-----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, DfHn8asATwpSeb3oEOI/iSyBAzhIExOETsoOIz2MmiXopxUm6LHjSmQTwNv8GqW/ M8Idm9Bm+g2fCRLd3jFWHg== 0000899078-05-000362.txt : 20050509 0000899078-05-000362.hdr.sgml : 20050509 20050509150510 ACCESSION NUMBER: 0000899078-05-000362 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20050331 FILED AS OF DATE: 20050509 DATE AS OF CHANGE: 20050509 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-12935 FILM NUMBER: 05811359 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-Q 1 fq2005-form10q.txt FORM 10-Q, FIRST QUARTER 2005 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) X Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange - --- Act of 1934 For the quarterly period ended March 31, 2005 Transition report pursuant to Section 13 or 15(d) of the Securities - --- Exchange Act of 1934 Commission file number 1-12935 DENBURY RESOURCES INC. (Exact name of Registrant as specified in its charter) Delaware 20-0467835 (State or other jurisdictions of (I.R.S. Employer incorporation or organization) Identification No.) 5100 Tennyson Parkway Suite 3000 Plano, TX 75024 (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code: (972) 673-2000 Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No__ Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes X No__ Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding at April 30, 2005 ----- ----------------------------- Common Stock, $.001 par value 56,760,657 INDEX Page ---- Part I. Financial Information Item 1. Financial Statements Unaudited Condensed Consolidated Balance Sheets at March 31, 2005 and December 31, 2004 3 Unaudited Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2005 and 2004 4 Unaudited Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2005 and 2004 5 Unaudited Condensed Consolidated Statements of Comprehensive Operations for the Three Months Ended March 31, 2005 and 2004 6 Notes to Unaudited Condensed Consolidated Financial Statements 7-16 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 17-29 Item 3. Quantitative and Qualitative Disclosures about Market Risk 30 Item 4. Controls and Procedures 30 Part II. Other Information Item 1. Legal Proceedings 30 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 30 Item 3. Defaults Upon Senior Securities 31 Item 4. Submission of Matters to a Vote of Security Holders 31 Item 5. Other Information 31 Item 6. Exhibits 31 Signatures 32 2
DENBURY RESOURCES INC. UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except shares) March 31, December 31, 2005 2004 --------------- --------------- Assets Current assets Cash and cash equivalents $ 42,742 $ 33,039 Short-term investments 14,572 57,171 Accrued production receivable 51,454 44,790 Related party receivable - Genesis - 745 Trade and other receivables 14,052 10,963 Deferred tax asset 31,452 25,189 Derivative assets 5 949 --------------- --------------- Total current assets 154,277 172,846 --------------- --------------- Property and equipment Oil and natural gas properties (using full cost accounting) Proved 1,394,274 1,326,401 Unevaluated 41,771 20,253 CO2 properties and equipment 160,594 132,685 Other 30,177 25,929 Less accumulated depletion and depreciation (729,027) (707,906) --------------- --------------- Net property and equipment 897,789 797,362 --------------- --------------- Investment in Genesis 6,945 6,791 Other assets 10,963 15,707 --------------- --------------- Total assets $ 1,069,974 $ 992,706 =============== =============== Current liabilities Accounts payable and accrued liabilities $ 70,955 $ 51,860 Accounts payable - Genesis 190 - Oil and gas production payable 24,173 24,856 Derivative liabilities 9,779 5,815 Short-term capital lease obligations - Genesis 534 375 --------------- --------------- Total current liabilities 105,631 82,906 --------------- --------------- Long-term liabilities Capital lease obligations - Genesis 6,305 4,184 Long-term debt 223,446 223,397 Asset retirement obligations 19,641 18,944 Deferred revenue - Genesis 22,756 23,378 Deferred tax liability 112,625 97,125 Other 757 1,100 --------------- --------------- Total long-term liabilities 385,530 368,128 --------------- --------------- 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; 56,915,476 and 56,607,877 shares issued at March 31, 2005 and December 31, 2004, respectively 57 57 Paid-in capital in excess of par 447,297 441,023 Deferred compensation (20,922) (21,678) Retained earnings 159,172 129,104 Accumulated other comprehensive loss (3,661) (4,788) Treasury stock, at cost, 124,594 and 93,072 shares at March 31, 2005 and December 31, 2004, respectively (3,130) (2,046) --------------- --------------- Total stockholders' equity 578,813 541,672 --------------- --------------- Total liabilities and stockholders' equity $ 1,069,974 $ 992,706 =============== =============== (See accompanying Notes to Unaudited Condensed Consolidated Financial Statements)
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DENBURY RESOURCES INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except shares) Three Months Ended March 31, ------------------------- 2005 2004 ------------ ------------ Revenues Oil, natural gas and related product sales: Unrelated parties $ 111,016 $ 91,274 Related party - Genesis - 18,962 CO2 sales and transportation fees: Unrelated parties 392 284 Related party - Genesis 1,338 1,077 Loss on effective hedge contracts - (14,268) Interest income and other 616 419 ------------ ------------ Total revenues 113,362 97,748 ------------ ------------ Expenses Lease operating expenses 22,962 22,528 Production taxes and marketing expenses 5,190 4,067 Transportation expense - Genesis 936 - CO2 operating expenses 346 144 General and administrative expenses 6,495 4,748 Interest, net of interest capitalized of $262 and none 4,476 5,081 Depletion and depreciation 21,528 27,324 Commodity derivative expense 7,821 818 ------------ ------------ Total expenses 69,754 64,710 ------------ ------------ Equity in net income (loss) of Genesis 287 (93) ------------ ------------ Income before income taxes 43,895 32,945 Income tax provision Current income taxes 5,282 2,119 Deferred income taxes 8,546 8,522 ------------ ------------ Net income $ 30,067 $ 22,304 ============ ============ Net income per common share - basic $ 0.54 $ 0.41 Net income per common share - diluted $ 0.51 $ 0.40 Weighted average common shares outstanding Basic 55,459 54,388 Diluted 58,604 56,313 (See accompanying Notes to Unaudited Condensed Consolidated Financial Statements)
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DENBURY RESOURCES INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Three Months Ended March 31, ---------------------------- 2005 2004 ------------- ------------- Cash flow from operating activities: Net income $ 30,067 $ 22,304 Adjustments needed to reconcile to net cash flow provided by operations: Depreciation, depletion and amortization 21,528 27,324 Non-cash hedging adjustments 6,722 818 Deferred income taxes 8,546 8,522 Deferred revenue - Genesis (622) (511) Deferred compensation - restricted stock 1,028 - Current income tax benefit from stock options 2,080 - Amortization of debt issue costs and other 62 463 Changes in assets and liabilities: Accrued production receivable (5,919) (7,426) Trade and other receivables (3,088) (1,227) Other assets 130 - Accounts payable and accrued liabilities 7,244 1,723 Oil and gas production payable (683) 1,798 Other liabilities (466) (793) ------------- ------------- Net cash provided by operations 66,629 52,995 ------------- ------------- Cash flow used for investing activities: Oil and natural gas expenditures (57,195) (47,750) Acquisitions of oil and gas properties (30,781) (163) Change in accrual for capital expenditures 11,239 - Acquisitions of CO2 assets and capital expenditures (27,963) (20,203) Purchases of other assets (1,930) (304) Proceeds from oil and gas property sales (18) 512 Deposits on oil and gas property acquisitions 4,507 - Maturities of short-term investments 42,575 - Increase in restricted cash (48) (203) ------------- ------------- Net cash used for investing activities (59,614) (68,111) ------------- ------------- Cash flow from financing activities: Bank repayments (14,000) (3,000) Bank borrowings 14,000 8,000 Payments on capital lease obligations - Genesis (125) - Issuance of common stock 4,361 3,879 Purchase of treasury stock (1,548) (743) ------------- ------------- Net cash provided by financing activities 2,688 8,136 ------------- ------------- Net increase (decrease) in cash and cash equivalents 9,703 (6,980) Cash and cash equivalents at beginning of period 33,039 24,188 ------------- ------------- Cash and cash equivalents at end of period $ 42,742 $ 17,208 ============= ============= Supplemental disclosure of cash flow information: Cash paid during the period for interest $ 259 $ 8,950 Cash paid (refunded) during the period for income taxes - (273) (See accompanying Notes to Unaudited Condensed Consolidated Financial Statements)
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DENBURY RESOURCES INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS (In thousands) Three Months Ended March 31, --------------------------- 2005 2004 ------------- ------------ Net income $ 30,067 $ 22,304 Other comprehensive income (loss), net of income tax: Change in fair value of derivative contracts, net of tax of ($6,744) - (11,004) Reclassification adjustments related to settlements of derivative contracts, net of tax of $689 and $5,422, respectively 1,125 8,846 Unrealized gain on securities available for sale 2 - ------------- ------------ Comprehensive income $ 31,194 $ 20,146 ============= ============ (See accompanying Notes to Unaudited Condensed Consolidated Financial Statements)
6 DENBURY RESOURCES INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION Interim Financial Statements The accompanying unaudited condensed consolidated financial statements of Denbury Resources Inc. and its subsidiaries have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. Unless indicated otherwise or the context requires, the terms "we," "our," "us," "Denbury" or "Company" refer to Denbury Resources Inc. and its subsidiaries. These financial statements and the notes thereto should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2004. Any capitalized terms used but not defined in these Notes to Unaudited Condensed Consolidated Financial Statements have the same meaning given to them in the Form 10-K. Accounting measurements at interim dates inherently involve greater reliance on estimates than at year end and the results of operations for the interim periods shown in this report are not necessarily indicative of results to be expected for the fiscal year. In management's opinion, the accompanying unaudited condensed consolidated financial statements include all adjustments (of a normal recurring nature) necessary to present fairly the consolidated financial position of Denbury as of March 31, 2005 and the consolidated results of its operations and cash flows for the three month periods ended March 31, 2005 and 2004. Certain prior period items have been reclassified to make the classification consistent with the classification in the most recent quarter. Net Income Per Common Share Basic net income per common share is computed by dividing net income by the weighted average number of shares of common stock outstanding during the period. Diluted net income per common share is calculated in the same manner but also considers the impact on net income and common shares for the potential dilution from stock options and any other convertible securities outstanding. For the three month periods ended March 31, 2005 and 2004, there were no adjustments to net income for purposes of calculating diluted net income per common share. The following is a reconciliation of the weighted average common shares used in the basic and diluted net income per common share calculations for the three month periods ended March 31, 2005 and 2004.
Three Months Ended March 31, -------------------------------- 2005 2004 ---------------- --------------- (shares in thousands) Weighted average common shares - basic....... 55,459 54,388 Potentially dilutive securities: Stock options.............................. 2,828 1,925 Restricted stock........................... 317 - ---------------- --------------- Weighted average common shares - diluted.... 58,604 56,313 ================ ===============
The weighted average common shares - basic amount in 2005 excludes 1,160,000 shares of non-vested restricted stock granted in 2005 and 2004 that is subject to future time vesting requirements. As these restricted shares vest, they will be included in the shares outstanding used to calculate basic net income per common share. For purposes of calculating weighted average common shares - diluted, the non-vested restricted stock is included in the computation using the treasury stock method, with the proceeds equal to the average unrecognized compensation during the period, adjusted for any estimated future tax consequences recognized directly in equity. The restricted shares were issued in August 2004 through January 2005 and have been included in the calculation for the periods they were outstanding. These shares may result in greater dilution in future periods, depending on the market price of our common stock during those periods. For the three months ended March 31, 2005 and 2004, common stock options to purchase approximately 18,000 and 425,000 shares of common stock, respectively, were outstanding but excluded from the diluted net income per common share calculations, as the exercise prices of the options exceeded the average market price of the Company's common stock during these periods and would be anti-dilutive to the calculations. 7 DENBURY RESOURCES INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Stock-based Compensation We issue stock options to all of our employees under our stock option plans and we have issued restricted stock to our officers and directors. We account for this stock-based compensation 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 for stock options 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. We recognize compensation expense for restricted stock over the applicable vesting periods. The following table illustrates the effect on net income and net income per common share if we had applied the fair value recognition and measurement provisions of Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation," as amended by SFAS No. 148, in accounting for our stock options.
Three Months Ended March 31, -------------------------- 2005 2004 ------------ ------------ Net income: (thousands) Net income, as reported.......................................... $ 30,067 $ 22,304 Add: stock-based compensation included in reported net income, net of related tax effects............................. 627 - Less: stock-based compensation expense applying fair value based method, net of related tax effects ...................... 1,544 499 ------------ ------------ Pro-forma net income .............................................. $ 29,150 $ 21,805 ============ ============ Net income per common share As reported: Basic ......................................................... $ 0.54 $ 0.41 Diluted........................................................ 0.51 0.40 Pro forma: Basic ......................................................... $ 0.53 $ 0.40 Diluted ....................................................... 0.50 0.39
Derivative Instruments and Hedging Activities Effective January 1, 2005, we elected to discontinue hedge accounting for our oil and natural gas derivative contracts. See Note 6 for further discussion regarding this change. Recent Accounting Pronouncements On December 16, 2004, the Financial Accounting Standards Board ("FASB") issued SFAS No. 123(R), which is a revision of SFAS No. 123. SFAS No. 123(R) supersedes APB 25 and amends SFAS No. 95, "Statement of Cash Flows." Generally, the approach in SFAS No. 123(R) is similar to the approach described in SFAS No. 123. However, SFAS No. 123(R) will require all share-based payments to employees, including grants of employee stock options, to be recognized in our Consolidated Statements of Operations based on their estimated fair values. Pro forma disclosure is no longer an alternative. SFAS No. 123(R) must be adopted at the beginning of our next fiscal year (i.e., January 1, 2006) and permits public companies to adopt its requirements using one of two methods: o A "modified prospective" method in which compensation cost is recognized based on the requirements of SFAS No. 123(R) for all share-based payments granted prior to the effective date of SFAS No. 123(R) that remain unvested on the adoption date. o A "modified retrospective" method which includes the requirements of the modified prospective method described above, but also permits entities to restate either all prior periods presented or 8 DENBURY RESOURCES INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS prior interim periods of the year of adoption based on the amounts previously recognized under SFAS No. 123 for purposes of pro forma disclosures. As permitted by SFAS No. 123, we currently account for share-based payments to employees using the intrinsic value method prescribed by APB 25 and related interpretations. As such, we generally do not recognize compensation expense associated with employee stock options. Accordingly, the adoption of SFAS No. 123(R)'s fair value method could have a significant impact on Denbury's future results of operations, although it will have no impact on our overall financial position. Had the Company adopted SFAS No 123(R) in prior periods, we estimate that the impact would have approximated the impact of SFAS No. 123 as described in the pro forma net income and earnings per share disclosures above. The adoption of SFAS No. 123(R) will have no effect on the Company's unvested outstanding restricted stock awards. We currently plan to adopt the provisions of SFAS No. 123(R) on January 1, 2006 using the modified prospective approach. Although we have not completed evaluating the impact the adoption of SFAS No. 123(R) will have on our future results of operations, we currently estimate the impact on an annual basis will be similar to that in our pro forma disclosures for SFAS No. 123 above. SFAS No. 123(R) also requires the tax benefits in excess of recognized compensation expenses to be reported as a financing cash flow, rather than as an operating cash flow as required under current literature. This requirement may serve to reduce Denbury's future cash provided by operating activities and increase future cash provided by financing activities, to the extent of associated tax benefits that may be realized in the future. While we cannot estimate what those amounts will be in the future (because they depend, among other things, upon when employees exercise stock options), the amount of operating cash flows recognized in prior periods for such excess tax deductions were $4.8 million during the year ended December 31, 2004. 2. 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, removal of equipment and facilities from leased acreage and land restoration. The fair value of a liability for an asset retirement obligation is 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. The following table summarizes the changes in our asset retirement obligations for the three months ended March 31, 2005.
Three Months Ended March 31, 2005 ----------------------- (in thousands) Beginning asset retirement obligation, as of 12/31/2004.... $ 21,540 Liabilities incurred during period......................... 1,343 Liabilities settled during period.......................... (166) Accretion expense.......................................... 321 ----------------------- Ending asset retirement obligation......................... $ 23,038 =======================
At March 31, 2005, $3.4 million of our asset retirement obligation was classified in "Accounts payable and accrued liabilities" under current liabilities in our Condensed Consolidated Balance Sheets. We hold cash and liquid investments in escrow accounts that are legally restricted for certain of our asset retirement obligations. The balances of these escrow accounts were $6.5 million at March 31, 2005, and $6.4 million at December 31, 2004 and are included in "Other assets" in our Condensed Consolidated Balance Sheets. 3. STOCK REPURCHASE PLAN Since August 2003, Denbury has had an active 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 9 DENBURY RESOURCES INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Stock Purchase Plan ("ESPP"). The Plan provides for purchases through an independent broker of 50,000 shares of Denbury's common stock per fiscal quarter over a period of approximately twelve months, or a total of 200,000 shares per year. 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. In 2004, we repurchased into treasury 200,000 shares at an average cost of $19.89 per share and reissued 115,090 treasury shares under the ESPP. In the first quarter of 2005, we repurchased into treasury 50,000 shares at an average cost of $30.95 per share and reissued 18,478 treasury shares under the ESPP. Our current repurchase program extends through June 2005. 4. RELATED PARTY TRANSACTIONS - GENESIS Interest in and Transactions with Genesis Denbury is the general partner and owns an aggregate 9.25% interest in Genesis Energy, L.P. ("Genesis"), a publicly traded master limited partnership. Genesis has three primary lines of business: crude oil gathering and marketing, pipeline transportation, primarily in Mississippi, Texas, Alabama and Florida, and wholesale marketing of carbon dioxide. We are accounting for our 9.25% ownership in Genesis under the equity method of accounting as we have significant influence over the limited partnership; however, our control is limited under the limited partnership agreement and therefore we do not consolidate Genesis. Our equity in Genesis' net income (loss) for the three months ended March 31, 2005 and 2004 was $287,000 and $(93,000), respectively. Genesis Energy, Inc., the general partner of which we own 100%, has guaranteed the bank debt of Genesis, which as of March 31, 2005 was $17.5 million, plus $9.5 million in outstanding letters of credit. There are no guarantees by Denbury or any of its other subsidiaries of the debt of Genesis or of Genesis Energy, Inc. Over the past several years, including the period prior to our investment in Genesis, we sold certain of our oil production to Genesis. Beginning in September 2004, we elected to sell our own crude oil to independent third parties rather than to Genesis. As such, we discontinued our direct sales to Genesis and began to transport our crude oil to our sales point using Genesis' common carrier pipeline. For these transportation services, we pay Genesis a fee for the use of their pipeline and trucking services. In the first three months of 2005, we expensed $936,000 for these transportation services. We recorded oil sales to Genesis of $19.0 million for the three months ended March 31, 2004. Denbury received other miscellaneous payments from Genesis for the three months ended March 31, 2005 and 2004, including $30,000 in each period of director fees for certain executive officers of Denbury that are board members of Genesis, and $130,000 and $125,000, respectively, in pro rata dividend distributions from Genesis as part of Genesis' cash distributions to all of its public holders. Transportation Leases In late 2004 and early 2005, we entered into pipeline transportation agreements with Genesis to transport in its pipelines our crude oil from Olive, Brookhaven, and McComb Fields in Southwest Mississippi to Genesis' main crude oil pipeline in order to improve our ability to market our crude oil, and to transport CO2 from our main CO2 pipeline to Brookhaven Field for our tertiary operations. As part of these arrangements, we entered into three transportation agreements. The first agreement, entered into in November 2004, was to transport crude oil from Olive Field. This agreement is for 10 years and has a minimum payment of approximately $18,000 per month. In December 2004, we entered into a second transportation agreement, to transport CO2 to Brookhaven Field in Southwest Mississippi. This agreement is for an eight-year period and has minimum payments of approximately $49,000 per month. In January 2005, we entered into a third transportation agreement, to transport crude oil from Brookhaven Field. This agreement is for 10 years and has a minimum payment of approximately $32,000 per month. The minimum monthly payment in each agreement will increase for any volumes transported in excess of the stated monthly volume in the contract. Genesis will operate and maintain these pipelines at its own expense. We have accounted for these agreements as capital leases. The pipelines held under these capital leases are classified as property and equipment and are amortized using the straight-line method over the lease terms. Lease amortization is included in depreciation expense. At March 31, 2005, we had $6.8 million of capital lease obligations recorded as liabilities in our Condensed Consolidated Balance Sheet, of which $534,000 was current. At December 31, 2004, we had $4.6 million of capital lease obligations recorded as liabilities in our Condensed Consolidated Balance Sheet, of which $375,000 was current. 10 DENBURY RESOURCES INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS CO2 Volumetric Production Payments 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 for transaction costs) under a volumetric production payment ("VPP"), and assigned to Genesis three of our existing long-term commercial CO2 supply agreements with our industrial customers. These industrial contracts represented approximately 60% of our then current industrial CO2 sales volumes. Pursuant to the VPP, Genesis may take up to 52.5 MMcf/d of CO2 through 2009, 43.0 MMcf/d from 2010 through 2012, and 25.2 MMcf/d to the end of the term. On August 26, 2004, we closed on another transaction with Genesis, selling to them a 33.0 Bcf volumetric production payment ("VPPII") of CO2 for $4.8 million ($4.6 million as adjusted for interim cash flows from the July 1 effective date and for transaction costs) along with a related long-term supply agreement with an industrial customer. Pursuant to the VPPII, Genesis may take up to 9 MMcf/d of CO2 to the end of the contract term. We have recorded the net proceeds of these volumetric production payment sales as deferred revenue and will recognize such revenue as CO2 is delivered during the term of the two volumetric production payments. At March 31, 2005 and December 31, 2004, $25.2 million and $25.8 million, respectively, was recorded as deferred revenue of which $2.4 million was included in current liabilities at March 31, 2005 and December 31, 2004. During the three months ended March 31, 2005 and 2004, we recognized deferred revenue of $622,000 and $511,000, respectively, for deliveries under the VPP and VPPII. We provide Genesis with certain processing and transportation services in connection with these agreements for a fee of approximately $0.16 per Mcf of CO2 delivered to their industrial customers, which resulted in $717,000 and $566,000 in revenue to Denbury for the three months ended March 31, 2005 and 2004, respectively. Summarized financial information of Genesis Energy, L.P. (amounts in thousands):
Three Months Ended March 31, --------------------------------------- 2005 2004 ------------------ ------------------ Revenues.................................... $ 256,600 $ 198,912 Cost of sales............................... 251,744 194,813 Other expenses ............................. 2,086 4,881 Loss from discontinued operations........... - 223 ------------------ ------------------ Net income (loss) ........................ $ 2,770 $ (1,005) ================== ================== March 31, December 31, 2005 2004 ------------------ ------------------ Current assets.............................. $ 99,262 $ 77,396 Non-current assets.......................... 67,395 65,758 ------------------ ------------------ Total assets ............................. $ 166,657 $ 143,154 ================== ================== Current liabilities ........................ $ 101,901 $ 81,938 Non-current liabilities..................... 17,656 15,460 Partners' capital........................... 47,100 45,756 ------------------ ------------------ Total liabilities and partners' capital... $ 166,657 $ 143,154 ================== ==================
11 DENBURY RESOURCES INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 5. SHORT-TERM INVESTMENTS The following is a summary of current available-for-sale marketable securities at March 31, 2005 (in thousands):
March 31, 2005 ------------------------------------------------------ Gross Gross Amortized Unrealized Unrealized Estimated Cost Gains Losses Fair Value ------------ ---------- ---------- ------------ Certificate of deposits......................... $ 2,000 $ - $ - $ 2,000 Government and agency obligations............... 4,994 - (13) 4,981 Other debt securities........................... 7,614 - (23) 7,591 ------------ ---------- --------- ------------ Total current available-for-sale securities.. $ 14,608 $ - $ (36) $ 14,572 ============ ========== ========= ============
6. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES Effective January 1, 2005, we elected to discontinue hedge accounting for our oil and natural gas derivative contracts and accordingly de-designated our derivative instruments from hedge accounting treatment. As a result of this change, we began accounting for our oil and natural gas derivative contracts as speculative contracts in the first quarter of 2005. As speculative contracts, the changes in the fair value of these instruments are recognized in income in the period of change. While this may result in more volatility in our net income than if we had continued to apply hedge accounting treatment as permitted by SFAS No. 133, we believe that the benefits associated with applying hedge accounting do not outweigh the cost, time and effort required to comply with hedge accounting. We enter into various financial contracts to economically 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. Historically, we have generally attempted 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 a majority of our budgeted exploration and development expenditures without incurring significant debt, although our hedging percentage may vary relative to our debt levels. For 2005 and beyond, we have hedged significantly less, primarily because of our strong financial position resulted from our lower levels of debt relative to our cash flow from operations. When we make a significant acquisition, we generally attempt to hedge a large percentage, up to 100%, of the forecasted production for the subsequent one to three years following the acquisition in order to help provide us with a minimum return on our investment. All of the mark-to-market valuations used for our financial derivatives are provided by external sources and are based on prices that are actively quoted. 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. For the 2004 period, the following is a summary of the net loss on our commodity contracts that qualified for hedge accounting and is included in "Loss on effective hedge contracts" in our Condensed Consolidated Statements of Operations:
(In Thousands) Three Months Ended March 31, 2004 - ------------------------------------------------------------------------------------- Settlement of hedge contracts - Oil.................... $ (10,521) Settlement of hedge contracts - Gas.................... (3,747) ------------------------ Loss on effective hedge contracts.................... $ (14,268) ========================
12 DENBURY RESOURCES INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The following is a summary of "Commodity Derivative Expense" included in our Condensed Consolidated Statements of Operations:
(In Thousands) Three Months Ended March 31, - ------------------------------------------------------------------------------------------------------------------- 2005 2004 ------------------ ----------------- Settlements of derivative contracts accounted for as speculative - Gas .... $ 1,099 $ - Hedge ineffectiveness on contracts qualifying for hedge accounting............................................................... - 818 Reclassification of accumulated other comprehensive income balance and adjustments to fair value associated with contracts no longer designated as hedges........................................... 6,722 - ------------------ ----------------- Commodity Derivative Expense........................................... $ 7,821 $ 818 ================== =================
Hedging Contracts at March 31, 2005
Crude Oil Contracts: - -------------------- NYMEX Contract Prices Per Bbl ----------------------------------------------- Collar Prices Fair Value at ---------------------- March 31, 2005 Type of Contract and Period Bbls/d Floor Price Floor Ceiling (In Thousands) - -------------------------------- ----------- ------------ ---------- ---------- ----------------- Floor Contracts April 2005 - Dec. 2005 7,500 $ 27.50 - - $ 5 Natural Gas Contracts: - ---------------------- NYMEX Contract Prices Per MMBtu ----------------------------------------------- Collar Prices Fair Value at ---------------------- March 31, 2005 Type of Contract and Period MMBtu/d Floor Price Floor Ceiling (In Thousands) - -------------------------------- ----------- ------------ ---------- ---------- ----------------- Swap Contracts April 2005 - Dec. 2005 15,000 - $ 3.00 $ 5.50 $ (9,779)
At March 31, 2005, our derivative contracts were recorded at their fair value, which was a net liability of $9.8 million. The balance in accumulated other comprehensive loss of $3.6 million at March 31, 2005, represents the unamortized deficit in the fair market value of our derivative contracts as compared to the cost of our hedges, net of income taxes, associated with our derivative contracts that we de-designated from hedge accounting effective January 1, 2005. The $3.6 million in accumulated other comprehensive loss as of March 31, 2005 will expire by December 31, 2005. 7. CONDENSED CONSOLIDATING FINANCIAL INFORMATION On December 29, 2003, we amended the indenture for our 7.5% Senior Subordinated Notes due 2013 to reflect our new holding company organizational structure. As part of this restructuring our indenture was amended so that both Denbury Resources Inc. 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: 13 DENBURY RESOURCES INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Condensed Consolidating Balance Sheets
Ended March 31, 2005 ---------------------------------------------------------------------------- Denbury Denbury Resources Inc. Onshore, LLC Denbury (Parent and Co- (Issuer and Co- Guarantor Resources Inc. Obligor) Obligor) Subsidiaries Eliminations Consolidated Amounts in thousands ---------------- --------------- ------------ -------------- --------------- ASSETS Current assets.................................. $ 209,773 $ 152,747 $ 2,758 $ (211,001) $ 154,277 Property and equipment ......................... - 897,719 70 - 897,789 Investment in subsidiaries (equity method)...... 366,717 - 365,244 (725,016) 6,945 Other assets.................................... 2,323 10,963 167 (2,490) 10,963 -------------- ------------- ----------- ------------- -------------- Total assets ................................. $ 578,813 $ 1,061,429 $ 368,239 $ (938,507) $ 1,069,974 ============== ============= =========== ============= ============== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities............................. $ - $ 315,334 $ 1,298 $ (211,001) $ 105,631 Long-term liabilities .......................... - 387,796 224 (2,490) 385,530 Stockholders' equity ........................... 578,813 358,299 366,717 (725,016) 578,813 -------------- ------------- ----------- ------------- -------------- Total liabilities and stockholders' equity.... $ 578,813 $ 1,061,429 $ 368,239 $ (938,507) $ 1,069,974 ============== ============= =========== ============= ============== December 31, 2004 --------------------------------------------------------------------------- Denbury Denbury Resources Inc. Onshore, LLC Denbury (Parent and Co- (Issuer and Co- Guarantor Resources Inc. Amounts in thousands Obligor) Obligor) Subsidiaries Eliminations Consolidated ---------------- --------------- ------------ -------------- --------------- ASSETS Current assets ................................. $ 1 $ 171,997 $ 204,709 $ (203,861) $ 172,846 Property and equipment ......................... - 796,578 784 - 797,362 Investment in subsidiaries (equity method) ..... 541,671 - 333,907 (868,787) 6,791 Other assets ................................... - 15,707 2,271 (2,271) 15,707 -------------- ------------- ----------- ------------- -------------- Total assets.................................. $ 541,672 $ 984,282 $ 541,671 $ (1,074,919) $ 992,706 ============== ============= =========== ============= ============== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities............................. $ - $ 286,767 $ - $ (203,861) $ 82,906 Long-term liabilities .......................... - 370,399 - (2,271) 368,128 Stockholders' equity............................ 541,672 327,116 541,671 (868,787) 541,672 -------------- ------------- ----------- ------------- -------------- Total liabilities and stockholders' equity ... $ 541,672 $ 984,282 $ 541,671 $ (1,074,919) $ 992,706 ============== ============= =========== ============= ==============
14 DENBURY RESOURCES INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Condensed Consolidating Statements of Operations
Three Months Ended March 31, 2005 ---------------------------------------------------------------------------- Denbury Denbury Resources Inc. Onshore, LLC Denbury (Parent and Co- (Issuer and Co- Guarantor Resources Inc. Obligor) Obligor) Subsidiaries Eliminations Consolidated Amounts in thousands ---------------- --------------- ------------ -------------- --------------- Revenues................................... $ - $ 113,362 $ - $ - $ 113,362 Expenses .................................. 41 69,486 227 - 69,754 -------------- -------------- ----------- ------------- -------------- Income before the following: (41) 43,876 (227) - 43,608 Equity in net earnings of subsidiaries .. 30,092 - 30,342 (60,147) 287 -------------- -------------- ----------- ------------- -------------- Income before income taxes................. 30,051 43,876 30,115 (60,147) 43,895 Income tax provision ...................... (16) 13,821 23 - 13,828 -------------- -------------- ----------- ------------- -------------- Net income ................................ $ 30,067 $ 30,055 $ 30,092 $ (60,147) $ $ 30,067 ============== ============== =========== ============= ============== Three Months Ended March 31, 2004 ---------------------------------------------------------------------------- Denbury Denbury Resources Inc. Onshore, LLC Denbury (Parent and Co- (Issuer and Co- Guarantor Resources Inc. Obligor) Obligor) Subsidiaries Eliminations Consolidated Amounts in thousands ---------------- --------------- ------------ -------------- --------------- Revenues................................... $ - $ 71,084 $ 26,664 $ - $ 97,748 Expenses................................... - 49,553 15,157 - 64,710 --------------- -------------- ------------ ------------- --------------- Income before the following: - 21,531 11,507 - 33,038 Equity in net earnings of subsidiaries... 22,304 - 14,608 (37,005) (93) --------------- -------------- ------------ ------------- --------------- Income before income taxes................. 22,304 21,531 26,115 (37,005) 32,945 Income tax provision....................... - 6,830 3,811 - 10,641 --------------- -------------- ------------ ------------- --------------- Net income................................. $ 22,304 $ 14,701 $ 22,304 $ (37,005) $ 22,304 =============== ============== ============ ============= ===============
15 DENBURY RESOURCES INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Condensed Consolidating Statements of Cash Flows
Three Months Ended March 31, 2005 ---------------------------------------------------------------------------- Denbury Denbury Resources Inc. Onshore, LLC Denbury (Parent and Co- (Issuer and Co- Guarantor Resources Inc. Obligor) Obligor) Subsidiaries Eliminations Consolidated Amounts in thousands ---------------- --------------- ------------ -------------- --------------- Cash flow from operations............... $ (2,813) $ 69,316 $ 126 $ - $ 66,629 Cash flow from investing activities..... - (59,614) - - (59,614) Cash flow from financing activities..... 2,813 (125) - - 2,688 ---------------- --------------- ------------ -------------- --------------- Net increase in cash.................... - 9,577 126 - 9,703 Cash, beginning of period............... 1 32,881 157 - 33,039 ---------------- --------------- ------------ -------------- --------------- Cash, end of period..................... $ 1 $ 42,458 $ 283 $ - $ 42,742 ================ =============== ============ ============== =============== Three Months Ended March 31, 2004 ---------------------------------------------------------------------------- Denbury Denbury Resources Inc. Onshore, LLC Denbury (Parent and Co- (Issuer and Co- Guarantor Resources Inc. Obligor) Obligor) Subsidiaries Eliminations Consolidated Amounts in thousands ---------------- --------------- ------------ -------------- --------------- Cash flow from operations............... $ (3,136) $ 37,741 $ 18,390 $ - $ 52,995 Cash flow from investing activities..... - (49,718) (18,393) - (68,111) Cash flow from financing activities..... 3,136 5,000 - - 8,136 ---------------- --------------- ------------- -------------- -------------- Net increase (decrease) in cash......... - (6,977) (3) - (6,980) Cash, beginning of period............... 1 24,174 13 - 24,188 ---------------- --------------- ------------- -------------- -------------- Cash, end of period..................... $ 1 $ $ 17,197 $ 10 $ - $ 17,208 ================ =============== ============= ============== ==============
16 DENBURY RESOURCES INC. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS - -------------------------------------------------------------------------------- OF OPERATIONS - ------------- You should read the following in conjunction with our financial statements contained herein and our Form 10-K for the year ended December 31, 2004, along with Management's Discussion and Analysis of Financial Condition and Results of Operations contained in such Form 10-K. Any terms used but not defined in the following discussion have the same meaning given to them in the Form 10-K. We are a growing independent oil and gas company engaged in acquisition, development and exploration activities in the U.S. Gulf Coast region. We are the largest oil and natural gas producer in Mississippi and own the largest reserves east of the Mississippi River of carbon dioxide ("CO2") used for tertiary oil recovery, and hold significant operating acreage onshore Louisiana and in the Barnett Shale play in Texas. 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 two primary field offices located in Houma, Louisiana, and Laurel, Mississippi. OVERVIEW CONTINUED EXPANSION OF OUR TERTIARY OPERATIONS. Since we acquired our first carbon dioxide tertiary flood in Mississippi over five years ago, we have gradually increased our emphasis on these types of operations. We particularly like this play because of its risk profile, rate of return and lack of competition in our operating area. Generally, from East Texas to Florida, there are no known significant natural sources of carbon dioxide except our own, and these large volumes of CO2 that we own drive the play. Please refer to Management's Discussion and Analysis of Financial Condition and Results of Operations and the sections entitled "Overview" and "CO2 Operations" contained in our 2004 Form 10-K for further information regarding these operations, their potential, and the ramifications of this change in focus. During the first three months of 2005, we drilled one additional CO2 source well which added an estimated 130 Bcf of proved CO2 reserves and further increased our estimated daily CO2 production capability to approximately 400 MMcf/d, up from approximately 350 MMcf/d at year-end 2004. We plan to drill an additional two or three CO2 source wells during 2005. Oil production from our tertiary operations increased to 8,644 BOE/d in the first quarter of 2005, a 19% increase over the prior fourth quarter 2004 tertiary production level of 7,242 BOE/d and a 37% increase over the first quarter of 2004 average tertiary production level of 6,318 BOE/d. This increase is generally on track to achieve our targeted average rate of 10,000 BOE/d of oil production from tertiary operations during 2005. OPERATING RESULTS. Earnings and cash flow from operations were at record or near-record levels for the first quarter of 2005, primarily as a result of high commodity prices. As a result of the sale of our offshore properties early in the third quarter of 2004, our total production, when comparing the respective first quarters, was significantly reduced, the primary reason for a 19% decline in production levels. However, higher commodity prices more than offset the lower production, resulting in net income of $30.1 million during the first quarter of 2005 as compared to $22.3 million of net income during the first quarter of 2004. Included in first quarter of 2005 net income is the effect of approximately $6.7 million ($4.6 million after tax) of non-cash charges related to our decision to discontinue hedge accounting in 2005 and the resultant mark-to-market adjustments and amortization of other comprehensive income (see "Market Risk Management"). Excluding these non-cash charges, net income for the first quarter of 2005 would have been approximately $34.7 million. Cash payments on our commodity hedges were significantly lower in the first quarter of 2005 than in the first quarter of 2004, as most of our out-of-the-money hedges expired as of December 31, 2004. Total cash payments on hedges were approximately $1.1 million in the first quarter of 2005 as compared to $14.3 million during the first quarter of 2004. Most of our expenses increased on a per BOE basis during the first quarter of 2005 due to (i) rising costs in the industry, (ii) a higher percentage of operations related to tertiary operations (which have higher operating costs per BOE), and (iii) lower production levels in the 2005 period following the offshore sale in July 2004. See "Results of Operations" for a more thorough discussion of our operating results and "Market Risk Management" for more information regarding our hedging positions at March 31, 2005. 17 DENBURY RESOURCES INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CAPITAL RESOURCES AND LIQUIDITY For 2005, our current capital budget, excluding any potential acquisitions, is $305 million, which at commodity futures prices as of the end of April 2005 will be significantly less than our anticipated cash flow from operations. That budget includes an estimated $45 million for a CO2 pipeline being constructed to East Mississippi, which we may refinance upon completion by entering into some type of long-term financing, effectively paying for the cost of the pipeline over time and recouping the cash spent. We monitor our capital expenditures on a regular basis, adjusting them up or down depending on commodity prices and the resultant cash flow. Therefore, during the last few years as commodity prices have increased, we have often increased our capital budget during the year. Based on current commodity prices and the resultant expected cash flow, we may increase our capital budget for 2005 by as much as $30 million to $50 million in the near future to fund additional projects and to provide for rising industry costs. In addition to our capital exploration and development budget, in the first quarter of 2005, we also spent approximately $30.8 million on acquisitions, primarily for interests in other oil fields that may be tertiary flood candidates and additional undeveloped acreage in the Barnett Shale play near Fort Worth, Texas. It is likely that we will attempt to make additional acquisitions of a similar nature during 2005, although it is not practical to forecast in what amounts. At March 31, 2005, we had approximately $35 million in cash and short-term investments remaining from the sale of our offshore properties, over and above our normal month-end cash balances. We plan to invest this remaining cash and any cash potentially generated from operations in excess of our capital budget (such amount being highly dependent on commodity prices) over the next one to two years on property acquisitions, particularly those that have future tertiary potential. We also may seek conventional development and exploration projects in our areas of operations or tertiary operations in other areas of the country. In addition to our cash and short-term investments which may be used for the potential aforementioned projects, we have all of our bank credit line available to us if we were to need additional capital. At March 31, 2005, we had outstanding $225 million (principal amount) of 7.5% subordinated notes due in 2013, approximately $6.8 million of capital lease commitments, no bank debt, and working capital of $48.6 million. We amended our bank agreement in April 2005 to (i) reaffirm our $200 million borrowing base, and (ii) allow us to borrow up to $80 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 2007 in Mississippi. This bond funding arrangement was completed in April 2005 to replace a prior two year program that expired as of May 1, 2005. Any borrowing 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. SOURCES AND USES OF CAPITAL RESOURCES During the first quarter of 2005, we incurred $57.2 million on oil and natural gas exploration and development expenditures, $28.0 million on CO2 exploration and development expenditures (including $19.0 million on our CO2 pipeline being constructed to East Mississippi), and approximately $30.8 million on property acquisitions, for total capital expenditures of approximately $116.0 million. Our exploration and development expenditures included approximately $24.1 million incurred on drilling, $6.4 million on geological, geophysical and acreage expenditures and $26.7 million incurred on facilities and recompletion costs. We funded these expenditures with $66.6 million of cash flow from operations, an $11.2 million increase in our accrued capital expenditures and the balance funded with cash remaining from our 2004 offshore property sale. Adjusted cash flow from operations (a non-GAAP measure defined as cash flow from operations before changes in assets and liabilities as discussed below under "Results of Operations-Operating Results") was $69.4 million for the first quarter of 2005, while cash flow from operations for the same period, the GAAP measure, was $66.6 million. During the first quarter of 2004, we spent $47.8 million on oil and natural gas exploration and development expenditures, $12.6 million on CO2 exploration and development expenditures, and approximately $7.7 million on property acquisitions (virtually all CO2 related), for total capital expenditures of approximately $68.1 million. We funded these expenditures with $53.0 million of cash flow from operations and $5.0 million of net bank borrowings, with the balance funded from cash and other sources. Adjusted cash flow from operations (a non-GAAP measure defined as cash flow from operations before changes in assets and liabilities as discussed below under "Results of Operations-Operating Results") was $58.9 million for the first quarter of 2004, while cash flow from operations for the same period, the GAAP measure, was $53.0 million. 18 DENBURY RESOURCES INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OFF-BALANCE SHEET ARRANGEMENTS Commitments and Obligations Our obligations that are not currently recorded on our balance sheet consist of our operating leases and various obligations for development and exploratory expenditures arising from purchase agreements, our capital expenditure program, or other transactions common to our industry. In addition, in order to recover our undeveloped proved reserves, we must also fund the associated future development costs as forecasted in the proved reserve reports. Further, one of our subsidiaries, the general partner of Genesis Energy, L.P., has guaranteed the bank debt of Genesis (which as of March 31, 2005, consisted of $17.5 million of debt and $9.5 million in letters of credit) and we have delivery obligations to deliver CO2 to our industrial customers. Our hedging obligations are discussed in Note 6 to the Unaudited Condensed Consolidated Financial Statements. Neither the amounts nor the terms of these commitments or contingent obligations have changed significantly from the year-end 2004 amounts reflected in our Form 10-K filed in March 2005. Please refer to Management's Discussion and Analysis of Financial Condition and Results of Operations contained in our 2004 Form 10-K for further information regarding our commitments and obligations. RESULTS OF OPERATIONS CO2 Operations As described in the "Overview" section above, our CO2 operations are becoming an ever-increasing part of our business and operations. We believe that there are significant additional oil reserves and production that can be obtained through the use of CO2, and we have outlined certain of this potential in our annual report and other public disclosures. In addition to its long-term effect, this shift in focus impacts certain trends in our current and near-term operating results, including inherent delays between the time of capital expenditures and realizing incremental increased production, higher operating costs for tertiary operations, and for current operations an improvement in our overall realized price differential as compared to NYMEX prices. Please refer to Management's Discussion and Analysis of Financial Condition and Results of Operations and the section entitled "CO2 Operations" contained in our 2004 Form 10-K for further information regarding these items. During the first quarter of 2005, we drilled and completed one additional CO2 source well that added an estimated 130 Bcf of additional CO2 reserves and as much as 50 MMcf/d of incremental production capability. During the first quarter, our CO2 production averaged 221 MMcf/d. We used 77% of this, or 170 MMcf/d, in our tertiary operations, and sold the balance to our industrial customers or to Genesis pursuant to our volumetric production payment. We believe that our current production capacity of CO2 is approximately 400 MMcf/d with the completion of our latest well and expect to increase this production capability to as much as 450 to 500 MMcf/d by the end of 2005. Two or three more CO2 source wells are planned for the remainder of 2005, which are intended to not only increase CO2 production, but increase our CO2 reserves as well. We have completed our 3-D seismic shoot over the Jackson Dome area and are currently processing and evaluating several prospects for potential CO2 reserves. Our oil production from our CO2 tertiary recovery activities increased 19% over fourth quarter 2004 levels to 8,644 Bbls/d in the first quarter of 2005, with increases occurring at all three producing tertiary fields, Mallalieu, Little Creek and McComb. We expect our tertiary oil production to further increase during 2005 to an estimated average of approximately 10,000 Bbls/d for the year, with most of the incremental production expected from the ongoing operations at Mallalieu and McComb Fields. Although we have commenced CO2 injections at Brookhaven Field, we do not anticipate any significant production increases from this field during 2005. We spent approximately $0.13 per Mcf to produce our CO2 during the first quarter of 2005, slightly higher than the 2004 average of $0.12 per Mcf as a result of higher commodity prices, which results in higher royalty payments. Our estimated total cost per thousand cubic feet of CO2 during the first quarter of 2005 was approximately $0.20, after inclusion of depreciation and amortization expense, down slightly from the 2004 average of $0.21 per Mcf. For the first quarter of 2005, our operating costs for our tertiary properties averaged $10.07 per BOE, slightly higher than the prior year average 19 DENBURY RESOURCES INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS of $9.90 per BOE. Even though our average operating costs of approximately $10.00 per BOE for our tertiary operations are near expectations, with the increased emphasis on tertiary operations, it is a primary factor in the higher total corporate average operating cost per BOE (see "Operating Results - Production Expenses" below). Operating Results As summarized in the "Overview" section above and discussed in more detail below, higher commodity prices, and lower hedge payments more than offset lower production and higher cash operating expenses, resulting in near-record quarterly earnings and cash flow from operations. Included in the first quarter of 2005 net income is the effect of approximately $6.7 million ($4.6 million after tax) of non-cash charges related to our decision to discontinue hedge accounting in 2005 and the resultant mark-to-market adjustments and amortization of other comprehensive income. Excluding these non-cash charges, net income for the first quarter of 2005 would have been approximately $34.7 million.
Three Months Ended March 31, - ------------------------------------------------------------------ ---------------------------- Amounts in thousands, except per share amounts 2005 2004 - ------------------------------------------------------------------ ------------- ------------- Net income $ 30,067 $ 22,304 Net income per common share - basic 0.54 0.41 Net income per common share - diluted 0.51 0.40 Adjusted cash flow from operations (see below) $ 69,411 $ 58,920 Net change in assets and liabilities relating to operations (2,782) (5,925) - ------------------------------------------------------------------ ------------- ------------- Cash flow from operations (1) $ 66,629 $ 52,995 - ------------------------------------------------------------------ ============= ============= (1) Net cash flow provided by operations as per the Unaudited Condensed Consolidated Statements of Cash Flows.
Adjusted cash flow from operations is a non-GAAP measure that represents cash flow provided by operations before changes in assets and liabilities, as calculated from our Unaudited Condensed Consolidated Statements of Cash Flows. Cash flow from operations is the GAAP measure as presented in our Unaudited Condensed Consolidated Statements of Cash Flows. In our discussion herein, we have elected to discuss these two components of cash flow provided by operations separately. Adjusted cash flow from operations, the non-GAAP measure, measures the cash flow earned or incurred from operating activities without regard to the collection or payment of associated receivables or payables. We believe that this is important to consider adjusted cash flow from operations 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 related operational factors, without regard to whether the earned or incurred item was collected or paid during that year. We also use this measure because the collection of our receivables or payment of our obligations has not been a significant issue for our business, but merely a timing issue from one period to the next, with fluctuations generally caused by significant changes in commodity prices or significant changes in drilling activity. The net change in assets and liabilities relating to operations is also important as it does require or provide additional cash for use in our business; however, we prefer to discuss its effect separately. For instance, as noted above, during the first quarter of both years, we used cash to fund a net increase in our working capital. This was primarily caused by an increase in our accrued production receivables during each first quarterly period caused primarily by rising commodity prices. In the first quarter of 2005, this was partially offset by higher accounts payables and accrued liabilities which helped conserve our cash. The higher liabilities were a result of the increased activity level compared to that of year end. Certain of our operating results and statistics for the comparative first quarters of 2005 and 2004 are included in the following table. 20 DENBURY RESOURCES INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Three Months Ended March 31, - ------------------------------------------------------------------------------------------------ 2005 2004 - ------------------------------------------------------------------------------------------------ Average daily production volume Bbls/d 20,263 19,404 Mcf/d 56,766 103,457 BOE/d (1) 29,724 36,647 Operating revenues (Thousands) Oil sales $ 79,182 $ 54,525 Natural gas sales 31,834 55,711 ------------- -------------- Total oil and natural gas sales $ 111,016 $ 110,236 ============= ============== Hedge Contracts(2) (Thousands) Cash gain (loss) on hedge contracts $ (1,099) $ (14,268) Non-cash hedging adjustments (6,722) (818) ------------- -------------- Total gain (loss) on hedge contracts $ (7,821) $ (15,086) ============= ============== Operating expenses (Thousands) Lease operating expenses $ 22,962 $ 22,528 Production taxes and marketing expenses 6,126 4,067 ------------- -------------- Total production expenses $ 29,088 $ 26,595 ============= ============== CO2 sales and transportation fees (3) $ 1,730 $ 1,361 CO2 operating expenses (346) (144) ------------- -------------- CO2 operating margin $ 1,384 $ 1,217 ============= ============== Unit prices - including impact of hedges Oil price per Bbl $ 43.42 $ 24.92 Gas price per Mcf 6.02 5.52 Unit prices - excluding impact of hedges Oil price per Bbl $ 43.42 $ 30.88 Gas price per Mcf 6.23 5.92 Oil and gas operating revenues and expenses per BOE (1): Oil and natural gas revenues $ 41.50 $ 33.06 ============= ============== Oil and gas lease operating expenses $ 8.58 $ 6.76 Oil and gas production taxes and marketing expense 2.29 1.22 ------------- -------------- Total oil and gas production expenses $ 10.87 $ 7.98 ================================================================================================ (1) Barrel of oil equivalent using the ratio of one barrel of oil to 6 Mcf of natural gas ("BOE"). (2) See also "Market Risk Management" below for information concerning the Company's hedging transactions. (3) For 2005 and 2004, includes deferred revenue of $622,000 and $511,000, respectively, associated with a volumetric production payment and $717,000 and $566,000, respectively, of transportation income, both from Genesis.
21 DENBURY RESOURCES INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS PRODUCTION: Production by area for each of the quarters of 2004 and the first - ---------- quarter of 2005 is listed in the following table.
Average Daily Production (BOE/d) ---------------------------------------------------------- First Second Third Fourth First Quarter Quarter Quarter Quarter Quarter Operating Area 2004 2004 2004 2004 2005 - ---------------------------------- --------------------------------------------------------- Mississippi - non-CO2 floods 12,754 13,048 12,969 13,564 13,057 Mississippi - CO2 floods 6,318 6,603 6,967 7,242 8,644 Onshore Louisiana 8,825 7,492 7,033 7,182 6,710 Barnett Shale and other 229 345 803 963 1,313 --------------------------------------------------------- Total production excl. offshore 28,126 27,488 27,772 28,951 29,724 Offshore Gulf of Mexico 8,521 9,114 1,885 26 - --------------------------------------------------------- Total Company 36,647 36,602 29,657 28,977 29,724 - ---------------------------------- =========================================================
As a result of the sale of our offshore properties in July 2004, overall production was lower in the first quarter of 2005 than in the comparable quarter of 2004. Adjusting for the offshore sale, overall production increased 6% on a BOE basis in the first quarter of 2005 as compared to the first quarter of 2004, and 3% over the prior 2004 fourth quarter level, anchored by the increased production from our tertiary operations and Barnett Shale play, generally offset by overall declines in our onshore natural gas wells in Louisiana. As more fully discussed in "CO2 Operations" above, oil production from our tertiary operations increased 19% in the first quarter of 2005 over tertiary production in the prior quarter and 37% over first quarter of 2004 tertiary production. Production in the Mississippi non-CO2 floods increased slightly over levels in the prior year comparable quarter, but has been relatively stable at around 13,000 BOE/d over the last five quarters. Although most of the production in this area is on a gradual decline, the natural gas drilling in the Selma Chalk at Heidelberg Field has been sufficient to generally offset these declines. Natural gas production at Heidelberg averaged 14.7 MMcf/d in the first quarter of 2005, up from 11.0 MMcf/d in the first quarter of 2004. Our onshore Louisiana production has generally declined over the last year, partially offset by incremental production from an occasional new well, with the most significant decreases at the Thornwell and Lirette Fields. Production at Thornwell declined to 930 BOE/d in the first quarter of 2005 as compared to 2,526 BOE/d in the first quarter of 2004. Similarly, although not as significant, production at Lirette Field declined to 1,951 BOE/d in the first quarter of 2005 as compared to 2,736 BOE/d in the first quarter of 2004. Both of these fields have natural gas wells that are relatively short-lived in nature and are expected to continue to decline in production. Partially offsetting these declines was incremental production from new wells in this area resulting from drilling in late 2004 and early 2005, primarily in the South Chauvin Field area. Natural gas production in the Barnett Shale has increased as a result of increased activity in 2004 and early 2005, increasing from 229 BOE/d (1.4 MMcf/d) in the first quarter of 2004 to 1,313 BOE/d (7.9 MMcf/d) in the first quarter of 2005. Natural gas production in this area is expected to further increase throughout 2005 as we expect to drill twenty to thirty wells in this area during 2005. Our production for the first quarter of 2005 was weighted toward oil (68%), essentially the same oil/natural gas ratio that we had in the fourth quarter of 2004 following the sale of our offshore properties in July 2004. Because of our emphasis on our tertiary operations, we expect to remain weighted toward oil in the foreseeable future. 22 DENBURY RESOURCES INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OIL AND NATURAL GAS REVENUES: Oil and natural gas revenues for the first quarter of 2005 increased $780,000, or 1%, from revenues in the comparable quarter of 2004, as a result of higher commodity prices, almost entirely offset by lower production resulting from the July 2004 sale of our offshore properties. Cash payments on our hedges were $1.1 million in the first quarter of 2005, down 92% from the $14.3 million paid during the first quarter of 2004, as most of our out-of-the-money hedges expired at December 31, 2004. See "Market Risk Management" for additional information regarding our hedging activities. The 19% decrease in production in the first quarter of 2005 as a result of the offshore sale decreased oil and natural gas revenues, when comparing the two first quarters, by $21.8 million, or 23%. This decrease was more than offset by an increase in overall commodity prices, increasing revenue by $22.6 million, or 24%, in the first quarter of 2005 as compared to the prior year first quarter. Our realized natural gas prices (excluding hedges) for the first quarter of 2005 averaged $6.23 per Mcf, an 5% increase from the average of $5.92 per Mcf realized during the first quarter of 2004, and our realized oil prices (excluding hedges) for the first quarter of 2005 averaged $43.42 per Bbl, a 41% increase from the $30.88 per Bbl average realized in the first quarter of 2004. On a combined BOE basis, commodity prices were 26% higher in the first quarter of 2005 as compared to prices in the first quarter of 2004. Our net realized oil prices (excluding hedges) relative to NYMEX prices were lower in the first quarter of 2005 than in the first quarter of 2004 as the NYMEX differential deteriorated significantly during 2004, and remained high during the first part of 2005, particularly for the heavy, sour crude (which predominately applies to our Eastern Mississippi production). Our average oil differential for the first quarter of 2005 was approximately $6.54 per Bbl as compared to $4.24 per Bbl during the first quarter of 2004 and an average of $3.60 per Bbl during 2003. As of the last part of April, 2005, it appears that these differentials may be beginning to narrow, although it is not possible to predict whether this trend will continue. If market conditions for the heavy, sour crude remain consistent, we would expect to gradually improve the overall NYMEX discount as the amount of light sweet oil production from our tertiary operations is expected to increase, improving the overall quality of our product mix. However, as evident in 2004, the oil market can change substantially. Our natural gas differentials have not changed as significantly, as generally we get near NYMEX prices. However, with the anticipated incremental production from the Barnett Shale, which has sold for about $1.00 less than NYMEX prices during the last two quarters, our overall natural gas NYMEX differential will likely increase. PRODUCTION EXPENSES: While lease operating expenses were approximately the same in the respective first quarters, on a per BOE basis operating expenses increased 27%, from $6.76 per BOE in the first quarter of 2004 to $8.58 per BOE in the first quarter of 2005. These per BOE operating expenses compare to an average of $7.60 per BOE in the fourth quarter of 2004. The single biggest factor for the increase relates to the increasing emphasis on tertiary operations, with operating costs that averaged $9.90 per BOE during 2004 and $10.07 per BOE during the first quarter of 2005, higher than the operating costs for our other operations. The balance of the cost increases is generally attributable to higher energy costs to operate our properties and general cost inflation in the industry. Production taxes and marketing expenses generally change in proportion to commodity prices and therefore were higher in the first quarter of 2005 than in the comparable quarter of 2004. The July 2004 sale of our offshore properties also contributed to an increase in 2005 production taxes and marketing expenses on a per BOE basis as most of our offshore properties were not subject to severance taxes. We recognized $936,000 of transportation expenses paid to Genesis during the first quarter of 2005 as a result of a change in the way we market a portion of our crude oil that commenced in September 2004. As of September 1, 2004, we ceased selling crude oil to Genesis at the wellhead, choosing rather to use Genesis to transport our crude to market where we sell our own crude directly to refineries. Overall, this has increased our aggregate net proceeds on our crude oil sales, and increased our per unit price per barrel; however, the higher sales proceeds were partially offset by the incremental transportation charges. 23 DENBURY RESOURCES INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General and Administrative Expenses General and administrative ("G&A") expenses increased 37% between the respective first quarters as set forth below:
Three Months Ended March 31, - ------------------------------------------------- ----------------------------------- 2005 2004 - ------------------------------------------------- ---------------- ---------------- Net G&A expense (thousands) Gross G&A expenses $ 14,378 $ 12,680 State franchise taxes 309 246 Operator overhead charges (6,986) (6,780) Capitalized exploration costs (1,206) (1,398) ---------------- ---------------- Net G&A expense $ 6,495 $ 4,748 ================ ================ Average G&A cost per BOE $ 2.43 $ 1.42 Employees as of March 31 400 378 - ------------------------------------------------- ---------------- ----------------
Gross G&A expenses increased $1.7 million, or 13%, between the first quarters of 2005 and 2004. The largest increase in the first quarter of 2005 relates to approximately $1.0 million of non-cash compensation expense associated with the amortization of deferred compensation resulting from the issuance of restricted stock to officers and directors during 2004 and an increase of approximately $950,000 in incremental consultant fees, primarily related to compliance costs associated with, or audit work related to, the Sarbanes-Oxley Act. These 2005 increases were partially offset by approximately $500,000 of severance payments in the first quarter of 2004 for a portion of the offshore professional and technical staff that were severed in March 2004 in conjunction with the sale of our offshore properties. The increase in gross G&A was offset in part by a slight increase in operator overhead recovery charges in the first quarter of 2005. 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 our incremental drilling and development activity during the first quarter of 2005, partially offset by the sale of our offshore properties, the amount we recovered as operator overhead charges increased by 3% between the respective first quarters of 2005 and 2004. Capitalized exploration costs decreased slightly between the comparable periods in 2005 and 2004 as a result of the 2004 termination of a portion of our offshore exploration staff. The net effect was a 37% increase in net G&A expense between the respective first quarters. On a per BOE basis, G&A costs increased 71% in the first quarter of 2005 as compared to those costs in the first quarter of 2004, which is a higher percentage increase than the increase in gross costs; this resulted from lower production caused by the July 2004 sale of our offshore properties. Since virtually all of the cost of our personnel that worked directly on the offshore properties sold in 2004 was charged to either operations or capitalized, the sale of the offshore properties had minimal impact on net G&A. 24 DENBURY RESOURCES INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Interest and Financing Expenses
Three Months Ended March 31, - ---------------------------------------------------- ---------------------------------- Amounts in thousands, except per BOE amounts 2005 2004 - ---------------------------------------------------- -------------- ---------------- Interest expense, including capitalized interest $ 4,738 $ 5,081 Non-cash interest expense (205) (227) -------------- ---------------- Cash interest expense 4,533 4,854 Interest and other income (616) (419) Capitalized interest (262) - -------------- ---------------- Net cash interest expense $ 3,655 $ 4,435 ============== ================ Average net cash interest expense per BOE $ 1.37 $ 1.33 Average interest rate (1) 7.5% 6.3% Average debt outstanding $ 240,632 $ 306,121 - ---------------------------------------------------- ============== ================ (1) Includes commitment fees but excludes amortization of discount and debt issue costs.
Interest expense for the first quarter of 2005 decreased from levels in the comparable prior year period primarily due to lower average debt levels in 2005 as a result of the sale of our offshore properties in July 2004, the proceeds of which were used to retire our bank debt. Interest and other income increased in the first quarter of 2005 as compared to levels of interest and other income in the first quarter of 2004 as a result of higher average cash balances, also related to the offshore sale. Interest expense increased slightly in the first quarter of 2005 as compared to the fourth quarter of 2004 level of such expenses, as a result of approximately $6.8 million of capital leases entered into late in 2004 and in early 2005. Depletion, Depreciation and Amortization
Three Months Ended March 31, - --------------------------------------------------- --------------------------------- Amounts in thousands, except per BOE amounts 2005 2004 - --------------------------------------------------- --------------- -------------- Depletion and depreciation $ 19,410 $ 25,004 Depletion and depreciation of CO2 assets 1,206 1,138 Accretion of asset retirement obligations 321 768 Depreciation of other fixed assets 591 414 --------------- -------------- Total DD&A $ 21,528 $ 27,324 =============== ============== DD&A per BOE: Oil and natural gas properties $ 7.38 $ 7.73 CO2 assets and other fixed assets 0.67 0.46 - --------------------------------------------------- --------------- -------------- Total DD&A cost per BOE $ 8.05 $ 8.19 - --------------------------------------------------- =============== ==============
In total, our depletion, depreciation and amortization ("DD&A") rate on a per BOE basis decreased 2% between the respective first quarters, primarily due to the offshore property sale in July 2004 which lowered our DD&A rate, partially offset by an increase in certain of our future development costs estimates to reflect the rising costs in the industry, causing our DD&A rate to increase during the latter half of 2004. Our first quarter of 2005 DD&A rate of $8.05 was only slightly higher than the fourth quarter 2004 DD&A rate of $7.98 per BOE, as we recognized incremental reserves in the first quarter of 2005 in 25 the Barnett Shale in Texas and Selma Chalk at Heidelberg, both from our increased drilling activity in those areas, and in Southern Louisiana from our late 2004 and early 2005 exploratory drilling success there. We did not book any incremental oil reserves related to our tertiary operations during the first quarter of 2005. Since we adjust our DD&A rate each quarter based on any changes in our estimates of oil and natural gas reserves and costs, our DD&A rate could change significantly in the future. Our DD&A rate for our CO2 and other fixed assets increased in 2005 as a result of additional depreciation of fixed assets acquired during 2004 and 2005. Income Taxes
Three Months Ended March 31, - ------------------------------------------------------------- --------------------------------- Amounts in thousands, except per BOE amounts and tax rates 2005 2004 - ------------------------------------------------------------- -------------- --------------- Income tax provision Current income tax expense $ 5,282 $ 2,119 Deferred income tax expense 8,546 8,522 -------------- --------------- Total income tax expense $ 13,828 $ 10,641 ============== =============== Average income tax expense per BOE $ 5.17 $ 3.19 Effective tax rate 31.5% 32.3% - ------------------------------------------------------------- -------------- ---------------
Our income tax provision for the first quarter of 2005 and 2004 was based on an estimated statutory tax rate of 39% and 38% respectively. Our net effective tax rates are lower than the statutory rates, primarily due to the recognition of enhanced oil recovery credits which lowered our overall tax expense. The current income tax expense represents our anticipated alternative minimum cash taxes that we cannot offset with regular tax net operating loss carryforwards or enhanced oil recovery credits. As of December 31, 2004, we had utilized all of our federal tax net operating loss carryforwards, but had an estimated $27.8 million of enhanced oil recovery ("EOR") credits to carryforward. We expect to generate additional net EOR credits during 2005, although if oil prices remain at current levels or increase further, we may not be able to generate additional credits in future years as these EOR credits phase out if oil prices are above a certain threshold. Per BOE Data The following table summarizes our cash flow, DD&A and results of operations on a per BOE basis for the comparative periods. Each of the individual components are discussed above. 26 DENBURY RESOURCES INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Three Months Ended March 31, - --------------------------------------------------------------- -------------------------- Per BOE data 2005 2004 - --------------------------------------------------------------- ------------ ------------ Revenues $ 41.50 $ 33.06 Loss on settlements of derivative contracts (0.41) (4.28) Lease operating expenses (8.58) (6.76) Production taxes and marketing expenses (2.29) (1.22) - --------------------------------------------------------------- ------------ ------------ Production netback 30.22 20.80 CO2 operating margin 0.52 0.37 General and administrative expenses (2.43) (1.42) Net cash interest expense (1.37) (1.33) Current income taxes and other (0.99) (0.75) Changes in assets and liabilities relating to operations (1.04) (1.78) - --------------------------------------------------------------- ------------ ------------ Cash flow from operations 24.91 15.89 DD&A (8.05) (8.19) Deferred income taxes (3.19) (2.56) Non-cash hedging adjustments (2.51) (0.25) Changes in assets and liabilities and other non-cash items 0.08 1.80 - --------------------------------------------------------------- ------------ ------------ Net income $ 11.24 $ 6.69 - --------------------------------------------------------------- ============ ============
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. We had no bank debt outstanding as of March 31, 2005 or December 31, 2004. 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 - ----------------------------------------- --------------------------------------------------- ------------- ----------- 2005- Carrying Fair Amounts in thousands 2006 2007 2008 2009 Value Value - ----------------------------------------- ------------ ------------ ------------ ------------ ------------- ----------- Fixed rate debt: 7.5% subordinated debt, net of discount, due 2013......... $ - $ - $ - $ - $ 223,446 $ 228,803 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. Historically, we have generally attempted 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 vary relative to our debt levels. For 2005 and beyond, we have hedged significantly less, primarily because of our strong financial position resulted from our lower levels of debt relative to our cash flow from operations. When we make a significant acquisition, we generally attempt to hedge a large percentage, up to 100%, of the forecasted proved production for the subsequent one to three years following the acquisition in order to help provide us with a minimum return on our investment. Much of our historical hedging activity has been done with collars, although for the 2002 COHO acquisition, we also used swaps in order to lock in the prices used in our economic forecasts. For 2005, all of our oil hedges are puts or price floors, allowing us to retain any price upside, while still providing protection in the event of lower prices at a fixed and determinable price (i.e. the cost of the put). We anticipate using more price floors in the future. 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 27 DENBURY RESOURCES INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS procedures, and diversification. For a full description of our hedging position at March 31, 2005, see Note 6 to the Condensed Consolidated Financial Statements. Effective January 1, 2005, we elected to de-designate our existing derivative contracts as hedges and to account for them as speculative contracts going forward. This means that any changes in the fair value of these derivative contracts will be charged to earnings on a quarterly basis instead of charging the effective portion to other comprehensive income and the balance to earnings. This also means that any balance remaining in other comprehensive income as of December 31, 2004 will be amortized over the remaining life of the contracts. During the first quarter of 2005, we recognized total expenses relating to our hedge contracts of $7.8 million consisting of $1.1 of cash payments, $4.9 million relating to a mark-to-market non-cash adjustment attributable to higher commodity prices and the resultant decrease in value, and $1.8 million relating to the amortization of other comprehensive income related to deferred hedge mark-to-market value losses that existed as of December 31, 2004 which are being amortized as the contracts expire during 2005. Information regarding our current hedging positions and historical hedging results is included in Note 6 to the Condensed Consolidated Financial Statements. At March 31, 2005, our derivative contracts were recorded at their fair value, which was a net liability of approximately $9.8 million, an increase of approximately $4.9 million from the $4.9 million fair value liability recorded as of December 31, 2004. This change is the result of a decrease in the fair market value of our hedges due to an increase in oil and natural gas commodity prices between December 31, 2004 and March 31, 2005. Based on NYMEX crude oil futures prices at March 31, 2005, oil prices were considerably higher than the floor price of $27.50 per barrel, so we would not expect to receive any funds even if oil prices were to drop 10%. Since the oil hedges are puts or price floors, we do not have to make any payments on the hedges regardless of how high oil prices would go. Based on NYMEX natural gas futures prices at March 31, 2005, we would expect to make future cash payments of $9.8 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 $6.6 million, and if futures prices were to increase by 10% we would expect to pay $13.1 million. CRITICAL ACCOUNTING POLICIES For a discussion of our critical accounting policies, which are related to property, plant and equipment, depletion and depreciation, oil and natural gas reserves, asset retirement obligations, income taxes and hedging activities, and which remain unchanged, see "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our annual report on Form 10-K for the year ended December 31, 2004. RECENT ACCOUNTING PRONOUNCEMENTS On December 16, 2004, the Financial Accounting Standards Board ("FASB") issued SFAS No. 123(R), which is a revision of SFAS No. 123. SFAS No. 123(R) supersedes APB 25 and amends SFAS No. 95, "Statement of Cash Flows." Generally, the approach in SFAS No. 123(R) is similar to the approach described in SFAS No. 123. However, SFAS No. 123(R) will require all share-based payments to employees, including grants of employee stock options, to be recognized in our Consolidated Statements of Operations based on their estimated fair values. Pro forma disclosure is no longer an alternative. SFAS No. 123(R) must be adopted at the beginning of our next fiscal year (i.e., January 1, 2006) and permits public companies to adopt its requirements using one of two methods: o A "modified prospective" method in which compensation cost is recognized based on the requirements of SFAS No. 123(R) for all share-based payments granted prior to the effective date of SFAS No. 123(R) that remain unvested on the adoption date. o A "modified retrospective" method which includes the requirements of the modified prospective method described above, but also permits entities to restate either all prior periods presented or prior interim periods of the year of adoption based on the amounts previously recognized under SFAS No. 123 for purposes of pro forma disclosures. 28 DENBURY RESOURCES INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS As permitted by SFAS No. 123, we currently account for share-based payments to employees using the intrinsic value method prescribed by APB 25 and related interpretations. As such, we generally do not recognize compensation expense associated with employee stock options. Accordingly, the adoption of SFAS No. 123(R)'s fair value method could have a significant impact on Denbury's future results of operations, although it will have no impact on our overall financial position. Had the Company adopted SFAS No 123(R) in prior periods, we estimate that the impact would have approximated the impact of SFAS No. 123 as described in the pro forma net income and earnings per share disclosures shown in Note 1 to our Condensed Consolidated Financial Statements. The adoption of SFAS No. 123(R) will have no effect on the Company's unvested outstanding restricted stock awards. We currently plan to adopt the provisions of SFAS No. 123(R) on January 1, 2006 using the modified prospective approach. Although we have not completed evaluating the impact the adoption of SFAS No. 123(R) will have on our future results of operations, we currently estimate the impact on an annual basis will be similar to that in our pro forma disclosures for SFAS No. 123. SFAS No. 123(R) also requires the tax benefits in excess of recognized compensation expenses to be reported as a financing cash flow, rather than as an operating cash flow as required under current literature. This requirement may serve to reduce the Denbury's future cash provided by operating activities and increase future cash provided by financing activities, to the extent of associated tax benefits that may be realized in the future. While we cannot estimate what those amounts will be in the future (because they depend, among other things, upon when employees exercise stock options), the amount of operating cash flows recognized in prior periods for such excess tax deductions were $4.8 million during the year ended December 31, 2004. FORWARD-LOOKING INFORMATION The statements contained in this Quarterly Report on Form 10-Q 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 or methods, acquisition plans and proposals and dispositions, development activities, cost savings, production rates and volumes or forecasts thereof, hydrocarbon reserves, hydrocarbon or expected reserve quantities and values, potential reserves from tertiary operations, hydrocarbon prices, pricing assumptions based upon current and projected oil and gas prices, liquidity, regulatory matters, mark-to-market values, competition, long-term forecasts of production, finding costs, rates of return, estimated costs, future capital expenditures 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," "target" 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 or its availability, general economic conditions, competition and government regulations, unexpected delays, as well as the risks and uncertainties inherent in oil and gas drilling and production activities or which are otherwise 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. 29 DENBURY RESOURCES INC. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - ------------------------------------------------------------------- The information required by Item 3 is set forth under "Market Risk Management" in Management's Discussion and Analysis of Financial Condition and Results of Operations. ITEM 4. CONTROLS AND PROCEDURES - -------------------------------- 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 quarterly report on Form 10-Q and have determined that such disclosure controls and procedures are effective in all material respects in providing to them on a timely basis material information required to be disclosed in this quarterly report. In January 2005, we began processing our transactions on a newly implemented accounting software system. We changed systems in order (i) to integrate and automate more of our functions, which will also allow us to have more information in one integrated database, (ii) to provide operating efficiencies, (iii) to enable us to close our books in a more timely manner without sacrificing quality, (iv) to review and improve our processes and (v) improve the internal control surrounding our computer systems. As a result of moving to a new system in January 2005, certain control procedures are being changed in order to conform to our new system. While we believe that our new accounting system will ultimately strengthen our internal control system, there are inherent weaknesses in implementing any new system and until we have fully tested all changes to our controls, we may not be able to provide assurance that our internal controls over financial reporting are effective in all material respects. While we have not found any reason to believe that our internal controls over financial reporting are not effective in all material respects, we are continuing to evaluate the impact and effect of a new accounting system on our internal controls and procedures and it is possible that we may find weaknesses in the future. Part II. Other Information ITEM 1. LEGAL PROCEEDINGS - ------------------------- Information with respect to this item has been incorporated by reference from our Form 10-K for the year ended December 31, 2004. There have been no material developments in such legal proceedings since the filing of such Form 10-K. ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS - --------------------------------------------------------------------
ISSUER PURCHASES OF EQUITY SECURITIES - ---------------------------------------------------------------------------------------------------------- (c) Total Number of (d) Maximum Number (a) Total Shares Purchased of Shares that May Number of (b) Average as Part of Publicly Yet Be Purchased Shares Price Paid Announced Plans or Under the Plan Or Period Purchased per Share Programs Programs - ---------------------------------------------------------------------------------------------------------- January 1 through 31, 2005 15,000 $ 25.36 15,000 85,000 - ---------------------------------------------------------------------------------------------------------- February 1 through 28, 2005 25,000 $ 33.29 25,000 60,000 - ---------------------------------------------------------------------------------------------------------- March 1 through 31, 2005 10,000 $ 33.51 10,000 50,000 - ---------------------------------------------------------------------------------------------------------- Total 50,000 $ 30.95 50,000 50,000 - ----------------------------------------------------------------------------------------------------------
In August 2003, we adopted a stock repurchase plan (the "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 30 DENBURY RESOURCES INC. Purchase Plan. The Plan originally provided 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. In May 2004, the Board of Directors renewed the Plan for another year beginning July 1, 2004 and ending June 30, 2005, covering another 200,000 shares at the same 50,000 shares per quarter rate. 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. ITEM 3. DEFAULTS UPON SENIOR SECURITIES - ---------------------------------------- None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - ------------------------------------------------------------ None. ITEM 5. OTHER INFORMATION - -------------------------- None. ITEM 6. EXHIBITS - ----------------- Exhibits: 10* First Amendment to Fifth Amended and Restated Credit Agreement among Denbury Onshore, LLC, as Borrower, Denbury Resources Inc, as Parent Guarantor, Bank One, N.A. as Administrative Agent, and certain other financial institutions dated as of April 1, 2005. 31(a)* Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31(b)* Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32* Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. * Filed herewith. 31 DENBURY RESOURCES INC. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. DENBURY RESOURCES INC. (Registrant) By: /s/ Phil Rykhoek --------------------------------------- Phil Rykhoek Sr. Vice President and Chief Financial Officer By: /s/ Mark C. Allen --------------------------------------- Mark C. Allen Vice President and Chief Accounting Officer Date: May 9, 2005 32 EX-31 2 fq2005-exhibit31a.txt EXHIBIT 31A - CERTIFICATION (302) OF CEO Exhibit 31(a) CERTIFICATION UNDER SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Gareth Roberts, certify that: 1. I have reviewed this quarterly report on Form 10-Q 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) 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 (d) 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. May 9, 2005 /s/ Gareth Roberts ------------------------------------- Gareth Roberts President and Chief Executive Officer EX-31 3 fq2005-exhibit31b.txt EXHIBIT 31B - CERTIFICATION (302) OF THE CFO Exhibit 31(b) CERTIFICATION UNDER SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Phil Rykhoek, certify that: 1. I have reviewed this quarterly report on Form 10-Q 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) 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 (d) 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. May 9, 2005 /s/ Phil Rykhoek ------------------------------------ Phil Rykhoek Sr. Vice President and Chief Financial Officer EX-32 4 fq2005-exhibit32.txt EXHIBIT 32, CERTIFICATION (906) OF THE CEO/CFO 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 Quarterly Report on Form 10-Q for the quarter ended March 31, 2005 (the "Report") of Denbury Resources Inc. ("Denbury") as filed with the Securities and Exchange Commission on May 9, 2005, 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: May 9, 2005 /s/ Gareth Roberts -------------------------------------- Gareth Roberts President and Chief Executive Officer Dated: May 9, 2005 /s/ Phil Rykhoek -------------------------------------- Phil Rykhoek Sr. Vice President and Chief Financial Officer EX-10 5 fq2005-exhibit10.txt EXHIBIT 10, FIRST AMENDMENT Exhibit 10 FIRST AMENDMENT TO FIFTH AMENDED AND RESTATED CREDIT AGREEMENT This First Amendment to Fifth Amended and Restated Credit Agreement (this "First Amendment") is entered into effective as of the 1st day of April, 2005 (the "Effective Date"), by and among Denbury Onshore, LLC, a Delaware limited liability company ("Borrower"), Denbury Resources Inc., a Delaware corporation ("Parent"), JPMorgan Chase Bank, N.A., successor by merger to Bank One, NA (Main Office Chicago), as Administrative Agent ("Administrative Agent"), and the financial institutions parties hereto as Banks ("Banks"). W I T N E S S E T H ------------------- WHEREAS, Borrower, Parent, Administrative Agent, the other agents a party thereto and Banks are parties to that certain Fifth Amended and Restated Credit Agreement dated as of September 1, 2004 (the "Credit Agreement") (unless otherwise defined herein, all terms used herein with their initial letter capitalized shall have the meaning given such terms in the Credit Agreement); and WHEREAS, pursuant to the Credit Agreement, Banks have made a Revolving Loan to Borrower and provided certain other credit accommodations to Borrower; and WHEREAS, Borrower has advised Administrative Agent and Banks that it intends to participate in an additional bond program sponsored by the State of Mississippi, pursuant to which Mississippi Business Finance Corporation would issue and sell additional Taxable Industrial Revenue Bonds in a maximum aggregate principal amount of $80,000,000 (the "2005 Bonds") to Administrative Agent, on behalf of Banks, the proceeds of which will ultimately be utilized by Borrower to finance certain of its projects and CO2 facilities in the State of Mississippi (the "2005 Bond Offering"), all as more particularly described in the 2005 Bond Documents (as hereinafter defined); and WHEREAS, Borrower has requested that Banks (a) amend certain terms of the Credit Agreement in certain respects, (b) consent to the 2005 Bond Offering as more particularly described herein and in the 2005 Bond Documents, and (c) reaffirm a Borrowing Base of $200,000,000 to be effective as of April 1, 2005 and continuing until the First Redetermination thereafter; and WHEREAS, subject to and upon the terms and conditions set forth herein, Banks have agreed to Borrower's requests. NOW THEREFORE, for and in consideration of the mutual covenants and agreements herein contained and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged and confessed, Borrower, Administrative Agent and each Bank hereby agree as follows: SECTION 1. AMENDMENTS. In reliance on the representations, warranties, covenants and agreements contained in this First Amendment, and subject to the 1 satisfaction of the conditions precedent set forth in Section 4 hereof, the Credit Agreement shall be amended effective as of the Effective Date in the manner provided in this Section 1. 1.1 ADDITIONAL DEFINITIONS. Section 2.1 of the Credit Agreement shall be amended to add thereto in alphabetical order the following definitions which shall read in full as follows: "2005 Bond Exposure" means, at any time, without duplication, the aggregate amount of proceeds of the 2005 Bonds which have not been advanced at such time by the Bond Purchaser. The 2005 Bond Exposure of any Bank at any time shall be its Commitment Percentage of the total 2005 Bond Exposure at such time. "2005 Bond Indenture" means that certain Trust Indenture, dated as of April 1, 2005, by and between Bond Issuer and Bond Trustee. "2005 Bond Loan Agreement" means that certain Loan Agreement, dated as of April 1, 2005, by and between Bond Issuer and Borrower. "2005 Bond Note" means that certain promissory note of Borrower, dated of even date with the 2005 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 2005 Bond Indenture and the 2005 Bonds. "2005 Bond Offering" means the issuance and sale by Bond Issuer of the 2005 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 2005 Bond Indenture, which Project Fund will be utilized to finance the Cost of the Project (as defined in the 2005 Bond Loan Agreement) located in the State of Mississippi. Upon the date of the issuance of the 2005 Bonds, Bond Purchaser was (or will be) deemed to have sold to each Bank, and each Bank was (or will be) deemed to have unconditionally and irrevocably purchased from Bond Purchaser, a participation in the 2005 Bonds and 2005 Bond Exposure equal to such Bank's Commitment Percentage of such 2005 Bonds and 2005 Bond Exposure. "2005 Bond Purchase Agreement" means that certain Bond Purchase Agreement, dated as of April 1, 2005, among Bond Purchaser, Bond Issuer and Borrower. "2005 Bonds" means, whether one or more, Bond Issuer's Taxable Industrial Development Revenue Bonds, Series 2005 2 (Denbury Onshore, LLC Project), which 2005 Bonds shall (a) be in a maximum aggregate principal amount of $80,000,000, (b) bear interest at rates identical to the interest rates set forth in this Agreement, (c) have a maturity date of April 1, 2007, 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 2005 Bonds. "First Amendment" means that certain First Amendment to Fifth Amended and Restated Credit Agreement dated as of April 1, 2005 among Borrower, Parent, Administrative Agent and Banks. 1.2 AMENDMENT TO DEFINITIONS. The definitions of "Administrative Agent," "Bank One," "Bond Disbursement," "Bond Documents," "Bond Purchaser," "Bond Trustee" and "Loan Papers" contained in Section 2.1 of the Credit Agreement shall be amended and restated to read in full as follows: "Administrative Agent" means JPMorgan Chase Bank, N.A., successor by merger to Bank One, NA (Main Office Chicago), in its capacity as Administrative Agent for Banks hereunder of any successor thereto. "Bank One" means JPMorgan Chase Bank, N.A., successor by merger to Bank One, NA (Main Office Chicago), a national banking association, in its capacity as a Bank. "Bond Disbursement" means an advance of proceeds of the Bonds or the 2005 Bonds by the Bond Purchaser to the Bond Trustee pursuant to the Bond Documents. "Bond Documents" means, collectively, the Bonds, the 2005 Bonds, the Bond Loan Agreement, the 2005 Bond Loan Agreement, the Bond Note, the 2005 Bond Note, the Bond Purchase Agreement, the 2005 Bond Purchase Agreement, the Bond Indenture, the 2005 Bond Indenture and all other agreements, documents and instruments now, heretofore 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 2005 Bonds, the Bond Loan Agreement, the 2005 Bond Loan Agreement, the Bond Purchase Agreement, the 2005 Bond Purchase Agreement, the Bond Indenture, the 2005 Bond Indenture or otherwise in connection with the Bond Offering or the 2005 Bond Offering, each of which agreements, documents and instruments shall be in form and substance acceptable to Administrative Agent in its sole discretion. 3 "Bond Purchaser" means Administrative Agent, as "Purchaser" of the Bonds and the 2005 Bonds under the Bond Purchase Agreement and the 2005 Bond Purchase Agreement, respectively. "Bond Trustee" means JPMorgan Chase Bank, N.A., in its capacity as "Trustee" under the Bond Indenture and the 2005 Bond Indenture. "Loan Papers" means this Agreement, the First Amendment, 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. 1.3 GENERAL PROVISIONS AS TO PAYMENTS. The "seventh" clause of Section 4.2(c) of the Credit Agreement shall be amended and restated to read in full as follows: "seventh, to the payment to each Bank (and/or its Affiliates) 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 (and/or its Affiliates) owed such Obligations in proportion to all such payments owed to all Banks (and/or its Affiliates) in respect of such Obligations,". 1.4 ADDITIONAL REPRESENTATION AND WARRANTY. Article VIII of the Credit Agreement shall be amended to include a new Section 8.21 which shall read in full as follows: "Section 8.21 Bond Documents. 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 each 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 4 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 is true and correct on the date of the First Amendment and will be true and correct on the date of each Borrowing or issuance of a Letter of Credit." 1.5 DEBT COVENANT. Section 10.1 of the Credit Agreement shall be amended to read in full as follows: "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 and the 2005 Bond Loan Agreement, (iii) Permitted Subordinate Debt, (iv) Debt described in clause (f) of the definition thereof in connection with any Permitted Genesis VPP Transaction, and (v) 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 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." 1.6 RESTRICTED PAYMENTS. Section 10.2 of the Credit Agreement shall be amended to read in full as follows: "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, (b) any Credit Party may make Distributions to any 5 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 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, 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, the 2005 Bond Loan Agreement, the Bond Note and the 2005 Bond Note in accordance with the terms thereof." 1.7 BORROWINGS RELATED TO BOND OFFERINGS. Section 10.16 of the Credit Agreement shall be amended to read in full as follows: "Section 10.16 Borrowings Related to Bond Offerings. Borrower will not request or receive any Borrowing hereunder, the proceeds of which are to be used to fund advances under the Bonds or the 2005 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 or the 2005 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 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 or the 2005 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 the 2005 Bond Loan Agreement or on any Bond Note or 2005 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)." SECTION 2. CONSENT AND WAIVER. In reliance on the representations, warranties, covenants and agreements contained in this First Amendment, and subject to the satisfaction of the conditions precedent set forth in Section 4 hereof, Banks hereby (a) consent to (i) the consummation of the 2005 Bond Offering in accordance with the terms of the 2005 Bond Documents (as defined in Section 4.2 hereof), and (ii) the execution and delivery by Borrower of the 2005 Bond Documents to which it is a party, and the performance of its obligations and the 6 exercise of its rights under and pursuant thereto, and (b) waive compliance by Borrower with each provision of the Credit Agreement and the other Loan Papers to the extent, but only to the extent, that the consummation of the 2005 Bond Offering and the execution and delivery of the 2005 Bond Documents by Borrower, and the performance of its obligations and the exercise of its rights under and pursuant thereto, violate such provisions or result in a Default or Event of Default under the Credit Agreement or the other Loan Papers. The consent and waiver herein contained are expressly limited as follows: (i) such consent and waiver are limited solely to (as applicable) the consummation of the 2005 Bond Offering in accordance with the terms of the 2005 Bond Documents most recently provided to Administrative Agent, and (ii) such consent and waiver are each a limited, one-time consent and waiver, and nothing contained herein shall obligate Banks to grant any additional or future consent or waiver with respect to, or in connection with, any provision of any Loan Paper. Without limiting the power and authority of Administrative Agent described in the Credit Agreement, Banks hereby: (a) appoint Administrative Agent, as Bond Purchaser, as its contractual representative under the 2005 Bond Documents and irrevocably authorize Administrative Agent to act as the contractual representative of each Bank under the 2005 Bond Documents with the rights and duties expressly set forth therein, and to hold the 2005 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 2005 Bond Documents; and (b) empower and authorize Administrative Agent to execute and deliver the 2005 Bond Documents to which it is a party. SECTION 3. BORROWING BASE. Effective as of April 1, 2005, the Borrowing Base shall be reaffirmed at $200,000,000 and shall remain at $200,000,000 until the next Redetermination thereafter. Borrower and Banks agree that the Redetermination provided for in this Section 3 shall not be construed or deemed to be a Special Redetermination for purposes of Section 5.3 of the Credit Agreement. SECTION 4. CONDITIONS PRECEDENT. The amendments contained in Section 1 hereof, and the consent and waiver contained in Section 2 hereof, are subject to the satisfaction of each of the following conditions precedent on or before April 1, 2005: 4.1 CONSUMMATION OF 2005 BOND OFFERING. Subject only to the granting of the consent thereto contained in Section 2 hereof, the 2005 Bond Offering shall have been consummated in accordance with the terms of the 2005 Bond Documents. 4.2 MATERIAL AGREEMENTS. Administrative Agent shall have been provided with fully executed copies of the 2005 Bonds, together with any and all loan agreements, notes, purchase agreements, amendments and all other agreements, documents and instruments executed and/or delivered pursuant to the 2005 Bonds or otherwise in connection with the 2005 Bond Offering, each of which shall be in form and substance acceptable to Administrative Agent in its sole discretion (collectively, the "2005 Bond Documents"), together with a certificate from an Authorized Officer of Borrower certifying that such copies are accurate and 7 complete and represent the complete understanding and agreement of the parties with respect to the subject matter thereof. 4.3 RESOLUTIONS. Parent and Borrower shall have provided Administrative Agent with copies of resolutions and comparable consents and authorizations approving (a) this First Amendment, (b) any other Loan Papers to be executed or delivered pursuant hereto, and (c) the 2005 Bond Documents to be executed or delivered by Borrower, and further authorizing the transactions contemplated by this First Amendment and any other Loan Papers to be executed or delivered pursuant hereto, duly adopted by the Board of Directors (or comparable authority) of Parent and Borrower accompanied by a certificate of the Secretary or comparable Authorized Officer of Borrower that such copies are true and correct copies of resolutions duly adopted at a meeting of or (if permitted by applicable Law and, if required by such Law, by the regulations or Bylaws of Parent and Borrower) by the unanimous written consent of the Board of Directors (or comparable authority) of Parent and Borrower, 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 date hereof. 4.4 OPINION. Borrower shall have delivered an opinion of Jenkens & Gilchrist, counsel to Parent and Borrower, with respect to the due authorization, execution, delivery and enforceability of this First Amendment and the 2005 Bond Documents to which Borrower is a party, and such other matters related thereto as Administrative Agent shall require. 4.5 NO DEFAULT. No Default or Event of Default shall have occurred which is continuing. 4.6 OTHER DOCUMENTS. Administrative Agent shall have been provided with such other documents, instruments and agreements, and Parent and Borrower shall have taken such actions, as Administrative Agent may reasonably require in connection with this First Amendment and the transactions contemplated hereby. Section 5. REPRESENTATIONS AND WARRANTIES. To induce Banks and Administrative Agent to enter into this First Amendment, Parent and Borrower hereby jointly and severally represent and warrant to Banks and Administrative Agent as follows: 5.1 REAFFIRM EXISTING REPRESENTATIONS AND WARRANTIES. Each representation and warranty of Parent and Borrower contained in the Credit Agreement and the other Loan Papers is true and correct on the date hereof and will be true and correct after giving effect to the amendments set forth in Section 1 hereof. 5.2 DUE AUTHORIZATION; NO CONFLICT. The execution, delivery and performance by Parent and Borrower of this First Amendment are within Parent's and Borrower's corporate or organizational powers, have been duly authorized by all necessary action, require no action by or in respect of, or filing with, any governmental body, agency or official and do not violate or constitute a default under any provision of applicable law or any Material Agreement binding upon Parent, Borrower or their Subsidiaries or result in the creation or imposition of any Lien upon any of the assets of Parent, Borrower or their Subsidiaries except Permitted Encumbrances. 8 5.3 VALIDITY AND ENFORCEABILITY. This First Amendment constitutes the valid and binding obligation of Parent and Borrower enforceable in accordance with its terms, except as (i) the enforceability thereof may be limited by bankruptcy, insolvency or similar laws affecting creditor's rights generally, and (ii) the availability of equitable remedies may be limited by equitable principles of general application. 5.4 NO DEFAULT OR EVENT OF DEFAULT. No Default or Event of Default has occurred which is continuing. Section 6. MISCELLANEOUS. 6.1 REAFFIRMATION OF LOAN PAPERS. Any and all of the terms and provisions of the Credit Agreement and the Loan Papers shall, except as amended and modified hereby, remain in full force and effect. The amendments contemplated hereby shall not limit or impair any Liens securing the Obligations, each of which are hereby ratified, affirmed and extended to secure the Obligations as they may be increased pursuant hereto. 6.2 PARTIES IN INTEREST. All of the terms and provisions of this First Amendment shall bind and inure to the benefit of the parties hereto and their respective successors and assigns. 6.3 LEGAL EXPENSES. Borrower hereby agrees to pay on demand all reasonable fees and expenses of counsel to Administrative Agent incurred by Administrative Agent in connection with the preparation, negotiation and execution of this First Amendment and all related documents. 6.4 COUNTERPARTS. This First Amendment may be executed in counterparts, and all parties need not execute the same counterpart; however, no party shall be bound by this First Amendment until Parent, Borrower and Required Banks have executed a counterpart. Facsimiles shall be effective as originals. 6.5 COMPLETE AGREEMENT. THIS FIRST AMENDMENT, THE CREDIT AGREEMENT AND THE OTHER LOAN PAPERS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN OR AMONG THE PARTIES. 6.6 HEADINGS. The headings, captions and arrangements used in this First Amendment are, unless specified otherwise, for convenience only and shall not be deemed to limit, amplify or modify the terms of this First Amendment, nor affect the meaning thereof. IN WITNESS WHEREOF, the parties hereto have caused this First Amendment to be duly executed by their respective authorized officers on the date and year first above written. [Signature Pages to Follow] 9 SIGNATURE PAGE TO FIRST AMENDMENT TO FIFTH AMENDED AND RESTATED CREDIT AGREEMENT PARENT: DENBURY RESOURCES INC., a Delaware corporation By: /s/ Phil Rykhoek ------------------------------- Phil Rykhoek, Senior Vice President and Chief Financial Officer BORROWER: DENBURY ONSHORE, LLC, a Delaware limited liability company By: /s/ Phil Rykhoek ------------------------------- Phil Rykhoek, Senior Vice President and Chief Financial Officer [Signature Page] SIGNATURE PAGE TO FIRST AMENDMENT TO FIFTH AMENDED AND RESTATED CREDIT AGREEMENT Each of the undersigned (i) consent and agree to this First Amendment, and (ii) agree that the Loan Papers to which it is a party shall remain in full force and effect and shall continue to be the legal, valid and binding obligation of such Person, enforceable against it in accordance with its terms. DENBURY MARINE, L.L.C., a Louisiana limited liability company By:___________________________________ Name:_________________________________ Title:________________________________ DENBURY OPERATING COMPANY, a Delaware corporation By:___________________________________ Name:_________________________________ Title:________________________________ TUSCALOOSA ROYALTY FUND LLC, a Mississippi limited liability company By:___________________________________ Name:_________________________________ Title:________________________________ DENBURY GATHERING & MARKETING, INC., a Delaware corporation By:___________________________________ Name:_________________________________ Title:________________________________ [Signature page] SIGNATURE PAGE TO FIRST AMENDMENT TO FIFTH AMENDED AND RESTATED CREDIT AGREEMENT ADMINISTRATIVE AGENT: JPMORGAN CHASE BANK, N.A., as Administrative Agent By: /s/ J. Scott Fowler --------------------------------- J. Scott Fowler, Vice President BANKS: JPMORGAN CHASE BANK, N.A. By: /s/ J. Scott Fowler --------------------------------- J. Scott Fowler, Vice President [Signature Page] SIGNATURE PAGE TO FIRST AMENDMENT TO FIFTH AMENDED AND RESTATED CREDIT AGREEMENT BANKS: FORTIS CAPITAL CORP. By:___________________________________ Name:_________________________________ Title:________________________________ By:___________________________________ Name:_________________________________ Title:________________________________ [Signature Page] SIGNATURE PAGE TO FIRST AMENDMENT TO FIFTH AMENDED AND RESTATED CREDIT AGREEMENT BANKS: CALYON NEW YORK BRANCH, successor by consolidation to Credit Lyonnais New York Branch By:___________________________________ Name:_________________________________ Title:________________________________ [Signature Page] SIGNATURE PAGE TO FIRST AMENDMENT TO FIFTH AMENDED AND RESTATED CREDIT AGREEMENT BANKS: COMERICA BANK By:___________________________________ Name:_________________________________ Title:________________________________ [Signature Page] SIGNATURE PAGE TO FIRST AMENDMENT TO FIFTH AMENDED AND RESTATED CREDIT AGREEMENT BANKS: UNION BANK OF CALIFORNIA, N.A. By:___________________________________ Name:_________________________________ Title:________________________________ By:___________________________________ Name:_________________________________ Title:________________________________ [Signature Page] SIGNATURE PAGE TO FIRST AMENDMENT TO FIFTH AMENDED AND RESTATED CREDIT AGREEMENT BANKS: WELLS FARGO BANK, N.A. By:___________________________________ Name:_________________________________ Title:________________________________ [Signature Page] SIGNATURE PAGE TO FIRST AMENDMENT TO FIFTH AMENDED AND RESTATED CREDIT AGREEMENT BANKS: BANK OF AMERICA, N.A. By:___________________________________ Name:_________________________________ Title:________________________________ [Signature Page] SIGNATURE PAGE TO FIRST AMENDMENT TO FIFTH AMENDED AND RESTATED CREDIT AGREEMENT BANKS: BANK OF SCOTLAND By:___________________________________ Name:_________________________________ Title:________________________________ [Signature Page] SIGNATURE PAGE TO FIRST AMENDMENT TO FIFTH AMENDED AND RESTATED CREDIT AGREEMENT BANKS: COMPASS BANK By:___________________________________ Name:_________________________________ Title:________________________________ [Signature Page] -----END PRIVACY-ENHANCED MESSAGE-----