10-Q 1 dnr-20190331x10q.htm FORM 10-Q Document
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
(Mark One)
þ   Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended March 31, 2019
OR

o   Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from _______ to ________

Commission file number: 001-12935
logo.jpg
DENBURY RESOURCES INC.
(Exact name of registrant as specified in its charter)

Delaware
 
20-0467835
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
5320 Legacy Drive,
Plano, TX
 
 
75024
(Address of principal executive offices)
 
(Zip Code)

Registrant’s telephone number, including area code:
 
(972) 673-2000

Not applicable
(Former name, former address and former fiscal year, if changed since last report)

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 þ  No o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ  No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ
Accelerated filer o
Non-accelerated filer o
Smaller reporting company o
Emerging growth company o
 
 
(Do not check if a smaller reporting company)
 
 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No þ

Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class:
Trading Symbol:
Name of Each Exchange on Which Registered:
Common Stock $.001 Par Value
DNR
New York Stock Exchange

The number of shares outstanding of the registrant’s Common Stock, $.001 par value, as of April 30, 2019, was 461,224,639.



Denbury Resources Inc.


Table of Contents

 
 
 
 
 
 
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Unaudited Condensed Consolidated Balance Sheets as of March 31, 2019 and December 31, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



2

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements

Denbury Resources Inc.
Unaudited Condensed Consolidated Balance Sheets
(In thousands, except par value and share data)
 
 
March 31,
 
December 31,
 
 
2019
 
2018
Assets
Current assets
 
 
 
 
Cash and cash equivalents
 
$
5,749


$
38,560

Accrued production receivable
 
147,379


125,788

Trade and other receivables, net
 
28,624


26,970

Derivative assets
 
14,012

 
93,080

Other current assets
 
10,282


11,896

Total current assets
 
206,046


296,294

Property and equipment
 
 

 
 

Oil and natural gas properties (using full cost accounting)
 
 

 
 

Proved properties
 
11,140,781


11,072,209

Unevaluated properties
 
1,003,669


996,700

CO2 properties
 
1,196,868


1,196,795

Pipelines and plants
 
2,304,745


2,302,817

Other property and equipment
 
233,277


250,279

Less accumulated depletion, depreciation, amortization and impairment
 
(11,537,622
)

(11,500,190
)
Net property and equipment
 
4,341,718


4,318,610

Operating lease right-of-use assets
 
37,913

 
—

Derivative assets
 
2,022

 
4,195

Other assets
 
103,463


104,123

Total assets
 
$
4,691,162


$
4,723,222

Liabilities and Stockholders’ Equity
Current liabilities
 
 

 
 

Accounts payable and accrued liabilities
 
$
147,324


$
198,380

Oil and gas production payable
 
65,893


61,288

Derivative liabilities
 
10,037


—

Current maturities of long-term debt (including future interest payable of $102,667 and $85,303, respectively – see Note 4)
 
120,258


105,125

Operating lease liabilities
 
7,070

 
—

Total current liabilities
 
350,582


364,793

Long-term liabilities
 
 


 

Long-term debt, net of current portion (including future interest payable of $147,550 and $164,914, respectively – see Note 4)
 
2,643,307


2,664,211

Asset retirement obligations
 
178,428


174,470

Derivative liabilities
 
306

 
—

Deferred tax liabilities, net
 
300,280


309,758

Operating lease liabilities
 
47,056

 
—

Other liabilities
 
51,883


68,213

Total long-term liabilities
 
3,221,260


3,216,652

Commitments and contingencies (Note 7)
 


 


Stockholders’ equity
 
 
 
 
Preferred stock, $.001 par value, 25,000,000 shares authorized, none issued and outstanding
 
—


—

Common stock, $.001 par value, 600,000,000 shares authorized; 463,728,262 and 462,355,725 shares issued, respectively
 
464


462

Paid-in capital in excess of par
 
2,689,517


2,685,211

Accumulated deficit
 
(1,558,786
)

(1,533,112
)
Treasury stock, at cost, 2,473,243 and 1,941,749 shares, respectively
 
(11,875
)

(10,784
)
Total stockholders’ equity
 
1,119,320


1,141,777

Total liabilities and stockholders’ equity
 
$
4,691,162


$
4,723,222

 
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.


3

Denbury Resources Inc.
Unaudited Condensed Consolidated Statements of Operations
(In thousands, except per share data)

 
 
Three Months Ended March 31,
 
 
2019
 
2018
Revenues and other income
 
 
 
 
Oil, natural gas, and related product sales
 
$
294,577

 
$
340,021

CO2 sales and transportation fees
 
8,570

 
7,552

Other income
 
2,305

 
5,661

Total revenues and other income
 
305,452

 
353,234

Expenses
 
 

 
 

Lease operating expenses
 
125,423

 
118,356

Marketing and plant operating expenses
 
12,045

 
12,424

CO2 discovery and operating expenses
 
556

 
462

Taxes other than income
 
23,785

 
27,319

General and administrative expenses
 
18,925

 
20,232

Interest, net of amounts capitalized of $10,534 and $8,452, respectively
 
17,398

 
17,239

Depletion, depreciation, and amortization
 
57,297

 
52,451

Commodity derivatives expense
 
83,377

 
48,825

Other expenses
 
3,079

 
2,328

Total expenses
 
341,885

 
299,636

Income (loss) before income taxes
 
(36,433
)
 
53,598

Income tax provision (benefit)
 
(10,759
)
 
14,020

Net income (loss)
 
$
(25,674
)
 
$
39,578

 
 


 
 
Net income (loss) per common share
 


 
 
Basic
 
$
(0.06
)
 
$
0.10

Diluted
 
$
(0.06
)
 
$
0.09


 


 


Weighted average common shares outstanding
 
 

 
 

Basic
 
451,720

 
392,742

Diluted
 
451,720

 
451,543


See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.


4

Denbury Resources Inc.
Unaudited Condensed Consolidated Statements of Cash Flows
(In thousands)

 
 
Three Months Ended March 31,
 
 
2019
 
2018
Cash flows from operating activities

 
 
 
Net income (loss)

$
(25,674
)
 
$
39,578

Adjustments to reconcile net income (loss) to cash flows from operating activities



 
 

Depletion, depreciation, and amortization

57,297

 
52,451

Deferred income taxes

(9,478
)
 
15,052

Stock-based compensation

3,263

 
2,592

Commodity derivatives expense

83,377

 
48,825

Receipt (payment) on settlements of commodity derivatives

8,206

 
(33,357
)
Debt issuance costs and discounts

1,263

 
1,137

Other, net

908

 
(838
)
Changes in assets and liabilities, net of effects from acquisitions

 

 
 

Accrued production receivable

(21,591
)
 
(11,510
)
Trade and other receivables

1,024

 
348

Other current and long-term assets

(387
)
 
(1,886
)
Accounts payable and accrued liabilities

(35,966
)
 
(19,817
)
Oil and natural gas production payable

4,605

 
(673
)
Other liabilities

(2,481
)
 
(275
)
Net cash provided by operating activities

64,366

 
91,627



 
 
 
Cash flows from investing activities

 

 
 

Oil and natural gas capital expenditures

(86,986
)
 
(56,669
)
Pipelines and plants capital expenditures
 
(1,682
)
 
(156
)
Net proceeds from sales of oil and natural gas properties and equipment
 
104

 
1,522

Other

(3,237
)
 
3,927

Net cash used in investing activities

(91,801
)
 
(51,376
)


 
 
 
Cash flows from financing activities

 

 
 

Bank repayments

(103,000
)
 
(571,653
)
Bank borrowings

103,000

 
546,653

Pipeline financing and capital lease debt repayments

(4,108
)
 
(6,287
)
Other

(1,099
)
 
(9,291
)
Net cash used in financing activities

(5,207
)
 
(40,578
)
Net decrease in cash, cash equivalents, and restricted cash

(32,642
)
 
(327
)
Cash, cash equivalents, and restricted cash at beginning of period

54,949

 
15,992

Cash, cash equivalents, and restricted cash at end of period

$
22,307

 
$
15,665


See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.


5

Denbury Resources Inc.
Unaudited Condensed Consolidated Statements of Changes in Stockholders' Equity
(Dollar amounts in thousands)

 
Common Stock
($.001 Par Value)
 
Paid-In
Capital in
Excess of
Par
 
Retained
Earnings (Accumulated Deficit)
 
Treasury Stock
(at cost)
 
 
 
Shares
 
Amount
Shares
 
Amount
Total Equity
Balance – December 31, 2018
462,355,725

 
$
462

 
$
2,685,211

 
$
(1,533,112
)
 
1,941,749

 
$
(10,784
)
 
$
1,141,777

Issued or purchased pursuant to stock compensation plans
1,331,050

 
2

 
—

 
—

 
—

 
—

 
2

Issued pursuant to directors’ compensation plan
41,487

 
—

 
—

 
—

 
—

 
—

 
—

Stock-based compensation
—

 
—

 
4,306

 
—

 
—

 
—

 
4,306

Tax withholding – stock compensation
—

 
—

 
—

 
—

 
531,494

 
(1,091
)
 
(1,091
)
Net loss
—

 
—

 
—

 
(25,674
)
 
—

 
—

 
(25,674
)
Balance – March 31, 2019
463,728,262

 
$
464

 
$
2,689,517

 
$
(1,558,786
)
 
2,473,243

 
$
(11,875
)
 
$
1,119,320


 
Common Stock
($.001 Par Value)
 
Paid-In
Capital in
Excess of
Par
 
Retained
Earnings (Accumulated Deficit)
 
Treasury Stock
(at cost)
 
 
 
Shares
 
Amount
Shares
 
Amount
Total Equity
Balance – December 31, 2017
402,549,346

 
$
403

 
$
2,507,828

 
$
(1,855,810
)
 
457,041

 
$
(4,256
)
 
$
648,165

Issued or purchased pursuant to stock compensation plans
378,595

 
—

 
—

 
—

 
—

 
—

 
—

Stock-based compensation
—

 
—

 
3,303

 
—

 
—

 
—

 
3,303

Tax withholding – stock compensation
—

 
—

 
—

 
—

 
330,826

 
(828
)
 
(828
)
Net income
—

 
—

 
—

 
39,578

 
—

 
—

 
39,578

Balance – March 31, 2018
402,927,941

 
$
403

 
$
2,511,131

 
$
(1,816,232
)
 
787,867

 
$
(5,084
)
 
$
690,218


See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.



6

Denbury Resources Inc.
Notes to Unaudited Condensed Consolidated Financial Statements


Note 1. Basis of Presentation

Organization and Nature of Operations

Denbury Resources Inc., a Delaware corporation, is an independent oil and natural gas company with operations focused in two key operating areas: the Gulf Coast and Rocky Mountain regions.  Our goal is to increase the value of our properties through a combination of exploitation, drilling and proven engineering extraction practices, with the most significant emphasis relating to CO2 enhanced oil recovery operations.

Interim Financial Statements

The accompanying unaudited condensed consolidated financial statements of Denbury Resources Inc. and its subsidiaries have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) and do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.  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, 2018 (the “Form 10-K”).  Unless indicated otherwise or the context requires, the terms “we,” “our,” “us,” “Company” or “Denbury,” refer to Denbury Resources Inc. and its subsidiaries.

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 year.  In management’s opinion, the accompanying unaudited condensed consolidated financial statements include all adjustments of a normal recurring nature necessary for a fair statement of our consolidated financial position as of March 31, 2019, our consolidated results of operations for the three months ended March 31, 2019 and 2018, our consolidated cash flows for the three months ended March 31, 2019 and 2018, and our consolidated statements of changes in stockholders’ equity for the three months ended March 31, 2019 and 2018.

Reclassifications

Certain prior period amounts have been reclassified to conform to the current year presentation. Such reclassifications had no impact on our reported net income, current assets, total assets, current liabilities, total liabilities or stockholders’ equity.

Cash, Cash Equivalents, and Restricted Cash

The following table provides a reconciliation of cash, cash equivalents, and restricted cash as reported within the Unaudited Condensed Consolidated Balance Sheets to “Cash, cash equivalents, and restricted cash at end of period” as reported within the Unaudited Condensed Consolidated Statements of Cash Flows:
In thousands
 
March 31, 2019
 
December 31, 2018
Cash and cash equivalents
 
$
5,749

 
$
38,560

Restricted cash included in other assets
 
16,558

 
16,389

Total cash, cash equivalents, and restricted cash shown in the Unaudited Condensed Consolidated Statements of Cash Flows
 
$
22,307

 
$
54,949


Amounts included in restricted cash included in “Other assets” in the accompanying Unaudited Condensed Consolidated Balance Sheets represent escrow accounts that are legally restricted for certain of our asset retirement obligations.

Our prior-year quarterly report on Form 10-Q for the period ended March 31, 2018, filed with the SEC on May 10, 2018 previously disclosed balances of certain U.S. Treasury Notes of $24.6 million and $25.2 million as of January 1, 2018 and March 31, 2018, respectively, that should have been excluded from “Cash, cash equivalents, and restricted cash” on the Consolidated Statements of Cash Flows. Accordingly, “Cash, cash equivalents, and restricted cash” as of January 1, 2018 and March 31, 2018, originally reported as $40.6 million and $40.9 million, respectively, should have been reported as $16.0 million and $15.7 million, respectively. In addition, changes in the U.S. Treasury Notes of $0.6 million during the three months ended March 31, 2018 should have been included in net cash used in investing activities. Accordingly, net cash used in investing activities for the three months


7

Denbury Resources Inc.
Notes to Unaudited Condensed Consolidated Financial Statements

ended March 31, 2018, originally reported as $50.8 million, should have been $51.4 million. These revisions had no impact on the Company’s financial condition or results of operations for the periods presented.

Net Income (Loss) per Common Share

Basic net income (loss) per common share is computed by dividing the net income (loss) attributable to common stockholders by the weighted average number of shares of common stock outstanding during the period.  Diluted net income (loss) per common share is calculated in the same manner, but includes the impact of potentially dilutive securities.  Potentially dilutive securities consist of nonvested restricted stock, nonvested performance-based equity awards, and shares into which our previously-outstanding convertible senior notes were convertible.

The following table sets forth the reconciliations of net income (loss) and weighted average shares used for purposes of calculating the basic and diluted net income (loss) per common share for the periods indicated:
 
 
Three Months Ended
 
 
March 31,
In thousands
 
2019
 
2018
Numerator
 
 
 
 
Net income (loss) – basic
 
$
(25,674
)
 
$
39,578

Effect of potentially dilutive securities
 
 
 
 

Interest on convertible senior notes
 
—

 
501

Net income (loss) – diluted
 
$
(25,674
)
 
$
40,079

 
 
 
 
 
Denominator
 
 
 
 
Weighted average common shares outstanding – basic
 
451,720

 
392,742

Effect of potentially dilutive securities
 
 
 
 
Restricted stock and performance-based equity awards
 
—

 
5,169

Convertible senior notes
 
—

 
53,632

Weighted average common shares outstanding – diluted
 
451,720

 
451,543


Basic weighted average common shares exclude shares of nonvested restricted stock. As these restricted shares vest, they will be included in the shares outstanding used to calculate basic net income (loss) per common share (although time-vesting restricted stock is issued and outstanding upon grant). For purposes of calculating diluted weighted average common shares during the three months ended March 31, 2018, the nonvested restricted stock and performance-based equity awards are included in the computation using the treasury stock method, with the deemed proceeds equal to the average unrecognized compensation during the period, and for the shares underlying the previously-outstanding convertible senior notes as if the convertible senior notes were converted at the beginning of the 2018 period. In April and May 2018, all outstanding convertible senior notes converted into shares of Denbury common stock, resulting in the issuance of 55.2 million shares of our common stock upon conversion.

The following securities could potentially dilute earnings per share in the future, but were excluded from the computation of diluted net income (loss) per share, as their effect would have been antidilutive:
 
 
Three Months Ended
 
 
March 31,
In thousands
 
2019
 
2018
Stock appreciation rights
 
2,091

 
2,954

Restricted stock and performance-based equity awards
 
8,350

 
431




8

Denbury Resources Inc.
Notes to Unaudited Condensed Consolidated Financial Statements

Recent Accounting Pronouncements

Recently Adopted

Leases. Effective January 1, 2019, we adopted Accounting Standards Update (“ASU”) 2016-02, Leases (“ASU 2016-02”), and ASU 2018-01, Leases (Topic 842) – Land Easement Practical Expedient for Transition to Topic 842, using the modified retrospective method with an application date of January 1, 2019. ASU 2016-02 does not apply to mineral leases or leases that convey the right to explore for or use the land on which oil, natural gas, and similar natural resources are contained. We elected the practical expedients provided in the new ASUs that allow historical lease classification of existing leases, allow entities to recognize leases with terms of one year or less in their statement of operations, allow lease and non-lease components to be combined, and carry forward our accounting treatment for existing land easement agreements. The adoption of the new standards resulted in the recognition of $39.1 million of lease assets and $55.8 million of lease liabilities ($16.7 million of which related to previously-existing lease obligations) as of January 1, 2019, in our Unaudited Condensed Consolidated Balance Sheets, but did not materially impact our results of operations and had no impact on our cash flows. The additional lease assets and liabilities recorded on our balance sheets primarily related to our operating leases for office space, as the accounting for our financing leases and pipeline financings was relatively unchanged.

Not Yet Adopted

Fair Value Measurement. In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820) – Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurements (“ASU 2018-13”). ASU 2018-13 adds, modifies, or removes certain disclosure requirements for recurring and nonrecurring fair value measurements based on the FASB’s consideration of costs and benefits. The amendments in this ASU are effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, and early adoption is permitted. Entities must adopt the amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty prospectively, and all other amendments should be applied retrospectively to all periods presented. The adoption of ASU 2018-13 is currently not expected to have a material effect on our consolidated financial statements, but may require enhanced footnote disclosures.

Note 2. Revenue Recognition

We record revenue in accordance with Financial Accounting Standards Board Codification (“FASC”) Topic 606, Revenue from Contracts with Customers. The core principle of FASC Topic 606 is that an entity should recognize revenue for the transfer of goods or services equal to the amount of consideration that it expects to be entitled to receive for those goods or services. Once we have delivered the volume of commodity to the delivery point and the customer takes delivery and possession, we are entitled to payment and we invoice the customer for such delivered production. Payment under most oil and CO2 contracts is made within a month following product delivery and for natural gas and NGL contracts is generally made within two months following delivery. Timing of revenue recognition may differ from the timing of invoicing to customers; however, as the right to consideration after delivery is unconditional based on only the passage of time before payment of the consideration is due, upon delivery we record a receivable in “Accrued production receivable” in our Unaudited Condensed Consolidated Balance Sheets, which was $147.4 million and $125.8 million as of March 31, 2019 and December 31, 2018, respectively.

Disaggregation of Revenue

The following table summarizes our revenues by product type for the three months ended March 31, 2019 and 2018:
 
 
Three Months Ended
 
 
March 31,
In thousands
 
2019
 
2018
Oil sales
 
$
291,965

 
$
337,406

Natural gas sales
 
2,612

 
2,615

CO2 sales and transportation fees
 
8,570

 
7,552

Total revenues
 
$
303,147

 
$
347,573




9

Denbury Resources Inc.
Notes to Unaudited Condensed Consolidated Financial Statements

Note 3. Leases

We evaluate contracts for leasing arrangements at inception. We lease office space, equipment, and vehicles that have non-cancelable lease terms. Leases with a term of 12 months or less are not recorded on our balance sheet. The table below reflects our operating lease assets and liabilities, which primarily consists of our office leases, and finance lease assets and liabilities:
 
 
March 31,
In thousands
 
2019
Operating leases
Operating lease right-of-use assets
 
$
37,913

 
 
 
Operating lease liabilities - current
 
$
7,070

Operating lease liabilities - long-term
 
47,056

Total operating lease liabilities
 
$
54,126

 
 
 
Finance leases
Other property and equipment
 
$
12,352

Accumulated depreciation
 
(10,491
)
Other property and equipment, net
 
$
1,861

 
 
 
Current maturities of long-term debt
 
$
1,671

Long-term debt, net of current portion
 
348

Total finance lease liabilities
 
$
2,019


The majority of our leases contain renewal options, typically exercisable at our sole discretion. We record right-of-use assets and liabilities based on the present value of lease payments over the initial lease term, unless the option to extend the lease is reasonably certain, and utilize our incremental borrowing rate based on information available at the lease commencement date. The following weighted average remaining lease terms and discount rates related to our outstanding leases:
 
 
March 31,
 
 
2019
Weighted Average Remaining Lease Term
Operating leases
 
6.3 years

Finance leases
 
1.2 years

 
 
 
Weighted Average Discount Rate
Operating leases
 
6.8
%
Finance leases
 
2.5
%



10

Denbury Resources Inc.
Notes to Unaudited Condensed Consolidated Financial Statements

Lease costs for operating leases or leases with a term of 12 months or less are recognized on a straight-line basis over the lease term. For finance leases, interest on the lease liability and the amortization of the right-of-use asset are recognized separately, with the depreciable life reflective of the expected lease term. We have subleased part of the office space included in our operating leases for which we receive rental payments. The following table summarizes the components of lease costs and sublease income:
 
 
 
 
Three Months Ended
 
 
 
 
March 31,
In thousands
 
Income Statement Presentation
 
2019
Operating lease cost
 
General and administrative expenses
 
$
2,415

 
 
 
 
 
Finance lease cost
 
 
 
 
Amortization of right-of-use assets
 
Depletion, depreciation, and amortization
 
$
870

Interest on lease liabilities
 
Interest expense
 
30

Total finance lease cost
 
 
 
$
900

 
 
 
 
 
Sublease income
 
General and administrative expenses
 
$
1,036


Our statement of cash flows included the following activity related to our operating and finance leases:
 
 
Three Months Ended
 
 
March 31,
In thousands
 
2019
Cash paid for amounts included in the measurement of lease liabilities
 
 
Operating cash flows from operating leases
 
$
2,893

Operating cash flows from interest on finance leases
 
30

Financing cash flows from finance leases
 
935

 
 
 
Right-of-use assets obtained in exchange for lease obligations
 


Operating leases
 
277

Finance leases
 
—


The following table summarizes by year the maturities of our lease liabilities as of March 31, 2019:
 
 
Operating
 
Finance
In thousands
 
Leases
 
Leases
2019
 
$
8,009

 
$
1,276

2020
 
9,874

 
775

2021
 
10,043

 
—

2022
 
10,260

 
—

2023
 
10,300

 
—

Thereafter
 
18,454

 
—

Total minimum lease payments
 
66,940

 
2,051

Less: Amount representing interest
 
(12,814
)
 
(32
)
Present value of minimum lease payments
 
$
54,126

 
$
2,019




11

Denbury Resources Inc.
Notes to Unaudited Condensed Consolidated Financial Statements

The following table summarizes by year the remaining non-cancelable future payments under our leases, as accounted for under previous accounting guidance under FASC Topic 840, Leases, as of December 31, 2018:
 
 
Operating
In thousands
 
Leases
2019
 
$
10,690

2020
 
9,776

2021
 
10,007

2022
 
10,223

2023
 
10,262

Thereafter
 
18,169

Total minimum lease payments
 
$
69,127


Note 4. Long-Term Debt

The table below reflects long-term debt and capital lease obligations outstanding as of the dates indicated:
 
 
March 31,
 
December 31,
In thousands
 
2019
 
2018
Senior Secured Bank Credit Agreement
 
$
—

 
$
—

9% Senior Secured Second Lien Notes due 2021
 
614,919

 
614,919

9¼% Senior Secured Second Lien Notes due 2022
 
455,668

 
455,668

7½% Senior Secured Second Lien Notes due 2024
 
450,000

 
450,000

6⅜% Senior Subordinated Notes due 2021
 
203,545

 
203,545

5½% Senior Subordinated Notes due 2022
 
314,662

 
314,662

4⅝% Senior Subordinated Notes due 2023
 
307,978

 
307,978

Pipeline financings
 
176,900

 
180,073

Capital lease obligations
 
2,019

 
5,362

Total debt principal balance
 
2,525,691

 
2,532,207

Future interest payable(1)
 
250,217

 
250,218

Debt issuance costs
 
(12,343
)
 
(13,089
)
Total debt, net of debt issuance costs
 
2,763,565

 
2,769,336

Less: current maturities of long-term debt(1)
 
(120,258
)
 
(105,125
)
Long-term debt and capital lease obligations
 
$
2,643,307

 
$
2,664,211


(1)
Future interest payable represents most of the interest due over the terms of our 9% Senior Secured Second Lien Notes due 2021 (the “2021 Senior Secured Notes”) and 9¼% Senior Secured Second Lien Notes due 2022 (the “2022 Senior Secured Notes”) and has been accounted for as debt in accordance with FASC 470-60, Troubled Debt Restructuring by Debtors. Our current maturities of long-term debt as of March 31, 2019 include $102.7 million of future interest payable related to the 2021 Senior Secured Notes and 2022 Senior Secured Notes that is due within the next twelve months.

The ultimate parent company in our corporate structure, Denbury Resources Inc. (“DRI”), is the sole issuer of all of our outstanding senior secured and senior subordinated notes. DRI has no independent assets or operations. Each of the subsidiary guarantors of such notes is 100% owned, directly or indirectly, by DRI, and the guarantees of the notes are full and unconditional and joint and several; any subsidiaries of DRI that are not subsidiary guarantors of such notes are minor subsidiaries.

Senior Secured Bank Credit Facility

In December 2014, we entered into an Amended and Restated Credit Agreement with JPMorgan Chase Bank, N.A., as administrative agent, and other lenders party thereto (as amended, the “Bank Credit Agreement”), which has been amended


12

Denbury Resources Inc.
Notes to Unaudited Condensed Consolidated Financial Statements

periodically since that time. The Bank Credit Agreement is a senior secured revolving credit facility with a maturity date of December 9, 2021, provided that the maturity date may occur earlier (between February 2021 and August 2021) if the 2021 Senior Secured Notes due in May 2021 or 6⅜% Senior Subordinated Notes due in August 2021, respectively, are not repaid or refinanced by each of their respective maturity dates. As part of our spring 2019 semiannual redetermination, the borrowing base and lender commitments for our Bank Credit Agreement were reaffirmed at $615 million, with the next such redetermination being scheduled for November 2019. If our outstanding debt under the Bank Credit Agreement were to ever exceed the borrowing base, we would be required to repay the excess amount over a period not to exceed six months. We incur a commitment fee of 0.50% on the undrawn portion of the aggregate lender commitments under the Bank Credit Agreement.

The Bank Credit Agreement contains certain financial performance covenants through the maturity of the facility, including the following:

•
A Consolidated Total Debt to Consolidated EBITDAX covenant, with such ratio not to exceed 5.25 to 1.0 through December 31, 2020, and 4.50 to 1.0 thereafter;
•
A consolidated senior secured debt to consolidated EBITDAX covenant, with such ratio not to exceed 2.5 to 1.0. Only debt under our Bank Credit Agreement is considered consolidated senior secured debt for purposes of this ratio;
•
A minimum permitted ratio of consolidated EBITDAX to consolidated interest charges of 1.25 to 1.0; and
•
A requirement to maintain a current ratio of 1.0 to 1.0.

As of March 31, 2019, we had no outstanding borrowings, and were in compliance with all debt covenants, under the Bank Credit Agreement. The above description of our Bank Credit Agreement is qualified by the express language and defined terms contained in the Bank Credit Agreement and the amendments thereto, each of which are filed as exhibits to our periodic reports filed with the SEC.

Note 5. Commodity Derivative Contracts

We do not apply hedge accounting treatment to our oil and natural gas derivative contracts; therefore, the changes in the fair values of these instruments are recognized in income in the period of change.  These fair value changes, along with the settlements of expired contracts, are shown under “Commodity derivatives expense” in our Unaudited Condensed Consolidated Statements of Operations.

Historically, we have entered into various oil and natural gas derivative contracts to provide an economic hedge of our exposure to commodity price risk associated with anticipated future oil and natural gas production and to provide more certainty to our future cash flows. We do not hold or issue derivative financial instruments for trading purposes. Generally, these contracts have consisted of various combinations of price floors, collars, three-way collars, fixed-price swaps, fixed-price swaps enhanced with a sold put, and basis swaps. The production that we hedge has varied from year to year depending on our levels of debt, financial strength and expectation of future commodity prices.

We manage and control market and counterparty credit risk through established internal control procedures that are reviewed on an ongoing basis.  We attempt to minimize credit risk exposure to counterparties through formal credit policies, monitoring procedures and diversification, and all of our commodity derivative contracts are with parties that are lenders under our Bank Credit Agreement (or affiliates of such lenders). As of March 31, 2019, all of our outstanding derivative contracts were subject to enforceable master netting arrangements whereby payables on those contracts can be offset against receivables from separate derivative contracts with the same counterparty. It is our policy to classify derivative assets and liabilities on a gross basis on our balance sheets, even if the contracts are subject to enforceable master netting arrangements.



13

Denbury Resources Inc.
Notes to Unaudited Condensed Consolidated Financial Statements

The following table summarizes our commodity derivative contracts as of March 31, 2019, none of which are classified as hedging instruments in accordance with the FASC Derivatives and Hedging topic:
Months
 
Index Price
 
Volume (Barrels per day)
 
Contract Prices ($/Bbl)
Range(1)
 
Weighted Average Price
Swap
 
Sold Put
 
Floor
 
Ceiling
Oil Contracts:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2019 Fixed-Price Swaps
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Apr – June
 
NYMEX
 
3,500
 
$
59.00

–
59.10

 
$
59.05

 
$
—

 
$
—

 
$
—

Apr – Dec
 
Argus LLS
 
13,000
 
 
60.00

–
74.90

 
64.69

 
—

 
—

 
—

2019 Three-Way Collars(2)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Apr – June
 
NYMEX
 
18,500
 
$
55.00

–
75.45

 
$
—

 
$
48.84

 
$
56.84

 
$
69.94

Apr – June
 
Argus LLS
 
5,500
 
 
62.00

–
86.00

 
—

 
54.73

 
63.09

 
79.93

July – Dec
 
NYMEX
 
22,000
 
 
55.00

–
75.45

 
—

 
48.55

 
56.55

 
69.17

July – Dec
 
Argus LLS
 
5,500
 
 
62.00

–
86.00

 
—

 
54.73

 
63.09

 
79.93

2020 Fixed-Price Swaps
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Jan – Dec
 
Argus LLS
 
2,000
 
$
60.72

–
61.05

 
$
60.89

 
$
—

 
$
—

 
$
—

2020 Three-Way Collars(2)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Jan – June
 
NYMEX
 
8,000
 
$
57.50

–
82.65

 
$
—

 
$
49.21

 
$
58.86

 
$
66.69

Jan – June
 
Argus LLS
 
3,000
 
 
62.50

–
87.10

 
—

 
53.83

 
63.83

 
73.93

July – Dec
 
NYMEX
 
6,000
 
 
58.25

–
82.65

 
—

 
49.59

 
59.13

 
67.47

July – Dec
 
Argus LLS
 
1,000
 
 
65.00

–
87.10

 
—

 
55.00

 
65.00

 
86.80


(1)
Ranges presented for fixed-price swaps represent the lowest and highest fixed prices of all open contracts for the period presented. For three-way collars, ranges represent the lowest floor price and highest ceiling price for all open contracts for the period presented.
(2)
A three-way collar is a costless collar contract combined with a sold put feature (at a lower price) with the same counterparty. The value received for the sold put is used to enhance the contracted floor and ceiling price of the related collar. At the contract settlement date, (1) if the index price is higher than the ceiling price, we pay the counterparty the difference between the index price and ceiling price for the contracted volumes, (2) if the index price is between the floor and ceiling price, no settlements occur, (3) if the index price is lower than the floor price but at or above the sold put price, the counterparty pays us the difference between the index price and the floor price for the contracted volumes and (4) if the index price is lower than the sold put price, the counterparty pays us the difference between the floor price and the sold put price for the contracted volumes.

Note 6. Fair Value Measurements

The FASC Fair Value Measurement topic defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (often referred to as the “exit price”). We utilize market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated or generally unobservable. We primarily apply the income approach for recurring fair value measurements and endeavor to utilize the best available information. Accordingly, we utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. We are able to classify fair value balances based on the observability of those inputs. The FASC establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). The three levels of the fair value hierarchy are as follows:

•
Level 1 – Quoted prices in active markets for identical assets or liabilities as of the reporting date.

•
Level 2 – Pricing inputs are other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reported date. Level 2 includes those financial instruments that are valued using models or other valuation methodologies. Instruments in this category include non-exchange-traded oil derivatives that are based


14

Denbury Resources Inc.
Notes to Unaudited Condensed Consolidated Financial Statements

on NYMEX pricing and fixed-price swaps that are based on regional pricing other than NYMEX (e.g., Light Louisiana Sweet). Our costless collars and the sold put features of our three-way collars are valued using the Black-Scholes model, an industry standard option valuation model that takes into account inputs such as contractual prices for the underlying instruments, maturity, quoted forward prices for commodities, interest rates, volatility factors and credit worthiness, as well as other relevant economic measures. Substantially all of these assumptions are observable in the marketplace throughout the full term of the instrument, can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace.

•
Level 3 – Pricing inputs include significant inputs that are generally less observable. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value. As of March 31, 2019, instruments in this category include non-exchange-traded three-way collars that are based on regional pricing other than NYMEX (e.g., Light Louisiana Sweet). The valuation models utilized for costless collars and three-way collars are consistent with the methodologies described above; however, the implied volatilities utilized in the valuation of Level 3 instruments are developed using a benchmark, which is considered a significant unobservable input. An increase or decrease of 100 basis points in the implied volatility inputs utilized in our fair value measurement would result in a change of approximately $100 thousand in the fair value of these instruments as of March 31, 2019.

We adjust the valuations from the valuation model for nonperformance risk, using our estimate of the counterparty’s credit quality for asset positions and our credit quality for liability positions. We use multiple sources of third-party credit data in determining counterparty nonperformance risk, including credit default swaps.

The following table sets forth, by level within the fair value hierarchy, our financial assets and liabilities that were accounted for at fair value on a recurring basis as of the periods indicated:
 
 
Fair Value Measurements Using:
In thousands
 
Quoted Prices
in Active
Markets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Total
March 31, 2019
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
Oil derivative contracts – current
 
$
—

 
$
11,259

 
$
2,753

 
$
14,012

Oil derivative contracts – long-term
 
—

 
987

 
1,035

 
2,022

Total Assets
 
$
—

 
$
12,246

 
$
3,788

 
$
16,034

 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
Oil derivative contracts – current
 
$
—

 
$
(9,965
)
 
$
(72
)
 
$
(10,037
)
Oil derivative contracts – long-term
 
—

 
(276
)
 
(30
)
 
(306
)
Total Liabilities
 
$
—

 
$
(10,241
)
 
$
(102
)
 
$
(10,343
)
 
 
 
 
 
 
 
 
 
December 31, 2018
 
 

 
 

 
 

 
 

Assets
 
 

 
 

 
 

 
 

Oil derivative contracts – current
 
$
—

 
$
81,621

 
$
11,459

 
$
93,080

Oil derivative contracts – long-term
 
—

 
2,030

 
2,165

 
4,195

Total Assets
 
$
—

 
$
83,651

 
$
13,624

 
$
97,275


Since we do not apply hedge accounting for our commodity derivative contracts, any gains and losses on our assets and liabilities are included in “Commodity derivatives expense” in the accompanying Unaudited Condensed Consolidated Statements of Operations.



15

Denbury Resources Inc.
Notes to Unaudited Condensed Consolidated Financial Statements

Level 3 Fair Value Measurements

The following table summarizes the changes in the fair value of our Level 3 assets and liabilities for the three months ended March 31, 2019 and 2018:
 
 
Three Months Ended
 
 
March 31,
In thousands
 
2019
 
2018
Fair value of Level 3 instruments, beginning of period
 
$
13,624

 
$
—

Fair value losses on commodity derivatives
 
(9,047
)
 
—

Receipts on settlements of commodity derivatives
 
(891
)
 
—

Fair value of Level 3 instruments, end of period
 
$
3,686

 
$
—

 
 
 
 
 
The amount of total losses for the period included in earnings attributable to the change in unrealized losses relating to assets or liabilities still held at the reporting date
 
$
(6,481
)
 
$
—


We utilize an income approach to value our Level 3 three-way collars. We obtain and ensure the appropriateness of the significant inputs to the calculation, including contractual prices for the underlying instruments, maturity, forward prices for commodities, interest rates, volatility factors and credit worthiness, and the fair value estimate is prepared and reviewed on a quarterly basis. The following table details fair value inputs related to implied volatilities utilized in the valuation of our Level 3 oil derivative contracts:
 
 
Fair Value at
3/31/2019
(in thousands)
 
Valuation Technique
 
Unobservable Input
 
Volatility Range
Oil derivative contracts
 
$
3,686

 
Discounted cash flow / Black-Scholes
 
Volatility of Light Louisiana Sweet for settlement periods beginning after March 31, 2019
 
12.3% – 30.5%

Other Fair Value Measurements

The carrying value of our loans under our Bank Credit Agreement approximate fair value, as they are subject to short-term floating interest rates that approximate the rates available to us for those periods. We use a market approach to determine the fair value of our fixed-rate long-term debt using observable market data. The fair values of our senior secured second lien notes and senior subordinated notes are based on quoted market prices, which are considered Level 1 measurements under the fair value hierarchy. The estimated fair value of the principal amount of our debt as of March 31, 2019 and December 31, 2018, excluding pipeline financing and capital lease obligations, was $1,990.0 million and $1,886.1 million, respectively. We have other financial instruments consisting primarily of cash, cash equivalents, short-term receivables and payables that approximate fair value due to the nature of the instrument and the relatively short maturities.

Note 7. Commitments and Contingencies

Litigation

We are involved in various lawsuits, claims and regulatory proceedings incidental to our businesses.  We are also subject to audits for various taxes (income, sales and use, and severance) in the various states in which we operate, and from time to time receive assessments for potential taxes that we may owe. While we currently believe that the ultimate outcome of these proceedings, individually and in the aggregate, will not have a material adverse effect on our financial position, results of operations or cash flows, litigation is subject to inherent uncertainties.  We accrue for losses from litigation and claims if we determine that a loss is probable and the amount can be reasonably estimated.



16

Denbury Resources Inc.
Notes to Unaudited Condensed Consolidated Financial Statements

Riley Ridge Helium Supply Contract Claim

As part of our 2010 and 2011 acquisitions of the Riley Ridge Unit and associated gas processing facility that was under construction, the Company assumed a 20-year helium supply contract under which we agreed to supply the helium separated from the full well stream by operation of the gas processing facility to a third-party purchaser, APMTG Helium, LLC (“APMTG”). The helium supply contract provides for the delivery of a minimum contracted quantity of helium, with liquidated damages payable if specified quantities of helium are not supplied in accordance with the terms of the contract. The liquidated damages are specified in the contract at up to $8.0 million per contract year and are capped at an aggregate of $46.0 million over the term of the contract.

As the gas processing facility has been shut-in since mid-2014 due to significant technical issues, we have not been able to supply helium under the helium supply contract. In a case filed in November 2014 in the Ninth Judicial District Court of Sublette County, Wyoming, APMTG claimed multiple years of liquidated damages for non-delivery of volumes of helium specified under the helium supply contract. The Company claimed that its contractual obligations were excused by virtue of events that fall within the force majeure provisions in the helium supply contract.

On March 11, 2019, the trial court entered a final judgment that a force majeure condition did exist, but the Company’s performance was excused by the force majeure provisions of the contract for only a 35-day period in 2014, and as a result the Company should pay APMTG liquidated damages and interest thereon for those time periods from contract commencement to the close of evidence (November 29, 2017) when the Company’s performance was not excused as provided in the contract.

The Company’s position continues to be that its contractual obligations have been and continue to be excused by events that fall within the force majeure provisions in the helium supply contract. On April 5, 2019, the Company filed a motion for amendment of judgment with the trial court requesting that the trial court amend certain of its findings of fact and conclusions of law with respect to the Company’s claims that a force majeure event excused the Company’s performance for a specified period of time after contract commencement. The Company intends to continue to vigorously defend its position and pursue all of its rights, including its right to appeal any portion of the trial court’s ruling to the Wyoming Supreme Court, the timing and results of which cannot be predicted at this time.

Subject to the Company’s motion for amendment of judgment, and absent reversal of the trial court’s factual or legal conclusions on appeal (the timing of which is currently unpredictable), the Company anticipates total liquidated damages would equal the $46.0 million aggregate cap under the helium supply contract (including $14.2 million of liquidated damages for the contract years ending July 31, 2018 and July 31, 2019) plus $3.8 million of associated costs through March 31, 2019, for a total of $49.8 million, which the Company has included in “Other liabilities” in our Unaudited Condensed Consolidated Balance Sheets as of March 31, 2019.

Note 8. Additional Balance Sheet Details

Accounts Payable and Accrued Liabilities
 
 
March 31,
 
December 31,
In thousands
 
2019
 
2018
Accounts payable
 
$
31,014

 
$
28,177

Accrued lease operating expenses
 
27,274

 
32,287

Accrued compensation
 
24,221

 
42,881

Accrued interest
 
24,080

 
31,391

Taxes payable
 
10,792

 
18,897

Accrued exploration and development costs
 
8,295

 
19,519

Other
 
21,648

 
25,228

Total
 
$
147,324

 
$
198,380




17

Denbury Resources Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with our Unaudited Condensed Consolidated Financial Statements and Notes thereto included herein and our Consolidated Financial Statements and Notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2018 (the “Form 10-K”), along with Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in the Form 10-K.  Any terms used but not defined herein have the same meaning given to them in the Form 10-K.  Our discussion and analysis includes forward-looking information that involves risks and uncertainties and should be read in conjunction with Risk Factors under Item 1A of the Form 10-K, along with Forward-Looking Information at the end of this section for information on the risks and uncertainties that could cause our actual results to be materially different than our forward-looking statements.

OVERVIEW

Denbury is an independent oil and natural gas company with operations focused in two key operating areas: the Gulf Coast and Rocky Mountain regions. Our goal is to increase the value of our properties through a combination of exploitation, drilling and proven engineering extraction practices, with the most significant emphasis relating to CO2 enhanced oil recovery operations.

Oil Price Impact on Our Business.  Our financial results are significantly impacted by changes in oil prices, as 97% of our production is oil. Changes in oil prices impact all aspects of our business; most notably our cash flows from operations, revenues, and capital allocation and budgeting decisions. NYMEX oil prices rebounded from the low-$40s at the end of 2018 to average in the mid-$50s during the first quarter of 2019, with a continued increase to an average of $64 during April 2019. With our continued focus on improving the Company’s financial position and preserving liquidity, we have based our 2019 budget on a flat $50 oil price, and our 2019 capital spending has been budgeted in a range of $240 million to $260 million, excluding capitalized interest and acquisitions, which is roughly a 23% decrease from our 2018 capital spending levels. Based on our original 2019 budget, assuming a flat $50 oil price, we have estimated that our cash flows from operations would be significantly higher than our capital expenditures and result in Denbury generating significant excess cash flow during 2019. Also, we have hedged approximately 70% of our estimated 2019 production in order to provide a greater level of certainty in our 2019 cash flow. Based on our expected level of capital spending and other assumptions, we currently anticipate that our 2019 production will average between 56,000 and 60,000 BOE/d. Additional information concerning our 2019 budget and plans is included below under Capital Resources and Liquidity – Overview.

Operating Highlights. We recognized a net loss of $25.7 million, or $0.06 per diluted common share, during the first quarter of 2019, compared to net income of $39.6 million, or $0.09 per diluted common share, during the first quarter of 2018. The primary drivers of the change in our operating results were the following:

•
Oil and natural gas revenues in the first quarter of 2019 decreased by $45.4 million, or 13%, principally driven by a 12% decrease in realized oil prices.
•
Commodity derivatives expense increased by $34.6 million, primarily due to an increase of $76.1 million in expense from noncash fair value adjustments, partially offset by a $41.6 million net change in settlements on derivative contracts (receipts of $8.2 million during the first quarter of 2019 compared to payments of $33.4 million in the prior-year period).

We generated $64.4 million of cash flow from operating activities in the first quarter of 2019, a decrease of $27.2 million from first quarter of 2018 cash flow from operations of $91.6 million. The decrease in cash flow from operations in the first quarter of 2019 was due primarily to an increase in working capital outflows of $21.0 million between the comparative first quarters, as cash flow from operating activities before working capital changes was lower by only $6.3 million.

Exploitation Drilling Update. In December 2018, we spudded our first well in the Cotton Valley interval at Tinsley Field, and in April 2019, we drilled a test well within the 2A Sand interval at Conroe Field, with plans to drill an additional well within the 2A Sand interval in July 2019. Initial results from these two wells are positive, and initial flow test results are expected during the second quarter of 2019. We continue to evaluate exploitation opportunities in additional horizons underlying the existing CO2 EOR flood at Tinsley Field, as well as within oil-bearing formations at Conroe Field. At Cedar Creek Anticline, we currently have plans to drill up to four additional Mission Canyon wells and a potential Charles B follow-up well in the second half of 2019.



18

Denbury Resources Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations

CAPITAL RESOURCES AND LIQUIDITY

Overview. Our primary sources of capital and liquidity are our cash flows from operations and availability of borrowing capacity under our senior secured bank credit facility. For the three months ended March 31, 2019, we generated cash flow from operations of $119.2 million, before giving effect to $54.8 million of cash outflows for working capital changes, which resulted in total cash flow from operations of $64.4 million. We typically have our highest level of working capital outflows in the first quarter of each year due to payments in the first quarter for accrued compensation and accrued ad valorem tax payments. Also, this quarter we had a $21.6 million increase in our accrued production receivable primarily due to a higher realized oil price in March 2019 as compared to December 2018. These working capital outflows in the first quarter were the primary reason for the reduction in our cash balance from $38.6 million at December 31, 2018 to $5.7 million at March 31, 2019. As of March 31, 2019, we had no outstanding borrowings on our $615 million senior secured bank credit facility, leaving us with $560.5 million of borrowing base availability after consideration of $54.5 million of currently outstanding letters of credit.

We have historically tried to limit our development capital spending to be roughly the same as, or less than, our cash flow from operations, and our 2019 cash flows from operations are currently expected to well exceed our planned $240 million to $260 million of development capital expenditures for the year.

As an additional source of potential liquidity, the Company has been engaged in two asset sale processes. In the first process, we continue to market for sale approximately 4,000 acres of surface land with no active oil and gas operations in the Houston area. We remain focused on a strategy that we believe will ultimately yield the highest value for the land, and we expect most of that value to be realized over the next couple of years. During 2018, we consummated approximately $5 million of land sales and currently have signed agreements for another $9 million that we expect to close in 2019. In the second process, in early 2018 we began the process of portfolio optimization through the marketing of mature properties located in Mississippi and Louisiana and Citronelle Field in Alabama, and completed the sale of Lockhart Crossing Field for net proceeds of $4.1 million during the third quarter of 2018. The pace and outcome of any sales of the remaining assets cannot be predicted at this time, but their successful completion could provide additional liquidity for financial or operational uses.

Over the last several years, we have been keenly focused on reducing leverage and improving the Company’s financial condition. In total, we have reduced our outstanding debt principal by over $1.0 billion between December 31, 2014 and March 31, 2019, primarily through debt exchanges, opportunistic open market debt repurchases, and the conversion in the second quarter of 2018 of all of our outstanding convertible senior notes into common stock. Our leverage metrics have improved considerably over the past year, due primarily to our cost reduction efforts, improvement in oil prices and our overall reduction in debt. In conjunction with our continuing efforts to improve the Company’s balance sheet, we plan to assess, and may engage in, potential debt reduction and/or maturity extension transactions of various types, with a primary focus initially on our 2021 debt maturities.

Senior Secured Bank Credit Facility. In December 2014, we entered into an Amended and Restated Credit Agreement with JPMorgan Chase Bank, N.A., as administrative agent, and other lenders party thereto (as amended, the “Bank Credit Agreement”), which has been amended periodically since that time. The Bank Credit Agreement is a senior secured revolving credit facility with a maturity date of December 9, 2021, provided that the maturity date may occur earlier (between February 2021 and August 2021) if the 9% Senior Secured Second Lien Notes due in May 2021 (the “2021 Senior Secured Notes”) or 6⅜% Senior Subordinated Notes due in August 2021, respectively, are not repaid or refinanced by each of their respective maturity dates. As part of our spring 2019 semiannual borrowing base redetermination, the borrowing base and lender commitments for our Bank Credit Agreement were reaffirmed at $615 million, with the next such redetermination scheduled for November 2019. The Bank Credit Agreement contains certain financial performance covenants through the maturity of the facility, including the following:

•
A Consolidated Total Debt to Consolidated EBITDAX covenant, with such ratio not to exceed 5.25 to 1.0 through December 31, 2020, and 4.50 to 1.0 thereafter;
•
A consolidated senior secured debt to consolidated EBITDAX covenant, with such ratio not to exceed 2.5 to 1.0. Only debt under our Bank Credit Agreement is considered consolidated senior secured debt for purposes of this ratio;
•
A minimum permitted ratio of consolidated EBITDAX to consolidated interest charges of 1.25 to 1.0; and
•
A requirement to maintain a current ratio of 1.0 to 1.0.

Under these financial performance covenant calculations, as of March 31, 2019, our ratio of consolidated total debt to consolidated EBITDAX was 4.32 to 1.0 (with a maximum permitted ratio of 5.25 to 1.0), our consolidated senior secured debt to consolidated EBITDAX was 0.00 to 1.0 (with a maximum permitted ratio of 2.5 to 1.0), our ratio of consolidated EBITDAX to


19

Denbury Resources Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations

consolidated interest charges was 3.09 to 1.0 (with a required ratio of not less than 1.25 to 1.0), and our current ratio was 3.38 to 1.0 (with a required ratio of not less than 1.0 to 1.0). Based upon our currently forecasted levels of production and costs, hedges in place as of May 6, 2019, and current oil commodity futures prices, we currently anticipate continuing to be in compliance with our financial performance covenants during the foreseeable future.

The above description of our Bank Credit Agreement is qualified by the express language and defined terms contained in the Bank Credit Agreement and the amendments thereto, each of which are filed as exhibits to our periodic reports filed with the SEC.

Capital Spending. We currently anticipate that our full-year 2019 capital spending, excluding capitalized interest and acquisitions, will be approximately $240 million to $260 million.  Although we currently have no plans to adjust our anticipated capital spending for 2019, we continually evaluate our expected cash flows and capital expenditures throughout the year and could adjust capital expenditures if our cash flows were to meaningfully change. Capitalized interest is currently estimated at between $30 million and $40 million for 2019. The 2019 capital budget, excluding capitalized interest and acquisitions, provides for approximate spending as follows:

•
$100 million allocated for tertiary oil field expenditures;
•
$70 million allocated for other areas, primarily non-tertiary oil field expenditures including exploitation;
•
$30 million to be spent on CO2 sources and pipelines; and
•
$50 million for other capital items such as capitalized internal acquisition, exploration and development costs and pre-production tertiary startup costs.

Based upon our currently forecasted levels of production and costs, commodity hedges in place, and current oil commodity futures prices, we intend to fund our development capital spending with cash flow from operations. If prices were to decrease or changes in operating results were to cause a reduction in anticipated 2019 cash flows significantly below our currently forecasted operating cash flows, we would likely reduce our capital expenditures. If we reduce our capital spending due to lower cash flows, any sizeable reduction would likely lower our anticipated production levels in future years.

Capital Expenditure Summary. The following table reflects incurred capital expenditures (including accrued capital) for the three months ended March 31, 2019 and 2018:
 
 
Three Months Ended
 
 
March 31,
In thousands
 
2019
 
2018
Capital expenditure summary
 
 
 
 
Tertiary oil fields
 
$
26,028

 
$
18,273

Non-tertiary fields
 
21,674

 
14,922

Capitalized internal costs(1)
 
11,890

 
14,085

Oil and natural gas capital expenditures
 
59,592

 
47,280

CO2 pipelines, sources and other
 
1,571

 
347

Capital expenditures, before acquisitions and capitalized interest
 
61,163

 
47,627

Acquisitions of oil and natural gas properties
 
29

 
35

Capital expenditures, before capitalized interest
 
61,192

 
47,662

Capitalized interest
 
10,534

 
8,452

Capital expenditures, total
 
$
71,726

 
$
56,114


(1)
Includes capitalized internal acquisition, exploration and development costs and pre-production tertiary startup costs.



Off-Balance Sheet Arrangements. Our off-balance sheet arrangements include obligations for various development and exploratory expenditures that arise from our normal capital expenditure program or from other transactions common to our industry,


20

Denbury Resources Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations

none of which are recorded on our balance sheet.  In addition, in order to recover our undeveloped proved reserves, we must also fund the associated future development costs estimated in our proved reserve reports.

Our commitments and obligations consist of those detailed as of December 31, 2018, in our Form 10-K under Management’s Discussion and Analysis of Financial Condition and Results of Operations – Capital Resources and Liquidity – Commitments and Obligations.


21

Denbury Resources Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations

RESULTS OF OPERATIONS

Our tertiary operations represent a significant portion of our overall operations and are our primary long-term strategic focus. The economics of a tertiary field and the related impact on our financial statements differ from a conventional oil and gas play, and we have outlined certain of these differences in our Form 10-K and other public disclosures. Our focus on these types of operations impacts certain trends in both current and long-term operating results. Please refer to Management’s Discussion and Analysis of Financial Condition and Results of Operations – Financial Overview of Tertiary Operations in our Form 10-K for further information regarding these matters.


22

Denbury Resources Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations

Operating Results Table

Certain of our operating results and statistics for the comparative three months ended March 31, 2019 and 2018 are included in the following table:
 
 
Three Months Ended
 
 
March 31,
In thousands, except per-share and unit data
 
2019
 
2018
Operating results
 
 
 
 
Net income (loss)
 
$
(25,674
)
 
$
39,578

Net income (loss) per common share – basic
 
(0.06
)
 
0.10

Net income (loss) per common share – diluted
 
(0.06
)
 
0.09

Net cash provided by operating activities
 
64,366

 
91,627

Average daily production volumes
 
 

 
 

Bbls/d
 
57,414

 
58,354

Mcf/d
 
10,827

 
11,904

BOE/d(1)
 
59,218

 
60,338

Operating revenues
 
 

 
 

Oil sales
 
$
291,965

 
$
337,406

Natural gas sales
 
2,612

 
2,615

Total oil and natural gas sales
 
$
294,577

 
$
340,021

Commodity derivative contracts(2)
 
 

 
 

Receipt (payment) on settlements of commodity derivatives
 
$
8,206

 
$
(33,357
)
Noncash fair value losses on commodity derivatives(3)
 
(91,583
)
 
(15,468
)
Commodity derivatives expense
 
$
(83,377
)
 
$
(48,825
)
Unit prices – excluding impact of derivative settlements
 
 

 
 

Oil price per Bbl
 
$
56.50

 
$
64.25

Natural gas price per Mcf
 
2.68

 
2.44

Unit prices – including impact of derivative settlements(2)
 
 
 
 

Oil price per Bbl
 
$
58.09

 
$
57.89

Natural gas price per Mcf
 
2.68

 
2.44

Oil and natural gas operating expenses
 
 
 
 

Lease operating expenses
 
$
125,423

 
$
118,356

Marketing expenses, net of third-party purchases, and plant operating expenses(4)
 
10,015

 
9,522

Production and ad valorem taxes
 
22,034

 
25,032

Oil and natural gas operating revenues and expenses per BOE
 
 
 
 

Oil and natural gas revenues
 
$
55.27

 
$
62.61

Lease operating expenses
 
23.53

 
21.80

Marketing expenses, net of third-party purchases, and plant operating expenses(4)
 
1.88

 
1.75

Production and ad valorem taxes
 
4.13

 
4.61

CO2 sources – revenues and expenses
 
 

 
 

CO2 sales and transportation fees
 
$
8,570

 
$
7,552

CO2 discovery and operating expenses
 
(556
)
 
(462
)
CO2 revenue and expenses, net
 
$
8,014

 
$
7,090


(1)
Barrel of oil equivalent using the ratio of one barrel of oil to six Mcf of natural gas (“BOE”).
(2)
See also Commodity Derivative Contracts below and Item 3. Quantitative and Qualitative Disclosures about Market Risk for information concerning our derivative transactions.


23

Denbury Resources Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations

(3)
Noncash fair value losses on commodity derivatives is a non-GAAP measure and is different from “Commodity derivatives expense” in the Unaudited Condensed Consolidated Statements of Operations in that the noncash fair value losses on commodity derivatives represent only the net changes between periods of the fair market values of commodity derivative positions, and exclude the impact of settlements on commodity derivatives during the period, which were receipts on settlements of $8.2 million for the three months ended March 31, 2019 compared to payments on settlements of $33.4 million for the three months ended March 31, 2018. We believe that noncash fair value losses on commodity derivatives is a useful supplemental disclosure to “Commodity derivatives expense” in order to differentiate noncash fair market value adjustments from receipts or payments upon settlements on commodity derivatives during the period. This supplemental disclosure is widely used within the industry and by securities analysts, banks and credit rating agencies in calculating EBITDA and in adjusting net income (loss) to present those measures on a comparative basis across companies, as well as to assess compliance with certain debt covenants. Noncash fair value losses on commodity derivatives is not a measure of financial or operating performance under GAAP, nor should it be considered in isolation or as a substitute for “Commodity derivatives expense” in the Unaudited Condensed Consolidated Statements of Operations.
(4)
Represents “Marketing and plant operating expenses” as presented in the Unaudited Condensed Consolidated Statements of Operations excluding expenses for purchases of oil from third-parties.


24

Denbury Resources Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations

Production

Average daily production by area for each of the four quarters of 2018 and for the first quarter of 2019 is shown below:
 
 
Average Daily Production (BOE/d)

 
First
Quarter
 
Second
Quarter

Third
Quarter

Fourth
Quarter
 
 
First
Quarter
Operating Area
 
2018
 
2018

2018

2018
 
 
2019
Tertiary oil production
 
 
 
 
 
 
 
 
 
 
 
Gulf Coast region
 
 
 
 
 
 
 
 
 
 
 
Delhi
 
4,169

 
4,391


4,383


4,526

 
 
4,474

Hastings
 
5,704

 
5,716


5,486


5,480

 
 
5,539

Heidelberg
 
4,445

 
4,330


4,376


4,269

 
 
3,987

Oyster Bayou
 
5,056

 
4,961


4,578


4,785

 
 
4,740

Tinsley
 
6,053

 
5,755


5,294


5,033

 
 
4,659

West Yellow Creek
 
57

 
142

 
240

 
375

 
 
436

Mature properties(1)
 
6,726

 
6,725

 
6,612

 
6,748

 
 
6,479

Total Gulf Coast region
 
32,210


32,020


30,969


31,216

 

30,314

Rocky Mountain region
 

 





 
 

Bell Creek
 
4,050

 
4,010


3,970


4,421

 
 
4,650

Salt Creek
 
2,002

 
2,049

 
2,274

 
2,107

 
 
2,057

Other
 
—

 
—

 
6

 
20

 
 
52

Total Rocky Mountain region
 
6,052

 
6,059


6,250


6,548

 
 
6,759

Total tertiary oil production
 
38,262

 
38,079


37,219


37,764

 
 
37,073

Non-tertiary oil and gas production
 


 
 
 
 
 
 
 
 


Gulf Coast region
 


 
 
 
 
 
 
 
 


Mississippi
 
875

 
901

 
1,038

 
1,023

 
 
1,034

Texas
 
4,386

 
4,947

 
4,533

 
4,319

 
 
4,345

Other
 
431

 
388

 
421

 
457

 
 
466

Total Gulf Coast region
 
5,692

 
6,236


5,992


5,799

 
 
5,845

Rocky Mountain region
 

 
 
 
 
 
 
 
 

Cedar Creek Anticline
 
14,437

 
15,742


14,208


14,961

 
 
14,987

Other
 
1,485

 
1,490


1,409


1,343

 
 
1,313

Total Rocky Mountain region
 
15,922

 
17,232


15,617


16,304

 
 
16,300

Total non-tertiary production
 
21,614

 
23,468


21,609


22,103

 

22,145

Total continuing production
 
59,876

 
61,547


58,828


59,867

 
 
59,218

Property sales
 

 

 

 

 
 

Lockhart Crossing(2)
 
462

 
447

 
353

 
—

 
 
—

Total production
 
60,338

 
61,994

 
59,181

 
59,867

 
 
59,218


(1)
Mature properties include Brookhaven, Cranfield, Eucutta, Little Creek, Mallalieu, Martinville, McComb and Soso fields.
(2)
Includes production from Lockhart Crossing Field sold in the third quarter of 2018.

Total production during the first quarter of 2019 averaged 59,218 BOE/d, including 37,073 Bbls/d, or 63%, from tertiary properties and 22,145 BOE/d from non-tertiary properties. First quarter 2019 total production was essentially flat with total continuing production levels in the fourth quarter of 2018 and first quarter of 2018 despite our reduced capital spending levels over the past few years. Our production during the three months ended March 31, 2019 was 97% oil, consistent with oil production during the prior-year period.



25

Denbury Resources Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations

Oil and Natural Gas Revenues

Our oil and natural gas revenues during the three months ended March 31, 2019 decreased 13% compared to these revenues for the same period in 2018.  The changes in our oil and natural gas revenues are due to changes in production quantities and commodity prices (excluding any impact of our commodity derivative contracts), as reflected in the following table:
 
 
Three Months Ended
 
 
March 31,
 
 
2019 vs. 2018
In thousands
 
Decrease in Revenues
 
Percentage Decrease in Revenues
Change in oil and natural gas revenues due to:
 
 
 
 
Decrease in production
 
$
(6,308
)
 
(2
)%
Decrease in commodity prices
 
(39,136
)
 
(11
)%
Total decrease in oil and natural gas revenues
 
$
(45,444
)
 
(13
)%

Excluding any impact of our commodity derivative contracts, our net realized commodity prices and NYMEX differentials were as follows during the three months ended March 31, 2019 and 2018:
 
 
Three Months Ended
 
 
March 31,
 
 
2019
 
2018
Average net realized prices
 
 
 
 
Oil price per Bbl
 
$
56.50

 
$
64.25

Natural gas price per Mcf
 
2.68

 
2.44

Price per BOE
 
55.27

 
62.61

Average NYMEX differentials
 
 

 
 

Gulf Coast region
 
 
 
 
Oil per Bbl
 
$
4.26

 
$
2.05

Natural gas per Mcf
 
(0.10
)
 
0.10

Rocky Mountain region
 
 
 
 
Oil per Bbl
 
$
(2.56
)
 
$
(0.06
)
Natural gas per Mcf
 
(0.28
)
 
(0.92
)
Total Company
 
 
 
 
Oil per Bbl
 
$
1.63

 
$
1.29

Natural gas per Mcf
 
(0.20
)
 
(0.40
)

Prices received in a regional market fluctuate frequently and can differ from NYMEX pricing due to a variety of reasons, including supply and/or demand factors, crude oil quality, and location differentials.

•
Gulf Coast Region. Our average NYMEX oil differential in the Gulf Coast region was a positive $4.26 per Bbl and a positive $2.05 per Bbl during the first quarters of 2019 and 2018, respectively, and a positive $5.34 per Bbl during the fourth quarter of 2018. Generally, our Gulf Coast region differentials are positive to NYMEX and highly correlated to the changes in prices of Light Louisiana Sweet crude oil, which have generally strengthened over the past year.

•
Rocky Mountain Region. NYMEX oil differentials in the Rocky Mountain region averaged $2.56 per Bbl and $0.06 per Bbl below NYMEX during the first quarters of 2019 and 2018, respectively, and $4.31 per Bbl below NYMEX during the fourth quarter of 2018. Differentials in the Rocky Mountain region can fluctuate significantly on a month-to-month


26

Denbury Resources Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations

basis due to weather, refinery or transportation issues, and Canadian and U.S. crude oil price index volatility. Although our differentials in the Rocky Mountain region have weakened somewhat from a year ago, they have improved from the differentials we experienced in the fourth quarter of 2018.

Commodity Derivative Contracts

The following table summarizes the impact our crude oil derivative contracts had on our operating results for the three months ended March 31, 2019 and 2018:
 
 
Three Months Ended
 
 
March 31,
In thousands
 
2019
 
2018
Receipt (payment) on settlements of commodity derivatives
 
$
8,206

 
$
(33,357
)
Noncash fair value losses on commodity derivatives(1)
 
(91,583
)
 
(15,468
)
Total expense
 
$
(83,377
)
 
$
(48,825
)

(1)
Noncash fair value losses on commodity derivatives is a non-GAAP measure. See Operating Results Table above for a discussion of the reconciliation between noncash fair value losses on commodity derivatives to “Commodity derivatives expense” in the Unaudited Condensed Consolidated Statements of Operations.

In order to provide a level of price protection to a portion of our oil production, we have hedged a portion of our estimated oil production through 2020 using both NYMEX and LLS fixed-price swaps and three-way collars. See Note 5, Commodity Derivative Contracts, to the Unaudited Condensed Consolidated Financial Statements for additional details of our outstanding commodity derivative contracts as of March 31, 2019, and Item 3, Quantitative and Qualitative Disclosures about Market Risk below for additional discussion. In addition, the following table summarizes our commodity derivative contracts as of May 6, 2019:
 
 
2Q 2019
2H 2019
1H 2020
2H 2020
WTI NYMEX
Volumes Hedged (Bbls/d)
3,500
—
2,000
2,000
Fixed-Price Swaps
Swap Price(1)
$59.05
—
$60.59
$60.59
Argus LLS
Volumes Hedged (Bbls/d)
13,000
13,000
4,000
4,000
Fixed-Price Swaps
Swap Price(1)
$64.69
$64.69
$62.41
$62.41
WTI NYMEX
Volumes Hedged (Bbls/d)
18,500
22,000
9,500
7,500
3-Way Collars
Sold Put Price / Floor / Ceiling Price(1)(2)
$48.84 / $56.84 / $69.94
$48.55 / $56.55 / $69.17
$49.33 / $58.94 / $66.50
$49.67 / $59.17 / $67.07
Argus LLS
Volumes Hedged (Bbls/d)
5,500
5,500
4,500
2,500
3-Way Collars
Sold Put Price / Floor / Ceiling Price(1)(2)
$54.73 / $63.09 / $79.93
$54.73 / $63.09 / $79.93
$53.89 / $63.89 / $72.55
$54.40 / $64.40 / $76.59
 
Total Volumes Hedged (Bbls/d)
40,500
40,500
20,000
16,000

(1)
Averages are volume weighted.
(2)
If oil prices were to average less than the sold put price, receipts on settlement would be limited to the difference between the floor price and the sold put price.
 
Based on current contracts in place and NYMEX oil futures prices as of May 6, 2019, which averaged approximately $62 per Bbl, we currently expect that we would make cash payments of approximately $15 million during the remainder of 2019 upon settlement of the 2019 contracts, the amount of which is dependent upon fluctuations in future NYMEX oil prices in relation to the prices of our 2019 fixed-price swaps which have weighted average prices of $59.05 per Bbl and $64.69 per Bbl for NYMEX and LLS hedges, respectively, and weighted average ceiling prices of our 2019 three-way collars of $69.40 per Bbl and $79.93 per Bbl for NYMEX and LLS hedges, respectively. Changes in commodity prices, expiration of contracts, and new commodity contracts entered into cause fluctuations in the estimated fair value of our oil derivative contracts. Because we do not utilize hedge


27

Denbury Resources Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations

accounting for our commodity derivative contracts, the period-to-period changes in the fair value of these contracts, as outlined above, are recognized in our statements of operations.

Production Expenses

Lease Operating Expenses
 
 
Three Months Ended
 
 
March 31,
In thousands, except per-BOE data
 
2019
 
2018
Total lease operating expenses
 
$
125,423

 
$
118,356

 
 
 
 
 
Total lease operating expenses per BOE
 
$
23.53

 
$
21.80


Total lease operating expenses increased $7.1 million (6%) on an absolute-dollar basis, or $1.73 (8%) on a per-BOE basis, during the three months ended March 31, 2019, compared to levels in the same period in 2018. Our lease operating expenses during the current-year period were primarily impacted by higher CO2 expense due to an increase in injection volumes and new floods and expansion areas moving into the production stage, resulting in costs being expensed versus capitalized, as well as an increase in contract labor primarily at CCA. Compared to the fourth quarter of 2018, lease operating expenses decreased $3.0 million (2%) on an absolute-dollar basis primarily due to lower workover expense, but remained relatively flat on a per-BOE basis due to slightly lower oil production in the first quarter of 2019.

Currently, our CO2 expense comprises approximately 25% of our typical tertiary lease operating expenses, and for the CO2 reserves we already own, consists of CO2 production expenses, and for the CO2 reserves we do not own, consists of our purchase of CO2 from royalty and working interest owners and industrial sources. During the first quarters of 2019 and 2018, approximately 56% and 54%, respectively, of the CO2 utilized in our CO2 floods consisted of CO2 owned and produced by us (our net revenue interest). The price we pay others for CO2 varies by source and is generally indexed to oil prices. When combining the production cost of the CO2 we own with what we pay third parties for CO2, our average cost of CO2 was approximately $0.39 per Mcf during the first quarter of 2019, including taxes paid on CO2 production but excluding depletion, depreciation and amortization of capital expended at our CO2 source fields and industrial sources. This per-Mcf CO2 cost during the first quarter of 2019 was consistent with the first quarter of 2018, but lower than the $0.42 per Mcf comparable measure during the fourth quarter of 2018, as the previous quarter included certain pipeline maintenance costs, as well as higher utilization of industrial-sourced CO2 in our Gulf Coast region, which has a higher average cost than our naturally-occurring CO2 sources.

Marketing and Plant Operating Expenses

Marketing and plant operating expenses primarily consist of amounts incurred relating to the marketing, processing, and transportation of oil and natural gas production. Marketing and plant operating expenses were $12.0 million and $12.4 million for the three months ended March 31, 2019 and 2018, respectively.

Taxes Other Than Income

Taxes other than income includes production, ad valorem and franchise taxes. Taxes other than income decreased $3.5 million (13%) during the three months ended March 31, 2019 compared to the same prior-year period, due primarily to a decrease in production taxes resulting from lower oil and natural gas revenues.


28

Denbury Resources Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations


General and Administrative Expenses (“G&A”)
 
 
Three Months Ended
 
 
March 31,
In thousands, except per-BOE data and employees
 
2019
 
2018
Gross cash compensation and administrative costs
 
$
54,701

 
$
57,038

Gross stock-based compensation
 
4,306

 
3,302

Operator labor and overhead recovery charges
 
(29,875
)
 
(31,137
)
Capitalized exploration and development costs
 
(10,207
)
 
(8,971
)
Net G&A expense
 
$
18,925

 
$
20,232

 
 
 
 
 
G&A per BOE
 
 

 
 

Net cash administrative costs
 
$
2.94

 
$
3.25

Net stock-based compensation
 
0.61

 
0.48

Net G&A expenses
 
$
3.55

 
$
3.73

 
 
 
 
 
Employees as of March 31
 
843

 
872


Our net G&A expenses on an absolute-dollar basis decreased $1.3 million (6%), or $0.18 (5%) on a per-BOE basis, during the three months ended March 31, 2019 compared to the same period in 2018, primarily due to the Company’s continued focus on cost reduction efforts.

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 to charge a monthly fixed overhead rate for each producing well.  In addition, salaries associated with field personnel are initially recorded as gross cash compensation and administrative costs and subsequently reclassified to lease operating expenses or capitalized to field development costs to the extent those individuals are dedicated to oil and gas production, exploration, and development activities.

Interest and Financing Expenses
 
 
Three Months Ended
 
 
March 31,
In thousands, except per-BOE data and interest rates
 
2019
 
2018
Cash interest(1)
 
$
47,948

 
$
46,603

Less: interest not reflected as expense for financial reporting purposes(1)
 
(21,279
)
 
(22,049
)
Noncash interest expense
 
1,263

 
1,137

Less: capitalized interest
 
(10,534
)
 
(8,452
)
Interest expense, net
 
$
17,398

 
$
17,239

Interest expense, net per BOE
 
$
3.26

 
$
3.17

Average debt principal outstanding
 
$
2,540,628

 
$
2,742,711

Average interest rate(2)
 
7.5
%
 
6.8
%

(1)
Cash interest includes the portion of interest on certain debt instruments accounted for as a reduction of debt for GAAP financial reporting purposes in accordance with Financial Accounting Standards Board Codification 470-60, Troubled Debt Restructuring by Debtors. The portion of interest treated as a reduction of debt relates to our 2021 Senior Secured Notes, 9¼% Senior Secured Second Lien Notes due 2022 (the “2022 Senior Secured Notes”), and our previously outstanding 3½% Convertible Senior Notes due 2024 (the “2024 Convertible Senior Notes”) and 5% Convertible Senior Notes due 2023 (the “2023 Convertible Senior Notes”). See below for further discussion.


29

Denbury Resources Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations

(2)
Includes commitment fees but excludes debt issue costs.

As reflected in the table above, cash interest expense during the three months ended March 31, 2019 increased $1.3 million (3%) when compared to the prior-year period due primarily to an increase in our weighted-average interest rate. Despite an overall reduction in the debt principal balance as a result of the conversion of our previously outstanding 2024 Convertible Senior Notes and 2023 Convertible Senior Notes into shares of Denbury common stock in the second quarter of 2018, our average interest rate increased between the first quarter of 2018 and 2019 as the interest rate on the 7½% Senior Secured Second Lien Notes due 2024 issued in August 2018 was higher than the interest rate on our previously outstanding borrowings on our senior secured bank credit facility.

Capitalized interest during the three months ended March 31, 2019 increased $2.1 million (25%) compared to the same period in 2018, primarily due to an increase in the number of projects that qualify for interest capitalization.

Future interest payable related to our 2021 Senior Secured Notes and 2022 Senior Secured Notes is accounted for in accordance with Financial Accounting Standards Board Codification 470-60, Troubled Debt Restructuring by Debtors, whereby most of the future interest was recorded as debt as of the transaction date, which will be reduced as semiannual interest payments are made. Future interest payable recorded as debt totaled $250.2 million as of March 31, 2019. Therefore, interest expense reflected in our Unaudited Condensed Consolidated Financial Statements will be significantly lower than the actual cash interest payment.

Depletion, Depreciation, and Amortization (“DD&A”)
 
 
Three Months Ended
 
 
March 31,
In thousands, except per-BOE data
 
2019
 
2018
Oil and natural gas properties
 
$
36,835

 
$
31,871

CO2 properties, pipelines, plants and other property and equipment
 
20,462

 
20,580

Total DD&A
 
$
57,297

 
$
52,451

 
 
 
 
 
DD&A per BOE
 
 

 
 

Oil and natural gas properties
 
$
6.91

 
$
5.87

CO2 properties, pipelines, plants and other property and equipment
 
3.84

 
3.79

Total DD&A cost per BOE
 
$
10.75

 
$
9.66


The increase in our oil and natural gas properties depletion during the three months ended March 31, 2019, when compared to the same period in 2018, was primarily due to an increase in depletable costs resulting from increases in our capitalized costs and future development costs associated with our reserves base, partially offset by an increase in proved oil and natural gas reserve quantities.

Income Taxes
 
 
Three Months Ended
 
 
March 31,
In thousands, except per-BOE amounts and tax rates
 
2019
 
2018
Current income tax benefit
 
$
(1,281
)
 
$
(1,032
)
Deferred income tax expense (benefit)
 
(9,478
)
 
15,052

Total income tax expense (benefit)
 
$
(10,759
)
 
$
14,020

Average income tax expense (benefit) per BOE
 
$
(2.02
)
 
$
2.58

Effective tax rate
 
29.5
%
 
26.2
%
Total net deferred tax liability
 
$
300,280


$
213,151




30

Denbury Resources Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations

We evaluate our estimated annual effective income tax rate based on current and forecasted business results and enacted tax laws on a quarterly basis and apply this tax rate to our ordinary income or loss to calculate our estimated tax liability or benefit. Our income taxes are based on an estimated statutory rate of approximately 25% in 2019 and 2018. Our effective tax rate for the three months ended March 31, 2019 was higher than our estimated statutory rate, primarily due to establishment of a valuation allowance against a portion of our business interest expense deduction that we estimate will be disallowed in the current year. The Tax Cuts and Jobs Act (“The Act”), which was enacted on December 22, 2017, revised the rules regarding the deductibility of business interest expense by limiting that deduction to 30% of adjusted taxable income (as defined), with disallowed amounts being carried forward to future taxable years. Based on our evaluation, using information existing as of the balance sheet date, of the near-term ability to utilize the tax benefits associated with our 2019 disallowed business interest expense, we have established a valuation allowance through our annual estimated effective income tax rate for that portion of our 2019 business interest expense that is currently expected to exceed the allowed limitation under The Act. Our effective tax rate for the three months ended March 31, 2018 differed from our estimated statutory rate, primarily due to the impact of a stock-based compensation deduction shortfall of $1.2 million.

The current income tax benefits for the three months ended March 31, 2019 and 2018, represent amounts estimated to be receivable resulting from alternative minimum tax credits and certain state tax obligations.

As of March 31, 2019, we had estimated amounts available for carry forward of $57.8 million of enhanced oil recovery credits related to our tertiary operations, $21.6 million of research and development credits, and $18.1 million of alternative minimum tax credits. The alternative minimum tax credits are fully refundable by 2021 and are recorded as a receivable on the balance sheet.  The enhanced oil recovery credits and research and development credits do not begin to expire until 2024 and 2031, respectively.

Per-BOE Data

The following table summarizes our cash flow and results of operations on a per-BOE basis for the comparative periods.  Each of the significant individual components is discussed above.
 
 
Three Months Ended
 
 
March 31,
Per-BOE data
 
2019
 
2018
Oil and natural gas revenues
 
$
55.27

 
$
62.61

Receipt (payment) on settlements of commodity derivatives
 
1.54

 
(6.14
)
Lease operating expenses
 
(23.53
)
 
(21.80
)
Production and ad valorem taxes
 
(4.13
)
 
(4.61
)
Marketing expenses, net of third-party purchases, and plant operating expenses
 
(1.88
)
 
(1.75
)
Production netback
 
27.27

 
28.31

CO2 sales, net of operating and exploration expenses
 
1.51

 
1.30

General and administrative expenses
 
(3.55
)
 
(3.73
)
Interest expense, net
 
(3.26
)
 
(3.17
)
Other
 
0.39

 
0.39

Changes in assets and liabilities relating to operations
 
(10.28
)
 
(6.23
)
Cash flows from operations
 
12.08

 
16.87

DD&A
 
(10.75
)
 
(9.66
)
Deferred income taxes
 
1.78

 
(2.77
)
Noncash fair value losses on commodity derivatives(1)
 
(17.18
)
 
(2.85
)
Other noncash items
 
9.25

 
5.70

Net income (loss)
 
$
(4.82
)
 
$
7.29




31

Denbury Resources Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations

(1)
Noncash fair value losses on commodity derivatives is a non-GAAP measure. See Operating Results Table above for a discussion of the reconciliation between noncash fair value losses on commodity derivatives to “Commodity derivatives expense” in the Unaudited Condensed Consolidated Statements of Operations.

CRITICAL ACCOUNTING POLICIES

For additional discussion of our critical accounting policies, see Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Form 10-K. Any new accounting policies or updates to existing accounting policies as a result of new accounting pronouncements have been included in the notes to the Company’s Unaudited Condensed Consolidated Financial Statements contained in this Quarterly Report on Form 10-Q.

FORWARD-LOOKING INFORMATION

The data and/or statements contained in this Quarterly Report on Form 10-Q that are not historical facts, including, but not limited to, statements found in the section 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 Exchange Act of 1934, as amended (the “Exchange Act”), that involve a number of risks and uncertainties.  Such forward-looking statements may be or may concern, among other things, financial forecasts, future hydrocarbon prices and their volatility, current or future liquidity sources or their adequacy to support our anticipated future activities, our ability to further reduce our debt levels or extend debt maturities, together with assumptions based on current and projected production levels, oil and gas prices and oilfield costs, current or future expectations or estimations of our cash flows or the impact of changes in commodity prices on cash flows, availability of capital, borrowing capacity, price and availability of advantageous commodity derivative contracts or the predicted cash flow benefits therefrom, forecasted capital expenditures, drilling activity or methods, including the timing and location thereof, the nature of any future asset purchases or sales or the timing or proceeds thereof, estimated timing of commencement of CO2 flooding of particular fields or areas, including CCA, or the availability of capital for CCA pipeline construction, or its ultimate cost or date of completion, timing of CO2 injections and initial production responses in tertiary flooding projects, development activities, finding costs, anticipated future cost savings, capital budgets, interpretation or prediction of formation details, hydrocarbon reserve quantities and values, CO2 reserves and supply and their availability, potential reserves, barrels or percentages of recoverable original oil in place, levels of tariffs or other trade restrictions, the likelihood, timing and impact of increased interest rates, the impact of regulatory rulings or changes, anticipated outcomes of pending litigation, prospective legislation affecting the oil and gas industry, environmental regulations, mark-to-market values, competition, rates of return, estimated costs, changes in costs, future capital expenditures and overall economics, worldwide economic conditions, the likelihood and extent of an economic slowdown, and other variables surrounding operations and future plans.  Such forward-looking statements generally are accompanied by words such as “plan,” “estimate,” “expect,” “predict,” “forecast,” “to our knowledge,” “anticipate,” “projected,” “preliminary,” “should,” “assume,” “believe,” “may” or other words that convey, or are intended to convey, the uncertainty of future events or outcomes.  Such forward-looking information is based upon management’s current plans, expectations, estimates, and assumptions and is subject to a number of risks and uncertainties that could significantly and adversely affect current, 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 us or on our behalf.  Among the factors that could cause actual results to differ materially are fluctuations in worldwide oil prices or in U.S. oil prices and consequently in the prices received or demand for our oil and natural gas; decisions as to production levels and/or pricing by OPEC or production levels by U.S. shale producers in future periods; levels of future capital expenditures; effects of our indebtedness; success of our risk management techniques; accuracy of our cost estimates; availability or terms of credit in the commercial banking or other debt markets; fluctuations in the prices of goods and services; the uncertainty of drilling results and reserve estimates; operating hazards and remediation costs; disruption of operations and damages from well incidents, hurricanes, tropical storms, forest fires, or other natural occurrences; acquisition risks; requirements for capital or its availability; conditions in the worldwide financial, trade and credit markets; general economic conditions; competition; government regulations, including changes in tax or environmental laws or regulations; and unexpected delays, as well as the risks and uncertainties inherent in oil and gas drilling and production activities or that are otherwise discussed in this quarterly report, including, without limitation, the portions referenced above, and the uncertainties set forth from time to time in our other public reports, filings and public statements including, without limitation, the Company’s most recent Form 10-K.



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Denbury Resources Inc.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Debt and Interest Rate Sensitivity

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. As of March 31, 2019, we did not have any outstanding borrowings on our senior secured bank credit facility. None of our existing debt has any triggers or covenants regarding our debt ratings with rating agencies, although under the NEJD financing lease, in light of credit downgrades in February 2016, we were required to provide a $41.3 million letter of credit to the lessor, which we provided on March 4, 2016. The letter of credit may be drawn upon in the event we fail to make a payment due under the pipeline financing lease agreement or upon other specified defaults set out in the pipeline financing lease agreement (filed as Exhibit 99.1 to the Form 8-K filed with the SEC on June 5, 2008). The fair values of our senior secured second lien notes and senior subordinated notes are based on quoted market prices.  The following table presents the principal and fair values of our outstanding debt as of March 31, 2019.

In thousands
 
2021
 
2022
 
2023
 
2024
 
Total
 
Fair Value
Fixed rate debt:
 
 

 
 

 
 
 
 
 
 
 
 
9% Senior Secured Second Lien Notes due 2021
 
$
614,919

 
$
—

 
$
—

 
$
—

 
$
614,919

 
$
598,009

9¼% Senior Secured Second Lien Notes due 2022
 
—

 
455,668

 
—

 
—

 
455,668

 
439,720

7½% Senior Secured Second Lien Notes due 2024
 
—

 
—

 
—

 
450,000

 
450,000

 
382,500

6⅜% Senior Subordinated Notes due 2021
 
203,545

 
—

 
—

 
—

 
203,545

 
156,730

5½% Senior Subordinated Notes due 2022
 
—

 
314,662

 
—

 
—

 
314,662

 
218,690

4⅝% Senior Subordinated Notes due 2023
 
—

 
—

 
307,978

 
—

 
307,978

 
194,365


See Note 4, Long-Term Debt, to the Unaudited Condensed Consolidated Financial Statements for details regarding our long-term debt.

Commodity Derivative Contracts

We enter into oil derivative contracts to provide an economic hedge of our exposure to commodity price risk associated with anticipated future oil production and to provide more certainty to our future cash flows.  We do not hold or issue derivative financial instruments for trading purposes.  Generally, these contracts have consisted of various combinations of price floors, collars, three-way collars, fixed-price swaps, fixed-price swaps enhanced with a sold put, and basis swaps.  The production that we hedge has varied from year to year depending on our levels of debt, financial strength, and expectation of future commodity prices.  In order to provide a level of price protection to a portion of our oil production, we have hedged a portion of our estimated oil production through 2020 using both NYMEX and LLS fixed-price swaps and three-way collars. Depending on market conditions, we may continue to add to our existing 2019 and 2020 hedges. See also Note 5, Commodity Derivative Contracts, and Note 6, Fair Value Measurements, to the Unaudited Condensed Consolidated Financial Statements for additional information regarding our commodity derivative contracts.

All of the mark-to-market valuations used for our commodity derivatives are provided by external sources.  We manage and control market and counterparty credit risk through established internal control procedures that are reviewed on an ongoing basis.  We attempt to minimize credit risk exposure to counterparties through formal credit policies, monitoring procedures and diversification.  All of our commodity derivative contracts are with parties that are lenders under our senior secured bank credit facility (or affiliates of such lenders).  We have included an estimate of nonperformance risk in the fair value measurement of our commodity derivative contracts, which we have measured for nonperformance risk based upon credit default swaps or credit spreads.

For accounting purposes, we do not apply hedge accounting treatment to our commodity derivative contracts.  This means that any changes in the fair value of these commodity derivative contracts will be charged to earnings instead of charging the effective portion to other comprehensive income and the ineffective portion to earnings.

At March 31, 2019, our commodity derivative contracts were recorded at their fair value, which was a net asset of $5.7 million, a $91.6 million decrease from the $97.3 million net asset recorded at December 31, 2018.  These changes are primarily related to the expiration of commodity derivative contracts during the three months ended March 31, 2019, new commodity derivative


33

Denbury Resources Inc.

contracts entered into during 2019 for future periods, and to the changes in oil futures prices between December 31, 2018 and March 31, 2019.

Commodity Derivative Sensitivity Analysis

Based on NYMEX and LLS crude oil futures prices as of March 31, 2019, and assuming both a 10% increase and decrease thereon, we would expect to receive or make payments on our crude oil derivative contracts as shown in the following table:
 
 
Receipt / (Payment)
In thousands
 
Crude Oil Derivative Contracts
Based on:
 
 
Futures prices as of March 31, 2019
 
$
872

10% increase in prices
 
(35,780
)
10% decrease in prices
 
69,387


Our commodity derivative contracts are used as an economic hedge of our exposure to commodity price risk associated with anticipated future production.  As a result, changes in receipts or payments of our commodity derivative contracts due to changes in commodity prices as reflected in the above table would be mostly offset by a corresponding increase or decrease in the cash receipts on sales of our oil production to which those commodity derivative contracts relate.




34

Denbury Resources Inc.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures.  As of the end of the period covered by this report, an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) was performed under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer.  Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of March 31, 2019, to ensure that information that is required to be disclosed in the reports the Company files and submits under the Securities Exchange Act of 1934 is recorded, that it is processed, summarized and reported within the time periods specified in the SEC’s rules and forms; and that information that is required to be disclosed under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.

Evaluation of Changes in Internal Control over Financial Reporting. Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, we have determined that, during the first quarter of fiscal 2019, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.



35

Denbury Resources Inc.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

We are involved in various lawsuits, claims and regulatory proceedings incidental to our businesses. While we currently believe that the ultimate outcome of these proceedings, individually and in the aggregate, will not have a material adverse effect on our business or finances, litigation is subject to inherent uncertainties. We accrue for losses from litigation and claims if we determine that a loss is probable and the amount can be reasonably estimated.

Riley Ridge Helium Supply Contract Claim

As part of our 2010 and 2011 acquisitions of the Riley Ridge Unit and associated gas processing facility that was under construction, the Company assumed a 20-year helium supply contract under which we agreed to supply the helium separated from the full well stream by operation of the gas processing facility to a third-party purchaser, APMTG Helium, LLC (“APMTG”). The helium supply contract provides for the delivery of a minimum contracted quantity of helium, with liquidated damages payable if specified quantities of helium are not supplied in accordance with the terms of the contract. The liquidated damages are specified in the contract at up to $8.0 million per contract year and are capped at an aggregate of $46.0 million over the term of the contract.

As the gas processing facility has been shut-in since mid-2014 due to significant technical issues, we have not been able to supply helium under the helium supply contract. In a case filed in November 2014 in the Ninth Judicial District Court of Sublette County, Wyoming, APMTG claimed multiple years of liquidated damages for non-delivery of volumes of helium specified under the helium supply contract. The Company claimed that its contractual obligations were excused by virtue of events that fall within the force majeure provisions in the helium supply contract.

On March 11, 2019, the trial court entered a final judgment that a force majeure condition did exist, but the Company’s performance was excused by the force majeure provisions of the contract for only a 35-day period in 2014, and as a result the Company should pay APMTG liquidated damages and interest thereon for those time periods from contract commencement to the close of evidence (November 29, 2017) when the Company’s performance was not excused as provided in the contract.

The Company’s position continues to be that its contractual obligations have been and continue to be excused by events that fall within the force majeure provisions in the helium supply contract. On April 5, 2019, the Company filed a motion for amendment of judgment with the trial court requesting that the trial court amend certain of its findings of fact and conclusions of law with respect to the Company’s claims that a force majeure event excused the Company’s performance for a specified period of time after contract commencement. The Company intends to continue to vigorously defend its position and pursue all of its rights, including its right to appeal any portion of the trial court’s ruling to the Wyoming Supreme Court, the timing and results of which cannot be predicted at this time.

Subject to the Company’s motion for amendment of judgment, and absent reversal of the trial court’s factual or legal conclusions on appeal (the timing of which is currently unpredictable), the Company anticipates total liquidated damages would equal the $46.0 million aggregate cap under the helium supply contract (including $14.2 million of liquidated damages for the contract years ending July 31, 2018 and July 31, 2019) plus $3.8 million of associated costs through March 31, 2019, for a total of $49.8 million, which the Company has included in “Other liabilities” in our Unaudited Condensed Consolidated Balance Sheets as of March 31, 2019.

Environmental Protection Agency Matter Concerning Certain Fields

The Company previously entered into a series of tolling agreements with the Environmental Protection Agency (“EPA”), and has been in discussions with the agency over the past several years regarding the EPA’s contention that it has causes of action under the Clean Water Act (“CWA”) related to releases (principally between 2008 and 2013) of oil and produced water containing small amounts of oil in the Citronelle Field in southern Alabama and several fields in Mississippi. The EPA has taken the position that these releases were in violation of the CWA.

In April 2019, the discussions concluded and the parties reached agreement on a proposed Consent Decree among the Company, the United States, and the State of Mississippi resolving the allegations of CWA violations. The proposed Consent Decree was lodged in U.S. District Court in Mississippi for a 30-day public comment period and will become effective only upon the District Court entering the Consent Decree as a judgment of the court. If approved, the Consent Decree would require the Company to


36

Denbury Resources Inc.

pay civil penalties totaling $3.5 million in the aggregate to the United States and the State of Mississippi, to implement enhancements to the Company’s mechanical integrity program designed to minimize the occurrence and impact of any future releases at the Mississippi fields, and to perform other relief such as enhanced training and reporting requirements with respect to the Mississippi fields.

Item 1A. Risk Factors

Please refer to Item 1A of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018. There have been no material changes to our risk factors contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018.



37

Denbury Resources Inc.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Issuer Purchases of Equity Securities

The following table summarizes purchases of our common stock during the first quarter of 2019:
Month
 
Total Number of Shares Purchased(1)
 
Average Price Paid per Share
 
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans or Programs
 
Approximate Dollar
Value of Shares
that May Yet Be
Purchased Under the Plans or Programs
(in millions)(2)
January 2019
 
8,758

 
$
2.13

 
—

 
$
210.1

February 2019
 
671

 
1.96

 
—

 
210.1

March 2019
 
522,065

 
2.05

 
—

 
210.1

Total
 
531,494

 
 

—

 



(1)
Shares purchased during the first quarter of 2019 were made in connection with the surrender of shares by our employees to satisfy their tax withholding requirements related to the vesting of restricted and performance shares.

(2)
In October 2011, we commenced a common share repurchase program, which has been approved for up to an aggregate of $1.162 billion of Denbury common shares by the Company’s Board of Directors. This program has effectively been suspended and we do not anticipate repurchasing shares of our common stock in the near future. The program has no pre-established ending date and may be suspended or discontinued at any time. We are not obligated to repurchase any dollar amount or specific number of shares of our common stock under the program.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

None.

Item 5. Other Information

None.



38

Denbury Resources Inc.

Item 6. Exhibits

Exhibit No.
 
Exhibit
10(a)*
 
10(b)*
 

10(c)*
 

10(d)*
 

10(e)*
 
31(a)*
 
 
31(b)*
 
 
32*
 
 
101*
 
Interactive Data Files.


*
Included herewith.


39

Denbury Resources Inc.

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.
 
 
 
May 9, 2019
 
/s/ Mark C. Allen
 
 
Mark C. Allen
Executive Vice President and Chief Financial Officer
 
 
 
May 9, 2019
 
/s/ Alan Rhoades
 
 
Alan Rhoades
Vice President and Chief Accounting Officer



40