Denbury Resources Reports Third Quarter 2019 Results

PLANO, Texas, Nov. 07, 2019 (GLOBE NEWSWIRE) — Denbury Resources Inc. (NYSE: DNR) (“Denbury” or the “Company”) today announced net income of $73 million, or $0.14 per diluted share, for the third quarter of 2019.  Adjusted net income⁽¹⁾ (a non-GAAP measure) was $41 million, or $0.08⁽¹⁾⁽²⁾ per diluted share, with the difference from GAAP net income primarily due to a $35 million gain from noncash fair value adjustments ($26 million after tax) on the Company’s commodity derivative positions (see reconciliation of GAAP and non-GAAP measures in tables beginning on page 9 of this press release).

THIRD QUARTER AND RECENT HIGHLIGHTS

• Generated cash flow from operations of $131 million and free cash flow⁽¹⁾ (a non-GAAP measure) of $44 million after considering development capital expenditures, capitalized interest and interest treated as debt reduction, with 2019 year-to-date free cash flow⁽¹⁾ of $109 million

• Continued debt reduction through debt repurchases and exchanges which reduced debt by $87 million since June 30, 2019 (including October transactions) and by $139 million since January 1, 2019

• Reaffirmed borrowing base of $615 million on senior secured bank credit facility

• Production of 56,441 barrels of oil equivalent (“BOE”) per day (“BOE/d”), in-line with expectations and on track for the midpoint of previously raised full-year guidance

• Two successful Mission Canyon exploitation wells recently drilled and completed with a projected combined IP-30 rate of 1,000 barrels of oil per day

• Completed $9 million of surface acreage sales during the third quarter of 2019 and an additional $5 million in October 2019

SELECTED QUARTERLY COMPARATIVE DATA

MANAGEMENT COMMENT

Chris Kendall, Denbury’s President and CEO, commented, “Denbury’s third quarter results once again demonstrate our commitment to exceptional execution, cost efficiency, and capital discipline.  We generated $44 million of free cash flow in the third quarter, keeping us on course to generate $140 – $150 million in free cash flow for the full year.

“We continue to execute on our key priorities for 2019 and we remain on track to reach the midpoint of our previously raised 2019 production guidance, despite third quarter production curtailments relating mainly to a planned maintenance shut-down of the Rockies CO₂ source plant impacting our Bell Creek production and Tropical Storm Imelda impacting our Gulf Coast production.  Our spending discipline is evident across the board, with capital spend, lease operating expense, and G&A spend each on target to be at or below full-year guidance.

“Our unique portfolio of assets and high quality, low decline, oil-weighted production are the driving forces behind our ability to generate sustainable free cash flow, enabling us to actively allocate capital to manage our debt maturities and reduce leverage.  We continued to make meaningful progress on improving our balance sheet by repurchasing or exchanging $54 million of 2022 and 2023 senior subordinated notes at a significant discount, and we further reduced our borrowings under our senior secured bank credit facility by $30 million.  Importantly, our flagship Cedar Creek Anticline EOR development continues to progress on schedule with first CO₂ injection projected in early 2021.

“None of these results would have been possible without the dedication to success and commitment to safety of Denbury’s team members across the business.  As we move into the final quarter of 2019, I am excited about where the Company is headed.  We continue to perform, to consistently deliver on our promises, and to make steady progress toward securing our long-term success.  Additionally, the low carbon footprint of our CO₂ EOR focused strategy will continue to differentiate us from the industry, providing an ideal solution that significantly reduces the CO₂ emissions associated with the production of oil, a vital energy source today and for the foreseeable future.”

REVIEW OF OPERATING AND FINANCIAL RESULTS

Denbury’s oil and natural gas production averaged 56,441 BOE/d during third quarter 2019, a decrease of 5% from continuing production on a sequential-quarter basis and a decrease of 3% compared to continuing production in the prior-year third quarter.  The sequential-quarter decrease was primarily due to an expected reduction in production at Bell Creek Field associated with planned maintenance at the Company’s primary CO₂ source in the Rocky Mountain region.  Third quarter production was also impacted by approximately 400 BOE/d due to unplanned downtime from power outages and flooding caused by Tropical Storm Imelda.  Further production information is provided on page 15 of this press release.

Denbury’s third quarter 2019 average realized oil price, including derivative settlements, was $59.23 per barrel (“Bbl”), a decrease of 4% from the prior quarter and 1% from the prior-year third quarter.  Denbury’s NYMEX differential for the third quarter 2019 was $1.30 per Bbl above NYMEX WTI oil prices, compared to $2.35 per Bbl above NYMEX WTI in the prior quarter and $1.84 per Bbl above NYMEX WTI in third quarter 2018.  The sequential decrease was primarily attributable to a lower Gulf Coast premium in the third quarter of 2019, which represents approximately 60% of the Company’s crude oil production.

Total lease operating expenses in third quarter 2019 were $118 million, or $22.70 per BOE, relatively unchanged on an absolute-dollar basis compared to the prior quarter.  When compared to third quarter 2018, lease operating expenses decreased $5 million, or 4%, on an absolute-dollar basis, primarily due to lower workover and power costs.

General and administrative expenses were $18 million in third quarter 2019, up slightly from the prior quarter, and a $3 million decrease compared to third quarter 2018, primarily due to lower performance-based compensation expense in the current-year period.

Interest expense, net of capitalized interest, totaled $23 million in third quarter 2019, a $2 million increase from the prior quarter and an increase of $4 million compared to third quarter 2018.  The sequential-quarter and prior-year increases were primarily due to noncash expense for amortization of debt discounts associated with the Company’s recently issued 7¾% Senior Secured Second Lien Notes due 2024 and 6⅜% Convertible Senior Notes due 2024.  The discount on these notes was initially recorded during the second quarter of 2019 and will continue to be amortized as interest expense over the terms of these notes.  A schedule detailing the components of interest expense is included on page 17 of this press release.

Depletion, depreciation, and amortization (“DD&A”) was $55 million during third quarter 2019, compared to $58 million in second quarter 2019 and $51 million in third quarter 2018.  The sequential-quarter decrease was primarily due to lower depletion on CO₂ assets resulting from lower CO₂ production in the Rocky Mountain region, and the increase compared to prior year was due primarily to an increase in depletable costs.

Denbury’s effective tax rate for third quarter 2019 was approximately 34%, higher than the Company’s estimated statutory rate of 25% due primarily to a valuation allowance applied against a portion of the Company’s business interest expense deduction that it estimates will be disallowed in the current year as a result of limitations enacted under the Tax Cuts and Jobs Act.  The Company currently forecasts that its effective tax rate for the fourth quarter and full-year 2019 will be approximately 32%, depending in part on taxable income.

RECENT DEBT TRANSACTIONS AND BANK CREDIT FACILITY

During the third quarter, Denbury repurchased $11 million in aggregate principal amount of its then outstanding 5½% Senior Subordinated Notes due 2022 (“5½% Senior Subordinated Notes”) in open market transactions for a total purchase price of $5 million, excluding accrued interest.  In connection with these transactions, the Company recognized a $6 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, the Company repurchased (principally through exchanges) an additional $13 million in aggregate principal amount of its then outstanding 5½% Senior Subordinated Notes and $29 million in aggregate principal amount of its then outstanding 4⅝% Senior Subordinated Notes due 2023 for $6 million in cash and issuance of 14 million shares of Denbury Common Stock.  The Company currently expects to record a noncash gain on debt extinguishment of approximately $22 million, net of unamortized debt issuance costs written off, in fourth quarter 2019 related to these transactions.

Pursuant to the fall 2019 semiannual borrowing base redetermination completed in late October 2019, the Company’s borrowing base and commitment levels of the banks were reaffirmed at $615 million.  As of September 30, 2019, the Company had $50 million of outstanding borrowings on its $615 million senior secured bank credit facility, compared to $80 million of outstanding borrowings as of June 30, 2019 and no outstanding borrowings as of December 31, 2018, leaving $510 million of liquidity available after consideration of $55 million of currently outstanding letters of credit.  Based on current 2019 projections using recent oil price futures, the Company currently expects to have the capacity to repay all of its outstanding borrowings on the senior secured bank credit facility by the end of the year.

2019 CAPITAL BUDGET AND ESTIMATED PRODUCTION

The Company’s 2019 estimated development capital, excluding acquisitions and capitalized interest, remains unchanged from the previously estimated range of $240 million to $260 million.  The capital budget consists of approximately $200 million for tertiary and non-tertiary field investments and CO₂ supply, plus approximately $50 million of estimated capitalized costs (including capitalized internal acquisition, exploration and development costs and pre-production tertiary startup costs).  Of this combined capital expenditure amount, $189 million (76%) has been incurred through the third quarter 2019, which is significantly less than cash flow from operations during that period.  Denbury’s estimated 2019 production remains unchanged from the previously disclosed updated guidance range of 57,000 – 59,500 BOE/d.

THIRD QUARTER CONFERENCE CALL INFORMATION

Denbury management will host a conference call to review and discuss third quarter 2019 financial and operating results, as well as financial and operating guidance for 2019, today, Thursday, November 7, at 10:00 A.M. (Central).  Additionally, Denbury will post presentation materials on its website which will be referenced during the conference call.  Individuals who would like to participate should dial 877.705.6003 or 201.493.6725 ten minutes before the scheduled start time.  To access a live webcast of the conference call and accompanying slide presentation, please visit the investor relations section of the Company’s website at www.denbury.com.  The webcast will be archived on the website, and a telephonic replay will be accessible for approximately one month after the call by dialing 844.512.2921 or 412.317.6671 and entering confirmation number 13695520.

Denbury is an independent oil and natural gas company with operations focused in two key operating areas: the Gulf Coast and Rocky Mountain regions.  The Company’s goal is to increase the value of its properties through a combination of exploitation, drilling and proven engineering extraction practices, with the most significant emphasis relating to CO₂ enhanced oil recovery operations.  For more information about Denbury, please visit www.denbury.com.

FINANCIAL AND STATISTICAL DATA TABLES AND RECONCILIATION SCHEDULES

Following are unaudited financial highlights for the comparative three and nine-month periods ended September 30, 2019 and 2018 and the three-month period ended June 30, 2019.  All production volumes and dollars are expressed on a net revenue interest basis with gas volumes converted to equivalent barrels at 6:1.

DENBURY RESOURCES INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

The following information is based on GAAP reported earnings (along with additional required disclosures) included or to be included in the Company’s periodic reports:

DENBURY RESOURCES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

DENBURY RESOURCES INC.
SUPPLEMENTAL NON-GAAP FINANCIAL MEASURES (UNAUDITED)

Reconciliation of net income (GAAP measure) to adjusted net income (non-GAAP measure)

Adjusted net income is a non-GAAP measure provided as a supplement to present an alternative net income measure which excludes expense and income items (and their related tax effects) not directly related to the Company’s ongoing operations.  Management believes that adjusted net income may be helpful to investors by eliminating the impact of noncash and/or special or unusual items not indicative of the Company’s performance from period to period, and is widely used by the investment community, while also being used by management, in evaluating the comparability of the Company’s ongoing operational results and trends.  Adjusted net income should not be considered in isolation, as a substitute for, or more meaningful than, net income or any other measure reported in accordance with GAAP, but rather to provide additional information useful in evaluating the Company’s operational trends and performance.

1. Diluted net income per common share includes the impact of potentially dilutive securities including nonvested restricted stock, nonvested performance-based equity awards, and shares into which the Company’s convertible senior notes are convertible.  The basic and diluted earnings per share calculations are included on page 10.
2. The net change between periods of the fair market values of open commodity derivative positions, excluding the impact of settlements on commodity derivatives during the period.
3. Gain on extinguishment related to the Company’s 2019 debt exchanges and open market repurchases.
4. Other adjustments include (a) $6 million gain on land sales, <$1 million of transaction costs related to the Company’s privately negotiated debt exchanges, and <$1 million of costs associated with the helium supply contract ruling during the three months ended September 30, 2019, (b) $2 million write-off of debt issuance costs associated with the Company’s 2018 reduction and extension of the senior secured bank credit facility and $1 million gain on land sales, partially offset by a $1 million accrual for litigation matters during the three months ended September 30, 2018, and (c) $1 million of transaction costs related to the Company’s privately negotiated debt exchanges and <$1 million of costs associated with the helium supply contract ruling during the three months ended June 30, 2019.  The nine months ended September 30, 2019 was further impacted by $1 million of expense related to an impairment of assets and <$1 million of costs associated with a helium supply contract court ruling during the three months ended March 31, 2019, and the nine months ended September 30, 2018 was further impacted by $3 million gain on land sales, offset by a similar amount of other expense accrued for litigation matters, and $2 million of transaction costs related to the Company’s privately negotiated debt exchanges.
5. The estimated income tax impacts on adjustments to net income are generally computed based upon a statutory rate of 25% with the exception of (a) the periodic tax impacts of a shortfall (benefit) on the stock-based compensation deduction which totaled $2 million, ($2) million, and <$1 million during the three months ended September 30, 2019, September 30, 2018 and June 30, 2019, respectively, and $2 million and $1 million for the nine months ended September 30, 2019 and 2018, respectively, (b) $22 million of tax expense associated with the gain on debt extinguishment and $9 million of valuation allowances established against a portion of the Company’s business interest expense deduction during the three months ended June 30, 2019, and (c) a tax benefit for enhanced oil recovery income tax credits of $5 million during the three and nine months ended September 30, 2018, respectively.

BASIC AND DILUTED NET INCOME PER COMMON SHARE

DENBURY RESOURCES INC.
SUPPLEMENTAL NON-GAAP FINANCIAL MEASURES (UNAUDITED)

Reconciliation of cash flows from operations (GAAP measure) to adjusted cash flows from operations (non-GAAP measure) to adjusted cash flows from operations less interest treated as debt reduction (non-GAAP measure) and free cash flow (non-GAAP measure)

Adjusted cash flows from operations is a non-GAAP measure that represents cash flows provided by operations before changes in assets and liabilities, as summarized from the Company’s Unaudited Condensed Consolidated Statements of Cash Flows.  Adjusted cash flows from operations measures the cash flows earned or incurred from operating activities without regard to the collection or payment of associated receivables or payables.  Adjusted cash flows from operations less interest treated as debt reduction is an additional non-GAAP measure that removes interest associated with the Company’s senior secured second lien notes and convertible senior notes not reflected as interest expense for financial reporting purposes and other special items.  Free cash flow is a non-GAAP measure that represents adjusted cash flows from operations less interest treated as debt reduction, development capital expenditures and capitalized interest, but before acquisitions.  Management believes that it is important to consider these additional measures, along with cash flows from operations, as it believes the non-GAAP measures can often be a better way to discuss changes in operating trends in its business caused by changes in production, prices, operating costs and related factors, without regard to whether the earned or incurred item was collected or paid during that period.

DENBURY RESOURCES INC.
SUPPLEMENTAL NON-GAAP FINANCIAL MEASURES (UNAUDITED)

Reconciliation of commodity derivatives income (expense) (GAAP measure) to noncash fair value gains (losses) on commodity derivatives (non-GAAP measure)

Noncash fair value adjustments 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 represents only the net change between periods of the fair market values of open commodity derivative positions, and excludes the impact of settlements on commodity derivatives during the period.  Management believes that noncash fair value gains (losses) on commodity derivatives is a useful supplemental disclosure to “Commodity derivatives expense (income)” because the GAAP measure also includes settlements on commodity derivatives during the period; the non-GAAP measure is widely used within the industry and by securities analysts, banks and credit rating agencies in calculating EBITDA and in adjusting net income to present those measures on a comparative basis across companies, as well as to assess compliance with certain debt covenants.

DENBURY RESOURCES INC.
SUPPLEMENTAL NON-GAAP FINANCIAL MEASURES (UNAUDITED)

Reconciliation of net income (GAAP measure) to Adjusted EBITDAX (non-GAAP measure)

Adjusted EBITDAX is a non-GAAP financial measure which management uses and is calculated based upon (but not identical to) a financial covenant related to “Consolidated EBITDAX” in the Company’s senior secured bank credit facility, which excludes certain items that are included in net income, the most directly comparable GAAP financial measure.  Items excluded include interest, income taxes, depletion, depreciation, and amortization, and items that the Company believes affect the comparability of operating results such as items whose timing and/or amount cannot be reasonably estimated or are non-recurring.  Management believes Adjusted EBITDAX may be helpful to investors in order to assess the Company’s operating performance as compared to that of other companies in the industry, without regard to financing methods, capital structure or historical costs basis.  It is also commonly used by third parties to assess leverage and the Company’s ability to incur and service debt and fund capital expenditures.  Adjusted EBITDAX should not be considered in isolation, as a substitute for, or more meaningful than, net income, cash flow from operations, or any other measure reported in accordance with GAAP.  The Company’s Adjusted EBITDAX may not be comparable to similarly titled measures of another company because all companies may not calculate Adjusted EBITDAX, EBITDAX or EBITDA in the same manner.  The following table presents a reconciliation of the Company’s net income to Adjusted EBITDAX.

DENBURY RESOURCES INC.
OPERATING HIGHLIGHTS (UNAUDITED)

DENBURY RESOURCES INC.
OPERATING HIGHLIGHTS (UNAUDITED)

1. Mature properties include Brookhaven, Cranfield, Eucutta, Little Creek, Mallalieu, Martinville, McComb and Soso fields.
2. Includes production from Citronelle Field sold in July 2019.
3. Includes production from Lockhart Crossing Field sold in the third quarter of 2018.

DENBURY RESOURCES INC.
PER-BOE DATA (UNAUDITED)

CAPITAL EXPENDITURE SUMMARY (UNAUDITED)⁽¹⁾

1. Capital expenditure amounts include accrued capital.
2. Includes capitalized internal acquisition, exploration and development costs and pre-production tertiary startup costs.

DENBURY RESOURCES INC.
INTEREST AND FINANCING EXPENSES (UNAUDITED)

1. Cash interest includes interest which is paid semiannually on the Company’s 9% Senior Secured Second Lien Notes due 2021, 9¼% Senior Secured Second Lien Notes due 2022, and the Company’s previously outstanding 5% Convertible Senior Notes due 2023 and 3½% Convertible Senior Notes due 2024.  As a result of the accounting for certain exchange transactions in previous years, most of the future interest related to these notes was recorded as debt as of the debt issuance dates, which is reduced as semiannual interest payments are made, and therefore not reflected as interest for financial reporting purposes.
2. Represents the amortization of debt discounts related to the Company’s 7¾% Senior Secured Second Lien Notes due 2024 (“7¾% Senior Secured Notes”) and 6⅜% Convertible Senior Notes due 2024 (“6⅜% Convertible Senior Notes”) issued in June 2019.  In accordance with FASC 470-50, Modifications and Extinguishments, the 7¾% Senior Secured Notes and 6⅜% Convertible Senior Notes were recorded on the Company’s balance sheet at a discount of $30 million and $80 million, respectively, which will be amortized as interest expense over the term of the notes.

SELECTED BALANCE SHEET DATA (UNAUDITED)

1. Excludes $190 million, $208 million, and $250 million of future interest payable on the notes as of September 30, 2019, June 30, 2019, and December 31, 2018, respectively, accounted for as debt for financial reporting purposes and also excludes a $28 million and $29 million discount to par on the 7¾% Senior Secured Notes as of September 30, 2019 and June 30, 2019, respectively.
2. Excludes a $77 million and $80 million discount to par on the 6⅜% Convertible Senior Notes as of September 30, 2019 and June 30, 2019, respectively.