Denbury Resources Inc. (DNR)

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Denbury Resources (DNR)

Q1 2011 Earnings Call

May 05, 2011 11:00 am ET

Executives

Mark Allen - Chief Financial Officer, Senior Vice President, Treasurer, Assistant Secretary and Member of Investment Committee

Phil Rykhoek - Chief Executive Officer, Director and Member of Investment Committee

Robert Cornelius - Senior Vice President of Operations, Assistant Secretary and Member of Investment Committee

Ronald Evans - President, Chief Operating Officer and Member of Investment Committee

Analysts

Scott Hanold - RBC Capital Markets, LLC

Jason Wangler - SunTrust Robinson Humphrey, Inc.

David Kistler - Simmons & Company

Cory J. Garcia

Noel Parks - Ladenburg Thalmann & Co. Inc.

Presentation

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the First Quarter 2011 Earnings Release. [Operator Instructions] As a reminder, this conference is being recorded. I'd now like to turn the conference over to our host, Chief Executive Officer, Mr. Phil Rykhoek. Please go ahead.

Phil Rykhoek

Hello. Welcome to Denbury's first quarter conference call. I would like to remind you that our following discussion may contain forward-looking statements and that actual results may differ materially. If you needed other information on that, please see our SEC documents.

With me today, I have Tracy Evans, our President and COO; Mark Allen, our Senior Vice President and CFO; Bob Cornelius, our SVP of CO2 Operations; and the newest member of our senior team, Craig McPherson, SVP of Production Operations. Tracy will introduce Craig to you in a moment. Since he started Denbury this week, we won't make him present anything, but you'll see much more of Craig in the future.

Our bottom line results this quarter were strong, with adjusted net income of $103.9 million as compared to only $17.4 million in the first quarter of last year and $86.9 million in last quarter, Q4 of 2010. Correspondingly, adjusted cash flow was $271.2 million as compared to $66 million a year ago and $247.5 million last quarter.

Of course, the reported book operating results are quite different, but Mark will walk you through that reconciliation, which will adjust for the non-cash and nonrecurring items. As we suggested in our year-end conference call a couple of months ago, our production was generally flat this quarter as compared to last quarter, the fourth quarter of 2010. As Mark and Bob will explain in more detail, the EOR production hit a temporary plateau at 2 of our significant fields, Tinsley and Heidelberg, although we expect growth to resume later this year. We have not changed our 2011 anticipated EOR production guidance of 32,500 barrels a day.

In the Bakken, the production increased, although at a slower rate than anticipated, primarily due to the tough winter but in that case also, we have not changed our 2011 production guidance. We have some positive IP rates to give you in the Bakken and some of our most recent wells in the Cherry area, but I'll let Bob tell you about that.

Although 2010 was filled with large transactions led by the Encore acquisition and subsequent sales of noncore assets, we continue to pursue our transaction involving CO2 and CO2 EOR. During the first quarter, we closed on a transaction in Heidelberg and signed a joint venture covering the Tuscaloosa marine shale assets. We signed 3 CO2 purchase contracts with industrial sources, which have a very high likelihood of delivering our first man-made volumes of CO2, supplementing our natural sources. Tracy will provide more color on these transactions.

I do want to mention one other thing. With the stronger oil prices, our stocks become a bargain relative to net asset value. I know that sometimes investors put their capital in the stock because of the limitation on the cash flow multiple, but I want to remind you that our proved net asset value is just over $20 a share at $100 oil, around $24 a share at $110 oil. Note this is a proved-only net asset value using the approximate 400 million BOEs of proved reserves that we had at year end. We have over 1.2 billion BOEs of 3P reserves, which is our proved plus probable and possible, but they're all relatively low-risk potential as they're almost all EOR for Bakken. We even have additional potential running room beyond that as the DOE has suggested that up to 10 billion barrels of oil could be recovered with EOR in the 2 core operating areas. That potential is significantly larger than the popular Bakken play, which I believe is generally regarded as around 4 billion barrels of total recoverable potential. Bottom line, with all of our potential incremental reserves, we should be trading well above our proved net asset value regardless of the cash flow multiple.

But let's get back to the quarter and look at the first quarter details and we'll start with Mark's review of our numbers. Mark?

Mark Allen

Thanks, Phil. As reported in our press release, Denbury had adjusted net income for the quarter of $103.9 million or $0.26 per common share. Adjusted net income is a non-GAAP measure that excludes certain items such as fair value hedging gains and losses and other unusual or nonrecurring items. In the first quarter, we had fair value hedging loss of $172 million, a loss on early extinguishment of debt of $16 million and Encore merger-related costs of $2 million. A reconciliation to get from adjusted net income to our reported net loss, on a GAAP basis, of $14.2 million is included in our press release.

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