UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☑ Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 20192020
OR
☐ Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from _______ to ________
Commission file number: 001-12935
DENBURY RESOURCES INC.
(Exact name of registrant as specified in its charter)
|
| | | | |
Delaware | | 20-0467835 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
| | | | |
53205851 Legacy Drive,Circle, | | |
Plano, | TX | | | 75024 |
(Address of principal executive offices) | | (Zip Code) |
|
| | | |
Registrant’s telephone number, including area code: | | (972) | 673-2000 |
Securities registered pursuant to Section 12(b) of the Act:
|
| | |
Title of Each Class: | Trading Symbol: | Name of Each Exchange on Which Registered: |
Common Stock $.001 Par Value | DNRDEN | New York Stock Exchange |
Not applicable
(Former name, former address and former fiscal year, if changed since last report)
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 ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
|
| | | | | | | | | |
Large accelerated filer | ☑ | Accelerated filer | ☐ | Non-accelerated filer | ☐ | Smaller reporting company | ☐ | Emerging growth company | ☐ |
| | | | (Do not check if a smaller reporting company) | | | | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑
The number of shares outstanding of the registrant’s Common Stock, $.001 par value, as of October 31, 2019,2020, was 483,262,340.49,999,999.
Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Denbury Resources Inc.
Unaudited Condensed Consolidated Balance Sheets
(In thousands, except par value and share data)
|
| | | | | | | | |
| | September 30, | | December 31, |
| | 2019 | | 2018 |
Assets |
Current assets | | | | |
Cash and cash equivalents | | $ | 514 |
|
| $ | 38,560 |
|
Accrued production receivable | | 127,216 |
|
| 125,788 |
|
Trade and other receivables, net | | 27,949 |
|
| 26,970 |
|
Derivative assets | | 55,615 |
| | 93,080 |
|
Other current assets | | 11,491 |
|
| 11,896 |
|
Total current assets | | 222,785 |
|
| 296,294 |
|
Property and equipment | | |
| | |
|
Oil and natural gas properties (using full cost accounting) | | |
| | |
|
Proved properties | | 11,315,866 |
|
| 11,072,209 |
|
Unevaluated properties | | 942,859 |
|
| 996,700 |
|
CO2 properties | | 1,199,339 |
|
| 1,196,795 |
|
Pipelines and plants | | 2,327,671 |
|
| 2,302,817 |
|
Other property and equipment | | 215,794 |
|
| 250,279 |
|
Less accumulated depletion, depreciation, amortization and impairment | | (11,629,245 | ) |
| (11,500,190 | ) |
Net property and equipment | | 4,372,284 |
|
| 4,318,610 |
|
Operating lease right-of-use assets | | 35,145 |
| | — |
|
Derivative assets | | 11,483 |
| | 4,195 |
|
Other assets | | 112,013 |
|
| 104,123 |
|
Total assets | | $ | 4,753,710 |
|
| $ | 4,723,222 |
|
Liabilities and Stockholders’ Equity |
Current liabilities | | |
| | |
|
Accounts payable and accrued liabilities | | $ | 159,256 |
|
| $ | 198,380 |
|
Oil and gas production payable | | 58,881 |
|
| 61,288 |
|
Current maturities of long-term debt (including future interest payable of $85,909 and $85,303, respectively – see Note 4) | | 100,626 |
|
| 105,125 |
|
Operating lease liabilities | | 6,710 |
| | — |
|
Total current liabilities | | 325,473 |
|
| 364,793 |
|
Long-term liabilities | | |
|
| |
|
Long-term debt, net of current portion (including future interest payable of $104,501 and $164,914, respectively – see Note 4) | | 2,409,683 |
|
| 2,664,211 |
|
Asset retirement obligations | | 175,716 |
|
| 174,470 |
|
Deferred tax liabilities, net | | 400,213 |
|
| 309,758 |
|
Operating lease liabilities | | 43,704 |
| | — |
|
Other liabilities | | 52,801 |
|
| 68,213 |
|
Total long-term liabilities | | 3,082,117 |
|
| 3,216,652 |
|
Commitments and contingencies (Note 7) | |
|
| |
|
|
Stockholders’ equity | | | | |
Preferred stock, $.001 par value, 25,000,000 shares authorized, none issued and outstanding | | — |
|
| — |
|
Common stock, $.001 par value, 750,000,000 shares authorized; 473,213,227 and 462,355,725 shares issued, respectively | | 473 |
|
| 462 |
|
Paid-in capital in excess of par | | 2,698,158 |
|
| 2,685,211 |
|
Accumulated deficit | | (1,339,232 | ) |
| (1,533,112 | ) |
Treasury stock, at cost, 3,620,785 and 1,941,749 shares, respectively | | (13,279 | ) |
| (10,784 | ) |
Total stockholders’ equity | | 1,346,120 |
|
| 1,141,777 |
|
Total liabilities and stockholders’ equity | | $ | 4,753,710 |
|
| $ | 4,723,222 |
|
|
| | | | | | | | | |
| | Successor | | | Predecessor |
| | September 30, 2020 | | | December 31, 2019 |
Assets | | | | | |
Current assets | | | | | |
Cash and cash equivalents | | $ | 21,860 |
| |
| $ | 516 |
|
Restricted cash | | 10,662 |
| | | 0 |
|
Accrued production receivable | | 74,296 |
| |
| 139,407 |
|
Trade and other receivables, net | | 34,788 |
| |
| 18,318 |
|
Derivative assets | | 26,778 |
| | | 11,936 |
|
Other current assets | | 11,730 |
| |
| 10,434 |
|
Total current assets | | 180,114 |
| |
| 180,611 |
|
Property and equipment | | |
| | | |
|
Oil and natural gas properties (using full cost accounting) | | |
| | | |
|
Proved properties | | 796,687 |
| |
| 11,447,680 |
|
Unevaluated properties | | 98,656 |
| |
| 872,910 |
|
CO2 properties | | 187,397 |
| |
| 1,198,846 |
|
Pipelines | | 132,669 |
| |
| 2,329,078 |
|
Other property and equipment | | 97,770 |
| |
| 212,334 |
|
Less accumulated depletion, depreciation, amortization and impairment | | (4,446 | ) | |
| (11,688,020 | ) |
Net property and equipment | | 1,308,733 |
| |
| 4,372,828 |
|
Operating lease right-of-use assets | | 1,225 |
| | | 34,099 |
|
Derivative assets | | 1,147 |
| | | 0 |
|
Intangible assets, net | | 99,655 |
| | | 22,139 |
|
Other assets | | 86,996 |
| |
| 82,190 |
|
Total assets | | $ | 1,677,870 |
| |
| $ | 4,691,867 |
|
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
Denbury ResourcesInc.
Unaudited Condensed Consolidated Balance Sheets (continued)
(In thousands, except par value and share data)
|
| | | | | | | | | |
| | Successor | | | Predecessor |
| | September 30, 2020 | | | December 31, 2019 |
Liabilities and Stockholders’ Equity | | | | | |
Current liabilities | | |
| | | |
|
Accounts payable and accrued liabilities | | $ | 166,385 |
| | | $ | 183,832 |
|
Oil and gas production payable | | 45,013 |
| | | 62,869 |
|
Derivative liabilities | | 5,739 |
| | | 8,346 |
|
Current maturities of long-term debt (including future interest payable of $0 and $86,054, respectively – see Note 6) | | 73,511 |
| | | 102,294 |
|
Operating lease liabilities | | 763 |
| | | 6,901 |
|
Total current liabilities | | 291,411 |
| | | 364,242 |
|
Long-term liabilities | | |
| | | |
|
Long-term debt, net of current portion (including future interest payable of $0 and $78,860, respectively – see Note 6) | | 102,456 |
| | | 2,232,570 |
|
Asset retirement obligations | | 158,757 |
| | | 177,108 |
|
Derivative liabilities | | 584 |
| | | 0 |
|
Deferred tax liabilities, net | | 3,836 |
| | | 410,230 |
|
Operating lease liabilities | | 463 |
| | | 41,932 |
|
Other liabilities | | 22,186 |
| | | 53,526 |
|
Total long-term liabilities | | 288,282 |
| | | 2,915,366 |
|
Commitments and contingencies (Note 12) | | | | | |
Stockholders’ equity | | | | | |
Predecessor preferred stock, $.001 par value, 25,000,000 shares authorized, none issued and outstanding | | — |
| | | 0 |
|
Predecessor common stock, $.001 par value, 750,000,000 shares authorized; 508,065,495 shares issued | | — |
| | | 508 |
|
Predecessor paid-in capital in excess of par | | — |
| | | 2,739,099 |
|
Predecessor treasury stock, at cost, 1,652,771 shares | | — |
| | | (6,034 | ) |
Successor preferred stock, $.001 par value, 50,000,000 shares authorized, none issued and outstanding | | 0 |
| | | — |
|
Successor common stock, $.001 par value, 250,000,000 shares authorized; 49,999,999 shares issued | | 50 |
| | | — |
|
Successor paid-in-capital in excess of par | | 1,095,369 |
| | | — |
|
Retained earnings (accumulated deficit) | | 2,758 |
| | | (1,321,314 | ) |
Total stockholders’ equity | | 1,098,177 |
| | | 1,412,259 |
|
Total liabilities and stockholders’ equity | | $ | 1,677,870 |
| | | $ | 4,691,867 |
|
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
Denbury Inc.
Unaudited Condensed Consolidated Statements of Operations
(In thousands, except per share data)
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
Revenues and other income | | | | | | | | |
Oil, natural gas, and related product sales | | $ | 293,192 |
| | $ | 379,628 |
| | $ | 918,190 |
| | $ | 1,095,214 |
|
CO2 sales and transportation fees | | 8,976 |
| | 8,149 |
| | 25,532 |
| | 22,416 |
|
Purchased oil sales | | 5,468 |
| | 265 |
| | 8,274 |
| | 1,668 |
|
Other income | | 7,817 |
| | 6,931 |
| | 12,274 |
| | 15,972 |
|
Total revenues and other income | | 315,453 |
| | 394,973 |
| | 964,270 |
| | 1,135,270 |
|
Expenses | | |
| | |
| | |
| | |
|
Lease operating expenses | | 117,850 |
| | 122,527 |
| | 361,205 |
| | 361,267 |
|
Transportation and marketing expenses | | 10,067 |
| | 11,116 |
| | 32,076 |
| | 31,671 |
|
CO2 discovery and operating expenses | | 879 |
| | 708 |
| | 2,016 |
| | 1,670 |
|
Taxes other than income | | 22,010 |
| | 27,344 |
| | 71,312 |
| | 81,897 |
|
Purchased oil expenses | | 5,436 |
| | 264 |
| | 8,213 |
| | 1,426 |
|
General and administrative expenses | | 18,266 |
| | 21,579 |
| | 54,697 |
| | 61,223 |
|
Interest, net of amounts capitalized of $8,773, $9,514, $27,545 and $26,817, respectively | | 22,858 |
| | 18,527 |
| | 60,672 |
| | 51,974 |
|
Depletion, depreciation, and amortization | | 55,064 |
| | 51,316 |
| | 170,625 |
| | 156,711 |
|
Commodity derivatives expense (income) | | (43,155 | ) | | 44,577 |
| | 15,462 |
| | 189,601 |
|
Gain on debt extinguishment | | (5,874 | ) | | — |
| | (106,220 | ) | | — |
|
Other expenses | | 2,140 |
| | 2,980 |
| | 8,664 |
| | 10,544 |
|
Total expenses | | 205,541 |
| | 300,938 |
| | 678,722 |
| | 947,984 |
|
Income before income taxes | | 109,912 |
| | 94,035 |
| | 285,548 |
| | 187,286 |
|
Income tax provision | | 37,050 |
| | 15,616 |
| | 91,668 |
| | 39,067 |
|
Net income | | $ | 72,862 |
| | $ | 78,419 |
| | $ | 193,880 |
| | $ | 148,219 |
|
| |
|
| | | | | | |
Net income per common share | |
|
| | | | | | |
Basic | | $ | 0.16 |
| | $ | 0.17 |
| | $ | 0.43 |
| | $ | 0.35 |
|
Diluted | | $ | 0.14 |
| | $ | 0.17 |
| | $ | 0.41 |
| | $ | 0.33 |
|
| |
|
| |
|
| |
|
| |
|
|
Weighted average common shares outstanding | | |
| | |
| | |
| | |
|
Basic | | 455,487 |
| | 451,256 |
| | 453,287 |
| | 426,036 |
|
Diluted | | 547,205 |
| | 458,450 |
| | 490,054 |
| | 455,934 |
|
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
Denbury Resources Inc.
Unaudited Condensed Consolidated Statements of Cash Flows
(In thousands)
|
| | | | | | | | |
| | Nine Months Ended September 30, |
| | 2019 | | 2018 |
Cash flows from operating activities |
| | | |
Net income |
| $ | 193,880 |
| | $ | 148,219 |
|
Adjustments to reconcile net income to cash flows from operating activities |
|
|
| | |
|
Depletion, depreciation, and amortization |
| 170,625 |
| | 156,711 |
|
Deferred income taxes |
| 90,454 |
| | 42,741 |
|
Stock-based compensation |
| 9,866 |
| | 8,711 |
|
Commodity derivatives expense |
| 15,462 |
| | 189,601 |
|
Receipt (payment) on settlements of commodity derivatives |
| 14,714 |
| | (149,738 | ) |
Gain on debt extinguishment | | (106,220 | ) | | — |
|
Debt issuance costs and discounts |
| 7,607 |
| | 4,980 |
|
Other, net |
| (6,862 | ) | | (7,066 | ) |
Changes in assets and liabilities, net of effects from acquisitions |
| |
| | |
|
Accrued production receivable |
| (1,428 | ) | | (17,140 | ) |
Trade and other receivables |
| (147 | ) | | 139 |
|
Other current and long-term assets |
| 27 |
| | (4,467 | ) |
Accounts payable and accrued liabilities |
| (33,167 | ) | | 27,435 |
|
Oil and natural gas production payable |
| (1,819 | ) | | (3,764 | ) |
Other liabilities |
| (9,414 | ) | | (2,832 | ) |
Net cash provided by operating activities |
| 343,578 |
| | 393,530 |
|
|
| | | |
Cash flows from investing activities |
| |
| | |
|
Oil and natural gas capital expenditures |
| (204,904 | ) | | (210,504 | ) |
Pipelines and plants capital expenditures | | (25,965 | ) | | (19,134 | ) |
Net proceeds from sales of oil and natural gas properties and equipment | | 10,494 |
| | 7,308 |
|
Other |
| 5,797 |
| | 5,598 |
|
Net cash used in investing activities |
| (214,578 | ) | | (216,732 | ) |
|
| | | |
Cash flows from financing activities |
| |
| | |
|
Bank repayments |
| (641,000 | ) | | (1,943,653 | ) |
Bank borrowings |
| 691,000 |
| | 1,468,653 |
|
Proceeds from issuance of senior secured notes | | — |
| | 450,000 |
|
Interest payments treated as a reduction of debt | | (59,808 | ) | | (37,233 | ) |
Cash paid in conjunction with debt exchange | | (125,268 | ) | | — |
|
Costs of debt financing | | (11,017 | ) | | (15,933 | ) |
Pipeline financing and capital lease debt repayments |
| (10,279 | ) | | (18,353 | ) |
Other |
| 5,470 |
| | (13,288 | ) |
Net cash used in financing activities |
| (150,902 | ) | | (109,807 | ) |
Net increase (decrease) in cash, cash equivalents, and restricted cash |
| (21,902 | ) | | 66,991 |
|
Cash, cash equivalents, and restricted cash at beginning of period |
| 54,949 |
| | 15,992 |
|
Cash, cash equivalents, and restricted cash at end of period |
| $ | 33,047 |
| | $ | 82,983 |
|
|
| | | | | | | | | | | | | |
| | Successor | | | Predecessor |
| | Period from Sept. 19, 2020 through | | | Period from July 1, 2020 through | | Three Months Ended |
| | Sept. 30, 2020 | | | Sept. 18, 2020 | | Sept. 30, 2019 |
Revenues and other income | | | | | | | |
Oil, natural gas, and related product sales | | $ | 22,321 |
| | | $ | 153,090 |
| | $ | 293,192 |
|
CO2 sales and transportation fees | | 967 |
| | | 6,517 |
| | 8,976 |
|
Oil marketing sales | | 151 |
| | | 3,332 |
| | 5,468 |
|
Other income | | 94 |
| | | 7,097 |
| | 7,817 |
|
Total revenues and other income | | 23,533 |
| | | 170,036 |
| | 315,453 |
|
Expenses | | | | | |
| | |
|
Lease operating expenses | | 11,484 |
| | | 59,708 |
| | 117,850 |
|
Transportation and marketing expenses | | 1,344 |
| | | 8,155 |
| | 10,067 |
|
CO2 operating and discovery expenses | | 242 |
| | | 955 |
| | 879 |
|
Taxes other than income | | 2,073 |
| | | 13,473 |
| | 22,010 |
|
Oil marketing expenses | | 139 |
| | | 3,288 |
| | 5,436 |
|
General and administrative expenses | | 1,735 |
| | | 15,013 |
| | 18,266 |
|
Interest, net of amounts capitalized of $183, $4,704 and $8,773, respectively | | 334 |
| | | 7,704 |
| | 22,858 |
|
Depletion, depreciation, and amortization | | 5,283 |
| | | 36,317 |
| | 55,064 |
|
Commodity derivatives expense (income) | | (4,035 | ) | | | 4,609 |
| | (43,155 | ) |
Gain on debt extinguishment | | 0 |
| | | 0 |
| | (5,874 | ) |
Write-down of oil and natural gas properties | | 0 |
| | | 261,677 |
| | 0 |
|
Reorganization items, net | | 0 |
| | | 849,980 |
| | 0 |
|
Other expenses | | 2,164 |
| | | 22,084 |
| | 2,140 |
|
Total expenses | | 20,763 |
| | | 1,282,963 |
| | 205,541 |
|
Income (loss) before income taxes | | 2,770 |
| | | (1,112,927 | ) | | 109,912 |
|
Income tax provision (benefit) | | 12 |
| | | (303,807 | ) | | 37,050 |
|
Net income (loss) | | $ | 2,758 |
| | | $ | (809,120 | ) | | $ | 72,862 |
|
| | | | |
|
| | |
Net income (loss) per common share | | | | |
|
| | |
Basic | | $ | 0.06 |
| | | $ | (1.63 | ) | | $ | 0.16 |
|
Diluted | | $ | 0.06 |
| | | $ | (1.63 | ) | | $ | 0.14 |
|
| | | | |
|
| |
|
|
Weighted average common shares outstanding | | | | | |
| | |
|
Basic | | 50,000 |
| | | 497,398 |
| | 455,487 |
|
Diluted | | 50,000 |
| | | 497,398 |
| | 547,205 |
|
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
Denbury Inc.
Unaudited Condensed Consolidated Statements of Operations
(In thousands, except per share data)
|
| | | | | | | | | | | | | |
| | Successor | | | Predecessor |
| | Period from Sept. 19, 2020 through | | | Period from Jan. 1, 2020 through | | Nine Months Ended |
| | Sept. 30, 2020 | | | Sept. 18, 2020 | | Sept. 30, 2019 |
Revenues and other income | | | | | | | |
Oil, natural gas, and related product sales | | $ | 22,321 |
| | | $ | 492,101 |
| | $ | 918,190 |
|
CO2 sales and transportation fees | | 967 |
| | | 21,049 |
| | 25,532 |
|
Oil marketing sales | | 151 |
| | | 8,543 |
| | 8,274 |
|
Other income | | 94 |
| | | 8,419 |
| | 12,274 |
|
Total revenues and other income | | 23,533 |
| | | 530,112 |
| | 964,270 |
|
Expenses | | |
| | | |
| | |
|
Lease operating expenses | | 11,484 |
| | | 250,271 |
| | 361,205 |
|
Transportation and marketing expenses | | 1,344 |
| | | 27,164 |
| | 32,076 |
|
CO2 operating and discovery expenses | | 242 |
| | | 2,592 |
| | 2,016 |
|
Taxes other than income | | 2,073 |
| | | 43,531 |
| | 71,312 |
|
Oil marketing expenses | | 139 |
| | | 8,399 |
| | 8,213 |
|
General and administrative expenses | | 1,735 |
| | | 48,522 |
| | 54,697 |
|
Interest, net of amounts capitalized of $183, $22,885 and $27,545, respectively | | 334 |
| | | 48,267 |
| | 60,672 |
|
Depletion, depreciation, and amortization | | 5,283 |
| | | 188,593 |
| | 170,625 |
|
Commodity derivatives expense (income) | | (4,035 | ) | | | (102,032 | ) | | 15,462 |
|
Gain on debt extinguishment | | 0 |
| | | (18,994 | ) | | (106,220 | ) |
Write-down of oil and natural gas properties | | 0 |
| | | 996,658 |
| | 0 |
|
Reorganization items, net | | 0 |
| | | 849,980 |
| | 0 |
|
Other expenses | | 2,164 |
| | | 35,868 |
| | 8,664 |
|
Total expenses | | 20,763 |
| | | 2,378,819 |
| | 678,722 |
|
Income (loss) before income taxes | | 2,770 |
| | | (1,848,707 | ) | | 285,548 |
|
Income tax provision (benefit) | | 12 |
| | | (416,129 | ) | | 91,668 |
|
Net income (loss) | | $ | 2,758 |
| | | $ | (1,432,578 | ) | | $ | 193,880 |
|
| | | | | | | |
Net income (loss) per common share | | | | | | | |
Basic | | $ | 0.06 |
| | | $ | (2.89 | ) | | $ | 0.43 |
|
Diluted | | $ | 0.06 |
| | | $ | (2.89 | ) | | $ | 0.41 |
|
| | | | | | | |
Weighted average common shares outstanding | | |
| | | |
| | |
|
Basic | | 50,000 |
| | | 495,560 |
| | 453,287 |
|
Diluted | | 50,000 |
| | | 495,560 |
| | 490,054 |
|
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
Denbury ResourcesInc.
Unaudited Condensed Consolidated Statements of Cash Flows
(In thousands)
|
| | | | | | | | | | | | | |
| | Successor | | | Predecessor |
| | Period from Sept. 19, 2020 through | | | Period from Jan. 1, 2020 through | | Nine Months Ended |
| | Sept. 30, 2020 | | | Sept. 18, 2020 | | Sept. 30, 2019 |
Cash flows from operating activities |
| | | | | | |
Net income (loss) |
| $ | 2,758 |
| | | $ | (1,432,578 | ) | | $ | 193,880 |
|
Adjustments to reconcile net income (loss) to cash flows from operating activities |
| | | |
|
| | |
|
Noncash reorganization items, net | | 0 |
| | | 810,909 |
| | 0 |
|
Depletion, depreciation, and amortization |
| 5,283 |
| | | 188,593 |
| | 170,625 |
|
Write-down of oil and natural gas properties | | 0 |
| | | 996,658 |
| | 0 |
|
Deferred income taxes |
| 6 |
| | | (408,869 | ) | | 90,454 |
|
Stock-based compensation |
| 0 |
| | | 4,111 |
| | 9,866 |
|
Commodity derivatives expense (income) |
| (4,035 | ) | | | (102,032 | ) | | 15,462 |
|
Receipt on settlements of commodity derivatives |
| 6,660 |
| | | 81,396 |
| | 14,714 |
|
Gain on debt extinguishment | | 0 |
| | | (18,994 | ) | | (106,220 | ) |
Debt issuance costs and discounts |
| 114 |
| | | 11,571 |
| | 7,607 |
|
Other, net |
| 589 |
| | | 439 |
| | (6,862 | ) |
Changes in assets and liabilities, net of effects from acquisitions |
| | | | |
| | |
|
Accrued production receivable |
| 38,537 |
| | | 26,575 |
| | (1,428 | ) |
Trade and other receivables |
| 1,366 |
| | | (22,343 | ) | | (147 | ) |
Other current and long-term assets |
| 705 |
| | | 743 |
| | 27 |
|
Accounts payable and accrued liabilities |
| (7,980 | ) | | | (16,102 | ) | | (33,167 | ) |
Oil and natural gas production payable |
| (11,064 | ) | | | (6,792 | ) | | (1,819 | ) |
Other liabilities |
| (29 | ) | | | 123 |
| | (9,414 | ) |
Net cash provided by operating activities |
| 32,910 |
| | | 113,408 |
| | 343,578 |
|
|
| | | | | | |
Cash flows from investing activities |
| | | | |
| | |
|
Oil and natural gas capital expenditures |
| (2,125 | ) | | | (99,582 | ) | | (204,904 | ) |
Pipelines and plants capital expenditures | | (6 | ) | | | (11,601 | ) | | (25,965 | ) |
Net proceeds from sales of oil and natural gas properties and equipment | | 880 |
| | | 41,322 |
| | 10,494 |
|
Other |
| (309 | ) | | | 12,747 |
| | 5,797 |
|
Net cash used in investing activities |
| (1,560 | ) | | | (57,114 | ) | | (214,578 | ) |
|
| | | | | | |
Cash flows from financing activities |
| | | | |
| | |
|
Bank repayments |
| (55,000 | ) | | | (551,000 | ) | | (641,000 | ) |
Bank borrowings |
| 0 |
| | | 691,000 |
| | 691,000 |
|
Interest payments treated as a reduction of debt | | 0 |
| | | (46,417 | ) | | (59,808 | ) |
Cash paid in conjunction with debt repurchases | | 0 |
| | | (14,171 | ) | | 0 |
|
Cash paid in conjunction with debt exchange | | 0 |
| | | 0 |
| | (125,268 | ) |
Costs of debt financing | | 0 |
| | | (12,482 | ) | | (11,017 | ) |
Pipeline financing and capital lease debt repayments |
| (54 | ) | | | (51,792 | ) | | (10,279 | ) |
Other |
| 0 |
| | | (9,363 | ) | | 5,470 |
|
Net cash provided by (used in) financing activities |
| (55,054 | ) | | | 5,775 |
| | (150,902 | ) |
Net increase (decrease) in cash, cash equivalents, and restricted cash |
| (23,704 | ) | | | 62,069 |
| | (21,902 | ) |
Cash, cash equivalents, and restricted cash at beginning of period |
| 95,114 |
| | | 33,045 |
| | 54,949 |
|
Cash, cash equivalents, and restricted cash at end of period |
| $ | 71,410 |
| | | $ | 95,114 |
| | $ | 33,047 |
|
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
Denbury Inc.
Unaudited Condensed Consolidated Statements of Changes in Stockholders' Equity
(Dollar amounts in thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock ($.001 Par Value) | | Paid-In Capital in Excess of Par | | Retained Earnings (Accumulated Deficit) | | Treasury Stock (at cost) | | |
| Shares | | Amount | Shares | | Amount | Total Equity |
Balance – December 31, 2018 | 462,355,725 |
| | $ | 462 |
| | $ | 2,685,211 |
| | $ | (1,533,112 | ) | | 1,941,749 |
| | $ | (10,784 | ) | | $ | 1,141,777 |
|
Issued or purchased pursuant to stock compensation plans | 1,331,050 |
| | 2 |
| | — |
| | — |
| | — |
| | — |
| | 2 |
|
Issued pursuant to directors’ compensation plan | 41,487 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Stock-based compensation | — |
| | — |
| | 4,306 |
| | — |
| | — |
| | — |
| | 4,306 |
|
Tax withholding – stock compensation | — |
| | — |
| | — |
| | — |
| | 531,494 |
| | (1,091 | ) | | (1,091 | ) |
Net loss | — |
| | — |
| | — |
| | (25,674 | ) | | — |
| | — |
| | (25,674 | ) |
Balance – March 31, 2019 | 463,728,262 |
| | 464 |
| | 2,689,517 |
| | (1,558,786 | ) | | 2,473,243 |
| | (11,875 | ) | | 1,119,320 |
|
Issued or purchased pursuant to stock compensation plans | 400,850 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Issued pursuant to directors’ compensation plan | 37,367 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Stock-based compensation | — |
| | — |
| | 4,667 |
| | — |
| | — |
| | — |
| | 4,667 |
|
Tax withholding – stock compensation | — |
| | — |
| | — |
| | — |
| | 1,661 |
| | (3 | ) | | (3 | ) |
Net income | — |
| | — |
| | — |
| | 146,692 |
| | — |
| | — |
| | 146,692 |
|
Balance – June 30, 2019 | 464,166,479 |
| | 464 |
| | 2,694,184 |
| | (1,412,094 | ) | | 2,474,904 |
| | (11,878 | ) | | 1,270,676 |
|
Issued or purchased pursuant to stock compensation plans | 9,046,748 |
| | 9 |
| | (9 | ) | | — |
| | — |
| | — |
| | — |
|
Stock-based compensation | — |
| | — |
| | 3,983 |
| | — |
| | — |
| | — |
| | 3,983 |
|
Tax withholding – stock compensation | — |
| | — |
| | — |
| | — |
| | 1,145,881 |
| | (1,401 | ) | | (1,401 | ) |
Net income | — |
| | — |
| | — |
| | 72,862 |
| | — |
| | — |
| | 72,862 |
|
Balance – September 30, 2019 | 473,213,227 |
| | $ | 473 |
| | $ | 2,698,158 |
| | $ | (1,339,232 | ) | | 3,620,785 |
| | $ | (13,279 | ) | | $ | 1,346,120 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock ($.001 Par Value) | | Paid-In Capital in Excess of Par | | Retained Earnings (Accumulated Deficit) | | Treasury Stock (at cost) | | |
| Shares | | Amount | Shares | | Amount | Total Equity |
Balance – December 31, 2019 (Predecessor) | 508,065,495 |
| | $ | 508 |
| | $ | 2,739,099 |
| | $ | (1,321,314 | ) | | 1,652,771 |
| | $ | (6,034 | ) | | $ | 1,412,259 |
|
Issued pursuant to stock compensation plans | 312,516 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Issued pursuant to directors’ compensation plan | 37,367 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Stock-based compensation | — |
| | — |
| | 3,204 |
| | — |
| | — |
| | — |
| | 3,204 |
|
Tax withholding for stock compensation plans | — |
| | — |
| | — |
| | — |
| | 175,673 |
| | (34 | ) | | (34 | ) |
Net income | — |
| | — |
| | — |
| | 74,016 |
| | — |
| | — |
| | 74,016 |
|
Balance – March 31, 2020 (Predecessor) | 508,415,378 |
| | 508 |
| | 2,742,303 |
| | (1,247,298 | ) | | 1,828,444 |
| | (6,068 | ) | | 1,489,445 |
|
Canceled pursuant to stock compensation plans | (6,218,868 | ) | | (6 | ) | | 6 |
| | — |
| | — |
| | — |
| | — |
|
Issued pursuant to notes conversion | 7,357,450 |
| | 8 |
| | 11,453 |
| | — |
| | — |
| | — |
| | 11,461 |
|
Stock-based compensation | — |
| | — |
| | 987 |
| | — |
| | — |
| | — |
| | 987 |
|
Net loss | — |
| | — |
| | — |
| | (697,474 | ) | | — |
| | — |
| | (697,474 | ) |
Balance – June 30, 2020 (Predecessor) | 509,553,960 |
| | 510 |
| | 2,754,749 |
| | (1,944,772 | ) | | 1,828,444 |
| | (6,068 | ) | | 804,419 |
|
Canceled pursuant to stock compensation plans | (95,016 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Issued pursuant to notes conversion | 14,800 |
| | — |
| | 40 |
| | — |
| | — |
| | — |
| | 40 |
|
Stock-based compensation | — |
| | — |
| | 10,126 |
| | — |
| | — |
| | — |
| | 10,126 |
|
Tax withholding for stock compensation plans | — |
| | — |
| | — |
| | — |
| | 567,189 |
| | (134 | ) | | (134 | ) |
Net loss | — |
| | — |
| | — |
| | (809,120 | ) | | — |
| | — |
| | (809,120 | ) |
Cancellation of Predecessor equity | (509,473,744 | ) | | (510 | ) | | (2,764,915 | ) | | 2,753,892 |
| | (2,395,633 | ) | | 6,202 |
| | (5,331 | ) |
Issuance of Successor equity | 49,999,999 |
| | 50 |
| | 1,095,369 |
| | — |
| | — |
| | — |
| | 1,095,419 |
|
Balance – September 18, 2020 (Predecessor) | 49,999,999 |
| | $ | 50 |
| | $ | 1,095,369 |
| | $ | — |
| | — |
| | $ | — |
| | $ | 1,095,419 |
|
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Balance – September 19, 2020 (Successor) | 49,999,999 |
| | $ | 50 |
| | $ | 1,095,369 |
| | $ | — |
| | — |
| | $ | — |
| | $ | 1,095,419 |
|
Net income | — |
| | — |
| | — |
| | 2,758 |
| | — |
| | — |
| | 2,758 |
|
Balance – September 30, 2020 (Successor) | 49,999,999 |
| | $ | 50 |
| | $ | 1,095,369 |
| | $ | 2,758 |
| | 0 |
| | $ | 0 |
| | $ | 1,098,177 |
|
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
Denbury Inc.
Unaudited Condensed Consolidated Statements of Changes in Stockholders' Equity
(Dollar amounts in thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock ($.001 Par Value) | | Paid-In Capital in Excess of Par | | Retained Earnings (Accumulated Deficit) | | Treasury Stock (at cost) | | |
| Shares | | Amount | Shares | | Amount | Total Equity |
Balance – December 31, 2017 | 402,549,346 |
| | $ | 403 |
| | $ | 2,507,828 |
| | $ | (1,855,810 | ) | | 457,041 |
| | $ | (4,256 | ) | | $ | 648,165 |
|
Issued or purchased pursuant to stock compensation plans | 378,595 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Stock-based compensation | — |
| | — |
| | 3,303 |
| | — |
| | — |
| | — |
| | 3,303 |
|
Tax withholding – stock compensation | — |
| | — |
| | — |
| | — |
| | 330,826 |
| | (828 | ) | | (828 | ) |
Net income | — |
| | — |
| | — |
| | 39,578 |
| | — |
| | — |
| | 39,578 |
|
Balance – March 31, 2018 | 402,927,941 |
| | 403 |
| | 2,511,131 |
| | (1,816,232 | ) | | 787,867 |
| | (5,084 | ) | | 690,218 |
|
Issued or purchased pursuant to stock compensation plans | 36,437 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Issued pursuant to notes conversion | 55,249,999 |
| | 55 |
| | 161,995 |
| | — |
| | — |
| | — |
| | 162,050 |
|
Stock-based compensation | — |
| | — |
| | 3,226 |
| | — |
| | — |
| | — |
| | 3,226 |
|
Tax withholding – stock compensation | — |
| | — |
| | — |
| | — |
| | 18,451 |
| | (71 | ) | | (71 | ) |
Net income | — |
| | — |
| | — |
| | 30,222 |
| | — |
| | — |
| | 30,222 |
|
Balance – June 30, 2018 | 458,214,377 |
| | 458 |
| | 2,676,352 |
| | (1,786,010 | ) | | 806,318 |
| | (5,155 | ) | | 885,645 |
|
Issued or purchased pursuant to stock compensation plans | 4,248,522 |
| | 4 |
| | (4 | ) | | — |
| | — |
| | — |
| | — |
|
Issued pursuant to notes conversion | (44 | ) | | — |
| | (46 | ) | | — |
| | — |
| | — |
| | (46 | ) |
Stock-based compensation | — |
| | — |
| | 4,597 |
| | — |
| | — |
| | — |
| | 4,597 |
|
Tax withholding – stock compensation | — |
| | — |
| | — |
| | — |
| | 1,087,564 |
| | (5,431 | ) | | (5,431 | ) |
Net income | — |
| | — |
| | — |
| | 78,419 |
| | — |
| | — |
| | 78,419 |
|
Balance – September 30, 2018 | 462,462,855 |
| | $ | 462 |
| | $ | 2,680,899 |
| | $ | (1,707,591 | ) | | 1,893,882 |
| | $ | (10,586 | ) | | $ | 963,184 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock ($.001 Par Value) | | Paid-In Capital in Excess of Par | | Retained Earnings (Accumulated Deficit) | | Treasury Stock (at cost) | | |
| Shares | | Amount | Shares | | Amount | Total Equity |
Balance – December 31, 2018 (Predecessor) | 462,355,725 |
| | $ | 462 |
| | $ | 2,685,211 |
| | $ | (1,533,112 | ) | | 1,941,749 |
| | $ | (10,784 | ) | | $ | 1,141,777 |
|
Issued pursuant to stock compensation plans | 1,331,050 |
| | 2 |
| | — |
| | — |
| | — |
| | — |
| | 2 |
|
Issued pursuant to directors’ compensation plan | 41,487 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Stock-based compensation | — |
| | — |
| | 4,306 |
| | — |
| | — |
| | — |
| | 4,306 |
|
Tax withholding for stock compensation plans | — |
| | — |
| | — |
| | — |
| | 531,494 |
| | (1,091 | ) | | (1,091 | ) |
Net loss | — |
| | — |
| | — |
| | (25,674 | ) | | — |
| | — |
| | (25,674 | ) |
Balance – March 31, 2019 (Predecessor) | 463,728,262 |
| | 464 |
| | 2,689,517 |
| | (1,558,786 | ) | | 2,473,243 |
| | (11,875 | ) | | 1,119,320 |
|
Issued pursuant to stock compensation plans | 400,850 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Issued pursuant to directors’ compensation plan | 37,367 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Stock-based compensation | — |
| | — |
| | 4,667 |
| | — |
| | — |
| | — |
| | 4,667 |
|
Tax withholding for stock compensation plans | — |
| | — |
| | — |
| | — |
| | 1,661 |
| | (3 | ) | | (3 | ) |
Net income | — |
| | — |
| | — |
| | 146,692 |
| | — |
| | — |
| | 146,692 |
|
Balance – June 30, 2019 (Predecessor) | 464,166,479 |
| | 464 |
| | 2,694,184 |
| | (1,412,094 | ) | | 2,474,904 |
| | (11,878 | ) | | 1,270,676 |
|
Issued pursuant to stock compensation plans | 9,046,748 |
| | 9 |
| | (9 | ) | | — |
| | — |
| | — |
| | — |
|
Stock-based compensation | — |
| | — |
| | 3,983 |
| | — |
| | — |
| | — |
| | 3,983 |
|
Tax withholding for stock compensation plans | — |
| | — |
| | — |
| | — |
| | 1,145,881 |
| | (1,401 | ) | | (1,401 | ) |
Net income | — |
| | — |
| | — |
| | 72,862 |
| | — |
| | — |
| | 72,862 |
|
Balance – September 30, 2019 (Predecessor) | 473,213,227 |
| | $ | 473 |
| | $ | 2,698,158 |
| | $ | (1,339,232 | ) | | 3,620,785 |
| | $ | (13,279 | ) | | $ | 1,346,120 |
|
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
Denbury Resources Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
Note 1. Basis of Presentation
Organization and Nature of Operations
Denbury Resources Inc. (“Denbury,” “Company” or the “Successor”), a Delaware corporation, is an independent oil and natural gas company with operations focused in two key operating areas: the Gulf Coast and Rocky Mountain regions. Our goal is to increase the value of our properties through a combination of exploitation, drilling and proven engineering extraction practices, with the most significant emphasis relating to CO2 enhanced oil recovery operations.
As further described in Emergence from Voluntary Reorganization Under Chapter 11 of the Bankruptcy Codebelow, Denbury Inc. became the successor reporting company of Denbury Resources Inc. (the “Predecessor”) upon the Predecessor’s emergence from bankruptcy on September 18, 2020. References to “Successor” relate to the financial position and results of operations of the Company subsequent to September 18, 2020, and references to “Predecessor” relate to the financial position and results of operations of the Company prior to, and including, September 18, 2020. On September 18, 2020, Denbury filed the Third Restated Certificate of Incorporation with the Delaware Secretary of State to effect a change of the Company’s corporate name from Denbury Resources Inc. to Denbury Inc., and on September 21, 2020, the Successor’s new common stock commenced trading on the New York Stock Exchange under the ticker symbol DEN.
Emergence from Voluntary Reorganization Under Chapter 11 of the Bankruptcy Code
On July 28, 2020, Denbury Resources Inc. and its subsidiaries entered into a Restructuring Support Agreement (the “RSA”) with lenders holding 100% of the revolving loans under our pre-petition revolving bank credit facility and debtholders holding approximately 67.1% of our senior secured second lien notes and approximately 73.1% of our convertible senior notes, which contemplated a restructuring of the Company pursuant to a prepackaged joint plan of reorganization (the “Plan”). On July 30, 2020 (the “Petition Date”), Denbury Resources Inc. and its subsidiaries filed petitions for reorganization in a “prepackaged” voluntary bankruptcy (the “Chapter 11 Restructuring”) under chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the Southern District of Texas (the “Bankruptcy Court”) under the caption “In re Denbury Resources Inc., et al., Case No. 20-33801”. On September 2, 2020, the Bankruptcy Court entered an order (the “Confirmation Order”) confirming the Plan and approving the Disclosure Statement, and on September 18, 2020 (the “Emergence Date”), the Plan became effective in accordance with its terms and the Company emerged from Chapter 11. On the Emergence Date and pursuant to the terms of the Plan and the Confirmation Order, all outstanding obligations under the senior secured second lien notes, convertible senior notes, and senior subordinated notes were fully extinguished, relieving approximately $2.1 billion of debt by issuing equity and/or warrants in the Successor to the former holders of that debt, and the Company:
Adopted an amended and restated certificate of incorporation and bylaws which reserved for issuance 250,000,000 shares of common stock, par value $0.001 per share, of Denbury (the “New Common Stock”) and 50,000,000 shares of preferred stock, par value $0.001 per share;
Cancelled all outstanding senior secured second lien notes, convertible senior notes, and senior subordinated notes issued by the Predecessor and related registration rights. In accordance with the Plan, claims against and interests in the Predecessor were treated as follows:
| |
◦ | Holders of secured pipeline lease claims received payment in full in cash, the collateral securing such pipeline lease claim, reinstatement, or such other treatment rendering such pipeline lease claim unimpaired (see Note 6, Long-Term Debt – Pipeline Financing Transactions, for discussion of subsequent pipeline transactions); |
| |
◦ | Holders of senior secured second lien notes claims received their pro rata share of 47,499,999 shares representing 95% of the New Common Stock issued on the Emergence Date, subject to dilution on account of warrants and a to-be-adopted management incentive plan; |
| |
◦ | Holders of convertible senior notes claims received their pro rata share of (a) 2,500,000 shares representing 5% of the New Common Stock issued on the Emergence Date, subject to dilution on account of warrants and a to-be-adopted management incentive plan and (b) 100% of the series A warrants (see below), reflecting up to a maximum of 5% ownership stake in the reorganized company’s equity interests; |
| |
◦ | Holders of subordinated notes claims received their pro rata share of 54.55% of the series B warrants (see below), reflecting up to a maximum of 3% of the reorganized company’s equity interests after giving effect to the exercise of the series A warrants; |
Denbury Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
| |
◦ | Holders of general unsecured claims received payment in full in cash, reimbursement, or such other treatment rendering such general unsecured claim unimpaired; and |
| |
◦ | Holder of existing equity interests received their pro rata share of 45.45% of the series B warrants (see below), reflecting up to a maximum of 2.5% of the reorganized company’s equity interests after giving effect to the exercise of the series A warrants. |
| |
◦ | Issued 2,631,579 series A warrants at an initial exercise price of $32.59 per share to former holders of the Predecessor’s convertible senior notes and 2,894,740 series B warrants at an initial exercise price of $35.41 per share to former holders of the Predecessor’s senior subordinated notes and Predecessor’s equity interests; |
Entered into a new senior secured revolving credit agreement with a syndicate of banks (the “Successor Bank Credit Agreement”) with total aggregate commitments of $575 million;
Appointed a new board of directors (the “Board”) consisting of four new independent members: Anthony Abate, Caroline Angoorly, Brett Wiggs and James N. “Jim” Chapman, and three continuing members: Dr. Kevin O. Meyers (Chairman of the Board), Lynn A. Peterson and Chris Kendall, Denbury’s President and Chief Executive Officer; and
Adopted a framework for a management incentive plan which will reserve primarily for employees and directors a pool of shares of New Common Stock representing up to 10% of the New Common Stock, determined on a fully diluted and fully distributed basis, with initial awards from within this pool to be issued within 60 days of emergence.
During the Predecessor period, the Company applied Financial Accounting Standards Board Codification (“FASC”) Topic 852, Reorganizations, in preparing the consolidated financial statements. FASC Topic 852 requires the financial statements, for periods subsequent to the commencement of the Chapter 11 Restructuring, to distinguish transactions and events that are directly associated with the reorganization from the ongoing operations of the business. Accordingly, certain charges incurred during 2020 related to the Chapter 11 Restructuring, including the write-off of unamortized long-term debt fees and discounts associated with debt classified as liabilities subject to compromise, and professional fees incurred directly as a result of the Chapter 11 Restructuring are recorded as “Reorganization items, net” in our Unaudited Condensed Consolidated Statements of Operations in the Predecessor period. FASC Topic 852 requires certain additional reporting for financial statements prepared between the bankruptcy filing date and the date of emergence from bankruptcy, including:
Reclassification of pre-petition liabilities that are unsecured, under-secured or where it cannot be determined that the liabilities are fully secured, to a separate line item in the Unaudited Condensed Consolidated Balance Sheet titled “Liabilities subject to compromise”; and
Segregation of Reorganization items, net as a separate line in the Unaudited Condensed Consolidated Statements of Operations.
The accompanying unaudited condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern and contemplate the realization of assets and the satisfaction of liabilities in the normal course of business. During the Chapter 11 Restructuring, the Company’s ability to continue as a going concern was contingent upon the Company’s ability to successfully implement a prepackaged joint plan of reorganization, among other factors. As a result of the effectiveness and implementation of the restructuring, there is no longer substantial doubt about the Company's ability to continue as a going concern.
Interim Financial Statements
The accompanying unaudited condensed consolidated financial statements of Denbury Resources Inc. and its subsidiaries have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) and do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. These financial statements and the notes thereto should be read in conjunction with ourthe Predecessor’s Annual Report on Form 10-K for the year ended December 31, 20182019 (the “Form 10-K”). Unless indicated otherwise or the context requires, the terms “we,” “our,” “us,” “Company” or “Denbury,” refer to Denbury Resources Inc. and its subsidiaries.
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 year. In management’s opinion, the accompanying unaudited condensed consolidated financial statements include all adjustments of a normal recurring nature necessary for a fair statement of our consolidated financial position as of September 30, 2020 (Successor) and December 31, 2019, (Predecessor); our consolidated results of operations for the three and nine months endedSeptember 30, 2019 and 2018, our consolidated cash flows for the nine months ended September 30, 2019 and 2018, and our consolidated statements of changes in stockholders’ equity for the periods September 19, 2020 through September 30, 2020 (Successor), for the period July 1, 2020
Denbury Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
through September 18, 2020 (Predecessor) and January 1, 2020 through September 18, 2020 (Predecessor), and for the three and nine months ended September 30, 2019 (Predecessor); and 2018.
Reclassifications
Certain prior period amounts have been reclassified to conform to the current year presentation. On the Unaudited Condensed Consolidated Statements of Operationsour consolidated cash flows for the threeperiod September 19, 2020 through September 30, 2020 (Successor), for the period January 1, 2020 through September 18, 2020 (Predecessor) and for the nine months ended September 30, 2018, “Purchased2019 (Predecessor). Upon the adoption of fresh start accounting, the Company’s assets and liabilities were recorded at their fair values as of the fresh start reporting date (see Note 2, Fresh Start Accounting). As a result of the adoption of fresh start accounting, certain values and operational results of the Company’s condensed consolidated financial statements subsequent to September 18, 2020 are not comparable to those in its condensed consolidated financial statements prior to, and including September 18, 2020, and as such, “black-line” financial statements are presented to distinguish between the Predecessor and Successor companies.
Risks and Uncertainties
In March 2020, the World Health Organization declared the ongoing COVID-19 coronavirus (“COVID-19”) outbreak a pandemic, and the President of the United States declared the COVID-19 pandemic a national emergency. The COVID-19 pandemic has caused a rapid and precipitous drop in oil sales” is a new line item and includes sales related to purchasesdemand, which worsened an already deteriorated oil market that followed the early-March 2020 failure by the group of oil producing nations known as OPEC+ to reach an agreement over proposed oil production cuts. Although OPEC+ subsequently agreed to reduced levels of production output, concerns about the ability of OPEC+ to maintain compliance with their reduced production targets and uncertainty about the duration of the COVID-19 pandemic and its resulting economic consequences has resulted in abnormally high worldwide inventories of produced oil. While oil prices have improved from third-parties, which were reclassified from “Other income,” “Purchasedthe low points experienced during the second quarter of 2020, the concerns and uncertainties around the balance of supply and demand for oil expenses” is a new line itemare expected to continue for some time. Because the realized oil prices we have received since early March 2020 have been significantly reduced, our operating cash flow and includes expenses related to purchases of oil from third-parties, which were reclassified from “Marketing and plant operating expenses” used in prior reports, and “Transportation and marketing expenses” is a new line item, previously captioned “Marketing and plant operating expenses,” but adjusted to exclude both expenses related to plant operating expenses, which were reclassified to “Other expenses,” and also purchases of oil from third-parties. Such reclassifications had no impact on our reported total revenues, expenses, net income, current assets, total assets, current liabilities, total liabilities or stockholders’ equity.liquidity have been adversely affected.
Cash, Cash Equivalents, and Restricted Cash
The following table provides a reconciliation of cash, cash equivalents, and restricted cash as reported within the Unaudited Condensed Consolidated Balance Sheets to “Cash, cash equivalents, and restricted cash at end of period” as reported within the Unaudited Condensed Consolidated Statements of Cash Flows:
| | | | | | | | | Successor | | | Predecessor |
In thousands | | September 30, 2019 | | December 31, 2018 | | Sept. 30, 2020 | | | Dec. 31, 2019 |
Cash and cash equivalents | | $ | 514 |
| | $ | 38,560 |
| | $ | 21,860 |
| | | $ | 516 |
|
Restricted cash, current | | | 10,662 |
| | | 0 |
|
Restricted cash included in other assets | | 32,533 |
| | 16,389 |
| | 38,888 |
| | | 32,529 |
|
Total cash, cash equivalents, and restricted cash shown in the Unaudited Condensed Consolidated Statements of Cash Flows | | $ | 33,047 |
| | $ | 54,949 |
| | $ | 71,410 |
| | | $ | 33,045 |
|
Amounts includedRestricted cash, current in the table above represents restricted escrow funds maintained by the Successor as required by certain contractual arrangements in accordance with the Plan. Other restricted cash included in “Other assets” in the accompanying Unaudited Condensed Consolidated Balance Sheetsamounts represent escrow accounts that are legally restricted for certain of our asset retirement obligations.
Denbury Resources Inc.
Notes toobligations, and are included in “Other assets” in the accompanying Unaudited Condensed Consolidated Financial Statements
Balance Sheets.
Net Income (Loss) per Common Share
Basic net income (loss) per common share is computed by dividing the net income (loss) attributable to common stockholders 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 includes the impact of potentially dilutive securities. Potentially dilutive securities consisthave historically consisted of nonvested restricted stock, nonvested performance-based equity awards, warrants, and shares into which our convertible senior notes are convertible.
Denbury Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
The following table setstables set forth the reconciliations of net income (loss) and weighted average shares used for purposes of calculating the basic and diluted net income (loss) per common share for the periods indicated:
| | | | Three Months Ended | | Nine Months Ended | | Successor | | | Predecessor |
| | September 30, | | September 30, | | Period from Sept. 19, 2020 through | | | Period from July 1, 2020 through | | Three Months Ended |
In thousands | | 2019 | | 2018 | | 2019 | | 2018 | | Sept. 30, 2020 | | | Sept. 18, 2020 | | Sept. 30, 2019 |
Numerator | | | | | | | | | | | | | | | |
Net income – basic | | $ | 72,862 |
| | $ | 78,419 |
| | $ | 193,880 |
| | $ | 148,219 |
| |
Net income (loss) – basic | | | $ | 2,758 |
| | | $ | (809,120 | ) | | $ | 72,862 |
|
Effect of potentially dilutive securities | | | | |
| | | | |
| | | | | | | |
|
Interest on convertible senior notes including amortization of discount, net of tax | | 5,101 |
| | — |
| | 5,649 |
| | 538 |
| | 0 |
| | | 0 |
| | 5,101 |
|
Net income – diluted | | $ | 77,963 |
| | $ | 78,419 |
| | $ | 199,529 |
| | $ | 148,757 |
| |
Net income (loss) – diluted | | | $ | 2,758 |
| | | $ | (809,120 | ) | | $ | 77,963 |
|
| | | | | | | | | | | | | | | |
Denominator | | | | | | | | | | | | | | | |
Weighted average common shares outstanding – basic | | 455,487 |
| | 451,256 |
| | 453,287 |
| | 426,036 |
| | 50,000 |
| | | 497,398 |
| | 455,487 |
|
Effect of potentially dilutive securities | | | | | | | | | | | | | | | |
Restricted stock and performance-based equity awards | | 865 |
| | 7,194 |
| | 2,489 |
| | 6,983 |
| | 0 |
| | | 0 |
| | 865 |
|
Convertible senior notes(1) | | 90,853 |
| | — |
| | 34,278 |
| | 22,915 |
| | 0 |
| | | 0 |
| | 90,853 |
|
Weighted average common shares outstanding – diluted | | 547,205 |
| | 458,450 |
| | 490,054 |
| | 455,934 |
| | 50,000 |
| | | 497,398 |
| | 547,205 |
|
|
| | | | | | | | | | | | | |
| | Successor | | | Predecessor |
| | Period from Sept. 19, 2020 through |
|
| Period from Jan. 1, 2020 through |
| Nine Months Ended |
In thousands | | Sept. 30, 2020 |
|
| Sept. 18, 2020 |
| Sept. 30, 2019 |
Numerator | | | | | | | |
Net income (loss) – basic | | $ | 2,758 |
| | | $ | (1,432,578 | ) | | $ | 193,880 |
|
Effect of potentially dilutive securities | | | | | | | |
|
Interest on convertible senior notes including amortization of discount, net of tax | | 0 |
| | | 0 |
| | 5,649 |
|
Net income (loss) – diluted | | $ | 2,758 |
| | | $ | (1,432,578 | ) | | $ | 199,529 |
|
| | | | | | | |
Denominator | | | | | | | |
Weighted average common shares outstanding – basic | | 50,000 |
| | | 495,560 |
| | 453,287 |
|
Effect of potentially dilutive securities | | | | |
|
| | |
Restricted stock and performance-based equity awards | | 0 |
| | | 0 |
| | 2,489 |
|
Convertible senior notes(1) | | 0 |
| | | 0 |
| | 34,278 |
|
Weighted average common shares outstanding – diluted | | 50,000 |
| | | 495,560 |
| | 490,054 |
|
| |
(1) | For the nine months ended September 30, 2019, sharesShares shown under “convertible senior notes” represent proration of the impact over the periodPredecessor periods of the approximately 90.9 million shares of the Company’sPredecessor’s common stock issuable upon full conversion of ourthe convertible senior notes which were issued on June 19, 2019 (see Note 4, Long-Term Debt – 2019 Debt Reduction Transactions). 2019. |
BasicTime-vesting restricted stock is included in basic weighted average common shares exclude shares of nonvested restricted stock. As these restricted shares vest, they will be included infrom the shares outstanding used to calculate basic net income per common sharevesting date (although time-vesting restricted stock is issued and outstanding upon grant). For purposes of calculating diluted weighted average common shares duringfor the three and nine months ended September 30, 2019, and 2018, the nonvested restricted stock and performance-based equity
Denbury Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
awards are included in the computation using the treasury stock method, with the deemed proceeds equal to the average unrecognized compensation during the period, and for the shares underlying the convertible senior notes as if the convertible senior notes were converted at the beginning of the 2018 and 2019 periods.2019.
The following securities could potentially dilute earnings per share in the future, but were excluded from the computation of diluted net income (loss) per share, as their effect would have been antidilutive:
| | | | Three Months Ended | | Nine Months Ended | | Successor | | | Predecessor |
| | September 30, | | September 30, | | Period from Sept. 19, 2020 through | | | Period from July 1, 2020 through | | Three Months Ended |
In thousands | | 2019 | | 2018 | | 2019 | | 2018 | | Sept. 30, 2020 | | | Sept. 18, 2020 | | Sept. 30, 2019 |
Stock appreciation rights | | 2,011 |
| | 2,689 |
| | 2,043 |
| | 2,824 |
| | 0 |
| | | 0 |
| | 2,011 |
|
Restricted stock and performance-based equity awards | | 7,996 |
| | — |
| | 5,859 |
| | 203 |
| | 0 |
| | | 165 |
| | 7,996 |
|
Convertible senior notes | | | 0 |
| | | 82,445 |
| | 0 |
|
Warrants(1) | | | 5,526 |
| | | 0 |
| | 0 |
|
|
| | | | | | | | | | |
| | Successor | | | Predecessor |
| | Period from Sept. 19, 2020 through | | | Period from Jan. 1, 2020 through | | Nine Months Ended |
In thousands | | Sept. 30, 2020 | | | Sept. 18, 2020 | | Sept. 30, 2019 |
Stock appreciation rights | | 0 |
| | | 1,007 |
| | 2,043 |
|
Restricted stock and performance-based equity awards | | 0 |
| | | 7,280 |
| | 5,859 |
|
Convertible senior notes | | 0 |
| | | 87,888 |
| | 0 |
|
Warrants(1) | | 5,526 |
| | | 0 |
| | 0 |
|
| |
(1) | Shares shown under “warrants” represent the impact over the Successor periods of the approximately 5.5 million shares of the Successor’s common stock issuable upon full exercise of the series A and series B warrants which were issued pursuant to the Plan to the Predecessor’s convertible senior notes, senior subordinated notes, and equity holders. |
Oil and Natural Gas Properties
Unevaluated Costs. Under full cost accounting, we exclude certain unevaluated costs from the amortization base and full cost ceiling test pending the determination of whether proved reserves can be assigned to such properties. These costs are transferred to the full cost amortization base as these properties are developed, tested and evaluated. At least annually, we test these assets for impairment based on an evaluation of management’s expectations of future pricing, evaluation of lease expiration terms, and planned development activities. Given the significant declines in NYMEX oil prices in March and April 2020 due to the oil supply and demand imbalance precipitated by the dramatic fall in demand associated with the COVID-19 pandemic combined with the concurrent OPEC+ decision to increase oil supply, we reassessed our development plans and recognized an impairment of $244.9 million of our unevaluated costs during the three months ended March 31, 2020 (Predecessor), whereby these costs were transferred to the full cost amortization base. Upon emergence from bankruptcy, the Company adopted fresh start accounting which resulted in our oil and natural gas properties, including unevaluated properties, being recorded at their fair values at the Emergence Date (see Note 2, Fresh Start Accounting, for additional information).
Write-Down of Oil and Natural Gas Properties. The net capitalized costs of oil and natural gas properties are limited to the lower of unamortized cost or the cost center ceiling. The cost center ceiling is defined as (1) the present value of estimated future net revenues from proved oil and natural gas reserves before future abandonment costs (discounted at 10%), based on the average first-day-of-the-month oil and natural gas price for each month during a 12-month rolling period prior to the end of a particular reporting period; plus (2) the cost of properties not being amortized; plus (3) the lower of cost or estimated fair value of unproved properties included in the costs being amortized, if any; less (4) related income tax effects. Our future net revenues from proved oil and natural gas reserves are not reduced for development costs related to the cost of drilling for and developing
Denbury Resources Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
CO2 reserves nor those related to the cost of constructing CO2 pipelines, as we do not have to incur additional costs to develop the proved oil and natural gas reserves. Therefore, we include in the ceiling test, as a reduction of future net revenues, that portion of our capitalized CO2 costs related to CO2 reserves and CO2 pipelines that we estimate will be consumed in the process of producing our proved oil and natural gas reserves. The fair value of our oil and natural gas derivative contracts is not included in the ceiling test, as we do not designate these contracts as hedge instruments for accounting purposes. The cost center ceiling test is prepared quarterly and was also prepared as of the Emergence Date.
The Predecessor recognized full cost pool ceiling test write-downs of $261.7 million during the period from July 1, 2020 through September 18, 2020, $662.4 million during the three months ended June 30, 2020, and $72.5 million during the three months ended March 31, 2020. There was no full cost pool ceiling test write-down for the Successor period from September 19, 2020 through September 30, 2020. The first-day-of-the-month oil prices for the preceding 12 months, after adjustments for market differentials by field, averaged $40.08 per Bbl as of September 18, 2020, $44.74 per Bbl as of June 30, 2020, and $55.17 per Bbl as of March 31, 2020. In addition, the first-day-of-the-month natural gas prices for the preceding 12 months, after adjustments for market differentials by field, averaged $1.72 per MMBtu as of September 18, 2020, $1.91 per MMBtu as of June 30, 2020, and $1.68 per MMBtu as of March 31, 2020.
Impairment Assessment of Long-Lived Assets
We test long-lived assets for impairment whenever events or changes in circumstances indicate that their carrying value may not be recoverable. These long-lived assets, which are not subject to our full cost pool ceiling test, are principally comprised of our capitalized CO2 properties and pipelines. Given the significant declines in NYMEX oil prices to approximately $20 per Bbl in late March 2020 due to OPEC supply pressures and a reduction in worldwide oil demand amid the COVID-19 pandemic, we performed a long-lived asset impairment test for our two long-lived asset groups (Gulf Coast region and Rocky Mountain region) as of March 31, 2020 (Predecessor).
We perform our long-lived asset impairment test by comparing the net carrying costs of our two long-lived asset groups to the respective expected future undiscounted net cash flows that are supported by these long-lived assets which include production of our probable and possible oil and natural gas reserves. The portion of our capitalized CO2 costs related to CO2 reserves and CO2 pipelines that we estimate will be consumed in the process of producing our proved oil and natural gas reserves is included in the full cost pool ceiling test as a reduction to future net revenues. The remaining net capitalized costs that are not included in the full cost pool ceiling test, and related intangible assets, are subject to long-lived asset impairment testing. These costs totaled approximately $1.3 billion as of March 31, 2020 (Predecessor). If the undiscounted net cash flows are below the net carrying costs for an asset group, we must record an impairment loss by the amount, if any, that net carrying costs exceed the fair value of the long-lived asset group. The undiscounted net cash flows for our asset groups exceeded the net carrying costs; thus, step two of the impairment test was not required and 0 impairment was recorded.
Significant assumptions impacting expected future undiscounted net cash flows include projections of future oil and natural gas prices, projections of estimated quantities of oil and natural gas reserves, projections of future rates of production, timing and amount of future development and operating costs, projected availability and cost of CO2, projected recovery factors of tertiary reserves and risk-adjustment factors applied to the cash flows. We performed a qualitative assessment as of June 30, 2020 and September 18, 2020 (Predecessor periods) and determined there were no material changes to our key cash flow assumptions and no triggering events since the analysis performed as of March 31, 2020; therefore, 0 impairment test was performed for the second quarter of 2020 or for the period ending September 18, 2020. Upon emergence from bankruptcy, the Company adopted fresh start accounting which resulted in our long-lived assets being recorded at their fair value at the Emergence Date (see Note 2, Fresh Start Accounting, for additional information).
Recent Accounting Pronouncements
Recently Adopted
Leases. Effective January 1, 2019, we adopted Accounting Standards Update (“ASU”) 2016-02, Leases (“ASU 2016-02”), and ASU 2018-01, Leases (Topic 842) – Land Easement Practical Expedient for Transition to Topic 842, using the modified retrospective method with an application date of January 1, 2019. ASU 2016-02 does not apply to mineral leases or leases that convey the right to explore for or use the land on which oil, natural gas, and similar natural resources are contained. We elected the practical expedients provided in the new ASUs that allow historical lease classification of existing leases, allow entities to recognize leases with terms of one year or less in their statement of operations, allow lease and non-lease components to be combined, and carry forward our accounting treatment for existing land easement agreements. The adoption of the new standards resulted in the recognition of $39.1 million of lease assets and $55.8 million of lease liabilities ($16.7 million of which related to previously-existing lease obligations) as of January 1, 2019, in our Unaudited Condensed Consolidated Balance Sheets, but did not materially impact our results of operations and had no impact on our cash flows. The additional lease assets and liabilities recorded on our balance sheet primarily related to our operating leases for office space, as the accounting for our financing leases and pipeline financings was relatively unchanged.
Not Yet Adopted
Financial Instruments – Credit Losses. In June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-13, Financial Instruments – Credit Losses (“ASU 2016-13”). ASU 2016-13 changes the impairment model for most financial assets and certain other instruments, including trade and other receivables, and requires the use of a new forward-looking expected loss model that will result in the earlier recognition of allowances for losses. Effective January 1, 2020, we adopted ASU 2016-13. The amendments inimplementation of this ASU are effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, and early adoption is permitted. Entities must adopt the amendment usingstandard did not have a modified retrospective approach to the first reporting period in which the guidance is effective. Management is currently assessing thematerial impact the adoption of ASU 2016-13 will have on our consolidated financial statements.
Denbury Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
Fair Value Measurement. In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820) – Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurements (“ASU 2018-13”). ASU 2018-13 adds, modifies, or removes certain disclosure requirements for recurring and nonrecurring fair value measurements based on the FASB’s consideration of costs and benefits. Effective January 1, 2020, we adopted ASU 2018-13. The implementation of this standard did not have a material impact on our consolidated financial statements or footnote disclosures.
Not Yet Adopted
Income Taxes. In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740) – Simplifying the Accounting for Income Taxes (“ASU 2019-12”). The objective of ASU 2019-12 is to simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740 and to provide more consistent application to improve the comparability of financial statements. The amendments in this ASU are effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years,2020, and early adoption is permitted. Entities must adoptWe are currently evaluating the amendments on changes in unrealized gains and losses for Level 3 fair value measurements, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty prospectively, and all other amendments should be applied retrospectively to all periods presented. The adoption of ASU 2018-13 is currently not expected toimpact this guidance may have a material effect on our consolidated financial statements but may require enhancedand related footnote disclosures.
Note 2. Fresh Start Accounting
Fresh Start Accounting
Upon emergence from bankruptcy, we met the criteria and were required to adopt fresh start accounting in accordance with FASC Topic 852, Reorganizations, which on the Emergence Date resulted in a new entity, the Successor, for financial reporting purposes, with no beginning retained earnings or deficit as of the fresh start reporting date. The criteria requiring fresh start accounting are: (1) the holders of the then-existing common shares of the Predecessor received less than 50 percent of the new common shares of the Successor outstanding upon emergence from bankruptcy and (2) the reorganization value of the Company’s assets immediately prior to confirmation of the Plan was less than the total of all post-petition liabilities and allowed claims.
Fresh start accounting requires that new fair values be established for the Company’s assets, liabilities and equity as of the date of emergence from bankruptcy, September 18, 2020, and therefore certain values and operational results of the condensed consolidated financial statements subsequent to September 18, 2020 are not comparable to those in the Company’s condensed consolidated financial statements prior to, and including September 18, 2020. The Emergence Date fair values of the Successor’s assets and liabilities differ materially from their recorded values as reflected on the historical balance sheet of the Predecessor.
Reorganization Value
The reorganization value derived from the range of enterprise values associated with the Plan was allocated to the Company’s identifiable tangible and intangible assets and liabilities based on their fair values. Under FASC Topic 852, reorganization value generally approximates the fair value of the entity before considering liabilities and is intended to approximate the amount a willing buyer would pay for the assets immediately after the effects of the restructuring. The value of the reconstituted entity (i.e., Successor) was based on management projections and the valuation models as determined by the Company’s financial advisors in setting an estimated range of enterprise values. As set forth in the Plan and Disclosure Statement approved by the Bankruptcy Court, the valuation analysis resulted in an enterprise value between $1.1 billion and $1.5 billion, with a mid-point of $1.3 billion. For U.S. GAAP purposes, we valued the Successor’s individual assets, liabilities, and equity instruments and determined the value of the enterprise was approximately $1.3 billion as of the Emergence Date, which fell in line with the mid-point of the forecast enterprise value ranges approved by the Bankruptcy Court. Specific valuation approaches and key assumptions used to arrive at reorganization value, and the value of discrete assets and liabilities resulting from the application of fresh start accounting, are described below in greater detail within the valuation process.
Denbury Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
The following table reconciles the enterprise value to the equity value of the Successor as of the Emergence Date:
|
| | | | |
In thousands | | Sept. 18, 2020 |
Enterprise value | | $ | 1,280,856 |
|
Plus: Cash and cash equivalents | | 45,585 |
|
Less: Total debt | | (231,022 | ) |
Equity value | | $ | 1,095,419 |
|
The following table reconciles enterprise value to reorganization value of the Successor (i.e., value of the reconstituted entity) and total reorganization value:
|
| | | | |
In thousands | | Sept. 18, 2020 |
Enterprise value | | $ | 1,280,856 |
|
Plus: Cash and cash equivalents | | 45,585 |
|
Plus: Current liabilities excluding current maturities of long-term debt | | 239,738 |
|
Plus: Non-interest bearing noncurrent liabilities | | 185,228 |
|
Reorganization value of the reconstituted Successor | | $ | 1,751,407 |
|
With the assistance of third-party valuation advisors, we determined the enterprise and corresponding equity value of the Successor using various valuation approaches and methods, including: (i) income approach using a calculation of the present value of future cash flows based on our financial projections, (ii) the market approach using selling prices of similar assets and (iii) the cost approach.
The enterprise value and corresponding equity value are dependent upon achieving the future financial results set forth in our valuation using an asset-based methodology of estimated proved reserves, undeveloped properties, and other financial information, considerations and projections, applying a combination of the income, cost and market approaches as of the fresh start reporting date of September 18, 2020. All estimates, assumptions, valuations and financial projections, including the fair value adjustments, the financial projections, the enterprise value and equity value projections, are inherently subject to significant uncertainties and the resolution of contingencies beyond our control. Accordingly, there is no assurance that the estimates, assumptions, valuations or financial projections will be realized, and actual results could vary materially, including variances when presented in our upcoming Form 10-K report for the year ended December 31, 2020.
Reorganization Items, Net
Reorganization items represent (i) expenses incurred during the Chapter 11 Restructuring subsequent to the Petition Date as a direct result of the Plan, (ii) gains or losses from liabilities settled and (iii) fresh start accounting adjustments and are recorded in “Reorganization items, net” in our Unaudited Condensed Consolidated Statements of Operations. Professional service provider charges associated with our restructuring that were incurred before the Petition Date and after the Emergence Date are recorded in “Other expenses” in our Unaudited Condensed Consolidated Statements of Operations. Contractual interest expense of $22.0 million from the Petition Date through the Emergence Date associated with our outstanding senior secured second lien notes, convertible senior notes, and senior subordinated notes was not accrued or recorded in the unaudited condensed consolidated statement of operations as interest expense.
Denbury Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
The following table summarizes the losses (gains) on reorganization items, net:
|
| | | | |
| | Predecessor |
| | Period from July 1, 2020 through |
In thousands | | Sept. 18, 2020 |
Gain on settlement of liabilities subject to compromise | | $ | (1,024,864 | ) |
Fresh start accounting adjustments | | 1,834,423 |
|
Professional service provider fees and other expenses | | 11,267 |
|
Success fees for professional service providers | | 9,700 |
|
Loss on rejected contracts and leases | | 10,989 |
|
Valuation adjustments to debt classified as subject to compromise | | 757 |
|
DIP credit agreement fees | | 3,107 |
|
Acceleration of Predecessor stock compensation expense | | 4,601 |
|
Total reorganization items, net | | $ | 849,980 |
|
Payments of professional service provider fees and success fees of $12.7 million and fees of $3.1 million related to the Senior Secured Superpriority Debtor-in-Possession Credit Agreement (“DIP Facility”) were included in cash outflows from operating activities and financing activities, respectively, in our Unaudited Condensed Consolidated Statements of Cash Flows for the period January 1, 2020 through September 18, 2020.
Valuation Process
The fair values of our principal assets, including oil and natural gas properties, CO2 properties, pipelines, other property and equipment, long-term CO2 customer contracts, favorable and unfavorable vendor contracts, pipeline financing liabilities and right-of-use assets, asset retirement obligations and warrants were estimated as of the Emergence Date.
Oil and Natural Gas Properties
The Company’s principal assets are its oil and natural gas properties, which are accounted for under the full cost accounting method as described in Note 1, Basis of Presentation – Oil and Natural Gas Properties. The Company determined the fair value of its oil and gas properties based on the discounted cash flows expected to be generated from these assets. The computations were based on market conditions and reserves in place as of the Emergence Date.
The fair value analysis was based on the Company’s estimated future production of proved and probable reserves as prepared by the Company’s independent petroleum engineering firm. Discounted cash flow models were prepared using the estimated future revenues and operating costs for all developed wells and undeveloped properties comprising the proved and probable reserves. Future revenues were based upon forward strip oil and natural gas prices as of the Emergence Date through 2024 and escalated for inflation thereafter, adjusted for differentials. Operating costs were adjusted for inflation beginning in year 2025. A risk adjustment factor was applied to each reserve category, consistent with the risk of the category. The discounted cash flow models also included adjustments for income tax expenses.
Discount factors utilized were derived using a weighted average cost of capital computation, which included an estimated cost of debt and equity for market participants with similar geographies and asset development type and varying corporate income tax rates based on the expected point of sale for each property’s produced assets. Cash flows were also adjusted for a market participant profit on CO2 costs, since Denbury charges oil fields for CO2 use on a cost basis. Finally, reserve values were adjusted for any asset retirement obligations as well as for CO2 indirect costs not directly allocable to oil fields. Based on this analysis, the Company concluded the fair value of its proved and probable reserves was $865.4 million as of the Emergence Date (see footnote 10 to Fresh Start Adjustments discussion below).
Denbury Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
CO2 Properties
The fair value of CO2 properties includes the value of CO2 mineral rights and associated infrastructure and was determined using the discounted cash flow method under the income approach. After-tax cash flows were forecast based on expected costs to produce and transport CO2 as provided by management, and income was imputed using a gross-up of costs based on a five-year average historical EBITDA margin for publicly traded companies that primarily develop or produce natural gas. Cash flows were then discounted using a rate considering reduced risk associated with CO2 industrial sales.
Pipelines
The fair values of our pipelines were determined using a combination of the replacement cost method under the cost approach and the discounted cash flow method under the income approach. The replacement cost method considers historical acquisition costs for the assets adjusted for inflation, as well as factors in any potential obsolescence based on the current condition of the assets and the ability of those assets to generate cash flow. For assets valued using the discounted cash flow method, after-tax cash flows were forecast based on expected costs provided by management, and profits were imputed using a gross-up of costs based on a five-year average historical EBITDA margin for publicly traded companies that primarily transport natural gas. Pipeline depreciable lives represent the remaining estimated useful lives of the pipelines, which will be depreciated on a straight-line basis ranging from 20 to 43 years.
Other Property and Equipment
The fair value of the non-reserve related property and equipment such as land, buildings, equipment, leasehold improvements and software was determined using the replacement cost method under the cost approach which considers historical acquisition costs for the assets adjusted for inflation, as well as factors in any potential obsolescence based on the current condition of the assets and the ability of those assets to generate cash flow.
Long-Term CO2 Customer Contracts
The fair value of long-term CO2 customer contracts was determined using the multi-period excess earnings method (“MPEEM”) under the income approach. MPEEM attributes cash flow to a specific intangible asset based on residual cash flows from a set of assets generating revenues after accounting for appropriate returns on and of other assets contributing to that revenue generation. Cash flows were forecast based on expected changes in pricing, volumes, renewal rates, and costs using volumes and prices through and beyond the initial contract terms. After-tax cash flows were discounted using a rate considering reduced risk of these industrial contracts relative to overall oil and gas production risks. The contracts will be depreciated over a useful life of seven to 14 years.
Favorable and Unfavorable Vendor Contracts
We recognized both favorable and unfavorable contracts using the incremental value method under the income approach. The incremental value method calculates value on the basis of the pricing differential between historical contracted rates and estimated pricing that the Company would most likely receive if it entered into similar contract conditions (other than the price) as of the Emergence Date. The differential is applied to expected contract volumes, tax-affected and discounted at a discount rate consistent with the risk of the associated cash flows.
Asset Retirement Obligations
The fair value of the asset retirement obligations was revalued based upon estimated current reclamation costs for our assets with reclamation obligations, an appropriate long-term inflation adjustment, and our revised credit adjusted risk-free rate (“CARFR”). The new CARFR was based on an evaluation of similar industry peers with similar factors such as emergence, new capital structure and current rates for oil and gas companies.
Pipeline Financing Liabilities
The fair value of the pipeline financing liabilities was measured as the present value of the remaining payments under the restructured pipeline agreements (see Note 6, Long-Term Debt – Pipeline Financing Transactions, for further discussion).
Denbury Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
Warrants
The fair values of the warrants issued upon the Emergence Date were estimated by applying a Black-Scholes-Merton model. The Black-Scholes-Merton model is a pricing model used to estimate the fair value of a European-style call or put option/warrant based on a current stock price, strike price, time to maturity, risk-free rate, annual volatility rate, and annual dividend yield.
The model used the following assumptions: implied stock price (total equity divided by total shares outstanding) of the Successor’s shares of common stock of $22.14; initial strike price per share of $32.59 and $35.41 for series A and B warrants, respectively; expected volatility of 49.3% and 53.6% for series A and B warrants, respectively; risk-free interest rates of 0.3% and 0.2% for series A and B warrants, respectively, using the United States Treasury Constant Maturity rates; and an expected annual dividend yield of 0%. Expected volatility was estimated using volatilities of similar entities whose share or option prices and assumptions were publicly available. The time to maturity of the warrants was based on the contractual terms of the warrants of five and three years for series A and series B warrants, respectively. The values were also adjusted for potential dilution impacts.
Condensed Consolidated Balance Sheet
The following illustrates the effects on the Company’s consolidated balance sheet due to the reorganization and fresh start accounting adjustments. The explanatory notes following the table below provide further details on the adjustments, including the assumptions and methods used to determine fair value for its assets, liabilities, and warrants.
|
| | | | | | | | | | | | | | | | |
| | As of September 18, 2020 |
In thousands | | Predecessor | | Reorganization Adjustments | | Fresh Start Adjustments | | Successor |
Assets | | | | | | | | |
Current assets | | | | | | | | |
|
Cash and cash equivalents | | $ | 73,372 |
| | $ | (27,787 | ) | (1) | $ | — |
| | $ | 45,585 |
|
Restricted cash | | — |
| | 10,662 |
| (2) | — |
| | 10,662 |
|
Accrued production receivable | | 112,832 |
| | — |
| | — |
| | 112,832 |
|
Trade and other receivables, net | | 36,221 |
| | — |
| | 0 |
| | 36,221 |
|
Derivative assets | | 32,635 |
| | — |
| | — |
| | 32,635 |
|
Other current assets | | 12,968 |
| | (539 | ) | (3) | — |
| | 12,429 |
|
Total current assets | | 268,028 |
| | (17,664 | ) | | 0 |
| | 250,364 |
|
Property and equipment | | | | | | | | |
|
Oil and natural gas properties (using full cost accounting) | | | | | | | | |
Proved properties | | 11,723,546 |
| | — |
| | (10,941,313 | ) | | 782,233 |
|
Unevaluated properties | | 650,553 |
| | — |
| | (538,570 | ) | | 111,983 |
|
CO2 properties | | 1,198,515 |
| | — |
| | (1,011,169 | ) | | 187,346 |
|
Pipelines | | 2,339,864 |
| | — |
| | (2,207,246 | ) | | 132,618 |
|
Other property and equipment | | 201,565 |
| | — |
| | (104,152 | ) | | 97,413 |
|
Less accumulated depletion, depreciation, amortization and impairment | | (12,864,141 | ) | | — |
| | 12,864,141 |
| | 0 |
|
Net property and equipment | | 3,249,902 |
| | — |
| | (1,938,309 | ) | (10) | 1,311,593 |
|
Operating lease right-of-use assets | | 1,774 |
| | 0 |
| | 69 |
| (10) | 1,843 |
|
Derivative assets | | 501 |
| | — |
| | — |
| | 501 |
|
Intangible assets, net | | 20,405 |
| | — |
| | 79,678 |
| (11) | 100,083 |
|
Other assets | | 81,809 |
| | 8,241 |
| (4) | (3,027 | ) | (12) | 87,023 |
|
Total assets | | $ | 3,622,419 |
| | $ | (9,423 | ) | | $ | (1,861,589 | ) | | $ | 1,751,407 |
|
Denbury Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
|
| | | | | | | | | | | | | | | | |
| | As of September 18, 2020 |
In thousands | | Predecessor | | Reorganization Adjustments | | Fresh Start Adjustments | | Successor |
Liabilities and Stockholders’ Equity | | | | | | | | |
Current liabilities | | | | | | | | |
|
Accounts payable and accrued liabilities | | $ | 67,789 |
| | $ | 102,793 |
| (5) | $ | 3,738 |
| (13) | $ | 174,320 |
|
Oil and gas production payable | | 39,372 |
| | 16,705 |
| (6) | — |
| | 56,077 |
|
Derivative liabilities | | 8,613 |
| | — |
| | — |
| | 8,613 |
|
Current maturities of long-term debt | | — |
| | 73,199 |
| (6) | 364 |
| (14) | 73,563 |
|
Operating lease liabilities | | — |
| | 757 |
| (6) | (29 | ) | (10) | 728 |
|
Total current liabilities | | 115,774 |
| | 193,454 |
| | 4,073 |
| | 313,301 |
|
Long-term liabilities | | | | | | | | |
|
Long-term debt, net of current portion | | 140,000 |
| | 42,610 |
| (6) | (25,151 | ) | (14) | 157,459 |
|
Asset retirement obligations | | 2,727 |
| | 180,408 |
| (6) | (24,697 | ) | (10) | 158,438 |
|
Derivative liabilities | | 295 |
| | — |
| | — |
| | 295 |
|
Deferred tax liabilities, net | | — |
| | 417,951 |
| (6)(15) | (414,120 | ) | (15) | 3,831 |
|
Operating lease liabilities | | — |
| | 515 |
| (6) | 10 |
| (10) | 525 |
|
Other liabilities | | — |
| | 3,540 |
| (6) | 18,599 |
| (16) | 22,139 |
|
Total long-term liabilities not subject to compromise | | 143,022 |
| | 645,024 |
| | (445,359 | ) | | 342,687 |
|
Liabilities subject to compromise | | 2,823,506 |
| | (2,823,506 | ) | (6) | — |
| | — |
|
Commitments and contingencies (Note 12) | | | | | | | | |
Stockholders’ equity | | | | | | | | |
Predecessor preferred stock | | — |
| | — |
| | — |
| | — |
|
Predecessor common stock | | 510 |
| | (510 | ) | (7) | — |
| | — |
|
Predecessor paid-in capital in excess of par | | 2,764,915 |
| | (2,764,915 | ) | (7) | — |
| | — |
|
Predecessor treasury stock, at cost | | (6,202 | ) | | 6,202 |
| (7) | — |
| | — |
|
Successor preferred stock | | — |
| | — |
| | — |
| | — |
|
Successor common stock | | — |
| | 50 |
| (8) | — |
| | 50 |
|
Successor paid-in-capital in excess of par | | — |
| | 1,095,369 |
| (8) | — |
| | 1,095,369 |
|
Accumulated deficit | | (2,219,106 | ) | | 3,639,409 |
| (9) | (1,420,303 | ) | (17) | — |
|
Total stockholders’ equity | | 540,117 |
| | 1,975,605 |
| | (1,420,303 | ) | | 1,095,419 |
|
Total liabilities and stockholders’ equity | | $ | 3,622,419 |
| | $ | (9,423 | ) | | $ | (1,861,589 | ) | | $ | 1,751,407 |
|
Reorganization Adjustments
| |
(1) | Represents the net cash payments that occurred on the Emergence Date as follows: |
|
| | | | |
In thousands | | |
Sources: | | |
Cash proceeds from Successor Bank Credit Agreement | | $ | 140,000 |
|
| | 140,000 |
|
| | |
Uses: | | |
Payment in full of DIP Facility and pre-petition revolving bank credit facility | | (140,000 | ) |
Retained professional service provider fees paid to escrow account | | (10,662 | ) |
Non-retained professional service provider fees paid | | (7,420 | ) |
Accrued interest and fees on DIP Facility | | (1,464 | ) |
Debt issuance costs related to Successor Bank Credit Agreement | | (8,241 | ) |
| | (167,787 | ) |
| | |
Net uses | | $ | (27,787 | ) |
Denbury Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
| |
(2) | Represents the transfer of funds to a restricted cash account utilized for the payment of fees to retained professional service providers assisting in the bankruptcy process. |
| |
(3) | Represents the write-off of costs related to the DIP Facility and a run-off policy for directors and officers’ insurance coverage, partially offset by the recording of prepaid amounts for non-retained professional service provider fees. |
| |
(4) | Represents debt issuance costs related to the Successor Bank Credit Agreement. |
| |
(5) | Adjustments to accounts payable and accrued liabilities as follows: |
|
| | | | |
In thousands | | |
Accrual of professional service provider fees | | $ | 2,826 |
|
Payment of accrued interest and fees on DIP Facility | | (1,464 | ) |
Reinstatement of accounts payable and accrued liabilities from liabilities subject to compromise | | 101,431 |
|
Accounts payable and accrued liabilities | | $ | 102,793 |
|
| |
(6) | Liabilities subject to compromise were settled as follows in accordance with the Plan: |
|
| | | | |
In thousands | | |
Liabilities subject to compromise prior to the Emergence Date: | | |
Settled liabilities subject to compromise | | |
Senior secured second lien notes | | $ | 1,629,417 |
|
Convertible senior notes | | 234,055 |
|
Senior subordinated notes | | 251,480 |
|
Total settled liabilities subject to compromise | | 2,114,952 |
|
Reinstated liabilities subject to compromise | | |
Current maturities of long-term debt | | 73,199 |
|
Accounts payable and accrued liabilities | | 101,431 |
|
Oil and gas production payable | | 16,705 |
|
Operating lease liabilities, current | | 757 |
|
Long-term debt, net of current portion | | 42,610 |
|
Asset retirement obligations | | 180,408 |
|
Deferred tax liabilities | | 289,389 |
|
Operating lease liabilities, long-term | | 515 |
|
Other long-term liabilities | | 3,540 |
|
Total reinstated liabilities subject to compromise | | 708,554 |
|
Total liabilities subject to compromise | | 2,823,506 |
|
| | |
Issuance of New Common Stock to second lien note holders | | (1,014,608 | ) |
Issuance of New Common Stock to convertible note holders | | (53,400 | ) |
Issuance of series A warrants to convertible note holders | | (15,683 | ) |
Issuance of series B warrants to senior subordinated note holders | | (6,398 | ) |
Reinstatement of liabilities subject to compromise | | (708,553 | ) |
Gain on settlement of liabilities subject to compromise | | $ | 1,024,864 |
|
Denbury Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
| |
(7) | Represents the cancellation of the Predecessor’s common stock, treasury stock, and related components of the Predecessor’s paid-in capital in excess of par. Paid-in capital in excess of par includes $4.6 million as a result of terminated Predecessor stock compensation plans. |
| |
(8) | Represents the Successor’s common stock and additional paid-in capital as follows: |
|
| | | | |
In thousands | | |
Capital in excess of par value of 47,499,999 issued and outstanding shares of New Common Stock issued to holders of the senior secured second lien note claims | | $ | 1,014,608 |
|
Capital in excess of par value of 2,500,000 issued and outstanding shares of New Common Stock issued to holders of the convertible senior note claims | | 53,400 |
|
Fair value of series A warrants issued to convertible senior note holders | | 15,683 |
|
Fair value of series B warrants issued to senior subordinated note holders | | 6,398 |
|
Fair value of series B warrants issued to Predecessor equity holders | | 5,330 |
|
Total change in Successor common stock and additional paid-in-capital | | 1,095,419 |
|
Less: Par value of Successor common stock | | (50 | ) |
Change in Successor additional paid-in-capital | | $ | 1,095,369 |
|
| |
(9) | Reflects the cumulative net impact of the effects on accumulated deficit as follows: |
|
| | | | |
In thousands | | |
Cancellation of Predecessor common stock, paid-in capital in excess of par, and treasury stock | | $ | 2,763,824 |
|
Gain on settlement of liabilities subject to compromise | | 1,024,864 |
|
Acceleration of Predecessor stock compensation expense | | (4,601 | ) |
Recognition of tax expenses related to reorganization adjustments | | (128,556 | ) |
Professional service provider fees recognized at emergence | | (9,700 | ) |
Issuance of series B warrants to Predecessor equity holders | | (5,330 | ) |
Other | | (1,092 | ) |
Net impact to Predecessor accumulated deficit | | $ | 3,639,409 |
|
Fresh Start Adjustments
| |
(10) | Reflects fair value adjustments to our (i) oil and natural gas properties, CO2 properties, pipelines, and other property and equipment, as well as the elimination of accumulated depletion, depreciation, and amortization, (ii) operating lease right-of-use assets and liabilities, and (iii) asset retirement obligations. |
| |
(11) | Reflects fair value adjustments to our long-term CO2 customer contracts. |
| |
(12) | Reflects fair value adjustments to our other assets as follows: |
|
| | | | |
In thousands | | |
Fair value adjustment for CO2 and oil pipeline line-fill | | $ | (3,698 | ) |
Fair value adjustments for escrow accounts | | 671 |
|
Fair value adjustments to other assets | | $ | (3,027 | ) |
Denbury Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
| |
(13) | Reflects fair value adjustments to accounts payable and accrued liabilities as follows: |
|
| | | | |
In thousands | �� | |
Fair value adjustment for the current portion of an unfavorable vendor contract | | $ | 3,500 |
|
Fair value adjustment for the current portion of Predecessor asset retirement obligation | | 689 |
|
Write-off accrued interest on NEJD pipeline financing | | (451 | ) |
Fair value adjustments to accounts payable and accrued liabilities | | $ | 3,738 |
|
| |
(14) | Represents adjustments to current and long-term maturities of debt associated with pipeline lease financings. The cumulative effect is as follows: |
|
| | | | |
In thousands | | |
Fair value adjustment for Free State pipeline lease financing | | $ | (24,699 | ) |
Fair value adjustment for NEJD pipeline lease financing | | (88 | ) |
Fair value adjustments to current and long-term maturities of debt | | $ | (24,787 | ) |
Our pipeline lease financings were restructured in late October 2020 (see Note 6, Long-Term Debt – Pipeline Financing Transactions).
| |
(15) | Represents (i) adjustment to deferred taxes, including the recognition of tax expenses related to reorganization adjustments as a result of the cancellation of debt and retaining tax attributes for the Successor and the reinstatement of deferred tax liabilities subject to compromise totaling $128.6 million and (ii) adjustments to deferred tax liabilities related to fresh start accounting of $414.1 million. |
| |
(16) | Represents a fair value adjustment for the long-term portion of an unfavorable vendor contract. |
| |
(17) | Represents the cumulative effect of the fresh start accounting adjustments discussed above. |
Note 3. Leases
We evaluate contracts for leasing arrangements at inception. We lease office space, equipment, and vehicles that have non-cancelable lease terms. Leases with a term of 12 months or less are not recorded on our balance sheet. As part of the Chapter 11 Restructuring, the Predecessor elected to terminate some of its operating leases, primarily related to office space.
Lease costs for operating leases or leases with a term of 12 months or less are recognized on a straight-line basis over the lease term. For finance leases, interest on the lease liability and the amortization of the right-of-use asset are recognized separately, with the depreciable life reflective of the expected lease term. The Predecessor previously subleased part of the office space included in its operating leases for which it received rental payments. Since those office space leases were terminated during the Chapter 11 Restructuring, the underlying sublease agreements were also terminated as of September 30, 2020.
Denbury Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
The following tables summarize the components of lease costs and sublease income:
|
| | | | | | | | | | | | | | | |
| | | | Successor | | | Predecessor |
| | | | Period from Sept. 19, 2020 through | | | Period from July 1, 2020 through | | Three Months Ended |
In thousands | | Income Statement Presentation | | Sept. 30, 2020 | | | Sept. 18, 2020 | | Sept. 30, 2019 |
Operating lease cost | | General and administrative expenses | | $ | 8 |
| | | $ | 1,715 |
| | $ | 1,187 |
|
| | Lease operating expenses | | 19 |
| | | 121 |
| | 0 |
|
| | CO2 operating and discovery expenses | | 2 |
| | | 11 |
| | 0 |
|
| | | | $ | 29 |
| | | $ | 1,847 |
| | $ | 1,187 |
|
| | | | | | | | | |
Finance lease cost | | | | | | | | | |
Amortization of right-of-use assets | | Depletion, depreciation, and amortization | | $ | 1 |
| | | $ | 5 |
| | $ | 54 |
|
Interest on lease liabilities | | Interest expense | | 0 |
| | | 2 |
| | 2 |
|
Total finance lease cost | | | | $ | 1 |
| | | $ | 7 |
| | $ | 56 |
|
| | | | | | | | | |
Sublease income | | General and administrative expenses | | $ | 100 |
| | | $ | 790 |
| | $ | 964 |
|
|
| | | | | | | | | | | | | | | |
| | | | Successor | | | Predecessor |
| | | | Period from Sept. 19, 2020 through | | | Period from Jan. 1, 2020 through | | Nine Months Ended |
In thousands | | Income Statement Presentation | | Sept. 30, 2020 | | | Sept. 18, 2020 | | Sept. 30, 2019 |
Operating lease cost | | General and administrative expenses | | $ | 8 |
| | | $ | 5,683 |
| | $ | 6,014 |
|
| | Lease operating expenses | | 19 |
| | | 214 |
| | 0 |
|
| | CO2 operating and discovery expenses | | 2 |
| | | 37 |
| | 0 |
|
| | | | $ | 29 |
| | | $ | 5,934 |
| | $ | 6,014 |
|
| | | | | | | | | |
Finance lease cost | | | | | | | | | |
Amortization of right-of-use assets | | Depletion, depreciation, and amortization | | $ | 1 |
| | | $ | 9 |
| | $ | 1,188 |
|
Interest on lease liabilities | | Interest expense | | 0 |
| | | 3 |
| | 40 |
|
Total finance lease cost | | | | $ | 1 |
| | | $ | 12 |
| | $ | 1,228 |
|
| | | | | | | | | |
Sublease income | | General and administrative expenses | | $ | 100 |
| | | $ | 2,584 |
| | $ | 3,331 |
|
Note 4. Predecessor Divestiture
On March 4, 2020, the Predecessor closed a farm-down transaction for the sale of half of its working interest positions in four southeast Texas oil fields for $40 million net cash and a carried interest in ten wells to be drilled by the purchaser. The Predecessor did not record a gain or loss on the sale of the properties in accordance with the full cost method of accounting.
Note 2.5. Revenue Recognition
We record revenue in accordance with Financial Accounting Standards Board Codification (“FASC”)FASC Topic 606, Revenue from Contracts with Customers. The core principle of FASC Topic 606 is that an entity should recognize revenue for the transfer of goods or services equal to the amount of consideration that it expects to be entitled to receive for those goods or services. Once we have delivered the volume of commodity to the delivery
Denbury Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
point and the customer takes delivery and possession, we are entitled to payment and we invoice the customer for such delivered production. Payment under most oil and CO2 contracts is made within a month following product delivery and for natural gas and NGL contracts is generally made within two months following delivery. Timing of revenue recognition may differ from the timing of invoicing to customers; however, as the right to consideration after delivery is unconditional based on only the passage of time before payment of the consideration is due, upon delivery we record a receivable in “Accrued production receivable” in our Unaudited Condensed Consolidated Balance Sheets, which was $127.2$74.3 million and $125.8$139.4 million as of September 30, 20192020 (Successor) and December 31, 2018,2019 (Predecessor), respectively. TheFrom time to time, the Company enters into marketing arrangements for the purchase transactions with third parties and separate sale transactions withof crude oil for third parties in the Gulf Coast region. Revenues and expenses from these transactions are presented on a gross basis, as we act as a principal in the transaction by assuming control of the commodities purchased and the responsibility to deliver the commodities sold. Revenue is recognized when control transfers to the purchaser at the delivery point based on the price received from the purchaser.
Denbury Resources Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
Disaggregation of Revenue
The following table summarizestables summarize our revenues by product type for the three and nine months ended September 30, 2019 and 2018:type:
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 30, | | September 30, |
In thousands | | 2019 | | 2018 | | 2019 | | 2018 |
Oil sales | | $ | 292,100 |
| | $ | 377,329 |
| | $ | 912,636 |
| | $ | 1,088,021 |
|
Natural gas sales | | 1,092 |
| | 2,299 |
| | 5,554 |
| | 7,193 |
|
CO2 sales and transportation fees | | 8,976 |
| | 8,149 |
| | 25,532 |
| | 22,416 |
|
Purchased oil sales | | 5,468 |
| | 265 |
| | 8,274 |
| | 1,668 |
|
Total revenues | | $ | 307,636 |
| | $ | 388,042 |
| | $ | 951,996 |
| | $ | 1,119,298 |
|
|
| | | | | | | | | | | | | |
| | Successor | | | Predecessor |
| | Period from Sept. 19, 2020 through | | | Period from July 1, 2020 through | | Three Months Ended |
In thousands | | Sept. 30, 2020 | | | Sept. 18, 2020 | | Sept. 30, 2019 |
Oil sales | | $ | 22,311 |
| | | $ | 152,136 |
| | $ | 292,100 |
|
Natural gas sales | | 10 |
| | | 954 |
| | 1,092 |
|
CO2 sales and transportation fees | | 967 |
| | | 6,517 |
| | 8,976 |
|
Oil marketing sales | | 151 |
| | | 3,332 |
| | 5,468 |
|
Total revenues | | $ | 23,439 |
| | | $ | 162,939 |
| | $ | 307,636 |
|
Note 3. Leases
We evaluate contracts for leasing arrangements at inception. We lease office space, equipment, and vehicles that have non-cancelable lease terms. Leases with a term of 12 months or less are not recorded on our balance sheet. During the third quarter of 2019, we exercised the early buyout option on our remaining finance leases. The table below reflects our operating lease assets and liabilities, which primarily consists of our office leases, and finance lease assets and liabilities:
|
| | | | |
| | September 30, |
In thousands | | 2019 |
Operating leases |
Operating lease right-of-use assets | | $ | 35,145 |
|
| | |
Operating lease liabilities - current | | $ | 6,710 |
|
Operating lease liabilities - long-term | | 43,704 |
|
Total operating lease liabilities | | $ | 50,414 |
|
| | |
Finance leases |
Other property and equipment | | $ | — |
|
Accumulated depreciation | | — |
|
Other property and equipment, net | | $ | — |
|
| | |
Current maturities of long-term debt | | $ | — |
|
Long-term debt, net of current portion | | — |
|
Total finance lease liabilities | | $ | — |
|
|
| | | | | | | | | | | | | |
| | Successor | | | Predecessor |
| | Period from Sept. 19, 2020 through | | | Period from Jan. 1, 2020 through | | Nine Months Ended |
In thousands | | Sept. 30, 2020 | | | Sept. 18, 2020 | | Sept. 30, 2019 |
Oil sales | | $ | 22,311 |
| | | $ | 489,251 |
| | $ | 912,636 |
|
Natural gas sales | | 10 |
| | | 2,850 |
| | 5,554 |
|
CO2 sales and transportation fees | | 967 |
| | | 21,049 |
| | 25,532 |
|
Oil marketing sales | | 151 |
| | | 8,543 |
| | 8,274 |
|
Total revenues | | $ | 23,439 |
| | | $ | 521,693 |
| | $ | 951,996 |
|
Denbury Resources Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
The majority of our leases contain renewal options, typically exercisable at our sole discretion. We record right-of-use assets and liabilities based on the present value of lease payments over the initial lease term, unless the option to extend the lease is reasonably certain, and utilize our incremental borrowing rate based on information available at the lease commencement date. The following weighted average remaining lease terms and discount rates related to our outstanding leases:
|
| | | |
| | September 30, |
| | 2019 |
Weighted Average Remaining Lease Term |
Operating leases | | 6.0 years |
|
Finance leases | | 0 years |
|
| | |
Weighted Average Discount Rate |
Operating leases | | 6.8 | % |
Finance leases | | — | % |
Lease costs for operating leases or leases with a term of 12 months or less are recognized on a straight-line basis over the lease term. For finance leases, interest on the lease liability and the amortization of the right-of-use asset are recognized separately, with the depreciable life reflective of the expected lease term. We have subleased part of the office space included in our operating leases for which we receive rental payments. The following table summarizes the components of lease costs and sublease income:
|
| | | | | | | | | | |
| | | | Three Months Ended | | Nine Months Ended |
In thousands | | Income Statement Presentation | | September 30, 2019 | | September 30, 2019 |
Operating lease cost | | General and administrative expenses | | $ | 1,187 |
| | $ | 6,014 |
|
| | | | | | |
Finance lease cost | | | | | | |
Amortization of right-of-use assets | | Depletion, depreciation, and amortization | | $ | 54 |
| | $ | 1,188 |
|
Interest on lease liabilities | | Interest expense | | 2 |
| | 40 |
|
Total finance lease cost | | | | $ | 56 |
| | $ | 1,228 |
|
| | | | | | |
Sublease income | | General and administrative expenses | | $ | 964 |
| | $ | 3,331 |
|
Our statement of cash flows included the following activity related to our operating and finance leases:
|
| | | | |
| | Nine Months Ended |
In thousands | | September 30, 2019 |
Cash paid for amounts included in the measurement of lease liabilities | | |
Operating cash flows from operating leases | | $ | 7,335 |
|
Operating cash flows from interest on finance leases | | 40 |
|
Financing cash flows from finance leases | | 1,275 |
|
| | |
Right-of-use assets obtained in exchange for lease obligations | |
|
|
Operating leases | | 307 |
|
Finance leases | | — |
|
Denbury Resources Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
The following table summarizes by year the maturities of our minimum lease payments as of September 30, 2019:
|
| | | | | | | | |
| | Operating | | Finance |
In thousands | | Leases | | Leases |
2019 | | $ | 2,479 |
| | $ | — |
|
2020 | | 9,874 |
| | — |
|
2021 | | 10,042 |
| | — |
|
2022 | | 10,260 |
| | — |
|
2023 | | 10,300 |
| | — |
|
Thereafter | | 18,604 |
| | — |
|
Total minimum lease payments | | 61,559 |
| | — |
|
Less: Amount representing interest | | (11,145 | ) | | — |
|
Present value of minimum lease payments | | $ | 50,414 |
| | $ | — |
|
The following table summarizes by year the remaining non-cancelable future payments under our leases, as accounted for under previous accounting guidance under FASC Topic 840, Leases, as of December 31, 2018:
|
| | | | |
| | Operating |
In thousands | | Leases |
2019 | | $ | 10,690 |
|
2020 | | 9,776 |
|
2021 | | 10,007 |
|
2022 | | 10,223 |
|
2023 | | 10,262 |
|
Thereafter | | 18,169 |
|
Total minimum lease payments | | $ | 69,127 |
|
Denbury Resources Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
Note 4.6. Long-Term Debt
The table below reflects long-term debt and capital lease obligations outstanding as of the dates indicated:
| | | | September 30, | | December 31, | | Successor | | | Predecessor |
In thousands | | 2019 | | 2018 | | Sept. 30, 2020 | | | Dec. 31, 2019 |
Senior Secured Bank Credit Agreement | | $ | 50,000 |
| | $ | — |
| |
Successor Senior Secured Bank Credit Agreement | | | $ | 85,000 |
| | | $ | 0 |
|
Predecessor Senior Secured Bank Credit Agreement | | | 0 |
| | | 0 |
|
9% Senior Secured Second Lien Notes due 2021 | | 614,919 |
| | 614,919 |
| | 0 |
| | | 614,919 |
|
9¼% Senior Secured Second Lien Notes due 2022 | | 455,668 |
| | 455,668 |
| | 0 |
| | | 455,668 |
|
7¾% Senior Secured Second Lien Notes due 2024 | | 531,821 |
| | — |
| | 0 |
| | | 531,821 |
|
7½% Senior Secured Second Lien Notes due 2024 | | 20,641 |
| | 450,000 |
| | 0 |
| | | 20,641 |
|
6⅜% Convertible Senior Notes due 2024 | | 245,548 |
| | — |
| | 0 |
| | | 245,548 |
|
6⅜% Senior Subordinated Notes due 2021 | | 51,304 |
| | 203,545 |
| | 0 |
| | | 51,304 |
|
5½% Senior Subordinated Notes due 2022 | | 83,736 |
| | 314,662 |
| | 0 |
| | | 58,426 |
|
4⅝% Senior Subordinated Notes due 2023 | | 211,695 |
| | 307,978 |
| | 0 |
| | | 135,960 |
|
Pipeline financings | | 171,067 |
| | 180,073 |
| | 90,815 |
| | | 167,439 |
|
Capital lease obligations | | — |
| | 5,362 |
| | 152 |
| | | 0 |
|
Total debt principal balance | | 2,436,399 |
| | 2,532,207 |
| | 175,967 |
| | | 2,281,726 |
|
Debt discount(1) | | (105,426 | ) | | — |
| |
Future interest payable(2) | | 190,410 |
| | 250,218 |
| |
Debt discount | | | 0 |
| | | (101,767 | ) |
Future interest payable | | | 0 |
| | | 164,914 |
|
Debt issuance costs | | (11,074 | ) | | (13,089 | ) | | 0 |
| | | (10,009 | ) |
Total debt, net of debt issuance costs and discount | | 2,510,309 |
| | 2,769,336 |
| | 175,967 |
| | | 2,334,864 |
|
Less: current maturities of long-term debt(3) | | (100,626 | ) | | (105,125 | ) | |
Long-term debt and capital lease obligations | | $ | 2,409,683 |
| | $ | 2,664,211 |
| |
Less: current maturities of long-term debt | | | (73,511 | ) | | | (102,294 | ) |
Long-term debt | | | $ | 102,456 |
| | | $ | 2,232,570 |
|
| |
(1) | Consists of discounts related to the issuance during June 2019 of our new 7¾% Senior Secured Second Lien Notes due 2024 (the “7¾% Senior Secured Notes”) and new 6⅜% Convertible Senior Notes due 2024 (the “2024 Convertible Senior Notes”) of $28.2 million and $77.2 million, respectively (see 2019 Debt Reduction Transactions below) as of September 30, 2019.
|
| |
(2) | Future interest payable represents most of the interest due over the terms of our 9% Senior Secured Second Lien Notes due 2021 (the “2021 Senior Secured Notes”) and 9¼% Senior Secured Second Lien Notes due 2022 (the “2022 Senior Secured Notes”) and has been accounted for as debt in accordance with FASC 470-60, Troubled Debt Restructuring by Debtors.
|
| |
(3) | Our current maturities of long-term debt as of September 30, 2019 include $85.9 million of future interest payable related to the 2021 Senior Secured Notes and 2022 Senior Secured Notes that is due within the next twelve months. |
The ultimate parent company in our corporate structure, Denbury Resources Inc. (“DRI”), is the sole issuer of all of our outstanding senior secured, convertible senior, and senior subordinated notes. DRIobligations under our Successor Bank Credit Agreement. Denbury Inc. has no independent assets or operations. Each of the subsidiary guarantors of such notesobligations is 100% owned, directly or indirectly, by DRI,Denbury Inc., and the guarantees of the notessuch obligations are full and unconditional and joint and several; any subsidiaries of DRI that are not subsidiary guarantors of such notes are minor subsidiaries.several.
Prior to our emergence from bankruptcy, our debt consisted of the Predecessor’s Bank Credit Agreement, senior secured second lien notes, convertible senior notes, senior subordinated notes, pipeline financings, and capital lease obligations. On the Emergence Date, pursuant to the terms of the Plan, all outstanding obligations under the senior secured second lien notes, convertible senior notes, and senior subordinated notes were fully extinguished, relieving approximately $2.1 billion of debt by issuing equity and/or warrants in the Successor to the holders of that debt. See Note 1, Basis of Presentation – Emergence from Voluntary Reorganization Under Chapter 11 of the Bankruptcy Code, for additional information.
Successor Senior Secured Bank Credit FacilityAgreement
In December 2014,connection with our emergence from Chapter 11 proceedings on September 18, 2020, we entered into an Amended and Restated Credit Agreementa new credit agreement with JPMorgan Chase Bank, N.A., as administrative agent, and other lenders party thereto (as amended, the “Bank(the “Successor Bank Credit Agreement”), which has been amended periodically since that time.. The Successor Bank Credit Agreement is a senior secured revolving credit facility with a maturity date of December 9, 2021, provided that the maturity date may occur earlier (between February 2021 and August 2021) if the 2021 Senior Secured Notes due in May 2021 or 6⅜% Senior Subordinated Notes due in August 2021 (the “6⅜% Senior Subordinated Notes”), respectively, are not repaid or refinanced by each of their respective maturity dates. As part of our fall 2019 semiannual redetermination, thean initial borrowing base and lender commitments for ourof $575 million. Additionally, under the Successor Bank Credit Agreement, were reaffirmedletters of credit are available in an aggregate amount not to exceed $100 million, and short-term swingline loans are available in an aggregate amount not to exceed $25 million, each subject to the available commitments under the Successor Bank Credit Agreement. Availability under the Successor Bank Credit Agreement is subject to a borrowing base, which is redetermined semiannually on or around May 1 and November 1 of each year, with our next scheduled redetermination around May 1, 2021. The borrowing base is adjusted at $615 million,the lenders’ discretion and is based, in part, upon external factors over which we have no control. The borrowing base is subject to a reduction by twenty-five percent (25%) of the principal amount of any unsecured or subordinated debt issued or incurred. The borrowing
Denbury Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
base may also be reduced if we sell borrowing base properties and/or cancel commodity derivative positions with an aggregate value in excess of 5% of the next such redetermination being scheduled for May 2020.then-effective borrowing base between redeterminations. If our outstanding debt under the Successor Bank Credit Agreement were to ever exceedexceeds the then-effective borrowing base, we would be required to repay the excess amount over a period not to exceed six months. The
Denbury Resources Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
weighted average interest rate on borrowings under the Successor Bank Credit Agreement was 4.7% as of Septembermatures on January 30, 2019. We incur a commitment fee of 0.50% on the undrawn portion of the aggregate lender commitments under the Bank Credit Agreement.2024.
The Successor Bank Credit Agreement prohibits us from paying dividends on our common stock through September 17, 2021. Commencing on September 18, 2021, we may pay dividends on our common stock or make other restricted payments in an amount not to exceed “Distributable Free Cash Flow”, but only if (1) no event of default or borrowing base deficiency exists; (2) our total leverage ratio is 2 to 1 or lower; and (3) availability under the Successor Bank Credit Agreement is at least 20%. The Successor Bank Credit Agreement also limits our ability to, among other things, incur and repay other indebtedness; grant liens; engage in certain mergers, consolidations, liquidations and dissolutions; engage in sales of assets; make acquisitions and investments; make other restricted payments (including redeeming, repurchasing or retiring our common stock); and enter into commodity derivative agreements, in each case subject to customary exceptions.
The Successor Bank Credit Agreement is secured by (1) our proved oil and natural gas properties, which are held through our restricted subsidiaries; (2) the pledge of equity interests of such subsidiaries; (3) a pledge of our commodity derivative agreements; (4) a pledge of deposit accounts, securities accounts and commodity accounts of Denbury Inc. and such subsidiaries (as applicable); and (5) a security interest in substantially all other collateral that may be perfected by a Uniform Commercial Code filing, subject to certain exceptions.
The Successor Bank Credit Agreement contains certain financial performance covenants, commencing with the fiscal quarter ending December 31, 2020 through the maturity of the facility, including the following:
A Consolidated Total Debt to Consolidated EBITDAX covenant, with such ratio not to exceed 5.25 to 1.0 through December 31, 2020, and 4.50 to 1.0 thereafter;
A consolidated senior secured debt to consolidated EBITDAX covenant, with such ratio not to exceed 2.5 to 1.0. Only debt under our Bank Credit Agreement is considered consolidated senior secured debt for purposes of this ratio;
A minimum permitted ratio of consolidated EBITDAX to consolidated interest charges of 1.25 to 1.0;3.5 times; and
A requirement to maintain a current ratio (i.e., Consolidated Current Assets to Consolidated Current Liabilities) of 1.0 to 1.0.times.
AsFor purposes of computing the current ratio per the Successor Bank Credit Agreement, Consolidated Current Assets exclude the current portion of derivative assets but include available borrowing capacity under that agreement, and Consolidated Current Liabilities exclude the current portion of derivative liabilities as well as the current portions of long-term indebtedness outstanding.
Loans under the Successor Bank Credit Agreement are subject to varying rates of interest based on either (1) for ABR Loans, a base rate determined under the Successor Bank Credit Agreement (the “ABR”) plus an applicable margin ranging from 2.00% to 3.00% per annum, or (2) for LIBOR Loans, the LIBOR rate (subject to a 1% floor) plus an applicable margin ranging from 3.00% to 4.00% per annum (capitalized terms as defined in the Successor Bank Credit Agreement). The weighted average interest rate on borrowings outstanding as of September 30, 2019, we were in compliance with all debt covenants2020 under the Successor Bank Credit Agreement. Agreement was 4.0%. The undrawn portion of the aggregate lender commitments under the Successor Bank Credit Agreement is subject to a commitment fee of 0.5% per annum.
The above description of our Successor Bank Credit Agreement and defined terms are contained in the Successor Bank Credit Agreement.
Pipeline Financing Transactions
On August 7, 2020, Genesis Energy, L.P. (“Genesis”) as the beneficiary of the $41.3 million letter of credit issued as “financial assurances” under the NEJD pipeline lease financing drew the full amount of such letter of credit in accordance with its terms as a result of the Predecessor’s Chapter 11 Restructuring, which resulted in a corresponding reduction to the principal balance outstanding. In late October 2020, we restructured our CO2 pipeline financing arrangements with Genesis, whereby (1) Denbury reacquired the NEJD pipeline system from Genesis in exchange for $70 million to be paid in four equal payments during 2021, representing full settlement of all remaining obligations under the NEJD secured financing lease; and (2) Denbury reacquired the Free State Pipeline from Genesis in exchange for a one-time payment of $22.5 million on October 30, 2020.
Predecessor Senior Secured Bank Credit Facility
From December 2014 through September 18, 2020, the Company maintained a senior secured revolving credit facility with JPMorgan Chase Bank, N.A., as administrative agent, and other lenders party thereto (the “Predecessor Bank Credit Agreement”).
Denbury Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
All but a minor portion of the Predecessor Bank Credit Agreement andwas refinanced through the amendments thereto.DIP Facility from August 4, 2020 through September 18, 2020, which was in turn refinanced by the Successor Bank Credit Agreement upon emergence from the Chapter 11 Restructuring.
2019 Debt Reduction TransactionsSecond Quarter 2020 Conversion of 6⅜% Convertible Senior Notes due 2024
During the thirdsecond quarter of 2019, we2020, holders of $19.9 million aggregate principal amount outstanding of the Predecessor’s 6⅜% Convertible Senior Notes due 2024 converted their notes into shares of the Predecessor’s common stock, at the rates specified in the indenture for the notes, resulting in the issuance of 7.4 million shares of Predecessor common stock upon conversion. The debt principal balance net of debt discounts totaling $13.9 million, was reclassified to “Paid-in capital in excess of par” and “Common stock” in the Unaudited Condensed Consolidated Balance Sheets of the Predecessor upon the conversion of the notes into shares of Predecessor common stock.
First Quarter 2020 Repurchases of Senior Secured Notes
During March 2020, the Predecessor repurchased $11.0a total of $30.2 million in aggregate principal amount of our then outstanding 5½%its 9% Senior SubordinatedSecured Second Lien Notes due 2022 (the “5½% Senior Subordinated Notes”)2021 in open marketopen-market transactions for a total purchase price of $5.3$14.2 million, excluding accrued interest. In connection with these transactions, wethe Predecessor recognized a $5.7$19.0 million gain on debt extinguishment, net of unamortized debt issuance costs and future interest payable written off, duringoff.
Note 7. Income Taxes
On March 27, 2020, Congress enacted the threeCoronavirus Aid, Relief, and nine monthsEconomic Security Act (the “CARES Act”) to provide certain taxpayer relief as a result of the COVID-19 pandemic. The CARES Act included several favorable provisions that impacted income taxes, primarily the modified rules on the deductibility of business interest expense for 2019 and 2020, a five-year carryback period for net operating losses generated after 2017 and before 2021, and the acceleration of refundable alternative minimum tax credits.
We evaluate our estimated annual effective income tax rate based on current and forecasted business results and enacted tax laws on a quarterly basis and apply this tax rate to our ordinary income or loss to calculate our estimated tax liability or benefit. Our income taxes are based on an estimated statutory rate of approximately 25% in 2020 and 2019. Our effective tax rate for the Predecessor period ended September 18, 2020 differed from our estimated statutory rate, primarily due to the numerous tax impacts related to the emergence from the Chapter 11 Restructuring, including the reduction of tax attributes from the exclusion of cancellation of debt income according to Section 108 of the U.S. Internal Revenue Code, and the establishment of a valuation allowance of our federal and state deferred tax assets existing after fresh start accounting. For the Successor period ended September 30, 2019. Additionally, during October 2019, we repurchased principally through exchanges an additional $13.5 million in aggregate principal amount2020, our effective tax rate differed from our estimated statutory rate as a result of a valuation allowance applied to our then outstanding 5½% Senior Subordinated Notesfederal and $29.3 million in aggregate principal amount of our then outstanding 4⅝% Senior Subordinated Notes due 2023state deferred tax assets.
Note 8. Stockholders' Equity
Registration Rights Agreement
On the Emergence Date, the Company entered into a registration rights agreement (the “4⅝% Senior Subordinated Notes”“Registration Rights Agreement”) for $5.9 million in cash and issuance of 13.7 million shareswith former beneficial holders of the Company’s common stock.second lien notes of the Predecessor who entered into the RSA dated July 28, 2020, and that together with their affiliates received 4% or more of New Common Stock (including as a result of exercise of series A warrants of the Successor) pursuant to the Plan, or their affiliates.
During June 2019,Under the Registration Rights Agreement, Securityholders have customary demand and piggyback registration rights, subject to the limitations set forth in a series of debt exchanges, we extended the maturities of our outstanding long-term debt and reduced the amount of our outstanding debt principal.Registration Rights Agreement. As part of these transactions, holders exchanged a totalthe offering registration rights, Securityholders have the right to demand the Company to effectuate the distribution of $468.4any or all of its Registrable Securities (as defined in the Registration Rights Agreement) by means of an underwritten offering pursuant to an effective registration statement; provided, however, that the expected aggregate offering price is equal to or greater than $25.0 million aggregate principal amount of our then outstanding senior subordinated notes for $102.6 million aggregate principal amount of new 7¾% Senior Secured Notes, $245.5 million aggregate principal amount of new 2024 Convertible Senior Notes and $120.0 million of cash. The exchanged senior subordinated notes consisted of $152.2 million aggregate principal amount of our 6⅜% Senior Subordinated Notes, $219.9 million aggregate principal amount of our 5½% Senior Subordinated Notes and $96.3 million aggregate principal amount of our 4⅝% Senior Subordinated Notes. In addition, holders also exchanged $425.4 million of 7½% Senior Secured Second Lien Notes due 2024 (the “7½% Senior Secured Notes”) for $425.4 million aggregate principal amount of 7¾% Senior Secured Notes. In July 2019, holders exchanged an additional $4.0 million aggregate principal amount of 7½% Senior Secured Notes for $3.8 million aggregate principal amount of 7¾% Senior Secured Notes. As a result, we recognized a noncash gain on debt extinguishment, net of transaction costs, totaling $0.2 million and $100.5 million for the three and nine months ended September 30, 2019, in our Unaudited Condensed Consolidated Statements of Operations.
In accordance with FASC 470-50, Modifications and Extinguishments, the June 2019 exchange of our existing senior subordinated notes was accounted for as a debt extinguishment. Therefore, our new 7¾% Senior Secured Notes and new 2024 Convertible Senior Notes were recorded on our balance sheetor includes at fair market value based upon initial trading prices following their issuance, resulting in a discount to their principal amount of $22.6 million and $79.9 million, respectively. These debt discounts will be amortized as interest expense over the terms of these notes.
Separately, the June 2019 exchange of our existing senior secured second lien notes was accounted for as a modification of those notes. Therefore, no gain or loss was recognized, and previously deferred debt issuance costs of $6.9 million were treated as a discount to the principal amountleast 20% of the new 7¾% Senior Secured Notes, which discount will be amortized as interest expense over the term of these notes.then-outstanding Registrable Securities.
Denbury Resources Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
7¾% Senior Secured Second Lien Notes due 2024These registration rights are subject to certain conditions and limitations, including the right of the underwriters to limit the number of shares to be included in an offering and the Company’s right to delay or withdraw a registration statement under certain circumstances. The Company will generally pay all registration expenses in connection with its obligations under the Registration Rights Agreement, regardless of whether a registration statement is filed or becomes effective. The registration rights granted in the Registration Rights Agreement are subject to customary indemnification and contribution provisions, as well as customary restrictions such as blackout periods and, if an underwritten offering is contemplated, limitations on the number of shares to be included in the underwritten offering that may be imposed by the managing underwriter.
Note 9. Stock Compensation
2020 Compensation Adjustments
In response to the then ongoing significant economic and market uncertainty affecting the oil and gas industry, in June 2020 the Predecessor and its Board of Directors (the “Predecessor Board”) and Compensation Committee (the “Predecessor Compensation Committee”) conducted a comprehensive review of compensation programs across the organization. As a result of this review, the Predecessor Board and Predecessor Compensation Committee determined that its historic compensation structure and performance metrics would not be effective in motivating and incentivizing its workforce in the current environment. With the advice of its independent compensation consultant and its legal advisors, effective June 3, 2020, the Predecessor and the Predecessor Board implemented a revised compensation structure for all of the Predecessor’s employees (including its named executive officers) and non-employee directors. In connection with the revised compensation structure, the Company’s CEO voluntarily reduced his 2020 base annual salary by 20%, and the Company’s CEO and CFO voluntarily reduced 2020 targeted variable compensation by 35% and 20%, respectively. In addition, the Predecessor Chairman of the Board reduced his 2020 chairman retainer by 20%.
Under part of the notes exchanges discussed above, in June 2019 we issued $528.0 millionrevised compensation structure, which applies to a group of 7¾% Senior Secured Notes in connection with exchanges with certain holders21 of the Company’s executives (including our named executive officers) and senior managers, all outstanding senior subordinated notesequity awards and existing 7½% Senior Secured Notes (see 2019 Debt Reduction Transactions above). The 7¾% Senior Secured Notes, which carry2020 targeted variable cash-based compensation for those individuals were canceled and replaced with a stated interest rate of 7.75% per annum,cash retention incentive. In total, $15.2 million in cash retention incentives were recorded at approximately 94% of their principal amountprepaid to those employees in accordanceJune 2020, with FASC 470-50, Modifications and Extinguishments, which equatesan obligation to an effective yield to maturity of approximately 9.39%. In July 2019, we issued an additional $3.8 million of 7¾% Senior Secured Notes in exchange for $4.0 million of 7½% Senior Secured Notes, which were recorded at par. Interest on the 7¾% Senior Secured Notes is payable semiannually in arrears on February 15 and August 15 of each year, and mature on February 15, 2024. We may redeem the 7¾% Senior Secured Notes in whole or in part at our option beginning August 15, 2020, at a redemption price of 103.875% of the principal amount, and at declining redemption prices thereafter, as specified in the indenture governing the 7¾% Senior Secured Notes. Prior to August 15, 2020, we may at our option redeemrepay up to an aggregate of 35% of the principal amount of the 7¾% Senior Secured Notes at a price of 107.75% of par with the proceeds of certain equity offerings. In addition, at any time prior to August 15, 2020, we may redeem the 7¾% Senior Secured Notes in whole or in part at a price equal to 100% of the principal amount plus a “make-whole” premium and accrued and unpaid interest. The 7¾% Senior Secured Notescompensation (on an after-tax basis) if specified conditions are not subjectsatisfied. The Predecessor’s named executive officers’ cash retention incentive will be earned 50% based on their continued employment for a period of up to any sinking fund requirements.
The 7¾% Senior Secured Notes are guaranteed jointly12 months, and severally by our subsidiaries representing substantially all of our assets, operations and income and are secured by second-priority liens50% based on substantially all of the assets that secure the Bank Credit Agreement, which second-priority liens are contractually subordinated to liens that secure our Bank Credit Agreement and any future additional priority lien debt.
6⅜% Convertible Senior Notes due 2024
As part of the notes exchanges discussed above, in June 2019 we issued $245.5 million of 2024 Convertible Senior Notes in connection with exchanges withachieving certain holders of the Company’s outstanding senior subordinated notes (see 2019 Debt Reduction Transactions above). The 2024 Convertible Senior Notes, which carry a stated interest rate of 6.375% per annum, were recorded at approximately 67% of their principal amount inspecified incentive metrics. In accordance with FASC 470-50,Topic 718, Modifications and ExtinguishmentsCompensation – Stock Compensation, which equateswe accounted for the transaction involving equity compensation as an award modification and reclassified the awards from equity to an effective yield to maturityliability awards. As a result of approximately 15.31%. Interest on the 2024 Convertible Senior Notes is payable semiannually in arrears on June 30 and December 30modification of each year, beginning in December 2019, and mature on December 31, 2024. We do not have the right to redeem the 2024 Convertible Senior Notes prior to their maturity. The 2024 Convertible Senior Notes are convertible into shares of our common stock at any time,awards, unrecognized compensation at the optiontime of modification was determined to be $18.7 million ($4.1 million of incremental compensation expense, of which $3.4 million was expensed during the second quarter of 2020 and $0.7 million was expensed during the Predecessor period from July 1, 2020 through September 18, 2020), which was higher than the $15.2 million cash payment, and was calculated as the greater of (i) grant date fair value of the holders, at a rate of 370 shares of common stock per $1,000 principal amount of 2024 Convertible Senior Notes, which is equivalentpreviously-outstanding awards plus incremental compensation (defined as cash paid related to approximately 90.9 million sharesthe cash retention incentive in excess of the Company’s common stock, subject to customary adjustments to the conversion rate and threshold price with respect to, among other things, stock dividends and distributions, mergers and reclassifications. The 2024 Convertible Senior Notes will be automatically converted into shares of common stock at this rate if the volume weighted average trading pricemodification date fair value of the Company’s common stock equalspreviously-existing awards) or exceeds(ii) cash paid for the threshold price, which is $2.43 per share,cash retention incentive for 10 trading days in any period of 15 consecutive trading days, subject to satisfaction of certain other conditions. Additionally,each award. The value was recognized as total compensation expense for each award over the Company may, based on a determination of its Board of Directors that such changes are in the best interestsservice period. We recognized $11.5 million of the Company,$18.7 million as compensation expense in “General and subject to certain limitations, increaseadministrative expenses” in our Unaudited Condensed Consolidated Statements of Operations during the conversion rate. Any such conversion rate increase would cause a proportional decrease insecond quarter of 2020, and the threshold priceremaining $7.2 million during the Predecessor period from July 1, 2020 through September 18, 2020. The accounting for mandatory conversions,the Predecessor’s remaining share-based compensation awards continued throughout the period covered by the Chapter 11 Restructuring, and thereby would enableupon cancellation of the Company to require a mandatory conversion into common stock at a lower price.awards, an additional $4.6 million of compensation expense was recognized during the Predecessor period ended September 18, 2020.
Note 5.10. Commodity Derivative Contracts
We do not apply hedge accounting treatment to our oil and natural gas derivative contracts; therefore, the changes in the fair values of these instruments are recognized in income in the period of change. These fair value changes, along with the settlements of expired contracts, are shown under “Commodity derivatives expense (income)” in our Unaudited Condensed Consolidated Statements of Operations.
Historically, we have entered into various oil and natural gas derivative contracts to provide an economic hedge of our exposure to commodity price risk associated with anticipated future oil and natural gas production and to provide more certainty to our future cash flows. We do not hold or issue derivative financial instruments for trading purposes. Generally, these contracts have
Denbury Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
consisted of various combinations of price floors, collars, three-way collars, fixed-price swaps, fixed-price swaps enhanced with a sold put, and basis swaps. The production that we hedge has varied from year to year depending on our levels of debt, financial strength and expectation of future commodity prices.
Denbury Resources Inc.
Notesour Successor Bank Credit Agreement, at any point in time within the initial measurement period of August 1, 2020 through July 31, 2021, we are required to Unaudited Condensed Consolidated Financial Statements
have hedges in place covering a minimum of 65% of our anticipated crude oil production and 35% of our anticipated crude oil production for the second measurement period of August 1, 2021 through July 31, 2022. We have until December 31, 2020 to enter into transactions for the initial measurement period to be in compliance.
We manage and control market and counterparty credit risk through established internal control procedures that are reviewed on an ongoing basis. We attempt to minimize credit risk exposure to counterparties through formal credit policies, monitoring procedures and diversification, and all of our commodity derivative contracts are with parties that are lenders under our Successor Bank Credit Agreement (or affiliates of such lenders). As of September 30, 2019,2020, all of our outstanding derivative contracts were subject to enforceable master netting arrangements whereby payables on those contracts can be offset against receivables from separate derivative contracts with the same counterparty. It is our policy to classify derivative assets and liabilities on a gross basis on our balance sheets, even if the contracts are subject to enforceable master netting arrangements.
The following table summarizes our commodity derivative contracts as of September 30, 20192020, none of which are classified as hedging instruments in accordance with the FASC Derivatives and Hedging topic:
| | Months | | Index Price | | Volume (Barrels per day) | | Contract Prices ($/Bbl) | | Index Price | | Volume (Barrels per day) | | Contract Prices ($/Bbl) |
Range(1) | | Weighted Average Price | Range(1) | | Weighted Average Price |
Swap | | Sold Put | | Floor | | Ceiling | Swap | | Sold Put | | Floor | | Ceiling |
Oil Contracts: | Oil Contracts: | | | | | | | | | | | | | | | Oil Contracts: | | | | | | | | | | | | | | |
2019 Fixed-Price Swaps | | | | | | | | | | | | | |
2020 Fixed-Price Swaps | | 2020 Fixed-Price Swaps | | | | | | | | | | | | |
Oct – Dec | | NYMEX | | 2,000 | | $ | 60.00 |
| – | 61.20 |
| | $ | 60.60 |
| | $ | — |
| | $ | — |
| | $ | — |
| | NYMEX | | 13,500 | | $ | 36.25 |
| – | 61.00 |
| | $ | 40.52 |
| | $ | — |
| | $ | — |
| | $ | — |
|
Oct – Dec | | Argus LLS | | 13,000 | | 60.00 |
| – | 74.90 |
| | 64.69 |
| | — |
| | — |
| | — |
| | Argus LLS | | 7,500 | | 35.00 |
| – | 64.26 |
| | 51.67 |
| | — |
| | — |
| | — |
|
2019 Three-Way Collars(2) | | | | | | | | | | | | | |
2020 Three-Way Collars(2) | | 2020 Three-Way Collars(2) | | | | | | | | | | | | |
Oct – Dec | | NYMEX | | 23,000 | | $ | 55.00 |
| – | 75.45 |
| | $ | — |
| | $ | 48.57 |
| | $ | 56.61 |
| | $ | 69.04 |
| | NYMEX | | 9,500 | | $ | 55.00 |
| – | 82.65 |
| | $ | — |
| | $ | 47.93 |
| | $ | 57.00 |
| | $ | 63.25 |
|
Oct – Dec | | Argus LLS | | 5,500 | | 62.00 |
| – | 86.00 |
| | — |
| | 54.73 |
| | 63.09 |
| | 79.93 |
| | Argus LLS | | 5,000 | | 58.00 |
| – | 87.10 |
| | — |
| | 52.80 |
| | 61.63 |
| | 70.35 |
|
2020 Fixed-Price Swaps | | | | | | | | | | | | | |
2021 Fixed-Price Swaps | | 2021 Fixed-Price Swaps | | | | | | | | | | | | |
Jan – Dec | | NYMEX | | 2,000 | | $ | 60.00 |
| – | 61.00 |
| | $ | 60.59 |
| | $ | — |
| | $ | — |
| | $ | — |
| | NYMEX | | 8,000 | | $ | 41.70 |
| – | 45.20 |
| | $ | 43.41 |
| | $ | — |
| | $ | — |
| | $ | — |
|
Jan – Dec | | Argus LLS | | 4,500 | | 60.72 |
| – | 64.26 |
| | 62.29 |
| | — |
| | — |
| | — |
| |
2020 Three-Way Collars(2) | | | | | | | | | | | | | |
2022 Fixed-Price Swaps | | 2022 Fixed-Price Swaps | | | | | | | | | | | | |
Jan – June | | NYMEX | | 16,000 | | $ | 55.00 |
| – | 82.65 |
| | $ | — |
| | $ | 48.17 |
| | $ | 57.62 |
| | $ | 64.19 |
| | NYMEX | | 6,000 | | $ | 42.90 |
| – | 45.50 |
| | $ | 43.75 |
| | $ | — |
| | $ | — |
| | $ | — |
|
Jan – June | | Argus LLS | | 6,000 | | 61.00 |
| – | 87.10 |
| | — |
| | 53.42 |
| | 63.19 |
| | 71.16 |
| |
July – Dec | | NYMEX | | 14,000 | | 55.00 |
| – | 82.65 |
| | — |
| | 48.18 |
| | 57.56 |
| | 64.17 |
| |
July – Dec | | Argus LLS | | 4,000 | | 61.00 |
| – | 87.10 |
| | — |
| | 53.50 |
| | 63.16 |
| | 72.99 |
| |
| |
(1) | Ranges presented for fixed-price swaps represent the lowest and highest fixed prices of all open contracts for the period presented. For three-way collars, ranges represent the lowest floor price and highest ceiling price for all open contracts for the period presented. |
| |
(2) | A three-way collar is a costless collar contract combined with a sold put feature (at a lower price) with the same counterparty. The value received for the sold put is used to enhance the contracted floor and ceiling price of the related collar. At the contract settlement date, (1) if the index price is higher than the ceiling price, we pay the counterparty the difference between the index price and ceiling price for the contracted volumes, (2) if the index price is between the floor and ceiling price, no settlements occur, (3) if the index price is lower than the floor price but at or above the sold put price, the counterparty pays us the difference between the index price and the floor price for the contracted volumes and (4) if the index price is loweroil prices average less than the sold put price, the counterparty pays usour receipts on settlement would be limited to the difference between the floor price and the sold put price for the contracted volumes. |
Note 6.11. Fair Value Measurements
The FASC Fair Value Measurement topic defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (often referred to as the “exit price”). We utilize market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated or generally unobservable. We primarily apply the income approach for recurring fair value measurements
Denbury Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
and endeavor to utilize the best available information. Accordingly, we utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. We are able to classify fair value balances based on the observability of those inputs. The FASC establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy
Denbury Resources Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). The three levels of the fair value hierarchy are as follows:
Level 1 – Quoted prices in active markets for identical assets or liabilities as of the reporting date.
Level 2 – Pricing inputs are other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reported date. Level 2 includes those financial instruments that are valued using models or other valuation methodologies. Instruments in this category include non-exchange-traded oil derivatives that are based on NYMEX pricing and fixed-price swaps that are based on regional pricing other than NYMEX (e.g., Light Louisiana Sweet). Our costless collars and the sold put features of our three-way collars are valued using the Black-Scholes model, an industry standard option valuation model that takes into account inputs such as contractual prices for the underlying instruments, maturity, quoted forward prices for commodities, interest rates, volatility factors and credit worthiness, as well as other relevant economic measures. Substantially all of these assumptions are observable in the marketplace throughout the full term of the instrument, can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace.
| |
• | Level 3 – Pricing inputs include significant inputs that are generally less observable. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value. As of September 30, 2019, instruments in this category include non-exchange-traded three-way collars that are based on regional pricing other than NYMEX (e.g., Light Louisiana Sweet). The valuation models utilized for costless collars and three-way collars are consistent with the methodologies described above; however, the implied volatilities utilized in the valuation of Level 3 instruments are developed using a benchmark, which isLevel 3 – Pricing inputs include significant inputs that are generally less observable. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value. As of December 31, 2019, instruments in this category included non-exchange-traded three-way collars that were based on regional pricing other than NYMEX (e.g., Light Louisiana Sweet). The valuation models utilized for three-way collars were consistent with the methodologies described above; however, the implied volatilities utilized in the valuation of Level 3 instruments were developed using a benchmark, which was considered a significant unobservable input. An increase or decrease of 100 basis points in the implied volatility inputs utilized in our fair value measurement would result in a change of approximately $230 thousand in the fair value of these instruments as of September 30, 2019. |
We adjust the valuations from the valuation model for nonperformance risk, using our estimate of the counterparty’s credit quality for asset positions and our credit quality for liability positions. We use multiple sources of third-party credit data in determining counterparty nonperformance risk, including credit default swaps.
Denbury Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
The following table sets forth, by level within the fair value hierarchy, our financial assets and liabilities that were accounted for at fair value on a recurring basis as of the periods indicated:
| | | | Fair Value Measurements Using: | | Fair Value Measurements Using: |
In thousands | | Quoted Prices in Active Markets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Total | | Quoted Prices in Active Markets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Total |
September 30, 2019 | | | | | | | | | |
September 30, 2020 (Successor) | | | | | | | | | |
Assets | | | | | | | | | | | | | | | | |
Oil derivative contracts – current | | $ | — |
| | $ | 46,099 |
| | $ | 9,516 |
| | $ | 55,615 |
| | $ | 0 |
| | $ | 26,778 |
| | $ | 0 |
| | $ | 26,778 |
|
Oil derivative contracts – long-term | | — |
| | 9,799 |
| | 1,684 |
| | 11,483 |
| | 0 |
| | 1,147 |
| | 0 |
| | 1,147 |
|
Total Assets | | $ | — |
| | $ | 55,898 |
| | $ | 11,200 |
| | $ | 67,098 |
| | $ | 0 |
| | $ | 27,925 |
| | $ | 0 |
| | $ | 27,925 |
|
| | | | | | | | | | | | | | | | |
December 31, 2018 | | |
| | |
| | |
| | |
| |
Liabilities | | | | | | | | | |
Oil derivative contracts – current | | | $ | 0 |
| | $ | (5,739 | ) | | $ | 0 |
| | $ | (5,739 | ) |
Oil derivative contracts – long-term | | | 0 |
| | (584 | ) | | 0 |
| | (584 | ) |
Total Liabilities | | | $ | 0 |
| | $ | (6,323 | ) | | $ | 0 |
| | $ | (6,323 | ) |
| | | | | | | | | |
| | | | | | | | | |
December 31, 2019 (Predecessor) | | | |
| | |
| | |
| | |
|
Assets | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Oil derivative contracts – current | | $ | — |
| | $ | 81,621 |
| | $ | 11,459 |
| | $ | 93,080 |
| | $ | 0 |
| | $ | 8,503 |
| | $ | 3,433 |
| | $ | 11,936 |
|
Oil derivative contracts – long-term | | — |
| | 2,030 |
| | 2,165 |
| | 4,195 |
| |
Total Assets | | $ | — |
| | $ | 83,651 |
| | $ | 13,624 |
| | $ | 97,275 |
| | $ | 0 |
| | $ | 8,503 |
| | $ | 3,433 |
| | $ | 11,936 |
|
| | | | | | | | | |
Liabilities | | | | | | | | | |
Oil derivative contracts – current | | | $ | 0 |
| | $ | (6,522 | ) | | $ | (1,824 | ) | | $ | (8,346 | ) |
Total Liabilities | | | $ | 0 |
| | $ | (6,522 | ) | | $ | (1,824 | ) | | $ | (8,346 | ) |
Since we do not apply hedge accounting for our commodity derivative contracts, any gains and losses on our assets and liabilities are included in “Commodity derivatives expense (income)” in the accompanying Unaudited Condensed Consolidated Statements of Operations.
Denbury Resources Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
Level 3 Fair Value Measurements
The following table summarizestables summarize the changes in the fair value of our Level 3 assets and liabilities for the three and nine months ended September 30, 2019 and 2018:liabilities:
| | | | Three Months Ended | | Nine Months Ended | | Successor | | | Predecessor |
| | September 30, | | September 30, | | Period from Sept. 19, 2020 through | | | Period from July 1, 2020 through | | Three Months Ended |
In thousands | | 2019 | | 2018 | | 2019 | | 2018 | | Sept. 30, 2020 | | | Sept. 18, 2020 | | Sept. 30, 2019 |
Fair value of Level 3 instruments, beginning of period | | $ | 6,073 |
| | $ | (1,168 | ) | | $ | 13,624 |
| | $ | — |
| | $ | 0 |
| | | $ | 0 |
| | $ | 6,073 |
|
Fair value gains (losses) on commodity derivatives | | 6,450 |
| | (5,244 | ) | | 90 |
| | (6,412 | ) | |
Transfers out of Level 3 | | | 0 |
| | | 0 |
| | 0 |
|
Fair value gains on commodity derivatives | | | 0 |
| | | 0 |
| | 6,450 |
|
Receipts on settlements of commodity derivatives | | (1,323 | ) | | — |
| | (2,514 | ) | | — |
| | 0 |
| | | 0 |
| | (1,323 | ) |
Fair value of Level 3 instruments, end of period | | $ | 11,200 |
| | $ | (6,412 | ) | | $ | 11,200 |
| | $ | (6,412 | ) | | $ | 0 |
| | | $ | 0 |
| | $ | 11,200 |
|
| | | | | | | | | | | | | | | |
The amount of total gains (losses) for the period included in earnings attributable to the change in unrealized gains (losses) relating to assets or liabilities still held at the reporting date | | $ | 6,234 |
| | $ | (5,244 | ) | | $ | 6,540 |
| | $ | (6,412 | ) | |
The amount of total gains for the period included in earnings attributable to the change in unrealized gains relating to assets or liabilities still held at the reporting date | | | $ | 0 |
| | | $ | 0 |
| | $ | 6,234 |
|
|
| | | | | | | | | | | | | |
| | Successor | | | Predecessor |
| | Period from Sept. 19, 2020 through | | | Period from Jan. 1, 2020 through | | Nine Months Ended |
In thousands | | Sept. 30, 2020 | | | Sept. 18, 2020 | | Sept. 30, 2019 |
Fair value of Level 3 instruments, beginning of period | | $ | 0 |
| | | $ | 1,609 |
| | $ | 13,624 |
|
Transfers out of Level 3 | | 0 |
| | | (1,609 | ) | | 0 |
|
Fair value gains on commodity derivatives | | 0 |
| | | 0 |
| | 90 |
|
Receipts on settlements of commodity derivatives | | 0 |
| | | 0 |
| | (2,514 | ) |
Fair value of Level 3 instruments, end of period | | $ | 0 |
| | | $ | 0 |
| | $ | 11,200 |
|
| | | | | | | |
The amount of total gains for the period included in earnings attributable to the change in unrealized gains relating to assets or liabilities still held at the reporting date | | $ | 0 |
| | | $ | 0 |
| | $ | 6,540 |
|
We utilize an income approach to value our
Instruments previously categorized as Level 3 included non-exchange-traded three-way collars. We obtaincollars that were based on regional pricing other than NYMEX, whereby the implied volatilities utilized were developed using a benchmark, which was considered a significant unobservable input. The transfers between Level 3 and ensureLevel 2 during the appropriateness ofperiod generally relate to changes in the significant relevant observable and unobservable inputs to the calculation, including contractual pricesthat are available for the underlying instruments, maturity, forward prices for commodities, interest rates, volatility factors and credit worthiness, and the fair value estimate is prepared and reviewed on a quarterly basis. The following table details fair value inputs related to implied volatilities utilized in the valuationmeasurements of our Level 3 oil derivative contracts:
|
| | | | | | | | | | |
| | Fair Value at 9/30/2019 (in thousands) | | Valuation Technique | | Unobservable Input | | Volatility Range |
Oil derivative contracts | | $ | 11,200 |
| | Discounted cash flow / Black-Scholes | | Volatility of Light Louisiana Sweet for settlement periods beginning after September 30, 2019 | | 22.6% – 41.3% |
such financial instruments.
Other Fair Value Measurements
The carrying value of our loans under our Successor Bank Credit Agreement approximate fair value, as they are subject to short-term floating interest rates that approximate the rates available to us for those periods. We use a market approach to determine the fair value of our fixed-rate long-term debt using observable market data. The fair values of ourthe Predecessor’s senior secured second lien notes, convertible senior notes, and senior subordinated notes arewere based on quoted market prices, which are considered Level 1 measurements under the fair value hierarchy. The estimated fair value of the principal amount of our debt as of September 30, 20192020 and December 31, 20182019, excluding pipeline financing and capital lease obligations, was $1,768.085.0 million and $1,833.1 million, respectively, which decrease is primarily the result of the cancellation of $2.1 billion principal amount of debt as part of the Chapter 11 Restructuring. See Note 1, $1,886.1 millionBasis of Presentation – Emergence from Voluntary Reorganization Under Chapter 11 of the Bankruptcy Code, respectively.for additional information. We have other financial instruments consisting primarily of cash, cash equivalents, U.S. Treasury
Denbury Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
notes, short-term receivables and payables that approximate fair value due to the nature of the instrument and the relatively short maturities.
Note 7.12. Commitments and Contingencies
Chapter 11 Proceedings
On July 30, 2020, Denbury Resources Inc. and each of its wholly-owned subsidiaries filed for relief under Chapter 11 of the Bankruptcy Code. The chapter 11 cases were administered jointly under the caption “In re Denbury Resources Inc., et al., Case No. 20-33801”. On September 2, 2020, the Bankruptcy Court entered the Confirmation Order and on the Emergence Date, all of the conditions of the Plan were satisfied or waived and the Plan became effective and was implemented in accordance with its terms. On September 30, 2020, the Bankruptcy Court closed the chapter 11 cases of each of Denbury Inc.’s wholly-owned subsidiaries. The chapter 11 case captioned “In re Denbury Resources Inc., et al., Case No. 20-33801” will remain pending until the final resolution of all outstanding claims.
Litigation
We are involved in various lawsuits, claims and regulatory proceedings incidental to our businesses. We are also subject to audits for various taxes (income, sales and use, and severance) in the various states in which we operate, and from time to time receive assessments for potential taxes that we may owe. While we currently believe that the ultimate outcome of these proceedings, individually and in the aggregate, will not have a material adverse effect on our financial position, results of operations or cash flows, litigation is subject to inherent uncertainties. We accrue for losses from litigation and claims if we determine that a loss is probable and the amount can be reasonably estimated.
Denbury Resources Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
Riley Ridge Helium Supply Contract Claim
As part of our 2010 and 2011 acquisitions of the Riley Ridge Unit and associated gas processing facility that was under construction, the Company assumed a 20-year helium supply contract under which we agreed to supply the helium separated from the full well stream by operation of the gas processing facility to a third-party purchaser, APMTG Helium, LLC (“APMTG”). The helium supply contract provides for the delivery of a minimum contracted quantity of helium, with liquidated damages payable if specified quantities of helium are not supplied in accordance with the terms of the contract. The liquidated damages are specified in the contract at up to $8.0 million per contract year and are capped at an aggregate of $46.0 million over the term of the contract.
As the gas processing facility has been shut-in since mid-2014 due to significant technical issues, we have not been able to supply helium under the helium supply contract. In a case filed in November 2014 in the Ninth Judicial District Court of Sublette County, Wyoming, APMTG claimed multiple years of liquidated damages for non-delivery of volumes of helium specified under the helium supply contract. The Company claimed that its contractual obligations were excused by virtue of events that fall within the force majeure provisions in the helium supply contract.
On March 11, 2019, the trial court entered a final judgment that a force majeure condition did exist, but the Company’s performance was excused by the force majeure provisions of the contract for only a 35-day period in 2014, and as a result the Company should pay APMTG liquidated damages and interest thereon for those time periods from contract commencement to the close of evidence (November 29, 2017) when the Company’s performance was not excused as provided in the contract. The Company has filed a notice of appeal of the trial court’s ruling to the Wyoming Supreme Court, the results and timing of which cannot be currently predicted.
. The Company’s position continues to be that its contractual obligations have been and continue to be excused by events that fall within the force majeure provisions inof the helium supply contract. Thecontract, so the Company intendshas appealed the trial court’s ruling to continue to vigorously defendthe Wyoming Supreme Court. Oral arguments were heard by the Wyoming Supreme Court on August 13, 2020. We anticipate the Wyoming Supreme Court will enter its position and pursue alljudgment on the appeal within the next few months; however, the outcome of its rights.the appeal is currently unpredictable.
Absent reversal of the trial court’s ruling on appeal, the Company anticipates total liquidated damages would equal the $46.0 million aggregate cap under the helium supply contract (including $14.2 million of liquidated damages for the contract years ending July 31, 2018 and July 31, 2019) plus $4.7$6.7 million of associated costs (through September 30, 2019)2020), for a total of $50.7$52.7 million, included in “Other“Accounts payable and accrued liabilities” in our Unaudited Condensed Consolidated Balance Sheets as of September 30, 2019.2020. The Company has a $32.8 million letter of credit posted as security in this case as part of the appeal process.
Denbury ResourcesInc.
Notes to Unaudited Condensed Consolidated Financial Statements
Note 13. Additional Balance Sheet Details
Trade and Other Receivables, Net
|
| | | | | | | | | |
| | Successor | | | Predecessor |
In thousands | | Sept. 30, 2020 | | | Dec. 31, 2019 |
Trade accounts receivable, net | | $ | 9,447 |
| | | $ | 12,630 |
|
Commodity derivative settlement receivables | | 7,606 |
| | | 675 |
|
Federal income tax receivable, net | | 1,600 |
| | | 2,987 |
|
Other receivables | | 16,135 |
| | | 2,026 |
|
Total | | $ | 34,788 |
| | | $ | 18,318 |
|
Note 14. Subsequent Events
Houston Area Land Sale
On October 30, 2020, we completed the sale of a portion of certain non-producing surface acreage in the Houston area for approximately $11 million.
Pipeline Financing Transactions
In late October 2020, we restructured our CO2 pipeline financing arrangements with Genesis, resulting in Denbury reacquiring the NEJD and Free State pipelines. See Note 6, Long-Term Debt – Pipeline Financing Transactions, for further discussion.
Denbury Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with our Unaudited Condensed Consolidated Financial Statements and Notes thereto included herein and our Consolidated Financial Statements and Notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 20182019 (the “Form 10-K”), along with Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in the Form 10-K. Any terms used but not defined herein have the same meaning given to them in the Form 10-K.
Our discussion and analysis includes forward-looking information that involves risks and uncertainties and should be read in conjunction with Risk Factors under Item 1A of this Form 10-Q as well as Item 1A of the Form 10-K, along with Forward-Looking Information at the end of this section for information on the risks and uncertainties that could cause our actual results to be materially different than our forward-looking statements.
OVERVIEW
Denbury is an independent oil and natural gas company with operations focused in two key operating areas: the Gulf Coast and Rocky Mountain regions. Our goal is to increase the value of our properties through a combination of exploitation, drilling and proven engineering extraction practices, with the most significant emphasis relating to CO2 enhanced oil recovery operations.
September 18, 2020 Emergence from Chapter 11 Restructuring. On July 30, 2020 (the “Petition Date”), Denbury Resources Inc. and its subsidiaries filed petitions for reorganization in a “prepackaged” voluntary bankruptcy (the “Chapter 11 Restructuring”) under chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the Southern District of Texas (the “Bankruptcy Court”) under the caption “In re Denbury Resources Inc., et al., Case No. 20-33801”. On September 2, 2020, the Bankruptcy Court entered an order (the “Confirmation Order”) confirming the chapter 11 plan of reorganization (the “Plan”) and approving the disclosure statement, and on September 18, 2020 (the “Emergence Date”), the Plan became effective in accordance with its terms and the Company emerged from Chapter 11. On September 18, 2020, Denbury filed the Third Restated Certificate of Incorporation with the Delaware Secretary of State to effect a change of the Company’s corporate name from Denbury Resources Inc. to Denbury Inc. (the “Successor”), and on September 21, 2020, the Successor’s new common stock commenced trading on the New York Stock Exchange under the ticker symbol “DEN”. Key accomplishments of the Chapter 11 Restructuring include the following:
Eliminated approximately $2.1 billion of bond debt by issuing equity and/or warrants to the holders of that debt;
Significantly improved leverage ratios;
Reduced ongoing annual interest expense by approximately $165 million, significantly lowering our cash flow breakeven level;
Eliminated approximately $9 million from ongoing general and administrative expenses by terminating certain office leases and relocating our corporate headquarters; and
Established a new $575 million senior secured bank credit facility with $436.7 million of availability at September 30, 2020 after outstanding letters of credit.
For more information on the Chapter 11 Restructuring and related matters, refer to Note 1, Basis of Presentation – Emergence from Voluntary Reorganization Under Chapter 11 of the Bankruptcy Code, and Note 6, Long-Term Debt, to the condensed consolidated financial statements.
Fresh Start Accounting. Upon emergence from bankruptcy, we met the criteria and were required to adopt fresh start accounting in accordance with Financial Accounting Standards Board Codification (“FASC”) Topic 852, Reorganizations, which on the Emergence Date resulted in a new entity, the Successor, for financial reporting purposes, with no beginning retained earnings or deficit as of the fresh start reporting date. References to “Successor” relate to the financial position and results of operations of the Company subsequent to the Company’s emergence from bankruptcy on September 18, 2020, and references to “Predecessor” relate to the financial position and results of operations of the Company prior to, and including, September 18, 2020. In order to assist investors in understanding the comparability of our financial results for the applicable periods, we have provided certain comparative analysis on a combined basis, which management believes provides meaningful information to assist investors in understanding our financial results for the applicable period, but should not be considered in isolation, as a substitute for, or more meaningful than, independent results of the Predecessor and Successor periods for the quarter reported in accordance with GAAP.
Denbury Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Fresh start accounting requires that new fair values be established for the Company’s assets, liabilities and equity as of the date of emergence from bankruptcy, September 18, 2020, and therefore certain values and operational results of the condensed consolidated financial statements subsequent to September 18, 2020 are not comparable to the Company’s condensed consolidated financial statements prior to, and including September 18, 2020, principally due to the Emergence Date re-evaluation of the fair value of our oil and natural gas properties, CO2 properties, and pipelines, together with the conversion of over $2 billion of previously outstanding debt into new common stock in the Successor. The reorganization value derived from the range of enterprise values associated with the Plan was allocated to the Company’s identifiable tangible and intangible assets and liabilities based on their fair values. The Emergence Date fair values of the Successor’s assets and liabilities differ materially from their recorded values as reflected on the historical balance sheet of the Predecessor and may materially affect our results of operations in Successor reporting periods.
Oil Price Impact on Our Business. Our financial results are significantly impacted by changes in oil prices, as 97% of our production is oil. Changes in oil prices impact all aspects of our business; most notably our cash flows from operations, revenues, and capital allocation and budgeting decisions.decisions, and oil and natural gas reserves volumes. The table below outlines changes in our realized oil prices, before and after commodity hedging impacts, which shows that our net realized oil price after hedges has been within a range of roughly $59 and $62 per barrel for our most recent comparative periods:
| | | | Three Months Ended | | Nine Months Ended | | | | | | | | | |
| | September 30, 2019 | | June 30, 2019 | | September 30, 2018 | | September 30, | | Three Months Ended |
| | 2019 | | 2018 | | September 30, 2020 | | June 30, 2020 | | December 31, 2019 | | September 30, 2019 |
Average net realized prices | | | | | | | | | | | | | | | | | | |
Oil price per Bbl - excluding impact of derivative settlements | | $ | 57.64 |
| | $ | 62.22 |
| | $ | 71.44 |
| | $ | 58.82 |
| | $ | 67.99 |
| | $ | 39.23 |
| | $ | 24.39 |
| | $ | 56.58 |
| | $ | 57.64 |
|
Oil price per Bbl - including impact of derivative settlements | | 59.23 |
| | 61.92 |
| | 59.78 |
| | 59.77 |
| | 58.63 |
| | 43.23 |
| | 34.64 |
| | 58.30 |
| | 59.23 |
|
With our continued focus on improvingResponse to 2020 Oil Price Declines. In January and February 2020, NYMEX WTI oil prices averaged in the Company’s financial position and preserving liquidity, we have based our 2019 budget onmid-$50s per Bbl range before a flat $50 oil price, and our 2019 capital spending has been budgetedprecipitous decline in a range of $240 millionearly March 2020 due to $260 million, excluding capitalized interest and acquisitions. Based on our results for the first nine monthscombination of the yearCOVID-19 coronavirus (“COVID-19”) pandemic and our projections for the remainderfailure of 2019, we estimate that our cash flowthe group of oil producing nations known as OPEC+ to reach an agreement over proposed oil production cuts. Although OPEC+ subsequently agreed to reduced levels of production output, concerns about the ability of OPEC+ to maintain compliance with their reduced production targets and uncertainty about the duration of the COVID-19 pandemic and its resulting economic consequences has resulted in abnormally high worldwide inventories of produced oil. While oil prices have improved from operations will be significantly higher than our capital expenditures and result in Denbury generating significant excess cash flow during 2019. Also,the low points experienced during the third quarter we entered into additional oil commodity hedges for the fourthsecond quarter of 2019 in order2020, the concerns and uncertainties around the balance of supply and demand for oil are expected to provide a greater level of certainty in our 2019 cash flow. Additional information concerning our 2019 budget and plans is included below under Capital Resources and Liquidity – Overview.continue for some time.
Comparative Financial ResultsThe decrease in NYMEX oil prices that began in the latter part of the first quarter of 2020 has significantly reduced our cash flow. In response to these developments, we implemented the following operational and Highlights. We recognized net income of $72.9financial measures:
Reduced budgeted 2020 capital spending by $80 million, or $0.14 per diluted common share, during the third quarter of 2019, compared44%, to net income of $78.4approximately $95 million or $0.17 per diluted common share, during the third quarter of 2018, with the slightly lower results generally reflective of lower oil and natural gas production levels and slightly lower oil prices, including the impact of our hedges. Additional details regarding the comparative period changes in our operating results and per diluted share amounts were the following:
to $105 million;
| |
• | Realized oil prices, includingDeferred the impact of derivative settlements, decreased by $0.55 per Bbl, or 1%, compared to the prior-year period. See Cedar Creek Anticline COResults of Operations –2 Oil and Natural Gas Revenues.
|
| |
• | Total production decreased by 2,740 BOE/d, or 5%, compared to the prior-year period. See Results of Operations – Production.
|
| |
• | Noncash fair value adjustments on commodity derivatives increased $18.1 million compared to the prior-year period. See Results of Operations – Commodity Derivative Contracts.tertiary flood development project beyond 2020;
|
Diluted common shares inImplemented cost reduction measures including shutting down compressors, delayed uneconomic well repairs and workovers and reduced our workforce to better align with current and projected near-term needs;
Restructured approximately 50% of our three-way collars covering 14,500 barrels per day (“Bbls/d”) into fixed-price swaps for the thirdsecond quarter through the fourth quarter of 2019 include2020 in order to increase downside oil price protection; and
Evaluated production economics at each field and shut-in production beginning in late March 2020 that was uneconomic to produce or repair based on then-prevailing oil prices.
Third Quarter 2020 Financial Results and Highlights. As a result of Denbury filing for bankruptcy and emerging from bankruptcy during the impactsame quarter, our quarterly financial results are broken out between the predecessor period (July 1, 2020 through September 18, 2020) and the successor period (September 19, 2020 through September 30, 2020). For the predecessor period we recognized a net loss of an additional 90.9$809.1 million, shares,and for a total diluted share countthe successor period we recognized net income of 547.2 million shares, of the Company’s common stock issuable upon full conversion$2.8 million. The primary drivers of our convertible seniorsignificant financial net loss for the predecessor period included the following:
Reorganization items, net, resulted in a $850.0 million charge during the predecessor period, primarily consisting of fresh start accounting adjustments of $1.9 billion to decrease the carrying value of our assets, partially offset by a gain on settlements
Denbury Resources Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
notes which were issuedof liabilities subject to compromise of $1.0 billion, primarily representing the net impact of approximately $2.1 billion of debt elimination offset by the new equity value in June 2019. See Note 1, BasisDenbury; and
A $261.7 million full cost pool ceiling test write-down during the predecessor period as a result of Presentation – Net Income per Common Share, to the Unaudited Condensed Consolidated Financial Statements.decline in NYMEX oil prices.
2019 Debt Reduction Transactions. During 2019,On a comparative basis, we have completed a seriesrecognized net income of debt exchanges$72.9 million in the prior year third quarter. The following reflects some of the primary drivers for our change in operating results between the third quarter 2020, in aggregate, and repurchases to extend the maturitiesthird quarter of our outstanding long-term debt and reduce our debt principal as described below:2019:
During June 2019, through a seriesOil and natural gas revenues decreased by $117.8 million (40%), with 28% of debt exchanges, we extended the maturitiesdecrease due to lower commodity prices and 12% of $348.4 million of our outstanding long-term debtthe decrease due to 2024 and reduced our debt principal by $120.0 million, whereby holders exchanged $468.4 million aggregate principal amount of our subordinated notes for:lower production;
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–• | $245.5Lease operating expenses decreased by $46.7 million aggregate principal amount(40%), primarily due to lower expenses for workovers, CO2, power and fuel, and labor costs as well as a $15.4 million insurance recovery of our new 6⅜% Convertible Senior Notes due 2024 (the “2024 Convertible Senior Notes”); |
| |
– | $102.6 million aggregate principal amount of new 7¾% Senior Secured Second Lien Notes due 2024 (the “7¾% Senior Secured Notes”); andcosts incurred in 2013. |
–$120.0 million of cash.
During June and July 2019, as partOctober 2020 Restructuring of creating a more liquid series of secured second lien debt due in 2024,CO2 Pipeline Agreements. In late October 2020, we also exchanged $429.4 million of 7½% Senior Secured Second Lien Notes due 2024 for $429.2 million aggregate principal amount of 7¾% Senior Secured Notes. As a result of all ofrestructured our CO2 pipeline financing arrangements with Genesis Energy, L.P. (“Genesis”), whereby (1) Denbury reacquired the above June and July note exchanges, we recognized a gain on debt extinguishment, net of transaction costs, totaling $100.5 million for the nine months ended September 30, 2019, in our Unaudited Condensed Consolidated Statements of Operations.
During the third quarter of 2019, we repurchased in open market transactions $11.0 million in aggregate principal amount of our then outstanding 5½% Senior Subordinated Notes due 2022 (the “5½% Senior Subordinated Notes”) for a total purchase price of $5.3 million, excluding accrued interest. In connection with these transactions, we recognized a $5.7 million gain on debt extinguishment, net of unamortized debt issuance costs written off, during the three and nine months ended September 30, 2019.
During October 2019, we repurchased principally through exchanges an additional $13.5 million in aggregate principal amount of our then outstanding 5½% Senior Subordinated Notes and $29.3 million in aggregate principal amount of our then outstanding 4⅝% Senior Subordinated Notes due 2023 (the “4⅝% Senior Subordinated Notes”) for $5.9 million in cash and issuance of 13.7 million shares of the Company’s common stock. In the aggregate, during the third quarter and October 2019, we have repurchased $53.8 million (approximately 15%) of our $357.8 million aggregate principal amount of senior subordinated notes outstanding as of June 30, 2019,NEJD pipeline system from Genesis in exchange for approximately $11.2$70 million to be paid in four equal payments during 2021, representing full settlement of cash (excluding accruedall remaining obligations under the NEJD secured financing lease; and unpaid interest) and issuance(2) Denbury reacquired the Free State Pipeline from Genesis in exchange for a one-time payment of 13.7$22.5 million shares of Denbury Common Stock.
The table below details the changes in our debt principal balances from December 31, 2018 to Septemberon October 30, 2019, which excludes the October debt repurchases:
|
| | | | | | | | | | | | |
In thousands | | December 31, 2018 | | Change | | September 30, 2019 |
Senior Secured Bank Credit Agreement | | $ | — |
| | $ | 50,000 |
| | $ | 50,000 |
|
9% Senior Secured Second Lien Notes due 2021 | | 614,919 |
| | — |
| | 614,919 |
|
9¼% Senior Secured Second Lien Notes due 2022 | | 455,668 |
| | — |
| | 455,668 |
|
7¾% Senior Secured Second Lien Notes due 2024 | | — |
| | 531,821 |
| | 531,821 |
|
7½% Senior Secured Second Lien Notes due 2024 | | 450,000 |
| | (429,359 | ) | | 20,641 |
|
6⅜% Convertible Senior Notes due 2024 | | — |
| | 245,548 |
| | 245,548 |
|
6⅜% Senior Subordinated Notes due 2021 | | 203,545 |
| | (152,241 | ) | | 51,304 |
|
5½% Senior Subordinated Notes due 2022 | | 314,662 |
| | (230,926 | ) | | 83,736 |
|
4⅝% Senior Subordinated Notes due 2023 | | 307,978 |
| | (96,283 | ) | | 211,695 |
|
Pipeline financings | | 180,073 |
| | (9,006 | ) | | 171,067 |
|
Capital lease obligations | | 5,362 |
| | (5,362 | ) | | — |
|
Total debt principal balance | | $ | 2,532,207 |
| | $ | (95,808 | ) | | $ | 2,436,399 |
|
Denbury Resources Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
July 2019 Citronelle Field Divestiture. On July 1, 2019, we closed the sale of one of our mature Gulf Coast fields, Citronelle Field, for $10 million. The sale had an effective date of May 1, 2019.2020.
Exploitation Drilling Update.Delhi Insurance Receivable. During August 2020, we recorded insurance reimbursements totaling $16.1 million ($15.4 million net to Denbury’s interest) for previously-incurred well control costs, cleanup costs, and damages associated with a 2013 incident at Delhi Field. Denbury’s portion of the insurance recovery ofDuring $15.4 million was recorded as a reduction to lease operating expenses.
Houston Area Land Sales. We have been actively marketing for sale non-producing surface acreage primarily around the thirdHouston area. On July 24, 2020, we completed the sale of a portion of this acreage for gross proceeds of approximately $14 million, and completed the sale on an additional portion for gross proceeds of approximately $11 million on October 30, 2020. To date, we have closed acreage sales for total gross proceeds of approximately $45 million, and we currently have an additional $4 million under contract which is expected to close in the fourth quarter of 2019,2020.
First Quarter 2020 Sale of Working Interests in Certain Texas Fields. On March 4, 2020, we closed a farm-down transaction for the sale of half of our nearly 100% working interest positions in four southeast Texas oil fields (consisting of Webster, Thompson, Manvel and East Hastings) for $40 million net cash and a carried interest in ten wells to be drilled two Mission Canyon wells, with initial production from one ofby the wells occurring at the end of September and initial production from the second well occurring in mid-October, which have a combined projected IP-30 rate of 1,000 barrels of oil per day.purchaser (the “Gulf Coast Working Interests Sale”).
CAPITAL RESOURCES AND LIQUIDITY
Overview. Our primary sources of capital and liquidity are our cash flow from operations and availability of borrowing capacity under our senior securedSuccessor bank credit facility. For the nine months ended September 30, 2019, we generated cash flow from operations of $343.6 million, after giving effect to $45.9In 2020 our liquidity has been supplemented by $40 million of proceeds from our March 2020 sale of working interests in four southeast Texas fields and by $25 million of proceeds from sales of non-producing surface acreage primarily around the Houston area. Our most significant cash outflows for working capital changes primarily relatedoutlays relate to payments during the first nine months of the year for accrued compensation, accrued interest and accrued lease operating expenses. We have historically tried to limit our development capital spending so that it is roughly the same as, or less than,expenditures and current period operating expenses. In conjunction with our cash flowemergence from operations, and our 2019 cash flow from operations is currently expected to significantly exceed our planned $240 million to $260 million of development capital expenditures for the year. We have utilizedbankruptcy, we established a portion of our excess cash flow in 2019 to repurchase debt and improve our balance sheet as discussed above in Overview – 2019 Debt Reduction Transactions.
As of September 30, 2019, we had $50 million of outstanding borrowings on our $615new $575 million senior secured bank credit facility, compared to no outstanding borrowingsunder which we had $85 million borrowed as of December 31, 2018 and $80 million as of JuneSeptember 30, 2019,2020, leaving us with $510.5$436.7 million of borrowing base availability after consideration of $54.5$53.3 million of currently outstanding letters of credit. Based onAs discussed in the Overview above, NYMEX oil prices have decreased significantly since the beginning of 2020, directly reducing our current 2019 projections using recent oil price futures, we currently expect to have the capacity to repay all of our outstanding borrowings on our senior secured bank credit facility by the end of the year.
As an additional source of potential liquidity, the Company has been engaged in two asset sale processes. In the first process,operating cash flow; however, we have been actively marketingtaken significant actions to reduce capital expenditures and operating expenses in order to adjust our spending levels such that our spending for sale surface land with no active oil and gasongoing operations aroundis below our Conroe and Webster fields. To date, we have approximately $52 million of land sold or under contract associated with this process. During 2018, we completed approximately $6 million of land sales, and we completed $9 million of land sales during the third quarter of 2019 plus an additional $5 million in land sales in October 2019. The remaining $32 million under contract provides for purchase price payments to begin by mid-2021, subject to a number of conditions. We remain focused on a strategy that we believe will ultimately yield the highest value for the remaining land, and we expect significant additional value of the remaining parcels not yet sold or under contract to be realized over the next two years. In the second process, in 2018 we began the process of portfolio optimization through the marketing of mature fields located in Mississippi and Louisiana and Citronelle Field in Alabama. In connection with this process, we completed the sale of Lockhart Crossing Field for net proceeds of approximately $4 million during the third quarter of 2018 and closed the sale of Citronelle Field for approximately $10 million during July 2019. The pace and outcome of any sales of the remaining assets cannot be predicted at this time, but their successful completion could provide additional liquidity for financial or operational uses. Additionally, we are actively evaluating joint venture options for our Cedar Creek Anticline (“CCA”) CO2 pipeline extension, including the possibility of raising third-party funds for all or a significant portion of our CCA pipeline capital spend in 2020. In addition, the Company may also raise funds through non-core asset sales or other joint venture transactions, or issuance of equity, which could enable us to further increase our available liquidity.cash flow generated from operations.
OverNew Senior Secured Bank Credit Agreement. In connection with our emergence from Chapter 11 proceedings on September 18, 2020, we entered into a bank credit agreement with JPMorgan Chase Bank, N.A., as administrative agent, and other lenders party thereto (the “Bank Credit Agreement”). The Bank Credit Agreement is a senior secured revolving credit facility with an initial borrowing base and lender commitments of $575 million. Additionally, under the last several years, we have been keenly focused on reducing leverageBank Credit Agreement, letters of credit are available in an aggregate amount not to exceed $100 million, and improving the Company’s financial condition. In total, we have reduced our outstanding debt principal by $1.1 billion between December 31, 2014 and September 30, 2019, primarily through debt exchanges, opportunistic open market debt repurchases, and the conversionshort-term swingline loans are available in the second quarter of 2018 of all of our then outstanding convertible senior notes into common stock. Our leverage metrics have improved considerably over the last several years, due primarilyan aggregate amount not to our cost reduction efforts and our overall reduction in debt. In additionexceed $25 million, each subject to the transactions which extended maturities of a portion of our existing debt (see Overview – 2019 Debt Reduction Transactions), these exchange transactions could further contribute to debt reduction of $245.5 million if all ofavailable commitments under the 2024 Convertible Senior Notes convert to Company common stock (based upon issuance of 90,852,760 shares at the current conversion rate of 370 shares of common stock per $1,000 principal amount of such notes). The 2024 Convertible Senior Notes provide for automatic conversion into shares of common stock at this rate if the volume weighted average trading price of the Company’s common stock equals or exceeds the threshold price, which is $2.43 per share, for 10 trading days in any period of 15 consecutive trading days; however, subject to satisfaction of conditions described more fully in Note 4 to the accompanying financial statements, the threshold price can be decreased by the Company’s Board of Directors to a lower price. In conjunction with our continuing efforts to improve theBank Credit Agreement. Availability
Denbury Resources Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Company’s balance sheet,under the Bank Credit Agreement is subject to a borrowing base, which is redetermined semiannually on or around May 1 and November 1 of each year, with our next scheduled redetermination around May 1, 2021. The borrowing base is adjusted at the lenders’ discretion and is based, in part, upon external factors over which we planhave no control. The borrowing base is subject to assess,a reduction by twenty-five percent (25%) of the principal amount of any unsecured or subordinated debt issued or incurred. The borrowing base may also be reduced if we sell borrowing base properties and/or cancel commodity derivative positions with an aggregate value in excess of 5% of the then-effective borrowing base between redeterminations. If our outstanding debt under the Bank Credit Agreement exceeds the then-effective borrowing base, we would be required to repay the excess amount over a period not to exceed six months. The Bank Credit Agreement matures on January 30, 2024.
The Bank Credit Agreement prohibits us from paying dividends on our common stock through September 17, 2021. Commencing on September 18, 2021, we may pay dividends on our common stock or make other restricted payments in an amount not to exceed “Distributable Free Cash Flow”, but only if (1) no event of default or borrowing base deficiency exists; (2) our total leverage ratio is 2 to 1 or lower; and may(3) availability under the Bank Credit Agreement is at least 20%. The Bank Credit Agreement also limits our ability to, among other things, incur and repay other indebtedness; grant liens; engage in potential debt reduction and/certain mergers, consolidations, liquidations and dissolutions; engage in sales of assets; make acquisitions and investments; make other restricted payments (including redeeming, repurchasing or maturity extension transactions of various types, with a primary focus onretiring our near-term debt maturities, balanced with maintaining liquidity.common stock); and enter into commodity derivative agreements, in each case subject to customary exceptions.
Senior Secured Bank Credit Facility. In December 2014, we entered into an Amended and Restated Credit Agreement with JPMorgan Chase Bank, N.A., as administrative agent, and other lenders party thereto (as amended, the “Bank Credit Agreement”), which has been amended periodically since that time. The Bank Credit Agreement is secured by (1) our proved oil and natural gas properties, which are held through our restricted subsidiaries; (2) the pledge of equity interests of such subsidiaries; (3) a senior secured revolving credit facility with a maturity date of December 9, 2021, provided that the maturity date may occur earlier (between February 2021 and August 2021) if the 9% Senior Secured Second Lien Notes due in May 2021 (the “2021 Senior Secured Notes”) or 6⅜% Senior Subordinated Notes due 2021, respectively, are not repaid or refinanced by each of their respective maturity dates. As partpledge of our fall 2019 semiannual borrowing base redetermination, the borrowing basecommodity derivative agreements; (4) a pledge of deposit accounts, securities accounts and lender commitments for our Bank Credit Agreement were reaffirmed at $615 million, with the nextcommodity accounts of Denbury Inc. and such redetermination scheduled for May 2020. subsidiaries (as applicable); and (5) a security interest in substantially all other collateral that may be perfected by a Uniform Commercial Code filing, subject to certain exceptions.
The Bank Credit Agreement contains certain financial performance covenants, commencing with the fiscal quarter ending December 31, 2020 through the maturity of the facility, including the following:
A Consolidated Total Debt to Consolidated EBITDAX covenant, with such ratio not to exceed 5.25 to 1.0 through December 31, 2020, and 4.50 to 1.0 thereafter;
A consolidated senior secured debt to consolidated EBITDAX covenant, with such ratio not to exceed 2.5 to 1.0. Only debt under our Bank Credit Agreement is considered consolidated senior secured debt for purposes of this ratio;
A minimum permitted ratio of consolidated EBITDAX to consolidated interest charges of 1.25 to 1.0;3.5 times; and
A requirement to maintain a current ratio (i.e., Consolidated Current Assets to Consolidated Current Liabilities) of 1.0 to 1.0.times.
Under these financial performance covenant calculations, asFor purposes of September 30, 2019, our ratio of consolidated total debt to consolidated EBITDAX was 4.09 to 1.0 (with a maximum permitted ratio of 5.25 to 1.0), our consolidated senior secured debt to consolidated EBITDAX was 0.08 to 1.0 (with a maximum permitted ratio of 2.5 to 1.0), our ratio of consolidated EBITDAX to consolidated interest charges was 3.08 to 1.0 (with a required ratio of not less than 1.25 to 1.0), and ourcomputing the current ratio was 3.01 to 1.0 (with a required ratioper the Bank Credit Agreement, Consolidated Current Assets exclude the current portion of not less than 1.0 to 1.0). Based upon our currently forecasted levelsderivative assets but include available borrowing capacity under that agreement, and Consolidated Current Liabilities exclude the current portion of production and costs, hedges in placederivative liabilities as well as the current portions of November 6, 2019, and current oil commodity futures prices, we currently anticipate continuing to be in compliance with our financial performance covenants during the foreseeable future.long-term indebtedness outstanding.
The above description of our Bank Credit Agreement is qualified by the express language and defined terms contained in the Bank Credit Agreement, and the amendments thereto, each of which areis filed as exhibitsan exhibit to our periodic reportsForm 8-K Report filed with the SEC.SEC on September 18, 2020.
Capital Spending. We currently anticipate that our full-year 20192020 capital spending, excluding capitalized interest and acquisitions, will be approximately $240$95 million to $260 million. Capitalized interest is currently estimated at$105 million, approximately 78% of which has been incurred through 2020. This 2020 capital expenditure budget reflects a reduction on March 31, 2020 of $80 million, or 44%, from the late-February 2020 estimate of between $30$175 million and $40$185 million for 2019. The 2019in response to the more than 50% decline in NYMEX WTI prices during March 2020. Our current 2020 capital budget, excluding capitalized interest and acquisitions, provides for approximate spending as follows:
$10035 million allocated for tertiary oil field expenditures;
$7025 million allocated for other areas, primarily non-tertiary oil field expenditures including exploitation;
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• | $3010 million to be spent on CO2 sources and pipelines; and |
$5030 million for other capital items such as capitalized internal acquisition, exploration and development costs and pre-production tertiary startup costs.
Denbury Resources Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Capital Expenditure Summary. The following table reflects incurred capital expenditures (including accrued capital) for the nine months ended September 30, 20192020 and 2018:2019:
| | | | Nine Months Ended | | Nine Months Ended |
| | September 30, | | September 30, |
In thousands | | 2019 | | 2018 | | 2020 | | 2019 |
Capital expenditure summary | | | | | | | | |
Tertiary oil fields | | $ | 72,333 |
| | $ | 107,133 |
| | $ | 22,564 |
| | $ | 72,333 |
|
Non-tertiary fields | | 55,939 |
| | 51,714 |
| | 19,115 |
| | 55,939 |
|
Capitalized internal costs(1) | | 35,389 |
| | 34,027 |
| | 26,695 |
| | 35,389 |
|
Oil and natural gas capital expenditures | | 163,661 |
| | 192,874 |
| | 68,374 |
| | 163,661 |
|
CO2 pipelines, sources and other | | 25,778 |
| | 22,345 |
| | 9,192 |
| | 25,778 |
|
Capital expenditures, before acquisitions and capitalized interest | | 189,439 |
| | 215,219 |
| | 77,566 |
| | 189,439 |
|
Acquisitions of oil and natural gas properties | | 122 |
| | 150 |
| | 95 |
| | 122 |
|
Capital expenditures, before capitalized interest | | 189,561 |
| | 215,369 |
| | 77,661 |
| | 189,561 |
|
Capitalized interest | | 27,545 |
| | 26,817 |
| | 23,068 |
| | 27,545 |
|
Capital expenditures, total | | $ | 217,106 |
| | $ | 242,186 |
| | $ | 100,729 |
| | $ | 217,106 |
|
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(1) | Includes capitalized internal acquisition, exploration and development costs and pre-production tertiary startup costs. |
Commitments and Obligations. We have numerous contractual commitments in the ordinary course of business including debt service requirements, operating and finance leases, purchase obligations, and asset retirement obligations. Our operating leases primarily consists of our office leases. Our purchase obligations represent future cash commitments primarily for purchase contracts for CO2 captured from industrial sources, transportation agreements and well-related costs, but excludes any potential payments related to the APMTG litigation being appealed.
Our commitments and obligations consist of those detailed as of December 31, 2019, in our Form 10-K under Management’s Discussion and Analysis of Financial Condition and Results of Operations – Capital Resources and Liquidity – Commitments and Obligations. Material changes to our contractual commitments since December 31, 2019 detailed in this Form 10-Q report include changes to our senior secured bank credit agreement, the cancellation of the Predecessor senior secured second lien notes, convertible senior notes, and senior subordinated notes pursuant to the Plan, and a $41.3 million payment related to the NEJD pipeline lease financing during the third quarter of 2020. As part of the Chapter 11 Restructuring, we elected to terminate some of our operating leases, primarily related to office space, reducing our annual rent expense by approximately $9 million. In late October 2020, we reacquired the NEJD pipeline system and Free State Pipeline from Genesis, representing full settlement of all remaining pipeline financing obligations.
Off-Balance Sheet Arrangements. Our off-balance sheet arrangements include obligations for various development and exploratory expenditures that arise from our normal capital expenditure program or from other transactions common to our industry, none of which are recorded on our balance sheet. In addition, in order to recover our undeveloped proved reserves, we must also fund the associated future development costs estimated in our proved reserve reports.
Our commitments and obligations consist of those detailed as of December 31, 2018, in our Form 10-K under Management’s Discussion and Analysis of Financial Condition and Results of Operations – Capital Resources and Liquidity – Commitments and Obligations.
Denbury Resources Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
RESULTS OF OPERATIONS
Our tertiary operations represent a significant portion of our overall operations and are our primary long-term strategic focus. The economics of a tertiary field and the related impact on our financial statements differ from a conventional oil and gas play, and we have outlined certain of these differences in our Form 10-K and other public disclosures. Our focus on these types of operations impacts certain trends in both current and long-term operating results. Please refer to Management’s Discussion and Analysis of Financial Condition and Results of Operations – Financial Overview of Tertiary Operations in our Form 10-K for further information regarding these matters.
Denbury Resources Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Operating Results Table
Certain of our financial results for our Successor and Predecessor periods are presented in the following tables:
|
| | | | | | | | | | | | | |
| | Successor | | | Predecessor |
| | Period from Sept. 19, 2020 through | | | Period from July 1, 2020 through | | Three Months Ended |
In thousands, except per-share and unit data | | Sept. 30, 2020 | | | Sept. 18, 2020 | | Sept. 30, 2019 |
Operating results | | | | | | | |
Net income (loss)(1) | | $ | 2,758 |
| | | $ | (809,120 | ) | | $ | 72,862 |
|
Net income (loss) per common share – basic(1) | | 0.06 |
| | | (1.63 | ) | | 0.16 |
|
Net income (loss) per common share – diluted(1) | | 0.06 |
| | | (1.63 | ) | | 0.14 |
|
Net cash provided by (used for) operating activities | | 32,910 |
| | | 40,597 |
| | 130,578 |
|
|
| | | | | | | | | | | | | |
| | Successor | | | Predecessor |
| | Period from Sept. 19, 2020 through | | | Period from Jan. 1, 2020 through | | Nine Months Ended |
In thousands, except per-share and unit data | | Sept. 30, 2020 | | | Sept. 18, 2020 | | Sept. 30, 2019 |
Operating results | | | | | | | |
Net income (loss)(1) | | $ | 2,758 |
| | | $ | (1,432,578 | ) | | $ | 193,880 |
|
Net income (loss) per common share – basic(1) | | 0.06 |
| | | (2.89 | ) | | 0.43 |
|
Net income (loss) per common share – diluted(1) | | 0.06 |
| | | (2.89 | ) | | 0.41 |
|
Net cash provided by (used for) operating activities | | 32,910 |
| | | 113,408 |
| | 343,578 |
|
| |
(1) | Includes a pre-tax full cost pool ceiling test write-down of our oil and natural gas properties of $261.7 million and $996.7 million for the Predecessor periods July 1, 2020 through September 18, 2020 and January 1, 2020 through September 18, 2020, respectively. In addition, includes reorganization adjustments, net totaling $850.0 million during the 2020 Predecessor periods. |
Denbury Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Certain of our operating results and statistics for the comparative three and nine months ended September 30, 20192020 and 20182019 are included in the following table:
| | | | Three Months Ended | | Nine Months Ended | | Three Months Ended | | Nine Months Ended |
| | September 30, | | September 30, | | September 30, | | September 30, |
In thousands, except per-share and unit data | | 2019 | | 2018 | | 2019 | | 2018 | | 2020 | | 2019 | | 2020 | | 2019 |
Operating results | | | | | | | | | |
Net income | | $ | 72,862 |
| | $ | 78,419 |
| | $ | 193,880 |
| | $ | 148,219 |
| |
Net income per common share – basic | | 0.16 |
| | 0.17 |
| | 0.43 |
| | 0.35 |
| |
Net income per common share – diluted | | 0.14 |
| | 0.17 |
| | 0.41 |
| | 0.33 |
| |
Net cash provided by operating activities | | 130,578 |
| | 147,904 |
| | 343,578 |
| | 393,530 |
| |
Average daily production volumes | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Bbls/d | | 55,085 |
| | 57,410 |
| | 56,836 |
| | 58,621 |
| | 48,334 |
| | 55,085 |
| | 50,619 |
| | 56,836 |
|
Mcf/d | | 8,135 |
| | 10,623 |
| | 9,681 |
| | 11,275 |
| | 8,110 |
| | 8,135 |
| | 7,916 |
| | 9,681 |
|
BOE/d(1) | | 56,441 |
| | 59,181 |
| | 58,449 |
| | 60,500 |
| | 49,686 |
| | 56,441 |
| | 51,939 |
| | 58,449 |
|
Operating revenues | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Oil sales | | $ | 292,100 |
| | $ | 377,329 |
| | $ | 912,636 |
| | $ | 1,088,021 |
| | $ | 174,447 |
| | $ | 292,100 |
| | $ | 511,562 |
| | $ | 912,636 |
|
Natural gas sales | | 1,092 |
| | 2,299 |
| | 5,554 |
| | 7,193 |
| | 964 |
| | 1,092 |
| | 2,860 |
| | 5,554 |
|
Total oil and natural gas sales | | $ | 293,192 |
| | $ | 379,628 |
| | $ | 918,190 |
| | $ | 1,095,214 |
| | $ | 175,411 |
| | $ | 293,192 |
| | $ | 514,422 |
| | $ | 918,190 |
|
Commodity derivative contracts(2) | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Receipt (payment) on settlements of commodity derivatives | | $ | 8,057 |
| | $ | (61,611 | ) | | $ | 14,714 |
| | $ | (149,738 | ) | |
Receipt on settlements of commodity derivatives | | | $ | 17,789 |
| | $ | 8,057 |
| | $ | 88,056 |
| | $ | 14,714 |
|
Noncash fair value gains (losses) on commodity derivatives(3) | | 35,098 |
| | 17,034 |
| | (30,176 | ) | | (39,863 | ) | | (18,363 | ) | | 35,098 |
| | 18,011 |
| | (30,176 | ) |
Commodity derivatives income (expense) | | $ | 43,155 |
| | $ | (44,577 | ) | | $ | (15,462 | ) | | $ | (189,601 | ) | | $ | (574 | ) | | $ | 43,155 |
| | $ | 106,067 |
| | $ | (15,462 | ) |
Unit prices – excluding impact of derivative settlements | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Oil price per Bbl | | $ | 57.64 |
| | $ | 71.44 |
| | $ | 58.82 |
| | $ | 67.99 |
| | $ | 39.23 |
| | $ | 57.64 |
| | $ | 36.88 |
| | $ | 58.82 |
|
Natural gas price per Mcf | | 1.46 |
| | 2.35 |
| | 2.10 |
| | 2.34 |
| | 1.29 |
| | 1.46 |
| | 1.32 |
| | 2.10 |
|
Unit prices – including impact of derivative settlements(2) | | | | |
| | |
| | | | | | |
| | |
| | |
Oil price per Bbl | | $ | 59.23 |
| | $ | 59.78 |
| | $ | 59.77 |
| | $ | 58.63 |
| | $ | 43.23 |
| | $ | 59.23 |
| | $ | 43.23 |
| | $ | 59.77 |
|
Natural gas price per Mcf | | 1.46 |
| | 2.35 |
| | 2.10 |
| | 2.34 |
| | 1.29 |
| | 1.46 |
| | 1.32 |
| | 2.10 |
|
Oil and natural gas operating expenses | | | | |
| | |
| | | | | | |
| | |
| | |
Lease operating expenses | | $ | 117,850 |
| | $ | 122,527 |
| | $ | 361,205 |
| | $ | 361,267 |
| | $ | 71,192 |
| | $ | 117,850 |
| | $ | 261,755 |
| | $ | 361,205 |
|
Transportation and marketing expenses | | 10,067 |
| | 11,116 |
| | 32,076 |
| | 31,671 |
| | 9,499 |
| | 10,067 |
| | 28,508 |
| | 32,076 |
|
Production and ad valorem taxes | | 20,220 |
| | 25,387 |
| | 65,780 |
| | 75,782 |
| | 13,697 |
| | 20,220 |
| | 40,450 |
| | 65,780 |
|
Oil and natural gas operating revenues and expenses per BOE | | | | |
| | |
| | | | | | |
| | |
| | |
Oil and natural gas revenues | | $ | 56.46 |
| | $ | 69.73 |
| | $ | 57.54 |
| | $ | 66.31 |
| | $ | 38.37 |
| | $ | 56.46 |
| | $ | 36.15 |
| | $ | 57.54 |
|
Lease operating expenses | | 22.70 |
| | 22.50 |
| | 22.64 |
| | 21.87 |
| | 15.57 |
| | 22.70 |
| | 18.39 |
| | 22.64 |
|
Transportation and marketing expenses | | 1.94 |
| | 2.04 |
| | 2.01 |
| | 1.92 |
| | 2.08 |
| | 1.94 |
| | 2.00 |
| | 2.01 |
|
Production and ad valorem taxes | | 3.89 |
| | 4.66 |
| | 4.12 |
| | 4.59 |
| | 3.00 |
| | 3.89 |
| | 2.84 |
| | 4.12 |
|
CO2 sources – revenues and expenses | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
CO2 sales and transportation fees | | $ | 8,976 |
| | $ | 8,149 |
| | $ | 25,532 |
| | $ | 22,416 |
| | $ | 7,484 |
| | $ | 8,976 |
| | $ | 22,016 |
| | $ | 25,532 |
|
CO2 discovery and operating expenses | | (879 | ) | | (708 | ) | | (2,016 | ) | | (1,670 | ) | |
CO2 operating and discovery expenses | | | (1,197 | ) | | (879 | ) | | (2,834 | ) | | (2,016 | ) |
CO2 revenue and expenses, net | | $ | 8,097 |
| | $ | 7,441 |
| | $ | 23,516 |
| | $ | 20,746 |
| | $ | 6,287 |
| | $ | 8,097 |
| | $ | 19,182 |
| | $ | 23,516 |
|
| |
(1) | Barrel of oil equivalent using the ratio of one barrel of oil to six Mcf of natural gas (“BOE”). |
| |
(2) | See also Commodity Derivative Contracts below and Item 3. Quantitative and Qualitative Disclosures about Market Risk for information concerning our derivative transactions. |
Denbury Resources Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
| |
(3) | Noncash fair value gains (losses) on commodity derivatives is a non-GAAP measure and is different from “Commodity derivatives expense (income)” in the Unaudited Condensed Consolidated Statements of Operations in that the noncash fair value gains (losses) on commodity derivatives represent only the net changes between periods of the fair market values of commodity derivative positions, and exclude the impact of settlements on commodity derivatives during the period, which were receipts on settlements of $17.8 million and $88.1 million for the three and nine months ended September 30, 2020, respectively, compared to receipts on settlements of $8.1 million and $14.7 million for the three and nine months ended September 30, 2019, compared to payments on settlements of $61.6 million and $149.7 million for the three and nine months ended September 30, 2018, respectively.2019. We believe that noncash fair value gains (losses) on commodity derivatives is a useful supplemental disclosure to “Commodity derivatives expense (income)” in order to differentiate noncash fair market value adjustments from receipts or payments upon settlements on commodity derivatives during the period. This supplemental disclosure is widely used within the industry and by securities analysts, banks and credit rating agencies in calculating EBITDA and in adjusting net income (loss) to present those measures on a comparative basis across companies, as well as to assess compliance with certain debt covenants. Noncash fair value gains (losses) on commodity derivatives is not a measure of financial or operating performance under GAAP, nor should it be considered in isolation or as a substitute for “Commodity derivatives expense (income)” in the Unaudited Condensed Consolidated Statements of Operations. |
Denbury ResourcesInc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
used within the industry and by securities analysts, banks and credit rating agencies in calculating EBITDA and in adjusting net income (loss) to present those measures on a comparative basis across companies, as well as to assess compliance with certain debt covenants. Noncash fair value gains (losses) on commodity derivatives is not a measure of financial or operating performance under GAAP, nor should it be considered in isolation or as a substitute for “Commodity derivatives expense (income)” in the Unaudited Condensed Consolidated Statements of Operations.
Denbury Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Production
Average daily production by area for each of the four quarters of 20182019 and for the first second, and thirdthree quarters of 20192020 is shown below:
| | | | Average Daily Production (BOE/d) | | Average Daily Production (BOE/d) |
| | First Quarter | | Second Quarter |
| Third Quarter |
| Fourth Quarter | | | First Quarter |
| Second Quarter | | Third Quarter | | First Quarter | | Second Quarter |
| Third Quarter | | Fourth Quarter | | | First Quarter |
| Second Quarter | | Third Quarter |
Operating Area | | 2018 | | 2018 |
| 2018 |
| 2018 | | | 2019 |
| 2019 | | 2019 | | 2019 | | 2019 |
| 2019 |
| 2019 | | | 2020 |
| 2020 | | 2020 |
Tertiary oil production | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Gulf Coast region | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Delhi | | 4,169 |
| | 4,391 |
|
| 4,383 |
|
| 4,526 |
| | | 4,474 |
| | 4,486 |
| | 4,256 |
| | 4,474 |
| | 4,486 |
|
| 4,256 |
|
| 4,085 |
| | | 3,813 |
| | 3,529 |
| | 3,208 |
|
Hastings | | 5,704 |
| | 5,716 |
|
| 5,486 |
|
| 5,480 |
| | | 5,539 |
| | 5,466 |
| | 5,513 |
| | 5,539 |
| | 5,466 |
|
| 5,513 |
|
| 5,097 |
| | | 5,232 |
| | 4,722 |
| | 4,473 |
|
Heidelberg | | 4,445 |
| | 4,330 |
|
| 4,376 |
|
| 4,269 |
| | | 3,987 |
| | 4,082 |
| | 4,297 |
| | 3,987 |
| | 4,082 |
|
| 4,297 |
|
| 4,409 |
| | | 4,371 |
| | 4,366 |
| | 4,256 |
|
Oyster Bayou | | 5,056 |
| | 4,961 |
|
| 4,578 |
|
| 4,785 |
| | | 4,740 |
| | 4,394 |
| | 3,995 |
| | 4,740 |
| | 4,394 |
|
| 3,995 |
|
| 4,261 |
| | | 3,999 |
| | 3,871 |
| | 3,526 |
|
Tinsley | | 6,053 |
| | 5,755 |
|
| 5,294 |
|
| 5,033 |
| | | 4,659 |
| | 4,891 |
| | 4,541 |
| | 4,659 |
| | 4,891 |
|
| 4,541 |
|
| 4,343 |
| | | 4,355 |
| | 3,788 |
| | 4,042 |
|
West Yellow Creek | | 57 |
| | 142 |
| | 240 |
| | 375 |
| | | 436 |
| | 586 |
| | 728 |
| | 436 |
| | 586 |
| | 728 |
| | 807 |
| | | 775 |
| | 695 |
| | 588 |
|
Mature properties(1) | | 6,726 |
| | 6,725 |
| | 6,612 |
| | 6,748 |
| | | 6,479 |
| | 6,448 |
| | 6,415 |
| | 6,479 |
| | 6,448 |
| | 6,415 |
| | 6,347 |
| | | 6,386 |
| | 5,249 |
| | 5,683 |
|
Total Gulf Coast region | | 32,210 |
|
| 32,020 |
|
| 30,969 |
|
| 31,216 |
| |
| 30,314 |
| | 30,353 |
| | 29,745 |
| | 30,314 |
|
| 30,353 |
|
| 29,745 |
|
| 29,349 |
| |
| 28,931 |
| | 26,220 |
| | 25,776 |
|
Rocky Mountain region | |
| |
|
|
|
|
| | |
| |
|
| | | |
| |
|
|
|
|
| | |
| |
|
| | |
Bell Creek | | 4,050 |
| | 4,010 |
|
| 3,970 |
|
| 4,421 |
| | | 4,650 |
| | 5,951 |
| | 4,686 |
| | 4,650 |
| | 5,951 |
|
| 4,686 |
|
| 5,618 |
| | | 5,731 |
| | 5,715 |
| | 5,551 |
|
Salt Creek | | 2,002 |
| | 2,049 |
| | 2,274 |
| | 2,107 |
| | | 2,057 |
| | 2,078 |
| | 2,213 |
| | 2,057 |
| | 2,078 |
| | 2,213 |
| | 2,223 |
| | | 2,149 |
| | 1,386 |
| | 2,167 |
|
Other | | — |
| | — |
| | 6 |
| | 20 |
| | | 52 |
| | 41 |
| | 58 |
| |
Grieve | | | 52 |
| | 41 |
| | 58 |
| | 60 |
| | | 50 |
| | 7 |
| | 0 |
|
Total Rocky Mountain region | | 6,052 |
| | 6,059 |
|
| 6,250 |
|
| 6,548 |
| | | 6,759 |
| | 8,070 |
| | 6,957 |
| | 6,759 |
| | 8,070 |
|
| 6,957 |
|
| 7,901 |
| | | 7,930 |
| | 7,108 |
| | 7,718 |
|
Total tertiary oil production | | 38,262 |
| | 38,079 |
|
| 37,219 |
|
| 37,764 |
| | | 37,073 |
| | 38,423 |
| | 36,702 |
| | 37,073 |
| | 38,423 |
|
| 36,702 |
|
| 37,250 |
| | | 36,861 |
| | 33,328 |
| | 33,494 |
|
Non-tertiary oil and gas production | |
|
| | | | | | | | |
|
| |
|
| | | | | | | |
|
| |
|
| | |
|
| |
|
| | |
Gulf Coast region | |
|
| | | | | | | | |
|
| |
|
| | | | | | | |
|
| |
|
| | |
|
| |
|
| | |
Mississippi | | 875 |
| | 901 |
| | 1,038 |
| | 1,023 |
| | | 1,034 |
| | 1,025 |
| | 873 |
| | 1,034 |
| | 1,025 |
| | 873 |
| | 952 |
| | | 748 |
| | 713 |
| | 629 |
|
Texas | | 4,386 |
| | 4,947 |
| | 4,533 |
| | 4,319 |
| | | 4,345 |
| | 4,243 |
| | 4,268 |
| | 3,298 |
| | 3,224 |
| | 3,165 |
| | 3,212 |
| | | 3,419 |
| | 3,087 |
| | 3,095 |
|
Other | | 44 |
| | — |
| | 5 |
| | 6 |
| | | 10 |
| | 6 |
| | 6 |
| | 10 |
| | 6 |
| | 6 |
| | 5 |
| | | 6 |
| | 5 |
| | 4 |
|
Total Gulf Coast region | | 5,305 |
| | 5,848 |
|
| 5,576 |
|
| 5,348 |
| | | 5,389 |
|
| 5,274 |
| | 5,147 |
| | 4,342 |
| | 4,255 |
|
| 4,044 |
|
| 4,169 |
| | | 4,173 |
|
| 3,805 |
| | 3,728 |
|
Rocky Mountain region | |
| | | | | | | | |
| |
| | | |
| | | | | | | | |
| |
| | |
Cedar Creek Anticline | | 14,437 |
| | 15,742 |
|
| 14,208 |
|
| 14,961 |
| | | 14,987 |
|
| 14,311 |
| | 13,354 |
| | 14,987 |
| | 14,311 |
|
| 13,354 |
|
| 13,730 |
| | | 13,046 |
|
| 11,988 |
| | 11,485 |
|
Other | | 1,485 |
| | 1,490 |
|
| 1,409 |
|
| 1,343 |
| | | 1,313 |
|
| 1,305 |
| | 1,238 |
| | 1,313 |
| | 1,305 |
|
| 1,238 |
|
| 1,192 |
| | | 1,105 |
|
| 1,069 |
| | 979 |
|
Total Rocky Mountain region | | 15,922 |
| | 17,232 |
|
| 15,617 |
|
| 16,304 |
| | | 16,300 |
|
| 15,616 |
| | 14,592 |
| | 16,300 |
| | 15,616 |
|
| 14,592 |
|
| 14,922 |
| | | 14,151 |
|
| 13,057 |
| | 12,464 |
|
Total non-tertiary production | | 21,227 |
| | 23,080 |
|
| 21,193 |
|
| 21,652 |
| |
| 21,689 |
|
| 20,890 |
| | 19,739 |
| | 20,642 |
| | 19,871 |
|
| 18,636 |
|
| 19,091 |
| |
| 18,324 |
|
| 16,862 |
| | 16,192 |
|
Total continuing production | | 59,489 |
| | 61,159 |
|
| 58,412 |
|
| 59,416 |
| | | 58,762 |
|
| 59,313 |
| | 56,441 |
| | 57,715 |
| | 58,294 |
|
| 55,338 |
|
| 56,341 |
| | | 55,185 |
|
| 50,190 |
| | 49,686 |
|
Property sales | |
| |
| |
| |
| | |
| | | | | |
| |
| |
| |
| | | | | | | |
Citronelle(2) | | 387 |
| | 388 |
| | 416 |
| | 451 |
| | | 456 |
| | 406 |
| | — |
| |
Lockhart Crossing(3) | | 462 |
| | 447 |
| | 353 |
| | — |
| | | — |
| | — |
| | — |
| |
Gulf Coast Working Interests Sale(2) | | | 1,047 |
| | 1,019 |
| | 1,103 |
| | 1,170 |
| | | 780 |
| | — |
| | — |
|
Citronelle(3) | | | 456 |
| | 406 |
| | — |
| | — |
| | | — |
| | — |
| | — |
|
Total production | | 60,338 |
| | 61,994 |
| | 59,181 |
| | 59,867 |
| | | 59,218 |
| | 59,719 |
| | 56,441 |
| | 59,218 |
| | 59,719 |
| | 56,441 |
| | 57,511 |
| | | 55,965 |
| | 50,190 |
| | 49,686 |
|
| |
(1) | Mature properties include Brookhaven, Cranfield, Eucutta, Little Creek, Mallalieu, Martinville, McComb and Soso fields. |
| |
(2) | Includes non-tertiary production from Citronelle Field soldrelated to the March 2020 sale of 50% of our working interests in July 2019.Webster, Thompson, Manvel, and East Hastings fields. |
| |
(3) | Includes production from Lockhart CrossingCitronelle Field sold in the third quarter of 2018.July 2019. |
Total continuing production during the third quarter of 20192020 averaged 56,44149,686 BOE/d, including 36,70233,494 Bbls/d or 65%, from tertiary properties and 19,73916,192 BOE/d from non-tertiary properties. Total continuingThis production excludeslevel represents a decrease of 504 BOE/d (1%) compared to production from Citronelle Field sold in July 2019 and, for prior-year periods, excludes production from Lockhart Crossing Field soldlevels in the second quarter of 2020 and a decrease of 5,652 BOE/d (10%) compared to third quarter of 2019 continuing
Denbury Resources Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
2018. This total continuing production, level represents a decreasewhich is adjusted for production from assets sold in the first quarter of 2,8722020. Production during the second and third quarters of 2020 was impacted by approximately 4,300 BOE/d (5%) comparedand 1,700 BOE/d, respectively, of production that was shut-in due to total continuingwells that were at that time uneconomic to produce or repair. In addition to shut-in production, levels in the second quarter of 2019 and a decrease of 1,971 BOE/d (3%) compared to third quarter of 2018 continuing production. The sequential decreaseyear-over-year production decline was primarily due to an expected reduction in production declines at Bell CreekDelhi Field associated with planned maintenance at our primarydue to the lack of CO2 source inpurchases since late-February 2020 as a result of the Rocky Mountain region. Third quarter 2019 production was also lowered by approximately 400 BOE/dDelta-Tinsley CO2 pipeline being down for repair, reduced levels of workovers and capital investment due to unplannedlower oil prices and higher than normal declines resulting from such. Although we returned to production approximately 2,600 BOE/d of shut-in production between the second and third quarters of 2020, sequential quarterly production declined slightly for various reasons, including the following: continued production declines at Delhi Field due to the lack of CO2 purchases, the impact of downtime from power outages and flooding caused by Tropical Storm Imelda. The year-over-year decrease in production was also impacted by lower production at Tinsley Field primarilyhurricanes impacting the Gulf Coast, typical seasonal impacts on CO2 density due to planned downtimehigher temperatures, and preventative maintenance, slightly offset bya higher portion of production increasesallocated to the net profits interest at West Yellowour Cedar Creek Anticline Fields relative to the second quarter. In late October 2020, repairs to the Delta-Tinsley pipeline were completed and the pipeline was brought back into service, allowing CO2 purchases to resume at Delhi Field.
Our production during the three and nine months ended September 30, 20192020 was 98% and 97% oil, respectively,slightly lower than our 98% oil production during the three months ended September 30, 2019 and consistent with oil production during the prior-year periods.period.
Oil and Natural Gas Revenues
Our oil and natural gas revenues during the three and nine months ended September 30, 20192020 decreased 23%40% and 16%44%, respectively, compared to these revenues for the same periods in 2018.2019. The changes in our oil and natural gas revenues are due to changes in production quantities and realized commodity prices (excluding any impact of our commodity derivative contracts), as reflected in the following table:
| | | | Three Months Ended | | Nine Months Ended | | Three Months Ended | | Nine Months Ended |
| | September 30, | | September 30, | | September 30, | | September 30, |
| | 2019 vs. 2018 | | 2019 vs. 2018 | | 2020 vs. 2019 | | 2020 vs. 2019 |
In thousands | | Decrease in Revenues | | Percentage Decrease in Revenues | | Decrease in Revenues | | Percentage Decrease in Revenues | | Decrease in Revenues | | Percentage Decrease in Revenues | | Decrease in Revenues | | Percentage Decrease in Revenues |
Change in oil and natural gas revenues due to: | | | | | | | | | | | | | | | | |
Decrease in production | | $ | (17,579 | ) | | (5 | )% | | $ | (37,126 | ) | | (3 | )% | | $ | (35,090 | ) | | (12 | )% | | $ | (99,290 | ) | | (11 | )% |
Decrease in realized commodity prices | | (68,857 | ) | | (18 | )% | | (139,898 | ) | | (13 | )% | | (82,691 | ) | | (28 | )% | | (304,478 | ) | | (33 | )% |
Total decrease in oil and natural gas revenues | | $ | (86,436 | ) | | (23 | )% | | $ | (177,024 | ) | | (16 | )% | | $ | (117,781 | ) | | (40 | )% | | $ | (403,768 | ) | | (44 | )% |
Denbury Resources Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Excluding any impact of our commodity derivative contracts, our net realized commodity prices and NYMEX differentials were as follows during each of the first quarters, second quarters, thirdthree quarters and nine months ended September 30, 20192020 and 2018:2019:
| | | | Three Months Ended | | Nine Months Ended | | Three Months Ended | | Nine Months Ended |
| | March 31, | | June 30, | | September 30, | | September 30, | | March 31, | | June 30, | | September 30, | | September 30, |
| | 2019 | | 2018 | | 2019 | | 2018 | | 2019 | | 2018 | | 2019 | | 2018 | | 2020 | | 2019 | | 2020 | | 2019 | | 2020 | | 2019 | | 2020 | | 2019 |
Average net realized prices | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Oil price per Bbl | | $ | 56.50 |
| | $ | 64.25 |
| | $ | 62.22 |
| | $ | 68.24 |
| | $ | 57.64 |
| | $ | 71.44 |
| | $ | 58.82 |
| | $ | 67.99 |
| | $ | 45.96 |
| | $ | 56.50 |
| | $ | 24.39 |
| | $ | 62.22 |
| | $ | 39.23 |
| | $ | 57.64 |
| | $ | 36.88 |
| | $ | 58.82 |
|
Natural gas price per Mcf | | 2.68 |
| | 2.44 |
| | 2.01 |
| | 2.21 |
| | 1.46 |
| | 2.35 |
| | 2.10 |
| | 2.34 |
| | 1.46 |
| | 2.68 |
| | 1.21 |
| | 2.01 |
| | 1.29 |
| | 1.46 |
| | 1.32 |
| | 2.10 |
|
Price per BOE | | 55.27 |
| | 62.61 |
| | 60.80 |
| | 66.57 |
| | 56.46 |
| | 69.73 |
| | 57.54 |
| | 66.31 |
| | 45.09 |
| | 55.27 |
| | 23.95 |
| | 60.80 |
| | 38.37 |
| | 56.46 |
| | 36.15 |
| | 57.54 |
|
Average NYMEX differentials | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | | | | | |
| | |
|
Gulf Coast region | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Oil per Bbl | | $ | 4.26 |
| | $ | 2.05 |
| | $ | 4.85 |
| | $ | 1.12 |
| | $ | 3.11 |
| | $ | 3.21 |
| | $ | 4.08 |
| | $ | 2.10 |
| | $ | 1.18 |
| | $ | 4.26 |
| | $ | (3.59 | ) | | $ | 4.85 |
| | $ | (1.38 | ) | | $ | 3.11 |
| | $ | (0.86 | ) | | $ | 4.08 |
|
Natural gas per Mcf | | (0.10 | ) | | 0.10 |
| | 0.10 |
| | 0.04 |
| | (0.24 | ) | | 0.06 |
| | (0.06 | ) | | 0.07 |
| | (0.06 | ) | | (0.10 | ) | | (0.09 | ) | | 0.10 |
| | (0.06 | ) | | (0.24 | ) | | (0.07 | ) | | (0.06 | ) |
Rocky Mountain region | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Oil per Bbl | | $ | (2.56 | ) | | $ | (0.06 | ) | | $ | (1.48 | ) | | $ | (0.84 | ) | | $ | (1.65 | ) | | $ | (0.54 | ) | | $ | (1.85 | ) | | $ | (0.47 | ) | | $ | (2.78 | ) | | $ | (2.56 | ) | | $ | (4.68 | ) | | $ | (1.48 | ) | | $ | (2.03 | ) | | $ | (1.65 | ) | | $ | (2.89 | ) | | $ | (1.85 | ) |
Natural gas per Mcf | | (0.28 | ) | | (0.92 | ) | | (1.13 | ) | | (1.25 | ) | | (1.61 | ) | | (1.05 | ) | | (0.90 | ) | | (1.07 | ) | | (0.91 | ) | | (0.28 | ) | | (1.04 | ) | | (1.13 | ) | | (1.74 | ) | | (1.61 | ) | | (1.25 | ) | | (0.90 | ) |
Total Company | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Oil per Bbl | | $ | 1.63 |
| | $ | 1.29 |
| | $ | 2.35 |
| | $ | 0.39 |
| | $ | 1.30 |
| | $ | 1.84 |
| | $ | 1.79 |
| | $ | 1.16 |
| | $ | (0.38 | ) | | $ | 1.63 |
| | $ | (4.03 | ) | | $ | 2.35 |
| | $ | (1.64 | ) | | $ | 1.30 |
| | $ | (1.67 | ) | | $ | 1.79 |
|
Natural gas per Mcf | | (0.20 | ) | | (0.40 | ) | | (0.50 | ) | | (0.62 | ) | | (0.87 | ) | | (0.51 | ) | | (0.47 | ) | | (0.51 | ) | | (0.41 | ) | | (0.20 | ) | | (0.54 | ) | | (0.50 | ) | | (0.83 | ) | | (0.87 | ) | | (0.60 | ) | | (0.47 | ) |
Prices received in a regional market fluctuate frequently and can differ from NYMEX pricing due to a variety of reasons, including supply and/or demand factors, crude oil quality, and location differentials.
| |
• | Gulf Coast Region. Our average NYMEX oil differential in the Gulf Coast region was a positive $3.11 per Bbl and a positive $3.21negative $1.38 per Bbl during the third quartersquarter of 2020, compared to a positive $3.11 per Bbl during the third quarter of 2019 and 2018, respectively, and a positive $4.85negative $3.59 per Bbl during the second quarter of 2019.2020. Generally, our Gulf Coast region differentials are positive to NYMEX and highly correlated to the changes in prices of Light Louisiana Sweet crude oil, which have generally strengthened overthough storage constraints and weak demand caused these differentials to weaken significantly during the past year, although recent Gulf Coast region differentials have softened.second and third quarters of 2020. |
| |
• | Rocky Mountain Region. NYMEX oil differentials in the Rocky Mountain region averaged $1.65$2.03 per Bbl and $0.54$1.65 per Bbl below NYMEX during the third quarters of 20192020 and 20182019, respectively, and $1.48$4.68 per Bbl below NYMEX during the second quarter of 2019.2020. Differentials in the Rocky Mountain region can fluctuate significantly on a month-to-month basis due to weather, refinery or transportation issues, and Canadian and U.S. crude oil price index volatility. Although our differentials in the Rocky Mountain region have weakened somewhat from a year ago, they have improved from the differentials we experienced in the fourth quarter of 2018 and first quarter of 2019. |
Our realized oil prices and differentials during 2020 have been significantly impacted by the rapid and precipitous drop in oil demand caused by the slowdown in economic activity due to the COVID-19 pandemic. This drop in oil demand worsened a deteriorated oil market which followed the early-March 2020 failure by the group of oil producing nations known as OPEC+ to reach an agreement over proposed oil production cuts. Although OPEC+ subsequently agreed to reduced levels of production output, concerns about the ability of OPEC+ to maintain compliance with their reduced production targets and uncertainty about the duration of the COVID-19 pandemic and its resulting economic consequences has resulted in abnormally high worldwide inventories of produced oil. While oil prices have improved from the low points experienced during the second quarter of 2020, concerns and uncertainties around the balance of supply and demand for oil are expected to continue for some time. While our oil differentials have improved since the second quarter of 2020, oil prices are expected to continue to be volatile as a result of these events, and as changes in oil inventories, oil demand and economic performance are reported.
Denbury Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
CO2 Revenues and Expenses
We sell approximately 15% to 20% of our produced CO2 produced from Jackson Dome to third-party industrial users at various contracted prices primarily under long-term contracts. We recognize the revenue received on these CO2 sales as “CO2 sales and transportation fees” with the corresponding costs recognized as “CO2 discoveryoperating and operatingdiscovery expenses” in our Unaudited Condensed Consolidated Statements of Operations.
Purchased Oil Marketing Revenues and Expenses
From time to time, we market third-party production for sale in exchange for a fee. We recognize the revenue received on these oil sales as “Purchased oil“Oil marketing sales” and the expenses incurred to market and transport the oil as “Purchased oil“Oil marketing expenses” in our Unaudited Condensed Consolidated Statements of Operations.
Denbury Resources Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Commodity Derivative Contracts
The following table summarizestables summarize the impact our crude oil derivative contracts had on our operating results for the three and nine months ended September 30, 2019 and 2018:periods indicated:
| | | | Three Months Ended | | Nine Months Ended | | Successor |
|
| Predecessor |
| | September 30, | | September 30, | | Period from Sept. 19, 2020 through |
|
| Period from July 1, 2020 through |
| Three Months Ended |
In thousands | | 2019 | | 2018 | | 2019 | | 2018 | | Sept. 30, 2020 |
|
| Sept. 18, 2020 |
| Sept. 30, 2019 |
Receipt (payment) on settlements of commodity derivatives | | $ | 8,057 |
| | $ | (61,611 | ) | | $ | 14,714 |
| | $ | (149,738 | ) | |
Receipt on settlements of commodity derivatives | | | $ | 6,660 |
| | | $ | 11,129 |
| | $ | 8,057 |
|
Noncash fair value gains (losses) on commodity derivatives(1) | | 35,098 |
| | 17,034 |
| | (30,176 | ) | | (39,863 | ) | | (2,625 | ) | | | (15,738 | ) | | 35,098 |
|
Total income (expense) | | $ | 43,155 |
| | $ | (44,577 | ) | | $ | (15,462 | ) | | $ | (189,601 | ) | | $ | 4,035 |
| | | $ | (4,609 | ) | | $ | 43,155 |
|
|
| | | | | | | | | | | | | |
| | Successor |
|
| Predecessor |
| | Period from Sept. 19, 2020 through |
|
| Period from Jan. 1, 2020 through |
| Nine Months Ended |
In thousands | | Sept. 30, 2020 |
|
| Sept. 18, 2020 |
| Sept. 30, 2019 |
Receipt (payment) on settlements of commodity derivatives | | $ | 6,660 |
| | | $ | 81,396 |
| | $ | 14,714 |
|
Noncash fair value gains (losses) on commodity derivatives(1) | | (2,625 | ) | | | 20,636 |
| | (30,176 | ) |
Total income (expense) | | $ | 4,035 |
| | | $ | 102,032 |
| | $ | (15,462 | ) |
| |
(1) | Noncash fair value gains (losses) on commodity derivatives is a non-GAAP measure. See Operating Results Table above for a discussion of the reconciliation between noncash fair value gains (losses) on commodity derivatives to “Commodity derivatives expense (income)” in the Unaudited Condensed Consolidated Statements of Operations. |
Denbury Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
In order to provide a level of price protection to a portion of our oil production, we have hedged a portion of our estimated oil production through 2020 using both NYMEX and LLS fixed-price swaps and three-way collars.collars and oil production in 2021 and the first half of 2022 using NYMEX fixed-price swaps. See Note 5,10, Commodity Derivative Contracts, to the Unaudited Condensed Consolidated Financial Statements for additional details of our outstanding commodity derivative contracts as of September 30, 2019,2020, and Item 3, Quantitative and Qualitative Disclosures about Market Risk below for additional discussion. In addition, the following table summarizes our commodity derivative contracts as of November 6, 2019:12, 2020:
| | | | 4Q 2019 | 1H 2020 | 2H 2020 | | 4Q 2020 | | 2021 | | 1H 2022 |
WTI NYMEX | Volumes Hedged (Bbls/d) | 2,000 | Volumes Hedged (Bbls/d) | | 13,500 | | 24,000 | | 8,500 |
Fixed-Price Swaps | Swap Price(1) | $60.60 | $60.59 | Swap Price(1) | | $40.52 | | $42.22 | | $43.55 |
Argus LLS | Volumes Hedged (Bbls/d) | 13,000 | 4,500 | Volumes Hedged (Bbls/d) | | 7,500 | | — | | — |
Fixed-Price Swaps | Swap Price(1) | $64.69 | $62.29 | Swap Price(1) | | $51.67 | | — | | — |
WTI NYMEX | Volumes Hedged (Bbls/d) | 23,000 | 19,000 | 17,000 | Volumes Hedged (Bbls/d) | | 9,500 | | — | | — |
3-Way Collars | Sold Put Price / Floor / Ceiling Price(1)(2) | $48.57 / $56.61 / $69.04 | $48.14 / $57.21 / $63.44 | $48.15 / $57.10 / $63.33 | Sold Put Price / Floor / Ceiling Price(1)(2) | | $47.93 / $57.00 / $63.25 | | — | | — |
Argus LLS | Volumes Hedged (Bbls/d) | 5,500 | 7,000 | 5,000 | Volumes Hedged (Bbls/d) | | 5,000 | | — | | — |
3-Way Collars | Sold Put Price / Floor / Ceiling Price(1)(2) | $54.73 / $63.09 / $79.93 | $53.07 / $62.45 / $70.00 | $53.00 / $62.13 / $71.00 | Sold Put Price / Floor / Ceiling Price(1)(2) | | $52.80 / $61.63 / $70.35 | | — | | — |
| Total Volumes Hedged (Bbls/d) | 43,500 | 32,500 | 28,500 | Total Volumes Hedged (Bbls/d) | | 35,500 | | 24,000 | | 8,500 |
| |
(1) | Averages are volume weighted. |
| |
(2) | If oil prices were to average less than the sold put price, receipts on settlement would be limited to the difference between the floor price and the sold put price. |
Based on current contracts in place and NYMEX oil futures prices as of November 6, 2019,12, 2020, which averaged approximately $56$40 per Bbl, we currently expect that we would receive cash payments of approximately $15$20 million during the remainder of 2019 upon settlement of our October through December 2020 contracts. Of this estimated amount, the 2019 contracts,majority relates to our three-way collars, which settlements are currently limited to the amountextent oil prices remain below the price of which isour sold puts. The weighted average differences between the floor and sold put prices of our 2020 three-way collars are $9.07 per Bbl and $8.83 per Bbl for NYMEX and LLS hedges, respectively. Settlements with respect to our fixed-price swaps are dependent upon fluctuations in future NYMEX oil prices in relation to the prices of our 20192020 fixed-price swaps which have weighted average prices of $60.60$40.52 per Bbl and $64.69 per Bbl for NYMEX and LLS hedges, respectively, and weighted average floor prices of our 2019 three-way collars of $56.61 per Bbl and $63.09$51.67 per Bbl for NYMEX and LLS hedges, respectively. Changes in commodity prices, expiration of contracts, and new commodity contracts entered into cause fluctuations in the estimated fair value of our oil derivative contracts. Because we do not utilize hedge accounting for our commodity derivative contracts, the period-to-period changes in the fair value of these contracts, as outlined above, are recognized in our statements of operations.
Denbury Resources Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Production Expenses
Lease Operating Expenses
| | | | Three Months Ended | | Nine Months Ended | | Successor | | | Predecessor |
| | September 30, | | September 30, | | Period from Sept. 19, 2020 through | | | Period from July 1, 2020 through | | Three Months Ended |
In thousands, except per-BOE data | | 2019 | | 2018 | | 2019 | | 2018 | | Sept. 30, 2020 | | | Sept. 18, 2020 | | Sept. 30, 2019 |
Total lease operating expenses | | $ | 117,850 |
| | $ | 122,527 |
| | $ | 361,205 |
| | $ | 361,267 |
| | $ | 11,484 |
| | | $ | 59,708 |
| | $ | 117,850 |
|
| | | | | | | | | | | | | | | |
Total lease operating expenses per BOE | | $ | 22.70 |
| | $ | 22.50 |
| | $ | 22.64 |
| | $ | 21.87 |
| | $ | 19.20 |
| | | $ | 15.03 |
| | $ | 22.70 |
|
|
| | | | | | | | | | | | | |
| | Successor | | | Predecessor |
| | Period from Sept. 19, 2020 through | | | Period from Jan. 1, 2020 through | | Nine Months Ended |
In thousands, except per-BOE data | | Sept. 30, 2020 | | | Sept. 18, 2020 | | Sept. 30, 2019 |
Total lease operating expenses | | $ | 11,484 |
| | | $ | 250,271 |
| | $ | 361,205 |
|
| | | | | | | |
Total lease operating expenses per BOE | | $ | 19.20 |
| | | $ | 18.36 |
| | $ | 22.64 |
|
Total lease operating expenses decreased $4.7were $71.2 million, (4%) on an absolute-dollar basis, but slightlyor $15.57 per BOE, for the combined Predecessor and Successor periods included within the three months ended September 30, 2020increased $0.20(1%) on a per-BOE basis,, compared to $117.9 million, or $22.70 per BOE, during the three months ended September 30, 2019, compared to the same prior-year period. The decrease on an absolute-dollar basis was primarily due to lower workover expense, lower power and fuel costs, and lower CO2 expense due to planned maintenance at our primary CO2 source in the Rocky Mountain region during the quarter. Lease2019. Total lease operating expenses on an absolute-dollar basis was relatively unchanged on a sequential-quarter basis fromwere $261.8 million, or $18.39 per BOE, for the second quarter of 2019combined Predecessor and forSuccessor periods included within the nine months ended September 30, 2019,2020, compared to levels in the same period in 2018, but increased $1.00 (5%) on a per-BOE basis from the second quarter of 2019 and increased $0.77(4%) on a per-BOE basis$361.2 million, or $22.64 per BOE, during the nine months ended September 30, 2019, compared2019. The decreases on an absolute-dollar basis and per-BOE basis were primarily due to lower expenses across all expense categories, with the largest decreases in workover expense, labor, and power and fuel costs, as well as insurance reimbursements totaling $15.4 million recorded for previously-incurred well control costs, cleanup costs, and damages associated with a 2013 incident at Delhi Field. In response to the same prior-year period. The increasessignificant decline in oil prices in 2020, we reduced our capital budget and implemented cost reduction measures which included shutting down compressors and delaying well repairs and workovers that were uneconomic. Compared to the second quarter of 2020, lease operating expenses decreased $10.1 million on an absolute-dollar basis and $2.23 on a per-BOE basis, for the comparative periods were due to a decrease in total productionthe insurance reimbursement mentioned above, partially offset by higher workover expense as we resumed some repairs and maintenance activity.
Currently, our CO2 expense comprises approximately 20% to 25% of our typical tertiary lease operating expenses, and consists of CO2 production expenses for the CO2 reserves we already own, consists of CO2 production expenses, and for the CO2 reserves we do not own, consists of our purchase of CO2 from royalty and working interest owners and industrial sources.sources for the CO2 reserves we do not own. During the third quarters of 2020 and 2019, approximately 46% and 2018, approximately 55% and 52%, respectively, of the CO2 utilized in our CO2 floods consisted of CO2 owned and produced by us (our net revenue interest). The price we pay others for CO2 varies by source and is generally indexed to oil prices. When combining the production cost of the CO2 we own with what we pay third parties for CO2, our average cost of CO2 was approximately $0.37 per Mcf during the third quarter of 20192020, including taxes paid on CO2 production but excluding depletion, depreciation and amortization of capital expended at our CO2 source fields and industrial sources. This per-Mcf CO2 cost during the third quarter of 20192020 was lower than the $0.41 per Mcf comparable measure duringconsistent with the third quarter of 20182019 due toand lower utilization of industrial-source CO2 in our Rocky Mountain region, but higher than the $0.33$0.39 per Mcf comparable measure during the second quarter of 20192020 due to highera lower utilization in our Gulf Coast operations of industrial-sourced CO2 in our Gulf Coast region,, which has a higher average cost than our naturally-occurring CO2 sources.source.
Transportation and Marketing Expenses
Transportation and marketing expenses primarily consist of amounts incurred relating to the transportation, marketing, and processing of oil and natural gas production. Transportation and marketing expenses were $10.1$9.5 million for the combined Predecessor
Denbury Inc.
Management’s Discussion and $11.1 million forAnalysis of Financial Condition and Results of Operations
and Successor periods included within the three months ended September 30, 20192020, compared to $10.1 million during the three months ended September 30, 2019. Transportation and 2018, respectively,marketing expenses were $28.5 million for the combined Predecessor and Successor periods included within the nine months ended September 30, 2020, compared to $32.1 million and $31.7 million for the nine months ended September 30, 20192019. The decreases between periods were primarily due to fewer third-party oil purchases and 2018, respectively.lower compression expenses.
Taxes Other Than Income
Taxes other than income includes production, ad valoremwere $15.5 million for the combined Predecessor and franchise taxes. Taxes other than income decreased $5.3Successor periods included within the three months ended September 30, 2020, compared to $22.0 million (20%) during the three months ended September 30, 2019, compared to2019. Taxes other than income were $45.6 million for the same prior-year periodcombined Predecessor and decreased $10.6 million (13%) duringSuccessor periods included within the nine months ended September 30, 2019,2020, compared to $71.3 million for the same periodnine months ended September 30, 2019. The decreases in 2018,both periods when compared to 2019 are due primarily to a decrease in production taxes resulting from lower oil and natural gas revenues.
General and Administrative Expenses (“G&A”)
|
| | | | | | | | | | | | | |
| | Successor | | | Predecessor |
| | Period from Sept. 19, 2020 through | | | Period from July 1, 2020 through | | Three Months Ended |
In thousands, except per-BOE data and employees | | Sept. 30, 2020 | | | Sept. 18, 2020 | | Sept. 30, 2019 |
Gross cash compensation and administrative costs | | $ | 5,590 |
| | | $ | 41,464 |
| | $ | 53,969 |
|
Gross stock-based compensation | | — |
| | | 880 |
| | 3,983 |
|
Operator labor and overhead recovery charges | | (3,343 | ) | | | (21,560 | ) | | (29,865 | ) |
Capitalized exploration and development costs | | (512 | ) | | | (5,771 | ) | | (9,821 | ) |
Net G&A expense | | $ | 1,735 |
| | | $ | 15,013 |
| | $ | 18,266 |
|
| | | | | | | |
G&A per BOE | | | | | |
| | |
|
Net cash administrative costs | | $ | 2.90 |
| | | $ | 3.64 |
| | $ | 2.94 |
|
Net stock-based compensation | | — |
| | | 0.14 |
| | 0.58 |
|
Net G&A expenses | | $ | 2.90 |
| | | $ | 3.78 |
| | $ | 3.52 |
|
| | | | | | | |
Employees as of period end | | 663 |
| | | 662 |
| | 826 |
|
32
Denbury Resources Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
General and Administrative Expenses (“G&A”)
| | | | Three Months Ended | | Nine Months Ended | | Successor | | | Predecessor |
| | September 30, | | September 30, | | Period from Sept. 19, 2020 through | | | Period from Jan. 1, 2020 through | | Nine Months Ended |
In thousands, except per-BOE data and employees | | 2019 | | 2018 | | 2019 | | 2018 | |
In thousands, except per-BOE data | | | Sept. 30, 2020 | | | Sept. 18, 2020 | | Sept. 30, 2019 |
Gross cash compensation and administrative costs | | $ | 53,969 |
| | $ | 57,765 |
| | $ | 162,589 |
| | $ | 172,287 |
| | $ | 5,590 |
| | | $ | 137,096 |
| | $ | 162,589 |
|
Gross stock-based compensation | | 3,983 |
| | 4,597 |
| | 12,958 |
| | 11,126 |
| | — |
| | | 5,771 |
| | 12,958 |
|
Operator labor and overhead recovery charges | | (29,865 | ) | | (31,586 | ) | | (90,480 | ) | | (94,910 | ) | | (3,343 | ) | | | (74,780 | ) | | (90,480 | ) |
Capitalized exploration and development costs | | (9,821 | ) | | (9,197 | ) | | (30,370 | ) | | (27,280 | ) | | (512 | ) | | | (19,565 | ) | | (30,370 | ) |
Net G&A expense | | $ | 18,266 |
| | $ | 21,579 |
| | $ | 54,697 |
| | $ | 61,223 |
| | $ | 1,735 |
| | | $ | 48,522 |
| | $ | 54,697 |
|
| | | | | | | | | | | | | | | |
G&A per BOE | | |
| | |
| | |
| | |
| | |
| | | |
| | |
|
Net cash administrative costs | | $ | 2.94 |
| | $ | 3.31 |
| | $ | 2.81 |
| | $ | 3.18 |
| | $ | 2.90 |
| | | $ | 3.26 |
| | $ | 2.81 |
|
Net stock-based compensation | | 0.58 |
| | 0.65 |
| | 0.62 |
| | 0.53 |
| | — |
| | | 0.30 |
| | 0.62 |
|
Net G&A expenses | | $ | 3.52 |
| | $ | 3.96 |
| | $ | 3.43 |
| | $ | 3.71 |
| | $ | 2.90 |
| | | $ | 3.56 |
| | $ | 3.43 |
|
| | | | | | | | | |
Employees as of September 30 | | 826 |
| | 847 |
| | | | | |
Our net G&A expenses on an absolute-dollar basis decreased $3.3were $16.7 million (15%)for the combined Predecessor and $6.5 million (11%), or $0.44 (11%) and $0.28 (8%) on a per-BOE basis, duringSuccessor periods included within the three months ended September 30, 2020, a decrease of $1.5 million (8%) from the three months ended September 30, 2019, and net G&A expenses on an absolute-dollar basis were $50.3 million for the combined Predecessor and Successor periods included within the nine months ended September 30, 2019, respectively,2020, a decrease of $4.4 million (8%) from the nine months ended September 30, 2019. The decreases in net G&A expenses during 2020 compared to the samethree and nine month periods in 2018,ended September 30, 2019, were primarily due to lower overall employee compensation and related costs due to reduced employee headcount, partially offset by lower G&A recoveries related to operator labor and overhead, and capitalized exploration and development costs which increased net G&A expense as a result of reductions in the number of employees, shut-in production and fewer producing wells in the current periods. On the Emergence Date, the Predecessor’s unvested shares were cancelled, resulting in the acceleration of stock compensation expense during the Predecessor period of $4.6 million; thereby, no stock-based compensation expense will be recognized in the Successor period until additional shares are granted. Also on the Emergence Date and pursuant to the terms of the Plan and the Confirmation Order, we adopted a framework for a management incentive plan which will reserve primarily for employees and directors a pool of shares of new common stock representing up to 10% of Denbury common stock, determined on a fully diluted and fully distributed basis, with initial awards from this pool scheduled to be issued within 60 days of emergence.
Compared to the second quarter of 2020, net G&A expenses decreased $7.0 million primarily due to the second quarter of 2020 including additional compensation-related expenses related to modifications in our continued focus on cost reduction efforts and reductioncompensation program which resulted in performance-based compensation.additional bonus accruals (see further discussion in Note 9, Stock Compensation, to the Unaudited Condensed Consolidated Financial Statements).
Our well operating agreements allow us, when we are the operator, to charge a well with a specified overhead rate during the drilling phase and also to charge a monthly fixed overhead rate for each producing well. In addition, salaries associated with field personnel are initially recorded as gross cash compensation and administrative costs and subsequently reclassified to lease operating expenses or capitalized to field development costs to the extent those individuals are dedicated to oil and gas production, exploration, and development activities.
Denbury Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Interest and Financing Expenses
| | | | Three Months Ended | | Nine Months Ended | | Successor | | | Predecessor |
| | September 30, | | September 30, | | Period from Sept. 19, 2020 through | | | Period from July 1, 2020 through | | Three Months Ended |
In thousands, except per-BOE data and interest rates | | 2019 | | 2018 | | 2019 | | 2018 | | Sept. 30, 2020 | | | Sept. 18, 2020 | | Sept. 30, 2019 |
Cash interest(1) | | $ | 48,297 |
| | $ | 46,515 |
| | $ | 144,616 |
| | $ | 138,660 |
| | $ | 403 |
| | | $ | 17,734 |
| | $ | 48,297 |
|
Less: interest not reflected as expense for financial reporting purposes(1) | | (21,372 | ) | | (21,186 | ) | | (64,006 | ) | | (64,849 | ) | | — |
| | | (6,976 | ) | | (21,372 | ) |
Noncash interest expense | | 1,060 |
| | 2,712 |
| | 3,517 |
| | 4,980 |
| | 114 |
| | | 347 |
| | 1,060 |
|
Amortization of debt discount(2) | | 3,646 |
| | — |
| | 4,090 |
| | — |
| | — |
| | | 1,303 |
| | 3,646 |
|
Less: capitalized interest | | (8,773 | ) | | (9,514 | ) | | (27,545 | ) | | (26,817 | ) | | (183 | ) | | | (4,704 | ) | | (8,773 | ) |
Interest expense, net | | $ | 22,858 |
| | $ | 18,527 |
| | $ | 60,672 |
| | $ | 51,974 |
| | $ | 334 |
| | | $ | 7,704 |
| | $ | 22,858 |
|
Interest expense, net per BOE | | $ | 4.40 |
| | $ | 3.40 |
| | $ | 3.80 |
| | $ | 3.15 |
| | $ | 0.56 |
| | | $ | 1.94 |
| | $ | 4.40 |
|
Average debt principal outstanding(3) | | $ | 2,374,422 |
| | $ | 2,542,712 |
| | $ | 2,491,015 |
| | $ | 2,611,225 |
| | $ | 185,877 |
| | | $ | 815,025 |
| | $ | 2,374,422 |
|
Average cash interest rate(4) | | 8.1 | % | | 7.3 | % | | 7.7 | % | | 7.1 | % | | 6.6 | % | | | 10.0 | % | | 8.1 | % |
|
| | | | | | | | | | | | | |
| | Successor | | | Predecessor |
| | Period from Sept. 19, 2020 through | | | Period from Jan. 1, 2020 through | | Nine Months Ended |
In thousands, except per-BOE data and interest rates | | Sept. 30, 2020 | | | Sept. 18, 2020 | | Sept. 30, 2019 |
Cash interest(1) | | $ | 403 |
| | | $ | 108,824 |
| | $ | 144,616 |
|
Less: interest not reflected as expense for financial reporting purposes(1) | | — |
| | | (49,243 | ) | | (64,006 | ) |
Noncash interest expense | | 114 |
| | | 2,439 |
| | 3,517 |
|
Amortization of debt discount(2) | | — |
| | | 9,132 |
| | 4,090 |
|
Less: capitalized interest | | (183 | ) | | | (22,885 | ) | | (27,545 | ) |
Interest expense, net | | $ | 334 |
| | | $ | 48,267 |
| | $ | 60,672 |
|
Interest expense, net per BOE | | $ | 0.56 |
| | | $ | 3.54 |
| | $ | 3.80 |
|
Average debt principal outstanding(3) | | $ | 185,877 |
| | | $ | 1,767,605 |
| | $ | 2,491,015 |
|
Average cash interest rate(4) | | 6.6 | % | | | 8.6 | % | | 7.7 | % |
| |
(1) | Cash interest includes the portion of interest on certain debt instruments accounted for as a reduction of debt for GAAP financial reporting purposes in accordance with Financial Accounting Standards Board Codification (“FASC”)FASC 470-60, Troubled Debt Restructuring by Debtors. The portion of interest treated as a reduction of debt relatesrelated to our 2021the Predecessor’s 9% Senior Secured Second Lien Notes due 2021 and 9¼% Senior Secured Second Lien Notes due 2022 (the “2022 Senior Secured Notes”), and our previously2022. Amounts remaining in future interest payable were written-off to “Reorganization items, net” in the Unaudited Condensed Consolidated Statements of Operations on the Petition Date. |
Denbury Resources Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
outstanding 3½% Convertible Senior Notes due 2024 and 5% Convertible Senior Notes due 2023. See below for further discussion.
| |
(2) | Represents amortization of debt discounts of $1.2$0.4 million and $1.4$3.0 million related to the 7¾% Senior Secured Second Lien Notes due 2024 (the “7¾% Senior Secured Notes”) during the threePredecessor periods July 1, 2020 through September 18, 2020 and nine months endedJanuary 1, 2020 through September 30, 2019,18, 2020, respectively, and $2.4$0.9 million and $2.7$6.1 million related to the 20246⅜% Convertible Senior Notes due 2024 (the “2024 Convertible Senior Notes”) during the threePredecessor periods July 1, 2020 through September 18, 2020 and nine months endedJanuary 1, 2020 through September 30, 2019,18, 2020, respectively. Remaining debt discounts were written-off to “Reorganization items, net” in the Unaudited Condensed Consolidated Statements of Operations on the Petition Date. |
| |
(3) | Excludes debt discounts related to our 7¾% Senior Secured Notes and 2024 Convertible Senior Notes. |
| |
(4) | Includes commitment fees but excludes debt issue costs and amortization of discount. |
As reflected inCash interest was $18.1 million for the table above, cash interest expensecombined Predecessor and Successor periods included within the three months ended September 30, 2020, compared to $48.3 million during the three months ended September 30, 2019. Cash interest was $109.2 million for the combined Predecessor and Successor periods included within the nine months ended September 30, 2019 increased $1.8 million (4%) and $6.0 million (4%), respectively, when2020, compared to the prior-year periods due primarily to an increase in our weighted-average interest rate.
Future interest payable related to our 2021 Senior Secured Notes and 2022 Senior Secured Notes is accounted for in accordance with FASC 470-60, Troubled Debt Restructuring by Debtors, whereby most of the future interest was recorded as debt as of the transaction date, which will be reduced as semiannual interest payments are made. Future interest payable recorded as debt totaled $190.4 million as of September 30, 2019. Therefore, interest expense reflected in our Unaudited Condensed Consolidated Statements of Operations will be approximately $86 million lower annually than the actual cash interest payments on our 2021 Senior Secured Notes and 2022 Senior Secured Notes.
As more fully described in Note 4, Long-Term Debt, to the Unaudited Condensed Consolidated Financial Statements, the June 2019 debt exchange transactions were accounted for in accordance with FASC 470-50, Modifications and Extinguishments, whereby our new 7¾% Senior Secured Notes and new 2024 Convertible Senior Notes were recorded on our balance sheet at discounts to their principal amounts of $29.6 million and $79.9 million, respectively. These debt discounts will be amortized as interest expense over the terms of the notes; therefore, future interest expense reflected in our Unaudited Condensed Consolidated Statements of Operations will be higher than the actual cash interest payments on our new 7¾% Senior Secured Notes and new 2024 Convertible Senior Notes by approximately $8 million in 2019, $16 million in 2020, $19 million in 2021, $21 million in 2022, $25 million in 2023 and $21 million in 2024.
Depletion, Depreciation, and Amortization (“DD&A”)
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 30, | | September 30, |
In thousands, except per-BOE data | | 2019 | | 2018 | | 2019 | | 2018 |
Oil and natural gas properties | | $ | 39,304 |
| | $ | 32,559 |
| | $ | 116,249 |
| | $ | 97,788 |
|
CO2 properties, pipelines, plants and other property and equipment | | 15,760 |
| | 18,757 |
| | 54,376 |
| | 58,923 |
|
Total DD&A | | $ | 55,064 |
| | $ | 51,316 |
| | $ | 170,625 |
| | $ | 156,711 |
|
| | | | | | | | |
DD&A per BOE | | |
| | |
| | |
| | |
|
Oil and natural gas properties | | $ | 7.57 |
| | $ | 5.98 |
| | $ | 7.29 |
| | $ | 5.92 |
|
CO2 properties, pipelines, plants and other property and equipment | | 3.03 |
| | 3.45 |
| | 3.40 |
| | 3.57 |
|
Total DD&A cost per BOE | | $ | 10.60 |
| | $ | 9.43 |
| | $ | 10.69 |
| | $ | 9.49 |
|
The increase in our oil and natural gas properties depletion during the three and nine months ended September 30, 2019, when compared to the same periods in 2018, was primarily due to an increase in depletable costs resulting from increases in our capitalized costs and future development costs associated with our reserves base.
Denbury Resources Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
to $144.6 million during the nine months ended September 30, 2019. The decreases between periods were primarily due to a decrease in the average debt principal outstanding, with the Successor period reflecting the full extinguishment of all outstanding obligations under the senior secured second lien notes, convertible senior notes, and senior subordinated notes on the Emergence Date, pursuant to the terms of the Plan, relieving approximately $2.1 billion of debt by issuing equity and/or warrants in the Successor to the holders of that debt. As a result, only interest expense associated with the Predecessor’s pipeline financings, capital leases and Senior Secured Superpriority Debtor-in-Possession Credit Agreement were recognized in interest expense during August and September 2020.
Depletion, Depreciation, and Amortization (“DD&A”)
|
| | | | | | | | | | | | | |
| | Successor | | | Predecessor |
| | Period from Sept. 19, 2020 through | | | Period from July 1, 2020 through | | Three Months Ended |
In thousands, except per-BOE data | | Sept. 30, 2020 | | | Sept. 18, 2020 | | Sept. 30, 2019 |
Oil and natural gas properties | | $ | 4,105 |
| | | $ | 21,636 |
| | $ | 39,304 |
|
CO2 properties, pipelines, plants and other property and equipment | | 1,178 |
| | | 12,890 |
| | 15,760 |
|
Accelerated depreciation charge(1) | | — |
| | | 1,791 |
| | — |
|
Total DD&A | | $ | 5,283 |
| | | $ | 36,317 |
| | $ | 55,064 |
|
| | | | | | | |
DD&A per BOE | | | | | |
| | |
|
Oil and natural gas properties | | $ | 6.86 |
| | | $ | 5.45 |
| | $ | 7.57 |
|
CO2 properties, pipelines, plants and other property and equipment | | 1.97 |
| | | 3.24 |
| | 3.03 |
|
Accelerated depreciation charge(1) | | — |
| | | 0.45 |
| | — |
|
Total DD&A cost per BOE | | $ | 8.83 |
| | | $ | 9.14 |
| | $ | 10.60 |
|
| | | | | | | |
Write-down of oil and natural gas properties | | $ | — |
| | | $ | 261,677 |
| | $ | — |
|
|
| | | | | | | | | | | | | |
| | Successor | | | Predecessor |
| | Period from Sept. 19, 2020 through | | | Period from Jan. 1, 2020 through | | Nine Months Ended |
In thousands, except per-BOE data | | Sept. 30, 2020 | | | Sept. 18, 2020 | | Sept. 30, 2019 |
Oil and natural gas properties | | $ | 4,105 |
| | | $ | 104,495 |
| | $ | 116,249 |
|
CO2 properties, pipelines, plants and other property and equipment | | 1,178 |
| | | 44,939 |
| | 54,376 |
|
Accelerated depreciation charge(1) | | — |
| | | 39,159 |
| | — |
|
Total DD&A | | $ | 5,283 |
| | | $ | 188,593 |
| | $ | 170,625 |
|
| | | | | | | |
DD&A per BOE | | |
| | | |
| | |
|
Oil and natural gas properties | | $ | 6.86 |
| | | $ | 7.66 |
| | $ | 7.29 |
|
CO2 properties, pipelines, plants and other property and equipment | | 1.97 |
| | | 3.30 |
| | 3.40 |
|
Accelerated depreciation charge(1) | | — |
| | | 2.87 |
| | — |
|
Total DD&A cost per BOE | | $ | 8.83 |
| | | $ | 13.83 |
| | $ | 10.69 |
|
| | | | | | | |
Write-down of oil and natural gas properties | | $ | — |
| | | $ | 996,658 |
| | $ | — |
|
| |
(1) | Represents an accelerated depreciation charge related to capitalized amounts associated with unevaluated properties that were transferred to the full cost pool. |
Denbury Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
DD&A expense was $41.6 million for the combined Predecessor and Successor periods included within the three months ended September 30, 2020, compared to $55.1 million during the three months ended September 30, 2019, with the decrease primarily due to a decrease in oil and natural gas properties depletion due to lower depletable costs, as well as lower CO2 properties, pipelines, plants and other property and equipment DD&A as a result of lower CO2 volumes from our CO2 sources. DD&A expense was $193.9 million for the combined Predecessor and Successor periods included within the nine months ended September 30, 2020, compared to $170.6 million during the nine months ended September 30, 2019, with the increase primarily due to an accelerated depreciation charge of $37.4 million related to assets associated with impaired unevaluated properties that were transferred to the full cost pool during the first quarter of 2020, partially offset by a decrease in oil and natural gas properties depletion due to lower depletable costs, as well as lower CO2 properties, pipelines, plants and other property and equipment DD&A as a result of lower CO2 volumes from our CO2 sources.
Full Cost Pool Ceiling Test
Under full cost accounting rules, we are required each quarter to perform a ceiling test calculation. Under these rules, the full cost ceiling value is calculated using the average first-day-of-the-month oil and natural gas price for each month during a 12-month rolling period prior to the end of a particular reporting period. The first-day-of-the-month oil prices for the preceding 12 months, after adjustments for market differentials by field, averaged $40.08 per Bbl as of September 18, 2020, $44.74 per Bbl as of June 30, 2020 and $55.17 per Bbl as of March 31, 2020. In addition, the first-day-of-the-month natural gas prices for the preceding 12 months, after adjustments for market differentials by field, averaged $1.72 per MMBtu as of September 18, 2020, $1.91 per MMBtu as of June 30, 2020 and $1.68 per MMBtu as of March 31, 2020. While representative oil prices at March 31, 2020 were roughly consistent with adjusted prices used to calculate the December 31, 2019 full cost ceiling value, the decline in NYMEX oil prices in late March 2020 due to OPEC supply pressures and a reduction in worldwide oil demand amid the COVID-19 pandemic contributed to the impairment and transfer of $244.9 million of our unevaluated costs to the full cost amortization base during the three months ended March 31, 2020. Primarily as a result of adding these additional costs to the amortization base, we recognized a full cost pool ceiling test write-down of $72.5 million during the three months ended March 31, 2020. In addition, as a result of the precipitous decline in NYMEX oil prices, we recognized additional full cost pool ceiling test write-downs of $662.4 million during the three months ended June 30, 2020 and $261.7 million during the period from July 1, 2020 through September 18, 2020.
Based upon fresh start accounting, oil and gas properties were recorded at fair value as of September 18, 2020. See Note 2, Fresh Start Accounting, to the Unaudited Condensed Consolidated Financial Statements for further discussion. There was no full cost pool ceiling test write-down for the period from September 19, 2020 through September 30, 2020.
Impairment Assessment of Long-lived Assets
We test long-lived assets for impairment whenever events or changes in circumstances indicate that their carrying value may not be recoverable. These long-lived assets, which are not subject to our full cost pool ceiling test, are principally comprised of our capitalized CO2 properties and pipelines. Given the significant recent declines in NYMEX oil prices to approximately $20 per Bbl in late March 2020 due to OPEC supply pressures and a reduction in worldwide oil demand amid the COVID-19 pandemic, we performed a long-lived asset impairment test for our two long-lived asset groups (Gulf Coast region and Rocky Mountain region) as of March 31, 2020.
We perform our long-lived asset impairment test by comparing the net carrying costs of our two long-lived asset groups to the respective expected future undiscounted net cash flows that are supported by these long-lived assets which include production of our probable and possible oil and natural gas reserves. The portion of our capitalized CO2 costs related to CO2 reserves and CO2 pipelines that we estimate will be consumed in the process of producing our proved oil and natural gas reserves is included in the full cost pool ceiling test as a reduction to future net revenues. The remaining net capitalized costs that are not included in the full cost pool ceiling test, and related intangible assets, are subject to long-lived asset impairment testing. These costs totaled approximately $1.3 billion as of March 31, 2020. If the undiscounted net cash flows are below the net carrying costs for an asset group, we must record an impairment loss by the amount, if any, that net carrying costs exceed the fair value of the long-lived asset group. The undiscounted net cash flows for our asset groups exceeded the net carrying costs; thus, step two of the impairment test was not required and no impairment was recorded.
Significant assumptions impacting expected future undiscounted net cash flows include projections of future oil and natural gas prices (management’s assumption of 2020 oil prices at strip pricing, gradually increasing to a long-term oil price of $65 per
Denbury Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Bbl beginning in 2026, and gas futures pricing were used for the March 31, 2020 analysis), projections of estimated quantities of oil and natural gas reserves, projections of future rates of production, timing and amount of future development and operating costs, projected availability and cost of CO2, projected recovery factors of tertiary reserves and risk-adjustment factors applied to the cash flows. We performed a qualitative assessment as of June 30, 2020 and September 18, 2020 and determined there were no material changes to our key cash flow assumptions and no triggering events since the analysis performed as of March 31, 2020; therefore, no impairment test was performed for the second quarter of 2020 or for the period ending September 18, 2020.
Reorganization Items, Net
Reorganization items represent (i) expenses incurred during the Chapter 11 Restructuring subsequent to the Petition Date as a direct result of the Plan, (ii) gains or losses from liabilities settled, and (iii) fresh start accounting adjustments and are recorded in “Reorganization items, net” in our Unaudited Condensed Consolidated Statements of Operations. Professional service provider charges associated with our restructuring that were incurred before the Petition Date and after the Emergence Date are recorded in “Other expenses” in our Unaudited Condensed Consolidated Statements of Operations. The following table summarizes the losses (gains) on reorganization items, net:
|
| | | | |
| | Predecessor |
| | Period from July 1, 2020 through |
In thousands | | Sept. 18, 2020 |
Gain on settlement of liabilities subject to compromise | | $ | (1,024,864 | ) |
Fresh start accounting adjustments | | 1,834,423 |
|
Professional service provider fees and other expenses | | 11,267 |
|
Success fees for professional service providers | | 9,700 |
|
Loss on reject contracts and leases | | 10,989 |
|
Valuation adjustments to debt classified as subject to compromise | | 757 |
|
DIP credit agreement fees | | 3,107 |
|
Accelerated and unvested stock compensation | | 4,601 |
|
Total reorganization items, net | | $ | 849,980 |
|
Other Expenses
Other expenses totaled $24.2 million for the combined Predecessor and Successor periods included within the three months ended September 30, 2020, and $38.0 million for the combined Predecessor and Successor periods included within the nine months ended September 30, 2020. Other expenses during 2020 primarily are comprised of $24.1 million of professional fees associated with restructuring activities, $4.2 million for the write-off of certain trade receivables, $3.8 million of costs associated with the Delta-Tinsley CO2 pipeline incident, and $1.6 million of costs associated with the APMTG Helium, LLC helium supply contract ruling. The 2019 amounts are primarily comprised of $1.5 million of transaction costs related to the Predecessor’s privately negotiated debt exchanges, $1.3 million of acquisition transaction costs, $1.3 million of expense related to an impairment of assets, and $1.3 million of costs associated with the APMTG Helium, LLC helium supply contract ruling.
Denbury Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Income Taxes
| | | | Three Months Ended | | Nine Months Ended | | Successor | | | Predecessor |
| | September 30, | | September 30, | | Period from Sept. 19, 2020 through | | | Period from July 1, 2020 through | | Three Months Ended |
In thousands, except per-BOE amounts and tax rates | | 2019 | | 2018 | | 2019 | | 2018 | | Sept. 30, 2020 | | | Sept. 18, 2020 | | Sept. 30, 2019 |
Current income tax expense (benefit) | | $ | (859 | ) | | $ | (1,888 | ) | | $ | 1,214 |
| | $ | (3,674 | ) | | $ | 6 |
| | | $ | (1,451 | ) | | $ | (859 | ) |
Deferred income tax expense | | 37,909 |
| | 17,504 |
| | 90,454 |
| | 42,741 |
| |
Total income tax expense | | $ | 37,050 |
| | $ | 15,616 |
| | $ | 91,668 |
| | $ | 39,067 |
| |
Average income tax expense per BOE | | $ | 7.13 |
| | $ | 2.87 |
| | $ | 5.75 |
| | $ | 2.37 |
| |
Deferred income tax expense (benefit) | | | 6 |
| | | (302,356 | ) | | 37,909 |
|
Total income tax expense (benefit) | | | $ | 12 |
| | | $ | (303,807 | ) | | $ | 37,050 |
|
Average income tax expense (benefit) per BOE | | | $ | 0.02 |
| | | $ | (76.47 | ) | | $ | 7.13 |
|
Effective tax rate | | 33.7 | % | | 16.6 | % | | 32.1 | % | | 20.9 | % | | 0.4 | % | | | 27.3 | % | | 33.7 | % |
Total net deferred tax liability | | $ | 400,213 |
|
| $ | 249,264 |
| | | | | | $ | 3,836 |
| | | |
| $ | 400,213 |
|
|
| | | | | | | | | | | | | |
| | Successor | | | Predecessor |
| | Period from Sept. 19, 2020 through | | | Period from Jan. 1, 2020 through | | Nine Months Ended |
In thousands, except per-BOE amounts and tax rates | | Sept. 30, 2020 | | | Sept. 18, 2020 | | Sept. 30, 2019 |
Current income tax expense | | $ | 6 |
| | | $ | (7,260 | ) | | $ | 1,214 |
|
Deferred income tax expense | | 6 |
| | | (408,869 | ) | | 90,454 |
|
Total income tax expense | | $ | 12 |
| | | $ | (416,129 | ) | | $ | 91,668 |
|
Average income tax expense per BOE | | $ | 0.02 |
| | | $ | (30.52 | ) | | $ | 5.75 |
|
Effective tax rate | | 0.4 | % | | | 22.5 | % | | 32.1 | % |
We evaluate our estimated annual effective income tax rate based on current and forecasted business results and enacted tax laws on a quarterly basis and apply this tax rate to our ordinary income or loss to calculate our estimated tax liability or benefit. Our income taxes are based on an estimated statutory rate of approximately 25% in 20192020 and 2018.2019. As provided for under FASC 740-270-35-2, we determined the actual effective tax rate for the Predecessor period from January 1, 2020 through September 18, 2020 was the best estimate of our annual effective tax rate. Our effective tax rate for the three and nine months ended September 30, 2019Predecessor period was higherlower than our estimated statutory rate, primarily due to the establishment of a valuation allowance againston our federal and state deferred tax assets after the application of fresh start accounting.
We have evaluated the impact of the Plan of Reorganization, including the change in control, resulting from our emergence from bankruptcy. The cancellation of debt income (“CODI”) realized upon emergence is excludable from income but results in a portionreduction or elimination of available net operating loss carryforwards, tax credit carryforwards and tax basis in assets, in accordance with the attribute reduction and ordering rules of Section 108 of the Internal Revenue Code of 1986 (the “Code”). The reduction in the Company’s tax attributes for excludable CODI does not occur until the last day of the Company’s tax year, December 31, 2020. Accordingly, the tax adjustments recorded in the Predecessor period represent our best estimate using all available information at September 30, 2020. Thus, the Company expects to fully reduce its federal net operating loss carryforwards, enhanced oil recovery credits, research and development tax credits, and a partial reduction of tax basis in assets. The final tax impacts of the bankruptcy emergence, as well as the Plan of Reorganization’s overall effect on the Company’s tax attributes will be refined based on the Company’s final financial position at December 31, 2020 as required under the Code. The Company is exploring an election under the ordering rules of the Code to first reduce tax basis in assets, followed by net operating losses and tax credits. The final tax impact on the Company’s tax attributes could change from the current estimates.
As the tax basis of our business interest expense deduction that we estimate will be disallowed. The Tax Cutsassets, primarily our oil and Jobs Act (“The Act”), which was enacted on December 22, 2017, revisedgas properties, is in excess of the rules regardingcarrying value, as adjusted in fresh start accounting, the deductibilitySuccessor is in a net deferred tax asset position. We evaluated our deferred tax assets in light of business interest expense by limiting that deduction to 30% of adjusted taxable income (as defined), with disallowed amounts being carried forward to future taxable years. Based on our evaluation, using information existingall available evidence as of the balance sheet date, including the tax impacts of the near-term abilityChapter 11 Restructuring and the full reduction of net operating losses and tax credits and partial reduction of tax basis in assets (collectively “tax attributes”). Given our cumulative
Denbury Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
loss position and the continued low oil price environment, we recorded a total valuation allowance of $129.4 million on our underlying deferred tax assets, consisting of $43.8 million on our federal deferred tax assets and $85.6 million on our state deferred tax assets as of September 18, 2020. Valuation allowances totaling $68.6 million and $13.5 million were recorded for our State of Louisiana and State of Mississippi deferred tax assets, respectively. A $3.8 million state deferred tax liability is recorded on the Successor balance sheet. For the Successor period, we continue to utilizeoffset our deferred tax assets with a valuation allowance. Thus, the income tax benefitsexpense associated with our 2019 disallowed business interest expense,the Successor’s pre-tax book income was offset by a change in valuation allowance. As of September 30, 2020, we have established ahad no federal net operating loss carryforwards and state net operating loss carryforwards of $52.3 million, all of which were fully offset with the valuation allowance through our annual estimated effective income tax rate for that portion of our business interest expense that is currently expected to exceed the allowed limitation under The Act.allowance.
The current income tax benefits for the Predecessor period ended September 18, 2020 and for the three and nine monthsmonth period ended September 30, 2018,2019 represent amounts estimated to be receivable resulting from alternative minimum tax credits and certain state tax obligations.
As We received our 2019 federal income tax refund of $9.5 million in late September 30, 2019, we had estimated amounts available for carry forward of $55.5 million of enhanced oil recovery credits related to our tertiary operations, $21.6 million of research and development credits, and $18.9 million of alternative minimum tax credits. The alternative minimum tax credits are fully refundable by 2021 and are recorded as a receivable on the balance sheet. The enhanced oil recovery credits and research and development credits do not begin to expire until 2025 and 2031, respectively.
Denbury Resources Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
2020.
Per-BOE Data
The following table summarizes our cash flow and results of operations on a per-BOE basis for the comparative periods. Each of the significant individual components is discussed above.
| | | | Three Months Ended | | Nine Months Ended | | Three Months Ended | | Nine Months Ended |
| | September 30, | | September 30, | | September 30, | | September 30, |
Per-BOE data | | 2019 | | 2018 | | 2019 | | 2018 | | 2020 | | 2019 | | 2020 | | 2019 |
Oil and natural gas revenues | | $ | 56.46 |
| | $ | 69.73 |
| | $ | 57.54 |
| | $ | 66.31 |
| | $ | 38.37 |
| | $ | 56.46 |
| | $ | 36.15 |
| | $ | 57.54 |
|
Receipt (payment) on settlements of commodity derivatives | | 1.56 |
| | (11.32 | ) | | 0.92 |
| | (9.07 | ) | |
Receipt on settlements of commodity derivatives | | | 3.90 |
| | 1.56 |
| | 6.19 |
| | 0.92 |
|
Lease operating expenses | | (22.70 | ) | | (22.50 | ) | | (22.64 | ) | | (21.87 | ) | | (15.57 | ) | | (22.70 | ) | | (18.39 | ) | | (22.64 | ) |
Production and ad valorem taxes | | (3.89 | ) | | (4.66 | ) | | (4.12 | ) | | (4.59 | ) | | (3.00 | ) | | (3.89 | ) | | (2.84 | ) | | (4.12 | ) |
Transportation and marketing expenses | | (1.94 | ) | | (2.04 | ) | | (2.01 | ) | | (1.92 | ) | | (2.08 | ) | | (1.94 | ) | | (2.00 | ) | | (2.01 | ) |
Production netback | | 29.49 |
| | 29.21 |
| | 29.69 |
| | 28.86 |
| | 21.62 |
| | 29.49 |
| | 19.11 |
| | 29.69 |
|
CO2 sales, net of operating and exploration expenses | | 1.56 |
| | 1.37 |
| | 1.47 |
| | 1.26 |
| |
CO2 sales, net of operating and discovery expenses | | | 1.38 |
| | 1.56 |
| | 1.35 |
| | 1.47 |
|
General and administrative expenses | | (3.52 | ) | | (3.96 | ) | | (3.43 | ) | | (3.71 | ) | | (3.66 | ) | | (3.52 | ) | | (3.53 | ) | | (3.43 | ) |
Interest expense, net | | (4.40 | ) | | (3.40 | ) | | (3.80 | ) | | (3.15 | ) | | (1.76 | ) | | (4.40 | ) | | (3.42 | ) | | (3.80 | ) |
Reorganization items settled in cash | | | (8.55 | ) | | — |
| | (2.75 | ) | | — |
|
Other | | 1.09 |
| | 1.49 |
| | 0.48 |
| | 0.61 |
| | (2.72 | ) | | 1.09 |
| | (0.74 | ) | | 0.48 |
|
Changes in assets and liabilities relating to operations | | 0.93 |
| | 2.46 |
| | (2.88 | ) | | (0.04 | ) | | 9.77 |
| | 0.93 |
| | 0.26 |
| | (2.88 | ) |
Cash flows from operations | | 25.15 |
| | 27.17 |
| | 21.53 |
| | 23.83 |
| | 16.08 |
| | 25.15 |
| | 10.28 |
| | 21.53 |
|
DD&A | | (10.60 | ) | | (9.43 | ) | | (10.69 | ) | | (9.49 | ) | |
DD&A – excluding accelerated depreciation charge | | | (8.71 | ) | | (10.60 | ) | | (10.87 | ) | | (10.69 | ) |
DD&A – accelerated depreciation charge(1) | | | (0.39 | ) | | — |
| | (2.75 | ) | | — |
|
Write-down of oil and natural gas properties | | | (57.25 | ) | | — |
| | (70.03 | ) | | — |
|
Deferred income taxes | | (7.30 | ) | | (3.21 | ) | | (5.67 | ) | | (2.59 | ) | | 66.14 |
| | (7.30 | ) | | 28.73 |
| | (5.67 | ) |
Gain on extinguishment of debt | | 1.13 |
| | — |
| | 6.66 |
| | — |
| | — |
| | 1.13 |
| | 1.33 |
| | 6.66 |
|
Noncash fair value gains (losses) on commodity derivatives(1) | | 6.75 |
| | 3.13 |
| | (1.89 | ) | | (2.41 | ) | |
Noncash fair value gains (losses) on commodity derivatives(2) | | | (4.03 | ) | | 6.75 |
| | 1.26 |
| | (1.89 | ) |
Noncash reorganization items, net | | | (177.40 | ) | | — |
| | (56.98 | ) | | — |
|
Other noncash items | | (1.10 | ) | | (3.26 | ) | | 2.21 |
| | (0.37 | ) | | (10.85 | ) | | (1.10 | ) | | (1.44 | ) | | 2.21 |
|
Net income | | $ | 14.03 |
| | $ | 14.40 |
| | $ | 12.15 |
| | $ | 8.97 |
| | $ | (176.41 | ) | | $ | 14.03 |
| | $ | (100.47 | ) | | $ | 12.15 |
|
| |
(1) | Represents an accelerated depreciation charge related to impaired unevaluated properties that were transferred to the full cost pool. |
Denbury Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
| |
(2) | Noncash fair value gains (losses) on commodity derivatives is a non-GAAP measure. See Operating Results Table above for a discussion of the reconciliation between noncash fair value gains (losses) on commodity derivatives to “Commodity derivatives expense (income)” in the Unaudited Condensed Consolidated Statements of Operations. |
CRITICAL ACCOUNTING POLICIES
For additional discussion of our critical accounting policies, see Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Form 10-K. Any new accounting policies or updates to existing accounting policies as a result of new accounting pronouncements have been included in the notes to the Company’s Unaudited Condensed Consolidated Financial Statements contained in this Quarterly Report on Form 10-Q.
FORWARD-LOOKING INFORMATION
The data and/or statements contained in this Quarterly Report on Form 10-Q that are not historical facts, including, but not limited to, statements found in the section Management’s Discussion and Analysis of Financial Condition and Results of Operations, and information regarding the financial position, business strategy, production and reserve growth,available sources of liquidity, possible or assumed future results of operations, and other plans and objectives for the future operations of Denbury, andprojections or assumptions as to general economic conditions, and anticipated continuation of the COVID-19 pandemic and its impact on U.S. and global oil demand are forward-looking statements, as that term is defined in Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that involve a number of risks and uncertainties. Such forward-looking statements may be or may concern, among other things, our ability to capitalize on emerging from bankruptcy and our ability to succeed on a long-term basis, the extent and length of the drop in worldwide oil demand due to the COVID-19 coronavirus, financial forecasts, future hydrocarbon prices and their volatility, current or future liquidity sources or their adequacy to support our anticipated future activities, our ability to further reduce our debt levels or extend debt maturities,possible future write-downs of oil and natural gas reserves, together with assumptions based on current and projected production levels, oil and gas prices and oilfield costs, current or future expectations
Denbury Resources Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
or estimations of our cash flows or the impact of changes in commodity prices on cash flows, availability of capital, borrowing capacity, price and availability of advantageous commodity derivative contracts or the predicted cash flow benefits therefrom, forecasted capital expenditures, drilling activity or methods, including the timing and location thereof, the nature of any future asset purchases or sales or the timing or proceeds thereof, estimated timing of commencement of CO2 flooding of particular fields or areas, including Cedar Creek Anticline (“CCA”), or the availability of capital for CCA pipeline construction, or its ultimate cost or date of completion, timing of CO2 injections and initial production responses in tertiary flooding projects, development activities, finding costs, anticipated future cost savings, capital budgets, interpretation or prediction of formation details, production rates and volumes or forecasts thereof, hydrocarbon reserve quantities and values, CO2 reserves and supply and their availability, potential reserves, barrels or percentages of recoverable original oil in place, levels of tariffs or other trade restrictions, the likelihood, timing and impact of increased interest rates, the impact of regulatory rulings or changes, anticipated outcomes of pending litigation, prospective legislation affecting the oil and gas industry, environmental regulations, mark-to-market values, competition, rates of return, estimated costs, changes in costs, future capital expenditures and overall economics, worldwide economic conditions, the likelihood and extent of an economic slowdown, and other variables surrounding operations and future plans. Such forward-looking statements generally are accompanied by words such as “plan,” “estimate,” “expect,” “predict,” “forecast,” “to our knowledge,” “anticipate,” “projected,” “preliminary,” “should,” “assume,” “believe,” “may” or other words that convey, or are intended to 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 and adversely affect current plans, anticipated actions, the timing of such actions and our 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 us or on our behalf. Among the factors that could cause actual results to differ materially are fluctuations in worldwide oil prices or in U.S. oil prices and consequently in the prices received or demand for our oil and natural gas; evolving political and military tensions in the Middle East; decisions as to production levels and/or pricing by OPEC or production levels by U.S. shale producers in future periods; levels of future capital expenditures; trade disputes and resulting tariffs or international economic sanctions; effects of our indebtedness; success of our risk management techniques; accuracy of our cost estimates; availability oraccess to and terms of credit in the commercial banking or other debt markets; fluctuations in the prices of goods and services; the uncertainty of drilling results and reserve estimates; operating hazards and remediation costs; disruption of operations and damages from well incidents, hurricanes, tropical storms, floods, forest fires, or other natural occurrences; acquisition risks; requirements for capital or its availability; conditions in the worldwide financial, trade and credit markets; general economic conditions; competition; government regulations, including changes in tax or environmental laws or regulations; and unexpected delays, as well as the risks and uncertainties inherent in oil and gas drilling and production activities or that are otherwise discussed in this quarterly report, including, without limitation, the portions referenced above, and the uncertainties set forth from time to time in our other public reports, filings and public statements including, without limitation, the Company’s most recent Form 10-K.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Debt and Interest Rate Sensitivity
As of September 30, 2019,2020, we had $2.2 billion of fixed-rate long-term debt outstanding and $50.0$85.0 million of outstanding borrowings onunder our variable-rate senior secured bank credit facility.Bank Credit Agreement. At this level of variable-rate debt, an increase or decrease of 10% in interest rates would have an immaterial effect on our interest expense. None of our existing debt hasOur Bank Credit Agreement does not have any triggers or covenants regarding our debt ratings with rating agencies, although under the NEJD financing lease, in light of credit downgrades in February 2016, we were required to provide a $41.3 million letter of credit to the lessor, which we provided on March 4, 2016. The letter of credit may be drawn upon in the event we fail to make a payment due under the pipeline financing lease agreement or upon other specified defaults set out in the pipeline financing lease agreement (filed as Exhibit 99.1 to the Form 8-K filed with the SEC on June 5, 2008). The fair values of our senior secured second lien notes, convertible senior notes, and senior subordinated notes are based on quoted market prices.agencies. The following table presents the principal and fair values of our outstanding debt as of September 30, 2019.2020.
|
| | | | | | | | | | | | | | | | | | | | | | | | |
In thousands | | 2021 | | 2022 | | 2023 | | 2024 | | Total | | Fair Value |
Variable rate debt: | | | | | | | | | | | | |
Senior Secured Bank Credit Facility (weighted average interest rate of 4.7% at September 30, 2019) | | $ | 50,000 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 50,000 |
| | $ | 50,000 |
|
Fixed rate debt: | | |
| | |
| | | | | | | | |
9% Senior Secured Second Lien Notes due 2021 | | 614,919 |
| | — |
| | — |
| | — |
| | 614,919 |
| | 579,315 |
|
9¼% Senior Secured Second Lien Notes due 2022 | | — |
| | 455,668 |
| | — |
| | — |
| | 455,668 |
| | 402,674 |
|
7¾% Senior Secured Second Lien Notes due 2024 | | — |
| | — |
| | — |
| | 531,821 |
| | 531,821 |
| | 410,832 |
|
7½% Senior Secured Second Lien Notes due 2024 | | — |
| | — |
| | — |
| | 20,641 |
| | 20,641 |
| | 14,655 |
|
6⅜% Convertible Senior Notes due 2024 | | — |
| | — |
| | — |
| | 245,548 |
| | 245,548 |
| | 145,021 |
|
6⅜% Senior Subordinated Notes due 2021 | | 51,304 |
| | — |
| | — |
| | — |
| | 51,304 |
| | 36,342 |
|
5½% Senior Subordinated Notes due 2022 | | — |
| | 83,736 |
| | — |
| | — |
| | 83,736 |
| | 42,915 |
|
4⅝% Senior Subordinated Notes due 2023 | | — |
| | — |
| | 211,695 |
| | — |
| | 211,695 |
| | 86,266 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | |
In thousands | | 2021 | | 2022 | | 2023 | | 2024 | | Total | | Fair Value |
Variable rate debt: | | | | | | | | | | | | |
Senior Secured Bank Credit Facility (weighted average interest rate of 4.0% at September 30, 2020) | | $ | — |
| | $ | — |
| | $ | — |
| | $ | 85,000 |
| | $ | 85,000 |
| | $ | 85,000 |
|
See Note 4,6, Long-Term Debt, to the Unaudited Condensed Consolidated Financial Statements for details regarding our long-term debt.
Commodity Derivative Contracts
We enter into oil derivative contracts to provide an economic hedge of our exposure to commodity price risk associated with anticipated future oil production and to provide more certainty to our future cash flows. We do not hold or issue derivative financial instruments for trading purposes. Generally, these contracts have consisted of various combinations of price floors, collars, three-way collars, fixed-price swaps, fixed-price swaps enhanced with a sold put, and basis swaps. The production that we hedge has varied from year to year depending on our levels of debt, financial strength, and expectation of future commodity prices. In order to provide a level of price protection to a portion of our oil production, we have hedged a portion of our estimated oil production through 2020 using both NYMEX and LLS fixed-price swaps and three-way collars.collars and oil production in 2021 and the first half of 2022 using NYMEX fixed-price swaps. Depending on market conditions, we may continue to add to our existing 20202021 and 2022 hedges. See also Note 5,10, Commodity Derivative Contracts, and Note 611, Fair Value Measurements, to the Unaudited Condensed Consolidated Financial Statements for additional information regarding our commodity derivative contracts. Under the terms of our Successor senior secured bank credit facility, at any point in time within the initial measurement period of August 1, 2020 through July 31, 2021, we are required to have hedges in place covering a minimum of 65% of our anticipated crude oil production for the first twelve calendar months and 35% of our anticipated crude oil production for the second twelve month period. We have until December 31, 2020 to enter into transactions for the initial measurement period to be in compliance.
All of the mark-to-market valuations used for our commodity derivatives are provided by external sources. We manage and control market and counterparty credit risk through established internal control procedures that are reviewed on an ongoing basis. We attempt to minimize credit risk exposure to counterparties through formal credit policies, monitoring procedures and diversification. All of our commodity derivative contracts are with parties that are lenders under our senior secured bank credit facility (or affiliates of such lenders). We have included an estimate of nonperformance risk in the fair value measurement of our commodity derivative contracts, which we have measured for nonperformance risk based upon credit default swaps or credit spreads.
For accounting purposes, we do not apply hedge accounting treatment to our commodity derivative contracts. This means that any changes in the fair value of these commodity derivative contracts will be charged to earnings instead of charging the effective portion to other comprehensive income and the ineffective portion to earnings.
At September 30, 2019,2020, our commodity derivative contracts were recorded at their fair value, which was a net asset of $67.1$21.6 million, a $35.1an $18.4 million increasedecrease from the $32.0$40.0 million net asset recorded at June 30, 2019,2020, and a $30.2an $18.0 million decreaseincrease from the $97.3$3.6 million net asset recorded at December 31, 2018.2019. These changes are primarily related to the expiration or early termination of commodity derivative contracts during the three and nine months ended September 30, 2019,2020, new commodity derivative contracts entered into during 20192020 for future periods, and to the changes in oil futures prices between December 31, 20182019 and September 30, 20192020.
Commodity Derivative Sensitivity Analysis
Based on NYMEX and LLS crude oil futures prices as of September 30, 20192020, and assuming both a 10% increase and decrease thereon, we would expect to receive or make payments on our crude oil derivative contracts outstanding at September 30, 2020 as shown in the following table:
| | | | Receipt / (Payment) | | Receipt / (Payment) |
In thousands | | Crude Oil Derivative Contracts | | Crude Oil Derivative Contracts |
Based on: | | | | |
Futures prices as of September 30, 2019 | | $ | 87,275 |
| |
Futures prices as of September 30, 2020 | | | $ | 21,842 |
|
10% increase in prices | | 23,998 |
| | (3,200 | ) |
10% decrease in prices | | 138,375 |
| | 46,886 |
|
Our commodity derivative contracts are used as an economic hedge of our exposure to commodity price risk associated with anticipated future production. As a result, changes in receipts or payments of our commodity derivative contracts due to changes in commodity prices as reflected in the above table would be mostly offset by a corresponding increase or decrease in the cash receipts on sales of our oil production to which those commodity derivative contracts relate.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures. As of the end of the period covered by this report, an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) was performed under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, 20192020, to ensure that information that is required to be disclosed in the reports the Company files and submits under the Securities Exchange Act of 1934 is recorded, that it is processed, summarized and reported within the time periods specified in the SEC’s rules and forms; and that information that is required to be disclosed under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.
Evaluation of Changes in Internal Control over Financial Reporting. Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, we have determined that, during the third quarter of fiscal 20192020, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
We are involved in various lawsuits, claimsThe information under Note 12, Commitments and regulatory proceedings incidentalContingencies, to our businesses. While we currently believe that the ultimate outcome of these proceedings, individually and in the aggregate, will not have a material adverse effect on our business or finances, litigation is subject to inherent uncertainties. We accrue for losses from litigation and claims if we determine that a loss is probable and the amount can be reasonably estimated.
Riley Ridge Helium Supply Contract Claim
As part of our 2010 and 2011 acquisitions of the Riley Ridge Unit and associated gas processing facility that was under construction, the Company assumed a 20-year helium supply contract under which we agreed to supply the helium separated from the full well stream by operation of the gas processing facility to a third-party purchaser, APMTG Helium, LLC (“APMTG”). The helium supply contract provides for the delivery of a minimum contracted quantity of helium, with liquidated damages payable if specified quantities of helium are not supplied in accordance with the terms of the contract. The liquidated damages are specified in the contract at up to $8.0 million per contract year and are capped at an aggregate of $46.0 million over the term of the contract.
As the gas processing facility has been shut-in since mid-2014 due to significant technical issues, we have not been able to supply helium under the helium supply contract. In a case filed in November 2014 in the Ninth Judicial District Court of Sublette County, Wyoming, APMTG claimed multiple years of liquidated damages for non-delivery of volumes of helium specified under the helium supply contract. The Company claimed that its contractual obligations were excused by virtue of events that fall within the force majeure provisions in the helium supply contract.
On March 11, 2019, the trial court entered a final judgment that a force majeure condition did exist, but the Company’s performance was excused by the force majeure provisions of the contract for only a 35-day period in 2014, and as a result the Company should pay APMTG liquidated damages and interest thereon for those time periods from contract commencement to the close of evidence (November 29, 2017) when the Company’s performance was not excused as provided in the contract. The Company has filed a notice of appeal of the trial court’s ruling to the Wyoming Supreme Court, the results and timing of which cannot be currently predicted.
The Company’s position continues to be that its contractual obligations have been and continue to be excused by events that fall within the force majeure provisions in the helium supply contract. The Company intends to continue to vigorously defend its position and pursue all of its rights.
Absent reversal of the trial court’s ruling on appeal, the Company anticipates total liquidated damages would equal the $46.0 million aggregate cap under the helium supply contract (including $14.2 million of liquidated damages for the contract years ending July 31, 2018 and July 31, 2019) plus $4.7 million of associated costs (through September 30, 2019), for a total of $50.7 million, included in “Other liabilities” in our Unaudited Condensed Consolidated Balance Sheets as of September 30, 2019.Financial Statements is incorporated herein by reference.
Environmental Protection Agency Matter Concerning Certain Fields
The Company has been in discussions with the Environmental Protection Agency (“EPA”) over the past several years regarding the EPA’s contention that it has causes of action under the Clean Water Act (“CWA”) related to releases (principally between 2008 and 2013) of oil and produced water containing small amounts of oil in the Citronelle Field in southern Alabama and several fields in Mississippi.
In September, the previously disclosed proposed Consent Decree among the Company, the United States, and the State of Mississippi resolving the allegations of CWA violations became effective upon the District Court entering the Consent Decree as a judgment of the court. The Consent Decree requires the Company to pay civil penalties totaling $3.5 million in the aggregate to the United States and the State of Mississippi, which payments have been made. The Consent Decree further requires the implementation of enhancements to the Company’s mechanical integrity program designed to minimize the occurrence and impact of any future releases at the Mississippi fields, and the performance of other relief such as enhanced training and reporting requirements with respect to the Mississippi fields.
Item 1A. Risk Factors
Please referIn addition to the risks identified below, carefully consider the risk factors under the caption “Risk Factors” under Part I, Item 1A of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018. There2019, together with all of the other information included in this Quarterly Report on Form 10-Q.
We recently emerged from bankruptcy, which could adversely affect our business and relationships.
It is possible that our having filed for bankruptcy and our recent emergence from the Chapter 11 bankruptcy proceedings could adversely affect our business and relationships with customers, employees and suppliers. Due to uncertainties, many risks exist, including the following:
key suppliers could terminate their relationship or require financial assurances or enhanced performance;
the ability to renew existing contracts and compete for new business may be adversely affected;
the ability to attract, motivate and/or retain key executives and employees may be adversely affected;
employees may be distracted from performance of their duties or more easily attracted to other employment opportunities; and
competitors may take business away from us, and our ability to attract and retain customers may be negatively impacted.
The occurrence of one or more of these events could have a material and adverse effect on our operations, financial condition and reputation. We cannot assure you that having been no material changessubject to bankruptcy protection will not adversely affect our operations in the future.
Our actual financial results after emergence from bankruptcy may not be comparable to our historical financial information as a result of the implementation of the plan of reorganization and the transactions contemplated thereby and our adoption of fresh start accounting.
In connection with the disclosure statement we filed with the bankruptcy court, and the hearing to consider confirmation of the plan of reorganization, we prepared projected financial information to demonstrate to the bankruptcy court the feasibility of the plan of reorganization and our ability to continue operations upon our emergence from bankruptcy. Those projections were prepared solely for the purpose of the bankruptcy proceedings and have not been, and will not be, updated on an ongoing basis and should not be relied upon by investors. At the time they were prepared, the projections reflected numerous assumptions concerning our anticipated future performance and with respect to prevailing and anticipated market and economic conditions that were and remain beyond our control and that may not materialize. Projections are inherently subject to substantial and numerous uncertainties and to a wide variety of significant business, economic and competitive risks and the assumptions underlying the projections and/or valuation estimates may prove to be wrong in material respects. Actual results will likely vary significantly from those contemplated by the projections. As a result, investors should not rely on these projections.
In addition, upon our emergence from bankruptcy, we adopted fresh start accounting. Accordingly, certain values and operational results of the Company’s condensed consolidated financial statements subsequent to September 18, 2020 are not comparable to those in its condensed consolidated financial statements prior to, and including September 18, 2020. The lack of comparable historical financial information may discourage investors from purchasing our common stock.
There is a limited trading market for our securities and the market price of our securities is subject to volatility.
Upon our emergence from bankruptcy, our old common stock was canceled and we issued new common stock. The market price of our common stock could be subject to wide fluctuations in response to, and the level of trading that develops with our common stock may be affected by, numerous factors, many of which are beyond our control. These factors include, among other things, our new capital structure as a result of the transactions contemplated by the plan of reorganization, our limited trading
history subsequent to our emergence from bankruptcy, our limited trading volume, the concentration of holdings of our common stock, the lack of comparable historical financial information due to our adoption of fresh start accounting, actual or anticipated variations in our operating results and cash flow, the nature and content of our earnings releases, announcements or events that impact our products, customers, competitors or markets, business conditions in our markets and the general state of the securities markets and the market for energy-related stocks, as well as general economic and market conditions and other factors that may affect our future results, including those described in this Report. No assurance can be given that an active market will develop for the common stock or as to the liquidity of the trading market for the common stock. The common stock may be traded only infrequently, and reliable market quotations may not be available. Holders of our common stock may experience difficulty in reselling, or an inability to sell, their shares. In addition, if an active trading market does not develop or is not maintained, significant sales of our common stock, or the expectation of these sales, could materially and adversely affect the market price of our common stock.
Upon our emergence from bankruptcy, the composition of our Board of Directors changed significantly.
Pursuant to the plan of reorganization, the composition of the Board changed significantly. Currently, the Board is made up of seven directors, four of whom have not previously served on the Board of the Company. The new directors have different backgrounds, experiences and perspectives from those individuals who previously served on the Board and, thus, may have different views on the issues that will determine the future of the Company. As a result, the future strategy and plans of the Company may differ materially from those of the past.
The continued COVID-19 pandemic, together with oil prices remaining at current levels, are likely to continue to negatively affect our cash flow.
The COVID-19 pandemic continues to spread and evolve, both in the United States and abroad. Its ultimate impact on our operational and financial performance will depend on future developments, including the duration and intensity of the pandemic, the actions to contain the disease or mitigate its impact, related restrictions on business activity and travel, and continued lower levels of domestic and global oil demand. The COVID-19 pandemic may also intensify the risks described in the other risk factors containeddisclosed in our Annual Report on Form 10-K10‑K for the fiscal year ended December 31, 2018 other than as detailed below.2019.
If we cannot meetPrices in the “price criteria” for continued listing onoil market have remained depressed since March 2020. Oil prices are expected to continue to be volatile as a result of the NYSE, the NYSE may delist our common stock, which could have an adverse impact on the trading volume, liquiditynear-term production instability, ongoing COVID-19 outbreaks, changes in oil inventories, industry demand and market priceglobal and national economic performance.
As previously described in “Risk Factors” under Item 1A of our common stock, or2019 annual report on Form 10-K filed with the tradingSEC on February 27, 2020, oil prices are the most important determinant of our 6⅜% Convertible Senior Notes due 2024.
If we do not maintainoperational and financial success. The reduction in our cash flows from operations since March 2020, and the possibility of a continued reduction in cash flows for an average closing price of $1.00 or more for our common stock over any consecutive 30 trading-day period, the NYSE may delist our common stock for a failure to maintain compliance with the NYSE price criteria listing standards. As of November 6, 2019, the average closing price of our common stock over the immediately preceding 30 consecutive trading-day period was $1.07. Despite NYSE rules and processes that provide aindeterminant period of time, to cure non-compliance with this NYSE standard (during which time the issuer’s common stock generally continues to be traded on the NYSE), there is no assurance that trading prices of our common stock or other steps we take would be successful in assuring our long-term listing on the NYSE. A delisting of our common stock from the NYSE would likely reduce the liquidity and market price of our common stock, (along with the trading prices of our 6⅜% Convertible Senior Notes due 2024), reduce the number of investors willing to hold or acquire our common stock, and negatively impactimpairs our ability to raise equity financing.develop our properties to support our oil production and pay oilfield operating expenses. Secondarily, this level of reduced cash flow may require us to continue to shut-in uneconomic production.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer PurchasesInformation regarding issuance on September 18, 2020 of Equity Securities
The following table summarizes purchases of ournew common stock duringand series A and B warrants to former debt and equity holders of the third quarterPredecessor upon cancellation of 2019:such debt and equity is contained in Item 3.02 of the Company’s Form 8-K filed with the Commission on September 18, 2020.
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Month | | Total Number of Shares Purchased(1) | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (in millions)(2) |
July 2019 | | 1,141,341 |
| | $ | 1.22 |
| | — |
| | $ | 210.1 |
|
August 2019 | | — |
| | — |
| | — |
| | 210.1 |
|
September 2019 | | 4,540 |
| | 1.13 |
| | — |
| | 210.1 |
|
Total | | 1,145,881 |
| | |
| — |
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(1) | Shares purchased during the third quarter of 2019 were made in connection with the surrender of shares by our employees to satisfy their tax withholding requirements related to the vesting of restricted and performance shares.
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(2) | In October 2011, we commenced a common share repurchase program, which has been approved for up to an aggregate of $1.162 billion of Denbury common shares by the Company’s Board of Directors. This program has effectively been suspended and we do not anticipate repurchasing shares of our common stock in the near future. The program has no pre-established ending date and may be suspended or discontinued at any time. We are not obligated to repurchase any dollar amount or specific number of shares of our common stock under the program. |
Item 3. Defaults Upon Senior Securities
None.Information regarding defaults upon senior securities is contained in Item 2.04 of the Company’s Form 8-K filed with the Commission on July 31, 2020.
Item 4. Mine Safety Disclosures
None.
Item 5. Other Information
None.
Item 6. Exhibits
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Exhibit No. | | Exhibit |
10(a)2(a) | |
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3(a) | |
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3(b) | |
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4(a) | | Series A Warrant Agreement, dated as of July 1, 2019,September 18, 2020, by and between Wilmington Trust, National Association,Denbury Inc., and Broadridge Corporate Issuer Solutions, Inc. (incorporated by reference to Exhibit 10.2 of Form 8-K filed by the Company on September 18, 2020, File No. 001-12935).
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4(b) | | Series B Warrant Agreement, dated as Trustee,of September 18, 2020, by and Wilmington Trust, National Association,between Denbury Inc., and Broadridge Corporate Issuer Solutions, Inc. (incorporated by reference to Exhibit 10.3 of Form 8-K filed by the Company on September 18, 2020, File No. 001-12935).
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4(c) | |
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10(a)† | | Credit Agreement, dated as of September 18, 2020, by and among Denbury Inc., as borrower, the lenders party thereto, and JPMorgan Chase Bank, N.A., as administrative agent, swingline lender, and letter of credit issuer (incorporated by reference to Exhibit 10.1 of Form 8-K filed by the Company on July 2, 2019)September 18, 2020, File No. 001-12935).
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10(b) | | Priority Confirmation Joinder, dated asForm of July 1, 2019,Indemnification Agreement, by and between JPMorgan Chase Bank, N.A., as Priority Lien Agent,Denbury Inc. and Wilmington Trust, National Association, as Collateral Trusteeits officers and directors (incorporated by reference to Exhibit 10.2 on10.5 of Form 8-K filed by the Company on July 2, 2019)September 18, 2020, File No. 001-12935). |
10(c)* | | |
31(a)* | |
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31(b)* | |
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32** | |
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101.INS* | | Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
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101.SCH* | | Inline XBRL Taxonomy Extension Schema Document
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101.CAL* | | Inline XBRL Taxonomy Extension Calculation Linkbase Document
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101.DEF* | | Inline XBRL Taxonomy Extension Definition Linkbase Document
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101.LAB* | | Inline XBRL Taxonomy Extension Label Linkbase Document
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101.PRE* | | Inline XBRL Taxonomy Extension Presentation Linkbase Document
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104 | | The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2019,2020, has been formatted in Inline XBRL.
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** | Furnished herewith in accordance with Item 601(b)(32) of Regulation S-K. |
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† | Certain schedules and similar attachments have been omitted pursuant to Item 601(a)(5) of Regulation S-K and will be provided to the SEC upon request. |
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.
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| | DENBURY RESOURCES INC. |
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November 7, 201916, 2020 | | /s/ Mark C. Allen |
| | Mark C. Allen Executive Vice President and Chief Financial Officer |
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November 7, 201916, 2020 | | /s/ Alan Rhoades |
| | Alan Rhoades Vice President and Chief Accounting Officer |