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, 1997
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 (I.R.S. Employer
jurisdiction of Identification No.)
incorporation or
organization)
17304 Preston Rd.,
Suite 200 75252
Dallas, TX (Zipcode)
(Address of principal
executive offices)
Registrant's telephone number,
including area code: (972)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 October 31, 1997
--------- -------------------------------
Common Stock, no par value 20,365,699
<PAGE>
DENBURY RESOURCES INC.
INDEX
Part I. Financial Information
Page
Consolidated Balance Sheets, September 30, 1997
(Unaudited) and December 31, 1996 3
Consolidated Statements of Income for the three
and nine months ended September 30, 1997 and 1996 (Unaudited) 4
Consolidated Statements of Cash Flows for the
nine months ended September 30, 1997 and 1996 (Unaudited) 5
Notes to Consolidated Financial Statements 6-8
Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-15
Part II. Other Information
Exhibits and Reports on Form 8-K 16
Signatures 17
2
<PAGE>
DENBURY RESOURCES INC.
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands of U.S. Dollars)
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
---------- ---------
(Unaudited)
Assets
<S> <C> <C>
Current assets
Cash and cash equivalents $ 2,236 $ 13,453
Accrued production receivable 7,097 11,906
Trade and other receivables 14,507 3,643
---------- ----------
Total current assets 23,840 29,002
---------- ----------
Property and equipment (using full cost accounting)
Oil and gas properties 230,521 159,724
Unevaluated oil and gas properties 6,389 6,413
Less accumulated depreciation and depletion (53,527) (31,141)
---------- ----------
Net property and equipment 183,383 134,996
---------- ----------
Other assets 3,201 2,507
---------- ----------
Total assets $ 210,424 $ 166,505
========== ==========
Liabilities and Shareholders' Equity
Current liabilities
Accounts payable and accrued liabilities $ 16,858 $ 10,903
Oil and gas production payable 4,060 5,550
Current portion of long-term debt 23 67
---------- ----------
Total current liabilities 20,941 16,520
---------- ----------
Long-term liabilities
Long-term debt 20,005 125
Provision for site reclamation costs 938 613
Deferred income taxes and other 12,982 6,743
---------- ----------
Total long-term liabilities 33,925 7,481
---------- ----------
Shareholders' equity
Common shares, no par value, unlimited shares
authorized; outstanding - 20,364,799 and 20,055,757
shares at September 30, 1997 and December 31, 1996,
respectively 132,744 130,323
Retained earnings 22,814 12,181
---------- ----------
Total shareholders' equity 155,558 142,504
---------- ----------
Total liabilities and shareholders' equity $ 210,424 $ 166,505
========== ==========
</TABLE>
(See accompanying notes to Consolidated Financial Statements)
3
<PAGE>
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,
------------------ ------------------
1997 1996 1997 1996
------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues
Oil, gas and related product
sales $20,180 $ 14,059 $ 60,083 $ 34,709
Interest and other income 221 301 986 425
------- -------- -------- --------
Total revenues 20,401 14,360 61,069 35,134
------- -------- -------- --------
Expenses
Production 5,425 3,847 15,737 9,197
General and administrative 1,415 1,169 4,535 2,825
Interest 235 849 387 1,530
Imputed preferred dividends - 394 - 1,153
Provision for loss on early
extinguishment of debt - - - 440
Depletion and depreciation 8,126 5,175 23,224 12,557
Franchise taxes 103 53 308 160
------- -------- -------- --------
Total expenses 15,304 11,487 44,191 27,862
------- -------- -------- --------
Income before income taxes 5,097 2,873 16,878 7,272
Provision for income taxes (1,886) (1,128) (6,245) (2,932)
------- -------- -------- --------
Net income $ 3,211 $ 1,745 $ 10,633 $ 4,340
======= ======== ======== ========
Net income per common share
Primary $ 0.16 $ 0.14 $ 0.53 $ 0.37
Fully diluted 0.15 0.13 0.50 0.36
Average number of common shares
outstanding 20,273 11,820 20,175 11,616
======== ======== ======== =========
</TABLE>
(See accompanying notes to Consolidated Financial Statements)
4
<PAGE>
DENBURY RESOURCES INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
(Amounts in thousands of U.S. dollars)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------------
1997 1996
--------- --------
<S> <C> <C>
Cash flow from operating activities:
Net income $ 10,633 $ 4,340
Adjustments needed to reconcile to net cash flow
provided by operations:
Depreciation, depletion and amortization 23,224 12,557
Deferred income taxes 6,245 2,932
Imputed preferred dividend - 1,153
Provision for loss on early extinguishment of
debt - 440
Other 64 345
--------- --------
40,166 21,767
Changes in working capital items relating to operations:
Accrued production receivable 4,809 (4,388)
Trade and other receivables (10,864) (659)
Accounts payable and accrued liabilities 5,955 9,688
Oil and gas production payable (1,490) 2,004
--------- --------
Net cash flow provided by operations 38,576 28,412
--------- --------
Cash flow from investing activities:
Oil and gas expenditures (54,700) (25,704)
Acquisition of oil and gas properties (16,073) (47,616)
Net purchases of other assets (1,238) (1,290)
Acquisition of subsidiary, net of cash acquired - 209
--------- --------
Net cash used for investing activities (72,011) (74,401)
--------- --------
Cash flow from financing activities:
Bank borrowings 19,900 44,900
Issuance of common stock 2,421 1,690
Costs of debt financing (33) (408)
Other (70) (135)
--------- --------
Net cash provided by financing activities 22,218 46,047
--------- --------
Net increase (decrease)in cash and cash equivalents (11,217) 58
Cash and cash equivalents at beginning of year 13,453 6,553
--------- --------
Cash and cash equivalents at end of period $ 2,236 $ 6,611
========= ========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 150 $ 1,080
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>
DENBURY RESOURCES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 1997 and 1996
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
consolidated financial position of the Company as of September 30, 1997, and the
results of its operations for the three and nine months ended September 30, 1997
and 1996 and its cash flow for the nine months ended September 30, 1997 and
1996.
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, 1996.
Net Income per Common Share
Net income 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 during 1996 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 and warrants were
included in the calculation of fully-diluted earnings per share. The conversion
of the Convertible Preferred and the convertible debt were either anti-dilutive
or immaterial and were not included in the calculation of earnings per share for
the three and nine months ended September 30, 1996. All of the Convertible
Preferred and the convertible debt were converted into common shares during 1996
and thus were not relevant to the calculation of earnings per share during 1997.
2. NOTES PAYABLE AND LONG-TERM INDEBTEDNESS
<TABLE>
<CAPTION>
September December
30, 31,
1997 1996
----------- ----------
(Amounts in thousands)
(Unaudited)
<S> <C> <C>
Senior bank loan $ 20,000 $ 100
Other notes payable 28 92
Less portion due within one year (23) (67)
----------- ----------
Total long-term debt $ 20,005 $ 125
=========== ==========
</TABLE>
Bank Credit Agreement
In April, 1997, the Company amended its bank credit facility (i) to extend
the revolver by one year to May 31, 1999, (ii) to extend the termination date by
one year to May 31, 2002, and (iii) to reduce the commitment fee percentages. As
of September 30, 1997, the Company had $20 million outstanding on this line of
credit with a borrowing base of $60 million.
In October, 1997, the Company further amended its bank credit facility to
(i) modify the security requirement of the facility such that mortgages will
only be required by the banks to the extent that they were in place as of the
date of the amendment and (ii) to modify certain other definitions and minor
provisions of the agreement.
6
<PAGE>
DENBURY RESOURCES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 1997 and 1996
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 difference between Canadian and U.S. GAAP affecting
the Company's 1997 financial statements result from the different methodologies
for computing earnings per common share. Under U.S. GAAP, the primary and
fully-diluted earnings per common share for the first nine months of 1997 would
be $0.50 and $0.49, as compared to the $0.53 and $0.50, respectively, as
reported under Canadian GAAP. For the three months ended September 30, 1997, the
primary and fully-diluted earnings per common share under U.S. GAAP would be
$0.15, as compared to the $0.16 and $0.15, as reported under Canadian GAAP. For
1996, under U.S. GAAP, the primary and fully-diluted earnings per common share
for the first nine months of 1996 would be $0.36 and $0.35, compared to the
$0.37 and $0.36, respectively, as reported under Canadian GAAP. For the three
months ended September 30, 1996, the primary and fully-diluted earnings per
common share under U.S. GAAP would be $0.14, as compared to the $0.14 and $0.13
as reported under Canadian GAAP.
In February 1997 the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 Earnings Per Share, ("SFAS 128"). SFAS
128 simplifies the standards for computing earnings per share ("EPS") and makes
them more comparable to international EPS standards. SFAS 128 replaces the
presentation of primary EPS with a presentation of basic EPS. Basic EPS excludes
dilution and is computed by dividing income available to common shareholders by
the weighted average number of common shares outstanding for the period. Diluted
EPS reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised, converted into common stock or
resulted in the issuance of common shares that then shared in the earnings of
the entity. Diluted EPS is computed similarly to fully diluted EPS pursuant to
Accounting Principles Board Opinion No. 15. SFAS 128 is effective for financial
statements issued for periods ending after December 15, 1997, including interim
periods. Earlier application is not permitted. Basic EPS for the three and nine
months ended September 30, 1997 under SFAS 128 would be $0.16 and $0.53 per
common share respectively and $0.14 and $0.37, respectively, for the three and
nine months ended September 30, 1996. This compares to $0.15, $0.50, $0.14 and
$0.36 for the same respective periods as computed under current U.S. GAAP.
During the first nine months of 1996, the Company expensed $440,000 of debt
issue cost relating to the Company's prior bank credit agreement with ING
Capital Corporation and $1,153,000 relating to the imputed preferred dividend on
the Convertible Preferred. Under U.S. GAAP, a loss on early extinguishment of
debt is reported as an extraordinary item rather than as an operating expense
and the preferred dividend is reported as a deduction from net income to arrive
at the net income attributable to the common shareholders rather than deducted
as an operating expense. While net income per common share and all balance sheet
accounts are not affected by this difference 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. For the three months ended
September 30, 1996, net income under U.S. GAAP would be $2,139,000 while under
Canadian GAAP the amount reported was $1,745,000. Since the Convertible
Preferred was converted into Common Shares on October 30, 1996, this difference
in GAAP did not affect the comparable 1997 financial results.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income" and SFAS No. 131, "Disclosures About Segments of an Enterprise and
Related Information." SFAS No. 130 establishes standards for reporting and
display of comprehensive income in the financial statements. Comprehensive
income is the total of net income and all other non-owner changes in equity.
SFAS No. 131 requires that companies disclose segment data based on how
management makes decisions about allocating resources to segments and measuring
their performance. SFAS Nos. 130 and 131 are effective for 1998. Adoption of
these standards is not expected to have an effect on the Company's financial
statements, financial position or results of operations.
7
<PAGE>
4. COMMITMENTS
On August 6, 1997, the Company entered into a ten year office lease for its
corporate headquarters which is expected to commence late in 1998. The estimated
minimum annual rental payments for the first five years of the lease are
projected to be $1.15 million per year (commencing on occupancy) and the minimum
annual rental payments during the remaining five years of the lease are
projected to be $1.25 million per year.
8
<PAGE>
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 four 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.
Capital Resources and Liquidity
During the first nine months of 1997, the Company made total capital
expenditures of $70.8 million, which was primarily funded by the cash generated
by operations ($40.2 million), bank debt ($19.9 million), and its available
cash. The Company has projected capital expenditures for 1997 of over $95
million. Although the Company's projected cash flow is highly variable and
difficult to predict as it is dependent on product prices, drilling success, and
other factors, these projected expenditures are expected to exceed the Company's
cash flow during 1997. However, as of September 30, 1997, the Company had
available working capital of $2.9 million as well as approximately $40 million
available on its $60 million borrowing base to fund any potential cash flow
deficits. The Company also believes that it could increase this borrowing base
if necessary. Furthermore, if external capital resources are limited or reduced
in the future, the Company can also adjust its capital expenditure program
accordingly although such adjustments could limit, or even eliminate, the
Company's future growth.
In addition to its internal capital expenditure program, the Company has
historically required capital for the acquisition of producing properties, which
have been a significant factor in the Company's rapid growth during recent
years, prior to 1997. During 1996, the Company spent approximately $48.2 million
on property acquisitions, while only $16.1 million was spent during the first
nine months of 1997. Although the annual expenditures were significantly less
prior to 1996, during 1993, 1994 and 1995 approximately 60% of the total capital
expenditures related to acquisitions. The Company is continuing to seek
additional acquisitions that meet its economic criteria and would fund these
additional acquisitions, if any, with bank debt or other forms of debt and
equity capital. There can be no assurance that additional 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 1997, the Company spent approximately $54.7
million on oil and natural gas exploration and development expenditures and
approximately $16.1 million on acquisitions. The exploration and development
expenditures included approximately $38.2 million spent on drilling, $6.7
million on geological, geophysical and acreage expenditures and the balance of
$9.8 million was spent on workover costs. These expenditures were funded by
available cash, bank debt and cash flow from operations.
During the first nine months of 1996, the Company spent approximately $73.3
million of which approximately $47.6 million was spent on acquisitions. The
acquisition expenditures included approximately $37.2 million for producing
properties acquired from Amerada Hess Corporation (the "Hess Acquisition"),
approximately $7.5 million for properties acquired from Ottawa Energy, Inc. plus
four other minor acquisitions. These expenditures were funded primarily by bank
debt, plus the Company's available cash and cash flow from operations.
9
<PAGE>
DENBURY RESOURCES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Operating Income
Operating income increased significantly during 1997 as compared to 1996 as
outlined in the following chart. Oil and gas revenue increased primarily as a
result of the increased oil and gas production.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
- ----------------------------------- ------------------- ------------------
1997 1996 1997 1996
- ----------------------------------- ------- -------- ------- -------
<S> <C> <C> <C> <C>
OPERATING INCOME (THOUSANDS)
Oil sales $12,085 $ 8,296 $36,436 $17,455
Natural gas sales 8,095 5,763 23,647 17,254
Less production expenses (5,425) (3,847) (15,737) (9,197)
------- -------- ------- -------
Operating income $14,755 $ 10,212 $44,346 $25,512
------- -------- ------- -------
UNIT PRICES
Oil price per barrel ("Bbl") $ 16.12 $ 18.84 $ 17.53 $ 18.05
Gas price per thousand cubic
feet ("Mcf") 2.43 2.36 2.54 2.64
NETBACK PER BOE (1):
Sales price $ 15.45 $ 16.59 $ 16.56 $ 16.87
Production expenses (4.15) (4.54) (4.34) (4.47)
------- -------- ------- -------
Production netback $ 11.30 $ 12.05 $ 12.22 $ 12.40
------- -------- ------- -------
AVERAGE DAILY PRODUCTION VOLUME:
Bbls 8,148 4,785 7,615 3,529
Mcf 36,282 26,537 34,061 23,867
BOE (1) 14,195 9,208 13,292 7,507
- ----------------------------------- ------- -------- ------- -------
<FN>
(1) Barrel of oil equivalent using the ratio of one barrel of oil to 6 Mcf of
natural gas ("BOE").
</FN>
</TABLE>
Production increases have been fueled by both internal growth from the
Company's development and exploration programs and from the acquisition of
producing properties during 1996, particularly the Hess Acquisition. During May
and June, 1996, the first two months of ownership, the properties included in
the Hess Acquisition averaged approximately 2,945 BOE per day ("BOE/d"). During
the first, second and third quarters of 1997, the production from these same
properties averaged approximately 4,385 BOE/d, 4,613 BOE/d and 5,373
respectively, a 49%, 57% and 82% increase respectively from initial production
levels. Total corporate production on a BOE/d basis increased 21% from the
fourth quarter of 1996 average of 10,132 to the first quarter of 1997 average of
12,256 BOE/d, increased an additional 9% to 13,405 BOE/d for the second quarter
of 1997 and an additional increase of 6% to 14,195 BOE/d for the third quarter
of 1997. Since the Company had only $16.1 million of acquisitions during the
first nine months of 1997 (most of which occurred during the third quarter) the
production increases during the last twelve months were almost solely as a
result of internal development. On a quarter to quarter comparison, production
on a BOE basis increased 54% between the respective third quarters. When
comparing the nine month periods, production on a BOE basis has increased 77%
as this increase includes the partial effect of the Hess Acquisition effective
in May, 1996.
10
<PAGE>
DENBURY RESOURCES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Oil and gas revenue has increased primarily because of the large increase
in production. Between the third quarters of 1996 and 1997, oil product prices
decreased 14% while natural gas product prices increased by only 3%, making an
overall price decline of 7% if measured on a BOE basis. This overall decline in
product prices partially offset the revenue gains from the improved production
levels particularly since the 1997 production is more heavily weighted toward
oil. During the third quarter of 1996, approximately 52% of the Company's
production on a BOE basis was oil while during the third quarter of 1997,
approximately 57% of the Company's production on a BOE basis was oil. When
comparing the two nine month periods of 1996 and 1997, oil product prices
decreased by 3% and natural gas product prices declined 4% or an overall decline
of 2% when measured on a BOE basis. During the first nine months of 1996,
approximately 47% of the Company's production on a BOE basis was oil while
during the first nine months of 1997, approximately 57% of the Company's
production on a BOE basis was oil.
Production expenses on an absolute basis increased between the relative
periods of 1996 and 1997 along with the increases in production. On a BOE basis,
production expenses decreased 8% from the third quarter of 1996 to the
comparable period in 1997 and decreased 3% when comparing the first nine months
of 1996 to the first nine months of 1997. This improvement was a result of
efficiencies achieved from higher production volumes (on both an absolute basis
and per well basis) despite the Company having a higher percentage of oil
production in 1997 as compared to 1996, which typically has a higher operating
cost per BOE.
General and Administrative Expenses
General and administrative ("G&A") expenses have increased as outlined
below along with the Company's growth.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
- ------------------------------- -------------------- --------------------
1997 1996 1997 1996
- ------------------------------- -------- ------- -------- --------
<S> <C> <C> <C> <C>
NET G&A EXPENSES (THOUSANDS)
Gross expenses $ 3,328 $ 2,334 $ 9,999 $ 5,583
State franchise taxes 103 53 308 159
Operator overhead charges (1,398) (829) (3,789) (1,906)
Capitalized exploration
expenses (515) (336) (1,675) (851)
-------- ------- -------- --------
Net expenses $ 1,518 $ 1,222 $ 4,843 $ 2,985
-------- ------- -------- --------
Average G&A expense per BOE $ 1.16 $ 1.44 $ 1.33 $ 1.45
Employees as of September 30 141 109 141 109
- ------------------------------- -------- ------- -------- --------
</TABLE>
On a BOE basis, G&A expenses declined 8% when comparing the first nine
months of 1996 to the comparable period in 1997. When comparing the third
quarter of 1996 to the third quarter of 1997, G&A costs decreased 19% on a BOE
basis. Both decreases are partially attributable to the increased production on
both an absolute and per well basis. Furthermore, the respective well operating
agreements allow the Company, when they are operator, to charge a well with a
specified overhead rate during the drilling phase. As a result of the increased
drilling activity in 1997, the percentage of gross G&A recovered through these
types of allocations (listed in the above table as "Operator overhead charges")
increased when compared to the corresponding periods of 1996. During the first
nine months of 1996, approximately 34% was recovered by operator overhead
charges, while during the comparable period of 1997 this increased to 38%. This
trend is even more pronounced in the third quarter of 1997 with 42% of the gross
G&A recovered as compared to 35% for the third quarter of 1996.
11
<PAGE>
DENBURY RESOURCES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Interest and Financing Expenses
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
- ----------------------------------- ------------------- ------------------
AMOUNTS IN THOUSANDS EXCEPT PER
UNIT AMOUNTS 1997 1996 1997 1996
- ----------------------------------- ------- -------- -------- -------
<S> <C> <C> <C> <C>
Interest expense $ 235 $ 849 $ 387 $ 1,530
Non-cash interest expense (20) (22) (64) (345)
------- -------- -------- -------
Cash interest expense 215 827 323 1,185
Interest and other income (221) (301) (986) (425)
------- -------- -------- -------
Net interest expense (income) $ (6) $ 526 $ (663) $ 760
- ----------------------------------- ------- -------- -------- -------
Average interest expense (income)
per BOE $ 0.00 $ 0.62 $ (0.18) $ 0.37
Average debt outstanding 10,375 44,939 3,610 20,673
- ----------------------------------- ------- -------- -------- -------
Imputed preferred dividend - $ 394 - $ 1,153
Loss on early extinguishment of
debt - - - 440
- ----------------------------------- ------- -------- -------- -------
</TABLE>
During the first half of 1996 and 1997, the Company had minimal debt
outstanding as virtually all of the bank debt had been retired during the
previous fourth quarter. In 1995, the bank debt was repaid with proceeds from
the December 1995 private placement of equity with the Texas Pacific Group
("TPG") and in 1996, the debt was repaid with proceeds from a public offering of
Common Shares completed in October, 1996. However, in 1996 the Company did incur
debt late in the second quarter in order to fund property acquisitions and
during the third quarter of 1997, the Company borrowed approximately $20 million
to fund $12.5 million of property acquisitions and $7.5 million of development
expenditures.
The private placement of equity in December 1995 with TPG included 1.5
million shares of Convertible Preferred. During the first nine months of 1996,
the Company recognized $1,153,000 of charges representing the imputed preferred
dividend on these shares. On October 30, 1996 the Convertible Preferred was
converted into 2.8 million Common Shares. Under Canadian GAAP, this dividend was
reported as an operating expense, while under U.S. GAAP this would not be an
expense but it would be deducted from net income to arrive at net income
attributable to the common shareholders.
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 related to the
remaining unamortized debt issue costs of the Company's prior credit facility
which was replaced in May 1996. 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.
Depletion, Depreciation and Site Restoration
Depletion, depreciation and amortization ("DD&A") has increased along with
the additional capitalized cost and increased production. The Company's DD&A
rate per BOE for the first half of 1997 increased to $6.50 per BOE to provide
for the estimated effect of reduced oil prices on reserve quantities, the
estimated effect of rising drilling costs on certain proved undeveloped
locations, and higher than anticipated costs on wells drilled in Louisiana that
were proved undeveloped locations at December 31, 1996. In comparison, the
Company's DD&A rate was $5.99 per BOE for the year ended December 31, 1996. The
oil prices used in the December 31, 1996 reserve report were based on a West
Texas Intermediate ("WTI") posting price of $23.39 per bbl in accordance with
the rules of the Securities and Exchange Commission while the comparable WTI
price at June 30, 1997 was $17.15 per bbl. This reduction in oil prices reduced
the June 30, 1997 estimated reserves by approximately 1.3 million barrels. As a
12
<PAGE>
DENBURY RESOURCES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
result of two oil and gas discoveries announced in September, 1997, the
Company's third quarter DD&A rate decreased to $6.22 per BOE ($6.40 per BOE for
the nine months ended September 30, 1997). During the third quarter of 1997, the
Company also transferred approximately $4.6 million from the unevaluated
properties to the full cost pool leaving a balance of approximately $6.4 million
in unevaluated properties as of September 30, 1997. The DD&A effect of this
transfer was approximately $440,000 for the quarter.
The Company also provides for the estimated future costs of well
abandonment and site reclamation, net of any anticipated salvage, on a
unit-of-production basis. This provision is included in the DD&A expense and has
increased each year along with an increase in the number of properties owned by
the Company.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
- --------------------------------- ------------------- -------------------
AMOUNTS IN THOUSANDS EXCEPT PER
UNIT AMOUNTS 1997 1996 1997 1996
- --------------------------------- -------- ------- -------- --------
<S> <C> <C> <C> <C>
Depletion and depreciation $ 8,050 $ 5,146 $ 22,899 $ 12,430
Site restoration provision 76 29 325 127
-------- ------- -------- --------
Total amortization $ 8,126 $ 5,175 $ 23,224 $ 12,557
-------- ------- -------- --------
Average DD&A cost per BOE $ 6.22 $ 6.11 $ 6.40 $ 6.10
- --------------------------------- -------- ------- -------- --------
</TABLE>
Income Taxes
Due to a net operating loss of the U.S. subsidiary for tax purposes, the
Company does not have any current tax provision. The deferred tax provision as a
percentage of net income has varied depending on the mix of Canadian and U.S.
expenses. The rate was slightly higher in 1996 due to the non-deductible imputed
preferred dividend and interest on the subordinated debt.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
- -------------------------------------- ---------------- -----------------
1997 1996 1997 1996
- -------------------------------------- ------- ------ ------- -------
<S> <C> <C> <C> <C>
Deferred income taxes (thousands) $ 1,886 $1,128 $ 6,245 $ 2,932
Average income tax costs per BOE $ 1.44 $ 1.33 $ 1.72 $ 1.43
Effective tax rate 37% 39% 37% 40%
- -------------------------------------- ------- ------ ------- -------
</TABLE>
Net Income
Primarily as a result of the increased production, net income and cash flow
from operations increased substantially on both a gross and per share basis
between the first nine months of 1996 and the first nine months of 1997 as
outlined below. Net income on a per share basis also increased between the third
quarter of 1996 and the third quarter of 1997, even though the percentage
increase was less significant as a result of the adjustments to the DD&A rate as
previously discussed and the significant increase in the number of common shares
outstanding since September 30, 1996.
13
<PAGE>
DENBURY RESOURCES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
- --------------------------------------- ---------------- -----------------
AMOUNTS IN THOUSANDS EXCEPT PER SHARE
AMOUNTS 1997 1996 1997 1996
- --------------------------------------- ------- ------ ------- -------
<S> <C> <C> <C> <C>
Net income $ 3,211 $1,745 $10,633 $ 4,340
Net income per common share:
Primary $ 0.16 $ 0.14 $ 0.53 $ 0.37
Fully diluted 0.15 0.13 0.50 0.36
Average number of common shares
outstanding 20,273 11,820 20,175 11,616
Cash flow from operations (1) $13,243 $8,464 $40,166 $21,767
- --------------------------------------- ------- ------ ------- -------
<FN>
(1) Represents cash flow provided by operations, exclusive of the net change in
non-cash working capital balances.
</FN>
</TABLE>
The following table summarizes the cash flow, DD&A and net income on a BOE
basis for the comparative periods. Each of the individual components are
discussed above.
<TABLE>
<CAPTION>
Three Months Nine months
Ended Ended
September 30, September 30,
- -------------------------------------- ---------------- -------------------
PER BOE (6:1 BASIS) 1997 1996 1997 1996
- -------------------------------------- ------- ------ ------- ------
<S> <C> <C> <C> <C>
Revenue $ 15.45 $16.59 $ 16.56 $16.87
Production expenses (4.15) (4.54) (4.34) (4.47)
------- ------ ------- ------
Production netback 11.30 12.05 12.22 12.40
General and administrative (1.16) (1.44) (1.33) (1.45)
Interest 0.00 (0.62) 0.18 (0.37)
------- ------ ------- ------
Cash flow (1) 10.14 9.99 11.07 10.58
DD&A (6.22) (6.11) (6.40) (6.10)
Deferred income taxes (1.44) (1.33) (1.72) (1.43)
Other non-cash items (0.02) (0.49) (0.02) (0.94)
- -------------------------------------- ------- ------ ------- ------
Net income $ 2.46 $ 2.06 $ 2.93 $ 2.11
- -------------------------------------- ------- ------ ------- ------
<FN>
(1) Represents cash flow provided by operations, exclusive of the net change in
non-cash working capital balances.
</FN>
</TABLE>
Year 2000 Modifications
The Company is currently reviewing its computer systems in order to
evaluate necessary modifications for the year 2000. The Company does not
currently anticipate that it will incur material expenditures to complete any
such modifications.
14
<PAGE>
DENBURY RESOURCES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Information
The statements contained in this Quarterly Report on Form 10-Q ("Quarterly
Report") that are not historical facts, including, but not limited to,
statements found in this Management's Discussion and Analysis of Financial
Condition and Results of Operations, are forward-looking statements, as that
term is defined in Section 21E of the Securities and Exchange Act of 1934, as
amended, that involve a number of risks and uncertainties. Such forward-looking
statements may be or may concern, among other things, capital expenditures,
drilling activity, acquisition plans and proposals and dispositions, development
activities, cost savings, production efforts and volumes, hydrocarbon reserves,
hydrocarbon prices, liquidity, regulatory matters and competition. Such
forward-looking statements generally are accompanied by words such as "plan,"
"estimate," "expect," "predict," "anticipate," "projected," "should," "assume,"
"believe" or other words that convey the uncertainty of future events or
outcomes. Such forward-looking information is based upon management's current
plans, expectations, estimates and assumptions and is subject to a number of
risks and uncertainties that could significantly affect current plans,
anticipated actions, the timing of such actions and the Company's financial
condition and results of operations. As a consequence, actual results may differ
materially from expectations, estimates or assumptions expressed in or implied
by any forward-looking statements made by or on behalf of the Company. Among the
factors that could cause actual results to differ materially are: fluctuations
of the prices received or demand for the Company's oil and natural gas, the
uncertainty of drilling results and reserve estimates, operating hazards,
acquisition risks, requirements for capital, general economic conditions,
competition and government regulations, as well as the risks and uncertainties
discussed in this Quarterly Report, including, without limitation, the portions
referenced above, and the uncertainties set forth from time to time in the
Company's other public reports, filings and public statements.
15
<PAGE>
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K during the Third Quarter of 1997
Exhibits:
10 Second amendment to Credit Agreement dated October 15, 1997 to the
Credit Agreement dated May 31, 1996 between the Company and
NationsBank of Texas, N.A. as agent.
Reports on Form 8-K:
On September 12, 1997, the Company reported that it had made two recent
discoveries which added approximately 4.2 million barrels of oil and 6.7 billion
cubic feet of gas to its proved reserves based on estimates from its independent
consulting engineers.
16
<PAGE>
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.
(Registrant)
/s/ Phil Rykhoek
By: --------------------------------
Phil Rykhoek
Chief Financial Officer
Date: November 6, 1997
17
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE DENBURY
RESOURCES INC. SEPTEMBER 30, 1997 FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000945764
<NAME> Denbury Resources Inc.
<MULTIPLIER> 1000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 9-mos
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1
<CASH> 2,236
<SECURITIES> 0
<RECEIVABLES> 21,840
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 23,840
<PP&E> 236,910
<DEPRECIATION> (53,527)
<TOTAL-ASSETS> 210,424
<CURRENT-LIABILITIES> 20,941
<BONDS> 0
0
0
<COMMON> 132,744
<OTHER-SE> 22,814
<TOTAL-LIABILITY-AND-EQUITY> 210,424
<SALES> 60,083
<TOTAL-REVENUES> 61,069
<CGS> 0
<TOTAL-COSTS> 43,804
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 387
<INCOME-PRETAX> 16,878
<INCOME-TAX> 6,245
<INCOME-CONTINUING> 10,633
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,633
<EPS-PRIMARY> .53
<EPS-DILUTED> .50
</TABLE>
EXHIBIT 10
SECOND AMENDMENT TO CREDIT
AGREEMENT
18
<PAGE>
SECOND AMENDMENT TO CREDIT AGREEMENT
This Second Amendment to Credit Agreement (this "Second Amendment") is
entered into as of the 15th day of October, 1997, by and among Denbury
Management, Inc. ("Borrower"), Denbury Resources, Inc., ("Resources"), Denbury
Holdings, Ltd., ("Holdings", together with Resources, the "Guarantors"),
NationsBank of Texas, N.A., as Agent ("Agent"), and NationsBank of Texas, N.A.,
Bankers Trust Company and Internationale Nederlanden (U.S.) Capital Corporation,
as Banks (the "Banks").
W I T N E S E T H
WHEREAS, Borrower, Guarantors, Agent and the Banks are parties to that
certain Credit Agreement dated as of May 31, 1996, as amended by that certain
First Amendment to Credit Agreement dated as of April 1, 1997 (as amended, the
"Credit Agreement") (unless otherwise defined herein, all terms used herein with
their initial letter capitalized shall have the meaning given such terms in the
Credit Agreement); and
WHEREAS, pursuant to the Credit Agreement the Banks have made certain Loans
to Borrower, and Agent has issued certain Letters of Credit on behalf of
Borrower; and
WHEREAS, Borrower has requested that the collateral requirements and
certain covenants in the Credit Agreement be amended in certain respects; and
WHEREAS, subject to the terms and conditions herein contained, the Banks
have agreed to Borrower's requests.
NOW THEREFORE, for and in consideration of the mutual covenants and
agreements herein contained and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged and confessed,
Borrower, Agent and each Bank hereby agree as follows:
Section 1. Amendments. In reliance on the representations, warranties,
covenants and agreements contained in this Second Amendment, the Credit
Agreement shall be amended effective October 15, 1997 (the "Effective
Date") in the manner provided in this Section 1.
1.1. Additional Definitions. Section 1.1 of the Credit Agreement shall be
amended to add the definitions of "First Amendment", "Second Amendment" and
"Unproved Reserves" as follows:
"First Amendment" means that certain First Amendment to Credit Agreement
dated as of April 1, 1997 among Borrower, Guarantors, Agent and Banks.
"Second Amendment" means that certain Second Amendment to Credit
Agreement dated as o October 15, 1997 among Borrower, Guarantors, Agent
and Banks.
"Unproved Reserves" means Mineral Interests which do not constitute
Proved Mineral Interests.
1.2 Amendment to Definition. The definition of "Loan Papers" in Section 1.1
of the Credit Agreement shall be amended to read in full as follows:
"Loan Papers" means this Agreement, the First Amendment, the Second
Amendment, the Notes, the Facility Guarantees, the Parent Pledge
Agreement, the Holdings Pledge Agreement, the Borrower Pledge Agreement,
the Assignment and Amendment to Mortgages, all Mortgages now or at any
time hereafter delivered pursuant to Section 5.1, and all other
certificates, documents or instruments delivered in connection with this
Agreement, as the foregoing may be amended from time to time.
19
<PAGE>
1.3 Security. Section 5.1 of the Credit Agreement shall be amended to read
in full as follows:
SECTION 5.1 Security. The Obligations shall be secured by (a) those
Mortgages granted by Borrower in favor of Agent as of the date of the
Second Amendment which Mortgages create first and prior Liens (subject only
to Permitted Encumbrances) covering and encumbering the Mineral Interests
described therein, and (b) one hundred percent (100%) of the issued and
outstanding capital stock of every class of Holdings and Borrower.
1.4 Asset Disposition. Section 9.5 of the Credit Agreement shall be amended
to add the following subsection (c) to the end of the first sentence of
such Section:
", and (c) the sale, lease, transfer, abandonment or the disposition of
Unproved Reserves."
Section 2. Representations and Warranties of Borrower. To induce the Banks
and Agent to enter into this First Amendment, Borrower and Guarantors
hereby represent and warrant to Agent as follows:
(a) Each representation and warranty of Borrower and Guarantors
contained in the Credit Agreement and the other Loan Papers is true and
correct on the date hereof and will be true and correct after giving
effect to the amendments set forth in Section 1 hereof.
(b) The execution, delivery and performance by Borrower and Guarantors
of this Second Amendment are within the Borrower's and each Guarantor's
corporate powers, have been duly authorized by necessary action, require
no action by or in respect of, or filing with, any governmental body,
agency or official and do not violate or constitute a default under any
provision of applicable law or any Material Agreement binding upon
Borrower, the Subsidiaries of Borrower or the Guarantors or result in
the creation or imposition of any Lien upon any of the assets of
Borrower or the Subsidiaries of Borrower or the Guarantors except
Permitted Encumbrances.
(c) This Second Amendment constitutes the valid and binding obligations
of Borrower and the Guarantors enforceable in accordance with its terms,
except as (i) the enforceability thereof may be limited by bankruptcy,
insolvency or similar laws affecting creditor's rights generally, and
(ii) the availability of equitable remedies may be limited by equitable
principles of general application.
(d) Borrower and Guarantors have no defenses to payment, counterclaim or
rights of set-off with respect to the Obligations existing on the date
hereof.
Section 3.Miscellaneous.
3.1 Reaffirmation of Loan Papers; Extension of Liens. Any and all of the
terms and provisions of the Credit Agreement and the Loan Papers shall,
except as amended and modified hereby, remain in full force and effect.
Borrower and Guarantors hereby extend the Liens securing the Obligations
until the Obligations have been paid in full or are specifically released
by Agent and Banks prior thereto, and agree that the amendments and
modifications herein contained shall in no manner affect or impair the
Obligations or the Liens securing payment and performance thereof.
Notwithstanding the foregoing, each Bank hereby authorizes Agent to release
20
<PAGE>
the Mineral Interests held by Borrower in the Lirette Field from the Liens
securing the Obligations solely to the extent of depths below 11,600 feet
in connection with the disposition by Borrower of certain Unproved Reserves
held by Borrower in such field (each Bank acknowledges that, in addition to
such Unproved Reserves, the Mineral Interests released will include certain
Proved Mineral Interests).
3.2 Parties in Interest. All of the terms and provisions of this Second
Amendment shall bind and inure to the benefit of the parties hereto and
their respective successors and assigns.
3.3 Legal Expenses. Borrower hereby agrees to pay on demand all reasonable
fees and expenses of counsel to Agent incurred by Agent, in connection with
the preparation, negotiation and execution of this Second Amendment and all
related documents.
3.4 Counterparts. This Second Amendment may be executed in counterparts,
and all parties need not execute the same counterpart; however, no party
shall be bound by this Second Amendment until all parties have executed a
counterpart. Facsimiles shall be effective as originals.
3.5 Complete Agreement. THIS SECOND AMENDMENT, THE CREDIT AGREEMENT AND THE
OTHER LOAN PAPERS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY
NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR ORAL
AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN
THE PARTIES.
3.6 Headings. The headings, captions and arrangements used in this Second
Amendment are, unless specified otherwise, for convenience only and shall
not be deemed to limit, amplify or modify the terms of this Second
Amendment, nor affect the meaning thereof.
IN WITNESS WHEREOF, the parties hereto have caused this Second Amendment to
be duly executed by their respective authorized officers on the date and year
first above written.
21
<PAGE>
BORROWER:
DENBURY MANAGEMENT, INC.,
a Texas corporation
By:_______________________________________
Name:_____________________________________
Title:____________________________________
By:_______________________________________
Name:_____________________________________
Title:____________________________________
GUARANTORS:
DENBURY HOLDINGS, LTD.,
a corporation incorporated under
the Business Corporations Act
(Alberta)
By:_______________________________________
Name:_____________________________________
Title:____________________________________
By:_______________________________________
Name:_____________________________________
Title:____________________________________
DENBURY RESOURCES, INC.,
a corporation incorporated under
the Canada Business Corporations
Act
By:_______________________________________
Name:_____________________________________
Title:____________________________________
By:_______________________________________
Name:_____________________________________
Title:____________________________________
22
<PAGE>
AGENT:
NATIONSBANK OF TEXAS, N.A.
By:_______________________________________
J. Scott Fowler
Vice President
BANKS:
NATIONSBANK OF TEXAS, N.A.
By:_______________________________________
J. Scott Fowler
Vice President
BANKERS TRUST COMPANY
By:_______________________________________
Name:_____________________________________
Title:____________________________________
INTERNATIONALE NEDERLANDEN (U.S.)
CAPITAL CORPORATION
By:_______________________________________
Name:_____________________________________
Title:____________________________________
23
