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 June 30, 1998
Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission file number 33-93722
---------------------------
DENBURY RESOURCES INC.
DENBURY MANAGEMENT, INC.
(Exact name of Registrants as specified in its charter)
Canada Not applicable
Texas 75-2294373
(State or other (I.R.S. Employer
jurisdiction of Identification No.)
incorporation or
organization)
17304 Preston Rd.,
Suite 200 75252
Dallas, TX (Zip code)
(Address of principal
executive offices)
Registrant's telephone number, including area code:(972) 673-2000
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at July 31, 1998
----- ----------------------------
Common Stock, no par value 26,736,397
<PAGE>
DENBURY RESOURCES INC.
INDEX
Part I. Financial Information
Page
Consolidated Balance Sheets at June 30, 1998
(Unaudited) and December 31, 1997 3
Consolidated Statements of Operations for the
Three and Six Months ended June 30, 1998
and 1997 (Unaudited) 4
Consolidated Statements of Cash Flows for
the Six Months ended June 30, 1998
and 1997 (Unaudited) 5
Notes to Consolidated Financial Statements 6-10
Management's Discussion and Analysis of
Financial Condition and Results of Operations 11-19
Part II. Other Information
Exhibits and Reports on Form 8-K 20
Signatures 21
2
<PAGE>
DENBURY RESOURCES INC.
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands of U.S. Dollars)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
--------- ---------
(Unaudited)
Assets
<S> <C> <C>
Current assets
Cash and cash equivalents $ 9,079 $ 9,326
Accrued production receivable 8,409 8,692
Trade and other receivables 11,494 15,362
--------- ----------
Total current assets 28,982 33,380
--------- ----------
Property and equipment (using full cost accounting)
Oil and natural gas properties 484,030 388,766
Unevaluated oil and gas natural properties 63,787 82,798
Less accumulated depreciation and depletion (255,541) (62,732)
--------- ----------
Net property and equipment 292,276 408,832
--------- ----------
Deferred income taxes 35,000 -
Other assets 8,548 5,336
--------- ----------
Total assets $ 364,806 $ 447,548
========= ==========
Liabilities and Shareholders' Equity
Current liabilities
Accounts payable and accrued liabilities $ 30,183 $ 24,616
Oil and gas production payable 6,657 6,052
Current portion of long-term debt - 20
--------- ----------
Total current liabilities 36,840 30,688
--------- ----------
Long-term liabilities
Long-term debt 195,000 240,000
Provision for site reclamation costs 1,205 1,017
Deferred income taxes and other - 15,620
--------- ----------
Total long-term liabilities 196,205 256,637
--------- ----------
Shareholders' equity
Common shares, no par value, unlimited shares
authorized; outstanding - 26,731,397 and
20,388,683 shares at June 30, 1998 and
December 31, 1997, respectively 227,296 133,139
Retained earnings (accumulated deficit) (95,535) 27,084
--------- ----------
Total shareholders' equity 131,761 160,223
--------- ----------
Total liabilities and shareholders' equity $ 364,806 $ 447,548
========= ==========
</TABLE>
(See accompanying notes to Consolidated Financial Statements)
3
<PAGE>
DENBURY RESOURCES INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands except per share amounts)
(Unaudited - U.S. dollars)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
1998 1997 1998 1997
--------- ------- -------- -------
<S> <C> <C> <C> <C>
Revenues
Oil, gas and related product
sales $ 22,508 $18,762 $ 47,696 $39,903
Interest and other income 375 253 742 765
--------- ------- --------- -------
Total revenues 22,883 19,015 48,438 40,668
--------- ------- --------- -------
Expenses
Production 8,109 5,259 15,963 10,312
General and administrative 1,677 1,599 3,453 3,120
Interest 3,978 73 8,369 152
Depletion and depreciation 16,071 8,473 28,458 15,098
Franchise taxes 232 108 432 205
Writedown of oil and natural
gas properties 165,000 - 165,000 -
--------- ------- --------- -------
Total expenses 195,067 15,512 221,675 28,887
--------- ------- --------- -------
Income (loss) before income taxes (172,184) 3,503 (173,237) 11,781
Income tax benefit (provision) 50,245 (1,296) 50,618 (4,359)
--------- ------- --------- -------
Net income (loss) $(121,939) $ 2,207 $(122,619) $ 7,422
========= ======= ========= =======
Net income (loss) per common share
Basic $ (4.57) $ 0.11 $ (4.89) $ 0.37
Fully diluted (4.57) 0.11 (4.89) 0.35
Average number of common shares
outstanding 26,690 20,156 25,066 20,125
========= ======= ========= =======
</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>
Six Months Ended
June 30,
------------------------
1998 1997
--------- ---------
<S> <C> <C>
Cash flow from operating activities:
Net income (loss) $(122,619) $ 7,422
Adjustments needed to reconcile to net cash flow
provided by operations:
Depreciation, depletion and amortization 28,458 15,098
Writedown of oil and natural gas properties 165,000 -
Deferred income taxes (50,618) 4,359
Other 286 44
--------- ---------
20,507 26,923
Changes in working capital items relating to operations:
Accrued production receivable 283 5,310
Trade and other receivables 3,868 (1,457)
Accounts payable and accrued liabilities 5,567 (803)
Oil and gas production payable 605 (1,897)
--------- ---------
Net cash flow provided by operations 30,830 28,076
--------- ---------
Cash flow used for investing activities:
Oil and natural gas expenditures (63,049) (32,608)
Acquisition of oil and natural gas properties (13,204) (3,548)
Net purchases of other assets (556) (843)
--------- ---------
Net cash used for investing activities (76,809) (36,999)
--------- ---------
Cash flow from financing activities:
Bank repayments (200,000) -
Bank borrowings 30,000 -
Issuance of senior subordinated debt 125,000 -
Issuance of common stock 94,157 1,551
Costs of debt financing (3,402) (33)
Other (23) (52)
--------- ---------
Net cash provided by financing activities 45,732 1,466
--------- ---------
Net decrease in cash and cash equivalents (247) (7,457)
Cash and cash equivalents at beginning of year 9,326 13,453
--------- ---------
Cash and cash equivalents at end of period $ 9,079 $ 5,996
========= =========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 4,178 $ 108
</TABLE>
(See accompanying notes to Consolidated Financial Statements)
5
<PAGE>
DENBURY RESOURCES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 30, 1998 and 1997
1. ACCOUNTING POLICIES
Interim Financial Statements
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, 1997. Any capitalized items used but not defined in these Notes to
Consolidated Financial Statements have the same meaning given to them in the
Form 10-K.
Accounting measurements at interim dates inherently involve greater
reliance on estimates then at year end and the results of operations for the
interim periods shown in this report are not necessarily indicative of results
to be expected for the fiscal year. In the opinion of management of Denbury
Resources Inc. (the "Company" or "Denbury"), the accompanying unaudited
consolidated financial statements include all adjustments (of a normal recurring
nature) necessary to present fairly the consolidated financial position of the
Company as of June 30, 1998 and the consolidated results of its operations for
the three and six months ended June 30, 1998 and 1997 and its cash flow for the
six months ended June 30, 1998 and 1997.
Net Income and Loss per Common Share
Net income or loss per common share is computed by dividing the net income
or loss by the weighted average number of shares of common stock outstanding. In
accordance with Canadian generally accepted accounting principles ("GAAP"), the
stock options and warrants were included in the calculation of fully diluted
earnings per share but were anti-dilutive to the calculation of losses per
share.
2. NOTES PAYABLE AND LONG-TERM INDEBTEDNESS
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
--------- ---------
(Amounts in thousands)
(Unaudited)
<S> <C> <C>
9% Senior Subordinated Notes Due 2008 $ 125,000 $ -
Senior bank loan 70,000 240,000
Other notes payable - 20
Less portion due within one year - (20)
--------- ---------
Total long-term debt $ 195,000 $ 240,000
========= =========
</TABLE>
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 1998 financial statements result from the different methodology
for computing fully diluted earnings or losses per common share. For Canadian
purposes, the proceeds from dilutive securities are used to reduce debt in the
calculation. Under U.S. GAAP, Statement of Financial Accounting Standards
("SFAS") No. 128 requires the proceeds from such instruments be used to
repurchase Common Shares. However, for the three and six month periods ended
June 30, 1998 and 1997, the earnings and losses per share were the same under
U.S. and Canadian GAAP.
6
<PAGE>
DENBURY RESOURCES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 30, 1998 and 1997
The U.S. full cost accounting rules differ from the Canadian full cost
accounting guidelines followed by the Company. In determining the limitation on
carrying values, U.S. accounting rules require the discounting of estimated
future net revenues from its proved reserves at 10% using constant current
prices following the guidelines of the Securities and Exchange Commission
("SEC") while the Canadian guidelines require the use of the same future net
revenues but on an undiscounted basis and after the deduction of estimated
future administrative and financing costs. The Canadian accounting guidelines
also allow a Company to exclude acquired properties from the ceiling test
calculation for up to two years while the SEC allows an exclusion for only one
year and then only after obtaining approval. See also "Note 4. Property and
Equipment" for a discussion of the application of these rules on the ceiling
test calculation.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (the "Statement"), which establishes
standards for accounting and reporting derivative instruments. SFAS No. 133 is
effective for periods beginning after June 15, 1999; however, earlier
application is permitted. Management is currently not planning on early adoption
of this Statement and has not had an opportunity to evaluate the impact of the
provisions of the Statement on the Company's consolidated financial statements.
4. PROPERTY AND EQUIPMENT
As further discussed in Note 3, the Canadian accounting guidelines allow a
Company to exclude acquired properties from the ceiling test calculation for up
to two years while the SEC allows an exclusion for only one year and then only
after obtaining approval. During the first quarter of 1998, the Company obtained
approval from the SEC for an exclusion of the Heidelberg Field acquired late in
1997. This exclusion was allowed because the Company believed that, based on its
success with similar properties in Mississippi, the value of the Heidelberg
Field acquired from Chevron and other entities was at least equal to its
carrying cost. Had this property been included in the ceiling test calculation,
the Company would have had a writedown of the property carrying costs as of
March 31, 1998 of approximately $35 million for both U.S. and Canadian GAAP.
Since the first quarter, oil prices have continued to decline with a drop
of approximately $1.45 in the NYMEX oil price from March 31 to June 30, 1998.
Furthermore, the gap between the NYMEX oil price and the net field price has
widened since the first of 1998, causing the net oil price at Heidelberg Field
to drop approximately $1.00 per barrel ("Bbl") more than the decline in the
NYMEX price. Due to the continued low oil prices, in June, 1998 the Company
announced that it was reducing its developmental drilling activity and capital
expenditure budget on its oil properties, including Heidelberg Field, until oil
product prices recover. As a result of this curtailment, it is unlikely that the
proved reserves and production from this property will increase as quickly as
originally anticipated, thus causing a decline in the current value of this
property. Therefore, as of June 30, 1998, the Company has included the
Heidelberg Field in the full cost pool for its ceiling test which resulted in a
$165 million writedown of the full cost pool as of the same date. Of this total,
$106 million resulted from the inclusion of the Heidelberg Field in the full
cost pool and $28 million relates to an impairment of the unevaluated carrying
cost on this same field. As required by U.S. GAAP, this ceiling test was
computed using June 30, 1998 prices which were equivalent to a NYMEX oil price
of $14.00 per Bbl and an average net realized oil price of $8.90 per Bbl. This
writedown was approximately the same for both U.S. and Canadian GAAP.
7
<PAGE>
DENBURY RESOURCES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 30, 1998 and 1997
5. CONDENSED CONSOLIDATING FINANCIAL INFORMATION
Denbury Management, Inc. issued debt securities during February 1998 which
are fully and unconditionally guaranteed by Denbury Resources Inc. Denbury
Holdings Ltd. was merged into Denbury Resources Inc. in December 1997 and is not
a guarantor of the debt. Condensed consolidating financial information for
Denbury Resources Inc. and Subsidiaries as of June 30, 1998 and December 31,
1997 and for the six months ended June 30, 1998 and 1997 is as follows:
DENBURY RESOURCES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEETS
(Amounts in thousands of U.S. dollars)
<TABLE>
<CAPTION>
June 30, 1998 (Unaudited)
---------------------------------------------
Denbury Denbury Denbury
Management Resources Resources
Inc. Inc. Inc.
(Issuer) (Guarantor) Elimination Consolidated
-------- -------- ---------- ---------
<S> <C> <C> <C> <C>
ASSETS
Current assets...................$ 28,795 $ 187 $ - $ 28,982
Property and equipment (using
full cost accounting).......... 292,276 - - 292,276
Investment in subsidiaries
(equity method)................ - 131,671 (131,671) -
Other assets..................... 43,547 1 - 43,548
-------- -------- --------- ---------
Total assets..................$364,618 $131,859 $(131,671) $ 364,806
======== ======== ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities..............$ 36,742 $ 98 $ - $ 36,840
Long-term liabilities............ 196,205 - - 196,205
Shareholders' equity............. 131,671 131,761 (131,671) 131,761
-------- -------- --------- ---------
Total liabilities and
shareholders' equity......$364,618 $131,859 $(131,671) $ 364,806
======== ======== ========= =========
</TABLE>
<TABLE>
<CAPTION>
December 31, 1997
---------------------------------------------
Denbury Denbury Denbury
Management Resources Resources
Inc. Inc. Inc.
(Issuer) (Guarantor) Elimination Consolidated
-------- -------- ---------- ---------
<S> <C> <C> <C> <C>
ASSETS
Current assets...................$ 33,017 $ 363 $ - $ 33,380
Property and equipment (using
full cost accounting).......... 408,832 - - 408,832
Investment in subsidiaries
(equity method)................ - 159,892 (159,892) -
Other assets..................... 5,234 102 - 5,336
-------- -------- ---------- ---------
Total assets..................$447,083 $160,357 $ (159,892) $ 447,548
======== ======== ========== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities..............$ 30,554 $ 134 $ - $ 30,688
Long-term liabilities............ 256,637 - - 256,637
Shareholders' equity............. 159,892 160,223 (159,892) 160,223
-------- -------- ---------- ---------
Total liabilities and
shareholders' equity........$447,083 $160,357 $ (159,892) $ 447,548
======== ======== ========== =========
</TABLE>
8
<PAGE>
DENBURY RESOURCES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 30, 1998 and 1997
DENBURY RESOURCES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
(Amounts in thousands of U.S. dollars)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended June 30, 1998
---------------------------------------------
Denbury Denbury Denbury
Management Resources Resources
Inc. Inc. Inc.
(Issuer) (Guarantor) Elimination Consolidated
--------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Revenues........................$ 22,882 $ 1 $ - $ 22,883
Expenses........................ 195,016 51 - 195,067
--------- --------- ---------- ---------
Loss before the following: (172,134) (50) - (172,184)
Equity in net earnings
(losses) of subsidiaries.... - (121,889) 121,889 -
--------- --------- ---------- ---------
Loss before income taxes........ (172,134) (121,939) 121,889 (172,184)
Income tax benefit.............. 50,245 - - 50,245
--------- --------- ---------- ---------
Net loss........................$(121,889) $(121,939) $ 121,889 $(121,939)
========= ========= ========== =========
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended June 30, 1997
--------------------------------------------------------
Denbury Denbury Denbury
Management Denbury Resources Resources
Inc. Holdings Inc. Inc.
(Issuer) Ltd. (Guarantor) Elimination Consolidated
--------- --------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Revenues........................$ 19,014 $ - $ 37 $ (36) $ 19,015
Expenses........................ 15,512 - 36 (36) 15,512
--------- --------- --------- ---------- ---------
Income before the following: 3,502 - 1 - 3,503
Equity in net earnings of
subsidiaries............... - 2,206 2,206 (4,412) -
Income before income taxes...... 3,502 2,206 2,207 (4,412) 3,503
Provision for income taxes...... 1,296 - - - (1,296)
--------- --------- --------- ---------- ---------
Net income......................$ 2,206 $ 2,206 $ 2,207 $ (4,412) $ 2,207
========= ========= ========= ========== =========
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended June 30, 1998
---------------------------------------------
Denbury Denbury Denbury
Management Resources Resources
Inc. Inc. Inc.
(Issuer) (Guarantor) Elimination Consolidated
--------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Revenues........................$ 48,436 $ 2 $ - $ 48,438
Expenses........................ 221,579 96 - 221,675
--------- --------- ---------- ---------
Loss before the following: (173,143) (94) - (173,237)
Equity in net earnings
(losses) of subsidiaries... - (122,525) 122,525 -
--------- --------- ---------- ---------
Loss before income taxes........ (173,143) (122,619) 122,525 (173,237)
Income tax benefit.............. 50,618 - - 50,618
--------- --------- ---------- ---------
Net loss........................$(122,525) $(122,619) $ 122,525 $(122,619)
========= ========= ========== =========
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended June 30, 1997
--------------------------------------------------------
Denbury Denbury Denbury
Management Denbury Resources Resources
Inc. Holdings Inc. Inc.
(Issuer) Ltd. (Guarantor) Elimination Consolidated
--------- --------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Revenues........................$ 40,666 $ - $ 68 $ (66) $ 40,668
Expenses........................ 28,887 - 66 (66) 28,887
--------- --------- --------- ---------- ---------
Income before the following: 11,779 - 2 - 11,781
Equity in net earnings of
subsidiaries................. - 7,420 7,420 (14,840) -
--------- --------- --------- ---------- ---------
Income before income taxes...... 11,779 7,420 7,422 (14,840) 11,781
Provision for income taxes...... (4,359) - - - (4,359)
--------- --------- --------- ---------- ---------
Net income......................$ 7,420 $ 7,420 $ 7,422 $ (14,840) $ 7,422
========= ========= ========= ========== =========
</TABLE>
9
<PAGE>
6. PRODUCT PRICE HEDGING CONTRACTS
During June and July, 1998, the Company entered into two financial
contracts ("collars") to hedge a total of 40 million cubic feet of natural gas
per day ("MMcf/d"). The first natural gas contract for 35 MMcf/d covers the
period from July 1998 to June 1999 and has a floor price of $1.90 per million
British Thermal Units ("MMBtu") and a ceiling price of $2.96 per MMBtu. The
second natural gas contract for five MMcf/d covers the period from September
1998 to August 1999 and has a floor price of $1.90 per MMBtu and a ceiling price
of $2.89 per MMBtu. These contracts cover over 90% of the Company's current net
natural gas production.
10
<PAGE>
DENBURY RESOURCES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following should be read in conjunction with the response to Part I,
Item 1 of this Report and Items 7 and 8 of the Form 10-K. Any capitalized terms
used but not defined in this Item have the same meaning given to them in the
Form 10-K.
Denbury is an independent energy company engaged in acquisition,
development and exploration activities in the U.S. Gulf Coast region, primarily
onshore in Louisiana and Mississippi. Over the last few 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
Due to the drop and continued low oil prices, the Company's cash flow and
earnings have been significantly reduced. As more fully described under "Results
of Operations", between the first half of 1997 and 1998, the Company's net oil
product prices have decreased 39% ($7.11 per barrel of oil ("Bbl")) and natural
gas product prices have declined by 8% ($0.22 per thousand cubic feet of natural
gas ("Mcf")). In response to the decline in oil prices, the Company announced in
June 1998 that it was curtailing the horizontal drilling program on its oil
properties and generally focusing on projects that may impact future years, such
as expenditures on facilities, waterflood units, and a few higher potential
projects. This modification in the development program was also done at the
Heidelberg Field in Mississippi, a property acquired from Chevron (with
additional minor interests from other third parties) for over $200 million in
December, 1997 (the "Chevron Acquisition"). In contrast, the Company is
attempting to escalate its development on its natural gas properties and as part
of its normal operations, continuing to look at potential acquisitions.
Under full cost accounting rules, each quarter the Company is required to
perform a ceiling test calculation. In determining the limitation on carrying
values, U.S. accounting rules require the discounting of estimated future net
revenues from its proved reserves at 10% using constant current prices following
the guidelines of the Securities and Exchange Commission ("SEC") while the
Canadian guidelines require the use of the same future net revenues but on an
undiscounted basis and after the deduction of estimated future administrative
and financing costs. The Canadian accounting guidelines also allow a Company to
exclude acquired properties from the ceiling test calculation for up to two
years while the SEC allows an exclusion for only one year and then only after
obtaining approval. The Company obtained approval for such an exclusion from the
SEC and excluded Heidelberg Field from the full cost ceiling test as of March
31, 1998 as it believed that, based on its success with similar properties in
Mississippi, the value of this property was at least equal to its carrying cost.
As of March 31, 1998, the inclusion of Heidelberg Field in the ceiling test
would have resulted in a $35 million writedown.
Since that date, the oil prices have continued to decline with a drop of
approximately $1.45 in the NYMEX oil price from March 31 to June 30, 1998.
Furthermore, the gap between the NYMEX oil price and the net realized price has
widened since the first of 1998, causing the net realized price at Heidelberg
Field to drop approximately $1.00 per Bbl more than the decline in the NYMEX
price. As previously discussed, due to the continued low oil prices, in June
1998 the Company announced that it was reducing its drilling activity and
capital expenditure budget on its oil properties, including Heidelberg Field,
until oil product prices recover. As a result of this curtailment, it is
unlikely that the proved reserves and production from this property will
increase as quickly as originally anticipated, thus causing a decline in the
current value of this property. Therefore, as of June 30, 1998, the Company has
included the Heidelberg Field in the full cost pool for its ceiling test which
resulted in a $165 million writedown of the full cost pool as of the same date.
Of this total, $106 million resulted from the inclusion of the Heidelberg Field
in the full cost pool and $28 million relates to an impairment of the
unevaluated carrying cost on this same field. As required by U.S. GAAP, this
ceiling test was computed using June 30, 1998 prices which were equivalent to a
NYMEX oil price of $14.00 per Bbl and an average net realized oil price of $8.90
per Bbl. This writedown was approximately
11
<PAGE>
DENBURY RESOURCES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
the same for both U.S. and Canadian GAAP. Although this writedown reduced the
Company's capital below the threshold required by the Company's banks (see also
"Restated Credit Facility" below) and required the Company to obtain a waiver,
these charges are non-cash items and should not have any direct impact on the
Company's liquidity.
As of June 30, 1998, the Company had minimal working capital with $70
million of bank debt outstanding ($80 million outstanding as of July 31, 1998),
$125 million outstanding on its Notes and $95 million available on its bank
credit line. During the first half of 1998, the Company spent approximately $63
million on development and exploration and $13 million on acquisitions with a
current development and exploration budget for 1998 of approximately $100
million. Although the spending level is almost the same as the original budget,
the focus has changed from horizontal drilling on Mississippi oil properties to
expenditures on leasehold, seismic, injection wells and other facility work in
both Mississippi and Louisiana and projected increased drilling expenditures
during the last half of 1998 in Louisiana. A substantial portion of these
expenditures are directed to long term projects and are not expected to provide
benefit to the Company until 1999 and beyond. 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, the Company's projected
expenditures for the remainder of the year are expected to exceed the Company's
cash flow during that period and thus the Company will use a portion of its
remaining bank line availability. This capital budget will continue to be
reviewed on a regular basis and may be reduced, depending on oil and natural gas
prices and the availability of capital, to a level more in line with expected
cash flow. Such a decrease in expenditures would have a corresponding reduction
in anticipated production levels and related cash flow.
The banks are beginning their regular semi-annual review of the Company's
borrowing base. This review will be based on June 30, 1998 assets and reserves
and will be completed late in the third quarter. As of June 30, 1998, the
Company had $70 million outstanding on its bank credit facility ($80 million as
of July 31, 1998) against a total borrowing base of $165 million. Due to the
drop in oil prices, it is probable that the borrowing base will be reduced;
however, it is unlikely that it will be reduced to the point that it would
require an immediate repayment on the loan due to an over advance, nor is any
borrowing base reduction expected to have a direct impact on the Company's
current plans and budget. However, a significant reduction in credit
availability could force the Company to reduce its capital expenditure program
in order to remain in compliance with its bank agreement, causing a
corresponding reduction in anticipated production levels and related cash flow.
Oil prices have also deteriorated further since June 30, 1998 and if they do not
recover, the Company may incur additional ceiling test writedowns and have
further violations of its bank debt covenants.
In addition to its internal capital expenditure 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.
There can be no assurance that suitable acquisitions will be identified in the
future, that any such acquisitions will be successful in achieving desired
profitability objectives or that the Company will have capital available to fund
such acquisitions. Without suitable acquisitions or the capital to fund such
acquisitions, the Company's future growth could be limited or even eliminated.
In further response to the decline in oil prices and to mitigate additional
price-related negative effects on the Company's cash flow, in June and July,
1998, the Company entered into two financial contracts ("collars") to hedge a
total of 40 million cubic feet of natural gas per day ("MMcf/d") of natural gas
production. The first natural gas contract for 35 MMcf/d covers the period from
July 1998 to June 1999 and has a floor price of $1.90 per million British
Thermal Units ("MMBtu") and a ceiling price of $2.96 per MMBtu. The second
natural gas contract for five MMcf/d covers the period from September 1998 to
August 1999 and has a floor price of $1.90 per MMBtu and a ceiling price of
$2.89 per MMBtu. These contracts cover over 90% of the Company's current net
natural gas production.
12
<PAGE>
DENBURY RESOURCES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Restated Credit Facility
The Company has a credit facility (the "Credit Facility") with NationsBank
of Texas, N.A., as agent and part of a group of eight other banks. The Credit
Facility was increased in size from $150 million to $300 million in December
1997 and the borrowing base was increased to $260 million in order to fund the
Chevron Acquisition. The December 31, 1997 outstanding balance of $240 million
was reduced to $40 million as of February 26, 1998 after application of the net
proceeds from the Debt and Equity Offerings and the TPG Purchase (collectively
the "Capital Transactions" as herein defined), net of $9.8 million of additional
borrowings.
The Credit Facility consists of a five-year revolving credit facility with
a borrowing base (after the Capital Transactions) of $165 million. This
borrowing base is subject to review every six months and the Credit Facility is
secured by substantially all of the Company's oil and natural gas properties,
except for those acquired in the Chevron Acquisition. Interest is payable on the
revolving credit facility at either the 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 13/8%. 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 in the Credit Agreement); (iv)
a minimum interest coverage test; and (v) a prohibition on most debt, lien and
corporate guarantees.
As previously discussed in "Capital Resources and Liquidity", the next
credit review of the borrowing base will be based on June 30, 1998 assets and
reserves and will be completed late in the third quarter. As a result of the
non-cash writedown of oil and natural gas properties at June 30, 1998, the
Company did default on the minimum equity requirements in the loan agreement.
The Company has received a waiver of such requirement and amended the equity
requirement section of the bank agreement.
1998 Public Debt and Equity Offering
On February 26, 1998, the Company closed its public sale of 5,240,780
Common Shares (which included the underwriter's over-allotment option of 683,580
Common Shares) at a price of $16.75 per share and a net price to the Company of
$15.955 per share (the "Equity Offering"). Concurrently with the Equity
Offering, affiliates of the Texas Pacific Group ("TPG"), the Company's largest
shareholder, purchased 313,400 Common Shares from the Company at $15.955 per
share, equal to the price to the public per share less underwriting discounts
and commissions (the "TPG Purchase"). The net proceeds to the Company from the
Equity Offering and TPG Purchase were approximately $88.6 million, before
offering expenses.
Concurrently with the Equity Offering and TPG Purchase, Denbury Management
Inc., a wholly owned subsidiary of the Company, issued $125 million in aggregate
principal amount of 9% Senior Subordinated Notes Due 2008 (the "Debt Offering"
and the "Notes"). These Notes contain certain debt covenants, including
covenants that limit (i) indebtedness, (ii) certain payments including
dividends, (iii) sale/leaseback transactions, (iv) transactions with affiliates,
(v) liens, (vi) asset sales, and (vii) mergers and consolidations. The net
proceeds to the Company from the Debt Offering were approximately $121.8
million, before offering expenses.
The total net proceeds from the debt and equity offerings (the "Capital
Transactions") were approximately $209.5 million after deducting the total
offering expenses of $900,000. The Company used these proceeds to reduce
outstanding borrowings under the Company's bank credit facility, the majority of
which had been borrowed to fund the December 1997 $202 million acquisition of
properties from Chevron (the "Chevron Acquisition").
Sources and Uses of Funds
During the first half of 1998, the Company spent approximately $63.1
million on exploration and development activities and approximately $13.2
million on acquisitions. The exploration and development expenditures included
approximately $38.0 million spent on drilling, $14.1 million on geological,
geophysical and acreage expenditures and $11.0 million on workover costs. These
expenditures were funded by bank debt and cash flow from operations.
13
<PAGE>
DENBURY RESOURCES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
During the first half of 1997, the Company spent approximately $32.6
million on oil and natural gas development activities and approximately $3.5
million on acquisitions. The development expenditures included approximately
$18.5 million spent on drilling, $4.3 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 and cash flow from
operations.
Acquisition Updates
On December 30, 1997, the Company acquired oil properties in the Heidelberg
Field, Jasper County, Mississippi, from Chevron for approximately $202 million,
plus other minor interests from other third parties (collectively the "Chevron
Acquisition"). The Chevron Acquisition represents the largest acquisition by the
Company to date. The average net daily production from these properties during
the fourth quarter of 1997 was approximately 2,800 barrels of oil per day
("Bbls/d") and 650 thousand cubic feet of natural gas per day ("Mcf/d"). During
the first half of 1998, the average net daily production increased to
approximately 3,285 BOE/d and was approximately 4,100 BOE/d as of June 30, 1998.
This increase resulted primarily from 8 horizontal wells drilled during the
first six months; however, as a result of the low oil prices, the Company has
postponed the drilling of 14 other horizontal wells originally planned for this
year. Because of this reduction in planned drilling expenditures, the production
is not expected to materially change at Heidelberg Field during the remainder of
1998. The Company is still planning on spending approximately $10 to $15 million
on this field during the remainder of the year, but these are expenditures which
primarily relate to the East Heidelberg waterflood unit and other facilities and
expenditures which are not expected to have any material impact on production
rates until 1999 or beyond.
The Company completed several property acquisitions during 1996, the
largest of which was the acquisition of producing oil and natural gas
properties, principally in Mississippi and Louisiana, for approximately $37.2
million from Amerada Hess, effective May 1, 1996 (the "Hess Acquisition"). The
average daily production from the properties included in the Hess Acquisition
during May and June 1996, the first two months of ownership, was approximately
2,945 BOE/d. The average daily production on these properties had increased to
5,969 BOE/d during the fourth quarter of 1997 and 9,563 BOE/d during the first
half of 1998.
RESULTS OF OPERATIONS
Operating Income
While production volumes were 69% higher on a BOE basis during the first
half of 1998 as compared to the first half of 1997, operating income increased
only 7% due to a 29% decline in product prices (on a BOE basis), as set forth in
the following chart.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
- --------------------------------- -------------------- ------------------
1998 1997 1998 1997
- --------------------------------- --------- -------- -------- -------
<S> <C> <C> <C> <C>
OPERATING INCOME (THOUSANDS)
Oil sales $ 14,655 $ 11,474 $ 30,828 $24,351
Natural gas sales 7,853 7,288 16,868 15,552
Less production expenses (8,109) (5,259) (15,963) (10,312)
--------- -------- -------- -------
Operating income $ 14,399 $ 13,503 $ 31,733 $29,591
========= ======== ======== =======
UNIT PRICES
Oil price per barrel ("Bbl") $ 10.29 $ 16.71 $ 11.21 $ 18.32
Gas price per thousand cubic
feet ("Mcf") 2.29 2.28 2.39 2.61
</TABLE>
14
<PAGE>
DENBURY RESOURCES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- ------------------
1998 1997 1998 1997
--------- -------- -------- -------
<S> <C> <C> <C> <C>
NETBACK PER BOE (1):
Sales price $ 11.28 $ 15.38 $ 12.15 $ 17.18
Production expenses (4.06) (4.31) (4.07) (4.44)
--------- -------- -------- -------
Production netback $ 7.22 $ 11.07 $ 8.08 $ 12.74
========= ======== ======== =======
AVERAGE DAILY PRODUCTION VOLUME:
Bbls 15,649 7,543 15,191 7,345
Mcf 37,665 35,166 38,963 32,933
BOE 21,927 13,405 21,685 12,833
- --------------------------------- --------- -------- -------- -------
<FN>
(1) Barrel of oil equivalent using the ratio of one barrel of oil to 6 Mcf of
natural gas ("BOE").
</FN>
</TABLE>
The production increases were fueled by both internal growth from the
Company's development and exploration programs and from the acquisition of
producing properties during 1997, particularly the Chevron Acquisition in
December 1997. The properties included in the Chevron Acquisition contributed
approximately 2,990 BOE/d to the increase during the first quarter of 1998 and
3,575 BOE/d during the second quarter of 1998, with the remainder of the
increase almost solely as a result of internal development, primarily on the
properties acquired in the Hess Acquisition. During the first and second
quarters of 1998, the production from these Hess properties averaged 9,390 BOE/d
and 9,730 BOE/d respectively, a 114% and 111% increase from the average of 4,385
BOE/d and 4,613 BOE/d during the comparable periods of 1997.
Oil and gas revenue increased as a result of the large increase in
production, although the revenue increase was not proportional to the production
increase due to a substantial decline primarily in oil, but also in natural gas
product prices. Between the second quarter of 1997 and 1998, oil product prices
decreased 38% ($6.42 per Bbl) while natural gas product prices were almost
identical during the two periods (at approximately $2.29 per Mcf). When
comparing the prices for the comparable six month periods, oil product prices
decreased 39% ($7.11 per Bbl) and natural gas product prices declined by 8%
($0.22 per Mcf).
Production and operating expenses increased between 1997 and 1998 primarily
due to an increase in the number of properties, with the largest increase coming
from the addition of properties acquired in the Chevron Acquisition. Even though
the number of properties increased, production increased at a faster pace
allowing the Company to reduce its production and operating expenses on a BOE
basis by 6% from the second quarter of 1997 to the comparable quarter in 1998
and 8% when comparing the first half of 1998 to the first half of 1997. For the
properties acquired in the Hess Acquisition, the operating expenses declined
from the 1996 level of $5.35 per BOE to $4.56 per BOE for 1997 and were further
reduced to $3.12 for the first half of 1998. This reduction is largely
attributable to the Company's emphasis in 1997 and early 1998 on horizontal
drilling on these properties and the resultant increases in production. The
Company has been able to achieve these reductions in operating expenses per BOE
even though the Company's production has become even more weighted towards oil
(which has higher operating costs) with approximately 70% of the Company's first
half 1998 production coming from oil as compared to 57% during the first half of
1997. The operating expenses per BOE for the properties acquired in the Chevron
Acquisition averaged $5.31 per BOE for the first half of 1998, a significant
decline from the average of approximately $6.38 per BOE when the properties were
owned by Chevron.
General and Administrative Expenses
General and administrative ("G&A") expenses have increased as set forth
below along with the Company's growth.
15
<PAGE>
DENBURY RESOURCES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
- -------------------------------- ------------------ -------------------
1998 1997 1998 1997
- -------------------------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
NET G&A EXPENSES (THOUSANDS)
Gross expenses $ 4,848 $ 3,329 $ 9,750 $ 6,671
State franchise taxes 232 108 432 205
Operator overhead charges (2,444) (1,223) (4,919) (2,391)
Capitalized exploration expenses (727) (507) (1,378) (1,160)
-------- -------- -------- --------
Net expenses $ 1,909 $ 1,707 $ 3,885 $ 3,325
======== ======== ======== ========
Average G&A cost per BOE $ 0.96 $ 1.40 $ 0.99 $ 1.43
Employees as of June 30 202 131 202 131
- -------------------------------- -------- -------- -------- --------
</TABLE>
On a BOE basis, G&A costs decreased 31% from the second quarter of 1997 to
the comparable period in 1998 and 31% when comparing the first half of 1998 to
the first half of 1997, in part because of increased production on both an
absolute and per well basis. Furthermore, the respective well operating
agreements allow the Company, when it is the operator, to charge a well with a
specified overhead rate during the drilling phase and to also charge a monthly
fixed overhead rate for each producing well. As a result of the increased
drilling activity in early 1998 and the addition of several producing wells
acquired in the Chevron Acquisition, 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 in 1997.
During the first half of 1997, approximately 36% of gross G&A was recovered by
operator overhead charges, while during the first half of 1998 this recovery
increased to 50%, with similar changes between the respective second quarters.
This significant increase in overhead recoveries is not expected to be as
pronounced during the second half of 1998 as a result of the curtailed drilling
expenditures on oil properties, thus reducing the amount of overhead recovered
from drilling wells which will result in a net increase in future G&A expenses.
Interest and Financing Expenses
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
- ------------------------------------ ------------------ -----------------
AMOUNTS IN THOUSANDS EXCEPT PER UNIT
AMOUNTS 1998 1997 1998 1997
- ------------------------------------ -------- ------- -------- -------
<S> <C> <C> <C> <C>
Interest expense $ 3,978 $ 73 $ 8,369 $ 152
Non-cash interest expense (164) (25) (285) (44)
-------- ------- -------- -------
Cash interest expense 3,814 48 8,084 108
Interest and other income (375) (253) (742) (765)
-------- ------- -------- -------
Net interest expense (income) $ 3,439 $ (205) $ 7,342 $ (657)
======== ======= ======== =======
Average interest expense (income)
per BOE $ 1.72 $ (0.17) $ 1.87 $ (0.28)
Average debt outstanding 179,844 158 195,673 170
- ------------------------------------ -------- ------- -------- -------
</TABLE>
During the first half of 1997 the Company had minimal debt outstanding as
virtually all bank debt had been retired during the fourth quarter of 1996 with
proceeds from a public offering of Common Shares completed in October 1996.
Conversely, in December 1997, the Company borrowed $202 million to fund the
Chevron Acquisition resulting in $240 million of outstanding bank debt during
January and most of February 1998. On February 26, 1998 this debt was refinanced
with proceeds from the Capital Transactions leaving a bank balance of $40
million for the rest of the first quarter of 1998, plus $125 million of debt
from the issuance of the Notes. This bank debt increased to $70
16
<PAGE>
DENBURY RESOURCES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
million during the second quarter of 1998 and the Notes were outstanding for the
entire quarter. These transactions resulted in substantially higher interest
expense for the first half and second quarter of 1998 as compared to the
comparable periods of 1997, on both an absolute and BOE basis.
Depletion, Depreciation and Site Restoration
Depletion, depreciation and amortization ("DD&A") has increased along with
the additional capitalized cost and increased production. DD&A per BOE increased
from $6.50 for 1997 to $7.25 for the first half of 1998 primarily as a result of
the decline in oil price. The reduced oil price causes wells to reach the end of
their economic life much sooner and also makes certain proved undeveloped
locations uneconomical, both of which reduce the reserve quantities. This
reduction due to price amounted to approximately 7.2 million Bbls based on a
comparison with reserves calculated using the December 31, 1997 and June 30,
1998 prices.
Under full cost accounting rules, each quarter the Company is required to
perform a ceiling test calculation. See "Capital Resources and Liquidity" for a
discussion of the writedown taken as of June 30, 1998.
The Company also provides for the estimated future costs of well
abandonment and site reclamation, net of any anticipated salvage, on a
unit-of-production basis. This provision is included in the DD&A expense.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
- --------------------------------- -------------------- ----------------
AMOUNTS IN THOUSANDS EXCEPT PER
UNIT AMOUNTS 1998 1997 1998 1997
- --------------------------------- --------- -------- ------- -------
<S> <C> <C> <C> <C>
Depletion and depreciation $ 15,972 $ 8,355 $28,270 $14,843
Site restoration provision 99 118 188 255
--------- -------- ------- -------
Total amortization $ 16,071 $ 8,473 $28,458 $15,098
========= ======== ======= =======
Average DD&A cost per BOE $ 8.05 $ 6.95 $ 7.25 $ 6.50
- --------------------------------- --------- -------- ------- -------
</TABLE>
Income Taxes
Due to a net operating loss of the U.S. subsidiary each year for tax
purposes, the Company does not have any current tax provision. The deferred
income tax provision as a percentage of net income varies slightly depending on
the mix of Canadian and U.S. expenses. In addition, as a result of the
previously discussed $165 million writedown of its oil and natural gas
properties and the resultant net pre-tax loss of $172.2 million, an income tax
provision using the effective tax rate of 37% would result in a $48 million
deferred tax asset. Since the Company currently has a large tax net operating
loss, it is uncertain whether this total tax asset could ultimately be realized.
As such, the Company has impaired and reduced the deferred tax asset by $13
million, resulting in a net asset of $35 million and a 29% effective tax benefit
rate for the first half of 1998.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
- --------------------------------- -------------------- ----------------
1998 1997 1998 1997
- --------------------------------- --------- -------- ------- -------
<S> <C> <C> <C> <C>
Deferred income taxes (thousands) $ (50,245) $ 1,296 $(50,618) $4,359
Average income tax costs
(benefit) per BOE $ (25.18) $ 1.06 $ (12.90) $ 1.88
Effective tax rate 29% 37% 29% 37%
- --------------------------------- --------- -------- ------- -------
</TABLE>
17
<PAGE>
DENBURY RESOURCES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Even though production was up during 1998 and most expenses, other than
interest expense, have shown a strong improvement on a BOE basis, as a result of
the decline in product prices, net income and cash flow from operations
decreased substantially on both a gross and per share basis between both periods
of 1997 and 1998 as set forth below. In addition, at June 30, 1998, the Company
incurred a $165 million non-cash charge to operations to writedown the carrying
value of its oil and natural gas properties as previously discussed.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
- --------------------------------------- ------------------- -----------------
AMOUNTS IN THOUSAND EXCEPT PER SHARE
AMOUNTS 1998 1997 1998 1997
- --------------------------------------- --------- -------- --------- -------
<S> <C> <C> <C> <C>
Net income (loss) $(121,939) $ 2,207 $(122,619) $ 7,422
Net income (loss) per common share:
Basic $ (4.57) $ 0.11 $ (4.89) $ 0.37
Fully diluted (4.57) 0.11 (4.89) 0.35
Cash flow from operations (1) $ 9,052 $ 12,001 $ 20,507 $26,923
- --------------------------------------- --------- -------- --------- -------
<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 results of
operations on a BOE basis for the comparative periods. Each of the individual
components are discussed above.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
- --------------------------------------- ------------------- ----------------
Per BOE Data 1998 1997 1998 1997
- --------------------------------------- -------- -------- ------- ------
<S> <C> <C> <C> <C>
Revenue $ 11.28 $ 15.38 $ 12.15 $17.18
Production expenses (4.06) (4.31) (4.07) (4.44)
- --------------------------------------- -------- -------- ------- ------
Production netback 7.22 11.07 8.08 12.74
General and administrative (0.96) (1.40) (0.99) (1.43)
Interest and other income (expense) (1.72) 0.17 (1.87) 0.28
- --------------------------------------- -------- -------- ------- ------
Cash flow from operations(a) 4.54 9.84 5.22 11.59
DD&A (8.05) (6.95) (7.25) (6.50)
Deferred income taxes 25.18 (1.06) 12.90 (1.88)
Writedown of oil and natural gas
properties (82.69) - (42.04) -
Other non-cash items (0.09) (0.02) (0.07) (0.01)
- --------------------------------------- -------- -------- ------- ------
Net income (loss) $ (61.11) $ 1.81 $(31.24) $ 3.20
- --------------------------------------- -------- -------- ------- ------
<FN>
(a) 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 and is also making inquiries
with regard to the systems used by its oil and natural gas purchasers and other
third parties that the Company relies on as part of its normal business. The
Company does not believe that it will incur any material expenditures, nor
require any significant modifications to make its internal systems year 2000
compliant; however, it has not yet fully evaluated the status of third-party
systems and the effect, if any, on the Company if third-party systems are not
year 2000 compliant.
18
<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.
19
<PAGE>
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K during the Second Quarter of 1998
Exhibits:
10 Third amendment to First Restated Credit Agreement dated August 10,
1998 between the Company and NationsBank of Texas, N.A. as agent, and
each of the financial institutions described on the signature page
therein.
Reports on Form 8-K:
None
20
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DENBURY RESOURCES INC.
(Registrant)
By: /s/ Phil Rykhoek
-------------------------------
Phil Rykhoek
Chief Financial Officer
By: /s/ Bobby J. Bishop
-------------------------------
Bobby J. Bishop
Chief Accounting Officer & Controller
Date: August 12, 1998
21
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
DENBURY RESOURCES INC. JUNE 30, 1998 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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<EXCHANGE-RATE> 1
<CASH> 9,079
<SECURITIES> 0
<RECEIVABLES> 19,903
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 28,982
<PP&E> 547,817
<DEPRECIATION> 255,541
<TOTAL-ASSETS> 364,806
<CURRENT-LIABILITIES> 36,840
<BONDS> 125,000
0
0
<COMMON> 227,296
<OTHER-SE> (95,535)
<TOTAL-LIABILITY-AND-EQUITY> 364,806
<SALES> 47,696
<TOTAL-REVENUES> 48,438
<CGS> 0
<TOTAL-COSTS> 213,306
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,369
<INCOME-PRETAX> (173,237)
<INCOME-TAX> (50,618)
<INCOME-CONTINUING> (122,619)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (122,619)
<EPS-PRIMARY> (4.89)
<EPS-DILUTED> (4.89)
</TABLE>
<PAGE>
THIRD AMENDMENT TO FIRST RESTATED CREDIT AGREEMENT
This Third Amendment to First Restated Credit Agreement (this "Third
Amendment") is entered into as of the 10th day of August, 1998, but to be
effective as of June 30, 1998, by and among Denbury Management, Inc.
("Borrower"), Denbury Resources, Inc. ("Parent"), NationsBank of Texas, N.A., as
Administrative Agent ("Agent"), and each of the financial institutions described
on the signature page hereto as Banks ("Banks").
W I T N E S S E T H
WHEREAS, Borrower, Parent, Agent and the Banks are parties to that certain
First Restated Credit Agreement dated as of December 29, 1997, as amended by
that certain First Amendment to First Restated Credit Agreement dated as of
January 27, 1998 and that certain Second Amendment to First Restated Credit
Agreement dated as of February 25, 1998 (as amended, "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
WHEREAS, Borrower has advised Agent and Banks that Parent and Borrower
intend to write down the carrying value of certain assets and take other charges
to earnings in an aggregate amount of $165,000,000 effective June 30, 1998
(collectively, the "Write Down"); and
WHEREAS, after giving effect to the Write Down, Borrower will not be in
compliance with the tangible net worth covenant contained in the Credit
Agreement; and
WHEREAS, Borrower has requested that the Banks and Agent agree to amend the
definition of Required Consolidated Tangible Net Worth contained in the Credit
Agreement; and
WHEREAS, the Banks have agreed to such request.
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 Third Amendment, the Credit Agreement
shall be amended effective June 30, 1998 (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 definition of "Third Amendment" as follows:
"Third Amendment" means that certain Third Amendment to First Restated
Credit Agreement dated as of June 30, 1998 among Borrower, Parent, Agent
and Banks.
1.2. Amendment to Definitions. The definitions of "Loan Papers" and
"Required Consolidated Tangible Net Worth" in Section 1.1 of the Credit
Agreement shall be amended to read in full as follows:
<PAGE>
"Loan Papers" means this Agreement, the First Amendment, the Second
Amendment, the Third Amendment, the Notes, the Facility Guarantees, the
Parent Pledge Agreement, the Existing Mortgages (as amended by the
Amendment to Mortgages), and 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.
"Required Consolidated Tangible Net Worth" means, initially,
$100,000,000; provided, that, the Required Consolidated Tangible Net Worth
shall (a) increase (but not decrease) on each Quarterly Date after July 1,
1998 by an amount equal to fifty percent (50%) of Parent's Consolidated Net
Income for the Fiscal Quarter then ended, and (b) increase on the date of
any issuance by Parent of its equity securities after July 1, 1998, by an
amount equal to fifty percent (50%) of the net proceeds received by Parent
from the issuance of such securities.
Section 2. Representations and Warranties of Borrower. To induce the Banks
and Agent to enter into this Third Amendment, Borrower and Parent hereby
represent and warrant to Agent as follows:
(a) Each representation and warranty of Borrower and Parent 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 Parent of this
Third Amendment are within the Borrower's and Parent'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 Parent or
result in the creation or imposition of any Lien upon any of the assets of
Borrower or the Subsidiaries of Borrower or the Parent except Permitted
Encumbrances.
(c) This Third Amendment constitutes the valid and binding obligations of
Borrower and the Parent 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 Parent have no defenses to payment, counterclaim or rights
of set-off with respect to the Obligations existing on the date hereof.
(e) Parent and Borrower will take the Write Down on their June 30, 1998
financial statements, and if they do not do so, this Third Amendment will be
rendered null and void and of no further force or effect.
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
Parent 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.
<PAGE>
3.2 Parties in Interest. All of the terms and provisions of this Third
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 Third Amendment and all related
documents.
3.4 Counterparts. This Third Amendment may be executed in counterparts, and
all parties need not execute the same counterpart; however, no party shall be
bound by this Third Amendment until all parties have executed a counterpart.
Facsimiles shall be effective as originals.
3.5 Complete Agreement. THIS THIRD 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 Third
Amendment are, unless specified otherwise, for convenience only and shall not be
deemed to limit, amplify or modify the terms of this Third Amendment, nor affect
the meaning thereof.
IN WITNESS WHEREOF, the parties hereto have caused this Third Amendment to
be duly executed by their respective authorized officers on the date and year
first above written.
BORROWER:
DENBURY MANAGEMENT, INC.,
a Texas corporation
By:_________________________________
Gareth Roberts
President and Chief Executive Officer
By:_________________________________
Phil Rykhoek
Chief Financial Officer and Secretary
<PAGE>
PARENT:
DENBURY RESOURCES, INC.,
a corporation incorporated under the
Canada Business Corporations Act
By:_________________________________
Gareth Roberts
President and Chief Executive Officer
By:_________________________________
Phil Rykhoek
Chief Financial Officer and Secretary
ADMINISTRATIVE AGENT:
NATIONSBANK OF TEXAS, N.A.
By:_________________________________
J. Scott Fowler
Vice President
BANKS:
NATIONSBANK OF TEXAS, N.A.
By:_________________________________
J. Scott Fowler
Vice President
BANKBOSTON, N.A.
By:_________________________________
Name:_______________________________
Title:______________________________
<PAGE>
WELLS FARGO BANK (TEXAS), N.A.
By:_________________________________
Name:_______________________________
Title:______________________________
CREDIT LYONNAIS NEW YORK BRANCH
By:_________________________________
Name:_______________________________
Title:______________________________
PARIBAS
By:_________________________________
Name:_______________________________
Title:______________________________
By:_________________________________
Name:_______________________________
Title:______________________________
NATEXIS BANQUE BFCE
By:_________________________________
Name:_______________________________
Title:______________________________
CHRISTIANIA BANK OG KREDITKASSE ASA
By:_________________________________
Name:_______________________________
Title:______________________________
BANK ONE, TEXAS, N.A.
By:_________________________________
Name:_______________________________
Title:______________________________
CHASE BANK OF TEXAS,
National Association
By:_________________________________
Name:_______________________________
Title:______________________________
