Business News

Denbury Resources Announces Second Quarter Results

2008-08-05 07:30:00

Denbury Resources Announces Second Quarter Results

29.8 MMBbls of Proved Reserves Added at Tinsley Field

DALLAS–(EMWNews)–Denbury Resources Inc. (NYSE: DNR) (Denbury

or the Company)

today announced its second quarter 2008 financial and operating results.

The Company posted quarterly earnings for the second quarter of 2008 of

$114.1 million, or $0.47 per basic common share, 82% higher than second

quarter 2007 net income of $62.6 million, or $0.26 per basic common

share, and 56% higher than first quarter of 2008 net income of $73.0

million. The higher net income in the second quarter 2008 period was

attributable to higher oil prices and higher production levels,

partially offset by a $30.2 million ($18.8 million after tax) non-cash

fair value charge on the Companys derivative

contracts, $28.6 million of net cash payments made on the same

derivative contracts and higher overall expenses. Comparatively, in the

second quarter of 2007, the Company recorded non-cash fair value income

on derivative contracts of approximately $13.3 million ($8.1 million

after tax), a delta of $43.5 million ($26.9 million after tax).

The 2008 six month results also were significantly higher for similar

reasons with net income of $187.1 million in the first half of 2008 as

compared to $79.2 million in the first half of 2007.

Adjusted cash flow from operations (cash flow from operations before

changes in assets and liabilities, a non-GAAP measure) for the second

quarter of 2008 was $259.1 million, an increase of 99% over second

quarter 2007 adjusted cash flow from operations of $130.5 million. Net

cash flow provided by operations, the GAAP measure, totaled $164.1

million during the second quarter of 2008, as compared to $102.3 million

for the same measure during the second quarter of 2007. Adjusted cash

flow and cash flow from operations differ in that the latter measure

includes the changes in receivables, accounts payable and accrued

liabilities during the quarter. (Please see the accompanying schedules

for a reconciliation of net cash flow provided by operations, as defined

by generally accepted accounting principles (GAAP), which is the GAAP

measure, as opposed to adjusted cash flow from operations, which is the

non-GAAP measure).


Production for the quarter was 46,305 BOE/d, a 25% increase over the

second quarter of 2007 production after adjusting for production from

our Louisiana natural gas properties sold in December 2007 and February

2008, and a 4% sequential increase over the first quarter of 2008

average production level. Oil production from the Companys

tertiary operations averaged 18,661 BOE/d, an increase of 36% over 2007s

second quarter tertiary production level of 13,683 BOE/d, and a 9%

sequential increase over the first quarter of 2008 tertiary production

level of 17,156 BOE/d. The Company had initial tertiary production from

Tinsley Field (Phase III) during the second quarter of 2008, averaging

675 Bbls/d. As a result of this production response to CO2

injections, the Company recorded proved reserves of approximately 29.8

million barrels of oil (MMBbls)

at Tinsley Field, approximately 75% of the anticipated ultimate tertiary

reserves expected to be recovered from that field. As a result of the

recognition of these proved reserves, as of June 30, 2008 on a PV10

proved reserve basis, Tinsley Field became the highest valued field in

the Company. The majority of the remaining production increase in

tertiary production over second quarter 2007 tertiary production levels

came from the Companys Phase II tertiary

operations in Eastern Mississippi, which contributed approximately

two-thirds of the comparative quarterly increase.

Average production from the Barnett Shale increased 61% to 13,434 BOE/d

in the second quarter of 2008 as compared to average production of 8,368

BOE/d for the second quarter of 2007, although as expected, Barnett

Shale production was up only slightly on a sequential basis from levels

in the fourth quarter of 2007 and first quarter of 2008. The Company is

maintaining a steady drilling program of 45 to 50 wells per year, which

is currently expected to maintain a relatively steady production level.

The balance of the Companys other production

declined slightly from first quarter 2008 levels, as expected.

Second Quarter 2008 Financial Results

Oil and natural gas revenues, excluding the impact of any derivative

contracts, increased 90% between the respective second quarters as

higher commodity prices increased revenue by 80% and higher production

increased revenue by 10%. The Company paid $28.6 million on its

derivative contract settlements in the second quarter of 2008 as

compared to cash receipts of $1.7 million on derivative contracts during

the second quarter of 2007. The Company incurred a $30.2 million

non-cash fair value charge to earnings in the second quarter of 2008 on

its derivative contracts as compared to a $13.3 million non-cash fair

value gain in the second quarter of 2007, a delta of $43.5 million.

Company-wide oil price differentials (Denburys

net oil price received as compared to NYMEX prices) worsened during the

second quarter of 2008 to one of the widest price spreads in the Companys

history, particularly on the heavier sour crudes and the Barnett Shale

liquid production, averaging $9.64 per Bbl below NYMEX as compared to

$6.50 per Bbl below NYMEX during the first quarter of 2008. Average oil

price differentials during the current and prior quarter were both

significantly worse than the $1.61 per Bbl average differential in the

second quarter of 2007, as the Companys oil

differentials were unusually low during the first three quarters of last

year due to anomalies in the crude oil markets during that time.

The Companys average NYMEX natural gas

differential was a negative variance of $0.93 per Mcf in the second

quarter of 2008, about the same as the negative variance of $0.90 per

Mcf during the first quarter of 2008, but significantly higher than the

positive variance of $0.07 per Mcf during the second quarter of 2007.

This negative variance is partially due to increasing natural gas prices

during the first half of 2008. Since most of the Companys

natural gas is sold on an index price that is set near the first of each

month and fixed for the entire month, variances become less favorable if

NYMEX natural gas prices increase throughout the quarter. Further, the

sale of the Companys Louisiana natural gas

properties also contributed to a higher negative variance as the

properties which were sold typically received above NYMEX pricing.

Lease operating expenses increased between the comparable second

quarters on both a per BOE basis and on an absolute dollar basis. Lease

operating expenses averaged $18.23 per BOE in the second quarter of

2008, up from $15.00 per BOE in the second quarter of 2007, and an

average of $16.15 per BOE during the first quarter of 2008. The increase

over prior years second quarter level was

primarily a result of (i) the Companys

increasing emphasis on tertiary operations with their inherently higher

operating costs, (ii) higher overall industry costs for services,

equipment and personnel, and (iii) additional lease payments for certain

of our new tertiary production facilities. Since over one-half of the

Companys tertiary operating expenses are for

the cost of power and CO2 which have a high

degree of correlation with commodity prices, the higher commodity prices

have caused a corresponding increase in tertiary operating cost per BOE.

A significant portion of the increased cost on a per BOE basis also

resulted from the sale of the Louisiana natural gas properties. If these

sold properties were excluded from second quarter 2007 results, the

Companys operating costs during that period

would have been approximately $1.17 per BOE higher than as reported, or

$16.17 per BOE, more in line with the current quarter results.

Historically, the Company expensed all costs associated with injecting CO2

used in its tertiary operations. Beginning January 1, 2008, the Company

began capitalizing injection costs in fields that have not yet seen an

oil production response to the CO2 injections,

although after a production response occurs, all subsequent injection

costs will be expensed. Had we continued with the prior accounting

methodology of expensing all tertiary injection costs, we would have

expensed an additional $2.9 million in the first quarter of 2008, or

approximately $1.84 per BOE (tertiary properties only), as the Company

had injection costs during the period in fields without production,

primarily the two new tertiary floods at Tinsley and Lockhart Crossing

Fields. During the second quarter of 2008, the Company would have

expensed an additional $1.4 million or $0.85 per BOE (tertiary

properties only) had we followed the Companys

prior year accounting methodology. The injection costs that the Company

capitalized during the second quarter of 2008 were lower following the

commencement of tertiary production at Tinsley Field in April. During

the first half of 2007, the impact of this accounting methodology was

not material as only $0.6 million would have been capitalized under the

new accounting procedure.

Production taxes and marketing expenses generally change in proportion

to production volumes and commodity prices, the primary reason for the

increase in the second quarter of 2008.

General and administrative expenses increased 14% on a per BOE basis

between the two second quarter periods, averaging $3.51 per BOE in the

second quarter of 2008, up from $3.07 per BOE in the prior years

second quarter. The majority of the increase relates to higher personnel

related costs as a result of salary increases and continued growth in

the Companys total number of employees.

The Companys average debt level was 7%

higher in the second quarter of 2008 as compared to debt levels in the

second quarter of 2007. Because of the significant expenditures made

during 2006 and 2007 on unevaluated properties, the Company capitalized

$5.5 million of interest expense in the second quarter of 2008 related

to these unevaluated properties (including CO2

pipelines under construction), as compared to $4.3 million during the

second quarter of 2007, more than offsetting the higher debt levels and

reducing the Companys overall interest

expense between the two periods by 3%. The amount of interest

capitalized during the second quarter of 2008 decreased by approximately

$1.7 million as compared to the amount capitalized during the first

quarter of 2008 as the Company discontinued its capitalization of

interest at Tinsley Field following the commencement of tertiary

production and recording of proved reserves at that field.

Depletion, depreciation and amortization (DD&A)

expenses increased $8.5 million (18%) in the second quarter of 2008 as

compared to DD&A in the prior year second quarter. The DD&A rate on oil

and natural gas properties in the second quarter of 2008 was $11.53 per

BOE, up from $10.94 per BOE in the prior year second quarter, and up

slightly from the $11.00 per BOE rate during the first quarter of 2008.

The recognition of 29.8 MMBbls of proven reserves at Tinsley Field did

not materially change the DD&A rate as the aggregate of the previously

unevaluated costs and future development costs for this field divided by

the 29.8 MMBbls was about the same as the existing Companys

DD&A rate. The Company anticipates recognizing additional proven

reserves at Tinsley over time which are expected to bring the average

ultimate unit cost to less than $10 per barrel at that field.


The Company has reviewed and revised its entire tertiary production

model taking into account such things as well and field response to

date, and anticipated timing for goods and services in the current

competitive operating environment. The revised production model will be

posted today as part of the latest analyst presentation on the Companys

website ( For

2008, the Company has lowered its anticipated tertiary production to

20,000 Bbls/d, a 35% increase over the 2007 average production, but down

from its prior target of 22,000 Bbl/d. Correspondingly, the Companys

total production anticipated for 2008 was reduced from 49,000 BOE/d to

47,000 BOE/d, representing a 20% increase in production over the Companys

2007 production levels after adjusting for the Louisiana property sale.

The Company recently obtained approval from the Internal Revenue Service

(IRS) to change

its method of tax accounting for certain assets used in its tertiary

oilfield recovery operations. Previously, the Company capitalized and

depreciated these costs, but has obtained IRS approval to deduct these

costs once the assets are placed into service. As a result, the Company

expects to receive tax refunds of approximately $6.0 million through the

2007 tax year and has reduced its current income tax expense by $19

million in the second quarter of 2008 to adjust for the impact of this

change through the first six months of 2008. The reduction in current

income tax expense has been offset be a corresponding change to deferred

income tax expense of approximately the same amount. Although this

change is not expected to have a significant impact on the Companys

overall tax rate, it is anticipated that it will reduce the amount of

cash taxes the Company expects to pay over the next several years. This

acceleration of tax deductions and resultant lower current cash income

taxes will likely change the overall economics of certain financing,

re-capitalization type transactions the Company has historically

utilized (see below).

In order to fully take advantage of the change in tax accounting

discussed above, the Company has discontinued its prior practice of

leasing certain tertiary facility equipment. The discontinuance of these

lease financing transactions will increase the Companys

2008 capital budget by approximately $78 million, with the offset being

a reduction of future lease operating expenses. Denburys

revised 2008 development and exploration budget is approximately $1.0

billion, an increase of approximately $100 million, with approximately

75% of our revised budget related to tertiary operations. Any

acquisitions made by the Company would be in addition to these current

capital budget amounts.

The economic impact of the change in tax accounting will also likely

affect certain types of future asset drop-downs

to Genesis. Transactions which are not sales for tax purposes, such as

the recent $175 million financing lease on the NEJD CO2

pipeline, would not be affected, provided they meet other necessary tax

structuring criteria. Those transactions which do constitute a sale for

tax purposes, such as the recent $75 million sale and associated

long-term transportation service agreement with Genesis on the Free

State CO2 pipeline, are likely to be


Denburys total debt (principal amount

excluding capital and financing leases) as of July 31, 2008 was

approximately $525 million, all of which is subordinated debt. In

addition, the Company had approximately $150 million of excess cash as

of that date.

Gareth Roberts, Chief Executive Officer, said: Our

biggest tertiary flood to date, Tinsley Field (Phase III), is performing

well in its initial stages, allowing us to recognize 29.8 MMBbls of

proven reserves this quarter, about 75% of the reserves that we

ultimately expect to recover from that field. Lockhart Crossing (Phase

I) also commenced production very late in the quarter and is looking

favorable. CO2 injections have started at

Cranfield (Phase IV), and we continue to work toward commencing floods

at Heidelberg (Phase II) and Delhi (Phase V) in 2009 following

completion of necessary pipelines, infrastructure and facilities.

Recently, we have reviewed our results to date, applied what we have

learned, and concluded that we needed to revise our production forecasts

and model. The net result of our forecast revisions is to push the

projected peak out one to two years, which has a minimal impact on our

net present value. We have not changed our proved plus probable reserve

forecasts as the overall program is working well. We have already

produced over 23 million barrels of oil to date from our tertiary

operations and anticipate recovering over 380 million barrels of

additional oil from the fields that we currently own or have a

contractual right to purchase (proved plus probable using the mid-points

of ranges). We continue to pursue other sources of CO2

from both our natural source at Jackson Dome and from potential

anthropogenic sources. While the development of anthropogenic sources

has been slower than we initially expected, we are confident that we can

bridge the timing gap with incremental production and reserves from

Jackson Dome and a portion of the capital budget increase from $900

million to $1.0 billion is dedicated to that purpose. Our program is

working, our plans and strategy have not changed, we continue to be

enthusiastic about the future and we continue to pursue potential

expansion opportunities.

Conference Call

The public is invited to listen to the Companys

conference call set for today, August 5, 2008 at 10:00 A.M. CDT. The

call will be broadcast live over the Internet at our web site:

If you are unable to participate during the live broadcast, the call

will be archived on our web site for approximately 30 days and will also

be available for playback for one week by dialing 888-203-1112 or

719-457-0820, passcode 2032184.

Financial and Statistical Data Tables

Following are financial highlights for the comparative three and six

month periods ended June 30, 2008 and 2007. All production volumes and

dollars are expressed on a net revenue interest basis with gas volumes

converted at 6:1.



(Amounts in thousands of U.S. dollars, except per share and unit





Three Months Ended



June 30,







Oil sales





> 100%

Natural gas sales





CO2 sales and transportation fees




Interest and other income




Total revenues







Lease operating expenses





Production taxes and marketing expense





CO2 operating expenses




General and administrative





Interest, net




Depletion and depreciation





Commodity derivative expense (income)




> 100%

Total expenses






Income before income taxes






Income tax provision

Current income taxes





Deferred income taxes












Net income per common share (1):












Weighted average common shares (1):












Production (daily – net of royalties):

Oil (barrels)





Gas (mcf)




BOE (6:1)






Unit sales price (including derivative settlements):

Oil (per barrel)





Gas (per mcf)





BOE (6:1)






Unit sales price (excluding derivative settlements):

Oil (per barrel)





Gas (per mcf)





BOE (6:1)







Oil and gas derivative contracts

Cash receipt (payment) on settlements



> 100%

Non-cash fair value adjustment income (expense)



Denbury Resources Inc.
Gareth Roberts, 972-673-2000

and CEO
Phil Rykhoek, 972-673-2000
Chief Financial


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