Quarterly / Earnings Reports | Third Quarter (3Q) Update

Denbury Resources Details Q3 2019 Results

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Denbury Resources Inc. reported its Q3 2019 results.

Highlights:

• Generated cash flow from operations of $131 million and free cash flow⁽¹⁾ (a non-GAAP measure) of $44 million after considering development capital expenditures, capitalized interest and interest treated as debt reduction, with 2019 year-to-date free cash flow⁽¹⁾ of $109 million

• Continued debt reduction through debt repurchases and exchanges which reduced debt by $87 million since June 30, 2019 (including October transactions) and by $139 million since January 1, 2019

• Reaffirmed borrowing base of $615 million on senior secured bank credit facility

• Production of 56,441 barrels of oil equivalent ("BOE") per day ("BOE/d"), in-line with expectations and on track for the midpoint of previously raised full-year guidance

• Two successful Mission Canyon exploitation wells recently drilled and completed with a projected combined IP-30 rate of 1,000 barrels of oil per day

• Completed $9 million of surface acreage sales during the third quarter of 2019 and an additional $5 million in October 2019

Chris Kendall, Denbury's President and CEO, commented, "Denbury's third quarter results once again demonstrate our commitment to exceptional execution, cost efficiency, and capital discipline. We generated $44 million of free cash flow in the third quarter, keeping us on course to generate $140 $150 million in free cash flow for the full year.

"We continue to execute on our key priorities for 2019 and we remain on track to reach the midpoint of our previously raised 2019 production guidance, despite third quarter production curtailments relating mainly to a planned maintenance shut-down of the Rockies CO₂ source plant impacting our Bell Creek production and Tropical Storm Imelda impacting our Gulf Coast production. Our spending discipline is evident across the board, with capital spend, lease operating expense, and G&A spend each on target to be at or below full-year guidance.

"Our unique portfolio of assets and high quality, low decline, oil-weighted production are the driving forces behind our ability to generate sustainable free cash flow, enabling us to actively allocate capital to manage our debt maturities and reduce leverage. We continued to make meaningful progress on improving our balance sheet by repurchasing or exchanging $54 million of 2022 and 2023 senior subordinated notes at a significant discount, and we further reduced our borrowings under our senior secured bank credit facility by $30 million. Importantly, our flagship Cedar Creek Anticline EOR development continues to progress on schedule with first CO₂ injection projected in early 2021.

"None of these results would have been possible without the dedication to success and commitment to safety of Denbury's team members across the business. As we move into the final quarter of 2019, I am excited about where the Company is headed. We continue to perform, to consistently deliver on our promises, and to make steady progress toward securing our long-term success. Additionally, the low carbon footprint of our CO₂ EOR focused strategy will continue to differentiate us from the industry, providing an ideal solution that significantly reduces the CO₂ emissions associated with the production of oil, a vital energy source today and for the foreseeable future."

2019 Guidance & Estimated Production

The Company's 2019 estimated development capital, excluding acquisitions and capitalized interest, remains unchanged from the previously estimated range of $240 million to $260 million. The capital budget consists of approximately $200 million for tertiary and non-tertiary field investments and CO₂ supply, plus approximately $50 million of estimated capitalized costs (including capitalized internal acquisition, exploration and development costs and pre-production tertiary startup costs). Of this combined capital expenditure amount, $189 million (76%) has been incurred through the third quarter 2019, which is significantly less than cash flow from operations during that period. Denbury's estimated 2019 production remains unchanged from the previously disclosed updated guidance range of 57,000 59,500 BOE/d.

Production & Realized Prices

Denbury's oil and natural gas production averaged 56,441 BOE/d during third quarter 2019, a decrease of 5% from continuing production on a sequential-quarter basis and a decrease of 3% compared to continuing production in the prior-year third quarter. The sequential-quarter decrease was primarily due to an expected reduction in production at Bell Creek Field associated with planned maintenance at the Company's primary CO₂ source in the Rocky Mountain region. Third quarter production was also impacted by approximately 400 BOE/d due to unplanned downtime from power outages and flooding caused by Tropical Storm Imelda. Further production information is provided on page 15 of this press release.

Denbury's third quarter 2019 average realized oil price, including derivative settlements, was $59.23 per barrel ("Bbl"), a decrease of 4% from the prior quarter and 1% from the prior-year third quarter. Denbury's NYMEX differential for the third quarter 2019 was $1.30 per Bbl above NYMEX WTI oil prices, compared to $2.35 per Bbl above NYMEX WTI in the prior quarter and $1.84 per Bbl above NYMEX WTI in third quarter 2018. The sequential decrease was primarily attributable to a lower Gulf Coast premium in the third quarter of 2019, which represents approximately 60% of the Company's crude oil production.

Q3 Financials

The company reported net income of $73 million, or $0.14 per diluted share, for the third quarter of 2019. Adjusted net income was $41 million, or $0.08 per diluted share, with the difference from GAAP net income primarily due to a $35 million gain from noncash fair value adjustments ($26 million after tax) on the Company's commodity derivative positions.

Total lease operating expenses in third quarter 2019 were $118 million, or $22.70 per BOE, relatively unchanged on an absolute-dollar basis compared to the prior quarter. When compared to third quarter 2018, lease operating expenses decreased $5 million, or 4%, on an absolute-dollar basis, primarily due to lower workover and power costs.

General and administrative expenses were $18 million in third quarter 2019, up slightly from the prior quarter, and a $3 million decrease compared to third quarter 2018, primarily due to lower performance-based compensation expense in the current-year period.

Interest expense, net of capitalized interest, totaled $23 million in third quarter 2019, a $2 million increase from the prior quarter and an increase of $4 million compared to third quarter 2018. The sequential-quarter and prior-year increases were primarily due to noncash expense for amortization of debt discounts associated with the Company's recently issued 7% Senior Secured Second Lien Notes due 2024 and 6% Convertible Senior Notes due 2024. The discount on these notes was initially recorded during the second quarter of 2019 and will continue to be amortized as interest expense over the terms of these notes. A schedule detailing the components of interest expense is included on page 17 of this press release.

Depletion, depreciation, and amortization ("DD&A") was $55 million during third quarter 2019, compared to $58 million in second quarter 2019 and $51 million in third quarter 2018. The sequential-quarter decrease was primarily due to lower depletion on CO₂ assets resulting from lower CO₂ production in the Rocky Mountain region, and the increase compared to prior year was due primarily to an increase in depletable costs.

Denbury's effective tax rate for third quarter 2019 was approximately 34%, higher than the Company's estimated statutory rate of 25% due primarily to a valuation allowance applied against a portion of the Company's business interest expense deduction that it estimates will be disallowed in the current year as a result of limitations enacted under the Tax Cuts and Jobs Act. The Company currently forecasts that its effective tax rate for the fourth quarter and full-year 2019 will be approximately 32%, depending in part on taxable income.

Debt Transactions / Credit Facility

During the third quarter, Denbury repurchased $11 million in aggregate principal amount of its then outstanding 5% Senior Subordinated Notes due 2022 ("5% Senior Subordinated Notes") in open market transactions for a total purchase price of $5 million, excluding accrued interest. In connection with these transactions, the Company recognized a $6 million gain on debt extinguishment, net of unamortized debt issuance costs written off, during the three and nine months ended September 30, 2019.

During October 2019, the Company repurchased (principally through exchanges) an additional $13 million in aggregate principal amount of its then outstanding 5% Senior Subordinated Notes and $29 million in aggregate principal amount of its then outstanding 4% Senior Subordinated Notes due 2023 for $6 million in cash and issuance of 14 million shares of Denbury Common Stock. The Company currently expects to record a noncash gain on debt extinguishment of approximately $22 million, net of unamortized debt issuance costs written off, in fourth quarter 2019 related to these transactions.

Pursuant to the fall 2019 semiannual borrowing base redetermination completed in late October 2019, the Company's borrowing base and commitment levels of the banks were reaffirmed at $615 million. As of September 30, 2019, the Company had $50 million of outstanding borrowings on its $615 million senior secured bank credit facility, compared to $80 million of outstanding borrowings as of June 30, 2019 and no outstanding borrowings as of December 31, 2018, leaving $510 million of liquidity available after consideration of $55 million of currently outstanding letters of credit. Based on current 2019 projections using recent oil price futures, the Company currently expects to have the capacity to repay all of its outstanding borrowings on the senior secured bank credit facility by the end of the year.