Denbury Resources Inc. (DNR)

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Denbury Resources Inc. (DNR)

Fall Analyst Meeting

November 12, 2012 2:00 pm ET

Executives

Phil Rykhoek - Chief Executive Officer, President and Director

Charles E. Gibson - Senior Vice President of Planning, Technology and Business Development

Craig J. McPherson - Chief Operating Officer and Senior Vice President

Robert L. Cornelius - Senior Vice President of Co(2) Operations and Assistant Secretary

Mark C. Allen - Chief Financial Officer, Senior Vice President, Treasurer and Assistant Secretary

Analysts

Ryan Oatman - SunTrust Robinson Humphrey, Inc., Research Division

Presentation

Phil Rykhoek

Okay. We'll try to keep this on time. We have quite a bit of information to cover.

Welcome to our annual Analyst Meeting. And we're good to go. We have some forward-looking statements, since my securities counsel is in the room. Be sure you read this thoroughly or he's going to clap.

First, the introductions. This is our management team. I am Phil Rykhoek, if you're not familiar with me, I'm the CEO. I've been with the company about 18 years, or will be 18 years this summer. The company was -- I was about the 35th employee here, or something like that and they hired me initially as CFO to take us public, and we went public with about $30 million or $40 million market cap, that was 18 years ago. So it's been quite a ride.

All the people in the top row, you're going to hear from today, they also have speaking parts. Mark Allen is our CFO. He's been with us about 13 years. Craig McPherson, he's actually our newest one. He's been with us about 1.5 years, I believe. Came to us with about nearly 30 years of experience at Conoco. So we recently promoted him to COO last summer. Bob Cornelius, I believe, here about 6. He's over at CO2 supply. And Charlie Gibson who'll also be speaking, he has his 10-year anniversary this year. In fact, we're honoring him on Friday at our quarterly meeting. And so if you have any good stories on Charlie, tell me because we want to have a little roast up there. He comes from planning, technology and business development. We recently promoted him to Senior VP. So you'll hear from all 5 of us.

Also introduce, I believe, we have 2 directors in the room. Laura Sugg, she's on the phone in the back, Laura, wave your arms. And the Chairman of the Board is here, Weiland Wettstein, in the back. So if you haven't met him, stop by and see him and say nice things about management or something like that.

We've also had some good, very nice additions to our staff. We've added -- Jim Matthews, came to us from V&E. Since we met at the last Analyst Meeting, he's our General Counsel. We've also added 2 new VPs of our operating regions. Those are the other ones, the 2 are Matt Elmer. This morning, he heads over the Hastings over the West Region, and Fred [indiscernible] over the East. So both of those came to us from Conoco. So we had some significant additions to our staff. So continuing to upgrade our management team, good group.

So we're a different kind of oil company. What do we do? We drill oil back to life. How do we do that? We buy oilfields, we inject carbon dioxide, and we've shown that we can recover some as much as much 50% more than what's been produced to date. So that in a nutshell is what we do. So why do we like that? Well, low risk. We know the field is there. We know that oil there. This process has been going on for years. It's a very repeatable, sustainable process. We have a competitive advantage. Those are all kind of the highlights of why we like CO2 EOR. Quite honestly, it's become our core strategy because that was our highest profitability of anything we're doing at the company. And so that's why we evolved into making this our core strategy.

And with the Exxon Mobil transaction, it's really our own strategy. So if you look at the classic definition of a strategy, what that say, to have winning strategy, you have to have 2 things: You have to have an advantage position and operational effectiveness. So advantage position, we have that. We control the CO2. We control the pipelines. We control now many, many of the oilfields. So we obviously have a competitive advantage over our peers.

Operational effectiveness, we've made a big push to improve on that, continue to do that, we'll never be happy with that. A lot of that's since Craig came on board, and I think you'll begin to see it in the results and the end targets, doing things -- what we always say on time as we expect them. And so I think those 2 will dramatically improve in our operational effectiveness. So if you get those 2 things, what do you get? Well, the classic, would be the best or a superior risk-weighted return.

So I'm going to give -- you're going to see several slides to them on value. We'll show you we have the highest margins and have the highest capital efficiency we think we're producing the best returns.

So we really believe we have a winning strategy. We think it really works. One of the other things that we put on the slide that we haven't really used before is the eco-friendly, down a the bottom. We've not really touched on that too much because to date, we've been using natural CO2. So we're not really -- it's not a net reduction in CO2 and that we're moving it from Jackson Dome into the Riley Ridge.

In the next 6 months, we will have 2 man-made sources, we will start to using in the Gulf Coast. Bob will go through those in a little bit. But that will be about 75 million a day. So we have found that if you use man-made CO2 for EOR, that it is a net reduction in carbon, even when you take into account the CO2 that's produced in the oil.

So it's extreme to call an oil company eco-friendly, but I think you may be the definition better than most. And I think you'll see CO2 expand over time.

So with that, the numbers in blue are actuals as of the dates listed there. Obviously, we have a high percentage of oil, 92% oil, because we're in EOR play. The ones in the orange are pro forma, adjusted for the Exxon Mobil transaction, which I'll go through in more detail here in just the second.

But you can see heavily weighted for oil, it doesn't change much. Based on this, if we use net of proceeds to reduce that, we'd have quite a bit less debt from the proceeds from the deal.

And our PV-10 is still $10.6 billion, although what really we did there, we took the year end number we added the 2 fields that we booked this year, Hastings and Oyster Bayou. That was about $1.5 billion, $1.6 billion and we took the Bakken off. It was about the same number. So ironically we have the same proved PV-10 pro forma for the deal as of now as we go to year end.

If you do the math, I might just encourage you to look at that, that proved PV-10 implies a net asset value per share of something north of $20. So I think that's something you might want to consider and you say, well, yes, but then why you're trading below proved PV-10? And I think it gets in the lot to how people tend to look at most oil companies. They tend to value them on a cash flow multiple. So our cash flow multiple is quite different relative to the net asset value than most of our peers.

Or put it another way, our net asset value is much higher relative to the current cash flow. So I think if you're just using a cash flow multiple, I think you're probably underestimating the value of Denbury. Obviously, we have significant reserves well beyond this proved PV-10. This is -- I'll show you the barrels we have, it's about 600 million barrels of 3P numbers.

But obviously, it's a disconnect to the net asset value, which is why we are going to be a bit more aggressive in buying our stock back. To be honest, it's very accretive to net asset value, it's very accretive to cash flow, and it's probably one of the best investments we can make. So we'll talk about this a little bit more here in a second.

How does it work? I'm not going to spend any time on this. Charlie is going to have a whole primer on EOR. So we have a section that talks about how EOR works, in summary, we take it from the source send it down to the field through the pipeline, inject it, and that's how we recover additional oil.

So I'll let him take you through that in detail.

We've had a good year. Our first 3 line items, all say we did what we said we were going to do. So I think that's -- I think it goes back to the operational effectiveness. We are on track with production, we are on track with cash flow and capital expenditures and so forth.

So obviously, a good year in meeting expectations. We've also had a good year in adding to our inventory of fields. We purchased Thompson early in the summer. That's a nice add, 18 miles in Hastings. And then of course, with the Exxon Mobil transaction, we've monetized the value of the Bakken, and we picked that 2 big plugs, Webster and Hartzog Draw. So with this inventory we have now, we more than a decade of growth in front of us. So it's

increased our focus on the EOR strategy, added to our inventory and then of course, I think the third thing, a big accomplishment this year, we had our first production from our Texas fields, Hastings and Oyster Bayou. In the third quarter, they produced about 4,300 barrels a day. We booked nearly 60 million barrels on those fields with a value of about $1.5 billion PV-10. So that was about $3.50 to $4 per share that we've added from those 2. So big additions in the EOR crude reserves in 2012.

Lower part, shaping up to be a great year. And Bakken transaction, our Exxon Mobil transaction.

So quite simply, I'm sure you've all seen this. I notice when you do deals with Exxon, you make it in the paper more than when you do deals with other people. So we got quite a bit of press on this. But specifically, it's -- we got $1.6 billion in cash and we get 2 fields, Hartzog and Webster. We'll talk more about those when we go through the field studies.

We are still expected to close on that in November. Obviously, we did this because we were really interested in buying, getting Webster Field. We've actually been working on that for some time. And I think this was about the only way we can get it is to do a trade and use the Bakken as a little bit of a carrot. In addition to the fields and not insignificant, we also are tying up -- basically, the remaining CO2 source that they have from the LaBarge Field out in Southwest Wyoming. So we are still working on that. Maybe it's a little confusing. We're trying to structure as a property interest, which means we would actually own an interest in those CO2 reserves in the ground.

If we do that, then we believe we can trade it as a like kind exchange and avoid some income taxes on the transaction. If we can't, it's a bit more complicated because you have to have some gas. You have to have a processing fee. It's just a bit more -- a few agreements you have to do when you take that sort of transaction and really abort back to more of a traditional purchase contract.

But either way, which have incremental CO2 from Exxon, and the real plus in that is we can use that at both Bell Creek and Hartzog Draw and get it there before we could probably get a lot of rich CO2 in either one of those fields.

That's the plus of taking up the Exxon Mobil CO2. And probably also, defers some of the Riley Ridge expenditures because it's pushing it out a little bit further because we won't need it close fast.

Riley Ridge is the backbone for the CO2 for the Rocky Mountain. The Exxon is a nice 115 million a day Bcf that fits in this intermediate period very nicely. So both parties are working on making that a property interest, and that's -- we're optimistic we can make that happen. But if it falls apart, we'll just normal's purchase contract.

So what we're going to do with the money? Obviously, we may buy some other fields, to the extent we find other properties we can buy and identify those before January 15. We can potentially put them in a tax-free exchange, which will then defer taxes. Now the taxes are estimated to be about $500 million. If we do the property interest on the CO2, I think it goes down to about $75 million for the quarter.I may be rounding off just a little bit. But to the extent that you trade for other properties, it would further reduce the tax.

I might encourage you, though, to look a little bit past the headline of the 4.25 because this is the tax abatement versus a tax deferral. So what happens when you trade and you have almost 0 basis in property you trade for, which means you pay income tax as you produce that oil. And so therefore, you really need to look at the delta or the present value of what you pay as you produce out a field with 0 basis or low basis versus the upfront tax.

But then your tax rate depending on different models, but I would guess is probably something in the range of 1/2 is what the real delta is. So while it appears that 400 million would be the headline number, in net terms, if you look at a net present value, it's probably about half that. And potentially, it could even be less and the change in that depends on our tax rate as we go forward.

In any case, we are talking to a couple of people, hard to predict that that's going to happen or not, but that's something that we obviously firm up probably in the next month or 2.

In any case, we have concluded that regardless of what we buy or regardless of what we look at, that we are going to expand our stock repurchase program. With the lower courts up in the valuable field the purchase of stock will be accretive, it will help both cash flow and net asset value. And so our banks have increased the amendment, they gave us $930 million authorized under bank amendment. To date, our board has authorized $500 million. That's $500 million incremental potential repurchases from today. That is not additive to what was under our repurchase program in the past.

Said another way, I think there is about $245 million and $230 million under the old repurchase deal so if you will, there's an increase of $270 million if you were to look at it that way. But there's $500 million of the Exxon Mobil proceeds that we are authorized by the board to repurchase stock today.

Then of course, anything that's left in the end will go to debt reduction or actually, probably from a real standpoint, probably a go to debt reduction initially and then we'll borrow that. We are very comfortable saying that we can spend $500 million on stock. And of course, that depends on where the stock price goes. That depends on what oil price does. Today, we would be a buyer, but it will vary, of course, depending on the where the stock goes or the oil price goes.

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