Denbury Resources Inc. (DNR)

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Denbury Resources (DNR)

Q4 2010 Earnings Call

February 23, 2011 10:00 am ET

Executives

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

Phil Rykhoek - Chief Executive Officer 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

Xin Liu - JP Morgan Chase & Co

Sven Del Pozzo - John S. Herold

Jason Wangler - SunTrust Robinson Humphrey, Inc.

Nicholas Pope - JP Morgan

Michael Scialla - Stifel, Nicolaus & Co., Inc.

Richard Tullis - Capital One Southcoast, Inc.

Scott Wilmoth - Simmons

Mitchell Wurschmidt - KeyBanc Capital Markets Inc.

Eugene Lipovetsky

Noel Parks - Ladenburg Thalmann & Co. Inc.

Presentation

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Fourth Quarter 2010 Earnings Release Conference Call. [Operator instructions] And at this time, I will turn the conference call over to your host, Mr. Phil Rykhoek. Please go ahead, sir.

Phil Rykhoek

Good morning, everybody. Welcome to our fourth quarter earnings conference call. Since this is the last time to discuss 2010, I thought I'd maybe just highlight a few of the accomplishments we had last year. As everybody probably knows, we acquired Encore Acquisition, a $3.8 billion deal, which not only established a new core EOR area for us in the Rockies, but it's also turning out to be a highly profitable acquisition. And I might refer you to look at our slideshow. We have a slide on that. It's on our website.

Of course, to pay for it, we sold $1.5 billion of nonstrategic Encore properties to reduce that debt. These were completed ahead of schedule and obtained prices that were better than expected, and we've now restored our leverage to pre-Encore levels so we're in great shape going forward. We recently completed a four-year project, the $884 million Green Pipeline, a strategic asset that will pay dividends for us for many years to come. And as a result, we have commenced a few injections into both Oyster Bayou and Hastings Field in Southeast Texas.

Tracy will talk more about reserves, but in summary, we added two Tcf of proved CO2 reserves last year. Part of that came from an interest we acquired in Riley Ridge Unit in Southwest Wyoming, a property that contains natural gas, helium and also CO2 and H2S. And the remainder incremental from additional development of our natural resource at Jackson Dome increased and improved reserves there to slightly over 7 Tcf as of year end. We still have significant remaining potential left in that field and plan to drill a couple wells there in 2011 that may prove up some additional CO2 reserves.

On the oil and gas side, we nearly doubled our proved reserves between year end, primarily from the Encore acquisition. And it all came in at a very respectable buying cost of just under $14.25. Our biggest reserve adds, other than Encore, were the almost 30 million barrels at Delhi and about 33 million barrels in the Bakken play. And most importantly, through all this activity, we met or exceeded our production economic forecast including the fourth quarter results that we're discussing today.

Our fourth quarter production was previously announced coming in ahead of forecast and I think as you look through the financial numbers today, you won't see anything that would disappoint you as we remain on forecast in almost all measures and I believe we're slightly ahead of first call. But I'll let the other guys give you the details. With me today from Denbury, I have Tracy Evans, our President and COO; Mark Allen, our Senior Vice President and CFO; and Bob Cornelius, our SVP of Operations. And we'll start with Mark's review of the financials. Mark?

Mark Allen

Thank you, Phil. As reported in our press release, Denbury had net income for the fourth quarter of $10.4 million or $0.03 per basic common share. Our Q4 net income includes a non-cash fair value loss in our derivative contracts of $129.6 million. Our net income adjusted to exclude fair value hedging changes, Encore merger-related costs, incremental deferred taxes and income from early settlement of certain 2011 natural gas derivative contracts was $86.9 million or $0.22 per share.

As we have typically done, I'll primarily focus on the sequential results of the third and fourth quarters of 2010. During the fourth quarter of 2010, our tertiary production averaged 31,139 barrels per day, 5% higher than our Q3 tertiary productions. For the full-year 2010, our tertiary production averaged 29,062 barrels per day, 19% higher than our 2009 tertiary production. Our tertiary production guidance for 2011 remains unchanged at 32,500 barrels per day. Even though we had a great year in 2010 with 19% tertiary production growth year-over-year, well ahead of the 13% growth rate initially forecasted, we have left our 2011 production target at essentially the same place as what it was two years ago. In other words, we do not expect that higher production in one year will necessarily translate into higher production in the next. It just means we achieved our higher production rate sooner than we expected.

In fact, as Bob will discuss in more detail, 2011 tertiary production to date has started out generally flat with Q4. So while we have a month left in the first quarter as of today, we don't expect much of the quarter-to-quarter growth in Q1. Our total company production for Q4 was 76,435 BOE/d. Our production for Q4, adjusted to exclude production associated with all asset divestitures, including the sale of Haynesville and East Texas and ENP was 63,712 BOE/d. Our Bakken production averaged 5,193 BOE/d, a 12% increase over Q3. Our total company production guidance for 2011 is also unchanged at 67,400 BOE/d.

In a few minutes, Bob will provide more details about our production results. Our average oil price received including derivatives settlements was $79.18 per barrel in Q4 as compared to $71.63 per barrel in Q3. Our NYMEX oil price differential was $3.90 per barrel below NYMEX in Q4, essentially the same as the Q3 NYMEX variance of $3.86 per barrel below NYMEX. Differentials in our northern properties were negatively impacted during a portion of both the third and fourth quarters as a result of a temporary pipeline shutdown, although much of the differential is offset by higher net prices for our Gulf Coast production.

You may have noticed recently that the Light Louisiana Sweet oil price has traded at a significant premium to the WTI NYMEX oil price. Throughout most of 2010, LLS [Light Louisiana Sweet] traded at slightly positive to $5 higher than WTI. Since near the end of January 2011, LLS has traded between $10 to $20 higher than WTI. The significance of this is that roughly 40% of our oil production is marketed on an oil price that incorporates this positive LLS differential. In general, the average of this differential goes into a pricing formula that is realized in the following month.

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