 wells by the end of March 2004. Based on our wells, the joint venture wells and the other wells in the immediate area, we believe the majority of our acreage contains productive natural gas in the Barnett Shale with significant reserve potential. During 2004, our plans include the drilling of three horizontal wells to determine if this drilling technique will improve the overall economics. In addition to our own plans, our joint venture partner is expected to drill an additional 15 wells, some of which may be horizontal, in which we plan to participate for our full interest. During 2003, we also addressed an issue of pipeline capacity in our area of the Barnett Shale play by installing additional pipelines to relieve some packed lines. Several of the gas buyers in the area are making plans to install additional pipelines to handle the expected future volumes of gas from this area of the play. 30
Denbury Resources Inc. Glossary and Selected Abbreviations 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 One billion cubic feet of natural gas or CO2. BOE One barrel of oil equivalent using the ratio of one barrel of crude oil, condensate or natural gas liquids to 6 Mcf of natural gas. BOE/d BOEs produced per day. Btu British thermal unit, which is the heat required to raise the temperature of a one-pound mass of water from 58.5 to 59.5 degrees Fahrenheit. MBbls One thousand barrels of crude oil or other liquid hydrocarbons. MBOE One thousand BOEs. MBtu One thousand Btus. Mcf One thousand cubic feet of natural gas or CO2. Mcf/d One thousand cubic feet of natural gas or CO2 produced per day. MMBbls One million barrels of crude oil or other liquid hydrocarbons. MMBOE One million BOEs. MMBtu One million Btus. MMcf One million cubic feet of natural gas or CO2. PV-10 Value When used with respect to oil and natural gas reserves, PV-10 Value means the estimated future gross revenue to be generated from the production of proved reserves, net of estimated production and future development costs, using prices and costs in effect at the determination date, before income taxes, and without giving effect to non-property-related expenses, discounted to a present value using an annual discount rate of 10% in accordance with the guidelines of the Securities and Exchange Commission. 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 that are expected to be recovered from new wells on undrilled acreage or from Reserves existing wells where a relatively major expenditure is required. Tcf One trillion cubic feet of natural gas or CO2. MCFE One thousand cubic feet of natural gas equivalent using the ratio of one barrel of crude oil, condensate or natural gas liquids to 6 Mcf of natural gas. MMCFE One thousand Mcfe. MCFE/D MCFEs produced per day. MMCFE/D MMCFEs produced per day.
31 Denbury Resources Inc. Management's Discussion and Analysis of Financial Condition and Results of Operations We are a growing independent oil and gas company engaged in acquisition, development and exploration activities in the U.S. Gulf Coast region. We are the largest oil and natural gas producer in Mississippi and hold significant operating acreage in the onshore Louisiana and the offshore Gulf of Mexico areas. Our goal is to increase the value of acquired properties through a combination of exploitation, drilling, and proven engineering extraction processes, including secondary and tertiary recovery operations. Our corporate headquarters are in Plano, Texas (a suburb of Dallas), and we have three primary field offices located in Houma and Covington, Louisiana, and Laurel, Mississippi. OVERVIEW Just over four years ago, we started a new focus area through an acquisition of a carbon dioxide ("CO2") tertiary flood in an area very familiar to us, Mississippi. We have subsequently acquired other related assets and are making that focus area a major part of our business. In summary, we are gradually becoming more of a tertiary exploitation company than a traditional acquire, drill and exploit type of exploration and production company. We particularly like this play as (i) it is lower risk and more predictable than most traditional exploration and development activities, (ii) it provides a reasonable rate of return at relatively low oil prices (upper teens to low twenties in the area of our current operations), and (iii) we have virtually no competition for this type of activity in our geographic area. Generally, from East Texas to Florida, there are no significant natural sources of carbon dioxide except our own, and these large volumes of CO2 that we own drive the play. During the last two years, we have gradually increased the percentage of our spending dedicated to CO2 related operations. During 2002, we spent approximately 23% of our capital budget on these operations, and during 2003 we spent approximately 27%. During 2004, we anticipate spending approximately 47% of our capital budget on these CO2 related projects. There are certain short-term ramifications to the gradual shift in focus, the most significant being relatively flat production levels from 2002 through 2004. This results from a shift in capital spending from shorter-life, higher-decline natural gas properties to longer-life oil properties (the tertiary operations) that have lower initial production rates and a longer lead time before production commences. In our tertiary operations, there is a significant delay between the initial capital expenditures and the resulting production, as the operations require installation of certain facilities before CO2 flooding can commence and there is usually a six- to twelve-month delay between the first injections of CO2 and resultant oil production. While our production from these tertiary operations has increased each year, during 2003 it did not quite offset the more rapid declines in our natural gas production in both Louisiana and offshore, which have steep decline rates due to their relatively short lives. For similar reasons, we expect our overall production for 2004 to be about the same as in 2003. Although still preliminary, we expect production to be higher in 2005, as the projected increases in production from our tertiary operations should exceed the production declines elsewhere. Our tertiary operations are also contributing to a general increase in operating expenses per BOE, although that increase is partially offset by a gradual improvement in our overall oil price relative to NYMEX. See "CO2 Operations" under "Results of Operations" below for a more extensive discussion of these operations and their perceived potential. One of our primary financial goals during 2003 was to reduce our total debt to approximately $300 million by year-end, a proposed $50 million reduction from the $350 million outstanding as of December 31, 2002. This target was determined by reviewing our leverage and setting a debt level that we believed to be reasonable in the anticipated near-term price environment. We generally measure leverage using a debt-to-cash flow ratio, cash flow being defined as cash flow from operations. Our target is a debt-to-cash flow ratio of 2 to 1 (or less), using a moderate price deck, which we currently define as oil prices of around $25.00 per Bbl and natural gas prices of around $3.50 per Mcf. We were able to accomplish this goal with the net proceeds from the Genesis transactions (see "Genesis Transactions" below), property sales and cash generated from operations, ending the year with $300 million of total debt. During 2004 and the near future, we plan to spend no more than cash flow from operations, unless we make a significant acquisition, which would likely be financed with debt. 33 Denbury Resources Inc. Management's Discussion and Analysis of Financial Condition and Results of Operations Graph depicting average NYMEX crude oil price listings by quarter from 2001 to 2003
2001 2002 2003 - --------------------------------------- -------------------------------------- ----------------------------------- Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 - --------------------------------------- -------------------------------------- ----------------------------------- $28.79 $27.98 $26.78 $20.45 $21.68 $26.24 $28.26 $28.20 $33.87 $28.93 $30.26 $31.22
Graph depicting average NYMEX natural gas price listings by quarter from 2001 to 2003
2001 2002 2003 - --------------------------------------- -------------------------------------- ----------------------------------- Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 - --------------------------------------- -------------------------------------- ----------------------------------- $ 6.30 $ 4.41 $ 2.81 $ 2.72 $ 2.49 $ 3.41 $ 3.21 $ 4.33 $ 5.90 $ 5.73 $ 4.89 $ 5.40
Our cash flow from operations and net income have been strong during the last three years, primarily because of higher than historical commodity prices. For 2003, the higher commodity prices more than offset a 2% decline in production and higher operating expenses, resulting in a 24% increase in cash flow from operations as compared to 2002. The increase in net income corresponded to the higher cash flow from operations, increasing 21% from 2002 to 2003. Finding costs and the related depreciation and amortization expense on a per BOE basis increased in 2003 because of higher expenditure levels in 2003 than in 2002 in the offshore Gulf of Mexico, which typically has higher finding costs, and because some of our higher potential exploration targets failed to materialize. Our finding and development costs related to our tertiary operations were relatively low (just over $5.00 per BOE for 2003 including the related future development costs), but they were not sufficient to offset the higher finding and development costs of the offshore and other natural gas properties. See "Results of Operations" for a more thorough discussion of these factors. Debt Refinancing In late March 2003, we issued $225 million of 7.5% Senior Subordinated Notes due 2013 to refinance our $200 million of then existing 9% Senior Subordinated Notes due 2008. The subordinated debt was refinanced to take advantage of the then current attractive interest rates and to extend the maturity of our long-term debt an additional five years. We estimate that we will save approximately $2.6 million per year in interest expense as a result of this refinancing. The total cost of the refinancing was approximately $15.6 million, consisting of the debt issue discount, underwriters' commission and other expenses totaling approximately $6.6 million, and a $9.0 million call premium to retire the old notes. The old notes were not retired until April 16, 2003, at the end of the required thirty-day notice period to call the old notes. We had a pre-tax charge to earnings in the second quarter of 2003 of approximately $17.6 million from the early retirement of the old 9% notes, made up of the $9.0 million call premium and the write-off of the remaining unamortized discount of $4.8 million and debt issue costs of $3.8 million on the old notes. The proceeds from the new issue were used to retire the old 9% subordinated notes in April 2003. Genesis Transactions During November 2003, we sold 167.5 Bcf of CO2 to Genesis Energy, L.P. ("Genesis") for $24.9 million ($23.9 million as adjusted for transaction costs and interim cash flow from the effective date until closing) under a volumetric production 34 Denbury Resources Inc. Management's Discussion and Analysis of Financial Condition and Results of Operations payment ("VPP"). Included in the transaction was the assignment to Genesis of three of our existing long-term CO2 supply agreements with our industrial customers, which represented approximately 60% of our industrial CO2 sales volumes at that time. Pursuant to the volumetric production payment, Genesis may take up to 52.5 MMcf of CO2 per day through 2009, 43.0 MMcf/d from 2010 through 2012 and 25.2 MMcf/d to the end of the term. We provide processing and transportation services to Genesis for a fee of $0.16 per Mcf in connection with the delivery of CO2 to the industrial customers. In a separate transaction, we purchased approximately 689,000 common partnership units of Genesis for $7.15 per unit for an aggregate purchase price of $4.9 million, representing approximately 7.25% of Genesis' total outstanding common units, increasing our total ownership of Genesis to 9.25%. We used the net cash proceeds of approximately $20 million from these two transactions to reduce our bank debt. CAPITAL RESOURCES AND LIQUIDITY Since our last significant acquisition in the third quarter of 2002, we have generally been reducing our debt with both excess cash flow from operations and proceeds from property sales. In addition to the $50 million debt reduction during 2003 (see "Overview" above), we repaid approximately $25 million of bank debt during the fourth quarter of 2002, or a total of approximately $75 million of repayments during the last fifteen months. By December 31, 2003, we had reached our targeted debt level of $300 million, so we anticipate that our spending during 2004 will be about the same, or less than, our cash flow from operations, as we do not see the need for further debt reduction. However, there will likely be some minor borrowings and repayments throughout the year in order to manage our working capital and to fund minor acquisitions. We do not anticipate an increase in overall debt during 2004 unless we make a significant acquisition. As of February 27, 2004, our total debt was $305 million, comprising $225 million of 7.5% Senior Subordinated Notes due 2013 and $80 million of bank debt. The incremental borrowings of $5.0 million since December 31 were to fund an acquisition of another CO2 producing well, which also included another industrial sales contract, giving us ownership of every producing CO2 well in the region. Graph depicting the Company's debt to total capitalization (in millions of dollars)
Year Ended December 31, ------------------------------------------------ 2000 2001 2002 2003 ---- ---- ---- ---- Long-term Debt 199.0 334.8 344.9 298.2 Total Capitalization 415.2 683.9 711.7 719.4
Capital Spending Forecast Our 2004 capital budget, excluding acquisitions, is currently approximately $172 million. Based on current projections, using NYMEX futures prices in place as of the last part of February 2004, this exploration and development spending level is expected to be as much as $25 million less than our 2004 forecasted cash flow. However, as we have done from time to time in prior years, if commodity prices remain strong, we will likely increase our capital budget throughout the year to more closely match our cash flow from operations. As of February 27, 2004, we had approximately $140 million of availability on our bank borrowing base, more than we could reasonably expect to use for short-term working capital requirements and enough credit line availability to fund all but the largest acquisitions. 35 Denbury Resources Inc. Management's Discussion and Analysis of Financial Condition and Results of Operations During 2004, we intend to focus on our CO2 operations, one objective of which will be to develop additional CO2 reserves and deliverability for a possible future expansion of our CO2 tertiary floods to other areas, most likely East Mississippi. (See "CO2 Operations" under "Results of Operations" for a discussion of the production and reserve potential.) This may have a short-term impact on our oil and natural gas production growth, although we believe it will provide long-term value for our shareholders, as it is the first step in expanding our CO2 operations, adding additional fields as CO2 flood candidates, and ultimately adding oil reserves. We are also considering the possibility of selling certain lower priority properties during 2004, including our offshore operations, which in the short-term would also reduce production, although the proceeds would likely be used to reduce debt. Ideally, rather than pay down debt, we would like to re-invest any sales proceeds in other properties that could be future potential tertiary flood candidates. In March 2004 we hired an investment banker to assist us with the sale of our offshore operations. No buyer has been identified as yet, and if the sales price is less than anticipated, we may withdraw the sales package. Our current acquisition focus is to seek additional properties that are potential tertiary flood candidates and to acquire incremental interests in fields that we already own. We continue to review other properties in all of our operating areas where we see additional potential based on our review of 3D seismic or other geologic and geophysical data, although this activity is a lower priority for us than has been the case historically, given our substantial inventory of projects in-house related to tertiary operations. Any acquisitions that we do make will likely be funded with either excess cash flow or bank debt. Sources and Uses of Capital Resources During 2003, we generated approximately $197.6 million of cash flow from operations and generated an additional $29.4 million of cash from sales of oil and gas properties. The largest single asset sale was the sale of Laurel Field, acquired from COHO in August 2002, which netted us approximately $25.9 million. Later in the year, we also sold a volumetric production payment to Genesis, which netted us approximately $20 million of cash (see "Genesis Transactions" above). During 2003, we spent $146.6 million on oil and natural gas exploration and development expenditures, $22.7 million on CO2 capital investments and acquisitions, and approximately $11.8 million on oil and natural gas property acquisitions, for total capital expenditures of approximately $181.1 million. In addition, during 2003 we incurred approximately $15.6 million of costs for the subordinated debt refinancing (see "Debt Refinancing" above). The $147.3 million of net total expenditures (including the $15.6 million of debt refinancing costs and net of property sales) was funded by our cash flow from operations, with the balance used to reduce our total debt by approximately $50.0 million. Graph depicting capital expenditures (in million of dollars)
Year Ended December 31, --------------------------------- 2001 2002 2003 ----- ----- ----- Acquisitions 157.1 60.6 14.9 Development and Exploration 170.1 111.4 166.3
During 2002, we spent approximately $99.3 million on exploration and development activities, approximately $56.4 million on acquisitions (the largest being the $48.2 million acquisition of the COHO properties), and approximately $16.4 million on CO2 related capital expenditures, for a total of approximately $172.1 million. Our exploration and development expenditures included approximately $62.3 million spent on drilling, $17.8 million of geological, geophysical and acreage expenditures and $19.1 million spent on facilities and recompletion costs. The exploration and development expenditures were funded by cash flow from operations, and the acquisitions were primarily funded by cash flow, supplemented by property dispositions totaling $7.7 million and incremental bank debt for the year of $9.1 million. 36 Denbury Resources Inc. Management's Discussion and Analysis of Financial Condition and Results of Operations During 2001, we spent approximately $170.1 million on exploration and development activities and approximately $157.1 million on acquisitions (excluding the $42 million CO2 acquisition), the largest being the acquisition of Matrix. Our exploration and development expenditures included approximately $115.9 million spent on drilling, $18.7 million of geological, geophysical and acreage expenditures and $35.5 million spent on facilities and recompletion costs. The exploration and development expenditures were funded by cash flow from operations, and the acquisitions were primarily funded by net incremental debt. Graph depicting development and exploration expenditures vs. cash flow from operations (in millions of dollars)
Year Ended December 31, --------------------------------- 2001 2002 2003 ----- ----- ----- Development and Exploration Expenditures 170.1 111.4 166.3 Cash Flow from Operations 185.0 159.6 197.6
Bank Credit Facility Our bank borrowing base was reaffirmed as of October 1, 2003 at $220 million as part of the semi-annual review by the banks. During 2003, we amended our credit agreement to increase the percentage of production we are allowed to hedge, setting a maximum of 85% of our forecasted production from our proved reserves for the current year (as defined in the amendment and which may include up to 18 months), a maximum of 70% of the forecasted production for the subsequent year, a maximum of 55% of the forecasted production for the third year and a maximum of 40% of the forecasted production for the fourth year. We also amended the credit agreement to allow us to borrow up to $20 million in a bond issue from a Mississippi governmental authority, resulting in the exemption or reduction of sales and ad valorem taxes on CO2 facilities we build through May 2005 in Mississippi. This bond funding arrangement was completed in May 2003. Any borrowings under this bond program will be purchased by the banks in our credit facility, will become part of our outstanding borrowings under our credit line and will accrue interest and be repaid on the same basis as our bank line. Our bank agreement was amended again in December 2003 to accommodate our conversion to a holding company organizational structure, although this amendment did not include any significant changes to the terms or covenants included therein (see "General and Administrative Expenses" under "Results of Operations" and Note 1 to the Consolidated Financial Statements). Our next bank borrowing base redetermination will be as of April 1, 2004, based on December 31, 2003 assets. We do not anticipate any significant changes to our borrowing base at this next review, although we cannot be certain, as there are several subjective aspects to the borrowing base determination. OFF-BALANCE SHEET ARRANGEMENTS Commitments and Obligations We have no off-balance sheet arrangements, special purpose entities, financing partnerships or guarantees, other than as disclosed in this section. We have no debt or equity triggers based upon our stock or commodity prices. Our dollar denominated obligations that are not on our balance sheet include our operating leases, the largest of which is a $6.0 million lease financing of certain equipment at our CO2 recycling facility at Mallalieu Field that commenced in August 2003. We also have several leases relating to office space and other minor equipment leases. We also have dollar related obligations that are not currently recorded on our balance sheet relating to various obligations for development and exploratory expenditures that arise from our normal capital expenditure program or from other transactions common to our industry. In addition, in order to recover our undeveloped proved reserves, we must also fund the associated future development costs forecasted in our proved reserve reports. For a further discussion of our future development costs and proved reserves, see "Results of Operations - Depletion, Depreciation and Amortization." At December 31, 2003, we had a total of $820,000 outstanding in letters of credit. Genesis Energy, Inc., the general partner of which we own 100%, has guaranteed the bank debt of Genesis, which was approximately $7.0 million as of 37 Denbury Resources Inc. Management's Discussion and Analysis of Financial Condition and Results of Operations December 31, 2003, and also included $21.6 million in letters of credit, of which $12.5 million secured purchases from Denbury. There are no guarantees by Denbury or any of its other subsidiaries of the debt of Genesis or of Genesis Energy, Inc. We do not have any material transactions with related parties other than sales of production and a VPP sold to Genesis as discussed in Note 3 to our Consolidated Financial Statements. A summary of our obligations is presented in the following table:
Payments Due by Period - --------------------------------------------------------------------------------------------------------------------------- Amounts in Thousands Total 2004 2005 2006 2007 2008 Thereafter - --------------------------------------------------------------------------------------------------------------------------- Contractual Obligations: - ----------------------- Bank debt (a) $ 75,000 $ - $ - $ 75,000 $ - $ - $ - Subordinated debt (a) 225,000 - - - - - 225,000 Operating lease obligations 16,621 2,664 2,784 2,786 2,781 2,670 2,936 Capital expenditure obligations (b) 6,657 6,657 - - - - - Other long-term liabilities reflected in our Consolidated Balance Sheet: Derivative liabilities (c) 37,129 37,057 72 - - - - Other Cash Commitments: - ---------------------- Future development costs on proved reserves, net of capital obligations (d) 268,936 69,329 107,536 24,399 29,548 18,656 19,468 Asset retirement obligations (e) 82,733 2,563 4,464 2,725 1,006 2,880 69,095 - --------------------------------------------------------------------------------------------------------------------------- Total $ 712,076 $ 118,270 $ 114,856 $ 104,910 $33,335 $ 24,206 $ 316,499 ===========================================================================================================================
(a) These long-term borrowings and related interest payments are further discussed in Note 6 to the Consolidated Financial Statements. The table assumes that our long-term debt is held until maturity. (b) Represents future minimum cash commitments under contracts in place as of December 31, 2003, primarily for drilling rig services and well related costs. As is common in our industry, we commit to make certain expenditures on a regular basis as part of our ongoing development and exploration program. These commitments generally relate to projects that occur during the subsequent six months and are usually part of our normal operating expenses or part of our capital budget, which for 2004 is currently set at $172 million. In addition, we have recurring expenditures for such things as accounting, engineering and legal fees, software maintenance, subscriptions, and other overhead type items. Normally these do not change materially from year to year and are part of our general and administrative expenses. We have not attempted to estimate these types of expenditures in this table as most could be quickly cancelled with regard to any specific vendor, even though the expense itself may be required for ongoing normal operations of the Company. (c) Represents the estimated future payments under our derivative obligations based on the futures market prices as of December 31, 2003. These amounts will change as oil and natural gas commodity prices change. The estimated fair market value of our oil and natural gas commodity derivatives at December 31, 2003 was a $44.6 million liability. See further discussion of our derivative contracts in "Market Risk Management" contained in this Management's Discussion and Analysis of Financial Condition and in Note 9 to the Consolidated Financial Statements. (d) Represents projected capital costs as scheduled in our December 31, 2003 proved reserve report that are necessary in order to recover our proved undeveloped reserves but are not current contractual commitments. (e) Represents the estimated future asset retirement obligations on an undiscounted basis. The discounted asset retirement obligation of $43.8 million, as determined under SFAS No. 143, is further discussed in Note 4 to the Consolidated Financial Statements. 38 Denbury Resources Inc. Management's Discussion and Analysis of Financial Condition and Results of Operations Long-term contracts require us to deliver CO2 to our industrial CO2 customers at various contracted prices, plus we have a CO2 delivery obligation to Genesis related to a VPP entered into during 2003 (see "Genesis Transactions" above). Based upon the maximum amounts deliverable as stated in the contracts and the volumetric production payment, we estimate that we may be obligated to deliver up to 412 Bcf of CO2 to these customers over the next 18 years; however, based on the current level of deliveries, our commitment would likely be reduced to approximately 310 Bcf. The maximum volume required in any given year is approximately 97 MMcf/d, although based on our current level of deliveries, this would likely be reduced to approximately 70 MMcf/d. Given the size of our proven CO2 reserves at December 31, 2003 (approximately 1.6 Tcf before deducting approximately 162.6 Bcf for the VPP), our current production capabilities and our projected levels of CO2 usage for our own tertiary flooding program, we believe that we can meet these delivery obligations. RESULTS OF OPERATIONS CO2 Operations OVERVIEW. Since 1999, when we acquired our first tertiary oil recovery operation at Little Creek Field, tertiary recovery operations have become increasingly important for us. More importantly, in February 2001 we acquired the sources of CO2 and a pipeline to transport it to these fields. Since February 2001, we have acquired two and drilled three CO2 producing wells, doubling our initial proven CO2 reserves to 1.6 Tcf as of December 31, 2003 (including the 162.6 Bcf of reserves dedicated to a VPP with Genesis). Today, we own every known producing CO2 well in the region, providing us a significant strategic advantage in the acquisition of other properties in Mississippi and Louisiana that could be further exploited through tertiary recovery. With the latest acquisition, which closed in early January 2004, we are capable of producing approximately 250 MMcf/d of CO2, about three times the production capacity at the time of our initial acquisition. We have four additional CO2 wells planned for 2004 (including one side-track operation), which are expected to increase our production capacity to around 350 MMcf/d of CO2 by the end of 2004, just short of our forecasted maximum requirement of about 400 MMcf/d in 2007 for the planned future projects in southwestern Mississippi along our CO2 pipeline. During 2004, two of these CO2 wells will test new structures, which if successful, will both increase our CO2 reserves and provide additional production capacity. We believe it is prudent to add additional reserves and deliverability before we commence our tentative plans to expand our CO2 operations to East Mississippi and/or other regions. Based on our current tertiary recovery projects and planned phases of expansion in both Southwest and East Mississippi, we will continue to drill additional CO2 wells after 2004, attempting to further increase our production capacity to at least 530 MMcf/d of CO2 production by 2011, in order to meet the delivery requirements for the operations that we currently have modeled. Although we believe that our plans and projections are reasonable and achievable, there could be delays or unforeseen problems in the future which could delay our overall tertiary development program. We believe that such delays, if any, should only be temporary. OIL PRODUCTION POTENTIAL. Although our oil production from our CO2 tertiary recovery activities is still relatively modest, we expect it to be an ever increasing portion of our production. Almost all of our incremental CO2 production is being used for our tertiary recovery operations currently ongoing at Little Creek, Mallalieu and McComb Fields. We have tentatively scheduled tertiary projects at other oil fields along our pipeline, and project that these projects will increase our net tertiary related oil production from its current level of over 6,000 Bbls/d during January 2004, to as much as 18,000 Bbls/d in 2010. As of December 31, 2003, we had approximately 35.3 MMBbls of proven oil reserves related to tertiary operations in these fields along our CO2 pipeline and have identified and estimated significant additional potential in fields that we own in this area. In addition to the development of the fields along our CO2 pipeline, we have completed a preliminary study of the feasibility of implementing tertiary recovery operations in East Mississippi, reviewing five fields that we expect to be part of the first phase of operations in this area. While the study is preliminary and requires significant additional work and review, including a determination of the precise costs and best location for a CO2 pipeline to this part of the state, and further refinement of the economics, preliminarily this project appears to have reasonable economics at NYMEX oil prices in the low to mid twenties. These five fields also appear to have aggregate 39 Denbury Resources Inc. Management's Discussion and Analysis of Financial Condition and Results of Operations potential oil reserves of approximately the same magnitude as those fields along our existing CO2 pipeline. Combining the initial production forecast for both of these areas, the forecasted oil production from tertiary operations could peak at rates of almost 32,000 Bbls/d by 2013. While it is extremely difficult to accurately forecast that far into the future, we do believe that our tertiary recovery operations provide significant long-term production growth potential at reasonable rates of return with relatively low risk. FINANCIAL STATEMENT IMPACT. The increasing emphasis on CO2 tertiary recovery projects has made, and will continue to make, an impact on our financial results and certain operating statistics. First, there is a significant delay between the initial capital expenditures and the resulting production increases, as these tertiary operations require the building of facilities before CO2 flooding can commence and usually require six to twelve months before the field responds to the injection of CO2. Secondly, as these tertiary projects are more expensive to operate than our other oil fields because of the cost of injecting and recycling the CO2 (primarily due to the significant energy requirements to re-compress the CO2 back into a liquid state for re-injection purposes), our overall operating expenses on a per BOE basis will likely continue to increase as these operations constitute an increasingly larger percentage of our operations. These tertiary recovery fields are expected to average around $10 per BOE in operating expenses over the life of the field for those projects along our CO2 pipeline, although the cost per BOE is generally higher at the beginning of each operation. These levels of operating expenses compare to a cost of around $5 to $7 per BOE for a more traditional oil property. We allocate the cost to produce and transport the CO2 between the sales to commercial users and CO2 used in our own oil fields. The CO2 operating expenses allocated to our oil fields are recorded as lease operating expenses on those fields. Third, while our operating expense on a per BOE basis may rise, our overall oil prices, measured as a discount to NYMEX prices, should continue to improve. These CO2 operations are all currently conducted in fields that produce light sweet oil and receive oil prices close to, and sometimes actually higher than, NYMEX prices. As this production becomes a larger percentage of our overall production, our overall average differential to NYMEX should decrease. While our oil prices have historically averaged between $4.00 and $5.00 below NYMEX prices, our 2002 average was $3.73 below NYMEX and our 2003 average decreased further to $3.60 below NYMEX. We expect that this positive trend should continue, subject of course to the normal fluctuations in the marketplace. 2003 OPERATING ACTIVITIES. During late July and early August 2003, we upgraded our CO2 facility at Jackson Dome, increasing the CO2 processing capacity of our facility by approximately 50%, from around 200 MMcf/d to approximately 300 MMcf/d. This upgrade was performed several months ahead of our original schedule in order to handle the higher than expected production volumes from our CO2 wells drilled during late 2002 and early 2003. At the same time, we increased the size of our CO2 processing facility at Mallalieu Field, increasing the amount of CO2 that we can recycle at that field from approximately 28 MMcf/d to approximately 108 MMcf/d. Our oil production from our CO2 tertiary recovery activities increased 18% from 2002 levels of 3,970 Bbls/d to 4,671 Bbls/d during 2003, and to 5,579 Bbls/d during the fourth quarter of 2003. This represents approximately 29% 40 Denbury Resources Inc. Management's Discussion and Analysis of Financial Condition and Results of Operations of our total corporate oil production during the fourth quarter of 2003 and approximately 16% of our total corporate production on a BOE basis. We believe that the year-over-year increase would have been more significant had we not curtailed CO2 production in the second quarter of 2003 due to a leak in a newly installed CO2 pipeline and a one-week shutdown during the third quarter while the facilities at Jackson Dome were upgraded. Our experience has indicated that any time our CO2 production and associated injections are curtailed, there is a corresponding drop in our oil production from these projects. While our CO2 production capability is currently ahead of schedule, as previously noted, temporary curtailments have had a negative short-term effect on our 2003 oil production. Recently we have been injecting more CO2 than initially forecasted, contributing to the recent increase in the related oil production, as evidenced by the record fourth quarter 2003 production, and a preliminary production estimate of over 6,000 Bbls/d during January 2004. We expect that this oil production will continue to increase, although the increases are not always predictable or consistent. We spent approximately $0.15 per Mcf to produce our CO2 during 2003, slightly higher than our 2002 annual average of $0.13 per Mcf, primarily due to higher royalty expenses, as certain of our royalty payments increase if the price of oil increases beyond a certain threshold, and due to approximately $700,000 of workover expenses on one CO2 well during the third quarter. The higher overall CO2 production rates partially offset the workover expenses. Our estimated total cost per thousand cubic feet of CO2 during 2003 was approximately $0.22, after inclusion of depreciation and amortization expense, still significantly less than the $0.34 per thousand cubic feet that we would currently be paying under the purchase contract in place at the time we acquired the CO2 properties in February 2001. The higher cost per Mcf of CO2 during 2003 contributed to a corresponding increase in the operating costs of our tertiary projects, as did higher electricity and other expenses, as we continue to inject and recycle higher volumes of CO2 each quarter. Furthermore, at Mallalieu Field in August 2003 we commenced lease payments relating to a portion of the upgraded CO2 facilities there (see "Commitments and Obligations" above). For 2003, our operating costs for our tertiary properties averaged $11.34 per BOE, higher than our 2002 annual average of $9.84 per BOE. In addition to using CO2 for our tertiary operations, we sell CO2 to third party industrial users under long-term contracts. Our net operating margin from these sales was $4.3 million during 2001, $6.2 million during 2002 and $6.5 million during 2003. Our average CO2 production during 2001, 2002 and 2003 was approximately 84 million, 104 million, and 170 million cubic feet per day, of which approximately 53% in 2001, 54% in 2002 and 62% in 2003 was used in our tertiary recovery operations, with the balance sold to third parties for industrial use. At December 31, 2003, we had proved reserves of 35.3 MMBbls relating to our tertiary recovery operations. Through December 31, 2003, we had spent a total of $104.8 million on fields involved in this process, and had received $83.0 million in net cash flow (revenue less operating expenses and capital expenditures), leaving us a balance of $21.8 million to recover for payout. The proved oil reserves in our CO2 fields have a PV-10 Value of $434.6 million, using December 31, 2003 constant NYMEX pricing of $32.52 per Bbl. These amounts do not include the capital costs or related depreciation and amortization of our CO2 producing properties. Through December 31, 2003, we have spent a total of $85.3 million on our CO2 producing properties, received a total of $41.3 million in net cash flow (revenue less operating expenses and capital expenditures, including the Genesis volumetric production payment receipts), leaving us a balance of approximately $44.0 million of unrecovered costs. CO2 RELATED CAPITAL BUDGET FOR 2004. Tentatively, we plan to spend approximately $30 million in 2004 in the Jackson Dome area, over and above what is currently required for our operations in Southwest Mississippi, with the intent to add additional CO2 reserves and deliverability for future operations. Approximately $50 million in capital expenditures is budgeted in 2004 for our oil fields with tertiary operations, increasing our combined CO2 related expenditures to just under 50% of our 2004 capital budget. 41 Denbury Resources Inc. Management's Discussion and Analysis of Financial Condition and Results of Operations Operating Income Cash flow from operations and net income have been strong for the last three years, primarily because of higher than historical commodity prices. Production increased 14% from 2001 to 2002, but declined slightly (2%) in 2003 (see also "Overview"). The higher commodity prices in 2003 more than offset the production decline, resulting in higher overall net income and cash flow from operations. Commodity prices were slightly lower in 2002, reducing our overall net income and cash flow during 2002 as compared to 2001.
Year Ended December 31, - ---------------------------------------------------------------------------------------------------------- Amounts in Thousands Except Per Share Amounts 2003 2002 2001 - ---------------------------------------------------------------------------------------------------------- Net income $ 56,553 $ 46,795 $ 56,550 Net income per common share: Basic $ 1.05 $ 0.88 $ 1.15 Diluted 1.02 0.86 1.12 - ---------------------------------------------------------------------------------------------------------- Adjusted cash flow from operations $ 189,802 $ 164,565 $ 186,801 Net change in assets and liabilities relating to operations 7,813 (4,965) (1,754) - ---------------------------------------------------------------------------------------------------------- Cash flow from operations (GAAP measure) $ 197,615 $ 159,600 $ 185,047 - ----------------------------------------------------------------------------------------------------------
Adjusted cash flow from operations is a non-GAAP measure that represents cash flow provided by operations before changes in assets and liabilities, as presented in our Consolidated Statements of Cash Flows. In our discussion of cash flow from operations herein, we have elected to discuss these two components of cash flow provided by operations (the GAAP measure). Graph depicting cash flow from operations by quarter (in millions of dollars)
2001 2002 2003 --------------------- --------------------- --------------------- Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 --------------------- --------------------- --------------------- Cash flow from operations 66.1 30.9 45.1 43.0 12.0 46.6 44.4 56.6 35.5 60.5 49.8 51.8 Adjusted cash flow from operations* 55.0 45.2 48.7 37.9 28.5 43.4 44.2 48.4 47.4 49.0 45.6 47.8 *Cash flow from operations before changes in assets and liabilities. See table above.
Adjusted cash flow from operations, the non-GAAP measure, measures the cash flow earned or incurred from operating activities without regard to the collection or payment of associated receivables or payables. We believe that this is important to consider separately, as we believe it can often be a better way to discuss changes in operating trends in our business caused by changes in production, prices, operating costs, and so forth, without regard to whether the earned or incurred item was collected or paid during that year. We also use this measure because the collection of our receivables or payment of our obligations has not been a significant issue for our business, but merely a timing issue from one period to the next, with fluctuations generally caused by significant changes in commodity prices or significant changes in drilling activity. The net change in assets and liabilities relating to operations is also important as it does require or provide additional cash for use in our business; however, we prefer to discuss its effect separately. For instance, as noted above, during 2003, our accounts payable and accrued liabilities increased as a result of our higher drilling activity level late in the year, particularly offshore, increasing our available cash from operations. Conversely, during 2002 we used approximately $5.0 million of cash to fund a net increase in working capital. This was primarily caused by a high level of drilling and exploitation activity late in 2001 that was not paid (or even due) until 2002. 42 Denbury Resources Inc. Management's Discussion and Analysis of Financial Condition and Results of Operations Certain of our operating statistics for the last three years are set forth in the following chart.
Year Ended December 31, - ----------------------------------------------------------------------------------------------------------- 2003 2002 2001 - ----------------------------------------------------------------------------------------------------------- Average daily production volume Bbls 18,894 18,833 16,978 Mcf 94,858 100,443 85,238 BOE(1) 34,704 35,573 31,185 Operating revenues and expenses (thousands) Oil sales $189,442 $153,705 $132,219 Natural gas sales 196,021 121,189 128,179 Gain (loss) on settlements of derivative contracts (2) (62,210) 932 18,654 -------- -------- -------- Total oil and natural gas revenues $323,253 $275,826 $279,052 ======== ======== ======== Lease operating expenses $ 89,439 $ 71,188 $ 55,049 Production taxes and marketing expenses 14,819 11,902 10,963 -------- -------- -------- Total production expenses $104,258 $ 83,090 $ 66,012 ======== ======== ======== CO2 sales to industrial customers (3) $ 8,188 $ 7,580 $ 5,210 CO2 operating expenses 1,710 1,400 891 -------- -------- -------- CO2 operating margin $ 6,478 $ 6,180 $ 4,319 ======== ======== ======== Unit prices-including impact of hedges(2) Oil price per Bbl $ 24.52 $ 22.27 $ 21.65 Gas price per Mcf 4.45 3.35 4.66 Unit prices-excluding impact of hedges(2) Oil price per Bbl $ 27.47 $ 22.36 $ 21.34 Gas price per Mcf 5.66 3.31 4.12 Oil and gas operating revenues and expenses per BOE (1) Oil and natural gas revenues (including hedges) $ 25.52 $ 21.24 $ 24.52 -------- -------- -------- Lease operating expenses $ 7.06 $ 5.48 $ 4.84 Production taxes and marketing expenses 1.17 0.92 0.96 -------- -------- -------- Total production expenses $ 8.23 $ 6.40 $ 5.80 ======== ======== ======== (1) Barrel of oil equivalent using the ratio of one barrel of oil to six Mcf of natural gas ("BOE"). (2) See also "Market Risk Management" below for information concerning the Company's hedging transactions. (3) For 2003, includes deferred revenue of $322,000 associated with a volumetric production payment and $355,000 of transportation income, both from Genesis.
Graph depicting production by quarter (Average MBOE per day)
2001 2002 2003 ------------------------- ------------------------- ------------------------- Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 ------------------------- ------------------------- ------------------------- Oil 16.2 16.5 16.9 18.3 17.8 17.9 18.9 20.7 19.6 19.0 18.0 19.0 Natural Gas 10.4 11.4 18.2 16.7 17.6 17.6 16.6 15.2 16.5 16.1 15.1 15.6 ------------------------- ------------------------- ------------------------- Total BOE 26.6 27.9 35.1 35.0 35.4 35.5 35.5 35.9 36.1 35.1 33.1 34.6
43 Denbury Resources Inc. Management's Discussion and Analysis of Financial Condition and Results of Operations PRODUCTION. Average daily production by area for 2001, 2002 and 2003, and each of the quarters of 2003 is listed in the following table (BOE/d).
Average Daily Production (BOE/d) -------------------------------------------------------------------------- First Second Third Fourth Quarter Quarter Quarter Quarter Operating Area 2001 2002 2003 2003 2003 2003 2003 ---------------------------- -------------------------------------------------------------------------- Mississippi - non-CO2 floods 13,481 13,378 14,537 13,600 13,367 13,066 13,638 Mississippi - CO2 floods 2,560 3,970 4,345 4,522 4,227 5,579 4,671 Onshore Louisiana 9,268 8,050 8,509 8,231 7,836 8,320 8,222 Offshore Gulf of Mexico 5,691 9,975 8,544 8,537 7,374 7,357 7,949 Other 185 200 158 160 312 268 224 -------------------------------------------------------------------------- Total Company 31,185 35,573 36,093 35,050 33,116 34,590 34,704 ============================ ==========================================================================
Our average daily BOE production for 2003 was approximately 2% lower than in 2002, due primarily to production decreases in our offshore Gulf of Mexico properties, offset in part by production increases in our Mississippi CO2 flood properties. In both the offshore and onshore Louisiana areas, we have experienced production declines from normal depletion, along with delayed production from equipment downtime and well workovers, with the single largest production decrease on a field basis coming from Thornwell Field in Louisiana. Average annual production at this field declined 1,346 BOE/d (principally natural gas), from 2002 to 2003, although we have generally had good success from our acquisition of Thornwell Field in 2000, as evidenced by a net profit (at the field level) to date through December 31, 2003 of $18.9 million and a remaining PV-10 Value of the reserves at year-end prices of $62.4 million. However, this field is characterized by relatively short-lived gas production that declines rapidly unless there is constant drilling activity. During 2003, our drilling activity at Thornwell was significantly less than in prior years as the field became more fully developed, contributing to the production decline. This trend is expected to continue into 2004. Partially offsetting the large decrease from Thornwell Field, onshore Louisiana, was the impact of our recent success in the Exxon Fee A-1 well in North Lirette Field, which came on production late in the third quarter. A second well drilled in that field commenced production early in the fourth quarter. While both are strong producers, they too are relatively short-lived wells and are expected to decline in the near future. The production increase in our Mississippi CO2 flood properties is almost entirely due to increased production at Mallalieu Field, which increased over 1,000 BOE/d from the prior year due to the CO2 flood that we initiated there during 2002 (see "CO2 operations" above for a further discussion of our tertiary properties). Offshore, production declined at several fields during the year, generally due to normal depletion and the short-lived nature of the reserves. Late in the fourth quarter of 2003, we made 15 well completions, four at Brazos A-21, three at North Padre A-9, three at Chandeleur Sound 69, two at West Cameron 192 and three at West Cameron 427. Although most of these were not completed until the latter half of the fourth quarter, the incremental production was sufficient to arrest, at least temporarily, the overall production decline in this area. Depending on our 2004 drilling success, we expect 2004 production offshore to be relatively flat or down slightly when compared with 2003 production. In addition, there are other factors that have impacted our production. For example, we have had temporary curtailments of CO2 injections at least twice during 2003, which have delayed the response of additional oil production from these projects (see "CO2 Operations" above). Our expected production increases from our exploration and development results were also less than anticipated, particularly during the first half of 2003, and we have experienced unexpected delays in drilling and completing offshore wells. In January 2003, we sold one of the largest producing fields acquired in the August 2002 COHO acquisition. Year over year, the properties in the COHO package contributed an additional 908 BOE/d to our annual production average, although there have been more significant fluctuations on a quarterly basis due to the timing of the acquisition and subsequent disposition. Our production for 2003 was weighted slightly toward oil 44 Denbury Resources Inc. Management's Discussion and Analysis of Financial Condition and Results of Operations (54%), and it appears that we will remain weighted toward oil in the future due to our increasing emphasis on tertiary operations, unless we make an acquisition that is predominantly natural gas. Our production growth in 2002, as compared to 2001, was primarily related to acquisitions and subsequent development of the acquired fields. During the last three years, our significant acquisitions of oil and natural gas properties have consisted of the $4.0 million acquisition of Mallalieu Field in May 2001, the $157.4 million corporate acquisition of Matrix in July 2001 (offshore Gulf of Mexico properties), the $2.3 million acquisition of McComb Field in September 2002, and the $48.2 million acquisition of COHO's Gulf Coast properties in August 2002. The biggest impact on 2002 was the effect of a full year of production from the Matrix properties (as compared to six months of production during 2001) and five months of production from the COHO acquisition. Heidelberg Field, located in Eastern Mississippi, is Denbury's largest single field. At the time of its acquisition in December 1997, Heidelberg Field was producing approximately 2,800 BOE/d. Annual average production under our ownership peaked in 2001 at 7,908 BOE/d, averaging 7,479 BOE/d in 2002 and 7,535 BOE/d for 2003. In its early years, our primary emphasis was on implementing our waterfloods, plus other developmental drilling. During the last few years, we have expanded our development of the natural gas production in the Selma Chalk formation, increasing Heidelberg's natural gas production from almost nothing at the time of acquisition to an average of 10.3 MMcf/d during 2003, the highest level to date, making Heidelberg Field our third largest natural gas producer for 2003, but our second largest during the fourth quarter of 2003. Overall production from this field is expected to remain relatively flat or slightly decline as the waterflood units appear to have reached a plateau, although there may be periodic spikes in the natural gas production as a result of recently drilled natural gas wells and the anticipated production from 16 additional natural gas wells scheduled for 2004. OIL AND NATURAL GAS REVENUES. Our oil and natural gas revenues were relatively flat between 2001 and 2002, but increased 17% between 2002 and 2003. Three factors cause the change in revenues: commodity prices, production levels and hedging receipts or payments. Between 2001 and 2002, revenues decreased by 1%, due primarily to lower hedging receipts. The overall increase in production volumes contributed $36.6 million in revenue, or a 13% increase, more than offset by the combined 14% reduction in revenues due to a decrease in cash receipts from hedges of $17.7 million (a 6% decrease) and an overall decrease of $22.1 million in commodity prices (or an 8% decrease). Between 2002 and 2003, revenues increased by 17%, due primarily to higher commodity prices. The overall increase in commodity prices contributed $117.3 million in revenue, a 42% increase, partially offset by a reduction in revenues due to a decrease in cash receipts from hedges of $63.1 million (a 23% decrease) and an overall decrease of $6.7 million related to the 2% lower production volumes. During 2003, we paid out $20.3 million on our oil hedges ($2.95 per Bbl) and $41.9 million ($1.21 per Mcf) on our natural gas hedges relating to swaps and collars we purchased a year or more earlier when commodity prices were lower. About $15.0 million of the hedge payments related to swaps originally put in place to protect the rate of return for the COHO acquisition in August 2002. During 2002, we had total net receipts on our hedges of $932,000, paying out $0.6 million ($0.09 per Bbl) on our oil hedges but collecting a net $1.5 million ($0.04 per Mcf) on our natural gas hedges. During 2001, we collected $18.7 million in hedge receipts, collecting $1.9 million ($0.31 per Bbl) on our oil hedges and $16.7 million ($0.54 per Mcf) on our natural gas hedges. Most of the natural gas hedge receipts for 2001 related to funds received from "puts" or floors purchased at the time of the Matrix acquisition in mid-2001. These hedges were purchased at a level just below the then current futures price for natural gas, resulting in cash receipts as natural gas prices dropped significantly during the latter half of that year. See "Market Risk Management" for a further discussion of our hedging activities. Our net oil and natural gas prices have fluctuated as outlined on the prior table. During 2003, we received the highest weighted average net price per BOE in our history, netting $25.52 per BOE even after paying out approximately $4.91 per BOE for hedge losses. This resulted from average NYMEX prices of approximately $31.00 per Bbl and approximately $5.45 per MMBtu during the year. In addition, we had one of our best years with regard to our realized net 45 Denbury Resources Inc. Management's Discussion and Analysis of Financial Condition and Results of Operations price relative to NYMEX prices. During 2001, we received an average discount to NYMEX of $4.66 per Bbl. This was reduced to an average discount of $3.73 per Bbl during 2002 and further reduced to an average discount of $3.60 per Bbl in 2003. While this differential fluctuates from period to period with market conditions, we are gradually improving the overall discount as the amount of light sweet oil production from the tertiary operations continues to grow, improving the overall quality of our product mix. This tertiary production along our CO2 pipeline receives a premium price, sometimes in excess of NYMEX prices. Year over year, there is generally less fluctuation in our natural gas prices relative to NYMEX. Normally, we receive a slight premium to the NYMEX market, primarily because of the high Btu content of our natural gas. For 2003, we averaged an $0.18 premium to NYMEX, as compared to a $0.05 discount in the prior year and a $0.06 premium during 2001. OPERATING EXPENSES. Lease operating expenses increased to $7.06 per BOE during 2003, an increase of 29% from the $5.48 per BOE average during 2002. The expense of two workovers totaling approximately $2.8 million, relating to mechanical failures at two onshore Louisiana gas wells, was the single biggest source of the increase in the first half of 2003, with several smaller workovers, including one on a CO2 well (see "CO2 Operations" above), contributing to the higher expense levels during the third quarter of 2003. As discussed under "CO2 Operations," the growth in our CO2 tertiary projects is causing an increase in both gross and per BOE operating expenses. Operating expenses per BOE for the tertiary operations averaged $11.34 per BOE during 2003 as compared to $9.84 per BOE during 2002, and on a gross cost basis, operating expenses related to these activities increased from $14.3 million in 2002 to $19.3 million during 2003. Other factors contributing to higher operating expenses during 2003 were (i) a full year of expenses on the properties acquired from COHO, which have typically had higher expenses on a per BOE basis than our other oil properties due to their age, their relatively low production rates and their general condition at the time we acquired them in August 2002, (ii) lease fuel costs that increased from $2.5 million during 2002 to $4.4 million during 2003 as a result of higher natural gas prices, and (iii) the slight decline in 2003 production rates, which also had an impact on per BOE rates. While our lease operating expenses during the fourth quarter of 2003 were lower than in any other quarter of the year (averaging $6.78 per BOE), they were still significantly higher than 2002 lease operating expense levels. We anticipate that lease operating expenses will remain at these generally higher levels, and probably gradually increase over time, for the aforementioned reasons. Our lease operating expenses increased 13% on a per BOE basis between 2001 and 2002. This increase was primarily due to higher than usual workover expenses, principally offshore on the Matrix properties, repairs relating to storm damage from Hurricane Lili that were not covered by insurance or were part of insurance deductibles, higher per BOE costs due to lost production from that storm and Tropical Storm Isidore, higher than average operating expenses on the properties acquired from COHO in August 2002, as significant repairs and clean-up were required, and the general increase caused by growing tertiary operations. Lease operating expenses increased on a gross basis by $16.1 million, or 29%, between 2001 and 2002. Production taxes and marketing expenses also increased to $1.17 per BOE in 2003, as compared to an average per BOE of $0.92 during 2002. The higher rate during 2003 is primarily due to higher commodity prices, as a significant portion of the severance tax is value based. Marketing expenses were relatively consistent at $1.8 million during 2003 and $1.9 million during 2002, primarily related to our offshore properties. Between 2001 and 2002, production taxes and marketing expenses were about the same, or $0.96 per BOE during 2001 and $0.92 per BOE during 2002. General and Administrative Expenses During the last three years, general and administrative ("G&A") expenses on a per BOE basis have gradually increased from $0.89 per BOE during 2001 to $1.20 per BOE during 2003 in line with the overall increase in gross G&A expense. With our slight decrease in production during 2003, the impact on G&A expense per BOE was even more pronounced. 46 Denbury Resources Inc. Management's Discussion and Analysis of Financial Condition and Results of Operations
Year Ended December 31, - --------------------------------------------------------------------------------------------------- Amounts in Thousands Except Per BOE and Employee Data 2003 2002 2001 - --------------------------------------------------------------------------------------------------- Gross G&A expense $46,031 $40,149 $33,727 Operator overhead charges (26,823) (23,857) (20,328) Capitalized exploration expense (5,507) (5,325) (4,102) - --------------------------------------------------------------------------------------------------- 13,701 10,967 9,297 State franchise taxes 1,488 1,459 877 - --------------------------------------------------------------------------------------------------- Net G&A expense $15,189 $12,426 $10,174 =================================================================================================== Average G&A expense per BOE $ 1.20 $ 0.96 $ 0.89 Employees as of December 31 374 356 320 ====================================================================================================
Gross G&A expenses increased $5.9 million, or 15%, between 2002 and 2003. The largest component of the increase was approximately $1.4 million of expenses spent for consultants hired to help document and test our system of internal controls, a requirement of the Sarbanes-Oxley Act of 2002. The cost of complying with this act and related new laws and regulations is significantly higher than these third party expenses, but most other costs are not as easily measured and identified. The second largest source of the increase was approximately $630,000 of legal, accounting, bank and other fees associated with the conversion to a holding company organizational structure during December 2003. This corporate restructure is expected to save us around $750,000 per year in taxes and expenses and provide other future operational benefits. Other factors also contributed to the increase, the most significant being expenses associated with the sale of stock by the Texas Pacific Group in the first and last quarters of 2003, higher year-end expenses for engineering and audit fees, and an overall increase in personnel and associated expenses primarily related to cost of living salary increases. Partially offsetting these increases was a reduction in our 2003 bonuses due to less positive operating results during 2003 in certain areas. An increase in operator overhead recovery charges and capitalized exploration costs in 2003 also partially offset the increase in gross G&A. Our well operating agreements allow us, when we are the operator, to charge a well with a specified overhead rate during the drilling phase and also to charge a monthly fixed overhead rate for each producing well. As a result of the additional operated wells from acquisitions, additional tertiary operations, and drilling activity during the past year, the amount we recovered as operator overhead charges increased by 12% between 2002 and 2003. Capitalized exploration costs increased slightly between 2002 and 2003, along with increases in employee related costs. The net effect of the increases in gross G&A expenses, operator overhead recoveries and capitalized exploration costs was a 22% increase in net G&A expense between 2002 and 2003 and a 25% increase on a per BOE basis. Most of the G&A increase between 2001 and 2002 was a result of additional personnel hired as part of the Matrix acquisition in July 2001 and COHO acquisition in August 2002. Along with the additional personnel, we had general increases in consultant fees as a result of the higher level of activity. Gross G&A expenses increased 19% between 2001 and 2002, net expenses increased 22%, and expenses increased 8% on a per BOE basis. Interest and Financing Expenses
Year Ended December 31, - --------------------------------------------------------------------------------------------------------- Amounts in Thousands Except Per BOE Data 2003 2002 2001 - --------------------------------------------------------------------------------------------------------- Interest expense $ 23,201 $ 26,833 $ 22,335 Non-cash interest expense (1,251) (2,659) (1,665) - --------------------------------------------------------------------------------------------------------- Cash interest expense 21,950 24,174 20,670 Interest and other income (1,573) (1,746) (849) - --------------------------------------------------------------------------------------------------------- Net cash interest expense $ 20,377 $ 22,428 $ 19,821 ========================================================================================================= Average net cash interest expense per BOE $ 1.61 $ 1.73 $ 1.74 Average debt outstanding $341,496 $350,556 $264,792 Average interest rate (1) 6.4% 6.9% 7.8% ========================================================================================================= (1) Includes commitment fees but excludes amortization of debt issue costs.
47 Denbury Resources Inc. Management's Discussion and Analysis of Financial Condition and Results of Operations Interest expense for 2003 decreased from levels in the prior year primarily due to (i) lower overall interest rates, resulting from an overall drop in market interest rates on our bank debt and due to the refinancing of our subordinated debt (see "Debt Refinancing" above), (ii) a 3% lower average outstanding debt balance during 2003, as we reduced debt by $50 million during the year, and (iii) reduced debt issue cost amortization resulting from the complete amortization of costs associated with the original maturity of our bank credit line in December 2002 after we refinanced and extended the bank credit line to April 2006. Our interest expense was $4.5 million (20%) higher in 2002 than 2001 primarily as a result of higher average debt levels. During 2001, we had total bank borrowings of $146.0 million, primarily to fund our acquisition of Matrix ($100.0 million) and the CO2 acquisition ($42.0 million). We repaid a total of $79.1 million during 2001, (i) $13.0 million of which related to excess cash flow generated from operations early in the year given the unusually high natural gas prices and (ii) $65.9 million of which represented the net proceeds of our issuance of Series B 9% Senior Subordinated Notes due 2008, in August 2001. During 2002, we borrowed $49.1 million, primarily to fund the COHO acquisition, and repaid $40.0 million during the year from excess cash flow, leaving us with $350 million of total debt outstanding as of December 31, 2002 (excluding the discount). The net effect of these transactions was $85.8 million higher average debt outstanding during 2002 than in 2001, an increase of 32%. Interest rates decreased during 2002, partially offsetting the higher debt levels. Depletion, Depreciation and Amortization Depletion, depreciation and amortization ("DD&A") was at its lowest rate on a per BOE basis in our history in 1999 as a result of our full cost pool writedowns in 1998. Since that time, our DD&A rate has increased each year as our overall finding cost has been greater than the abnormally low DD&A rate in 1999, particularly the finding cost of certain of our acquisitions.
Year Ended December 31, - ----------------------------------------------------------------------------------------------------------- Amounts in Thousands Except Per BOE Data 2003 2002 2001 - ----------------------------------------------------------------------------------------------------------- Depletion and depreciation of oil and natural gas properties $ 87,842 $ 87,728 $ 66,402 Depletion and depreciation of CO2 assets 2,542 1,858 1,572 Asset retirement obligations 2,852 2,951 1,946 Depreciation of other fixed assets 1,472 1,699 1,425 - ----------------------------------------------------------------------------------------------------------- Total DD&A $ 94,708 $ 94,236 $ 71,345 =========================================================================================================== DD&A per BOE: Oil and natural gas properties $ 7.16 $ 6.98 $ 6.01 CO2 assets and other fixed assets 0.32 0.28 0.26 - ----------------------------------------------------------------------------------------------------------- Total DD&A cost per BOE $ 7.48 $ 7.26 $ 6.27 ===========================================================================================================
But for the sale of 8.3 million BOEs in early 2003, our total proved reserve quantities would have increased each of the last three years. Our proved reserves increased from 109.5 MMBOE as of December 31, 2001, to 130.7 MMBOE as of December 31, 2002, and decreased to 128.2 MMBOE as of December 31, 2003. Reserve quantities and associated production are only one side of the DD&A equation, with capital expenditures, asset retirement obligations less related salvage value, and projected future development costs making up the remainder of the calculation. During 2001, our DD&A rate increased from $4.62 per BOE in 2000 to an average rate of $6.27 per BOE ($7.19 per BOE during the second half of the year after the Matrix acquisition), primarily as result of our acquisition of Matrix in July 2001. This acquisition had a higher than average cost per BOE ($13.28 per BOE, including unevaluated property costs) because of the high natural gas price environment. Even though the reserves from this acquisition have increased by 6% (or 57% by adding back production) through December 31, 2003, our offshore Gulf of Mexico properties in the aggregate have consistently had higher finding and development costs than our other properties, contributing to the rising DD&A rate. 48 Denbury Resources Inc. Management's Discussion and Analysis of Financial Condition and Results of Operations Graph depicting our proved reserves (MMBOE)
December 31, ------------------------------------ 2001 2002 2003 ----- ----- ----- Oil 76.5 97.2 91.2 Natural Gas 33.0 33.5 37.0 ----- ----- ----- Total 109.5 130.7 128.2
During 2002, our DD&A rate increased slightly from the $7.19 DD&A rate per BOE (after the Matrix acquisition), averaging $7.26 per BOE for the year. During 2003, the fourth quarter DD&A rate increased to $8.00 per BOE, increasing the 2003 annual average to $7.48 per BOE. The higher DD&A was partially due to the higher percentage of capital expenditures spent on our offshore properties, 34% during 2003 as compared to approximately 10% during 2002, where we have a higher overall finding cost. The rate was also affected by less than hoped for drilling results in the Gulf of Mexico and Southern Louisiana, particularly in the fourth quarter, where some of our larger exploration potential failed to materialize. In contrast to our offshore properties, our tertiary operations during 2003 yielded a finding and development cost, including the net change in forecasted future development costs, of just over $5.00 per BOE, in line with our long-term expectations, helping to partially offset the higher finding and development cost of our offshore and other natural gas properties. DD&A expense on our CO2 properties increased $684,000 between 2002 and 2003 (37%) as a result of a 53% increase in our CO2 production and $22.7 million of incremental capital cost related to our CO2 properties incurred during 2003. Historically, we have provided for the estimated future costs of well abandonment and site reclamation, net of any anticipated salvage, on a unit-of-production basis. This provision was included in DD&A expense and increased each year, along with the general increase in the number of our properties, especially the acquisition of our offshore properties. Effective January 1, 2003, we adopted Statement of Financial Accounting Standards ("SFAS") No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 requires that the fair value of a liability for an asset retirement obligation be recorded in the period in which it is incurred, discounted to its present value using our credit adjusted risk-free interest rate, and that the corresponding amount be 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. If the liability is settled for an amount other than the recorded amount, the difference is recorded to the full cost pool, unless significant. The adoption of this statement resulted in a $2.6 million benefit to net income during the first quarter of 2003 and was recorded as the cumulative effect of a change in accounting principle in our Consolidated Statements of Operations. As part of this adoption, we ceased accruing for site reclamation costs, as had been our practice in the past, and recorded a $41.0 million liability representing the estimated present value of our retirement obligations, with a $34.4 million increase to oil and natural gas properties. On an undiscounted basis, we estimated our retirement obligations as of December 31, 2003 to be $82.7 million, with an estimated salvage value of $43.3 million, also on an undiscounted basis. DD&A is calculated on the increase to oil and natural gas and CO2 properties, net of estimated salvage value. We also include the accretion of discount on the asset retirement obligation in our DD&A expense. Under full cost accounting rules, we are required each quarter to perform a ceiling test calculation. We did not have any full cost pool ceiling test writedowns in 2001, 2002 or 2003 and do not expect to have any such writedowns in the foreseeable future at current commodity price levels. 49 Denbury Resources Inc. Management's Discussion and Analysis of Financial Condition and Results of Operations Income Taxes During 2001, we began to recognize the amount of enhanced oil recovery credits that we had earned to date from our tertiary projects, which totaled $5.3 million at year-end 2001. As a result of these credits, our effective tax rate for 2001 was lowered from 37% to 30.5%. Most of this provision was deferred, as we were able to offset our taxable income with our net operating losses ("NOLs"). The current portion of the tax provision was related to alternative minimum taxes that could not be offset by NOLs. Prior to 2002, our statutory tax rate was 37%. During 2002, we determined that our statutory rate had increased to 38% and adjusted our statutory provision for the year accordingly. The net effective tax rate for 2002 was lower than 38%, primarily due to the recognition of enhanced oil recovery credits, which lowered our overall tax expense. The net effective tax rate for 2003 was 33%, also lower than the effective rate primarily because of the enhanced oil recovery credits. As of December 31, 2003, we had an estimated $16.6 million of enhanced oil recovery credits to carry forward. We also had approximately $95.0 million of regular tax net operating loss carryforwards remaining to shelter our future income against regular tax and $14.9 million of alternative minimum tax net operating loss carryforwards. We were able to generate additional alternative minimum tax net operating loss carryforwards during 2003 as a result of a tax loss for the year, primarily due to the high percentage of expenditures that were intangible drilling costs, a portion of which were deducted for income tax purposes. Our overall current income tax credit for 2002 was the result of a tax law change that allowed us to offset 100% of our 2001 alternative minimum taxes with our alternative minimum tax net operating loss carryforwards. Prior to the law change, we were able to offset only 90% of our alternative minimum taxes with these carryforwards. This change resulted in a refund of cash taxes paid for 2001 and a reclassification of tax expense between current and deferred taxes, but did not impact our overall effective tax rate.
Year Ended December 31, - ------------------------------------------------------------------------------------------------------- Amounts in Thousands Except Per BOE Amounts 2003 2002 2001 - ------------------------------------------------------------------------------------------------------- Current income tax expense (benefit) $ (91) $ (406) $ 640 Deferred income tax provision 26,303 23,926 24,184 - ------------------------------------------------------------------------------------------------------- Total income tax provision $26,212 $ 23,520 $ 24,824 ======================================================================================================= Average income tax provision per BOE $ 2.07 $ 1.81 $ 2.18 Net operating loss carryforwards 94,955 84,891 100,601 Total net deferred tax asset (liability) (43,538) (21,777) (17,433) =======================================================================================================
Results of Operations on a per BOE Basis The following table summarizes the cash flow, DD&A and results of operations on a per BOE basis for the comparative periods. Each of the individual components is discussed above. 50 Denbury Resources Inc. Management's Discussion and Analysis of Financial Condition and Results of Operations
Year Ended December 31, ------------------------------------------------------------------------------------------------------------------ Per BOE Data 2003 2002 2001 ------------------------------------------------------------------------------------------------------------------- Oil and natural gas revenues $30.43 $21.17 $22.88 Gain (loss) on settlements of derivative contracts (4.91) 0.07 1.64 Lease operating expenses (7.06) (5.48) (4.84) Production taxes and marketing expenses (1.17) (0.92) (0.96) ------------------------------------------------------------------------------------------------------------------- Production netback 17.29 14.84 18.72 CO2 operating margin relating to industrial sales 0.51 0.48 0.38 General and administrative expenses (1.20) (0.96) (0.89) Net cash interest expense (1.61) (1.73) (1.74) Current income taxes and other (0.01) 0.04 (0.06) Changes in assets and liabilities 0.62 (0.38) (0.15) ------------------------------------------------------------------------------------------------------------------- Cash flow from operations 15.60 12.29 16.26 DD&A (7.48) (7.26) (6.27) Deferred income taxes (2.08) (1.84) (2.12) Amortization of derivative contracts and other non-cash hedging adjustments 0.28 0.24 (2.90) Changes in assets and liabilities, loss on early retirement of debt, change in accounting principle and other non-cash items (1.86) 0.17 - --------------------------------------------------------------------------------------------------------------------- Net income $ 4.46 $ 3.60 $ 4.97 =======================================================================================================================
Market Risk Management We finance some of our acquisitions and other expenditures with fixed and variable rate debt. These debt agreements expose us to market risk related to changes in interest rates. The following table presents the carrying and fair values of our debt, along with average interest rates. The fair value of our bank debt is considered to be the same as the carrying value because the interest rate is based on floating short-term interest rates. The fair value of the subordinated debt is based on quoted market prices. None of our debt has any triggers or covenants regarding our debt ratings with rating agencies.
Expected Maturity Dates - -------------------------------------- -------------------------------------------- ---------- ---------- Carrying Fair Amounts in Thousands 2004-2005 2006 2007 2008 Value Value - -------------------------------------- --------- ---------- ------- ----- ---------- ---------- Variable rate debt: Bank debt $ - $ 75,000 $ - $ - $ 75,000 $ 75,000 (The weighted-average interest rate on the bank debt at December 31, 2003 is 2.4%.) Fixed rate debt: Subordinated debt, net of discount $ - $ - $ - $ - $ 223,203 $ 232,875 (The interest rate on the subordinated debt is a fixed rate of 7.5%.)
We enter into various financial contracts to hedge our exposure to commodity price risk associated with anticipated future oil and natural gas production. We do not hold or issue derivative financial instruments for trading purposes. These contracts have historically consisted of price floors, collars and fixed price swaps. We generally attempt to hedge between 50% and 75% of our anticipated production each year to provide us with a reasonably certain amount of cash flow to cover most of our budgeted exploration and development expenditures without incurring significant debt, although our hedging percentage may decrease somewhat in the future, as we are stronger financially since lowering our overall debt levels relative to cash flow. When we make an acquisition, we attempt to hedge a large percentage, up to 100%, of the forecasted production for the subsequent one to three years following the acquisition in order to help provide us with a minimum return on our investment. Our recent hedging activity has been predominantly with collars, although for the COHO acquisition, we also used swaps in order to lock in the prices used in our economic forecasts. All of the mark-to-market valuations used for our financial derivatives are provided by external sources and are based on prices that are actively quoted. We manage and control market and counterparty credit risk through established internal control procedures that are reviewed on an ongoing basis. We attempt to minimize credit risk exposure to counterparties through formal credit policies, monitoring procedures, and diversification. 51 Denbury Resources Inc. Management's Discussion and Analysis of Financial Condition and Results of Operations At December 31, 2003, our derivative contracts were recorded at their fair value, which was a net liability of approximately $44.6 million, an increase of approximately $9.0 million from the $35.6 million fair value liability recorded as of December 31, 2002. This change is the result of (i) a decrease in the fair market value of our hedges due to an increase in oil and natural gas commodity prices between December 31, 2002 and December 31, 2003 and (ii) the expiration of certain derivative contracts during 2003 for which we recorded amortization expense of $1.2 million. Information regarding our current hedging positions and historical hedging results is included in Note 9 to the Consolidated Financial Statements. Based on NYMEX natural gas futures prices at December 31, 2003, we would expect to make future cash payments of $11.7 million on our natural gas commodity hedges. If natural gas futures prices were to decline by 10%, the amount we would expect to pay under our natural gas commodity hedges would decrease to $4.9 million, and if futures prices were to increase by 10% we would expect to pay $20.3 million. Based on NYMEX crude oil futures prices at December 31, 2003, we would expect to pay $25.4 million on our crude oil commodity hedges. If crude oil futures prices were to decline by 10%, we would expect to pay $14.9 million under our crude oil commodity contracts, and if crude oil futures prices were to increase by 10%, we would expect to pay $36.0 million under our crude oil commodity hedges. Critical Accounting Policies and Estimates The preparation of financial statements in accordance with generally accepted accounting principles requires that we select certain accounting policies and make certain estimates and judgments regarding the application of those policies. Our significant accounting policies are included in Note 1 to the Consolidated Financial Statements. These policies, along with the underlying assumptions and judgments by our management in their application, have a significant impact on our consolidated financial statements. Following is a discussion of our most critical accounting estimates, judgments and uncertainties that are inherent in the preparation of our financial statements. The senior management of Denbury has discussed the following critical accounting estimates with the Audit Committee of Denbury's Board of Directors. Full Cost Method of Accounting, Depletion and Depreciation and Oil and Natural Gas Reserves Businesses involved in the production of oil and natural gas are required to follow accounting rules that are unique to the oil and gas industry. We apply the full-cost method of accounting for our oil and natural gas properties. Another acceptable method of accounting for oil and gas production activities is the successful efforts method of accounting. In general, the primary differences between the two methods are related to the capitalization of costs and the evaluation for asset impairment. Under the full-cost method, all geological and geophysical costs, exploratory dry holes and delay rentals are capitalized to the full cost pool, whereas under the successful efforts method such costs are expensed as incurred. In the assessment of impairment of oil and gas properties, the successful efforts method follows the guidance of SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," under which assets are measured for impairment against the undiscounted future cash flows using commodity prices consistent with management expectations. Under the full-cost method, the full cost pool (net book value of oil and gas properties) is measured against future cash flows discounted at ten percent using commodity prices in effect at the end of the reporting period. The financial results for a given period could be substantially different depending on the method of accounting an oil and gas entity applies. In our application of full cost accounting for our oil and gas producing activities, we make significant estimates at the end of each period related to accruals for oil and gas revenues, production, capitalized costs and operating expenses. While management is not aware of any required revisions to its estimates, there will likely be future adjustments resulting from such things as changes in ownership interests, payouts, joint venture audits, re-allocations by the purchaser/pipeline, or other corrections and adjustments common in the oil and natural gas industry, many of which will require retroactive application. These types of adjustments cannot be currently estimated or determined and will be recorded in the period during which the adjustment occurs. 52 Denbury Resources Inc. Management's Discussion and Analysis of Financial Condition and Results of Operations Under full cost accounting, the estimated quantities of proved oil and natural gas reserves used to compute depletion and the related present value of estimated future net cash flows therefrom used to perform the full-cost ceiling test have a significant impact on the underlying financial statements. The process of estimating oil and natural gas reserves is very complex, requiring significant decisions in the evaluation of all available geological, geophysical, engineering and economic data. The data for a given field may also change substantially over time as a result of numerous factors, including additional development activity, evolving production history and continued reassessment of the viability of production under varying economic conditions. As a result, material revisions to existing reserve estimates may occur from time to time. Although every reasonable effort is made to ensure that the reported reserve estimates represent the most accurate assessments possible, including the hiring of independent engineers to prepare the report, the subjective decisions and variances in available data for various fields make these estimates generally less precise than other estimates included in our financial statement disclosures. Changes in commodity prices also affect our reserve quantities. For instance, between 2000 and 2001, the significant reduction in commodity prices, particularly oil, reduced the economic lives of our properties and reduced reserve quantities by 8.3 MMBOE. During 2002, both commodity prices rebounded, resulting in an increase to our reserve quantities of approximately 3.5 MMBOE. During 2003, the change related to commodity prices was virtually zero, less than in prior years, as prices were relatively high at both year-end 2002 and year-end 2003. These changes in quantities affect our DD&A rate and the combined effect of changes in quantities and commodity prices impacts our full-cost ceiling test calculation. Also, reserve quantities and their ultimate values are the primary factors in determining the borrowing base under our bank credit facility and are determined solely by our banks. There can also be significant questions as to whether reserves are sufficiently supported by technical evidence to be considered proven. In some cases our proven reserves are less than what we believe to exist because additional evidence, including production testing, is required in order to classify the reserves as proven. In other cases, properties such as certain of our potential tertiary recovery projects may not have proven reserves assigned to them primarily because we have not yet completed a specific plan for development or firmly scheduled such development. We have a corporate policy whereby we do not book proved undeveloped reserves unless the project has been committed to internally, which normally means it is scheduled in our development budget (or at least the commencement of the project is scheduled in the case of longer-term multi-year projects such as waterfloods and tertiary recovery projects). Therefore, particularly with regard to potential reserves from tertiary recovery (our CO2 operations), there is uncertainty as to whether the reserves should be included as proven or not. We also have a corporate policy whereby proved undeveloped reserves must be economic at long-term historical prices, which during the last two years are significantly less than the year-end prices used in our reserve report. This also can have the effect of eliminating certain projects in a high price environment, as was the case at year-end 2002 and year-end 2003. (See "Depletion, Depreciation and Amortization" under "Results of Operations" above for a further discussion.) All of these factors and the decisions made regarding these issues can have a significant effect on our proven reserves and thus on our DD&A rate, full-cost ceiling test calculation, borrowing base and financial statements. Asset Retirement Obligations We have significant obligations related to the plugging and abandonment of our oil and gas wells, dismantling our offshore production platforms, and the removal of equipment and facilities from leased acreage and returning such land to its original condition. SFAS No. 143 requires that we estimate the future cost of this obligation, discount it to its present value, and record a corresponding asset and liability in our Consolidated Balance Sheets. The values ultimately derived are based on many significant estimates, including the ultimate expected cost of the obligation, the expected future date of the required cash payment, and interest and inflation rates. Revisions to these estimates may be required based on changes to cost estimates, the timing of settlement, and changes in legal requirements. Any such changes that result in upward or downward revisions in the estimated obligation will result in an adjustment to the related capitalized asset and corresponding liability on a prospective basis. See Note 4 to our Consolidated Financial Statements for further discussion regarding our asset retirement obligations. 53 Denbury Resources Inc. Management's Discussion and Analysis of Financial Condition and Results of Operations Income Taxes We make certain estimates and judgments in determining our income tax expense for financial reporting purposes. These estimates and judgments occur in the calculation of certain tax assets and liabilities that arise from differences in the timing and recognition of revenue and expense for tax and financial reporting purposes. Further, we must assess the likelihood that we will be able to recover or utilize our deferred tax assets (primarily our net operating losses and enhanced oil recovery credits). If recovery is not likely, we must record a valuation allowance against such deferred tax assets for the amount we would not expect to recover, which would result in an increase to our income tax expense. As of December 31, 2003, we believe that all of our deferred tax assets recorded on our Consolidated Balance Sheet will ultimately be recovered. If our estimates and judgments change regarding our ability to utilize our deferred tax assets, our tax provision would increase in the period it is determined that recovery is not probable. See Note 7 to the Consolidated Financial Statements for further information concerning our income taxes. Hedging Activities We enter into derivative contracts (i.e., hedges) to mitigate our exposure to commodity price risk associated with future oil and natural gas production. These contracts have historically consisted of options, in the form of price floors or collars, and fixed price swaps. With the adoption of SFAS No. 133 in 2001, every derivative instrument must be recorded on the balance sheet as either an asset or a liability measured at its fair value. If the derivative does not qualify as a hedge or is not designated as a hedge, the change in fair value of the derivative is recognized currently in earnings. If the derivative qualifies for cash flow hedge accounting, the change in fair value of the derivative is recognized in other comprehensive income (equity) to the extent that the hedge is effective and in the income statement to the extent it is ineffective. We recognized ineffectiveness on our hedges of $600,000 for 2002 and $282,000 for 2003. With the significant changes in commodity prices over the last two years, the fair value of our hedges has gone from an asset valued at $23.5 million at year-end 2001 to a liability of $44.6 million as of year-end 2003. While most of this change in value is recorded in other comprehensive income, the dramatic swing in commodity prices and the corresponding effect on the fair value of our hedges can cause a dramatic change to our balance sheet. If these hedges were deemed to no longer qualify for hedge accounting at some point in time, as happened to our hedges with Enron in 2001 (see below), then the future changes in value would be reflected in our income statement. In order to qualify for hedge accounting the relationship between the hedging instruments and the hedged items must be highly effective in achieving the offset of changes in fair values or cash flows attributable to the hedged risk, both at the inception of the hedge and on an ongoing basis. We measure and compute hedge effectiveness on a quarterly basis. If a hedging instrument becomes ineffective, hedge accounting is discontinued and any deferred gains or losses on the cash flow hedge remain in accumulated other comprehensive income until the periods during which the hedges would have otherwise expired. If we determine it probable that a hedged forecasted transaction will not occur, deferred gains or losses on the hedging instrument are recognized in earnings immediately. All of our current derivative hedging instruments qualify for hedge accounting. However, during 2001 we had derivative contracts with Enron that initially qualified for hedge accounting, but their status changed when Enron filed bankruptcy, causing us to change our accounting treatment of this asset before the hedge expired. As these hedges no longer qualified for hedge accounting due to the counterparty's inability to perform, we recognized a pre-tax write-down of $24.4 million in the fourth quarter of 2001. As demonstrated by the prior year impact, these adjustments can be material to our financial statements and are unpredictable. The preparation of financial statements requires us to make other estimates and assumptions that affect the reported amounts of certain assets, liabilities, revenues and expenses during each reporting period. We believe that our estimates and assumptions are reasonable and reliable and believe that the ultimate actual results will not differ significantly from those reported; however, such estimates and assumptions are subject to a number of risks and uncertainties and such risks and uncertainties could cause the actual results to differ materially from our estimates. 54 Denbury Resources Inc. Management's Discussion and Analysis of Financial Condition and Results of Operations Recent Accounting Pronouncements SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets," became effective July 1, 2001 and January 1, 2002, respectively. It is our understanding that questions have been raised as to the proper application by registrants in the oil and gas industry of the provisions of SFAS No. 141 and SFAS No. 142. The Emerging Issues Task Force of the FASB is scheduled to address the relevant issues in its March 2004 meeting. In question is whether the acquisition of contractual mineral interests, including both proved and undeveloped, should be classified separately as "intangible assets" on the balance sheet apart from other oil and gas property costs. Currently, Denbury and virtually all other companies in the oil and gas industry include purchased contractual mineral rights in oil and gas properties on the balance sheet. Until there is further guidance regarding this issue, we will continue to include mineral interests as oil and gas properties on our Consolidated Balance Sheets for mineral interests acquired subsequent to July 1, 2001. Based on the limited guidance available at this time, we estimate that approximately $196 million at December 31, 2003, and $206 million at December 31, 2002, of acquisition costs subsequent to July 1, 2001 would be reclassified from oil and gas properties to intangible assets in our December 31, 2003 Consolidated Balance Sheets. The provisions of SFAS No. 141 and 142, if determined to be applicable to the acquisitions of mineral interests in our industry, would impact only the classification of certain amounts on our balance sheet and associated footnote disclosures, and would not impact the Company's results of operations or cash flows. Forward-Looking Information The statements contained in this Annual Report on Form 10-K that are not historical facts, including, but not limited to, statements found in this Management's Discussion and Analysis of Financial Condition and Results of Operations, are forward-looking statements, as that term is defined in Section 21E of the Securities and Exchange Act of 1934, as amended, that involve a number of risks and uncertainties. Such forward-looking statements may be or may concern, among other things, forecasted capital expenditures, drilling activity, acquisition plans and proposals and dispositions, development activities, cost savings, production efforts and volumes, hydrocarbon reserves, hydrocarbon prices, liquidity, regulatory matters, mark-to-market values, competition and long-term forecasts of production, finding cost, rates of return, estimated costs and overall economics and other variables surrounding our tertiary operations and future plans. 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 information is based upon management's current plans, expectations, estimates and assumptions and is subject to a number of risks and uncertainties that could significantly affect current plans, anticipated actions, the timing of such actions and 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, inaccurate cost estimates, fluctuations in the prices of goods and services, the uncertainty of drilling results and reserve estimates, operating hazards, acquisition risks, requirements for capital, general economic conditions, competition and government regulations, unexpected delays, as well as the risks and uncertainties discussed in this annual 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. This Annual Report is not deemed to be "soliciting material" or to be "filed" with the Securities and Exchange Commission or subject to the liabilities of Section 18 of the Securities Act of 1934, except with respect to pages 2, 9-10, 12-13, 17-18, 20-21, 23-25, 27-31, and 33-86 which are incorporated into the Company's Annual Report on Form 10-K. 55 INDEPENDENT AUDITORS' REPORT To the Stockholders of Denbury Resources Inc. We have audited the accompanying consolidated balance sheets of Denbury Resources Inc. and Subsidiaries (the "Company") as of December 31, 2003 and 2002, and the related consolidated statements of operations, cash flows, stockholders' equity and comprehensive income for each of the three years in the period ended December 31, 2003. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2003 and 2002, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2003 in conformity with accounting principles generally accepted in the United States of America. As discussed in Note 1 to the financial statements under the caption "Asset Retirement Obligations", the Company changed its method of accounting for asset retirement obligations in 2003 as required by Statement of Financial Accounting Standards No. 143, "Accounting for Asset Retirement Obligations". /s/ Deloitte & Touche LLP Dallas, TX March 8, 2004 56
Denbury Resources Inc. Consolidated Balance Sheets Amounts in Thousands DECEMBER 31, --------------------------- 2003 2002 ---------- ---------- Assets Current assets Cash and cash equivalents.......................................... $ 24,188 $ 23,940 Accrued production receivables..................................... 33,944 34,458 Related party accrued production receivable - Genesis.............. 6,927 3,334 Trade and other receivables, net of allowance of $238 and $207..... 18,080 16,846 Deferred tax asset................................................. 25,016 49,886 ---------- ---------- Total current assets....................................... 108,155 128,464 ---------- ---------- Property and equipment Oil and natural gas properties (using full cost accounting) Proved ......................................................... 1,409,579 1,245,896 Unevaluated..................................................... 46,065 45,736 CO2 properties and equipment....................................... 85,467 62,370 Less accumulated depletion and depreciation........................ (696,366) (609,917) ---------- ---------- Net property and equipment.................................. 844,745 744,085 ---------- ---------- Investment in Genesis................................................. 7,450 2,224 Other assets.......................................................... 22,271 20,519 ---------- ---------- Total assets............................................... $ 982,621 $ 895,292 ========== ========== Liabilities and Stockholders' Equity Current liabilities Accounts payable and accrued liabilities........................... $ 62,349 $ 49,281 Oil and gas production payable..................................... 22,215 17,309 Derivative liabilities............................................. 42,010 29,289 ---------- ---------- Total current liabilities.................................. 126,574 95,879 ---------- ---------- Long-term liabilities Long-term debt..................................................... 298,203 344,889 Asset retirement obligations....................................... 41,711 6,845 Derivative liabilities............................................. 2,603 6,281 Deferred revenue - Genesis......................................... 21,468 - Deferred tax liability............................................. 68,555 71,663 Other.............................................................. 2,305 2,938 ---------- ---------- Total long-term liabilities................................ 434,845 432,616 ---------- ---------- Commitments and contingencies (Note 10) Stockholders' equity Preferred stock, $.001 par value, 25,000,000 shares authorized; none issued and outstanding................................... - - Common stock, $.001 par value, 100,000,000 shares authorized; 54,190,042, and 53,539,329 shares issued and outstanding at December 31, 2003 and December 31, 2002, respectively......... 54 54 Paid-in capital in excess of par................................... 401,709 395,906 Retained earnings (accumulated deficit)............................ 46,656 (9,875) Accumulated other comprehensive loss............................... (27,113) (19,288) Treasury stock, at cost, 8,162 shares at December 31, 2003......... (104) - ---------- ---------- Total stockholders' equity................................. 421,202 366,797 ---------- ---------- Total liabilities and stockholders' equity................. $ 982,621 $ 895,292 ========== ========== See Notes to Consolidated Financial Statements.
57 Denbury Resources Inc. Consolidated Statements of Operations
YEAR ENDED DECEMBER 31, ------------------------------------- Amounts in Thousands Except Per Share Amounts 2003 2002 2001 -------- -------- -------- Revenues Oil, natural gas and related product sales Unrelated parties........................................ $336,521 $251,972 $260,398 Related party - Genesis.................................. 48,942 22,922 - CO2 sales and transportation fees Unrelated parties........................................ 7,512 7,580 5,210 Related party - Genesis.................................. 676 - - Gain (loss) on settlements of derivative contracts.......... (62,210) 932 18,654 Interest income and other................................... 1,573 1,746 849 -------- -------- -------- Total revenues............................................. 333,014 285,152 285,111 -------- -------- -------- Expenses Lease operating expenses.................................... 89,439 71,188 55,049 Production taxes and marketing expenses..................... 14,819 11,902 10,963 CO2 operating expenses...................................... 1,710 1,400 891 General and administrative.................................. 15,189 12,426 10,174 Interest ................................................... 23,201 26,833 22,335 Loss on early retirement of debt............................ 17,629 - - Depletion, depreciation and accretion....................... 94,708 94,236 71,345 Loss on Enron related assets................................ - - 25,164 Amortization of derivative contracts and other non-cash hedging adjustments....................................... (3,578) (3,093) 7,816 -------- -------- -------- Total expenses............................................. 253,117 214,892 203,737 -------- -------- -------- Equity in net income of Genesis.................................. 256 55 - -------- -------- -------- Income before income taxes....................................... 80,153 70,315 81,374 Income tax provision (benefit) Current income taxes........................................ (91) (406) 640 Deferred income taxes....................................... 26,303 23,926 24,184 -------- -------- -------- Income before cumulative effect of change in accounting principle................................................. 53,941 46,795 56,550 -------- -------- -------- Cumulative effect of change in accounting principle, net of income taxes of $1,600.................................... 2,612 - - -------- -------- -------- Net income ...................................................... $ 56,553 $ 46,795 $ 56,550 ======== ======== ======== Net income per share - basic Income before cumulative effect of change in accounting principle...................................... $ 1.00 $ $0.88 $ 1.15 Cumulative effect of change in accounting principle......... 0.05 - - -------- -------- -------- Net income per share - basic................................ $ 1.05 $0.88 $ 1.15 ======== ======== ======== Net income per share - diluted Income before cumulative effect of change in accounting principle...................................... $ 0.97 $ 0.86 $ 1.12 Cumulative effect of change in accounting principle......... 0.05 - - -------- -------- -------- Net income per common share - diluted....................... $ 1.02 $ 0.86 $ 1.12 ======== ======== ======== Weighted average common shares outstanding Basic....................................................... 53,881 53,243 49,325 Diluted..................................................... 55,464 54,365 50,361
See Notes to Consolidated Financial Statements. 58 Denbury Resources Inc. Consolidated Statements of Cash Flows
YEAR ENDED DECEMBER 31, ------------------------------------- Amounts in Thousands 2003 2002 2001 -------- -------- -------- Cash flow from operating activities: Net income .................................................... $ 56,553 $ 46,795 $ 56,550 Adjustments needed to reconcile to net cash flow provided by operations: Depletion, depreciation and accretion...................... 94,708 94,236 71,345 Deferred income taxes...................................... 26,303 23,926 24,184 Deferred income - Genesis.................................. (322) - - Loss on early retirement of debt........................... 17,629 - - Non-cash loss on Enron related assets...................... - - 25,164 Amortization of derivative contracts and other non-cash hedging adjustments...................................... (3,578) (3,093) 7,816 Amortization of debt issue costs and other................. 1,121 2,701 1,742 Cumulative effect of change in accounting principle........ (2,612) - - Changes in assets and liabilities relating to operations: Accrued production receivable.............................. (3,079) (14,381) 19,399 Trade and other receivables................................ (1,234) 15,078 (17,622) Derivative assets and liabilities.......................... - 8,427 (28,043) Other assets............................................... 7 133 863 Accounts payable and accrued liabilities................... 8,862 (17,217) 23,560 Oil and gas production payable............................. 4,906 3,869 (2,213) Other liabilities.......................................... (1,649) (874) 2,302 -------- -------- -------- Net cash provided by operating activities......................... 197,615 159,600 185,047 -------- -------- -------- Cash flow used for investing activities: Oil and natural gas expenditures............................... (146,596) (99,273) (170,109) Acquisitions of oil and gas properties......................... (11,848) (56,364) (97,871) Investment in Genesis.......................................... (5,026) (2,170) - Acquisition of CO2 assets and capital expenditures............. (22,673) (16,445) (45,555) Net purchases of other assets.................................. (2,192) (3,688) (1,799) Increase in restricted cash.................................... (848) (909) (3,496) Net proceeds from CO2 production payment - Genesis............. 23,895 - - Proceeds from sales of oil and gas properties.................. 29,410 7,688 - -------- -------- -------- Net cash used for investing activities............................ (135,878) (171,161) (318,830) -------- -------- -------- Cash flow from financing activities: Bank repayments................................................ (160,000) (40,000) (79,130) Bank borrowings................................................ 85,000 49,130 146,000 Repayment of 9% subordinated debt, including redemption premium...................................................... (209,000) - - Issuance of 7.5% subordinated debt, net of discount............ 223,054 - - Issuance of 9% subordinated debt, net of discount.............. - - 68,528 Issuance of common stock....................................... 5,537 3,594 2,594 Costs of debt financing........................................ (4,812) (719) (3,026) Other.......................................................... (1,268) - 20 -------- -------- -------- Net cash provided by (used for) financing activities.............. (61,489) 12,005 134,986 -------- -------- -------- Net increase in cash and cash equivalents......................... 248 444 1,203 Cash and cash equivalents at beginning of year.................... 23,940 23,496 22,293 -------- -------- -------- Cash and cash equivalents at end of year.......................... $ 24,188 $ 23,940 $ 23,496 ======== ======== ========
See Notes to Consolidated Financial Statements. 59
Denbury Resources Inc. Consolidated Statements of Changes in Stockholders' Equity Accumulated Other Paid-In Retained Compre- Capital In Earnings hensive Total Common Stock Excess of (Accumulated Income Treasury Stock Stockholders' ($.001 Par Value) Par Deficit) (Loss) (at cost) Equity ---------------------- --------- --------- --------- ---------------- ------------- Dollar Amounts in Thousands Shares Amount Shares Amount ---------- ------ ------ ------ Balance - December 31, 2000......... 45,979,981 $46 $329,339 $(113,220) $ - - $ - $216,165 ---------- ------ -------- --------- --------- ------ ------ -------- Issued pursuant to employee stock purchase plan............... 189,485 - 1,546 - - - - 1,546 Issued pursuant to employee stock option plan................. 209,600 - 1,048 - - - - 1,048 Issued pursuant to directors' compensation plan................. 7,829 - 63 - - - - 63 Issued in Matrix acquisition........ 6,569,930 7 59,188 - - - - 59,195 Tax benefit from stock options...... - - 373 - - - - 373 Unrealized gain on cash flow hedge.. - - - - 14,228 - - 14,228 Net income.......................... - - - 56,550 - - - 56,550 ---------- ------ -------- --------- --------- ------- ------ -------- Balance - December 31, 2001......... 52,956,825 53 391,557 (56,670) 14,228 - - 349,168 ---------- ------ -------- --------- --------- ------- ------ -------- Issued pursuant to employee stock purchase plan..................... 203,893 - 1,928 - - - - 1,928 Issued pursuant to employee stock option plan................. 370,120 1 1,665 - - - - 1,666 Issued pursuant to directors' compensation plan................. 8,491 - 82 - - - - 82 Tax benefit from stock options...... - - 674 - - - - 674 Unrealized loss on cash flow hedge.. - - - - (33,516) - - (33,516) Net income.......................... - - - 46,795 - - - 46,795 ---------- ------ -------- --------- --------- ------- ------ -------- Balance - December 31, 2002......... 53,539,329 54 395,906 (9,875) (19,288) - - 366,797 ---------- ------ -------- --------- --------- ------- ------ -------- Repurchase of common stock.......... - - - - - 100,000 (1,276) (1,276) Issued pursuant to employee stock purchase plan................... 94,968 - 1,174 (22) - (91,838) 1,172 2,324 Issued pursuant to employee stock option plan....... ............. 550,090 - 3,213 - - - - 3,213 Issued pursuant to directors' compensation plan............... 5,655 - 69 - - - - 69 Tax benefit from stock options...... - - 1,347 - - - - 1,347 Unrealized loss on cash flow hedge.. - - - - (7,825) - - (7,825) Net income.......................... - - - 56,553 - - - 56,553 ---------- ----- -------- --------- --------- ------- ------ -------- Balance - December 31, 2003......... 54,190,042 $54 $401,709 $ 46,656 $ (27,113) 8,162 $(104) $421,202 ========== ====== ======== ========= ========= ======= ====== ======== See Notes to Consolidated Financial Statements.
60
Denbury Resources Inc. Consolidated Statements of Comprehensive Income Year Ended December 31, ------------------------------------ Amounts in Thousands 2003 2002 2001 ------- ------- ------- Net income......................................................................... $56,553 $46,795 $56,550 Other comprehensive income (loss), net of tax: Reclassification adjustments related to settlements of derivative contracts, net of tax of $22,173, ($1,758), and ($5,172), respectively... 36,177 (2,868) (8,806) Change in fair value of derivative contracts, net of tax of ($26,969), ($18,784), and $12,934, respectively......................... (44,002) (30,648) 22,022 Change in accounting principle for derivative contracts, net of tax of $594...................................................... - - 1,012 ------- ------- ------- Comprehensive income............................................................... $48,728 $13,279 $70,778 ======= ======= =======
See Notes to Consolidated Financial Statements. 61 Denbury Resources Inc. Notes to Consolidated Financial Statements Note 1. Significant Accounting Policies Organization and Nature of Operations Denbury Resources Inc. is a Delaware corporation, organized under Delaware General Corporation Law, engaged in the acquisition, development, operation and exploration of oil and natural gas properties. Denbury has one primary business segment, which is the exploration, development and production of oil and natural gas in the U.S. Gulf Coast region. We also own the rights to a natural source of carbon dioxide ("CO2" ) reserves that we use for injection in our tertiary oil recovery operations. We also sell some of the CO2 we produce to third parties for various industrial uses. Principles of Reporting and Consolidation The consolidated financial statements herein have been prepared in accordance with generally accepted accounting principles ("GAAP") and include the accounts of Denbury and its subsidiaries, all of which are wholly owned. In 2002, one of our subsidiaries acquired the general partner of Genesis Energy, L.P. ("Genesis"), a publicly traded master limited partnership. During 2003, we acquired additional partnership units, increasing our ownership interest in Genesis from 2% to 9.25%. We account for our ownership interest in Genesis under the equity method of accounting. Even though we have significant influence over the limited partnership in our role as general partner, because our control is limited by the general partnership agreement we do not consolidate Genesis. See Note 3 for more information regarding our related party transactions with Genesis and summary financial information. All material intercompany balances and transactions have been eliminated. Effective December 29, 2003, Denbury Resources Inc. changed its corporate structure to a holding company format. The purposes of creating the holding company structure were to better reflect the operating practices and methods of Denbury, to improve its economics, and to provide greater administrative and operational flexibility. As part of this restructure, Denbury Resources Inc. (predecessor entity) merged into a newly formed limited liability company and survived as Denbury Onshore, LLC, a Delaware limited liability company and an indirect subsidiary of the newly formed holding company, Denbury Holdings, Inc. Denbury Holdings, Inc. subsequently assumed the name Denbury Resources Inc. (new entity). The reorganization was structured as a tax free reorganization to Denbury's stockholders and all outstanding capital stock of the original public company was automatically converted into the identical number of and type of shares of the new public holding company. Stockholders' ownership interests in the business did not change as a result of the new structure and shares of the Company remain publicly traded under the same symbol (DNR) on the New York Stock Exchange. The new parent holding company is co-obligor (or guarantor, as appropriate) regarding the payment of principal and interest on Denbury's outstanding debt securities. Oil and Natural Gas Operations a) Capitalized costs. We follow the full-cost method of accounting for oil and natural gas properties. Under this method, all costs related to acquisitions, exploration and development of oil and natural gas reserves are capitalized and accumulated in a single cost center representing our activities, which are undertaken exclusively in the United States. Such costs include lease acquisition costs, geological and geophysical expenditures, lease rentals on undeveloped properties, costs of drilling both productive and non-productive wells and general and administrative expenses directly related to exploration and development activities and do not include any costs related to production, general corporate overhead or similar activities. Proceeds received from disposals are credited against accumulated costs except when the sale represents a significant disposal of reserves, in which case a gain or loss is recognized. b) Depletion and depreciation. The costs capitalized, including production equipment, are depleted or depreciated on the unit-of-production method, based on proved oil and natural gas reserves as determined by independent petroleum engineers. Oil and natural gas reserves are converted to equivalent units based upon the relative energy content which is six thousand cubic feet of natural gas to one barrel of crude oil. 62 Denbury Resources Inc. Notes to Consolidated Financial Statements c) Asset Retirement Obligations. On January 1, 2003, we adopted the provisions of Statement of Financial Accounting Standards ("SFAS") No. 143, "Accounting for Asset Retirement Obligations." In general, our future asset retirement obligations relate to future costs associated with plugging and abandonment of our oil and natural gas wells, dismantling our offshore production platforms, and removal of equipment and facilities from leased acreage and returning such land to its original condition. SFAS No. 143 requires that the fair value of a liability for an asset retirement obligation be recorded in the period in which it is incurred, discounted to its present value using our credit adjusted risk-free interest rate, and a corresponding amount capitalized by increasing the carrying amount of the related long-lived asset. The liability is accreted each period, and the capitalized cost is depreciated over the useful life of the related asset. Revisions to estimated retirement obligations will result in an adjustment to the related capitalized asset and corresponding liability. If the liability is settled for an amount other than the recorded amount, the difference is recorded to the full cost pool, unless significant. Prior to the adoption of this new standard, we recognized a provision for our asset retirement obligations each period as part of our depletion and depreciation calculation, based on the unit-of-production method. See Note 4 for more information regarding our change in accounting related to the adoption of SFAS No. 143. d) Ceiling test. The net capitalized costs of oil and natural gas properties are limited to the lower of unamortized cost or the cost center ceiling. The cost center ceiling is defined as the sum of (i) the present value of estimated future net revenues from proved reserves (discounted at 10%), based on unescalated period-end oil and natural gas prices; (ii) plus the cost of properties not being amortized; (iii) plus the lower of cost or estimated fair value of unproved properties included in the costs being amortized, if any; (iv) less related income tax effects. The cost center ceiling test is prepared quarterly. e) Joint interest operations. Substantially all of our oil and natural gas exploration and production activities are conducted jointly with others. These financial statements reflect only Denbury's proportionate interest in such activities and any amounts due from other partners are included in trade receivables. f) Proved Reserves. See Note 12 for information on our proved oil and natural gas reserves and the basis on which they are recorded. Revenue Recognition Revenue is recognized at the time oil and natural gas is produced and sold. Any amounts due from purchasers of oil and natural gas are included in accrued production receivables. We follow the "sales method" of accounting for our oil and natural gas revenue, whereby we recognize sales revenue on all oil or natural gas sold to our purchasers regardless of whether the sales are proportionate to our ownership in the property. A receivable or liability is recognized only to the extent that we have an imbalance on a specific property greater than the expected remaining proved reserves. As of December 31, 2003 and 2002, our aggregate oil and natural gas imbalances were not material to our consolidated financial statements. We recognize revenue and expenses of purchased producing properties at the time we assume effective control, commencing from either the closing or purchase agreement date, depending on the underlying terms and agreements. We follow the same methodology in reverse when we sell properties by recognizing revenue and expenses of the sold properties until either the closing or purchase agreement date, depending on the underlying terms and agreements. Derivative Instruments and Hedging Activities We enter into derivative contracts to mitigate our exposure to commodity price risk associated with future oil and natural gas production. These contracts have historically consisted of options, in the form of price floors or collars, and fixed price swaps. On January 1, 2001, we adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended. Upon adoption of SFAS No. 133, we recorded a $1.6 million increase in our derivative assets to reflect the fair value of our derivative instruments in place at that time and a corresponding increase to accumulated 63 Denbury Resources Inc. Notes to Consolidated Financial Statements other comprehensive income of approximately $1.0 million, net of tax, in the transition adjustment. This transition adjustment was reclassified out of accumulated other comprehensive income to earnings over the remainder of 2001. Derivative financial instruments are recorded on the balance sheet as either an asset or a liability measured at fair value. If the derivative does not qualify as a hedge or is not designated as a hedge, the change in fair value of the derivative is recognized currently in earnings. If the derivative qualifies for hedge accounting, the change in fair value of the derivative is recognized either currently in earnings or deferred in other comprehensive income (equity) depending on the type of hedge and to what extent the hedge is effective. All of our current derivative hedging instruments are cash flow hedges. In order to qualify for hedge accounting the relationship between the hedging instruments and the hedged items must be highly effective in achieving the offset of changes in fair values or cash flows attributable to the hedged risk, both at the inception of the hedge and on an ongoing basis. We measure hedge effectiveness on a quarterly basis. Hedge accounting is discontinued prospectively when a hedging instrument becomes ineffective. We assess hedge effectiveness based on total changes in the fair value of options used in cash flow hedges rather than changes of intrinsic value only. As a result, changes in the entire fair value of option contracts are deferred in accumulated other comprehensive income, to the extent they are effective, until the hedged transaction is completed. If a hedge becomes ineffective, any deferred gains or losses on the cash flow hedge remain in accumulated other comprehensive income until the underlying production related to the derivative hedge has been delivered. If it is determined probable that a hedged forecasted transaction will not occur, and the hedge is not re-designated, deferred gains or losses on the hedging instrument are recognized in earnings immediately. Receipts and payments resulting from settlements of derivative hedging instruments are recorded in "Gain (loss) on settlements of derivative contracts" included in revenues in the Consolidated Statements of Operations. We apply Derivative Implementation Group Issue G20 in accounting for our net purchased puts and collars, which allows the amortization of the cost of net purchased options over the period of the hedge. We record this amortization and any gains or losses resulting from hedge ineffectiveness in "Amortization of derivative contracts and other non-cash hedging adjustments" under expenses in the Consolidated Statements of Operations. Denbury's hedging activities are further discussed in Note 9. Financial Instruments with Off-Balance-Sheet Risk and Concentrations of Credit Risk Our financial instruments that are exposed to concentrations of credit risk consist primarily of cash equivalents and trade and accrued production receivables in addition to the derivative hedging instruments discussed above. Our cash equivalents represent high-quality securities placed with various investment grade institutions. This investment practice limits our exposure to concentrations of credit risk. Our trade and accrued production receivables are dispersed among various customers and purchasers; therefore, concentrations of credit risk are limited. Also, most of our significant purchasers are large companies with excellent credit ratings. If customers are considered a credit risk, letters of credit are the primary security obtained to support lines of credit. We attempt to minimize our credit risk exposure to the counterparties of our derivative hedging contracts through formal credit policies, monitoring procedures and diversification. There are no margin requirements with the counterparties of our derivative contracts. CO2 Operations We own and produce CO2 reserves that are used for our own tertiary oil recovery operations, and in addition, we sell a portion to third party industrial users. We record revenue from our sales of CO2 to third parties when it is produced and sold. CO2 used for our own tertiary oil recovery operations is not recorded as revenue in the Consolidated Statements of Operations. Expenses related to the production of CO2 are allocated between volumes sold to third parties and volumes used for our own use. The expenses related to third party sales are recorded in "CO2 operating expenses" and the expenses related to our own uses are recorded in "Lease operating expenses" in the Consolidated Statements of Operations. We capitalize acquisitions and the costs of exploring and developing CO2 reserves. The costs capitalized are 64 Denbury Resources Inc. Notes to Consolidated Financial Statements depleted or depreciated on the unit-of-production method, based on proved CO2 reserves as determined by independent engineers. We evaluate our CO2 assets for impairment by comparing the expected future revenues from these assets to their carrying value. Cash Equivalents We consider all highly liquid investments to be cash equivalents if they have maturities of three months or less at the date of purchase. Restricted Cash At December 31, 2003 and 2002, we had approximately $9.5 million and $8.7 million, respectively, of restricted cash held in escrow for future site reclamation costs. This restricted cash is included in "Other Assets" in the Consolidated Balance Sheets. Net Income Per Common Share Basic net income per common share is computed by dividing the net income attributable to common stockholders by the weighted average number of shares of common stock outstanding during the period. Diluted net income per common share is calculated in the same manner, but also considers the impact to net income and common shares for the potential dilution from stock options, stock warrants and any other outstanding convertible securities. For each of the three years in the period ended December 31, 2003, there were no adjustments to net income for purposes of calculating basic and diluted net income per common share. The following is a reconciliation of the weighted average shares used in the basic and diluted net income per common share computations:
Year Ended December 31, -------------------------------------- Amounts in Thousands 2003 2002 2001 ------ ------ ------ Weighted average common shares - basic.......... 53,881 53,243 49,325 Effect of diluted securities: Stock options................................ 1,583 1,122 1,036 ------ ------ ------ Weighted average common shares - diluted........ 55,464 54,365 50,361 ====== ====== ======
We did not include in the diluted shares outstanding calculation 1.0 million options in 2003, 1.7 million options in 2002, and 1.8 million options in 2001 because their inclusion would be antidilutive as their exercise prices exceeded the average market price of our common stock during the respective periods. Stock Option Compensation We issue stock options to all of our employees under our stock option plan, which is described more fully in Note 8. We account for our stock option plan utilizing the recognition and measurement principles of Accounting Principles Board Opinion 25, "Accounting for Stock Issued to Employees," and its related interpretations. Under these principles, no stock-based employee compensation expense is reflected in net income as long as the stock options have an exercise price equal to the underlying common stock on the date of grant. The following table illustrates the effect on net income and net income per common share if we had applied the fair value provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," as amended by SFAS No. 148, in accounting for our stock option plan. 65 Denbury Resources Inc. Notes to Consolidated Financial Statements
Year Ended December 31, ---------------------------------- Amounts in Thousands Except Per Share Amounts 2003 2002 2001 --------- --------- --------- Net Income, as reported ..................................................... $ 56,553 $ 46,795 $ 56,550 Less: stock-based compensation expense applying fair value based method, net of related tax effects.................................. 4,114 2,866 2,763 --------- --------- --------- Pro forma net income................................................ $ 52,439 $ 43,929 $ 53,787 ========= ========= ========= Net income per common share: As reported: Basic................................................................ $ 1.05 $ 0.88 $ 1.15 Diluted.............................................................. 1.02 0.86 1.12 Pro forma: Basic................................................................ $ 0.97 $ 0.83 $ 1.09 Diluted.............................................................. 0.97 0.83 1.09
The weighted average fair value of options granted using the Black-Scholes option pricing model and the weighted average assumptions used in determining those fair values are as follows:
2003 2002 2001 -------- -------- ------- Weighted average fair value of options granted.. $ 6.02 $ 4.17 $ 5.19 Risk-free interest rate......................... 2.94% 4.05% 4.64% Expected life................................... 5 years 5 years 5 years Expected volatility............................. 59.6% 61.4% 63.4% Dividend yield.................................. - - -
Income Taxes Income taxes are accounted for using the liability method under which deferred income taxes are recognized for the future tax effects of temporary differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities using the enacted statutory tax rates in effect at year-end. The effect on deferred taxes for a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance for deferred tax assets is recorded when it is more likely than not that the benefit from the deferred tax asset will not be realized. Use of Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amount of certain assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during each reporting period. Management believes its estimates and assumptions are reasonable; however, such estimates and assumptions are subject to a number of risks and uncertainties that may cause actual results to differ materially from such estimates. Significant estimates underlying these financial statements include (i) the fair value of financial derivative instruments, (ii) the estimated quantities of proved oil and natural gas reserves used to compute depletion of oil and natural gas properties and the related present value of estimated future net cash flows therefrom, (iii) accruals related to oil and gas production and revenues, capital expenditures and lease operating expenses, (iv) the estimated costs and timing of future asset retirement obligations, and (v) estimates made in the calculation of income taxes. While management is not aware of any significant revisions to any of its estimates, there will likely be future revisions to its estimates resulting from matters such as changes in ownership interests, payouts, joint venture audits, re-allocations by purchasers or pipelines, or other corrections and adjustments common in the oil and gas industry, many of which require retroactive application. These types of adjustments cannot be currently estimated and will be recorded in the period during which the adjustment occurs. 66 Denbury Resources Inc. Notes to Consolidated Financial Statements Reclassifications Certain prior period amounts have been reclassified to conform with the current year presentation. Such reclassifications had no impact on our reported net income, current assets, total assets, current liabilities, total liabilities or stockholders' equity. Recent Accounting Pronouncements SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets," became effective July 1, 2001 and January 1, 2002, respectively. It is our understanding that questions have been raised as to the proper application by registrants in the oil and gas industry of the provisions of SFAS No. 141 and SFAS No. 142. The Emerging Issues Task Force of the FASB is scheduled to address the relevant issues in its March 2004 meeting. In question is whether the acquisition of contractual mineral interests, including both proved and undeveloped, should be classified separately as "intangible assets" on the balance sheet apart from other oil and gas property costs. Currently, Denbury and virtually all other companies in the oil and gas industry include purchased contractual mineral rights in oil and gas properties on the balance sheet. Until there is further guidance regarding this issue, we will continue to include mineral interests as oil and gas properties in our Consolidated Balance Sheets for mineral interests acquired subsequent to July 1, 2001. Based on the limited guidance available at this time, we estimate that approximately $196 million at December 31, 2003, and $206 million at December 31, 2002, of acquisition costs subsequent to July 1, 2001 would be reclassified from oil and gas properties to intangible assets in our December 31, 2003 Consolidated Balance Sheets. The provisions of SFAS No. 141 and 142, if determined to be applicable to the acquisitions of mineral interests in our industry, would impact only the classification of certain amounts on our balance sheet and associated footnote disclosures, and would not impact the Company's results of operations or cash flows. In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities" and amended the Interpretation in December 2003. FIN 46 requires an investor with a majority of the variable interests (primary beneficiary) in a variable interest entity (VIE) to consolidate the entity and also requires majority and significant variable interest entities to provide certain disclosures. An entity is considered a VIE if (i) the entity lacks sufficient equity to carry on its principal operations, (ii) the equity owners of the entity cannot make decisions about the entity's activities, or (iii) the entity's equity neither absorbs losses nor benefits from gains. Development stage entities that have sufficient equity to finance their activities and entities that are businesses, as defined in FIN 46, are not considered to be VIEs. The provisions of FIN 46 were effective immediately for VIEs created after January 15, 2003, and we have applied the remaining provisions of FIN 46 for the period ending December 31, 2003. We do not have any VIEs that would require consolidation or any significant exposure to VIEs that would require disclosure. Note 2. Property Transactions COHO Gulf Coast Properties In August 2002, we acquired the Gulf Coast properties of COHO Energy, Inc., auctioned in the U.S. Bankruptcy Court in Dallas, Texas. Our net purchase price was $48.2 million and included nine fields, eight of which are located in Mississippi and one in Texas. At December 31, 2002, these properties had reserves of approximately 15.1 million barrels of oil and net production of approximately 4,000 barrels of oil per day. The Mississippi fields included interests in the Brookhaven, Laurel, Martinville, Soso and Summerland Fields, with such interests representing operational control with working interests in excess of 90%, plus interests in the smaller Bentonia, Cranfield and Glazier Fields. In February 2003, we sold Laurel Field, acquired in the COHO acquisition, for $25.9 million and other consideration which included an interest in Atchafalaya Bay Field (where we already owned an interest) and seismic over that area. At December 31, 2002, Laurel Field had approximately 7.4 MMBbls of proved reserves. In March 2003, we sold the Bentonia and Glazer fields for approximately $1.6 million. The proceeds from the sale of Laurel Field were used to reduce our bank debt. 67 Denbury Resources Inc. Notes to Consolidated Financial Statements Matrix Oil and Gas, Inc. On July 10, 2001, we completed the acquisition of Matrix Oil & Gas, Inc.("Matrix"), an independent oil and gas company based in Covington, Louisiana. Under the merger agreement, we paid a total of approximately $157.4 million, comprised of $98.2 million (62%) in cash and $59.2 million (38%) in the form of 6.6 million shares of Denbury's common stock, including post-closing adjustments. The purchase price was allocated to the net assets acquired based on estimated fair market values at the date of acquisition, with the predominant amount allocated to oil and gas properties. As part of our purchase price allocations, we recorded a deferred income tax liability of $53.1 million to reflect the difference between the book and carryover tax basis of the acquired properties, and we allocated $30.0 million of the purchase price as unevaluated property to reflect the significant probable and possible reserves that were identified in the acquisition. Based on subsequent drilling activity and our ongoing evaluation of the undeveloped prospects, we have reclassified $11.6 million of the original $30.0 million to developed property as of December 31, 2003. Denbury's financial statements include the operations of Matrix from July 1, 2001. CO2 Acquisition On February 2, 2001, we purchased certain CO2 reserves, production and associated assets from a division of Airgas, Inc., for $42.0 million. The acquisition included ten producing CO2 wells and production facilities located near Jackson, Mississippi, and a 183-mile, 20-inch pipeline that is currently transporting CO2 to our tertiary oil recovery operations, as well as to other commercial customers. Note 3. Related Party Transactions - Genesis On May 14, 2002, a newly formed subsidiary of Denbury acquired Genesis Energy, L.L.C. (which was susequently converted to Genesis Energy, Inc.), the general partner of Genesis, a publicly traded master limited partnership, for total consideration, including expenses and commissions, of approximately $2.2 million. Genesis has two primary lines of business: crude oil gathering and marketing and pipeline transportation, primarily in Mississippi, Texas, Alabama and Florida. In November 2003, through our subsidiary general partner, we purchased an additional 689,000 partnership common units and 14,000 general partner units of Genesis for $7.15 per unit, with an aggregate purchase price of approximately $5.0 million. With these additional units, our ownership interest increased to approximately 9.25% (2.0% general partner ownership and 7.25% limited partner ownership). We are accounting for our 9.25% ownership in Genesis under the equity method of accounting as we have significant influence over the limited partnership; however, our control is limited under the limited partnership agreement and therefore we do not consolidate Genesis. Our equity in Genesis' net income for 2003 was $256,000 and for 2002 was $55,000, representing 2% of Genesis' net income for the period from May 14, 2002 through October 31, 2003 and 9.25% 68 Denbury Resources Inc. Notes to Consolidated Financial Statements of Genesis' net income for the period from November 1, 2003 through December 31, 2003. Genesis Energy, Inc., the general partner of which we own 100%, has guaranteed the bank debt of Genesis, which was $7.0 million as of December 31, 2003, and also included $21.6 million in letters of credit of which $12.5 million are for Denbury's benefit to secure purchases of oil from Denbury. There are no guarantees by Denbury or any of its other subsidiaries of the debt of Genesis or of Genesis Energy, Inc. Our investment in Genesis of $7.2 million exceeded our percentage of net equity in the limited partnership at the time of acquisition by approximately $2.2 million, which represents goodwill and is not subject to amortization. Genesis has historically been a purchaser of our crude oil and we anticipate future purchases of our crude oil production by Genesis. At December 31, 2003 and 2002, we had a production receivable from Genesis of $6.9 million and $3.3 million, respectively. For the year ended December 31, 2003, we recorded oil sales to Genesis of $48.9 million. Our oil sales to Genesis from the period May 14, 2002 through December 31, 2002 were $22.9 million. Denbury received other miscellaneous payments from Genesis during 2003, including $120,000 in director fees for certain executive officers of Denbury that are board members of Genesis, and $57,000 in pro rata dividend distributions from Genesis. CO2 Volumetric Production Payment In November 2003, we sold 167.5 Bcf of CO2 to Genesis for $24.9 million ($23.9 million as adjusted for interim cash flows from the September 1, 2003 effective date and transaction costs) under a volumetric production payment ("VPP"). This sale included the assignment of three of our existing long-term commercial CO2 supply agreements with our industrial customers, which represented approximately 60% of our then current industrial CO2 sales volumes. Pursuant to the VPP, Genesis may take up to 52.5 MMcf/d through 2009, 43.0 MMcf/d from 2010 through 2012, and 25.2 MMcf/d to the end of the term. We have recorded the net proceeds as deferred revenue and will recognize such revenue as CO2 is delivered during the term of the VPP. At December 31, 2003, $23.6 million was recorded as deferred income ($2.1 million in current liabilities and $21.5 million long term). During 2003, we recognized deferred revenue of $322,000 for deliveries under the VPP. We will continue to provide Genesis with certain processing and transportation services in connection with this agreement for a fee of $0.16 per Mcf of CO2 delivered to their industrial customers. Summarized financial information of Genesis Energy, L.P.
Year Ended Year Ended December 31, December 31, Amounts in Thousands 2003 2002 ----------- ---------- Revenues...................................... $ 657,897 $ 652,628 Cost of sales................................. 644,157 636,042 Other expenses................................ 14,159 15,576 Income from discontinued operations........... 13,741 4,082 ---------- --------- Net income ................................ $ 13,322 $ 5,092 ========== ========= December 31, December 31, 2003 2002 ----------- ---------- Current assets................................ $ 88,211 $ 92,097 Non-current assets............................ 58,904 45,440 ---------- --------- Total assets............................... $ 147,115 $ 137,537 ========== ========= Current liabilities........................... $ 87,244 $ 96,220 Non-current liabilities....................... 7,000 5,500 Partners' capital............................. 52,871 35,817 ---------- --------- Total liabilities and partners' capital.... $ 147,115 $ 137,537 ========== =========
69 Denbury Resources Inc. Notes to Consolidated Financial Statements Note 4. Asset Retirement Obligations On January 1, 2003, we adopted the provisions of SFAS No. 143, "Accounting for Asset Retirement Obligations." In general, our future asset retirement obligations relate to future costs associated with plugging and abandonment of our oil and natural gas wells, dismantling our offshore production platforms, and removal of equipment and facilities from leased acreage and returning such land to its original condition. SFAS 143 requires that the fair value of a liability for an asset retirement obligation be recorded in the period in which it is incurred, discounted to its present value using our credit adjusted risk-free interest rate, and a corresponding amount capitalized by increasing the carrying amount of the related long-lived asset. The liability is accreted each period, and the capitalized cost is depreciated over the useful life of the related asset. Prior to the adoption of this new standard, we recognized a provision for our asset retirement obligations each period as part of our depletion and depreciation calculation, based on the unit-of-production method. The adoption of SFAS No. 143 on January 1, 2003, required us to record (i) a $41.0 million liability for our future asset retirement obligations (an increase of $34.1 million in our liability for asset retirement obligations that we had recorded at December 31, 2002), (ii) a $34.4 million increase in oil and natural gas properties, (iii) a $3.9 million decrease in accumulated depreciation and depletion, and (iv) a $2.6 million gain as a cumulative effect adjustment of a change in accounting principle, net of taxes. The following pro forma data summarizes Denbury's net income and net income per common share as if we had applied the provisions of SFAS No. 143 in prior periods, and as if we had removed the first quarter 2003 cumulative effect adjustment for the adoption of SFAS No. 143:
Year Ended December 31, --------------------------------------- Amounts in Thousands Except Per Share Amounts 2003 2002 2001 ---------- ---------- --------- Net income, as reported ........................ $ 56,553 $ 46,795 $ 56,550 Pro forma adjustments to reflect retroactive adoption of SFAS 143........................ (2,612) 473 503 ---------- ---------- --------- Pro forma net income....................... $ 53,941 $ 47,268 $ 57,053 ========== ========== ========= Net income per common share: As reported: Basic...................................... $ 1.05 $ 0.88 $ 1.15 Diluted.................................... 1.02 0.86 1.12 Pro forma: Basic...................................... $ 1.00 $ 0.89 $ 1.16 Diluted.................................... 0.97 0.87 1.13
The following table summarizes the changes in our asset retirement obligations for the year ended December 31, 2003.
Year Ended Amounts in Thousands December 31, 2003 ----------------- Beginning asset retirement obligation, as of December 31, 2002........... $ 6,845 Cumulative effect adjustment for SFAS No. 143, January 1, 2003........ 34,110 Liabilities incurred during period.................................... 3,405 Liabilities settled during period..................................... (1,007) Liabilities sold during period........................................ (2,393) Accretion expense..................................................... 2,852 ----------------- Ending asset retirement obligation....................................... $43,812 =================
At December 31, 2003, $2.1 million of our asset retirement obligation was classified in "Accounts payable and accrued liabilities" under current liabilities in our Consolidated Balance Sheet. We have escrow accounts that are legally restricted for certain of our asset retirement obligations. The balances of these escrow accounts were $9.5 million at December 31, 2003, and $8.7 million at December 31, 2002, and are included in "Other assets" in our Consolidated Balance Sheets. If we 70 Denbury Resources Inc. Notes to Consolidated Financial Statements had adopted SFAS No. 143 as of January 1, 2002, we estimate that our asset retirement obligations at that date would have been $34.1 million, based on the same assumptions used in our calculation of our obligations at January 1, 2003. Note 5. Property and Equipment
December 31, Amounts in Thousands ----------------------------------- 2003 2002 -------------- -------------- Oil and natural gas properties: Proved properties................................... $ 1,409,579 $ 1,245,896 Unevaluated properties.............................. 46,065 45,736 -------------- -------------- Total........................................... 1,455,644 1,291,632 Accumulated depletion and depreciation................ (690,395) (606,488) -------------- -------------- Net oil and natural gas properties................. 765,249 685,144 -------------- -------------- CO2 properties........................................ 85,467 62,370 Accumulated depletion and depreciation................ (5,971) (3,429) -------------- -------------- Net CO2 properties................................. 79,496 58,941 -------------- -------------- Net property and equipment............................ $ 844,745 $ 744,085 ============== ==============
Unevaluated Oil and Natural Gas Properties Excluded From Depletion Under full cost accounting, we may exclude certain unevaluated costs from the amortization base pending determination of whether proved reserves have been discovered or impairment has occurred. A summary of the unevaluated properties excluded from oil and natural gas properties being amortized at December 31, 2003 and 2002 and the year in which they were incurred follows:
December 31, 2003 December 31, 2002 --------------------------------------------- -------------------------------------------- Costs Incurred During: Costs Incurred During: --------------------------------- --------------------------------- Amounts in Thousands 2003 2002 2001 Total 2002 2001 2000 Total --------- ---------- ---------- --------- ---------- ----------- -------- --------- Property acquisition costs.. $ 3,640 $ 6,301 $ 21,169 $ 31,110 $ 7,459 $ 27,128 $ 228 $ 34,815 Exploration costs........... 6,528 5,291 3,136 14,955 7,526 2,938 457 10,921 --------- ---------- ---------- --------- ---------- ----------- -------- --------- Total................... $ 10,168 $ 11,592 $ 24,305 $ 46,065 $ 14,985 $ 30,066 $ 685 $ 45,736 ========= ========== ========== ========= ========== =========== ======== =========
Costs are transferred into the amortization base on an ongoing basis as the projects are evaluated and proved reserves established or impairment determined. Until we are able to determine whether there are any proved reserves attributable to the above costs, we are not able to assess the future impact on the amortization rate. As of December 31, 2003, approximately $25.1 million of the total unevaluated property balance relates to offshore properties, of which of $18.4 million relates to the original $30.0 million classified as unevaluated properties in the Matrix acquisition. These costs will be transferred into the amortization base as the undeveloped areas are tested. We anticipate that the majority of this activity should be completed over the next two to three years. Note 6. Notes Payable and Long-Term Indebtedness
December 31, ------------------------ Amounts in Thousands 2003 2002 -------- -------- Senior bank loan.............................................. $ 75,000 $150,000 7.5 % Senior Subordinated Notes due 2013...................... 225,000 - 9% Senior Subordinated Notes due 2008......................... - 125,000 9% Series B Senior Subordinated Notes due 2008................ - 75,000 Discount on Senior Subordinated Notes......................... (1,797) (5,111) -------- -------- Total debt............................................... $298,203 $344,889 ======== ========
71 Denbury Resources Inc. Notes to Consolidated Financial Statements Senior Bank Loan In December 2003, we entered into a Fourth Amended and Restated Credit Agreement with our banks to restate the existing credit agreement for our internal reorganization to a holding-company-organizational structure (see Note 1). There were no significant changes to the agreement except to incorporate the new legal entities into the agreement. Earlier in 2003, we amended certain provisions of our credit agreement to (i) increase the percentage of our oil and natural gas production that we are allowed to hedge, setting a maximum of 85% of our forecasted production from our proved reserves for the current year (as defined in the amendment and may include up to 18 months), a maximum of 70% of forecasted production for the subsequent year, a maximum of 55% of forecasted production for the third year and a maximum of 40% of forecasted production for the fourth year, and (ii) to allow us to borrow up to $20 million in a bond issue from a Mississippi governmental authority in order to receive certain exemptions or reductions in sales and ad valorem taxes on certain qualified expenditures in Mississippi through May 2005. Any borrowings under this bond program will be purchased by the banks in our credit facility, will become part of our outstanding borrowings under our credit line and will accrue interest and be repaid on the same basis as our bank line. The borrowing base remained at $220 million, leaving a borrowing capacity of approximately $145 million as of December 31, 2003. The bank credit facility is secured by substantially all of our producing oil and natural gas properties and contains several restrictions including, among others: (i) a prohibition on the payment of dividends, (ii) a requirement for a minimum equity balance, (iii) a requirement to maintain positive working capital, as defined, (iv) a minimum interest coverage test and (v) a prohibition of most debt and corporate guarantees. We were in compliance with all of our bank covenants as of December 31, 2003. Our bank credit facility provides for a semi-annual redetermination of the borrowing base on April 1 and October 1. At the April 2001 redetermination, our borrowing base was increased from $150 million to $200 million and was further increased at the October 2001 redetermination to $220 million. It has not changed since that time. Borrowings under the credit facility are generally in tranches that can have maturities up to one year. Interest on any borrowings are based on LIBOR plus an applicable margin as determined by the borrowings outstanding. The facility matures in April 2006. As of December 31, 2003, we had $75 million outstanding under the facility, at a weighted average interest rate of 2.4%, $820,000 of letters of credit outstanding and a borrowing base of $220 million. The next scheduled redetermination of the borrowing base will be as of April 1, 2004, based on December 31, 2003 assets and proved reserves. Subordinated Debt Issuance of 7.5% Senior Subordinated Notes due 2013 On March 25, 2003, we issued $225 million of 7.5% Senior Subordinated Notes due 2013. The notes were priced at 99.135% of par and we used most of our $218.4 million of net proceeds from the offering, after underwriting and issuance costs, to retire our existing $200 million of 9% Senior Subordinated Notes due 2008, including the Series B notes (see "Redemption of 9% Senior Subordinated Notes due 2008 (Including Series B Notes)" below). The notes mature on April 1, 2013 and interest on the notes is payable each April 1 and October 1. We may redeem the notes at our option beginning April 1, 2008 at the following redemption prices: 103.75% after April 1, 2008, 102.5% after April 1, 2009, 101.25% after April 1, 2010, and 100% after April 1, 2011 and thereafter. In addition, prior to April 1, 2006, we may redeem up to 35% of the notes at a redemption price of 107.5% with net cash proceeds from a stock offering. The indenture under which the notes were issued is essentially the same as the indenture covering our previously outstanding 9% notes. The indenture contains certain restrictions on our ability to incur additional debt, pay dividends on our common stock, make investments, create liens on our assets, engage in transactions with our affiliates, transfer or sell assets, consolidate or merge, or sell substantially all of our assets. The notes are not subject to any sinking fund requirements. All of our significant subsidiaries fully and unconditionally guarantee this debt. 72 Denbury Resources Inc. Notes to Consolidated Financial Statements In connection with our internal reorganization to a holding-company-organizational structure (see Note 1), we entered into a First Supplemental Indenture dated December 29, 2003, which did not require the consent of the holders of the 7.5% Senior Subordinated Notes due 2013. The supplemental indenture made Denbury Resources Inc. and Denbury Onshore, LLC, co-obligors of this debt. All of our significant subsidiaries continue to fully and unconditionally guarantee this debt. There were no other significant changes as part of the amendment. Redemption of 9% Senior Subordinated Notes due 2008 (Including Series B Notes) On April 16, 2003, we redeemed our $200 million of 9% Senior Subordinated Notes due 2008 at an aggregate cost of $209.0 million, including a $9.0 million call premium. As a result of this early redemption, we recorded a before-tax charge to earnings in the second quarter of 2003 of $17.6 million ($11.5 million after income tax), which included the $9.0 million call premium and the write-off of the remaining discount and debt issuance costs associated with these notes. Indebtedness Repayment Schedule As of December 31, 2003, our indebtedness, excluding the discount on our senior subordinated debt, is repayable over the next five years and thereafter as follows: Amounts in Thousands 2004....................... $ - 2005....................... - 2006....................... 75,000 2007....................... - 2008....................... - Thereafter................. 225,000 ---------- Total indebtedness .... $ 300,000 ========== Note 7. Income Taxes
Our income tax provision (benefit) is as follows: Year Ended December 31, ----------------------------------- Amounts in Thousands 2003 2002 2001 ------ ------ ------- Current income tax expense (benefit) Federal.......................................... $ (91) $ (419) $ 614 State............................................ - 13 26 ------- ------- ------ Total current income tax expense (benefit)..... (91) (406) 640 ------- ------- ------ Deferred income tax expense Federal.......................................... 23,864 21,822 22,637 State............................................ 2,439 2,104 1,547 ------- ------- ------- Total deferred income tax expense ............... 26,303 23,926 24,184 ------- ------- ------- Total income tax expense ...................... $26,212 $23,520 $24,824 ======= ======= =======
Our current income tax expense in 2001 was for alternative minimum taxes that could not be offset by our alternative minimum tax net operating losses, and conversely, our current income tax benefit in 2002 is primarily related to tax law changes in 2002 that allowed us to receive a refund of our alternative minimum taxes paid for 2001. At December 31, 2003, we had net operating loss carryforwards for U.S. federal income tax purposes of $95.0 million and $14.9 million for alternative minimum tax purposes. As a result of the acquisition of Matrix and other prior ownership changes, the utilization of some of our net operating loss carryforwards is subject to limitations imposed by the Internal 73 Denbury Resources Inc. Notes to Consolidated Financial Statements Revenue Code of 1986. However, we do not expect such limitations to have an effect on our ability to use these net operating loss carryforwards. Our net operating loss carryforwards are scheduled to expire as follows:
Amounts in Thousands Income Alternative Tax Minimum Tax ------- ----------- Year 2018 ................................. $54,698 $ - 2019 ................................. 21,356 12,054 2020 ................................. 10,187 2,154 2021 ................................. 8,467 213 2022 ................................. 30 - 2023 ................................. 217 524
In 2001, we began to recognize a benefit for the amount of enhanced oil recovery credits earned from our tertiary recovery projects. The total credits earned to date are approximately $16.6 million. These credits begin to expire in 2020. Deferred income taxes relate to temporary differences based on tax laws and statutory rates in effect at the December 31, 2003 and 2002 balance sheet dates. At December 31, 2003 and 2002, our deferred tax assets and liabilities were as follows:
December 31, ------------------------ Amounts in Thousands 2003 2002 --------- --------- Deferred tax assets: Loss carryforwards................................ $ 35,998 $ 32,266 Tax credit carryover.............................. 978 1,069 Enhanced oil recovery credit carryforwards........ 16,578 9,927 Derivative hedging contracts...................... 16,617 11,822 Other............................................. 90 79 --------- --------- Total deferred tax assets................... 70,261 55,163 --------- --------- Deferred tax liabilities: Property and equipment............................ (112,200) (76,940) Asset retirement obligations...................... (1,600) - --------- --------- Total deferred tax liabilities............... (113,800) (76,940) --------- --------- Total net deferred tax liability................... $ (43,539) $ (21,777) ========= =========
Our income tax provision varies from the amount that would result from applying the federal statutory income tax rate to income before income taxes as follows:
Year Ended December 31, ------------------------------------ Amounts in Thousands 2003 2002 2001 ------- ------- ------- Income tax provision calculated using the federal statutory income tax rate.................... $28,054 $24,587 $28,481 State income taxes...................................... 2,398 2,121 1,623 Enhanced oil recovery credits........................... (4,687) (3,394) (5,280) Other................................................... 447 206 - ------- ------- ------- Total income tax expense .......................... $26,212 $23,520 $24,824 ======= ======= =======
Note 8. Stockholders' Equity Authorized We are authorized to issue 100 million shares of common stock, par value $.001 per share, and 25 million shares of preferred stock, par value $.001 per share. The preferred shares may be issued in one or more series with rights and conditions determined by the board of directors. 74 Denbury Resources Inc. Notes to Consolidated Financial Statements Stock Repurchase Plan In August 2003, we adopted a stock repurchase plan ("Plan") to purchase shares of our common stock on the NYSE in order for such repurchased shares to be reissued to our employees who participate in Denbury's Employee Stock Purchase Plan (see Employee Stock Purchase Plan below). The Plan provides for purchases through an independent broker of 50,000 shares of Denbury's common stock per fiscal quarter for a period of approximately twelve months, or a total of 200,000 shares, beginning August 13, 2003 and ending on July 31, 2004. Purchases are to be made at prices and times determined at the discretion of the independent broker, provided however that no purchases may be made during the last ten business days of a fiscal quarter. During 2003, we purchased 100,000 shares at an average cost of $12.77 per share. On September 30, 2003 and December 31, 2003, we reissued 48,013 and 43,825, respectively, of these shares under Denbury's Employee Stock Purchase Plan. Stock Option Plan As of December 31, 2003, we had a total of 8,195,587 shares of common stock authorized for issuance pursuant to our Stock Option Plan, of which 1,040,530 shares were available for issuance. Under the terms of the plan, incentive and non-qualified options may be issued to officers, key employees and consultants. Options generally become exercisable over a four-year vesting period with the specific terms of vesting determined by the board of directors at the time of grant. The options expire over terms not to exceed ten years from the date of grant, 90 days after termination of employment or permanent disability or one year after the death of the optionee. The options are granted at the fair market value at the time of grant, which is generally defined as the average closing price of our common stock for the ten trading days prior to issuance. The plan is administered by the Stock Option Committee of Denbury's board of directors. The following is a summary of our stock option activity:
Year Ended December 31, ---------------------------------------------------------------------------------- 2003 2002 2001 -------------------------- ------------------------- ------------------------ Weighted Weighted Weighted Number Average Number Average Number Average of Options Price of Options Price of Options Price ---------- -------- ---------- -------- ---------- -------- Outstanding at beginning of year.. 4,997,475 $ 8.46 4,616,333 $ 8.40 3,802,122 $8.03 Granted........................... 956,384 11.33 921,341 7.50 1,222,141 9.00 Exercised......................... (550,090) 5.77 (370,120) 4.51 (209,600) 5.00 Forfeited......................... (29,567) 7.72 (170,079) 10.30 (198,330) 8.53 --------- ------ --------- ------ --------- ----- Outstanding at end of year........ 5,374,202 $ 9.25 4,997,475 $ 8.46 4,616,333 $8.40 ========= ====== ========= ====== ========= ===== Exercisable at end of year........ 2,311,834 $10.21 2,267,497 $10.26 1,858,072 $9.49 ========= ====== ========= ====== ========= =====
The following is a summary of stock options outstanding at December 31, 2003:
Options Outstanding Options Exercisable ----------------------------------------- ---------------------------- Weighted Number Average Weighted Number Weighted of Options Remaining Average of Options Average Outstanding Contractual Exercise Exercisable at Exercise Range of Exercise Prices at 12/31/03 Life Price 12/31/03 Price --------------------------- ----------- ----------- -------- -------------- -------- $ 3.77 - 5.50 1,203,973 5.4 $ 4.13 736,784 $ 4.23 $ 5.51 - 8.00 957,217 7.1 7.06 175,258 6.94 $ 8.01 - 11.50 2,176,331 7.7 10.09 411,252 9.42 $11.51 - 14.50 602,679 3.5 13.34 554,538 13.38 $14.51 - 22.25 434,002 3.8 18.38 434,002 18.38 --------- --- ---------- --------- ------- 5,374,202 6.3 $ 9.25 2,311,834 $ 10.21 ========= === ========== ========= =======
75 Denbury Resources Inc. Notes to Consolidated Financial Statements Employee Stock Purchase Plan We have a Stock Purchase Plan that is authorized to issue up to 1,750,000 shares of common stock to all full-time employees. As of December 31, 2003, there are 406,466 authorized shares remaining to be issued under the plan. In accordance with the plan, employees may contribute up to 10% of their base salary and Denbury matches 75% of their contribution. The combined funds are used to purchase previously unissued Denbury common stock at its current market value at the end of each quarter. We recognize compensation expense for the 75% company matching portion, which totaled $997,000, $822,000 and $666,000 for the years ended December 31, 2003, 2002 and 2001, respectively. This plan is administered by the Stock Purchase Plan Committee of Denbury's board of directors. 401(k) Plan Denbury offers a 401(k) Plan to which employees may contribute tax deferred earnings subject to Internal Revenue Service limitations. Up to 3% of an employee's compensation, as defined by the plan, is matched by Denbury at 100% and an employee's contribution between 3% and 6% of compensation is matched by Denbury at 50%. Denbury's match is vested immediately. During 2003, 2002 and 2001, Denbury's matching contributions were $1,067,000, $884,000 and $670,000, respectively, to the 401(k) Plan. Note 9. Derivative Hedging Contracts We enter into various financial contracts to hedge our exposure to commodity price risk associated with anticipated future oil and natural gas production. We do not hold or issue derivative financial instruments for trading purposes. These contracts have historically consisted of price floors, collars and fixed price swaps. We generally attempt to hedge up to 75% of our anticipated production each year (depending on our overall debt level) to provide us with a reasonably certain amount of cash flow to cover a majority of our budgeted exploration and development expenditures without incurring significant debt. When we make an acquisition, we attempt to hedge a large percentage, up to 100%, of the forecasted production for the subsequent one to three years following the acquisition in order to help provide us with a minimum return on our investment. Our recent hedging activity has been predominantly with collars, although for the 2002 COHO acquisition, we also used swaps in order to lock in the prices used in our economic forecasts. All of the mark-to-market valuations used for our financial derivatives are provided by external sources and are based on prices that are actively quoted. We manage and control market and counterparty credit risk through established internal control procedures, which are reviewed on an ongoing basis. We attempt to minimize credit risk exposure to counterparties through formal credit policies, monitoring procedures, and diversification. The following is a summary of the net gain (loss) representing cash receipts and payments on our hedge settlements:
Year Ended December 31, ------------------------------------------ Amounts in Thousands 2003 2002 2001 -------- ------ ------- Oil Hedge Contracts $(20,337) $ (598) $ 1,925 Gas Hedge Contracts (41,873) 1,530 16,729 -------- ------ ------- Net gain (loss) $(62,210) $ 932 $18,654 ======== ====== =======
Some of our derivative contracts require us to pay a premium that we amortize over the contract periods. This expense is included in "Amortization of derivative contracts and other non-cash hedging adjustments" in our Consolidated Statements of Operations. For the years ended December 31, 2003 and 2002, we recorded premium amortization expense of $1.2 million and $9.7 million, respectively. Also, for the year ended December 31, 2003, we reclassified $5.1 million related to our former Enron hedges (discussed below) out of accumulated other comprehensive income into income and recorded hedge ineffectiveness of $282,000 which is also included in "Amortization of derivative contracts and other non-cash hedging adjustments." 76 Denbury Resources Inc. Notes to Consolidated Financial Statements Loss on Enron Hedges In conjunction with the acquisition of Matrix in July 2001, we purchased commodity hedges to protect our investment. These hedges, in the form of price floors, covered nearly all of the forecasted production from the acquired properties through the end of 2003 at floor prices ranging from $3.75 to $4.25 per MMBtu. Due to the falling natural gas prices in the latter half of 2001, we collected approximately $12.7 million on these hedges. The price floors relating to 2002 and 2003 were purchased from Enron Corporation, which filed bankruptcy in December 2001. We sold our bankruptcy claim against Enron in February 2002 for net proceeds of approximately $9.2 million. In total, we collected approximately $21.9 million from the price floors relating to the Matrix acquisition, resulting in a net cash gain of approximately $3.9 million over the cost of the floors. Because of the rise in natural gas prices since December 2001, we would not have collected anything on the price floors relating to 2003, even if Enron had not filed bankruptcy, as the natural gas NYMEX prices during 2003 were above $3.75 (the floor price for 2003). We calculate that our total cash loss due to Enron's bankruptcy was approximately $5.4 million, representing the difference between what we would have collected during 2002 and the $9.2 million that we obtained from selling the bankruptcy claim. When Enron filed for bankruptcy during the fourth quarter of 2001, these Enron hedges ceased to qualify for hedge accounting treatment, which changed the accounting treatment for those hedges as of that point in time as required by SFAS No. 133. The result is that any future changes in the current market value of these assets must be reflected in the income statement and any remaining accumulated other comprehensive income at the time of the accounting change must be recognized over the original expected life of the hedges. To adjust the value of the Enron hedges down to the market value at December 31, 2001, which was determined to be the amount that we received from the sale of our claims in February 2002, we recorded a pre-tax write-down of $24.4 million in the fourth quarter of 2001. We also had a claim against Enron for production receivables relating to November 2001 natural gas production that was also sold in February 2002, which resulted in an overall total pre-tax loss on our Enron related assets of $25.2 million. The after-tax balance in accumulated other comprehensive income related to these Enron hedges was approximately $11.6 million at the point they no longer qualified for hedge accounting. Accordingly, we recognized pre-tax income attributable to the Enron hedges during 2002 of approximately $13.4 million and recognized pre-tax income during 2003 of approximately $5.1 million. The three-year total pre-tax net loss on the Enron hedges was approximately $5.9 million, which approximates the difference between the amount collected and paid for the Enron portion of the associated price floors. Hedging Contracts at December 31, 2003
Crude Oil Contracts: - -------------------- NYMEX Contract Prices Per Bbl ------------------------------------------------------ Collar Prices Estimated -------------------- Fair Value at Type of Contract and Period Bbls/d Swap Price Floor Price Floor Ceiling December 31, 2003 - --------------------------- ------ ---------- ----------- ----- ------- ----------------- Swap Contracts Jan. 2004 - Dec. 2004 2,500 $22.89 $ - $ - $ - $ (6,625) Jan. 2004 - Dec. 2004 4,500 23.00 - - - (11,746) Jan. 2004 - Dec. 2004 2,500 23.08 - - - (6,453)
Natural Gas Contracts: - ---------------------- NYMEX Contract Prices Per MMBtu ------------------------------------------------------ Collar Prices Estimated -------------------- Fair Value at Type of Contract and Period MMBtu/d Swap Price Floor Price Floor Ceiling December 31, 2003 - --------------------------- ------- ---------- ----------- ----- ------- ----------------- Swap Contracts Jan. 2004 - Dec. 2004 30,000 $ - $ - $3.50 $4.45 $(12,527) Jan. 2004 - Dec. 2004 15,000 - - 3.00 5.87 (2,285) Jan. 2004 - Dec. 2004 15,000 - - 3.00 5.82 (2,374) Jan. 2005 - Dec. 2005 15,000 - - 3.00 5.50 (2,603)
77 Denbury Resources Inc. Notes to Consolidated Financial Statements At December 31, 2003, our derivative contracts were recorded at their fair value, which was a net liability of $44.6 million. To the extent our hedges are considered effective, this fair value liability, net of income taxes, is included in Accumulated other comprehensive income (loss) reported under Stockholders' equity in our Consolidated Balance Sheets. The balance in accumulated other comprehensive loss of $27.1 million at December 31, 2003, represents the deficit in the fair market value of our derivative contracts as compared to the cost of our hedges, net of income taxes. Of the $27.1 million in accumulated other comprehensive loss as of December 31, 2003, $25.5 million relates to current hedging contracts that will expire within the next 12 months and $1.6 million relates to contracts that expire after December 31, 2004. Note 10. Commitments and Contingencies We have operating leases for the rental of office space, equipment, and vehicles that totaled $16.6 million, $1.7 million and $1.6 million for the years ended December 31, 2003, 2002 and 2001, respectively. In August 2003, we entered into a $6.0 million lease financing arrangement for certain equipment at our CO2 processing facility at Mallalieu Field. This lease term is for seven years with monthly payments of approximately $81,000 per month. At December 31, 2003, long-term commitments for these items require the following future minimum rental payments: Amounts in Thousands 2004.........................$ 2,664 2005......................... 2,784 2006......................... 2,786 2007......................... 2,781 2008......................... 2,670 Thereafter .................. 2,936 ------- Total lease commitments $16,621 ======= Long-term contracts require us to deliver CO2 to our industrial CO2 customers at various contracted prices, plus we have a CO2 delivery obligation to Genesis related to a VPP entered into during 2003 (see "Genesis Transactions" above). Based upon the maximum amounts deliverable as stated in the contracts and the volumetric production payment, we estimate that we may be obligated to deliver up to 412 Bcf of CO2 to these customers over the next 18 years; however, based on the current level of deliveries, our commitment would likely be reduced to approximately 310 Bcf. The maximum volume required in any given year is approximately 97 MMcf/d, although based on our current level of deliveries, this would likely be reduced to approximately 70 MMcf/d. Given the size of our proven CO2 reserves at December 31, 2003 (approximately 1.6 Tcf before deducting approximately 162.6 Bcf for the VPP), our current production capabilities and our projected levels of CO2 usage for our own tertiary flooding program, we believe that we can meet these delivery obligations. Denbury is subject to various possible contingencies that arise primarily from interpretation of federal and state laws and regulations affecting the oil and natural gas industry. Such contingencies include differing interpretations as to the prices at which oil and natural gas sales may be made, the prices at which royalty owners may be paid for production from their leases, environmental issues and other matters. Although management believes that it has complied with the various laws and regulations, administrative rulings and interpretations thereof, adjustments could be required as new interpretations and regulations are issued. In addition, production rates, marketing and environmental matters are subject to regulation by various federal and state agencies. We are involved in various lawsuits, claims and regulatory proceedings incidental to our businesses. In the opinion of management, the outcome of such matters will not have a material adverse effect on our consolidated financial position, results of operations or cash flows. 78 Denbury Resources Inc. Notes to Consolidated Financial Statements Note 11. Supplemental Information Significant Oil and Natural Gas Purchasers Oil and natural gas sales are made on a day-to-day basis or 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 our operations. For the year ended December 31, 2003, we had two significant purchasers that each accounted for 10% or more of our oil and natural gas revenues: Hunt Refining (15%) and Genesis (12%). For the year ended December 31, 2002, two purchasers each accounted for 10% or more of our natural gas revenues: Hunt Refining (14%) and Genesis (11%). For the year ended December 31, 2001, four purchasers each accounted for 10% or more of our oil and natural gas revenues: Conoco (14%), Hunt Refining (13%), EOTT Energy (12%), and Dynegy (12%). Accounts Payable and Accrued Liabilities
Year Ended December 31, ----------------------- Amounts in Thousands 2003 2002 ------- ------- Accounts payable............................. $33,321 $26,243 Accrued exploration and development costs.... 7,546 3,984 Accrued interest............................. 4,272 6,248 Advances payable............................. 4,430 5,951 Accrued compensation......................... 2,806 3,633 Asset retirement obligations - current....... 2,101 - Deferred revenues - Genesis................. 2,105 - Other........................................ 5,768 3,222 ------- ------- Total.................................... $62,349 $49,281 ======= =======
Supplemental Cash Flow Information
Year Ended December 31, ------------------------------- Amounts in Thousands 2003 2002 2001 ------- ------- ------ Interest paid........................... $23,525 $24,636 $17,451 Income taxes paid (refunded)............ 184 (1,304) 2,482
In 2001, in connection with our acquisition of Matrix, we recorded non-cash increases to property and equipment resulting from the issuance of common stock in the amount of $59.2 million and the recording of deferred taxes in the amount of $53.1 million. Fair Value of Financial Instruments
December 31, ----------------------------------------------- 2003 2002 ---------------------- ---------------------- Carrying Estimated Carrying Estimated Amounts in Thousands Amount Fair Value Amount Fair Value -------- ---------- -------- ---------- Senior bank debt.................................. $ 75,000 $ 75,000 $150,000 $150,000 7.5% Senior Subordinated notes due 2013........... 223,203 232,875 - - 9% Senior Subordinated Notes due 2008............. - - 125,000 129,113 9% Series B Senior Subordinated Notes due 2008.... - - 69,889 77,468
As of December 31, 2003 and 2002, the carrying value of our bank debt approximated fair value based on the fact that our bank debt is subject to short-term floating interest rates that approximated the rates available to us at those periods. The fair values of our senior subordinated notes are based on quoted market prices. We have other financial instruments consisting 79 Denbury Resources Inc. Notes to Consolidated Financial Statements primarily of cash, cash equivalents, short-term receivables and payables that approximate fair value due to the nature of the instrument and the relatively short maturities. Note 12. Supplemental Oil and Natural Gas Disclosures (unaudited) Costs Incurred The following table summarizes costs incurred and capitalized in oil and natural gas property acquisition, exploration and development activities. Property acquisition costs are those costs incurred to purchase, lease, or otherwise acquire property, including both undeveloped leasehold and the purchase of reserves in place. Exploration costs include costs of identifying areas that may warrant examination and examining specific areas that are considered to have prospects containing oil and natural gas reserves, including costs of drilling exploratory wells, geological and geophysical costs and carrying costs on undeveloped properties. Development costs are incurred to obtain access to proved reserves, including the cost of drilling development wells, and to provide facilities for extracting, treating, gathering and storing the oil and natural gas. Costs incurred in oil and natural gas activities were as follows:
Year Ended December 31, -------------------------------------- Amounts in Thousands 2003 2002 2001 -------- -------- -------- Property acquisitions: Proved (1)..................... $ 22,307 $ 56,364 $127,066 Unevaluated.................... 3,955 4,342 37,051 Exploration........................ 34,050 29,985 36,836 Development........................ 98,132 64,946 126,222 Asset retirement obligations....... 3,405 - - -------- -------- -------- Total costs incurred (2)..... $161,849 $155,637 $327,175 ======== ======== ========
(1) Excludes deferred taxes recorded in the acquisition of Matrix of $53.1 million in 2001. (2) Capitalized general and administrative costs that directly relate to exploration and development activities were $5.5 million, $5.3 million and $4.1 million for the years ended December 31, 2003, 2002 and 2001, respectively. Oil and Natural Gas Operating Results Results of operations from oil and natural gas producing activities, excluding corporate overhead and interest costs, were as follows:
Year Ended December 31, ------------------------------------------- Amounts in Thousands 2003 2002 2001 -------- -------- -------- Oil, natural gas and related product sales......................... $385,463 $274,894 $260,398 Gain (loss) on settlements of derivative contracts................. (62,210) 932 18,654 -------- -------- -------- Total revenues............................................... 323,253 275,826 279,052 -------- -------- -------- Lease operating costs.............................................. 89,439 71,188 55,049 Production taxes and marketing expenses............................ 14,819 11,902 10,963 Depletion, depreciation and accretion.............................. 90,694 90,679 68,348 Loss on Enron related assets....................................... - - 25,164 Amortization of derivative contracts and other non-cash hedging adjustments.................................................... (3,578) (3,093) 7,816 -------- -------- -------- Net operating income.......................................... 131,879 105,150 111,712 Income tax provision............................................... 45,427 36,563 36,053 -------- -------- -------- Results of operations from oil and natural gas producing activities $ 86,452 $ 68,587 $ 75,659 ======== ======== ======== Depletion, depreciation and accretion per BOE...................... $ 7.16 $ 6.98 $ 6.01 ======== ======== ========
80 Denbury Resources Inc. Notes to Consolidated Financial Statements Oil and Natural Gas Reserves Net proved oil and natural gas reserve estimates for all years presented were prepared by DeGolyer and MacNaughton, independent petroleum engineers located in Dallas, Texas. The reserves were prepared in accordance with guidelines established by the Securities and Exchange Commission and, accordingly, were based on existing economic and operating conditions. Oil and natural gas prices in effect as of the reserve report date were used without any escalation. (See "Standardized Measure of Discounted Future Net Cash Flows and Changes Therein Relating to Proved Oil and Natural Gas Reserves" below for a discussion of the effect of the different prices on reserve quantities and values.) Operating costs, production and ad valorem taxes and future development costs were based on current costs with no escalation. We have a corporate policy whereby we do not book proved undeveloped reserves until we have committed to perform the required development operations, the majority of which we generally expect to commence within the next year. We also have a corporate policy whereby proved undeveloped reserves must be economic at prices significantly lower than the year-end prices used in our reserve report, at prices closer to historical averages. There are numerous uncertainties inherent in estimating quantities of proved reserves and in projecting the future rates of production and timing of development expenditures. The following reserve data represents estimates only and should not be construed as being exact. Moreover, the present values should not be construed as the current market value of our oil and natural gas reserves or the costs that would be incurred to obtain equivalent reserves. All of our reserves are located in the United States. Estimated Quantities of Reserves
Year Ended December 31, ------------------------------------------------------------------- 2003 2002 2001 ------------------ ------------------ ------------------- Oil Gas Oil Gas Oil Gas (MBbl) (MMcf) (MBbl) (MMcf) (MBbl) (MMcf) ------ ------- ------ ------- ------ ------- Balance at beginning of year................ 97,203 200,947 76,490 198,277 70,667 100,550 Revisions of previous estimates........ 2,958 (25,451) (408) (22,975) 4,344 (631) Revisions due to price changes......... 50 (152) 3,020 2,660 (7,800) (2,745) Extensions and discoveries............. 1,059 68,408 2,326 51,819 2,308 66,448 Improved recovery (1).................. 4,009 - - - 1,667 - Production............................. (6,896) (34,623) (6,874) (36,662) (6,197) (31,112) Acquisition of minerals in place....... 838 14,541 23,383 9,360 11,501 65,767 Sales of minerals in place............. (7,955) (1,783) (734) (1,532) - - ------ ------- ------ ------- ------ ------- Balance at end of year...................... 91,266 221,887 97,203 200,947 76,490 198,277 ====== ======= ====== ======= ====== ======= Proved developed reserves Balance at beginning of year........... 62,398 142,812 54,722 169,897 52,353 77,358 Balance at end of year................. 53,804 144,750 62,398 142,812 54,722 169,897 (1) Improved recovery additions result from the application of secondary recovery methods such as water-flooding or tertiary recovery methods such as CO2 flooding.
Standardized Measure of Discounted Future Net Cash Flows and Changes Therein Relating to Proved Oil and Natural Gas Reserves The Standardized Measure of Discounted Future Net Cash Flows and Changes Therein Relating to Proved Oil and Natural Gas Reserves ("Standardized Measure") does not purport to present the fair market value of our oil and natural gas properties. An estimate of such value should consider, among other factors, anticipated future prices of oil and natural gas, the probability of recoveries in excess of existing proved reserves, the value of probable reserves and acreage prospects, and perhaps different discount rates. It should be noted that estimates of reserve quantities, especially from new discoveries, are inherently imprecise and subject to substantial revision. Under the Standardized Measure, future cash inflows were estimated by applying year-end prices to the estimated future production of year-end proved reserves. The product prices used in calculating these reserves have varied widely during the three-year period. These prices have a significant impact on both the quantities and value of the proven reserves as the reduced oil price causes wells to reach the end of their economic life much sooner and can make certain proved undeveloped 81 Denbury Resources Inc. Notes to Consolidated Financial Statements locations uneconomical, both of which reduce the reserves. The following representative oil and natural gas year-end prices were used in the Standardized Measure. These prices were adjusted by field to arrive at the appropriate corporate net price.
December 31, ------------------------------------ 2003 2002 2001 ------ ------ ------ Oil (NYMEX)............................ $32.52 $31.20 $19.84 Natural Gas (NYMEX Henry Hub).......... 6.19 4.79 2.57
Future cash inflows were reduced by estimated future production and development costs based on year-end costs to determine pre-tax cash inflows. Future income taxes were computed by applying the statutory tax rate to the excess of pre-tax cash inflows over our tax basis in the associated proved oil and natural gas properties. Tax credits and net operating loss carryforwards were also considered in the future income tax calculation. Future net cash inflows after income taxes were discounted using a 10% annual discount rate to arrive at the Standardized Measure.
December 31, ------------------------------------------- Amounts in Thousands 2003 2002 2001 ------------ ------------ ---------- Future cash inflows................................................... $ $4,059,424 $ 3,787,077 $1,786,884 Future production costs............................................... (1,120,741) (1,044,193) (655,363) Future development costs.............................................. (300,981) (268,269) (178,546) ------------ ------------ ---------- Future net cash flows before taxes ............................... 2,637,702 2,474,615 952,975 10% annual discount for estimated timing of cash flows................ (1,071,331) (1,048,395) (378,647) ------------ ------------ ---------- Discounted future net cash flows before taxes..................... 1,566,371 1,426,220 574,328 Discounted future income taxes........................................ (442,244) (397,244) (68,533) ------------ ------------ ---------- Standardized measure of discounted future net cash flows.......... $ 1,124,127 $ 1,028,976 $ 505,795 ============ ============ ==========
The following table sets forth an analysis of changes in the Standardized Measure of Discounted Future Net Cash Flows from proved oil and natural gas reserves:
December 31, ------------------------------------------- Amounts in Thousands 2003 2002 2001 ------------ ------------ ---------- Beginning of year.................................................... $ 1,028,976 $ $505,795 $ 841,299 Sales of oil and natural gas produced, net of production costs....... (281,205) (191,803) (194,386) Net changes in sales prices.......................................... 141,932 694,646 (838,124) Extensions and discoveries, less applicable future development and production costs............................................... 235,228 151,926 123,214 Improved recovery (1)................................................ 40,663 - 5,045 Previously estimated development costs incurred...................... 52,874 34,931 64,072 Revisions of previous estimates, including revised estimates of development costs, reserves and rates of production................ (157,989) (50,855) (13,290) Accretion of discount................................................ 142,622 57,433 115,897 Acquisition of minerals in place..................................... 44,856 160,899 152,931 Sales of minerals in place........................................... (78,830) (5,285) - Net change in income taxes........................................... (45,000) (328,711) 249,137 ------------ ------------ ---------- End of year.......................................................... $ 1,124,127 $ 1,028,976 $ 505,795 ============ ============ ========== (1) Improved recovery additions result from the application of secondary recovery methods such as water flooding or tertiary recovery methods such as CO2 flooding.
CO2 Reserves Based on engineering reports prepared by DeGolyer and MacNaughton, our CO2 reserves, on a working interest basis, were estimated at approximately 1.6 Tcf at December 31, 2003 (includes 162.6 Bcf of reserves dedicated to a volumetric production payment), 1.6 Tcf at December 31, 2002, and 815 Bcf at December 31, 2001. 82 Denbury Resources Inc. Notes to Consolidated Financial Statements Note 13. Condensed Consolidating Financial Information On December 29, 2003, we amended the indenture for our 7.5% Senior Subordinated Notes due 2013 to reflect our new holding company organizational structure (see Note 1 and Note 6). As part of this restructuring our indenture was amended so that both Denbury Resources Inc. and Denbury Onshore, LLC became co-obligors of our subordinated debt. Prior to this restructure, Denbury Resources Inc. was the sole obligor. Our subordinated debt is fully and unconditionally guaranteed by Denbury Resources Inc.'s significant subsidiaries. Genesis Energy, Inc., the subsidiary that holds the Company's investment in Genesis Energy, L.P., is not a guarantor of our subordinated debt. The results of our equity interest in Genesis is reflected through the equity method by one of our significant subsidiaries, Denbury Gathering & Marketing. The following is condensed consolidating financial information for Denbury Resources Inc., Denbury Onshore, LLC, and significant subsidiaries: Condensed Consolidating Balance Sheets
December 31, 2003 ---------------------------------------------------------------------------- Denbury Denbury Onshore, Resources Inc. LLC Denbury (Parent and (Issuer and Guarantor Resources Inc. Amounts in Thousands Co-obligor) Co-obligor) Subsidiaries Eliminations Consolidated -------------- ------------ ------------ ------------ -------------- ASSETS Current assets.................................. 1 $ 85,109 $ 23,045 $ - $108,155 Property and equipment.......................... - 553,205 291,540 - 844,745 Investment in subsidiaries (equity method)...... $ 421,201 - 210,803 (624,554) 7,450 Other assets.................................... - 18,019 4,252 - 22,271 --------- -------- --------- --------- -------- Total assets................................ $ 421,202 $656,333 $ 529,640 $(624,554) $982,621 ========= ======== ========= ========= ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities............................. $ - $119,364 $ 7,210 $ - $126,574 Long-term liabilities........................... - 333,616 101,229 - 434,845 Stockholders' equity............................ 421,202 203,353 421,201 (624,554) 421,202 --------- -------- --------- --------- -------- Total liabilities and stockholders' equity.. $ 421,202 $656,333 $ 529,640 $(624,554) $982,621 ========= ======== ========= ========= ========
December 31, 2002 ------------------------------------------------------------ Denbury Resources Inc. Denbury (Parent and Guarantor Resources Inc. Amounts in Thousands Issuer) Subsidiaries Eliminations Consolidated -------------- ------------ ------------ -------------- ASSETS Current assets.................................. $ 111,063 $ 17,401 $ - $ 128,464 Property and equipment ......................... 528,754 215,331 - 744,085 Investment in subsidiaries (equity method)...... 169,309 2,224 (169,309) 2,224 Other assets.................................... 16,881 3,638 - 20,519 --------- -------- --------- --------- Total assets................................ $ 826,007 $238,594 $(169,309) $ 895,292 ========= ======== ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities............................. $ 87,101 $ 8,778 $ - $ 95,879 Long-term liabilities........................... 372,109 60,507 - 432,616 Stockholders' equity............................ 366,797 169,309 (169,309) 366,797 --------- -------- --------- --------- Total liabilities and stockholders' equity.. $ 826,007 $238,594 $(169,309) $ 895,292 ========= ======== ========= =========
83
Denbury Resources Inc. Notes to Consolidated Financial Statements Condensed Consolidating Statements of Operations Year Ended December 31, 2003 ----------------------------------------------------------------------- Denbury Denbury Onshore, Resources Inc. LLC Denbury Amounts in Thousands (Parent and (Issuer and Guarantor Resources Inc. Co-obligor) Co-obligor) Subsidiaries Eliminations Consolidated -------------- ----------- ------------ ------------ -------------- Revenues.......................................... $ - $238,072 $94,942 $ - $333,014 Expenses.......................................... - 196,392 56,725 - 253,117 ------- -------- ------- -------- -------- Income before the following: - 41,680 38,217 - 79,897 Equity in net earnings of subsidiaries........ 56,553 - 40,667 (96,964) 256 ------- -------- ------- -------- -------- Income before income taxes and cumulative effect of change in accounting principle........ 56,553 41,680 78,884 (96,964) 80,153 Income tax provision.............................. - 5,250 20,962 - 26,212 ------- -------- ------- -------- -------- Net income before cumulative effect of change in accounting principle............................ 56,553 36,430 57,922 (96,964) 53,941 ------- -------- ------- -------- -------- Cumulative effect of a change in accounting principle, net of income tax.................... - 3,981 (1,369) - 2,612 ------- -------- ------- -------- ------- Net income (loss)................................. $56,553 $ 40,411 $56,553 $(96,964) $ 56,553 ======= ======== ======= ======== ========
Year Ended December 31, 2002 ---------------------------------------------------------------- Denbury Resources Inc. Denbury (Parent and Guarantor Resources Inc. Amounts in Thousands Issuer) Subsidiaries Eliminations Consolidated -------------- ------------ ------------ -------------- Revenues....................................... $231,147 $54,005 $ - $285,152 Expenses....................................... 166,805 48,087 - 214,892 -------- ------- -------- -------- Income before the following: 64,342 5,918 - 70,260 Equity in net earnings of subsidiaries..... 3,456 55 (3,456) 55 -------- ------- -------- -------- Income (loss) before income taxes.............. 67,798 5,973 (3,456) 70,315 Income tax benefit............................. 21,003 2,517 - 23,520 -------- ------- -------- -------- Net income (loss).............................. $ 46,795 $ 3,456 $ (3,456) $ 46,795 ======== ======= ======== ========
Year Ended December 31, 2001 ---------------------------------------------------------------- Denbury Resources Inc. Denbury (Parent and Guarantor Resources Inc. Amounts in Thousands Issuer) Subsidiaries Eliminations Consolidated -------------- ------------ ------------ -------------- Revenues....................................... $261,678 $23,433 $ - $285,111 Expenses....................................... 181,346 22,391 - 203,737 -------- ------- -------- -------- Income before the following: 80,332 1,042 - 81,374 Equity in net earnings of subsidiaries..... 653 - (653) - -------- ------- -------- -------- Income (loss) before income taxes.............. 80,985 1,042 (653) 81,374 Income tax provision........................... 24,435 389 - 24,824 -------- ------- -------- -------- Net income (loss).............................. $ 56,550 653 $ (653) $ 56,550 ======== ======= ======== ========
84 Denbury Resources Inc. Notes to Consolidated Financial Statements Condensed Consolidating Statements of Cash Flows
Year Ended December 31, 2003 ---------------------------------------------------------------------- Denbury Onshore, Denbury LLC Resources Inc. (Issuer Denbury Amounts in Thousands (Parent and and Guarantor Resources Inc. Co-obligor) Co-obligor) Subsidiaries Eliminations Consolidated -------------- ----------- ------------ ------------ -------------- Cash flow from operations......................... $ - $146,639 $50,976 $ - $ 197,615 Cash flow from investing activities............... - (81,256) (54,622) - (135,878) Cash flow from financing activities............... 1 (61,490) - - (61,489) ------- -------- ------- ------- --------- Net increase (decrease) in cash flow.............. 1 3,893 (3,646) - 248 Cash, beginning of period......................... - 20,281 3,659 - 23,940 ------- -------- ------- ------- --------- Cash, end of period............................... $ 1 $ 24,174 $ 13 $ - $ 24,188 ======= ======== ======= ======= =========
Year Ended December 31, 2002 ---------------------------------------------------------------- Denbury Resources Inc. Denbury (Parent and Guarantor Resources Inc. Amounts in Thousands Issuer) Subsidiaries Eliminations Consolidated -------------- ------------ ------------ -------------- Cash flow from operations......................... $ 146,132 $ 13,468 $ - $ 159,600 Cash flow from investing activities............... (154,908) (16,253) - (171,161) 0ash flow from financing activities............... 12,005 - - 12,005 --------- -------- -------- --------- Net increase (decrease) in cash flow.............. 3,229 (2,785) - 444 Cash, beginning of period......................... 17,052 6,444 - 23,496 --------- -------- -------- --------- Cash, end of period............................... $ 20,281 $ 3,659 $ - $ 23,940 ========= ======== ======== =========
Year Ended December 31, 2001 ---------------------------------------------------------------- Denbury Resources Inc. Denbury (Parent and Guarantor Resources Inc. Amounts in Thousands Issuer) Subsidiaries Eliminations Consolidated -------------- ------------ ------------ -------------- Cash flow from operations......................... $ 154,034 $ 31,013 $ - $ 185,047 Cash flow from investing activities............... (294,253) (24,577) - (318,830) 0ash flow from financing activities............... 134,986 - - 134,986 --------- -------- -------- --------- Net increase (decrease) in cash flow.............. (5,233) 6,436 - 1,203 Cash, beginning of period......................... 22,285 8 - 22,293 --------- -------- -------- --------- Cash, end of period............................... $ 17,052 $ 6,444 $ - $ 23,496 ========= ======== ======== =========
85
Denbury Resources Inc. Notes to Consolidated Financial Statements Note 14. Unaudited Quarterly Information ----------------------------------------------------------------------------------------------------------------- In Thousands Except Per Share Amounts March 31 June 30 Sept. 30 December 31 ----------------------------------------------------------------------------------------------------------------- 2003 ---- Revenues....................................... $ 86,432 $ 84,188 $ 79,415 $ 82,979 Expenses (1)................................... 58,910 76,660 56,691 60,856 Income before accounting change (2)............ 18,453 5,129 15,149 15,210 Net income (2)................................. 21,065 5,129 15,149 15,210 Income per share before accounting change Basic...................................... 0.34 0.10 0.28 0.28 Diluted.................................... 0.33 0.09 0.27 0.27 Net income per share: Basic...................................... 0.39 0.10 0.28 0.28 Diluted.................................... 0.38 0.09 0.27 0.27 Cash flow from operations ..................... 35,509 60,542 49,789 51,775 Cash flow used for investing activities........ (18,139) (54,742) (35,495) (27,502) Cash flow provided by (used for) financing activities................................. 119,860 (147,622) (5,534) (28,193) 2002 ---- Revenues....................................... $ 55,447 $ 73,433 $ 74,524 $ 81,748 Expenses....................................... 49,924 53,842 52,906 58,220 Net income .................................... 4,546 13,498 13,459 15,292 Net income per share: Basic...................................... 0.09 0.25 0.25 0.29 Diluted ................................... 0.08 0.25 0.25 0.28 Cash flow from operations ..................... 12,032 46,572 44,379 56,617 Cash flow used for investing activities........ (27,129) (32,069) (80,622) (31,341) Cash flow provided by (used for) financing activities................................. 5,970 (8,697) 38,992 (24,260) (1) In the second quarter of 2003, we incurred a $17.6 million ($11.5 million net of income tax) loss on early retirement of debt (see Note 6). (2) In the first quarter of 2003, we recognized a gain of $2.6 million for the cumulative effect adoption of SFAS No. 143, "Accounting for Asset Retirement Obligations" (see Note 4).
Common Stock Trading Summary The following table summarizes the high and low reported sales prices on days in which there were trades of Denbury's common stock on the New York Stock Exchange ("NYSE"), for each quarterly period for the last two fiscal years. Denbury de-listed from the Toronto Stock Exchange effective April 15, 2002. As of March 1, 2004, to the best of our knowledge, Denbury's common stock was held of record by approximately 5,700 holders. We have never paid any dividends on our common stock and we currently do not anticipate paying any dividends in the foreseeable future. Also, we are restricted from declaring or paying any cash dividends on our common stock under our bank loan agreement. NYSE - ------------------------------------------------------------------------------ High Low - ------------------------------------------------------------------------------ 2003 - ---- First quarter $ 11.59 $ 10.18 Second quarter 13.86 10.25 Third quarter 13.95 11.65 Fourth quarter 14.24 11.23 2003 annual 14.24 10.18 - ------------------------------------------------------------------------------ 2002 - ---- First quarter $ 8.50 $ 6.20 Second quarter 10.42 7.91 Third quarter 10.35 7.80 Fourth quarter 11.97 9.45 2002 annual 11.97 6.20 - ------------------------------------------------------------------------------ 86 EX-21 5 denbury200310kex21.txt EXHIBIT 21 EXHIBIT 21
LIST OF SUBSIDIARIES JURISDICTION OF NAME OF SUBSIDIARY INCORPORATION STATUS - ------------------ --------------- ------ Denbury Offshore, Inc. Delaware Wholly owned subsidiary of Denbury Resources Inc. - offshore oil and gas properties Denbury Gathering & Marketing, Inc. Delaware Wholly owned subsidiary of Denbury Resources Inc. - parent company of Genesis Energy, Inc. Genesis Energy, Inc. Delaware Wholly owned subsidiary of Denbury Gathering & Marketing, Inc. - holds 9.25% general partner interest of Genesis Energy LP and .01% general partner interest of Genesis Crude Oil LP Denbury Operating Company Delaware Wholly owned subsidiary of Denbury Resources Inc. - operating holding company of limited liability companies Denbury Onshore, L.L.C. Delaware Wholly owned subsidiary of Denbury Operating Company - onshore oil and gas properties Denbury Marine, L.L.C. Louisiana Wholly owned subsidiary of Denbury Operating Company - marine company Tuscaloosa Royalty Fund L.L.C. Delaware Wholly Owned Subsidiary of Denbury Operating Company
EX-23 6 denbury200310kex23.txt EXHIBIT 23(A) EXHIBIT 23 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement Nos. 333-1006, 333-27995, 333-55999, 333-70485, 333-39172, 333-39218, 333-63198, 333-90398, and 333-106253 on Forms S-8, and Registration Statement No. 333-107676 on Form S-3 of Denbury Resources Inc. of our report dated March 8, 2004 which report expresses an unqualified opinion and includes an explanatory paragraph relating to a change in method of accounting for asset retirement obligations in 2003 as required by Statement of Financial Accounting Standards No. 143, "Accounting for Asset Retirement Obligations", appearing in this Annual Report on Form 10-K of Denbury Resources Inc. for the year ended December 31, 2003. /s/ Deloitte & Touche LLP Dallas, Texas March 8, 2004 EX-23 7 denbury200310kex23b.txt EXHIBIT 23(B) EXHIBIT 23(b) DeGolyer and MacNaughton 4925 Greenville Avenue, Suite 400 One Energy Square Dallas, Texas 75206 March 9, 2004 Denbury Resources Inc. 5100 Tennyson Parkway Suite 3000 Plano, Texas 75024 Ladies and Gentlemen: We consent to the use of the name DeGolyer and MacNaughton, to references to DeGolyer and MacNaughton, and to the inclusion of information taken from our "Appraisal Report as of December 31, 2003 on Certain Properties owned by Denbury Resources Inc. SEC Case," "Appraisal Report as of December 31, 2002 on Certain Properties owned by Denbury Resources Inc. SEC Case," and "Appraisal Report as of December 31, 2001 on Certain Properties owned by Denbury Resources Inc. SEC Case" (our Reports) under the sections "Financial Highlights," "Selected Operating Data - Oil and Gas Reserves," "Operations Section of Annual Report - Our CO2 Assets," and "Notes to Consolidated Financial Statements - Estimated Quantities of Reserves and Standardized Measure of Future Net Cash Flows" in the Denbury Resources Inc. Annual Report on Form 10-K for the year ended December 31, 2003. We further consent to the incorporation of our "Appraisal Report as of December 31, 2003 on Proved Reserves of Certain Properties owned by Denbury Resources Inc. SEC Case" in such Form 10-K as Exhibit 99 therein. Very truly yours, /s/ DeGolyer and MacNaughton DeGOLYER and MacNAUGHTON EX-31 8 denbury200310kex31a.txt EXHIBIT 31(A) EXHIBIT 31(a) CERTIFICATION UNDER SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Gareth Roberts, certify that: 1. I have reviewed this report on Form 10-K of Denbury Resources Inc. (the "registrant"); 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. March 8, 2004 /s/ Gareth Roberts ------------------------------------- Gareth Roberts President and Chief Executive Officer EX-31 9 denbury200310kex31b.txt EXHIBIT 31(B) EXHIBIT 31(b) CERTIFICATION UNDER SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Phil Rykhoek, certify that: 1. I have reviewed this report on Form 10-K of Denbury Resources Inc. (the "registrant"); 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. March 8, 2004 /s/ Phil Rykhoek ---------------------------------------------- Phil Rykhoek Sr. Vice President and Chief Financial Officer EX-32 10 denbury200310kex32.txt EXHIBIT 32 EXHIBIT 32 Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 In connection with the accompanying Annual Report on Form 10-K for the year ended December 31, 2003 (the "Report") of Denbury Resources Inc. ("Denbury") as filed with the Securities and Exchange Commission on March 12, 2004, each of the undersigned, in his capacity as an officer of Denbury, hereby certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to his knowledge: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Denbury. Dated: March 12, 2004 /s/ Gareth Roberts ---------------------------------------------- Gareth Roberts President and Chief Executive Officer Dated: March 12, 2004 /s/ Phil Rykhoek ---------------------------------------------- Phil Rykhoek Sr. Vice President and Chief Financial Officer EX-99 11 denbury200310kex99.txt EXHIBIT 99 EXHIBIT 99 DeGolyer and MacNaughton 4925 Greenville Avenue, Suite 400 One Energy Square Dallas, Texas 75206 APPRAISAL REPORT as of DECEMBER 31, 2003 on PROVED RESERVES of CERTAIN PROPERTIES owned by DENBURY RESOURCES INC. SEC CASE DeGolyer and MacNaughton TABLE of CONTENTS Page ---- FOREWORD...................................................................1 Scope of Investigation.................................................1 Authority..............................................................2 Source of Information..................................................2 CLASSIFICATION OF RESERVES.................................................4 ESTIMATION OF RESERVES.....................................................7 VALUATION OF RESERVES......................................................9 SUMMARY and CONCLUSIONS...................................................12 DeGolyer and MacNaughton 4925 Greenville Avenue, Suite 400 One Energy Square Dallas, Texas 75206 APPRAISAL REPORT as of DECEMBER 31, 2003 on PROVED RESERVES of CERTAIN PROPERTIES owned by DENBURY RESOURCES INC. SEC CASE FOREWORD Scope of Investigation - ---------------------- This report presents an appraisal, as of December 31, 2003, of the extent and value of the proved crude oil, condensate, natural gas liquids, and natural gas reserves of certain properties owned by Denbury Resources Inc. (Denbury). Estimates of carbon dioxide gas reserves are also included. The reserves estimated in this report are located in Arkansas, Louisiana, Mississippi, Texas, and offshore from Louisiana and Texas. The properties appraised are listed in detail in a related report entitled "Appraisal Report as of December 31, 2003 on Certain Properties owned by Denbury Resources Inc. SEC Case." Reserves estimated in this report are expressed as gross and net reserves. Gross reserves are defined as the total estimated petroleum to be produced from these properties after December 31, 2003. Net reserves are defined as that portion of the gross reserves attributable to the interests owned by Denbury after deducting royalties and interests owned by others. This report also presents values that were estimated for proved reserves using initial prices and costs provided by Denbury. Prices are related to NYMEX prices of $32.52 per barrel and $6.189 per million British thermal units (MMBtu). No escalation has been applied to prices and costs. DeGolyer and MacNaughton Page 2 A detailed explanation of the future price and cost assumptions is included in the Valuation of Reserves section of this report. Values of proved reserves in this report are expressed in terms of estimated future gross revenue, future net revenue, and present worth. Future gross revenue is that revenue which will accrue to the appraised interests from the production and sale of the estimated net reserves. Future net revenue is calculated by deducting estimated production taxes, ad valorem taxes, operating expenses, and capital costs from the future gross revenue. Operating expenses include field operating expenses, compression charges, and the estimated expenses of direct supervision, but do not include that portion of general administrative costs sometimes allocated to production. Future income tax expenses were not taken into account in the preparation of these estimates. Present worth is defined as future net revenue discounted at a specified arbitrary discount rate compounded monthly over the expected period of realization. In this report, present worth values using a discount rate of 10 percent are reported. Estimates of oil, condensate, natural gas liquids, and gas reserves and future net revenue should be regarded only as estimates that may change as further production history and additional information become available. Not only are such reserves and revenue estimates based on that information which is currently available, but such estimates are also subject to the uncertainties inherent in the application of judgmental factors in interpreting such information. Authority - --------- This report was prepared at the request of Mr. Ronald T. Evans, Senior Vice President Reservoir Engineering, Denbury. Source of Information - --------------------- Data used in the preparation of this report were obtained from Denbury, from records on file with the appropriate regulatory agencies, and from public sources. In the preparation of this report we have relied, without independent verification, upon information furnished by Denbury with respect to its property interests, production from such properties, current costs of operation and development, current prices for production, agreements relating to current and future operations and sale of production, and various other information and data that were accepted as represented. A field examination of the properties was not considered necessary for the purposes of this report. DeGolyer and MacNaughton Page 3 CLASSIFICATION of RESERVES - -------------------------- Petroleum reserves included in this report are classified as proved and are judged to be economically producible in future years from known reservoirs under existing economic and operating conditions and assuming continuation of current regulatory practices using conventional production methods and equipment. In the analyses of production-decline curves, reserves were estimated only to the limit of economic rates of production under existing economic and operating conditions using prices and costs as of the date the estimate is made, including consideration of changes in existing prices provided only by contractual arrangements but not including escalations based upon future conditions. Proved reserves classifications used in this report are in accordance with the reserves definitions of Rules 4-10(a) (1)-(13) of Regulation S-X of the Securities and Exchange Commission (SEC) of the United States. The petroleum reserves are classified as follows: Proved oil and gas reserves - Proved oil and gas reserves are the estimated quantities of crude oil, natural gas, and natural gas liquids which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions, i.e., prices and costs as of the date the estimate is made. Prices include consideration of changes in existing prices provided only by contractual arrangements, but not on escalations based upon future conditions. (i) Reservoirs are considered proved if economic producibility is supported by either actual production or conclusive formation test. The area of a reservoir considered proved includes (A) that portion delineated by drilling and defined by gas-oil and/or oil-water contacts, if any; and (B) the immediately adjoining portions not yet drilled, but which can be reasonably judged as economically productive on the basis of available geological and engineering data. In the absence of information on fluid contacts, the lowest known structural occurrence of hydrocarbons controls the lower proved limit of the reservoir. (ii) Reserves which can be produced economically through application of improved recovery techniques (such as fluid injection) are included in the "proved" classification when successful testing by a pilot project, or the operation of an installed program in the reservoir, provides support for the engineering analysis on which the project or program was based. DeGolyer and MacNaughton Page 4 (iii) Estimates of proved reserves do not include the following: (A) oil that may become available from known reservoirs but is classified separately as "indicated additional reserves"; (B) crude oil, natural gas, and natural gas liquids, the recovery of which is subject to reasonable doubt because of uncertainty as to geology, reservoir characteristics, or economic factors; (C) crude oil, natural gas, and natural gas liquids, that may occur in undrilled prospects; and (D) crude oil, natural gas, and natural gas liquids, that may be recovered from oil shales, coal, gilsonite, and other such sources. Proved developed oil and gas reserves - Proved developed oil and gas reserves are reserves that can be expected to be recovered through existing wells with existing equipment and operating methods. Additional oil and gas expected to be obtained through the application of fluid injection or other improved recovery techniques for supplementing the natural forces and mechanisms of primary recovery should be included as "proved developed reserves" only after testing by a pilot project or after the operation of an installed program has confirmed through production response that increased recovery will be achieved. Proved undeveloped reserves - Proved undeveloped oil and gas reserves are reserves that are expected to be recovered from new wells on undrilled acreage, or from existing wells where a relatively major expenditure is required for recompletion. Reserves on undrilled acreage shall be limited to those drilling units offsetting productive units that are reasonably certain of production when drilled. Proved reserves for other undrilled units can be claimed only where it can be demonstrated with certainty that there is continuity of production from the existing productive formation. Under no circumstances should estimates for proved undeveloped reserves be attributable to any acreage for which an application of fluid injection or other improved recovery technique is contemplated, unless such techniques have been proved effective by actual tests in the area and in the same reservoir. DeGolyer and MacNaughton Page 5 ESTIMATION of RESERVES - ---------------------- Estimates of reserves were prepared by the use of geological and engineering methods generally accepted by the petroleum industry. The method or combination of methods used in the analysis of each reservoir was tempered by experience with similar reservoirs, stage of development, quality and completeness of basic data, and production history. When applicable, the volumetric method was used to estimate the original oil in place (OOIP) and original gas in place (OGIP). Structure maps were prepared to delineate each reservoir, and isopach maps were constructed to estimate reservoir volume. Electrical logs, radioactivity logs, core analyses, and other available data were used to prepare these maps as well as to estimate representative values for porosity and water saturation. When adequate data were available and when circumstances justified, material-balance and other engineering methods were used to estimate OOIP or OGIP. Estimates of ultimate recovery were obtained after applying recovery factors to OOIP or OGIP. These recovery factors were based on consideration of the type of energy inherent in the reservoirs, analyses of the petroleum, the structural positions of the properties, and the production histories. When applicable, material-balance and other engineering methods were used to estimate recovery factors. An analysis of reservoir performance, including production rate, reservoir pressure, and gas-oil ratio behavior, was used in the estimation of reserves. For depletion-type reservoirs or those whose performance disclosed a reliable decline in producing-rate trends or other diagnostic characteristics, reserves were estimated by the application of appropriate decline curves or other performance relationships. In the analyses of production-decline curves, reserves were estimated only to the limits of economic production based on current economic conditions. In certain cases, when the previously named methods could not be used, reserves were estimated by analogy with similar wells or reservoirs for which more complete data were available. The gas reserves included herein are reported as sales gas. Sales gas is defined as that gas to be delivered into a gas pipeline for sale after separation, processing, fuel use, and flare. All gas volumes are expressed at a temperature base of 60 degrees Fahrenheit ((degree)F) and at the legal pressure base of the state or area in which the reserves are located. Condensate reserves estimated herein are those to be recovered by conventional lease DeGolyer and MacNaughton Page 6 separation. Natural gas liquids reserves are estimated to be those attributable to the leasehold interests appraised based on historical yield information. In the preparation of this study, as of December 31, 2003, gross production estimated to December 31, 2003, was deducted from gross ultimate recovery to arrive at the estimate of gross reserves. In some fields, this required that the production rates be estimated for up to 3 months, since production data from certain properties were available only through September 2003. The following table presents estimates of the proved reserves, as of December 31, 2003, of the properties appraised, expressed in thousands of barrels (Mbbl) or millions of cubic feet (MMcf):
Oil and Natural Gas Total Condensate Liquids Liquids Gas (Mbbl) (Mbbl) (Mbbl) (MMcf) ---------------- --------------- ---------- --------- Gross Reserves Developed Producing 87,532 224 87,756 380,720 Developed Nonproducing 20,984 193 21,177 117,387 Undeveloped 46,545 0 46,545 115,994 ---------------- --------------- ---------- --------- Total Gross Reserves 155,061 417 155,478 614,101 Net Reserves Developed Producing 38,237 120 38,357 103,007 Developed Nonproducing 15,328 119 15,447 41,743 Undeveloped 37,462 0 37,462 77,137 ---------------- --------------- ---------- --------- Total Net Reserves 91,027 239 91,266 221,887
In addition to the natural gas reserves shown in the foregoing tabulation, Denbury's net proved carbon dioxide gas reserves in Mississippi, as of December 31, 2003, are estimated to be 1,289,632 MMcf. This amount includes 1,055,668 MMcf of developed reserves and 233,964 MMcf of undeveloped reserves. The carbon dioxide gas reserves have been prepared under the same guidelines as those for oil and natural gas. No revenue estimates have been made for the carbon dioxide reserves. VALUATION of RESERVES - --------------------- Revenue values in this report were estimated using the initial prices and costs provided by Denbury. Future prices were estimated using guidelines established by the United States Securities and Exchange Commission (SEC) and the Financial Accounting Standards Board (FASB). DeGolyer and MacNaughton Page 7 In this report, values for proved reserves were based on projections of estimated future production and revenue prepared for these properties. The following assumptions were used for estimating future prices and costs: Oil and Condensate Prices Oil and condensate prices were calculated using differentials furnished by Denbury for each lease to a NYMEX price of $32.52 per barrel and held constant thereafter. The weighted average price over the lives of the properties was $29.65 per barrel. Natural Gas Liquids Prices Natural gas liquids prices were calculated using the 2003 average ratio to the NYMEX price of $32.52 per barrel. These prices were held constant over the lives of the properties. Natural Gas Prices Natural gas prices were calculated for each lease using differentials furnished by Denbury to a NYMEX price of $6.189 per MMBtu and held constant thereafter. The weighted average price over the lives of the properties was $6.10 per thousand cubic feet. Operating Expenses and Capital Costs Current operating expenses and capital costs, based on information provided by Denbury, were used in estimating future costs required to operate the properties. In certain cases, future costs, either higher or lower than current costs, may have been used because of anticipated changes in operating conditions. These costs were not escalated for inflation. DeGolyer and MacNaughton Page 8 The future revenue to be derived from the production and sale of the proved reserves, as of December 31, 2003, of the properties appraised is estimated as follows:
Proved ------------------------------------------------------ Developed Developed Total Producing Nonproducing Undeveloped Proved ------------------------------------------------------ Future Gross Revenue, M$ 1,714,249 727,873 1,617,302 4,059,424 Production and Ad Valorem Taxes, M$ 64,213 26,483 53,655 144,351 Operating Expenses, M$ 482,159 130,868 363,363 976,390 Capital Costs, M$ 37,235 24,103 239,643 300,981 Future Net Revenue*, M$ 1,130,642 546,419 960,641 2,637,702 Present Worth at 10 Percent*, M$ 777,025 317,020 472,326 1,566,371
* Future income taxes have not been taken into account in the preparation of these estimates. Timing of capital expenditures and the resulting development of production were based on a development plan provided by Denbury. In our opinion, the information relating to estimated proved reserves, estimated future net revenue from proved reserves, and present worth of estimated future net revenue from proved reserves of oil, condensate, natural gas liquids, and gas contained in this report has been prepared in accordance with Paragraphs 10-13, 15, and 30(a)-(b) of Statement of Financial Accounting Standards No. 69 (November 1982) of the FASB and Rules 4-10(a) (1)-(13) of Regulation S-X and Rule 302(b) of Regulation S-K of the SEC; provided, however, that (i) certain estimated data have not been provided with respect to changes in reserves information and (ii) future income tax expenses have not been taken into account in estimating the future net revenue and present worth values set forth herein. To the extent that the above-enumerated rules, regulations, and statements require determinations of an accounting or legal nature or information beyond the scope of our report, we are necessarily unable to express an opinion as to whether the above-described information is in accordance therewith or sufficient therefor. DeGolyer and MacNaughton Page 9 SUMMARY and CONCLUSIONS - ----------------------- Denbury owns working and royalty interests in certain properties located in Arkansas, Louisiana, Mississippi, Texas, and offshore from Louisiana and Texas. The estimated net proved reserves of the properties appraised, as of December 31, 2003, are summarized as follows, expressed in thousands of barrels (Mbbl) or millions of cubic feet (MMcf):
Oil and Natural Gas Total Condensate Liquids Liquids Gas (Mbbl) (Mbbl) (Mbbl) (MMcf) ---------------- --------------- ---------- --------- Net Reserves Developed Producing 38,237 120 38,357 103,007 Developed Nonproducing 15,328 119 15,447 41,743 Undeveloped 37,462 0 37,462 77,137 ---------------- --------------- ---------- --------- Total 91,027 239 91,266 221,887
The estimated revenue and costs attributable to Denbury's interests in the proved reserves, as of December 31, 2003, of the properties appraised under the aforementioned assumptions concerning future prices and costs are summarized as follows:
Proved ------------------------------------------------------ Developed Developed Total Producing Nonproducing Undeveloped Proved ------------------------------------------------------ Future Gross Revenue, M$ 1,714,249 727,873 1,617,302 4,059,424 Production and Ad Valorem Taxes, M$ 64,213 26,483 53,655 144,351 Operating Expenses, M$ 482,159 130,868 363,363 976,390 Capital Costs, M$ 37,235 24,103 239,643 300,981 Future Net Revenue*, M$ 1,130,642 546,419 960,641 2,637,702 Present Worth at 10 Percent*, M$ 777,025 317,020 472,326 1,566,371
* Future income taxes have not been taken into account in the preparation of these estimates. DeGolyer and MacNaughton Page 10 All gas volumes in this report are expressed at a temperature base of 60 (degree)F and at the legal pressure base of the state or area in which the reserves are located. Submitted, /s/ DeGolyer and MacNaughton DeGOLYER and MacNAUGHTON SIGNED: March 9, 2004 /s/ Paul J. Szatkowski, P.E. -------------------------------- Paul J. Szatkowski, P.E. Senior Vice President DeGolyer and MacNaughton -----END PRIVACY-ENHANCED MESSAGE-----