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Denbury Resources First Quarter 2020 Results

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   |    Monday,May 18,2020

Denbury Resources Inc. announced its first quarter 2020 financial and operating results.

Q1 Highlights

  • Net income of $74 million, or $0.14 per diluted share
    • Adjusted net income(1) (a non-GAAP measure) of $27 million, or $0.06 per diluted share
    • Adjusted EBITDAX(1) (a non-GAAP measure) of $116 million
    • Generated $35 million of free cash flow(1) (a non-GAAP measure)
  • Produced 55,965 barrels of oil equivalent ("BOE") per day ("BOE/d"), in line with expectations
  • Reduced debt principal by $34 million, primarily through open market debt repurchases, and ended the first quarter with no outstanding borrowings on the Company's bank credit facility
  • Reduced 2020 capital budget by $80 million, or 44%, to current expected range of $95 million to $105 million
  • Restructured a portion of 2020 three-way collars into fixed-price swaps to increase downside protection. Current hedge portfolio covers 39,500 Bbls/d for the second quarter of 2020 and 35,500 Bbls/d for the third and fourth quarters of 2020, with over half of those contracts being fixed-price swaps and the remainder being three-way collars
  • Completed the sale in early March of half of the Company's nearly 100% working interests in four conventional southeast Texas oil fields for $40 million net cash and a carried interest in 10 wells to be drilled by the purchasers (the "Gulf Coast Working Interests Sale")
  • Reacted quickly to the COVID-19 pandemic, prioritizing employee health and safety while maintaining operations and making adjustments to the business in response to the impact of the significant decline in oil prices resulting from the global disruption in oil demand caused by the pandemic

Chris Kendall, Denbury's President and CEO, commented, "We took multiple steps in the first quarter to further enhance Denbury's operational and financial performance and preserve liquidity, including the significant reduction to our 2020 capital spending plans that we announced in late March, and we have redoubled our first quarter efforts over the past two months to further reduce costs in response to the deep impact of the COVID-19 pandemic on the energy markets. Denbury's first quarter results reflect our focus on operational execution and efficiency, as we continued to generate free cash and maintained relatively consistent continuing production levels while spending significantly less capital. The Company has sufficient liquidity to meet its operating needs, with nothing drawn on our bank facility at the end of the first quarter, and we believe the actions we are taking will help the Company maintain access to ample liquidity as we manage through this challenging environment. In addition, we are working with advisors to evaluate a range of strategic alternatives, and we are engaging in discussions with our lenders and bondholders as part of that process.

"Denbury's low decline assets and industry-leading carbon reduction capabilities set our company apart in our industry, and we expect these same core strengths will continue to differentiate us in the future. As always, our top priority is the health and safety of our employees, and I want to express my sincere gratitude to our team for its continued commitment to Denbury under these unprecedented conditions."

Production / Realized Prices

Denbury's oil and natural gas production averaged 55,965 BOE/d during first quarter 2020. Total continuing production, which excludes production associated with the Gulf Coast Working Interests Sale, was 55,185 BOE/d during the first quarter of 2020, a decrease of 2% from the fourth quarter of 2019 (the "prior quarter") and 4% compared to continuing production in the prior-year first quarter. Further production information is provided on page 15 of this press release.

Denbury's first quarter 2020 average realized oil price, including derivative settlements, was $50.92 per barrel ("Bbl"), a decrease of 13% from the prior quarter and 12% from the prior-year first quarter. Denbury's NYMEX differential for the first quarter 2020 was $0.38 per Bbl below NYMEX WTI oil prices, compared to $0.44 per Bbl below NYMEX WTI in the prior quarter and $1.63 per Bbl above NYMEX WTI in first quarter 2019. The year-over-year decrease was primarily attributable to a lower Gulf Coast premium in the first quarter of 2020, affecting approximately 60% of the Company's crude oil production.


Total lease operating expenses in first quarter 2020 were $109 million, or $21.46 per BOE, a decrease of $7 million, or 6%, compared to the prior quarter due primarily to lower labor and overhead and a decrease of $16 million, or 13%, compared to first quarter 2019 due primarily to reductions in CO2 costs and workovers.

Taxes other than income, which includes ad valorem, production and franchise taxes, decreased $3 million, or 12%, from the prior quarter and decreased $4 million, or 17%, from the prior-year first quarter, generally due to a decrease in production taxes resulting from lower oil and natural gas revenues.

General and administrative expenses ("G&A") were $10 million in first quarter 2020, unchanged from the prior quarter when excluding $19 million of severance expense associated with the Company's December 2019 voluntary separation program. Compared to the first quarter of 2019, G&A expenses decreased $9 million, or 49%, due to lower headcount and lower bonus and other performance-based compensation expense in the current-year period.

Interest expense, net of capitalized interest, totaled $20 million in first quarter 2020, a $1 million decrease from the prior quarter and an increase of $3 million compared to first quarter 2019. The sequential-quarter decrease was primarily due to senior subordinated notes repurchases in the fourth quarter of 2019, and the prior-year increase was primarily due to additional noncash expense for amortization of debt discounts associated with new notes (the Company's 7% Senior Secured Second Lien Notes due 2024 and 6% Convertible Senior Notes due 2024) issued as part of the June 2019 debt exchanges. A schedule detailing the components of interest expense is included on page 17 of this press release.

The Company recognized a full cost pool ceiling test write-down of $73 million during the three months ended March 31, 2020. Representative oil prices utilized in the Company's full cost ceiling test were roughly consistent with adjusted prices used to calculate the December 31, 2019 full cost ceiling value; however, the decline in NYMEX oil prices during March 2020 due to OPEC supply pressures and a reduction in worldwide oil demand amid the COVID-19 pandemic contributed to an impairment of the Company's unevaluated oil and natural gas properties and the transfer of $245 million of unevaluated costs to the full cost amortization base during first quarter 2020. Based on current oil price futures, the Company would expect to record significant write-downs in subsequent quarters, as the 12-month average price used in determining the full cost ceiling value would then continue to decline throughout 2020.

Depletion, depreciation, and amortization ("DD&A") was $97 million during first quarter 2020, compared to $57 million in first quarter 2019 and $63 million in fourth quarter 2019, primarily due to an accelerated depreciation charge of $37 million attributable to certain depreciable costs associated with the impaired unevaluated properties discussed above. Excluding the accelerated depreciation charge, DD&A increased $2 million from the prior-year quarter primarily due to a decrease in proved oil and natural gas reserve volumes and decreased $4 million from the sequential-quarter primarily due to a decrease in depletable costs.

Denbury's effective tax rate for first quarter 2020 was negative 17%, significantly lower than the Company's estimated statutory rate of 25% due primarily to tax relief offered under the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"), which included the full release of a $25 million valuation allowance against a portion of business interest expense that was previously estimated to be disallowed. The Company currently forecasts that its effective tax rate for the remainder of 2020 will be approximately 16%, depending in part on taxable income.

Credit Facility / Q1 Debt Transactions

As of March 31, 2020, the Company had no outstanding borrowings on the senior secured bank credit facility, consistent with March 31, 2019 and December 31, 2019, leaving $520 million of borrowing availability after consideration of $95 million of currently outstanding letters of credit. The borrowing base under the Company's senior secured bank credit facility is evaluated semi-annually, generally around May 1 and November 1. As of today, the bank group has not yet completed the process for the spring redetermination and therefore the borrowing base and commitment levels remain at $615 million. The Company currently anticipates that the banks will complete the redetermination process over the next several weeks, and it is uncertain if there will be any change to the borrowing base or banks' commitment levels.

During the first quarter, Denbury repurchased $30 million in aggregate principal amount of its then outstanding 9% Senior Secured Second Lien Notes due 2021 in open-market transactions for a total purchase price of $14 million, excluding accrued interest. In connection with these transactions, the Company recognized a $19 million gain on debt extinguishment, net of unamortized debt issuance costs and future interest payable written off, during the three months ended March 31, 2020.

2020 Capital Budget

As previously announced, the Company's 2020 estimated development capital budget, excluding acquisitions and capitalized interest, is currently anticipated to be between $95 million and $105 million, an $80 million, or 44%, reduction from the originally disclosed amount of between $175 million and $185 million. The capital budget consists of approximately $70 million for tertiary and non-tertiary field investments and CO2 supply, plus approximately $30 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, $39 million (39%) has been incurred through first quarter 2020. In addition, late in the first quarter, the Company's Board of Directors determined to defer the Company's Cedar Creek Anticline CO2 tertiary flood development project beyond 2020.

Shut-In Production

As a result of the significant decline in oil prices, the Company has focused its efforts to optimize cash flow through evaluating production economics and shutting in production where validated. Beginning in late March and accelerating through April 2020, the Company estimates that approximately 2,000 BOE/d of uneconomic production was shut-in during April as a result of those efforts. In May 2020, the Company continued evaluations around expected oil prices and production costs, and has shut-in additional production, bringing the total shut-in production to approximately 8,500 BOE/d. Management plans to continue this routine evaluation to assess levels of uneconomic production based on its expectations for wellhead oil prices and variable production costs, and will actively make decisions to either shut-in additional production or bring production back online as conditions warrant. As a result of these actions, along with reduced capital and workover spend, the Company expects production to decline from the first quarter to the second quarter. Production could be further curtailed by future regulatory actions or limitations in storage and/or takeaway capacity.

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