Exploration & Production | Quarterly / Earnings Reports | Second Quarter (2Q) Update
Denbury Continues to Cut Costs in 2Q; Talks Production
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Denbury Resources Inc. reported adjusted net income of $93 million for the second quarter of 2014, or $0.26 per diluted share.
On a GAAP basis, for the quarter the Company recorded a net loss of $55 million, or ($0.16) per diluted share. Adjusted net income for the second quarter of 2014 differs from the GAAP net loss due to a pre-tax loss of $125 million ($77 million after tax) for noncash fair value adjustments on commodity derivatives and a pre-tax loss of $114 million ($71 million after tax) on early extinguishment of debt related to the redemption of the Company's 81/4% senior subordinated notes due 2020, which were refinanced during the quarter with the issuance of 51/2% senior subordinated notes due 2022.
Second Quarter of 2014 Highlights:
- Increased adjusted cash flow from operations by 9% sequentially;
- Increased tertiary production by 3% and total production by 2% sequentially;
- Lowered lease operating expense per barrel of oil equivalent by 7% sequentially; and
- Year-to-date, generated an excess of $62 million of adjusted cash flow from operations after capital expenditures of $498 million and dividend payments of $43 million.
Phil Rykhoek, Denbury's President and CEO, commented, "Our organization remains highly focused on increasing shareholder value by executing on our growth and income strategy. Our second quarter results demonstrate that we are starting to see the benefits of our focus on reducing costs, with our lease operating expenses coming down nearly $2 per BOE from the prior quarter. In addition, we are seeing reductions in our capital costs, and based on our spend rate thus far, we believe that we could see spending on our planned 2014 capital projects come in below our budget of $1.1 billion. Although we still have some ground to cover, we are encouraged by the efforts and accomplishments we have seen thus far and feel confident that we can continue to find efficiencies and additional reductions in our cost structure.
"Our tertiary production achieved a new record level during the quarter, increasing 3% from the first quarter of 2014 level. However, based on year-to-date production levels and estimates for the remainder of 2014, we now estimate our total annual production volumes should average slightly below the low end of our previously estimated range of 76,500 BOE per day. The largest driver of the change is lower than estimated natural gas sales from our Riley Ridge gas processing facility due to unplanned downtime. Even though our production is a little lower than desired, our cash management is doing well, as evidenced by the $62 million of cash generated year-to-date in excess of our capital expenditures and dividends, and we may generate additional excess cash in the second half of the year depending primarily on capital expenditures and oil prices.
"We have also used the recent improvement in oil futures prices to extend our hedge positions into the fourth quarter of 2015 and first quarter of 2016 at levels above those used in our long-term planning assumptions. Our hedging activities are designed to improve the estimated range of our future cash flow from operations and hence allow us to sustainably grow our dividend over the long term. We remain confident in our outlook and reiterate our plans to grow our dividend to an annualized rate of $0.50 per share to $0.60 per share in 2015."
Production
Production for the second quarter of 2014 averaged 75,320 barrels of oil equivalent per day, which included 40,897 barrels per day of oil from tertiary properties and 34,423 BOE/d from non-tertiary properties. Denbury's second quarter of 2014 production was 94% oil, unchanged from the same prior-year period. Tertiary oil production was up 3%, or 1,005 Bbls/d, on a sequential-quarter basis, and up 6%, or 2,145 Bbls/d, from the second quarter of 2013 levels. The year-over-year and sequential quarterly tertiary production increases were primarily due to production growth in response to continued field development and expansion of facilities in the Gulf Coast region CO2 floods of Hastings, Heidelberg, Oyster Bayou and Tinsley fields and production in the Rocky Mountain region from Bell Creek Field, partially offset by declines at mature tertiary properties and at Delhi Field.
Non-tertiary oil equivalent production was up 2%, or 597 BOE/d, from the first quarter of 2014 levels, and down 2%, or 877 BOE/d, from the prior-year quarter amounts. The sequential quarterly increase in non-tertiary oil equivalent production was primarily due to increases in production from properties in the Rocky Mountain region as a result of recently completed wells and field optimization projects. The year-over-year quarterly decrease was primarily due to previously anticipated production declines at CCA and lower production at various non-tertiary fields in Texas.
Review of Financial Results
Sequentially, adjusted net income for the second quarter of 2014 increased by $4 million and adjusted cash flow from operations increased $25 million from the first quarter of 2014 levels, primarily due to 2% higher production volumes and lower lease operating expenses.
Compared to the prior-year second quarter, 2014 second quarter adjusted net income decreased by $58 million primarily due to $50 million of payments on settlement of commodity derivative contracts during the current quarter, compared to no such payments in the prior-year period. These comparative second quarter results were also impacted by higher interest expense due to less capitalized interest in the current quarter and higher current depletion, depreciation and amortization due to higher production volumes and a higher depletion rate per BOE. These higher expenses were partially offset by 2% higher production volumes and slightly higher realized prices (excluding the impact of derivative settlements) in the most recent quarter.
Oil and natural gas revenues, excluding the impact of derivative contracts, increased 3% when comparing the second quarters of 2014 and 2013 due to increases in both production and realized commodity prices. Denbury's average realized oil price, excluding derivative contracts, was $100.04 in the second quarter of 2014, compared to $98.92 in the prior-year second quarter. Denbury's oil price differential (the difference between the average price at which the Company sold its production and the average NYMEX price) decreased from the prior-year second quarter level, as both the Light Louisiana Sweet (LLS) index premium and the differentials in the Rocky Mountain region declined. Company-wide oil price differentials in the second quarter of 2014 were $3.03 per barrel ("Bbl") below NYMEX prices, compared to $4.78 per Bbl above NYMEX in the prior-year second quarter. During the second quarter of 2014, the Company sold 43% of its crude oil at prices based on the LLS index price, 23% at prices 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.
Lease operating expenses decreased nearly $2 on a per-BOE basis in the second quarter of 2014 from $25.68 in the first quarter of 2014 primarily due to a decrease in workover costs, but increased 7% in the second quarter of 2014 from $22.34 per BOE in the prior-year second quarter (excluding costs incurred or estimated to be incurred to remediate an area of Delhi Field) primarily due to higher power and CO2 costs and costs associated with the expansion of the Company's CO2 floods. Tertiary operating expenses averaged $26.57 per Bbl in the second quarter of 2014, down from $27.21 per Bbl in the first quarter of 2014, but up from $23.52 per Bbl in the prior-year second quarter (excluding costs incurred or estimated to be incurred to remediate an area of Delhi Field). On a sequential-quarterly-comparison basis, per-barrel tertiary operating costs were lower, also primarily due to lower workover costs. The year-over-year increase in per-barrel tertiary operating expenses was primarily the result of higher power and CO2 costs and costs associated with the Company's newest tertiary flood at Bell Creek Field, which had initial tertiary production in the third quarter of 2013. The flood's production is low relative to its operating costs because production is still ramping up, which is typical with a new tertiary flood. As Bell Creek's tertiary production increases, the field's per-barrel operating costs are expected to decrease.
General and administrative expenses increased approximately $5.6 million in the second quarter of 2014 from the prior-year second quarter level, primarily due to higher employee-related costs and the prior year quarter including a $1.9 million insurance reimbursement. On a sequential basis, general and administrative expenses were down approximately $4.7 million from those in the first quarter of 2014 as most of the Company's incentive compensation vests in the first part of the year, which results in higher payroll taxes and associated costs during the first quarter.
Interest expense increased approximately $16 million in the second quarter of 2014 from the prior-year second quarter level due to a reduction in capitalized interest of approximately $17 million between the periods. The decrease in capitalized interest between the second quarters of 2013 and 2014 was primarily the result of the completion of major projects in 2013, including the Riley Ridge gas processing facility, Greencore Pipeline, and the tertiary flood at Bell Creek. In addition, the Company's average interest rate declined from 6.2% during the second quarter of 2013 to 5.3% during the second quarter of 2014. The lower rate in 2014 is primarily due to our April 2014 long-term debt refinancing, whereby we issued $1.25 billion of 51/2% Notes to replace our $996 million in 81/4% Notes. Although our average debt outstanding between the periods increased by about $438 million, our cash interest expense declined slightly because of the lower average interest rate. Due to the refinancing, we recognized a loss on extinguishment of debt of $114 million (principally related to the premium on the repurchase and redemption of the 81/4% Notes) during the second quarter of 2014.
Denbury's overall DD&A rate was $21.62 per BOE in the second quarter of 2014, compared to $18.82 per BOE in the prior-year second quarter. The higher per-BOE DD&A rate was primarily driven by higher finding and development costs, which were primarily attributable to the reserve additions at Bell Creek Field in late 2013 that resulted in the transfer of most of that field's development costs from unevaluated properties to proved properties.
The Company recorded a noncash expense of $125 million in the second quarter of 2014 associated with changes in the fair values of the Company's derivative contracts, compared to a noncash fair value expense of $50 million in the first quarter of 2014, and a $46 million noncash fair value gain in the prior-year second quarter. Payments on the settlement of derivative contracts were $50 million in the second quarter of 2014 compared to $27 million in payments in the first quarter of 2014 and no payments in the prior-year second quarter. These payments lowered average net realized oil prices in the second quarter of 2014 by $7.72 per barrel and in the first quarter of 2014 by $4.23 per barrel.
2014 Production and CapEx Estimates
Based on year-to-date production levels and estimates for the remainder of 2014, the Company now estimates total annual production volumes should average slightly below the low end of its prior estimated range of 76,500 BOE/d. Denbury's full-year 2014 capital expenditure budget is now estimated at $1.1 billion, down $25 million from the previously estimated amount of $1.125 billion. The capital budget consists of $1.0 billion of tertiary, non-tertiary, and CO2 supply and pipeline projects, plus approximately $100 million of estimated capitalized costs (including capitalized internal acquisition, exploration and development costs; capitalized interest; and pre-production start-up costs associated with new tertiary floods). The $25 million reduction in the capital budget is primarily due to decreases in estimated capitalized interest and pre-production tertiary start-up costs. Of this combined capital expenditure amount, $498 million (approximately 45%) has been spent through the first six months of 2014. Based on year-to-date capital expenditures and reductions in the Company's capital costs, spending on planned 2014 capital projects could come in below $1.1 billion, potentially allowing the Company to accelerate a portion of future capital spending into 2014.
Share Repurchase Update
No common stock repurchases were made under Denbury's share repurchase program during the second quarter of 2014, leaving approximately $222 million of repurchases remaining authorized under the program at quarter end. Total repurchases under such program since its commencement in October 2011 through the end of the second quarter of 2014 have been nearly 60 million shares, or about 15% of shares outstanding at September 30, 2011, at an average cost of $15.68 per share.