The change adjusts for the loss in potential revenue and cash flow during 2002 from its natural gas hedges with Enron Corporation and for the general decline in commodity prices. The reduction in spending is expected to reduce the Company's forecasted 2002 production only 2%, from its previously announced target of 36,000 BOE/d to a revised annual target of 35,250 BOE/d. The Company is currently pursuing its legal remedies to protect itself as a creditor in the Enron bankruptcy proceedings and is reviewing other options available to it. The Company has no assurance that it will prevail in these efforts.
The 2002 CAPEX budget was recently reduced from approximately $120 million to approximately $95 million. The reductions relate to anticipated cost savings due to decreased oil field costs and the postponement of various projects from 2002 to 2003. Approximately one-third of the reductions relate to natural gas projects offshore, approximately 20% relate to CO2 projects and the balance to the Company's other core areas of Eastern Mississippi and Southern Louisiana, together with overall anticipated cost savings. Through the control of operations we are able to delay the selected projects without losing the opportunities.
The Company has also repositioned its natural gas hedges by securing collars for 2002 with a floor price of $2.50 per MMBtu and an average ceiling price of approximately $4.15 per MMBtu covering 90 MMcf per day, which represents approximately 75% of the Company's anticipated natural gas production for 2002. The cost of this hedge was approximately $5.2 million and has been secured from four separate counter parties.
Gareth Roberts, Chief Executive Officer of Denbury, said, "We are committed to maintaining a strong balance sheet, which also allows us to preserve our bank credit line ($89 million) for potential acquisitions, which should be attractive in a weak commodity price environment. Meanwhile our employee teams have been doing a great job of reducing costs, allowing us to reduce the budget without significant effects on production. Our development at West Mallalieu (CO2 tertiary recovery project) is ahead of schedule and oil field costs are decreasing. Our company will enter 2002 with one of the strongest inventory of investment opportunities in the industry, consistent with our strategy of creating long-term value for shareholders."
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