Denbury Resources announced its fourth quarter and full year 2009 financial and operating results.
Fourth quarter 2009 net income was $3.5 million, or $0.01 per basic common share, as compared to $43.8 million, or $0.18 per basic common share in the fourth quarter of 2008. Net income adjusted to exclude non-cash gains and losses in the fair value of commodity derivatives and merger related expenses associated with the planned acquisition of Encore Acquisition Company was $45.8 million, or $0.18 per basic common share in the fourth quarter of 2009, as compared to adjusted net income of $35.3 million, or $0.14 per basic common share in the prior year fourth quarter, after adjustments principally for non-cash fair value commodity derivative gains and a full cost ceiling test write-down. The higher adjusted net income for the quarter was principally attributable to higher oil prices, partially offset by higher operating costs and lower production levels due to the sale of the Company’s Barnett Shale assets in 2009.
The Company reported a net loss for the full year 2009 of $75.2 million, or $0.30 per basic common share, as compared to net income of $388.4 million, or $1.59 per basic common share in 2008. Net income adjusted to exclude non-cash gains and losses in the fair value of commodity derivatives and other lesser non-recurring items was $174.0 million, or $0.70 per basic common share in 2009, as compared to $388.1 million, or $1.59 per basic common share in 2008 after adjustments principally for non-cash fair value commodity derivative gains, a full cost ceiling test write-down and abandoned acquisition costs.
Adjusted cash flow from operations (cash flow from operations before changes in assets and liabilities, a non-GAAP measure) for the fourth quarter of 2009 was $151.7 million, as compared to adjusted cash flow of $122.8 million in the fourth quarter of 2008. Cash flow provided by operations, the GAAP measure, totaled $124.2 million during the fourth quarter of 2009, as compared to $141.7 million during the fourth quarter of 2008. Adjusted cash flow and cash flow from operations differ in that the latter measure includes the changes in receivables, accounts payable and accrued liabilities during the quarter.
Review of Financial Results
Denbury's fourth quarter 2009 production averaged 45,012 barrels of oil equivalent per day ("BOE/d"), an 11% increase over fourth quarter 2008 production levels (after adjusting both periods to remove production for our Barnett Shale assets, which were sold in mid-year 2009 and December 2009), and a 6% sequential increase over adjusted levels in the third quarter of 2009 (also adjusted to remove Barnett Shale production). Denbury's fourth quarter 2009 production on a pro forma basis, excluding the production from the Company's Barnett Shale assets sold in December 2009 and adding a full quarter's production from Conroe Field acquired in December 2009, averaged approximately 42,000 BOE/d, 91% of which was oil.
Production from the Company's tertiary recovery operations averaged 26,307 barrels of oil per day ("Bbls/d") in the fourth quarter of 2009 and 24,343 Bbls/d for full year 2009, a 20% increase over the 21,874 Bbls/d average tertiary production in the fourth quarter of 2008, a 26% increase over 2008's annual average tertiary production and an 8% sequential increase over average tertiary production in the third quarter of 2009. During 2009, the Company had initial production response from its tertiary floods at Cranfield Field and Heidelberg Field along with continued improved production response primarily from its Tinsley, Brookhaven, Eucutta and Soso Fields. The Company expects a production response from its latest tertiary flood, Delhi Field, by mid-2010. The Company is re-confirming its prior guidance as to its anticipated average tertiary oil production for 2010 of 27,000 Bbls/d.
The Company’s net revenue per BOE was 38% lower on an annual basis in 2009 than in 2008, but was 30% higher during the fourth quarter of 2009 than in the fourth quarter of 2008, reflecting the steep decline in commodity prices during the last half of 2008. As a result of the sale of the Company's Barnett Shale properties in mid-2009, production levels, on a BOE basis, were 7% lower in the fourth quarter of 2009 than in the fourth quarter of 2008, but higher oil prices more than offset the lower production levels, resulting in a 22% increase in oil and natural gas revenues between the respective fourth quarters.
Company-wide oil price differentials (Denbury's net oil price received as compared to NYMEX prices) in the fourth quarter of 2009 were similar to recent historical levels and to those in the fourth quarter of 2008. Oil price differentials during the fourth quarter of 2009 averaged $3.44 per Bbl less than NYMEX prices, as compared to $3.59 per Bbl below NYMEX prices during the fourth quarter of 2008.
Lease operating expenses increased 6% on an absolute basis between the two fourth quarters and increased 14% on a per BOE basis, with the larger increase on a per BOE basis primarily due to the sale of 60% of the Company’s Barnett Shale properties in mid-2009. Adjusted for the sale of the Company's Barnett Shale properties in mid-2009 and December 2009, lease operating expenses averaged $22.37 per BOE in the fourth quarter of 2009, compared to $21.92 per BOE in the fourth quarter of 2008 and $23.40 per BOE in the third quarter of 2009. When comparing the fourth quarters of 2009 and 2008, the largest increase in lease operating expenses was related to power and utilities, as a result of the expansion of our tertiary operations during 2009. On a per BOE basis, our tertiary operating expense averaged $22.03 per BOE in the fourth quarter of 2009, as compared to $21.86 per BOE in the prior year fourth quarter and $23.14 per BOE in the third quarter of 2009. Production taxes and marketing expenses increased during the fourth quarter of 2009 as compared to fourth quarter of 2008, primarily as a result of the higher oil prices, offset by slightly lower production (as a result of the Barnett Shale property sale in mid-2009).
General and administrative expenses increased $21.7 million between the respective fourth quarters due primarily to $8.2 million of Encore merger related expenses, $5.1 million of expense associated with Genesis' management incentive awards, and higher overall compensation resulting from salary increases, additional employees and higher bonus awards in the current year quarter.
During the fourth quarter of 2009, the Company capitalized approximately $19.9 million of interest expense as compared to $9.6 million capitalized during the fourth quarter of 2008, primarily associated with the Company’s construction of its Green Pipeline and the continued expansion of its tertiary operations. Nonetheless, interest expense, net of amounts capitalized, still increased 22% between the respective fourth quarters, resulting from higher average debt levels in the fourth quarter of 2009 and a higher weighted average interest rate, primarily due to the Company's senior subordinated debt issuance in February 2009.
Depletion, depreciation and amortization ("DD&A") expense for the fourth quarter of 2009 was essentially flat compared to that expense in the prior year quarter, but increased on a per BOE basis from $13.72 per BOE in the prior year fourth quarter to $14.77 per BOE in the current year fourth quarter. The incremental DD&A per BOE was due to the sale of the Company’s Barnett Shale properties and due to pipelines and other assets being placed into service during 2009.
In the fourth quarter of 2009, the Company recorded a current tax benefit offset by an increase in deferred income taxes, due to a larger than anticipated deduction for tertiary injection costs.
Denbury’s 2010 stand-alone development and exploration budget (excluding acquisitions) remains unchanged at $650 million; however, assuming the successful completion of the Encore acquisition in early March 2010, the Company currently expects a combined company 2010 capital expenditure budget of approximately $1 billion. Currently, approximately 90% of the Company's 2010 stand-alone budget is expected to be spent on tertiary related operations, while approximately 60% of the Denbury/Encore combined budget would be spent on tertiary related operations.
Phil Rykhoek, Chief Executive Officer, said, "2009 was a good year for Denbury. We weathered the economic storms of the last twelve to eighteen months without incident, thanks to our strong balance sheet, and seized the opportunity to make three strategic company-changing acquisitions. We acquired two significant future enhanced oil recovery ("EOR") floods in our Gulf Coast region during the year, Conroe and Hastings Fields, adding over 200 MMBbls of EOR potential to our existing inventory. We also entered into an agreement to acquire Encore Acquisition Company, expected to close on or around March 9th, expanding our opportunities to apply our EOR expertise to the Rocky Mountain region. The Encore acquisition nearly doubles our potential oil recoverable with EOR and gives us opportunity for growth in another core area. We are working to put together sale packages that we plan to launch following closing, and have targeted raising between $500 million and $1.0 billion from these sales, depending on offers received and commodity prices. Our goal is to reduce our leverage incurred to fund the acquisition and to concentrate our focus on assets that are core to our strategy.
"Our fourth quarter production was slightly above forecast, our operating expenses were a bit better than expected, and we would have reported net income during 2009 were it not for the non-cash derivative charges. We are starting 2010 with strong tertiary production levels, well on the way to achieving our 2010 production forecast. Our employees have been extremely busy with our significant level of activity, particularly centered on the pending Encore acquisition and integration, and I wish to publicly thank them for their extraordinary effort and dedication during the last few months. There is a lot of work ahead to develop our billion barrel inventory of potential recoverable oil, but we are extremely pleased with how the Company is positioned and how things are moving forward. We have an exciting year ahead for Denbury."
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