-----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, QBLNXZbKg/lr5gcIqxeT1PcIWzNolVzc+O9v9Tc3KCsiUj+N9b2MMQKO061tqp3C gKixcu9ZfxjtaDJLBnNwiw== 0000945764-99-000049.txt : 19990812 0000945764-99-000049.hdr.sgml : 19990812 ACCESSION NUMBER: 0000945764-99-000049 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990811 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: 99684388 BUSINESS ADDRESS: STREET 1: 17304 PRESTON RD STREET 2: STE 200 CITY: DALLAS STATE: TX ZIP: 75252 BUSINESS PHONE: 9726732000 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 UNITED STATES SECURITIES AND EXCHA NGE 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 June 30, 1999 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) Delaware 75-2815171 (State or other (I.R.S. Employer jurisdiction of Identification No.) incorporation or organization) 5100 Tennyson Parkway Suite 3000 Plano, TX 75024 (Address of principal (Zip code) 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 July 31, 1999 ----- ---------------------------- Common Stock, $.001 par value 45,586,544 DENBURY RESOURCES INC. INDEX Part I. Financial Information - ------------------------------ Page ---- Item 1. Financial Statements Condensed Consolidated Balance Sheets at June 30, 1999 (Unaudited) and December 31, 1998 3 Condensed Consolidated Statements of Operations for the Three and Six Months ended June 30, 1999 and 1998 (Unaudited) 4 Condensed Consolidated Statements of Cash Flows for the Six Months ended June 30, 1999 and 1998 (Unaudited) 5 Notes to Condensed Consolidated Financial Statements 6-8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9-20 Item 3. Quantitative and Qualitative Disclosures about Market 20sk Part II. Other Information - --------------------------- Item 4. Submission of Matters to a Vote of Security Holders 21 Item 6. Exhibits and Reports on Form 8-K 21 Signatures 22 2 DENBURY RESOURCES INC. CONDENSED CONSOLIDATED BALANCE SHEETS (Amounts in thousands of U.S. dollars except share amounts)
June 30, December 31, 1999 1998 --------- --------- (Unaudited) Assets Current assets Cash and cash equivalents $ 8,049 $ 2,049 Accrued production receivable 7,435 5,495 Trade and other receivables 10,576 16,390 --------- ---------- Total current assets 26,060 23,934 --------- ---------- Property and equipment (using full cost accounting) Oil and gas properties 543,773 508,571 Unevaluated oil and gas properties 49,833 65,645 Less accumulated depreciation and depletion (404,027) (393,552) --------- ---------- Net property and equipment 189,579 180,664 --------- ---------- Other assets 9,117 8,261 --------- ---------- Total assets $ 224,756 $ 212,859 ========= ========== Liabilities and Stockholders' Equity (Deficit) Current liabilities Accounts payable and accrued liabilities $ 9,584 $ 13,570 Oil and gas production payable 6,030 5,118 --------- ---------- Total current liabilities 15,614 18,688 --------- ---------- Long-term liabilities Long-term debt 142,500 225,000 Provision for site reclamation costs 1,581 1,436 Other liabilities 280 - --------- ---------- Total long-term liabilities 144,361 226,436 --------- ---------- Stockholders' equity (deficit) Preferred stock, $.001 par value, 25,000,000 shares authorized; none issued and outstanding - - Common stock, $.001 par value, 100,000,000 shares authorized; 45,586,544 and 26,801,680 shares issued and outstanding at June 30, 1999 and December 31, 1998, respectively 46 27 Paid-in capital in excess of par 327,333 227,769 Accumulated deficit (262,598) (260,061) --------- ---------- Total stockholders' equity (deficit) 64,781 (32,265) --------- ---------- Total liabilities and stockholders' equity (deficit) $ 224,756 $ 212,859 ========= ==========
(See accompanying notes to Condensed Consolidated Financial Statements) 3 DENBURY RESOURCES INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Amounts in thousands except per share amounts) (Unaudited - U.S. dollars)
Three Months Ended Six Months Ended June 30, June 30, ------------------ ------------------ 1999 1998 1999 1998 --------- -------- -------- -------- Revenues Oil, gas and related product sales $ 17,858 $ 22,508 $ 32,561 $ 47,696 Interest and other income 370 375 731 742 --------- -------- -------- --------- Total revenues 18,228 22,883 33,292 48,438 --------- -------- -------- --------- Expenses Production 6,487 8,109 12,342 15,963 General and administrative 1,669 1,677 3,560 3,453 Interest 3,820 3,978 8,678 8,369 Depletion and depreciation 5,610 16,071 10,945 28,458 Franchise taxes 150 232 304 432 Writedown of oil and gas properties - 165,000 - 165,000 --------- -------- -------- --------- Total expenses 17,736 195,067 35,829 221,675 --------- -------- -------- --------- Income (loss) before income taxes 492 (172,184) (2,537) (173,237) Income tax benefit - 50,245 - 50,618 --------- -------- -------- --------- Net income (loss) $ 492 $(121,939) $ (2,537 $(122,619) ========= ========= ======== ========= Net income (loss) per common share Basic $ 0.01 $ (4.57) $ (0.07) $ (4.89) Diluted 0.01 (4.57) (0.07) (4.89) Average number of common shares outstanding Basic 41,407 26,690 34,145 25,066 Diluted 41,475 26,690 34,145 25,066
(See accompanying notes to Condensed Consolidated Financial Statements) 4 DENBURY RESOURCES INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in thousands of U.S. dollars) (Unaudited)
Six Months Ended June 30, ----------------------- 1999 1998 --------- -------- Cash flow from operating activities: Net loss $ (2,537) $(122,619) Adjustments needed to reconcile to net cash flow provided by operations: Depreciation, depletion and amortization 10,945 28,458 Writedown of oil and natural gas properties - 165,000 Deferred income taxes - (50,618) Other 687 286 --------- -------- 9,095 20,507 Changes in working capital items relating to operations: Accrued production receivable (1,940) 283 Trade and other receivables 5,814 3,868 Other assets (342) - Accounts payable and accrued liabilities (3,986) 5,567 Oil and gas production payable 912 605 --------- -------- Net cash flow provided by operations 9,553 30,830 --------- -------- Cash flow used for investing activities: Oil and natural gas expenditures (12,797) (63,049) Acquisition of oil and natural gas properties (6,593) (13,204) Net purchases of other assets (759) (556) --------- -------- Net cash used for investing activities (20,149) (76,809) --------- -------- Cash flow from financing activities: Bank repayments (100,000) (200,000) Bank borrowings 17,500 30,000 Issuance of senior subordinated debt - 125,000 Issuance of common stock 99,583 94,157 Costs of debt financing - (3,402) Other (487) (23) --------- -------- Net cash provided by financing activities 16,596 45,732 --------- -------- Net increase (decrease) in cash and cash equivalents 6,000 (247) Cash and cash equivalents at beginning of period 2,049 9,326 --------- -------- Cash and cash equivalents at end of period $ 8,049 $ 9,079 ========= ======== Supplemental disclosure of cash flow information: Cash paid during the period for interest $ 9,409 $ 4,178 --------- --------
(See accompanying notes to Condensed Consolidated Financial Statements) 5 DENBURY RESOURCES INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. ACCOUNTING POLICIES Interim Financial Statements The accompanying condensed consolidated financial statements of Denbury Resources Inc. (the "Company" or "Denbury") have been prepared in accordance with generally accepted accounting principles and pursuant to the rules and regulations of the Securities and Exchange Commission. 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, 1998. Any capitalized terms used but not defined in these Notes to Condensed Consolidated Financial Statements have the same meaning given to them in the Form 10-K. Accounting measurements at interim dates inherently involve greater reliance on estimates than at year end and the results of operations for the interim periods shown in this report are not necessarily indicative of results to be expected for the fiscal year. In the opinion of management of Denbury, the accompanying unaudited condensed consolidated financial statements include all adjustments (of a normal recurring nature) necessary to present fairly the consolidated financial position of the Company as of June 30, 1999 and the consolidated results of its operations for the three and six months ended June 30, 1999 and 1998 and its cash flow for the six months ended June 30, 1999 and 1998. 2. NET INCOME (LOSS) PER COMMON SHARE Basic net income (loss) per common share is computed by dividing net income or loss by the weighted average number of shares of common stock outstanding during the period. Diluted net income (loss) per common share is calculated in the same manner but also considers the impact on net income and common shares for the potential dilution from stock options, stock warrants, and any other convertible securities outstanding. For the three and six month periods ended June 30, 1999 and 1998, there were no adjustments to net income for purposes of calculating diluted net income (loss) per common share. The following is a reconciliation of the weighted average common shares used in the basic and diluted net income (loss) per common share calculations for the three and six month periods ended June 30, 1999 and 1998 (in thousands).
Three Months Ended Six Months Ended June 30, June 30, ------------------ ----------------- 1999 1998 1999 1998 -------- -------- ------- -------- Weighted average common shares - basic 41,407 26,690 34,145 25,066 Potentially dilutive securities: Stock options 68 - - - Stock warrants - - - - -------- -------- ------- -------- Weighted average common shares - diluted 41,475 26,690 34,145 25,066 ======== ======== ======= ========
Due to the losses incurred by the Company for the six months ended June 30, 1999, and for the three and six months ended June 30, 1998, any dilutive effect from stock options and stock warrants would be antidilutive to the calculation of diluted net income (loss) per common share and therefore are not included for those periods. 6 DENBURY RESOURCES INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 3. NOTES PAYABLE AND LONG-TERM INDEBTEDNESS
June 30, December 31, 1999 1998 --------- --------- (Amounts in thousands) (Unaudited) 9% Senior Subordinated Notes Due 2008 $ 125,000 $ 125,000 Senior bank loan 17,500 100,000 --------- --------- Total long-term debt $ 142,500 $ 225,000 ========= =========
4. CHANGE TO UNITED STATES GAAP; DIFFERENCES IN GAAP BETWEEN UNITED STATES AND CANADA In April 1999, the Company moved its corporate domicile from Canada to the United States as a Delaware corporation (see Note 5). As a result of this move, the consolidated financial statements for all periods have been prepared in accordance with United States GAAP rather than Canadian GAAP. For the periods presented herein, there are not any differences between United States and Canadian GAAP. Historically, the Company has had differences between the two accounting methods in the areas of diluted earnings per share, the handling of losses on the early extinguishment of debt and the guidelines regarding full cost ceiling tests. 5. 1999 SALE OF EQUITY AND MOVE OF DOMICILE At a special meeting of the stockholders held on April 20, 1999, the stockholders approved (i) a move of the Corporate's domicile from Canada to the United States as a Delaware corporation, (ii) the sale of 18,552,876 common shares to an affiliate of the Texas Pacific Group ("TPG") for $100 million or $5.39 per share, and (iii) increases in the number of shares available for issuance under the Company's stock purchase and stock option plans. The move of domicile was completed on April 21, 1999, and along with the move, the Company's wholly-owned subsidiary, Denbury Management Inc. ("DMI"), was merged into the new Delaware parent company, Denbury Resources Inc. This move of domicile did not have any effect on the operations and assets of the Company, and as part of the move and merger, Denbury Resources Inc. expressly assumed any and all liabilities of its subsidiary, DMI, including DMI's obligation for the 9% Senior Subordinated Notes due 2008 and DMI's outstanding bank credit facility. The December 31, 1998 year-end balance sheet included herein has been modified to reflect the capital structure of the Company after the move of domiciles even though this transaction occurred after the balance sheet date. The sale of common stock to TPG was also completed on April 21, 1999. As a result of this equity transaction, TPG's pro-rata ownership of the outstanding common stock of the Company increased from 32% to 60%. The Company intends to use the proceeds from the equity sale for acquisitions, although in the interim, the funds were used to reduce its outstanding bank debt. 6. PRODUCT PRICE HEDGING CONTRACTS During June and July 1998, the Company entered into two no-cost financial contracts ("collars") to hedge a total of 40 million cubic feet of natural gas per day ("MMcf/d"). The Company collected $539,000 on these financial contracts, which have now expired, during the first quarter of 1999. During December 1998, the Company extended these natural gas hedges through December 2000 by entering into an additional no-cost collar with a floor price of $1.90 per MMBtu and a ceiling price of $2.58 per MMBtu for the period of July 1999 through December 2000. This contract 7 DENBURY RESOURCES INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS hedges 25 MMcf/d for the months of July and August 1999 and 30 MMcf/d for each month thereafter. This contract covers over 100% of the Company's current net natural gas production. Based on the futures market prices at June 30, 1999, the Company would expect to pay approximately $422,000 on these commodity contracts during the remaining term because certain futures market prices at June 30, 1999 exceeded the ceiling on the contract collars. During the fourth quarter of 1998, the Company also modified certain of its oil sales contracts. The new contracts, which are generally for a period of eighteen months, provide that approximately 45% of the Company's oil production as of January 31, 1999, has a price floor of between $8.00 and $10.00 per Bbl. This equates to a NYMEX oil price of between $15.00 and $16.00 per Bbl. As compensation for the price floors, the contracts provide that the premiums received on the posted prices decrease as oil prices rise. During March and April 1999, the Company entered into two collars to hedge a portion of its oil production. The first contract was a fixed price swap for 3,000 Bbls/d for the period of April through December, 1999 at a price of $14.24 per Bbl. The second contract was a collar to hedge 3,000 Bbls/d for the period of May, 1999 through December, 2000 with a floor price of $14.00 per Bbl and a ceiling price of $18.05 per Bbl. The Company paid approximately $540,000 on these contracts during the second quarter, which lowered the effective net oil price received by the Company during that quarter by $0.51 per barrel. When combined with the amount received on the gas contracts, the Company paid a net amount of $1,000 during the first six months of 1999 on its commodity hedges. These two oil financial contracts hedge approximately 50% of the Company's current oil production. Based on the futures market prices at June 30, 1999, the Company would expect to pay approximately $3.5 million over the remaining terms of the oil hedge contracts. For further discussion regarding the Company's derivative financial instruments, see "Market Risk Management" in Management's Discussion and Analysis of Financial Condition and Results of Operations. 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 Company's financial statements contained herein and in the Form 10-K for the year ended December 31, 1998, along with Management's Discussion and Analysis contained in such Form 10-K. Any capitalized terms used but not defined in the following discussion 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. The Company's growth in proved reserves, production and cash flow over the years has been achieved 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. RECENT 1999 EVENTS 1999 SALE OF EQUITY AND MOVE OF DOMICILE. At a special meeting of the stockholders held on April 20, 1999, the stockholders approved (i) a move of the Corporate's domicile from Canada to the United States as a Delaware corporation, (ii) the sale of 18,552,876 common shares to an affiliate of the Texas Pacific Group ("TPG") for $100 million or $5.39 per share, and (iii) increases in the number of shares available for issuance under the Company's stock purchase and stock option plans. The move of domicile was completed April 21, 1999, and along with the move, the Company's wholly-owned subsidiary, Denbury Management Inc. ("DMI"), was merged into the new Delaware parent company, Denbury Resources Inc. This move of domicile did not have any effect on the operations and assets of the Company, and as part of the move and merger, Denbury Resources Inc. expressly assumed any and all liabilities of its subsidiary, DMI, including DMI's obligation for the 9% Senior Subordinated Notes due 2008 and DMI's outstanding bank credit facility. The sale of common stock to TPG was also completed on April 21, 1999. As a result of this transaction, TPG's pro-rata ownership of the outstanding common stock of the Company increased from 32% to 60%. The Company had approximately 45.6 million common shares outstanding as of June 30, 1999. The Company intends to use the proceeds from the TPG equity sale for acquisitions, although in the interim, the funds were used to reduce its outstanding bank debt. FEBRUARY 1999 AMENDMENT TO BANK CREDIT FACILITY. On February 19, 1999, the Company completed an amendment to its credit facility with Bank of America, as agent for a group of eight other banks. This amendment set the borrowing base at $110 million, of which $60 million was considered by the banks to be within their normal credit guidelines. The credit facility continues with its other restrictions, such as a prohibition on the payment of dividends and a prohibition on most debt, liens and corporate guarantees. This amendment: o provided certain relief on the minimum equity and interest coverage tests; o changed the facility to one secured by substantially all of the Company's oil and natural gas properties; o requires that as long as the borrowing base is larger than a borrowing base that conforms to normal credit guidelines (currently $60 million), that at least 75% of the funds borrowed subsequent to the closing of the TPG purchase must be used for either qualifying acquisitions or capital expenditures made to maintain, enhance or develop its proved reserves; and o increased the interest rate to a range from LIBOR plus 1.0% to LIBOR plus 1.75% (depending on the amounts outstanding) and LIBOR plus 2.125% if the outstanding debt exceeds the borrowing base under normal credit guidelines, currently set at $60 million. 9 DENBURY RESOURCES INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) After the repayment of the credit facility in April, 1999, with the proceeds from the sale of common stock to TPG, there was approximately $9.6 million outstanding on the facility ($17.5 million as of June 30, 1999), leaving a total borrowing capacity at that time of approximately $100 million ($92.5 million as of June 30, 1999). The next scheduled re-determination of the borrowing base will be as of October 1, 1999, based on June 30, 1999 assets and proved reserves. There can be no assurance that the banks will not reduce the borrowing base at that time, as such redetermination will depend on current and expected oil and natural gas prices at that time, the Company's development and acquisition results during 1999, the current level of debt and several other factors, some of which are beyond the Company's control. CAPITAL RESOURCES AND LIQUIDITY As a result of depressed oil prices in 1998 which continued into the first part of 1999, the Company's cash flow and results of operations were significantly adversely effected during 1998 and the first quarter of 1999. This reduction in cash flow also contributed to an increase in the Company's debt levels, which as a multiple of cash flow, were at historic highs as of March 31, 1999. Because of the downturn in the oil and gas industry during 1998, resulting from the decreases in oil and natural gas prices, the Company sought additional capital in order to have funds to pursue acquisitions, and in December 1998 entered into an agreement to sell $100 million of common shares to TPG. This sale of equity was approved by stockholders on April 20, 1999 and closed on April 21, 1999 (see "1999 Sale of Equity and Move of Domicile" above). As a result of the equity infusion, the Company's bank debt was reduced to $17.5 million outstanding as of June 30, 1999 and the Company's stockholders' deficit was eliminated. As of June 30, 1999, the Company had positive stockholders equity of $64.8 million. In addition, oil prices have climbed from a first quarter average NYMEX price of approximately $13.00 per Bbl to a second quarter of 1999 average of approximately $17.65 per Bbl, and have further increased to levels above $21.00 per Bbl in early August 1999. Both the improved product prices and the reduction of debt had a positive impact on the Company's earnings and cash flow for the second quarter of 1999 and will continue to impact future periods. These prices will allow the Company to pursue oil development opportunities that were uneconomical at the low oil prices which prevailed in the second half of 1998 and first quarter of 1999. However, there can be no assurance that the recent increase in oil prices will be sustained. In addition, with the funds made available by the equity sale to TPG, the Company intends to pursue oil and gas acquisitions which, if accomplished, should also be accretive to the Company's operating results. However, 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. The Company's current development budget for 1999 remains at $35 million, although the Company is considering increasing the fourth quarter budget slightly due to the improved product prices, if these price increases hold. However, the general intent is to minimize the use of the bank credit facility for anything other than acquisitions. Although the level of the Company's projected cash flow is highly variable and difficult to predict due to volatility in product prices, the success of its drilling and developmental work and other factors, the Company does not expect its 1999 development spending to cause debt to increase substantially. The Company also expects that this spending level should be sufficient to cause a slight increase in production levels throughout the year. Furthermore, if acquisitions are unavailable at attractive rates, the Company does have an inventory of potential development projects that it could commence, subject to the availability and allocation of capital resources. 10 DENBURY RESOURCES INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) SOURCES AND USES OF FUNDS During the first half of 1999, the Company spent approximately $12.6 million on exploration and development expenditures and approximately $6.8 million on acquisitions. The exploration and development expenditures included approximately $5.6 million spent on drilling, $2.9 million on geological, geophysical and acreage expenditures and $4.1 million on workover costs. These expenditures were funded by bank debt and cash flow from operations. In contrast, during the first half of 1998 the Company spent approximately $63.1 million on oil and natural gas development expenditures and approximately $13.2 million on acquisitions. The development expenditures included approximately $38.0 million spent on drilling, $14.1 million on geological, geophysical and acreage expenditures and $11.0 million spent on workover costs. These expenditures were funded by cash flow from operations and bank debt. RESULTS OF OPERATIONS Operating Income Production volumes were lower on a BOE basis during both the three and six month periods ended June 30, 1999 when compared to the corresponding periods in 1998. These declines in production are generally the result of the curtailment in spending during the last half of 1998 after the decline in oil prices. Correspondingly, operating income was also less during the 1999 periods than the corresponding 1998 periods. These statistics and other data are set forth in the following chart.
Three Months Ended Six Months Ended June 30, June 30, - --------------------------------- -------------------- ------------------ 1999 1998 1999 1998 - --------------------------------- -------- -------- -------- -------- OPERATING INCOME (THOUSANDS) Oil sales $ 12,444 $ 14,655 $ 20,976 $ 30,828 Natural gas sales 5,414 7,853 11,585 16,868 Less production expenses (6,487) (8,109) (12,342) (15,963) -------- -------- -------- -------- Operating income $ 11,371 $ 14,399 $ 20,219 $ 31,733 -------- -------- -------- -------- UNIT PRICES Oil price per barrel ("Bbl") $ 11.85 $ 10.29 $ 10.62 $ 11.21 Gas price per thousand cubic feet ("Mcf") 2.22 2.29 2.22 2.39 NETBACK PER BOE (1): Sales price $ 12.26 $ 11.28 $ 11.44 $ 12.15 Production expenses (4.45) (4.06) (4.34) (4.07) -------- -------- -------- -------- Production netback $ 7.81 $ 7.22 $ 7.10 $ 8.08 -------- -------- -------- -------- AVERAGE DAILY PRODUCTION VOLUME: Bbls 11,541 15,649 10,914 15,191 Mcf 26,828 37,665 28,812 38,963 BOE 16,013 21,927 15,716 21,685 - --------------------------------- --------- -------- -------- -------- (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 (continued) Production for the second quarter of 1999 averaged 16,013 BOE/d, an increase of 4% from the first quarter of 1999, but a decline from the Company's peak production level during the second quarter of 1998 (21,927 BOE/d), after which spending was curtailed due to the low oil prices. However, with the recent response from the Company's East waterflood unit at Heidelberg, the production in recent months has began to increase, even though development spending for the first half of 1999 was limited to $12.6 million, the lowest level of development spending in the last few years. Activity on the East waterflood unit commenced in early 1998 and production has increased from approximately 250 Bbls/d in the summer of 1998 to approximately 1,675 Bbls/d for the month of June, 1999. The majority of the Company's planned 1999 development activities relate to facilities and workovers with a substantial portion of these funds to be spent on the waterflood units at Heidelberg Field, including the planned initiation of two more waterfloods late in 1999. Drilling activities make up approximately 20% of the current 1999 budget. Production for the second quarter of 1999 was also impacted by the $4.9 million acquisition of the King Bee Field in Mississippi in late April, which added approximately 650 BOE/d of average daily production for the months of May and June, 1999. Production during the second quarter of 1999 from the Company's two key prior acquisitions, the properties acquired from Amerada Hess in 1996 and from Chevron in 1997, averaged 4,081and 5,626 BOE/d respectively. This compares to 9,730 and 3,575 BOE/d for the second quarter of 1998 on these properties and 4,544 and 4,541 BOE/d for the first quarter of 1999. The production from the Chevron properties (Heidelberg Field) represents the sixth consecutive quarterly increase since its purchase in late 1997. However, the Amerada Hess properties peaked in the second quarter of 1998 at 9,730 BOE/d and have declined since that time due to production declines on horizontal oil wells drilled at Eucutta Field in late 1997 and early 1998 and the lack of subsequent development work to replace this production. Oil and gas revenue for the three and six month periods ended June 30, 1999 decreased primarily as a result of the decrease in production. Oil prices were also 5% lower in 1999 when comparing the six month periods, but showed a 15% improvement in 1999 when comparing the second quarter periods. In general, oil prices gradually declined throughout the first half of 1998 and did not begin to recover until late in the first quarter of 1999. In contrast, prices generally improved throughout the second quarter of 1999 and have reached levels in early August of over $21.00 per Bbl. Although the comparison between the first and second quarters of 1998 and 1999 do not show significant changes, the trend in oil prices during the first half of each year is remarkably different. Included in the net oil price for the second quarter of 1999 is a $540,000 loss on oil hedges during the period, which lowered the net realized price by $0.51 per Bbl. The net average realized gas price was relatively consistent between the comparable periods in 1998 and 1999, ranging from a low of $2.22 per Mcf to a high of $2.39 as outlined in the above table. Included in the gas revenue for the first quarter of 1999 was $523,000 related to a settlement of a gas imbalance and $539,000 relating to a gain on the Company's natural gas hedge contracts. These two items caused the average natural gas price per Mcf to increase by $.20 per Mcf for the first six months of 1999. Production and operating expenses decreased 20% between the second quarter of 1998 and 1999 and 23% between the comparable six month periods as a result of cost savings measures and an overall decline in production. On a BOE basis, operating expenses increased due to the declines in production. For the properties acquired from Amerada Hess, the operating expenses declined from the 1996 level of $5.35 per BOE to $3.39 per BOE for 1998, but increased to $4.27 for the first six months of 1999 as a result of the production declines. Operating expense per BOE on the properties acquired from Chevron continued to decrease from their initial level of $6.38 per BOE when acquired in late 1997 to an average of $5.04 per BOE during 1998 and to an average of $4.86 per BOE for the first six months of 1999. 12 DENBURY RESOURCES INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) These reductions result from general cost saving measures and increased productivity per well through overall production increases at Heidelberg. General and Administrative Expenses General and administrative ("G&A") expenses decreased slightly as set forth below:
Three Months Ended Six Months Ended June 30, June 30, - -------------------------------- ------------------ ------------------- 1999 1998 1999 1998 - -------------------------------- -------- -------- -------- -------- NET G&A EXPENSES (THOUSANDS) Gross expenses $ 4,633 $ 4,848 $ 9,422 $ 9,750 State franchise taxes 150 232 304 432 Operator overhead charges (2,348) (2,444) (4,515) (4,919) Capitalized exploration expenses (616) (727) (1,347) (1,378) -------- -------- -------- -------- Net expenses $ 1,819 $ 1,909 $ 3,864 $ 3,885 -------- -------- -------- -------- Average G&A cost per BOE $ 1.25 $ 0.96 $ 1.36 $ 0.99 Employees as of June 30 201 202 201 202 - -------------------------------- -------- -------- -------- --------
Gross G&A expenses decreased 4% between the second quarter of 1998 and 1999 and 3% between the first six months of 1998 and 1999. The largest component of this decrease was the elimination of a bonus accrual in 1999 which was approximately $375,000 per quarter during the first half of 1998 (no bonus accrual was made during the last half of 1998), partially offset by approximately $200,000 of additional non-recurring expenses incurred during the first six months of 1999 as part of the cost of the move of domicile from Canada to the United States (see "1999 Sale of Equity and Move of Domicile") and $142,000 of increased rent expense as a result of increased space and the expiration of an old lease which had below market rates. The net G&A is also affected by the amount of overhead charged during the period. 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 decreased drilling activity in the first and second quarters of 1999 as compared to the same periods in 1998, gross G&A recovered through these types of charges (listed in the above table as "Operator overhead charges") was lower in the two 1999 periods than in 1998. During the second quarter of 1998, approximately $2.4 million of gross G&A was recovered by operator overhead charges, while during the second quarter of 1999 this recovery was reduced slightly to $2.3 million. Correspondingly, during the first six months of 1998, approximately $4.9 million of gross G&A was recovered by operator overhead charges, while during the first six months of 1999 this recovery was reduced to $4.5 million. Consequently, net G&A expense decreased slightly during the applicable periods of 1999 as compared to 1998. On a BOE basis, G&A costs increased 30% from the second quarter of 1998 to the comparable quarter in 1999 and increased 37% from the first half of 1998 to the first half of 1999, primarily because of decreased production on both an absolute and per well basis. 13 DENBURY RESOURCES INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Interest and Financing Expenses
Three Months Ended Six Months Ended June 30, June 30, - ------------------------------------ ------------------- ------------------ AMOUNTS IN THOUSANDS EXCEPT PER BOE 1999 1998 1999 1998 - ------------------------------------ -------- -------- --------- -------- Interest expense $ 3,820 $ 3,978 $ 8,678 $ 8,369 Non-cash interest expense (216) (164) (407) (285) --------- --------- --------- -------- Cash interest expense 3,604 3,814 8,271 8,084 Interest and other income (370) (375) (731) (742) --------- --------- --------- -------- Net interest expense $ 3,234 $ 3,439 $ 7,540 $ 7,342 --------- --------- --------- -------- Average net interest expense per BOE $ 2.22 $ 1.72 $ 2.65 $ 1.87 Average debt outstanding $ 159,976 $ 179,844 $ 194,761 $195,673 - ------------------------------------ --------- --------- --------- ---------
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 issuance of equity and subordinated notes, 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 subordinated notes. Borrowing increased by $30 million during the second quarter of 1998 to fund $49.8 million of capital expenditures. In 1999, the Company began the year with $225 million of total debt and further increased this to $234.6 million by the end of the first quarter. Furthermore, the bank amendment in February 1999 (see "February 1999 Amendment to Bank Credit Facility") resulted in higher bank interest rates, as the margins over LIBOR rates were increased at that time. This debt was reduced in April 1999 by $100 million with the proceeds from the TPG equity infusion (see "1999 Sale of Equity and Move of Domicile" above), although an additional $7.9 million was borrowed during the remainder of the second quarter, primarily to fund acquisitions. The net result was a lower average level of debt in the second quarter of 1999 as compared to the second quarter of 1998, but an almost identical level of average overall debt when comparing the two six months periods. The net effect on interest expense was a decrease of 4% when comparing the second quarters of 1999 and 1998, but an increase of 4% when comparing the two six month periods, although interest on a BOE basis increased for both 1999 periods as a result of the overall decline in production. Depletion, Depreciation and Site Restoration The Company's depletion, depreciation and amortization ("DD&A") rate dropped from $8.05 per BOE for the second quarter of 1998 and $7.25 for the first six months of 1998 to an average rate of $3.85 per BOE for the two comparable periods in 1999. This resulted from an increase in the proved reserve quantities since December 31, 1998 related to improved oil prices during 1999 and the reduced oil and gas property basis after the second quarter and year-end 1998 full cost pool writedowns. 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 and Exchange Commission ("SEC"). Due to the higher product prices in 1999, the Company did not have any ceiling 14 DENBURY RESOURCES INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) test limitations at either March 31, 1999 or June 30, 1999. However, at the end of the second quarter of 1998, the Company incurred a $165 million writedown of oil and natural gas properties, primarily due to the decline in oil prices during the first half of 1998. 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 DD&A expense.
Three Months Ended Six Months Ended June 30, June 30, - --------------------------------- -------------------- ----------------- AMOUNTS IN THOUSANDS EXCEPT PER BOE 1999 1998 1999 1998 - --------------------------------- ------- -------- ------- -------- Depletion and depreciation $ 5,542 $ 15,972 $ 10,800 $ 28,270 Site restoration provision 68 99 145 188 ------- -------- -------- -------- Total amortization $ 5,610 $ 16,071 $ 10,945 $ 28,458 ------- -------- -------- -------- Average DD&A cost per BOE $ 3.85 $ 8.05 $ 3.85 $ 7.25 - --------------------------------- ------- -------- -------- --------
Income Taxes Due to a net operating loss of the Company for tax purposes, the Company does not have any current tax provision. In addition, as a result of the net pre-tax loss of $2.5 million for the six months ended June 30, 1999, an income tax provision for that period using the effective tax rate of 37% would have resulted in a $939,000 income tax benefit and an increase to the deferred tax asset. Since the Company currently has a large tax net operating loss and it is uncertain whether this total tax asset will ultimately be realized, the Company has provided a valuation allowance for the tax benefit generated in the first six months of 1999, resulting in no effective income tax provision.
Three Months Ended Six Months Ended June 30, June 30, - --------------------------------- -------------------- ----------------- 1999 1998 1999 1998 - --------------------------------- --------- -------- ------- -------- Deferred income tax benefit (thousands) $ - $(50,245) $ - $(50,618) Average income tax costs (benefit) per BOE - $ (25.18) - $ (12.90) Effective tax rate - 29% - 29% - --------------------------------- --------- -------- ------- --------
15 DENBURY RESOURCES INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Summary Operating and BOE Data As a result of the $165 million writedown of oil and natural gas properties as of June 30, 1998, net income increased during 1999 for both the second quarter and the first six months, when compared to 1998. However, there are several other factors also discussed above which had an impact on the results of operations.
Three Months Ended Six Months Ended June 30, June 30, - --------------------------------------- ------------------ ----------------- AMOUNTS IN THOUSAND EXCEPT PER SHARE AMOUNTS 1999 1998 1999 1998 - --------------------------------------- ------- --------- -------- --------- Net income (loss) $ 492 $(121,939) $ (2,537)$(122,619) Net income (loss) per common share: Basic $ 0.01 $ (4.57) $ (0.07)$ (4.89) Diluted 0.01 (4.57) (0.07) (4.89) Cash flow from operations (1) $ 6,598 $ 9,052 $ 9,095 $ 20,507 - --------------------------------------- -------- --------- -------- --------- (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 Six Months Ended June 30, June 30, - --------------------------------------- ------------------- ---------------- Per BOE Data 1999 1998 1999 1998 - --------------------------------------- -------- -------- ------ ------- Oil and natural gas revenue $ 12.26 $ 11.28 $ 11.44 $ 12.15 Production expenses (4.45) (4.06) (4.34) (4.07) - --------------------------------------- -------- -------- ------- ------- Production netback 7.81 7.22 7.10 8.08 General and administrative (1.25) (0.96) (1.36) (0.99) Interest and other income (expense) (2.22) (1.72) (2.65) (1.87) - --------------------------------------- -------- -------- ------- ------- Cash flow from operations(1) 4.34 4.54 3.09 5.22 DD&A (3.85) (8.05) (3.85) (7.25) Deferred income taxes - 25.18 - 12.90 Writedown of oil and natural gas properties - (82.69) - (42.04) Other non-cash items (0.15) (0.09) (0.13) (0.07) - --------------------------------------- -------- -------- ------- ------- Net income (loss) $ 0.34 $ (61.11) $ (0.89) $(31.24) - --------------------------------------- -------- -------- ------- ------- (1) Represents cash flow provided by operations, exclusive of the net change in non-cash working capital balances.
Market Risk Management The Company uses fixed and variable rate debt to partially finance budgeted expenditures. These agreements expose the Company to market risk related to changes in interest rates. The Company does not hold or issue derivative financial instruments for trading purposes. The carrying and fair value of these debt instruments have not changed significantly since year-end. The Company also enters into various financial contracts to hedge its exposure to 16 DENBURY RESOURCES INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) commodity price risk associated with anticipated future oil and natural gas production. These contracts consist of price ceilings and floors, no-cost collars and fixed price swaps. During June and July 1998, the Company entered into two no-cost financial contracts ("collars") to hedge a total of 40 million cubic feet of natural gas per day ("Mmcf/d"). The Company collected $539,000 on these financial contracts, which have now expired, during the first half of 1999. During December 1998, the Company extended these natural gas hedges through December 2000 by entering into an additional no-cost collar with a floor price of $1.90 per MMBtu and a ceiling price of $2.58 per MMBtu for the period of July 1999 through December 2000. This contract hedges 25 MMcf/d for the months of July and August 1999 and 30 MMcf/d for each month thereafter. This contract covers over 100% of the Company's current net natural gas production. Based on the futures market prices at June 30, 1999, the Company would expect to pay approximately $422,000 on these commodity contracts during the remaining term because a portion of the futures market prices at June 30, 1999 exceeded the ceiling on the contract collars. During the fourth quarter of 1998, the Company also modified certain of its oil sales contracts. The new contracts, which are generally for a period of eighteen months, provide that approximately 45% of the Company's oil production as of January 31, 1999, has a price floor of between $8.00 and $10.00 per Bbl. This equates to a NYMEX oil price of between $15.00 and $16.00 per Bbl. As compensation for the price floors, the contracts provide that the premiums received on the posted prices decrease as oil prices rise. During March and April 1999, the Company entered into two no-cost financial contracts to hedge a portion of its oil production. The first contract was a fixed price swap for 3,000 Bbls/d for the period of April through December, 1999 at a price of $14.24 per Bbl. The second contract was a collar to hedge 3,000 Bbls/d for the period of May, 1999 through December, 2000 with a floor price of $14.00 per Bbl and a ceiling price of $18.05 per Bbl. The Company paid approximately $540,000 on the first contract during the second quarter of 1999 which lowered the effective net oil price received during that quarter by $0.51 per barrel. When combined with the amount received on the gas contracts, the Company paid a net amount of $1,000 during the first six months of 1999 on its commodity hedges. These two oil financial contracts hedge approximately 50% of the Company's current oil production. These contracts in effect at June 30, 1999 expire at various dates, with the latest being December 2000. Gain or loss on these derivative commodity contracts would be offset by a corresponding gain or loss on the hedged commodity positions. Based on the futures market prices at June 30, 1999, the Company would expect to pay approximately $3.5 million on the oil hedge contracts and pay approximately $422,000 on the natural gas hedge contracts. If the futures market prices were to increase 10% from those in effect at June 30, 1999, the Company would be required to make additional cash payments under the commodity contracts of approximately $5.7 million. If the futures market prices were to decline 10% from those in effect as June 30, 1999, the Company would neither pay or receive anything under the natural gas commodity contracts and reduce the payments due under the oil contracts by $1.8 million. 17 DENBURY RESOURCES INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Year 2000 Update Year 2000 issues relate to the ability of computer programs or equipment to accurately calculate, store or use dates after December 31, 1999. These dates can be handled or interpreted in a number of different ways, but the most common error is for the system to contain a two digit year which may cause the system to interpret the year 2000 as 1900. Errors of this type can result in system failures, miscalculations and the disruption of operations, including, among other things, a temporary inability to process transactions, send invoices or engage in similar normal business. In response to the Year 2000 issues, the Company has developed a strategic plan divided into the following phases: inventory, product compliance based on vendor representations and in-house testing, third party integration and development of a contingency plan. All of the Company's processing needs are handled by third party systems, none of which have been substantially modified and all of which have been purchased within the last few years. Therefore, the Company's initial review of its in-house systems with regard to Year 2000 issues required an inventory of its systems and a review of the vendor representations. The Company has completed this initial review of its information systems. The licensor of the Company's core financial software system has certified that such software is Year 2000 compliant. Additionally, most other less critical software systems, various types of equipment and non-information technology have been reviewed, and based on vendor representations, are either compliant, will be compliant with the next forthcoming software release or are systems that are not date specific. The Company's non-information technology consists primarily of various oil and gas exploration and production equipment. The initial review has established that the primary non-information technology systems functions are either not date sensitive or are Year 2000 compliant based on vendor representations, and are therefore predicted to operate in customary manners when faced with Year 2000 issues. However, the Company has determined that in the event such systems are unable to address the Year 2000, employees can manually perform most, if not all, functions. In anticipation of Year 2000 issues, the Company is also evaluating the Year 2000 readiness status of its third party service suppliers. In addition to reviewing Year 2000 readiness statements issued by the third parties handling the Company's processing needs, to date the Company has received, and is relying upon, Year 2000 readiness reports periodically issued by its financial services and electrical service providers, vendors and purchasers of the Company's oil and natural gas products. The Company is continuing to review Year 2000 readiness of third party service suppliers and, based on their representations, does not currently foresee material disruptions in the Company's business as a result of Year 2000 issues. Unanticipated prolonged losses of certain services, such as electrical power, could cause material disruptions for which no economically feasible contingency plan has been developed. The Company is continuing to conduct in-house testing of the core systems and non-information technology, and to date either all systems tested have adequately addressed possible Year 2000 scenarios or the Company has a plan in place to remedy the deficiency. The Company expects testing to be completed during the third quarter of 1999. After the completion of its Year 2000 review and testing, the Company will further develop a contingency plan as required, including replacing or upgrading by December 31, 1999 any system incapable of addressing the Year 2000. This final step is also expected to be completed during the third quarter of 1999. Although the effects of Year 2000 issues cannot be predicted with certainty, the Company believes that the potential impact, if any, of such events will, at most, require employees to manually complete otherwise automated tasks or 18 DENBURY RESOURCES INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) calculations, other than those which might occur in a "worst case" scenario as described below, which the Company does not anticipate will occur. After considering Year 2000 effects on in-house operations, the Company does not expect that any additional training would be required to perform these tasks on a manual basis due to the level of experience of its personnel and the routine nature of the tasks being performed. If, based on the results of its in-house testing, the Company should determine that certain systems are not Year 2000 compliant and it appears as though the system is not likely to be compliant within a reasonable time period, the Company will either elect to perform the task manually or will attempt to purchase a different system for that particular task and convert before December 31, 1999. The Company does not believe that either option would impact the Company's ability to continue exploration, drilling, production or sales activities, although the tasks may require additional time and personnel to complete the same function or may require incremental time and personnel during 1999 for a conversion to a new system. The Company's core business consists primarily of oil and gas acquisition, development and exploration activities. The equipment which is deemed "mission critical" to the Company's activities requires external power sources such as electricity supplied by third parties. Although the Company maintains limited on-site secondary power sources such as generators, it is not economically feasible to maintain secondary power supplies for any major component of its "mission critical" equipment. Therefore, the most reasonably likely worst case Year 2000 scenario for the Company would involve a disruption of third party supplied electrical power, which would result in a substantial decrease in the Company's oil production. Such event could result in a business interruption that could materially affect the Company's operations, liquidity or capital resources. The Company has initiated the third party integration phase and will continue to have formal communications with its significant suppliers, business partners and key customers to determine the extent to which the Company is vulnerable to either the third parties' or its own failure to correct their Year 2000 issues. The Company has been communicating with such third parties to keep them informed of the Company's internal assessment of its Year 2000 review and plans. This portion of the review and discussions with third parties is expected to be completed during the third quarter of 1999. To date, more than one-half of these third parties have provided certain favorable representations as to their Year 2000 readiness and received similar representations from the Company. There can be no guarantee that the systems of other companies on which the Company relies will be timely converted or that the conversion will be compatible with the Company's systems. However, after reviewing and estimating the effects of such events, the Company's contingency plan involves identifying and arranging for other vendors, purchasers and third party contractors to provide such services, if necessary, in order to maintain its normal operations. The Company has, and will continue to, utilize both internal and external resources to complete tasks and perform testing necessary to address the Year 2000 issue. The Company has not incurred, and does not anticipate that it will incur, any significant costs relating to the assessment and remediation of Year 2000 issues. 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 19 DENBURY RESOURCES INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) 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," "budgeted," "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. In assessing Year 2000 issues, the Company has relied on certain representations of third parties and has attempted to predict and address all possible scenarios which could arise. However, uncertainties exist which could cause Year 2000 effects to be more significant than the Company anticipates. Such uncertainties include the success of the Company in identifying systems and programs that are not Year 2000 compliant, the nature and amount of programming required to up-grade or replace each of the affected programs, the availability, rate and magnitude of related labor and consulting costs and the success of the Company's vendors in addressing the Year 2000 issue. Item 3. Quantitative and Qualitative Disclosures about Market Risk The information required by Item 3 is set forth under "Market Risk Management" in Management's Discussion and Analysis of Financial Condition and Results of Operations. 20 Part II. Other Information Item 4. Submission of Matters to a Vote of Security Holders Denbury's annual meeting of shareholders was held on May 19, 1999 for the purpose of considering the following proposals: 1) the election of seven nominees to serve as Directors of Denbury for one-year terms to expire at the 2000 annual meeting of stockholders and 2) the appointment of Deloitte and Touche LLP as auditors for the ensuing year and the authorization of the directors to fix their remuneration as such. At the record date, 26,801,680 shares of common stock were outstanding and entitled to one vote per share upon all matters submitted at the meeting. With respect to proposal 1 above, the votes were cast as follows:
NOMINEES FOR DIRECTORS FOR AGAINST ABSTENTIONS ----------------------- ------------ ----------- ------------- Ronald G. Greene 22,897,443 - 12,445 David Bonderman 22,897,443 - 12,445 Wilmot L. Matthews 22,897,443 - 12,445 William S. Price, III 22,897,443 - 12,445 Gareth Roberts 22,897,443 - 12,445 David M. Stanton 22,897,443 - 12,445 Wieland F. Wettstein 22,897,443 - 12,445
With respect to proposal 2 above, the votes were cast as follows:
FOR AGAINST ABSTENTIONS ------------ ----------- ------------ 22,898,488 - 11,400
Item 6. Exhibits and Reports on Form 8-K during the Second Quarter of 1999 Exhibits: --------- 10 Form of indemnification agreement between Denbury Resources Inc. and its officers and directors. 27 Financial Data Schedule (EDGAR version only). Reports on Form 8-K: -------------------- None 21 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. DENBURY RESOURCES INC. (Registrant) By: ------------------------------- Phil Rykhoek Chief Financial Officer By: ------------------------------- Mark C. Allen Chief Accounting Officer & Controller Date: August 11, 1999 22 EX-10 2 FORM OF INDEMNIFICATION AGREEMENT EXHIBIT 10 Indemnification Agreement INDEMNIFICATION AGREEMENT dated July 28, 1999, between Denbury Resources Inc., a corporation incorporated under the Delaware General Corporation Law (the "Company"), and _______________ ("Indemnitee"). Preliminary Statements Competent and experienced persons are becoming more reluctant to serve as directors or officers of corporations unless they are provided with adequate protection against claims and actions against them for their activities on behalf or at the request of such corporations, generally through insurance and indemnification. Uncertainties in the interpretations of the statutes and regulations, laws and public policies relating to indemnification of corporate directors and officers are such as to make adequate, reliable assessment of the risks to which directors and officers of such corporations may be exposed difficult, particularly in light of the proliferation of lawsuits against directors and officers generally. The Board of Directors of the Company, based upon its business experience, has concluded that the continuation of present trends in litigation against corporate directors and officers will inevitably make it more difficult for the Company to attract and retain directors and officers of the highest degree of competence committed to the active and effective direction and supervision of the business and affairs of the Company and its subsidiaries and affiliates and the operation of its and their facilities, and the Board deems such consequences to be so detrimental to the best interests of the Company that it has concluded that the Company should act to provide its directors and officers with enhanced protection against inordinate risks attendant on their positions in order to assure that the most capable persons otherwise available will be attracted to, or will remain in, such positions and, in such connection, such directors have further concluded that it is not only reasonable and prudent but necessary for the Company to obligate itself contractually to indemnify to the fullest extent permitted by applicable law its directors and certain of its officers and certain persons serving other entities on behalf or at the request of the Company and to assume, to the maximum extent permitted by applicable law, financial responsibility for expenses and liabilities which might be incurred by such individuals in connection with claims lodged against them for their decisions and actions in such capacities. Section 145(a) of the Delaware General Corporation Law (the "DGCL"), under which the Company is incorporated, provides that a corporation shall have power to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation) by reason of the fact that the person is or was a director or officer of the corporation, or is or was serving at the request of the corporation as a director or officer of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by the person in connection with such action, suit or proceeding if the person acted in good faith and in a manner the person reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe the person's conduct was unlawful. The termination of any action, suit, or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which the person reasonably believed to be in or not opposed to the best interests of the Company and with respect to any criminal action or proceeding, had reasonable cause to believe that the person's conduct was lawful. In addition, Section 145(b) of the DGCL provides that a corporation shall have power to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that the person is or was a director or officer of the corporation, or is or was serving at the request of the corporation as a director or officer of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees) actually and reasonably incurred by the person in connection with the defense or settlement of such action or suit if the person acted in good faith and in a manner the person reasonably believed to be in or not opposed to the best 10-1 interests of the corporation and except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper. In addition, Section 145(g) of the DGCL empowers a company to purchase and maintain insurance on behalf of any person who is or was a director or officer of the corporation, or is or was serving at the request of the corporation as a director or officer of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against such person and incurred by such person in any such capacity, or arising out of such person's status as such, whether or not the corporation would have the power to indemnify such person against such liability under Section 145 of the DGCL. The Company hereby agrees to hold harmless and indemnify Indemnitee to the fullest extent permitted or required by the provisions of the DGCL or court interpretations thereunder as it is presently constituted and as it may be amended from time to time; provided, however, that in the case of any amendment to the DGCL, the Company's obligations to hold harmless and indemnify Indemnitee shall be changed only to the extent that such amendment to the DGCL permits or requires the Company to provide broader indemnification rights than prior to such amendment. The Company desires to have Indemnitee serve or continue to serve as a director or officer of the Company or at the request of the Company as a director or officer of another corporation, partnership, joint venture, trust or other enterprise (each a "Company Affiliate") of which he has been or is serving, or will serve at the request of the Company, free from undue concern for unpredictable, inappropriate or unreasonable claims for damages by reason of his being, or having been, a director or officer of the Company or a director or officer of a Company Affiliate or by reason of his decisions or actions on their behalf. Indemnitee is willing to serve, or to continue to serve, or to take on additional service for, the Company or the Company's Affiliates in such aforesaid capacities on the condition that he be indemnified as provided for herein. Accordingly, in consideration of the premises and the covenants contained herein, the Company and Indemnitee do hereby covenant and agree as follows: 1. SERVICES TO THE COMPANY. Indemnitee will serve or continue to serve as a director or officer of the Company (in the case of a Company officer, at the will of the Company or under a separate contract, if any such contract exists or shall hereafter exist) or as a director or officer of a Company Affiliate faithfully and to the best of his ability so long as he is duly elected and qualified in accordance with the provisions of the By-laws or other applicable constitutive documents thereof; provided, however, that (i) Indemnitee may at any time and for any reason resign from such position (subject to any contractual obligations which Indemnitee shall have assumed apart from this Agreement) and (ii) neither the Company nor any Company Affiliate shall have any obligation under this Agreement to continue the Indemnitee in any such position. 2. RIGHT TO INDEMNIFICATION. The Company shall, to the fullest extent permitted by applicable law as then in effect, indemnify any Indemnitee who is or was involved in any manner (including, without limitation, as a party or a witness) or is threatened to be made so involved in any threatened, pending or completed investigation, claim, action, suit or proceeding (a "Proceeding"), whether civil, criminal, administrative or investigative by reason of the fact that such person is or was a director or officer of the Company, or is or was serving at the request of the Company as a director or officer of any Company Affiliate against all costs, charges and expenses (including attorneys' fees), including an amount paid to settle an action or satisfy a judgment, reasonably incurred by such person in connection with such Proceeding to which such person is made a party by reason of being or having been a director 10-2 or officer of the Company or any Company Affiliate, if (a) such person acted in good faith and in a manner the person reasonably believed to be in and not opposed to the best interests of the Company; and (b) in the case of a criminal or administrative action or proceeding had no reasonable cause to believe that such persons conduct was unlawful; and provided further that, except as provided in Section 3(d), the foregoing shall not apply to a director or officer of the Company or any Company Affiliate with respect to any Proceeding which was commenced by such director or officer. Such indemnification shall include the right to receive payment in advance of any expenses incurred by Indemnitee in connection with such Proceeding, consistent with the provisions of applicable law as then in effect. 3. ADVANCEMENT OF EXPENSES; PROCEDURES; PRESUMPTIONS AND EFFECT OF CERTAIN PROCEEDINGS; Remedies In furtherance, but not in limitation, of the foregoing provisions, the following procedures, presumptions and remedies shall apply with respect to advancement of expenses and the right to indemnification hereunder. (a) Advancement of Expenses. Expenses (including attorneys' fees) incurred by an officer or director in defending any civil, criminal, administrative or investigative action, suit or proceeding may be paid by the Company in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such director or officer to repay such amount if it shall ultimately be determined that such person is not entitled to be indemnified by the Company as authorized in Section 145 of the DGCL. Such expenses (including attorneys' fees) incurred by former directors and officers or other employees and agents may be so paid upon such terms and conditions, if any, as the Company deems appropriate. (b) Procedure for Determination of Entitlement to Indemnification. (i) To obtain indemnification under this Article, an Indemnitee shall submit to the Secretary of the Company a written request, including such documentation and information as is reasonably available to the Indemnitee and reasonably necessary to determine whether and to what extent the Indemnitee is entitled to indemnification (the "Supporting Documentation"). The determination of the Indemnitee's entitlement to indemnification shall be made not later than 60 calendar days after receipt by the Company of the written request for indemnification together with the Supporting Documentation. The Secretary of the Company shall, promptly upon receipt of such a request for indemnification, advise the Board in writing that the Indemnitee has requested indemnification. (ii) The Indemnitee's entitlement to indemnification hereunder shall be determined in one of the following ways (each of which shall give effect to the presumptions set forth in Section 3(c)): (A) by a majority vote of the directors who are not parties to such action, suit or proceeding (the "Disinterested Directors"), even though less than a quorum, or (B) by a committee of Disinterested Directors designated by majority vote of Disinterested Directors, even though less than a quorum, or (C) if there are no Disinterested Directors, or if the Disinterested Directors so direct, by independent legal counsel in a written opinion, or (4) by the stockholders. (iii) If the determination of entitlement to indemnification is to be made by Independent Counsel pursuant to Section 3(b)(ii), a majority of the Disinterested Directors, if any, shall select the Independent Counsel, but only an Independent Counsel to which the Indemnitee does not reasonably object. If there shall be no Disinterested Directors, such Independent Counsel shall be selected by a majority of the Directors, but only an Independent Counsel to which the Indemnitee does not reasonably object. (c)Presumptions and Effect of Certain Proceedings. Except as otherwise expressly provided herein, the Indemnitee shall be presumed to be entitled to indemnification hereunder upon submission of a request for indemnification together with the Supporting Documentation in accordance with Section 3(b)(i), and thereafter the Company shall have the burden of proof to overcome that presumption in reaching a contrary determination. 10-3 In any event, if the person or persons empowered under Section 3(b) to determine entitlement to indemnification shall not have been appointed or shall not have made a determination within 60 calendar days after receipt by the Company of the request therefor together with the Supporting Documentation, the Indemnitee shall be deemed to be entitled to indemnification and the Indemnitee shall be entitled to such indemnification unless the Company establishes as provided in the final sentence or Section 3(d)(ii) or by written opinion of Independent Counsel that (A) the Indemnitee misrepresented or failed to disclose a material fact in making the request for indemnification or in the Supporting Documentation or (B) such indemnification is prohibited by law. The termination of any Proceeding described in Section 2, or of any claim, issue or matter therein, by judgment, order, settlement or conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, adversely affect the right of the Indemnitee to indemnification or create a presumption that the Indemnitee did not act in good faith and in a manner which the Indemnitee reasonably believed to be in or not opposed to the best interests of the Company and, with respect to any criminal Proceeding, that the Indemnitee had reasonable cause to believe that his conduct was unlawful. (d) Remedies of Indemnitee. (i) In the event that a determination is made pursuant to Section 3(b) that the Indemnitee is not entitled to indemnification hereunder, the Indemnitee shall be entitled, on five days' written notice to the Secretary of the Company, to receive the written report of the persons making such determination, which report shall include the reasons and factual findings, if any, upon which such determination was based. At his sole option, the Indemnitee shall be entitled to seek an adjudication of his entitlement to such indemnification in the Court of Chancery. (ii) If a determination shall have been made or deemed to have been made, pursuant to Section 3(b) or (c), that the Indemnitee is entitled to indemnification, the Company shall be obligated to pay the amount constituting such indemnification within five days after such determination has been made or deemed to have been made and shall be conclusively bound by such determination unless the Company establishes as provided in the final sentence of this paragraph that (A) the Indemnitee misrepresented or failed to disclose a material fact in making the request for indemnification or in the Supporting Documentation or (B) such indemnification is prohibited by law. If (x) advancement of expenses is not timely made pursuant to Section 3(a) or (y) payment of indemnification is not made within five calendar days after a determination of entitlement to indemnification has been made or deemed to have been made pursuant to Section 3(b) or (c), the Indemnitee shall be entitled to seek judicial enforcement of the Company's obligation to pay to the Indemnitee such advancement of expenses or indemnification. Notwithstanding the foregoing, the Company may bring an action, in the Court of Chancery, contesting the right of the Indemnitee to receive indemnification hereunder due to the occurrence of an event described in subclause (A) or (B) of this paragraph (ii) (a "Disqualifying Event"); provided however, that in any such action the Company shall have the burden of proving the occurrence of such Disqualifying Event. (iii) The Company shall be precluded from asserting in any judicial proceeding commenced pursuant to this Section 3(d) that the procedures and presumptions of this Section 3 are not valid, binding and enforceable and shall stipulate in any such court that the Company is bound by all the provisions of this Agreement. (iv) If the Indemnitee, pursuant to this Section 3(d), seeks a judicial adjudication to enforce his rights under, or to recover damages for breach of, this Agreement, the Indemnitee shall be entitled to recover from the Company, and shall be indemnified by the Company against, any expenses actually and reasonably incurred by the Indemnitee if the Indemnitee prevails in such judicial adjudication. If it shall be determined in such judicial adjudication that the Indemnitee is entitled to receive part but not all of the indemnification or advancement of expenses sought, the expenses incurred by the Indemnitee in connection with such judicial adjudication shall be prorated accordingly. 10-4 (e) Definitions. For purposes of this Section 3: "Disinterested Director" means a director of the Company who is not or was not a party to the Proceeding in respect of which indemnification is sought by the Indemnitee. "Independent Counsel" means a law firm or a member of a law firm that neither presently is, nor in the past five years has been, retained to represent (a) the Company, its officers, directors or holders of more than 10% of the Company's issued and outstanding equity securities, or the Indemnitee in any matter material to either such party or (b) any other party to the Proceeding giving rise to a claim for indemnification hereunder. Notwithstanding the foregoing, the term "Independent Counsel" shall not include any person who, under the applicable standards of professional conduct then prevailing under the law of Delaware, would have a conflict of interest in representing either the Company or the Indemnitee in an action to determine the Indemnitee's rights hereunder. 4. OTHER RIGHTS TO INDEMNIFICATION. The indemnification and advancement of costs and expenses (including attorneys' fees and disbursements) provided by this Agreement shall not be deemed exclusive of any other rights to which Indemnitee may now or in the future be entitled under any provision of applicable law, the Certificate of Incorporation or any By-law of the Company or any other agreement or any vote of directors or shareholders or otherwise, whether as to action in his official capacity or in another capacity while occupying any of the positions or having any of the relationships referred to in Section 1 of this Agreement. 5. DURATION OF AGREEMENT. (a) This Agreement shall be effective from and after April 22, 1999 and shall continue until and terminate upon the later of (i) the tenth anniversary after Indemnitee has ceased to occupy any of the positions or have any of the relationships described in Section 1 of this Agreement or (ii) (A) the final termination or resolution of all Proceedings with respect to Indemnitee commenced during such 10-year period and (B) either (x) receipt by Indemnitee of the indemnification to which he is entitled hereunder with respect thereto or (y) a final adjudication or binding arbitration that Indemnitee is not entitled to any further indemnification with respect thereto, as the case may be. (b) This Agreement shall be binding upon the Company and its successors and assigns and shall inure to the benefit of Indemnitee and his heirs, devisees, executors, administrators or other legal representatives. 6. SEVERABILITY. If any provision or provisions of this Agreement shall be held to be invalid, illegal or unenforceable under any particular circumstances or for any reason whatsoever (a) the validity, legality and enforceability of the remaining provisions of this Agreement (including, without limitation, all other portions of any Section, paragraph or clause of this Agreement that contains any provision that has been found to be invalid, illegal or unenforceable), or the validity, legality or enforceability under any other circumstances shall not in any way be affected or impaired thereby and (b) to the fullest extent possible consistent with applicable law, the provisions of this Agreement (including, without limitation, all other portions of any Section, paragraph or clause of this Agreement that contains any such provision that has been found to be invalid, illegal or unenforceable, that are not themselves invalid, illegal or unenforceable) shall be deemed revised and shall be construed so as to give effect to the intent manifested by this Agreement (including the provision held invalid, illegal or unenforceable). 7. IDENTICAL COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall for all purposes be deemed to be an original but all of which together shall constitute one and the same Agreement. Only one such counterpart signed by the party against whom enforceability is sought needs to be produced to evidence 10-5 the existence of this Agreement. 8. GENDER NEUTRAL. Whenever the context requires herein, the gender of all words used herein shall include the masculine, feminine, and neuter, and the number of all words shall include the singular and plural. Specifically, for convenience herein the masculine pronoun "his" has been used throughout but is intended to mean "her" where appropriate. 9. HEADINGS. The headings of the paragraphs of this Agreement are inserted for convenience only and shall not be deemed to constitute part of this Agreement or to affect the construction thereof. 10. MODIFICATION AND WAIVER. No supplement, modification or amendment of this Agreement shall be binding unless executed in writing by both of the parties hereto. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provisions hereof (whether or not similar) nor shall such waiver constitute a continuing waiver. 11. NOTIFICATION AND DEFENSE OF CLAIM. Indemnitee agrees to notify the Company promptly in writing upon being served with any summons, citation, subpoena, complaint, indictment, information or other document relating to any matter which may be subject to indemnification hereunder, whether civil, criminal, administrative or investigative; provided, however, that the failure of Indemnitee to give such notice to the Company shall not adversely affect Indemnitee's rights under this Agreement except to the extent the Company shall have been materially prejudiced as a direct result of such failure. Nothing in this Agreement shall constitute a waiver of the Company's right to seek participation at its own expense in any Proceeding which may give rise to indemnification hereunder. 12. NOTICES. All notices, requests, demands and other communications hereunder shall be in writing and shall be deemed to have been duly given if (i) delivered by hand and receipted for by the party to whom said notice or other communication shall have been directed or (ii) mailed by certified or registered mail with postage prepaid, on the third business day after the date on which it is so mailed, in either case: (a) if to Indemnitee, at the address indicated on the signature page hereof, (b) if to the Company: Denbury Resources Inc. 5100 Tennyson Pkwy, Suite 3000 Dallas, Texas 75024 Attention: Secretary or to such other address as may have been furnished to either party by the other party. 10-6 13. GOVERNING LAW. The parties hereto agree that this Agreement shall be governed by, and construed and enforced in accordance with, the laws of the State of Delaware. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. Denbury Resources Inc. By: -------------------------------- Name: Gareth Roberts Title: President and CEO Indemnitee: By: -------------------------------- Name: -------------------------------- Address: -------------------------------- 10-7 EX-27 3 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE DENBURY RESOURCES INC. JUNE 30, 1999 FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000945764 Denbury Resources Inc. 1000 U.S. DOLLARS 6-MOS DEC-31-1999 JAN-01-1999 JUN-30-1999 1 8,049 0 18,011 0 0 26,060 593,656 404,027 224,756 15,614 142,500 0 0 46 64,735 224,756 32,561 33,292 0 27,151 0 0 8,678 (2,537) 0 (2,537) 0 0 0 (2,537) (.07) (.07)
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