Adjusted cash flow from operations (cash flow from operations before changes in assets and liabilities, a non-GAAP measure) for the fourth quarter of 2005 was $104.7 million, more than double fourth quarter 2004 adjusted cash flow from operations of $48.5 million. Net cash flow provided by operations, the GAAP measure, totaled $129.7 million during the fourth quarter of 2005, as compared to $17.7 million during the fourth quarter of 2004. The difference between the respective adjusted cash flow from operations and cash flow from operations is primarily due to increases or decreases in accounts payables and accrued liabilities during the quarter. (Please see the accompanying schedules for a reconciliation of net cash flow provided by operations, as defined by generally accepted accounting principles (GAAP), which is the GAAP measure, as opposed to adjusted cash flow from operations, which is the non-GAAP measure discussed above).
Review of Financial Results
Denbury's fourth quarter 2005 production averaged 20,808 Bbls/d and 65.0 MMcf/d, or 31,649 BOE/d, a 16% increase over third quarter 2005 production levels, both of which were negatively impacted by the two hurricanes, and a 9% increase over fourth quarter 2004 production levels. Production from the Company's tertiary recovery operations set another quarterly record in the fourth quarter of 2005, averaging 9,939 BOE/d, a 12% increase over third quarter 2005 levels, and a 37% increase over the fourth quarter of 2004 average of 7,242 BOE/d. Production from the Barnett Shale averaged 18.3 MMcfe/d (3,048 BOE/d) during the fourth quarter of 2005, more than a threefold increase over the 5.8 MMcfe/d (962 BOE/d) average production during the fourth quarter of 2004. Production in Louisiana reversed its downward trend as a result of recent drilling successes there, averaging 6,992 BOE/d, a 35% increase over third quarter of 2005 levels and just slightly less than the average production in the fourth quarter of 2004. Production during the fourth quarter of 2005 was 66% oil, on trend with prior quarters since the sale of Denbury's offshore properties in July 2004.
Total revenues in the fourth quarter of 2005 increased $86.4 million (95%), as compared to revenues in the fourth quarter of 2004, primarily as a result of higher commodity prices, but also assisted by lower hedging payments and higher production levels. In the fourth quarter of 2005, NYMEX oil prices averaged approximately $60.00 per Bbl, and natural gas NYMEX prices averaged approximately $12.85 per Mcf, as compared to NYMEX averages of approximately $48.35 per Bbl and $7.25 per Mcf in the fourth quarter of 2004. Denbury's weighted average net price received per BOE was $17.50 higher per BOE (excluding hedges) in the fourth quarter of 2005 than in the comparable period of 2004. Hedge payments also decreased significantly, paying out $7.70 less per BOE on hedges during the 2005 quarterly period than made a year earlier, increasing the net realized revenue price per BOE between the respective fourth quarters by $25.20 per BOE.
Oil price differentials (Denbury's net oil price received as compared to NYMEX prices) deteriorated during the last half of 2004 and remained substantial during 2005, principally because the price of heavy, sour crude produced primarily in the Company's East Mississippi properties dropped significantly relative to NYMEX prices. The Company's average NYMEX differential was $6.17 per Bbl during the fourth quarter of 2005, only slightly better than the average of $6.48 per Bbl during the fourth quarter of 2004. For the full year periods, the average oil price differential was $6.33 per Bbl during 2005 as compared to $4.94 per Bbl during 2004.
The Company incurred more expenses in every category during the fourth quarter of 2005, as compared to the fourth quarter of 2004, partially offsetting the significantly higher revenue. Lease operating expenses increased $12.6 million (62%) on a gross basis as a result of general cost inflation in the industry, an increasing emphasis on tertiary operations, increasing lease payments for certain of our tertiary operating facilities, and higher workover costs. On a per BOE basis, operating costs increased to $11.28 per BOE, a 48% increase over the $7.60 per BOE during the fourth quarter of 2004. Higher commodity prices translated into higher energy and fuel costs in the Company's tertiary operations and into higher royalty costs for CO2 (most of which correlate with oil prices), contributing to the higher operating costs. Production taxes and marketing expenses also increased primarily as a result of higher commodity prices.
General and administrative expenses increased $0.8 million (12%) between the fourth quarter of 2004 and 2005, averaging $2.44 per BOE in the fourth quarter of 2005, up slightly from $2.38 per BOE in the comparable quarter of 2004. The increase is primarily related to additional personnel added during 2005 and general cost inflation, coupled with continued high costs related to the Sarbanes-Oxley Act and incremental costs related to the Company's new software system.
Depletion, depreciation and amortization ("DD&A") expenses increased $7.3 million (34%) in the fourth quarter of 2005 as compared to DD&A in the prior year fourth quarter. The DD&A rate in the fourth quarter of 2005 was $9.80 per BOE, up from the $7.98 per BOE rate in the prior year fourth quarter. DD&A expense on a per BOE basis increased primarily due to rising costs in the industry for both 2005 expenditures and upward revisions of future development costs.
During the fourth quarter of 2005, the Company paid out $10.1 million on its hedges, offset in-part by non-cash income of $9.2 million for fair market value adjustments associated with these hedges. Additionally, the Company recognized non-cash expense of $9.4 million for fair value adjustments for hedges put in place during the fourth quarter of 2005. Comparatively, in the fourth quarter of 2004, the Company made hedge payments of $29.8 million, offset in-part by non-cash income associated with fair value adjustments of $7.1 million.
Denbury's 2006 development and exploration budget (excluding acquisitions) is currently set at just under $500 million. Approximately 50% of the 2006 capital budget is related to tertiary operations, approximately 25% to the Barnett Shale area, with the balance split almost equally between the Company's other operating areas. The Company still anticipates that its average daily production for 2006 will be approximately 37,000 BOE/d, including approximately 2,000 BOE/d from the recent acquisition. This production target represents a 24% increase in production over the Company's 2005 production levels, or a 17% increase if you exclude the production contributed from the recent acquisition. Production from the Company's tertiary operations is expected to increase from a 2005 average of 9,215 BOE/d to a projected 2006 average of approximately 13,000 BOE/d, a 40% increase.
Gareth Roberts, Chief Executive Officer, said: "2005 was another year of outstanding results for Denbury. During the year we (i) increased our additional proven CO2 reserves by 74%, to 4.6 Tcf as of December 31, 2005; (ii) completed most of our Free State CO2 pipeline from Jackson Dome to East Mississippi, with which we plan to start our first East Mississippi CO2 injections next month; (iii) increased our CO2 tertiary oil production by 37% fourth quarter 2004 to fourth quarter 2005; (iv) purchased five additional oil fields that are part of future phases of our tertiary operations; (v) expanded our horizontal well drilling in the Barnett Shale with plans to further accelerate that program during 2006; and (vi) replaced 313% of our 2005 production, increasing our proven reserves by 18% year-end over year-end, almost all from organic internal growth. All of these factors, combined with high commodity prices, helped our stock reach new highs during 2005 and early 2006."
"Our decision to focus on tertiary operations continues to be a winning strategy and the backbone of our Company. Tertiary oil production continues to grow and we added over 12.5 million barrels of proved tertiary oil reserves this past year, and we expect our growth in tertiary oil production and reserves to continue. We are enthusiastic about the inventory of assets we have compiled, having added tertiary opportunities for Phases III, IV and beyond. We expect to grow our tertiary oil production approximately 40% during 2006 and our total corporate production by approximately 24%, predominately from internal organic growth. Our future continues to look bright."
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