Denbury Resources Inc. (DNR)

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Denbury Resources, Inc. (DNR)

Q3 2009 Earnings Call

November 5, 2009 12:00 p.m. ET


Phil Rykhoek - CEO

Mark Allen - SVP and CFO

Tracy Evans - President and COO

Bob Cornelius - SVP, Operations


Mike Scialla - Thomas Weisel Partners

Nicholas Pope - Dahlman Rose

Andrew Coleman - UBS

Noel Parks - Ladenburg Thalmann

Eric Hagen - Lazard Capital Markets



Good afternoon and welcome to the third quarter 2009 earnings release conference call. All participants will be in listen-only mode. (Operator Instructions). After today's presentation, there will be an opportunity to ask questions. (Operator Instructions). Please note, this event is being recorded. I would now like to turn the conference over to Mr. Phil Rykhoek. Please go ahead, sir.

Phil Rykhoek

Thank you, Amy. Welcome to Denbury's third quarter earnings conference call. While it's been an eventful week, today we are reporting and focusing on Denbury's third quarter results. You should also be aware that there could be some forward-looking information in this report, and so you might want to check our SEC filings regarding that. With me today I have Tracy Evans, our President and COO; Mark Allen, our Senior Vice President and CFO; and Bob Cornelius, our Senior Vice President of Operations.

As disclosed in the press release, our clean or adjusted net income this quarter was $40.7 million, slightly better than our second quarter results on the same basis, but only about a third of the comparable adjusted net income a year ago, the difference primarily due to the lower commodity prices. While our tertiary production is slightly below target this quarter, the tertiary production response during the last couple weeks has been strong, putting us on a path to end 2009 with 25% tertiary growth year-over-year.

Good things are happening at Denbury. Our CO2 pipeline projects are moving forward. We're about to start injections at Delhi. Our prospects at Jackson Dome are looking good. And we plan to get started on our Texas Gulf Coast EOR projects next year after the Green Pipeline arrives. We've also locked in some additional hedges in 2011 because of the pending acquisition of Encore.

Well, I'll let each of the guys to give you more details and operational updates, starting with Mark's review of the financials. Mark?

Mark Allen

Thanks, Phil. As reported in our press release, we had net income for the third quarter of $26.9 million, which included a non-cash charge for the change in fair value of our commodity derivative contracts of $22.3 million, or $13.8 million after taxes. When you adjust for the non-cash fair value adjustments, we had net income in the third quarter of $40.7 million or $0.16 per share.

This is slightly higher than our last quarter results which after adjusted to remove the charges associated with the fair value changes of our derivative contracts, and special compensation charge, our net income would have been approximately $39.7 million or $0.16 per share. As we have typically done I will primarily focus on the sequential results of the second and third quarters of 2009, rather than the comparative third quarter of 2008. During the third quarter of 2009, our tertiary production was slightly higher than Q2.

But our production decreased on an overall basis due to the sale of 60% of our Barnett Shale properties. The Barnett Shale production for the remaining portion of the property sale that occurred in mid-July added approximately 350 BOEs per day to our third quarter production. Bob is going to discuss more about our production in a moment. Our average oil price received for the quarter including derivative settlements was $70.54 per barrel in Q3, as compared to $66.70 per barrel in Q2.

But if derivative settlements are excluded, our average oil price received for the third quarter was $64.77 per barrel as compared to $54.53 per barrel in Q2. Our NYMEX oil price differential improved slightly during the third quarter from approximately $5.30 per barrel below NYMEX in Q2 to$3.47 per barrel below NYMEX in Q3. That is largely due to the impact of lower natural gas liquids in our oil production mix as a result of the Barnett Shale sale.

Our total corporate lease operating costs were down slightly, approximately $360,000 Q2 to Q3, due primarily to the Barnett property sale. On a per BOE basis, our overall lease operating costs increased from $17.59 per BOE in Q2 to $21.22 per BOE in Q3, also primarily due to the Barnett Shale property sale and higher BOE costs in our tertiary operations in Q3. As I mentioned last quarter, our LOE per BOE in Q2 on a pro forma basis for the Barnett sale would have been $19.90 as compared to $21.22 per BOE this quarter.

That increase on a per BOE basis is due to increased work over expense, higher purchases and cost of CO2, and only slightly higher volumes due to the facility downtime, as Bob will more fully discuss. G&A expenses decreased by $9.1 million from Q2 levels due primarily to the $10 million compensation charge under our Founder's Retirement Agreement with Gareth Roberts related to his retirement as CEO in the second quarter. Again this quarter we recognized compensation expense related to the Genesis management compensation awards of approximately $3.6 million, approximately $600,000 higher than the prior quarter.

As a result of lower production for the Barnett Shale sale, our G&A expense on a per BOE basis will likely to be very similar to our current quarter results for the remainder of the year. However, on top of this, we will have transaction costs related to the Encore acquisition that we will incur and that will run through our G&A expense. As a footnote, the relatively new accounting rules relate to acquisition costs, in case you aren't familiar with them, requires us to expense our acquisition transaction costs.

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