<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
---------
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 33-93722
- --------------------------------------------------------------------------------
DENBURY RESOURCES INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CANADA NOT APPLICABLE
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
17304 PRESTON RD., SUITE 200 75252
DALLAS, TX (Zipcode)
(Address of principal executive offices)
Registrant's telephone number, including area code: (214)713-3000
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
------ ------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
CLASS OUTSTANDING AT NOVEMBER 1, 1996
----- -------------------------------
Common Stock, no par value 20,038,269
<PAGE> 2
DENBURY RESOURCES INC.
INDEX
<TABLE>
<CAPTION>
Part I. Financial Information
Page
<S> <C>
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets 3
Consolidated Statements of Income 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-15
Part II. Other Information 16
</TABLE>
2
<PAGE> 3
DENBURY RESOURCES INC.
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands of U.S. Dollars)
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------ -----------
ASSETS (Unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 6,611 $ 6,553
Accrued production receivable 7,600 3,212
Trade and other receivables 2,793 1,160
----------- -----------
Total current assets 17,004 10,925
----------- -----------
PROPERTY AND EQUIPMENT (USING FULL COST ACCOUNTING)
Oil and gas properties 145,341 72,510
Unevaluated oil and gas properties 7,258 7,085
Less accumulated depreciation and depletion (26,180) (13,982)
----------- -----------
Net property and equipment 126,419 65,613
----------- -----------
OTHER ASSETS 2,238 1,103
----------- -----------
TOTAL ASSETS $ 145,661 $ 77,641
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 16,899 $ 3,886
Current portion of long-term debt 87 177
----------- -----------
Total current liabilities 16,986 4,063
----------- -----------
LONG-TERM LIABILITIES
Senior bank debt 45,000 75
Subordinated debt and other notes payable 1,867 3,399
Provision for site reclamation costs 369 242
Deferred income taxes and other 4,296 1,361
----------- -----------
Total long-term liabilities 51,532 5,077
----------- -----------
CONVERTIBLE FIRST PREFERRED SHARES, SERIES A
1,500,000 shares authorized; issued and
outstanding 16,153 15,000
----------- -----------
SHAREHOLDERS' EQUITY
Common shares, no par value
unlimited shares authorized;
outstanding - 11,960,299 shares at September 30, 1996
and 11,428,809 shares at December 31, 1995 53,213 50,064
Retained earnings 7,777 3,437
----------- -----------
Total shareholders' equity 60,990 53,501
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 145,661 $ 77,641
=========== ===========
</TABLE>
See accompanying notes to Consolidated Financial Statements
3
<PAGE> 4
DENBURY RESOURCES INC.
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands except per share amounts)
(Unaudited - U.S. dollars)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- -----------------------
1996 1995 1996 1995
--------- -------- --------- ---------
<S> <C> <C> <C> <C>
REVENUES
Oil, gas and related product sales $ 14,059 $ 4,818 $ 34,709 $ 13,814
Interest income 301 24 425 45
--------- -------- --------- ---------
Total revenues 14,360 4,842 35,134 13,859
--------- -------- --------- ---------
EXPENSES
Production 3,847 1,687 9,197 4,815
General and administrative 1,169 409 2,825 1,343
Interest 849 506 1,530 1,434
Imputed preferred dividends 394 - 1,153 -
Provision for loss on early extinguishment of
debt - - 440 200
Depletion and depreciation 5,175 1,932 12,557 5,007
Franchise taxes 53 20 160 62
--------- -------- --------- ---------
Total expenses 11,487 4,554 27,862 12,861
--------- -------- --------- ---------
Income before income taxes 2,873 288 7,272 998
Provision for federal income taxes 1,128 98 2,932 339
--------- -------- --------- ---------
NET INCOME $ 1,745 $ 190 $ 4,340 $ 659
========= ======== ========= =========
NET INCOME PER COMMON SHARE (1)
Primary $ 0.14 $ 0.03 $ 0.37 $ 0.10
========= ======== ========= =========
Fully diluted $ 0.13 $ 0.03 $ 0.36 $ 0.10
========= ======== ========= =========
Average number of common shares outstanding (1) 11,820 6,929 11,616 6,668
========= ======== ========= =========
</TABLE>
(1) Adjusted for a one-for-two reverse split on October 10, 1996.
See accompanying notes to Consolidated Financial Statements
4
<PAGE> 5
DENBURY RESOURCES INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
(Amounts in thousands of U.S. dollars)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1996 1995
-------- --------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net income $ 4,340 $ 659
Adjustments needed to reconcile to net cash flow provided by operations:
Depreciation, depletion and amortization 12,557 5,007
Deferred income taxes 2,932 339
Imputed preferred dividend 1,153 -
Provision for loss on early extinguishment of debt 440 200
Other 345 54
--------- --------
21,767 6,259
Changes in working capital items relating to operations:
Accrued production receivable (4,388) (458)
Trade and other receivables (659) (173)
Accounts payable and accrued liabilities 11,692 865
--------- --------
NET CASH FLOW PROVIDED BY OPERATIONS 28,412 6,493
--------- --------
CASH FLOW USED FOR INVESTING ACTIVITIES:
Oil and gas property expenditures (25,704) (8,191)
Acquisition of oil and gas properties (47,616) (6,509)
Net purchases of other assets (1,290) (289)
Acquisition of subsidiary, net of cash acquired 209 -
--------- --------
NET CASH USED FOR INVESTING ACTIVITIES (74,401) (14,989)
--------- --------
CASH FLOW FROM FINANCING ACTIVITIES:
Bank borrowings 44,900 9,150
Bank repayments - (2,100)
Issuance of subordinated debt - 1,773
Issuance of common stock 1,690 2,368
Costs of debt financing (408) (353)
Other (135) (91)
--------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 46,047 10,747
--------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 58 2,251
Cash and cash equivalents at beginning of year 6,553 712
--------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 6,611 $ 2,963
========= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest $ 1,080 $ 1,086
SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING ACTIVITIES:
Conversion of subordinated debt to common stock 1,465 -
</TABLE>
See accompanying notes to Consolidated Financial Statements
5
<PAGE> 6
DENBURY RESOURCES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 1996 AND 1995
1. ACCOUNTING POLICIES
INTERIM FINANCIAL STATEMENTS
The results of operations for the interim periods shown in this report
are not necessarily indicative of results to be expected for the fiscal year.
In the opinion of management of Denbury Resources Inc. (the "Company" or
"Denbury"), the accompanying unaudited financial statements contain all
adjustments (consisting of normal recurring accruals) necessary to present
fairly the financial position as of September 30, 1996, and the results of
operations for the three and nine months ended September 30, 1996 and 1995 and
cash flow for the nine months ended September 30, 1996 and 1995.
These financial statements and the notes thereto should be read in
conjunction with the Company's annual report on Form 10-K for the year ended
December 31, 1995.
NET INCOME PER COMMON SHARE
Primary earnings per common share is computed by dividing the net
income by the weighted average number of shares of common stock outstanding,
after adjusting for the one-for-two reverse split effective on October 10,
1996. In accordance with Canadian generally accepted accounting principles
("GAAP"), the imputed dividend on the Convertible First Preferred Shares,
Series A ("Convertible Preferred") has been recorded as an operating expense in
the accompanying financial statements and thus is deducted from net income in
computing earnings per common share. The stock options, warrants, and the
conversion of the convertible debt were included in the calculation of
fully-diluted earnings per share. The conversion of the Convertible Preferred
was anti-dilutive and was not included in either calculation of earnings per
share.
2. NOTES PAYABLE AND LONG-TERM INDEBTEDNESS
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------- ------------
(Amounts in thousands)
(Unaudited)
<S> <C> <C>
Senior bank loan $ 45,000 $ 100
6 3/4% Convertible debentures, due March 23, 1999 - 1,465
9 1/2% Convertible debentures, due January 17, 2000 1,831 1,831
Other notes payable 123 255
Less portion due within one year (87) (177)
--------- --------
Total long-term debt $ 46,867 $ 3,474
========= ========
</TABLE>
BANK CREDIT AGREEMENT
In the second quarter of 1996, the Company entered into a new $150
million credit facility with NationsBank of Texas, N.A. ("NationsBank"). As of
November 1, 1996, this facility had a borrowing base of $60 million, with an
outstanding balance of $100,000 as $47.9 million of the previous balance was
repaid with the proceeds from the equity offering completed on October 30, 1996
(See Note 4). NationsBank is the agent bank with ING Capital Corporation and
Bankers Trust as participating banks. The credit facility is a two year
revolver that converts to a three year term loan in May, 1998, unless renewed
or extended. The credit facility is secured by virtually all the Company's oil
and gas
6
<PAGE> 7
DENBURY RESOURCES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 1996 AND 1995
properties and interest will be payable at either the bank's prime rate or,
depending on the percentage of the borrowing base that is outstanding, at rates
ranging from LIBOR plus 7/8% to LIBOR plus 1 3/8%. This credit facility has
several restrictions including, among others (i) a prohibition on the payment
of dividends, (ii) a requirement for a minimum equity balance, (iii) a
requirement to maintain positive working capital as defined, and (iv) a
prohibition of most debt and corporate guarantees.
3. DIFFERENCES IN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES BETWEEN CANADA AND
THE UNITED STATES
The consolidated financial statements have been prepared in accordance
with Canadian GAAP. The primary differences between Canadian and U.S. GAAP
affecting the Company's 1996 financial statements relate to the presentation of
the early extinguishment of debt and the imputed dividend on the Convertible
Preferred. During the first nine months, the Company expensed $1,153,000
relating to the imputed preferred dividend, as required under Canadian GAAP.
Under U.S. GAAP, this dividend would be deducted after net income to compute
the net income attributable to the common shareholders. The Company also
expensed its debt issue cost relating to the Company's prior bank credit
agreement with ING Capital Corporation totaling $440,000. Under Canadian
GAAP, this is an operating expense while under U.S. GAAP, a loss on early
extinguishment of debt is an extraordinary item. While net income per common
share and all balance sheet accounts are not affected by these differences in
GAAP, the net income for the first nine months of 1996 under U.S. GAAP would be
$5,493,000 while under Canadian GAAP the amount reported was $4,340,000.
In addition, the methodology for computing earnings per common share
is not consistent between the two countries. Under U.S. GAAP, the primary and
fully-diluted earnings for the third quarter of 1996 would both be $.14 per
common share while the primary and fully-diluted earnings per common share for
the nine months ended September 30, 1996 would be $.36 and $.35 per common
share respectively.
4. CAPITALIZATION ADJUSTMENTS
During the third quarter of 1996, the Company issued 187,500 Common
Shares for the conversion of the remaining 6 3/4% Convertible Debentures of the
Company and 75,000 Common Shares for the exercise of half of the Cdn. $8.40
Warrants. On October 10, 1996, the Company effected a one-for-two reverse
split of its outstanding Common Shares. Effective October 15, 1996, all of the
Company's outstanding 9 1/2% Convertible Debentures ("Debentures") were
converted by their holders in accordance with their terms into 308,642 Common
Shares. The holders of the Debentures also received an additional 7,948 Common
Shares in lieu of interest which would have been due the holders absent an
early conversion of the Debentures. At a special meeting held on October 9,
1996 the shareholders of the Company approved an amendment to the terms of the
Convertible Preferred to allow the Company to require the conversion of the
Convertible Preferred at any time, provided that the conversion rate in effect
as of January 1, 1999 would apply to any required conversion prior to that
date. The Company converted all of the 1,500,000 shares of Convertible
Preferred simultaneously with the closing of its equity offering (see below) on
October 30, 1996 into 2,816,372 Common Shares. Giving effect to the issuance
of Common Shares for the Debentures and the conversion of the Convertible
Preferred (collectively, the "Capitalization Adjustments"), as of September 30,
1996 an additional 3,132,962 Common Shares would have been outstanding.
EQUITY OFFERING
On October 30, 1996, the Company closed on a 4.4 million public
offering of Common Shares at $12.875 per share with net proceeds to the Company
of approximately $52.5 million after underwriting discounts and estimated
expenses. The Texas Pacific Group, a significant shareholder of the Company,
purchased 800,000 of these shares at a price equal to the public price per
share less underwriting discounts and commissions. On November 1, 1996, the
Company closed on an additional 540,000 shares relating to the underwriters
over-allotment option, with additional net proceeds to the Company of
approximately $6.5 million.
7
<PAGE> 8
DENBURY RESOURCES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
SEPTEMBER 30, 1996 AND 1995
5. COMMITMENTS AND CONTINGENCIES
The Company has operating leases for the rental of office space,
office equipment, and vehicles. At September 30, 1996, long-term commitments
for these items require the following future minimum rental payments:
<TABLE>
<S> <C>
1996 $242,000
1997 428,000
1998 409,000
1999 166,000
----------
$1,245,000
==========
</TABLE>
The Company is subject to various possible contingencies which arise
primarily from interpretation of federal and state laws and regulations
affecting the oil and gas industry. Such contingencies include differing
interpretations as to the prices at which oil and gas sales may be made, the
prices at which royalty owners may be paid for production from their leases and
other matters. Although management believes it has complied with the various
laws and regulations, administrative rulings and interpretations thereof,
adjustments could be required as new interpretations and regulations are
issued. In addition, production rates, marketing and environmental matters are
subject to regulation by various federal and state agencies.
The Company is not currently a party to any litigation which would
have a material impact on its financial statements. However, due to the nature
of its business, certain legal or administrative proceedings may arise in the
ordinary course of its business.
8
<PAGE> 9
DENBURY RESOURCES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Denbury is an independent energy company engaged in acquisition,
development and exploration activities in the U.S. Gulf Coast region. Since
1993, after having disposed of its Canadian oil and natural gas properties, the
Company has focused its operations primarily onshore in Louisiana and
Mississippi. Over the last three years, the Company has achieved rapid growth
in proved reserves, production and cash flow by concentrating on the
acquisition of properties which it believes have significant upside potential
and through the efficient development, enhancement and operation of those
properties.
CAPITALIZATION ADJUSTMENTS
During the third quarter of 1996, the Company issued 187,500 Common
Shares for the conversion of the remaining 6 3/4% Convertible Debentures of the
Company and 75,000 Common Shares for the exercise of half of the Cdn. $8.40
Warrants ("Warrants"). On October 10, 1996, the Company effected a one-for-two
reverse split of its outstanding Common Shares. Effective October 15, 1996,
all of the Company's outstanding 9 1/2% Convertible Debentures ("Debentures")
were converted by their holders in accordance with their terms into 308,642
Common Shares. The holders of the Debentures also received an additional 7,948
Common Shares in lieu of interest which would have been due the holders absent
an early conversion of the Debentures. At a special meeting held on October 9,
1996 the shareholders of the Company approved an amendment to the terms of the
Convertible Preferred to allow the Company to require the conversion of the
Convertible Preferred at any time, provided that the conversion rate in effect
as of January 1, 1999 would apply to any required conversion prior to that
date. The Company converted all of the 1,500,000 shares of Convertible
Preferred simultaneously with the closing of its equity offering (see below) on
October 30, 1996 into 2,816,372 Common Shares. Giving effect to the issuance
of Common Shares for the Debentures and the conversion of the Convertible
Preferred (collectively the "Capitalization Adjustments"), as of September 30,
1996 an additional 3,132,962 Common Shares would have been outstanding.
EQUITY OFFERING
On October 30, 1996, the Company closed on a 4.4 million public
offering of Common Shares (the "Offering") at $12.875 per share with net
proceeds to the Company of approximately $52.5 million after underwriting
discounts and estimated expenses. The Texas Pacific Group, a significant
shareholder of the Company, purchased 800,000 of these shares at $12.035 per
share which is equal to the public price per share less underwriting discounts
and commissions. On November 1, 1996, the Company closed on an additional
540,000 shares relating to the underwriters over-allotment option, with
additional net proceeds to the Company of approximately $6.5 million.
The following table is a pro forma presentation of the Company's
capitalization as of November 1, 1996, solely to show the effect of the
Capitalization Adjustments and the Offering.
<TABLE>
<CAPTION>
September 30, November 1,
1996 1996
------------------------------
Actual Pro forma
------------ ----------
(Dollars in thousands)
<S> <C> <C>
Working Capital $ 18 $ 12,000
========= =========
Long-term debt:
Revolving bank loan $ 45,000 -
Convertible debentures 1,831 -
Other notes payable 36 36
--------- ---------
Total long-term debt 46,867 36
--------- ---------
</TABLE>
9
<PAGE> 10
DENBURY RESOURCES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
September 30, November 1,
1996 1996
------------ -----------
Actual Pro forma
------------ -----------
(Dollars in thousands)
<S> <C> <C>
Convertible First Preferred Shares, Series A
1,500,000 authorized; $10 par value; 1,500,000 and
-0- shares outstanding, respectively 16,153 -
---------- ----------
Shareholders' equity:
Common Shares, no par value; unlimited shares
authorized; 11,960,299 and 20,038,269 outstanding,
respectively 53,213 128,319
Retained earnings 7,777 7,777
---------- ----------
Total shareholders' equity 60,990 136,096
---------- ----------
Total capitalization $ 124,010 $ 136,132
========== ==========
</TABLE>
ACQUISITION OF HESS PROPERTIES
The Company completed several property acquisitions during the first half
of 1996, the largest of which was the acquisition of producing oil and natural
gas properties in Mississippi, Louisiana, and Alabama, plus certain overriding
royalty interests in Ohio, for approximately $36.7 million from Amerada Hess,
effective May 1, 1996 (the "Hess Acquisition"). The average daily production
from the properties included in the Hess Acquisition from May 1 through
September 30, 1996 was approximately 4.6 MMcf/d and 1,952 Bbls/d, which
increased the Company's average daily production during the first nine months
of 1996 by approximately 2.6 MMcf/d and 1,090 Bbls/d, or 1,523 BOE/d. As of
July 1, 1996, the properties in this acquisition had estimated net proved
reserves of approximately 5.9 MMBOE which consisted of approximately 5.0 MMBbls
and approximately 5.6 Bcf, with a PV10 Value of $43.1 million. Approximately
90% of the PV10 Value was for wells on which Denbury assumed operations with an
average working interest of approximately 80%.
OTHER ACQUISITIONS
In addition to the Hess Acquisition, during the first nine months of 1996
the Company completed other acquisitions totaling $10.9 million. The largest
of these was the Ottawa Acquisition, an acquisition of additional working
interests in five Mississippi oil and natural gas properties in which the
Company already owned an interest, plus certain overriding royalty interests in
other areas, which were acquired during April 1996 for approximately $7.5
million. The average daily production from the Ottawa Acquisition during the
second and third quarters of 1996 was approximately 2.0 MMcf/d and 400 Bbls/d,
which increased the Company's average daily production during the first nine
months of 1996 by approximately 1.3 MMcf/d and 270 Bbls/d, or 490 BOE/d.
In addition to the Ottawa Acquisition, the Company spent an additional $3.4
million on four other acquisitions, primarily in Louisiana. These properties
contributed approximately 1.4 MMcf/d and 50 Bbls/d, or 280 BOE/d, to the
Company's average daily production during the first nine months of 1996. As of
July 1, 1996, the Company's estimated net proved reserves for all of these
other acquisitions, including the Ottawa Acquisition, totaled approximately 1.1
MMBbls and 13.1 Bcf or 3.3 MMBOE, with a PV10 Value of $24.1 million.
10
<PAGE> 11
DENBURY RESOURCES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
NEW CREDIT FACILITY
In order to fund these acquisitions, improve the terms and increase the
size of its previous credit facility, the Company entered into the new $150.0
million Credit Facility. This refinancing closed during the second quarter of
1996 and has a borrowing base as of November 1, 1996 of $60.0 million. With
the proceeds from the Offering, the Company repaid $47.9 million of this
indebtedness on October 30, 1996, reducing the outstanding balance to $100,000.
The Credit Facility is a two-year revolving credit facility that converts to a
three-year term loan in May 1998, unless renewed or extended. The Credit
Facility is secured by virtually all the Company's oil and natural gas
properties and interest is payable at either the bank's prime rate or,
depending on the percentage of the borrowing base that is outstanding, at rates
ranging from LIBOR plus 7/8% to LIBOR plus 1 3/8%. The Credit Facility has
several restrictions including, among others: (i) a prohibition on the payment
of dividends, (ii) a requirement for a minimum equity balance, (iii) a
requirement to maintain positive working capital as defined and (iv) a
prohibition of most debt and corporate guarantees.
CAPITAL RESOURCES AND LIQUIDITY
As outlined in the following table, in each of the last three years and
during the first nine months of 1996, the Company made capital expenditures
which required additional debt and equity capital to supplement cash flow from
operations.
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended December 31, September 30,
1993 1994 1995 1996
--------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Acquisitions of oil and natural gas
properties . . . . . . . . . . $ 20,076 $ 6,606 $ 16,763 $ 47,616
Oil and natural gas expenditures . 9,779 10,297 11,761 25,704
--------- -------- -------- --------
Total . . . . . . . . . . $ 29,855 $ 16,903 $ 28,524 $ 73,320
========= ======== ======== ========
</TABLE>
Since January 1, 1993, the Company has made total capital expenditures
of $148.6 million, which were primarily financed with equity ($59.8 million,
including the Convertible Preferred), debt ($48.2 million) and cash from
operations ($40.4 million). During 1995, the Company's sources of capital,
other than cash flow from operations, were a $1.8 million issue of subordinated
debt, a $2.4 million private placement of Common Shares and the $39.5 million,
net of expenses, TPG Placement in December 1995. To date during 1996, the
Company's funds were provided by the Offering and operating cash flow, with
interim financing provided by bank debt. The Company began the year with
$100,000 of outstanding bank debt, borrowed $47.9 million during the year and
repaid $47.9 million on October 30, 1996 with the proceeds from the Offering.
Although the Company only had working capital of $18,000 as of
September 30, 1996, as a result of the proceeds from the Offering, the Company
had working capital of approximately $12 million and total bank debt of
$100,000 as of November 1, 1996. In addition, the Company has a virtually
unused borrowing base of $60.0 million as of November 1, 1996. With the
increased cash flow from the recently acquired properties and the undrawn
portion of the Credit Facility, the Company anticipates that it can fund its
development budget for the remainder of 1996 and 1997 of approximately $60
million and meet its obligations in the foreseeable future. If external
capital resources are limited or reduced in the future, the Company can adjust
its development expenditure program accordingly. However, such adjustments
could limit, or even eliminate, the Company's future growth.
In addition to its development program, the Company has historically
required capital for the acquisition of producing properties, which have been a
major factor in the Company's rapid growth during recent years. The amount of
11
<PAGE> 12
DENBURY RESOURCES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
capital required for these potential acquisitions is highly variable and
difficult to predict. There can be no assurance that suitable acquisitions
will be identified in the future or that any such acquisitions will be
successful in achieving desired profitability objectives. Without suitable
acquisitions or the capital to fund such acquisitions, the Company's future
growth could be limited or even eliminated.
SOURCES AND USES OF FUNDS
During the first nine months of 1996, the Company spent approximately
$22.9 million on oil and natural gas development expenditures, $48.0 million on
the previously discussed oil and natural gas acquisitions, and approximately
$3.0 million on geological, geophysical and acreage expenditures. The
development expenditures included $11.6 million spent on drilling and the
balance of $11.1 million spent on workover costs. These expenditures were
funded by bank debt, available cash and cash flow from operations.
RESULTS OF OPERATIONS
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1996 AND SEPTEMBER 30, 1995
Denbury continued to increase its daily production with an average of
5,453 BOE/d during the first quarter of 1996, 7,841 BOE/d during the second
quarter, and 9,208 BOE/d during the third quarter, for an overall average of
7,507 BOE/d during the first nine months of 1996 as compared to 3,917 BOE/d for
the comparable nine month period of 1995 (92% increase). The combination of
the Hess and Ottawa Acquisitions contributed approximately 2,013 BOE/d to the
Company's average daily production during the first nine months of 1996. The
production from these two acquisitions for the first nine months of 1996,
including the periods when they were not owned by the Company, was
approximately 3,800 BOE/d. In addition, the properties in the Gibson area
acquired in the fourth quarter of 1995 ("Gibson Acquisition") contributed
approximately 994 BOE/d to the Company's average daily production during the
first nine months of 1996, with the balance of the increase, 583 BOE/d,
primarily attributable to the Company's development and exploitation program.
In addition, oil and natural gas prices improved substantially over
1995 levels during the first nine months of 1996. Average oil prices were
$18.05 per Bbl as compared to $14.87 per Bbl for the comparable period in 1995
(21% increase) and natural gas prices increased to an average price of $2.64
per Mcf during the first nine months of 1996 as compared to $1.84 for the
comparable period in 1995 (43% increase). The Company averaged a sales price
of $16.87 per BOE during the first nine months of 1996 as compared to $12.92
per BOE during the first nine months of 1995 (31% increase).
As a result of the aforementioned production and price increases and
property acquisitions, oil and natural gas revenue increased 151% to $34.7
million during the first nine months of 1996 from $13.8 million for the first
nine months of 1995. Approximately $9.2 million of the increase was related to
the Hess and Ottawa Acquisitions, approximately $4.5 million to the Gibson
Acquisition, approximately $5.0 million to the increase in product prices, and
the balance due to an increase in production as a result of development and
other acquisition activities. Production expenses also increased 91% to $9.2
million during the first nine months of 1996 as compared to $4.8 million for
the comparable period in 1995. Production expenses on a BOE basis were $4.47
and $4.50 for the first nine months of 1996 and 1995 respectively, a decline of
1% from first nine months of 1995 levels. The first quarter of 1996 operating
expenses were slightly less on a BOE basis because a larger percentage of the
first quarter's production was natural gas (62% on a BOE basis), which
typically has a lower operating cost per BOE than oil. However, the second
quarter and third quarters included five months of operating expenses relating
to the Hess Acquisition which had an average production cost of $5.36 per BOE.
In July 1996, the Company assumed operations of these Hess Acquisition
properties and will focus on lowering the production costs during the balance
of 1996 and 1997 to levels more consistent with the Company's average.
12
<PAGE> 13
DENBURY RESOURCES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General and administrative expenses increased by 110% to $2.8 million
for the first nine months of 1996 from $1.3 million for the comparable period
in 1995. On a per BOE basis, general and administrative costs increased
slightly to $1.45 per BOE for the first nine months of 1996 as compared to
$1.32 per BOE for the comparable period in 1995. During the first quarter of
1996, the Company conducted a review of salaries and awarded raises and bonuses
to its employees. Bonuses, including related payroll taxes, amounted to
approximately $225,000. In addition, the Company significantly increased its
staff levels during the second and third quarters of 1996 to handle the Hess
Acquisition and used significant contract labor to assist in the conversion of
data and records. The Company was not, however, entitled to any operator's
overhead recovery on these properties until July 15, 1996 as Amerada Hess
remained the operator of record until that date. During the first nine months
of 1995, the Company had non-recurring expenses of approximately $190,000
relating to personnel changes.
As a result of the $39.5 million TPG Placement and the corresponding
retirement of bank debt, the only interest-bearing debt outstanding during the
first quarter of 1996 was approximately $3.3 million of subordinated debt and
minor trade notes payable. During the second and third quarters, however, the
Company borrowed $44.9 million on its Credit Facility primarily for the Hess
and Ottawa Acquisitions. The net effect was an overall 7% increase in
interest expense to $1.5 million for the first nine months of 1996, from $1.4
million for the comparable period of 1995.
During the first nine months of 1996, the Company expensed $1,153,000
relating to an imputed dividend on the Convertible Preferred. Under Canadian
GAAP this is reported as an operating expense, while under U.S. GAAP this would
be deducted from net income to arrive at net income applicable to the common
shareholders. This charge to earnings reflects the increase in the mandatory
redemption value of the Convertible Preferred during the period. The
Convertible Preferred was converted into Common Shares on October 30, 1996
simultaneously with the closing of the Offering.
Also during the first nine months of 1996, the Company had a $440,000
charge relating to a loss on early extinguishment of debt. These costs relate
to the remaining unamortized debt issue costs of the Company's prior credit
facility with ING Capital Corporation, which was replaced in May 1996 with the
current Credit Facility, as previously discussed. The Company also had a
charge of $200,000 during the first nine months of 1995 for the same item
relating to another bank refinancing. Under U.S. GAAP, a loss on early
extinguishment of debt would be an extraordinary item rather than a normal
operating expense as required by Canadian GAAP.
DD&A increased by 151% to $12.6 million for the first nine months of
1996 as compared to $5.0 million for the first nine months of 1995. DD&A per
BOE increased 17% to $6.10 per BOE for the first nine months of 1996 from
$5.22 per BOE for the year ended December 31, 1995 due to a large percentage of
the 1995 and 1996 capital expenditures being related to acquisitions, which
have had a higher per unit cost for the Company than those reserves added by
development.
The deferred tax provision for the first nine months of 1996 was
approximately 40%, which is higher than the U.S. statutory rate due to certain
non-deductible Canadian expenses and the non-deductible imputed preferred
dividend expense of $1,153,000. The Company did not have a current tax
provision as it generated a loss for federal income tax purposes.
Primarily as a result of increased production and improved product
prices, net income increased 559% to $4.3 million ($0.37 per common share) for
the first nine months of 1996 from $659,000 ($0.10 per common share) during the
first nine months of 1995. Cash flow from operations (before the change in
non-cash working capital balances) also increased 248% to $21.8 million during
the first nine months of 1996 from $6.3 million during the first nine months of
1995, also primarily due to strong oil and natural gas prices as well as
increased production.
13
<PAGE> 14
DENBURY RESOURCES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 1996 AND SEPTEMBER 30, 1995
As discussed, the Company continued to increase its daily production
with an average of 9,208 BOE/d during the third quarter as compared to 4,062
BOE/d for the comparable three month period of 1995 (127% increase). The
combination of the Hess and Ottawa Acquisitions contributed approximately 3,442
BOE/d to the Company's average daily production during the third quarter of
1996. In addition, the properties in the Gibson area acquired in the fourth
quarter of 1995 ("Gibson Acquisition") contributed approximately 906 BOE/d to
the Company's average daily production during the third quarter of 1996, with
the balance of the increase, 798 BOE/d, primarily attributable to the Company's
development and exploitation program.
In addition, oil and natural gas prices improved substantially over
1995 levels during the third quarter of 1996. Average oil prices were $18.84
per Bbl as compared to $14.78 per Bbl for the comparable period in 1995 (27%
increase) and natural gas prices increased to an average price of $2.36 per Mcf
during the third quarter of 1996 as compared to $1.82 for the comparable period
in 1995 (30% increase). The Company averaged a sales price of $16.59 per BOE
during the third quarter of 1996 as compared to $12.89 per BOE during the third
quarter of 1995 (29% increase).
As a result of the aforementioned production and price increases and
property acquisitions, oil and natural gas revenue increased 192% to $14.1
million during the third quarter of 1996 from $4.8 million for the third
quarter of 1995. Approximately $5.4 million of the increase was related to the
Hess and Ottawa Acquisitions, approximately $1.2 million to the Gibson
Acquisition, approximately $1.6 million to the increase in product prices, and
the balance due to an increase in production as a result of development and
other acquisition activities. Production expenses also increased 128% to $3.8
million during the third quarter of 1996 as compared to $1.7 million for the
comparable period in 1995. Production expenses on a BOE basis were $4.54 and
$4.51 for the third quarter of 1996 and 1995 respectively, an increase of 1%
from third quarter 1995 levels. The 1996 operating expenses included
properties from the Hess Acquisition which had an average production cost
during the quarter of $4.88 per BOE. In July 1996, the Company assumed
operations of these Hess Acquisition properties and will focus on lowering the
production costs during the balance of 1996 and 1997 to levels more consistent
with the Company's average.
General and administrative expenses increased by 186% to $1.2 million
for the third quarter of 1996 from $409,000 for the comparable period in 1995.
On a per BOE basis, general and administrative costs increased to $1.44 per
BOE for the third quarter of 1996 as compared to $1.09 per BOE for the
comparable period in 1995. The Company significantly increased its staff
levels during the second and third quarters of 1996 to handle the Hess
Acquisition and also used significant contract labor to assist in the
conversion of data and records, increasing the general overhead cost per BOE.
During the second and third quarters of 1996 the Company borrowed
$44.9 million on its Credit Facility primarily for the Hess and Ottawa
Acquisitions, increasing the outstanding bank debt to $45 million as of
September 30, 1996. In comparison, the bank debt as of September 30,1995 was
$22 million. The net effect was an overall 68% increase in interest expense to
$849,000 for the third quarter of 1996, from $506,000 for the comparable period
of 1995.
During the third quarter of 1996, the Company expensed $394,000
relating to an imputed dividend on the Convertible Preferred. Under Canadian
GAAP this is reported as an operating expense, while under U.S. GAAP this would
be deducted from net income to arrive at net income applicable to the common
shareholders. This charge to earnings reflects the increase in the mandatory
redemption value of the Convertible Preferred during the period. The
Convertible Preferred was converted into Common Shares on October 30, 1996
simultaneously with the closing of the Offering.
DD&A increased by 168% to $5.2 million for the third quarter of 1996
as compared to $1.9 million for the third quarter of 1995. DD&A per BOE
increased 17% to $6.10 per BOE for the third quarter of 1996 from $5.22 per BOE
for the year ended December 31, 1995 due to a large percentage of the 1995 and
1996 capital expenditures relating to
14
<PAGE> 15
DENBURY RESOURCES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
acquisitions, which have had a higher per unit cost for the Company than those
reserves added by development expenditures.
The deferred tax provision for the third quarter of 1996 was
approximately 39%, which is higher than the U.S. statutory rate due to certain
non-deductible Canadian expenses and the non-deductible imputed preferred
dividend expense of $394,000. The Company did not have a current tax provision
as it generated a loss for federal income tax purposes.
Primarily as a result of increased production and improved product
prices, net income increased 818% to $1.7 million ($0.14 per common share) for
the third quarter of 1996 from $190,000 ($0.03 per common share) during the
third quarter of 1995. Cash flow from operations (before the change in
non-cash working capital balances) also increased 279% over first nine month
1995 levels to $8.5 million during the third quarter of 1996 from $2.2 million
during the third quarter of 1995, also primarily due to strong oil and natural
gas prices and increased production.
FORWARD-LOOKING INFORMATION
The statements contained in this Quarterly Report on Form 10-Q
("Quarterly Report") that are not historical facts, including, but not limited
to, statements found in this "Management's Discussion and Analysis of Financial
Condition and Results of Operations", are forward-looking statements, as that
term is defined in Section 21E of the Securities and Exchange Act of 1934, as
amended, that involve a number of risks and uncertainties. The actual results
of the future events described in such forward-looking statements in this
Quarterly Report, including those regarding the Company's financial results,
levels of oil and gas production and revenue, capital expenditures and capital
resource activities, could differ materially from those stated in such
forward-looking statements. Among the factors that could cause actual results
to differ materially are: general economic conditions, competition and
government regulations, as well as the risks and uncertainties set forth from
time to time in the Company's other public reports, filings and public
statements.
15
<PAGE> 16
DENBURY RESOURCES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K DURING THE THIRD QUARTER OF 1996
27. Financial Data Schedule
16
<PAGE> 17
DENBURY RESOURCES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DENBURY RESOURCES INC.
By: /s/ Phil Rykhoek
--------------------------------------
Phil Rykhoek
Chief Financial Officer and Authorized
Signatory for the Registrant
Date: November 12, 1996
17
<PAGE> 18
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
27 - Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE DENBURY
RESOURCES INC. SEPTEMBER 30, 1996 FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 6,611
<SECURITIES> 0
<RECEIVABLES> 10,393
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 17,004
<PP&E> 152,599
<DEPRECIATION> (26,180)
<TOTAL-ASSETS> 145,661
<CURRENT-LIABILITIES> 16,986
<BONDS> 1,831
16,153
0
<COMMON> 53,213
<OTHER-SE> 7,777
<TOTAL-LIABILITY-AND-EQUITY> 60,990
<SALES> 34,709
<TOTAL-REVENUES> 35,134
<CGS> 0
<TOTAL-COSTS> 24,739
<OTHER-EXPENSES> 1,593
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,530
<INCOME-PRETAX> 7,272
<INCOME-TAX> 2,932
<INCOME-CONTINUING> 4,340
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,340
<EPS-PRIMARY> .37
<EPS-DILUTED> .36
</TABLE>
