Denbury Resources Inc. (DNR)

DNR 
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Denbury Resources (DNR)

Q2 2011 Earnings Call

August 04, 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

Kenneth McPherson - Senior Vice President of Production Operations

Robert Cornelius - Senior Vice President of CO(2) Operations, Assistant Secretary and Member of Investment Committee

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

Analysts

Gray Peckham - Susquehanna Financial Group, LLLP

Scott Hanold - RBC Capital Markets, LLC

Pearce Hammond - Simmons & Company International

Noel Parks - Ladenburg Thalmann & Co. Inc.

Presentation

Operator

Welcome to the Denbury Resources Inc. Second Quarter Conference Call. Today's call is being recorded. Joining us today will be Phil Rykhoek, Chief Executive Officer; Tracy Evans, President and Chief Operating Officer; Mark Allen, Senior Vice President and Chief Financial Officer; Robert Cornelius, Senior Vice President of CO2 Operations; and Craig McPherson, Senior Vice President of Production Operations.

The company's comments today will include forward-looking statements consisting of opinions, forecasts, projections or other statements other than statements of historical facts, which are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based upon our current assumptions, estimates and projections regarding Denbury and the external markets and economic conditions. These statements are subject to a number of risks and uncertainties that are detailed in our SEC reports, which may cause actual results in future periods to differ materially from our forward-looking statements.

At this time, for opening remarks and introductions, I will turn the call over to Denbury's Chief Executive Officer, Mr. Phil Rykhoek. Please go ahead.

Phil Rykhoek

Thank you. Welcome to Denbury's First Quarter Conference Call. I think our moderator has already introduced everybody who is here, it's our senior team and what we call internally our investment committee.

Our bottom line results this quarter were at record levels. Adjusted net income roughly $147 million, 41% increase sequentially over the last quarter, and invested cash flow was just over $344 million, which was a 27% sequential increase. Of course, the reported book operating income results were quite good with reconciled items being noncash, nonrecurring items, and Mark may touch on that a little bit.

For those of you that focus on cash flow multiples, you might want to take a look and notice that the cash flow we generated this quarter was our best quarter ever. Personally, I encourage you to also look at our net asset value. And I think that may be a better stock valuation measure, and I think you'll find we're significantly undervalued based on that metric.

As I mentioned in the press release, there are many positive aspects to this quarter. We had record quarterly cash flow. We reduced our operating administrative expenses per BOE on a sequential quarter basis. We recorded the best-ever NYMEX oil price differentials, thanks to the positive LSS oil markets. And actually, those items were -- the directed cash flow and the positive NYMEX differentials were achievable since we have over 90% of our production in crude oil.

We expect production growth to accelerate next year, as construction of our new facilities on schedule at Hastings and Oyster Bayou fields, with initial oil production expected there soon, and our Bakken oil production results continue to be strong. We are gradually accelerating in our activity in that areas. We plan to add 2 additional operating rigs before year end.

All these things are positive, but to me, one of the more important things that happened this quarter was the acquisition of the remaining interest at Riley Ridge. If you missed the significance of this deal, this acquisition gives us control of the vast natural resources of Riley Ridge and a source of CO2 that we anticipate will be less expensive than Jackson Domes's CO2, which was already one of the least expensive in the industry.

Although we have just begun our engineering, and therefore, we don't have precise numbers, we expect the revenue from the natural gas and helium to cover the projected development costs, and most, if not all, of the incremental costs of extracting the CO2, resulting in a very inexpensive source of CO2, if you look at this project as one combined CO2 operation.

We do expect to spend more capital at Riley Ridge over time, than we have today at Jackson Dome, but the big difference is we have a revenue stream from the natural gas and helium to pay for that investment. Jackson Dome simply doesn't have that.

We also believe that this source will ultimately provide more CO2 than we need for existing properties, allowing us to pursue other oil properties that are EOR candidates in the Rocky Mountain region. This acquisition is a big step for Denbury, as we strive to replicate our Gulf Coast EOR strategy in the Rockies. Bob will give you a few more details on the acquisition in a minute.

Before I turn it over to the other guys, I also want to briefly discuss production. As I have often stated, predicting the timing of the EOR production is one of our more difficult tasks. We realized how important it is, and we are always striving to improve our accuracy, but due to the nature of this business, this will always be difficult and always have margin innovator. In fact, we find it somewhat easier to forecast the Bakken production, as evidenced by our relative better accuracy, in spite of a tough weather this spring and significant competition. Craig will give you more details/updates and provide additional color regarding our EOR activities. But to keep things in perspective, I wanted to quickly review with you our recent forecasting results.

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