-----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, N4HcA/162euyxk5CxHqDr58kDajks31lYYgy0MwvbxjQyFjTSCmJi61oEL8TaGsj ML1rOL+XRDnRvJbDm3m72Q== 0000945764-97-000033.txt : 19971107 0000945764-97-000033.hdr.sgml : 19971107 ACCESSION NUMBER: 0000945764-97-000033 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971106 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: DENBURY RESOURCES INC CENTRAL INDEX KEY: 0000945764 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 000000000 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-12935 FILM NUMBER: 97708747 BUSINESS ADDRESS: STREET 1: 17304 PRESTON RD STREET 2: STE 200 CITY: DALLAS STATE: TX ZIP: 75252 BUSINESS PHONE: 2147133000 MAIL ADDRESS: STREET 1: 17304 PRESTON RD STREET 2: STE 200 CITY: DALLAS STATE: TX ZIP: 75252 FORMER COMPANY: FORMER CONFORMED NAME: NEWSCOPE RESOURCES LTD DATE OF NAME CHANGE: 19950627 10-Q 1 FORM 10-Q FOR PERIOD ENDING 9/30/97 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 SEPTEMBER 30, 1997 Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission File Number 33-93722 --------------------------- DENBURY RESOURCES INC. (Exact name of Registrant as specified in its charter) Canada Not applicable (State or other (I.R.S. Employer jurisdiction of Identification No.) incorporation or organization) 17304 Preston Rd., Suite 200 75252 Dallas, TX (Zipcode) (Address of principal executive offices) Registrant's telephone number, including area code: (972)713-3000 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 the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding at October 31, 1997 --------- ------------------------------- Common Stock, no par value 20,365,699 DENBURY RESOURCES INC. INDEX Part I. Financial Information Page Consolidated Balance Sheets, September 30, 1997 (Unaudited) and December 31, 1996 3 Consolidated Statements of Income for the three and nine months ended September 30, 1997 and 1996 (Unaudited) 4 Consolidated Statements of Cash Flows for the nine months ended September 30, 1997 and 1996 (Unaudited) 5 Notes to Consolidated Financial Statements 6-8 Management's Discussion and Analysis of Financial Condition and Results of Operations 9-15 Part II. Other Information Exhibits and Reports on Form 8-K 16 Signatures 17 2 DENBURY RESOURCES INC. CONSOLIDATED BALANCE SHEETS (Amounts in thousands of U.S. Dollars)
September 30, December 31, 1997 1996 ---------- --------- (Unaudited) Assets Current assets Cash and cash equivalents $ 2,236 $ 13,453 Accrued production receivable 7,097 11,906 Trade and other receivables 14,507 3,643 ---------- ---------- Total current assets 23,840 29,002 ---------- ---------- Property and equipment (using full cost accounting) Oil and gas properties 230,521 159,724 Unevaluated oil and gas properties 6,389 6,413 Less accumulated depreciation and depletion (53,527) (31,141) ---------- ---------- Net property and equipment 183,383 134,996 ---------- ---------- Other assets 3,201 2,507 ---------- ---------- Total assets $ 210,424 $ 166,505 ========== ========== Liabilities and Shareholders' Equity Current liabilities Accounts payable and accrued liabilities $ 16,858 $ 10,903 Oil and gas production payable 4,060 5,550 Current portion of long-term debt 23 67 ---------- ---------- Total current liabilities 20,941 16,520 ---------- ---------- Long-term liabilities Long-term debt 20,005 125 Provision for site reclamation costs 938 613 Deferred income taxes and other 12,982 6,743 ---------- ---------- Total long-term liabilities 33,925 7,481 ---------- ---------- Shareholders' equity Common shares, no par value, unlimited shares authorized; outstanding - 20,364,799 and 20,055,757 shares at September 30, 1997 and December 31, 1996, respectively 132,744 130,323 Retained earnings 22,814 12,181 ---------- ---------- Total shareholders' equity 155,558 142,504 ---------- ---------- Total liabilities and shareholders' equity $ 210,424 $ 166,505 ========== ==========
(See accompanying notes to Consolidated Financial Statements) 3 DENBURY RESOURCES INC. CONSOLIDATED STATEMENTS OF INCOME (Amounts in thousands except per share amounts) (Unaudited - U.S. dollars)
Three Months Ended Nine Months Ended September 30, September 30, ------------------ ------------------ 1997 1996 1997 1996 ------- -------- -------- -------- Revenues Oil, gas and related product sales $20,180 $ 14,059 $ 60,083 $ 34,709 Interest and other income 221 301 986 425 ------- -------- -------- -------- Total revenues 20,401 14,360 61,069 35,134 ------- -------- -------- -------- Expenses Production 5,425 3,847 15,737 9,197 General and administrative 1,415 1,169 4,535 2,825 Interest 235 849 387 1,530 Imputed preferred dividends - 394 - 1,153 Provision for loss on early extinguishment of debt - - - 440 Depletion and depreciation 8,126 5,175 23,224 12,557 Franchise taxes 103 53 308 160 ------- -------- -------- -------- Total expenses 15,304 11,487 44,191 27,862 ------- -------- -------- -------- Income before income taxes 5,097 2,873 16,878 7,272 Provision for income taxes (1,886) (1,128) (6,245) (2,932) ------- -------- -------- -------- Net income $ 3,211 $ 1,745 $ 10,633 $ 4,340 ======= ======== ======== ======== Net income per common share Primary $ 0.16 $ 0.14 $ 0.53 $ 0.37 Fully diluted 0.15 0.13 0.50 0.36 Average number of common shares outstanding 20,273 11,820 20,175 11,616 ======== ======== ======== =========
(See accompanying notes to Consolidated Financial Statements) 4 DENBURY RESOURCES INC. CONSOLIDATED STATEMENTS OF CASH FLOW (Amounts in thousands of U.S. dollars) (Unaudited)
Nine Months Ended September 30, ----------------------- 1997 1996 --------- -------- Cash flow from operating activities: Net income $ 10,633 $ 4,340 Adjustments needed to reconcile to net cash flow provided by operations: Depreciation, depletion and amortization 23,224 12,557 Deferred income taxes 6,245 2,932 Imputed preferred dividend - 1,153 Provision for loss on early extinguishment of debt - 440 Other 64 345 --------- -------- 40,166 21,767 Changes in working capital items relating to operations: Accrued production receivable 4,809 (4,388) Trade and other receivables (10,864) (659) Accounts payable and accrued liabilities 5,955 9,688 Oil and gas production payable (1,490) 2,004 --------- -------- Net cash flow provided by operations 38,576 28,412 --------- -------- Cash flow from investing activities: Oil and gas expenditures (54,700) (25,704) Acquisition of oil and gas properties (16,073) (47,616) Net purchases of other assets (1,238) (1,290) Acquisition of subsidiary, net of cash acquired - 209 --------- -------- Net cash used for investing activities (72,011) (74,401) --------- -------- Cash flow from financing activities: Bank borrowings 19,900 44,900 Issuance of common stock 2,421 1,690 Costs of debt financing (33) (408) Other (70) (135) --------- -------- Net cash provided by financing activities 22,218 46,047 --------- -------- Net increase (decrease)in cash and cash equivalents (11,217) 58 Cash and cash equivalents at beginning of year 13,453 6,553 --------- -------- Cash and cash equivalents at end of period $ 2,236 $ 6,611 ========= ======== Supplemental disclosure of cash flow information: Cash paid during the period for interest $ 150 $ 1,080 Supplemental schedule of noncash financing activities: Conversion of subordinated debt to common stock - 1,465
(See accompanying notes to Consolidated Financial Statements) 5 DENBURY RESOURCES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) September 30, 1997 and 1996 1. ACCOUNTING POLICIES Interim Financial Statements 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 the opinion of management of Denbury Resources Inc. (the "Company" or "Denbury"), the accompanying unaudited financial statements contain all adjustments (consisting of normal recurring accruals) necessary to present fairly the consolidated financial position of the Company as of September 30, 1997, and the results of its operations for the three and nine months ended September 30, 1997 and 1996 and its cash flow for the nine months ended September 30, 1997 and 1996. These financial statements and the notes thereto should be read in conjunction with the Company's annual report on Form 10-K for the year ended December 31, 1996. Net Income per Common Share Net income per common share is computed by dividing the net income by the weighted average number of shares of common stock outstanding, after adjusting for the one-for-two reverse split effective on October 10, 1996. In accordance with Canadian generally accepted accounting principles ("GAAP"), the imputed dividend during 1996 on the Convertible First Preferred Shares, Series A ("Convertible Preferred") has been recorded as an operating expense in the accompanying financial statements and thus is deducted from net income in computing earnings per common share. The stock options and warrants were included in the calculation of fully-diluted earnings per share. The conversion of the Convertible Preferred and the convertible debt were either anti-dilutive or immaterial and were not included in the calculation of earnings per share for the three and nine months ended September 30, 1996. All of the Convertible Preferred and the convertible debt were converted into common shares during 1996 and thus were not relevant to the calculation of earnings per share during 1997. 2. NOTES PAYABLE AND LONG-TERM INDEBTEDNESS
September December 30, 31, 1997 1996 ----------- ---------- (Amounts in thousands) (Unaudited) Senior bank loan $ 20,000 $ 100 Other notes payable 28 92 Less portion due within one year (23) (67) ----------- ---------- Total long-term debt $ 20,005 $ 125 =========== ==========
Bank Credit Agreement In April, 1997, the Company amended its bank credit facility (i) to extend the revolver by one year to May 31, 1999, (ii) to extend the termination date by one year to May 31, 2002, and (iii) to reduce the commitment fee percentages. As of September 30, 1997, the Company had $20 million outstanding on this line of credit with a borrowing base of $60 million. In October, 1997, the Company further amended its bank credit facility to (i) modify the security requirement of the facility such that mortgages will only be required by the banks to the extent that they were in place as of the date of the amendment and (ii) to modify certain other definitions and minor provisions of the agreement. 6 DENBURY RESOURCES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) September 30, 1997 and 1996 3. DIFFERENCES IN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES BETWEEN CANADA AND THE UNITED STATES The consolidated financial statements have been prepared in accordance with Canadian GAAP. The primary difference between Canadian and U.S. GAAP affecting the Company's 1997 financial statements result from the different methodologies for computing earnings per common share. Under U.S. GAAP, the primary and fully-diluted earnings per common share for the first nine months of 1997 would be $0.50 and $0.49, as compared to the $0.53 and $0.50, respectively, as reported under Canadian GAAP. For the three months ended September 30, 1997, the primary and fully-diluted earnings per common share under U.S. GAAP would be $0.15, as compared to the $0.16 and $0.15, as reported under Canadian GAAP. For 1996, under U.S. GAAP, the primary and fully-diluted earnings per common share for the first nine months of 1996 would be $0.36 and $0.35, compared to the $0.37 and $0.36, respectively, as reported under Canadian GAAP. For the three months ended September 30, 1996, the primary and fully-diluted earnings per common share under U.S. GAAP would be $0.14, as compared to the $0.14 and $0.13 as reported under Canadian GAAP. In February 1997 the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128 Earnings Per Share, ("SFAS 128"). SFAS 128 simplifies the standards for computing earnings per share ("EPS") and makes them more comparable to international EPS standards. SFAS 128 replaces the presentation of primary EPS with a presentation of basic EPS. Basic EPS excludes dilution and is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised, converted into common stock or resulted in the issuance of common shares that then shared in the earnings of the entity. Diluted EPS is computed similarly to fully diluted EPS pursuant to Accounting Principles Board Opinion No. 15. SFAS 128 is effective for financial statements issued for periods ending after December 15, 1997, including interim periods. Earlier application is not permitted. Basic EPS for the three and nine months ended September 30, 1997 under SFAS 128 would be $0.16 and $0.53 per common share respectively and $0.14 and $0.37, respectively, for the three and nine months ended September 30, 1996. This compares to $0.15, $0.50, $0.14 and $0.36 for the same respective periods as computed under current U.S. GAAP. During the first nine months of 1996, the Company expensed $440,000 of debt issue cost relating to the Company's prior bank credit agreement with ING Capital Corporation and $1,153,000 relating to the imputed preferred dividend on the Convertible Preferred. Under U.S. GAAP, a loss on early extinguishment of debt is reported as an extraordinary item rather than as an operating expense and the preferred dividend is reported as a deduction from net income to arrive at the net income attributable to the common shareholders rather than deducted as an operating expense. While net income per common share and all balance sheet accounts are not affected by this difference in GAAP, the net income for the first nine months of 1996 under U.S. GAAP would be $5,493,000 while under Canadian GAAP the amount reported was $4,340,000. For the three months ended September 30, 1996, net income under U.S. GAAP would be $2,139,000 while under Canadian GAAP the amount reported was $1,745,000. Since the Convertible Preferred was converted into Common Shares on October 30, 1996, this difference in GAAP did not affect the comparable 1997 financial results. In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income" and SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information." SFAS No. 130 establishes standards for reporting and display of comprehensive income in the financial statements. Comprehensive income is the total of net income and all other non-owner changes in equity. SFAS No. 131 requires that companies disclose segment data based on how management makes decisions about allocating resources to segments and measuring their performance. SFAS Nos. 130 and 131 are effective for 1998. Adoption of these standards is not expected to have an effect on the Company's financial statements, financial position or results of operations. 7 4. COMMITMENTS On August 6, 1997, the Company entered into a ten year office lease for its corporate headquarters which is expected to commence late in 1998. The estimated minimum annual rental payments for the first five years of the lease are projected to be $1.15 million per year (commencing on occupancy) and the minimum annual rental payments during the remaining five years of the lease are projected to be $1.25 million per year. 8 DENBURY RESOURCES INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Denbury is an independent energy company engaged in acquisition, development and exploration activities in the U.S. Gulf Coast region. Since 1993, after having disposed of its Canadian oil and natural gas properties, the Company has focused its operations primarily onshore in Louisiana and Mississippi. Over the last four years, the Company has achieved rapid growth in proved reserves, production and cash flow by concentrating on the acquisition of properties which it believes have significant upside potential and through the efficient development, enhancement and operation of those properties. Capital Resources and Liquidity During the first nine months of 1997, the Company made total capital expenditures of $70.8 million, which was primarily funded by the cash generated by operations ($40.2 million), bank debt ($19.9 million), and its available cash. The Company has projected capital expenditures for 1997 of over $95 million. Although the Company's projected cash flow is highly variable and difficult to predict as it is dependent on product prices, drilling success, and other factors, these projected expenditures are expected to exceed the Company's cash flow during 1997. However, as of September 30, 1997, the Company had available working capital of $2.9 million as well as approximately $40 million available on its $60 million borrowing base to fund any potential cash flow deficits. The Company also believes that it could increase this borrowing base if necessary. Furthermore, if external capital resources are limited or reduced in the future, the Company can also adjust its capital expenditure program accordingly although such adjustments could limit, or even eliminate, the Company's future growth. In addition to its internal capital expenditure program, the Company has historically required capital for the acquisition of producing properties, which have been a significant factor in the Company's rapid growth during recent years, prior to 1997. During 1996, the Company spent approximately $48.2 million on property acquisitions, while only $16.1 million was spent during the first nine months of 1997. Although the annual expenditures were significantly less prior to 1996, during 1993, 1994 and 1995 approximately 60% of the total capital expenditures related to acquisitions. The Company is continuing to seek additional acquisitions that meet its economic criteria and would fund these additional acquisitions, if any, with bank debt or other forms of debt and equity capital. There can be no assurance that additional suitable acquisitions will be identified in the future or that any such acquisitions will be successful in achieving desired profitability objectives. Without suitable acquisitions or the capital to fund such acquisitions, the Company's future growth could be limited or even eliminated. Sources and Uses of Funds During the first nine months of 1997, the Company spent approximately $54.7 million on oil and natural gas exploration and development expenditures and approximately $16.1 million on acquisitions. The exploration and development expenditures included approximately $38.2 million spent on drilling, $6.7 million on geological, geophysical and acreage expenditures and the balance of $9.8 million was spent on workover costs. These expenditures were funded by available cash, bank debt and cash flow from operations. During the first nine months of 1996, the Company spent approximately $73.3 million of which approximately $47.6 million was spent on acquisitions. The acquisition expenditures included approximately $37.2 million for producing properties acquired from Amerada Hess Corporation (the "Hess Acquisition"), approximately $7.5 million for properties acquired from Ottawa Energy, Inc. plus four other minor acquisitions. These expenditures were funded primarily by bank debt, plus the Company's available cash and cash flow from operations. 9 DENBURY RESOURCES INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Operating Income Operating income increased significantly during 1997 as compared to 1996 as outlined in the following chart. Oil and gas revenue increased primarily as a result of the increased oil and gas production.
Three Months Ended Nine Months Ended September 30, September 30, - ----------------------------------- ------------------- ------------------ 1997 1996 1997 1996 - ----------------------------------- ------- -------- ------- ------- OPERATING INCOME (THOUSANDS) Oil sales $12,085 $ 8,296 $36,436 $17,455 Natural gas sales 8,095 5,763 23,647 17,254 Less production expenses (5,425) (3,847) (15,737) (9,197) ------- -------- ------- ------- Operating income $14,755 $ 10,212 $44,346 $25,512 ------- -------- ------- ------- UNIT PRICES Oil price per barrel ("Bbl") $ 16.12 $ 18.84 $ 17.53 $ 18.05 Gas price per thousand cubic feet ("Mcf") 2.43 2.36 2.54 2.64 NETBACK PER BOE (1): Sales price $ 15.45 $ 16.59 $ 16.56 $ 16.87 Production expenses (4.15) (4.54) (4.34) (4.47) ------- -------- ------- ------- Production netback $ 11.30 $ 12.05 $ 12.22 $ 12.40 ------- -------- ------- ------- AVERAGE DAILY PRODUCTION VOLUME: Bbls 8,148 4,785 7,615 3,529 Mcf 36,282 26,537 34,061 23,867 BOE (1) 14,195 9,208 13,292 7,507 - ----------------------------------- ------- -------- ------- ------- (1) Barrel of oil equivalent using the ratio of one barrel of oil to 6 Mcf of natural gas ("BOE").
Production increases have been fueled by both internal growth from the Company's development and exploration programs and from the acquisition of producing properties during 1996, particularly the Hess Acquisition. During May and June, 1996, the first two months of ownership, the properties included in the Hess Acquisition averaged approximately 2,945 BOE per day ("BOE/d"). During the first, second and third quarters of 1997, the production from these same properties averaged approximately 4,385 BOE/d, 4,613 BOE/d and 5,373 respectively, a 49%, 57% and 82% increase respectively from initial production levels. Total corporate production on a BOE/d basis increased 21% from the fourth quarter of 1996 average of 10,132 to the first quarter of 1997 average of 12,256 BOE/d, increased an additional 9% to 13,405 BOE/d for the second quarter of 1997 and an additional increase of 6% to 14,195 BOE/d for the third quarter of 1997. Since the Company had only $16.1 million of acquisitions during the first nine months of 1997 (most of which occurred during the third quarter) the production increases during the last twelve months were almost solely as a result of internal development. On a quarter to quarter comparison, production on a BOE basis increased 54% between the respective third quarters. When comparing the nine month periods, production on a BOE basis has increased 77% as this increase includes the partial effect of the Hess Acquisition effective in May, 1996. 10 DENBURY RESOURCES INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Oil and gas revenue has increased primarily because of the large increase in production. Between the third quarters of 1996 and 1997, oil product prices decreased 14% while natural gas product prices increased by only 3%, making an overall price decline of 7% if measured on a BOE basis. This overall decline in product prices partially offset the revenue gains from the improved production levels particularly since the 1997 production is more heavily weighted toward oil. During the third quarter of 1996, approximately 52% of the Company's production on a BOE basis was oil while during the third quarter of 1997, approximately 57% of the Company's production on a BOE basis was oil. When comparing the two nine month periods of 1996 and 1997, oil product prices decreased by 3% and natural gas product prices declined 4% or an overall decline of 2% when measured on a BOE basis. During the first nine months of 1996, approximately 47% of the Company's production on a BOE basis was oil while during the first nine months of 1997, approximately 57% of the Company's production on a BOE basis was oil. Production expenses on an absolute basis increased between the relative periods of 1996 and 1997 along with the increases in production. On a BOE basis, production expenses decreased 8% from the third quarter of 1996 to the comparable period in 1997 and decreased 3% when comparing the first nine months of 1996 to the first nine months of 1997. This improvement was a result of efficiencies achieved from higher production volumes (on both an absolute basis and per well basis) despite the Company having a higher percentage of oil production in 1997 as compared to 1996, which typically has a higher operating cost per BOE. General and Administrative Expenses General and administrative ("G&A") expenses have increased as outlined below along with the Company's growth.
Three Months Ended Nine Months Ended September 30, September 30, - ------------------------------- -------------------- -------------------- 1997 1996 1997 1996 - ------------------------------- -------- ------- -------- -------- NET G&A EXPENSES (THOUSANDS) Gross expenses $ 3,328 $ 2,334 $ 9,999 $ 5,583 State franchise taxes 103 53 308 159 Operator overhead charges (1,398) (829) (3,789) (1,906) Capitalized exploration expenses (515) (336) (1,675) (851) -------- ------- -------- -------- Net expenses $ 1,518 $ 1,222 $ 4,843 $ 2,985 -------- ------- -------- -------- Average G&A expense per BOE $ 1.16 $ 1.44 $ 1.33 $ 1.45 Employees as of September 30 141 109 141 109 - ------------------------------- -------- ------- -------- --------
On a BOE basis, G&A expenses declined 8% when comparing the first nine months of 1996 to the comparable period in 1997. When comparing the third quarter of 1996 to the third quarter of 1997, G&A costs decreased 19% on a BOE basis. Both decreases are partially attributable to the increased production on both an absolute and per well basis. Furthermore, the respective well operating agreements allow the Company, when they are operator, to charge a well with a specified overhead rate during the drilling phase. As a result of the increased drilling activity in 1997, the percentage of gross G&A recovered through these types of allocations (listed in the above table as "Operator overhead charges") increased when compared to the corresponding periods of 1996. During the first nine months of 1996, approximately 34% was recovered by operator overhead charges, while during the comparable period of 1997 this increased to 38%. This trend is even more pronounced in the third quarter of 1997 with 42% of the gross G&A recovered as compared to 35% for the third quarter of 1996. 11 DENBURY RESOURCES INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Interest and Financing Expenses
Three Months Ended Nine Months Ended September 30, September 30, - ----------------------------------- ------------------- ------------------ AMOUNTS IN THOUSANDS EXCEPT PER UNIT AMOUNTS 1997 1996 1997 1996 - ----------------------------------- ------- -------- -------- ------- Interest expense $ 235 $ 849 $ 387 $ 1,530 Non-cash interest expense (20) (22) (64) (345) ------- -------- -------- ------- Cash interest expense 215 827 323 1,185 Interest and other income (221) (301) (986) (425) ------- -------- -------- ------- Net interest expense (income) $ (6) $ 526 $ (663) $ 760 - ----------------------------------- ------- -------- -------- ------- Average interest expense (income) per BOE $ 0.00 $ 0.62 $ (0.18) $ 0.37 Average debt outstanding 10,375 44,939 3,610 20,673 - ----------------------------------- ------- -------- -------- ------- Imputed preferred dividend - $ 394 - $ 1,153 Loss on early extinguishment of debt - - - 440 - ----------------------------------- ------- -------- -------- -------
During the first half of 1996 and 1997, the Company had minimal debt outstanding as virtually all of the bank debt had been retired during the previous fourth quarter. In 1995, the bank debt was repaid with proceeds from the December 1995 private placement of equity with the Texas Pacific Group ("TPG") and in 1996, the debt was repaid with proceeds from a public offering of Common Shares completed in October, 1996. However, in 1996 the Company did incur debt late in the second quarter in order to fund property acquisitions and during the third quarter of 1997, the Company borrowed approximately $20 million to fund $12.5 million of property acquisitions and $7.5 million of development expenditures. The private placement of equity in December 1995 with TPG included 1.5 million shares of Convertible Preferred. During the first nine months of 1996, the Company recognized $1,153,000 of charges representing the imputed preferred dividend on these shares. On October 30, 1996 the Convertible Preferred was converted into 2.8 million Common Shares. Under Canadian GAAP, this dividend was reported as an operating expense, while under U.S. GAAP this would not be an expense but it would be deducted from net income to arrive at net income attributable to the common shareholders. During the first nine months of 1996, the Company had a $440,000 charge relating to a loss on early extinguishment of debt. These costs related to the remaining unamortized debt issue costs of the Company's prior credit facility which was replaced in May 1996. Under U.S. GAAP, a loss on early extinguishment of debt would be an extraordinary item rather than a normal operating expense as required by Canadian GAAP. Depletion, Depreciation and Site Restoration Depletion, depreciation and amortization ("DD&A") has increased along with the additional capitalized cost and increased production. The Company's DD&A rate per BOE for the first half of 1997 increased to $6.50 per BOE to provide for the estimated effect of reduced oil prices on reserve quantities, the estimated effect of rising drilling costs on certain proved undeveloped locations, and higher than anticipated costs on wells drilled in Louisiana that were proved undeveloped locations at December 31, 1996. In comparison, the Company's DD&A rate was $5.99 per BOE for the year ended December 31, 1996. The oil prices used in the December 31, 1996 reserve report were based on a West Texas Intermediate ("WTI") posting price of $23.39 per bbl in accordance with the rules of the Securities and Exchange Commission while the comparable WTI price at June 30, 1997 was $17.15 per bbl. This reduction in oil prices reduced the June 30, 1997 estimated reserves by approximately 1.3 million barrels. As a 12 DENBURY RESOURCES INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS result of two oil and gas discoveries announced in September, 1997, the Company's third quarter DD&A rate decreased to $6.22 per BOE ($6.40 per BOE for the nine months ended September 30, 1997). During the third quarter of 1997, the Company also transferred approximately $4.6 million from the unevaluated properties to the full cost pool leaving a balance of approximately $6.4 million in unevaluated properties as of September 30, 1997. The DD&A effect of this transfer was approximately $440,000 for the quarter. The Company also provides for the estimated future costs of well abandonment and site reclamation, net of any anticipated salvage, on a unit-of-production basis. This provision is included in the DD&A expense and has increased each year along with an increase in the number of properties owned by the Company.
Three Months Ended Nine Months Ended September 30, September 30, - --------------------------------- ------------------- ------------------- AMOUNTS IN THOUSANDS EXCEPT PER UNIT AMOUNTS 1997 1996 1997 1996 - --------------------------------- -------- ------- -------- -------- Depletion and depreciation $ 8,050 $ 5,146 $ 22,899 $ 12,430 Site restoration provision 76 29 325 127 -------- ------- -------- -------- Total amortization $ 8,126 $ 5,175 $ 23,224 $ 12,557 -------- ------- -------- -------- Average DD&A cost per BOE $ 6.22 $ 6.11 $ 6.40 $ 6.10 - --------------------------------- -------- ------- -------- --------
Income Taxes Due to a net operating loss of the U.S. subsidiary for tax purposes, the Company does not have any current tax provision. The deferred tax provision as a percentage of net income has varied depending on the mix of Canadian and U.S. expenses. The rate was slightly higher in 1996 due to the non-deductible imputed preferred dividend and interest on the subordinated debt.
Three Months Ended Nine Months Ended September 30, September 30, - -------------------------------------- ---------------- ----------------- 1997 1996 1997 1996 - -------------------------------------- ------- ------ ------- ------- Deferred income taxes (thousands) $ 1,886 $1,128 $ 6,245 $ 2,932 Average income tax costs per BOE $ 1.44 $ 1.33 $ 1.72 $ 1.43 Effective tax rate 37% 39% 37% 40% - -------------------------------------- ------- ------ ------- -------
Net Income Primarily as a result of the increased production, net income and cash flow from operations increased substantially on both a gross and per share basis between the first nine months of 1996 and the first nine months of 1997 as outlined below. Net income on a per share basis also increased between the third quarter of 1996 and the third quarter of 1997, even though the percentage increase was less significant as a result of the adjustments to the DD&A rate as previously discussed and the significant increase in the number of common shares outstanding since September 30, 1996. 13 DENBURY RESOURCES INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Three Months Ended Nine Months Ended September 30, September 30, - --------------------------------------- ---------------- ----------------- AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS 1997 1996 1997 1996 - --------------------------------------- ------- ------ ------- ------- Net income $ 3,211 $1,745 $10,633 $ 4,340 Net income per common share: Primary $ 0.16 $ 0.14 $ 0.53 $ 0.37 Fully diluted 0.15 0.13 0.50 0.36 Average number of common shares outstanding 20,273 11,820 20,175 11,616 Cash flow from operations (1) $13,243 $8,464 $40,166 $21,767 - --------------------------------------- ------- ------ ------- ------- (1) Represents cash flow provided by operations, exclusive of the net change in non-cash working capital balances.
The following table summarizes the cash flow, DD&A and net income on a BOE basis for the comparative periods. Each of the individual components are discussed above.
Three Months Nine months Ended Ended September 30, September 30, - -------------------------------------- ---------------- ------------------- PER BOE (6:1 BASIS) 1997 1996 1997 1996 - -------------------------------------- ------- ------ ------- ------ Revenue $ 15.45 $16.59 $ 16.56 $16.87 Production expenses (4.15) (4.54) (4.34) (4.47) ------- ------ ------- ------ Production netback 11.30 12.05 12.22 12.40 General and administrative (1.16) (1.44) (1.33) (1.45) Interest 0.00 (0.62) 0.18 (0.37) ------- ------ ------- ------ Cash flow (1) 10.14 9.99 11.07 10.58 DD&A (6.22) (6.11) (6.40) (6.10) Deferred income taxes (1.44) (1.33) (1.72) (1.43) Other non-cash items (0.02) (0.49) (0.02) (0.94) - -------------------------------------- ------- ------ ------- ------ Net income $ 2.46 $ 2.06 $ 2.93 $ 2.11 - -------------------------------------- ------- ------ ------- ------ (1) Represents cash flow provided by operations, exclusive of the net change in non-cash working capital balances.
Year 2000 Modifications The Company is currently reviewing its computer systems in order to evaluate necessary modifications for the year 2000. The Company does not currently anticipate that it will incur material expenditures to complete any such modifications. 14 DENBURY RESOURCES INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Forward-Looking Information The statements contained in this Quarterly Report on Form 10-Q ("Quarterly Report") that are not historical facts, including, but not limited to, statements found in this Management's Discussion and Analysis of Financial Condition and Results of Operations, are forward-looking statements, as that term is defined in Section 21E of the Securities and Exchange Act of 1934, as amended, that involve a number of risks and uncertainties. Such forward-looking statements may be or may concern, among other things, capital expenditures, drilling activity, acquisition plans and proposals and dispositions, development activities, cost savings, production efforts and volumes, hydrocarbon reserves, hydrocarbon prices, liquidity, regulatory matters and competition. Such forward-looking statements generally are accompanied by words such as "plan," "estimate," "expect," "predict," "anticipate," "projected," "should," "assume," "believe" or other words that convey the uncertainty of future events or outcomes. Such forward-looking 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, the uncertainty of drilling results and reserve estimates, operating hazards, acquisition risks, requirements for capital, general economic conditions, competition and government regulations, as well as the risks and uncertainties discussed in this Quarterly Report, including, without limitation, the portions referenced above, and the uncertainties set forth from time to time in the Company's other public reports, filings and public statements. 15 Part II. Other Information Item 6. Exhibits and Reports on Form 8-K during the Third Quarter of 1997 Exhibits: 10 Second amendment to Credit Agreement dated October 15, 1997 to the Credit Agreement dated May 31, 1996 between the Company and NationsBank of Texas, N.A. as agent. Reports on Form 8-K: On September 12, 1997, the Company reported that it had made two recent discoveries which added approximately 4.2 million barrels of oil and 6.7 billion cubic feet of gas to its proved reserves based on estimates from its independent consulting engineers. 16 SIGNATURE 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) /s/ Phil Rykhoek By: -------------------------------- Phil Rykhoek Chief Financial Officer Date: November 6, 1997 17 EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE DENBURY RESOURCES INC. SEPTEMBER 30, 1997 FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000945764 Denbury Resources Inc. 1000 U.S. Dollars 9-mos DEC-31-1997 JAN-01-1997 SEP-30-1997 1 2,236 0 21,840 0 0 23,840 236,910 (53,527) 210,424 20,941 0 0 0 132,744 22,814 210,424 60,083 61,069 0 43,804 0 0 387 16,878 6,245 10,633 0 0 0 10,633 .53 .50
EX-10 3 SECOND AMENDMENT TO CREDIT AGREEMENT EXHIBIT 10 SECOND AMENDMENT TO CREDIT AGREEMENT 18 SECOND AMENDMENT TO CREDIT AGREEMENT This Second Amendment to Credit Agreement (this "Second Amendment") is entered into as of the 15th day of October, 1997, by and among Denbury Management, Inc. ("Borrower"), Denbury Resources, Inc., ("Resources"), Denbury Holdings, Ltd., ("Holdings", together with Resources, the "Guarantors"), NationsBank of Texas, N.A., as Agent ("Agent"), and NationsBank of Texas, N.A., Bankers Trust Company and Internationale Nederlanden (U.S.) Capital Corporation, as Banks (the "Banks"). W I T N E S E T H WHEREAS, Borrower, Guarantors, Agent and the Banks are parties to that certain Credit Agreement dated as of May 31, 1996, as amended by that certain First Amendment to Credit Agreement dated as of April 1, 1997 (as amended, 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 the Banks have made certain Loans to Borrower, and Agent has issued certain Letters of Credit on behalf of Borrower; and WHEREAS, Borrower has requested that the collateral requirements and certain covenants in the Credit Agreement be amended in certain respects; and WHEREAS, subject to the terms and conditions herein contained, the 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, Agent and each Bank hereby agree as follows: Section 1. Amendments. In reliance on the representations, warranties, covenants and agreements contained in this Second Amendment, the Credit Agreement shall be amended effective October 15, 1997 (the "Effective Date") in the manner provided in this Section 1. 1.1. Additional Definitions. Section 1.1 of the Credit Agreement shall be amended to add the definitions of "First Amendment", "Second Amendment" and "Unproved Reserves" as follows: "First Amendment" means that certain First Amendment to Credit Agreement dated as of April 1, 1997 among Borrower, Guarantors, Agent and Banks. "Second Amendment" means that certain Second Amendment to Credit Agreement dated as o October 15, 1997 among Borrower, Guarantors, Agent and Banks. "Unproved Reserves" means Mineral Interests which do not constitute Proved Mineral Interests. 1.2 Amendment to Definition. The definition of "Loan Papers" in Section 1.1 of the Credit Agreement shall be amended to read in full as follows: "Loan Papers" means this Agreement, the First Amendment, the Second Amendment, the Notes, the Facility Guarantees, the Parent Pledge Agreement, the Holdings Pledge Agreement, the Borrower Pledge Agreement, the Assignment and Amendment to Mortgages, all Mortgages now or at any time hereafter delivered pursuant to Section 5.1, and all other certificates, documents or instruments delivered in connection with this Agreement, as the foregoing may be amended from time to time. 19 1.3 Security. Section 5.1 of the Credit Agreement shall be amended to read in full as follows: SECTION 5.1 Security. The Obligations shall be secured by (a) those Mortgages granted by Borrower in favor of Agent as of the date of the Second Amendment which Mortgages create first and prior Liens (subject only to Permitted Encumbrances) covering and encumbering the Mineral Interests described therein, and (b) one hundred percent (100%) of the issued and outstanding capital stock of every class of Holdings and Borrower. 1.4 Asset Disposition. Section 9.5 of the Credit Agreement shall be amended to add the following subsection (c) to the end of the first sentence of such Section: ", and (c) the sale, lease, transfer, abandonment or the disposition of Unproved Reserves." Section 2. Representations and Warranties of Borrower. To induce the Banks and Agent to enter into this First Amendment, Borrower and Guarantors hereby represent and warrant to Agent as follows: (a) Each representation and warranty of Borrower and Guarantors 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. (b) The execution, delivery and performance by Borrower and Guarantors of this Second Amendment are within the Borrower's and each Guarantor's corporate powers, have been duly authorized by 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 Borrower, the Subsidiaries of Borrower or the Guarantors or result in the creation or imposition of any Lien upon any of the assets of Borrower or the Subsidiaries of Borrower or the Guarantors except Permitted Encumbrances. (c) This Second Amendment constitutes the valid and binding obligations of Borrower and the Guarantors 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. (d) Borrower and Guarantors have no defenses to payment, counterclaim or rights of set-off with respect to the Obligations existing on the date hereof. Section 3.Miscellaneous. 3.1 Reaffirmation of Loan Papers; Extension of Liens. 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. Borrower and Guarantors hereby extend the Liens securing the Obligations until the Obligations have been paid in full or are specifically released by Agent and Banks prior thereto, and agree that the amendments and modifications herein contained shall in no manner affect or impair the Obligations or the Liens securing payment and performance thereof. Notwithstanding the foregoing, each Bank hereby authorizes Agent to release 20 the Mineral Interests held by Borrower in the Lirette Field from the Liens securing the Obligations solely to the extent of depths below 11,600 feet in connection with the disposition by Borrower of certain Unproved Reserves held by Borrower in such field (each Bank acknowledges that, in addition to such Unproved Reserves, the Mineral Interests released will include certain Proved Mineral Interests). 3.2 Parties in Interest. All of the terms and provisions of this Second Amendment shall bind and inure to the benefit of the parties hereto and their respective successors and assigns. 3.3 Legal Expenses. Borrower hereby agrees to pay on demand all reasonable fees and expenses of counsel to Agent incurred by Agent, in connection with the preparation, negotiation and execution of this Second Amendment and all related documents. 3.4 Counterparts. This Second Amendment may be executed in counterparts, and all parties need not execute the same counterpart; however, no party shall be bound by this Second Amendment until all parties have executed a counterpart. Facsimiles shall be effective as originals. 3.5 Complete Agreement. THIS SECOND 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 THE PARTIES. 3.6 Headings. The headings, captions and arrangements used in this Second Amendment are, unless specified otherwise, for convenience only and shall not be deemed to limit, amplify or modify the terms of this Second Amendment, nor affect the meaning thereof. IN WITNESS WHEREOF, the parties hereto have caused this Second Amendment to be duly executed by their respective authorized officers on the date and year first above written. 21 BORROWER: DENBURY MANAGEMENT, INC., a Texas corporation By:_______________________________________ Name:_____________________________________ Title:____________________________________ By:_______________________________________ Name:_____________________________________ Title:____________________________________ GUARANTORS: DENBURY HOLDINGS, LTD., a corporation incorporated under the Business Corporations Act (Alberta) By:_______________________________________ Name:_____________________________________ Title:____________________________________ By:_______________________________________ Name:_____________________________________ Title:____________________________________ DENBURY RESOURCES, INC., a corporation incorporated under the Canada Business Corporations Act By:_______________________________________ Name:_____________________________________ Title:____________________________________ By:_______________________________________ Name:_____________________________________ Title:____________________________________ 22 AGENT: NATIONSBANK OF TEXAS, N.A. By:_______________________________________ J. Scott Fowler Vice President BANKS: NATIONSBANK OF TEXAS, N.A. By:_______________________________________ J. Scott Fowler Vice President BANKERS TRUST COMPANY By:_______________________________________ Name:_____________________________________ Title:____________________________________ INTERNATIONALE NEDERLANDEN (U.S.) CAPITAL CORPORATION By:_______________________________________ Name:_____________________________________ Title:____________________________________ 23 -----END PRIVACY-ENHANCED MESSAGE-----