Adjusted cash flow from operations for the first quarter of 2004 (before changes in assets and liabilities) was also near-record highs, totaling $58.9 million, a 24% increase over the $47.4 million generated in the first quarter of 2003. Net cash flow provided by operations, the GAAP measure, totaled $53.0 million during the first quarter of 2004, as compared to $35.5 million during the first quarter of 2003. (Please see the accompanying schedules for a reconciliation of net cash flow provided by operations, as defined by generally accepted accounting principles ("GAAP"), which is a GAAP measure, as opposed to adjusted cash flow, which is the non-GAAP measure).
Production for the quarter was 36,647 BOE/d, just slightly higher than the first quarter of 2003 average of 36,093 BOE/d, but a 6% increase over the fourth quarter of 2003 levels. Oil production for the Company's tertiary operations increased 13% over levels in the prior quarter, and 45% when compared to first quarter of 2003 production, averaging 6,318 Bbls/d in 2004's first quarter, primarily as a result of production increases at Mallalieu Field. The Company also had an initial response, although minor, from McComb Field, where the Company initiated CO2 injections late in 2003, although oil production from this field is not expected to be significant until late 2004. Production from the offshore Gulf of Mexico also increased 24% over levels in the prior quarter, averaging 8,521 BOE/d, primarily as a result of several recent well completions. Partially offsetting these increases were minor declines in other areas resulting from property sales and general depletion.
First Quarter 2004 Financial Results
In the first quarter of 2004, revenues increased $11.2 million primarily as a result of lower hedge payments than in the first quarter of 2003. The $27.7 million paid during the first quarter of 2003 on hedges was primarily caused by the unusually high natural gas prices during March 2003, when natural gas price indexes were $9.28 per MMBtu. During the first quarter of 2004, the most significant payments on hedges were oil related. Excluding the hedge payments, the slightly higher production rates in 2004 were offset by slightly lower commodity prices on a BOE basis. Oil prices were 4% higher in the first quarter of 2004 than in the prior year first quarter, but natural gas prices were 11% lower, resulting in an overall decline of 4% in commodity prices on a BOE basis.
Overall, operating cash expenses on a BOE basis were lower, although there were both positive and negative changes. Operating expenses decreased to $6.76 per BOE in the first quarter of 2004, down from $6.90 in the first quarter of 2003, primarily because there were no significant unusual workover expenses in the first part of 2004. Conversely, in the first quarter of 2003, the Company expensed $850,000 on two workovers relating to the mechanical failures of two onshore Louisiana wells. Higher production levels in 2004 also helped reduce operating expenses on a per BOE basis.
General and administrative expenses increased, averaging $1.42 per BOE in the first quarter of 2004, up from $1.17 per BOE in the prior year's first quarter. The increase primarily relates to severance costs for a portion of the Company's offshore professional and technical staff, plus expenses associated with the recent sale of stock by the Texas Pacific Group.
Interest expenses decreased on a gross and per BOE basis as a result of lower overall interest rates, primarily related to the subordinated debt refinancing in 2003, and lower average debt levels, as a result of the $50 million reduction in debt during 2003.
Depreciation, depletion and amortization expense ("DD&A") increased in the first quarter of 2004 to $8.19 per BOE, primarily as a result of the higher percentage of expenditures on offshore properties during 2003 and early 2004, which typically have a higher finding and development cost per BOE. The first quarter 2004 rate is more comparable to the fourth quarter of 2003 DD&A rate of $8.00 per BOE than to the first quarter of 2003 DD&A rate of $7.25 per BOE.
The Company recognized current income tax expense of $2.1 million in the first quarter of 2004 related to alternative minimum taxes due that cannot be offset by the Company's regular tax net loss carryforwards or enhanced oil recovery credits.
On Jan. 1, 2003, the Company implemented SFAS No.143, "Accounting for Asset Retirement Obligations." The cumulative effect of this change in accounting principle for the prior years, net of related income tax expense, was $2.6 million, which was a credit to earnings in the first quarter of 2003.
Denbury's 2004 development and exploration budget is currently set at $172 million. Any acquisitions made by the Company will increase these capital budget amounts. Denbury's total debt as of April 27, 2004 is approximately $310 million, with $135 million undrawn on its recently reaffirmed bank borrowing base of $220 million. The $10 million increase in bank debt since year-end was primarily to fund the acquisition of the last remaining CO2 producing well in Mississippi not previously owned by the Company.
The Company expects its production during the remaining three quarters of 2004 to be slightly lower than the first quarter rate of 36,647 BOE/d, with an annual average of between 35,000 and 36,000 BOE/d. The Company will adjust its guidance if, and when, the proposed sale of its offshore properties is consummated, currently expected to occur mid-year. During the first quarter of 2004, production from these offshore properties averaged 8,521 BOE/d (principally natural gas).
Gareth Roberts, Chief Executive Officer, said: "We are pleased with the operational results of this quarter. Production from our tertiary operations was right on forecast, averaging 6,318 Bbls/d, a 13% increase over the fourth quarter production rates. We are in the process of completing two additional CO2 source wells, which should bring our CO2 production capacity to around 300 MMcf/d, with two more CO2 source wells scheduled to be drilled this year. We recognized the benefits of our 2003 offshore activity this quarter as offshore production increased to its highest level in over a year, as a result of several well completions in the fourth and first quarters. We hope to complete the proposed sale of our offshore properties mid-year, assuming we obtain an acceptable price. With the proceeds from our offshore sale, we plan to repay our bank debt and invest the remaining cash balance over the next couple of years. We have not yet finalized the use of proceeds pending the results of the sale, but generally we plan to accelerate our development of CO2 reserves and production at Jackson Dome, accelerate to the extent possible our second phase of tertiary operations planned for East Mississippi, and increase our expenditures in other areas such as the Barnett Shale. We are also continuing to look for property acquisitions, particularly those that have future tertiary potential."
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