-----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, AmOtbYUf9coDd+BagqCxseWflFH1jSv7zvrMKz4+UY9WgiF6xdDfgLAQl7N8fU95 WTLihAX+SCViIvsnUgGLPw== 0000899078-03-000298.txt : 20030514 0000899078-03-000298.hdr.sgml : 20030514 20030514165315 ACCESSION NUMBER: 0000899078-03-000298 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20030331 FILED AS OF DATE: 20030514 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DENBURY RESOURCES INC CENTRAL INDEX KEY: 0000945764 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 752815171 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-12935 FILM NUMBER: 03699805 BUSINESS ADDRESS: STREET 1: 5100 TENNYSON PARKWAY STREET 2: SUITE 3000 CITY: PLANO STATE: TX ZIP: 75024 BUSINESS PHONE: 9726732000 MAIL ADDRESS: STREET 1: 5100 TENNYSON PARKWAY STREET 2: SUITE 3000 CITY: PLANO STATE: TX ZIP: 75024 FORMER COMPANY: FORMER CONFORMED NAME: NEWSCOPE RESOURCES LTD DATE OF NAME CHANGE: 19950627 10-Q 1 denbury1stq10q2003.txt FIRST QUARTER 10-Q - 2003 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q -------------------------------- (Mark One) X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER 1-12935 ---------------------------------------- DENBURY RESOURCES INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 75-2815171 (State or other jurisdictions of (I.R.S. Employer incorporation or organization) Identification No.) 5100 TENNYSON PARKWAY SUITE 3000 PLANO, TX 75024 (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code: (972) 673-2000 Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes X No Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. CLASS OUTSTANDING AT APRIL 30, 2003 ----- ----------------------------- Common Stock, $.001 par value 53,754,702 DENBURY RESOURCES INC.
INDEX Page ---- Part I. Financial Information - ------------------------------ Item 1. Financial Statements Independent Accountants' Report 3 Consolidated Balance Sheets at March 31, 2003 (Unaudited) and December 31, 2002 4 Consolidated Statements of Operations for the Three Months Ended March 31, 2003 and 2002 (Unaudited) 5 Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2003 and 2002 (Unaudited) 6 Consolidated Statements of Comprehensive Income (Loss) for the Three Months Ended March 31, 2003 and 2002 (Unaudited) 7 Notes to Consolidated Financial Statements 8-18 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 19-31 Item 3. Quantitative and Qualitative Disclosures about Market Risk 32 Item 4. Controls and Procedures 32 Part II. Other Information - --------------------------- Item 6. Exhibits and Reports on Form 8-K 32 Signatures 33 Certifications 34-35
PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS - ----------------------------- INDEPENDENT ACCOUNTANTS' REPORT To the Board of Directors of Denbury Resources Inc.: We have reviewed the accompanying consolidated balance sheet of Denbury Resources Inc. and subsidiaries (the "Company") as of March 31, 2003, and the related consolidated statements of operations, cash flows and comprehensive income (loss) for the three month periods ended March 31, 2003 and 2002. These financial statements are the responsibility of the Company's management. We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and of making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States of America, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our reviews, we are not aware of any material modifications that should be made to such condensed consolidated financial statements for them to be in conformity with accounting principles generally accepted in the United States of America. We have previously audited, in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheet of Denbury Resources Inc. and subsidiaries as of December 31, 2002 and the related consolidated statements of operations, stockholders' equity, and cash flows for the year then ended (not presented herein); and in our report dated March 3, 2003, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2002 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. As discussed in Note 3 to the consolidated financial statements, the Company adopted Statement of Financial Accounting Standards No. 143, "Accounting for Asset Retirement Obligations," effective January 1, 2003. /s/ Deloitte & Touche LLP Dallas, Texas May 13, 2003 3 DENBURY RESOURCES INC. CONSOLIDATED BALANCE SHEETS (Amounts in thousands except share amounts) (Unaudited)
March 31, December 31, 2003 2002 --------------- --------------- ASSETS Current assets Cash and cash equivalents $ 161,170 $ 23,940 Accrued production receivables 48,042 34,458 Related party accrued production receivable - Genesis 5,615 3,334 Trade and other receivables 18,413 16,846 Deferred tax asset 44,529 49,886 ------------ ----------- Total current assets 277,769 128,464 ------------ ----------- PROPERTY AND EQUIPMENT Oil and natural gas properties (using full cost accounting) Proved 1,288,413 1,245,896 Unevaluated 47,517 45,736 CO2 properties and equipment 68,827 62,370 Less accumulated depletion and depreciation (628,399) (609,917) ------------ ----------- Net property and equipment 776,358 744,085 ------------ ----------- INVESTMENT IN GENESIS 2,241 2,224 OTHER ASSETS 25,709 20,519 ------------ ----------- TOTAL ASSETS $ 1,082,077 $ 895,292 ============ =========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable and accrued liabilities $ 53,388 $ 49,281 Oil and gas production payable 21,179 17,309 Derivative liabilities 40,112 29,289 Current subordinated debt 200,000 - ------------ ----------- Total current liabilities 314,679 95,879 ------------ ----------- LONG-TERM LIABILITIES Long-term debt 268,193 344,889 Asset retirement liabilities 38,790 6,845 Derivative liabilities 9,602 6,281 Deferred tax liability 67,979 71,663 Other 2,990 2,938 ------------ ----------- Total long-term liabilities 387,554 432,616 ------------ ----------- STOCKHOLDERS' EQUITY Preferred stock, $.001 par value, 25,000,000 shares authorized; none issued and outstanding - - Common stock, $.001 par value, 100,000,000 shares authorized; 53,741,052 and 53,539,329 shares issued and outstanding at March 31, 2003 and December 31, 2002, respectively 54 54 Paid-in capital in excess of par 397,593 395,906 Retained earnings (accumulated deficit) 11,190 (9,875) Accumulated other comprehensive loss (28,993) (19,288) ------------ ----------- Total stockholders' equity 379,844 366,797 ------------ ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,082,077 $ 895,292 ============ ===========
(See accompanying Notes to Consolidated Financial Statements) 4 DENBURY RESOURCES INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Amounts in thousands except per share amounts) (Unaudited)
Three Months Ended March 31, ------------------------------------------ 2003 2002 ------------------ ----------------- REVENUES Oil, natural gas and related product sales Unrelated parties $ 99,311 $ 50,910 Related party - Genesis 12,413 - CO2 sales 2,189 1,490 Gain (loss) on settlements of derivative contracts (27,685) 2,636 Interest and other income 204 411 ------------------ ----------------- Total revenues 86,432 55,447 ------------------ ----------------- EXPENSES Lease operating expenses 22,402 15,428 Production taxes and marketing expenses 3,896 2,614 CO2 operating expenses 317 167 General and administrative expenses 3,791 3,216 Interest 6,461 6,654 Depletion and depreciation 23,553 22,926 Amortization of derivative contracts and other non-cash hedging adjustments (1,510) (1,081) ------------------ ----------------- Total expenses 58,910 49,924 ------------------ ----------------- EQUITY IN NET INCOME OF GENESIS 16 - ------------------ ----------------- INCOME BEFORE INCOME TAXES 27,538 5,523 INCOME TAX PROVISION (BENEFIT) Current income taxes 2,730 (481) Deferred income taxes 6,355 1,458 ------------------ ----------------- INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 18,453 4,546 CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE, NET OF INCOME TAXES OF $1,600 2,612 - ------------------ ----------------- NET INCOME $ 21,065 $ 4,546 ================== ================= NET INCOME PER COMMON SHARE - BASIC Income before cumulative effect of change in accounting principle $ 0.34 $ 0.09 Cumulative effect of change in accounting principle 0.05 - ------------------ ----------------- Net income per common share - basic $ 0.39 $ 0.09 ================== ================= NET INCOME PER COMMON SHARE - DILUTED Income before cumulative effect of change in accounting principle $ 0.33 $ 0.08 Cumulative effect of change in accounting principle 0.05 - ------------------ ----------------- Net income per common share - diluted $ 0.38 $ 0.08 ================== ================= WEIGHTED AVERAGE COMMON SHARES OUTSTANDING Basic 53,639 52,994 Diluted 55,049 53,724
(See accompanying Notes to Consolidated Financial Statements) 5
DENBURY RESOURCES INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in thousands) (Unaudited) Three Months Ended March 31, ---------------------------------- 2003 2002 ------------- ------------ CASH FLOW FROM OPERATING ACTIVITIES: Net income $ 21,065 $ 4,546 Adjustments needed to reconcile to net cash flow provided by operations: Depreciation, depletion and amortization 23,553 22,926 Amortization of derivative contracts and other non-cash hedging adjustments (1,510) (1,081) Deferred income taxes 6,355 1,458 Amortization of debt issue costs and other 515 675 Cumulative effect of change in accounting principle (2,612) - Changes in assets and liabilities: Accrued production receivable (15,865) (1,391) Trade and other receivables (1,233) 14,424 Derivative assets - 9,028 Other assets (330) 732 Accounts payable and accrued liabilities 1,653 (37,688) Oil and gas production payable 3,870 (1,357) Other liabilities 48 (240) ------------- ------------ NET CASH PROVIDED BY OPERATIONS 35,509 12,032 ------------- ------------ CASH FLOW USED FOR INVESTING ACTIVITIES: Oil and natural gas expenditures (32,668) (24,192) Acquisitions of oil and gas properties (3,693) (2,084) Acquisitions of CO2 assets and capital expenditures (6,904) (335) Proceeds from oil and gas property sales 26,366 - Increase in restricted cash (146) (149) Net purchases of other assets (1,094) (369) ------------- ------------ NET CASH USED FOR INVESTING ACTIVITIES (18,139) (27,129) ------------- ------------ CASH FLOW FROM FINANCING ACTIVITIES: Bank repayments (110,000) - Bank borrowings 10,000 5,130 Issuance of subordinated debt 223,057 - Issuance of common stock 1,325 842 Costs of debt financing (4,522) (2) ------------- ------------ NET CASH PROVIDED BY FINANCING ACTIVITIES 119,860 5,970 ------------- ------------ NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 137,230 (9,127) Cash and cash equivalents at beginning of period 23,940 23,496 ------------- ------------ CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 161,170 $ 14,369 ============= ============ SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the period for interest $ 10,260 $ 10,654 Cash paid (refunded) during the period for income taxes - (849)
(See accompanying Notes to Consolidated Financial Statements) 6
DENBURY RESOURCES INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Amounts in thousands) (Unaudited) Three Months Ended March 31, ---------------------------------- 2003 2002 ------------- ------------ Net income $ 21,065 $ 4,546 Other comprehensive income (loss), net of income tax: Change in fair value of derivative contracts (8,769) (12,226) Amortization of derivative contracts 182 (1,620) Reclassification adjustments related to derivative contracts (1,118) (2,301) ------------- ------------ Comprehensive income (loss) $ 11,360 $ (11,601) ============= ============
(See accompanying Notes to Consolidated Financial Statements) 7 DENBURY RESOURCES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION Interim Financial Statements The accompanying unaudited consolidated financial statements of Denbury Resources Inc. and its subsidiaries have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. Unless indicated otherwise or the context requires, the terms "we," "our," "us," "Denbury" or "Company" refers to Denbury Resources Inc. and its subsidiaries. These financial statements and the notes thereto should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2002. Any capitalized terms used but not defined in these Notes to Consolidated Financial Statements have the same meaning given to them in the Form 10-K. Accounting measurements at interim dates inherently involve greater reliance on estimates 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 our opinion, the accompanying unaudited consolidated financial statements include all adjustments (of a normal recurring nature) necessary to present fairly the consolidated financial position of Denbury as of March 31, 2003 and the consolidated results of its operations and cash flows for the three month periods ended March 31, 2003 and 2002. Certain prior period items have been reclassified to make the classification consistent with this quarter. 2. NEW ACCOUNTING STANDARDS See Note 3 regarding our change in accounting related to our adoption of Statement of Financial Accounting Standards ("SFAS") No. 143, "Accounting for Asset Retirement Obligations." On January 1, 2003, we adopted the provisions of SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." SFAS No. 145 changes the method of reporting gains or losses on the early extinguishment of debt. Prior to SFAS No. 145, gains or losses on the early extinguishment of debt were required to be classified in a company's statement of operations as an extraordinary item, net of the related income tax effect. SFAS No. 145 considers the use of early debt extinguishment to generally be a risk management strategy and states that its effects should be reflected as income or expense from continuing operations, except in rare cases where the extinguishment of debt could be considered unusual or infrequent and would therefore be classified as an extraordinary item. The adoption of this statement on January 1, 2003 had no impact on the Company's financial statements for any of the periods presented. However, in April 2003, we early retired our $200 million of Senior Subordinated Notes Due 2008, and in the second quarter of 2003 we expect to record a $17.7 million loss, before income taxes, on the early retirement of this debt (see Note 7 for further information regarding this debt retirement). In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 requires that a liability be recognized for exit and disposal costs only when the liability has been incurred and when it can be measured at fair value. The statement is effective for exit and disposal activities that are initiated after December 31, 2002. We adopted this statement in the first quarter of 2003 and it did not have any effect on our financial statements. In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." SFAS No. 149 amends and clarifies certain accounting and reporting for derivative instruments. This statement is effective for contracts entered into or modified after June 30, 2003. We will adopt this statement in the third quarter of 2003. We are currently evaluating the provisions of this statement to determine its impact, if any, on our financial statements. 8 DENBURY RESOURCES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 3. ASSET RETIREMENT OBLIGATIONS On January 1, 2003, we adopted the provisions of SFAS No. 143, "Accounting for Asset Retirement Obligations." In general, our future asset retirement obligations relate to future costs associated with plugging and abandonment of our oil and natural gas wells, dismantling our offshore production platforms, and removal of equipment and facilities from leased acreage and returning such land to its original condition. SFAS No. 143 requires that the fair value of a liability for an asset retirement obligation be recorded in the period in which it is incurred, discounted to its present value using our credit adjusted risk-free interest rate, and a corresponding amount capitalized by increasing the carrying amount of the related long-lived asset. The liability is accreted each period, and the capitalized cost is depreciated over the useful life of the related asset. Prior to the adoption of this new standard, we recognized a provision for our asset retirement obligations each period as part of our depletion and depreciation calculation, based on the unit-of-production method. The adoption of SFAS No. 143 on January 1, 2003, required us to record (i) a $41.0 million liability for our future asset retirement obligations (an increase of $34.1 million in our liability for asset retirement obligations that we had recorded at Decmeber 31, 2002), (ii) a $34.4 million increase in oil and natural gas properties, (iii) a $3.9 million decrease in accumulated depreciation and depletion, and (iv) a $2.6 million gain as a cumulative effect adjustment of a change in accounting principle, net of taxes. The following pro forma data summarizes Denbury's net income and net income per common share as if we had applied the provisions of SFAS No. 143 in prior periods, and as if we had removed the first quarter of 2003 cumulative effect adjustment for the adoption of SFAS No. 143:
THREE MONTHS ENDED YEAR ENDED MARCH 31, DECEMBER 31, ----------------------- ---------------------------------- 2003 2002 2002 2001 2000 ----------- ---------- ---------- ---------- ---------- NET INCOME: (THOUSANDS) Net income, as reported ................... $ 21,065 $ 4,546 $ 46,795 $ 56,550 $142,227 Pro forma adjustments to reflect retroactive adoption of SFAS 143................... (2,612) (248) 473 503 306 --------- -------- -------- -------- -------- Pro forma net income....................... $ 18,453 $ 4,298 $ 47,268 $ 57,053 $142,533 ========= ======== ======== ======== ======== NET INCOME PER COMMON SHARE: As reported: Basic.................................. $ 0.39 $ 0.09 $ 0.88 $ 1.15 $ 3.10 Diluted................................ 0.38 0.08 0.86 1.12 3.07 Pro forma: Basic.................................. $ 0.34 $ 0.08 $ 0.89 $ 1.16 $ 3.11 Diluted................................ 0.34 0.08 0.87 1.13 3.08
9 DENBURY RESOURCES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table summarizes the changes in our asset retirement obligations for the three months ended March 31, 2003.
Three Months Ended March 31, 2003 ---------------------- (in thousands) Beginning asset retirement obligation, as of 12/31/2002..... $ 6,845 Cumulative effect adjustment for SFAS 143, 1/1/2003......... 34,109 Liabilities incurred during period.......................... 91 Liabilities settled during period........................... (928) Accretion expense........................................... 820 ---------------------- Ending asset retirement obligation.......................... $ 40,937 ======================
At March 31, 2003, $2.1 million of our asset retirement obligation was classified in "Accounts payable and accrued liabilities" under current liabilities in our Consolidated Balance Sheets. We have escrow accounts that are legally restricted for certain of our asset retirement obligations. The balances of these escrow accounts were $8.8 million at March 31, 2003, and $8.7 million at December 31, 2002 and are included in "Other assets" in our Consolidated Balance Sheets. If we had adopted SFAS No. 143 as of January 1, 2002, we estimate that our asset retirement obligations at that date would have been $34.1 million, based on the same assumptions used in our calculation of our obligations at January 1, 2003. 4. NET INCOME PER COMMON SHARE Basic net income per common share is computed by dividing net income by the weighted average number of shares of common stock outstanding during the period. Diluted net income per common share is calculated in the same manner but also considers the impact on net income and common shares for the potential dilution from stock options and any other convertible securities outstanding. For the three month periods ended March 31, 2003 and 2002, there were no adjustments to net income for purposes of calculating diluted net income per common share. The following is a reconciliation of the weighted average common shares used in the basic and diluted net income per common share calculations for the three month periods ended March 31, 2003 and 2002. Three Months Ended March 31, -------------------------- 2003 2002 ------------ ------------ (shares in thousands) Weighted average common shares - basic........ 53,639 52,994 Potentially dilutive securities: Stock options............................ 1,410 730 ------------ ------------ Weighted average common shares - diluted...... 55,049 53,724 ============ ============ For the three months ended March 31, 2003 and 2002, common stock options to purchase approximately 1.9 million and 2.4 million shares of common stock, respectively, were outstanding but excluded from the diluted net income per common share calculations, as the exercise prices of the options exceeded the average market price of the Company's common stock during these periods and would be anti-dilutive to the calculations. 5. SALE OF LAUREL FIELD In February 2003, we sold Laurel Field, acquired in the COHO acquisition in August 2002, for approximately $26.2 million and other consideration which included an interest in Atchafalaya Bay Field (where we already owned 10 DENBURY RESOURCES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS an interest) and seismic over that area. At December 31, 2002, Laurel Field had approximately 7.4 MMBbls of proved reserves. 6. STOCK-BASED COMPENSATION We issue stock options to all of our employees under our stock option plan, which we account for utilizing the recognition and measurement principles of Accounting Principles Board Opinion 25, "Accounting for Stock Issued to Employees," and its related interpretations. Under these principles, we do not recognize any stock-based employee compensation for stock option grants, as long as the exercise price is equal to the underlying common stock on the date of grant. The following table illustrates the effect on net income and net income per common share if we had applied the fair value recognition and measurement provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," in accounting for our stock option plan.
THREE MONTHS ENDED MARCH 31, -------------------------- 2003 2002 ------------ ----------- NET INCOME: (THOUSANDS) Net Income, as reported ...................................... $ 21,065 $ 4,546 Less: stock-based compensation expense applying fair value based method, net of related tax effects.................. 558 728 ------------ ----------- Pro forma net income.......................................... $ 20,507 $ 3,818 ============ =========== NET INCOME PER COMMON SHARE: As reported: Basic..................................................... $ 0.39 $ 0.09 Diluted................................................... 0.38 0.08 Pro forma: Basic..................................................... $ 0.38 $ 0.07 Diluted................................................... 0.38 0.07
7. INDEBTEDNESS
March 31, December 31, 2003 2002 --------------- --------------- (Amounts in thousands) (Unaudited) 9% Senior Subordinated Notes Due 2008......................................... $ 125,000 $ 125,000 9% Series B Senior Subordinated Notes Due 2008................................ 75,000 75,000 7.5% Senior Subordinated Notes Due 2013....................................... 225,000 - Senior bank loan.............................................................. 50,000 150,000 Debt discount................................................................. (6,807) (5,111) --------------- --------------- Total debt................................................................ $ 468,193 $ 344,889 --------------- --------------- Debt classified as short-term................................................. 200,000 - --------------- --------------- Long-term debt................................................................ $ 268,193 $ 344,889 =============== ===============
11 DENBURY RESOURCES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Issuance of 7.5% Senior Subordinated Notes Due 2013 On March 25, 2003, we issued $225 million of 7.5% Senior Subordinated Notes Due 2013 in a Rule 144A private offering. We issued the notes to refinance our existing $200 million of 9% Senior Subordinated Notes Due 2008, including the Series B notes. The notes were priced at 99.135% of par and our net proceeds from the offering were approximately $218.5 million after underwriting and issuance costs. A portion of the proceeds from the notes were temporarily used to reduce our bank debt; however, the proceeds were ultimately used to retire our existing $200 million of 9% Senior Subordinated Notes Due 2008, including the Series B notes, in April 2003 (see "Redemption of 9% Senior Subordinated Notes due 2008 (Including Series B Notes)" below). The notes mature on April 1, 2013 and interest on the notes is payable each April 1 and October 1, commencing October 1, 2003. We may redeem the notes at our option beginning April 1, 2008 at the following redemption prices: 103.75% after April 1, 2008, 102.5% after April 1, 2009, 101.25% after April 1, 2010, and at 100% after April 1, 2011 and thereafter. In addition, prior to April 1, 2006, we may redeem up to 35% of the notes at a redemption price of 107.5% with net cash proceeds from a stock offering. The indenture under which the notes were issued is essentially the same as the indenture covering the 9% notes. The indenture contains certain restrictions on our ability to incur additional debt, pay dividends on our common stock, make investments, create liens on our assets, engage in transactions with our affiliates, transfer or sell assets and to consolidate or merge substantially all of our assets. The notes are not subject to any sinking fund requirements. Redemption of 9% Senior Subordinated Notes Due 2008 (Including Series B Notes) On March 18, 2003, we issued the required 30-day notice to call our existing $200 million of 9% Senior Subordinated Notes Due 2008. Accordingly, we have classified the $200 million of notes as a current liability at March 31, 2003. On April 16, 2003, we redeemed the $200 million of notes at an aggregate cost of $209.0 million, including a $9.0 million call premium. As a result of this early redemption, we estimate that we will have a before tax charge to earnings in the second quarter of 2003 of approximately $17.7 million, which includes the $9.0 million call premium and the write-off of the remaining discount and debt issuance costs associated with these notes. Senior Bank Loan Our bank borrowing base was recently reaffirmed at $220 million as part of an amendment to our credit agreement completed in early May. In addition, the amendment modified the hedging provisions to increase the amount of production we can hedge to a maximum of 85% of our forecasted production from our proved reserves for the current year, 70% of the forecasted production for the subsequent year, 55% of the forecasted production for the third year and 40% of the forecasted production for the fourth year. The amendment also permits us to borrow up to $20 million in a bond issue from a Mississippi governmental authority, resulting in the exemption or reduction of sales and ad valorem taxes on CO2 facilities we build in the next two years in Mississippi. We anticipate entering into such bond funding arrangements in May 2003. Any borrowings in this bond issue will be purchased by the banks in our credit facility, will be part of our outstanding borrowings under our credit line and will accrue interest and be repaid on the same basis as our bank line. At March 31, 2003, we had $50.0 million outstanding under our bank credit facility, leaving us approximately $170.0 million of borrowing capacity. We also had letters of credit outstanding in the amount of $730,000 at March 31, 2003. 12 DENBURY RESOURCES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 8. RELATED PARTY TRANSACTIONS - GENESIS Through certain of our subsidiaries, since May 14, 2002 we have been the general partner of Genesis Energy, L.P. ("Genesis"), a publicly traded master limited partnership. Our subsidiary general partner has a 2% interest in Genesis. Genesis has two primary lines of business: crude oil gathering and marketing, and pipeline transportation, primarily in Mississippi, Texas, Alabama and Florida. We account for our 2% ownership in Genesis under the equity method, as we have significant influence over the limited partnership; however, our control is limited under the general partnership agreement and therefore we do not consolidate Genesis. Our equity in Genesis' net income for the three month period ended March 31, 2003 was $16,000. Genesis Energy, Inc., the general partner of which we indirectly own 100%, has guaranteed the bank debt of Genesis, which was $3.5 million as of March 31, 2003, and also included $30.0 million in letters of credit, of which $9.7 million are for Denbury's benefit to secure purchases from Denbury. There are no guarantees by Denbury or any of its other subsidiaries of the debt of Genesis or of Genesis Energy, Inc. Genesis has historically been a purchaser of our crude oil and we anticipate future purchases of our crude oil production by Genesis. For the three month period ended March 31, 2003, we recorded sales to Genesis of $12.4 million and at March 31, 2003, had a production receivable from Genesis of $5.6 million. Summarized financial information of Genesis Energy, L.P. is as follows (amounts in thousands): Three Months Ended March 31, 2003 ------------------- Revenues.................................. $ 261,882 Cost of sales............................. 256,627 Other expenses............................ 4,376 ------------------- Net income ............................ $ 879 =================== March 31, 2003 ------------------- Current assets............................ $ 97,170 Non-current assets........................ 46,423 ------------------- Total assets........................... $ 143,593 =================== Current liabilities....................... $ 103,358 Non-current liabilities................... 4,015 Partners' capital......................... 36,220 ------------------- Total liabilities and partners' capital $ 143,593 =================== 13 DENBURY RESOURCES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 9. PRODUCT PRICE HEDGING CONTRACTS We enter into various financial contracts to hedge our exposure to commodity price risk associated with anticipated future oil and natural gas production. We do not hold or issue derivative financial instruments for trading purposes. These contracts have historically consisted of price floors, collars and fixed price swaps. We generally attempt to hedge between 50% and 75% of our anticipated production each year to provide us with a reasonably certain amount of cash flow to cover most of our budgeted exploration and development expenditures without incurring significant debt. When we make an acquisition, we attempt to hedge a large percentage, up to 100%, of the forecasted production for the subsequent one to three years following the acquisition in order to help provide us with a minimum return on our investment. All of the mark-to-market valuations used for our financial derivatives are provided by external sources and are based on prices that are actively quoted. The following is a summary of the net gain (loss) representing cash receipts and payments on our hedge settlements: Three Months Ended March 31, ------------------------------------ 2003 2002 ---------------- ---------------- (Amounts in thousands) Oil hedge contracts $ (8,738) $ 462 Gas hedge contracts (18,947) 2,174 ---------------- ---------------- Net gain (loss) $ (27,685) $ 2,636 ================ ================ Some of our derivative contracts require us to pay a premium which we amortize over the contract periods. This expense is included in "Amortization of derivative contracts and other non-cash hedging adjustments" in our Consolidated Statements of Operations. For the three months ended March 31, 2003 and 2002, we recorded premium amortization expense of $294,000 and $2.6 million, respectively. Also, for the three months ended March 31, 2003, we reclassified $1.3 million related to our former Enron hedges (discussed below) out of accumulated other comprehensive income into income and recorded a gain from hedge ineffectiveness of $459,000 which is also included in "Amortization of derivative contracts and other non-cash hedging adjustments."
Hedging Contracts at March 31, 2003 CRUDE OIL CONTRACTS: - ------------------- NYMEX Contract Prices Per Bbl ------------------------------------------------------------- Collar Prices --------------------------- Fair Value at Type of Contract and Period Bbls/d Swap Price Floor Price Floor Ceiling March 31, 2003 - ---------------------------------- ------------- ------------- -------------- ------------ ------------ -------------- Collar Contracts April 2003 - Dec. 2003 10,000 $ - $ - $ 20.00 $ 30.00 $ (2,539) Swap Contracts April 2003 - Dec. 2003 2,500 24.25 - - - (2,247) April 2003 - Dec. 2003 2,000 24.30 - - - (1,770) April 2003 - Dec. 2003 2,000 25.70 - - - (1,004) Jan. 2004 - Dec. 2004 2,500 22.89 - - - (1,709) Jan. 2004 - Dec. 2004 4,500 23.00 - - - (2,898) Jan. 2004 - Dec. 2004 2,500 23.08 - - - (1,538)
14 DENBURY RESOURCES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NATURAL GAS CONTRACTS: - --------------------- NYMEX Contract Prices Per MMBtu ---------------------------------------------------------- Collar Prices --------------------------- Fair Value at Type of Contract and Period MMBtu/d Swap Price Floor Price Floor Ceiling March 31, 2003 - -------------------------------- ------------- ------------- ------------ ------------ ------------ ------------------ Collar Contracts April 2003 - Dec. 2003 45,000 $ - $ - $ 2.75 $ 4.00 $ (14,907) April 2003 - Dec. 2003 25,000 - - 2.75 4.07 (7,882) Jan. 2004 - Dec. 2004 30,000 - - 3.50 4.45 (6,122) Jan. 2004 - Dec. 2004 15,000 - - 3.00 5.87 (1,343) Jan. 2004 - Dec. 2004 15,000 - - 3.00 5.82 (1,387) Jan. 2005 - Dec. 2005 15,000 - - 3.00 5.50 (1,005) Swap Contracts April 2003 - Dec. 2003 10,000 3.905 - - - (3,362)
At March 31, 2003, our derivative contracts were recorded at their fair value, which was a net liability of $49.7 million. To the extent our hedges are considered effective, this fair value liability, net of income taxes, is included in "Accumulated other comprehensive loss" reported under Stockholders' equity in our Consolidated Balance Sheets. The balance in accumulated other comprehensive loss of $29.0 million at March 31, 2003, represents the deficit in the fair market value of our derivative contracts as compared to the cost of our hedges, net of income taxes, and also includes the remaining accumulated other comprehensive income of $2.3 million relating to the Enron hedges that ceased to qualify for hedge accounting treatment when Enron filed for bankruptcy. This $2.3 million relating to the former Enron hedges will be reclassified out of accumulated other comprehensive income during the remainder of 2003, over the periods that the hedges would have otherwise expired. Of the $29.0 million in accumulated other comprehensive loss as of March 31, 2003, $24.9 million relates to current hedging contracts that will expire within the next 12 months. 10. CONDENSED CONSOLIDATING FINANCIAL INFORMATION As of August 2001, all of the Company's subordinated debt securities were fully and unconditionally guaranteed by Denbury Resources Inc.'s significant subsidiaries. Condensed consolidating financial information for Denbury Resources Inc. and its significant subsidiaries as of March 31, 2003 and December 31, 2002 and for the three months ended March 31, 2003 and 2002 is as follows: 15 DENBURY RESOURCES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidating Balance Sheets March 31, 2003 --------------------------------------------------------------- Denbury Denbury Resources Resources Inc. (Parent Guarantor Inc. Amounts in thousands and Issuer) Subsidiaries Eliminations Consolidated -------------- ------------- ------------- -------------- ASSETS Current assets..................................$ 248,664 $ 29,105 $ - $ 277,769 Property and equipment.......................... 506,929 269,429 - 776,358 Investment in subsidiaries (equity method)...... 209,188 2,241 (209,188) 2,241 Other assets.................................... 21,960 3,749 - 25,709 -------------- ------------- ------------- -------------- Total assets...............................$ 986,741 $ 304,524 $ (209,188) $ 1,082,077 ============== ============= ============= ============== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities.............................$ 299,594 $ 15,085 $ - $ 314,679 Long-term liabilities........................... 307,303 80,251 - 387,554 Stockholders' equity............................ 379,844 209,188 (209,188) 379,844 -------------- ------------- ------------- -------------- Total liabilities and stockholders' equity.$ 986,741 $ 304,524 $ (209,188) $ 1,082,077 ============== ============= ============= ============== December 31, 2002 --------------------------------------------------------------- Denbury Denbury Resources Resources Inc. (Parent Guarantor Inc. Amounts in thousands and Issuer) Subsidiaries Eliminations Consolidated -------------- ------------- -------------- -------------- ASSETS Current assets..................................$ 111,063 $ 17,401 $ - $ 128,464 Property and equipment.......................... 528,754 215,331 - 744,085 Investment in subsidiaries (equity method)...... 169,309 2,224 (169,309) 2,224 Other assets.................................... 16,881 3,638 - 20,519 -------------- ------------- -------------- -------------- Total assets...............................$ 826,007 $ 238,594 $ (169,309) $ 895,292 ============== ============= ============== ============== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities.............................$ 87,101 $ 8,778 $ - $ 95,879 Long-term liabilities........................... 372,109 60,507 - 432,616 Stockholders' equity............................ 366,797 169,309 (169,309) 366,797 -------------- ------------- -------------- -------------- Total liabilities and stockholders' equity.$ 826,007 $ 238,594 $ (169,309) $ 895,292 ============== ============= ============== ==============
16 DENBURY RESOURCES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidating Statements of Operations Three Months Ended March 31, 2003 ------------------------------------------------------------------ Denbury Denbury Resources Resources Inc. (Parent Guarantor Inc. Amounts in thousands and Issuer) Subsidiaries Eliminations Consolidated --------------- -------------- -------------- -------------- Revenues.....................................$ 57,285 $ 29,147 $ - $ 86,432 Expenses..................................... 44,320 14,590 - 58,910 --------------- -------------- -------------- -------------- Income before the following: 12,965 14,557 - 27,522 Equity in net earnings of subsidiaries.. 8,495 16 (8,495) 16 --------------- -------------- -------------- -------------- Income (loss) before income taxes and cumulative effect of a change in accounting principal................................. 21,460 14,573 (8,495) 27,538 Income tax provision......................... 4,376 4,709 - 9,085 --------------- -------------- -------------- -------------- Net income before cumulative effect of a change in accounting principal............ 17,084 9,864 (8,495) 18,453 Cumulative effect of a change in accounting principal, net of income taxes............ 3,981 (1,369) - 2,612 --------------- -------------- -------------- -------------- Net income (loss)............................$ 21,065 $ 8,495 $ (8,495) $ 21,065 =============== ============== ============== ============== Three Months Ended March 31, 2002 ------------------------------------------------------------------ Denbury Denbury Resources Resources Inc. (Parent Guarantor Inc. Amounts in thousands and Issuer) Subsidiaries Eliminations Consolidated --------------- -------------- --------------- -------------- Revenues.....................................$ 45,333 $ 10,114 $ - $ 55,447 Expenses..................................... 38,417 11,507 - 49,924 --------------- -------------- --------------- -------------- Income before the following: 6,916 (1,393) - 5,523 Equity in net earnings of subsidiaries.... (892) - 892 - --------------- -------------- --------------- -------------- Income before income taxes................... 6,024 (1,393) 892 5,523 Income tax provision (benefit)............... 1,478 (501) - 977 --------------- -------------- --------------- -------------- Net income (loss)............................$ 4,546 $ (892) $ 892 $ 4,546 =============== ============== =============== ==============
17 DENBURY RESOURCES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidating Statements of Cash Flows Three Months Ended March 31, 2003 ------------------------------------------------------------------ Denbury Denbury Resources Inc. Resources (Parent and Guarantor Inc. Amounts in thousands Issuer) Subsidiaries Eliminations Consolidated ----------------- -------------- -------------- -------------- Cash flow from operations....................$ 20,288 $ 15,221 $ - $ 35,509 Cash flow from investing activities.......... (3,701) (14,438) - (18,139) Cash flow from financing activities.......... 119,860 - - 119,860 ----------------- -------------- -------------- -------------- Net increase (decrease) in cash flow......... 136,447 783 - 137,230 Cash, beginning of period.................... 20,281 3,659 - 23,940 ----------------- -------------- -------------- -------------- Cash, end of period..........................$ 156,728 $ 4,442 $ - $ 161,170 ================= ============== ============== ============== Three Months Ended March 31, 2002 ------------------------------------------------------------------ Denbury Denbury Resources Inc. Resources (Parent and Guarantor Inc. Amounts in thousands Issuer) Subsidiaries Eliminations Consolidated ----------------- -------------- -------------- -------------- Cash flow from operations....................$ 5,071 $ 6,961 $ - $ 12,032 Cash flow from investing activities.......... (18,301) (8,828) - (27,129) Cash flow from financing activities.......... 5,970 - - 5,970 ----------------- -------------- -------------- -------------- Net increase (decrease) in cash flow......... (7,260) (1,867) - (9,127) Cash, beginning of period.................... 17,052 6,444 - 23,496 ----------------- -------------- -------------- -------------- Cash, end of period..........................$ 9,792 $ 4,577 $ - $ 14,369 ================= ============== ============== ==============
18 DENBURY RESOURCES INC. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- You should read the following in conjunction with our financial statements contained herein and our Form 10-K for the year ended December 31, 2002, along with Management's Discussion and Analysis of Financial Condition and Results of Operations contained in such Form 10-K. Any terms used but not defined in the following discussion have the same meaning given to them in the Form 10-K. We are a growing independent oil and gas company engaged in acquisition, development and exploration activities in the U.S. Gulf Coast region. We are the largest oil and natural gas producer in Mississippi, hold key operating acreage onshore Louisiana and have a growing presence in the offshore Gulf of Mexico areas. Our goal is to increase the value of acquired properties through a combination of exploitation, drilling, and proven engineering extraction processes. Our corporate headquarters are in Dallas, Texas, and we have three primary field offices located in Houma and Covington, Louisiana, and Laurel, Mississippi. Debt Refinancing In late March 2003, we issued $225 million of 7.5% Senior Subordinated Notes due 2013 to refinance our $200 million of existing 9% Senior Subordinated Notes due 2008. The subordinated debt was refinanced to take advantage of the currently attractive interest rates and to extend the maturity of our long-term debt an additional five years. We estimate that we will save approximately $2.6 million per year in interest expense as a result of this refinancing. The total cost of the refinancing was approximately $15.5 million, consisting of the debt issue discount, underwriters commission and other expenses totaling approximately $6.5 million, and a $9.0 million call premium to retire the old notes. The old notes were not retired until April 16, 2003, at the end of the required thirty day notice period to call the old notes. We estimate that we will have a pre-tax charge to earnings in the second quarter of 2003 of approximately $17.7 million from the early retirement of the old 9% notes, made up of the write-off of the call premium and the unamortized discount and debt issue costs. The proceeds from the new issue were ultimately used to retire the old notes in April 2003, although pending this use, the proceeds were used to temporarily repay a portion of our bank debt, with the balance invested in short-term securities. CAPITAL RESOURCES AND LIQUIDITY During the first quarter of 2003, we spent $32.7 million on oil and natural gas exploration and development expenditures, $6.9 million on CO2 capital investments, and approximately $3.7 million on oil and natural gas property acquisitions, for total capital expenditures of approximately $43.3 million. In addition, during the first quarter we incurred approximately $6.5 million of costs for the subordinated debt refinancing (see "Debt Refinancing" above). We sold Laurel Field, effective as of January 31, 2003, for net cash proceeds of $26.2 million plus other additional consideration that included an interest in Atchafalaya Bay Field (where we already own an interest) and seismic over that area. Laurel Field had been acquired as part of the acquisition of properties from COHO in August 2002 and had approximately 7.4 MMBbls of proven reserves as of December 31, 2002. The $23.6 million of net total expenditures (including the debt refinancing costs) was funded by $35.5 million of cash flow from operations, with the excess used to fund other minor items and to reduce our net total debt (net of cash), by approximately $12.2 million. Adjusted cash flow from operations (a non-GAAP measure defined as cash flow from operations before the changes in assets and liabilities as discussed below under "Results of Operations-Operating Results")was $47.4 million, with the difference of $11.9 million primarily relating to an increase in oil and gas production receivables caused by the high natural gas prices in March 2003. At March 31, 2003, both our old and new subordinated notes were outstanding, totaling $425 million, plus $50 million of bank debt, for total outstanding debt of $475 million. However, we also had $161.2 million of cash, an increase of $137.2 million from our year-end cash balance, resulting in a $12.2 million reduction in net debt (net of cash) between December 31, 2002 and March 31, 2003. As of April 30, 2003, after retiring the old notes and payment of the call premium, we had $350 million of total debt, the same outstanding principal balance as at December 31, 2002 and consistent with the debt levels prior to the subordinated debt refinancing, after adjustment for the refinancing transaction costs. 19 DENBURY RESOURCES INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Our goal is to limit our leverage. We generally measure leverage by a debt-to-cash flow ratio, cash flow being defined as cash flow from operations. Our target is a debt-to-cash flow ratio of 2 to 1 or less, using a moderate price deck. In today's commodity price environment, we interpret that to be oil prices between $22.50 and $25.00 per Bbl and natural gas prices between $3.25 and $3.50 per Mcf. Based on these price assumptions, we anticipate reaching our targeted debt-to-cash flow ratio during 2003 if our total debt is reduced to $300 million. Since our last significant acquisition in the third quarter of 2002, we have used a portion of our cash flow from operations and proceeds from property sales to reduce our bank debt. We repaid approximately $25 million during the fourth quarter of 2002 and, had $15 million not been used to pay costs of our subordinated debt refinancing, that amount would have been used to reduce debt during the first four months of 2003. Even with the incremental debt from the refinancing, we expect to achieve our debt goal of $300 million during the latter half of 2003 through the application of excess cash flow from operations, assuming that commodity prices do not decrease substantially. We may also reduce debt with any cash received from the possible economic transfer of certain of our assets, such as the value of some of our industrial CO2 sales, to Genesis Energy, L.P. during 2003. Our bank borrowing base was recently reaffirmed at $220 million as part of an amendment to our credit agreement completed in early May. In addition, the amendment modified the hedging provisions to increase the amount of production we can hedge to a maximum of 85% of our forecasted production from our proved reserves for the current year, 70% of the forecasted production for the subsequent year, 55% of the forecasted production for the third year and 40% of the forecasted production for the fourth year. The amendment also permits us to borrow up to $20 million in a bond issue from a Mississippi governmental authority, resulting in the exemption or reduction of sales and ad valorem taxes on CO2 facilities we build in the next two years in Mississippi. We anticipate entering into such bond funding arrangements in May 2003. Any borrowings in this bond issue will be purchased by the banks in our credit facility, will be part of our outstanding borrowings under our credit line and will accrue interest and be repaid on the same basis as our bank line. We anticipate that our capital spending during 2003, excluding any possible acquisitions, will be equal to or less than our cash flow generated from operations, a goal we have met each year since 1999. Our 2003 budget remains unchanged at approximately $137.7 million, including approximately $7.7 million of projects carried over from 2002. Based on current projections, using futures prices in place as of the first part of May 2003, this spending level is expected to be as much as $50 million to $60 million below our forecasted cash flow. Initially, we plan to use any excess funds generated from operations to pay down debt or to fund, in whole or in part, possible acquisitions, although we may consider increasing our budget slightly if commodity prices remain high and it appears we can still reach our $300 million debt target by year-end. We review our capital expenditure budget every quarter and make adjustments as necessary to reflect changes in commodity prices and successes or failures in our drilling program. As a result, since 1999, we have been able to keep our capital spending (excluding acquisitions) at levels equal to or below our cash flow from operations. Although we have a significant inventory of development and exploration projects in-house, on a long-term basis we will need to make acquisitions in order to continue our growth and to replace our production. We are continuing to pursue small acquisitions that are near our CO2 pipeline in Western Mississippi and Southern Louisiana, plus individual fields in the Gulf of Mexico. Although we now control most of the fields along our CO2 pipeline, there are a few remaining smaller fields with potential that we do not control, plus we are continuing to acquire additional interests in the fields that we currently own. We have targeted the acquisition of offshore blocks, which generally consist of one or two fields, where we see additional potential based on our review of 3D seismic or other geologic and geophysical data. Although we are continuing to pursue acquisitions in our other core areas, including larger acquisitions, this activity is a lower priority for us in 2003 than has been the case historically, given our substantial inventory of projects in-house and our goal of reducing our debt level. Any acquisitions that we make will likely be funded with either our excess cash flow or bank debt. 20 DENBURY RESOURCES INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Commitments and Obligations Our obligations that are not currently recorded on our balance sheet are our operating leases, which primarily relate to our office space and minor equipment leases, and various obligations for development and exploratory expenditures arising from purchase agreements or other transactions common to our industry. In addition, in order to recover our undeveloped proved reserves, we must also fund the associated future development costs as forecasted in the proved reserve reports. Further, one of our subsidiaries, the general partner of Genesis Energy, L.P., has guaranteed the bank debt of Genesis (which as of March 31, 2003, consisted of $3.5 million of debt and $30.0 million in letters of credit, $9.7 million of which are for Denbury's benefit) and we have delivery obligations to deliver CO2 to our industrial customers. Our hedging obligations are discussed in Note 9 to the Consolidated Financial Statements. Neither the amounts nor the terms of these commitments or contingent obligations have changed significantly from the year-end 2002 amounts reflected in our Form 10-K filed in March 2003. The significant changes to our debt obligations, which are recorded on our balance sheet, are discussed above under "Debt Refinancing" and Capital Resources and Liquidity. Please refer to Management's Discussion and Analysis of Financial Condition and Results of Operations contained in our 2002 Form 10-K for further information regarding our commitments and obligations. RESULTS OF OPERATIONS CO2 Operations During the first quarter, we completed an additional CO2 well, the IP 15-4 #1, which increased our CO2 production capabilities to approximately 175 MMcf/d, up from approximately 100 to 110 MMcf/d approximately one year ago. As of the end of April 2003, an additional CO2 well was near completion and is expected to commence production early in the third quarter with an anticipated daily volume capability of 30 to 40 MMcf/d. We also plan to upgrade our CO2 facilities in the third quarter, which coupled with the new wells, should increase our CO2 production capacity to around 210 to 220 MMcf/d. Since our CO2 wells have been performing better than anticipated, we do not plan to spud the third CO2 well scheduled in 2003 until very late in the year, or perhaps even early in 2004. Based on our inventory of potential tertiary recovery projects, we will need to drill additional CO2 wells in 2004 and beyond to further increase our CO2 production capacity to 350 MMcf/d in order to develop the oil fields along our CO2 pipeline as planned, or to potentially higher levels if we expand our tertiary operations to other parts of the region. Although we believe that our plans and projections are reasonable and achievable, there could be unforseen delays or problems in the future which could delay our overall tertiary development program. We believe that such delays, if any, should only be temporary. As of December 31, 2002, based on a report prepared by DeGolyer and MacNaughton, we estimate that we have approximately 1.6 trillion cubic feet of usable CO2 reserves. Our oil production from our CO2 tertiary recovery activities increased 12% over fourth quarter 2002 levels to 4,345 Bbls/d in the first quarter of 2003. This represented approximately 22% of our total corporate oil production during the quarter. While this is still a modest percentage of our total production, we expect tertiary oil production to be an ever increasing portion of our production (see further discussion of production below). We spent approximately $0.16 per Mcf to produce our CO2 during the first quarter of 2003, higher than the 2002 average of $0.13 per Mcf, primarily due to higher royalty expenses, as certain of our royalty payments increase if the price of oil increases beyond a certain threshold. Unless oil prices continue to increase, we expect our costs to produce CO2 to decline as our CO2 production increases. The higher cost per Mcf of CO2 caused a corresponding increase in the operating costs of our tertiary projects. For the first quarter, our operating costs for our tertiary properties averaged $10.76 per BOE, slightly higher than our 2002 average of $10.02 per BOE. Our tertiary recovery fields are expected to average between $9 and $10 per BOE in operating expenses over the life of the field, although the cost per BOE is usually higher at the beginning of each operation. This compares to a cost of around $5 per BOE for a more traditional oil property without secondary or tertiary operations. 21 DENBURY RESOURCES INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Operating Results Our operating results for the first quarter of 2003 were substantially better than results for the first quarter of the prior year due to the sharp increase in commodity prices, partially offset by higher overall expenses. During the first quarter of 2003, we implemented SFAS No. 143, "Accounting for Asset Retirement Obligations," as more fully discussed below under "Depletion, Depreciation and Amortization." The adoption of SFAS No. 143 is recorded as a cumulative effect adjustment of a change in accounting principle, net of income taxes, in our Consolidated Statements of Operations and is listed below on both a gross and per share basis.
Three Months Ended March 31, - -------------------------------------------------------- -------------------------- AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS 2003 2002 - -------------------------------------------------------- ------------ ------------ Income before cumulative effect of a change in accounting principle $ 18,453 $ 4,546 Cumulative effect of a change in accounting principal, net of income tax expense of $1,600 2,612 - ------------ ------------ Net income $ 21,065 $ 4,546 - -------------------------------------------------------- ------------ ------------ Net income per common share - basic: Income before cumulative effect of a change in accounting principle $ 0.34 $ 0.09 Cumulative effect of a change in accounting principle 0.05 - ------------ ------------ Net income per common share - basic $ 0.39 $ 0.09 - -------------------------------------------------------- ------------ ------------ Net income per common share - diluted: Income before cumulative effect of a change in accounting principle $ 0.33 $ 0.08 Cumulative effect of a change in accounting principle 0.05 - ------------ ------------ Net income per common share - diluted: $ 0.38 $ 0.08 - -------------------------------------------------------- ------------ ------------ Adjusted cash flow from operations (see below) $ 47,366 $ 28,524 Net change in assets and liabilities relating to operations (11,857) (16,492) - -------------------------------------------------------- ------------ ------------ Cash flow from operations (1) $ 35,509 $ 12,032 - -------------------------------------------------------- ------------ ------------
(1) Net cash flow provided by operations as per the Consolidated Statements of Cash Flows. Adjusted cash flow from operations is a non-GAAP measure that represents cash flow provided by operations before the changes in assets and liabilities, as summarized from our Consolidated Statements of Cash Flows. In our discussion of cash flow from operations herein, we have elected to discuss the two primary components of cash flow provided by operations. Adjusted cash flow from operations measures the cash flow earned or incurred from operating activities without regard to the collection or payment of associated receivables or payables. We believe that this is important to consider separately, as we believe it can often be a better way to discuss changes in operating trends in our business caused by changes in production, prices, operating costs, and so forth, without regard to whether the earned or incurred item was collected or paid during that period. We also use this measure because the collection of our receivables or payment of our obligations generally have not been a significant issue for our business, but merely a timing issue from one period to the next, with fluctuations generally caused by significant changes in commodity prices or significant changes in drilling activity, as we have very few uncollectible receivables and timely pay all of our obligations. 22 DENBURY RESOURCES INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The net change in assets and liabilities relating to operations is also important as it does require or provide additional cash for use in our business; however, we prefer to discuss its effect separately. For instance, as noted above, during the first quarter of 2003 we used approximately $11.9 million of cash to fund a net increase in working capital. This was primarily caused by an increase in our accrued production receivables during March caused by the unusually high natural gas price, with natural gas index prices in the $9.28 per MMBtu range. We received payment for substantially all of this natural gas during April 2003. Similarly, we used a significant amount of cash flow from operations in the first quarter of 2002 to fund a $16.5 million increase in working capital, primarily relating to a significant reduction of our payables and accrued liabilities in early 2002 following a high level of drilling and exploitation activity late in 2001. While both are components of the GAAP measure, we believe that it makes sense to discuss them independently. Certain of our operating results and statistics for the comparative first quarters of 2003 and 2002 are included in the following table.
Three Months Ended March 31, - ----------------------------------------------------------------- ----------------------------------- 2003 2002 - ----------------------------------------------------------------- ---------------- ----------------- AVERAGE DAILY PRODUCTION VOLUME Bbls 19,565 17,740 Mcf 99,170 105,726 BOE(1) 36,093 35,361 OPERATING REVENUES AND EXPENSES (THOUSANDS) Oil sales $ 52,213 $ 27,833 Natural gas sales 59,511 23,077 Gain (loss) on settlements of derivative contracts (27,685) 2,636 ---------------- ----------------- Total oil and natural gas revenues $ 84,039 $ 53,546 ---------------- ----------------- Lease operating expenses $ 22,402 $ 15,428 Production taxes and marketing expenses 3,896 2,614 ---------------- ----------------- Total production expenses $ 26,298 $ 18,042 ---------------- ----------------- CO2 sales to industrial customers $ 2,189 $ 1,490 CO2 operating expenses 317 167 ---------------- ----------------- CO2 operating margin $ 1,872 $ 1,323 ---------------- ----------------- UNIT PRICES-INCLUDING IMPACT OF HEDGES Oil price per barrel ("Bbl") $ 24.69 $ 17.72 Gas price per thousand cubic feet ("Mcf") 4.54 2.65 UNIT PRICES-EXCLUDING IMPACT OF HEDGES Oil price per Bbl $ 29.65 $ 17.43 Gas price per Mcf 6.67 2.43 OIL AND GAS OPERATING REVENUES AND EXPENSES PER BOE (1): Oil and natural gas revenues $ 34.40 $ 15.99 ---------------- ----------------- Oil and gas lease operating expenses $ 6.90 $ 4.85 Oil and gas production taxes and marketing expenses 1.20 0.82 ---------------- ----------------- Total oil and gas production expenses $ 8.10 $ 5.67 - ----------------------------------------------------------------- ---------------- -----------------
(1) Barrel of oil equivalent using the ratio of one barrel of oil to 6 Mcf of natural gas ("BOE"). 23 DENBURY RESOURCES INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS PRODUCTION: Production by area for each of the quarters of 2002 and the first quarter of 2003 is listed in the following table.
Average Daily Production (BOE/d) -------------------------------------------------------------------- First Second Third Fourth First Quarter Quarter Quarter Quarter Quarter Operating Area 2002 2002 2002 2002 2003 - --------------------------------- ----------- ------------ ------------ ------------- ------------- Mississippi - non-CO2 floods 12,423 12,124 13,232 15,703 14,537 Mississippi - CO2 floods 3,839 4,278 3,895 3,863 4,345 Onshore Louisiana 8,405 7,717 8,224 7,859 8,509 Offshore Gulf of Mexico 10,550 11,229 9,863 8,287 8,544 Other 144 178 292 182 158 ----------- ------------ ------------ ------------- ------------- Total Company 35,361 35,526 35,506 35,894 36,093 - --------------------------------- ----------- ------------ ------------ ------------- -------------
During the first quarter of 2003, we sold Laurel Field, a Mississippi non-CO2 flood property that has averaged between 1,500 and 1,700 BOE/d since we acquired it in August 2002. The field was sold effective January 31, 2003, lowering our first quarter 2003 oil production, as compared to the fourth quarter of 2002, by approximately 1,100 BOE/d. Our first quarter of 2003 production was also negatively affected by mechanical failures in two of our onshore Louisiana natural gas wells, reducing production by approximately 500 BOE/d. However, the production increases from our tertiary recovery projects and other onshore Louisiana projects more than offset these production decreases, resulting in a slight increase in overall production in the first quarter of 2003 when compared to fourth quarter of 2002 production. As of May 12, 2003, the two well failures discussed above had been repaired and production was gradually increasing, with current production at about 75% of their previous production levels. When comparing production in the first quarters of 2002 and 2003, the COHO acquisition in August of 2002 (Mississippi - non-CO2 flood properties) was the single biggest source of production growth, adding 2,773 BOE/d to the first quarter of 2003 average production rate. We also benefitted from a 506 BOE/d (13%) increase in our tertiary recovery projects when comparing the respective first quarters. Partially offsetting these increases were general production declines from normal depletion in the Mississippi - non-CO2 flood properties and our offshore properties. The net result was a 2% increase in overall production in the first quarter of 2003 as compared to the first quarter of 2002. With regard to specific fields, production at Heidelberg Field, a Mississippi non-CO2 flood property and our single largest field, decreased from 7,702 BOE/d in the first quarter of 2002 to 7,441 BOE/d in the first quarter of 2003, as part of a general decline in production since that field's peak in 2001. However, first quarter of 2003 production was up slightly from the fourth quarter of 2002 average of 7,290 BOE/d as a result of incremental natural gas production from three wells drilled at Heidelberg during the fourth quarter of 2002. As previously discussed, production from our tertiary recovery projects increased in the first quarter of 2003, with most of this increase coming from Mallalieu Field. The oil production increases correlate with the higher volumes of CO2 injected during the last few months following the increase in our CO2 production capabilities. Oil production has continued to gradually increase, at least through April, at both of the primary tertiary recovery projects, Little Creek and Mallalieu Fields, and is expected to continue, although there may be fluctuations from period to period. CO2 injection is not expected to commence at McComb Field, a new project started this year, until the fourth quarter of 2003, with initial oil production response expected six to twelve months later. Production from our onshore Louisiana area increased slightly in the first quarter of 2003 as compared to production in the prior year first quarter, and increased more significantly when compared to production in the fourth quarter of 2002. This 24 DENBURY RESOURCES INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS increase was in spite of mechanical well problems on two Louisiana natural gas wells which lowered overall onshore Louisiana production by approximately 500 BOE/d. The production at Lirette Field accounted for most of the increased production onshore Louisiana, as production during the first quarter of 2003 averaged 2,097 BOE/d (mostly natural gas), as compared to 1,358 BOE/d in the fourth quarter of 2002 and 1,645 BOE/d in the first quarter of 2002. This increase was primarily due to a successful recompletion, in late December 2002, of the Laterre #29 well. The most significant production declines in this area have come from Thornwell Field, as most of this production is short-lived natural gas production. Production at Thornwell Field averaged 3,138 BOE/d (mostly natural gas) during the first quarter of 2003, down from 4,399 BOE/d during the first quarter of 2002. Production at Thornwell fluctuates with drilling activity, and during the first quarter of 2003 the only well we drilled was a dry hole, our first dry hole in this field. We are continuing development and exploration activities at Thornwell Field in 2003, although at a lower level than in 2002. Production offshore generally declined during the latter half of 2002 due to the minimal activity level there in 2002. The two exploratory wells drilled offshore during late 2002 at North Padre Island were successful, but require a production facility before they can be produced, with production expected to commence early in the fourth quarter of 2003. Two other wells have been drilled offshore during the first quarter of 2003, but these were both dry. Similar to Thornwell Field onshore Louisiana, our production offshore is relatively short-lived, and without continued activity production will gradually decrease from normal depletion. We plan to drill up to nine additional wells offshore during 2003, as well as other development work such as workovers and recompletions, and expect production to generally increase from first quarter levels throughout the year. Our production for the first quarter of 2003 was weighted slightly towards oil (54%) primarily due to the mechanical problems with two onshore Louisiana natural gas wells discussed above. Although there will be fluctuations from period to period, we generally expect our production to remain close to a 50/50 mix throughout 2003, unless we make any acquisitions that are predominately oil or predominantly natural gas. OIL AND NATURAL GAS REVENUES: Oil and natural gas revenues, net of hedge receipts and payments, for the first quarter of 2003 increased $30.5 million, or 57%, from the comparable quarter of 2002, and also increased when comparing the first quarter of 2003 with the fourth quarter of 2002. The increase in oil and natural gas revenues when comparing the two first quarters is primarily due to the increase in commodity prices, which increased revenues by $59.8 million, or 112%, from levels in the prior year quarter. This increase was supplemented by an increase in production volumes, which increased revenues by $1.0 million, or 2%. These increases were partially offset by significant losses on the settlements of derivative contracts which reduced revenues by $30.3 million, or 57% of the revenues increase when comparing the two first quarters. Our realized natural gas prices (excluding hedges) for the first quarter of 2003 averaged $6.67 per Mcf, a 174% increase from the average of $2.43 per Mcf realized during the first quarter of 2002, and our realized oil prices (excluding hedges) for the first quarter of 2003 averaged $29.65 per Bbl, a 70% increase from the $17.43 per Bbl average realized in the first quarter of 2002. We paid out a portion of our increase in revenues due to commodity prices with the payment of $27.7 million on our hedges in the first quarter of 2003, as compared to collections of $2.6 million on our commodity hedges in the first quarter of 2002, reducing our average realized natural gas price to $4.54 per Mcf and our average realized oil price to $24.69 per Bbl in the first quarter of 2003. On a weighted average price per BOE received net to us, prices were $18.41 per BOE higher (excluding hedges) in the first quarter of 2003 than in the comparable period of 2002. However, we paid out approximately $8.52 per BOE on our oil and natural gas hedges in the current quarter, as compared to cash receipts of $0.83 per BOE in the prior year quarter, leaving a net realized price increase of approximately $9.06 per BOE. PRODUCTION EXPENSES: Lease operating expenses increased from $4.85 per BOE in the first quarter of 2002 to $6.90 per BOE in the first quarter of 2003, which was also higher than our fourth quarter 2002 average of $6.34 per BOE. The cost of the two workovers relating to mechanical failures at two onshore Louisiana gas wells discussed above, totaling approximately $850,000, was the biggest source of the increase, although continued high expenses on the properties acquired from COHO, 25 DENBURY RESOURCES INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS continued expansion of CO2 tertiary projects (which typically have a higher than average cost per BOE), along with higher lease fuel costs caused by the high natural gas prices, also contributed to the higher than historical level of operating costs. We expect to incur between $1.8 million and $2.0 million of additional expense in the second quarter of 2003 on the two aforementioned workovers, which were not completed until late April. We anticipate that our lease operating expenses on a per BOE basis will decrease later this year, assuming a return to normal operating parameters. Production taxes and marketing expenses also increased from $0.82 per BOE in the first quarter of 2002 to $1.20 per BOE in the first quarter of 2003, primarily due to the higher commodity prices. General and Administrative Expenses General and administrative ("G&A") expenses increased 16% on a per BOE basis between the respective first quarters as set forth below:
Three Months Ended March 31, - --------------------------------------------------- ------------------------------------------ 2003 2002 - --------------------------------------------------- ------------------- ------------------- NET G&A EXPENSE (THOUSANDS) Gross G&A expenses $ 11,433 $ 9,509 State franchise taxes 363 367 Operator overhead charges (6,515) (5,203) Capitalized exploration costs (1,490) (1,457) ------------------- ------------------- Net G&A expense $ 3,791 $ 3,216 ------------------- ------------------- Average G&A cost per BOE $ 1.17 $ 1.01 Employees as of March 31 360 324 - --------------------------------------------------- ------------------- -------------------
Gross G&A expenses increased $1.9 million, or 20%, between the first quarters of 2002 and 2003. The largest components of this increase relate to expenses associated with the recent sale of stock by the Texas Pacific Group, higher year-end expenses than in the prior year for engineering fees and audit fees, and an overall increase in personnel and associated expenses. The increase in gross G&A is offset in part by an increase in operator overhead recovery charges and capitalized exploration costs in the first quarter of 2003. Our well operating agreements allow us, when we are the operator, to charge a well with a specified overhead rate during the drilling phase and also charge a monthly fixed overhead rate for each producing well. As a result of the additional operated wells from our recent acquisitions and drilling activity during the past year, the amount we recovered as operator overhead charges increased by 25% between the respective first quarters of 2002 and 2003. Capitalized exploration costs increased slightly between the comparable periods in 2002 and 2003, along with the increase in gross G&A expenses. The net effect of the increase in gross G&A expenses, operator overhead charges and capitalized exploration costs was an 18% increase in net G&A expense between the respective first quarters. On a per BOE basis, G&A costs increased 16% in the first quarter of 2003 as compared to the first quarter of 2002, as the production increase was not proportional to the cost increase. 26 DENBURY RESOURCES INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Interest and Financing Expenses
Three Months Ended March 31, - ---------------------------------------------------- --------------------------------- AMOUNTS IN THOUSANDS, EXCEPT PER BOE AMOUNTS 2003 2002 - ---------------------------------------------------- -------------- --------------- Interest expense $ 6,461 $ 6,654 Non-cash interest expense (503) (650) -------------- --------------- Cash interest expense 5,958 6,004 Interest and other income (204) (411) -------------- --------------- Net cash interest expense $ 5,754 $ 5,593 -------------- --------------- Average net cash interest expense per BOE $ 1.77 $ 1.76 Average interest rate (1) 6.8% 7.0% Average debt outstanding $ 351,556 $ 342,409 - ---------------------------------------------------- -------------- ---------------
(1) Includes commitment fees but excludes amortization of debt issue costs. Interest expense for the first quarter of 2003 decreased from levels in the comparable prior year period primarily due to (i) lower overall interest rates, as our average outstanding debt balance increased slightly, and (ii) reduced debt issue cost amortization resulting from the complete amortization of costs associated with the original maturity of our bank credit line in December 2002. Our net cash interest expense increased slightly between periods as our interest and other income decreased in the first quarter of 2003. We expect interest expense to further decrease in 2003 as a result of the refinancing of our subordinated debt (see "Debt Refinancing" above), which is expected to save approximately $2.6 million per year in interest expense. This decrease will not be fully recognized until the third quarter of 2003, as the old subordinated debt was not retired until April 16, 2003. Depletion, Depreciation and Amortization
Three Months Ended March 31, - ------------------------------------------------------ ---------------------------- AMOUNTS IN THOUSANDS, EXCEPT PER BOE AMOUNTS 2003 2002 - ------------------------------------------------------ ------------- ----------- Depletion and depreciation $ 21,979 $ 21,216 Depreciation of CO2 assets 438 527 Site restoration provision - 774 Accretion of discount on asset retirement obligations 820 - Depreciation of other fixed assets 316 409 ------------- ----------- Total DD&A $ 23,553 $ 22,926 ------------- ----------- DD&A per BOE: Oil and natural gas properties $ 7.02 $ 6.91 CO2 assets and other fixed assets 0.23 0.29 ------------- ----------- Total DD&A cost per BOE $ 7.25 $ 7.20 - ------------------------------------------------------ ------------- -----------
27 DENBURY RESOURCES INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS In total, our depletion, depreciation and amortization ("DD&A") rate on a per BOE basis was almost the same in the first quarters of 2003 and 2002, and similar to the average rate per BOE during 2002, as there were no significant changes in reserves during the first quarter of 2003. Effective January 1, 2003, we adopted Statement of Financial Accounting Standards ("SFAS") No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 requires that the fair value of a liability for an asset retirement obligation be recorded in the period in which it is incurred, discounted to its present value using our credit adjusted risk-free interest rate, and that the corresponding amount be capitalized by increasing the carrying amount of the related long-lived asset. The liability is accreted each period, and the capitalized cost is depreciated over the useful life of the related asset. If the liability is settled for an amount other than the recorded amount, the difference is recorded to the full cost pool, unless significant. The adoption of this statement resulted in a $2.6 million benefit to net income and was recorded as a cumulative effect of a change in accounting principle in our Consolidated Statements of Operations. As part of the adoption, we ceased accruing for site reclamation costs, as had been our practice in the past, and recorded a $41.0 million liability representing the estimated present value of our retirement obligations, with a $34.4 million increase to oil and natural gas properties. On an undiscounted basis, we estimate that our retirement obligations will be $81.8 million, with an estimated salvage value of $43.3 million, also on an undiscounted basis. DD&A was calculated on the increase to oil and natural gas properties, net of estimated salvage value, and the liability was accreted during the quarter by $820,000.
Income Taxes Three Months Ended March 31, - ----------------------------------------------------------------- ------------------------------ AMOUNTS IN THOUSANDS, EXCEPT PER BOE AMOUNTS AND TAX RATES 2003 2002 - ------------------------------------------------------------------ -------------- -------------- Income tax provision Current income tax expense (benefit) $ 2,730 $ (481) Deferred income tax expense 6,355 1,458 -------------- -------------- Total income tax expense $ 9,085 $ 977 -------------- -------------- Average income tax expense per BOE $ 2.80 $ 0.31 Effective tax rate 33.0% 17.7% - ----------------------------------------------------------------- -------------- --------------
Our income tax provision for the first quarter of 2002 was based on an estimated effective tax rate of 37%, although we increased this effective rate to 38% during 2002. The net effective tax rate was lower than the statutory rates, primarily due to the recognition of enhanced oil recovery credits which lowered our overall tax expense. During 2002, we utilized alternative minimum tax loss carryfowards, virtually eliminating our current tax expense. The current income tax credit in the first quarter of 2002 was the result of a tax law change that allowed us to offset 100% of our 2001 alternative minimum taxes with our alternative minimum tax net operating loss carryforwards. Prior to the law change, we were able to offset only 90% of our alternative minimum taxes with these carryforwards. This change resulted in a reclassification of tax expense between current and deferred taxes and did not impact our overall effective tax rate. As of January 1, 2003, we had utilized virtually all of the alternative minimum tax carryfowards and thus recognized current income tax expense for the projected alternative minimum taxes that are expected to be incurred during 2003. Per BOE Data The following table summarizes the cash flow, DD&A and results of operations on a per BOE basis for the comparative periods. Each of the individual components are discussed above. 28 DENBURY RESOURCES INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Three Months Ended March 31, ---------------------------- Per BOE Data 2003 2002 - -------------------------------------------------------- ------------ ------------ Revenues $ 34.40 $ 15.99 Gain (loss) on settlements of derivative contracts (8.52) 0.83 Lease operating expenses (6.90) (4.85) Production taxes and marketing expenses (1.20) (0.82) - -------------------------------------------------------- ------------ ------------ Production netback 17.78 11.15 CO2 operating margin 0.58 0.42 General and administrative expenses (1.17) (1.01) Net cash interest expense (1.77) (1.76) Current income taxes and other (0.83) 0.16 Changes in assets and liabilities (3.66) (5.18) - -------------------------------------------------------- ------------ ------------ Cash flow from operations 10.93 3.78 DD&A (7.25) (7.20) Deferred income taxes (1.96) (0.46) Amortization of derivative contracts and other non-cash hedging adjustments 0.46 0.34 Cumulative effect of a change in accounting principle 0.80 - Changes in assets and liabilities and other non-cash items 3.50 4.97 - -------------------------------------------------------- ------------ ------------ Net income $ 6.48 $ 1.43 - -------------------------------------------------------- ------------ ------------
MARKET RISK MANAGEMENT We finance some of our acquisitions and other expenditures with fixed and variable rate debt. These debt agreements expose us to market risk related to changes in interest rates. The following table presents the carrying and fair values of our debt, along with average interest rates. The fair value of our bank debt is considered to be the same as the carrying value because the interest rate is based on floating short-term interest rates. The fair value of the subordinated debt is based on quoted market prices. None of our debt has any triggers or covenants regarding our debt ratings with rating agencies.
Expected Maturity Dates - ---------------------------------------- ------------------------------------------------ ----------- ----------- Carrying Fair Amounts in Thousands 2003-2005 2006 2007 2008 Value Value - ---------------------------------------- ----------- ----------- ------------ ----------- ----------- ----------- Variable rate debt: Bank debt.......................... $ - $ 50,000 $ - $ - $ 50,000 $ 50,000 The weighted-average interest rate on the bank debt at March 31, 2003 is 3.21%. Fixed rate debt: 9% subordinated debt, net of discount........................ $ 195,136 $ - $ - $ - $ 195,136 $ 209,000 7.5% subordinated debt, net of discount, due 2013.............. $ - $ - $ - $ - $ 223,057 $ 223,057 The interest rate on the subordinated debt is an average fixed rate of 8.2%. The 9% notes were retired on April 16, 2003.
29 DENBURY RESOURCES INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS We enter into various financial contracts to hedge our exposure to commodity price risk associated with anticipated future oil and natural gas production. We do not hold or issue derivative financial instruments for trading purposes. These contracts have historically consisted of price floors, collars and fixed price swaps. We generally attempt to hedge between 50% and 75% of our anticipated production each year to provide us with a reasonably certain amount of cash flow to cover most of our budgeted exploration and development expenditures without incurring significant debt. When we make an acquisition, we attempt to hedge a large percentage, up to 100%, of the forecasted production for the subsequent one to three years following the acquisition in order to help provide us with a minimum return on our investment. Our recent hedging activity has been predominately with collars, although for the recent COHO acquisition, we also used swaps in order to lock in the prices used in our economic forecasts. All of the mark-to-market valuations used for our financial derivatives are provided by external sources and are based on prices that are actively quoted. We manage and control market and counterparty credit risk through established internal control procedures which are reviewed on an ongoing basis. We attempt to minimize credit risk exposure to counterparties through formal credit policies, monitoring procedures, and diversification. At March 31, 2003, our derivative contracts were recorded at their fair value, which was a net liability of approximately $49.7 million, an increase of approximately $14.1 million from the $35.6 million fair value liability recorded as of December 31, 2002. This change is the result of (i) a decrease in the fair market value of our hedges due to an increase in oil and natural gas commodity prices between December 31, 2002 and March 31, 2003, and (ii) the expiration of certain derivative contracts during 2003 for which we recorded amortization expense of $294,000. Information regarding our current hedging positions is included in Note 9 to the Consolidated Financial Statements. Based on NYMEX natural gas futures prices at March 31, 2003, we would expect to make future cash payments of $29.9 million on our natural gas commodity hedges. If natural gas futures prices were to decline by 10%, the amount we would expect to pay under our natural gas commodity hedges would decrease to $14.1 million, and if futures prices were to increase by 10% we would expect to pay $51.0 million. Based on NYMEX crude oil futures prices at March 31, 2003, we would expect to pay $12.1 million on our crude oil commodity hedges. If crude oil futures prices were to decline by 10%, we would expect to receive $1.8 million, and if crude oil futures prices were to increase by 10%, we would expect to pay $27.7 million under our crude oil commodity hedges. Critical Accounting Policies For a discussion of our critical accounting policies, which are related to property, plant and equipment, depletion and depreciation, oil and natural gas reserves and hedging activities, and which remain unchanged, see our annual report on Form 10-K for the year ended December 31, 2002. Forward-Looking Information The statements contained in this Quarterly Report on Form 10-Q ("Quarterly Report") that are not historical facts, including, but not limited to, statements found in this Management's Discussion and Analysis of Financial Condition and Results of Operations, are forward-looking statements, as that term is defined in Section 21E of the Securities and Exchange Act of 1934, as amended, that involve a number of risks and uncertainties. Such forward-looking statements may be or may concern, among other things, capital expenditures, drilling activity, acquisition plans and proposals and dispositions, development activities, cost savings, production efforts and volumes, hydrocarbon reserves, hydrocarbon prices, liquidity, regulatory matters and competition. Such forward-looking statements generally are accompanied by words such as "plan," "estimate," "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 30 DENBURY RESOURCES INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 our 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 our 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. 31 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - ------------------------------------------------------------------- The information required by Item 3 is set forth under "Market Risk Management" in Management's Discussion and Analysis of Financial Condition and Results of Operations. ITEM 4. CONTROLS AND PROCEDURES - -------------------------------- We maintain disclosure controls and procedures and internal controls designed to ensure that information required to be disclosed in our filings under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. Our chief executive officer and chief financial officer have evaluated our disclosure controls and procedures within 90 days prior to the filing of this Quarterly Report on Form 10-Q and have determined that such disclosure controls and procedures are effective. Subsequent to their evaluation, there were no significant changes in internal controls that could significantly affect such controls subsequent to the date of their evaluation. PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K DURING THE FIRST QUARTER OF 2003 - -------------------------------------------------------------------------- EXHIBITS: -------- 4(a) Indenture for $225 million of 7-1/2% Senior Subordinated Notes Due 2013 among Denbury Resources Inc., certain of its subsidiaries and JPMorgan Chase Bank as trustee, dated March 25, 2003 (incorporated by reference from Exhibit 4(a) to the Registration Statement on Form S-4 filed with the SEC on May 14, 2003). 4(b) Registration Rights Agreement dated March 25, 2003 pertaining to $225 million of 7-1/2% Senior Subordinated Notes Due 2013 (incorporated by reference from Exhibit 4(b) to the Registration Statement on Form S-4 filed with the SEC on May 14, 2003). 10* First Amendment to Third Amended and Restated Credit Agreement. 15* Letter from Independent Accountants as to unaudited interim financial information. 99* Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. * Filed herewith. REPORTS ON FORM 8-K: -------------------- On March 11, 2003, we announced that Denbury and TPG entered into an underwriting agreement, pursuant to which TPG would sell 2.5 million shares of Denbury's common stock. Additionally, TPG has granted to the underwriter a 30-day option to purchase up to an additional 375,000 shares to cover over-allotments, if any. Denbury did not receive any proceeds from this transaction. On March 17, 2003, we announced that Denbury intends to offer $200 million of Senior Subordinated Notes due 2013 in a Private Rule 144A offering and, conditioned upon the closing of such offering, to call for redemption $125 million aggregate principal amount of our 9% Senior Subordinated Notes due 2008 and $75 million aggregate principal amount of our 9% Series B Senior Subordinated Notes due 2008. On March 19, 2003, we announced that we had priced our private offering of $225 million of Senior Subordinated Notes due 2013, which will carry a coupon interest rate of 7.5%. We also announced that we expect to close the sale of the Notes on March 25, 2003, subject to the satisfaction of customary closing conditions. 32 SIGNATURES ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. DENBURY RESOURCES INC. (REGISTRANT) By: /s/ Phil Rykhoek ----------------------------------------------- /s/ Phil Rykhoek Sr. Vice President and Chief Financial Officer By: /s/ Mark C. Allen ----------------------------------------------- /s/ Mark C. Allen Vice President and Chief Accounting Officer Date: May 14, 2003 33 CERTIFICATIONS I, Gareth Roberts, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Denbury Resources Inc. (the "registrant"); 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: (a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and (c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function): (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. May 14, 2003 /s/ Gareth Roberts ------------------------------------- Gareth Roberts President and Chief Executive Officer 34 I, Phil Rykhoek, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Denbury Resources Inc. (the "registrant"); 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: (a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and (c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function): (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. May 14, 2003 /s/ Phil Rykhoek ----------------------------------------------- Phil Rykhoek Sr. Vice President and Chief Financial Officer 35 EX-10 3 denbury1stq10q2003ex10.txt EXHIBIT 10 Exhibit 10 FIRST AMENDMENT TO THIRD AMENDED AND RESTATED CREDIT AGREEMENT This First Amendment to Third Amended and Restated Credit Agreement (this "FIRST AMENDMENT") is entered into effective as of the 30th day of April, 2003 (the "EFFECTIVE DATE"), by and among Denbury Resources Inc., a Delaware corporation ("BORROWER"), Bank One, NA, as Administrative Agent ("ADMINISTRATIVE AGENT"), and the financial institutions parties hereto as Banks ("EXECUTING BANKS"). W I T N E S S E T H WHEREAS, Borrower, Administrative Agent, the other agents a party thereto and Banks are parties to that certain Third Amended and Restated Credit Agreement dated as of September 12, 2002 (the "CREDIT AGREEMENT") (unless otherwise defined herein, all terms used herein with their initial letter capitalized shall have the meaning given such terms in the Credit Agreement); and WHEREAS, pursuant to the Credit Agreement, Banks have made a Revolving Loan to Borrower and provided certain other credit accommodations to Borrower; and WHEREAS, Borrower has requested that Banks (a) amend certain terms of the Credit Agreement in certain respects, (b) consent to certain transactions more particularly described herein, and (c) reaffirm and establish a Borrowing Base and Conforming Borrowing Base of $220,000,000 to be effective as of April 1, 2003 and continuing until the first Redetermination thereafter; and WHEREAS, subject to and upon the terms and conditions set forth herein, Executing Banks have agreed to Borrower's requests. NOW THEREFORE, for and in consideration of the mutual covenants and agreements herein contained and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged and confessed, Borrower, Administrative Agent and each Executing Bank hereby agree as follows: SECTION 1. AMENDMENTS. In reliance on the representations, warranties, covenants and agreements contained in this First Amendment, and subject to the satisfaction of the conditions precedent set forth in Section 4 hereof, the Credit Agreement shall be amended effective as of the Effective Date in the manner provided in this Section 1. 1.1 ADDITIONAL DEFINITIONS. Section 2.1 of the Credit Agreement shall be amended to add thereto in alphabetical order the definitions of "BOND DISBURSEMENT," "BOND DOCUMENTS," "BOND EXPOSURE," "BOND INDENTURE," "BOND ISSUER," "BOND LOAN AGREEMENT," "BOND NOTE," "BOND OFFERING," "BOND PURCHASE AGREEMENT," "BOND PURCHASER," "BOND TRUSTEE," "BONDS" and "FIRST AMENDMENT" which shall read in full as follows: "BOND DISBURSEMENT" means an advance of proceeds of the Bonds by the Bond Purchaser to the Bond Trustee pursuant to the Bond Documents. "BOND DOCUMENTS" means, collectively, the Bonds, the Bond Loan Agreement, the Bond Note, the Bond Purchase Agreement, the Bond Indenture and all other agreements, documents and instruments now or hereafter executed and/or delivered by, between or among any Credit Party, Bond Issuer, Bond Trustee and/or Bond Purchaser pursuant to the Bonds, the Bond Loan Agreement, the Bond Purchase Agreement, the Bond Indenture or otherwise in connection with the Bond Offering, each of which agreements, documents and instruments shall be in form and substance acceptable to Administrative Agent in its sole discretion. "BOND EXPOSURE" means, at any time, without duplication, the aggregate amount of proceeds of the Bonds which have not been advanced at such time by the Bond Purchaser. The Bond Exposure of any Bank at any time shall be its Commitment Percentage of the total Bond Exposure at such time. "BOND INDENTURE" means that certain Indenture, dated as of May 1, 2003, between Bond Issuer and Bond Trustee. "BOND ISSUER" means Mississippi Business Finance Corporation, a public corporation organized and existing under the laws of the State of Mississippi. "BOND LOAN AGREEMENT" means that certain Loan Agreement, dated as of May 1, 2003, by and between Bond Issuer and Borrower. "BOND NOTE" means that certain promissory note of Borrower, dated of even date with the Bond Loan Agreement, payable to the order of Bond Issuer, which promissory note shall be pledged and assigned to Bond Trustee to secure the obligations of Bond Issuer under the Bond Indenture and the Bonds. "BOND OFFERING" means the issuance and sale by Bond Issuer of the Bonds to Bond Purchaser, the proceeds of which are to be advanced, from time to time, by Bond Purchaser to Bond Trustee to fund the "Project Fund" as created under, and defined in, the Bond Indenture, which Project Fund will be utilized to finance the Cost of the Project (as defined in the Bond Loan Agreement) located in the State of Mississippi. Upon the date of the issuance of the Bonds, Bond Purchaser shall be deemed to have 2 sold to each Bank, and each Bank shall be deemed to have unconditionally and irrevocably purchased from Bond Purchaser, a participation in the Bonds and Bond Exposure equal to such Bank's Commitment Percentage of such Bonds and Bond Exposure. "BOND PURCHASE AGREEMENT" means that certain Bond Purchase Agreement, dated as of May 1, 2003, among Bond Purchaser, Bond Issuer and Borrower. "BOND PURCHASER" means Administrative Agent, as "Purchaser" of the Bonds under the Bond Purchase Agreement. "BOND TRUSTEE" means Bank One, NA, in its capacity as "Trustee" under the Bond Indenture and not as Administrative Agent. "BONDS" means, whether one or more, Bond Issuer's Taxable Industrial Development Revenue Bonds, Series 2003 (Denbury Resources Inc. Project), which Bonds shall (a) be in a maximum aggregate principal amount of $20,000,000, (b) bear interest at rates identical to the interest rates set forth in the Credit Agreement, (c) have a maturity date of April 30, 2006, and (d) provide that Bond Purchaser's obligation to make advances of the proceeds thereof shall expire two (2) years from the date of issuance of such Bonds. "FIRST AMENDMENT" means that certain First Amendment to Third Amended and Restated Credit Agreement dated as of April 30, 2003 among Borrower, Administrative Agent and Banks. 1.2 AMENDMENT TO DEFINITIONS. The definitions of "LOAN PAPERS" and "PERMITTED SUBORDINATE DEBT" contained in Section 2.1 of the Credit Agreement shall be amended to read in full as follows: "LOAN PAPERS" means this Agreement, the First Amendment, the Notes, each Facility Guaranty which may now or hereafter be executed, each Borrower Pledge Agreement which may now or hereafter be executed, each Subsidiary Pledge Agreement which may now or hereafter be executed, the Existing Mortgages (as amended by the Assignments and Amendments to Mortgages), all Mortgages now or at any time hereafter delivered pursuant to Section 6.1, the Assignments and Amendments to Mortgages, and all other certificates, documents or instruments delivered in connection with this Agreement, as the foregoing may be amended from time to time. In addition, the term "LOAN 3 PAPERS," as used in Article XIII hereof, shall also include the Bond Documents. "PERMITTED SUBORDINATE DEBT" means Debt of Borrower resulting from a single issue of Borrower's 7.5% Senior Subordinated Notes Due 2013 in an aggregate outstanding principal balance of $225,000,000, and (a) the proceeds of which shall be used, in part, to redeem in full Borrower's 9% Senior Subordinated Notes due 2008, (b) which is fully subordinated to the Obligations pursuant to subordination provisions which have been approved by Required Banks, and (c) which is not subject to negative covenants or events of default (or other provisions which have the same effect as negative covenants or events of default) which have not been approved by Required Banks. 1.3 ADDITIONAL REPRESENTATION AND WARRANTY. Article VIII of the Credit Agreement shall be amended to include a new Section 8.21 which shall read in full as follows: "SECTION 8.21 BOND DOCUMENTS. Borrower has provided to Administrative Agent a true and correct copy of each of the Bond Documents, including all amendments and modifications thereto (whether characterized as an amendment, modification, waiver, consent or similar document). No material rights or obligations of any party to any of the Bond Documents have been waived and no party to any of the Bond Documents is in default of its obligations or in breach of any representations or warranties made thereunder. Each of the Bond Documents is a valid, binding and enforceable obligation of each party thereto in accordance with its terms and is in full force and effect. As used in this Agreement, the term "OBLIGATIONS" shall include, without limitation, any and all obligations, indebtedness and liabilities owed by Borrower or any other Credit Party to Bond Purchaser (whether directly or as assignee of Bond Issuer) under the Bond Documents, which obligations, indebtedness and liabilities shall be secured by Liens on all property described as collateral security for the Obligations in accordance with and pursuant to the Mortgages and the other Loan Papers. Each representation and warranty made by each party in the Bond Documents is true and correct on the date of the First Amendment and will be true and correct on the date of each Borrowing or issuance of a Letter of Credit." 1.4 AMENDMENT TO COMPLIANCE COVENANT. Section 9.8 of the Credit Agreement shall be amended to read in full as follows: "SECTION 9.8 COMPLIANCE WITH LAWS AND DOCUMENTS. Borrower will, and will cause each other Credit Party to, comply with (a) all Laws, their respective certificates (or articles) of incorporation, 4 bylaws, regulations and similar organizational documents and all Material Agreements to which any Credit Party is a party, if a violation, alone or when combined with all other such violations, could have a Material Adverse Effect, and (b) all Bond Documents to which any Credit Party is a party." 1.5 AMENDMENT TO DEBT COVENANT. Section 10.1 of the Credit Agreement shall be amended to read in full as follows: "SECTION 10.1 INCURRENCE OF DEBT. Borrower will not, nor will Borrower permit any other Credit Party to, incur, become or remain liable for any Debt; provided, that (a) Borrower may incur, become or remain liable for (i) the Obligations, (ii) Existing LC Exposure, (iii) without duplication, Debt evidenced by the Bond Loan Agreement, and (iv) other unsecured Debt in an aggregate amount outstanding at any time not to exceed $10,000,000, (b) Borrower may incur, become and remain liable for Permitted Subordinate Debt, and (c) any Restricted Subsidiary may incur, become and remain liable for Permitted Subordinate Debt as a guarantor; provided, that (i) such Guarantees of Permitted Subordinate Debt shall be subordinated to the Obligations pursuant to subordination provisions approved by Required Banks, such approval to not be unreasonably withheld, and (ii) prior to the execution and delivery by any Restricted Subsidiary of any Guaranty of Permitted Subordinate Debt, such Restricted Subsidiary shall have executed and delivered to Administrative Agent for the ratable benefit of Banks a Facility Guaranty, and all the Equity of such Restricted Subsidiary owned by Borrower shall have been pledged to Administrative Agent pursuant to a Borrower Pledge Agreement." 1.6 AMENDMENT TO RESTRICTED PAYMENTS COVENANT. Section 10.2 of the Credit Agreement shall be amended to read in full as follows: "SECTION 10.2 RESTRICTED PAYMENTS. Borrower will not, nor will Borrower permit any other Credit Party to, directly or indirectly, declare or pay, or incur any liability to declare or pay, any Restricted Payment; provided, that (a) any Subsidiary of Borrower may make Distributions to Borrower, any Credit Party may make Distributions to any other Credit Party that has provided a Facility Guaranty, and all of the Equity of which owned by Borrower or any Indirect Subsidiary which is a Restricted Subsidiary (as applicable) has been pledged to Administrative Agent pursuant to a Borrower Pledge Agreement or a Subsidiary Pledge Agreement (as applicable), (c) so long as (1) no Default or Borrowing Base Deficiency exists on the date any such Distribution is declared or paid and no Default or Event of Default 5 would result therefrom, and (2) the Borrowing Base does not exceed the Conforming Borrowing Base on the date such Restricted Payments are declared or paid, in addition to Distributions permitted under the preceding clauses (a) and (b), Borrower may make Restricted Payments up to $5,000,000 in the aggregate in any Fiscal Year, and (d) Borrower may make payments under and pursuant to the Bond Loan Agreement and the Bond Note in accordance with the terms thereof." 1.7 AMENDMENT TO NO AMENDMENTS COVENANT. Section 10.6 of the Credit Agreement shall be amended to read in full as follows: "SECTION 10.6 AMENDMENTS TO ORGANIZATIONAL AND OTHER DOCUMENTS. Borrower will not, nor will Borrower permit any other Credit Party to, enter into or permit any modification or amendment of, or waive any material right or obligation of any Person under (a) its certificate or articles of incorporation, bylaws, partnership agreement, regulations or other organizational documents other than amendments, modifications and waivers which will not, individually or in the aggregate, have a Material Adverse Effect, and/or (b) any Bond Document." 1.8 AMENDMENT TO USE OF PROCEEDS COVENANT. Section 10.7 of the Credit Agreement shall be amended to read in full as follows: "SECTION 10.7 USE OF PROCEEDS. The proceeds of Borrowings will not be used for any purpose other than (a) working capital, (b) to finance the acquisition, exploration and development of Mineral Interests, (c) for general corporate purposes, (d) to refinance the obligations outstanding under the Existing Credit Agreement, and (e) with respect to any Borrowings made or deemed made hereunder through advances to Borrower pursuant to the Bond Documents, solely for the purposes set forth in the Bond Documents. None of such proceeds (including, without limitation, proceeds of Letters of Credit issued hereunder) will be used, directly or indirectly, for the purpose, whether immediate, incidental or ultimate, of purchasing or carrying any Margin Stock, and none of such proceeds will be used in violation of applicable Law (including, without limitation, the Margin Regulations). Letters of Credit will be issued hereunder only for the purpose of securing bids, tenders, bonds, contracts and other obligations entered into in the ordinary course of Borrower's business. Without limiting the foregoing, no Letters of Credit will be issued hereunder for the purpose of or providing credit enhancement with respect to any Debt or equity security of any Credit Party or to secure any Credit Party's obligations with respect to Hedge 6 Transactions other than Hedge Transactions with a Bank or an Affiliate of such Bank." 1.9 AMENDMENT TO HEDGE TRANSACTIONS COVENANT. Section 10.11 of the Credit Agreement shall be amended to read in full as follows: "SECTION 10.11 HEDGE TRANSACTIONS. (a) Borrower will not, nor will Borrower permit any other Credit Party to, hedge (which hedges shall not have a tenor of greater than four (4) years) more than the following percentages of its "forecasted production from Proved Mineral Interests" (as defined below) during any applicable calendar year (a "MEASUREMENT PERIOD"), as measured from the current date (a "MEASUREMENT date"):
Calendar Year Hedged Percentage Limitation -------------------- --------------------- (relative to measurement date) Oil Gas Current Year 85% 85% First Subsequent Year 70% 70% Second Subsequent Year 55% 55% Third Subsequent Year 40% 40%
provided, that, if any measurement date occurs in the final two Fiscal Quarters of any measurement period, for the purpose of determining the appropriate percentage limitation from the table above, the limitations of the current year shall apply to both the remaining portion of that current year and the entire subsequent year, and the limitations of the first subsequent year shall apply to the second subsequent year, and so forth (as an example only, and for the avoidance of doubt, for any measurement date occurring during the first two Fiscal Quarters of 2003, an Oil and Gas Hedge Transaction for 2004 would have a 70% limitation; provided, however, for any measurement date occurring during the last two Fiscal Quarters of 2003, an Oil and Gas Hedge Transaction for 2004 would have an 85% limitation); provided, further, that, Borrower may enter into Hedge Transactions consisting solely of a floor price (i.e. floor, put or option) so long as the amount of Hydrocarbons which are the subject of any such Hedge Transaction in existence at any such time do not exceed one-hundred percent (100%) of Borrower's anticipated production from Proved Mineral Interests during the term of any such existing Hedge Transaction; and 7 (b) Borrower will not permit its (i) production of oil during any Fiscal Quarter to be less than the aggregate amount of oil which is the subject of Oil and Gas Hedge Transactions during such Fiscal Quarter, or (ii) production of gas during any Fiscal Quarter to be less than the aggregate amount of gas which is the subject of Oil and Gas Hedge Transactions during such Fiscal Quarter. As used in Section 10.11(a) above, "forecasted production from Proved Mineral Interests" shall mean the forecasted production for oil and gas, each taken individually, for the applicable calendar year as reflected in the most recent Reserve Report delivered to Administrative Agent pursuant to Section 5.1 hereof, after giving effect to any pro forma adjustments for the consummation of any "material acquisitions or dispositions" between the effective date of such Reserve Report and the measurement date. "Material acquisitions or dispositions" means any acquisition or disposition of any asset with a Recognized Value in excess of $10,000,000, or any cumulative total of all immaterial acquisitions or dispositions which in the aggregate have a Recognized Value in excess of $10,000,000." 1.10 ADDITIONAL COVENANT. Article X of the Credit Agreement shall be amended to include a new Section 10.16 which shall read in full as follows: "SECTION 10.16 BORROWINGS RELATED TO BOND OFFERING. Borrower will not request or receive any Borrowing hereunder, the proceeds of which are to be used to fund advances under the Bonds, except in accordance and in compliance with the terms of the Bond Documents. Borrower agrees that each Request for Borrowing, the proceeds of which are to be used to fund advances under the Bonds, will include, in addition to the information described in Section 3.2 hereof, a certification from an Authorized Officer as to the purpose and utilization of the proceeds of such Borrowing. Additionally, notwithstanding anything to the contrary contained in the Loan Papers or Bond Documents, each payment of principal and interest received by Bond Purchaser on the Bonds shall be deemed to be and considered as, without duplication, a payment of principal and interest on the Revolving Loan, and any borrowing by Borrower under the Bond Loan Agreement or on any Bond Note shall also be deemed to be and considered as, without duplication, a Borrowing of a Revolving Loan hereunder (the outstanding principal of which shall be and be deemed to be included in the Outstanding Credit for all purposes hereunder)." 1.11 AMENDMENT TO EVENTS OF DEFAULT. Section 12.1 of the Credit Agreement shall be amended (a) to delete the word "or" at the end of clause (k) thereof, (b) to insert the word "or" at the end of clause (l) thereof, and (c) to add a new clause (m) thereto which shall read in full as follows: 8 "(m) any Credit Party or Bond Issuer shall fail to observe or perform any covenant or agreement contained in any Bond Document after any applicable cure period;". 1.12 AMENDMENT TO AGENT PROVISIONS. Article XIII of the Credit Agreement shall be amended to include a new Section 13.17 which shall read in full as follows: "SECTION 13.17 BOND DOCUMENTS. Without limiting the power and authority of Administrative Agent described herein, Banks hereby: (a) appoint Administrative Agent, as Bond Purchaser, as its contractual representative under the Bond Documents and irrevocably authorize Administrative Agent to act as the contractual representative of each Bank under the Bond Documents with the rights and duties expressly set forth therein, and to hold the Bonds on behalf of the Banks, it being expressly understood and agreed, however, that Administrative Agent shall not have any fiduciary responsibilities to any Bank by reason of the Bond Documents; (b) empower and authorize Administrative Agent to execute and deliver the Bond Documents to which it is a party; and (c) agree that all references in this Article XIII to "LOAN PAPERS," shall be deemed to include, without limitation, the Bond Documents." SECTION 2. CONSENT AND WAIVER. In reliance on the representations, warranties, covenants and agreements contained in this First Amendment, and subject to the satisfaction of the conditions precedent set forth in Section 4 hereof, Executing Banks hereby (a) consent to (i) the consummation of the Bond Offering in accordance with the terms of the Bond Documents, and (ii) the execution and delivery by Borrower of the Bond Documents to which it is a party, and the performance of its obligations and the exercise of its rights under and pursuant thereto, (b) waive compliance by Borrower with each provision of the Credit Agreement and the other Loan Papers to the extent, but only to the extent, that the consummation of the Bond Offering and the execution and delivery of the Bond Documents by Borrower, and the performance of its obligations and the exercise of its rights under and pursuant thereto, violate such provisions or result in a Default or Event of Default under the Credit Agreement or the other Loan Papers, and (c) waive compliance by Borrower with Section 10.11 of the Credit Agreement with respect to, but only with respect to, non-compliance by Borrower with the provisions of Section 10.11 of the Credit Agreement prior to the Effective Date. The consent and waivers herein contained are expressly limited as follows: (i) such consent and waivers are limited solely to (as applicable) (A) the consummation of the Bond Offering in accordance with the terms of the Bond Documents most recently provided to Administrative Agent, and (B) the non-compliance by Borrower with the provisions of Section 10.11 of the Credit Agreement prior to the Effective Date, and (ii) such consent and waivers are each a limited, one-time consent and waiver, and nothing contained herein shall obligate Banks to grant any additional or future consent or waiver with respect to, or in connection with, any provision of any Loan Paper. SECTION 3. BORROWING BASE AND CONFORMING BORROWING BASE. Effective as of April 1, 2003, the Borrowing Base and the Conforming Borrowing Base shall each be reaffirmed at 9 $220,000,000 and each shall remain at $220,000,000 until the next Redetermination thereafter. Borrower and Banks agree that the Redetermination provided for in this Section 3 shall not be construed or deemed to be a Special Redetermination for purposes of Section 5.3 of the Credit Agreement. SECTION 4. CONDITIONS PRECEDENT TO AMENDMENTS. The amendments contained in Section 1 hereof and the consent and waiver contained in Section 2 hereof are subject to the satisfaction of each of the following conditions precedent on or before May 31, 2003: 4.1 CONSUMMATION OF BOND OFFERING. Subject only to the granting of the consent thereto contained in Section 2 hereof, the Bond Offering shall have been consummated in accordance with the terms of the Bond Documents. 4.2 MATERIAL AGREEMENTS. Administrative Agent shall have been provided with fully executed copies of (a) the Bond Documents, and (b) all material documents, instruments and agreements executed and/or delivered by Borrower or any of its Subsidiaries in connection with the issuance of the Permitted Subordinate Debt, together with a certificate from an Authorized Officer of Borrower certifying that such copies are accurate and complete and represent the complete understanding and agreement of the parties with respect to the subject matter thereof. 4.3 RESOLUTIONS. Borrower shall have provided Administrative Agent with copies of resolutions and comparable authorizations approving (a) this First Amendment, (b) any other Loan Papers to be executed or delivered pursuant hereto, and (c) the Bond Documents to be executed or delivered by Borrower, and further authorizing the transactions contemplated by this First Amendment and any other Loan Papers to be executed or delivered pursuant hereto, duly adopted by the Board of Directors of Borrower accompanied by a certificate of the Secretary or comparable Authorized Officer of Borrower that such copies are true and correct copies of resolutions duly adopted at a meeting of or (if permitted by applicable Law and, if required by such Law, by the Bylaws of Borrower) by the unanimous written consent of the Board of Directors of Borrower, and that such resolutions constitute all the resolutions adopted with respect to such transactions, have not been amended, modified or revoked in any respect, and are in full force and effect as of the date hereof. 4.4 OPINION. Borrower shall have delivered an opinion of Jenkens & Gilchrist, counsel to Borrower, with respect to the due authorization, execution, delivery and enforceability of this First Amendment and the Bond Documents to which Borrower is a party, and such other matters related thereto as Administrative Agent shall require. 4.5 AMENDMENT FEE. Upon execution of the First Amendment by Required Banks, Borrower shall pay to Administrative Agent, for the benefit of Executing Banks, a fee in the amount of $3,000 for each Executing Bank. Such $3,000 fee shall be distributed by Administrative Agent to each Executing Bank provided that such Executing Bank executes and delivers this First Amendment on or before May 7, 2003. 4.6 NO DEFAULT. No Default or Event of Default shall have occurred which is continuing. 10 4.7 OTHER DOCUMENTS. Administrative Agent shall have been provided with such other documents, instruments and agreements, and Borrower shall have taken such actions, as Administrative Agent may reasonably require in connection with this First Amendment and the transactions contemplated hereby. SECTION 5. REPRESENTATIONS AND WARRANTIES OF BORROWER. To induce Banks and Administrative Agent to enter into this First Amendment, Borrower hereby represents and warrants to Banks and Administrative Agent as follows: 5.1 REAFFIRM EXISTING REPRESENTATIONS AND WARRANTIES. Each representation and warranty of Borrower contained in the Credit Agreement and the other Loan Papers is true and correct on the date hereof and will be true and correct after giving effect to the amendments set forth in Section 1 hereof. 5.2 DUE AUTHORIZATION; NO CONFLICT. The execution, delivery and performance by Borrower of this First Amendment are within Borrower's corporate powers, have been duly authorized by all necessary action, require no action by or in respect of, or filing with, any governmental body, agency or official and do not violate or constitute a default under any provision of applicable law or any Material Agreement binding upon Borrower or the Subsidiaries of Borrower or result in the creation or imposition of any Lien upon any of the assets of Borrower or the Subsidiaries of Borrower except Permitted Encumbrances. 5.3 VALIDITY AND ENFORCEABILITY. This First Amendment constitutes the valid and binding obligation of Borrower enforceable in accordance with its terms, except as (i) the enforceability thereof may be limited by bankruptcy, insolvency or similar laws affecting creditor's rights generally, and (ii) the availability of equitable remedies may be limited by equitable principles of general application. 5.4 NO DEFAULT OR EVENT OF DEFAULT. No Default or Event of Default has occurred which is continuing. SECTION 6. MISCELLANEOUS. 6.1 REAFFIRMATION OF LOAN PAPERS. Any and all of the terms and provisions of the Credit Agreement and the Loan Papers shall, except as amended and modified hereby, remain in full force and effect. The amendments contemplated hereby shall not limit or impair any Liens securing the Obligations, each of which are hereby ratified, affirmed and extended to secure the Obligations as they may be increased pursuant hereto. 6.2 PARTIES IN INTEREST. All of the terms and provisions of this First Amendment shall bind and inure to the benefit of the parties hereto and their respective successors and assigns. 6.3 LEGAL EXPENSES. Borrower hereby agrees to pay on demand all reasonable fees and expenses of counsel to Administrative Agent incurred by Administrative Agent in connection with the preparation, negotiation and execution of this First Amendment and all related documents. 11 6.4 COUNTERPARTS. This First Amendment may be executed in counterparts, and all parties need not execute the same counterpart; however, no party shall be bound by this First Amendment until all parties have executed a counterpart. Facsimiles shall be effective as originals. 6.5 COMPLETE AGREEMENT. THIS FIRST AMENDMENT, THE CREDIT AGREEMENT AND THE OTHER LOAN PAPERS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN OR AMONG THE PARTIES. 6.6 HEADINGS. The headings, captions and arrangements used in this First Amendment are, unless specified otherwise, for convenience only and shall not be deemed to limit, amplify or modify the terms of this First Amendment, nor affect the meaning thereof. IN WITNESS WHEREOF, the parties hereto have caused this First Amendment to be duly executed by their respective authorized officers on the date and year first above written. [Signature Pages to Follow] SIGNATURE PAGE TO FIRST AMENDMENT TO THIRD AMENDED AND RESTATED CREDIT AGREEMENT BORROWER: --------- DENBURY RESOURCES INC., a Delaware corporation By: ------------------------------------------------- Phil Rykhoek, Senior Vice President and Chief Financial Officer SIGNATURE PAGE TO FIRST AMENDMENT TO THIRD AMENDED AND RESTATED CREDIT AGREEMENT ADMINISTRATIVE AGENT: -------------------- BANK ONE, NA, as Administrative Agent By: ------------------------------------------------- J. Scott Fowler, Director, Capital Markets BANKS: ----- BANK ONE, NA By: ------------------------------------------------- J. Scott Fowler, Director, Capital Markets SIGNATURE PAGE TO FIRST AMENDMENT TO THIRD AMENDED AND RESTATED CREDIT AGREEMENT FORTIS CAPITAL CORP. By: ------------------------------------------------- Name: ----------------------------------------------- Title: ---------------------------------------------- By: ------------------------------------------------- Name: ----------------------------------------------- Title: ---------------------------------------------- SIGNATURE PAGE TO FIRST AMENDMENT TO THIRD AMENDED AND RESTATED CREDIT AGREEMENT CREDIT LYONNAIS NEW YORK BRANCH By: ------------------------------------------------- Name: ------------------------------------------------- Title: ---------------------------------------------- SIGNATURE PAGE TO FIRST AMENDMENT TO THIRD AMENDED AND RESTATED CREDIT AGREEMENT COMERICA BANK - TEXAS By: ------------------------------------------------- Name: ----------------------------------------------- Title: ---------------------------------------------- SIGNATURE PAGE TO FIRST AMENDMENT TO THIRD AMENDED AND RESTATED CREDIT AGREEMENT UNION BANK OF CALIFORNIA, N.A. By: ------------------------------------------------- Name: ----------------------------------------------- Title: ---------------------------------------------- SIGNATURE PAGE TO FIRST AMENDMENT TO THIRD AMENDED AND RESTATED CREDIT AGREEMENT WELLS FARGO BANK TEXAS, N.A. By: ------------------------------------------------- Name: ----------------------------------------------- Title: ---------------------------------------------- SIGNATURE PAGE TO FIRST AMENDMENT TO THIRD AMENDED AND RESTATED CREDIT AGREEMENT FLEET NATIONAL BANK By: ------------------------------------------------- Name: ----------------------------------------------- Title: ---------------------------------------------- SIGNATURE PAGE TO FIRST AMENDMENT TO THIRD AMENDED AND RESTATED CREDIT AGREEMENT BANK OF SCOTLAND By: ------------------------------------------------- Name: ----------------------------------------------- Title: ---------------------------------------------- SIGNATURE PAGE TO FIRST AMENDMENT TO THIRD AMENDED AND RESTATED CREDIT AGREEMENT BANK OF AMERICA, N.A. By: ------------------------------------------------- Name: ----------------------------------------------- Title: ---------------------------------------------- SIGNATURE PAGE TO FIRST AMENDMENT TO THIRD AMENDED AND RESTATED CREDIT AGREEMENT COMPASS BANK By: ------------------------------------------------- Name: ----------------------------------------------- Title: ---------------------------------------------- EX-15 4 denbury1stq10q2003ex15.txt EXHIBIT 15 Exhibit 15 Denbury Resources Inc.: We have made a review, in accordance with standards established by the American Institute of Certified Public Accountants, of the condensed unaudited consolidated interim financial information of Denbury Resources Inc. (the "Company"), for the three month periods ended March 31, 2003 and 2002 as indicated in our report dated May 13, 2003; because we did not perform an audit, we expressed no opinion on that information. We are aware that our report referred to above, which is included in the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2003, is incorporated by reference in Registration Statement Nos. 333-1006, 333-27995, 333-55999, 333-70485, 333-39172, 333-39218, 333-63198 and 333-90398 on Forms S-8, and Registration Statement No. 333-57382 on Form S-3 of Denbury Resources Inc. We also are aware that the aforementioned report, pursuant to Rule 436(c) under the Securities Act of 1933, is not considered a part of the Registration Statement prepared or certified by an accountant or report prepared or certified by an accountant within the meaning of Sections 7 and 11 of that Act. /s/Deloitte & Touche LLP Dallas, Texas May 14, 2003 EX-99 5 denbury1stq10q2003ex99.txt EXHIBIT 99 Exhibit 99 CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the accompanying Quarterly Report on Form 10-Q for the quarter ended March 31, 2003 (the "Report") of Denbury Resources Inc. ("Denbury") as filed with the Securities and Exchange Commission on May 14, 2003, each of the undersigned, in his capacity as an officer of Denbury, hereby certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to his knowledge: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Denbury. Dated: May 14, 2003 /s/ Gareth Roberts ----------------------------------------------- /s/ Gareth Roberts President and Chief Executive Officer Dated: May 14, 2003 /s/ Phil Rykhoek ----------------------------------------------- /s/ Phil Rykhoek Sr. Vice President and Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----