The Company posted record annual earnings for the full year 2006 of $202.5 million or $1.74 per basic common share, 22% higher than 2005 net income of $166.5 million, or $1.49 per basic common share, the increase due to a 23% increase in average production levels, combined with slightly higher commodity prices on a BOE basis. Fourth quarter 2006 net income was $55.1 million, or $0.46 per basic common share, slightly less than fourth quarter 2005 net income of $57.2 million, or $0.51 per basic common share, the decrease as a result of significantly lower natural gas prices and higher expenses in the fourth quarter of 2006 (other than non-cash commodity derivative income), partially offset by 16% higher production levels. Cash flow from operations for 2006 was $461.8 million, a record annual amount, as compared to $361.0 million for 2005.
Adjusted cash flow from operations (cash flow from operations before changes in assets and liabilities, a non-GAAP measure) for the fourth quarter of 2006 was $92.8 million, slightly less than fourth quarter 2005 adjusted cash flow from operations of $104.7 million. Net cash flow provided by operations, the GAAP measure, totaled $117.5 million during the fourth quarter of 2006, as compared to $129.7 million during the fourth quarter of 2005. The difference between the two fourth quarter cash flow measures is primarily due to increases or decreases in accounts payables, accrued liabilities, and trade receivables during the quarter.
Review of Financial Results
Denbury's fourth quarter 2006 production averaged 22,692 Bbls/d and 83.6 MMcf/d, or 36,619 BOE/d, a 16% increase over fourth quarter 2005 production levels. Production from the Company's tertiary recovery operations was 10,028 Bbls/d, up slightly from the fourth quarter of 2005 levels, although the Company's tertiary oil production was relatively flat throughout 2006 because of several delays associated with these operations during the year. As previously announced, preliminary production figures for January 2007 indicate that the Company's net tertiary oil production for the month averaged in excess of 11,000 BOE/d, approximately 10% higher than average fourth quarter 2006 production levels.
Production from the Barnett Shale averaged 35.4 MMcfe/d (5,893 BOE/d) during the fourth quarter of 2006, almost double the 18.3 MMcfe/d (3,048 BOE/d) average production during the fourth quarter of 2005 as a result of drilling activity. Production in Louisiana was 6% lower than prior fourth quarter levels, averaging 6,572 BOE/d, down from the second quarter of 2006 peak rate of 8,623 BOE/d.
While commodity prices were 6% higher on an annual per BOE basis in 2006 as compared to 2005, fourth quarter of 2006 commodity prices on the same basis were 19% lower than in the comparable 2005 period, primarily due to a significant drop in natural gas prices between the two periods. As a result, even with 16% higher production in the 2006 fourth quarter, total revenues during the same period decreased $9.8 million (6%), as compared to total revenues in the fourth quarter of 2005. During both fourth quarters, NYMEX oil prices averaged around $60.00 per Bbl. However, NYMEX natural gas prices declined 44% between the two periods, averaging approximately $7.20 per Mcf in the fourth quarter of 2006 as compared to a NYMEX average of approximately $12.84 per Mcf in the fourth quarter of 2005.
Hedge payments decreased significantly in 2006, with fourth quarter 2006 payments totaling only $0.1 million as compared to payments of $10.1 million in the fourth quarter of 2005. The Company did recognize a $30.7 million non-cash gain in the fourth quarter of 2006 consisting of a $26.9 million mark-to-market value adjustment on the Company's 2007 natural gas swaps acquired in mid-December and a $3.8 million gain on the Company's oil swaps, both resulting from the decline in commodity prices during the quarter. There was only a $0.2 million non-cash loss on the Company's hedges in the fourth quarter of 2005.
The Company incurred more expenses in almost every category during the fourth quarter of 2006 as compared to the fourth quarter of 2005. Lease operating expenses increased $14.3 million (43%) on a gross basis in the fourth quarter of 2006 as compared to levels in the fourth quarter of 2005 primarily as a result of (i) increasing emphasis on tertiary operations with their inherently higher operating costs, (ii) general cost inflation in the industry, (iii) increased personnel and related costs, (iv) higher fuel and energy costs to operate Company properties, and (v) additional lease payments for certain tertiary operating facilities. On a per BOE basis, operating costs increased to $13.99 per BOE, a 24% increase over the $11.28 per BOE level of these costs during the fourth quarter of 2005, less of a percentage increase than the increase in gross costs because of higher production levels. Production taxes and marketing expenses also increased primarily as a result of the increased production.
General and administrative expenses increased 12% between the respective fourth quarters on a gross basis, but decreased 3% on a per BOE basis. General and administrative expenses increased as a result of the adoption of SFAS No. 123R relating to stock compensation effective January 1, 2006, adding approximately $1.3 million to expense in the fourth quarter of 2006 as compared to the prior fourth quarter. Expenses have also increased as a result of a 30% increase in total employees during 2006. These increases were partially offset as result of a fourth quarter reduction in the 2006 bonus accrual as bonuses were not granted at the upper end of the range as had been previously accrued, because of the Company's overall performance during 2006. General and administrative expenses averaged $2.37 per BOE in the fourth quarter of 2006 as compared to $2.44 per BOE in the comparable quarter of 2005.
During the fourth quarter of 2006, the Company capitalized approximately $4.6 million of interest expense primarily related to the unevaluated properties associated with the Company's two 2006 acquisitions. This caused interest expense to decline slightly between the respective fourth quarters, even though average debt levels were 79% higher in the fourth quarter of 2006 than in the comparable period of 2005. These higher debt levels were primarily due to the use of debt to partially fund the $250 million acquisition which closed in January 2006, to fully fund the $50 million Delhi acquisition in the second quarter of 2006, and to fully fund the $37.5 million option payment to acquire Hastings Field in the fourth quarter, all acquisitions of future tertiary flood properties.
Depletion, depreciation and amortization ("DD&A") expenses increased $10.6 million (37%) in the fourth quarter of 2006 as compared to DD&A in the prior year fourth quarter. The DD&A rate in the fourth quarter of 2006 was $11.60 per BOE, up from the $9.80 per BOE rate in the prior year fourth quarter, although the rate was down from the third quarter of 2006 DD&A rate of $11.92. DD&A expense on a per BOE basis increased primarily due to rising costs in the industry for both 2006 expenditures and upward revisions of future development costs.
Agreement to Acquire Anadarko Seabreeze Complex
The Company has entered into an agreement with Anadarko Petroleum to acquire their Seabreeze complex, which is composed of five significant fields and a few smaller fields, in the general area of Houston, Texas, for $42 million. The acquisition is expected to close during March and is subject to satisfactory completion of normal and customary due diligence and closing conditions. These fields are currently producing approximately 750 BOE/d and have estimated current conventional proved reserves of between 500 MBOE and 750 MBOE. Certain of these fields are potential CO2 tertiary flood candidates. The Company has preliminarily estimated that these fields have net reserve potential of up to 30 to 40 MMBOE from tertiary flood operations.
Tertiary flooding at these fields is not expected to begin until 2010 or 2011, following completion of the proposed 280 to 300 mile CO2 pipeline from Louisiana to Hastings Field, near Houston, Texas. Based on updated, but still preliminary estimates, this CO2 pipeline is now expected to cost between $450 million and $650 million, although this cost could vary significantly depending on the ultimate size of the pipeline, its pressure rating, its specific route and other variables, all of which are unknown at this time. These cost estimates for the pipeline are higher than prior estimates, largely due to an anticipated increase in the size of the pipe in order to transport larger volumes of CO2 based on the Company's anticipated needs.
Denbury's 2007 development and exploration budget (excluding acquisitions) is currently set at $650 million. Approximately 60% of the 2007 capital budget is related to tertiary operations, approximately 20% to the Barnett Shale area, with the balance split almost equally between the Company's other operating areas. The Company is reaffirming its prior total production forecast for 2007 of approximately 40,700 BOE/d. This production target represents an 11% increase in production over the Company's 2006 production levels. Production from the Company's tertiary operations is expected to increase from a 2006 average of 10,070 BOE/d to a projected 2007 average of approximately 14,750 BOE/d, a 46% increase.
Gareth Roberts, Chief Executive Officer, said:
"2006 was another good year for Denbury. During the year we (i) increased our additional proven CO2 reserves by 19%, to 5.5 Tcf as of December 31, 2006; (ii) acquired four additional potential tertiary flood candidates, that being Tinsley, Citronelle, Delhi and South Cypress Creek Fields, which in the aggregate may have over 100 MMBbls of potential recoverable oil through tertiary flooding; (iii) acquired an option to purchase Hastings Field, a strategically significant potential tertiary flood candidate located near Houston, Texas, with an additional 50 to 90 MMBbls of potential recoverable oil through tertiary flooding; (iv) replaced over 260% of our 2006 production; (v) increased our proved oil and natural gas reserves by 14% even though at year-end 2006 we were unable to book significant additional tertiary oil reserves due to delays during the year; and (vi) achieved record annual net income and cash flow from operations.
"In spite of these successes, our year was not perfect, as delays and rising costs negatively affected our overall performance, most visibly in our tertiary program. We believe that we have made the appropriate adjustments, adjusted our forecasts, and we look forward to an excellent year in 2007. Our year is off to a good start with rising tertiary production levels in January 2007, and our having just entered into an agreement for our first significant acquisition for the year, the Seabreeze Complex acquisition, which gives us additional tertiary flood candidates in the Houston area to supplement our Hastings Field option. Our tertiary flood inventory and future growth potential continues to increase."
The Company announced its 2007 Annual Meeting of Shareholders will be held on Tuesday, May 15th at 3:00 P.M., local time, at the Marriott at Legacy Town Center located at 7120 Dallas Parkway, Plano, Texas. The record date for determination of shareholders entitled to vote at the annual meeting will be the close of business on March 30, 2007.
Denbury Resources Inc. is a growing independent oil and gas company. The Company is the largest oil and natural gas operator in Mississippi, owns the largest reserves of CO2 used for tertiary oil recovery east of the Mississippi River, and holds key operating acreage in the onshore Louisiana and Texas Barnett Shale areas. The Company increases the value of acquired properties in its core areas through a combination of exploitation drilling and proven engineering extraction practices.
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