Denbury Resources Inc. (DNR)

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Denbury Resources, Inc. (DNR)

Q1 2010 Earnings Call

May 6, 2010 11:00 am ET

Executives

Phil Rykhoek - CEO

Tracy Evans - President and COO

Mark Allen - SVP and CFO

Bob Cornelius - SVP of Operations

Analysts

Scott Hanold - RBC Capital

Dave Kistler - Simmons & Company

Noel Parks - Ladenburg Thalmann

Mitch Wurschmidt - KeyBanc

Kevin Smith - Raymond James

Presentation

Operator

Good morning and welcome to the Denbury Resources first quarter 2010 earnings release. (Operator Instructions) Please note this event is being recorded.

The following discussion contains forward-looking statements, and our actual results may differ materially from those discussed here. Additional information concerning factors such as price, volatility, production forecasts, drilling results, and current market conditions that could cause such a difference can be found in our reports filed with the Securities and Exchange Commission including our reports on Form 10-K and 10-Q.

I would now like to turn the conference over to Phil Rykhoek. Sir, please go ahead.

Phil Rykhoek

Thank you, Chad. Welcome, everybody, to Denbury and ENP's first quarter 2010 conference call. We plan to cover Denbury first, then, we'll follow with an update on ENP, and then we'll open up for questions.

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 you've probably noticed, we continue to have a lot of activity and lot of several positive events. Since, our last call, we have obviously closed on the Encore acquisition. We have entered into an agreement to sell most of our Encore Southern region properties for $900 million, which will get our leverage back to near pre-acquisition levels.

And we have had earlier than expected EOR production from Delhi Field. If you can sort through all the unusual items in this quarter's financial statements, underneath it all things are on track or ahead of expectations. Mark will cover these numbers in a little bit more detail, but let me briefly hit a couple high points.

As you can see from our first quarter production, operationally things are going well, with total company production at 86,578 BOEs per day if you include a full quarter of results from Encore. And of course, our tertiary averaged 27,023. As a result, we are increasing our tertiary oil production forecasts from 27,000 barrels a day for 2010 to 27,750.

And we plan to update the total company production guidance at the upcoming analyst meeting, adjusting for property sales. Although, I can report that non tertiary production is generally on track with our original forecast. So, things are looking good there also.

Bob will give you more details on production from our EOR properties, and Tracy is going to cover the recent results from our acquired Bakken and Haynesville assets. Our results from the Bakken wells, we recently fact are looking good, but I'll let Tracy give you the details.

With regard to property sales, our initial bids on the Haynesville have been less than we hoped for, so at this point in time, a sale of that property doesn't look too promising. The good part is that there is no pressure to sell, since we have already reduced our leverage, and it shouldn't be any problem to wait a little while and see if we get some help later from natural gas prices.

We do plan to let our operated rig go after it completes the current well in progress, so we are reducing our activity a little bit in this region due to the natural gas prices, although, we will still spend money there this year as much of our acreage is non operated and we are still being AFE. The Haynesville properties are still up for sale, so if things change we could pull the trigger later on.

But with that introduction, let me turn over to Mark to review the numbers.

Mark Allen

Thank you, Phil. As reported in our press release, Denbury had net income for the first quarter of $96.9 million. However, as we mentioned in the year end conference call, our first quarter results would have a lot of noise with several unusual or non recurring items.

First, since we closed on the merger with Encore on March 9, our first quarter results only included the operations of Encore from March 9 through March 31. In connection with the merger, we expensed $45 million in acquisition costs in the first quarter, representing advisory fees, financing, legal, accounting, integration, et cetera, that related specifically to the merger transaction.

Second, we incurred approximately $6.9 million of incremental interest expense for approximately one month due to our early February issuance of $1 billion of senior subordinated notes to finance a portion of the merger and redeem approximately $600 million of Encore's subordinated debt upon completion of the merger.

Third, we sold our GP and LP interest in Genesis Energy during the first quarter, and recognized a gain of $101.6 million on those transactions. Fourth, we had non-cash gains on the change in fair value of our commodity derivative contracts of approximately $101 million, all of these items before income tax effects.

And then, lastly, as a result of the merger, we increased our statutory tax rate due to our mix of new states and applied a new deferred tax rate to our deferred tax balances. In doing this, we increased our deferred tax expense for the quarter by approximately $10 million.

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