Denbury's Q1 Earnings 339% Higher Than 2007
Denbury Resources Inc. announced its first quarter 2008 financial and operating results. The Company posted quarterly earnings for the first quarter of 2008 of $73.0 million, or $0.30 per basic common share, 339% higher than first quarter 2007 net income of $16.6 million, or $0.07 per basic common share. The higher net income in the 2008 period was attributable to higher oil prices and higher production levels, partially offset by a $38.7 million ($24.4 million after tax) non-cash fair value charge on the Company's derivative contracts, incremental net cash payments on the same and higher overall expenses. Included in the first quarter of 2007 was a non-cash fair value charge of approximately $35.2 million ($21.4 million after tax).
Adjusted cash flow from operations (cash flow from operations before changes in assets and liabilities, a non-GAAP measure) for the first quarter of 2008 of $186.7 million increased 79% over first quarter 2007 adjusted cash flow from operations of $104.2 million. Net cash flow provided by operations, the GAAP measure, totaled $206.3 million during the first quarter of 2008, as compared to $93.3 million for the same measure during the first quarter of 2007. 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. (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).
First Quarter 2008 Financial Results
Oil and natural gas revenues, excluding any derivative contracts, increased 85% between the respective first quarters as higher commodity prices increased revenue by 67% and the higher production increased revenue by 18%. The Company paid $8.0 million on its derivative contract settlements in the first quarter of 2008 as compared to cash receipts of $8.3 million on derivative contracts during the first quarter of 2007. The $38.7 million non-cash fair value charge to earnings in the first quarter of 2008 and the $35.2 million non-cash fair value charge in the first quarter of 2007 were both primarily attributable to the Company's natural gas swaps for each calendar year entered into the year before and the resultant decline in value as a result of the increase in natural gas prices during the period.
Company-wide oil price differentials (Denbury's net oil price received as compared to NYMEX prices) improved slightly during the first quarter of 2008 over the fourth quarter of 2007 levels, averaging $6.50 per Bbl below NYMEX as compared to $7.27 per Bbl below NYMEX during the fourth quarter of 2007. However, the differentials were both significantly worse than the $3.73 per Bbl differential in the first quarter of 2007, as oil differentials were unusually low during the first three quarters of 2007 due to anomalies in the crude oil market during that time.
The Company's average NYMEX natural gas differential was a negative variance of $0.90 per Mcf in the first quarter of 2008 as compared to a negative variance of $0.51 per Mcf during the first quarter of 2007 and a negative variance of $0.55 per Mcf during the fourth quarter of 2007. This negative variance is partially due to natural gas prices which increased during the first quarter of 2008. Since most of the Company's natural gas is sold on an index price that is set near the first of each month and fixed for the entire month, variances become more favorable if NYMEX natural gas prices decline throughout the quarter. Further, the sale of the Company's Louisiana natural gas properties also contributed to a higher negative variance as the sold properties typically received above NYMEX pricing.
Lease operating expenses increased between the comparable first quarters on both a per BOE basis and on an absolute dollar basis. Lease operating expenses averaged $16.15 per BOE in the first quarter of 2008, up from $14.66 per BOE in the first quarter of 2007, and an average of $13.78 per BOE during the fourth quarter of 2007. The increase over prior year's first quarter level was primarily a result of (i) the Company's increasing emphasis on tertiary operations with their inherently higher operating costs, (ii) higher overall industry and personnel costs, and (iii) additional lease payments for certain of our new tertiary production facilities. A significant portion of the increased cost on a per BOE basis also resulted from the sale of the Louisiana natural gas properties. If the sold properties were excluded from the first quarter of 2007 results, the Company's operating costs during that period would have been approximately $1.41 per BOE higher than as reported, or $16.07 per BOE, more in line with the current quarter results.
Historically, the Company expensed all costs associated with injecting CO2 used in its tertiary operations. Beginning January 1, 2008, the Company began capitalizing injection costs in fields that had not yet seen an oil production response to the CO2 injections. After a production response occurs, all subsequent injection costs will be expensed. Had we continued with the prior accounting methodology of expensing all tertiary injectant costs, we would have expensed an additional $2.9 million in the first quarter of 2008, or approximately $0.70 per BOE, as there were significant injectant costs during the period in fields without production, primarily the two new tertiary floods at Tinsley and Lockhart Crossing Fields. During the first quarter of 2007, the accounting methodology was not material as only $116,000 would have been capitalized under the new procedure.
Production taxes and marketing expenses generally change in proportion to production volumes and commodity prices, the primary reason for the increase in the first quarter of 2008.
General and administrative expenses increased 18% on a BOE basis between the two first quarter periods, averaging $3.92 per BOE in the first quarter of 2008, up from $3.32 per BOE in the prior year's first quarter. The majority of the increase relates to higher personnel related costs as a result of salary increases and continued growth in the Company's total number of employees.
The Company's average debt level was 25% higher in the first quarter of 2008 as compared to debt levels in the first quarter of 2007. Because of the significant expenditures made during 2006 and 2007 on unevaluated properties, the Company capitalized $7.3 million of interest expense in the first quarter of 2008 related to these unevaluated properties (including CO2 pipelines under construction), as compared to $4.0 million during the first quarter of 2007, more than offsetting the higher debt levels and reducing the Company's overall interest expense between the two periods by 19%.
Depletion, depreciation and amortization ("DD&A") expenses increased $8.8 million (21%) in the first quarter of 2008 as compared to DD&A in the prior year first quarter. The DD&A rate on oil and natural gas properties in the first quarter of 2008 was $11.00 per BOE, up from $10.64 per BOE in the prior year first quarter, and up slightly from the $10.96 per BOE rate during the fourth quarter of 2007. No incremental tertiary proved reserves were booked during the first quarter of 2008.
The Company reaffirms its production guidance for 2008 of 49,000 BOE/d. This production target represents a 25% increase in production over the Company's 2007 production levels after adjusting for the Louisiana property sale. Production from the Company's tertiary operations is expected to increase from a 2007 average of 14,767 BOE/d to a projected 2008 range between 22,000 BOE/d and 25,000 BOE/d, a 49% to 69% increase, although based on production rates to date during 2008, the Company currently expects the annual tertiary production to be at the lower end of this range.
Denbury's 2008 development and exploration budget remains at approximately $900 million, of which approximately 72% is related to tertiary operations. Any acquisitions made by the Company would be in addition to these current capital budget amounts.
Denbury's total debt (principal amount excluding capital leases) as of April 30, 2008 was approximately $656 million, consisting of $525 million of subordinated debt and $131 million of bank debt.
Gareth Roberts, Chief Executive Officer, said: "We are pleased that our first quarter results were on target with our expectations. We continue to expand at a rapid pace and we were pleased to see our first production response in April at Tinsley Field, our biggest potential tertiary flood to date, and we expect a production response at Lockhart Crossing Field, another new but smaller flood during the third quarter. The flooding at Cranfield should begin during the second quarter and we are preparing pipelines, facilities and other infrastructure for the floods we expect to start in early 2009 at Delhi and Heidelberg Fields. We have had some delays and slower than expected production growth at some of our existing floods, primarily at McComb and Brookhaven Fields, and therefore we currently expect our annual production to be at the lower end of our previously forecasted range. However, that does not dampen our enthusiasm as we recognize that it is not easy to have everything work exactly as planned or scheduled, and we realize that the production rate forecast is much more difficult to predict than the ultimate reserves we expect to recover. With the completion of our Louisiana property sale, we have become even more focused on our tertiary operations, the highest rate of return and lowest risk projects in our Company. Our program is working, our plans and strategy have not changed, we continue to be enthusiastic about the future and we continue to pursue potential expansion opportunities."
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