2018 | ANNUAL REPORT
FORWARD-LOOKING STATEMENTS
The data and/or statements contained in this annual report that are not historical facts are forward-looking statements, as that term is defined
in Section 21E of the Securities Exchange Act of 1934, as amended, that involve a number of risks and uncertainties. Such forward-looking
statements may be or may concern, among other things, financial forecasts, future hydrocarbon prices and their volatility, current or future
liquidity sources or their adequacy to support our anticipated future activities, our ability to further reduce our debt levels, possible future
write-downs of oil and natural gas reserves, together with assumptions based on current and projected production levels, oil and gas prices and
oilfield costs, current or future expectations or estimations of our cash flows or the impact of changes in commodity prices on cash flows,
availability of capital, borrowing capacity, price and availability of advantageous commodity derivative contracts or the predicted cash flow
benefits therefrom, forecasted capital expenditures, drilling activity or methods, including the timing and location thereof, the nature of any
proposed future asset purchase or sales or dispositions or the timing or proceeds thereof, estimated timing of commencement of CO2 flooding
of particular fields or areas, including CCA, or the availability of capital for CCA pipeline construction, or its ultimate cost or its date of
completion, timing of CO2 injections and initial production responses in tertiary flooding projects, development activities, finding costs,
anticipated future cost savings, capital budgets, interpretation or prediction of formation details, production rates and volumes or forecasts
thereof, hydrocarbon reserve quantities and values, CO2 reserves and supply and their availability, potential reserves, barrels or percentages of
recoverable original oil in place, levels of U.S. and worldwide tariffs or other trade restrictions, the likelihood, timing and impact of increased
interest rates, the impact of regulatory rulings or changes, anticipated outcomes of pending litigation, prospective legislation affecting the oil
and gas industry, environmental regulations, mark-to-market values, competition, long-term forecasts of production, rates of return, estimated
costs, changes in costs, future capital expenditures and overall economics, worldwide economic conditions and other variables surrounding
our operations and future plans. Such forward-looking statements generally are accompanied by words such as “plan,” “estimate,” “expect,”
“predict,” “forecast,” “to our knowledge,” “anticipate,” “projected,” “preliminary,” “should,” “assume,” “believe,” “may” or other words that
convey, or are intended to convey, the uncertainty of future events or outcomes. Such forward-looking information is based upon
management’s current plans, expectations, estimates, and assumptions and is subject to a number of risks and uncertainties that could
significantly and adversely affect current plans, anticipated actions, the timing of such actions and our financial condition and results of
operations. As a consequence, actual results may differ materially from expectations, estimates or assumptions expressed in or implied by any
forward-looking statements made by us or on our behalf. Among the factors that could cause actual results to differ materially are fluctuations
in worldwide oil prices or in U.S. oil prices and consequently in the prices received or demand for our oil and natural gas; decisions as to
production levels and/or pricing by OPEC or production levels by U.S. shale producers in future periods; levels of future capital expenditures;
effects of our indebtedness; success of our risk management techniques; accuracy of our cost estimates; availability or terms of credit in the
commercial banking or other debt markets; fluctuations in the prices of goods and services; the uncertainty of drilling results and reserve
estimates; operating hazards and remediation costs; disruption of operations and damages from well incidents, hurricanes, tropical storms,
forest fires, or other natural occurrences; acquisition risks; requirements for capital or its availability; conditions in the worldwide financial,
trade and credit markets; general economic conditions; competition; government regulations, including changes in tax or environmental laws
or regulations; and unexpected delays, as well as the risks and uncertainties inherent in oil and gas drilling and production activities or that are
otherwise discussed in this report, including, without limitation, the portions referenced above, and the uncertainties set forth from time to
time in our other public reports, filings and public statements.
Current SEC rules regarding oil and gas reserves information allow oil and gas companies to disclose in filings with the SEC not only proved
reserves, but also probable and possible reserves that meet the SEC’s definitions of such terms. We disclose only proved reserves in our filings
with the SEC. Denbury’s proved reserves as of December 31, 2017 and December 31, 2018 were estimated by DeGolyer and MacNaughton, an
independent petroleum engineering firm. In this presentation, we may make reference to probable and possible reserves, some of which have
been estimated by our independent engineers and some of which have been estimated by Denbury’s internal staff of engineers. In this
presentation, we also may refer to estimates of original oil in place, resource or reserves “potential,” barrels recoverable, “risked” and “unrisked”
resource potential, estimated ultimate recovery (EUR) or other descriptions of volumes potentially recoverable, which in addition to reserves
generally classifiable as probable and possible (2P and 3P reserves), include estimates of resources that do not rise to the standards for possible
reserves, and which SEC guidelines strictly prohibit us from including in filings with the SEC. These estimates, as well as the estimates of
probable and possible reserves, are by their nature more speculative than estimates of proved reserves and are subject to greater uncertainties,
and accordingly the likelihood of recovering those reserves is subject to substantially greater risk.
OPERATING AREAS
ROCKY MOUNTAIN REGION
MT
˜110 Miles
Cost: ˜$150MM
ND
Cedar Creek Anticline Area (CCA)
Gas Draw
Bell Creek
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Lost
Cabin
(COP)
p
c
Greencore Pipeline
232 Miles
3
Hartzog Draw
Salt Creek
Grieve
Shute
Creek
(XOM)
GULF COAST REGION
Proved Reserves & Total
Company Resource Potential
(MMBOEs)
Proved Reserves (1)
Tertiary
Non-Tertiary
Total Proved Reserves
151
111
262
Total Company Resource
Potential (2)
>1,000
MS
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Jackson
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Green Pipeline
˜325 MilesM
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Little Creek
L
M
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0
˜90 Miles
Cost: ˜$220MM
22
Conroe
Webster
Thompson
Ai Products
Air Products
Oyster Bayou
Manvel
Hastings
Nutrien
Citronelle
Gulf of
Mexico
Denbury Operated Pipelines
Denbury Planned Pipelines
Pipelines Owned by Others
Denbury Owned Fields – Current CO2 Floods
Denbury Owned Fields – Potential CO2 Floods
Naturally-Occurring CO2 Source
Fields Owned by Others – Potential CO2 EOR Candidates
Industrial CO2 Sources Owned or Contracted
(1) Proved tertiary and non-tertiary oil and natural gas reserves based upon 2018 SEC pricing.
(2) Total Company resource potential includes both tertiary and non-tertiary resource potential, based on a range of recovery factors and long-
term oil price assumptions, which also may include estimates of resources that do not rise to the standards of possible reserves. Potential
tertiary reserves are estimated as of 12/31/18, and also include proved tertiary reserves estimated as of 12/31/18, based on 2018 SEC pricing.
Potential non-tertiary reserves includes exploitation potential estimated as of 12/31/18, and also includes proved non-tertiary reserves
estimated as of 12/31/18, based on 2018 SEC pricing. See “Forward-Looking Statements” for additional information.
LETTER TO THE SHAREHOLDERS
DEAR FELLOW SHAREHOLDERS,
2018 continued to form the foundation for Denbury’s
promising future, providing a prelude to Denbury’s
Christian S. Kendall
President and
Chief Executive Officer
dynamic potential in a strengthening oil market. While we
oil fields, and our significant CO2 sources and
certainly did not desire the steep fall in oil prices in the
infrastructure position us very well to continue to be the
fourth quarter, it provided a strong reinforcement of the
industry leader in EOR for its long future.
importance of Denbury’s sustained emphasis on balance
sheet improvement, cost discipline and capital flexibility.
Reflecting on 2018, I am inspired by the sustained
dedication and skills of our employees, and I am more
Many factors and uncertainties contribute to the oil
than encouraged and impressed by the great strides we
supply and demand equation. It is our belief that
have taken together as a company. Importantly, we set
projections for strong long-term oil demand, together
Company records in each of our safety and spill prevention
with the likelihood that supply growth from tight oil
measures, a strong indicator that we continue to be on
development will slow and potentially peak around the
the right track in our operations and priorities. The
middle of the next decade, combine to support a
Company had several other important accomplishments
conclusion that significant long-term additional oil supply
during the year, including:
will be critical. At the same time, however, investor
sentiment for the industry has been challenging, with a
desire for companies to show value creation instead of
growing at all costs, all amid increasing public pressure
for oil producing companies to limit their carbon impact
while safely and responsibly providing this vital
commodity that powers much of the world’s economy.
• Significant strengthening of our balance sheet,
reducing our leverage ratio by over two turns, and
lowering our net debt by over $280 million;
• Reducing year-on-year G&A by an incremental
$30 million, or 30%;
• Sustained capital discipline, maintaining total capital
within our original guidance range and continuing
This combination of circumstances and sentiments aligns
our longstanding objective of spending within cash
perfectly with the core of Denbury’s business, both
flow, generating over $80 million in free cash;
currently as well as in the future. With our strong focus
• Replacing reserves in excess of our annual production,
on CO2 enhanced oil recovery (EOR), our current and
with year-end 2018 reserves up 111% compared to
planned developments provide decades of low decline,
year-end 2017 reserves, less 2018 production;
high margin oil production while annually injecting into
• Meaningful success in our high value, organic
our reservoirs over 3 million tons of industrial-sourced
exploitation program, highlighted by seven
CO2 that would otherwise be emitted into the
successful wells and a strong inventory for continued
atmosphere. Putting that number in perspective, this
exploitation development in 2019 and beyond;
amount of CO2 is equivalent to the amount of CO2 emitted
• Sanctioning of the Cedar Creek Anticline EOR
annually by roughly 700,000 vehicles.
The IEA World Energy Outlook 2018 projects strong growth
in worldwide EOR production, more than doubling from
current levels to approach nearly five million barrels of
production per day by 2040. As the only sizable U.S. public
E&P company whose EOR operations generate the
majority of its production, Denbury’s broad EOR
experience and expertise, our deep inventory of existing
development, a cornerstone project with the
potential to recover in excess of 400 million barrels
of oil from this great asset;
• Significant success with Phase Five development at
Bell Creek, exceeding our expectations; and
• Extending our bank credit facility by two years
to 2021, while simultaneously refinancing the full
outstanding balance of the facility into a new note
due in 2024, leaving a fully undrawn credit facility.
The fourth quarter of 2018 also provided a strong
continue to drive the CCA EOR project along its path
reminder of the reasons we must continue to focus our
toward first oil, and we will expand our exploitation work
business in 2019 around $50 oil. The collapse in oil price
to test new, high potential concepts across our asset base.
was nearly unprecedented in terms of how far and how
We will also continue to optimize and expand production
fast the price fell, but our cost discipline, coupled with the
from our great set of legacy fields, where our technical
capital flexibility afforded by our low-decline assets,
teams continue to find opportunities to extract even
allowed us to quickly adjust plans for a lower price
greater value.
environment in 2019 while still generating meaningful
free cash.
Shareholders, I deeply value your longstanding
commitment to Denbury. Your faith in the Company and
We constantly consider the future of EOR, and we see
your unwavering support of our team is inspirational and
great potential in the Eagle Ford shale, where only around
energizing. We share a great vision for what Denbury can
10% of original hydrocarbons in place are recovered
become, and I, along with the rest of the Denbury team,
through primary production. The transaction we
are committed to bringing that vision to reality.
announced in late October — where we would have
acquired Penn Virginia Corporation — was the result of
careful and deliberate consideration of this great
Sincerely,
potential and opportunity, and, if consummated, would
have provided the Company with a platform to commence
work on this new frontier for EOR. While we had to make
the tough decision to mutually terminate the transaction
in early 2019 - primarily due to the poor market conditions
and opposition from certain Penn Virginia shareholders —
we continue to believe in the significant potential for EOR
in the Eagle Ford and will continue to pursue practical
opportunities to expand our business in areas where our
EOR expertise, experience, and extensive CO2 resources can
create value for the benefit of all Denbury stakeholders.
Looking ahead to 2019, our priorities are clear. While we
have made significant improvements in our balance
sheet, we will continue with a sharp focus on progressing
additional impactful initiatives. As we have done in past
years, we will manage spending across our high-margin
asset base to generate significant free cash flow, we will
Chris Kendall
President and
Chief Executive Officer
March 29, 2019
DENBURY’S CO2 EOR CYCLE
STEP 1
STEP 2
STEP 3
STEP 4
CO2 SOURCES & CAPTURE
The first step in implementing a carbon dioxide enhanced oil recovery (“CO2
EOR”) project is to secure access to substantial volumes of CO2. Denbury
sources CO2 both from naturally-occurring underground reservoirs and from
industrial sources which capture, process and then compress the CO2 for
delivery into a pipeline network. The CO2 captured from industrial sources
(which is sometimes referred to as anthropogenic or man-made CO2) could
otherwise be released into the atmosphere.
CO2 TRANSPORTATION
The second step is transporting the CO2 from the source to the oil field. We
operate or control over 1,100 miles of CO2 pipelines and are continually
expanding this network to transport naturally-occurring CO2 and CO2 from
industrial sources to our tertiary fields. During 2018, we utilized an average
of more than 170 million cubic feet of CO2 from industrial sources per day
and anticipate additional CO2 from industrial sources from currently
planned or future construction of facilities in our Gulf Coast region.
CO2 INJECTION
The third step is to inject the CO2 into the oil-bearing reservoir through a
wellbore. The injected CO2 moves through the reservoir, mixing with the
crude oil trapped there. The CO2 acts to separate the oil from the reservoir
rock and increase the oil’s mobility within the reservoir. The mixture is
driven through the formation into a producing wellbore, where it then
comes to the surface, increasing the field’s oil production. To date, our CO2
EOR operations have resulted in the gross production of over 190 million
barrels of oil that may not have otherwise been recovered.
CO2 EOR BENEFITS & STORAGE
CO2 EOR operations provide considerable economic and environmental
benefits. The economic benefits of CO2 EOR include the creation of jobs due
to investments required to implement and operate a CO2 EOR project, along
with tax payments to local governments. Our CO2 EOR operations provide an
environmentally responsible method of utilizing CO2 for the primary
purpose of oil recovery, that also results in the incidental underground
storage of CO2, while also making our nation more energy secure.
UNITED STATT TES SECURITIES
AA
AND EXCHANGE COMMISSION
WW
Washington, D.C. 20549
Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
2018 FORM 10-K
(Mark One)
r
For the fiscal year ended December 31, 2018
OR
Transition r
TT
eport pursuant to Section 13 or 15(d) of the Securities Exchange
r
Act of 1934
For the transition period from _________ to________
Commission file number 1-12935
r
DENBURYRR RESOURCES INC.
(Exact name of Registrant as specified in its charter)
Y
Delaware
20-0467835
(State or other jurisdiction of incorporation or organization)
r
(I.R.S. Employer Identification No.)
5320 Legacy Drive,
Plano, TX
(Address of principal executive offices)
rr
Registrant’s telephone number, including area code:
75024
(Zip Code)
(972) 673-2000
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class:
Common Stock $.001 Par ValueVV
Name of Each Exchange on Which Registered:
New York Stock Exchange
YY
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YesYY
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YesYY
No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. YesYY
No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 (§232.405
No
of this chapter) of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). YesYY
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not
be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an
emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company,” and “emer
in Rule 12-b2 of the Exchange Act.
Large accelerated filer
Smaller reporting company
Emerging growth company
Non-accelerated filer
Accelerated filer
yy
yy
ging growth company”
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or
revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
yy
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). YesYY
No
The aggregate market value of the registrant’s common stock held by non-affiliates, based on the closing price of the registrant’
business day of the registrant’s most recently completed second fiscal quarter was $2,178,055,595.
ff
s common stock as of the last
The number of shares outstanding of the registrant’s Common Stock as of January 31, 2019, was 460,442,251.
Y
DOCUMENTS INCORPORATED BY
AA
REFERENCE
Document:
1. Notice and Proxy Statement for the Annual Meeting of Stockholders to be held May 22, 2019.
Incorporated as to:
1. Part III, Items 10, 11, 12, 13, 14
Denbury Resources Inc.
2018 Annual Report on Form 10-K
Table of Contents
Page
Glossary and Selected Abbreviations
PART I
Business and Properties
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
PART II
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Item 7.
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Item 9.
Item 9A.
Item 9B.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Item 15.
Item 16.
Financial Statements and Supplementary Information
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
PART III
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
PART IV
Exhibits and Financial Statement Schedules
Form 10-K Summary
Signatures
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3
5
26
32
32
33
34
35
37
39
63
63
104
104
104
105
105
105
105
105
106
111
112
Denbury Resources Inc.
Glossary and Selected Abbreviations
Bbl
Bbls/d
Bcf
BOE
BOE/d
Btu
CO2
EOR
One stock tank barrel, of 42 U.S. gallons liquid volume, used herein in reference to crude oil or other liquid
hydrocarbons.
Barrels of oil or other liquid hydrocarbons produced per day.
One billion cubic feet of natural gas or CO2.
One barrel of oil equivalent, using the ratio of one barrel of crude oil, condensate or natural gas liquids to
6 Mcf of natural gas.
BOEs produced per day.
British thermal unit, which is the heat required to raise the temperature of a one-pound mass of water from
58.5 to 59.5 degrees Fahrenheit (°F).
Carbon dioxide.
Enhanced oil recovery. In the context of our oil and natural gas production, EOR is also referred to as
tertiary recovery.
Finding and
development costs
The average cost per BOE to find and develop proved reserves during a given period. It is calculated by
dividing (a) costs, which include the sum of (i) the total acquisition, exploration and development costs
incurred during the period plus (ii) future development and abandonment costs related to the specified
property or group of properties, by (b) the sum of (i) the change in total proved reserves during the period
plus (ii) total production during that period.
GAAP
MBbls
MBOE
Mcf
Mcf/d
MMBbls
MMBOE
MMBtu
MMcf
MMcf/d
Accounting principles generally accepted in the United States of America.
One thousand barrels of crude oil or other liquid hydrocarbons.
One thousand BOEs.
One thousand cubic feet of natural gas or CO2 at a temperature base of 60 degrees Fahrenheit (°F) and at
the legal pressure base (14.65 to 15.025 pounds per square inch absolute) of the state or area in which the
reserves are located or sales are made.
One thousand cubic feet of natural gas or CO2 per day.
One million barrels of crude oil or other liquid hydrocarbons.
One million BOEs.
One million Btus.
One million cubic feet of natural gas or CO2.
One million cubic feet of natural gas or CO2 produced per day.
Noncash fair value
gains (losses) on
commodity
derivatives
The net change during the period in the fair market value of commodity derivative positions. Noncash fair
value gains (losses) on commodity derivatives is a non-GAAP measure and makes up only a portion of
“Commodity derivatives expense (income)” in the Consolidated Statements of Operations, which also
includes the impact of settlements on commodity derivatives during the period. Its use is further discussed
in Management’s Discussion and Analysis of Financial Condition and Results of Operations – Results of
Operations – Operating Results Table.
NYMEX
The New York Mercantile Exchange. In the context of our oil and natural gas sales, NYMEX pricing
represents the West Texas Intermediate benchmark price for crude oil and Henry Hub benchmark price for
natural gas.
Probable
Reserves*
Reserves that are less certain to be recovered than proved reserves but which, together with proved reserves,
are as likely as not to be recovered.
Proved Developed
Reserves*
Reserves that can be expected to be recovered through existing wells with existing equipment and operating
methods.
3
Denbury Resources Inc.
Proved Reserves* Reserves that geological and engineering data demonstrate with reasonable certainty to be recoverable in
future years from known reservoirs under existing economic and operating conditions.
Proved
Undeveloped
Reserves*
PV-10 Value
Reserves that are expected to be recovered from new wells on undrilled acreage or from existing wells, in
each case where a relatively major expenditure is required.
The estimated future gross revenue to be generated from the production of proved reserves, net of estimated
future production, development and abandonment costs, and before income taxes, discounted to a present
value using an annual discount rate of 10%. PV-10 Values were prepared using average hydrocarbon prices
equal to the unweighted arithmetic average of hydrocarbon prices on the first day of each month within the
12-month period preceding the reporting date. PV-10 Value is a non-GAAP measure and does not purport
to represent the fair value of our oil and natural gas reserves; its use is further discussed in Item 1, Business
and Properties – Non-GAAP Financial Measures and Reconciliations.
Tcf
One trillion cubic feet of natural gas or CO2.
Tertiary Recovery A term used to represent techniques for extracting incremental oil out of existing oil fields (as opposed to
primary and secondary recovery or “non-tertiary” recovery). In the context of our oil and natural gas
production, tertiary recovery is also referred to as EOR.
* This definition is an abbreviated version of the complete definition set forth in Rule 4-10(a) of Regulation S-X. For the
complete definition see:
http://www.ecfr.gov/cgi-bin/text-idx?
SID=2d916841db86d079fa060fa63b08d34e&mc=true&node=se17.3.210_14_610&rgn=div8.
4
Denbury Resources Inc.
PART I
Item 1. Business and Properties
GENERAL
Denbury Resources Inc., a Delaware corporation, is an independent oil and natural gas company with 262.2 MMBOE of
estimated proved oil and natural gas reserves as of December 31, 2018, of which 97% is oil. Our operations are focused in two
key operating areas: the Gulf Coast and Rocky Mountain regions. Our goal is to increase the value of our properties through a
combination of exploitation, drilling and proven engineering extraction practices, with the most significant emphasis relating to
CO2 enhanced oil recovery operations.
As part of our corporate strategy, we are committed to strong financial discipline, efficient operations and creating long-term
value for our shareholders through the following key principles:
•
•
•
target specific regions where we either have, or believe we can create, a competitive advantage as a result of our ownership
or use of CO2 reserves, oil fields and CO2 infrastructure;
secure properties where we believe additional value can be created through tertiary recovery operations and a combination
of other exploitation, development, exploration and marketing techniques;
acquire properties that give us a majority working interest and operational control or where we believe we can ultimately
obtain it;
• maximize the value and cash flow generated from our operations by increasing production and reserves while controlling
costs;
optimize the timing and allocation of capital among our investment opportunities to maximize the rates of return on our
investments;
exercise financial discipline by attempting to balance our development capital expenditures with our cash flows from
operations; and
attract and maintain a highly competitive team of experienced and incentivized personnel.
•
•
•
Denbury has been publicly traded on the New York Stock Exchange since 1997. Our corporate headquarters is located at
5320 Legacy Drive, Plano, Texas 75024, and our phone number is 972-673-2000. At December 31, 2018, we had 847 employees,
484 of whom were employed in field operations or at our field offices. We make our annual report on Form 10-K, quarterly reports
on Form 10-Q, current reports on Form 8-K, and amendments to those reports, filed or furnished pursuant to section 13(a) or 15(d)
of the Securities Exchange Act of 1934, available free of charge on or through our website, www.denbury.com, as soon as reasonably
practicable after we electronically file such material with, or furnish it to, the SEC. The SEC also maintains a website, http://
www.sec.gov, which contains periodic reports on Forms 8-K, 10-Q and 10-K filed with the SEC, along with other reports, proxy
and information statements and other information filed by Denbury. Throughout this Annual Report on Form 10-K (“Form 10-
K”) we use the terms “Denbury,” “Company,” “we,” “our” and “us” to refer to Denbury Resources Inc. and, as the context may
require, its subsidiaries.
DEFINITIVE MERGER AGREEMENT TO ACQUIRE PENN VIRGINIA CORPORATION
On October 28, 2018, we entered into a definitive Agreement and Plan of Merger (the “Merger Agreement”) with Penn Virginia
Corporation (NASDAQ: PVAC) (“Penn Virginia”). The Merger Agreement provides for us to acquire Penn Virginia in a stock
and cash transaction (the “Merger”). The Merger is subject to approval by shareholders of Penn Virginia and approval by Denbury’s
stockholders of the issuance of Denbury common stock in the Merger and an amendment to Denbury’s charter to increase its
authorized shares. Consummation of the Merger is also subject to other customary mutual closing conditions, which are described
in the Form 8-K references below. A Form S-4 Registration Statement pertaining to the Merger has been filed with the SEC, and
we and Penn Virginia intend to provide to our respective equity holders an updated version of the Joint Proxy Statement/Prospectus
contained therein in connection with solicitation of approval by Denbury stockholders and Penn Virginia shareholders of those
matters described above. Based upon Denbury’s per share closing price on the NYSE on October 26, 2018, the transaction value
is approximately $1.7 billion, including the assumption of Penn Virginia debt outstanding as of the date of the Merger Agreement.
For further information, see “Overview – Agreement to Acquire Penn Virginia Corporation” in Management’s Discussion and
Analysis of Financial Condition and Results of Operations, which is only a summary of certain aspects of the Merger Agreement
and the transactions contemplated thereby, and is not intended to be complete. For further information, see our Form 8-K and
exhibits thereto filed with the Securities and Exchange Commission (the “Commission” or the “SEC”) on October 29, 2018.
5
Denbury Resources Inc.
In connection with the Merger Agreement, Denbury has received a commitment letter from JPMorgan Chase Bank, N.A.,
subject to certain funding conditions, for a proposed new $1.2 billion senior secured revolving credit facility with a maturity date
of December 9, 2021 and a $400 million senior secured second lien bridge facility to be available to the extent Denbury does not
secure alternate financing prior to April 30, 2019. The commitment letter is an exhibit to our Form 10-Q Report for the third
quarter of 2018 filed with the SEC on November 9, 2018. These two new debt financings are expected to be used to fully or
partially fund the $400 million cash portion of the consideration in the Merger, potentially retire and replace Penn Virginia’s $200
million second lien term loan, replace Penn Virginia’s existing bank credit facility, which had $321 million drawn and outstanding
as of December 31, 2018, and pay fees and expenses.
Consummation of the Merger and the related financing, which cannot be assured and requires satisfaction of a variety of
conditions, would have a significant impact on all aspects of our business and financial condition.
2018 BUSINESS DEVELOPMENTS
Since our production is 97% oil, oil prices generally constitute the single largest variable in our operating results. Over the
last few years, NYMEX oil prices have been volatile, decreasing to a low of $26 in early 2016 and gradually improving to hit a
three-year peak of $76 in October 2018, before retreating to the low-$40’s in late December 2018 and then moving upward again
to an average of approximately $53 per Bbl during the first two months of 2019. During the period of lower oil prices, our focus
primarily has been on preservation of cash and liquidity, together with cost reductions and debt management, rather than
concentration on expansion and growth. Our 2018 key accomplishments and business developments included the following:
•
Sanctioned our CO2 enhanced oil recovery development project at Cedar Creek Anticline, Denbury’s largest oil field, a project
to access the potential for significant long-term oil production and cash flow of this key asset, which will require capital outlay
for the initial phase of the project of approximately $300 million through 2022.
• Generated $529.7 million of cash flow from operations in 2018 ($443.6 million after reducing for interest payments treated
as debt reduction), significantly exceeding our incurred development capital expenditures in 2018 of $322.7 million.
• Reduced our debt principal by $243.2 million during 2018, with $144.1 million of that reduction coming from the conversion
of our 5% Convertible Senior Notes due 2023 and 3½% Convertible Senior Notes due 2024 into shares of Denbury common
stock.
• Extended the maturity date of our senior secured bank credit facility from December 9, 2019 to December 9, 2021.
•
•
Issued $450.0 million of 7½% Senior Secured Second Lien Notes due 2024 in August 2018, with a portion of the proceeds
utilized to fully repay outstanding borrowings on our senior secured bank credit facility.
Improved the ratio of net debt (debt principal less cash and cash equivalents) to 2018 Adjusted EBITDAX (a non-GAAP
measure) to 4.2x (including hedge settlements) and 3.3x (excluding hedge settlements) from 6.6x (including hedge settlements)
and 5.9x (excluding hedge settlements) utilizing the comparable 2017 measures (see Item 1, Business and Properties – Non-
GAAP Financial Measures and Reconciliations).
• Reduced 2018 general and administrative expenses by $30.3 million to $71.5 million, a 30% reduction from 2017 amounts,
reflective of our reductions in personnel and our efforts to reduce costs during the oil price downturn.
•
Increased proved reserves at December 31, 2018 to 262.2 MMBOE, from 259.7 MMBOE at December 31, 2017, representing
a 111% replacement of 2018 annual production.
2019 BUSINESS OUTLOOK
As we approached the end of 2018, we experienced another significant downward move in oil prices, which dropped from
over $76 per barrel in early October 2018 to lows in the $40 per barrel range by the end of 2018. In light of this, we remained
diligent in determining our capital budget for 2019, exercising the flexibility we have with our asset base and focusing on both
short-term and long-term projects that maximize value while meeting one of our key objectives of spending within cash flow. For
2019, we have initially budgeted our development capital spending at $240 million to $260 million, excluding capitalized interest
and acquisitions, a decrease of roughly 23% from 2018 actual capital spending levels. We utilized a NYMEX oil price estimate
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Denbury Resources Inc.
of $50 per Bbl in developing our 2019 budget, which based on our current projections would generate a level of cash flow that
would more than fully fund our development capital spending plans, with any excess cash flow potentially used for debt reduction,
acquisitions, and/or additional capital spending, among other things. At this decreased capital spending level, we currently anticipate
2019 average daily production to average between 56,000 and 60,000 BOE/d, compared to our 2018 average production rate of
60,341 BOE/d.
Our capital spending during 2019 will focus primarily on the continued development of our current tertiary floods, certain
exploitation projects within our existing fields and approximately $30 million of the cost for the CO2 pipeline needed for the Cedar
Creek Anticline enhanced oil recovery project. Planned development activities presented in the discussions that follow may be
modified during the course of 2019 depending primarily upon oil prices and our level of cash flow to fund such development, and
we will continue to evaluate the timing of the development of our inventory of fields and related pipelines and facilities. Additionally,
we plan to continue our focus on strengthening our financial condition by opportunistically taking steps to reduce our remaining
debt levels and/or extend debt maturities, maintaining and enhancing the efficiencies achieved over the last couple of years, and
pursuing opportunities to increase or accelerate growth through organic projects such as accretive acquisitions.
Along with Denbury’s 2019 development plans, we are continuing to market for sale approximately 4,000 acres of surface
land with no active oil and gas operations in the Houston area. We remain focused on a strategy that we believe will ultimately
yield the highest value for the land, and we expect most of that value to be realized over the next couple of years. During 2018,
we consummated approximately $5 million of land sales and currently have signed agreements covering another $9 million that
we expect to close in 2019. In early 2018, we began the process of portfolio optimization through the marketing of mature properties
located in Mississippi and Louisiana and Citronelle Field in Alabama, and completed the sale of Lockhart Crossing Field for net
proceeds of $4.1 million during the third quarter of 2018. The decline in oil prices and our focus on the Penn Virginia transaction
stalled our process in the fourth quarter of 2018, but we plan to continue to evaluate our options with these fields as oil prices
improve. In aggregate, these fields produced an average of approximately 7,228 BOE/d during the fourth quarter of 2018. In
aggregate, these fields accounted for 12% of our total 2018 production and approximately 8% of our year-end proved reserves.
We believe the acquisition of Penn Virginia would enhance Denbury’s operating results and balance sheet by creating a
combination of short-cycle investment opportunities in Penn Virginia’s Eagle Ford Shale acreage and Denbury’s lower-declining
EOR focused asset base, with the opportunity to apply Denbury’s technical EOR knowledge and capabilities to enhance the long-
term development potential of Penn Virginia’s Eagle Ford acreage. As a combined entity, Denbury plans to continue to spend
within cash flow and remain focused on the same core objectives. If the merger is not approved by the shareholders of both
companies, Denbury will execute its 2019 plans on a stand-alone basis and remain focused on these same key objectives.
7
ESTIMATED NET QUANTITIES OF PROVED OIL AND NATURAL GAS RESERVES AND PRESENT VALUE OF
ESTIMATED FUTURE NET REVENUES
Denbury Resources Inc.
Oil and Natural Gas Reserve Estimates
DeGolyer and MacNaughton (“D&M”) prepared estimates of our net proved oil and natural gas reserves as of December 31,
2018, 2017 and 2016 (see the summary of D&M’s report as of December 31, 2018, included as an exhibit to this Form 10-K).
These estimates of reserves were prepared using an average price equal to the unweighted arithmetic average of hydrocarbon prices
on the first day of each month within the 12-month period in accordance with rules and regulations of the SEC. These oil and
natural gas reserve estimates do not include any value for probable or possible reserves that may exist, nor do they include any
value for undeveloped acreage. The reserve estimates represent our net revenue interest in our properties.
8
Denbury Resources Inc.
The following table provides estimated proved reserve information prepared by D&M as of December 31, 2018, 2017 and
2016, as well as PV-10 Values and Standardized Measures for each period. During 2018, total proved reserves increased by 24.5
MMBOE (9%) excluding 2018 production of 22.0 MMBOE, representing a 111% replacement of 2018 annual production. There
are numerous uncertainties inherent in estimating quantities of proved oil and natural gas reserves and their values, including many
factors beyond our control, which are further discussed in Item 1A, Risk Factors – Estimating our reserves, production and future
net cash flows is difficult to do with any certainty. See also Oil and Natural Gas Operations – Field Summary Table
and Supplemental Oil and Natural Gas Disclosures (Unaudited) to the Consolidated Financial Statements for further discussion
of reserve inputs and changes between periods.
Estimated proved reserves
Oil (MBbls)
Natural gas (MMcf)
Oil equivalent (MBOE)
Reserve volumes categories
Proved developed producing
Oil (MBbls)
Natural gas (MMcf)
Oil equivalent (MBOE)
Proved developed non-producing
Oil (MBbls)
Natural gas (MMcf)
Oil equivalent (MBOE)
Proved undeveloped
Oil (MBbls)
Natural gas (MMcf)
Oil equivalent (MBOE)
Percentage of total MBOE
Proved developed producing
Proved developed non-producing
Proved undeveloped
Representative oil and natural gas prices(1)
Oil (NYMEX price per Bbl)
Natural gas (Henry Hub price per MMBtu)
Present values (in thousands)(2)
December 31,
2018
2017
2016
255,042
43,008
262,210
200,852
39,562
207,446
21,884
3,350
22,442
32,306
96
32,322
252,625
42,721
259,745
189,166
38,184
195,530
33,365
4,251
34,073
30,094
286
30,142
247,103
44,315
254,489
170,082
40,167
176,777
31,837
3,788
32,468
45,184
360
45,244
79%
9%
12%
75%
13%
12%
69%
13%
18%
$
65.56
$
51.34
$
3.10
2.98
42.75
2.55
Discounted estimated future net cash flows before income taxes (PV-10
Value)(3)
$ 4,025,139
$ 2,533,798
$ 1,541,684
Standardized measure of discounted estimated future net cash flows
after income taxes (“Standardized Measure”)
$ 3,351,385
$ 2,232,429
$ 1,399,217
(1) The reference prices were based on the arithmetic average of the first-day-of-the-month NYMEX commodity prices for each
month during the respective year. These prices do not reflect adjustments for market differentials by field that are utilized in
the preparation of our reserve report to arrive at the appropriate net price we receive. See Item 7, Management’s Discussion
and Analysis of Financial Condition and Results of Operations – Results of Operations – Operating Results Table for details
of oil and natural gas prices received, both including and excluding the impact of derivative settlements.
(2) Determined based on the average first-day-of-the-month prices for each month, adjusted to prices received by field in
accordance with standards set forth in the Financial Accounting Standards Board Codification (“FASC”). PV-10 Values and
the Standardized Measure are significantly impacted by the oil prices we receive relative to NYMEX oil prices (our NYMEX
9
Denbury Resources Inc.
oil price differential). The weighted-average oil price differentials utilized were $0.24 per Bbl below representative NYMEX
oil prices as of December 31, 2018, compared to $2.25 per Bbl below NYMEX oil prices as of December 31, 2017, and $3.39
per Bbl below NYMEX oil prices as of December 31, 2016.
(3) PV-10 Value is a non-GAAP measure and is different from the Standardized Measure in that PV-10 Value is a pre-tax number
and the Standardized Measure is an after-tax number. See Item 1, Business and Properties – Non-GAAP Financial Measures
and Reconciliations for further discussion.
Our proved non-producing reserves primarily relate to reserves that are to be recovered from productive zones that currently
require a response to performance modifications before they can be classified as proved developed producing. Since a majority
of our properties are in areas with multiple pay zones, these properties may have both proved producing and proved non-producing
reserves.
As of December 31, 2018, our estimated proved undeveloped reserves totaled approximately 32.3 MMBOE, or approximately
12% of our estimated total proved reserves, an increase of 2.2 MMBOE (7%) from December 31, 2017 levels for these reserves,
which changes are discussed below. Approximately 88% (28.3 MMBOE) of our proved undeveloped oil reserves relate to planned
future development within our CO2 tertiary operating fields. We generally consider the CO2 tertiary proved undeveloped reserves
to be lower risk than other proved undeveloped reserves that require drilling at locations offsetting existing production, because
all of these proved undeveloped reserves are associated with tertiary recovery operations in fields and reservoirs that historically
produced substantial volumes of oil under primary production. As of December 31, 2018, 19.8 MMBOE of our total proved
undeveloped reserves are not scheduled to be developed within five years of initial booking, all of which are part of CO2 EOR
projects. We believe these reserves satisfy the conditions to be included as proved reserves because (1) we have established and
continue to follow the previously adopted development plan for each of these projects; (2) we have significant ongoing development
activities in each of these CO2 EOR projects and (3) we have a historical record of completing the development of comparable
long-term projects.
During 2018, we spent approximately $20 million to convert 1.1 MMBOE of proved undeveloped reserves to proved developed
reserves, primarily related to continued tertiary development activities at Delhi Field and non-tertiary development activities at
Cedar Creek Anticline through our Mission Canyon drilling program. Other changes in proved undeveloped reserves during 2018
included improved recovery additions of 2.3 MMBOE related to our non-tertiary operations at Cedar Creek Anticline; adding an
additional 2.0 MMBOE primarily related to our tertiary operations at Hastings Field and Salt Creek Field; and recognizing net
downward revisions of our proved undeveloped reserves of 1.0 MMBOE, primarily the result of reserves that were reclassified to
unproved based on changes in our waterflood development plans that would now extend beyond the five-year development
timeframe.
During 2018, we provided oil and natural gas reserve estimates for 2017 to the United States Energy Information Agency that
were substantially the same as the reserve estimates included in our Form 10-K for the year ended December 31, 2017.
Internal Controls Over Reserve Estimates
Reserve information in this report is based on estimates prepared by D&M, an independent petroleum engineering consulting
firm located in Dallas, Texas, utilizing data provided by our internal reservoir engineering team and is the responsibility of
management. We rely on D&M’s expertise to ensure that our reserve estimates are prepared in compliance with SEC rules and
regulations and that appropriate geologic, petroleum engineering, and evaluation principles and techniques are applied in accordance
with practices generally recognized by the petroleum industry as presented in the publication of the Society of Petroleum Engineers
entitled “Standards Pertaining to the Estimating and Auditing of Oil and Gas Reserves Information (Revision as of February 19,
2007)”. The person responsible for the preparation of the reserve report is a Senior Vice President at D&M; he is a Registered
Professional Engineer in the State of Texas. He received a Master of Science degree in Petroleum Engineering from the University
of Texas in 1984, and he has in excess of 34 years of experience in oil and gas reservoir studies and evaluations. Our Senior Vice
President – Business Development and Technology is primarily responsible for overseeing the independent petroleum engineering
firm during the process. Our Senior Vice President – Business Development and Technology has a Bachelor of Science degree
in Petroleum Engineering from the Colorado School of Mines and over 34 years of industry experience working with petroleum
engineering and reserve estimates. D&M relies on various data provided by our internal reservoir engineering team in preparing
its reserve estimates, including such items as oil and natural gas prices, ownership interests, production information, operating
costs, planned capital expenditures and other technical data. Our internal reservoir engineering team consists of qualified petroleum
engineers who maintain the Company’s internal evaluation of reserves and compare the Company’s information to the reserves
10
Denbury Resources Inc.
prepared by D&M. Management is responsible for designing the internal control procedures used in the preparation of our oil
and gas reserves, which include verification of data input into reserve forecasting and economics evaluation software, as well as
multi-discipline management reviews. The internal reservoir engineering team reports directly to our Senior Vice President –
Business Development and Technology. In addition, our Board of Directors’ Reserves and Health, Safety and Environmental
(“HSE”) Committee, on behalf of the Board of Directors, oversees the qualifications, independence, performance and hiring of
our independent petroleum engineering firm and reviews the final report and subsequent reporting of our oil and natural gas reserve
estimates. The Chairman of the Reserves and HSE Committee holds a Ph.D. in Chemical Engineering from the Massachusetts
Institute of Technology and bachelor’s degrees in Chemistry and Mathematics from Capital University in Ohio. He has more than
35 years of industry experience, with responsibilities including reserves preparation and approval.
OIL AND NATURAL GAS OPERATIONS
Summary. Our oil and natural gas properties are concentrated in the Gulf Coast and Rocky Mountain regions of the United
States. Currently our properties with proved and producing reserves in the Gulf Coast region are situated in Mississippi, Texas,
Louisiana and Alabama, and in the Rocky Mountain region are situated in Montana, North Dakota and Wyoming. Our primary
focus is increasing the value of our properties through a combination of exploitation, drilling and proven engineering extraction
practices, with the most significant emphasis relating to CO2 EOR operations. Our current portfolio of CO2 EOR projects provides
us significant oil production and reserve growth potential in the future, assuming crude oil prices are at levels that support the
development of those projects.
We have been conducting and expanding EOR operations on our assets in the Gulf Coast region since 1999, and as a result,
we currently have many more CO2 EOR projects in this region than in the Rocky Mountain region. We began operations in the
Rocky Mountain region in 2010 in connection with, and following, our merger with Encore Acquisition Company (“Encore”). In
the Gulf Coast region, we own what is, to our knowledge, the region’s only significant naturally occurring source of CO2, and
these large volumes of naturally occurring CO2 give us a significant competitive advantage in this area. In the Rocky Mountain
region, we own an overriding royalty interest equivalent to an approximate one-third ownership interest in Exxon Mobil
Corporation’s (“ExxonMobil’s”) CO2 reserves in LaBarge Field in southwestern Wyoming. In addition to the sources of CO2 we
currently own, we purchase and use CO2 captured from industrial sources which could otherwise be released into the atmosphere
(sometimes referred to as anthropogenic, man-made or industrial-source CO2) in our tertiary operations. These industrial sources
of CO2 help us recover additional oil from mature oil fields and, we believe, also provide an economical way to reduce atmospheric
CO2 emissions through the concurrent underground storage of CO2 which occurs as part of our oil-producing EOR operations.
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Denbury Resources Inc.
Field Summary Table. The following table provides a summary by field and region of selected proved oil and natural gas
reserve information, including total proved reserve quantities as of December 31, 2018, and average daily production for 2018,
all based on Denbury’s net revenue interest (“NRI”). The reserve estimates presented were prepared by D&M, independent
petroleum engineers located in Dallas, Texas. We serve as operator of nearly all of our significant properties, in which we also
own most of the interests, although typically less than a 100% working interest, and a lesser NRI due to royalties and other burdens.
For additional oil and natural gas reserves information, see Estimated Net Quantities of Proved Oil and Natural Gas Reserves and
Present Value of Estimated Future Net Revenues above and Supplemental Oil and Natural Gas Disclosures (Unaudited) to the
Consolidated Financial Statements.
Proved Reserves as of December 31, 2018(1)
2018 Average Daily
Production
Oil
(MBbls)
Natural
Gas
(MMcf)
MBOEs
% of
Company
Total
MBOEs
Oil
(Bbls/d)
Natural
Gas
(Mcf/d)
Average
2018 NRI
18,359
34,557
22,469
14,998
17,427
2,084
16,850
126,744
16,443
7,562
24,005
150,749
16,245
4,460
20,705
81,395
2,193
83,588
104,293
255,042
—
—
—
—
—
—
—
—
—
—
—
—
18,359
34,557
22,469
14,998
17,427
2,084
16,850
7.0%
13.2%
8.6%
5.7%
6.6%
0.8%
6.4%
4,368
5,596
4,355
4,843
5,530
205
6,702
126,744
48.3%
31,599
16,443
7,562
24,005
6.3%
2.9%
9.2%
4,113
2,116
6,229
150,749
57.5%
37,828
—
—
—
—
—
—
—
—
—
—
—
—
11,977
5,379
17,356
21,515
4,137
25,652
43,008
43,008
18,241
5,357
23,598
84,980
2,883
87,863
111,461
262,210
7.0%
2.0%
9.0%
32.4%
1.1%
33.5%
42.5%
100.0%
4,066
963
5,029
14,513
847
15,360
20,389
58,217
2,877
2,528
5,405
1,940
3,509
5,449
10,854
10,854
—
—
—
—%
315
—
255,042
43,008
262,210
100.0%
58,532
10,854
58.0%
79.9%
81.3%
87.0%
81.9%
47.2%
78.1%
76.8%
84.5%
18.5%
38.2%
66.4%
81.6%
21.6%
52.8%
80.2%
63.7%
79.0%
69.7%
67.5%
32.0%
67.1%
Tertiary oil and gas properties
Gulf Coast region
Delhi
Hastings
Heidelberg
Oyster Bayou
Tinsley
West Yellow Creek
Mature properties(2)
Total Gulf Coast region
Rocky Mountain region
Bell Creek
Salt Creek and other
Total Rocky Mountain region
Total tertiary properties
Non-tertiary oil and gas properties
Gulf Coast region
Texas
Mississippi and other
Total Gulf Coast region
Rocky Mountain region
Cedar Creek Anticline(3)
Other
Total Rocky Mountain region
Total non-tertiary properties
Total continuing properties
Property sales
Lockhart Crossing(4)
Company Total
(1) The above reserve estimates were prepared in accordance with FASC Topic 932, Extractive Industries – Oil and Gas, using
the arithmetic averages of the first-day-of-the-month NYMEX commodity price for each month during 2018, which were
$65.56 per Bbl for crude oil and $3.10 per MMBtu for natural gas.
(2) Mature properties include Brookhaven, Cranfield, Eucutta, Little Creek, Mallalieu, Martinville, McComb and Soso fields in
Mississippi.
12
(3) The Cedar Creek Anticline consists of a series of 14 different operating areas.
Denbury Resources Inc.
(4) Includes production from Lockhart Crossing Field sold in the third quarter of 2018, the majority of which was previously
included in ‘Mature properties’ in the Gulf Coast region.
Enhanced Oil Recovery Overview. CO2 used in EOR is one of the most efficient tertiary recovery mechanisms for producing
crude oil. When injected under pressure into underground, oil-bearing rock formations, CO2 acts somewhat like a solvent as it
travels through the reservoir rock, mixing with and modifying the characteristics of the oil so it can be produced and sold. The
terms “tertiary flood,” “CO2 flood” and “CO2 EOR” are used interchangeably throughout this document.
While enhanced oil recovery projects utilizing CO2 have been successfully performed by numerous oil and gas companies in
a wide range of oil-bearing reservoirs in different oil-producing basins, we believe our investments, experience and acquired
knowledge give us a strategic and competitive advantage in the areas in which we operate. We apply what we have learned and
developed over the years to improve and increase sweep efficiency within the CO2 EOR projects we operate.
We began our CO2 operations in August 1999, when we acquired Little Creek Field, followed by our acquisition of Jackson
Dome CO2 reserves and the NEJD pipeline in 2001. Based upon our success at Little Creek and the ownership of the CO2 reserves,
we began to transition our capital spending and acquisition efforts to focus more heavily on CO2 EOR and, over time, transformed
our strategy to focus primarily on owning and operating oil fields that are well suited for CO2 EOR projects. Prior to tertiary
flooding, we strive to maximize the currently sizeable primary and secondary production from our prospective tertiary fields and
from fields in which tertiary floods have commenced but still contain significant non-tertiary production. Our asset base today
almost entirely consists of, or otherwise relates to, oil fields that we are currently flooding with CO2 or plan to flood with CO2 in
the future, or assets that produce CO2.
Our tertiary operations have grown so that (1) 58% of our proved reserves at December 31, 2018 are proved tertiary oil
reserves; (2) 63% of our 2018 total production was related to tertiary oil operations (on a BOE basis); and (3) 62% of our 2018
capital expenditures (excluding acquisitions) were related to our tertiary oil operations. At year-end 2018, the proved oil reserves
in our tertiary recovery oil fields had an estimated PV-10 Value of approximately $2.7 billion, or 67% of our total PV-10 Value. In
addition, there are significant probable and possible reserves at several other fields for which tertiary operations are underway or
planned.
Although the up-front cost of tertiary production infrastructure and time to construct pipelines and production facilities is
greater than in primary oil recovery in most circumstances, we believe tertiary recovery has several favorable, offsetting and unique
attributes, including (1) a lower exploration risk, as we are operating oil fields that have significant historical production and
reservoir and geological data, (2) lower production decline rates than unconventional development, (3) reasonable return metrics
at our anticipated long-term prices, (4) limited competition for this recovery method in our geographic regions and a strategic
advantage due to our ownership of the CO2 reserves and CO2 pipeline infrastructure, (5) our EOR operations are generally less
disruptive to new habitats in comparison to other oil and natural gas development because we further develop existing (as opposed
to new) oil fields, and (6) through our oil-producing EOR operations, we concurrently store CO2 captured from industrial sources
in the same underground formations that previously trapped and stored oil and natural gas.
Tertiary Oil Properties
Gulf Coast Region
CO2 Sources and Pipelines
Jackson Dome. Our primary Gulf Coast CO2 source, Jackson Dome, located near Jackson, Mississippi, was discovered
during the 1970s by oil and gas companies that were exploring for hydrocarbons. This large and relatively pure source of naturally
occurring CO2 (98% CO2) is, to our knowledge, the only significant underground deposit of CO2 in the United States east of the
Mississippi River. Together with the related CO2 pipeline infrastructure, Jackson Dome provides us a significant strategic advantage
in the acquisition of properties in Mississippi, Louisiana and southeastern Texas that are well suited for CO2 EOR.
We acquired Jackson Dome in February 2001 in a purchase that also gave us ownership and control of the NEJD CO2 pipeline
and provided us with a reliable supply of CO2 at a reasonable and predictable cost for our Gulf Coast CO2 tertiary recovery
operations. Since February 2001, we have acquired and drilled numerous CO2-producing wells, significantly increasing our
13
Denbury Resources Inc.
estimated proved Gulf Coast CO2 reserves from approximately 800 Bcf at the time of acquisition of Jackson Dome to approximately
5.0 Tcf as of December 31, 2018. The proved CO2 reserve estimates are based on a gross (8/8ths) basis, of which our net revenue
interest is approximately 4.0 Tcf, and is included in the evaluation of proved CO2 reserves prepared by D&M, an independent
petroleum engineering consulting firm. In discussing our available CO2 reserves, we make reference to the gross amount of proved
and probable reserves, as this is the amount that is available both for our own tertiary recovery programs and for industrial users
who are customers of Denbury and others, as we are responsible for distributing the entire CO2 production stream.
In addition to our proved reserves, we estimate that we have 910.1 Bcf of probable CO2 reserves at Jackson Dome. While
the majority of these probable reserves are located in structures that have been drilled and tested, such reserves are still considered
probable reserves because (1) the original well is plugged; (2) they are located in fault blocks that are immediately adjacent to
fault blocks with proved reserves; or (3) they are reserves associated with increasing the ultimate recovery factor from our existing
reservoirs with proved reserves. In addition, a significant portion of these probable reserves at Jackson Dome are located in
undrilled structures where we have sufficient subsurface and seismic data indicating geophysical attributes that, coupled with our
historically high drilling success rate, provide a reasonably high degree of certainty that CO2 is present.
In addition to our drilling at Jackson Dome, we have the capability to expand our processing and dehydration capacities, and
install additional pipelines and/or pumping stations necessary to transport the CO2 through our controlled pipeline network. We
expect our current proved reserves of CO2, coupled with a risked drilling program at Jackson Dome and CO2 expected to be
captured from industrial sources, to provide sufficient quantities of CO2 for us to develop our proved and probable EOR reserves
in the Gulf Coast region. In the future, we believe that once a CO2 flood in a field reaches its productive economic limit, we could
recycle a portion of the CO2 that remains in that field’s reservoir and utilize it for oil production in another field’s tertiary flood.
In the Gulf Coast region, approximately 83% of our average daily CO2 produced from Jackson Dome or captured from
industrial sources in 2018 was used in our tertiary recovery operations, compared to 87% in 2017 and 85% in 2016, with the
balance delivered to third-party industrial users. During 2018, we used an average of 466 MMcf/d of CO2 (including CO2 captured
from industrial sources) for our tertiary activities.
Gulf Coast CO2 Captured from Industrial Sources. In addition to our natural source of CO2, we are currently party to two
long-term contracts to purchase CO2 from industrial plants. We have purchased CO2 from an industrial facility in Port Arthur,
Texas since 2012 and from an industrial facility in Geismar, Louisiana since 2013, which supplied an average of approximately
53 MMcf/d of CO2 to our EOR operations during 2018. Additionally, we are in ongoing discussions with other parties regarding
plans to construct plants near the Green Pipeline. In order to capture such volumes, we (or the plant owner) would need to install
additional equipment, which includes, at a minimum, compression and dehydration facilities.
Gulf Coast CO2 Pipelines. We acquired the 183-mile NEJD CO2 pipeline that runs from Jackson Dome to near Donaldsonville,
Louisiana, as part of the 2001 acquisition of our Jackson Dome CO2 source. Since 2001, we have acquired or constructed nearly
750 miles of CO2 pipelines, and as of December 31, 2018, we have access to nearly 950 miles of CO2 pipelines, which gives us
the ability to deliver CO2 throughout the Gulf Coast region. In addition to the NEJD CO2 pipeline, the major pipelines in the Gulf
Coast region are the Free State Pipeline (90 miles), Delta Pipeline (110 miles), Green Pipeline Texas (120 miles), and Green
Pipeline Louisiana (200 miles).
Completion of the Green Pipeline allowed for the first CO2 injection into Hastings Field, located near Houston, Texas, in
2010, and gives us the ability to deliver CO2 to oil fields all along the Gulf Coast from Baton Rouge, Louisiana, to Alvin, Texas. At
the present time, most of the CO2 flowing in the Green Pipeline is delivered from the Jackson Dome area, but also includes the
CO2 we are receiving from the industrial facilities in Port Arthur, Texas and Geismar, Louisiana, and we are currently transporting
a third party’s CO2 for a fee to the sales point at Hastings Field. We currently have ample capacity within the Green Pipeline to
handle additional volumes that may be required to develop our inventory of CO2 EOR projects in this area.
Tertiary Properties with Tertiary Production and Proved Tertiary Reserves at December 31, 2018
Delhi Field. Delhi Field is located east of Monroe, Louisiana. In May 2006, we purchased our initial interest in Delhi for
$50 million. We began well and facility development in 2008, began delivering CO2 to the field in 2009 via the Delta Pipeline,
which runs from Tinsley Field to Delhi Field, and first tertiary production occurred at Delhi Field in 2010. Production from Delhi
Field in the fourth quarter of 2018 averaged 4,526 Bbls/d, compared to 4,906 Bbls/d in the fourth quarter of 2017. During 2016,
we completed construction of a natural gas liquids extraction plant, which provides us with the ability to sell natural gas liquids
from the produced stream, improve the efficiency of the CO2 flood, and utilize extracted methane to power the plant and reduce
14
Denbury Resources Inc.
field operating expenses. Our 2019 development plans for Delhi Field are primarily related to facility improvement and conformance
work.
Hastings Field. Hastings Field is located south of Houston, Texas. We acquired a majority interest in this field in February
2009 for $247 million. We initiated CO2 injection in the West Hastings Unit during 2010 upon completion of the construction of
the Green Pipeline. Due to the large vertical oil column that exists in the field, we are developing the Frio reservoir using dedicated
CO2 injection and producing wells for each of the major sand intervals. We began producing oil from our EOR operations at
Hastings Field in 2012, and we booked initial proved tertiary reserves for the West Hastings Unit in 2012. The Company also has
future plans for continued tertiary development of existing proved undeveloped reserves at the field. During the fourth quarter of
2018, tertiary production from Hastings Field averaged 5,480 Bbls/d, compared to 5,747 Bbls/d in the fourth quarter of 2017.
Heidelberg Field. Heidelberg Field is located in Mississippi off of the Free State Pipeline and consists of an East Unit and
a West Unit. Construction of the CO2 facility, connecting pipeline and well work commenced on the West Heidelberg Unit during
2008, with our first CO2 injections into the Eutaw zone in 2008. Our first tertiary oil production occurred in 2009, and we began
flooding the Christmas and Tuscaloosa zones in 2013 and 2014, respectively. During the fourth quarter of 2018, tertiary production
at Heidelberg Field averaged 4,269 Bbls/d, compared to 4,751 Bbls/d in the fourth quarter of 2017. Our 2019 development plans
for Heidelberg Field include continued development of the Christmas zone and conformance work, with future plans for continued
tertiary development of existing proved undeveloped reserves at the field.
Oyster Bayou Field. We acquired a majority interest in Oyster Bayou Field in 2007. The field is located in southeast Texas,
east of Galveston Bay, and is somewhat unique when compared to our other CO2 EOR projects because the field covers a relatively
small area of 3,912 acres. We began CO2 injections into Oyster Bayou Field in 2010, commenced tertiary production in 2011 from
the Frio A-1 zone, and booked initial proved tertiary reserves for the field in 2012. In 2014, we completed development of the
Frio A-2 zone. During the fourth quarter of 2018, tertiary production at Oyster Bayou Field averaged 4,785 Bbls/d, compared to
4,868 Bbls/d in the fourth quarter of 2017.
Tinsley Field. We acquired Tinsley Field in 2006. This Mississippi field was discovered and first developed in the 1930s
and is separated by different fault blocks. As is the case with the majority of fields in Mississippi, Tinsley Field produces from
multiple reservoirs. Our CO2 enhanced oil recovery operations at Tinsley Field have thus far targeted the Woodruff formation,
although there is additional potential in the Perry sandstone and other smaller reservoirs. We commenced tertiary oil production
from Tinsley Field in 2008 and substantially completed development of the Woodruff formation during 2014. During the fourth
quarter of 2018, tertiary oil production from the field averaged 5,033 Bbls/d, compared to 6,241 Bbls/d in the fourth quarter of
2017. Although production from Tinsley Field is believed to have peaked in 2015 and is generally on decline, we continue to
evaluate future potential investment opportunities in this field.
In addition to our tertiary operations at Tinsley Field, we recently conducted exploitation drilling in other oil-bearing formations
in the field. We completed a total of two wells in the Perry Sand interval during 2018 and the first quarter of 2019. Overall, the
two Perry wells were successful; however, we plan to evaluate the economics and performance of these wells before drilling any
additional wells. In December 2018, we spudded our first well in the Cotton Valley interval and currently expect to complete this
well during the first quarter of 2019. We continue to evaluate exploitation opportunities in additional horizons underlying the
existing CO2 EOR flood.
West Yellow Creek Field. We acquired an approximate 48% non-operated working interest in West Yellow Creek Field in
Mississippi in March 2017 for approximately $16 million, a field in which the operator had previously invested significant capital
converting the field to a CO2 EOR flood. Under our arrangement with the operator, we supply CO2 to the field for a fee. West
Yellow Creek Field is in close proximity to and analogous to Eucutta Field, a very successful CO2 flood that we developed and
continue to operate. We booked initial proved tertiary oil reserves at West Yellow Creek Field as of year-end 2017 and commenced
tertiary production in early 2018. During the fourth quarter of 2018, tertiary oil production from the field averaged 375 Bbls/d.
Development of the field is ongoing, with 2019 development plans including continued tertiary development of the initial formation
within the field.
Mature properties. Mature properties include our longest-producing properties which are generally located along our NEJD
CO2 pipeline in southwest Mississippi and Louisiana and our Free State Pipeline in east Mississippi. This group of properties
includes our initial CO2 field, Little Creek, as well as several other fields (Brookhaven, Cranfield, Eucutta, Mallalieu, Martinville,
McComb and Soso fields). These fields accounted for 18% of our total 2018 CO2 EOR production and approximately 6% of our
15
Denbury Resources Inc.
year-end proved reserves. These fields have been producing under CO2 flood for many years, in many cases more than a decade,
and their production is generally declining.
Future Tertiary Properties with No Tertiary Production or Proved Tertiary Reserves at December 31, 2018
Webster Field. We acquired our interest in Webster Field in 2012. The field is located southeast of Houston, Texas,
approximately eight miles northeast of our Hastings Field which we are currently flooding with CO2. At December 31, 2018,
Webster Field had estimated proved non-tertiary reserves of approximately 2.5 MMBOE, net to our interest. During the fourth
quarter of 2018, non-tertiary production at Webster Field averaged 841 BOE/d, compared to 834 BOE/d in the fourth quarter of
2017. Webster Field is geologically similar to our Hastings Field, producing oil from the Frio zone at similar depths; as a result,
we believe it is well suited for CO2 EOR. In 2014, we completed a nine-mile lateral between the Green Pipeline and Webster
Field, which we plan will eventually deliver CO2 to the field. The timing of the development of a CO2 flood at Webster Field is
primarily dependent upon capital availability and priorities and future oil prices.
Conroe Field. Conroe Field, our largest potential tertiary flood in the Gulf Coast region, is located north of Houston, Texas. We
acquired a majority interest in this field in 2009 for $271 million in cash and 11.6 million shares of Denbury common stock, for
a total aggregate value of $439 million. Conroe Field had estimated proved non-tertiary reserves of approximately 9.9 MMBOE
at December 31, 2018, net to our interest, all of which are proved developed. During the fourth quarter of 2018, production at
Conroe Field averaged 1,970 BOE/d, compared to 2,140 BOE/d in the fourth quarter of 2017.
To initiate a CO2 flood at Conroe Field, a pipeline must be constructed so that CO2 can be delivered to the field. This pipeline,
which is planned as an extension of our Green Pipeline, is preliminarily estimated to cover approximately 90 miles at a cost of
approximately $220 million. Our current plan for initiating a CO2 flood at Conroe Field is scheduled several years from now, the
timing of which may change depending on capital availability and priorities, future oil prices and pipeline construction.
In addition to the currently-producing oil-bearing formations at Conroe Field, we are evaluating exploitation opportunities in
other formations, and currently plan to drill a test well within the 2A Sand interval during 2019.
Thompson Field. We acquired our interest in Thompson Field in June 2012 for $366 million. The field is located in Texas,
approximately 18 miles west of our Hastings Field. Thompson Field had estimated proved non-tertiary reserves of approximately
3.9 MMBOE at December 31, 2018, net to our interest, all of which are proved developed. During the fourth quarter of 2018,
non-tertiary production at Thompson Field averaged 942 BOE/d net to our interest, compared to 987 BOE/d in the fourth quarter
of 2017. Thompson Field is geologically similar to Hastings Field, producing oil from the Frio zone at similar depths, and we
therefore believe it has CO2 EOR potential. Under the terms of the Thompson Field acquisition agreement, after the initiation of
CO2 injection, the seller will retain approximately a 5% gross revenue interest (less severance taxes) once average monthly oil
production exceeds 3,000 Bbls/d. The timing of the development of a CO2 flood at Thompson Field is primarily dependent upon
capital availability and priorities and future oil prices.
Rocky Mountain Region
CO2 Sources and Pipelines
LaBarge Field. We acquired an overriding royalty interest equivalent to an approximate one-third ownership interest in
ExxonMobil’s CO2 reserves in LaBarge Field in the fourth quarter of 2012 as part of a sale and exchange transaction with
ExxonMobil. LaBarge Field is located in southwestern Wyoming, and as of December 31, 2018, our interest in LaBarge Field
consisted of approximately 1.2 Tcf of proved CO2 reserves.
During 2018, we received an average of approximately 88 MMcf/d of CO2 from the Shute Creek gas processing plant at
LaBarge Field that we used in our Rocky Mountain region CO2 floods. Based on current capacity, and subject to availability of
CO2, we currently expect our CO2 volumes from Shute Creek to increase in future years. We pay ExxonMobil a fee to process
and deliver the CO2, which we use in our Rocky Mountain region CO2 floods.
Other Rocky Mountain CO2 Sources. We currently have a contract to receive CO2 from the ConocoPhillips-operated Lost
Cabin gas plant in central Wyoming that provides us as much as 50 MMcf/d of CO2 for use in our Rocky Mountain region CO2
floods. We currently estimate that our existing CO2 sources, plus additional CO2 from those or other CO2 sources in the region,
are sufficient to carry out our base Rocky Mountain region EOR development plans.
16
Denbury Resources Inc.
Rocky Mountain CO2 Pipelines. The 20-inch Greencore Pipeline in Wyoming is the first CO2 pipeline we constructed in
the Rocky Mountain region. We plan to use the pipeline as our trunk line in the Rocky Mountain region, eventually connecting
our various Rocky Mountain region CO2 sources to the Cedar Creek Anticline in eastern Montana and western North Dakota. The
232-mile pipeline begins at the ConocoPhillips-operated Lost Cabin gas plant in Wyoming and terminates at Bell Creek Field in
Montana. We completed construction of the pipeline in 2012 and received our first CO2 deliveries from the ConocoPhillips-
operated Lost Cabin gas plant during 2013. During 2014, we completed construction of an interconnect between our Greencore
Pipeline and an existing third-party CO2 pipeline in Wyoming, which enables us to transport CO2 from LaBarge Field to our Bell
Creek Field.
In mid-2018, we sanctioned the CO2 enhanced oil recovery development project at Cedar Creek Anticline, which requires a
110-mile extension of the Greencore CO2 pipeline to CCA from Bell Creek Field. The capital outlay for the pipeline is projected
to be approximately $150 million, of which approximately $20 million was incurred in 2018 with an additional $30 million currently
expected to be incurred in 2019, with the remainder expected in 2020 and early 2021.
Tertiary Properties with Tertiary Production and Proved Tertiary Reserves at December 31, 2018
Bell Creek Field. We acquired our interest in Bell Creek Field in southeast Montana as part of the Encore merger in 2010. The
oil-producing reservoir in Bell Creek Field is a sandstone reservoir with characteristics similar to those we have successfully
flooded with CO2 in the Gulf Coast region. During 2013, we began first CO2 injections into Bell Creek Field, recorded our first
tertiary oil production, and booked initial proved tertiary reserves. Tertiary production, net to our interest, during the fourth quarter
of 2018 averaged 4,421 Bbls/d of oil, compared to 3,571 Bbls/d in the fourth quarter of 2017. During 2018, we completed the
phase five expansion at the field, and our 2019 development plans are primarily related to phase six expansion of the flood.
Salt Creek Field. We acquired our 23% non-operated working interest in Salt Creek Field in Wyoming for approximately
$72 million in June 2017. Tertiary production, net to our interest, during the fourth quarter of 2018 averaged 2,107 Bbls/d of oil,
compared to 2,172 Bbls/d in the fourth quarter of 2017.
Future Tertiary Properties with No Tertiary Production or Proved Tertiary Reserves at December 31, 2018
Cedar Creek Anticline. CCA is the largest potential EOR property that we own and currently our largest producing property,
contributing approximately 25% of our 2018 total production. Historical production from the property has primarily been from
the Red River interval. The field is primarily located in Montana but extends over such a large area (approximately 126 miles)
that it also extends into North Dakota. CCA is a series of 14 different operating areas on a common geological trend, each of
which could be considered a field by itself. We acquired our initial interest in CCA as part of the Encore merger in 2010 and
acquired additional interests (the “CCA Acquisition”) from a wholly-owned subsidiary of ConocoPhillips in 2013 for $1.0 billion,
adding 42.2 MMBOE of incremental proved reserves at that date. Production from CCA, net to our interest, averaged 14,961
BOE/d during the fourth quarter of 2018, compared to production during the fourth quarter of 2017 of 14,302 BOE/d. The non-
tertiary proved reserves associated with CCA were 85.0 MMBOE, net to our interest, as of December 31, 2018.
In addition to the Red River interval, CCA contains other oil-bearing intervals including Mission Canyon and Charles B. We
began pursuing these additional exploitation opportunities in late 2017. We have drilled seven successful Mission Canyon
exploitation wells and a successful initial test well in Cabin Creek’s Charles B formation. We continue to evaluate the Charles B
formation and believe it has characteristics that would make it a good candidate for secondary or tertiary flooding. Our 2019
development plans for CCA include up to four additional Mission Canyon wells and a potential Charles B follow-up well.
CCA is located approximately 110 miles north of Bell Creek Field, and our current plan is to connect this field to our Greencore
Pipeline by the end of 2020. In June 2018, we announced the sanctioning of the CO2 enhanced oil recovery development project
at Cedar Creek Anticline. The capital outlay for the initial phase of the project is currently estimated at $300 million through 2022,
which includes $150 million for a 110-mile extension of the Greencore CO2 pipeline from Bell Creek Field discussed above and
$150 million for development in the Red River formation at East Lookout Butte and Cedar Hills South fields in CCA. First tertiary
production from CCA is currently expected in the second half of 2022 or early 2023. Additional phases of development are
expected to target the Interlake, Stony Mountain and Red River formations at Cabin Creek Field beginning in 2024.
Grieve Field. Under a 2011 farm-in agreement, we obtained a 65% working interest in Grieve Field, located in Natrona
County, Wyoming, in exchange for developing the Grieve Field CO2 flood. During 2016, the Company and its joint venture partner
in Grieve Field revised their development arrangement for the field so that our partner funded $55 million of the remaining estimated
17
Denbury Resources Inc.
capital to complete development of the facility and fieldwork in exchange for a 14% higher working interest and a disproportionate
sharing of revenue from the first 2 million barrels of production. Thus, our working interest in the field was reduced from 65%
to 51%, and our net revenue interest on the first million barrels of production is approximately 20%. This arrangement accelerated
the remaining development of the facility and fieldwork, and we currently anticipate first tertiary production in early 2019.
Hartzog Draw Field. We acquired our interest in Hartzog Draw Field in 2012 in conjunction with the Bakken exchange
transaction with ExxonMobil. The field is located in the Powder River Basin of northeastern Wyoming, approximately 12 miles
from our Greencore Pipeline. Hartzog Draw Field had estimated proved reserves of approximately 2.9 MMBOE at December 31,
2018, net to our interest, 0.7 MMBOE of which relate to the natural gas producing Big George coal zone. During the fourth quarter
of 2018, non-tertiary production averaged 1,327 BOE/d, compared to 1,518 BOE/d in the fourth quarter of 2017. Industry activity
around this field has been increasing for the last several years, with several operators testing various formations such as the Turner,
Niobrara, Shannon, Parkman and Mowry for potential development. We believe the oil reservoir characteristics of Hartzog Draw
Field make it well suited for CO2 EOR in the future. We currently plan to initiate a CO2 flood at Hartzog Draw Field several years
from now, the timing of which is dependent on capital availability and priorities and future oil prices.
Other Non-Tertiary Oil Properties
Despite the majority of our oil and natural gas properties discussed above consisting of either existing or planned future tertiary
floods, we also produce oil and natural gas either from fields in both our Gulf Coast and Rocky Mountain regions that are not
amenable to EOR or from specific reservoirs (within an existing tertiary field) that are not amenable to EOR. For example, at
Heidelberg Field, we produce natural gas from the Selma Chalk reservoir, which is separate from the Christmas and Eutaw reservoirs
currently being flooded with CO2. Continuing production from these other non-tertiary properties totaled 2,062 BOE/d during
the fourth quarter of 2018, compared to 1,864 BOE/d during the fourth quarter of 2017.
OIL AND GAS ACREAGE, PRODUCTIVE WELLS AND DRILLING ACTIVITY
In the data below, “gross” represents the total acres or wells in which we own a working interest and “net” represents the gross
acres or wells multiplied by our working interest percentage. For the wells that produce both oil and gas, the well is typically
classified as an oil or natural gas well based on the ratio of oil to natural gas production.
Oil and Gas Acreage
The following table sets forth our acreage position at December 31, 2018:
Gulf Coast region
Rocky Mountain region
Total
Developed
Undeveloped
Total
Gross
226,858
361,472
588,330
Net
180,005
314,479
494,484
Gross
286,802
157,176
443,978
Net
18,213
46,399
64,612
Gross
513,660
518,648
1,032,308
Net
198,218
360,878
559,096
The percentage of our net undeveloped acreage that is subject to expiration over the next three years, if not renewed, is
approximately 37% in 2019, 3% in 2020 and 4% in 2021.
18
Productive Wells
Denbury Resources Inc.
The following table sets forth our gross and net productive oil and natural gas wells as of December 31, 2018:
Producing Oil Wells
Producing Natural Gas Wells
Total
Gross
Net
Gross
Net
Gross
Net
Operated wells
Gulf Coast region
Rocky Mountain region
Total
Non-operated wells
Gulf Coast region
Rocky Mountain region
Total
Total wells
Gulf Coast region
Rocky Mountain region
Total
Drilling Activity
1,240
979
2,219
52
637
689
1,292
1,616
2,908
1,154
933
2,087
18
135
153
1,172
1,068
2,240
144
278
422
7
6
13
151
284
435
135
180
315
—
2
2
135
182
317
1,384
1,257
2,641
59
643
702
1,443
1,900
3,343
1,289
1,113
2,402
18
137
155
1,307
1,250
2,557
The following table sets forth the results of our drilling activities over the last three years. As of December 31, 2018, we had
six wells in progress.
Exploratory wells(1)
Productive(2)
Non-productive(3)
Development wells(1)
Productive(2)
Non-productive(3)(4)
Total
2018
2017
2016
Gross
Net
Gross
Net
Gross
Net
Year Ended December 31,
2
—
14
3
19
2
—
12
3
17
—
—
2
—
2
—
—
2
—
2
—
—
—
—
—
—
—
—
—
—
(1) An exploratory well is a well drilled to find a new field or to find a new reservoir in a field previously found to be productive
of oil or natural gas in another reservoir. Generally, an exploratory well is any well that is not a development well, an extension
well, a service well or a stratigraphic test well. A development well is a well drilled within the proved area of an oil or gas
reservoir to the depth of a stratigraphic horizon known to be productive.
(2) A productive well is an exploratory or development well found to be capable of producing either oil or natural gas in sufficient
quantities to justify completion as an oil or natural gas well.
(3) A non-productive well is an exploratory or development well that is not a productive well.
(4) During 2018, 2017 and 2016, an additional 4, 3 and 1 wells, respectively, were drilled for water or CO2 injection purposes.
19
The following table summarizes sales volumes, sales prices and production cost information for our net oil and natural gas
production for the years ended December 31, 2018, 2017 and 2016:
Denbury Resources Inc.
Net sales volume
Gulf Coast region
Oil (MBbls)
Natural gas (MMcf)
Total Gulf Coast region (MBOE)
Rocky Mountain region
Oil (MBbls)
Natural gas (MMcf)
Total Rocky Mountain region (MBOE)
Total Company (MBOE)
Average sales prices – excluding impact of derivative settlements
Gulf Coast region
Oil (per Bbl)
Natural gas (per Mcf)
Rocky Mountain region
Oil (per Bbl)
Natural gas (per Mcf)
Total Company
Oil (per Bbl)
Natural gas (per Mcf)
Average production cost (per BOE sold)(1)
Gulf Coast region
Rocky Mountain region
Total Company
(1) Excludes oil and natural gas ad valorem and production taxes.
PRODUCTION AND UNIT PRICES
Year Ended December 31,
2018
2017
2016
13,484
1,973
13,813
7,880
1,988
8,211
22,024
14,114
1,995
14,447
7,205
2,141
7,562
22,009
$
$
$
$
67.75
$
51.19
$
3.16
2.98
63.30
$
49.58
$
2.01
1.88
66.11
$
50.64
$
2.58
2.41
22.22
$
20.48
$
22.27
22.24
20.09
20.35
14,772
3,274
15,318
7,715
2,354
8,107
23,425
41.99
2.04
39.44
1.90
41.12
1.98
18.42
16.38
17.71
Further information regarding average production rates, unit sales prices and unit costs per BOE are set forth under Item 7,
Management’s Discussion and Analysis of Financial Condition and Results of Operations – Results of Operations – Operating
Results Table, included herein.
TITLE TO PROPERTIES
As is customary in the oil and natural gas industry, Denbury conducts a limited title examination at the time of its acquisition
of properties or leasehold interests targeted for enhanced recovery, and curative work is performed with respect to significant defects
on higher-value properties of the greatest significance. We believe that title to our oil and natural gas properties is good and
defensible, subject only to such exceptions that we believe do not materially interfere with the use of such properties, including
encumbrances, easements, restrictions and royalty, overriding royalty and other similar interests.
20
SIGNIFICANT OIL AND GAS PURCHASERS AND PRODUCT MARKETING
Denbury Resources Inc.
Oil and natural gas sales are made on a day-to-day basis or under short-term contracts at the current area market price. We
would not expect the loss of any single purchaser to have a material adverse effect upon our operations; however, the loss of a
large single purchaser could potentially reduce the competition for our oil and natural gas production, which in turn could negatively
impact the prices we receive. For the year ended December 31, 2018, two purchasers accounted for 10% or more of our oil and
natural gas revenues: Plains Marketing LP (24%) and Hunt Crude Oil Supply Company (10%). For the years ended December
31, 2017 and 2016, two purchasers accounted for 10% or more of our oil and natural gas revenues: Plains Marketing LP (22% and
20% in 2017 and 2016, respectively) and Marathon Petroleum Company (10% and 14% in 2017 and 2016, respectively).
Our ability to market oil and natural gas depends on many factors beyond our control, including the extent of domestic
production and imports of oil and natural gas, the proximity of our oil and natural gas production to pipelines and corresponding
markets, the available capacity in such pipelines, the demand for oil and natural gas, the effects of weather, and the effects of state
and federal regulation. As of December 31, 2018, we have not experienced significant difficulty in finding a market for all of our
production as it becomes available or in transporting our production to those markets; however, there is no assurance that we will
always be able to market all of our production or obtain favorable prices.
Oil Marketing
Prices received in a regional market fluctuate frequently and can differ from NYMEX pricing due to a variety of reasons,
including supply and/or demand factors, crude oil quality and location differentials. The oil differentials we received in the Gulf
Coast and Rocky Mountain regions are discussed in further detail below.
Crude oil prices in the Gulf Coast region are impacted significantly by the changes in prices received for our crude oil sold
under Light Louisiana Sweet (“LLS”) index prices relative to the change in NYMEX prices. Overall, during 2018 and 2017, we
sold approximately 60% and 65%, respectively, of our crude oil at prices based on, or partially tied to, the LLS index price, and
the balance at prices based on various other indexes tied to NYMEX prices, primarily in the Rocky Mountain region. The average
LLS-to-NYMEX trade-month differential was a positive $4.91 per Bbl during 2018, compared to a positive $2.85 per Bbl during
2017 and a positive $1.70 per Bbl in 2016. Our average NYMEX oil differential in the Gulf Coast region was a positive $2.94
per Bbl and a positive $0.22 per Bbl during 2018 and 2017, respectively, and $1.42 per Bbl below NYMEX in 2016. Our current
markets at various sales points along the Gulf Coast have sufficient demand to accommodate our production, but there can be no
assurance of future demand. We are, therefore, monitoring the marketplace for opportunities to strategically enter into long-term
marketing arrangements.
The marketing of our Rocky Mountain region oil production is dependent on transportation through local pipelines to market
centers in Guernsey, Wyoming; Clearbrook, Minnesota; Wood River, Illinois; and most recently Cushing, Oklahoma. Shipments
on some of the pipelines are at or near capacity and may be subject to apportionment. We currently have access to, or have
contracted for, sufficient pipeline capacity to move our oil production; however, there can be no assurance that we will be allocated
sufficient pipeline capacity to move all of our oil production in the future. Because local demand for production is small in
comparison to current production levels, much of the production in the Rocky Mountain region is transported to markets outside
of the region. Therefore, prices in the Rocky Mountain region are further influenced by fluctuations in prices (primarily Brent
and LLS) in coastal markets and by available pipeline capacity in the Midwest and Cushing markets. For the year ended
December 31, 2018, the discount for our oil production in the Rocky Mountain region averaged $1.50 per Bbl, compared to $1.39
per Bbl during 2017 and $3.97 per Bbl during 2016.
COMPETITION AND MARKETS
We face competition from other oil and natural gas companies in all aspects of our business, including acquisition of producing
properties, oil and gas leases, drilling rights, and CO2 properties; marketing of oil and natural gas; and obtaining and maintaining
goods, services and labor. Many of our competitors have substantially larger financial and other resources. Factors that affect our
ability to acquire producing properties include available liquidity, available information about prospective properties and our
expectations for earning a minimum projected return on our investments. Because of the primary nature of our core assets (our
tertiary operations) and our ownership of relatively uncommon significant natural sources of CO2 in the Gulf Coast and Rocky
Mountain regions, we believe that we are effective in competing in the market and have less competition than our peers in certain
aspects of our business.
21
Denbury Resources Inc.
The demand for qualified and experienced field personnel to drill wells and conduct field operations and for geologists,
geophysicists, engineers and other professionals in the oil and gas industry can fluctuate significantly, often in correlation with
commodity prices, causing periodic shortages in such personnel. Prior to the downturn in oil prices, the competition for qualified
technical personnel had been extensive, and our personnel costs escalated. There were also periods with shortages of drilling rigs
and other equipment, as demand for rigs and equipment has increased along with the number of wells being drilled. These factors
also cause significant increases in costs for equipment, services and personnel. We cannot be certain when we will experience
these issues, and these types of shortages or price increases could significantly decrease our profit margin, cash flow and operating
results, and cause significant delays in our development operations.
FEDERAL AND STATE REGULATIONS
Numerous federal, state and local laws and regulations govern the oil and gas industry. Additions or changes to these laws
and regulations are often made in response to the current political or economic environment. Compliance with the evolving
regulatory landscape is often difficult, and substantial penalties may be incurred for noncompliance. Additionally, the future annual
cost of complying with all laws and regulations applicable to our operations is uncertain and will be ultimately determined by
several factors, including future changes to legal and regulatory requirements. Management believes that continued compliance
with existing laws and regulations applicable to our operations and future compliance therewith will not have a materially adverse
effect on our consolidated financial position, results of operations or cash flows, although such laws and regulations, and compliance
therewith, could cause significant delays or otherwise impede operations, which may, among other things, cause our expected
production rates and cash flows to be less than anticipated.
The following sections describe some specific laws and regulations that may affect us. We cannot predict the cost or impact
of these or other future legislative or regulatory initiatives.
Regulation of Oil and Gas Exploration and Production
Our operations are subject to various types of regulation at the federal, state and local levels. Such regulation includes requiring
permits for drilling wells; maintaining bonding requirements in order to drill or operate wells and regulating the location of wells;
the method of drilling and casing wells; the surface use and restoration of properties upon which wells are drilled; the plugging
and abandoning of wells; and the composition or disposal of chemicals and fluids used in connection with operations. Our operations
are also subject to various conservation laws and regulations. These include regulation of the size of drilling, spacing or proration
units and the density of wells that may be drilled in those units, and the unitization or pooling of oil and gas properties. In addition,
federal and state conservation laws, which establish maximum rates of production from oil and gas wells, generally prohibit or
restrict the venting or flaring of natural gas and impose certain requirements regarding the ratability of production. The effect of
these laws and regulations may limit the amount of oil and natural gas we can produce from our wells and may limit the number
of wells or the locations at which we can drill. Regulatory requirements and compliance relative to the oil and gas industry increase
our costs of doing business and, consequently, affect our profitability.
Federal Regulation of Sales Prices and Transportation
The transportation of, and certain sales with respect to, natural gas in interstate commerce are heavily regulated by agencies
of the U.S. federal government and are affected by, among other things, the availability, terms and cost of transportation. Notably,
the price and terms of access to pipeline transportation are subject to extensive U.S. federal and state regulation. The Federal
Energy Regulatory Commission (“FERC”) is continually proposing and implementing new and/or modified rules and regulations
affecting the natural gas industry, some of which may adversely affect the availability and reliability of interruptible transportation
service on interstate pipelines. While our sales of crude oil, condensate and natural gas liquids are not currently subject to FERC
regulation, our ability to transport and sell such products is dependent on certain pipelines whose rates, terms and conditions of
service are subject to FERC regulation. Additional proposals and proceedings that might affect the natural gas industry are
considered from time to time by Congress, FERC, state regulatory bodies and the courts, and we cannot predict when or if any
such proposals or proceedings might become effective and their effect or impact, if any, on our operations.
Federal Energy and Climate Change Legislation and Regulation
The Pipeline Safety, Regulatory Certainty and Job Creation Act of 2011, among other things, updated federal pipeline safety
standards, increased penalties for violations of such standards, gave the Department of Transportation’s Pipeline and Hazardous
Materials Safety Administration (the “PHMSA”) authority for new damage prevention and incident notification, and directed the
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Denbury Resources Inc.
PHMSA to prescribe new minimum safety standards for CO2 pipelines, which safety standards could affect our operations and the
costs thereof. While the PHMSA has adopted or proposed to adopt a number of new regulations to implement this act, no new
minimum safety standards have been proposed or adopted for CO2 pipelines.
Both federal and state authorities have in recent years proposed new regulations to limit the emission of greenhouse gasses
as part of climate change initiatives. For example, both the EPA and BLM have issued regulations for the control of methane
emissions. The EPA has promulgated regulations requiring permitting for certain sources of greenhouse gas emissions, and in
May 2016, promulgated final regulations to reduce methane and volatile organic compound emissions from the oil and gas sector.
In July 2017, a federal appeals court rejected an attempt by the EPA to delay implementation of the rule. In September 2018, the
EPA proposed amendments to the rule that are targeted at reducing regulatory requirements and streamlining the rule’s
implementation. Enforcement of these regulations may impose additional costs related to compliance with new emission limits,
as well as inspections and maintenance of several types of equipment used in our operations.
Natural Gas Gathering Regulations
State and federal regulation of natural gas gathering facilities generally includes various safety, environmental and, in some
circumstances, nondiscriminatory-take requirements. With the increase in construction and operation of natural gas gathering
lines in various states, natural gas gathering is receiving greater regulatory scrutiny from state and federal regulatory agencies,
which is likely to continue in the future.
Federal, State or Indian Leases
Our operations on federal, state or Indian oil and gas leases, especially those in the Rocky Mountain region, are subject to
numerous restrictions, including nondiscrimination statutes. Such operations must be conducted pursuant to certain on-site security
regulations and other permits and authorizations issued by the Bureau of Land Management, the Bureau of Ocean Energy
Management, the Bureau of Safety and Environmental Enforcement, the Bureau of Indian Affairs, and other federal and state
stakeholder agencies.
Environmental Regulations
Our oil and natural gas production, saltwater disposal operations, injection of CO2, and the processing, handling and disposal
of materials such as hydrocarbons and naturally occurring radioactive materials (“NORM”) are subject to stringent regulation. We
could incur significant costs, including cleanup costs resulting from a release of product, third-party claims for property damage
and personal injuries, or penalties and other sanctions as a result of any violations or liabilities under environmental laws and
regulations or other laws and regulations applicable to our operations. Changes in, or more stringent enforcement of, environmental
laws and other laws applicable to our operations could also result in delays or additional operating costs and capital expenditures.
Various federal, state and local laws and regulations controlling the discharge of materials into the environment, or otherwise
relating to the protection of the environment and human health, directly impact our oil and gas exploration, development and
production operations. These include, among others, (1) regulations adopted by the EPA and various state agencies regarding
approved methods of disposal for certain hazardous and nonhazardous wastes; (2) the Comprehensive Environmental Response,
Compensation, and Liability Act and analogous state laws that regulate the removal or remediation of previously disposed wastes
(including wastes disposed of or released by prior owners or operators), property contamination (including groundwater
contamination), and remedial plugging operations to prevent future contamination; (3) the Clean Air Act and comparable state and
local requirements already applicable to our operations and new restrictions on air emissions from our operations, including
greenhouse gas emissions and those that could discourage the production of fossil fuels that, when used, ultimately release CO2;
(4) the Oil Pollution Act of 1990, which contains numerous requirements relating to the prevention of, and response to, oil spills
into waters of the United States; (5) the Resource Conservation and Recovery Act, which is the principal federal statute governing
the treatment, storage and disposal of hazardous wastes; (6) the Endangered Species Act and counterpart state legislation, which
protects certain species (and their related habitats), including certain species that could be present on our leases, as threatened or
endangered; and (7) state regulations and statutes governing the handling, treatment, storage and disposal of NORM and other
wastes.
In the Rocky Mountain Region, federal agencies’ actions based upon their environmental review responsibilities under the
National Environmental Policy Act can significantly impact the scope and timing of hydrocarbon development by slowing the
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Denbury Resources Inc.
timing of individual applications for permits to drill and requests for rights-of-way, and delaying large scale planning associated
with region-level resource management plans and project-level master development plans.
Management believes that we are currently in substantial compliance with existing applicable environmental laws and
regulations, and does not currently anticipate that future compliance will have a materially adverse effect on our consolidated
financial position, results of operations or cash flows, although such laws and regulations, and compliance therewith, could cause
significant delays or otherwise impede operations, which may, among other things, cause our expected production rates and cash
flows to be less than anticipated.
Hydraulic Fracturing
During 2018, we fracture stimulated five wells at Bell Creek Field and two wells at Tinsley Field utilizing water-based fluids.
We currently have plans to potentially hydraulically fracture one well during 2019. We are familiar with the laws and regulations
applicable to hydraulic fracturing operations and take steps to ensure compliance with these requirements.
NON-GAAP FINANCIAL MEASURES AND RECONCILIATIONS
Reconciliation of Standardized Measure to PV-10 Value
PV-10 Value is a non-GAAP measure and is different from the Standardized Measure in that PV-10 Value is a pre-tax number
and the Standardized Measure is an after-tax number. The information used to calculate PV-10 Value is derived directly from data
determined in accordance with FASC Topic 932. We believe that PV-10 Value is a useful supplemental disclosure to the
Standardized Measure because the Standardized Measure can be impacted by a company’s unique tax situation, and it is not
practical to calculate the Standardized Measure on a property-by-property basis. Because of this, PV-10 Value is a widely used
measure within the industry and is commonly used by securities analysts, banks and credit rating agencies to evaluate the estimated
future net cash flows from proved reserves on a comparative basis across companies or specific properties. PV-10 Value is
commonly used by us and others in our industry to evaluate properties that are bought and sold, to assess the potential return on
investment in our oil and natural gas properties, and to perform our impairment testing of oil and natural gas properties. PV-10
Value is not a measure of financial or operating performance under GAAP, nor should it be considered in isolation or as a substitute
for the Standardized Measure. Our PV-10 Value and the Standardized Measure do not purport to represent the fair value of our
oil and natural gas reserves. See also Glossary and Selected Abbreviations for the definition of “PV-10 Value” and Supplemental
Oil and Natural Gas Disclosures (Unaudited) to the Consolidated Financial Statements for additional disclosures about the
Standardized Measure.
The following table provides a reconciliation of the Standardized Measure to PV-10 Value for the periods indicated:
In thousands
Standardized Measure (GAAP measure)
Discounted estimated future income tax
PV-10 Value (non-GAAP measure)
Reconciliation of Net Income to Adjusted EBITDAX
Year Ended December 31,
2018
3,351,385
673,754
4,025,139
$
$
2017
2,232,429
301,369
2,533,798
$
$
2016
1,399,217
142,467
1,541,684
$
$
Adjusted EBITDAX is a non-GAAP financial measure which management uses and is calculated based upon (but not identical
to) a financial covenant related to “Consolidated EBITDAX” in our senior secured bank credit facility, which excludes certain
items that are included in net income, the most directly comparable GAAP financial measure. Items excluded include interest,
income taxes, depletion, depreciation, and amortization, and items that the Company believes affect the comparability of operating
results such as items whose timing and/or amount cannot be reasonably estimated or are non-recurring. Management believes
Adjusted EBITDAX may be helpful to investors in order to assess our operating performance as compared to that of other companies
in our industry, without regard to financing methods, capital structure or historical costs basis. It is also commonly used by third
parties to assess the Company’s leverage and ability to incur and service debt and fund capital expenditures. Adjusted EBITDAX
should not be considered in isolation, as a substitute for, or more meaningful than, net income, cash flows from operations, or any
other measure reported in accordance with GAAP. The Company’s Adjusted EBITDAX may not be comparable to similarly titled
24
Denbury Resources Inc.
measures of another company because all companies may not calculate Adjusted EBITDAX, EBITDAX, or EBITDA in the same
manner.
The following table presents a reconciliation of our net income to Adjusted EBITDAX for the periods indicated:
In thousands
Net income (GAAP measure)
Adjustments to reconcile to Adjusted EBITDAX
Interest expense
Income tax expense (benefit)
Depletion, depreciation, and amortization
Noncash fair value adjustments on commodity derivatives
Stock-based compensation
Accrued expense related to litigation over a helium supply contract
Impairment of loan receivable and related assets
Noncash, non-recurring and other(1)
Adjusted EBITDAX (non-GAAP measure)
Year Ended December 31,
2018
2017
$
322,698
$
163,152
69,688
87,233
216,449
(196,335)
11,951
49,373
17,805
5,504
584,366
$
99,263
(116,652)
207,713
29,781
15,154
—
—
23,358
421,769
$
(1) Excludes pro forma adjustments related to qualified acquisitions or dispositions under the Company’s senior secured bank
credit facility.
25
Item 1A. Risk Factors
Denbury Resources Inc.
Oil and natural gas prices are volatile. A sustained period of deterioration of oil prices is likely to adversely affect our
future financial condition, results of operations, cash flows and the carrying value of our oil and natural gas properties.
Oil prices are the most important determinant of our operational and financial success. Oil prices are highly impacted by
worldwide oil supply, demand and prices, and have historically been subject to significant price changes over short periods of
time. Over the last few years, NYMEX oil prices have been volatile, decreasing to a low of $26 in early 2016 and gradually
improving to hit a three-year peak of $76 in October 2018, before retreating to the low-$40’s in late December 2018 and then
moving upward again to an average of approximately $53 per Bbl during the first two months of 2019. Based on past commodity
cycles, volatility will remain, and prices could move downward or upward on a rapid or repeated basis, which can make planning
and budgeting, acquisition and divestiture transactions, capital raising, valuations and sustained business strategies more difficult.
Our cash flow from operations is highly dependent on the prices that we receive for oil, as oil comprised approximately 97% of
our 2018 production and approximately 97% of our proved reserves at December 31, 2018. The prices for oil and natural gas are
subject to a variety of factors that are beyond our control. These factors include:
•
•
the level of worldwide consumer demand for oil and natural gas and the domestic and foreign supply of oil and natural
gas and levels of domestic oil and natural gas storage;
the degree to which members of the Organization of Petroleum Exporting Countries maintain oil price and production
controls;
the degree to which domestic oil and natural gas production affects worldwide supply of crude oil or its price;
•
• worldwide political events, conditions and policies, including actions taken by foreign oil and natural gas producing
nations; and
• worldwide economic conditions.
Negative movements in oil prices could harm us in a number of ways, including:
•
•
•
lower cash flows from operations may require reduced levels of capital expenditures;
reduced levels of capital expenditures in turn could lower our present and future production levels, and lower the quantities
and value of our oil and gas reserves, which constitute our major asset;
our lenders could reduce our borrowing base, and we may not be able to raise capital at attractive rates in the public
markets;
• we could have difficulty repaying or refinancing our indebtedness;
• we could be forced to increase our level of indebtedness, issue additional equity, or sell assets;
• we could be required to impair various assets, including a further write-down of our oil and natural gas assets or the value
•
of other tangible or intangible assets; and/or
our potential cash flows from our commodity derivative contracts that include sold puts could be limited to the extent
that oil prices are below the prices of those sold puts.
Furthermore, some or all of our tertiary projects could remain or become uneconomical. We may also decide to suspend future
expansion projects, and if prices were to drop below our operating cash break-even points for an extended period of time, we may
decide to shut-in existing production, both of which could have a material adverse effect on our operations, financial condition
and reduce our production.
A financial downturn in one or more of the world’s major markets could negatively affect our business and financial
condition.
In addition to the impact on the demand for oil, drops in domestic or foreign economic growth rates, regional or worldwide
increases in tariffs or other trade restrictions, significant international currency fluctuations, a sustained credit crisis, a severe
economic contraction either regionally or worldwide or turmoil in the global financial system, could materially affect our business
and financial condition, or impact our ability to finance operations. Negative credit market conditions could inhibit our lenders
from funding our senior secured bank credit facility or cause them to restrict our borrowing base or make the terms of our senior
secured bank credit facility more costly and more restrictive. Negative economic conditions could also adversely affect the
collectability of our trade receivables or performance by our suppliers or cause our commodity hedging arrangements to be
ineffective if our counterparties are unable to perform their obligations.
26
Constraints on liquidity could affect our ability to maintain or increase cash flow from operations.
Denbury Resources Inc.
In recent years, sources and levels of liquidity for the oil and gas industry have become more restrictive, in part due to the
tightening of commercial lenders. Although our liquidity was sufficient to support our capital expenditures during 2018, future
additional liquidity restrictions could negatively affect our level of capital expenditures, and thus our maintenance or growth in
production and operational cash flow. Additionally, our liquidity could be affected by payments made upon finalization of ongoing
litigation (see Item 3, Legal Proceedings). We require continued access to capital. As a result, we may seek to access the public
or private capital markets whenever conditions are favorable, even if we do not have an immediate need for additional capital at
that time.
Our level of indebtedness could adversely affect the level of our operating activities.
As of December 31, 2018, our outstanding indebtedness consisted of $1.5 billion aggregate principal amount of senior
indebtedness and $826.2 million aggregate principal amount of subordinated indebtedness. Our outstanding senior indebtedness
consisted of $614.9 million principal amount of 9% Senior Secured Second Lien Notes due 2021, $455.7 million principal amount
of 9¼% Senior Secured Second Lien Notes due 2022, and $450.0 million principal amount of 7½% Senior Secured Second Lien
Notes due 2024. Our subordinated indebtedness consisted of $826.2 million principal amount of subordinated notes, all of which
have maturity dates between 2021 and 2023 at interest rates ranging from 4.625% to 6.375% per annum at a weighted average
interest rate of 5.39% per annum. As of December 31, 2018, we had no outstanding borrowings on our senior secured bank credit
facility, a borrowing base and aggregate lender commitments of $615 million under our senior secured bank credit facility and
availability with respect to such commitments of $553.0 million after considering letters of credit outstanding. Although the merger
is currently expected to increase our debt levels while improving our leverage metrics and cash flow, consummation of the merger
would further increase our exposure to economic or oil price downturns and the negative effects thereof.
Our debt could have important consequences for us, including but not limited to the following:
•
•
•
•
•
•
increasing our vulnerability to general adverse economic and industry conditions, including falling crude oil prices;
impairing our ability to obtain additional financing for working capital, capital expenditures, acquisitions, development
activities or general corporate and other purposes;
potentially restricting us from making acquisitions or exploiting business opportunities;
requiring dedication of a substantial portion of our cash flows from operations to servicing our indebtedness (so that such
cash flows would not be available for capital expenditures or other purposes);
limiting our ability to borrow additional funds, dispose of assets and make certain investments; and/or
placing us at a competitive disadvantage as compared to our competitors that have less debt.
Increases in interest rates could adversely affect our business.
Our business and operating results can be harmed by increases in interest rates. These changes could cause our cost of doing
business to increase, limit our ability to pursue acquisition opportunities, reduce cash flow, affect our interest costs under our senior
secured bank credit facility, or increase the cost of any new debt financings.
Inability to meet financial performance covenants in our bank agreements may require us to seek modification of covenants,
force a reduction in our borrowing base, or cause repayment of amounts outstanding under our bank credit facility.
Between May 2015 and August 2018, we modified certain of our financial performance covenants under our senior secured
bank credit facility to support continuing compliance with these covenants through the lower oil price environment we have
experienced over the last several years. In August 2018, we extended the maturity of our bank credit facility to December 2021
and reset certain financial performance covenants based on projections and oil price expectations that existed at that time. Oil
prices subsequent to August 2018 have been volatile, and if oil and natural gas prices decrease for an extended period of time,
these metrics could deteriorate further, potentially causing us to not be in compliance with our senior secured bank credit facility’s
covenants. As such, we may be required to seek modifications of these covenants, the banks could force a reduction in our bank
borrowing base and repayment of amounts outstanding under our bank credit facility, or provide a waiver at a significant cost to
the Company. As of December 31, 2018, we had no bank debt outstanding, but we did have $62.0 million in letters of credit
outstanding. Also, we may seek to reduce our debt by, among other things, purchasing our debt in the open market, completing
cash tenders for our debt or public or privately negotiated debt exchanges, issuing equity or completing asset sales and other cash-
generating activities. We cannot assure you, however, that we will be able to successfully modify these covenants or reduce our
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Denbury Resources Inc.
debt in the future. For more information on our senior secured bank credit facility, see Item 7, Management’s Discussion and
Analysis of Financial Condition and Results of Operations – Capital Resources and Liquidity – Senior Secured Bank Credit Facility.
Our bank borrowing base is determined semiannually, and upon requested unscheduled special redeterminations, in each case
at the banks’ discretion, and the amount is established and based, in part, upon certain external factors, such as commodity prices. We
do not know, nor can we control, the results of such redeterminations or the effect of then-current oil and natural gas prices on any
such redetermination. A future redetermination lowering our borrowing base could limit availability under our senior secured
bank credit facility or require us to seek different forms of financing arrangements. If the outstanding debt under our senior secured
bank credit facility were to ever exceed the borrowing base, we would be required to repay the excess amount over a period not
to exceed six months.
Certain of our operations may be limited during certain periods due to severe weather conditions and other regulations.
Our operations in the Gulf Coast region may be subjected to adverse weather conditions such as hurricanes, flooding and
tropical storms in and around the Gulf of Mexico that can damage oil and natural gas facilities and delivery systems and disrupt
operations, which can also increase costs and have a negative effect on our results of operations. Certain of our operations in
North Dakota, Montana and Wyoming, including the construction of CO2 pipelines, the drilling of new wells and production from
existing wells, are conducted in areas subject to extreme weather conditions, including severe cold, snow and rain, which conditions
may cause such operations to be hindered or delayed, or otherwise require that they be conducted only during non-winter months,
and depending on the severity of the weather, could have a negative effect on our results of operations in these areas. Further,
certain of our operations in these areas are confined to certain time periods due to environmental regulations, federal restrictions
on when drilling can take place on federal lands, and lease stipulations designed to protect certain wildlife, which regulations,
restrictions and limitations could slow down our operations, cause delays, increase costs and have a negative effect on our results
of operations.
Oil and natural gas development and producing operations involve various risks.
Our operations are subject to all of the risks normally incident and inherent to the operation and development of oil and natural
gas properties and the drilling of oil and natural gas wells, including, without limitation, pipe failure; fires; formations with abnormal
pressures; uncontrollable flows of oil, natural gas, brine or well fluids; release of contaminants into the environment and other
environmental hazards and risks and well blowouts, cratering or explosions. In addition, our operations are sometimes near
populated commercial or residential areas, which add additional risks. The nature of these risks is such that some liabilities could
exceed our insurance policy limits or otherwise be excluded from, or limited by, our insurance coverage, as in the case of
environmental fines and penalties, for example, which are excluded from coverage as they cannot be insured.
We could incur significant costs related to these risks that could have a material adverse effect on our results of operations,
financial condition and cash flows or could have an adverse effect upon the profitability of our operations. Additionally, a portion
of our production activities involves CO2 injections into fields with wells plugged and abandoned by prior operators. However,
it is often difficult (or impracticable) to determine whether a well has been properly plugged prior to commencing injections and
pressuring the oil reservoirs. We may incur significant costs in connection with remedial plugging operations to prevent
environmental contamination and to otherwise comply with federal, state and local regulations relative to the plugging and
abandoning of our oil, natural gas and CO2 wells. In addition to the increased costs, if wells have not been properly plugged,
modification to those wells may delay our operations and reduce our production.
Development activities are subject to many risks, including the risk that we will not recover all or any portion of our investment
in such wells. Drilling for oil and natural gas may involve unprofitable efforts, not only from dry wells, but also from wells that
are productive but do not produce sufficient net reserves to return a profit after deducting drilling, operating and other costs. The
cost of drilling, completing and operating a well is often uncertain, and cost factors can adversely affect the economics of a project.
Further, our drilling operations may be curtailed, delayed or canceled as a result of numerous factors, including:
•
•
•
•
unexpected drilling conditions;
pressure or irregularities in formations;
equipment failures or accidents;
adverse weather conditions, including hurricanes and tropical storms in and around the Gulf of Mexico that can damage
oil and natural gas facilities and delivery systems and disrupt operations, and winter conditions and forest fires in the
Rocky Mountain region that can delay or impede operations;
28
Denbury Resources Inc.
•
•
•
compliance with environmental and other governmental requirements;
the cost of, or shortages or delays in the availability of, drilling rigs, equipment, pipelines and services; and
title problems.
Estimating our reserves, production and future net cash flows is difficult to do with any certainty.
Estimating quantities of proved oil and natural gas reserves is a complex process. It requires interpretations of available
technical data and various assumptions, including assumptions relating to economic factors such as future commodity prices,
production costs, severance and excise taxes, capital expenditures and workover and remedial costs, and the assumed effect of
governmental rules and regulations. There are numerous uncertainties about when a property may have proved reserves as
compared to potential or probable reserves, particularly relating to our tertiary recovery operations. Forecasting the amount of oil
reserves recoverable from tertiary operations, and the production rates anticipated therefrom, requires estimates, one of the most
significant being the oil recovery factor. Actual results most likely will vary from our estimates. Also, the use of a 10% discount
factor for reporting purposes, as prescribed by the SEC, may not necessarily represent the most appropriate discount factor, given
actual interest rates and risks to which our business, and the oil and natural gas industry in general, are subject. Any significant
inaccuracies in these interpretations or assumptions, or changes of conditions, could result in a revision of the quantities and net
present value of our reserves.
The reserves data included in documents incorporated by reference represent estimates only. Quantities of proved reserves
are estimated based on economic conditions, including first-day-of-the-month average oil and natural gas prices for the 12-month
period preceding the date of the assessment. The representative oil and natural gas prices used in estimating our December 31,
2018 reserves were $65.56 per Bbl for crude oil and $3.10 per MMBtu for natural gas, both of which were adjusted for market
differentials by field. Rapid crude oil price declines beginning in late 2014 have resulted in a significant decrease in our proved
reserve value from 2014 levels, and to a lesser degree, a reduction in our proved reserve volumes, which has caused us to record
write-downs due to the full cost ceiling test in 2015 and 2016. As discussed in greater detail below, significant declines in oil
prices could result in additional write-downs. Our reserves and future cash flows may be subject to revisions based upon changes
in economic conditions, including oil and natural gas prices, as well as due to production results, results of future development,
operating and development costs, and other factors. Downward revisions of our reserves could have an adverse effect on our
financial condition and operating results. Actual future prices and costs may be materially higher or lower than the prices and
costs used in our estimates.
As of December 31, 2018, approximately 12% of our estimated proved reserves were undeveloped. Recovery of undeveloped
reserves requires significant capital expenditures and may require successful drilling operations. The reserves data assumes that
we can and will make these expenditures and conduct these operations successfully, but these assumptions may not be accurate,
and these expenditures and operations may not occur.
Our planned tertiary operations and the related construction of necessary CO2 pipelines could be delayed by difficulties
in obtaining pipeline rights-of-way and/or permits, and/or by the listing of certain species as threatened or endangered.
The production of crude oil from our planned tertiary operations is dependent upon having access to pipelines to transport
available CO2 to our oil fields at a cost that is economically viable. Our future construction of CO2 pipelines will require us to
obtain rights-of-way from private landowners, state and local governments and the federal government in certain areas. Certain
states where we operate have considered or may again consider the adoption of laws or regulations that could limit or eliminate
the ability of a pipeline owner or of a state, state’s legislature or its administrative agencies to exercise eminent domain over private
property, in addition to possible judicially imposed constraints on, and additional requirements for, the exercise of eminent
domain. We also conduct operations on federal and other oil and natural gas leases inhabited by species that could be listed as
threatened or endangered under the Endangered Species Act, which listing could lead to tighter restrictions as to federal land use
and other land use where federal approvals are required. These laws and regulations, together with any other changes in law related
to the use of eminent domain or the listing of certain species as threatened or endangered, could inhibit or eliminate our ability to
secure rights-of-way or otherwise access land for current or future pipeline construction projects and may require additional
regulatory and environmental compliance, and increased costs in connection therewith, which could delay our CO2 pipeline
construction schedule and initiation of our pipeline operations, and/or increase the costs of constructing our pipelines.
29
Denbury Resources Inc.
Our future performance depends upon our ability to effectively develop our existing oil and natural gas reserves and find
or acquire additional oil and natural gas reserves that are economically recoverable.
Unless we can successfully develop our existing reserves and/or replace the reserves that we produce, our reserves will decline,
resulting eventually in a decrease in oil and natural gas production and lower revenues and cash flows from operations. We have
historically replaced reserves through both acquisitions and internal organic growth activities. For internal organic growth
activities, the magnitude of proved reserves that we can book in any given year depends on our progress with new floods and the
timing of the production response, as well as the success of exploitation projects. In the future, we may not be able to continue
to replace reserves at acceptable costs. The business of exploring for, developing or acquiring reserves is capital intensive. We
may not be able to make the necessary capital investment to maintain or expand our oil and natural gas reserves if our cash flows
from operations are reduced, whether due to current oil or natural gas prices or otherwise, or if external sources of capital become
limited or unavailable. Further, the process of using CO2 for tertiary recovery, and the related infrastructure, requires significant
capital investment prior to any resulting and associated production and cash flows from these projects, heightening potential capital
constraints. If our capital expenditures are restricted, or if outside capital resources become limited, we will not be able to maintain
our current production levels.
Commodity derivative contracts may expose us to potential financial loss.
To reduce our exposure to fluctuations in the prices of oil and natural gas, we enter into commodity derivative contracts in
order to economically hedge a portion of our forecasted oil and natural gas production. As of February 26, 2019, we have oil
derivative contracts in place covering 39,500 Bbls/d for the remainder of 2019 and 4,000 Bbls/d for 2020. Such derivative contracts
expose us to risk of financial loss in some circumstances, including when there is a change in the expected differential between
the underlying price in the hedging agreement and actual prices received, when the cash benefit from hedges including a sold put
is limited to the extent oil prices fall below the price of our sold puts, or when the counterparty to the derivative contract is financially
constrained and defaults on its contractual obligations. In addition, these derivative contracts may limit the benefit we would
otherwise receive from increases in the prices for oil and natural gas.
Shortages of or delays in the availability of oil field equipment, services and qualified personnel could reduce our cash flow
and adversely affect results of operations.
The demand for qualified and experienced field personnel, geologists, geophysicists, engineers and other professionals in the
oil and natural gas industry can fluctuate significantly, often in correlation with oil and natural gas prices, causing periodic shortages
in such personnel. In the past, during periods of higher oil and natural gas prices, there have been shortages of oil field and other
necessary equipment, including drilling rigs, along with increased prices for such equipment, services and associated
personnel. These types of shortages or price increases could significantly decrease our profit margin, cash flow and operating
results and/or restrict or delay our ability to drill wells and conduct our operations, possibly causing us to miss our forecasts and
projections.
The marketability of our production is dependent upon transportation lines and other facilities, certain of which we do not
control. When these facilities are unavailable, our operations can be interrupted and our revenues reduced.
The marketability of our oil and natural gas production depends, in part, upon the availability, proximity and capacity of
transportation lines owned by third parties. In general, we do not control these transportation facilities, and our access to them
may be limited or denied. A significant disruption in the availability of, and access to, these transportation lines or other production
facilities could adversely impact our ability to deliver to market or produce our oil and thereby cause a significant interruption in
our operations.
Our production will decline if our access to sufficient amounts of carbon dioxide is limited.
Our long-term strategy is primarily focused on our CO2 tertiary recovery operations. The crude oil production from our tertiary
recovery projects depends, in large part, on having access to sufficient amounts of naturally occurring and industrial-source
CO2. Our ability to produce oil from these projects would be hindered if our supply of CO2 was limited due to, among other things,
problems with our current CO2 producing wells and facilities, including compression equipment, catastrophic pipeline failure or
our ability to economically purchase CO2 from industrial sources. This could have a material adverse effect on our financial
condition, results of operations and cash flows. Our anticipated future crude oil production from tertiary operations is also dependent
on the timing, volumes and location of CO2 injections and, in particular, on our ability to increase our combined purchased and
30
Denbury Resources Inc.
produced volumes of CO2 and inject adequate amounts of CO2 into the proper formation and area within each of our tertiary oil
fields.
The development of our naturally occurring CO2 sources involves the drilling of wells to increase and extend the CO2 reserves
available for use in our tertiary fields. These drilling activities are subject to many of the same drilling and geological risks of
drilling and producing oil and gas wells (see Oil and natural gas development and producing operations involve various risks
above). Furthermore, recent market conditions may cause the delay or cancellation of construction of plants that produce industrial-
source CO2 as a byproduct that we can purchase, thus limiting the amount of industrial-source CO2 available for our use in our
tertiary operations.
A cyber incident could occur and result in information theft, data corruption, operational disruption, and/or financial loss.
Our business has become increasingly dependent on digital technologies to conduct day-to-day operations, including certain
of our exploration, development and production activities. We depend on digital technology, among other things, to process and
record financial and operating data; analyze seismic and drilling information; monitor and control pipeline and plant equipment;
and process and store personally identifiable information of our employees and royalty owners. Our technologies, systems and
networks may become the target of cyber attacks or information security breaches that could result in the disruption of our business
operations and/or financial loss.
Although we utilize various procedures and controls to monitor and protect against these threats and to mitigate our exposure
to such threats, there can be no assurance that these procedures and controls will be sufficient in preventing security threats from
materializing and causing us to suffer such losses in the future. As cyber threats continue to evolve, we may be required to expend
significant additional resources to continue to modify or enhance our procedures and controls or to investigate and remediate any
cyber vulnerabilities.
We may lose key executive officers or specialized technical employees, which could endanger the future success of our
operations.
Our success depends to a significant degree upon the continued contributions of our executive officers, other key management
and specialized technical personnel. Our employees, including our executive officers, are employed at will and do not have
employment agreements. We believe that our future success depends, in large part, upon our ability to hire and retain highly skilled
personnel.
Environmental laws and regulations are costly and stringent.
Our exploration, production, and marketing operations are subject to complex and stringent federal, state, and local laws and
regulations governing, among other things, the discharge of substances into the environment or otherwise relating to the protection
of human health and the protection of endangered species. These laws and regulations and related public policy considerations
affect the costs, manner, and feasibility of our operations and require us to make significant expenditures in order to comply.
Failure to comply with these laws and regulations may result in the assessment of administrative, civil, and criminal penalties, the
imposition of investigatory and remedial obligations, and the issuance of injunctions that could limit or prohibit our operations.
Some of these laws and regulations may impose joint and several, strict liability for contamination resulting from spills, discharges,
and releases of substances, including petroleum hydrocarbons and other wastes, without regard to fault, or the legality of the
original conduct. Under such laws and regulations, we could be required to remove or remediate previously disposed substances
and property contamination, including wastes disposed or released by prior owners or operators.
Enactment of executive, legislative or regulatory proposals under consideration could negatively affect our business.
While it is currently anticipated that the President will attempt to move away from the trend of proposing stricter standards
and increasing oversight and regulation at the federal level, it is possible that other proposals affecting the oil and gas industry
could be enacted or adopted in the future, including state or local regulations, any of which could result in increased costs or
additional operating restrictions that could have an effect on demand for oil and natural gas or prices at which it can be sold.
31
Denbury Resources Inc.
The loss of one or more of our large oil and natural gas purchasers could have an adverse effect on our operations.
For the year ended December 31, 2018, two purchasers individually accounted for 10% or more of our oil and natural gas
revenues and, in the aggregate, for 34% of such revenues. The loss of a large single purchaser could adversely impact the prices
we receive or the transportation costs we incur.
If commodity prices decline appreciably, we may be required to write down the carrying value of our oil and natural gas
properties.
Under full cost accounting rules related to our oil and natural gas properties, we are required each quarter to perform a ceiling
test calculation, with the net capitalized costs of our oil and natural gas properties limited to the lower of unamortized cost or the
cost center ceiling. The present value of estimated future net revenues from proved oil and natural gas reserves included in the
cost center ceiling is based on the average first-day-of-the-month oil and natural gas price for each month during a 12-month
rolling period prior to the end of a particular reporting period. During 2016, we recorded a full cost pool ceiling test write-down
of our oil and natural gas properties totaling $810.9 million ($508.2 million net of tax). We did not record any ceiling test write-
downs during 2017 or 2018. Future material write-downs of our oil and natural gas properties, as well as future impairment of
other long-lived assets, could significantly reduce earnings during the period in which such write-down and/or impairment occurs
and would result in a corresponding reduction to long-lived assets and equity. See Item 7, Management’s Discussion and Analysis
of Financial Condition and Results of Operations – Critical Accounting Policies and Estimates.
Failure to complete the pending acquisition of Penn Virginia Corporation could negatively impact the price of our common
stock and our future business and financial results.
Failure to consummate the Penn Virginia acquisition may cause negative reactions from the financial markets, including a
downturn in the price of Denbury’s common stock; may negatively affect the manner in which costumers, lenders, business partners
and other third parties perceive Denbury; and may lead to adverse effects on Denbury’s business and financial results from having
expended time and resources on the pending acquisition rather than on Denbury’s existing businesses and pursuit of other
opportunities.
Closing of the pending acquisition of Penn Virginia would present a variety of possible business challenges to Denbury.
In addition to the possible negative effect on Denbury’s common stock price of the dilution resulting from issuance of shares
to Penn Virginia shareholders and the higher debt levels used to finance the merger, Denbury might be negatively affected on an
ongoing basis by the attention required to integrate Penn Virginia and its assets. Consummating the acquisition may also fail to
be as accretive as anticipated by Denbury and carry higher costs than anticipated, inclusive of the employee retention costs, fees
paid to legal, financial and accounting advisors and severance benefits and costs. Lastly, the anticipated synergies and economic
benefits from the transaction may not be realized.
The combined company debt may limit Denbury’s financial flexibility.
Denbury’s approximate total debt of $2.5 billion at December 31, 2018 would increase upon consummation of the Penn
Virginia acquisition. This additional debt may carry less favorable terms than Denbury’s current debt and may bear higher interest
rates; impose additional cash requirements to support interest payments and repay the debt obligations; and increase Denbury’s
exposure to general economic downturns, falling oil prices and rising interest rates.
Item 1B. Unresolved Staff Comments
There are no unresolved written SEC staff comments regarding our periodic or current reports under the Securities Exchange
Act of 1934 received 180 days or more before the end of the fiscal year to which this annual report on Form 10-K relates.
Item 2. Properties
Information regarding the Company’s properties called for by this item is included in Item 1, Business and Properties – Oil
and Natural Gas Operations. We also have various operating leases for rental of office space, office and field equipment, and
vehicles. See Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations – Capital Resources
32
and Liquidity – Off-Balance Sheet Arrangements, and Note 12, Commitments and Contingencies, to the Consolidated Financial
Statements for the future minimum rental payments. Such information is incorporated herein by reference.
Denbury Resources Inc.
Item 3. Legal Proceedings
We are involved in various lawsuits, claims and regulatory proceedings incidental to our businesses. While we currently
believe that the ultimate outcome of these proceedings, individually and in the aggregate, will not have a material adverse effect
on our business or finances, litigation is subject to inherent uncertainties. We accrue for losses from litigation and claims if we
determine that a loss is probable and the amount can be reasonably estimated.
Riley Ridge Helium Supply Contract Claim
As part of our 2010 and 2011 acquisitions of the Riley Ridge Unit and associated gas processing facility that was under
construction, the Company assumed a 20-year helium supply contract under which we agreed to supply the helium separated from
the full well stream by operation of the gas processing facility to a third-party purchaser, APMTG Helium, LLC (“APMTG”). The
helium supply contract provides for the delivery of a minimum contracted quantity of helium with liquidated damages payable if
specified quantities of helium are not supplied in accordance with the terms of the contract. The liquidated damages are specified
in the contract at up to $8.0 million per contract year and are capped at an aggregate of $46.0 million over the term of the contract.
As the gas processing facility has been shut-in since mid-2014 due to significant technical issues, we have not been able to
supply helium under the helium supply contract. In a case filed in November 2014 in the Ninth Judicial District Court of Sublette
County, Wyoming, APMTG claimed multiple years of liquidated damages for non-delivery of volumes of helium specified under
the helium supply contract. The Company’s position is that our contractual obligations are excused by virtue of events that fall
within the force majeure provisions in the helium supply contract.
On January 21, 2019, the Company received notice of the trial court’s ruling that a force majeure condition did exist, but the
Company’s performance was only excused by the force majeure provisions of the contract for a 35-day period in 2014, and as a
result the Company should pay APMTG liquidated damages and interest thereon for those time periods from contract
commencement to the close of evidence (November 29, 2017) when the Company’s performance was not excused as provided in
the contract. The trial court has not yet entered a final judgment based upon its decision. The Company currently estimates the
contractual liquidated damages to be $31.8 million, representing the amount due for the contract years for which evidence was
submitted at the trial ending November 29, 2017. However, absent reversal of the trial court’s factual or legal conclusions on
appeal, the Company anticipates total liquidated damages will equal the $46.0 million aggregate cap under the helium supply
contract (which includes an additional $14.2 million of liquidated damages for the contract years ending July 31, 2018 and July
31, 2019) and other costs associated with the settlement of approximately $3.4 million, the total of which the Company has included
in “Other liabilities” in our Consolidated Balance Sheets as of December 31, 2018 and “Other expenses” in our Consolidated
Statements of Operations for the year ended December 31, 2018. The Company’s position continues to be that its contractual
obligations have been and continue to be excused by events that fall within the force majeure provisions in the helium supply
contract. The Company intends to continue to vigorously defend its position and pursue all of its rights, which may include an
appeal of the trial court’s ruling, the results of which cannot be currently predicted.
Environmental Protection Agency Matter Concerning Citronelle and Other Fields
The Company has entered into a series of tolling agreements (effective through May 30, 2019) with the Environmental Protection
Agency (“EPA”), and has been in discussions with the agency over the past several years regarding the EPA’s contention that it
has causes of action under the Clean Water Act (“CWA”) related to releases (principally between 2008 and 2013) of oil and produced
water containing small amounts of oil in the Citronelle Field in southern Alabama and several fields in Mississippi. The EPA has
taken the position that these releases were in violation of the CWA. Discussions have focused upon actions taken or to be taken
by Denbury, including enhancements to the Company’s mechanical integrity program designed to minimize the occurrence and
impact of any future releases in these fields.
Based upon ongoing discussions with the EPA, the Company currently anticipates that in the coming months it will reach
agreement with the EPA as to a consent decree regarding the EPA’s claims, which consent decree will provide for a monetary fine
as a civil penalty. Based upon these discussions, the Company expects that such civil penalty will not be material to the Company’s
business or financial condition.
33
Item 4. Mine Safety Disclosures
Not applicable.
Denbury Resources Inc.
34
Denbury Resources Inc.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Market Information and Holders of Record
Denbury’s common stock is listed on the New York Stock Exchange under the symbol “DNR.” As of January 31, 2019, based
on information from the Company’s transfer agent, Broadridge Stock Transfer Agent, the number of holders of record of Denbury’s
common stock was 1,411.
Dividends
We have not paid dividends on our common stock since the fourth quarter of 2015 and have no current plans to resume common
stock dividends. Our Bank Credit Agreement and senior secured second lien and senior subordinated note indentures require us
to meet certain financial covenants at the time dividend payments are made. For further discussion, see Note 6, Long-Term Debt,
to the Consolidated Financial Statements.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
Month
October 2018
November 2018
December 2018
Total
Total Number
of Shares
Purchased(1)
Average Price
Paid per Share
20,925
$
23,664
3,278
47,867
6.12
2.72
1.71
Total Number of Shares
Purchased as Part of
Publicly Announced
Plans or Programs
Approximate Dollar
Value of Shares that May
Yet Be Purchased Under
the Plans or Programs
(in millions)(2)
— $
—
—
—
210.1
210.1
210.1
(1) Shares purchased during the fourth quarter of 2018 were made in connection with the surrender of shares by our employees
to satisfy their tax withholding requirements related to the vesting of restricted shares.
(2) In October 2011, we commenced a common share repurchase program, which has been approved for up to an aggregate of
$1.162 billion of Denbury common shares by the Company’s Board of Directors. This program has effectively been suspended
and we do not anticipate repurchasing shares of our common stock in the near future. The program has no pre-established
ending date and may be suspended or discontinued at any time. We are not obligated to repurchase any dollar amount or
specific number of shares of our common stock under the program.
35
Stock Performance Graph
Denbury Resources Inc.
The following Performance Graph and related information shall not be deemed “soliciting material” or to be “filed” with
the SEC, nor shall such information be incorporated by reference into any future filings under the Securities Act of 1933 or
Securities Exchange Act of 1934, each as amended, except to the extent that the Company specifically incorporates it by reference
into such filings.
The following graph illustrates changes over the five-year period ended December 31, 2018, in cumulative total stockholder
return on our common stock as measured against the cumulative total return of the S&P 500 Index and the Dow Jones U.S.
Exploration and Production Index. The graph tracks the performance of a $100 investment in our common stock and in each index
(with the reinvestment of all dividends for the index securities) from December 31, 2013, to December 31, 2018.
COMPARISON OF 5-YEAR CUMULATIVE TOTAL RETURN
2013
2014
2015
2016
2017
2018
December 31,
Denbury Resources Inc.
$
S&P 500
Dow Jones U.S. Exploration & Production
100
100
100
$
50
$
13
$
24
$
14
$
114
89
115
68
129
85
157
86
11
150
71
36
Item 6. Selected Financial Data
Denbury Resources Inc.
In thousands, except per-share data or otherwise noted
2018
2017
2016
2015
2014
Year Ended December 31,
Consolidated Statements of Operations data
Revenues and other income
Oil, natural gas, and related product sales
Other
Total revenues and other income
Net income (loss)(1)
Net income (loss) per common share
Basic(1)
Diluted(1)
Dividends declared per common share(2)
Weighted average number of common shares outstanding
Basic
Diluted
Consolidated Statements of Cash Flows data
Cash provided by (used in)
Operating activities
Investing activities(3)
Financing activities
Production (average daily)
Oil (Bbls)
Natural gas (Mcf)
BOE (6:1)
Unit sales prices – excluding impact of derivative
settlements
Oil (per Bbl)
Natural gas (per Mcf)
Unit sales prices – including impact of derivative
settlements
Oil (per Bbl)
Natural gas (per Mcf)
Costs per BOE
Lease operating expenses(4)
Taxes other than income
General and administrative expenses
Depletion, depreciation, and amortization(5)
Proved oil and natural gas reserves(6)
$
$
$
Oil (MBbls)
Natural gas (MMcf)
MBOE (6:1)
Proved carbon dioxide reserves
Gulf Coast region (MMcf)(7)
Rocky Mountain region (MMcf)(8)
Consolidated Balance Sheets data
Total assets
Total long-term liabilities
Stockholders’ equity
$
$
1,422,589
51,036
1,473,625
322,698
$
$
1,089,666
40,120
1,129,786
163,152
$
$
935,751
39,845
975,596
$
$
1,213,026
44,534
1,257,560
$
$
(976,177)
(4,385,448)
2,372,473
62,732
2,435,205
635,491
0.75
0.71
—
0.42
0.41
—
(2.61)
(2.61)
—
432,483
456,169
390,928
395,921
373,859
373,859
(12.57)
(12.57)
0.1875
348,802
348,802
1.82
1.81
0.25
348,962
351,167
$
529,685
$
267,143
$
219,223
$
864,304
$
1,222,825
(333,276)
(157,452)
(356,814)
88,613
(204,663)
(15,012)
(549,730)
(334,460)
(1,076,179)
(135,104)
58,532
10,854
60,341
58,410
11,329
60,298
61,440
15,378
64,003
69,165
22,172
72,861
66.11
$
50.64
$
41.12
$
47.30
$
2.58
2.41
1.98
2.35
57.91
$
48.40
$
44.86
$
67.41
$
2.58
2.41
1.98
2.83
22.24
$
20.35
$
17.71
$
19.37
$
4.75
3.25
9.83
255,042
43,008
262,210
3.96
4.63
9.44
252,625
42,721
259,745
3.33
4.69
36.12
247,103
44,315
254,489
4.13
5.44
19.99
282,250
38,305
288,634
70,606
22,955
74,432
90.74
4.07
90.82
3.99
23.84
6.25
5.83
21.83
362,335
452,402
437,735
4,982,440
1,155,538
5,164,741
1,187,787
5,332,576
1,214,428
5,501,175
1,237,603
5,697,642
3,035,286
$
4,723,222
$
4,471,299
$
4,274,578
$
5,885,533
$
12,690,156
3,216,652
1,141,777
3,365,077
648,165
3,372,634
468,448
4,263,606
1,248,912
6,503,194
5,703,856
37
Denbury Resources Inc.
(1) Includes pre-tax impairments of assets of $810.9 million and $6.2 billion for the years ended December 31, 2016 and 2015,
respectively, and an accelerated depreciation charge of $591.0 million related to the Riley Ridge gas processing facility and
related assets for the year ended December 31, 2016.
(2) In September 2015, in light of the low oil price environment and our desire to maintain our financial strength and flexibility,
the Company’s Board of Directors suspended our quarterly cash dividend.
(3) Reflects the adoption of Financial Accounting Standards Board Accounting Standards Update (“ASU”) 2016-18, Statement
of Cash Flows (“ASU 2016-18”), whereby changes in restricted cash are now included in the consolidated statements of cash
flows. We adopted ASU 2016-18 effective January 1, 2018, which has been applied retrospectively to all periods presented.
(4) Lease operating expenses reported in this table include certain special items comprised of (1) lease operating expenses and
related insurance recoveries recorded to remediate an area of Delhi Field in 2014 and 2015, (2) a reimbursement for a retroactive
utility rate adjustment in 2015, and (3) other insurance recoveries in 2015. If these special items are excluded, lease operating
expenses would have totaled $528.8 million and $654.7 million for the years ended December 31, 2015 and 2014, respectively,
and lease operating expenses per BOE would have averaged $19.88 and $24.10 for the years ended December 31, 2015 and
2014, respectively.
(5) Depletion, depreciation, and amortization during the year ended December 31, 2016 includes an accelerated depreciation
charge of $591.0 million, or $25.23 per BOE, associated with the Riley Ridge gas processing facility and related assets.
(6) Estimated proved reserves as of December 31, 2015, reflect negative reserve revisions of approximately 126 MMBOE (29%)
in 2015 due to declines in the average first-day-of-the-month NYMEX oil price used to estimate reserves from $94.99 per
Bbl at December 31, 2014, to $50.28 per Bbl at December 31, 2015. In addition, the average first-day-of-the-month NYMEX
natural gas price used to estimate reserves declined from $4.30 per MMBtu at December 31, 2014, to $2.63 per MMBtu at
December 31, 2015.
(7) Proved CO2 reserves in the Gulf Coast region consist of reserves from our reservoirs at Jackson Dome and are presented on
a gross or 8/8ths working interest basis, of which our net revenue interest was approximately 4.0 Tcf, 4.1 Tcf, 4.2 Tcf, 4.4 Tcf
and 4.5 Tcf at December 31, 2018, 2017, 2016, 2015 and 2014, respectively, and include reserves dedicated to volumetric
production payments of 3.1 Bcf, 7.6 Bcf, 12.3 Bcf, 25.3 Bcf and 9.3 Bcf at December 31, 2018, 2017, 2016, 2015 and 2014,
respectively (see Supplemental CO2 Disclosures (Unaudited) to the Consolidated Financial Statements).
(8) Proved CO2 reserves in the Rocky Mountain region consist of our overriding royalty interest in LaBarge Field and at year-
end 2014 our reserves at Riley Ridge (presented on a gross (8/8ths) basis), of which our net revenue interest was approximately
1.2 Tcf, 1.2 Tcf, 1.2 Tcf, 1.2 Tcf and 2.6 Tcf at December 31, 2018, 2017, 2016, 2015 and 2014, respectively. As of December 31,
2015, Riley Ridge CO2 and helium reserves were reclassified and are no longer considered proved reserves primarily as a
result of the decline in average first-day-of-the-month natural gas prices utilized in preparing our December 31, 2015 reserve
report.
38
Denbury Resources Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with our Consolidated Financial Statements and Notes
thereto included in Item 8, Financial Statements and Supplementary Information. Our discussion and analysis includes forward-
looking information that involves risks and uncertainties and should be read in conjunction with Risk Factors under Item 1A of
this Form 10-K, along with Forward-Looking Information at the end of this section for information on the risks and uncertainties
that could cause our actual results to be materially different from our forward-looking statements.
OVERVIEW
Denbury is an independent oil and natural gas company with operations focused in two key operating areas: the Gulf Coast
and Rocky Mountain regions. Our goal is to increase the value of our properties through a combination of exploitation, drilling
and proven engineering extraction practices, with the most significant emphasis relating to CO2 enhanced oil recovery operations.
Oil Price Impact on Our Business. Our financial results are significantly impacted by changes in oil prices, as 97% of our
production is oil. Over the last year, NYMEX oil prices gradually improved from around $60 per Bbl at December 31, 2017 to
around $70 per Bbl at the end of September 2018, before retreating to the low-$40’s in late December 2018. NYMEX prices
averaged approximately $65 per Bbl in 2018, compared to approximately $51 per Bbl in 2017, and $43 per Bbl in 2016. Changes
in oil prices impact all aspects of our business; most notably our cash flow from operations, revenues, and capital allocation and
budgeting decisions. For 2018, we remained disciplined with our capital spending despite oil prices averaging higher than our
budgeted levels throughout most of the year. Our 2018 capital expenditure level of $322.7 million was within our original budgeted
range of $300 million to $325 million, and we generated approximately $80 million of excess cash flow after considering
development capital expenditures, capitalized interest and interest payments treated as repayment of debt in our financial statements.
With this approximately $80 million of excess cash flow, debt exchanges and conversion of convertible debt, we were able to
reduce our debt principal by $243.2 million during 2018, helping to further improve the Company’s financial condition.
During the first two months of 2019, oil prices have rebounded from the low-$40s at the end of 2018 to a level in the low-to-
mid $50s and for 2019 we have based our budget on a flat $50 oil price. Our 2019 capital spending is budgeted in a range of $240
million to $260 million, excluding capitalized interest and acquisitions, which is roughly a 23% decrease from our 2018 capital
spending levels. Assuming a flat $50 oil price, we expect that our cash flows from operations would be significantly higher than
our capital budget and result in Denbury generating significant excess cash flow during 2019. We have hedged over 60% of our
estimated oil production in 2019 in order to protect against downward oil price volatility and to provide a degree of certainty in
our 2019 estimated cash flow. Based on this budgeted level of capital spending, we currently anticipate that our 2019 production
will average between 56,000 and 60,000 BOE/d. Additional information concerning our 2019 budget and plans is included below
under Capital Resources and Liquidity – Overview.
2018 Highlights. During 2018, we recognized net income of $322.7 million, or $0.71 per diluted common share, compared
to net income of $163.2 million, or $0.41 per diluted common share, during 2017. The primary drivers of our change in operating
results between 2017 and 2018 were the following:
• Oil and natural gas revenues increased by $332.9 million, or 31%, in 2018, driven by 31% higher realized commodity prices.
• Commodity derivative expense in 2018 decreased by $98.7 million as a result of a $226.1 million gain from noncash fair
value adjustments between the periods, partially offset by a $127.5 million increase in payments for derivative settlements
($175.2 million in payments on settlements during 2018 compared to $47.8 million during 2017).
Our 2017 net income also included the effect of a one-time deferred tax benefit of $132.2 million in the fourth quarter of 2017
resulting from the reduction of the federal income tax rate from 35% to 21% as enacted by the Tax Cut and Jobs Act (the “Act”)
in December 2017.
We generated $529.7 million of cash flow from operating activities during 2018, compared to $267.1 million during 2017,
due primarily to a $332.9 million increase in revenues due to higher oil prices, offset in part by a $127.5 million increase in cash
outflows due to derivative settlements.
Agreement to Acquire Penn Virginia Corporation. On October 28, 2018, we entered into a definitive Agreement and Plan
of Merger (the “Merger Agreement”) with Penn Virginia Corporation (NASDAQ: PVAC) (“Penn Virginia”). The Merger
39
Denbury Resources Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Agreement provides for us to acquire Penn Virginia in a stock and cash transaction (the “Merger”) valued (based upon Denbury’s
per share closing price on the NYSE on October 26, 2018) at approximately $1.7 billion, including the assumption of Penn Virginia
debt outstanding as of the date of the Merger Agreement. In the aggregate, $400 million in cash and approximately 191.8 million
shares of Denbury Common Stock are expected to be paid as merger consideration. For further information see our Form 8-K
and exhibits thereto filed with the Commission on October 29, 2018.
The Merger is subject to approval by the shareholders of Penn Virginia and to approval by Denbury’s stockholders of the
issuance of Denbury common stock (“Denbury Common Stock”) in the Merger and an amendment to Denbury’s charter to increase
its authorized shares. Consummation of the Merger is also subject to other customary mutual closing conditions, which are
described in the above-referenced Form 8-K.
In connection with the Merger Agreement, Denbury has received a commitment letter from JPMorgan Chase Bank, N.A.,
subject to certain funding conditions, for a proposed new $1.2 billion senior secured revolving credit facility with a maturity date
of December 9, 2021 and a $400 million senior secured second lien bridge facility to be available to the extent Denbury does not
secure alternate financing prior to April 30, 2019. These two new debt financings are expected to be used to fully or partially fund
the $400 million cash portion of the consideration in the Merger, potentially retire and replace Penn Virginia’s $200 million second
lien term loan, replace Penn Virginia’s existing bank credit facility, which had $321 million drawn and outstanding as of December
31, 2018, and pay fees and expenses.
The Merger Agreement contains certain termination rights for both Denbury and Penn Virginia, including, among others, if
the Merger is not completed by April 30, 2019. On a termination of the Merger Agreement under certain circumstances, Penn
Virginia may be required to pay Denbury a termination fee of $45 million, or Denbury may be required to pay Penn Virginia a
termination fee of $45 million.
Consummation of the Merger and the related financing would have a significant impact on all aspects of our results of operations
and financial condition.
Extension of Senior Secured Bank Credit Facility. In August 2018, we entered into the Sixth Amendment to the Bank
Credit Agreement (the “Sixth Amendment”) which primarily extended the maturity date from December 9, 2019 to December 9,
2021 and reduced the borrowing base and total commitments from $1.05 billion to $615 million. At December 31, 2018, we had
no outstanding borrowings on our Bank Credit Facility and $38.6 million cash on hand. See Capital Resources and Liquidity –
Senior Secured Bank Credit Facility for further discussion.
Issuance of 7½% Senior Secured Second Lien Notes due 2024. In August 2018, we issued $450.0 million of 7½% Senior
Secured Second Lien Notes due 2024 (the “2024 Senior Secured Notes”). The 2024 Senior Secured Notes, which bear interest at
a rate of 7.50% per annum, were issued at par to repay outstanding borrowings on our Bank Credit Agreement, with additional
proceeds used for general corporate purposes (see Note 6, Long-Term Debt, to the Consolidated Financial Statements for additional
details).
2018 Debt Reduction. During 2018, we reduced our debt principal by $184.9 million through debt exchange transactions
and the conversion into common stock of convertible senior debt as follows:
• During January 2018, we reduced debt principal by $40.8 million through an exchange transaction, in which institutional
holders exchanged $174.3 million aggregate principal amount of our subordinated debt for:
–
$74.1 million aggregate principal amount of 9¼% Senior Secured Second Lien Notes due 2022 (the “2022 Senior Secured
Notes”) and
$59.4 million aggregate principal amount of 5% Convertible Senior Notes due 2023 (the “2023 Convertible Senior Notes”)
–
•
In April and May 2018, we reduced debt principal by $144.1 million when holders of all outstanding 3½% Convertible Senior
Notes due 2024 (the “2024 Convertible Senior Notes”) and 2023 Convertible Senior Notes, issued in the exchange above and
another exchange completed in December 2017, converted their notes into shares of Denbury common stock, at rates specified
in the indentures for the notes, which resulted in the issuance of 55.2 million shares of our common stock upon conversion.
As of April 18, 2018 and May 30, 2018, there were no remaining 2024 Convertible Senior Notes or 2023 Convertible Senior
Notes outstanding, with the conversion of these notes saving the Company annual cash interest payments of $5.9 million.
40
Denbury Resources Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Sanctioning of CO2 Enhanced Oil Recovery Development at Cedar Creek Anticline. In June 2018, we announced the
sanctioning of the CO2 enhanced oil recovery development project at Cedar Creek Anticline. The capital outlay for the initial
phase of the project is currently estimated at $300 million through 2022, which includes $150 million for a 110-mile extension of
the Greencore CO2 pipeline from Bell Creek Field that will be spread over 2018 through 2020, with roughly two-thirds of the cost
expected to be incurred in 2020, and $150 million for development in the Red River formation at East Lookout Butte and Cedar
Hills South fields. First tertiary production is currently expected in the second half of 2022 or early 2023.
Exploitation Drilling Update. Following the success of our first exploitation horizontal well in the Mission Canyon interval
at Cedar Creek Anticline at the end of 2017, we continued and expanded this program into 2018. To date, we have drilled seven
successful Mission Canyon exploitation wells and a successful initial test well in Cabin Creek’s Charles B formation. We continue
to evaluate the Charles B formation and believe it has characteristics that would make it a good candidate for secondary or tertiary
flooding. Our 2019 development plans for Cedar Creek Anticline include up to four additional Mission Canyon wells and a
potential Charles B follow-up well. At Tinsley Field, we completed a total of two wells in the Perry Sand interval during 2018
and the first quarter of 2019. Overall, the two Perry wells were successful; however, we plan to evaluate the economics and
performance of these wells before drilling any additional wells. In December 2018, we spudded our first well in the Cotton Valley
interval at Tinsley Field and currently expect to complete this well during the first quarter of 2019. We continue to evaluate
exploitation opportunities in additional horizons underlying the existing CO2 EOR flood at Tinsley Field. Finally, we are currently
evaluating exploitation opportunities within oil-bearing formations at Conroe Field, and currently plan to drill a test well within
the 2A Sand interval during 2019.
CAPITAL RESOURCES AND LIQUIDITY
Overview. Our primary sources of capital and liquidity are our cash flows from operations and availability of borrowing
capacity under our senior secured bank credit facility. During 2018, we generated cash flows from operations of $529.7 million,
while incurring capital expenditures of $322.7 million, resulting in approximately $80 million of cash flow after considering
capitalized interest and interest payments treated as repayment of debt. Over the last several years of generally lower oil prices
and high volatility, we have remained focused on our disciplined approach of living within cash flow and preserving liquidity
under our bank line. During this time, we have also remained focused on improving the Company’s financial position, and our
efforts resulted in a reduction of $243.2 million in our debt principal since year-end 2017 and a reduction of over $1 billion since
the end of 2014.
In total, we have reduced our outstanding debt principal, net of cash by nearly $1.1 billion between December 31, 2014 and
December 31, 2018, primarily through debt exchanges, opportunistic open market debt repurchases, and the conversion in the
second quarter of 2018 of all of our outstanding convertible senior notes into common stock. We also remain keenly focused on
continuing to improve our overall leverage metrics. Our leverage metrics have improved considerably over the past year, due
primarily to our cost reduction efforts, continued improvement in oil prices and our overall reduction in debt. In conjunction with
our efforts to improve the Company’s balance sheet, we may have discussions with bondholders from time to time regarding
potential debt reduction or maturity extension transactions of various types.
For 2019, we have budgeted capital expenditures in a range of $240 million to $260 million, which is significantly less that
our anticipated cash flow from operations utilizing a flat $50/Bbl NYMEX oil price. We also have oil price hedges on over 60%
of our estimated 2019 production, protecting a portion of our cash flows in case we experience another significant drop in oil
prices. Therefore, we believe we have ample liquidity from the free cash flow we project to generate at $50/Bbl oil, or even lower
prices, in 2019, and the approximate $553.0 million of liquidity available under our bank credit facility to cover any excess working
capital needs. As discussed above in “Overview – Agreement to Acquire Penn Virginia Corporation,” we have signed a definitive
agreement to acquire Penn Virginia, and votes by holders of Penn Virginia and our common stock are scheduled to take place in
mid-April 2019. The primary source of cash for the proposed acquisition of Penn Virginia is anticipated to be a new $1.2 billion
senior secured revolving credit facility with a maturity date of December 9, 2021 (or earlier in 2021 in certain circumstances),
which would replace our existing facility, and a $400 million senior secured second lien bridge facility to be available to the extent
Denbury does not secure alternate financing prior to April 30, 2019. These two new debt financings are expected to be used to
fully or partially fund the $400 million cash portion of the consideration in the acquisition, potentially retire and replace Penn
Virginia’s $200 million second lien term loan, replace Penn Virginia’s existing bank credit facility, which had $321 million drawn
and outstanding as of December 31, 2018, and pay fees and expenses.
41
Denbury Resources Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Looking forward, we plan to continue our focus of living within cash flow, while seeking opportunities to further reduce our
leverage and improve the Company’s financial condition. Our first maturities of debt are not until 2021, so we plan to continue
our efforts to reduce debt and extend maturities of our debt over the next two years. We believe the acquisition of Penn Virginia
would significantly improve Denbury’s operating results and balance sheet by creating a combination of short-cycle investment
opportunities in Penn Virginia’s Eagle Ford Shale acreage and Denbury’s lower-declining EOR focused asset base, with the
opportunity to apply Denbury’s technical EOR knowledge and capabilities to enhance the long-term development potential of
Penn Virginia’s Eagle Ford acreage. As a combined entity, Denbury plans to continue to spend within cash flow and remain focused
on the same core objectives. If the merger is not approved by the shareholders of both companies, Denbury will execute its 2019
plans on a stand-alone basis and remain focused on these same key objectives.
During 2018, the Company’s financial and liquidity position improved through the extension and repayment of its senior
secured bank credit facility. In August 2018, we issued $450.0 million of 2024 Senior Secured Notes, with a portion of the proceeds
utilized to fully repay outstanding borrowings on our senior secured bank credit facility. As of December 31, 2018, we had no
outstanding borrowings on our senior secured bank credit facility and $38.6 million of cash and cash equivalents, compared to
$475.0 million of borrowings outstanding as of December 31, 2017 with nominal cash at that date. Also in August 2018, we
entered into the Sixth Amendment to our senior secured bank credit facility. As part of this amendment, we streamlined our bank
group from 24 to 14 banks and reduced our borrowing base and total commitments from $1.05 billion to $615 million; therefore,
as of December 31, 2018, we had $553.0 million of borrowing base availability after consideration of $62.0 million of outstanding
letters of credit.
Senior Secured Bank Credit Facility. In December 2014, we entered into an Amended and Restated Credit Agreement with
JPMorgan Chase Bank, N.A., as administrative agent, and other lenders party thereto (as amended, the “Bank Credit Agreement”).
In August 2018, we entered into the Sixth Amendment to the Bank Credit Agreement (the “Sixth Amendment”), pursuant to which
the following changes were made to the Bank Credit Agreement:
• The maturity date was extended from December 9, 2019 to December 9, 2021, provided that the maturity date may occur
earlier (between February 2021 and August 2021) if the 9% Senior Secured Second Lien Notes due in May 2021 (“2021
Senior Secured Notes”) or 6 % Senior Subordinated Notes due in August 2021 are not repaid or refinanced by their respective
maturity dates;
• The borrowing base and total commitments were reduced from $1.05 billion to $615 million in connection with a reduction
in the number of lenders party to the Bank Credit Facility;
• The amount of junior lien debt we can incur was increased from $1.2 billion to $1.65 billion outstanding in the aggregate at
any one time; and
• A Consolidated Total Debt to Consolidated EBITDAX financial maintenance covenant was added with a ratio not to exceed
5.25 to 1.0 through December 31, 2020, and 4.50 to 1.0 thereafter through the maturity date.
At December 31, 2018, in addition to the Consolidated Total Debt to Consolidated EBITDAX covenant added with the Sixth
Amendment, the Bank Credit Agreement contained certain financial performance covenants through the maturity of the facility,
including the following:
• A consolidated senior secured debt to consolidated EBITDAX covenant, with such ratio not to exceed 2.5 to 1.0. Currently,
only debt under our Bank Credit Agreement is considered consolidated senior secured debt for purposes of this ratio;
• A minimum permitted ratio of consolidated EBITDAX to consolidated interest charges of 1.25 to 1.0; and
• A requirement to maintain a current ratio of 1.0 to 1.0.
Under these financial performance covenant calculations, as of December 31, 2018, our ratio of consolidated total debt to
consolidated EBITDAX was 4.24 to 1.0 (based on a maximum permitted ratio of 5.25 to 1.0), our ratio of consolidated senior
secured debt to consolidated EBITDAX was 0.00 to 1.0 (based upon a maximum permitted ratio of 2.5 to 1.0), our ratio of
consolidated EBITDAX to consolidated interest charges was 3.13 to 1.0 (based upon a required ratio of not less than 1.25 to 1.0),
and our current ratio was 2.91 to 1.0 (based upon a required ratio of not less than 1.0 to 1.0). Based upon our currently forecasted
levels of production and costs, hedges in place as of February 26, 2019, and current oil commodity futures prices, we currently
anticipate continuing to be in compliance with our financial performance covenants during the foreseeable future.
The above description of our Bank Credit Agreement is qualified by the express language and defined terms contained in the
Bank Credit Agreement and the amendments thereto, each of which are filed as exhibits to our periodic reports filed with the SEC.
42
Denbury Resources Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
As an additional source of potential liquidity, the Company has been engaged in two asset sale processes. In the first process,
we continue to market for sale approximately 4,000 acres of surface land with no active oil and gas operations in the Houston area.
We remain focused on a strategy that we believe will ultimately yield the highest value for the land, and we expect most of that
value to be realized over the next couple of years. During 2018, we consummated approximately $5 million of land sales and
currently have signed agreements for another $9 million that we expect to close in 2019. In the second process, in early 2018 we
began the process of portfolio optimization through the marketing of mature properties located in Mississippi and Louisiana and
Citronelle Field in Alabama, and completed the sale of Lockhart Crossing Field for net proceeds of $4.1 million during the third
quarter of 2018. The decline in oil prices and our focus on the Penn Virginia transaction stalled our process in the fourth quarter
of 2018, but we plan to continue evaluating our options with these fields as oil prices improve. The pace and outcome of any sales
of the remaining assets cannot be predicted at this time, but their successful completion could provide additional liquidity for
financial or operational uses.
2019 Capital Spending. We currently anticipate that our full-year 2019 capital budget, excluding capitalized interest and
acquisitions, will be approximately $240 million to $260 million, roughly a 23% decrease from 2018 capital spending levels of
$322.7 million. We anticipate our 2019 capital budget could be increased or decreased if oil prices and our resultant cash flows
were to meaningfully change. Capitalized interest is currently estimated at between $30 million and $40 million for 2019. The
2019 capital budget, excluding capitalized interest and acquisitions, provides for approximate spending as follows:
•
•
•
•
$100 million allocated for tertiary oil field expenditures;
$70 million allocated for other areas, primarily non-tertiary oil field expenditures including exploitation;
$30 million to be spent on CO2 sources and pipelines; and
$50 million for other capital items such as capitalized internal acquisition, exploration and development costs and pre-
production tertiary startup costs.
Based upon our currently forecasted levels of production and costs, commodity hedges in place, and current oil commodity
futures prices, we intend to fund our development capital spending with cash flow from operations, with any shortfall funded with
incremental borrowings under our Bank Credit Agreement, under which as of December 31, 2018, we had ample available
borrowing capacity to cover any foreseeable cash flow shortfall. If prices were to decrease or changes in operating results were
to cause a reduction in anticipated 2019 cash flows significantly below our currently forecasted operating cash flows, we would
likely reduce our capital expenditures. If we reduce our capital spending due to lower cash flows, any sizeable reduction would
likely lower our anticipated production levels in future years.
Capital Expenditure Summary. The following table reflects incurred capital expenditures (including accrued capital) for
the years ended December 31, 2018, 2017 and 2016:
In thousands
Capital expenditures by project
Tertiary oil fields
Non-tertiary fields
Capitalized internal costs(1)
Oil and natural gas capital expenditures
CO2 pipelines, sources and other
Capital expenditures, before acquisitions and capitalized interest
Acquisitions of oil and natural gas properties
Capital expenditures, before capitalized interest
Capitalized interest
Capital expenditures, total
Year Ended December 31,
2018
2017
2016
$
142,560
$
129,458
$
119,117
104,811
46,599
293,970
28,700
322,670
541
323,211
37,079
53,647
52,616
235,721
5,105
240,826
88,777
329,603
30,762
31,034
56,260
206,411
2,235
208,646
11,706
220,352
25,982
$
360,290
$
360,365
$
246,334
(1) Includes capitalized internal acquisition, exploration and development costs and pre-production tertiary startup costs.
43
Denbury Resources Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Commitments and Obligations. A summary of our obligations at December 31, 2018, is presented in the following table:
In thousands
Contractual obligations
Estimated interest payments on
senior secured bank credit facility,
senior secured second lien notes
and subordinated debt
Senior secured debt (principal
balance)
Subordinated debt (principal
balance)
Operating lease obligations
Pipeline and capital lease
obligations including interest
component
Other obligations(1)
Asset retirement obligations(2)
2019
2020 and 2021
2022 and 2023
Thereafter
Total
Payments Due by Period
$
178,533
$
317,444
$
105,765
$
4,313
$
606,055
—
—
10,690
32,369
61,213
2,115
614,919
203,545
19,783
54,863
160,801
1,442
455,668
622,640
20,485
55,770
73,425
17,740
450,000
—
18,169
113,439
84,577
781,249
1,520,587
826,185
69,127
256,441
380,016
802,546
Total contractual obligations
$
284,920
$
1,372,797
$
1,351,493
$
1,451,747
$
4,460,957
(1) Represents future cash commitments under contracts in place as of December 31, 2018, primarily for purchase contracts for
CO2 captured from industrial sources, drilling rig services and well-related costs. As is common in our industry, we commit
to make certain expenditures on a regular basis as part of our ongoing development and exploration program. These
commitments generally relate to projects that occur during the subsequent several months and are usually part of our normal
operating expenses or part of our capital budget (see 2019 Capital Spending above). We also have recurring expenditures for
such things as accounting, engineering and legal fees; software maintenance; subscriptions; and other overhead-type
items. Normally these expenditures do not change materially on an aggregate basis from year to year and are part of our
general and administrative expenses. We have not attempted to estimate the amounts of these types of recurring expenditures
in this table, as most could be quickly canceled with regard to any specific vendor, even though the expense itself may be
required for our ongoing normal operations. For further discussion of our long-term commitments to purchase CO2, see Note
12, Commitments and Contingencies, to the Consolidated Financial Statements.
(2) Represents the estimated future asset retirement obligations on an undiscounted basis. The present value of the discounted
asset retirement obligation is $176.6 million, as determined under the Asset Retirement and Environmental Obligations topic
of the Financial Accounting Standards Board Codification (“FASC”), and is further discussed in Note 4, Asset Retirement
Obligations, to the Consolidated Financial Statements.
Off-Balance Sheet Arrangements. We have several operating leases relating to office space and other minor equipment
leases. At December 31, 2018, we had a total of $62.0 million of letters of credit outstanding under our senior secured bank credit
facility. Additionally, we have obligations for development and exploratory expenditures that arise from our normal capital
expenditure program or from other transactions common to our industry, none of which are recorded on our balance sheet. These
obligations are further described in Commitments and Obligations above. In addition, in order to recover our undeveloped proved
reserves, we must also fund the associated future development costs estimated in our proved reserve reports, which are only
included in the table above to the extent we have firm contracts. For a further discussion of our future development costs, see
Supplemental Oil and Natural Gas Disclosures (Unaudited) to the Consolidated Financial Statements.
FINANCIAL OVERVIEW OF TERTIARY OPERATIONS
As discussed in Item 1, Business and Properties – Oil and Natural Gas Operations – Enhanced Oil Recovery Overview above,
our tertiary operations represent a significant portion of our overall operations and have become our primary strategic focus. The
economics of a tertiary field and the related impact on our financial statements differ from a conventional oil and gas play and are
explained further below.
While it is difficult to accurately forecast future production, we believe our tertiary recovery operations provide significant
long-term production growth potential at reasonable return metrics, with relatively low risk, assuming crude oil prices are at levels
that support the development of those projects. We have been developing tertiary oil properties for over 19 years, and the financial
44
Denbury Resources Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
impact of such operations is reflected in our historical financial statements. The summary below highlights our observations
regarding how tertiary operations have impacted our financial statements.
Finding and Development Costs. We currently expect finding and development costs (including future development and
abandonment costs but excluding CO2 pipeline infrastructure capital expenditures) over the life of each field to be competitive
with the industry average costs for other oil properties. See the definition of finding and development costs in the Glossary and
Selected Abbreviations.
Timing of Capital Costs. When initiating a new tertiary flood, there generally is a delay between the initial capital expenditures
and the resulting production increases. We must build facilities, and often a CO2 pipeline to the field, before CO2 flooding can
commence, and it usually takes six to twelve months before the field responds to the injection of CO2 (i.e., oil production
commences). Further, we may spend significant amounts of capital before we can recognize any proved reserves from fields we
flood and, even after a field has proved reserves, significant amounts of additional capital will usually be required to fully develop
the field.
Recognition of Proved Reserves. In order to recognize proved tertiary oil reserves, we must either demonstrate production
resulting from the tertiary process or the field must be analogous to an existing tertiary flood. The magnitude of proved reserves
that we can book in any given year will depend on our progress with new floods, the timing of the production response from new
floods and the performance of our existing floods. Typically, a high percentage of the potential reserves for a tertiary field are
recognized when a production response is initially observed, and generally only modest changes are made thereafter.
Production Rates. The production rate at a tertiary flood can vary from quarter to quarter, as a tertiary field’s production
may increase rapidly when wells respond to the CO2, plateau temporarily, and then resume growth as additional areas of the field
are developed. During a tertiary flood life cycle, facility capacity is increased from time to time, which occasionally requires
temporary shutdowns during installation, thereby causing temporary declines in production. We also find it difficult to precisely
predict when any given well will respond to the injected CO2, as the CO2 seldom travels through the rock consistently due to
heterogeneity in the oil-bearing formations. With the low oil prices over the past several years, our pace of development has
generally slowed, thereby leading to a less consistent growth pattern. We find all of these fluctuations to be normal, and generally
expect oil production at a tertiary field to increase over time until the field is fully developed, albeit sometimes in inconsistent
patterns.
Operating Costs. Tertiary projects may be more expensive to operate than traditional industry operations because of the cost
of injecting and recycling the CO2 (primarily due to the cost of the CO2 and the significant energy requirements to re-compress
the CO2 back into a near-liquid state for re-injection purposes). The costs of our CO2 and the electricity required to recycle and
inject this CO2 comprise nearly half of our typical tertiary operating expenses. Since these costs vary along with commodity and
commercial electricity prices, they are highly variable and will increase in a high-commodity-price environment and decrease in
a low-price environment. Most of our CO2 operating costs are allocated to our tertiary oil fields and recorded as lease operating
expenses (following the commencement of tertiary oil production) at the time the CO2 is injected. These costs have historically
represented approximately 20% to 25% of the total operating costs for our tertiary operations. Since we expense all of the operating
costs to produce and inject our CO2 (following the commencement of tertiary oil production), operating costs per barrel for a new
flood will be higher at the inception of CO2 injection projects because of minimal related oil production at that time.
45
Denbury Resources Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
RESULTS OF OPERATIONS
Operating Results Table
Certain of our operating results and statistics for each of the last three years are included in the following table.
In thousands, except per share and unit data
Operating results
Net income (loss)(1)
Net income (loss) per common share – basic(1)
Net income (loss) per common share – diluted(1)
Net cash provided by operating activities
Average daily production volumes
Bbls/d
Mcf/d
BOE/d
Operating revenues
Oil sales
Natural gas sales
Total oil and natural gas sales
Commodity derivative contracts(2)
Receipt (payment) on settlements of commodity derivatives
Noncash fair value gains (losses) on commodity derivatives(3)
Commodity derivatives income (expense)
Unit prices – excluding impact of derivative settlements
Oil price per Bbl
Natural gas price per Mcf
Unit prices – including impact of derivative settlements(2)
Oil price per Bbl
Natural gas price per Mcf
Oil and natural gas operating expenses
Lease operating expenses
Marketing expenses, net of third-party purchases, and plant operating
expenses(4)
Production and ad valorem taxes
Oil and natural gas operating revenues and expenses per BOE
Oil and natural gas revenues
Lease operating expenses
Marketing expenses, net of third-party purchases, and plant operating
expenses(4)
Production and ad valorem taxes
CO2 sources – revenues and expenses
CO2 sales and transportation fees
CO2 discovery and operating expenses
CO2 revenue and expenses, net
Year Ended December 31,
2018
2017
2016
$
322,698
$
163,152
$
(976,177)
0.75
0.71
0.42
0.41
(2.61)
(2.61)
529,685
267,143
219,223
58,532
10,854
60,341
58,410
11,329
60,298
1,412,358
10,231
1,422,589
$
$
1,079,703
9,963
1,089,666
$
$
61,440
15,378
64,003
924,618
11,133
935,751
(175,248) $
(47,795) $
84,181
(29,781)
(77,576) $
(212,125)
(127,944)
196,335
21,087
66.11
2.58
$
$
50.64
$
2.41
57.91
$
48.40
$
2.58
2.41
41.12
1.98
44.86
1.98
489,720
$
447,799
$
414,937
39,147
96,589
39,617
79,198
64.59
$
22.24
49.51
$
20.35
2.27
4.39
1.80
3.60
31,145
(2,816)
28,329
$
$
26,182
(3,099)
23,083
$
$
45,151
68,878
39.95
17.71
1.92
2.94
24,816
(3,374)
21,442
$
$
$
$
$
$
$
$
$
$
(1) Includes pre-tax full-cost pool ceiling test write-downs of our oil and natural gas properties of $810.9 million and an accelerated
depreciation charge of $591.0 million related to the Riley Ridge gas processing facility and related assets for the year ended
December 31, 2016.
46
Denbury Resources Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(2) See also Commodity Derivative Contracts below and Market Risk Management for information concerning our commodity
derivative transactions.
(3) Noncash fair value gains (losses) on commodity derivatives is a non-GAAP measure and is different from “Commodity
derivatives expense (income)” in the Consolidated Statements of Operations in that the noncash fair value gains (losses) on
commodity derivatives represent only the net changes between periods of the fair market values of commodity derivative
positions, and exclude the impact of settlements on commodity derivatives during the period, which were payments on
settlements of $175.2 million and $47.8 million for the years ended December 31, 2018 and 2017, respectively, and receipts
on settlements of $84.2 million for the year ended December 31, 2016. We believe that noncash fair value gains (losses) on
commodity derivatives is a useful supplemental disclosure to “Commodity derivatives expense (income)” in order to
differentiate noncash fair market value adjustments from receipts or payments upon settlements on commodity derivatives
during the period. This supplemental disclosure is widely used within the industry and by securities analysts, banks and credit
rating agencies in calculating EBITDA and in adjusting net income (loss) to present those measures on a comparative basis
across companies, as well as to assess compliance with certain debt covenants. Noncash fair value gains (losses) on commodity
derivatives is not a measure of financial or operating performance under GAAP, nor should it be considered in isolation or as
a substitute for “Commodity derivatives expense (income)” in the Consolidated Statements of Operations. See also the
Glossary and Selected Abbreviations for the definition of noncash fair value gains (losses) on commodity derivatives.
(4) Represents “Marketing and plant operating expenses” as presented in the Consolidated Statements of Operations excluding
expenses for purchases of oil from third parties.
47
Denbury Resources Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Production
Average daily production by area for 2018, 2017 and 2016, and for each of the quarters of 2018, is shown below:
Operating Area
Tertiary oil production
Gulf Coast region
Delhi
Hastings
Heidelberg
Oyster Bayou
Tinsley
Other
Mature properties(1)
Total Gulf Coast region
Rocky Mountain region
Bell Creek
Salt Creek(2)
Other
Total Rocky Mountain region
Total tertiary oil production
Non-tertiary oil and gas production
Gulf Coast region
Mississippi
Texas
Other
Total Gulf Coast region
Rocky Mountain region
Cedar Creek Anticline
Other
Total Rocky Mountain region
Total non-tertiary production
Total continuing production
Property sales
Property divestitures(3)
Total production
Average Daily Production (BOE/d)
2018 Quarters
Year Ended December 31,
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
2018
2017
2016
4,169
5,704
4,445
5,056
6,053
57
6,726
32,210
4,050
2,002
—
6,052
38,262
875
4,386
431
5,692
14,437
1,485
15,922
21,614
59,876
462
60,338
4,391
5,716
4,330
4,961
5,755
142
6,725
4,383
5,486
4,376
4,578
5,294
240
6,612
4,526
5,480
4,269
4,785
5,033
375
6,748
4,368
5,596
4,355
4,843
5,530
205
6,702
32,020
30,969
31,216
31,599
4,010
2,049
—
6,059
38,079
901
4,947
388
6,236
15,742
1,490
17,232
23,468
61,547
447
61,994
3,970
2,274
6
6,250
37,219
1,038
4,533
421
5,992
14,208
1,409
15,617
21,609
58,828
353
59,181
4,421
2,107
20
6,548
37,764
1,023
4,319
457
5,799
14,961
1,343
16,304
22,103
59,867
—
59,867
4,113
2,109
7
6,229
37,828
960
4,546
424
5,930
14,837
1,431
16,268
22,198
60,026
315
60,341
4,869
4,830
4,851
5,007
6,430
13
7,078
33,078
3,313
1,115
—
4,428
37,506
981
4,493
478
5,952
14,754
1,537
16,291
22,243
59,749
549
60,298
4,155
4,829
5,128
5,083
7,192
11
8,241
34,639
3,121
—
—
3,121
37,760
850
4,906
515
6,271
16,322
1,844
18,166
24,437
62,197
1,806
64,003
(1) Mature properties include Brookhaven, Cranfield, Eucutta, Little Creek, Mallalieu, Martinville, McComb and Soso fields.
(2) Represents production related to the acquisition of a 23% non-operated working interest in Salt Creek Field in Wyoming,
which closed on June 30, 2017.
(3) Includes production from Lockhart Crossing Field sold in the third quarter of 2018, non-tertiary production in the Rocky
Mountain region related to the sale of remaining non-core assets in the Williston Basin of North Dakota and Montana, which
closed in the third quarter of 2016, and other minor property divestitures.
48
Denbury Resources Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Total Production
Total continuing production during 2018 averaged 60,026 BOE/d, including 37,828 Bbls/d from tertiary properties and 22,198
BOE/d from non-tertiary properties. Total continuing production excludes production from Lockhart Crossing Field sold in the
third quarter of 2018, which production totaled 315 BOE/d and 549 BOE/d during 2018 and 2017, respectively. Our 2018 total
continuing production level represents a slight increase of 277 BOE/d compared to 2017 levels, most significantly attributable to
a 1,801 BOE/d increase from our Rocky Mountain region tertiary properties, partially offset by declines in our Gulf Coast tertiary
properties.
Our production during 2018 was 97% oil, consistent with 2017 and slightly higher than 96% for 2016. We currently anticipate
2019 average daily production will decrease slightly from our average 2018 production rate, with an expected range of between
56,000 BOE/d and 60,000 BOE/d.
Tertiary Production
Continuing oil production from our tertiary operations averaged 37,828 Bbls/d during 2018, an increase of 322 Bbls/d (1%)
compared to 2017 levels, as production increases from the redevelopment project in mid-2017 at Hastings Field, continued
expansion at Bell Creek Field, and a full year of production from the mid-2017 acquisition at Salt Creek Field were partially offset
by natural production declines at Tinsley, Heidelberg, and our mature fields in the Gulf Coast region.
Non-Tertiary Production
Continuing production from our non-tertiary operations averaged 22,198 BOE/d during 2018, essentially unchanged compared
to 2017 levels, as production from our Mission Canyon exploitation wells offset natural production declines at other non-tertiary
properties.
Oil and Natural Gas Revenues
Oil and natural gas revenues increased 31% between 2017 and 2018 and increased 16% between 2016 and 2017. The changes
in our oil and natural gas revenues are due to changes in production quantities and commodity prices (excluding any impact of
our commodity derivative contracts), as reflected in the following table:
In thousands
Change in oil and natural gas revenues due to:
Increase (decrease) in production
Increase in commodity prices
Total increase in oil and natural gas revenues
Year Ended December 31,
2018 vs. 2017
Year Ended December 31,
2017 vs. 2016
Increase in
Revenues
Percentage
Increase in
Revenues
Increase
(Decrease) in
Revenues
Percentage
Increase
(Decrease) in
Revenues
$
$
765
332,158
332,923
0% $
31%
(56,574)
210,489
31% $
153,915
(6)%
22 %
16 %
49
Denbury Resources Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Excluding any impact of our commodity derivative contracts, our average net realized commodity prices and NYMEX
differentials were as follows during 2018, 2017 and 2016:
Average net realized prices
Oil price per Bbl
Natural gas price per Mcf
Price per BOE
Average NYMEX differentials
Gulf Coast region
Oil per Bbl
Natural gas per Mcf
Rocky Mountain region
Oil per Bbl
Natural gas per Mcf
Total Company
Oil per Bbl
Natural gas per Mcf
Year Ended December 31,
2018
2017
2016
$
66.11
$
50.64
$
2.58
64.59
2.41
49.51
$
$
$
$
2.94
0.09
(1.50) $
(1.06)
$
1.30
(0.49)
$
0.22
(0.04)
(1.39) $
(1.15)
(0.32) $
(0.61)
41.12
1.98
39.95
(1.42)
(0.52)
(3.97)
(0.66)
(2.29)
(0.58)
Prices received in a regional market fluctuate frequently and can differ from NYMEX pricing due to a variety of reasons,
including supply and/or demand factors, crude oil quality, and location differentials.
• Gulf Coast Region. Our average NYMEX oil differential in the Gulf Coast region was a positive $2.94 per Bbl and a
positive $0.22 per Bbl during 2018 and 2017, respectively. These differentials are impacted significantly by the changes
in prices received for our crude oil sold under LLS index prices relative to the changes in NYMEX prices, as well as
various other factors such as those noted above. The average LLS-to-NYMEX differential (on a trade-month basis)
averaged a positive $4.91 per Bbl and $2.85 per Bbl during 2018 and 2017, respectively. During 2018, we sold
approximately 60% of our crude oil at prices based on, or partially tied to, the LLS index price, and the balance at prices
based on various other indexes tied to NYMEX prices, primarily in the Rocky Mountain region.
• Rocky Mountain Region. NYMEX oil differentials in the Rocky Mountain region averaged $1.50 per Bbl below
NYMEX during 2018, compared to an average differential of $1.39 per Bbl below NYMEX in 2017. Differentials in the
Rocky Mountain region can fluctuate significantly on a month-to-month basis due to weather, refinery or transportation
issues, and Canadian and U.S. crude oil price index volatility.
Commodity Derivative Contracts
From time to time, we enter into oil derivative contracts to provide an economic hedge of our exposure to commodity price
risk associated with anticipated future oil production and to provide more certainty to our future cash flows. These contracts have
historically consisted of price floors, collars, three-way collars, fixed-price swaps, fixed-price swaps enhanced with a sold put,
and basis swaps.
50
Denbury Resources Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following table summarizes the impact our commodity derivative contracts had on our operating results for 2018, 2017
and 2016:
In thousands
2018
Payment on settlements of commodity derivatives
Noncash fair value gains (losses) on commodity derivatives(1)
Commodity derivatives income (expense)
2017
Receipt (payment) on settlements of commodity derivatives
Noncash fair value gains (losses) on commodity derivatives(1)
Commodity derivatives income (expense)
2016
Receipt (payment) on settlements of commodity derivatives
Noncash fair value gains (losses) on commodity derivatives(1)
Commodity derivatives income (expense)
$
$
$
$
$
$
Three Months Ended
March 31
June 30
September 30 December 31
Full Year
(33,357) $
(54,770) $
(61,611) $
(25,510) $ (175,248)
(15,468)
(41,429)
17,034
236,198
196,335
(48,825) $
(96,199) $
(44,577) $
210,688
$
21,087
(26,940) $
(11,767) $
89
$
(9,177) $
(47,795)
51,542
22,140
(25,352)
(78,111)
(29,781)
24,602
$
10,373
$
(25,263) $
(87,288) $
(77,576)
72,227
$
52,026
$
(7,295) $
(32,777) $
84,181
(95,053)
(150,235)
28,519
4,644
(212,125)
(22,826) $
(98,209) $
21,224
$
(28,133) $ (127,944)
(1) Noncash fair value gains (losses) on commodity derivatives is a non-GAAP measure. See Operating Results Table above for
a discussion of the reconciliation between noncash fair value gains (losses) on commodity derivatives to “Commodity
derivatives expense (income)” in the Consolidated Statements of Operations. See also the Glossary and Selected Abbreviations
for the definition of noncash fair value gains (losses) on commodity derivatives.
In order to provide a level of price protection to a portion of our oil production, we have hedged a portion of our estimated
oil production through 2019 and also have begun to enter into additional contracts for 2020 using both NYMEX and LLS fixed-
price swaps and three-way collars. See Note 10, Commodity Derivative Contracts, to the Consolidated Financial Statements for
additional details of our outstanding commodity derivative contracts as of December 31, 2018, and Market Risk Management
below for additional discussion. In addition, the following table summarizes our oil derivative contracts as of February 26, 2019:
WTI
NYMEX
Fixed-Price
Swaps
Volumes Hedged (Bbls/d)
Swap Price(1)
Argus LLS Volumes Hedged (Bbls/d)
Fixed-Price
Swaps
WTI
NYMEX
Swap Price(1)
Volumes Hedged (Bbls/d)
Jan. 2019
Feb. 2019
Mar. – June
2019
2H 2019
2020
3,500
$59.05
7,000
$66.57
18,500
3,500
$59.05
9,000
$65.14
18,500
3,500
$59.05
12,000
$64.67
18,500
—
—
12,000
$64.67
22,000
—
—
2,000
$60.89
1,000
3-Way Collars Sold Put Price / Floor / Ceiling Price(1)(2)
$48.84 / $56.84 /
$69.94
$48.84 / $56.84 /
$69.94
$48.84 / $56.84 /
$69.94
$48.55 / $56.55 /
$69.17
$50.00 / $60.00 /
$82.50
Argus LLS Volumes Hedged (Bbls/d)
5,500
5,500
5,500
5,500
1,000
3-Way Collars Sold Put Price / Floor / Ceiling Price(1)(2)
$54.73 / $63.09 /
$79.93
$54.73 / $63.09 /
$79.93
$54.73 / $63.09 /
$79.93
$54.73 / $63.09 /
$79.93
$55.00 / $65.00 /
$86.80
Total Volumes Hedged (Bbls/d)
34,500
36,500
39,500
39,500
4,000
(1) Averages are volume weighted.
(2) If oil prices were to average less than the sold put price, receipts on settlement would be limited to the difference between the
floor price and the sold put price.
51
Denbury Resources Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Commodity derivative contracts in place for 2019 and 2020 include fixed-price swaps and three-way collars. Based on current
contracts in place and NYMEX oil futures prices as of February 26, 2019, which average approximately $57 per Bbl for the
remainder of 2019, we currently expect that we would receive cash payments of approximately $10 million during 2019 upon
settlement of these contracts, the amount of which is dependent upon fluctuations in future NYMEX oil prices in relation to the
prices of our 2019 fixed-price swaps which have weighted average prices of $59.05 per Bbl and $64.80 per Bbl for NYMEX and
LLS hedges, respectively, and weighted average ceiling prices of our 2019 three-way collars of $69.52 per Bbl and $79.93 per
Bbl for NYMEX and LLS hedges, respectively. Changes in commodity prices, expiration of contracts, and new commodity
contracts entered into cause fluctuations in the estimated fair value of our oil derivative contracts. Because we do not utilize hedge
accounting for our commodity derivative contracts, the period-to-period changes in the fair value of these contracts, as outlined
above, are recognized in our statements of operations.
Production Expenses
Lease Operating Expenses
In thousands, except per-BOE data
Total lease operating expenses
Total lease operating expenses per BOE
Year Ended December 31,
2018
489,720
22.24
$
$
$
$
2017
447,799
20.35
$
$
2016
414,937
17.71
Total lease operating expense during 2018 increased $41.9 million (9%), or $1.89 (9%) on a per-BOE basis, compared to
2017. Our lease operating expenses during 2018 were primarily impacted by operating expenses related to our non-operated
working interest in Salt Creek Field, which was acquired on June 30, 2017, and has higher per-BOE operating cost than our
corporate average, along with increased workover and other repair activity at certain fields, and increased CO2 expense due to
higher oil prices and CO2 injection volumes.
Currently, our CO2 expense comprises approximately 20% of our typical tertiary lease operating expenses, and for the CO2
reserves we already own, consists of CO2 production expenses, and for the CO2 reserves we do not own, consists of our purchase
of CO2 from royalty and working interest owners and industrial sources. During the year ended December 31, 2018, approximately
52% of the CO2 utilized in our CO2 floods consisted of CO2 owned and produced by us (our net revenue interest). The price we
pay others for CO2 varies by source and is generally indexed to oil prices. When combining the production cost of the CO2 we
own with what we pay third parties for CO2, our average cost of CO2 during 2018 was approximately $0.42 per Mcf, including
taxes paid on CO2 production but excluding depletion, depreciation and amortization of capital expended at our CO2 source fields
and industrial sources. This per-Mcf CO2 cost during 2018 was higher than the $0.38 per Mcf comparable measure during 2017
due primarily to higher utilization of industrial-source CO2, which has a higher average cost than our naturally-occurring CO2
sources.
Marketing and Plant Operating Expenses
Marketing and plant operating expenses primarily consist of amounts incurred related to the marketing, processing, and
transportation of oil and natural gas production. Marketing and plant operating expenses were $50.0 million and $51.8 million
during 2018 and 2017, respectively, which amounts include purchases of oil from third parties of $6.5 million and $7.8 million
during 2018 and 2017, respectively.
Taxes Other than Income
Taxes other than income includes production, ad valorem and franchise taxes. Taxes other than income increased $17.5 million
(20%) between 2017 and 2018, due primarily to an increase in production taxes resulting from higher oil and natural gas revenues.
52
Denbury Resources Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
General and Administrative Expenses (“G&A”)
In thousands, except per-BOE data and employees
Gross cash compensation and administrative costs
Gross stock-based compensation
Operator labor and overhead recovery charges
Capitalized exploration and development costs
Net G&A expense
G&A per BOE
Net administrative costs
Net stock-based compensation
Net G&A expense
Employees as of December 31
Year Ended December 31,
2018
2017
2016
$
220,127
$
250,703
$
271,049
15,438
(126,570)
(37,500)
71,495
2.70
0.55
3.25
847
$
$
$
19,721
(127,425)
(41,193)
101,806
3.94
0.69
4.63
879
$
$
$
21,042
(133,727)
(48,438)
109,926
4.08
0.61
4.69
1,058
$
$
$
Our gross G&A expenses, which include our field operations employee costs, on an absolute-dollar basis decreased $34.9
million (13%) between 2017 and 2018. The change between periods was primarily due to lower employee-related costs such as
salaries and long-term incentives during 2018 and the 2017 period including severance-related payments associated with a
workforce reduction and compensation costs associated with the retirement of our chief executive officer. As part of our efforts
to reduce overhead and operating costs, we reduced our employee headcount through involuntary workforce reductions in 2017
and 2016. The severance-related payments associated with the 2017 workforce reduction were approximately $6.8 million.
Net G&A expense decreased $30.3 million (30%) between 2017 and 2018 primarily due to the items mentioned above that
decreased gross G&A expenses. The more significant percentage decrease in net G&A compared to the percentage decrease in
gross G&A expenses was due to the workforce reduction having a larger impact on the non-field employee workforce.
Our well operating agreements allow us, when we are the operator, to charge a well with a specified overhead rate during the
drilling phase and also to charge a monthly fixed overhead rate for each producing well. In addition, salaries associated with field
personnel are initially recorded as gross cash compensation and administrative costs and subsequently reclassified to lease operating
expenses or capitalized to field development costs to the extent those individuals are dedicated to oil and natural gas production,
exploration, and development activities.
Interest and Financing Expenses
In thousands, except per-BOE data and interest rates
Cash interest(1)
Less: interest on Senior Secured Notes and Convertible Notes not
reflected as interest for financial reporting purposes(1)
Noncash interest expense
Less: capitalized interest
Interest expense, net
Interest expense, net per BOE
Average debt principal outstanding
Average interest rate(2)
Year Ended December 31,
2018
2017
2016
$
186,632
$
176,307
$
170,772
(86,111)
6,246
(37,079)
69,688
3.16
$
$
(52,473)
6,191
(30,762)
99,263
4.51
$
$
(32,120)
12,475
(25,982)
125,145
5.34
$
$
$ 2,593,035
$ 2,892,785
$ 2,973,823
7.2%
6.1%
5.7%
(1) Cash interest is presented on an accrual basis, and includes the portion of interest on our 2021 Senior Secured Notes, 2022
Senior Secured Notes, 2023 Convertible Senior Notes and 2024 Convertible Senior Notes versus the GAAP financial statement
53
Denbury Resources Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
presentation in which interest on these notes is accounted for as a reduction of debt and not reflected as interest for financial
reporting purposes in accordance with Financial Accounting Standards Board Codification 470-60, Troubled Debt
Restructuring by Debtors. See below for further discussion.
(2) Includes commitment fees but excludes debt issue costs and amortization of discount or premium.
As reflected in the table above, cash interest expense during 2018 increased when compared to 2017 due primarily to the
issuance of 2024 Senior Secured Notes during the third quarter of 2018. Despite an overall reduction in the debt principal balance
as a result of the exchange transactions, our average interest rate increased between 2017 and 2018 as the combined interest
payments on the senior secured and convertible senior notes was higher than the previously issued senior subordinated notes and
interest rate on our senior secured bank credit facility.
Capitalized interest increased $6.3 million (21%) during 2018, primarily due to an increase in the number of projects that
qualify for interest capitalization.
As more fully described in Note 6, Long-Term Debt, to the Consolidated Financial Statements, the exchange transactions were
accounted for in accordance with Financial Accounting Standards Board Codification 470-60, Troubled Debt Restructuring by
Debtors, whereby most of the future interest associated with the 2021 Senior Secured Notes, 2022 Senior Secured Notes, and
previously outstanding 2023 Convertible Senior Notes and 2024 Convertible Senior Notes was recorded as debt as of the transaction
date, which will be reduced as semiannual interest payments are made. Future interest payable recorded as debt totaled $250.2
million and $316.8 million as of December 31, 2018 and 2017, respectively. Therefore, interest expense reflected in our
Consolidated Statements of Operations is and will remain significantly lower than the actual cash interest payment.
During the second quarter of 2018, the debt principal balance and future interest applicable to the 2024 Convertible Notes
and 2023 Convertible Notes, totaling $162.0 million, were reclassified to “Paid-in capital in excess of par” and “Common stock”
in our Consolidated Balance Sheets upon the conversion of those notes into shares of Denbury common stock (see Overview –
2018 Debt Reduction). The conversion of these notes saves the Company annual cash interest payments of $5.9 million.
Depletion, Depreciation, and Amortization (“DD&A”)
In thousands, except per-BOE data
Oil and natural gas properties
CO2 properties, pipelines, plants and other property and equipment
Accelerated depreciation charge(1)
Total DD&A
DD&A per BOE
Oil and natural gas properties
CO2 properties, pipelines, plants and other property and equipment
Accelerated depreciation charge(1)
Total DD&A per BOE
Write-down of oil and natural gas properties
Year Ended December 31,
2018
2017
2016
134,486
$
118,792
$
81,963
—
88,921
—
216,449
$
207,713
$
149,700
105,318
591,025
846,043
$
6.11
3.72
—
$
5.40
4.04
—
9.83
$
9.44
$
6.39
4.50
25.23
36.12
— $
— $
810,921
$
$
$
$
$
(1) Represents an accelerated depreciation charge associated with the Riley Ridge gas processing facility and related assets.
The increase in our oil and natural gas properties depletion during 2018 when compared to 2017 was primarily due to an
increase in depletable costs resulting from increases in our capitalized costs and future development costs associated with our
reserves base, partially offset by an increase in proved oil and natural gas reserve quantities. Our oil and natural gas properties
depletion rate was $6.66 per BOE during the fourth quarter of 2018.
54
Denbury Resources Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Write-Down of Oil and Natural Gas Properties
Under full cost accounting rules, we are required each quarter to perform a ceiling test calculation. Under these rules, the full
cost ceiling value is calculated using the average first-day-of-the-month oil and natural gas price for each month during a 12-month
rolling period through the end of each quarterly reporting period. The falling prices throughout 2016 led to our recognizing full
cost pool ceiling test write-downs totaling $810.9 million during 2016. We did not record any ceiling test write-down during 2017
or 2018. See Item 1A, Risk Factors, and Critical Accounting Policies and Estimates – Full Cost Method of Accounting, Depletion
and Depreciation and Oil and Natural Gas Properties for further discussion.
Other Expenses
Other expenses totaled $79.9 million and $7.0 million during 2018 and 2017, respectively. Other expenses during 2018 include
$49.4 million of expense related to the Riley Ridge helium supply contract claim (see Note 12, Commitments and Contingencies
– Litigation, to the Consolidated Financial Statements), a $17.8 million impairment for an investment related to a proposed plant
in the Gulf Coast that would potentially supply CO2 to Denbury, due to uncertainties of the project achieving financial close (see
Note 1, Significant Accounting Policies – Other Receivables, to the Consolidated Financial Statements), $4.4 million of transaction
costs associated with the proposed acquisition of Penn Virginia, $2.1 million of transaction costs related to privately negotiated
debt exchanges, and a $1.5 million write-off of debt issuance costs associated with the Company’s reduction and extension of the
senior secured bank credit facility. The 2017 amounts are primarily comprised of transaction costs associated with our privately
negotiated debt exchanges in December 2017.
Income Taxes
In thousands, except per-BOE amounts and tax rates
Current income tax benefit
Deferred income tax expense (benefit)
Total income tax expense (benefit)
Average income tax expense (benefit) per BOE
Effective tax rate
Total net deferred tax liability
Year Ended December 31,
2018
(16,001)
103,234
2017
$
(20,873)
(95,779)
87,233
$ (116,652)
3.96
21.3%
309,758
$
$
(5.30)
(250.9)%
198,099
$
$
$
$
2016
(785)
(543,385)
(544,170)
(23.23)
35.8%
293,878
$
$
$
$
Our income tax provisions were based on an estimated statutory rate of approximately 25% for 2018 and 38% for 2017 and
2016. The Tax Cut and Jobs Act (the “Act”) enacted in December 2017 resulted in a reduction of the federal income tax rate from
35% to 21% effective for calendar year 2018. Our effective tax rate for 2018 was lower than our estimated statutory rate primarily
due to tax benefits resulting from enhanced oil recovery income tax credits. Our effective tax rate for 2017 was significantly lower
than our estimated statutory rate due to a one-time deferred income tax benefit of $132.2 million reflecting a re-measurement of
our deferred income tax assets and liabilities associated with the federal income tax rate reduction, as well as tax valuation allowances
recorded during the period, which also reduced the net deferred tax benefit recognized. Our total tax valuation allowance of $51.1
million remains unchanged from December 31, 2017. The valuation allowances will remain until the realization of future deferred
tax benefits are more likely than not to become utilized.
As of December 31, 2018, we had an unrecognized tax benefit of $5.4 million related to an uncertain tax position. The
unrecognized tax benefit was recorded during 2015 as a direct reduction of the associated deferred tax asset and, if recognized,
would not materially affect our annual effective tax rate. We currently do not expect a material change to the uncertain tax position
within the next 12 months.
The current income tax benefit recorded in 2018 primarily represents the estimated receivable associated with our refundable
alternative minimum tax credits.
As of December 31, 2018, we had no federal net operating loss carryforwards (“NOLs”), tax effected business interest expense
carryforward totaling $9.0 million, state NOLs and tax credits totaling $52.4 million (before provision for valuation allowance),
an estimated $57.8 million of enhanced oil recovery credits to carry forward related to our tertiary operations and $21.6 million
55
Denbury Resources Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
of research and development credits that can be utilized to reduce our current income taxes during 2019 or future years. We also
have $18.1 million of alternative minimum tax credits, which under the Act will be fully refundable by 2021 and are recorded as
a receivable on the balance sheet. Our business interest expense carryforward does not expire. Our state NOLs expire in various
years, starting in 2019, although most do not begin to expire until 2024. Our enhanced oil recovery credits and research and
development credits do not begin to expire until 2024 and 2031, respectively. The statutes of limitation for our income tax returns
for tax years ending prior to 2015 have lapsed and therefore are not subject to examination by respective taxing authorities.
Per-BOE Data
The following table summarizes our cash flow and results of operations on a per-BOE basis for the comparative periods. Each
of the individual components is discussed above.
Per-BOE data
Oil and natural gas revenues
Receipt (payment) on settlements of commodity derivatives
Lease operating expenses
Production and ad valorem taxes
Marketing expenses, net of third-party purchases, and plant operating
expenses
Production netback
CO2 sales, net of operating and exploration expenses
General and administrative expenses
Interest expense, net
Other
Changes in assets and liabilities relating to operations
Cash flows from operations
DD&A – excluding accelerated depreciation charge
DD&A – accelerated depreciation charge(1)
Write-down of oil and natural gas properties
Deferred income taxes
Gain on early extinguishment of debt
Noncash fair value gains (losses) on commodity derivatives(2)
Other noncash items
Net income (loss)
$
$
Year Ended December 31,
2017
2016
2018
$
64.59
(7.96)
(22.24)
(4.39)
$
49.51
(2.17)
(20.35)
(3.60)
(1.78)
28.22
1.28
(3.25)
(3.16)
(2.23)
3.19
24.05
(9.83)
—
—
(4.69)
—
8.92
(3.80)
14.65
(1.80)
21.59
1.05
(4.63)
(4.51)
1.47
(2.83)
12.14
(9.44)
—
—
4.35
—
(1.35)
1.71
$
7.41
$
39.95
3.59
(17.71)
(2.94)
(1.92)
20.97
0.92
(4.69)
(5.34)
(0.58)
(1.92)
9.36
(10.89)
(25.23)
(34.62)
23.20
4.91
(9.05)
0.65
(41.67)
(1) Represents an accelerated depreciation charge associated with the Riley Ridge gas processing facility and related assets.
(2) Noncash fair value gains (losses) on commodity derivatives is a non-GAAP measure. See Operating Results Table above for
a discussion of the reconciliation between noncash fair value gains (losses) on commodity derivatives to “Commodity
derivatives expense (income)” in the Consolidated Statements of Operations. See also the Glossary and Selected Abbreviations
for the definition of noncash fair value gains (losses) on commodity derivatives.
56
Denbury Resources Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
MARKET RISK MANAGEMENT
Debt
We finance some of our acquisitions and other expenditures with fixed and variable rate debt. These debt agreements expose
us to market risk related to changes in interest rates. At December 31, 2018, we had no outstanding borrowings on our senior
secured bank credit facility. None of our existing debt has any triggers or covenants regarding our debt ratings with rating agencies,
although under the NEJD financing lease, in light of credit downgrades in February 2016, we were required to provide a $41.3
million letter of credit to the lessor, which we provided on March 4, 2016. The letter of credit may be drawn upon in the event
we fail to make a payment due under the pipeline financing lease agreement or upon other specified defaults set out in the pipeline
financing lease agreement (filed as Exhibit 99.1 to the Form 8-K filed with the SEC on June 5, 2008). The fair values of our senior
secured second lien notes, senior notes, and senior subordinated notes are based on quoted market prices. The following table
presents the principal and fair values of our outstanding debt at December 31, 2018:
In thousands
Fixed rate debt
2021
2022
2023
2024
Total
Fair
Value
9% Senior Secured Second Lien Notes due 2021
$
614,919
$
— $
— $
— $
614,919
$
570,337
9¼% Senior Secured Second Lien Notes due 2022
7½% Senior Secured Second Lien Notes due 2024
5½% Senior Subordinated Notes due 2022
Commodity Derivative Contracts
—
—
203,545
—
—
455,668
—
—
314,662
—
—
—
—
—
307,978
—
450,000
—
—
—
455,668
450,000
203,545
314,662
307,978
421,493
362,250
142,482
213,970
175,547
We enter into oil derivative contracts to provide an economic hedge of our exposure to commodity price risk associated with
anticipated future oil production and to provide more certainty to our future cash flows. We do not hold or issue derivative financial
instruments for trading purposes. Generally, these contracts have consisted of various combinations of price floors, collars, three-
way collars, fixed-price swaps, fixed-price swaps enhanced with a sold put, and basis swaps. The production that we hedge has
varied from year to year depending on our levels of debt, financial strength, and expectation of future commodity prices. In order
to provide a level of price protection to a portion of our oil production, we have hedged a portion of our estimated oil production
through 2020 using both NYMEX and LLS fixed-price swaps and three-way collars. Depending on market conditions, we may
continue to add to our existing 2019 and 2020 hedges. See also Note 10, Commodity Derivative Contracts, and Note 11, Fair
Value Measurements, to the Consolidated Financial Statements for additional information regarding our commodity derivative
contracts.
All of the mark-to-market valuations used for our commodity derivatives are provided by external sources. We manage and
control market and counterparty credit risk through established internal control procedures that are reviewed on an ongoing
basis. We attempt to minimize credit risk exposure to counterparties through formal credit policies, monitoring procedures and
diversification. All of our commodity derivative contracts are with parties that are lenders under our senior secured bank credit
facility (or affiliates of such lenders). We have included an estimate of nonperformance risk in the fair value measurement of our
commodity derivative contracts, which we have measured for nonperformance risk based upon credit default swaps or credit
spreads.
For accounting purposes, we do not apply hedge accounting to our commodity derivative contracts. This means that any
changes in the fair value of these commodity derivative contracts will be charged to earnings instead of charging the effective
portion to other comprehensive income and the ineffective portion to earnings.
At December 31, 2018, our commodity derivative contracts were recorded at their fair value, which was a net asset of $97.3
million, a $196.4 million increase from the $99.1 million net liability recorded at December 31, 2017. This change is primarily
related to the expiration of commodity derivative contracts during 2018, new commodity derivative contracts entered into during
2018 for future periods, and changes in oil futures prices between December 31, 2017 and 2018.
57
Denbury Resources Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Commodity Derivative Sensitivity Analysis
Based on NYMEX and LLS crude oil futures prices as of December 31, 2018, and assuming both a 10% increase and decrease
thereon, we would expect to receive payments on our crude oil derivative contracts as shown in the following table:
In thousands
Based on:
Futures prices as of December 31, 2018
$
10% increase in prices
10% decrease in prices
Receipts
126,497
80,315
145,173
Our commodity derivative contracts are used as an economic hedge of our exposure to commodity price risk associated with
anticipated future production. As a result, changes in receipts or payments of our commodity derivative contracts due to changes
in commodity prices, as reflected in the above table, would be mostly offset by a corresponding increase or decrease in the cash
receipts on sales of our oil and natural gas production to which those commodity derivative contracts relate.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in accordance with generally accepted accounting principles requires that we select
certain accounting policies and make certain estimates and judgments regarding the application of those policies. Our significant
accounting policies are included in Note 1, Significant Accounting Policies, to the Consolidated Financial Statements. These
policies, along with the underlying assumptions and judgments by our management in their application, have a significant impact
on our consolidated financial statements. Following is a discussion of our most critical accounting estimates, judgments and
uncertainties that are inherent in the preparation of our financial statements.
Full Cost Method of Accounting, Depletion and Depreciation and Oil and Natural Gas Properties
Businesses involved in the production of oil and natural gas are required to follow accounting rules that are unique to the oil
and gas industry. We apply the full cost method of accounting for our oil and natural gas properties. Another acceptable method
of accounting for oil and natural gas production activities is the successful efforts method of accounting. In general, the primary
differences between the two methods are related to the capitalization of costs and the evaluation for asset impairment. Under the
full cost method, all geological and geophysical costs, exploratory dry holes and delay rentals are capitalized to the full cost pool,
whereas under the successful efforts method such costs are expensed as incurred. In the assessment of impairment of oil and
natural gas properties, the successful efforts method follows the Accounting for the Impairment or Disposal of Long-Lived Assets
topic of the FASC, under which the net book value of assets is measured for impairment against the undiscounted future cash flows
using commodity prices consistent with management expectations. Under the full cost method, the full cost pool (net book value
of oil and natural gas properties) is measured against future cash flows discounted at 10% using the average first-day-of-the-month
oil and natural gas price for each month during a 12-month rolling period through the end of each quarterly reporting period. The
financial results for a given period could be substantially different depending on the method of accounting that an oil and gas entity
applies. Further, we do not designate our oil and natural gas derivative contracts as hedging instruments for accounting purposes
under the Derivatives and Hedging topic of the FASC (see below), and as a result, these contracts are not considered in the full
cost ceiling test.
We make significant estimates at the end of each period related to accruals for oil and natural gas revenues, production,
capitalized costs and operating expenses. We calculate these estimates with our best available data, which includes, among other
things, production reports, price posting, information compiled from daily drilling reports and other internal tracking devices, and
analysis of historical results and trends. While management is not aware of any required revisions to its estimates, there will likely
be future adjustments resulting from such things as revisions in estimated oil and natural gas volumes, changes in ownership
interests, payouts, joint venture audits, re-allocations by the purchasers or pipelines, or other corrections and adjustments common
in the oil and gas industry, many of which will require retroactive application. These types of adjustments cannot be currently
estimated or determined and will be recorded in the period during which the adjustment occurs.
Under full cost accounting, the estimated quantities of proved oil and natural gas reserves used to compute depletion and the
related present value of estimated future net cash flows therefrom used to perform the full cost ceiling test have a significant impact
58
Denbury Resources Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
on the underlying financial statements. The process of estimating oil and natural gas reserves is very complex, requiring significant
decisions in the evaluation of all available geological, geophysical, engineering and economic data. The data for a given field
may also change substantially over time as a result of numerous factors, including additional development activity, evolving
production history and continued reassessment of the viability of production under varying economic conditions. As a result,
material revisions to existing reserve estimates may occur from time to time. Although every reasonable effort is made to ensure
the reported reserve estimates represent the most accurate assessments possible, including the hiring of independent engineers to
prepare reported estimates, the subjective decisions and variances in available data for various fields make these estimates generally
less precise than other estimates included in our financial statement disclosures. Over the last four years, annual revisions to our
reserve estimates, excluding any revisions related to changes in commodity prices, have averaged approximately 1.7% of the
previous year’s estimates and have been both positive and negative.
Changes in commodity prices also affect our reserve quantities. These changes in quantities affect our DD&A rate, and the
combined effect of changes in quantities and commodity prices impacts our full cost ceiling test calculation. For example, we
estimate that a 5% increase in our estimate of proved reserve quantities would have lowered our fourth quarter 2018 oil and natural
gas property DD&A rate from $6.66 per BOE to approximately $6.38 per BOE, and a 5% decrease in our proved reserve quantities
would have increased our DD&A rate to approximately $6.97 per BOE. Also, reserve quantities and their ultimate values,
determined solely by our lenders, are the primary factors in determining the maximum borrowing base under our senior secured
bank credit facility, particularly quantities and values of our proved developed producing reserves.
Under full cost accounting rules, we are required each quarter to perform a ceiling test calculation. The net capitalized costs
of oil and natural gas properties are limited to the lower of unamortized cost or the cost center ceiling. The cost center ceiling is
defined as (1) the present value of estimated future net revenues from proved oil and natural gas reserves before future abandonment
costs (discounted at 10%), based on the average first-day-of-the-month oil and natural gas price for each month during a 12-month
rolling period prior to the end of a particular reporting period; plus (2) the cost of properties not being amortized; plus (3) the lower
of cost or estimated fair value of unproved properties included in the costs being amortized, if any; less (4) related income tax
effects. Our future net revenues from proved oil and natural gas reserves are not reduced for development costs related to the cost
of drilling for and developing CO2 reserves nor those related to the cost of constructing CO2 pipelines, as we do not have to incur
additional costs to develop the proved oil and natural gas reserves. Therefore, we include in the ceiling test, as a reduction of
future net revenues, that portion of our capitalized CO2 costs related to CO2 reserves and CO2 pipelines that we estimate will be
consumed in the process of producing our proved oil and natural gas reserves. The fair value of our oil and natural gas derivative
contracts is not included in the ceiling test, as we do not designate these contracts as hedging instruments for accounting purposes.
The cost center ceiling test is prepared quarterly.
The average first-day-of-the-month NYMEX oil price used in estimating our proved reserves declined throughout 2016 and
led to our recognizing a full cost pool ceiling test write-down totaling $810.9 million during 2016. We did not record any ceiling
test write-downs during 2017 or 2018.
We exclude certain unevaluated costs from the amortization base and full cost ceiling test pending the determination of whether
proved reserves can be assigned to such properties. These costs are transferred to the full cost amortization base in the course of
these properties being developed, tested and evaluated. At least annually, we test these assets for impairment based on an evaluation
of management’s expectations of future pricing, evaluation of lease expiration terms, and planned project development activities.
As a result of this analysis, we recognized impairments of our unevaluated costs totaling $21.4 million and $21.0 million during
the years ended December 31, 2017 and 2016, respectively, whereby these costs were transferred to the full cost amortization base.
We did not record any impairments of our unevaluated costs during the year ended December 31, 2018.
Tertiary Injection Costs
Our tertiary operations are conducted in reservoirs that have already produced significant amounts of oil over many years;
however, in accordance with the rules for recording proved reserves, we cannot recognize proved reserves associated with enhanced
recovery techniques such as CO2 injection until we can demonstrate production resulting from the tertiary process or unless the
field is analogous to an existing flood. Our costs associated with the CO2 we produce (or acquire) and inject are principally our
cash out-of-pocket costs of production, transportation and acquisition, and to pay royalties.
We capitalize, as a development cost, injection costs in fields that are in their development stage, which means we have not
yet seen incremental oil production due to the CO2 injections (i.e., a production response). These capitalized development costs
59
Denbury Resources Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
will be included in our unevaluated property costs if there are not already proved tertiary reserves in that field. After we see a
production response to the CO2 injections (i.e., the production stage), injection costs will be expensed as incurred, and any previously
deferred unevaluated development costs will become subject to depletion upon recognition of proved tertiary reserves. During
2018, 2017 and 2016, we capitalized $24.5 million, $25.0 million and $17.3 million, respectively, of tertiary injection costs
associated with our tertiary projects.
Income Taxes
We make certain estimates and judgments in determining our income tax expense for financial reporting purposes. These
estimates and judgments occur in the calculation of certain tax assets and liabilities that arise from differences in the timing and
recognition of revenue and expense for tax and financial reporting purposes. Our federal and state income tax returns are generally
not prepared or filed before the consolidated financial statements are prepared; therefore, we estimate the tax basis of our assets
and liabilities at the end of each period as well as the effects of tax rate changes, tax credits and net operating loss
carryforwards. Adjustments related to these estimates are recorded in our tax provision in the period in which we finalize our
income tax returns. Further, we must assess the likelihood that we will be able to recover or utilize our deferred tax assets (primarily
our enhanced oil recovery credits and state loss carryforwards). If recovery is not likely, we must record a valuation allowance
against such deferred tax assets for the amount we would not expect to recover, which would result in an increase to our income
tax expense. As of December 31, 2018, 2017 and 2016, we had tax valuation allowances totaling $51.1 million, $51.1 million,
and $36.5 million, respectively, to reduce the carrying value of our state deferred income tax assets. The valuation allowances
will remain until the realization of future deferred tax benefits are more likely than not to become utilized. A 1% increase in our
statutory tax rate would have increased our calculated income tax expense (benefit) by approximately $4.1 million, $0.5 million
and ($15.2 million) for the years ended December 31, 2018, 2017 and 2016, respectively. See Note 7, Income Taxes, to the
Consolidated Financial Statements and Results of Operations – Income Taxes above for further information concerning our income
taxes.
Fair Value Estimates
The FASC defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value
measurements. It does not require us to make any new fair value measurements, but rather establishes a fair value hierarchy that
prioritizes the inputs to the valuation techniques used to measure fair value. Level 1 inputs are given the highest priority in the
fair value hierarchy, as they represent observable inputs that reflect unadjusted quoted prices for identical assets or liabilities in
active markets as of the reporting date, while Level 3 inputs are given the lowest priority, as they represent unobservable inputs
that are not corroborated by market data. Valuation techniques that maximize the use of observable inputs are favored. See Note
11, Fair Value Measurements, to the Consolidated Financial Statements for disclosures regarding our recurring fair value
measurements.
Significant uses of fair value measurements include:
•
•
assessment of impairment of long-lived assets; and
recorded value of commodity derivative instruments.
Impairment Assessment of Long-Lived Assets
We test long-lived assets that are not subject to our quarterly full cost pool ceiling test for impairment, including a portion of
our capitalized CO2 properties and pipelines, whenever events or changes in circumstances indicate that the carrying value may
not be recoverable. The factors we assess to determine if a long-lived asset impairment test is necessary include, among other
factors, a significant adverse change in the business climate that could affect the value of a long-lived asset, a significant decrease
in the market price of an asset group, a significant adverse change in the extent or manner in which a long-lived asset (asset group)
is being used or in its physical condition, or a current-period operating or cash flow loss combined with a history of operating or
cash flow losses or a projection or forecast that demonstrates continuing losses associated with the use of a long-lived asset (asset
group).
We perform our long-lived asset impairment test by comparing the net carrying costs of our long-lived asset groups to the
respective expected future undiscounted net cash flows that are supported by these long-lived assets which include production of
our probable and possible oil and natural gas reserves. If the undiscounted net cash flows are below the net carrying costs for an
60
Denbury Resources Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
asset group, we must record an impairment loss by the amount, if any, that net carrying costs exceed the fair value of the long-
lived asset group. Management assumptions impacting expected future undiscounted net cash flows include market estimates of
future commodity prices, projections of estimated reserve quantities, projections of future rates of production, timing and amount
of future development and operating costs, projected availability and cost of CO2, projected recovery factors of tertiary reserves
and risk-adjustment factors applied to the net cash flows. We did not record an impairment of long-lived assets during the year
ended December 31, 2018.
Commodity Derivative Contracts
Historically, we have entered into oil and natural gas derivative contracts to provide an economic hedge of our exposure to
commodity price risk associated with anticipated future oil and natural gas production and to provide more certainty to our future
cash flows. We do not hold or issue derivative financial instruments for trading purposes. Generally, these contracts have consisted
of various combinations of price floors, collars, three-way collars, fixed-price swaps, fixed-price swaps enhanced with a sold put,
and basis swaps. Our derivative financial instruments are recorded on the balance sheet as either an asset or liability measured at
fair value. The valuation methods used to measure the fair values of these assets and liabilities require considerable management
judgment and estimates to derive the inputs necessary to determine fair value estimates, such as forward prices for commodities,
interest rates, volatility factors and credit worthiness, as well as other relevant economic measures. We do not apply hedge
accounting to our commodity derivative contracts under the FASC Derivatives and Hedging topic; accordingly, changes in the
fair value of these instruments are recognized in earnings instead of charging the effective portion to other comprehensive income
and the ineffective portion to earnings. While we may experience more volatility in our net income (loss) than if we were to apply
hedge accounting treatment as permitted by the FASC Derivatives and Hedging topic, we believe that for us, the benefits associated
with applying hedge accounting do not outweigh the cost, time and effort to comply with hedge accounting.
Environmental and Litigation Contingencies
The Company makes judgments and estimates in recording liabilities for contingencies such as environmental remediation
or ongoing litigation. Liabilities are recorded when it is both probable that a loss has been incurred and such loss is reasonably
estimable. Assessments of liabilities are based on information obtained from independent and in-house experts, loss experience
in similar situations, actual costs incurred, and other case-by-case factors. Actual costs can vary from such estimates for a variety
of reasons. The costs of environmental remediation or litigation can vary from estimates due to new developments regarding the
facts and circumstances of each event, including in the case of environmental remediation, the timing of remediation, our
understanding of the environmental impact, remediation methods available, and regulatory requirements, and in the case of
litigation, differing interpretations of laws and facts and assessments of damages asserted and/or incurred.
Use of Estimates
See Note 1, Significant Accounting Policies, to the Consolidated Financial Statements for a discussion of our use of estimates.
Recent Accounting Pronouncements
See Note 1, Significant Accounting Policies, to the Consolidated Financial Statements for a discussion of recent accounting
pronouncements.
FORWARD-LOOKING INFORMATION
The data and/or statements contained in this Annual Report on Form 10-K that are not historical facts, including, but not
limited to, statements found in the sections entitled “Business and Properties” and “Management’s Discussion and Analysis of
Financial Condition and Results of Operations,” are forward-looking statements, as that term is defined in Section 21E of the
Securities Exchange Act of 1934, as amended (the “Exchange Act”), that involve a number of risks and uncertainties. Such forward-
looking statements may be or may concern, among other things, financial forecasts, future hydrocarbon prices and timing, the
degree and length of any price recovery for oil, current or future liquidity sources or their adequacy to support our anticipated
future activities, our ability to further reduce our debt levels, possible future write-downs of oil and natural gas reserves, together
with assumptions based on current and projected oil and gas prices and oilfield costs, current or future expectations or estimations
of our cash flows or the impact of changes in commodity prices on cash flows, availability of capital, borrowing capacity, availability
of advantageous commodity derivative contracts or the predicted cash flow benefits therefrom, forecasted capital expenditures,
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Denbury Resources Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
drilling activity or methods, including the timing and location thereof, nature of any future proposed asset sales or dispositions or
the timing or proceeds thereof, estimated timing of commencement of CO2 flooding of particular fields or areas, timing of CO2
injections and initial production responses in tertiary flooding projects, development activities, finding costs, anticipated future
cost savings, capital budgets, interpretation or prediction of formation details, production rates and volumes or forecasts thereof,
hydrocarbon reserve quantities and values, CO2 reserves and supply and their availability, potential reserves, barrels or percentages
of recoverable original oil in place, potential increases in worldwide tariffs or other trade restrictions, the likelihood, timing and
impact of increased interest rates, the impact of regulatory rulings or changes, anticipated outcomes of pending litigation, prospective
legislation affecting the oil and gas industry, environmental regulations, mark-to-market values, competition, long-term forecasts
of production, rates of return, estimated costs, changes in costs, future capital expenditures and overall economics, worldwide
economic conditions and other variables surrounding our estimated original oil in place, operations and future plans, including
statements regarding anticipated consequences or possible risk of our pending acquisition of Penn Virginia. Such forward-looking
statements generally are accompanied by words such as “plan,” “estimate,” “expect,” “predict,” “forecast,” “to our knowledge,”
“anticipate,” “projected,” “preliminary,” “should,” “assume,” “believe,” “may” or other words that convey, or are intended to
convey, the uncertainty of future events or outcomes. Such forward-looking information is based upon management’s current
plans, expectations, estimates, and assumptions and is subject to a number of risks and uncertainties that could significantly and
adversely affect current plans, anticipated actions, the timing of such actions and our financial condition and results of operations. As
a consequence, actual results may differ materially from expectations, estimates or assumptions expressed in or implied by any
forward-looking statements made by us or on our behalf. Among the factors that could cause actual results to differ materially
are fluctuations in worldwide oil prices or in U.S. oil prices and consequently in the prices received or demand for our oil and
natural gas; decisions as to production levels and/or pricing by OPEC or production levels by U.S. shale producers in future periods;
levels of future capital expenditures; effects of our indebtedness; success of our risk management techniques; accuracy of our cost
estimates; availability of credit in the commercial banking market; fluctuations in the prices of goods and services; the uncertainty
of drilling results and reserve estimates; operating hazards and remediation costs; disruption of operations and damages from well
incidents, hurricanes, tropical storms, forest fires, or other natural occurrences; acquisition risks; requirements for capital or its
availability; conditions in the worldwide financial, trade and credit markets; general economic conditions; competition; government
regulations, including changes in tax or environmental laws or regulations; and unexpected delays, as well as the risks and
uncertainties inherent in oil and gas drilling and production activities or that are otherwise discussed in this annual report, including,
without limitation, the portions referenced above, and the uncertainties set forth from time to time in our other public reports,
filings and public statements.
62
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Denbury Resources Inc.
The information required by Item 7A is set forth under Market Risk Management in Item 7, Management’s Discussion and
Analysis of Financial Condition and Results of Operations.
Item 8. Financial Statements and Supplementary Information
Significant Accounting Policies
Revenue Recognition
Potential Asset Sales
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Cash Flows
Consolidated Statements of Changes in Stockholders’ Equity
Notes to Consolidated Financial Statements
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
Supplemental Oil and Natural Gas Disclosures (Unaudited)
Supplemental CO2 Disclosures (Unaudited)
Unaudited Quarterly Information
Asset Retirement Obligations
Unevaluated Property
Long-Term Debt
Income Taxes
Stockholders’ Equity
Stock Compensation
Commitments and Contingencies
Additional Balance Sheet Details
Supplemental Cash Flow Information
Subsequent Events
Commodity Derivative Contracts
Fair Value Measurements
Page
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103
63
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Denbury Resources Inc.:
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Denbury Resources Inc. and its subsidiaries (the “Company”)
as of December 31, 2018 and 2017, and the related consolidated statements of operations, changes in stockholders’ equity, and
cash flows for each of the three years in the period ended December 31, 2018, including the related notes (collectively referred to
as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of
December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position
of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years
in the period ended December 31, 2018 in conformity with accounting principles generally accepted in the United States of America.
Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control
over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in
Management's Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express
opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based
on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States)
(PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and
the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether
due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement
of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks.
Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial
statements. Our audits also included evaluating the accounting principles used and significant estimates made by management,
as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial
reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness
exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits
also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide
a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets
of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that
could have a material effect on the financial statements.
64
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
Dallas, Texas
February 28, 2019
We have served as the Company’s auditor since 2004.
65
Denbury Resources Inc.
Consolidated Balance Sheets
(In thousands, except par value and share data)
Assets
Current assets
Cash and cash equivalents
Accrued production receivable
Trade and other receivables, net
Derivative assets
Other current assets
Total current assets
Property and equipment
Oil and natural gas properties (using full cost accounting)
Proved properties
Unevaluated properties
CO2 properties
Pipelines and plants
Other property and equipment
Less accumulated depletion, depreciation, amortization and impairment
Net property and equipment
Derivative assets
Other assets
Total assets
Current liabilities
Accounts payable and accrued liabilities
Oil and gas production payable
Derivative liabilities
Liabilities and Stockholders’ Equity
Current maturities of long-term debt (including future interest payable of $85,303 and $75,347, respectively –
see Note 6)
Total current liabilities
Long-term liabilities
December 31,
2018
2017
$
38,560
$
125,788
26,970
93,080
11,896
296,294
58
146,334
45,193
—
10,670
202,255
11,072,209
10,775,792
996,700
1,196,795
2,302,817
250,279
(11,500,190)
4,318,610
4,195
104,123
4,723,222
$
951,397
1,191,058
2,286,047
339,218
(11,376,646)
4,166,866
—
102,178
4,471,299
198,380
$
61,288
—
105,125
364,793
177,220
76,588
99,061
105,188
458,057
$
$
Long-term debt, net of current portion (including future interest payable of $164,914 and $241,472, respectively
– see Note 6)
2,664,211
2,979,086
Asset retirement obligations
Deferred tax liabilities, net
Other liabilities
Total long-term liabilities
Commitments and contingencies (Note 12)
Stockholders’ equity
Preferred stock, $.001 par value, 25,000,000 shares authorized, none issued and outstanding
Common stock, $.001 par value, 600,000,000 shares authorized; 462,355,725 and 402,549,346 shares issued,
respectively
Paid-in capital in excess of par
Accumulated deficit
Treasury stock, at cost, 1,941,749 and 457,041 shares, respectively
Total stockholders’ equity
Total liabilities and stockholders’ equity
174,470
309,758
68,213
165,756
198,099
22,136
3,216,652
3,365,077
—
462
2,685,211
(1,533,112)
(10,784)
1,141,777
$
4,723,222
$
—
403
2,507,828
(1,855,810)
(4,256)
648,165
4,471,299
See accompanying Notes to Consolidated Financial Statements.
66
Denbury Resources Inc.
Consolidated Statements of Operations
(In thousands, except per share data)
Year Ended December 31,
2018
2017
2016
Revenues and other income
Oil, natural gas, and related product sales
CO2 sales and transportation fees
Other income
Total revenues and other income
Expenses
Lease operating expenses
Marketing and plant operating expenses
CO2 discovery and operating expenses
Taxes other than income
General and administrative expenses
Interest, net of amounts capitalized of $37,079, $30,762, and $25,982, respectively
Depletion, depreciation, and amortization
Commodity derivatives expense (income)
Gain on debt extinguishment
Write-down of oil and natural gas properties
Other expenses
Total expenses
Income (loss) before income taxes
Income tax provision (benefit)
Net income (loss)
Net income (loss) per common share
Basic
Diluted
Weighted average common shares outstanding
Basic
Diluted
$
1,422,589
$
1,089,666
$
31,145
19,891
26,182
13,938
1,473,625
1,129,786
489,720
50,002
2,816
104,670
71,495
69,688
216,449
(21,087)
—
—
79,941
1,063,694
409,931
87,233
447,799
51,820
3,099
87,207
101,806
99,263
207,713
77,576
—
—
7,003
1,083,286
46,500
(116,652)
322,698
$
163,152
$
935,751
24,816
15,029
975,596
414,937
57,454
3,374
77,892
109,926
125,145
846,043
127,944
(115,095)
810,921
37,402
2,495,943
(1,520,347)
(544,170)
(976,177)
0.75
0.71
$
$
0.42
0.41
$
$
(2.61)
(2.61)
432,483
456,169
390,928
395,921
373,859
373,859
$
$
$
See accompanying Notes to Consolidated Financial Statements.
67
Denbury Resources Inc.
Consolidated Statements of Cash Flows
(In thousands)
Cash flows from operating activities
Net income (loss)
Adjustments to reconcile net income (loss) to cash flows from operating activities
Depletion, depreciation, and amortization
Write-down of oil and natural gas properties
Deferred income taxes
Stock-based compensation
Commodity derivatives expense (income)
Receipt (payment) on settlements of commodity derivatives
Gain on debt extinguishment
Debt issuance costs and discounts
Other, net
Changes in assets and liabilities, net of effects from acquisitions
Accrued production receivable
Trade and other receivables
Other current and long-term assets
Accounts payable and accrued liabilities
Oil and natural gas production payable
Other liabilities
Net cash provided by operating activities
Cash flows from investing activities
Oil and natural gas capital expenditures
Acquisitions of oil and natural gas properties
CO2 capital expenditures
Pipelines and plants capital expenditures
Net proceeds from sales of oil and natural gas properties and equipment
Other
Net cash used in investing activities
Cash flows from financing activities
Bank repayments
Bank borrowings
Interest payments treated as a reduction of debt
Proceeds from issuance of senior secured notes
Repayment or repurchases of senior subordinated notes
Cost of debt financing
Pipeline financing and capital lease debt repayments
Other
Net cash provided by (used in) financing activities
Net increase (decrease) in cash, cash equivalents, and restricted cash
Cash, cash equivalents, and restricted cash at beginning of year
Cash, cash equivalents, and restricted cash at end of year
Year Ended December 31,
2018
2017
2016
$
322,698
$
163,152
$
(976,177)
216,449
—
103,234
11,951
(21,087)
(175,248)
—
6,246
(4,725)
20,547
16,094
(6,827)
13,008
(15,300)
42,645
529,685
(316,647)
(541)
(5,878)
(23,108)
7,762
5,136
207,713
—
(95,779)
15,154
77,576
(47,795)
—
6,191
3,112
(21,398)
(4,421)
(1,722)
(24,710)
(3,997)
(5,933)
267,143
(262,867)
(88,886)
(2,159)
(2,540)
1,696
(2,058)
846,043
810,921
(543,385)
14,995
127,944
84,181
(115,095)
17,006
(2,161)
(24,290)
35,923
(8,661)
(34,240)
(6,752)
(7,029)
219,223
(243,027)
(1,310)
(2,321)
(2,666)
47,725
(3,064)
(333,276)
(356,814)
(204,663)
(1,982,653)
1,507,653
(79,606)
450,000
—
(16,060)
(23,300)
(13,486)
(157,452)
38,957
15,992
(1,589,000)
1,763,000
(50,349)
(1,730,500)
1,856,500
(25,835)
—
(2,503)
(6,289)
(27,462)
1,216
88,613
(1,058)
17,050
—
(76,708)
(9,574)
(28,849)
(46)
(15,012)
(452)
17,502
17,050
$
54,949
$
15,992
$
See accompanying Notes to Consolidated Financial Statements.
68
Denbury Resources Inc.
Consolidated Statements of Changes in Stockholders’ Equity
(Dollar amounts in thousands)
Balance – December 31, 2015
354,541,626
$
355
$
2,353,549
$
(1,058,954)
3,124,311
$
(46,038)
$
1,248,912
Common Stock
($.001 Par Value)
Shares
Amount
Paid-In
Capital in
Excess of
Par
Retained
Earnings
(Accumulated
Deficit)
Treasury Stock
(at cost)
Shares
Amount
Total Equity
Cumulative effect of accounting change
—
Issued or purchased pursuant to stock
compensation plans
Issued pursuant to directors’ compensation plan
Issued as part of debt exchange
Stock-based compensation
Tax withholding – stock compensation
Dividends adjustments
Net loss
7,031,767
31,930
40,729,332
—
—
—
—
—
7
—
40
—
—
—
—
(415)
16,072
(7)
50
160,451
21,042
—
—
—
—
—
—
—
—
70
(976,177)
—
—
—
—
—
—
—
—
—
—
782,566
(1,597)
—
—
—
—
Balance – December 31, 2016
402,334,655
402
2,534,670
(2,018,989)
3,906,877
(47,635)
Issued or purchased pursuant to stock
compensation plans
Issued pursuant to directors’ compensation plan
Stock-based compensation
Tax withholding – stock compensation
Retirement of treasury stock
Dividends adjustments
Net income
5,201,854
12,837
—
—
(5,000,000)
—
—
6
—
—
—
(5)
—
—
(6)
—
19,721
—
(46,557)
—
—
—
—
—
—
—
27
163,152
—
—
—
1,550,164
(5,000,000)
—
—
—
—
—
(3,183)
46,562
—
—
Balance – December 31, 2017
402,549,346
403
2,507,828
(1,855,810)
457,041
(4,256)
Issued or purchased pursuant to stock
compensation plans
Issued pursuant to notes conversion
Stock-based compensation
Tax withholding – stock compensation
Net income
4,556,424
55,249,955
—
—
—
4
55
—
—
—
(4)
161,949
15,438
—
—
—
—
—
—
322,698
—
—
—
1,484,708
—
—
—
—
(6,528)
—
15,657
—
50
160,491
21,042
(1,597)
70
(976,177)
468,448
—
—
19,721
(3,183)
—
27
163,152
648,165
—
162,004
15,438
(6,528)
322,698
Balance – December 31, 2018
462,355,725
$
462
$
2,685,211
$
(1,533,112)
1,941,749
$
(10,784)
$
1,141,777
See accompanying Notes to Consolidated Financial Statements.
69
Denbury Resources Inc.
Notes to Consolidated Financial Statements
Note 1. Significant Accounting Policies
Organization and Nature of Operations
Denbury Resources Inc., a Delaware corporation, is an independent oil and natural gas company with operations focused in
two key operating areas: the Gulf Coast and Rocky Mountain regions. Our goal is to increase the value of our properties through
a combination of exploitation, drilling and proven engineering extraction practices, with the most significant emphasis relating to
CO2 enhanced oil recovery operations.
Principles of Reporting and Consolidation
The consolidated financial statements herein have been prepared in accordance with accounting principles generally accepted
in the United States (“GAAP”) and include the accounts of Denbury and entities in which we hold a controlling financial
interest. Undivided interests in oil and gas joint ventures are consolidated on a proportionate basis. All intercompany balances
and transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions
that affect the reported amount of certain assets and liabilities, disclosure of contingent assets and liabilities at the date of the
financial statements, and the reported amounts of revenues and expenses during each reporting period. Management believes its
estimates and assumptions are reasonable; however, such estimates and assumptions are subject to a number of risks and
uncertainties that may cause actual results to differ materially from such estimates. Significant estimates underlying these financial
statements include (1) the fair value of financial derivative instruments; (2) the estimated quantities of proved oil and natural gas
reserves used to compute depletion of oil and natural gas properties, the related present value of estimated future net cash flows
therefrom and the ceiling test; (3) future net cash flow estimates used in the impairment assessment of long-lived assets; (4) the
estimated quantities of proved and probable CO2 reserves used to compute depletion of CO2 properties; (5) estimated useful lives
used to compute depreciation and amortization of long-lived assets; (6) accruals related to oil and natural gas sales volumes and
revenues, capital expenditures and lease operating expenses; (7) the estimated costs and timing of future asset retirement obligations;
and (8) estimates made in the calculation of income taxes. While management is not aware of any significant revisions to any of
its current year-end estimates, there will likely be future revisions to its estimates resulting from matters such as revisions in
estimated oil and natural gas volumes, changes in ownership interests, payouts, joint venture audits, re-allocations by purchasers
or pipelines, or other corrections and adjustments common in the oil and natural gas industry, many of which require retroactive
application. These types of adjustments cannot be currently estimated and will be recorded in the period in which the adjustment
occurs.
Reclassifications
Certain prior period amounts have been reclassified to conform to the current year presentation. Such reclassifications had
no impact on our reported net income, current assets, total assets, current liabilities, total liabilities or stockholders’ equity.
Cash, Cash Equivalents, and Restricted Cash
We consider all highly liquid investments to be cash equivalents if they have maturities of three months or less at the date of
purchase. The following table provides a reconciliation of cash, cash equivalents, and restricted cash as reported within the
Consolidated Balance Sheets to “Cash, cash equivalents, and restricted cash at end of period” as reported within the Consolidated
Statements of Cash Flows:
Cash and cash equivalents
Restricted cash included in other assets
Total cash, cash equivalents, and restricted cash shown in the Consolidated Statements of
Cash Flows
December 31,
2018
2017
$
$
38,560
$
16,389
58
15,934
54,949
$
15,992
70
Denbury Resources Inc.
Notes to Consolidated Financial Statements
Amounts included in restricted cash included in “Other assets” in the accompanying Consolidated Balance Sheets represent
escrow accounts that are legally restricted for certain of our asset retirement obligations.
Oil and Natural Gas Properties
Capitalized Costs. We follow the full cost method of accounting for oil and natural gas properties. Under this method, all
costs related to the acquisition, exploration and development of oil and natural gas reserves are capitalized and accumulated in a
single cost center representing our activities, which are undertaken exclusively in the United States. Such costs include lease
acquisition costs, geological and geophysical expenditures, lease rentals on undeveloped properties, costs of drilling both productive
and nonproductive wells, capitalized interest on qualifying projects, and general and administrative expenses directly related to
exploration and development activities, and do not include any costs related to production, general corporate overhead or similar
activities. We assign the purchase price of oil and natural gas properties we acquire to proved and unevaluated properties based
on the estimated fair values as defined in the Financial Accounting Standards Board Codification (“FASC”) Fair Value Measurement
topic. Proceeds received from disposals are credited against accumulated costs except when the sale represents a significant
disposal of reserves, in which case a gain or loss would be recognized. A disposal of 25% or more of our proved reserves would
be considered significant.
Depletion and Depreciation. The costs capitalized, including production equipment and future development costs, are
depleted or depreciated using the unit-of-production method, based on proved oil and natural gas reserves as determined by
independent petroleum engineers. Oil and natural gas reserves are converted to equivalent units on a basis of 6,000 cubic feet of
natural gas to one barrel of crude oil.
Under full cost accounting, we may exclude certain unevaluated costs from the amortization base pending determination of
whether proved reserves can be assigned to such properties. The costs classified as unevaluated are transferred to the full cost
amortization base as the properties are developed, tested and evaluated. At least annually, we test these assets for impairment
based on an evaluation of management’s expectations of future pricing, evaluation of lease expiration terms, and planned project
development activities. As a result of this analysis, we recognized impairments of our unevaluated costs totaling $21.4 million
and $21.0 million during the years ended December 31, 2017 and 2016, respectively, whereby these costs were transferred to the
full cost amortization base. We did not record any impairments of our unevaluated costs during the year ended December 31,
2018.
Write-Down of Oil and Natural Gas Properties. The net capitalized costs of oil and natural gas properties are limited to
the lower of unamortized cost or the cost center ceiling. The cost center ceiling is defined as (1) the present value of estimated
future net revenues from proved oil and natural gas reserves before future abandonment costs (discounted at 10%), based on the
average first-day-of-the-month oil and natural gas price for each month during a 12-month rolling period prior to the end of a
particular reporting period; plus (2) the cost of properties not being amortized; plus (3) the lower of cost or estimated fair value
of unproved properties included in the costs being amortized, if any; less (4) related income tax effects. Our future net revenues
from proved oil and natural gas reserves are not reduced for development costs related to the cost of drilling for and developing
CO2 reserves nor those related to the cost of constructing CO2 pipelines, as we do not have to incur additional costs to develop the
proved oil and natural gas reserves. Therefore, we include in the ceiling test, as a reduction of future net revenues, that portion of
our capitalized CO2 costs related to CO2 reserves and CO2 pipelines that we estimate will be consumed in the process of producing
our proved oil and natural gas reserves. The fair value of our oil and natural gas derivative contracts is not included in the ceiling
test, as we do not designate these contracts as hedge instruments for accounting purposes. The cost center ceiling test is prepared
quarterly.
Declines in 2016 average first-day-of-the-month NYMEX oil prices used in estimating our proved reserves led to our
recognizing a full cost pool ceiling test write-down totaling $810.9 million during 2016. We did not record any ceiling test write-
downs during 2017 or 2018.
Joint Interest Operations. Substantially all of our oil and natural gas exploration and production activities are conducted
jointly with others. These financial statements reflect only our proportionate interest in such activities, and any amounts due from
other partners are included in trade receivables.
Tertiary Injection Costs. Our tertiary operations are conducted in reservoirs that have already produced significant amounts
of oil over many years; however, in accordance with the SEC rules and regulations for recording proved reserves, we cannot
71
Denbury Resources Inc.
Notes to Consolidated Financial Statements
recognize proved reserves associated with enhanced recovery techniques, such as CO2 injection, until we can demonstrate
production resulting from the tertiary process or unless the field is analogous to an existing flood.
We capitalize, as a development cost, injection costs in fields that are in their development stage, which means we have not
yet seen incremental oil production due to the CO2 injections (i.e., a production response). These capitalized development costs
are included in our unevaluated property costs if there are not already proved tertiary reserves in that field. After we see a production
response to the CO2 injections (i.e., the production stage), injection costs are expensed as incurred, and once proved reserves are
recognized, previously deferred unevaluated development costs become subject to depletion.
CO2 Properties
We own and produce CO2 reserves, a non-hydrocarbon resource, that are used in our tertiary oil recovery operations on our
own behalf and on behalf of other interest owners in enhanced recovery fields, with a portion sold to third-party industrial users. We
record revenue from our sales of CO2 to third parties when it is produced and sold. Expenses related to the production of CO2 are
allocated between volumes sold to third parties and volumes consumed internally that are directly related to our tertiary
production. The expenses related to third-party sales are recorded in “CO2 discovery and operating expenses,” and the expenses
related to internal use are recorded in “Lease operating expenses” in the Consolidated Statements of Operations or are capitalized
as oil and natural gas properties in our Consolidated Balance Sheets, depending on the stage of the tertiary flood that is receiving
the CO2 (see Tertiary Injection Costs above for further discussion).
Costs incurred to search for CO2 are expensed as incurred until proved or probable reserves are established. Once proved or
probable reserves are established, costs incurred to obtain those reserves are capitalized and classified as “CO2 properties” on our
Consolidated Balance Sheets. Capitalized CO2 costs are aggregated by geologic formation and depleted on a unit-of-production
basis over proved and probable reserves.
Pipelines and Plants
CO2 used in our tertiary floods is transported to our fields through CO2 pipelines. Costs of CO2 pipelines under construction
are not depreciated until the pipelines are placed into service. Pipelines are depreciated on a straight-line basis over their estimated
useful lives, which range from 20 to 50 years. Capitalized costs include $122.5 million of CO2 pipelines as of December 31, 2018,
that were either under construction or had not been placed into service and therefore, were not subject to depreciation during 2018.
Pipelines and plants also include capitalized costs associated with the Riley Ridge gas processing facility in southwestern
Wyoming. During the fourth quarter of 2016, we reassessed the estimated useful life of the gas processing facility and related
assets, due to the extended shut-in status of the Riley Ridge gas processing facility and our analysis of cost estimates and engineering
options to remedy certain existing issues, and recorded accelerated depreciation to fully depreciate capitalized costs related to the
facility and intangible assets assigned to helium production rights at Riley Ridge.
Property and Equipment – Other
Other property and equipment, which includes furniture and fixtures, vehicles, computer equipment and software, and
capitalized leases, is depreciated principally on a straight-line basis over each asset’s estimated useful life. Vehicles and furniture
and fixtures are generally depreciated over a useful life of five to ten years, and computer equipment and software are generally
depreciated over a useful life of three to five years. Leasehold improvements are amortized over the shorter of the estimated useful
life or the remaining lease term.
Leased property meeting certain capital lease criteria is capitalized, and the present value of the related lease payments is
recorded as a liability. Amortization of capitalized leased assets is computed using the straight-line method over the shorter of the
estimated useful life or the lease term.
Maintenance and repair costs that do not extend the useful life of the property or equipment are charged to expense as incurred.
72
Denbury Resources Inc.
Notes to Consolidated Financial Statements
Intangible Assets
Our intangible assets subject to amortization primarily consist of amounts assigned in purchase accounting to a CO2 purchase
contract with ConocoPhillips to offtake CO2 from the Lost Cabin gas plant in Wyoming and is included in our Consolidated Balance
Sheets under the caption “Other assets.” We amortize the CO2 contract intangible asset on a straight-line basis over the contract
term. Total amortization expense for our intangible assets was $2.4 million, $2.4 million and $2.3 million during the years ended
December 31, 2018, 2017 and 2016. The following table summarizes the carrying value of our intangible assets as of December 31,
2018 and 2017:
In thousands
Intangible asset value
Accumulated amortization
Net book value
December 31,
2018
2017
$
$
37,848
(13,074)
24,774
$
$
37,848
(10,645)
27,203
As of December 31, 2018, our estimated amortization expense for our intangible assets subject to amortization over the next
five years is as follows:
In thousands
2019
2020
2021
2022
2023
$
2,430
2,430
2,430
2,430
2,430
Impairment Assessment of Long-Lived Assets
The portion of our capitalized CO2 costs related to CO2 reserves and CO2 pipelines that we estimate will be consumed in the
process of producing our proved oil and natural gas reserves is included in the full cost pool ceiling test as a reduction to future
net revenues. The remaining net capitalized costs that are not included in the full cost pool ceiling test, and related intangible
assets, are subject to long-lived asset impairment testing whenever events or changes in circumstances indicate that the carrying
value may not be recoverable.
We perform our long-lived asset impairment test by comparing the net carrying costs of our long-lived asset groups to the
respective expected future undiscounted net cash flows that are supported by these long-lived assets which include production of
our probable and possible oil and natural gas reserves. If the undiscounted net cash flows are below the net carrying costs for an
asset group, we must record an impairment loss by the amount, if any, that net carrying costs exceed the fair value of the long-
lived asset group. We did not record an impairment of long-lived assets during the year ended December 31, 2018.
Asset Retirement Obligations
In general, our future asset retirement obligations relate to future costs associated with plugging and abandoning our oil,
natural gas and CO2 wells, removing equipment and facilities from leased acreage, and returning land to its original condition. The
fair value of a liability for an asset retirement obligation is recorded in the period in which it is incurred, discounted to its present
value using our credit-adjusted-risk-free interest rate, and a corresponding amount capitalized by increasing the carrying amount
of the related long-lived asset. The liability is accreted each period, and the capitalized cost is depreciated over the useful life of
the related asset. Revisions to estimated retirement obligations will result in an adjustment to the related capitalized asset and
corresponding liability. If the liability for an oil or natural gas well is settled for an amount other than the recorded amount, the
difference is recorded to the full cost pool, unless significant.
Asset retirement obligations are estimated at the present value of expected future net cash flows. We utilize unobservable
inputs in the estimation of asset retirement obligations that include, but are not limited to, costs of labor and materials, profits on
73
Denbury Resources Inc.
Notes to Consolidated Financial Statements
costs of labor and materials, the effect of inflation on estimated costs, and the discount rate. Accordingly, asset retirement obligations
are considered a Level 3 measurement under the FASC Fair Value Measurement topic.
Commodity Derivative Contracts
We utilize oil and natural gas derivative contracts to mitigate our exposure to commodity price risk associated with our future
oil and natural gas production. These derivative contracts have historically consisted of options, in the form of price floors, collars,
three-way collars, fixed-price swaps, fixed-price swaps enhanced with a sold put, and basis swaps. Our derivative financial
instruments, other than any derivative instruments that are designated under the “normal purchase normal sale” exclusion, are
recorded on the balance sheet as either an asset or a liability measured at fair value. We do not apply hedge accounting to our
commodity derivative contracts; accordingly, changes in the fair value of these instruments are recognized in “Commodity
derivatives expense (income)” in our Consolidated Statements of Operations in the period of change.
Concentrations of Credit Risk
Our financial instruments that are exposed to concentrations of credit risk consist primarily of cash equivalents, trade and
accrued production receivables, and the derivative instruments discussed above. Our cash equivalents represent high-quality
securities placed with various investment-grade institutions. This investment practice limits our exposure to concentrations of
credit risk. Our trade and accrued production receivables are dispersed among various customers and purchasers; therefore,
concentrations of credit risk are limited. We evaluate the credit ratings of our purchasers, and if customers are considered a credit
risk, letters of credit are the primary security obtained to support lines of credit. We attempt to minimize our credit risk exposure
to the counterparties of our oil and natural gas derivative contracts through formal credit policies, monitoring procedures and
diversification. All of our derivative contracts are with parties that are lenders under our senior secured bank credit facility (or
affiliates of such lenders). There are no margin requirements with the counterparties of our derivative contracts.
Oil and natural gas sales are made on a day-to-day basis or under short-term contracts at the current area market price. We
would not expect the loss of any purchaser to have a material adverse effect upon our operations. For the year ended December 31,
2018, two purchasers accounted for 10% or more of our oil and natural gas revenues: Plains Marketing LP (24%) and Hunt Crude
Oil Supply Company (10%). For the years ended December 31, 2017 and 2016, two purchasers accounted for 10% or more of
our oil and natural gas revenues: Plains Marketing LP (22% and 20% in 2017 and 2016, respectively) and Marathon Petroleum
Company (10% and 14% in 2017 and 2016, respectively).
Other Receivables
Denbury, along with other companies, has supported the development of a proposed plant in the Gulf Coast for which one of
the by-products would be CO2, and for which Denbury has an offtake agreement. Since early 2015, we have made successive
loans towards this development, which totaled $16.9 million at December 31, 2018. The loan is to be repaid at financial close.
We understand the project is supported by multiple offtake agreements of various products and loans from several other interested
parties and fixed prices have been agreed upon for engineering, procurement and construction services. We have been informed
by the project developer that it has been marketing and negotiating contractual terms with potential equity investors for the project
during the past year; however, the expectation of a financial close projected by the developer continues to be delayed. In addition,
the project developer has informed us that potential equity investors are interested in obtaining Section 45Q tax credits seeking
certification of the captured CO2 from the proposed plant being safely and securely stored in long-term geological storage that
will have to be developed in the future. Currently, the requirements to qualify for Section 45Q tax credits associated with future
carbon capture and sequestration operations are not clear, as the U.S. Treasury (in consultation with the EPA, Department of Energy
and the Department of Interior) have not issued regulations for determining adequate security measures for the geologic storage
of CO2 as required by the Bipartisan Budget Act of 2018. Although the project developer continues to work toward a financial
close, due to these uncertainties, we believe it is unclear that the project developer will be able to secure the required equity
investment and achieve a financial close. Therefore, we have recorded a $16.9 million allowance to fully impair the loan, which
is included within “Other expenses” in our Consolidated Statements of Operations for the year ended December 31, 2018.
Income Taxes
Income taxes are accounted for using the asset and liability method, under which deferred income taxes are recognized for
the future tax effects of temporary differences between the financial statement carrying amounts and the tax basis of existing assets
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Denbury Resources Inc.
Notes to Consolidated Financial Statements
and liabilities using the enacted statutory tax rates in effect at year end. The effect on deferred taxes for a change in tax rates is
recognized in income in the period that includes the enactment date. A valuation allowance for deferred tax assets is recorded
when it is more likely than not that the benefit from the deferred tax asset will not be realized.
We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be
sustained upon examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized
in the financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood
of being realized upon ultimate settlement.
Net Income (Loss) per Common Share
Basic net income (loss) per common share is computed by dividing the net income (loss) attributable to common stockholders
by the weighted average number of shares of common stock outstanding during the period. Diluted net income (loss) per common
share is calculated in the same manner, but includes the impact of potentially dilutive securities. Potentially dilutive securities
consist of nonvested restricted stock, stock appreciation rights (“SARs”), nonvested performance-based equity awards, and shares
into which our previously-outstanding convertible senior notes were convertible.
The following table sets forth the reconciliations of net income (loss) and weighted average shares used for purposes of
calculating basic and diluted net income (loss) per common share for the periods indicated:
In thousands
Numerator
Net income (loss) – basic
Effect of potentially dilutive securities
Interest on convertible senior notes
Net income (loss) – diluted
Denominator
Year Ended December 31,
2017
2016
2018
$
$
322,698
$
163,152
$
(976,177)
539
49
323,237
$
163,201
$
—
(976,177)
Weighted average common shares outstanding – basic
432,483
390,928
373,859
Effect of potentially dilutive securities
Restricted stock, SARs and performance-based equity awards
Convertible senior notes
Weighted average common shares outstanding – diluted
6,500
17,186
456,169
2,242
2,751
—
—
395,921
373,859
Basic weighted average common shares exclude shares of nonvested restricted stock. As these restricted shares vest, they
will be included in the shares outstanding used to calculate basic net income (loss) per common share (although time-vesting
restricted stock is issued and outstanding upon grant). For purposes of calculating diluted weighted average common shares during
the year ended December 31, 2018 and 2017, the nonvested restricted stock and performance-based equity awards are included
in the computation using the treasury stock method, with the deemed proceeds equal to the average unrecognized compensation
during the period, and for the shares underlying the previously-outstanding convertible senior notes as if the convertible senior
notes were converted at the beginning of the 2018 and 2017 periods. In April and May 2018, all outstanding convertible senior
notes converted into shares of Denbury common stock, resulting in the issuance of 55.2 million shares of our common stock upon
conversion. These shares have been included in basic weighted average common shares outstanding beginning on the date of
conversion. See Note 6, Long-Term Debt, for further discussion.
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Notes to Consolidated Financial Statements
The following securities could potentially dilute earnings per share in the future, but were excluded from the computation of
diluted net income (loss) per share, as their effect would have been antidilutive:
In thousands
SARs
Restricted stock and performance-based equity awards
Environmental and Litigation Contingencies
Year Ended December 31,
2017
2016
2018
2,743
1,234
4,512
5,645
6,427
5,816
The Company makes judgments and estimates in recording liabilities for contingencies such as environmental remediation
or ongoing litigation. Liabilities are recorded when it is both probable that a loss has been incurred and such loss is reasonably
estimable. Assessments of liabilities are based on information obtained from independent and in-house experts, loss experience
in similar situations, actual costs incurred, and other case-by-case factors. Any related insurance recoveries are recognized in our
financial statements during the period received or at the time receipt is determined to be virtually certain.
Recent Accounting Pronouncements
Recently Adopted
Cash Flows. In November 2016, the Financial Accounting Standards Board (‘FASB”) issued Accounting Standards Update
(“ASU”) 2016-18, Statement of Cash Flows (“ASU 2016-18”). ASU 2016-18 addresses the diversity that existed in the classification
and presentation of changes in restricted cash on the statement of cash flows, and requires that a statement of cash flows explain
the change in total cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents.
Therefore, entities will no longer present transfers between cash and cash equivalents and restricted cash and restricted cash
equivalents in the statement of cash flows. Effective January 1, 2018, we adopted ASU 2016-18, which was applied retrospectively
for all comparative periods presented. Accordingly, restricted cash associated with our escrow accounts of $15.9 million and $15.4
million for the years ended December 31, 2018 and 2017, respectively, have been included in “Cash, cash equivalents, and restricted
cash at beginning of period” on our Consolidated Statements of Cash Flows and $15.9 million and $15.4 million included in “Cash,
cash equivalents, and restricted cash at end of period” for the years ended December 31, 2017 and 2016. The adoption of ASU
2016-18 did not have an impact on our consolidated balance sheets or results of operations.
Revenue Recognition. In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (“ASU
2014-09”). ASU 2014-09 amends the guidance for revenue recognition to replace numerous, industry-specific requirements. The
core principle of the ASU is that an entity should recognize revenue for the transfer of goods or services equal to the amount that
it expects to be entitled to receive for those goods or services. The ASU implements a five-step process for customer contract
revenue recognition that focuses on transfer of control, as opposed to transfer of risk and rewards. The amendment also requires
enhanced disclosures regarding the nature, amount, timing and uncertainty of revenues and cash flows arising from contracts with
customers. In March, April and May 2016, the FASB issued four additional ASUs which primarily clarified the implementation
guidance on principal versus agent considerations, performance obligations and licensing, collectibility, presentation of sales taxes
and other similar taxes collected from customers, and non-cash consideration. Effective January 1, 2018, we adopted ASU 2014-09
using the modified retrospective method. The adoption of ASU 2014-09 did not have an impact on our consolidated financial
statements but required enhanced footnote disclosures. See Note 2, Revenue Recognition, for additional information.
Not Yet Adopted
Fair Value Measurement. In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820) – Disclosure
Framework – Changes to the Disclosure Requirements for Fair Value Measurements (“ASU 2018-13”). ASU 2018-13 adds,
modifies, or removes certain disclosure requirements for recurring and nonrecurring fair value measurements based on the FASB’s
consideration of costs and benefits. The amendments in this ASU are effective for fiscal years beginning after December 15, 2019,
and interim periods within those fiscal years, and early adoption is permitted. Entities must adopt the amendments on changes in
unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value
measurements, and the narrative description of measurement uncertainty prospectively, and all other amendments should be applied
retrospectively to all periods presented. The adoption of ASU 2018-13 is currently not expected to have a material effect on our
consolidated financial statements but may require enhanced footnote disclosures.
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Denbury Resources Inc.
Notes to Consolidated Financial Statements
Leases. In February 2016, the FASB issued ASU 2016-02, Leases (“ASU 2016-02”). ASU 2016-02 amends the guidance
for lease accounting to require lease assets and liabilities to be recognized on the balance sheet, along with additional disclosures
regarding key leasing arrangements. The ASU does not apply to mineral leases or leases that convey the right to explore for or
use the land on which oil, natural gas, and similar natural resources are contained. The amendments in this ASU are effective for
fiscal years beginning after December 15, 2018, and interim periods within those fiscal years, and early adoption is permitted.
Entities must adopt the standard using a modified retrospective transition and apply the guidance to the earliest comparative period
presented, with certain practical expedients that entities may elect to apply. In January 2018, the FASB issued ASU 2018-01, Leases
(Topic 842) – Land Easement Practical Expedient for Transition to Topic 842, which provides an optional practical expedient to
existing or expired land easements that were not previously accounted for as leases under Topic 840, which permits a company to
evaluate only new or modified land easements under the new guidance. We intend to adopt the standard using a modified
retrospective approach with an application date of January 1, 2019 and elect the practical expedients provided in the new ASUs
that allow historical lease classification of existing leases, allow entities to recognize leases with terms of one year or less in their
statement of operations, and carry forward our accounting treatment for existing land easement agreements. We have implemented
a software system to summarize the key contract terms and financial information associated with each lease agreement, in order
to assess the impact the adoption of ASU 2016-02 and ASU 2018-01 will have on our consolidated financial statements. Based
on our assessment of our leasing arrangements, we anticipate recording an operating lease liability of approximately $55 million
primarily for office leases. The liability recognized for our financing leases has not changed as a result of the adoption of ASU
2016-02.
Note 2. Revenue Recognition
We record revenue in accordance with FASC Topic 606, Revenue from Contracts with Customers, which we adopted on
January 1, 2018, and applied to all existing contracts using the modified retrospective method. The core principle of FASC Topic
606 is that an entity should recognize revenue for the transfer of goods or services equal to the amount of consideration that it
expects to be entitled to receive for those goods or services. This principle is achieved through applying a five-step process for
customer contract revenue recognition:
•
Identify the contract or contracts with a customer – We derive the majority of our revenues from oil and natural gas sales
contracts and CO2 sales and transportation contracts. The contracts specify each party’s rights regarding the goods or services to
be transferred and contain commercial substance as they impact our financial statements. A high percentage of our receivables
balance is current, and we have not historically entered into contracts with counterparties that pose a credit risk without requiring
adequate economic protection to ensure collection.
•
Identify the performance obligations in the contract – Each of our revenue contracts specify a volume per day, or production
from a lease designated in the contract (a distinct good), to be delivered at the delivery point over the term of the contract (the
identified performance obligation). The customer takes delivery and physical possession of the product at the delivery point,
which generally is also the point at which title transfers and the customer obtains the risks and rewards of ownership (the identified
performance obligation is satisfied).
• Determine the transaction price – Typically, our oil and natural gas contracts define the price as a formula price based on
the average market price, as specified on set dates each month, for the specific commodity during the month of delivery. Certain
of our CO2 contracts define the price as a fixed contractual price adjusted to an inflation index to reflect market pricing. Given
the industry practice to invoice customers the month following the month of delivery and our high probability of collection of
payment, no significant financing component is included in our contracts.
• Allocate the transaction price to the performance obligations in the contract – The majority of our revenue contracts are
short-term, with terms of one year or less, to which we have applied the practical expedient permitted under the standard eliminating
the requirement to disclose the transaction price allocated to remaining performance obligations. In limited instances, we have
revenue contracts with terms greater than one year; however, the future delivery volumes are wholly unsatisfied as they represent
separate performance obligations with variable consideration. We utilized the practical expedient which eliminates the requirement
to disclose the transaction price allocated to remaining performance obligations if the variable consideration is allocated entirely
to wholly unsatisfied performance obligations. As there is only one performance obligation associated with our contracts, no
allocation of the transaction price is necessary.
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Denbury Resources Inc.
Notes to Consolidated Financial Statements
• Recognize revenue when, or as, we satisfy a performance obligation – Once we have delivered the volume of commodity
to the delivery point and the customer takes delivery and possession, we are entitled to payment and we invoice the customer for
such delivered production. Payment under most oil and CO2 contracts is made within a month following product delivery and for
natural gas and NGL contracts is generally made within two months following delivery. Timing of revenue recognition may differ
from the timing of invoicing to customers; however, as the right to consideration after delivery is unconditional based on only the
passage of time before payment of the consideration is due, upon delivery we record a receivable in “Accrued production receivable”
in our Consolidated Balance Sheets, which was $125.8 million and $146.3 million as of December 31, 2018 and December 31,
2017, respectively.
Disaggregation of Revenue
The following table summarizes our revenues by product type for the years ended December 31, 2018, 2017 and 2016:
In thousands
Oil sales
Natural gas sales
CO2 sales and transportation fees
Note 3. Potential Asset Sales
Year Ended December 31,
2018
2017
2016
$
1,412,358
$
1,079,703
$
924,618
10,231
31,145
9,963
26,182
11,133
24,816
$
1,453,734
$
1,115,848
$
960,567
We are marketing for sale certain surface land with no active oil and gas operations in the Houston area. As of December 31,
2018, the carrying value of the land was $33.0 million, which is included in “Other property and equipment” on our Consolidated
Balance Sheets.
Note 4. Asset Retirement Obligations
The following table summarizes the changes in our asset retirement obligations for the years ended December 31, 2018 and
2017:
In thousands
Beginning asset retirement obligations
Liabilities incurred and assumed during period
Revisions in estimated retirement obligations
Liabilities settled and sold during period
Accretion expense
Ending asset retirement obligations
Less: current asset retirement obligations(1)
Long-term asset retirement obligations
Year Ended December 31,
2018
2017
$
166,310
$
149,120
2,201
2,298
(9,481)
15,257
176,585
(2,115)
174,470
$
$
2,698
6,867
(5,617)
13,242
166,310
(554)
165,756
(1) Included in “Accounts payable and accrued liabilities” in our Consolidated Balance Sheets.
Liabilities assumed relate to minor acquisitions, with liabilities incurred generally relating to wells and facilities.
We have escrow accounts that are legally restricted for certain of our asset retirement obligations. The balances of these
escrow accounts were $42.1 million and $40.6 million as of December 31, 2018 and 2017, respectively. These balances are
primarily invested in U.S. Treasury bonds, recorded at amortized cost, and money market accounts, which investments are included
in “Other assets” in our Consolidated Balance Sheets. A portion of these investments are included in cash, cash equivalents, and
restricted cash balances on our Consolidated Statements of Cash Flows (see Note 1, Significant Accounting Policies – Cash, Cash
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Denbury Resources Inc.
Notes to Consolidated Financial Statements
Equivalents, and Restricted Cash). The carrying value of these investments approximates their estimated fair market value as of
December 31, 2018 and 2017.
Note 5. Unevaluated Property
A summary of the unevaluated property costs excluded from oil and natural gas properties being amortized at December 31,
2018, and the year in which the costs were incurred follows:
December 31, 2018
Costs Incurred During:
In thousands
Property acquisition costs
Exploration and development
Capitalized interest
Total
2018
2017
2016
2015 and Prior
Total
$
$
— $
8,527
$
— $
582,364
$
9,849
36,510
6,948
30,762
20,673
25,220
189,890
85,957
46,359
$
46,237
$
45,893
$
858,211
$
590,891
227,360
178,449
996,700
Our property acquisition costs for 2015 and prior were primarily related to the fair value allocated to the purchase of interests
in the Cedar Creek Anticline (“CCA”) and Hartzog Draw, as well as CO2 tertiary potential at Conroe Field. Exploration and
development costs shown as unevaluated properties are primarily associated with our tertiary oil fields that are under development
but did not have proved reserves at December 31, 2018. The most significant development costs incurred during each period relate
to development in preparation for the CO2 floods at Grieve and Webster fields. We have not yet recognized proved tertiary reserves
in these fields.
Costs are transferred into the amortization base on an ongoing basis as projects are evaluated and proved reserves established
or impairment determined. We review the excluded properties for impairment at least annually. We currently estimate that
evaluation of the majority of these properties and the inclusion of their costs in the amortization base is expected to be completed
within five to ten years. Until we are able to determine whether there are any proved reserves attributable to the above costs, we
are not able to assess the future impact on the amortization rate of the full cost pool.
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Denbury Resources Inc.
Notes to Consolidated Financial Statements
Note 6. Long-Term Debt
The table below reflects long-term debt and capital lease obligations outstanding as of December 31, 2018 and 2017:
In thousands
Senior Secured Bank Credit Agreement
9% Senior Secured Second Lien Notes due 2021
9¼% Senior Secured Second Lien Notes due 2022
7½% Senior Secured Second Lien Notes due 2024
3½% Convertible Senior Notes due 2024
5½% Senior Subordinated Notes due 2022
Pipeline financings
Capital lease obligations
Total debt principal balance
Future interest payable(1)
Debt issuance costs
Total debt, net of debt issuance costs
Less: current maturities of long-term debt(1)
Long-term debt and capital lease obligations
December 31,
2018
2017
$
— $
614,919
455,668
450,000
—
203,545
314,662
307,978
180,073
5,362
475,000
614,919
381,568
—
84,650
215,144
408,882
376,501
192,429
26,298
2,532,207
250,218
(13,089)
2,769,336
(105,125)
2,664,211
$
2,775,391
316,818
(7,935)
3,084,274
(105,188)
2,979,086
$
(1) Future interest payable represents most of the interest due over the term of our 9% Senior Secured Second Lien Notes due
2021 (the “2021 Senior Secured Notes”), 9¼% Senior Secured Second Lien Notes due 2022 (the “2022 Senior Secured Notes”)
and to a small extent our previously outstanding 3½% Convertible Senior Notes due 2024 (the “2024 Convertible Senior
Notes”) and has been accounted for as debt in accordance with FASC 470-60, Troubled Debt Restructuring by Debtors. Our
current maturities of long-term debt as of December 31, 2018 include $85.3 million of future interest payable related to the
2021 Senior Secured Notes and 2022 Senior Secured Notes that is due within the next twelve months. See January 2018
Senior Subordinated Note Exchanges and 2017 Senior Subordinated Note Exchanges below for further discussion.
The ultimate parent company in our corporate structure, Denbury Resources Inc. (“DRI”), is the sole issuer of all of our
outstanding senior secured and senior subordinated notes. DRI has no independent assets or operations. Each of the subsidiary
guarantors of such notes is 100% owned, directly or indirectly, by DRI, and the guarantees of the notes are full and unconditional
and joint and several; any subsidiaries of DRI that are not subsidiary guarantors of such notes are minor subsidiaries.
Senior Secured Bank Credit Facility
In December 2014, we entered into an Amended and Restated Credit Agreement with JPMorgan Chase Bank, N.A., as
administrative agent, and other lenders party thereto (as amended, the “Bank Credit Agreement”). The Bank Credit Agreement is
a senior secured revolving credit facility with semiannual borrowing base redeterminations in May and November of each year,
with the next such redetermination being scheduled for May 2019. If our outstanding debt under the Bank Credit Agreement were
to ever exceed the borrowing base, we would be required to repay the excess amount over a period not to exceed six months.
Under the Bank Credit Agreement, letters of credit are available in an aggregate amount not to exceed $100 million, which may
be increased at the sole discretion of the administrative agent, and short-term swingline loans are available in an aggregate amount
not to exceed $25 million, each subject to the available commitments under the Bank Credit Agreement. The Bank Credit Agreement
is guaranteed jointly and severally by each subsidiary of DRI that is 100% owned, directly or indirectly, by DRI and is secured by
(1) a significant portion of our proved oil and natural gas properties held through DRI’s restricted subsidiaries; (2) the pledge of
equity interests of such subsidiaries; (3) a pledge of commodity derivative agreements of DRI and such subsidiaries (as applicable);
and (4) a pledge of deposit accounts, securities accounts and commodity accounts of DRI and such subsidiaries (as applicable).
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Denbury Resources Inc.
Notes to Consolidated Financial Statements
The Bank Credit Agreement limits our ability to, among other things, incur and repay indebtedness; grant liens; engage in
certain mergers, consolidations, liquidations and dissolutions; engage in sales of assets; make acquisitions and investments; make
distributions and dividends; and enter into commodity derivative agreements, in each case subject to customary exceptions.
In August 2018, we entered into the Sixth Amendment to the Bank Credit Agreement (the “Sixth Amendment”), pursuant to
which the following changes were made to the Bank Credit Agreement:
• The maturity date was extended from December 9, 2019 to December 9, 2021, provided that the maturity date may occur
earlier (between February 2021 and August 2021) if the 2021 Senior Secured Notes due in May 2021 or 6 % Senior
Subordinated Notes due in August 2021 (the “2021 Notes”) are not repaid or refinanced by their respective maturity dates;
• The borrowing base and total commitments were reduced from $1.05 billion to $615 million while streamlining our bank
group from 24 to 14 banks;
• The amount of junior lien debt we can incur was increased from $1.2 billion to $1.65 billion outstanding in the aggregate
at any one time; and
• A Consolidated Total Debt to Consolidated EBITDAX financial maintenance covenant was added with a ratio not to
exceed 5.25 to 1.0 through December 31, 2020, and 4.50 to 1.0 thereafter through the maturity date.
At December 31, 2018, in addition to the Consolidated Total Debt to Consolidated EBITDAX covenant added by the Sixth
Amendment, the Bank Credit Agreement contains certain financial performance covenants through the maturity of the facility,
including the following:
• A consolidated senior secured debt to consolidated EBITDAX covenant, with such ratio not to exceed 2.5 to 1.0. Currently,
only debt under our Bank Credit Agreement is considered consolidated senior secured debt for purposes of this ratio;
• A minimum permitted ratio of consolidated EBITDAX to consolidated interest charges of 1.25 to 1.0; and
• A requirement to maintain a current ratio of 1.0 to 1.0.
As of December 31, 2018, (1) loans under the Bank Credit Agreement were subject to varying rates of interest based on either
(a) for ABR Loans, a base rate determined under the Bank Credit Agreement (the “ABR”) plus an applicable margin ranging from
1.75% to 2.75% per annum, or (b) for LIBOR Loans, the LIBOR rate plus an applicable margin ranging from 2.75% to 3.75% per
annum (capitalized terms as defined in the Bank Credit Agreement) and (2) the undrawn portion of the aggregate lender commitments
under the Bank Credit Agreement was subject to a commitment fee of 0.50%. As of December 31, 2018, we had no outstanding
borrowings and were in compliance with all debt covenants under the Bank Credit Agreement. The weighted average interest rate
on borrowings outstanding under the Bank Credit Agreement was 4.5% as of December 31, 2017.
The above description of our Bank Credit Agreement is qualified by the express language and defined terms contained in the
Bank Credit Agreement and the amendments thereto, each of which are filed as exhibits to our periodic reports filed with the SEC.
January 2018 Senior Subordinated Note Exchanges
During January 2018, we closed transactions to exchange a total of $174.3 million aggregate principal amount of our then
existing senior subordinated notes for $74.1 million aggregate principal amount of new 2022 Senior Secured Notes and $59.4
million aggregate principal amount of new 5% Convertible Senior Notes due 2023 (the “2023 Convertible Senior Notes”), resulting
in a net reduction in our debt principal from these exchanges of $40.8 million. The exchanged notes consisted of $11.6 million
aggregate principal amount of our 2021 Notes, $94.2 million aggregate principal amount of our 5½% Senior Subordinated Notes
due 2022 (the “2022 Notes”) and $68.5 million aggregate principal amount of our 4 % Senior Subordinated Notes due 2023 (the
“2023 Notes”).
In accordance with FASC 470-60, the exchanges were accounted for as a troubled debt restructuring due to the level of
concession provided by our senior subordinated note holders. Under this guidance, future interest applicable to the new 2022
Senior Secured Notes and 2023 Convertible Senior Notes was recorded as debt up to the point that the principal and future interest
of the new notes was equal to the principal amount of the extinguished notes, rather than recognizing a gain on extinguishment
for this amount. In May 2018, the debt principal balance and future interest applicable to the 2023 Convertible Senior Notes were
reclassified to “Paid-in capital in excess of par” and “Common stock” in our Consolidated Balance Sheets following the conversion
of the notes into shares of Denbury common stock (see Conversions of 2023 and 2024 Convertible Senior Notes into Common
Stock in April and May 2018 below for further discussion). As of December 31, 2018, $113.8 million of future interest on the
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Denbury Resources Inc.
Notes to Consolidated Financial Statements
2022 Senior Secured Notes was recorded as debt, which will be reduced as semiannual interest payments are made, with the
remaining $23.2 million of future interest to be recognized as interest expense over the term of these notes. Therefore, future
interest expense reflected in our Consolidated Statements of Operations on the 2022 Senior Secured Notes will be significantly
lower than the actual cash interest payments.
2017 Senior Subordinated Note Exchanges
During December 2017, we entered into privately negotiated agreements to exchange a total of $609.8 million aggregate
principal amount of our existing senior subordinated notes for $381.6 million aggregate principal amount of new 2022 Senior
Secured Notes and $84.7 million aggregate principal amount of new 2024 Convertible Senior Notes, resulting in a net reduction
in our debt principal from these exchanges of $143.6 million. The exchanged notes consisted of $364.0 million aggregate principal
amount of our 2022 Notes and $245.8 million aggregate principal amount of our 2023 Notes.
2016 Senior Subordinated Note Exchanges
During May 2016, we entered into privately negotiated agreements to exchange a total of $1,057.8 million of our existing
senior subordinated notes for $614.9 million principal amount of our 2021 Senior Secured Notes plus 40.7 million shares of
Denbury common stock, resulting in a net reduction from these exchanges of $442.9 million in our debt principal. As a result of
this debt exchange, we recognized a gain of $12.0 million during the year ended December 31, 2016, which is included in “Gain
on debt extinguishment” in the accompanying Consolidated Statements of Operations.
Conversions of 2023 and 2024 Convertible Senior Notes into Common Stock in April and May 2018
During the second quarter of 2018, holders of all $59.4 million aggregate principal amount outstanding of our 2023 Convertible
Senior Notes and $84.7 million aggregate principal amount outstanding of our 2024 Convertible Senior Notes converted their
notes into shares of Denbury common stock, at the rates specified in the indentures for these notes, resulting in the issuance of 55.2
million shares of our common stock upon conversion. The debt principal balances and future interest treated as debt applicable
to the 2023 Convertible Senior Notes and 2024 Convertible Senior Notes, totaling $162.0 million, were reclassified to “Paid-in
capital in excess of par” and “Common stock” in our Consolidated Balance Sheets upon the conversion of the notes into shares
of Denbury common stock. As of April 18, 2018 and May 30, 2018, there were no remaining 2024 Convertible Senior Notes and
2023 Convertible Senior Notes outstanding, respectively.
Senior Secured Second Lien Notes
9% Senior Secured Second Lien Notes due 2021. In May 2016, we issued $614.9 million of 2021 Senior Secured Notes.
The 2021 Senior Secured Notes, which bear interest at a rate of 9% per annum, were issued at par in connection with privately
negotiated exchanges with a limited number of holders of existing senior subordinated notes (see 2016 Senior Subordinated Note
Exchanges above). The 2021 Senior Secured Notes mature on May 15, 2021, and interest is payable semiannually in arrears on
May 15 and November 15 of each year. We may redeem the 2021 Senior Secured Notes in whole or in part at our option beginning
December 15, 2018, at a redemption price of 109% of the principal amount, and at declining redemption prices thereafter, as
specified in the indenture governing the 2021 Senior Secured Notes. The 2021 Senior Secured Notes are not subject to any sinking
fund requirements.
The 2021 Senior Secured Notes are guaranteed jointly and severally by our subsidiaries representing substantially all of our
assets, operations and income and are secured by second-priority liens on substantially all of the assets that secure the Bank Credit
Agreement, which second-priority liens are contractually subordinated to liens that secure our Bank Credit Agreement and any
future additional priority lien debt.
9¼% Senior Secured Second Lien Notes due 2022. In December 2017 and January 2018, we issued $381.6 million and
$74.1 million, respectively, of 2022 Senior Secured Notes. The 2022 Senior Secured Notes, which bear interest at a rate of 9.25%
per annum, were issued at par in connection with exchanges with a limited number of holders of existing senior subordinated notes
(see January 2018 Senior Subordinated Note Exchanges and 2017 Senior Subordinated Note Exchanges above). The 2022 Senior
Secured Notes mature on March 31, 2022, and interest is payable semiannually in arrears on March 31 and September 30 of each
year. We may redeem the 2022 Senior Secured Notes in whole or in part at our option beginning March 31, 2019, at a redemption
price of 109.25% of the principal amount, and at declining redemption prices thereafter, as specified in the indenture governing
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Denbury Resources Inc.
Notes to Consolidated Financial Statements
the 2022 Senior Secured Notes. Prior to March 31, 2019, we may at our option redeem up to an aggregate of 35% of the principal
amount of the 2022 Senior Secured Notes at a price of 109.25% of par with the proceeds of certain equity offerings. In addition,
at any time prior to March 31, 2019, we may redeem the 2022 Senior Secured Notes in whole or in part at a price equal to 100%
of the principal amount plus a “make-whole” premium and accrued and unpaid interest. The 2022 Senior Secured Notes are not
subject to any sinking fund requirements.
The 2022 Senior Secured Notes are guaranteed jointly and severally by our subsidiaries representing substantially all of our
assets, operations and income and are secured by second-priority liens on substantially all of the assets that secure the Bank Credit
Agreement, which second-priority liens are contractually subordinated to liens that secure our Bank Credit Agreement and any
future additional priority lien debt.
7½% Senior Secured Second Lien Notes due 2024. In August 2018, we issued $450.0 million of 7½% Senior Secured
Second Lien Notes due 2024 (the “2024 Senior Secured Notes”). The 2024 Senior Secured Notes, which bear interest at a rate
of 7.50% per annum, were issued at par to repay outstanding borrowings on our Bank Credit Agreement, with additional proceeds
used for general corporate purposes. The 2024 Senior Secured Notes mature on February 15, 2024, and interest is payable
semiannually in arrears on February 15 and August 15 of each year, beginning in February 2019. We may redeem the 2024 Senior
Secured Notes in whole or in part at our option beginning August 15, 2020, at a redemption price of 103.75% of the principal
amount, and at declining redemption prices thereafter, as specified in the indenture governing the 2024 Senior Secured Notes.
Prior to August 15, 2020, we may at our option redeem up to an aggregate of 35% of the principal amount of the 2024 Senior
Secured Notes at a price of 107.50% of par with the proceeds of certain equity offerings. In addition, at any time prior to August
15, 2020, we may redeem the 2024 Senior Secured Notes in whole or in part at a price equal to 100% of the principal amount plus
a “make-whole” premium and accrued and unpaid interest. The 2024 Senior Secured Notes are not subject to any sinking fund
requirements.
The 2024 Senior Secured Notes are guaranteed jointly and severally by our subsidiaries representing substantially all of our
assets, operations and income and are secured by second-priority liens on substantially all of the assets that secure the Bank Credit
Agreement, which second-priority liens are contractually subordinated to liens that secure our Bank Credit Agreement and any
future additional priority lien debt.
Restrictive Covenants in Indentures for Senior Secured Second Lien Notes. Each of the indentures for the 2021 Senior
Secured Notes, 2022 Senior Secured Notes and 2024 Senior Secured Notes contains customary covenants that are generally
consistent and that restrict our ability and the ability of our restricted subsidiaries to (1) incur additional debt; (2) make investments;
(3) create liens on our assets or the assets of our restricted subsidiaries; (4) create limitations on the ability of our restricted
subsidiaries to pay dividends or make other payments to DRI or other restricted subsidiaries; (5) engage in transactions with our
affiliates; (6) transfer or sell assets or subsidiary stock; (7) consolidate, merge or transfer all or substantially all of our assets and
the assets of our restricted subsidiaries; and (8) make restricted payments (which includes paying dividends on our common stock
or redeeming, repurchasing or retiring such stock or subordinated debt (including existing senior subordinated notes)), provided
that in certain circumstances we may make unlimited restricted payments so long as we maintain a ratio of total debt to EBITDA
(as defined in the indentures) not to exceed 2.5 to 1.0 (both before and after giving effect to any restricted payment). As of December
31, 2018, we were in compliance with all debt covenants under the indentures related to our senior secured second lien notes.
Senior Subordinated Notes
6 % Senior Subordinated Notes due 2021. In February 2011, we issued $400 million of 2021 Notes. The 2021 Notes,
which bear interest at a rate of 6.375% per annum, were sold at par. The 2021 Notes mature on August 15, 2021, and interest is
payable on February 15 and August 15 of each year. At any time prior to August 15, 2019, we may redeem the 2021 Notes in
whole or in part at our option at a redemption price of 101.062% of the principal amount, and at declining redemption prices
thereafter, as specified in the indenture.
5½% Senior Subordinated Notes due 2022. In April 2014, we issued $1.25 billion of 2022 Notes. The 2022 Notes, which
bear interest at a rate of 5.5% per annum, were sold at par. The 2022 Notes mature on May 1, 2022, and interest is payable on
May 1 and November 1 of each year. At any time prior to May 1, 2019, we may redeem the 2022 Notes in whole or in part at our
option, at a redemption price of 102.750% of the principal amount, and at declining redemption prices thereafter, as specified in
the indenture. The 2022 Notes are not subject to any sinking fund requirements.
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Denbury Resources Inc.
Notes to Consolidated Financial Statements
4 % Senior Subordinated Notes due 2023. In February 2013, we issued $1.2 billion of 2023 Notes. The 2023 Notes,
which bear interest at a rate of 4.625% per annum, were sold at par. The 2023 Notes mature on July 15, 2023, and interest is
payable on January 15 and July 15 of each year. At any time prior to January 15, 2020, we may redeem the 2023 Notes in whole
or in part at our option at a redemption price of 101.542% of the principal amount, and at declining redemption prices thereafter,
as specified in the indenture. The 2023 Notes are not subject to any sinking fund requirements.
Restrictive Covenants in Indentures for Senior Subordinated Notes. Each of the indentures for the 2021 Notes, 2022
Notes and 2023 Notes contains certain covenants that are generally consistent and that restrict our ability and the ability of our
restricted subsidiaries to take or permit certain actions, including restrictions on our ability and the ability of our restricted
subsidiaries to (1) incur additional debt; (2) make investments; (3) create liens on our assets or the assets of our restricted subsidiaries;
(4) create restrictions on the ability of our restricted subsidiaries to pay dividends or make other payments to DRI or other restricted
subsidiaries; (5) engage in transactions with our affiliates; (6) transfer or sell assets or subsidiary stock; (7) consolidate, merge or
transfer all or substantially all of our assets and the assets of our restricted subsidiaries; and (8) make restricted payments (which
includes paying dividends on our common stock or redeeming, repurchasing or retiring such stock or subordinated debt), provided
that the restricted payments covenant in the indentures for the 2022 and 2023 Notes (the “2022 and 2023 Indentures”) permits us
in certain circumstances to make unlimited restricted payments so long as we maintain a ratio of total debt to EBITDA (both as
defined in the 2022 and 2023 Indentures) not to exceed 2.5 to 1.0 (both before and after giving effect to any restricted payment),
although we will not be able to realize the practical benefit of the restricted payment covenant flexibility in the 2022 and 2023
Indentures until the 2021 Notes have been redeemed or retired. As of December 31, 2018, we were in compliance with all debt
covenants under the indentures related to our senior subordinated notes.
2016 Repurchases of Senior Subordinated Notes. During 2016, we repurchased a total of $181.9 million of our outstanding
long-term indebtedness, consisting of $9.8 million principal amount of our 2021 Notes, $66.1 million principal amount of our
2022 Notes, and $106.0 million principal amount of our 2023 Notes in open-market transactions for a total purchase price of $76.7
million, excluding accrued interest. In connection with these series of transactions, we recognized a $103.1 million gain on
extinguishment, net of unamortized debt issuance costs written off, during the year ended December 31, 2016.
Pipeline Financings
In May 2008, we closed two transactions with Genesis Energy, L.P. (“Genesis”) involving two of our pipelines. The NEJD
Pipeline system included a 20-year financing lease, and the Free State Pipeline included a long-term transportation service
agreement. These transactions are both accounted for as financing leases.
Debt Issuance Costs
In connection with the issuance of our outstanding long-term debt, we have incurred debt issuance costs, which are being
amortized to interest expense using the straight line or effective interest method over the term of each related facility or
borrowing. Remaining unamortized debt issuance costs were $19.1 million and $13.8 million at December 31, 2018 and 2017,
respectively. Issuance costs associated with our Bank Credit Agreement are included in “Other assets” in our Consolidated Balance
Sheets, and issuance costs associated with our senior secured second lien notes and senior subordinated notes are included as a
reduction of “Long-term debt, net of current portion” in our Consolidated Balance Sheets.
84
Denbury Resources Inc.
Notes to Consolidated Financial Statements
Indebtedness Repayment Schedule
At December 31, 2018, our indebtedness, including our capital and financing lease obligations but excluding future interest
payable treated as debt in accordance with FASC 470-60, Troubled Debt Restructuring by Debtors, is payable over the next five
years and thereafter as follows:
In thousands
2019
2020
2021
2022
2023
Thereafter
Total indebtedness
Note 7. Income Taxes
Our income tax provision (benefit) is as follows:
In thousands
Current income tax expense (benefit)
Federal
State
Total current income tax benefit
Deferred income tax expense (benefit)
Federal
State
Total deferred income tax expense (benefit)
Total income tax expense (benefit)
$
$
19,180
16,638
834,296
788,752
327,622
545,719
2,532,207
Year Ended December 31,
2017
2016
2018
$
(17,885) $
1,884
(16,001)
(19,485) $
(1,388)
(20,873)
—
(785)
(785)
93,395
9,839
103,234
$
87,233
$
(113,863)
18,084
(95,779)
(116,652) $
(521,519)
(21,866)
(543,385)
(544,170)
At December 31, 2018, we had no federal net operating loss carryforwards (“NOLs”), tax effected business interest expense
carryforward totaling $9.0 million, state NOLs and tax credits totaling $52.4 million (before provision for valuation allowance),
an estimated $57.8 million of enhanced oil recovery credits to carry forward related to our tertiary operations, an estimated $21.6
million of research and development credits, and $18.1 million of alternative minimum tax credits. Under the Tax Cut and Jobs
Act (“the Act”) enacted in December 2017, all of our alternative minimum tax credits are fully refundable by 2021 and are recorded
as a receivable on the balance sheet. We considered our assessment of the recorded tax benefit associated with the impacts of the
Act to be substantially complete as of December 31, 2017, which is reflected in the table reconciling income tax expense below.
Federal and state regulatory guidance of the Act are continuing to be issued and could result in further tax effects but are not
expected to be material to our financial statements. Our business interest expense carryforward does not expire. Our state NOLs
expire in various years, starting in 2019, although most do not begin to expire until 2024. Our enhanced oil recovery credits and
research and development credits begin to expire in 2024 and 2031, respectively.
Deferred income taxes reflect the available tax carryforwards and the temporary differences based on tax laws and statutory
rates in effect at the December 31, 2018 and 2017 balance sheet dates. As of December 31, 2018, we had $51.1 million of deferred
tax assets associated with State of Louisiana and Mississippi net operating losses and tax credits. A tax valuation allowance was
recorded in 2015 to reduce the carrying value of our Louisiana deferred tax assets as the result of a tax law enacted in the State of
Louisiana, which limits a company’s utilization of certain deductions, including our net operating loss carryforwards. As of
December 31, 2018, tax valuation allowances totaling $41.9 million were recorded for our State of Louisiana deferred tax assets.
Based on losses from falling commodity prices and lower future forecasted income related to our Mississippi deferred tax assets,
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Denbury Resources Inc.
Notes to Consolidated Financial Statements
we concluded it was not more-likely-than-not that the deferred tax assets would be realized. Accordingly, we recorded a valuation
allowance against our Mississippi deferred tax assets in 2017. As of December 31, 2018, tax valuation allowances totaling $9.2
million were recorded for our State of Mississippi deferred tax assets. The valuation allowances will remain until the realization
of future deferred tax benefits are more likely than not to become utilized. The decrease in our valuation allowance was due to a
utilization of a portion of our net operating loss carryforwards, offset by the generation of additional state tax credit carryforwards.
As of December 31, 2018, we had an unrecognized tax benefit of $5.4 million related to an uncertain tax position. The
unrecognized tax benefit was recorded during 2015 as a direct reduction of the associated deferred tax asset and, if recognized,
would not materially affect our annual effective tax rate. The tax benefit from an uncertain tax position will only be recognized
if it is more likely than not that the tax position will be sustained upon examination by the taxing authorities, based upon the
technical merits of the position. We currently do not expect a material change to the uncertain tax position within the next 12
months. Our policy is to recognize penalties and interest related to uncertain tax positions in income tax expense; however, no
such amounts were accrued related to the uncertain tax position as of December 31, 2018.
Significant components of our deferred tax assets and liabilities as of December 31, 2018 and 2017 are as follows:
In thousands
Deferred tax assets
Loss carryforwards – federal
Loss and tax credit carryforwards – state
Tax credit carryover
Business credit carryforwards
Derivative contracts
Unrecognized gain and original issue discount on debt exchange
Accrued liabilities and other reserves
Other
Valuation allowance
Total deferred tax assets
Deferred tax liabilities
Property and equipment
Derivative contracts
Other
Total deferred tax liabilities
Total net deferred tax liability
December 31,
2018
2017
$
— $
52,366
—
79,528
—
73,937
25,231
32,257
(51,093)
212,226
18,581
53,367
20,270
73,057
23,024
85,951
2,673
29,681
(51,134)
255,470
(492,214)
(23,127)
(6,643)
(521,984)
(309,758) $
(450,629)
—
(2,940)
(453,569)
(198,099)
$
86
Denbury Resources Inc.
Notes to Consolidated Financial Statements
Our reconciliation of income tax expense computed by applying the U.S. federal statutory rate and the reported effective tax
rate on income from continuing operations is as follows:
In thousands
Income tax provision (benefit) calculated using the federal statutory
income tax rate
State income taxes, net of federal income tax benefit
Tax shortfall (windfall) on stock-based compensation deduction
Valuation allowance
Enhanced oil recovery tax credits generated
Re-measurement of deferreds related to federal tax rate change
Other
Year Ended December 31,
2017
2016
2018
$
86,086
$
16,275
$
11,968
(1,565)
(42)
(10,818)
—
1,604
2,764
5,567
5,562
(11,307)
(132,224)
(3,289)
(116,652) $
(532,121)
(25,351)
9,557
2,910
—
—
835
(544,170)
Total income tax expense (benefit)
$
87,233
$
We file consolidated and separate income tax returns in the U.S. federal jurisdiction and in many state jurisdictions. The
statutes of limitation for our income tax returns for tax years ending prior to 2015 have lapsed and therefore are not subject to
examination by respective taxing authorities. We have not paid any significant interest or penalties associated with our income
taxes.
Note 8. Stockholders’ Equity
401(k) Plan
We offer a 401(k) plan to which employees may contribute earnings subject to IRS limitations. We match 100% of an
employee’s contribution, up to 6% of compensation, as defined by the plan, which is vested immediately. During 2018, 2017 and
2016, our matching contributions to the 401(k) plan were approximately $6.2 million, $7.1 million and $7.7 million, respectively.
2017 Retirement of Treasury Stock
During the year ended December 31, 2017, we retired 5.0 million shares of existing treasury stock, with a carrying value
of $46.6 million, acquired principally through the delivery by our employees of shares to satisfy tax withholding requirements
related to the vesting of restricted shares, as well as shares acquired through our stock repurchase program. These retired shares
were included in the pool of authorized but unissued shares at the date of retirement. Our accounting policy upon the retirement
of treasury stock is to deduct its par value from common stock and reduce additional paid-in capital by the excess amount of
treasury stock retired.
Note 9. Stock Compensation
The Amended and Restated 2004 Omnibus Stock and Incentive Plan, amended and restated as of March 29, 2018 (the “2004
Plan”), is an incentive plan that provides for the issuance of incentive and non-qualified stock options, restricted stock awards,
restricted stock units, SARs settled in stock, and performance-based awards to officers, employees and directors. Since the 2004
Plan’s inception, awards covering a total of 48.4 million shares of common stock have been authorized for issuance pursuant to
the 2004 Plan. As of December 31, 2018, 9.1 million shares were available under the 2004 Plan for future issuance of awards, all
of which could be issued in the form of restricted stock or performance-based awards. Our incentive compensation program is
administered by the Compensation Committee of our Board of Directors. The 2004 Plan was last approved by our stockholders
in May 2017 and will expire in May 2027.
Stock-based compensation expense associated with our field employees is included in “Lease operating expenses,” while such
expense associated with non-field employees is included in “General and administrative expenses” in the Consolidated Statements
of Operations. Stock-based compensation associated with our employees involved in exploration and drilling activities is
capitalized as part of “Oil and natural gas properties” in the Consolidated Balance Sheets. Effective January 1, 2016, with the
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Denbury Resources Inc.
Notes to Consolidated Financial Statements
adoption of ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, we made an accounting policy election
to account for forfeitures as they occur, versus the previously-estimated forfeiture rate.
Stock-based compensation costs for the years ended December 31, 2018, 2017 and 2016, are as follows:
In thousands
Stock-based compensation expensed
General and administrative expenses
Lease operating expenses
Total stock-based compensation expensed
Stock-based compensation capitalized
Total cost of stock-based compensation arrangements
Income tax benefit recognized for stock-based compensation arrangements
SARs
Year Ended December 31,
2017
2016
2018
$
$
$
11,951
$
15,154
$
14,359
—
11,951
3,487
15,438
2,988
$
$
—
15,154
4,567
19,721
5,759
$
$
636
14,995
6,047
21,042
5,698
Prior to January 1, 2016, we granted SARs settled in stock to our employees. The SARs generally become exercisable over
a three-year vesting period, with the specific terms of vesting determined at the time of grant based on guidelines established by
the Compensation Committee of the Board of Directors. The SARs expire over terms not to exceed 7 years from the date of grant,
90 days after termination of employment, 90 days or one year after permanent disability, depending on the award, or one year after
the death of the optionee. The SARs were granted with a strike price equal to the fair market value at the time of grant, which is
generally defined as the closing price on the NYSE on the date of grant.
The following is a summary of our SAR activity:
Number
of Awards
Weighted
Average
Exercise Price
Weighted Average
Remaining
Contractual Life
(in years)
Aggregate
Intrinsic Value
(in thousands)
Outstanding at December 31, 2017
3,666,025
$
13.07
Granted
Exercised
Forfeited
Expired
Outstanding at December 31, 2018
—
—
—
(1,165,140)
2,500,885
—
—
—
18.78
10.41
Exercisable at end of period
2,497,612
$
10.41
2.2
$
2.2
$
—
—
The following is a summary of the total intrinsic value of SARs exercised and grant-date fair value of SARs vested:
In thousands
Intrinsic value of SARs exercised
Grant-date fair value of SARs vested
Year Ended December 31,
2018
2017
2016
$
— $
— $
1,095
1,818
—
4,787
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Denbury Resources Inc.
Notes to Consolidated Financial Statements
As of December 31, 2018, all SARs vested and there was no remaining compensation cost to be recognized in future periods
related to nonvested share-based SAR compensation arrangements. There were no exercises of SARs for the years ended
December 31, 2018, 2017 or 2016.
Restricted Stock
We grant non-performance-based restricted stock to employees and directors as part of our long-term compensation program.
Holders of non-performance-based restricted stock awards have the rights of owning non-restricted stock (including voting rights)
except that the holders are not entitled to delivery of a portion thereof until certain requirements are met. Beginning in 2014, non-
performance-based restricted stock awards provide the holders with forfeitable dividend equivalent rights which vests with the
underlying shares. Non-performance-based restricted stock vests over a three-year vesting period, with the specific terms of vesting
determined at the time of grant.
As of December 31, 2018, there was $23.0 million of unrecognized compensation expense related to nonvested non-
performance-based restricted stock grants. This unrecognized compensation cost is expected to be recognized over a weighted-
average period of 2.1 years. The following is a summary of the total vesting date fair value of non-performance-based restricted
stock:
In thousands
Fair value of restricted stock vested
Year Ended December 31,
2018
2017
2016
$
23,060
$
9,325
$
6,161
A summary of the status of our nonvested non-performance-based restricted stock grants issued, and the changes during the
year ended December 31, 2018, is presented below:
Nonvested at December 31, 2017
Granted
Vested
Forfeited
Nonvested at December 31, 2018
Performance-Based Equity Awards
Number
of Shares
9,748,683
$
4,651,571
(5,055,129)
(354,547)
8,990,578
Weighted
Average
Grant-Date
Fair Value
2.51
4.62
2.81
3.43
3.40
Annually, the Compensation Committee of the Board of Directors grants performance-based equity awards to Denbury’s
officers. Performance-based awards generally vest over 1.25 to 3.25 years for awards granted in 2016 and 2017 and over 3.25
years for awards granted in 2018. The number of performance-based shares earned (and eligible to vest) during the performance
period will depend upon: (1) our level of success in achieving specifically identified performance targets (“Performance-Based
Operational Awards”) and (2) performance of our stock relative to that of a designated peer group (“Performance-Based TSR
Awards”). Generally, one-half of the maximum number of shares that could be earned under the performance-based awards will
be earned for performance at the designated target levels (100% target vesting levels) or upon any earlier change of control, and
twice the target number of shares will be earned if the maximum target levels are met (200% of target vesting levels). With respect
to the performance-based equity awards, any amounts earned above the 100% target levels will be payable in cash, rather than in
shares of Denbury stock, in order to conserve available shares under the Plan. If performance is below the designated minimum
levels, no performance-based shares will be earned. Performance-Based Operational Awards are valued using the fair market
value of Denbury stock, and Performance-Based TSR Awards are valued using a Monte Carlo simulation.
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Denbury Resources Inc.
Notes to Consolidated Financial Statements
As of December 31, 2018, there was $4.3 million of unrecognized compensation expense related to nonvested performance-
based equity awards. This unrecognized compensation cost is expected to be recognized over a weighted-average period of 2.1
years. The range of assumptions used in the Monte Carlo simulation valuation approach for Performance-Based TSR Awards
(presented at the target level) are as follows:
Weighted average fair value of Performance-Based TSR Awards granted
$
Risk-free interest rate
Expected life
Expected volatility
Dividend yield
Year Ended December 31,
2018
2017
2016
2.29
$
2.37%
3.42
$
1.49%
1.78
1.31%
3.0 years
3.0 years
3.0 years
102.9%
—%
94.7%
—%
57.2%
—%
A summary of the status of the nonvested performance-based equity awards (presented at the target level) during the year
ended December 31, 2018, is as follows:
Nonvested at December 31, 2017
Granted(1)
Vested(2)
Forfeited
Nonvested at December 31, 2018
Performance-Based
Operational Awards
Performance-Based
TSR Awards
Number
of Awards
Weighted
Average
Grant-Date Fair
Value
Number
of Awards
Weighted
Average
Grant-Date Fair
Value
554,218
$
857,812
(554,218)
—
857,812
5.47
2.43
5.47
—
2.43
2,497,417
$
1,705,342
(396,643)
—
3,806,116
3.76
2.29
7.55
—
2.71
(1) Amounts granted reflect the number of performance units granted. The actual payout of the shares may be between 0% and
200%, with any amounts earned above the 100% target levels payable in cash, rather than in shares of Denbury stock, in order
to conserve available shares under the Plan.
(2) During 2018, the service period lapsed on these performance unit awards. The lapsed units earned a weighted average of
75% and 53% of target for each vested Operational and TSR performance-based award, respectively, representing 415,045
aggregate shares of common stock issued.
The following is a summary of the total vesting date fair value of performance-based equity awards:
In thousands
Vesting date fair value of Performance-Based Operational Awards
$
Vesting date fair value of Performance-Based TSR Awards
Year Ended December 31,
2018
2017
2016
595
542
$
1,079
$
227
—
81
Note 10. Commodity Derivative Contracts
We do not apply hedge accounting treatment to our oil and natural gas derivative contracts; therefore, the changes in the fair
values of these instruments are recognized in income in the period of change. These fair value changes, along with the settlements
of expired contracts, are shown under “Commodity derivatives expense (income)” in our Consolidated Statements of Operations.
Historically, we have entered into various oil and natural gas derivative contracts to provide an economic hedge of our exposure
to commodity price risk associated with anticipated future oil and natural gas production and to provide more certainty to our
future cash flows. We do not hold or issue derivative financial instruments for trading purposes. Generally, these contracts have
consisted of various combinations of price floors, collars, three-way collars, fixed-price swaps, fixed-price swaps enhanced with
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Denbury Resources Inc.
Notes to Consolidated Financial Statements
a sold put, and basis swaps. The production that we hedge has varied from year to year depending on our levels of debt, financial
strength and expectation of future commodity prices.
We manage and control market and counterparty credit risk through established internal control procedures that are reviewed
on an ongoing basis. We attempt to minimize credit risk exposure to counterparties through formal credit policies, monitoring
procedures and diversification, and all of our commodity derivative contracts are with parties that are lenders under our Bank
Credit Agreement (or affiliates of such lenders). As of December 31, 2018, all of our outstanding derivative contracts were subject
to enforceable master netting arrangements whereby payables on those contracts can be offset against receivables from separate
derivative contracts with the same counterparty. It is our policy to classify derivative assets and liabilities on a gross basis on our
balance sheets, even if the contracts are subject to enforceable master netting arrangements.
The following table summarizes our commodity derivative contracts as of December 31, 2018, none of which are classified
as hedging instruments in accordance with the FASC Derivatives and Hedging topic:
Index Price
Months
Oil Contracts:
2019 Fixed-Price Swaps
Jan – June
Jan – Dec
NYMEX
Argus LLS
2019 Three-Way Collars(2)
Jan – June
July – Dec
Jan – Dec
NYMEX
NYMEX
Argus LLS
2020 Three-Way Collars(2)
Jan – Dec
Jan – Dec
NYMEX
Argus LLS
Volume
(Barrels per
day)
Contract Prices ($/Bbl)
Weighted Average Price
Range(1)
Swap
Sold Put
Floor
Ceiling
3,500
7,000
18,500
22,000
5,500
1,000
1,000
$
$
$
59.00 –
60.00 –
59.10
$
59.05
$
74.90
66.57
— $
—
— $
—
—
—
55.00 –
55.00 –
62.00 –
60.00 –
65.00 –
75.45
$
— $
48.84
$
56.84
$
75.45
86.00
—
—
48.55
54.73
56.55
63.09
82.65
$
— $
50.00
$
60.00
$
87.10
—
55.00
65.00
69.94
69.17
79.93
82.50
86.80
(1) Ranges presented for fixed-price swaps represent the lowest and highest fixed prices of all open contracts for the period
presented. For three-way collars, ranges represent the lowest floor price and highest ceiling price for all open contracts for
the period presented.
(2) A three-way collar is a costless collar contract combined with a sold put feature (at a lower price) with the same counterparty.
The value received for the sold put is used to enhance the contracted floor and ceiling price of the related collar. At the contract
settlement date, (1) if the index price is higher than the ceiling price, we pay the counterparty the difference between the index
price and ceiling price for the contracted volumes, (2) if the index price is between the floor and ceiling price, no settlements
occur, (3) if the index price is lower than the floor price but at or above the sold put price, the counterparty pays us the difference
between the index price and the floor price for the contracted volumes and (4) if the index price is lower than the sold put
price, the counterparty pays us the difference between the floor price and the sold put price for the contracted volumes.
Note 11. Fair Value Measurements
The FASC Fair Value Measurement topic defines fair value as the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants at the measurement date (often referred to as the “exit
price”). We utilize market data or assumptions that market participants would use in pricing the asset or liability, including
assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable,
market corroborated or generally unobservable. We primarily apply the income approach for recurring fair value measurements
and endeavor to utilize the best available information. Accordingly, we utilize valuation techniques that maximize the use of
observable inputs and minimize the use of unobservable inputs. We are able to classify fair value balances based on the observability
of those inputs. The FASC establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy
gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement)
and the lowest priority to unobservable inputs (Level 3 measurement). The three levels of the fair value hierarchy are as follows:
91
Denbury Resources Inc.
Notes to Consolidated Financial Statements
• Level 1 – Quoted prices in active markets for identical assets or liabilities as of the reporting date.
• Level 2 – Pricing inputs are other than quoted prices in active markets included in Level 1, which are either directly or
indirectly observable as of the reported date. Level 2 includes those financial instruments that are valued using models
or other valuation methodologies. Instruments in this category include non-exchange-traded oil derivatives that are based
on NYMEX pricing and fixed-price swaps that are based on regional pricing other than NYMEX (e.g., Light Louisiana
Sweet). Our costless collars and the sold put features of our three-way collars are valued using the Black-Scholes model,
an industry standard option valuation model that takes into account inputs such as contractual prices for the underlying
instruments, maturity, quoted forward prices for commodities, interest rates, volatility factors and credit worthiness, as
well as other relevant economic measures. Substantially all of these assumptions are observable in the marketplace
throughout the full term of the instrument, can be derived from observable data or are supported by observable levels at
which transactions are executed in the marketplace.
• Level 3 – Pricing inputs include significant inputs that are generally less observable. These inputs may be used with
internally developed methodologies that result in management’s best estimate of fair value. As of December 31, 2018,
instruments in this category included non-exchange-traded three-way collars that were based on regional pricing other
than NYMEX (e.g., Light Louisiana Sweet). The valuation models utilized for costless collars and three-way collars
were consistent with the methodologies described above; however, the implied volatilities utilized in the valuation of
Level 3 instruments were developed using a benchmark, which was considered a significant unobservable input. An
increase or decrease of 100 basis points in the implied volatility inputs utilized in our fair value measurement would result
in a change of approximately $180 thousand in the fair value of these instruments as of December 31, 2018.
We adjust the valuations from the valuation model for nonperformance risk, using our estimate of the counterparty’s credit
quality for asset positions and our credit quality for liability positions. We use multiple sources of third-party credit data in
determining counterparty nonperformance risk, including credit default swaps.
The following table sets forth by level within the fair value hierarchy our financial assets and liabilities that were accounted
for at fair value on a recurring basis as of December 31, 2018 and 2017:
In thousands
December 31, 2018
Assets
Oil derivative contracts – current
Oil derivative contracts – long-term
Total Assets
December 31, 2017
Liabilities
Oil derivative contracts – current
Total Liabilities
Fair Value Measurements Using:
Quoted Prices
in Active
Markets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total
$
$
$
$
— $
—
— $
81,621
2,030
83,651
$
$
11,459
2,165
13,624
$
$
93,080
4,195
97,275
— $
— $
(99,061) $
(99,061) $
— $
— $
(99,061)
(99,061)
Since we do not apply hedge accounting for our commodity derivative contracts, any gains and losses on our assets and
liabilities are included in “Commodity derivatives expense (income)” in the accompanying Consolidated Statements of Operations.
92
Denbury Resources Inc.
Notes to Consolidated Financial Statements
Level 3 Fair Value Measurements
The following table summarizes the changes in the fair value of our Level 3 assets and liabilities for the years ended
December 31, 2018 and 2017:
In thousands
Fair value of Level 3 instruments, beginning of year
Fair value adjustments on commodity derivatives
Payment on settlements of commodity derivatives
Fair value of Level 3 instruments, end of year
The amount of total gains for the period included in earnings attributable to the change in
unrealized gains relating to assets or liabilities still held at the reporting date
Year Ended December 31,
2018
2017
$
$
$
— $
13,624
—
13,624
$
13,624
$
(526)
526
—
—
—
We utilize an income approach to value our Level 3 three-way collars. We obtain and ensure the appropriateness of the
significant inputs to the calculation, including contractual prices for the underlying instruments, maturity, forward prices for
commodities, interest rates, volatility factors and credit worthiness, and the fair value estimate is prepared and reviewed on a
quarterly basis. The following table details fair value inputs related to implied volatilities utilized in the valuation of our Level 3
oil derivative contracts:
Fair Value at
12/31/2018
(in thousands)
Oil derivative
contracts
$
13,624
Other Fair Value Measurements
Valuation
Technique
Discounted
cash flow /
Black-Scholes
Unobservable Input
Volatility Range
Volatility of Light Louisiana Sweet for settlement
periods beginning after December 31, 2018
23.3% – 43.5%
The carrying value of our loans under our Bank Credit Agreement approximate fair value, as they are subject to short-term
floating interest rates that approximate the rates available to us for those periods. We use a market approach to determine the fair
value of our fixed-rate long-term debt using observable market data. The fair values of our senior secured second lien notes,
previously outstanding convertible senior notes, and senior subordinated notes are based on quoted market prices, which are
considered Level 1 measurements under the fair value hierarchy. The estimated fair value of the principal amount of our debt as
of December 31, 2018 and 2017, excluding pipeline financing and capital lease obligations, was $1,886.1 million and $2,260.6
million, respectively. We have other financial instruments consisting primarily of cash, cash equivalents, short-term receivables
and payables that approximate fair value due to the nature of the instrument and the relatively short maturities.
Note 12. Commitments and Contingencies
Leases
We lease office space, equipment and vehicles that have non-cancelable lease terms. Currently, our outstanding leases have
terms up to 14 years. We have subleased part of the office space included in our operating leases for which we received rental
payments. The following table summarizes operating lease payments paid and sublease rentals received during the periods indicated:
In thousands
Operating lease payments
Sublease rental receipts
Year Ended December 31,
2018
2017
2016
$
25,448
$
25,075
$
2,224
4,275
22,744
3,074
93
Denbury Resources Inc.
Notes to Consolidated Financial Statements
The following tables summarize by year the remaining non-cancelable future payments under our leases as of December 31,
2018:
In thousands
2019
2020
2021
2022
2023
Thereafter
Total minimum lease payments
Less: Amount representing interest
Present value of minimum lease payments
In thousands
2019
2020
2021
2022
2023
Thereafter
Total minimum lease payments
Pipeline
and Capital
Leases
32,369
28,502
26,361
27,871
27,899
113,439
256,441
(71,006)
185,435
Operating
Leases
10,690
9,776
10,007
10,223
10,262
18,169
69,127
$
$
$
$
In addition, we expect to receive approximately $8.1 million for 2019 through 2021 under our sublease agreements.
Commitments
We have entered into long-term commitments to purchase CO2 that are either non-cancelable or cancelable only upon the
occurrence of specified future events. The commitments continue for up to 9 years. The price we will pay for CO2 generally
varies depending on the amount of CO2 delivered and the price of oil. Once all commitments have commenced, our annual
commitment under these contracts could range from $14 million to $33 million per year, assuming a $60 per Bbl NYMEX oil
price.
We are party to long-term contracts that require us to deliver CO2 to our industrial CO2 customers at various contracted prices,
plus we have a CO2 delivery obligation to Genesis related to one CO2 volumetric production payment (“VPP”). Based upon the
maximum amounts deliverable as stated in the industrial contracts and the VPP, we estimate that we may be obligated to deliver
up to 853 Bcf of CO2 to these customers over the next 16 years. The maximum volume required in any given year is approximately
254 MMcf/d, which we judge to be minor given the size of our Jackson Dome proved CO2 reserves at December 31, 2018, our
current production capabilities and our projected levels of CO2 usage for our own tertiary flooding program.
Litigation
We are involved in various lawsuits, claims and regulatory proceedings incidental to our businesses. While we currently
believe that the ultimate outcome of these proceedings, individually and in the aggregate, will not have a material adverse effect
on our financial position, results of operations or cash flows, litigation is subject to inherent uncertainties. We accrue for losses
from litigation and claims if we determine that a loss is probable and the amount can be reasonably estimated.
94
Denbury Resources Inc.
Notes to Consolidated Financial Statements
Riley Ridge Helium Supply Contract Claim
As part of our 2010 and 2011 acquisitions of the Riley Ridge Unit and associated gas processing facility that was under
construction, the Company assumed a 20-year helium supply contract under which we agreed to supply the helium separated from
the full well stream by operation of the gas processing facility to a third-party purchaser, APMTG Helium, LLC (“APMTG”). The
helium supply contract provides for the delivery of a minimum contracted quantity of helium with liquidated damages payable if
specified quantities of helium are not supplied in accordance with the terms of the contract. The liquidated damages are specified
in the contract at up to $8.0 million per contract year and are capped at an aggregate of $46.0 million over the term of the contract.
As the gas processing facility has been shut-in since mid-2014 due to significant technical issues, we have not been able to
supply helium under the helium supply contract. In a case filed in November 2014 in the Ninth Judicial District Court of Sublette
County, Wyoming, APMTG claimed multiple years of liquidated damages for non-delivery of volumes of helium specified under
the helium supply contract. The Company’s position is that our contractual obligations are excused by virtue of events that fall
within the force majeure provisions in the helium supply contract.
On January 21, 2019, the Company received notice of the trial court’s ruling that a force majeure condition did exist, but the
Company’s performance was only excused by the force majeure provisions of the contract for a 35-day period in 2014, and as a
result the Company should pay APMTG liquidated damages and interest thereon for those time periods from contract
commencement to the close of evidence (November 29, 2017) when the Company’s performance was not excused as provided in
the contract. The trial court has not yet entered a final judgment based upon its decision. The Company currently estimates the
contractual liquidated damages to be $31.8 million, representing the amount due for the contract years for which evidence was
submitted at the trial ending November 29, 2017. However, absent reversal of the trial court’s factual or legal conclusions on
appeal, the Company anticipates total liquidated damages will equal the $46.0 million aggregate cap under the helium supply
contract (which includes an additional $14.2 million of liquidated damages for the contract years ending July 31, 2018 and July
31, 2019) and other costs associated with the settlement of approximately $3.4 million, the total of which the Company has included
in “Other liabilities” in our Consolidated Balance Sheets as of December 31, 2018 and “Other expenses” in our Consolidated
Statements of Operations for the year ended December 31, 2018. The Company’s position continues to be that its contractual
obligations have been and continue to be excused by events that fall within the force majeure provisions in the helium supply
contract. The Company intends to continue to vigorously defend its position and pursue all of its rights, which may include an
appeal of the trial court’s ruling, the results of which cannot be currently predicted.
Other Contingencies
We are subject to audits for various taxes (income, sales and use, and severance) in the various states in which we operate,
and from time to time receive assessments for potential taxes that we may owe. In the past, settlement of these matters has not
had a material adverse financial impact on us, and currently we have no material assessments for potential taxes.
The Penn Virginia Merger Agreement contains certain termination rights for both Denbury and Penn Virginia, including,
among others, if the Merger is not completed by April 30, 2019. In the event of a termination of the Merger Agreement under
certain circumstances, Penn Virginia may be required to pay Denbury a termination fee of $45 million, or Denbury may be required
to pay Penn Virginia a termination fee of $45 million, in each case depending on the circumstances of the termination.
We are subject to various possible contingencies that arise primarily from interpretation of federal and state laws and regulations
affecting the oil and natural gas industry. Such contingencies include differing interpretations as to the prices at which oil and
natural gas sales may be made, the prices at which royalty owners may be paid for production from their leases, environmental
issues and other matters. Although we believe that we have complied with the various laws and regulations, administrative rulings
and interpretations thereof, adjustments could be required as new interpretations and regulations are issued. In addition, production
rates, marketing and environmental matters are subject to regulation by various federal and state agencies.
95
Denbury Resources Inc.
Notes to Consolidated Financial Statements
Note 13. Additional Balance Sheet Details
Trade and Other Receivables, Net
In thousands
Trade accounts receivable, net
Federal income tax receivable, net
Commodity derivative settlement receivables
Other receivables
Total
Note 14. Supplemental Cash Flow Information
Supplemental Cash Flow Information
In thousands
Supplemental cash flow information
Cash paid for interest, expensed
Cash paid for interest, capitalized
Cash paid for interest, treated as a reduction of debt
Cash paid for income taxes
Cash received from income tax refunds
Noncash investing and financing activities
Increase in asset retirement obligations
Increase (decrease) in liabilities for capital expenditures
Conversion of convertible senior notes into common stock
Retirement of treasury stock
Note 15. Subsequent Events
Penn Virginia Merger Agreement
December 31,
2018
2017
11,643
$
9,037
2,390
3,900
26,970
$
15,926
8,262
—
21,005
45,193
$
$
Year Ended December 31,
2017
2016
2018
$
50,076
$
98,261
$
130,843
37,079
79,606
492
(8,280)
4,499
14,600
162,004
—
30,762
50,349
450
(13,323)
9,565
3,930
—
46,562
25,982
25,835
375
(2,455)
11,621
(13,593)
—
—
On October 28, 2018, we entered into a definitive Agreement and Plan of Merger (the “Merger Agreement”) with Penn Virginia
Corporation (NASDAQ: PVAC) (“Penn Virginia”), the closing of which is subject to approval by shareholders of Penn Virginia
and Denbury’s stockholders and other conditions. The Merger Agreement provides for each share of Penn Virginia common stock
(“Penn Virginia Common Stock”), issued and outstanding immediately prior to the effective time of the merger (other than as
described in the Merger Agreement) to be converted into the right to receive, at the election of the holder of such share of Penn
Virginia Common Stock, either, (i) $25.86 in cash without interest and 12.4 shares of the Company’s common stock (“Denbury
Common Stock”), (ii) $79.80 in cash without interest (the “Cash Election”), or (iii) 18.3454 shares of Denbury Common Stock
(the “Stock Election”). The Cash and Stock Elections are to be subject to proration to ensure that the total amount of cash paid
to holders of Penn Virginia Common Stock is equal to $400 million. In the aggregate, $400 million in cash and approximately
191.8 million shares of Denbury Common Stock are expected to be paid as merger consideration. Consummation of the merger
is subject to satisfaction of customary conditions. Denbury and Penn Virginia each scheduled April 17, 2019 as the date for their
respective upcoming special stockholder meetings, at which time shareholders will vote on, among other items, the merger of Penn
Virginia with and into Denbury.
96
Denbury Resources Inc.
Notes to Consolidated Financial Statements
October 2018 Financing Commitment Letter
In connection with the Merger Agreement, Denbury received a commitment letter from JPMorgan Chase Bank, N.A., subject
to certain funding conditions, for a proposed new $1.2 billion senior secured revolving credit facility with a maturity date of
December 9, 2021 and a $400 million senior secured second lien bridge facility to be available to the extent Denbury does not
secure alternate financing prior to April 30, 2019. These two new debt financings are expected to be used to fully or partially fund
the $400 million cash portion of the consideration in the acquisition, potentially retire and replace Penn Virginia’s $200 million
second lien term loan, replace Penn Virginia’s existing bank credit facility, which had $321 million drawn and outstanding as of
December 31, 2018, and pay fees and expenses.
97
Denbury Resources Inc.
Unaudited Supplementary Information
SUPPLEMENTAL OIL AND NATURAL GAS DISCLOSURES (UNAUDITED)
Costs Incurred
The following table summarizes costs incurred and capitalized in oil and natural gas property acquisition, exploration and
development activities. Property acquisition costs are those costs incurred to purchase, lease or otherwise acquire property,
including both undeveloped leasehold and the purchase of reserves in place. Exploration costs include costs of identifying areas
that may warrant examination and examining specific areas that are considered to have prospects containing oil and natural gas
reserves, including costs of drilling exploratory wells, geological and geophysical costs, and carrying costs on undeveloped
properties. Development costs are incurred to obtain access to proved reserves, including the cost of drilling development wells,
and to provide facilities for extracting, treating, gathering and storing the oil and natural gas, and the cost of improved recovery
systems.
We capitalize interest on unevaluated oil and natural gas properties that have ongoing development activities. Included in
costs incurred in the table below is capitalized interest of $36.5 million, $30.8 million and $25.2 million during the years ended
December 31, 2018, 2017 and 2016, respectively. Costs incurred also include new asset retirement obligations established, as
well as changes to asset retirement obligations resulting from revisions in cost estimates or abandonment dates. Asset retirement
obligations included in the table below were $6.8 million, $5.6 million and $3.9 million during the years ended December 31,
2018, 2017 and 2016, respectively. See Note 4, Asset Retirement Obligations, for additional information.
Costs incurred in oil and natural gas activities were as follows:
In thousands
Property acquisitions
Proved
Unevaluated
Exploration
Development
Total costs incurred(1)
Year Ended December 31,
2017
2016
2018
$
2,030
$
75,086
$
—
1,030
338,203
15,748
297
274,325
$
341,263
$
365,456
$
4,867
8,771
176
251,597
265,411
(1) Capitalized general and administrative costs that directly relate to exploration and development activities were $37.2 million,
$41.1 million and $48.4 million for the years ended December 31, 2018, 2017 and 2016, respectively.
98
Denbury Resources Inc.
Unaudited Supplementary Information
Oil and Natural Gas Operating Results
Results of operations from oil and natural gas producing activities, excluding corporate overhead and interest costs, were as
follows:
In thousands, except per BOE data
Oil, natural gas, and related product sales
Lease operating expenses
Marketing expenses, net of third-party purchases, and plant operating
expenses
Production and ad valorem taxes
Depletion, depreciation, and amortization
CO2 properties and pipelines depletion and depreciation(1)
Write-down of oil and natural gas properties
Commodity derivatives expense (income)
Net operating income (loss)
Income tax provision (benefit)
Results of operations from oil and natural gas producing activities
Depletion, depreciation, and amortization per BOE
$
$
$
Year Ended December 31,
2017
1,089,666
$
$
2018
1,422,589
489,720
447,799
39,147
96,589
144,423
48,792
—
(21,087)
625,005
156,251
468,754
8.77
$
$
39,617
79,198
134,721
49,241
—
77,576
261,514
99,375
162,139
8.36
$
$
2016
935,751
414,937
45,151
68,878
169,550
50,573
810,921
127,944
(752,203)
(285,837)
(466,366)
9.40
(1) Represents an allocation of the depletion and depreciation of our CO2 properties and pipelines associated with our tertiary oil
producing activities.
Oil and Natural Gas Reserves
Net proved oil and natural gas reserve estimates for all years presented were prepared by DeGolyer and MacNaughton,
independent petroleum engineers located in Dallas, Texas. These oil and natural gas reserve estimates do not include any value
for probable or possible reserves that may exist, nor do they include any value for undeveloped acreage. The reserve estimates
represent our net revenue interest in our properties. See Standardized Measure of Discounted Future Net Cash Flows and Changes
Therein Relating to Proved Oil and Natural Gas Reserves below for a discussion of the effect of the different prices on reserve
quantities and values. Operating costs, production and ad valorem taxes, and future development costs were based on current
costs as of December 31, 2018.
There are numerous uncertainties inherent in estimating quantities of proved reserves and in projecting the future rates of
production and timing of development expenditures. The following reserve data represents estimates only and should not be
construed as being exact. Moreover, the present values should not be construed as the current market value of our oil and natural
gas reserves or the costs that would be incurred to obtain equivalent reserves. Estimates of reserves as of year-end 2018, 2017
and 2016 were prepared using an average price equal to the unweighted arithmetic average of hydrocarbon prices received on a
field-by-field basis on the first day of each month within the applicable fiscal 12-month period. All of our reserves are located in
the United States.
99
Denbury Resources Inc.
Unaudited Supplementary Information
Estimated Quantities of Proved Reserves
Year Ended December 31,
Oil
(MBbl)
2018
Gas
(MMcf)
Total
(MBOE)
Oil
(MBbl)
2017
Gas
(MMcf)
Total
(MBOE)
Oil
(MBbl)
2016
Gas
(MMcf)
Total
(MBOE)
Balance at beginning of
year
Revisions of previous
estimates
252,625
42,721
259,745
247,103
44,315
254,489
282,250
38,305
288,634
21,658
6,115
22,677
14,352
2,541
14,775
(9,302)
16,289
(6,587)
Improved recovery(1)
2,314
(157)
2,288
1,936
—
1,936
—
—
—
Production
(21,364)
(3,962)
(22,024)
(21,320)
(4,135)
(22,009)
(22,487)
(5,628)
(23,425)
Acquisition of minerals
in place
—
—
—
10,554
Sales of minerals in place
(191)
(1,709)
(476)
—
—
—
10,554
36
—
36
—
(3,394)
(4,651)
(4,169)
Balance at end of year
255,042
43,008
262,210
252,625
42,721
259,745
247,103
44,315
254,489
Proved Developed
Reserves – end of year
Proved Undeveloped
Reserves – end of year
222,736
42,912
229,888
222,531
42,435
229,603
201,919
43,955
209,245
32,306
96
32,322
30,094
286
30,142
45,184
360
45,244
(1) Improved recovery reflects reserve additions that result from the application of secondary recovery methods such as water
flooding, or tertiary recovery methods such as CO2 flooding. In order to recognize proved tertiary oil reserves, we must either
have an oil production response to CO2 injections or the field must be analogous to an existing tertiary flood. The magnitude
of proved reserves that we can book in any given year will depend on our progress with new floods and the timing of the
production response.
Revisions of previous estimates during 2018 and 2017 primarily reflect increases in commodity prices between December
31, 2016 and 2018.
There were no significant additions, excluding acquisitions of minerals in place, to our oil and natural gas reserves in 2017
or 2016, as the magnitude of proved reserves that we can book in any given year depends on our progress with new floods and
the timing of the production response, and we initiated no new floods in 2018, 2017 or 2016. Acquisitions of minerals in place
during 2017 were primarily related to our non-operated working interest acquisitions in Salt Creek and West Yellow Creek fields.
Standardized Measure of Discounted Future Net Cash Flows and Changes Therein Relating to Proved Oil and Natural
Gas Reserves
The Standardized Measure of Discounted Future Net Cash Flows and Changes Therein Relating to Proved Oil and Natural
Gas Reserves (“Standardized Measure”) does not purport to present the fair market value of our oil and natural gas properties. An
estimate of such value should consider, among other factors, anticipated future prices of oil and natural gas, the probability of
recoveries in excess of existing proved reserves, the value of probable reserves and acreage prospects, and perhaps different
discount rates. It should be noted that estimates of reserve quantities, especially from new discoveries, are inherently imprecise
and subject to substantial revision.
Under the Standardized Measure, future cash inflows were estimated by applying a first-day-of-the-month 12-month average
price to the estimated future production of year-end proved reserves. These prices have a significant impact on both the quantities
and value of the proved reserves, as reductions in oil and natural gas prices can cause wells to reach the end of their economic life
much sooner and can make certain proved undeveloped locations uneconomical, both of which reduce the reserves. The following
representative oil and natural gas prices were used in the Standardized Measure. These prices were adjusted by field to arrive at
the appropriate corporate net price.
100
Denbury Resources Inc.
Unaudited Supplementary Information
Oil (NYMEX price per Bbl)
Natural Gas (Henry Hub price per MMBtu)
2018
December 31,
2017
$
65.56
$
51.34
$
3.10
2.98
2016
42.75
2.55
The changes in the Standardized Measure of discounted future net cash flows in the tables that follow were significantly
impacted by the movement in first-day-of-the-month average NYMEX oil prices between 2016 and 2018. The weighted-average
oil prices we receive relative to NYMEX oil prices (our NYMEX oil price differential) utilized were $0.24 per Bbl below
representative NYMEX oil prices as of December 31, 2018, compared to $2.25 per Bbl below representative NYMEX oil prices
as of December 31, 2017, and $3.39 per Bbl below representative NYMEX oil prices as of December 31, 2016.
Future cash inflows were reduced by estimated future production, development and abandonment costs based on current cost,
with no escalation to determine pre-tax cash inflows. Our future net inflows do not include a reduction for cash previously expended
on our capitalized CO2 assets that will be consumed in the production of proved tertiary reserves. Future income taxes were
computed by applying the statutory tax rate to the excess of net cash inflows over our tax basis in the associated proved oil and
natural gas properties. Tax credits and net operating loss carryforwards were also considered in the future income tax
calculation. Future net cash inflows after income taxes were discounted using a 10% annual discount rate to arrive at the
Standardized Measure.
In thousands
Future cash inflows
Future production costs
Future development costs
Future income taxes
Future net cash flows
10% annual discount for estimated timing of cash flows
Standardized measure of discounted future net cash flows
2018
$ 16,657,988
(8,000,884)
(1,524,476)
(1,186,769)
5,945,859
(2,594,474)
3,351,385
$
December 31,
2017
$ 12,421,620
(6,623,563)
(1,433,900)
(528,767)
3,835,390
(1,602,961)
2,232,429
$
$
$
2016
9,747,726
(5,743,198)
(1,595,871)
(258,047)
2,150,610
(751,393)
1,399,217
The following table sets forth an analysis of changes in the Standardized Measure of Discounted Future Net Cash Flows from
proved oil and natural gas reserves:
In thousands
Beginning of year
Sales of oil and natural gas produced, net of production costs
Net changes in prices and production costs
Improved recovery(1)
Previously estimated development costs incurred
Change in future development costs
Revisions due to timing and other
Accretion of discount
Acquisition of minerals in place
Sales of minerals in place
Net change in income taxes
End of year
$
Year Ended December 31,
2017
1,399,217
(523,049)
1,231,649
2018
2,232,429
(797,132)
1,963,333
$
$
11,536
109,214
(42,240)
10,915
234,434
—
6,119
89,238
39,926
(71,141)
142,007
77,366
1,281
(372,385)
3,351,385
$
—
(158,903)
2,232,429
$
2016
1,890,124
(406,782)
(784,010)
—
86,012
85,797
48,697
209,608
477
(16,671)
285,965
$
1,399,217
(1) Improved recovery additions result from the application of secondary recovery methods such as water flooding or tertiary
recovery methods such as CO2 flooding.
101
Denbury Resources Inc.
Unaudited Supplementary Information
SUPPLEMENTAL CO2 DISCLOSURES (UNAUDITED)
Based on engineering reports prepared by DeGolyer and MacNaughton, proved CO2 reserves were estimated as follows:
In MMcf
CO2 reserves
Gulf Coast region(1)
Rocky Mountain region(2)
Year Ended December 31,
2017
2016
2018
4,982,440
1,155,538
5,164,741
1,187,787
5,332,576
1,214,428
(1) Proved CO2 reserves in the Gulf Coast region consist of reserves from our reservoirs at Jackson Dome and are presented on
a gross (8/8ths) basis, of which our net revenue interest was approximately 4.0 Tcf, 4.1 Tcf and 4.2 Tcf at December 31, 2018,
2017 and 2016, respectively, and include reserves dedicated to volumetric production payments of 3.1 Bcf, 7.6 Bcf and 12.3
Bcf at December 31, 2018, 2017 and 2016, respectively.
(2) Proved CO2 reserves in the Rocky Mountain region consist of our overriding royalty interest in LaBarge Field, of which our
net revenue interest was approximately 1.2 Tcf, 1.2 Tcf and 1.2 Tcf at December 31, 2018, 2017 and 2016, respectively.
102
Denbury Resources Inc.
Unaudited Supplementary Information
UNAUDITED QUARTERLY INFORMATION
In thousands, except per-share data
2018
Revenues and other income
Commodity derivatives expense (income)
Other expenses
Net income
Net income per common share:
Basic
Diluted
Cash flow provided by operating activities
Cash flow used in investing activities(1)
Cash flow provided by (used in) financing activities
2017
Revenues and other income
$
Commodity derivatives expense (income)
Other expenses
Net income
Net income per common share:
Basic
Diluted
Cash flow provided by operating activities
Cash flow used in investing activities(1)
Cash flow provided by (used in) financing activities
March 31
June 30
September 30
December 31
$
353,234
$
387,063
$
394,973
$
48,825
250,811
39,578
0.10
0.09
91,627
(51,376)
(40,578)
$
275,454
(24,602)
257,552
21,530
0.06
0.05
24,262
(67,696)
43,476
96,199
251,211
30,222
0.07
0.07
153,999
(83,522)
(69,908)
261,184
(10,373)
246,885
14,399
0.04
0.04
52,946
(152,991)
102,368
44,577
256,361
78,419
0.17
0.17
147,904
(81,834)
679
338,355
(210,688)
326,398
174,479
0.39
0.38
136,155
(116,544)
(47,645)
$
266,559
$
326,589
25,263
255,083
442
0.00
0.00
65,651
(73,123)
3,756
87,288
246,190
126,781
0.32
0.31
124,284
(63,004)
(60,987)
(1) Balances presented above reflect the adoption of FASB ASU 2016-18, Statement of Cash Flows (“ASU 2016-18”), whereby
changes in restricted cash are now included in the consolidated statements of cash flows (see Note 1, Significant Accounting
Policies – Recent Accounting Pronouncements). Our quarterly reports on Form 10-Q for the periods ended March 31, 2018
and June 30, 2018, filed with the SEC on May 10, 2018 and August 9, 2018, respectively, incorrectly included in the beginning-
of-period and end-of-period balances of “Cash, cash equivalents, and restricted cash” in our Statements of Cash Flows, certain
U.S. Treasury Notes held in escrow accounts legally restricted for use in certain of our asset retirement obligations. Under
Financial Accounting Standards Board Codification (“FASC”) 230-10-20, these notes do not meet the definition of restricted
cash and restricted cash equivalents due to their maturity date exceeding 90 days. Therefore, changes in the U.S. Treasury
Notes of $0.6 million and $0.8 million during the three months ended March 31, 2018 and six months ended June 30, 2018,
respectively, should have been included in net cash used in investing activities. Accordingly, net cash used in investing
activities for the three months ended March 31, 2018, originally reported as $50.8 million, should have been $51.4 million,
and net cash used in investing activities for the six months ended June 30, 2018, originally reported as $134.1 million, should
have been $134.9 million. Management has evaluated the quantitative and qualitative impact of the error to previously issued
unaudited consolidated statements of cash flows and concluded that the previously issued consolidated financial statements
were not materially misstated.
103
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Denbury Resources Inc.
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report, an evaluation of the effectiveness of the design and operation of our disclosure
controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) was performed under the supervision and with the
participation of management, including our Chief Executive Officer and our Chief Financial Officer. Based on that evaluation,
our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as
of December 31, 2018, to ensure that information that is required to be disclosed in the reports the Company files and submits
under the Securities Exchange Act of 1934 is recorded; that it is processed, summarized and reported within the time periods
specified in the SEC’s rules and forms; and that information that is required to be disclosed under the Exchange Act is accumulated
and communicated to management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate to allow
timely decisions regarding required disclosure.
Evaluation of Changes in Internal Control over Financial Reporting
Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief
Financial Officer, we have determined that, during the fourth quarter of fiscal 2018, there were no changes in our internal control
over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial
reporting.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined
in Rules 13a-15(f) and 15d-15(f) of the Securities Exchange Act of 1934, as amended. Under the supervision and with the
participation of our management, including our Chief Executive Officer and our Chief Financial Officer, we assessed the
effectiveness of our internal control over financial reporting as of the end of the period covered by this report based on the framework
in “Internal Control – Integrated Framework” (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Based on that assessment, our Chief Executive Officer and our Chief Financial Officer concluded that our internal
control over financial reporting was effective to provide reasonable assurance regarding the reliability of our financial reporting
and the preparation of our financial statements for external purposes in accordance with U.S. generally accepted accounting
principles.
The effectiveness of our internal control over financial reporting as of December 31, 2018, has been audited by
PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in the report that appears herein.
Important Considerations
The effectiveness of our disclosure controls and procedures and our internal control over financial reporting is subject to
various inherent limitations, including cost limitations, judgments used in decision making, assumptions about the likelihood of
future events, the soundness of our systems, the possibility of human error, and the risk of fraud. Moreover, projections of any
evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions and the risk that the degree of compliance with policies or procedures may deteriorate over time. Because of these
limitations, there can be no assurance that any system of disclosure controls and procedures or internal control over financial
reporting will be successful in preventing all errors or fraud or in making all material information known in a timely manner to
the appropriate levels of management.
Item 9B. Other Information
None.
104
Denbury Resources Inc.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Except as disclosed below, information as to Item 10 will be set forth in the Proxy Statement (“Proxy Statement”) for the 2019
Annual Meeting of Shareholders to be held May 22, 2019 (“Annual Meeting”), and is incorporated herein by reference.
Code of Ethics
We have adopted a Code of Ethics for Senior Financial Officers. This Code of Ethics, including any amendments or waivers,
is posted on our website at www.denbury.com.
Item 11. Executive Compensation
Information as to Item 11 will be set forth in the Proxy Statement for the Annual Meeting and is incorporated herein by
reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Information as to Item 12 will be set forth in the Proxy Statement for the Annual Meeting and is incorporated herein by
reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Information as to Item 13 will be set forth in the Proxy Statement for the Annual Meeting and is incorporated herein by
reference.
Item 14. Principal Accountant Fees and Services
Information as to Item 14 will be set forth in the Proxy Statement for the Annual Meeting and is incorporated herein by
reference.
105
Denbury Resources Inc.
PART IV
Item 15. Exhibits and Financial Statement Schedules
Financial Statements and Schedules. Financial statements and schedules filed as a part of this report are presented on page
63. All financial statement schedules have been omitted because they are not applicable, or the required information is presented
in the financial statements or the notes to consolidated financial statements.
Exhibits. The following exhibits are included as part of this report.
Exhibit No.
2(a)
Exhibit
Agreement and Plan of Merger among Denbury Resources Inc., Penn Virginia Corporation, Dragon Merger
Sub Inc. and DR Sub LLC, dated as of October 28, 2018 (incorporated by reference to Exhibit 2.1 of Form 8-
K filed by the Company on October 29, 2018, File No. 001-12935).
3(a)
3(b)
4(a)
4(b)
4(c)
4(d)
4(e)
4(f)
4(g)
4(h)
Second Restated Certificate of Incorporation of Denbury Resources Inc. filed with the Delaware Secretary of
State on October 30, 2014 (incorporated by reference to Exhibit 3(a) of Form 10-Q filed by the Company on
November 7, 2014, File No. 001-12935).
Second Amended and Restated Bylaws of Denbury Resources Inc. as of November 4, 2014 (incorporated by
reference to Exhibit 3(b) of Form 10-Q filed by the Company on November 7, 2014, File No. 001-12935).
Indenture for 6 % Senior Subordinated Notes due 2021, dated as of February 17, 2011, by and among Denbury
Resources Inc., certain of its subsidiaries, and Wells Fargo Bank, National Association, as Trustee (incorporated
by reference to Exhibit 4.1 of Form 8-K filed by the Company on February 22, 2011, File No. 001-12935).
First Supplemental Indenture for 6 % Senior Subordinated Notes due 2021, dated as of December 31, 2014,
by and among Denbury Resources Inc., certain of its subsidiaries, and Wells Fargo Bank, National Association,
as Trustee (incorporated by reference to Exhibit 4(x) of Form 10-K filed by the Company on February 27, 2015,
File No. 001-12935).
Second Supplemental Indenture for 6 % Senior Subordinated Notes due 2021, dated as of September 8, 2017,
by and among Denbury Resources Inc., certain of its subsidiaries, and Wilmington Trust, National Association,
as Trustee (incorporated by reference to Exhibit 4(a) of Form 10-Q filed by the Company on November 7, 2017,
File No. 001-12935).
Indenture for 4 % Senior Subordinated Notes due 2023, dated as of February 5, 2013, by and among Denbury
Resources Inc., certain of its subsidiaries, and Wells Fargo Bank, National Association, as Trustee (incorporated
by reference to Exhibit 4.1 of Form 8-K filed by the Company on February 5, 2013, File No. 001-12935).
First Supplemental Indenture for 4 % Senior Subordinated Notes due 2023, dated as of December 31, 2014,
by and among Denbury Resources Inc., certain of its subsidiaries, and Wells Fargo Bank, National Association,
as Trustee (incorporated by reference to Exhibit 4(z) of Form 10-K filed by the Company on February 27, 2015,
File No. 001-12935).
Second Supplemental Indenture for 4 % Senior Subordinated Notes due 2023, dated as of September 8, 2017,
by and among Denbury Resources Inc., certain of its subsidiaries, and Wilmington Trust, National Association,
as Trustee (incorporated by reference to Exhibit 4(b) of Form 10-Q filed by the Company on November 7, 2017,
File No. 001-12935).
Indenture for 5½% Senior Subordinated Notes due 2022, dated as of April 30, 2014, by and among Denbury
Resources Inc., certain of its subsidiaries, and Wells Fargo Bank, National Association, as Trustee (incorporated
by reference to Exhibit 4.1 of Form 8-K filed by the Company on May 1, 2014, File No. 001-12935).
First Supplemental Indenture for 5½% Senior Subordinated Notes due 2022, dated as of December 31, 2014,
by and among Denbury Resources Inc., certain of its subsidiaries, and Wells Fargo Bank, National Association,
as Trustee (incorporated by reference to Exhibit 4(bb) of Form 10-K filed by the Company on February 27,
2015, File No. 001-12935).
106
Denbury Resources Inc.
Exhibit No.
4(i)
Exhibit
Second Supplemental Indenture for 5½% Senior Subordinated Notes due 2022, dated as of September 8, 2017,
by and among Denbury Resources Inc., certain of its subsidiaries, and Wilmington Trust, National Association,
as Trustee (incorporated by reference to Exhibit 4(c) of Form 10-Q filed by the Company on November 7, 2017,
File No. 001-12935).
4(j)
4(k)
4(l)
4(m)
4(n)
4(o)
10(a)
10(b)
10(c)
10(d)
10(e)
Indenture for 9% Senior Secured Second Lien Notes due 2021, dated as of May 10, 2016, by and among Denbury
Resources Inc., certain of its subsidiaries, and Wilmington Trust, National Association, as Trustee and Collateral
Trustee (incorporated by reference to Exhibit 4.1 of Form 8-K filed by the Company on May 11, 2016, File No.
001-12935).
First Supplemental Indenture for 9% Senior Subordinated Notes due 2021, dated as of September 8, 2017, by
and among Denbury Resources Inc., certain of its subsidiaries, and Wilmington Trust, National Association, as
Trustee and Collateral Trustee (incorporated by reference to Exhibit 4(d) of Form 10-Q filed by the Company
on November 7, 2017, File No. 001-12935).
Indenture for 9¼% Senior Secured Second Lien Notes due 2022, dated as of December 6, 2017, by and among
Denbury Resources Inc., certain of its subsidiaries, and Wilmington Trust, National Association, as Trustee and
Collateral Trustee (incorporated by reference to Exhibit 4.1 of Form 8-K filed by the Company on December
12, 2017, File No. 001-12935).
Indenture for 3½% Convertible Senior Notes due 2024, dated as of December 6, 2017, by and among Denbury
Resources Inc., certain of its subsidiaries, and Wilmington Trust, National Association, as Trustee (incorporated
by reference to Exhibit 4.3 of Form 8-K filed by the Company on December 12, 2017, File No. 001-12935).
Indenture, dated as of January 9, 2018, among the Company, the Subsidiary Guarantors named therein, and
Wilmington Trust, National Association, as Trustee, with respect to $59,439,000 aggregate principal amount
of 5% Convertible Senior Notes due 2023 (incorporated by reference to Exhibit 4.1 of Form 8-K filed by the
Company on January 11, 2018, File No. 001-12935).
Indenture, dated as of August 21, 2018, among the Company, the Subsidiary Guarantors named therein, and
Wilmington Trust, National Association, as Trustee and Collateral Trustee, with respect to $450,000,000
aggregate principal amount of 7½% Senior Secured Second Lien Notes due 2024 (incorporated by reference
to Exhibit 4.1 of Form 8-K filed by the Company on August 22, 2018, File No. 001-12935).
Amended and Restated Credit Agreement, dated as of December 9, 2014, by and among Denbury Resources
Inc., as Borrower, JPMorgan Chase Bank, N.A., as Administrative Agent, and the lending institutions party
thereto (incorporated by reference to Exhibit 10.1 of Form 8-K filed by the Company on December 15, 2014,
File No. 001-12935).
First Amendment to Amended and Restated Credit Agreement, dated as of May 4, 2015, by and among Denbury
Resources Inc., as Borrower, JPMorgan Chase Bank, N.A., as Administrative Agent, and the financial institutions
party thereto (incorporated by reference to Exhibit 10(a) of Form 10-Q filed by the Company on May 6, 2015,
File No. 001-12935).
Second Amendment to Amended and Restated Credit Agreement, dated as of February 17, 2016, by and among
Denbury Resources Inc., as Borrower, JPMorgan Chase Bank, N.A., as Administrative Agent, and the financial
institutions party thereto (incorporated by reference to Exhibit 10.1 of Form 8-K filed by the Company on
February 23, 2016, File No. 001-12935).
Third Amendment to Amended and Restated Credit Agreement, dated as of April 18, 2016, by and among
Denbury Resources Inc., as Borrower, JPMorgan Chase Bank, N.A., as Administrative Agent, and the financial
institutions party thereto (incorporated by reference to Exhibit 10.1 of Form 8-K filed by the Company on April
20, 2016, File No. 001-12935).
Fourth Amendment to Amended and Restated Credit Agreement, dated as of May 3, 2017, by and among
Denbury Resources Inc., as Borrower, JPMorgan Chase Bank, N.A., as Administrative Agent, and the financial
institutions party thereto (incorporated by reference to Exhibit 10.1 of Form 8-K filed by the Company on May
4, 2017, File No. 001-12935).
107
Denbury Resources Inc.
Exhibit No.
10(f)
Exhibit
Fifth Amendment to Amended and Restated Credit Agreement, dated as of November 6, 2017, by and among
Denbury Resources Inc., as Borrower, JPMorgan Chase Bank, N.A., as Administrative Agent, and the financial
institutions party thereto (incorporated by reference to Exhibit 10(b) of Form 10-Q filed by the Company on
November 7, 2017, File No. 001-12935).
10(g)
10(h)
10(i)
10(j)
10(k)
10(l)
10(m)
10(n)
10(o)
10(p)
10(q)
10(r)
Sixth Amendment to Amended and Restated Credit Agreement, dated as of August 13, 2018, by and among
Denbury Resources Inc., as Borrower, JPMorgan Chase Bank, N.A., as Administrative Agent, and the financial
institutions party thereto (incorporated by reference to Exhibit 10.1 of Form 8-K filed by the Company on
August 14, 2018, File No. 001-12935).
Commitment Letter, dated October 28, 2018, from JPMorgan Chase Bank, N.A. regarding a revolving credit
facility and a bridge facility (incorporated by reference to Exhibit 10(d) of Form 10-Q filed by the Company
on November 9, 2018, File No. 001-12935).
Collateral Trust Agreement, dated as of May 10, 2016, by and among Denbury Resources Inc., certain of its
subsidiaries, and Wilmington Trust, National Association, as Trustee and Collateral Trustee (incorporated by
reference to Exhibit 10.1 of Form 8-K filed by the Company on May 11, 2016, File No. 001-12935).
Collateral Trust Joinder, dated as of December 6, 2017, by and among Denbury Resources Inc., certain of its
subsidiaries, and Wilmington Trust, National Association, as Trustee and Collateral Trustee (incorporated by
reference to Exhibit 10.1 of Form 8-K filed by the Company on December 12, 2017, File No. 001-12935).
Collateral Trust Joinder, dated as of January 9, 2018, among the Company, the Subsidiary Guarantors named
therein, Wilmington Trust, National Association, as Trustee, the other parity lien representatives from time to
time party thereto and Wilmington Trust, National Association, as Collateral Trustee (incorporated by reference
to Exhibit 10.1 of Form 8-K filed by the Company on January 11, 2018, File No. 001-12935).
Collateral Trust Joinder, dated as of August 21, 2018, between Wilmington Trust, National Association, as
Trustee, and Wilmington Trust, National Association, as Collateral Trustee (incorporated by reference to Exhibit
10.1 of Form 8-K filed by the Company on August 22, 2018, File No. 001-12935).
Intercreditor Agreement, dated as of May 10, 2016, by and between JPMorgan Chase Bank, N.A., as Priority
Lien Agent, and Wilmington Trust, National Association, as Collateral Trustee (incorporated by reference to
Exhibit 10.2 of Form 8-K filed by the Company on May 11, 2016, File No. 001-12935).
Priority Confirmation Joinder, dated as of December 6, 2017, by and between JPMorgan Chase Bank, N.A., as
Priority Lien Agent, and Wilmington Trust, National Association, as Collateral Trustee (incorporated by
reference to Exhibit 10.2 of Form 8-K filed by the Company on December 12, 2017, File No. 001-12935).
Priority Confirmation Joinder, dated as of August 21, 2018, by and between JPMorgan Chase Bank, N.A., as
Priority Lien Agent, and Wilmington Trust, National Association, as Collateral Trustee (incorporated by
reference to Exhibit 10.2 of Form 8-K filed by the Company on August 22, 2018, File No. 001-12935).
Collateral Trust Joinder, dated as of January 9, 2018, among the Company, the Subsidiary Guarantors named
therein, Wilmington Trust, National Association, as Trustee, the other parity lien representatives from time to
time party thereto and Wilmington Trust, National Association, as Collateral Trustee (incorporated by reference
to Exhibit 10.1 of Form 8-K filed by the Company on January 11, 2018, File No. 001-12935).
Pipeline Financing Lease Agreement, dated as of May 30, 2008, by and between Genesis NEJD Pipeline, LLC,
as Lessor, and Denbury Onshore, LLC, as Lessee (incorporated by reference to Exhibit 99.1 of Form 8-K filed
by the Company on June 5, 2008, File No. 001-12935).
Transportation Services Agreement, dated as of May 30, 2008, by and between Genesis Free State Pipeline,
LLC and Denbury Onshore, LLC (incorporated by reference to Exhibit 99.2 of Form 8-K filed by the Company
on June 5, 2008, File No. 001-12935).
108
Denbury Resources Inc.
Exhibit No.
10(s)**
Exhibit
Form of Indemnification Agreement, by and between Denbury Resources Inc. and its officers and directors
(incorporated by reference to Exhibit 10(a) of Form 10-Q filed by the Company on November 7, 2017, File No.
001-12935).
10(t)**
10(u)**
10(v)**
10(w)**
10(x)**
10(y)**
10(z)**
10(aa)**
10(bb)**
10(cc)**
10(dd)**
10(ee)**
10(ff)**
Denbury Resources Inc. Director Deferred Compensation Plan, as amended and restated effective as of
December 16, 2015 (incorporated by reference to Exhibit 10(i) of Form 10-K filed by the Company on February
26, 2016, File No. 001-12935).
Denbury Resources Inc. Severance Protection Plan, as amended and restated effective as of March 29, 2018
(incorporated by reference to Exhibit 10(a) of Form 10-Q filed by the Company on May 10, 2018, File No.
001-12935).
Denbury Resources Inc. 2004 Omnibus Stock and Incentive Plan, as amended and restated effective as of March
29, 2018 (incorporated by reference to Exhibit 10(b) of Form 10-Q filed by the Company on May 10, 2018,
File No. 001-12935).
2004 Form of Restricted Stock Award that vests on retirement for grants to officers pursuant to the 2004 Omnibus
Stock and Incentive Plan for Denbury Resources Inc. (incorporated by reference to Exhibit 10(l) of Form 10-
K filed by the Company on March 15, 2005, File No. 001-12935).
2016 Form of TSR Performance Award-Equity under the 2004 Omnibus Stock and Incentive Plan for Denbury
Resources Inc. (incorporated by reference to Exhibit 10(a) of Form 10-Q filed by the Company on May 6, 2016,
File No. 001-12935).
2016 Form of TSR Performance Award-Cash under the 2004 Omnibus Stock and Incentive Plan for Denbury
Resources Inc. (incorporated by reference to Exhibit 10(b) of Form 10-Q filed by the Company on May 6, 2016,
File No. 001-12935).
2016 Form of EBITDAX Performance Award-Equity under the 2004 Omnibus Stock and Incentive Plan for
Denbury Resources Inc. (incorporated by reference to Exhibit 10(mm) of Form 10-K filed by the Company on
March 1, 2017, File No. 001-12935).
2016 Form of EBITDAX Performance Award-Cash under the 2004 Omnibus Stock and Incentive Plan for
Denbury Resources Inc. (incorporated by reference to Exhibit 10(nn) of Form 10-K filed by the Company on
March 1, 2017, File No. 001-12935).
2016 Form of Oil Price Change vs. TSR Performance Award, under the 2004 Omnibus Stock and Incentive
Plan for Denbury Resources Inc. (incorporated by reference to Exhibit 10(e) of Form 10-Q filed by the Company
on May 6, 2016, File No. 001-12935).
2016 Form of Restricted Share Award to officers pursuant to the 2004 Omnibus Stock and Incentive Plan for
Denbury Resources Inc. (incorporated by reference to Exhibit 10(pp) of Form 10-K filed by the Company on
March 1, 2017, File No. 001-12935).
2016 Form of Restricted Stock Award to non-employee directors pursuant to the 2004 Omnibus Stock and
Incentive Plan for Denbury Resources Inc. (incorporated by reference to Exhibit 10(qq) of Form 10-K filed by
the Company on March 1, 2017, File No. 001-12935).
2016 Form of Deferred Stock Unit Award pursuant to the Director Deferred Compensation Plan (with respect
to deferred long-term incentive awards) (incorporated by reference to Exhibit 10(rr) of Form 10-K filed by the
Company on March 1, 2017, File No. 001-12935).
Standalone Restricted Share New Hire Inducement Award Agreement between Denbury Resources Inc. and
Christian S. Kendall, dated September 8, 2015 (incorporated by reference to Exhibit 10.1 of Form 8-K filed by
the Company on September 8, 2015, File No. 001-12935).
109
Denbury Resources Inc.
Exhibit No.
10(gg)**
Exhibit
Restricted Stock Officer Promotion Award pursuant to the 2004 Omnibus Stock and Incentive Plan for Denbury
Resources Inc. (incorporated by reference to Exhibit 10(tt) of Form 10-K filed by the Company on March 1,
2017, File No. 001-12935).
10(hh)**
10(ii)**
10(jj)**
10(kk)**
10(ll)**
2017 Form of TSR Performance Award-Equity under the 2004 Omnibus Stock and Incentive Plan for Denbury
Resources Inc. (incorporated by reference to Exhibit 10(a) of Form 10-Q filed by the Company on May 5, 2017,
File No. 001-12935).
2017 Form of TSR Performance Award-Cash under the 2004 Omnibus Stock and Incentive Plan for Denbury
Resources Inc. (incorporated by reference to Exhibit 10(b) of Form 10-Q filed by the Company on May 5, 2017,
File No. 001-12935).
2017 Form of EBITDAX Performance Award-Equity under the 2004 Omnibus Stock and Incentive Plan for
Denbury Resources Inc. (incorporated by reference to Exhibit 10(c) of Form 10-Q filed by the Company on
May 5, 2017, File No. 001-12935).
2017 Form of EBITDAX Performance Award-Cash under the 2004 Omnibus Stock and Incentive Plan for
Denbury Resources Inc. (incorporated by reference to Exhibit 10(d) of Form 10-Q filed by the Company on
May 5, 2017, File No. 001-12935).
2017 Form of Oil Change vs. TSR Performance Award under the 2004 Omnibus Stock and Incentive Plan for
Denbury Resources Inc. (incorporated by reference to Exhibit 10(e) of Form 10-Q filed by the Company on
May 5, 2017, File No. 001-12935).
10(mm)**
2017 Form of Restricted Share Award to officers pursuant to the 2004 Omnibus Stock and Incentive Plan for
Denbury Resources Inc. (incorporated by reference to Exhibit 10(b) of Form 10-Q filed by the Company on
August 8, 2017, File No. 001-12935).
10(nn)**
10(oo)**
10(pp)**
10(qq)**
10(rr)**
10(ss)**
10(tt)**
2017 Form of Restricted Share Award to non-employee directors pursuant to the 2004 Omnibus Stock and
Incentive Plan for Denbury Resources Inc. (incorporated by reference to Exhibit 10(c) of Form 10-Q filed by
the Company on August 8, 2017, File No. 001-12935).
2018 Form of TSR Performance Award-Cash under the 2004 Omnibus Stock and Incentive Plan for Denbury
Resources Inc. (incorporated by reference to Exhibit 10(c) of Form 10-Q filed by the Company on May 10,
2018, File No. 001-12935).
2018 Form of TSR Performance Award-Equity under the 2004 Omnibus Stock and Incentive Plan for Denbury
Resources Inc. (incorporated by reference to Exhibit 10(d) of Form 10-Q filed by the Company on May 10,
2018, File No. 001-12935).
2018 Form of Debt-Adjusted Reserves Growth Per Share Performance Award-Cash under the 2004 Omnibus
Stock and Incentive Plan for Denbury Resources Inc. (incorporated by reference to Exhibit 10(e) of Form 10-
Q filed by the Company on May 10, 2018, File No. 001-12935).
2018 Form of Debt-Adjusted Reserves Growth Per Share Performance Award-Equity under the 2004 Omnibus
Stock and Incentive Plan for Denbury Resources Inc. (incorporated by reference to Exhibit 10(f) of Form 10-
Q filed by the Company on May 10, 2018, File No. 001-12935).
2018 Form of Restricted Share Award to officers pursuant to the 2004 Omnibus Stock and Incentive Plan for
Denbury Resources Inc. (incorporated by reference to Exhibit 10(a) of Form 10-Q filed by the Company on
August 9, 2018, File No. 001-12935).
2018 Form of Restricted Share Award to non-employee directors pursuant to the 2004 Omnibus Stock and
Incentive Plan for Denbury Resources Inc. (incorporated by reference to Exhibit 10(b) of Form 10-Q filed by
the Company on August 9, 2018, File No. 001-12935).
110
Denbury Resources Inc.
Exhibit No.
10(uu)
10(vv)
10(ww)
Exhibit
Voting and Support Agreement, by and among Denbury Resources Inc. and Strategic Value Partners, LLC, SVP
Special Situations III LLC, SVP Special Situations III-A LLC, Strategic Value Master Fund, Ltd., Strategic
Value Special Situations Fund III, L.P. and Strategic Value Opportunities Fund, L.P., dated as of October 28,
2018 (incorporated by reference to Exhibit 10.1 of Form 8-K filed by the Company on October 29, 2018, File
No. 001-12935).
Voting and Support Agreement, by and between Denbury Resources Inc. and KLS Diversified Asset
Management LP, dated as of October 28, 2018 (incorporated by reference to Exhibit 10.2 of Form 8-K filed by
the Company on October 29, 2018, File No. 001-12935).
Voting and Support Agreement, by and among Denbury Resources Inc. and John A. Brooks, David Geenberg,
Michael Hanna, Darin G. Holderness, Jerry R. Schuyler, Frank Pottow, Steven A. Hartman and Benjamin Mathis,
dated as of October 28, 2018 (incorporated by reference to Exhibit 10.3 of Form 8-K filed by the Company on
October 29, 2018, File No. 001-12935).
10(xx)**
Officer Retirement Agreement, by and between Denbury Resources Inc. and Phil Rykhoek, dated as of March
21, 2017 (incorporated by reference to Exhibit 10(f) of Form 10-Q filed by the Company on May 5, 2017, File
No. 001-12935).
21*
23(a)*
23(b)*
31(a)*
31(b)*
32*
99*
List of subsidiaries of Denbury Resources Inc.
Consent of PricewaterhouseCoopers LLP.
Consent of DeGolyer and MacNaughton.
Certification of Chief Executive Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002.
Certification of Chief Financial Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002.
Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002.
The summary of DeGolyer and MacNaughton’s Report as of December 31, 2018, on oil and gas reserves (SEC
Case) dated February 19, 2019.
* Included herewith.
** Compensation arrangements.
Item 16. Form 10-K Summary
None.
111
Denbury Resources Inc.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Denbury Resources Inc. has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
February 28, 2019
/s/ Mark C. Allen
DENBURY RESOURCES INC.
Mark C. Allen
Executive Vice President and Chief Financial Officer
February 28, 2019
/s/ Alan Rhoades
Alan Rhoades
Vice President and Chief Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of Denbury Resources Inc. and in the capacities and on the dates indicated.
February 28, 2019
/s/ Christian S. Kendall
Christian S. Kendall
Director, President and Chief Executive Officer
(Principal Executive Officer)
February 28, 2019
/s/ Mark C. Allen
Mark C. Allen
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
February 28, 2019
/s/ Alan Rhoades
Alan Rhoades
Vice President and Chief Accounting Officer
(Principal Accounting Officer)
February 28, 2019
February 28, 2019
February 28, 2019
February 28, 2019
/s/ John P. Dielwart
John P. Dielwart
Director
/s/ Michael B. Decker
Michael B. Decker
Director
/s/ Gregory L. McMichael
Gregory L. McMichael
Director
/s/ Kevin O. Meyers
Kevin O. Meyers
Director
112
February 28, 2019
February 28, 2019
February 28, 2019
Denbury Resources Inc.
/s/ Lynn A. Peterson
Lynn A. Peterson
Director
/s/ Randy Stein
Randy Stein
Director
/s/ Laura A. Sugg
Laura A. Sugg
Director
113
LIST OF SUBSIDIARIES
Exhibit 21
Name of Subsidiary
Jurisdiction of Organization
Denbury Operating Company
Denbury Onshore, LLC
Denbury Pipeline Holdings, LLC
Denbury Holdings, Inc.
Denbury Green Pipeline – Texas, LLC
Greencore Pipeline Company, LLC
Denbury Gulf Coast Pipelines, LLC
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 333-01006, 333-27995,
333-55999, 333-70485, 333-39172, 333-39218, 333-39224, 333-63198, 333-90398, 333-106253, 333-116249, 333-143848,
333-160178, 333-167480, 333-175273, 333-189438, 333-206320, 333-206808, 333-212402 and 333-218941), Form S-3 (No.
333-222066) and Form S-4 (No. 333-228935) of Denbury Resources Inc. of our report dated February 28, 2019 relating to the
financial statements and the effectiveness of internal control over financial reporting, which appears in this Form 10-K.
Exhibit 23(a)
/s/ PricewaterhouseCoopers LLP
Dallas, Texas
February 28, 2019
Exhibit 23(b)
DeGolyer and MacNaughton
5001 Spring Valley Road
Suite 800 East
Dallas, Texas 75244
February 27, 2019
Denbury Resources Inc.
5320 Legacy Drive
Plano, Texas 75024
Ladies and Gentlemen:
We hereby consent to the use of the name DeGolyer and MacNaughton, to references to DeGolyer and MacNaughton, to the
inclusion of our report of third party dated February 19, 2019, regarding the proved reserves of Denbury Resources Inc., and to
the inclusion of information taken from our reports entitled “Report as of December 31, 2018 on Reserves and Revenue of Certain
Properties with interests attributable to Denbury Resources Inc. SEC Case” (the 2018 Report), “Report as of December 31, 2017
on Reserves and Revenue of Certain Properties owned by Denbury Resources Inc. SEC Case,” and “Report as of December 31,
2016 on Reserves and Revenue of Certain Properties owned by Denbury Resources Inc. SEC Case” in the Annual Report on Form
10-K of Denbury Resources Inc. for the year ended December 31, 2018. We hereby consent to the incorporation by reference of
information contained in the 2018 Report in the Registration Statement on Form S-4 (No. 333-228935).
Very truly yours,
/s/ DeGolyer and MacNaughton
DeGolyer and MacNaughton
Texas Registered Engineering Firm F-716
Exhibit 31(a)
CERTIFICATION UNDER SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Christian S. Kendall, certify that:
1.
I have reviewed this report on Form 10-K of Denbury Resources Inc. (the registrant);
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons
performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial
information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
February 28, 2019
/s/ Christian S. Kendall
Christian S. Kendall
Director, President and Chief Executive Officer
Exhibit 31(b)
CERTIFICATION UNDER SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Mark C. Allen, certify that:
1.
I have reviewed this report on Form 10-K of Denbury Resources Inc. (the registrant);
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons
performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial
information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
February 28, 2019
/s/ Mark C. Allen
Mark C. Allen
Executive Vice President, Chief Financial Officer,
Treasurer, and Assistant Secretary
Certification of Chief Executive Officer and Chief Financial Officer
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 32
In connection with the accompanying Annual Report on Form 10-K for the year ended December 31, 2018 (the Report) of Denbury
Resources Inc. (Denbury) as filed with the Securities and Exchange Commission, each of the undersigned, in his capacity as an
officer of Denbury, hereby certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that to his knowledge:
1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended;
and
2.
information contained in the Report fairly presents, in all material respects, the financial condition and results of operations
of Denbury.
Dated: February 28, 2019
Dated: February 28, 2019
/s/ Christian S. Kendall
Christian S. Kendall
Director, President and Chief Executive Officer
/s/ Mark C. Allen
Mark C. Allen
Executive Vice President, Chief Financial Officer,
Treasurer, and Assistant Secretary
CORPORATE INFORMATION
BOARD OF DIRECTORS
STOCK EXCHANGE LISTING
John P. Dielwart
Chairman of the Board
Vice-Chairman
ARC Financial Corp.
Michael B. Decker
Partner
Wingate Partners
Christian S. Kendall
President
and Chief Executive Officer
Denbury Resources Inc.
Gregory L. McMichael
Independent Consultant
Kevin O. Meyers
Independent Consultant
Lynn A. Peterson
President and Chief Executive Officer
SRC Energy Inc.
Randy Stein
Independent Consultant
Laura A. Sugg
Independent Consultant
Mary M. VanDeWeghe
Chief Executive Officer and President
Forte Consulting, Inc.
New York Stock Exchange (“NYSE”) Ticker
Symbol: DNR
CORPORATE HEADQUARTERS
Denbury Resources Inc.
5320 Legacy Drive
Plano, Texas 75024
972. 673. 2000
www.denbury.com
STOCK TRANSFER AGENT
& REGISTRAR
For questions concerning dividends, stock
certificates, transfer procedures or address
changes, please contact:
Broadridge Corporate Issuer Solutions
P.O. Box 1342, Brentwood, NY 11717
866.804.4482
Email: shareholder@broadridge.com
www.shareholder.broadridge.com/bcis
INVESTOR INQUIRIES
Mark Allen
Executive Vice President, Chief Financial
Officer, Treasurer and Assistant Secretary
972. 673. 2000
John Mayer
Director of Investor Relations
972. 673. 2383
CONTACTING BOARD MEMBERS
Email: john.mayer@denbury.com
ANNUAL CERTIFICATIONS
During 2018, our Chief Financial Officer
certified to the NYSE that he is not aware of
any violation by the Company of the NYSE’s
corporate governance listing standards.
You may contact our board members by
addressing a letter to Denbury Resources
Inc., Attn: Corporate Secretary, or
by email to secretary@denbury.com
EXECUTIVE OFFICERS
Christian S. Kendall
President and
Chief Executive Officer
Mark Allen
Executive Vice President, Chief Financial
Officer, Treasurer and Assistant Secretary
Jim Matthews
Executive Vice President,
Chief Administrative Officer, General
Counsel and Secretary
FINANCIAL INFORMATION
REQUESTS
For additional information and to receive
additional copies of the Annual Report on
Form 10-K as filed with the Securities and
Exchange Commission (“SEC”) or to obtain
other Denbury public documents, please
contact:
Denbury Resources Inc.
Investor Relations
5320 Legacy Drive
Plano, Texas 75024
972.673.2000
Email: ir@denbury.com
Our Form 10-K filed with the SEC is
included herein, excluding all exhibits
other than our Section 302, 404 and 906
certifications by the CEO and CFO. We will
send shareholders our Form 10-K exhibits
and any of our corporate governance
documents, without charge, upon request.
These documents are also available on our
website at www.denbury.com.
ANNUAL MEETING
The Annual Meeting of the Stockholders
will be held on Wednesday, May 22, 2019,
at 8:00 A.M. CDT at Denbury’s Corporate
Headquarters, located at 5320 Legacy Drive,
Plano, Texas 75024.
LEGAL COUNSEL
Baker & Hostetler LLP
BANKERS
J.P. Morgan (Agent)
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
PricewaterhouseCoopers LLP
RESERVE ENGINEERS
DeGolyer and MacNaughton
Denbury Resources Inc.
5320 Legacy Drive
Plano, Texas 75024
972.673.2000
www.denbury.com