UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
----------------------
(Mark One)
X Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended June 30, 2000
Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission file number 1-12935
---------------------------
DENBURY RESOURCES INC.
(Exact name of Registrant as specified in its charter)
Delaware
(State or other
jurisdiction of 75-2815171
incorporation or (I.R.S. Employer
organization) Identification No.)
5100 Tennyson Parkway
Suite 3000
Plano, TX
(Address of principal 75024
executive offices) (Zip code)
Registrant's telephone number, including area code: (972) 673-2000
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes x No
Indicate 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, 2000
----- ----------------------------
Common Stock, $.001 par value 45,853,567
<PAGE>
DENBURY RESOURCES INC.
INDEX
Part I. Financial Information Page
------------------------------ ----
Item 1. Financial Statements
Independent Accountants' Report 3
Condensed Consolidated Balance Sheets at
June 30, 2000 (Unaudited)and December 31, 1999 4
Condensed Consolidated Statements of Operations
for the Three and Six Months ended June 30, 2000
and 1999 (Unaudited) 5
Condensed Consolidated Statements of Cash Flows
for the Six Months ended June 30, 2000
and 1999 (Unaudited) 6
Notes to Condensed Consolidated Financial Statements 7-9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10-17
Item 3. Quantitative and Qualitative Disclosures about
Market risk 17
Part II. Other Information
----------------------------
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
2
<PAGE>
Part I. Financial Information
Item 1. Financial Statements
-----------------------------
INDEPENDENT ACCOUNTANTS' REPORT
To the Board of Directors of Denbury Resources Inc.:
We have reviewed the accompanying condensed consolidated balance sheet of
Denbury Resources Inc. and subsidiaries (the "Company") as of June 30, 2000, and
the related condensed consolidated statements of operations for the three and
six-month periods ended June 30, 2000 and 1999 and cash flows for the six-month
periods ended June 30, 2000 and 1999. These financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and of making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with auditing standards generally accepted in the United States of America, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to such condensed consolidated financial statements for them to be in
conformity with accounting principles generally accepted in the United States of
America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet of
Denbury Resources Inc. and subsidiaries as of December 31, 1999 and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the year then ended (not presented herein); and in our report dated February 22,
2000, we expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the accompanying
condensed consolidated balance sheet as of December 31, 1999 is fairly stated,
in all material respects, in relation to the consolidated balance sheet from
which it has been derived.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Dallas, Texas
August 2, 2000
3
<PAGE>
DENBURY RESOURCES INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands of U.S. dollars except share amounts)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
--------- ---------
(Unaudited)
Assets
<S> <C> <C>
Current assets
Cash and cash equivalents $ 13,563 $ 11,768
Accrued production receivable 24,596 15,836
Trade and other receivables 5,072 2,942
-------- --------
Total current assets 43,231 30,546
-------- --------
Property and equipment (using full cost accounting)
Oil and gas properties 657,855 587,412
Unevaluated oil and gas properties 8,131 41,371
Less accumulated depreciation and depletion (432,364) (417,828)
-------- --------
Net property and equipment 233,622 210,955
-------- --------
Other assets 10,545 11,065
-------- --------
Total assets $287,398 $252,566
======== ========
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable and accrued liabilities $ 25,420 $ 18,042
Oil and gas production payable 11,913 7,120
-------- --------
Total current liabilities 37,333 25,162
-------- --------
Long-term liabilities
Long-term debt 148,500 152,500
Provision for site reclamation costs 2,738 1,820
Other liabilities 654 656
-------- --------
Total long-term liabilities 151,892 154,976
-------- --------
Stockholders' equity
Preferred stock, $.001 par value, 25,000,000
shares authorized; none issued and outstanding - -
Common stock, $.001 par value, 100,000,000
shares authorized; 45,853,567 and 45,718,486
shares issued and outstanding at June 30, 2000
and December 31, 1999, respectively 46 46
Paid-in capital in excess of par 328,456 327,829
Accumulated deficit (230,329) (255,447)
-------- --------
Total stockholders' equity 98,173 72,428
-------- --------
Total liabilities and stockholders' equity $287,398 $252,566
======== ========
</TABLE>
(See accompanying notes to Condensed Consolidated Financial Statements)
4
<PAGE>
DENBURY RESOURCES INC..
CONDENSED 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,
------------------ ------------------
2000 1999 2000 1999
--------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues
Oil, gas and related product
sales $ 37,185 $ 17,858 $ 72,387 $ 32,561
Interest and other income 365 370 930 731
--------- -------- -------- --------
Total revenues 37,550 18,228 73,317 33,292
--------- -------- -------- --------
Expenses
Operating costs 9,104 5,601 18,136 10,913
Production taxes 1,654 886 3,311 1,429
General and administrative 1,903 1,669 3,875 3,560
Interest 3,610 3,820 7,218 8,678
Depletion and depreciation 7,505 5,610 15,330 10,945
Franchise taxes 151 150 289 304
--------- -------- -------- --------
Total expenses 23,927 17,736 48,159 35,829
--------- -------- -------- --------
Income (loss) before income taxes 13,623 492 25,158 (2,537)
Income tax provision 20 - 40 -
--------- -------- -------- --------
Net income (loss) $ 13,603 $ 492 $ 25,118 $ (2,537)
========= ======== ======== ========
Net income (loss) per common share
Basic $ 0.30 $ 0.01 $ 0.55 $ (0.07)
Diluted 0.30 0.01 0.55 (0.07)
Weighted average common shares
outstanding
Basic 45,799 41,407 45,759 34,145
Diluted 46,099 41,475 45,885 34,145
</TABLE>
(See accompanying notes to Condensed Consolidated Financial Statements)
5
<PAGE>
DENBURY RESOURCES INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands of U.S. dollars)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-----------------------
2000 1999
--------- --------
<S> <C> <C>
Cash flow from operating activities:
Net income (loss) $ 25,118 $ (2,537)
Adjustments needed to reconcile to net cash flow
provided by operations:
Depreciation, depletion and amortization 15,330 10,945
Other 454 687
--------- --------
40,902 9,095
Changes in working capital items relating to
operations:
Accrued production receivable (8,760) (1,940)
Trade and other receivables (1,470) 5,814
Accounts payable and accrued liabilities 7,378 (3,986)
Oil and gas production payable 4,793 912
--------- --------
Net cash flow provided by operations 42,843 9,895
--------- --------
Cash flow used for investing activities:
Oil and natural gas expenditures (36,320) (12,797)
Acquisitions of oil and natural gas properties (1,784) (6,593)
Proceeds from dispositions of oil and natural gas 901 -
properties
(Increases) decreases in restricted cash 280 (342)
Net purchases of other assets (627) (759)
--------- --------
Net cash used for investing activities (37,550) (20,491)
--------- --------
Cash flow from financing activities:
Bank repayments (4,000) (100,000)
Bank borrowings - 17,500
Issuance of common stock 627 99,583
Other (125) (487)
--------- --------
Net cash provided by (used for) financing activities (3,498) 16,596
--------- --------
Net increase in cash and cash equivalents 1,795 6,000
Cash and cash equivalents at beginning of period 11,768 2,049
--------- --------
Cash and cash equivalents at end of period $ 13,563 $ 8,049
========= ========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 6,762 $ 9,409
========= ========
</TABLE>
(See accompanying notes to Condensed Consolidated Financial Statements)
6
<PAGE>
1. ACCOUNTING POLICIES
Interim Financial Statements
The accompanying condensed consolidated financial statements of Denbury
Resources Inc. (the "Company" or "Denbury") have been prepared in accordance
with generally accepted accounting principles and pursuant to the rules and
regulations of the Securities and Exchange Commission ("SEC"). 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, 1999. Any
capitalized terms used but not defined in these Notes to Condensed Consolidated
Financial Statements have the same meaning given to them in the Form 10-K.
The financial data for the three and six month periods ended June 30, 2000
and 1999, included herein, have been subjected to a limited review by Deloitte &
Touche LLP, Denbury's independent accountants. Accounting measurements at
interim dates inherently involve greater reliance on estimates than at year end
and the results of operations for the interim periods shown in this report are
not necessarily indicative of results to be expected for the fiscal year. In the
opinion of management of Denbury, the accompanying unaudited condensed
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, 2000 and the consolidated results of its operations for
the three and six months ended June 30, 2000 and 1999 and its cash flows for the
six months ended June 30, 2000 and 1999.
2. NET INCOME (LOSS) PER COMMON SHARE
Basic net income (loss) per common share is computed by dividing net income
or loss by the weighted average number of shares of common stock outstanding
during the period. Diluted net income (loss) per common share is calculated in
the same manner but also considers the impact on net income and common shares
for the potential dilution from stock options and any other convertible
securities outstanding. For the three and six month periods ended June 30, 2000
and 1999, there were no adjustments to net income for purposes of calculating
diluted net income (loss) per common share. The following is a reconciliation of
the weighted average common shares used in the basic and diluted net income
(loss) per common share calculations for the three and six month periods ended
June 30, 2000 and 1999 (shares in thousands).
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ -----------------
2000 1999 2000 1999
-------- -------- ------- --------
<S> <C> <C> <C> <C>
Weighted average common
shares - basic 45,799 41,407 45,759 34,145
Potentially dilutive securities:
Stock options 300 68 126 -
-------- -------- ------- --------
Weighted average common
shares - diluted 46,099 41,475 45,885 34,145
======== ======== ======= ========
</TABLE>
For the three and six months ended June 30, 2000, approximately 1.7 million
of the 3.8 million stock options outstanding were excluded from the diluted net
income per common share calculation as the exercise prices exceeded the average
market price of the Company's common stock for these periods. For the second
quarter of 1999, approximately 1.6 million of 3.5 million stock options
outstanding were excluded from the diluted net income per common share
calculation as the exercise prices exceeded the average market price of the
Company's common stock for this period. For the six months ended June 30, 1999,
all outstanding stock options were excluded from the calculation of diluted net
loss per common share as their effect would have been anti-dilutive.
7
<PAGE>
DENBURY RESOURCES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3. NOTES PAYABLE AND LONG-TERM INDEBTEDNESS
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
--------- ---------
(Amounts in thousands)
(Unaudited)
<S> <C> <C>
9% Senior Subordinated Notes Due 2008 $ 125,000 $ 125,000
Senior bank loan 23,500 27,500
--------- ---------
Total long-term debt $ 148,500 $ 152,500
========= =========
</TABLE>
The Company's bank credit facility provides for a semi-annual
redetermination of the borrowing base on April 1st and October 1st. At the April
1, 2000 redetermination, the conforming borrowing base of $60 million and the
total borrowing base of $110 million were re-affirmed. In June 2000, the Company
repaid $4.0 million of its outstanding bank debt, which leaves the Company with
a total borrowing capacity of $86.5 million as of June 30, 2000. The next
scheduled borrowing base redetermination is set to be as of October 1, 2000.
4. PRODUCT PRICE HEDGING CONTRACTS
The Company has financial contracts that hedge its exposure to commodity
price risk on a portion of its oil and natural gas production. The Company has a
contract on its oil production that hedges 3,000 Bbls/d with a price floor of
$14.00 per Bbl and a price ceiling of $18.05 per Bbl. This contract has been in
effect since April 1999, expires as of December 31, 2000, and hedges
approximately 20% of the Company's oil production based on the second quarter of
2000 average oil production. The Company also has a contract that hedges 24
million cubic feet of natural gas per day with a price floor of $1.90 per MMBtu
and a price ceiling of $2.58 per MMBtu. This contract has been in effect since
1998, expires as of December 31, 2000, and hedges approximately 84% of the
Company's natural gas production based on the second quarter of 2000 average
natural gas production.
During the second quarter of 2000 the Company paid approximately $2.9
million on the oil hedge contract and $1.8 million on the natural gas hedge
contract. Through the first six months of 2000 the Company paid approximately
$5.8 million on the oil hedge contract and $1.8 million on the natural gas hedge
contract. Based on futures market prices at June 30, 2000, the Company would
expect to pay approximately $6.7 million on the oil hedge contract and $8.4
million on the natural gas hedge contract during the remainder of 2000. For
further discussion regarding the Company's derivative financial instruments, see
"Market Risk Management" in Management's Discussion and Analysis of Financial
Condition and Results of Operations.
8
<PAGE>
DENBURY RESOURCES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5. SIGNIFICANT INCREASE IN RESERVES
As of June 30, 2000, the engineering firm of DeGolyer and MacNaughton
prepared a reserve report for the Company on its four largest fields,
Heidelberg, Eucutta, Little Creek and Lirette, which as of December 31, 1999
comprised 78% of the Company's total value on both a BOE and PV10 (estimated
future net revenues discounted at 10%) basis. For comparative purposes, the June
30, 2000 reserve report was prepared using the same unescalated price scenario
used in the December 31, 1999 SEC report, which was based on a NYMEX oil price
of $25.60 per barrel ("Bbl") and a NYMEX natural gas price of $2.12 per million
British thermal units ("MMBtu"). Using these prices, following are the
comparative values of proved reserves at December 31, 1999 and June 30, 2000 for
these four fields:
<TABLE>
<CAPTION>
Jan. to
December 31, 1999 June 30, 2000 June, 2000
----------------- ------------------ Production
Field MBOE PV10(000s) MBOE PV10(000s) (MBOE)
--------------- ------ --------- ------- --------- ------------
<S> <C> <C> <C> <C> <C>
Heidelberg 32,789 $ 238,192 47,470 $ 270,475 1,236
Eucutta 4,902 41,672 6,303 52,905 401
Little Creek 6,146 58,440 8,505 86,554 353
Lirette 2,890 21,027 2,062 14,736 240
------ --------- ------- --------- ------------
Four Field
Total 46,727 $ 359,331 64,340 $ 424,670 2,230
====== ========= ======= ========= ============
</TABLE>
The PV10 value of these same four fields using unescalated oil and natural
gas prices as of June 30, 2000 was $657.8 million based on a NYMEX oil price of
$32.50 per barrel and a NYMEX natural gas price of $4.46 per MMBtu.
9
<PAGE>
DENBURY RESOURCES INC.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
--------------------------------------------------------------------------------
of Operations
-------------
The following should be read in conjunction with the Company's financial
statements contained herein and in the Form 10-K for the year ended December 31,
1999, along with Management's Discussion and Analysis contained in such Form
10-K. Any capitalized terms used but not defined in the following discussion
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. The Company's growth in proved reserves,
production and cash flow over the years has been achieved 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
As more fully described under "Results of Operations" below, the Company's
results of operations, cash flows and financial position improved throughout
1999 and have continued to improve through the first six months of 2000,
primarily as a result of increasing oil prices and increasing production. Oil
prices improved from the 1998 year-end NYMEX oil price of approximately $12.00
per Bbl to approximately $15.38 per Bbl for the first six months of 1999 and to
approximately $28.72 per Bbl for the first six months of 2000. In addition, the
Company's average daily production has increased for the fifth consecutive
quarter, with average daily production of 19,580 barrels of oil equivalent
produced per day ("BOE/d") for the second quarter of 2000, a 22% increase from
the second quarter of 1999 average of 16,013 BOE/d and a 2% increase from the
first quarter of 2000 average of 19,121 BOE/d. As a result of the improved
product prices and increased production, the Company posted record quarterly
earnings and cash flow generated from operations in the second quarter and first
six months of 2000, up sharply from the financial results for the comparable
periods of 1999.
During 1999, the Company adopted a fiscal policy whereby its development
and exploration expenditures would be at approximately the same level as cash
flow from operations. Although the level of the Company's projected cash flow is
highly variable and difficult to predict due to volatility in product prices,
the success of its drilling and other developmental work and other factors, the
Company has continued to follow this policy in 2000. During the first six months
of 2000, the Company spent approximately $4.6 million less than cash flow from
operations (before the changes in working capital balances) on development and
exploration expenditures. The Company has not borrowed any additional funds on
its bank credit line since the third quarter of 1999 when it acquired Little
Creek Field in Mississippi for approximately $12 million. The Company repaid
$4.0 million on its credit line late in the second quarter of 2000 with the
excess cash flow and from other working capital balances. The Company plans to
continue to reserve this credit line for potential acquisitions. The Company's
minor acquisitions, which aggregated $1.8 million during the first six months of
2000, were funded by cash flow from operations.
The Company's bank credit facility provides for a semi-annual
redetermination of the borrowing base on April 1st and October 1st. At the April
1, 2000 redetermination, the conforming borrowing base of $60 million and the
total borrowing base of $110 million were re-affirmed, and after repayment of
$4.0 million of debt in June 2000, the Company had a total borrowing capacity of
$86.5 million as of June 30, 2000. The next scheduled borrowing base
redetermination will be as of October 1, 2000. There can be no assurance that
the banks will not reduce the borrowing base at that time, as such
redetermination will depend on current and expected oil and natural gas prices
at that time, the Company's development and acquisition results during 2000, its
then current level of debt and other factors, some of which are beyond the
Company's control.
During the first six months of 2000, the Company spent $36.3 million on its
capital development program and is on track for a total projected capital
program of approximately $70 million for the year. The Company expects that this
spending level should be sufficient to cause production levels to increase each
quarter throughout the year. Using capital resources made available by the
equity sale to the Texas Pacific Group ("TPG") in April 1999, the Company is
continuing to pursue acquisitions which, if accomplished, should be accretive to
the Company's operating results. There can be no assurance that suitable
acquisitions will be identified in the future or that such acquisitions will be
successful
10
<PAGE>
DENBURY RESOURCES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (cont.)
in achieving desired profitability objectives. The Company's future growth could
be limited or even eliminated if the Company is unable to complete suitable
acquisitions or is unable to fund such acquisitions over an extended period of
time.
Sources and Uses of Funds
During the first six months of 2000, the Company spent approximately $36.3
million on exploration and development expenditures and approximately $1.8
million on acquisitions. The exploration and development expenditures included
approximately $17.5 million spent on drilling, $4.2 million on geological,
geophysical and acreage expenditures and $14.6 million spent on workover costs.
These expenditures were funded by cash flow from operations.
In contrast, during the first six months of 1999 the Company spent
approximately $12.6 million on oil and natural gas development expenditures and
approximately $6.8 million on acquisitions. The development expenditures
included approximately $5.6 million spent on drilling, $2.9 million on
geological, geophysical and acreage expenditures and $4.1 million spent on
workover costs. These expenditures were funded by cash flow from operations.
RESULTS OF OPERATIONS
The Company's operating results for the second quarter and six months ended
June 30, 2000 improved significantly over the comparable prior year periods due
to the improved oil and natural gas prices and the Company's fifth consecutive
quarterly increase in production, partially offset by an increase in operating
expenses, as further set forth below.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------------- -------------------- ------------------
2000 1999 2000 1999
---------------------------------- --------- -------- -------- -------
<S> <C> <C> <C> <C>
AVERAGE DAILY PRODUCTION VOLUME:
Bbls 14,809 11,541 14,595 10,914
Mcf 28,630 26,828 28,535 28,812
BOE 19,580 16,013 19,351 15,716
OPERATING REVENUES AND EXPENSES
(THOUSANDS)
Oil sales $ 29,801 $ 12,444 $ 58,190 $20,976
Natural gas sales 7,384 5,414 14,197 11,585
--------- -------- -------- -------
Total oil and natural gas
revenues $ 37,185 $ 17,858 $ 72,387 $32,561
--------- -------- -------- -------
Operating costs $ 9,104 $ 5,601 $ 18,136 $10,913
Production taxes 1,654 886 3,311 1,429
--------- -------- -------- -------
Total production expenses $ 10,758 $ 6,487 $ 21,447 $12,342
--------- -------- -------- -------
UNIT PRICES-INCLUDING IMPACT OF
HEDGES
Oil price per barrel ("Bbl") $ 22.11 $ 11.85 $ 21.91 $ 10.62
Gas price per thousand cubic
feet ("Mcf") 2.83 2.22 2.73 2.22
UNIT PRICES-EXCLUDING IMPACT OF
HEDGES
Oil price per Bbl $ 24.26 $ 12.36 $ 24.09 $ 10.89
Gas price per Mcf 3.54 2.22 3.09 2.12
OPERATING REVENUES AND EXPENSES
PER BOE (1):
Oil and natural gas revenues $ 20.87 $ 12.26 $ 20.55 $ 11.44
--------- -------- -------- -------
Operating costs $ 5.11 $ 3.84 $ 5.15 $ 3.84
Production taxes 0.93 0.61 0.94 0.50
--------- -------- -------- -------
Total production expenses $ 6.04 $ 4.45 $ 6.09 $ 4.34
---------------------------------- --------- -------- -------- -------
<FN>
(1) Barrel of oil equivalent using the ratio of one barrel of oil to 6 Mcf of
natural gas ("BOE").
</FN>
</TABLE>
11
<PAGE>
DENBURY RESOURCES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (cont.)
In the second quarter of 2000, production increased for the fifth
consecutive quarter, with average daily production of 19,580 BOE/d, a 3,567
BOE/d (22%) increase from the second quarter of 1999 and a 459 BOE/d (2%)
increase from the first quarter of 2000. Production for the six months ended
June 30, 2000 averaged 19,351 BOE/d, a 23% increase over the first six months of
1999. The production increase since 1999 is due primarily to the King Bee and
Little Creek Field acquisitions in the second and third quarters of 1999,
respectively, and subsequent development work thereon. Production for these two
fields contributed 2,750 BOE/d to the second quarter of 2000, as compared to
2,554 BOE/d to the first quarter of 2000 and 366 BOE/d to the second quarter of
1999. The current production on these two fields is up approximately 650 BOE/d
(31%) from the 2,100 BOE/d level at the time of acquisition. The Company also
increased its presence in the offshore arena in the Gulf of Mexico with an
acquisition in May 2000, which added 210 BOE/d to the second quarter of 2000.
In addition, production for the Company's largest field, Heidelberg Field,
increased for the tenth consecutive quarter, with average daily production of
7,006 BOE/d, a 1,380 BOE/d (25%) increase from the second quarter of 1999 and a
430 BOE/d (7%) increase from the prior quarter. These production increases were
the result of the Company's active drilling program and further improvements in
the performance of its waterfloods. A total of 15 wells were drilled at
Heidelberg in the second quarter of 2000, comprised of five oil, four gas and
six water injection wells.
Oil and natural gas revenues for the three and six month periods ended June
30, 2000 increased primarily as a result of improved oil and gas prices and the
increases in production discussed above. The Company's net realized unhedged oil
price of $24.26 per Bbl for the second quarter of 2000 was a 96% increase over
the prior year quarter unhedged average price of $12.36 per Bbl. The net
realized unhedged oil price for the second quarter of 2000 also increased $0.34
per Bbl over the first quarter prices even though the NYMEX oil price decreased
$0.07 per Bbl, primarily as a result of improved oil contracts. The Company's
net realized unhedged natural gas price of $3.54 per Mcf for the second quarter
of 2000 was a 59% increase over the prior year quarter unhedged natural gas
price of $2.22 per Mcf. The Company's net unhedged natural gas price also
increased 46% when comparing the six month periods ended June 30. The net effect
of increased product prices and production resulted in a 108% increase in oil
and natural gas revenues from the second quarter of 1999 to 2000 and a 122%
increase in oil and natural gas revenues between the first six months of 1999
and 2000.
Production expenses increased by $4.3 million, or 66%, between the second
quarters of 1999 and 2000 and increased by $9.1 million, or 74%, between the
first six months of 1999 and 2000. Approximately $2.0 million of the second
quarter of 2000 increase and $4.3 million of the first six months of 2000
increase was due to the addition of the King Bee Field and Little Creek Field (a
tertiary oil recovery operation which has higher operating expenses than the
Company's average), which were acquired in the second and third quarters of
1999, respectively. An additional $560,000 increase in the second quarter of
2000 and $1.5 million in the first six months of 2000 was due to increased
production taxes resulting from the increase in oil and natural gas prices and
increased production. The remaining increase of
12
<PAGE>
DENBURY RESOURCES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (cont.)
approximately $1.7 million in the second quarter of 2000 and $3.3 million for
the first six months of 2000 was due primarily to increased operating costs,
primarily at Heidelberg Field, due to the higher costs associated with the
expansion of the water floods in 1999 and 2000, increased workover expenses and
additional wells added as a result of increased drilling activity during the
last year. Total production expenses were relatively unchanged between the first
and second quarters of 2000 and decreased slightly ($0.10 or 2%) on a BOE basis.
General and Administrative Expenses
General and administrative ("G&A") expenses increased between the
respective quarters and six month periods ended June 30, 1999 and 2000 as set
forth below:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------------- ------------------ -------------------
2000 1999 2000 1999
-------------------------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
NET G&A EXPENSES (THOUSANDS)
Gross expenses $ 5,977 $ 4,633 $ 12,011 $ 9,422
State franchise taxes 151 150 289 304
Operator overhead charges (3,291) (2,348) (6,597) (4,515)
Capitalized exploration
expenses (783) (616) (1,539) (1,347)
-------- -------- -------- --------
Net expense $ 2,054 $ 1,819 $ 4,164 $ 3,864
-------- -------- -------- --------
Average G&A cost per BOE $ 1.15 $ 1.25 $ 1.18 $ 1.36
Employees as of June 30 239 201 239 201
-------------------------------- -------- -------- -------- --------
</TABLE>
Gross G&A expenses increased $1.3 million, or 29%, between the second
quarters of 1999 and 2000 and $2.6 million, or 27%, between the first six months
of 1999 and 2000. The largest components of these increases were salaries, bonus
accruals, and other related employee costs, which accounted for approximately
$1.2 million of the increase between the respective quarters and $2.1 million of
the increase between the respective six month periods. The increased employee
cost was due to salary increases that were given for the first time in two years
(effective January 1, 2000) at an overall average increase of 7%, personnel
additions resulting primarily from the King Bee and Little Creek acquisitions in
the second and third quarters of 1999, and an accrual for bonuses in the first
and second quarters of 2000 versus no bonus accrual for the comparable periods
in 1999 due to the depressed industry conditions at that time.
The increase in gross G&A is offset in part by an increase in operator
overhead recovery charges and capitalized exploration costs in 2000. The
Company's 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
also charge a monthly fixed overhead rate for each producing well. As a result
of the additional operated wells acquired in the King Bee and Little Creek Field
acquisitions and the new wells added as a result of increased drilling activity
since the second quarter of 1999, the amount recovered by the Company as
operator overhead charges increased by 40% between the second quarters of 1999
and 2000 and by 46% between the first six months of 1999 and 2000. Capitalized
exploration costs increased between the comparable periods in 1999 and 2000
along with the increase in gross G&A expenses. The net effect of the increase in
gross G&A expenses, operator overhead charges and capitalized exploration costs
was a 13% increase in net G&A expense between the second quarters of 1999 and
2000 and an 8% increase in net G&A expense between the first six months of 1999
and 2000. On a BOE basis, G&A costs decreased 8% in the second quarter of 2000
as compared to the second quarter of 1999 and by 13% for the comparable six
month periods, due to a higher percentage increase in production than in net G&A
expense.
13
<PAGE>
DENBURY RESOURCES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (cont.)
Interest and Financing Expenses
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------------ ------------------ -----------------
AMOUNTS IN THOUSANDS EXCEPT PER BOE
AMOUNTS 2000 1999 2000 1999
------------------------------------ -------- -------- -------- --------
<S> <C> <C> <C> <C>
Interest expense $ 3,610 $ 3,820 $ 7,218 $ 8,678
Non-cash interest expense (234) (216) (456) (407)
-------- -------- -------- --------
Cash interest expense 3,376 3,604 6,762 8,271
Interest and other income (365) (370) (930) (731)
-------- -------- -------- --------
Net cash interest expense $ 3,011 $ 3,234 $ 5,832 $ 7,540
-------- -------- -------- --------
Average net cash interest expense
per BOE $ 1.69 $ 2.22 $ 1.66 $ 2.65
Average debt outstanding $152,456 $159,976 $152,478 $194,761
------------------------------------ -------- -------- -------- --------
</TABLE>
Interest expense for the quarter and six month periods ended June 30, 2000
decreased from the comparable prior year periods primarily due to lower average
outstanding debt balances during 2000, offset in part by higher interest rates
on the Company's variable rate bank debt. For most of the first six months of
2000, the Company's bank borrowings remained constant at $27.5 million. In late
June 2000, the Company paid down $4.0 million of its outstanding bank debt,
leaving $23.5 million outstanding as of June 30, 2000. Conversely, in 1999 the
Company began the year with $100.0 million of total bank debt and increased that
amount to $109.6 million by the end of the first quarter. This debt was reduced
in April 1999 by $100.0 million with the proceeds from the sale of stock to TPG,
but subsequently increased by $7.9 million to $17.5 million during the second
quarter of 1999 to fund property acquisitions. The Company's $125 million of 9%
Senior Subordinated Notes Due 2008 was outstanding during both 1999 and 2000. On
a BOE basis, the decrease in interest expense was even more pronounced due to
the production increases each quarter since the first quarter of 1999.
Depletion, Depreciation and Site Restoration
The Company's depletion, depreciation and amortization ("DD&A") rate on a
BOE basis increased from $3.85 per BOE for the second quarter and first six
months of 1999 to $4.17 per BOE for the full fiscal year of 1999, increased to
$4.50 per BOE for the first quarter of 2000 and was reduced to $4.21 per BOE for
the second quarter of 2000, which resulted in an average of $4.35 per BOE for
the first six months of 2000. The gradual increase throughout 1999 and the first
quarter of 2000 was a reflection of development costs which exceeded, or were
projected to exceed, the DD&A rate in place after the oil and natural gas full
cost pool writedowns in 1998.
As of June 30, 2000, the engineering firm of DeGolyer and MacNaughton
prepared a reserve report on the Company's four largest fields using the same
unescalated price scenario used in the Company's December 31, 1999 SEC report.
These four fields as of December 31, 1999 comprised 78% of the Company's total
value on both a BOE and PV10 (estimated future net revenues discounted at 10%)
basis. Based on the results of this report, the Company's estimated proved
reserves for its four largest fields increased approximately 19.8 MMBOE since
December 31, 1999 (including the 2.2 MMBOE produced during the first six months
of 2000 from these fields). The Company has used the results of this report in
estimating the DD&A rate for the second quarter and first six months of 2000,
which resulted in a reduction in the DD&A rate from $4.50 per BOE in the first
quarter of 2000 to $4.35 per BOE for the first six months of 2000. In addition
to the increase in reserves, the Company also factored into the DD&A rate
calculation the effect of transferring approximately $32.7 million from
unevaluated properties into the full cost pool and the increase in site
reclamation expense attributable to the purchase of offshore properties in the
Gulf of Mexico, both in the second quarter of 2000. The Company's provision for
well abandonment and site reclamation is made net of anticipated salvage value
and is included in DD&A expense.
14
<PAGE>
DENBURY RESOURCES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (cont.)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------------ ------------------ ----------------
AMOUNTS IN THOUSANDS EXCEPT PER BOE
AMOUNTS 2000 1999 2000 1999
------------------------------------ -------- ------- ------- -------
<S> <C> <C> <C> <C>
Depletion and depreciation $ 7,081 $ 5,366 $14,536 $10,475
Site restoration provision 145 68 257 145
Depreciation of other fixed assets 279 176 537 325
-------- ------- ------- -------
Total DD&A $ 7,505 $ 5,610 $15,330 $10,945
-------- ------- ------- -------
Average DD&A cost per BOE $ 4.21 $ 3.85 $ 4.35 $ 3.85
------------------------------------ -------- ------- ------- -------
</TABLE>
Income Taxes
Based on the Company's pre-tax income of $13.6 million for the second
quarter and $25.2 million for the six months ended June 30, 2000, an income tax
provision for these periods using an effective tax rate of 37% would have
resulted in a $5.0 million and a $9.3 million income tax provision for the three
and six month periods ended June 30, 2000, respectively. As of December 31,
1999, the Company had a fully reserved deferred tax asset of $95.1 million which
is available to offset pre-tax income. As the deferred tax asset is utilized,
the Company makes a corresponding adjustment to its valuation allowance,
resulting in no net deferred tax income or expense. The Company believes that
the remaining deferred tax asset should continue to be fully impaired at this
time, based on projected future profitability at oil and gas pricing consistent
with the Company's long range planning and anticipated levels of capital
spending, a portion of which are intangible drilling costs which are deducted in
the year incurred. The Company's $20,000 current provision for income taxes in
the second quarter and $40,000 for the first six months of 2000 is for
alternative minimum tax, based on projected taxable income that may not be
completely offset by net operating losses.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------------- -------------------- ----------------
2000 1999 2000 1999
---------------------------------- --------- -------- ------- -------
<S> <C> <C> <C> <C>
Income tax provision (thousands) $ 20 $ - $ 40 $ -
Average income tax expense per BOE $ 0.01 - $ 0.01 -
Effective tax rate 0.1% - 0.2% -
---------------------------------- --------- -------- ------- -------
</TABLE>
Summary Operating and BOE Data
Primarily as a result of the increased production and product prices in the
second quarter and first six months of 2000, net income and cash flow from
operations increased on both a gross and per share basis over the comparable
periods.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------------- ------------------ -----------------
AMOUNTS IN THOUSAND EXCEPT PER SHARE
AMOUNTS 2000 1999 2000 1999
--------------------------------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income (loss) $ 13,603 $ 492 $ 25,118 $ (2,537)
Net income (loss) per common share:
Basic $ 0.30 $ 0.01 $0.55 $ (0.07)
Diluted 0.30 0.01 0.55 (0.07)
Cash flow from operations (1) $ 21,340 $ 6,598 $ 40,902 $ 9,095
--------------------------------------- -------- -------- -------- --------
<FN>
(1) Represents cash flow provided by operations, exclusive of the net change in
non-cash working capital balances.
</FN>
</TABLE>
15
<PAGE>
DENBURY RESOURCES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (cont.)
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 2000 1999 2000 1999
--------------------------------------- -------- -------- ------- -------
<S> <C> <C> <C> <C>
Oil and natural gas revenue $ 20.87 $ 12.26 $ 20.55 $ 11.44
Operating costs (5.11) (3.84) (5.15) (3.84)
Production taxes (0.93) (0.61) (0.94) (0.50)
--------------------------------------- -------- -------- ------- -------
Production netback 14.83 7.81 14.46 7.10
General and administrative (1.15) (1.25) (1.18) (1.36)
Net cash interest expense (1.69) (2.22) (1.66) (2.65)
Other (0.01) 0.19 (0.01) 0.11
--------------------------------------- -------- -------- ------- -------
Cash flow from operations(1) 11.98 4.53 11.61 3.20
DD&A (4.21) (3.85) (4.35) (3.85)
Other non-cash items (0.14) (0.34) (0.13) (0.24)
--------------------------------------- -------- -------- ------- -------
Net income (loss) $ 7.63 $ 0.34 $ 7.13 $ (0.89)
--------------------------------------- -------- -------- ------- -------
<FN>
(1) Represents cash flow provided by operations, exclusive of the net change in
non-cash working capital balances.
</FN>
</TABLE>
Market Risk Management
The Company uses fixed and variable rate debt to partially finance budgeted
expenditures. These agreements expose the Company to market risk related to
changes in interest rates. The Company does not hold or issue derivative
financial instruments for trading purposes. The carrying and fair value of these
debt instruments have not changed materially since year-end.
The Company also enters into various financial contracts to hedge its
exposure to commodity price risk associated with anticipated future oil and
natural gas production. The Company has a contract on its oil production that
hedges 3,000 Bbls/d with a price floor of $14.00 per Bbl and a price ceiling of
$18.05 per Bbl. This contract has been in effect since April 1999, expires as of
December 31, 2000, and hedges approximately 20% of the Company's oil production
based on the Company's second quarter of 2000 average oil production. The
Company also has a contract that hedges 24 million cubic feet of natural gas per
day with a price floor of $1.90 per MMBtu and a price ceiling of $2.58 per
MMBtu. This contract has been in effect since 1998, expires as of December 31,
2000, and hedges approximately 84% of the Company's natural gas production based
on the Company's second quarter of 2000 average natural gas production. During
the second quarter of 2000 the Company paid approximately $2.9 million on the
oil hedge contract, which reduced the net average realized price by $2.15 per
Bbl, and paid approximately $1.8 million on the natural gas hedge contract,
which reduced the net realized price by $0.71 per Mcf. Through the first six
months of 2000 the Company paid approximately $5.8 million the oil hedge
contract and $1.8 million on the natural gas hedge contract. During the three
and six month periods ended June 30, 1999, the Company paid $540,000 on its oil
hedge contract which reduced the Company's average oil price by $0.51 and $0.27
respectively. During the first quarter of 1999, the Company collected $539,000
on its natural gas hedge contracts, increasing the net average realized natural
gas price by $0.10 per Mcf for the six month period ended June 30. During the
second quarter of 1999, there was no gain or loss on the Company's natural gas
hedging contracts.
16
<PAGE>
DENBURY RESOURCES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (cont.)
Gain or loss on these derivative commodity contracts would be offset by a
corresponding gain or loss on the hedged commodity positions. Based on futures
market prices at June 30, 2000, the Company would expect to pay approximately
$6.7 million on the oil hedge contract and $8.4 million on the natural gas hedge
contract through their expiration at the end of 2000. If the futures market
prices were to increase 10% from those in effect at June 30, 2000, the Company
would be required to make additional cash payments under the oil contract of
approximately $1.7 million and additional payments under the natural gas
contract of $2.0 million. If the futures market prices were to decline 10% from
those in effect as June 30, 2000, the Company would reduce cash payments under
the oil contact by approximately $1.7 million and reduce the payments due under
the natural gas contract by $2.0 million.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This statement
establishes accounting and reporting standards for derivative instruments and
hedging activities. It requires the recognition of all derivatives as either
assets or liabilities in the statement of financial position and measurement of
these instruments at fair value. The Company is required to adopt this statement
in the first quarter of 2001. The Company does not expect the adoption of this
statement to have a significant impact on the Company's financial position or
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," "budgeted," "expect," "predict," "anticipate," "projected,"
"should," "assume," "believe" or other words that convey the uncertainty of
future events or outcomes. Such forward-looking information is 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.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
-------------------------------------------------------------------
The information required by Item 3 is set forth under "Market Risk
Management" in Management's Discussion and Analysis of Financial Condition and
Results of Operations.
17
<PAGE>
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders
-----------------------------------------------------------
Denbury's Annual Meeting of Shareholders was held on May 24, 2000 for the
purpose of 1) the election of seven nominees to serve as Directors of Denbury
for one-year terms to expire at the 2001 Annual Meeting of Shareholders and 2)
an increase in the number of shares issuable under the Company's employee stock
purchase plan, from 750,000 to 1,250,000 shares of common stock. At the record
date, 45,798,827 shares of common stock were outstanding and entitled to one
vote per share upon all matters submitted at the meeting.
With respect to Proposal 1 above, the votes were cast as follows:
<TABLE>
<CAPTION>
NOMINEES FOR DIRECTORS FOR WITHHELD
----------------------- ------------ -----------
<S> <C> <C>
Ronald G. Greene 41,062,233 4,736,594
David Bonderman 39,707,833 6,090,994
David I. Heather 41,061,933 4,736,894
William S. Price, III 41,061,733 4,737,094
Gareth Roberts 41,062,533 4,736,294
David M. Stanton 41,062,933 4,735,894
Wieland F. Wettstein 41,063,033 4,735,794
</TABLE>
With respect to Proposal 2 above, the votes were cast as follows:
<TABLE>
<CAPTION>
FOR AGAINST ABSTENTIONS
------------ ----------- ------------
<S> <C> <C>
40,017,724 1,088,034 4,693,069
</TABLE>
Item 6. Exhibits and Reports on Form 8-K during the Second Quarter of 2000
---------------------------------------------------------------------------
Exhibits:
10(a) Amendment to Denbury Resources Inc. Stock Purchase Plan to
increase the number of shares issuable under the Plan from
750,000 to 1,250,000 shares of common stock (incorporated by
reference as Exhibit 4 of the Registrant's Registration Statement
on Form S-8, No. 333-39218, dated June 13, 2000).
10(b) Denbury Resources Inc. Director Compensation Plan (incorporated
by reference as Exhibit 4 of the Registrant's Registration
Statement on Form S-8, No. 333-39172, dated June 13, 2000).
15* Letter from Independent Accountants as to unaudited interim
financial information.
27* Financial Data Schedule (EDGAR version only).
* Filed herewith.
Reports on Form 8-K:
None.
18
<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/ Mark C. Allen
-------------------------------
Mark C. Allen
Chief Accounting Officer & Controller
Date: August 8, 2000
19
