Note 2. Acquisitions and Divestitures

Acquisitions and Exchange Transaction

Fair Value. The FASC Fair Value Measurements and Disclosures topic defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (often referred to as the “exit price”). The fair value measurement is based on the assumptions of market participants and not those of the reporting entity. Therefore, entity-specific intentions do not impact the measurement of fair value unless those assumptions are consistent with market participant views.

The fair value of oil and natural gas properties is based on significant inputs not observable in the market, which the FASC Fair Value Measurements and Disclosures topic defines as Level 3 inputs. Key assumptions may include: (1) NYMEX oil and natural gas futures (this input is observable); (2) dollar-per-acre values of recent sale transactions (this input is observable); (3) projections of the estimated quantities of oil and natural gas reserves, including those classified as proved, probable and possible; (4) estimated oil and natural gas pricing differentials; (5) projections of future rates of production; (6) timing and amount of future development and operating costs; (7) projected costs of CO₂ (to a market participant); (8) projected reserve recovery factors; and (9) risk-adjusted discount rates.

Bakken Exchange Transaction. In late 2012, we closed a sale and exchange transaction with Exxon Mobil Corporation and its wholly-owned subsidiary XTO Energy Inc. (collectively, “ExxonMobil”) under which we sold to ExxonMobil our Bakken area assets in North Dakota and Montana in exchange for $1.3 billion in cash (after preliminary closing adjustments) and the following assets:


•	operating interests in the Webster Field, a planned future tertiary field, located in southeastern Texas, made up of a nearly 100% working interest and nearly 80% revenue interest;


•	operating interests in the Hartzog Draw Field, a planned future tertiary field, located in Wyoming, consisting of an 83% working interest and 71% net revenue interest in the oil-producing Shannon Sandstone zone and a 67% working interest and 53% net revenue interest in the natural gas producing Big George Coal zone; and


•	approximately a one-third overriding royalty ownership interest in ExxonMobil's CO₂ reserves in LaBarge Field in Wyoming.

The exchange of properties closed in two phases on November 30, 2012 and December 21, 2012, and is collectively referred to as the "Bakken Exchange Transaction".

Our acquisition of property interests constitutes a business combination under the FASC Business Combinations topic. Accordingly, the purchase price of the acquisition is measured as the fair value of consideration transferred, which consists of our Bakken area assets. The fair value of Bakken area net assets transferred to ExxonMobil in the Bakken Exchange Transaction was measured using a discounted future net cash flow model for developed properties and a market dollar-per-acre value for undeveloped properties. The fair value of assets transferred in the Bakken Exchange Transaction was measured at the dates control was transferred to ExxonMobil, which were November 30, 2012 and December 21, 2012 for 82.5% and 17.5%, respectively, of our interest in our Bakken area assets. The fair value of oil and gas properties received from ExxonMobil in such transaction was measured using a discounted future net cash flow model, and the fair value of CO₂interests received was measured using a market-based approach, at the date control was transferred to Denbury, which was November 30, 2012, for the acquisition of interests in Webster and Hartzog Draw fields and December 21, 2012, for the acquisition of interests in LaBarge Field. We did not record a gain or loss on the exchange in accordance with the full cost method of accounting.

The following table presents a summary of the preliminary fair value of assets acquired and liabilities assumed in the Bakken Exchange Transaction:



In thousands
Consideration:
Fair value of net assets transferred	$	1,903,280

Less: Fair value of assets acquired and liabilities assumed: ⁽¹⁾
Cash ⁽²⁾	1,331,684
Oil and natural gas properties
Proved	201,301
Unevaluated	98,635
CO₂ properties	314,505
Other assets	477
Other liabilities	(29,531		)
Asset retirement obligations	(13,791		)
Fair value of net assets acquired	$	1,903,280


(1)	Fair value of the assets acquired and liabilities assumed is preliminary, pending final closing adjustments and further evaluation of reserves and asset retirement obligations.

(2)

Cash proceeds include preliminary closing adjustments of $41.7 million primarily representing adjustments for net revenues and capital expenditures of the transferred oil and natural gas property assets from the Bakken Exchange Transaction effective date to the closing dates. Also see Note 12, Supplemental Information and Note 13, Subsequent Events, for additional information regarding the placement of $1.05 billion of the proceeds in a qualified trust to facilitate an anticipated like-kind-exchange transaction for federal income tax purposes.

June 2012 Acquisition of Reserves in the Gulf Coast region at Thompson Field. In June 2012, we acquired a nearly 100% working interest and 84.7% net revenue interest in Thompson Field for $366.2 million after preliminary closing adjustments. The field is located approximately 18 miles west of Hastings Field, which is an enhanced oil recovery field that we are currently flooding with CO₂, and is the current terminus of the Green Pipeline which transports CO₂ from the Jackson Dome, located near Jackson, Mississippi. Thompson Field is similar to Hastings Field, producing oil from the Frio zone at similar depths, and is also a planned future tertiary field. Under the terms of the Thompson Field acquisition agreement, the seller will retain approximately a 5% gross revenue interest (less severance taxes) once average monthly oil production exceeds 3,000 Bbls/d after the initiation of CO₂ injection.

This acquisition meets the definition of a business under the FASC Business Combinations topic. As such, we estimated the fair value of assets acquired and liabilities assumed as of June 1, 2012, the closing date of the acquisition using a discounted future net cash flow model. In applying these accounting principles, we estimated the fair value of the assets acquired less liabilities assumed on the acquisition date to be approximately $318.9 million. This measurement resulted in the recognition of goodwill of approximately $47.3 million, which represents the excess of the cash paid to acquire the field over the acquisition date estimated fair value. This resultant goodwill is due primarily to two factors. The first factor is the decrease in average NYMEX oil futures prices between the date of signing the purchase agreement on April 24, 2012 and closing the purchase on June 1, 2012. The second factor is the fair value assigned to the estimated oil reserves recoverable through a CO₂ EOR project. By building an 18-mile extension of the Green Pipeline, we will have access to CO₂ reserves at Jackson Dome, one of the few known significant natural sources of CO₂ in the United States, and the largest known source east of the Mississippi River, allowing us to carry out CO₂ EOR activities in this field at a lower cost than other market participants. However, the FASC Fair Value Measurements and Disclosures topic does not allow entity-specific assumptions in the measurement of fair value. Therefore, we estimated the fair value of the oil reserves recoverable through CO₂ EOR using a higher estimated cost of CO₂ to other market participants, which lowers the discounted net revenue stream used in making the fair value estimate related to this field. All of the goodwill associated with the acquisition is deductible for tax purposes as property cost.

The fair value of the assets acquired and liabilities assumed was finalized during the fourth quarter of 2012, after consideration of final closing adjustments and evaluation of reserves and asset retirement obligations. The following table presents a summary of the fair value of assets acquired and liabilities assumed in the Thompson Field acquisition:



In thousands
Consideration:
Cash payment ⁽¹⁾	$	366,179

Less: Fair value of assets acquired and liabilities assumed:
Oil and natural gas properties
Proved	305,233
Unevaluated	12,023
Pipelines and plants	2,000
Other assets	2,957
Asset retirement obligations	(3,306		)
	318,907
Goodwill	$	47,272


(1)	See Note 6, Income Taxes, for additional information regarding the like-kind-exchange transaction utilized to fund this purchase and Note 12, Supplemental Information, for supplemental cash flow information regarding the cash payment.

October 2010 and August 2011 Riley Ridge Acquisitions. In October 2010, we acquired a 42.5% non-operated working interest in Riley Ridge, located in southwestern Wyoming, for $132.3 million after closing adjustments. Riley Ridge contains natural gas resources, as well as helium and CO₂ resources. The purchase included a 42.5% interest in a gas plant, currently under construction, which will separate the helium and natural gas from the commingled gas stream, and interests in certain surrounding properties. On August 1, 2011, we acquired the remaining 57.5% working interest in Riley Ridge that we did not already own, the remaining 57.5% interest in the gas plant, and interests in certain surrounding properties for $214.8 million after closing adjustments. As a result of the transaction, we became the operator of both projects. The purchase price includes a $15 million deferred payment to be made, subject to the terms of the purchase agreement, at the time the property's gas plant is operational and meets specific performance conditions. This deferred payment is measured at fair value on a quarterly basis using management's expectation of future cash flows. Because the Riley Ridge plant remains under construction, current production at the field is negligible. As a result, pro forma information has not been disclosed due to the immateriality of revenues and expenses during 2011 and 2010.

Each of the acquisitions of Riley Ridge meets the definition of a business under the FASC Business Combinations topic. As such, we estimated the fair value of assets acquired and liabilities assumed using a discounted net cash flow model. Goodwill associated with the acquisitions is deductible for income tax purposes. The fair values assigned to assets acquired and liabilities assumed in the August 2011 acquisition have been finalized, and no adjustments have been made to fair value amounts previously disclosed in our Form 10-K for the period ended December 31, 2011. The following table presents a summary of the fair value of assets acquired and liabilities assumed in the August 2011 Riley Ridge acquisition:



In thousands
Consideration:
Cash payment	$	199,779
Deferred payment	15,000
Total consideration	214,779

Less: Fair value of assets acquired and liabilities assumed:
Oil and natural gas properties
Proved	48,731
Unproved	12,542
CO₂ properties	9,741
Pipelines and plants	91,594
Other assets ⁽¹⁾	48,660
Asset retirement obligations	(389		)
	210,879
Goodwill	$	3,900

(1)

Other assets includes helium extraction rights of $36.7 million. Helium reserves at Riley Ridge are owned by the U.S. government. The fair value assigned to helium extraction rights was calculated using the income approach and represents the discounted future net revenues associated with our right to extract and sell the helium on behalf of the helium resource owners. Upon commencement of helium production, helium extraction rights will be amortized on a unit-of-production basis.

2010 Merger with Encore Acquisition Company. On March 9, 2010, we acquired Encore pursuant to the Encore Merger Agreement entered into with Encore on October 31, 2009. The Encore Merger Agreement provided for a stock and cash transaction valued at approximately $4.8 billion at the acquisition date, including the assumption of debt and the value of the noncontrolling interest in ENP. Under the Encore Merger Agreement, Encore was merged with and into Denbury, with Denbury surviving the Encore Merger.

In the Encore Merger, we issued approximately 135.2 million shares of common stock and paid approximately $833.9 million in cash to Encore stockholders. The Denbury shares issued to Encore stockholders represented approximately 34% of Denbury’s common stock issued and outstanding immediately after the Encore Merger. The total fair value of our common stock issued to Encore stockholders in the Encore Merger was approximately $2.1 billion based upon our closing price of $15.43 per share on March 9, 2010. The Encore Merger was financed through a combination of issuing $1.0 billion of 8¼% Senior Subordinated Notes due 2020, which we issued in February 2010, borrowings under a new $1.6 billion revolving credit agreement entered into in March 2010, and the assumption of Encore's remaining outstanding senior subordinated notes.

The Encore Merger met the definition of a business combination under the FASC Business Combinations topic. As such, we estimated the fair value of Encore as of March 9, 2010, the acquisition date, which was the date on which we obtained control of Encore.

For the period from March 9, 2010 to December 31, 2010, we recognized $623.4 million of oil, natural gas and related product sales related to properties acquired in the Encore Merger. For the period from March 9, 2010 to December 31, 2010, we recognized $426.0 million net field operating income (oil, natural gas and related product sales less lease operating expenses and production taxes and marketing expenses) related to properties acquired in the Encore Merger. Transaction and other costs related to the Encore Merger included in the Consolidated Statement of Operations for the year ended December 31, 2010 include $48.5 million of third-party, legal and accounting fees, which have been expensed as incurred, and $43.8 million of employee-related severance and termination costs, which were accrued over the employees’ service period. Accrued employee-related severance costs totaled $19.8 million at December 31, 2010, of which $16.5 million was classified as accounts payable and accrued liabilities and $3.3 million was classified as long-term other liabilities on our balance sheet. Transaction and other costs related to the Encore Merger included in the Consolidated Statement of Operations for the year ended December 31, 2011, include $0.8 million of third-party, legal and accounting fees, which have been expensed as incurred, and $3.6 million of employee-related severance and termination costs.

Unaudited Pro Forma Acquisition Information. The following combined pro forma total revenues and other income and net income are presented as if the Bakken Exchange Transaction and Thompson Field acquisition had occurred on January 1, 2011:



	Year Ended December 31,
In thousands, except per share data	2012		2011
Pro forma total revenues and other income	$	2,203,703	$	2,184,507
Pro forma net income	454,549		523,227
Pro forma net income per common share
Basic	$	1.18	$	1.32
Diluted	1.17		1.30

The following combined pro forma total revenues and other income and net income attributable to Denbury stockholders are presented as if the acquisition of Encore occurred on January 1, 2010:



In thousands, except per share data	Year Ended December 31, 2010
Pro forma total revenues and other income	$	2,098,241
Pro forma net income attributable to Denbury stockholders	286,891
Pro forma net income per common share
Basic	$	0.73
Diluted	0.72

Divestitures

2012 Divestitures. In April 2012, we completed the sale of certain non-operated assets in the Paradox Basin of Utah for $75.0 million. The sale had an effective date of January 1, 2012, and proceeds received after consideration of final closing adjustments totaled $68.5 million. Closing adjustments included operating net revenues after January 1, 2012, net of capital and lease operating expenditures, along with other purchase price adjustments. We did not record a gain or loss on the sale in accordance with the full cost method of accounting.

In February 2012, we completed the sale of certain non-core assets primarily located in central and southern Mississippi and in southern Louisiana for $155.0 million to a privately held entity in which a member of our Board of Directors served as chairman of the board, in a sale for which there was a competing bid contained in a multi-property purchase proposal. We realized net proceeds of $141.8 million, after final closing adjustments. The sale had an effective date of December 1, 2011, and consequently, operating revenues of $13.5 million after the effective date, net of capital and lease operating expenditures, along with any other purchase price adjustments, were adjustments to the selling price. We did not record a gain or loss on the sale in accordance with the full cost method of accounting.

Certain of our 2012 divestitures were structured as like-kind-exchange transactions for federal income tax purposes. See Note 6, Income Taxes for further details.

2010 Divestitures. In December 2010, we sold our ownership interests in ENP, which consisted of our 100% ownership in ENP GP LLC, ENP’s general partner, and 20.9 million ENP common units, to a subsidiary of Vanguard for consideration consisting of $300.0 million cash and 3,137,255 Vanguard common units valued at $93.0 million at the time of closing. In addition, Vanguard assumed all of ENP’s long-term bank debt of $234.0 million. We did not record a gain or loss on the sale of oil and gas properties in accordance with the full cost method of accounting, nor did we record a gain or loss on the remainder of the net assets sold as the book value approximated fair value.

Pursuant to our plan of divesting non-strategic legacy Encore properties, certain oil and gas properties in the Permian Basin, Mid-continent area and East Texas Basin were sold in May 2010 for consideration of $892.1 million after final closing adjustments. We subsequently divested our production and acreage in the Cleveland Sand Play of western Oklahoma for consideration of $32.1 million after closing adjustments and the Haynesville and East Texas natural gas properties for consideration of $213.8 million after closing adjustments. Together with the sale of our ownership interest in ENP and ENP GP LLC discussed above, we received $1.5 billion in total consideration from these divestitures in 2010. For all Encore legacy property dispositions during 2010, we reduced our full cost pool by the amount of the net proceeds and did not record a gain or loss on the sale in accordance with the full cost method of accounting.

In February 2010, we sold our interest in Genesis Energy, LLC, the general partner of Genesis Energy, L.P. ("Genesis"), for net proceeds of approximately $84 million, after giving effect to the change of control provision of the incentive compensation agreement with Genesis’ management, which was triggered and under which we paid a total of $14.9 million. In March 2010, we sold all of our Genesis common units in a secondary public offering for net proceeds of approximately $79 million. We accounted for our investment in Genesis under the equity method, and we recognized a pre-tax gain of approximately $101.5 million ($63.0 million after tax) on these dispositions.