-----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, MzZElZUHdbdbR/mB5y+NDMnChn7Wt9j3wava3TrnFCtHqWwszYGYBMO5twyEJwc/ ccn7DGT99t4sTlKca4/S+A== 0000945764-98-000021.txt : 19980508 0000945764-98-000021.hdr.sgml : 19980508 ACCESSION NUMBER: 0000945764-98-000021 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980507 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: 98612904 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 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, 1998 Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission file number 33-93722 --------------------------- DENBURY RESOURCES INC. DENBURY MANAGEMENT, INC. (Exact name of Registrants as specified in its charter) Canada Not applicable Texas 75-2294373 (State or other (I.R.S. Employer jurisdiction of incorporation Identification No.) or organization) 17304 Preston Rd., Suite 200 75252 Dallas, TX (Zip code) (Address of principal executive offices) 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 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, 1998 ----- ----------------------------- Common Stock, no par value 26,692,104 DENBURY RESOURCES INC. INDEX Part I. Financial Information Page Consolidated Balance Sheets at March 31, 1998(Unaudited) and December 31, 1997 3 Consolidated Statements of Operations for the three months ended March 31, 1998 and 1997 (Unaudited) 4 Consolidated Statements of Cash Flows for the three months ended March 31, 1998 and 1997 (Unaudited) 5 Notes to Consolidated Financial Statements 6-8 Management's Discussion and Analysis of Financial Condition and Results of Operations 9-16 Part II. Other Information Exhibits and Reports on Form 8-K 17 Signatures 18 2 DENBURY RESOURCES INC. CONSOLIDATED BALANCE SHEETS (Amounts in thousands of U.S. Dollars)
March 31, December 31, 1998 1997 --------- --------- (Unaudited) Assets Current assets Cash and cash equivalents........................ $ 3,808 $ 9,326 Accrued production receivable.................... 10,285 8,692 Trade and other receivables...................... 13,285 15,362 --------- ---------- Total current assets.......................... 27,378 33,380 --------- ---------- Property and equipment (using full cost accounting) Oil and gas properties........................... 411,740 388,766 Unevaluated oil and gas properties............... 86,234 82,798 Less accumulated depreciation and depletion...... (74,800) (62,732) --------- ---------- Net property and equipment.................... 423,174 408,832 --------- ---------- Other assets........................................ 8,782 5,336 --------- ---------- Total assets............................. $ 459,334 $ 447,548 ========= ========== Liabilities and Shareholders' Equity Current liabilities Accounts payable and accrued liabilities......... $ 17,651 $ 24,616 Oil and gas production payable................... 7,423 6,052 Current portion of long-term debt................ 17 20 --------- ---------- Total current liabilities..................... 25,091 30,688 --------- ---------- Long-term liabilities Long-term debt................................... 165,000 240,000 Provision for site reclamation costs............. 1,106 1,017 Deferred income taxes and other.................. 15,249 15,620 --------- ---------- Total long-term liabilities................... 181,355 256,637 --------- ---------- Shareholders' equity Common shares, no par value, unlimited shares authorized; outstanding - 26,642,729 and 20,388,683 shares at March 31, 1998 and December 31, 1997, respectively............... 226,484 133,139 Retained earnings................................ 26,404 27,084 --------- ---------- Total shareholders' equity.................... 252,888 160,223 --------- ---------- Total liabilities and shareholders' equity.... $ 459,334 $ 447,548 ========= ==========
(See accompanying notes to Consolidated Financial Statements) 3 DENBURY RESOURCES INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Amounts in thousands except per share amounts) (Unaudited - U.S. dollars)
Three Months Ended March 31, ------------------------- 1998 1997 --------- --------- Revenues Oil, gas and related product sales $ 25,188 $ 21,141 Interest and other income....... 367 512 --------- --------- Total revenues............ 25,555 21,653 --------- --------- Expenses Production...................... 7,854 5,053 General and administrative...... 1,776 1,521 Interest........................ 4,391 79 Depletion and depreciation...... 12,387 6,625 Franchise taxes................. 200 97 --------- --------- Total expenses........... 26,608 13,375 --------- --------- Income (loss) before income taxes.... (1,053) 8,278 Provision for income taxes........... 373 (3,063) --------- --------- Net income (loss).................... $ (680) $ 5,215 ========= ========= Net income (loss) per common share Basic .......................... $ (0.03) $ 0.26 Fully diluted .................. (0.03) 0.24 Average number of common shares outstanding 23,425 20,094 ========= =========
(See accompanying notes to Consolidated Financial Statements) 4 DENBURY RESOURCES INC. CONSOLIDATED STATEMENTS OF CASH FLOW (Amounts in thousands of U.S. dollars) (Unaudited)
Three Months Ended March 31, ------------------------ 1998 1997 --------- --------- Cash flow from operating activities: Net income (loss) ................................ $ (680) $ 5,215 Adjustments needed to reconcile to net cash flow provided by operations: Depreciation, depletion and amortization .... 12,387 6,625 Deferred income taxes ....................... (373) 3,063 Other ....................................... 121 19 -------- -------- 11,455 14,922 Changes in working capital items relating to operations: Accrued production receivable ............... (1,593) 4,965 Trade and other receivables ................. 2,077 (1,033) Accounts payable and accrued liabilities .... (6,965) 1,999 Oil and gas production payable .............. 1,371 (2,104) -------- -------- Net cash flow provided by operations ............... 6,345 18,749 --------- -------- Cash flow from investing activities: Oil and natural gas expenditures ............ (26,163) (14,965) Acquisition of oil and natural gas properties (247) (177) Net purchases of other assets ............... (279) (430) --------- -------- Net cash used for investing activities ............. (26,689) (15,572) --------- -------- Cash flow from financing activities: Bank repayments ............................. (200,000) -- Issuance of senior subordinated debt ........ 125,000 -- Issuance of common stock .................... 93,345 473 Costs of debt financing ..................... (3,518) (6) Other ....................................... (1) (31) --------- -------- Net cash provided by financing activities .......... 14,826 436 --------- -------- Net increase (decrease) in cash and cash equivalents (5,518) 3,613 Cash and cash equivalents at beginning of year ..... 9,326 13,453 --------- -------- Cash and cash equivalents at end of year ........... $ 3,808 $ 17,066 ========= ======== Supplemental disclosure of cash flow information: Cash paid during the quarter for interest .. $ 3,225 $ 60
(See accompanying notes to Consolidated Financial Statements) 5 DENBURY RESOURCES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) March 31, 1998 and 1997 1. ACCOUNTING POLICIES Interim Financial Statements 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, 1997. Any capitalized items used but not defined in these Notes to 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 then 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 the opinion of management of Denbury Resources Inc. (the "Company" or "Denbury"), the accompanying unaudited financial statements include all adjustments (of a normal recurring nature) necessary to present fairly the consolidated financial position of the Company as of March 31, 1998 and the consolidated results of its operations and cash flow for the three months ended March 31, 1998 and 1997. Net Income and Loss per Common Share Net income or loss per common share is computed by dividing the net income or loss by the weighted average number of shares of common stock outstanding. In accordance with Canadian generally accepted accounting principles ("GAAP"), the stock options and warrants were included in the calculation of fully diluted earnings per share but were anti-dilutive to the calculation of losses per share. 2. NOTES PAYABLE AND LONG-TERM INDEBTEDNESS
March 31, December 31, 1998 1997 -------- --------- (Amounts in thousands) (Unaudited) 9% Senior Subordinated Notes Due 2008 $125,000 $ - Senior bank loan 40,000 240,000 Other notes payable 17 20 Less portion due within one year (17) (20) -------- --------- Total long-term debt $165,000 $ 240,000 ======== =========
6 DENBURY RESOURCES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) March 31, 1998 and 1997 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 first quarter financial statements result from the different methodology for computing fully diluted earnings or losses per common share. For Canadian purposes, the proceeds from dilutive securities are used to reduce debt in the calculation. Under U.S. GAAP, Statement of Financial Accounting Standards ("SFAS") No. 128 requires the proceeds from such instruments be used to repurchase Common Shares. Under U.S. GAAP, fully diluted earnings (losses) per share would be ($0.03) and $0.25 for the quarters ended March 31, 1998 and 1997 as compared to the ($0.03) and $0.24 reported under Canadian GAAP. In addition, the U.S. full cost accounting rules differ materially from the Canadian full cost accounting guidelines followed by the Company. In determining the limitation on carrying values, U.S. accounting rules require the discounting of estimated future net revenues from its proved reserves at 10% using constant current prices following the guidelines of the Securities and Exchange Commission ("SEC") while the Canadian guidelines require the use of the same future net revenues but on an undiscounted basis and after the deduction of estimated future administrative and financing costs. The Canadian accounting guidelines also allow a Company to exclude acquired properties from the ceiling test calculation for up to two years while the SEC allows an exclusion for only one year and then only after obtaining approval. The Company obtained approval for the exclusion from the SEC and believes that based on its success with similar properties in Mississippi, the value of the properties acquired in December 1997 from Chevron (the "Chevron Properties") is at least equal to their carrying cost. As such, the Company has excluded these Chevron Properties from the ceiling test calculation for both U.S. and Canadian GAAP. If these properties were included, the Company would have a write-down of the property carrying costs as of March 31, 1998 of approximately $35 million for both U.S. and Canadian GAAP. 4. CONDENSED CONSOLIDATING FINANCIAL INFORMATION Denbury Management, Inc. issued debt securities during February 1998 which are fully and unconditionally guaranteed by Denbury Resources Inc. Denbury Holdings Ltd. was merged into Denbury Resources Inc. in December 1997 and is not a guarantor of the debt. Condensed consolidating financial information for Denbury Resources Inc. and Subsidiaries as of March 31, 1998 and December 31, 1997 and for the three months ended March 31, 1998 and 1997 is as follows: DENBURY RESOURCES INC. AND SUBSIDIARIES CONDENSED CONSOLIDATING BALANCE SHEETS (Amounts in thousands of U.S. dollars)
March 31, 1998 ------------------------------------------- Denbury Denbury Denbury Management Resources Resources Inc. Inc. Inc. (Issuer) (Guarantor)Eliminations Consolidated -------- -------- ---------- --------- ASSETS Current assets.....................$ 27,139 $ 239 $ - $ 27,378 Property and equipment (using full cost accounting)................. 423,174 - - 423,174 Investment in subsidiaries (equity method).......................... - 252,744 (252,744) - Other assets....................... 8,781 1 - 8,782 -------- -------- ---------- --------- Total assets....................$459,094 $252,984 $ 252,744 $ 459,334 ======== ======== ========== ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities................$ 24,995 $ 96 $ - $ 25,091 Long-term liabilities.............. 181,355 - - 181,355 Shareholders' equity............... 252,744 252,888 (252,744) 252,888 -------- -------- ---------- --------- Total liabilities and shareholders' equity.........$459,094 $252,984 $ (252,744) $ 459,334 ======== ======== ========== =========
7 DENBURY RESOURCES INC. AND SUBSIDIARIES CONDENSED CONSOLIDATING BALANCE SHEETS (Amounts in thousands of U.S. dollars)
December 31, 1997 ------------------------------------------- Denbury Denbury Denbury Management Resources Resources Inc. Inc. Inc. (Issuer) (Guarantor)Eliminations Consolidated -------- -------- ---------- --------- ASSETS Current assets.....................$ 33,017 $ 363 $ - $ 33,380 Property and equipment (using full cost accounting)................. 408,832 - - 408,832 Investment in subsidiaries (equity method).......................... - 159,892 (159,892) - Other assets....................... 5,234 102 - 5,336 -------- -------- ---------- --------- Total assets....................$447,083 $160,357 $ (159,892) $ 447,548 ======== ======== ========== ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities................$ 30,554 $ 134 $ - $ 30,688 Long-term liabilities.............. 256,637 - - 256,637 Shareholders' equity............... 159,892 160,223 (159,892) 160,223 -------- -------- ---------- --------- Total liabilities and shareholders' equity.........$447,083 $160,357 $ (159,892) $ 447,548 ======== ======== ========== =========
DENBURY RESOURCES INC. AND SUBSIDIARIES CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS (Amounts in thousands of U.S. dollars)
Three Months Ended March 31, 1998 ------------------------------------------- Denbury Denbury Denbury Management Resources Resources Inc. Inc. Inc. (Issuer) (Guarantor)Eliminations Consolidated -------- -------- ---------- --------- Revenues...........................$ 25,554 $ 1 $ - $ 25,555 Expenses........................... 26,563 45 - 26,608 -------- -------- ---------- --------- Income (loss) before the following: (1,009) (44) - (1,053) Equity in net earnings (losses) of subsidiaries...... - (636) 636 - -------- -------- ---------- --------- Income (loss) before income taxes.. (1,009) (680) 636 (1,053) Provision for income taxes......... 373 - - 373 -------- -------- ---------- --------- Net income (loss)..................$ (636) $ (680) $ 636 $ (680) ======== ======== ========== =========
Three Months Ended March 31, 1997 ----------------------------------------------------------- Denbury Denbury Denbury Management Denbury Resources Resources Inc. Holdings Inc. Inc. (Issuer) Ltd. (Guarantor) Eliminations Consolidated -------- -------- --------- ------------ ------------ Revenues..........................$ 21,652 $ - $ 31 $ (30) $ 21,653 Expenses ......................... 13,375 - 30 (30) 13,375 -------- -------- --------- ------------ ------------ Income before the following: ..... 8,277 - 1 - 8,278 Equity in net earnings of subsidiaries................ - 5,214 5,214 (10,428) - -------- -------- --------- ------------ ------------ Income before income taxes ....... 8,277 5,214 5,215 (10,428) 8,278 Provision for income taxes ....... (3,063) - - - (3,063) -------- -------- --------- ------------ ------------ Net income........................$ 5,214 $ 5,214 $ 5,215 $ (10,428) $ 5,215 ======== ======== ========= ============ ============
8 DENBURY RESOURCES INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following should be read in conjunction with the response to Part I, Item 1 of this Report and Items 7 and 8 of the Form 10-K. Any capitalized terms used but not defined in this Item have the same meaning given to them in the Form 10-K. Denbury is an independent energy company engaged in acquisition, development and exploration activities in the U.S. Gulf Coast region, primarily onshore in Louisiana and Mississippi. Over the last few 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. 1998 Public Debt and Equity Offering On February 26, 1998, the Company closed its public sale of 5,240,780 Common Shares (which included the underwriter's over-allotment option of 683,580 Common Shares) at a price of $16.75 per share and a net price to the Company of $15.955 per share (the "Equity Offering"). Concurrently with the Equity Offering, affiliates of the Texas Pacific Group ("TPG"), the Company's largest shareholder, purchased 313,400 Common Shares from the Company at $15.955 per share, equal to the price to the public per share less underwriting discounts and commissions (the "TPG Purchase"). The net proceeds to the Company from the Equity Offering and TPG Purchase were approximately $88.6 million, before offering expenses. Concurrently with the Equity Offering and TPG Purchase, Denbury Management Inc., a wholly owned subsidiary of the Company, issued $125 million in aggregate principal amount of 9% Senior Subordinated Notes Due 2008 (the "Debt Offering" and the "Notes"). These Notes contain certain debt covenants, including covenants that limit (i) indebtedness, (ii) certain payments including dividends, (iii) sale/leaseback transactions, (iv) transactions with affiliates, (v) liens, (vi) asset sales, and (vii) mergers and consolidations. The net proceeds to the Company from the Debt Offering were approximately $121.8 million, before offering expenses. The total net proceeds from the debt and equity offerings (the "Capital Transactions") were approximately $209.6 million after deducting the total offering expenses of $850,000. The Company used these proceeds to reduce outstanding borrowings under the Company's bank credit facility, the majority of which had been borrowed to fund the December 1997 $202 million acquisition of properties from Chevron (the "Chevron Acquisition"). Restated Credit Facility The Company has a credit facility (the "Credit Facility") with NationsBank of Texas, N.A., as agent for a group of eight other banks. The Credit Facility was increased in size from $150 million to $300 million in December 1997 and the borrowing base was increased to $260 million in order to fund the Chevron Acquisition. The December 31, 1997 outstanding balance of $240 million was reduced to $40 million as of February 26, 1998 after application of the net proceeds from the Debt and Equity Offerings and the TPG Purchase (collectively the "Capital Transactions"), net of $9.8 million of additional borrowings. The Credit Facility consists of a five-year revolving credit facility with a borrowing base (after the Capital Transactions) of $165 million. This borrowing base is subject to review every six months and the Credit Facility is secured by substantially all of the Company's oil and natural gas properties, except for those acquired in the Chevron Acquisition. Interest is payable on the revolving credit facility at either the prime rate or, depending on the percentage of the borrowing base that is outstanding, at rates ranging from LIBOR plus 7/8% to LIBOR plus 13/8%. The Credit Facility has several restrictions, including, among others: (i) a prohibition on the payment of dividends; (ii) a requirement for a minimum equity balance; (iii) a requirement to maintain positive working capital (as defined in the 9 DENBURY RESOURCES INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Credit Agreement); (iv) a minimum interest coverage test; and (v) a prohibition on most debt, lien and corporate guarantees. Capital Resources and Liquidity Historically, the Company's capital expenditures have required additional debt and equity capital to supplement cash flow from operations. From January 1, 1995, through December 31, 1997, the Company made total capital expenditures of $420.8 million. These capital expenditures were funded by the issuance of equity ($105.3 million), bank debt ($225.1 million) and cash generated by operations ($90.4 million). As previously discussed, during the first quarter of 1998 the Company issued Common Shares and Notes to refinance the majority of its December 31, 1997 bank debt balance of $240 million. During the first quarter of 1998, the Company's capital expenditures were $26.4 million which exceeded its cash flow from operations (excluding working capital changes) by approximately $15.0 million. This shortfall was funded primarily with bank debt. As of March 31, 1998, the Company had minimal working capital with $40 million of bank debt outstanding, $125 million outstanding on its Notes and $125 million available on its bank credit line. Since year-end, oil prices have dropped significantly with a net average oil price of $12.20 for the Company during the first quarter of 1998 as compared to the 1997 average price of $17.25. This has significantly reduced the Company's cash flow and profitability during the first quarter of 1998, and if these prices continue, will have a similar effect on the remainder of 1998. In response to the lower oil prices, the Company has recently reduced its 1998 capital budget from its initial program of $95 million to approximately $75 million by postponing projects with lower rates of returns, such as those fields with the heavier gravity oil and lower than average oil prices. However, the Company hopes to spend this difference of $20 million on acquisitions around its core properties. 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, the Company's projected expenditures are expected to exceed the Company's cash flow during 1998 and thus will require some use of the Company's existing bank line availability. The reduced oil prices are not expected to cause any violation of debt covenants, nor cause the Company to fail to meet any of its obligations; however, the reduction of capital expenditures and the reduced oil prices will have a corresponding reduction in the Company's production growth and, as previously discussed, the Company's projected income and cash flow. In addition to its internal capital expenditure program, the Company has historically required capital for the acquisition of producing properties, which have been a major factor in the Company's rapid growth during recent years. There can be no assurance that 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 quarter of 1998, the Company spent approximately $26.2 million on exploration and development expenditures and approximately $247,000 on acquisitions. The exploration and development expenditures included approximately $17.6 million spent on drilling, $4.1 million on geological, geophysical and acreage expenditures and $4.5 million on workover costs. These expenditures were funded by bank debt and cash flow from operations. During the first quarter of 1997, the Company spent approximately $15.0 million on oil and natural gas development expenditures and approximately $177,000 on acquisitions. The development expenditures included approximately $6.2 million spent on drilling, $2.3 million on geological, geophysical and acreage expenditures and the balance of $6.5 million was spent on workover costs. These expenditures were funded by available cash and cash flow from operations. 10 DENBURY RESOURCES INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Acquisition Updates On December 30, 1997, the Company acquired oil properties in the Heidelberg Field, Jasper County, Mississippi, from Chevron for approximately $202 million (the "Chevron Acquisition"). The Chevron Acquisition represents the largest acquisition by the Company to date. The average net daily production from these properties during the fourth quarter of 1997 was approximately 2,800 Bbls/d and 650 Mcf/d. As of January 1, 1998, the Company took over operations on these properties although limited field work was performed during the quarter at this field due to the lead time involved to plan, implement and perform any operations. During the first quarter, the field averaged 2,970 Bbls/d and 135 Mcf/d. The Company's capital budget for this field during the reminder of 1998 is approximately $30 million. The Company completed several property acquisitions during 1996, the largest of which was the acquisition of producing oil and natural gas properties, principally in Mississippi and Louisiana, for approximately $37.2 million from Amerada Hess, effective May 1, 1996 (the "Hess Acquisition"). The average daily production from the properties included in the Hess Acquisition during May and June 1996, the first two months of ownership, was approximately 2,945 BOE/d. The average daily production on these properties had increased to 5,969 BOE/d during the fourth quarter of 1997 and 9,390 BOE/d during the first quarter of 1998. RESULTS OF OPERATIONS Operating Income While production volumes were 75% higher on a BOE basis during the first quarter of 1998 as compared to the first quarter of 1997, operating income increased only 8% due to a 32% decline in product prices (on a BOE basis), as set forth in the following chart.
Three Months Ended March 31, - -------------------------------------------------------------- 1998 1997 - -------------------------------------------------------------- OPERATING INCOME (THOUSANDS) Oil sales $ 16,173 $ 12,877 Natural gas sales 9,015 8,264 Less production expenses (7,854) (5,053) -------------------- Operating income $ 17,334 $ 16,088 -------------------- UNIT PRICES Oil price per barrel ("Bbl") $ 12.20 $ 20.03 Gas price per thousand cubic feet ("Mcf") 2.49 2.99 NETBACK PER BOE (1): Sales price $ 13.05 $ 19.17 Production expenses (4.07) (4.58) -------------------- Production netback $ 8.98 $ 14.59 -------------------- AVERAGE DAILY PRODUCTION VOLUME: Bbls 14,728 7,143 Mcf 40,275 30,674 BOE 21,441 12,256 - -------------------------------------------------------------- (1) Barrel of oil equivalent using the ratio of one barrel of oil to 6 Mcf of natural gas ("BOE").
11 DENBURY RESOURCES INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The production increases were fueled by both internal growth from the Company's development and exploration programs and from the acquisition of producing properties during 1997, particularly the $202 million Chevron Acquisition in December 1997. The properties included in the Chevron Acquisition contributed approximately 2,990 BOE per day ("BOE/d") to the increase during the first quarter of 1998 with the remainder of the increase almost solely as a result of internal development, primarily on the properties acquired in the Hess Acquisition. During the first quarter of 1998, the production from these Hess properties averaged 9,390 BOE/d, a 114% increase from the average of 4,385 BOE/d during the first quarter of 1997. Oil and gas revenue increased as a result of the large increase in production, although the revenue increase was not proportional to the production increase due to a substantial decline in both oil and natural gas product prices. Between the first quarter of 1997 and 1998, oil product prices decreased 39% ($7.83 per Bbl) and natural gas product prices declined by 17% ($0.50 per Mcf). Production and operating expenses increased between the first quarters of 1997 and 1998 along with an increase in the number of properties, with the largest increase coming from the addition of properties acquired in the Chevron Acquisition. Even though the number of properties increased, production increased at a faster pace allowing the Company to reduce its production and operating expenses on a BOE basis by 11% from the first quarter of 1997 to the comparable quarter in 1998. For the properties acquired in the Hess Acquisition, the operating expenses declined from the 1996 level of $5.35 per BOE to $4.56 per BOE for 1997 and were further reduced to $3.07 for the first quarter of 1998. This reduction is largely attributable to the Company's recent emphasis on horizontal drilling on these properties and the resultant previously discussed increases in production. The Company has been able to achieve these reductions in operating expenses per BOE even though the Company's production has become even more weighted towards oil (which has higher operating costs) with approximately 69% of the Company's first quarter 1998 production coming from oil as compared to 58% during the first quarter of 1997. The operating expenses per BOE for the properties acquired in the Chevron Acquisition averaged $6.51 per BOE, about the same as when the properties were owned by Chevron. The Company anticipates that these costs will be lower in the future as it expects to increase the production level on these properties throughout 1998. General and Administrative Expenses General and administrative ("G&A") expenses have increased as set forth below along with the Company's growth.
Three Months ended March 31, - ------------------------------------------------------------ 1998 1997 - ------------------------------------------------------------ NET G&A EXPENSES (THOUSANDS) Gross expenses $ 4,902 $ 3,342 State franchise taxes 200 97 Operator overhead charges (2,475) (1,168) Capitalized exploration expenses (651) (653) -------------------- Net expenses $ 1,976 $ 1,618 -------------------- Average G&A cost per BOE $ 1.02 $ 1.47 Employees as of March 31 199 129 - ------------------------------------------------------------
12 DENBURY RESOURCES INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS On a BOE basis, G&A costs decreased 30% from the first quarter of 1997 to the comparable quarter in 1998 in part because of increased production on both an absolute and per well basis. Furthermore, the respective well operating agreements allow the Company, when it is the operator, to charge a well with a specified overhead rate during the drilling phase and to also charge a monthly fixed overhead rate for each producing well. As a result of the increased drilling activity in the first quarter of 1998 and the addition of several producing wells acquired in the Chevron Acquisition, 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 period in 1997. During the first quarter of 1997, approximately 35% of gross G&A was recovered by operator overhead charges, while during the first quarter of 1998 this recovery increased to 50%. Interest and Financing Expenses
Three Months Ended March 31, - --------------------------------------------------------------- AMOUNTS IN THOUSANDS EXCEPT PER UNIT AMOUNTS 1998 1997 - --------------------------------------------------------------- Interest expense $ 4,391 $ 79 Non-cash interest expense (121) (19) ------------------ Cash interest expense 4,270 60 Interest and other income (367) (512) ------------------ Net interest expense (income) $ 3,903 $ (452) - --------------------------------------------------------------- Average interest expense (income) per BOE $ 2.02 $ (0.41) Average debt outstanding 211,685 180 - ---------------------------------------------------------------
During the first quarter of 1997 the Company had minimal debt outstanding as virtually all bank debt had been retired during the fourth quarter of 1996 with proceeds from a public offering of Common Shares completed in October 1996. Conversely, in December 1997, the Company borrowed $202 million to fund the Chevron Acquisition resulting in $240 million of outstanding bank debt during January and most of February 1998. On February 26, 1998 this debt was refinanced with proceeds from the Capital Transactions leaving a bank balance of $40 million for the rest of the first quarter of 1998, plus $125 million of debt from the issuance of the Notes. These transactions resulted in substantially higher interest expense for the first quarter of 1998 as compared to the first quarter of 1997, on both an absolute and BOE basis. Depletion, Depreciation and Site Restoration Depletion, depreciation and amortization ("DD&A") has increased along with the additional capitalized cost and increased production. DD&A per BOE increased 7% from the first quarter of 1997 to the fourth quarter of 1997 primarily due to a drop in oil and gas prices during 1997 which resulted in a loss of reserves. This loss of reserves due to product price decreases caused DD&A to increase approximately $0.29 per BOE during 1997. The remaining increase of $0.14 per BOE during 1997 resulted from rising drilling costs, particularly in Louisiana. The Company's DD&A rate per BOE for the first quarter of 1998 was the same as the DD&A rate per BOE for the year ended December 31, 1997, as there was insufficient data to justify any changes in the rate. Under full cost accounting rules, each quarter the Company is required to perform a ceiling test calculation. In determining the limitation on property carrying values, U.S. accounting rules require the discounting of estimated future net revenues from its proved reserves at 10% using constant current prices following the guidelines of the Securities 13 DENBURY RESOURCES INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS and Exchange Commission ("SEC"), while the Canadian guidelines require the use of the same future net revenues but on an undiscounted basis and after the deduction of estimated future administrative and financing costs. This limitation is then compared to the property's book basis. The Canadian accounting guidelines also allow a Company to exclude acquired properties from a ceiling test calculation for up to two years while the SEC allows an exclusion for only one year and then only after obtaining approval. The Company obtained approval for such an exclusion from the SEC and believes that based on its success with similar properties in Mississippi, the value of the properties acquired in the Chevron Acquisition is at least equal to their carrying cost. As such, the Company has excluded these properties from the ceiling test calculation for both U.S. and Canadian GAAP. If these properties were included, the Company would have a write-down of the property carrying costs as of March 31, 1998 of approximately $35 million for both U.S. and Canadian GAAP. 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.
Three Months Ended March 31, - -------------------------------------------------------------- AMOUNTS IN THOUSANDS EXCEPT PER UNIT AMOUNTS 1998 1997 - -------------------------------------------------------------- Depletion and depreciation $ 12,298 $ 6,488 Site restoration provision 89 137 ----------------- Total amortization $ 12,387 $ 6,625 ----------------- Average DD&A cost per BOE $ 6.42 $ 6.01 - --------------------------------------------------------------
Income Taxes Due to a net operating loss of the U.S. subsidiary each year for tax purposes, the Company does not have any current tax provision. The deferred income tax provision as a percentage of net income varies slightly depending on the mix of Canadian and U.S. expenses.
Three Months Ended March 31, - -------------------------------------------------------------- 1998 1997 - -------------------------------------------------------------- Deferred income taxes (thousands) $ (373) $ 3,063 Average income tax costs per BOE $ (0.19) $ 2.78 Effective tax rate 35% 37% - --------------------------------------------------------------
Results of Operations Even though production was up 75% between the quarters and most expenses, other than interest expense, have shown a strong improvement on a BOE basis, as a result of the decline in product prices net income and cash flow from operations decreased substantially on both a gross and per share basis between the first quarter of 1997 and the first quarter of 1998 as set forth below. 14 DENBURY RESOURCES INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Three Months Ended March 31, - -------------------------------------------------------------- AMOUNTS IN THOUSAND EXCEPT PER SHARE AMOUNTS 1998 1997 - -------------------------------------------------------------- Net income (loss) $ (680) $ 5,215 Net income (loss) per common share: Basic $ (0.03) $ 0.26 Fully diluted (0.03) 0.24 Cash flow from operations (1) $ 11,455 $14,922 - -------------------------------------------------------------- (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 results of operations on a BOE basis for the comparative periods. Each of the individual components are discussed above.
Three Months Ended March 31, - --------------------------------------------------------- Per BOE Data 1998 1997 - --------------------------------------------------------- Revenue $ 13.05 $ 19.17 Production expenses (4.07) (4.58) - --------------------------------------------------------- Production netback 8.98 14.59 General and administrative (1.02) (1.47) Interest and other income (expense) (2.02) 0.41 - --------------------------------------------------------- Cash flow from operations (a) 5.94 13.53 DD&A (6.42) (6.01) Deferred income taxes 0.19 (2.78) Other non-cash items (0.06) (0.01) - --------------------------------------------------------- Net income (loss) $ (0.35) $ 4.73 - --------------------------------------------------------- (a) 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 and is also making inquiries with regard to the systems used by its oil and natural gas purchasers and other third parties that the Company relies on as part of its normal business. The Company does not believe that it will incur any material expenditures, nor require any significant modifications to make its internal systems year 2000 compliant; however, it has not yet fully evaluated the status of third-party systems and the effect, if any, on the Company if third-party systems are not year 2000 compliant. 15 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. 16 Part II. Other Information Item 6. Exhibits and Reports on Form 8-K during the First Quarter of 1998 Exhibits: None Reports on Form 8-K: On December 8, 1997, the Company filed a Form 8-K to report that it had entered into an asset sale agreement to purchase producing oil properties in the Heidelberg Field, Jasper County, Mississippi for $202 million from Chevron U.S.A. Inc. On January 20, 1998, the Company filed an Amendment No. 1 to such Form 8-K to include audited statements of revenues and expenses related to the acquired properties and to report the related pro forma results of operations. 17 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 /s/ Bobby J. Bishop By: ------------------------------- Bobby J. Bishop Chief Accounting Officer & Controller Date: May 7, 1998 18 EX-27 2 ARTICLE 5 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE DENBURY RESOURCES INC. MARCH 31, 1998 FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000945764 Denbury Resources Inc. 1000 U.S. DOLLARS 3-MOS DEC-31-1997 JAN-01-1998 MAR-31-1998 1 3,808 0 23,570 0 0 27,378 497,974 74,800 459,334 25,091 125,000 0 0 226,484 26,404 459,334 25,188 25,555 0 22,217 0 0 4,391 (1,053) (373) (680) 0 0 0 (680) (.03) (.03)
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