Quarterly Report (10-q)

Date : 08/09/2019 @ 7:27PM
Source : Edgar (US Regulatory)
Stock : Denbury Resources Inc (DNR)
Quote : 1.01  -0.03 (-2.88%) @ 12:59AM
After Hours
Last Trade
Last $ 1.01 ▲ 0.00 (0.01%)

Quarterly Report (10-q)

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
(Mark One)
   Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended June 30, 2019
OR

   Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from _______ to ________

Commission file number: 001-12935
logo.jpg
DENBURY RESOURCES INC.
(Exact name of registrant as specified in its charter)

Delaware
 
20-0467835
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
 
 
5320 Legacy Drive,
 
 
Plano,
TX
 
 
75024
(Address of principal executive offices)
 
(Zip Code)

Registrant’s telephone number, including area code:
 
(972)
673-2000

Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class:
Trading Symbol:
Name of Each Exchange on Which Registered:
Common Stock $.001 Par Value
DNR
New York Stock Exchange

Not applicable
(Former name, former address and former fiscal year, if changed since last report)

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. Yes   No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes   No

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 “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
 
 
 
 
(Do not check if a smaller reporting 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.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes   No

The number of shares outstanding of the registrant’s Common Stock, $.001 par value, as of July 31, 2019, was 469,661,433.




Denbury Resources Inc.


Table of Contents

 
 
 
 
 
 
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Unaudited Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2019 and 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



2


PART I. FINANCIAL INFORMATION
Item 1. Financial Statements

Denbury Resources Inc.
Unaudited Condensed Consolidated Balance Sheets
(In thousands, except par value and share data)
 
 
June 30,
 
December 31,
 
 
2019
 
2018
Assets
Current assets
 
 
 
 
Cash and cash equivalents
 
$
341


$
38,560

Accrued production receivable
 
135,697


125,788

Trade and other receivables, net
 
28,469


26,970

Derivative assets
 
24,447

 
93,080

Other current assets
 
14,989


11,896

Total current assets
 
203,943


296,294

Property and equipment
 
 

 
 

Oil and natural gas properties (using full cost accounting)
 
 

 
 

Proved properties
 
11,275,255


11,072,209

Unevaluated properties
 
941,336


996,700

CO2 properties
 
1,198,657


1,196,795

Pipelines and plants
 
2,324,265


2,302,817

Other property and equipment
 
223,666


250,279

Less accumulated depletion, depreciation, amortization and impairment
 
(11,583,497
)

(11,500,190
)
Net property and equipment
 
4,379,682


4,318,610

Operating lease right-of-use assets
 
36,421

 

Derivative assets
 
9,488

 
4,195

Other assets
 
102,500


104,123

Total assets
 
$
4,732,034


$
4,723,222

Liabilities and Stockholders’ Equity
Current liabilities
 
 

 
 

Accounts payable and accrued liabilities
 
$
180,283


$
198,380

Oil and gas production payable
 
63,034


61,288

Derivative liabilities
 
1,912



Current maturities of long-term debt (including future interest payable of $85,677 and $85,303, respectively – see Note 4)
 
101,829


105,125

Operating lease liabilities
 
6,739

 

Total current liabilities
 
353,797


364,793

Long-term liabilities
 
 


 

Long-term debt, net of current portion (including future interest payable of $121,982 and $164,914, respectively – see Note 4)
 
2,466,127


2,664,211

Asset retirement obligations
 
181,491


174,470

Derivative liabilities
 
22

 

Deferred tax liabilities, net
 
362,303


309,758

Operating lease liabilities
 
45,391

 

Other liabilities
 
52,227


68,213

Total long-term liabilities
 
3,107,561


3,216,652

Commitments and contingencies (Note 7)
 


 


Stockholders’ equity
 
 
 
 
Preferred stock, $.001 par value, 25,000,000 shares authorized, none issued and outstanding
 



Common stock, $.001 par value, 750,000,000 shares authorized; 464,166,479 and 462,355,725 shares issued, respectively
 
464


462

Paid-in capital in excess of par
 
2,694,184


2,685,211

Accumulated deficit
 
(1,412,094
)

(1,533,112
)
Treasury stock, at cost, 2,474,904 and 1,941,749 shares, respectively
 
(11,878
)

(10,784
)
Total stockholders equity
 
1,270,676


1,141,777

Total liabilities and stockholders’ equity
 
$
4,732,034


$
4,723,222

 
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.


3


Denbury Resources Inc.
Unaudited Condensed Consolidated Statements of Operations
(In thousands, except per share data)

 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2019
 
2018
 
2019
 
2018
Revenues and other income
 
 
 
 
 
 
 
 
Oil, natural gas, and related product sales
 
$
330,421

 
$
375,565

 
$
624,998

 
$
715,586

CO2 sales and transportation fees
 
7,986

 
6,715

 
16,556

 
14,267

Purchased oil sales
 
2,591

 
346

 
2,806

 
1,403

Other income
 
2,367

 
4,437

 
4,457

 
9,041

Total revenues and other income
 
343,365

 
387,063

 
648,817

 
740,297

Expenses
 
 

 
 

 
 

 
 

Lease operating expenses
 
117,932

 
120,384

 
243,355

 
238,740

Transportation and marketing expenses
 
11,236

 
10,062

 
22,009

 
20,555

CO2 discovery and operating expenses
 
581

 
500

 
1,137

 
962

Taxes other than income
 
25,517

 
27,234

 
49,302

 
54,553

Purchased oil expenses
 
2,564

 
289

 
2,777

 
1,162

General and administrative expenses
 
17,506

 
19,412

 
36,431

 
39,644

Interest, net of amounts capitalized of $8,238, $8,851, $18,772 and $17,303, respectively
 
20,416

 
16,208

 
37,814

 
33,447

Depletion, depreciation, and amortization
 
58,264

 
52,944

 
115,561

 
105,395

Commodity derivatives expense (income)
 
(24,760
)
 
96,199

 
58,617

 
145,024

Gain on debt extinguishment
 
(100,346
)
 

 
(100,346
)
 

Other expenses
 
2,386

 
4,178

 
6,524

 
7,564

Total expenses
 
131,296

 
347,410

 
473,181

 
647,046

Income before income taxes
 
212,069

 
39,653

 
175,636

 
93,251

Income tax provision
 
65,377

 
9,431

 
54,618

 
23,451

Net income
 
$
146,692

 
$
30,222

 
$
121,018

 
$
69,800

 
 


 
 
 
 
 
 
 Net income per common share
 


 
 
 
 
 
 
Basic
 
$
0.32

 
$
0.07

 
$
0.27

 
$
0.17

Diluted
 
$
0.32

 
$
0.07

 
$
0.26

 
$
0.15


 


 


 


 


Weighted average common shares outstanding
 
 

 
 

 
 

 
 

Basic
 
452,612

 
433,467

 
452,169

 
413,217

Diluted
 
467,427

 
457,165

 
461,460

 
454,466


See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.


4


Denbury Resources Inc.
Unaudited Condensed Consolidated Statements of Cash Flows
(In thousands)

 
 
Six Months Ended June 30,
 
 
2019
 
2018
Cash flows from operating activities

 
 
 
Net income

$
121,018

 
$
69,800

Adjustments to reconcile net income to cash flows from operating activities



 
 

Depletion, depreciation, and amortization

115,561

 
105,395

Deferred income taxes

52,545

 
25,237

Stock-based compensation

6,865

 
5,152

Commodity derivatives expense (income)

58,617

 
145,024

Receipt (payment) on settlements of commodity derivatives

6,657

 
(88,127
)
Gain on debt extinguishment
 
(100,346
)
 

Debt issuance costs and discounts

2,901

 
2,268

Other, net

(57
)
 
(5,107
)
Changes in assets and liabilities, net of effects from acquisitions

 

 
 

Accrued production receivable

(9,909
)
 
(17,385
)
Trade and other receivables

(271
)
 
(320
)
Other current and long-term assets

(3,389
)
 
(5,627
)
Accounts payable and accrued liabilities

(33,320
)
 
14,999

Oil and natural gas production payable

1,746

 
(4,501
)
Other liabilities

(5,618
)
 
(1,182
)
Net cash provided by operating activities

213,000

 
245,626



 
 
 
Cash flows from investing activities

 

 
 

Oil and natural gas capital expenditures

(148,254
)
 
(134,458
)
Pipelines and plants capital expenditures
 
(10,591
)
 
(7,882
)
Net proceeds from sales of oil and natural gas properties and equipment
 
431

 
2,077

Other

(725
)
 
5,365

Net cash used in investing activities

(159,139
)
 
(134,898
)


 
 
 
Cash flows from financing activities

 

 
 

Bank repayments

(281,000
)
 
(1,153,653
)
Bank borrowings

361,000

 
1,093,653

Interest payments treated as a reduction of debt
 
(42,558
)
 
(37,233
)
Cash paid in conjunction with debt exchange
 
(120,007
)
 

Costs of debt financing
 
(9,332
)
 

Pipeline financing and capital lease debt repayments

(7,273
)
 
(12,625
)
Other

12,899

 
(628
)
Net cash used in financing activities

(86,271
)
 
(110,486
)
Net increase (decrease) in cash, cash equivalents, and restricted cash

(32,410
)
 
242

Cash, cash equivalents, and restricted cash at beginning of period

54,949

 
15,992

Cash, cash equivalents, and restricted cash at end of period

$
22,539

 
$
16,234


See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.


5


Denbury Resources Inc.
Unaudited Condensed Consolidated Statements of Changes in Stockholders' Equity
(Dollar amounts in thousands)

 
Common Stock
($.001 Par Value)
 
Paid-In
Capital in
Excess of
Par
 
Retained
Earnings (Accumulated Deficit)
 
Treasury Stock
(at cost)
 
 
 
Shares
 
Amount
Shares
 
Amount
Total Equity
Balance – December 31, 2018
462,355,725

 
$
462

 
$
2,685,211

 
$
(1,533,112
)
 
1,941,749

 
$
(10,784
)
 
$
1,141,777

Issued or purchased pursuant to stock compensation plans
1,331,050

 
2

 

 

 

 

 
2

Issued pursuant to directors’ compensation plan
41,487

 

 

 

 

 

 

Stock-based compensation

 

 
4,306

 

 

 

 
4,306

Tax withholding – stock compensation

 

 

 

 
531,494

 
(1,091
)
 
(1,091
)
Net loss

 

 

 
(25,674
)
 

 

 
(25,674
)
Balance – March 31, 2019
463,728,262

 
464

 
2,689,517

 
(1,558,786
)
 
2,473,243

 
(11,875
)
 
1,119,320

Issued or purchased pursuant to stock compensation plans
400,850

 

 

 

 

 

 

Issued pursuant to directors’ compensation plan
37,367

 

 

 

 

 

 

Stock-based compensation

 

 
4,667

 

 

 

 
4,667

Tax withholding – stock compensation

 

 

 

 
1,661

 
(3
)
 
(3
)
Net income

 

 

 
146,692

 

 

 
146,692

Balance – June 30, 2019
464,166,479

 
$
464

 
$
2,694,184

 
$
(1,412,094
)
 
2,474,904

 
$
(11,878
)
 
$
1,270,676


 
Common Stock
($.001 Par Value)
 
Paid-In
Capital in
Excess of
Par
 
Retained
Earnings (Accumulated Deficit)
 
Treasury Stock
(at cost)
 
 
 
Shares
 
Amount
Shares
 
Amount
Total Equity
Balance – December 31, 2017
402,549,346

 
$
403

 
$
2,507,828

 
$
(1,855,810
)
 
457,041

 
$
(4,256
)
 
$
648,165

Issued or purchased pursuant to stock compensation plans
378,595

 

 

 

 

 

 

Stock-based compensation

 

 
3,303

 

 

 

 
3,303

Tax withholding – stock compensation

 

 

 

 
330,826

 
(828
)
 
(828
)
Net income

 

 

 
39,578

 

 

 
39,578

Balance – March 31, 2018
402,927,941

 
403

 
2,511,131

 
(1,816,232
)
 
787,867

 
(5,084
)
 
690,218

Issued or purchased pursuant to stock compensation plans
36,437

 

 

 

 

 

 

Issued pursuant to notes conversion
55,249,999

 
55

 
161,995

 

 

 

 
162,050

Stock-based compensation

 

 
3,226

 

 

 

 
3,226

Tax withholding – stock compensation

 

 

 

 
18,451

 
(71
)
 
(71
)
Net income

 

 

 
30,222

 

 

 
30,222

Balance – June 30, 2018
458,214,377

 
$
458

 
$
2,676,352

 
$
(1,786,010
)
 
806,318

 
$
(5,155
)
 
$
885,645


See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.



6


Denbury Resources Inc.
Notes to Unaudited Condensed Consolidated Financial Statements


Note 1. Basis of Presentation

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.

Interim Financial Statements

The accompanying unaudited condensed consolidated financial statements of Denbury Resources Inc. and its subsidiaries have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) and do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.  These financial statements and the notes thereto should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2018 (the “Form 10-K”).  Unless indicated otherwise or the context requires, the terms “we,” “our,” “us,” “Company” or “Denbury,” refer to Denbury Resources Inc. and its subsidiaries.

Accounting measurements at interim dates inherently involve greater reliance on estimates than at year end, and the results of operations for the interim periods shown in this report are not necessarily indicative of results to be expected for the year.  In management’s opinion, the accompanying unaudited condensed consolidated financial statements include all adjustments of a normal recurring nature necessary for a fair statement of our consolidated financial position as of June 30, 2019, our consolidated results of operations for the three and six months ended June 30, 2019 and 2018, our consolidated cash flows for the six months ended June 30, 2019 and 2018, and our consolidated statements of changes in stockholders’ equity for the three and six months ended June 30, 2019 and 2018.

Reclassifications

Certain prior period amounts have been reclassified to conform to the current year presentation. On the Unaudited Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2018, “Purchased oil sales” is a new line item and includes sales related to purchases of oil from third-parties, which were reclassified from “Other income,” “Purchased oil expenses” is a new line item and includes expenses related to purchases of oil from third-parties, which were reclassified from “Marketing and plant operating expenses” used in prior reports, and “Transportation and marketing expenses” is a new line item, previously captioned “Marketing and plant operating expenses,” but adjusted to exclude both expenses related to plant operating expenses, which were reclassified to “Other expenses,” and also purchases of oil from third-parties. Such reclassifications had no impact on our reported total revenues, expenses, net income, current assets, total assets, current liabilities, total liabilities or stockholders’ equity.

Cash, Cash Equivalents, and Restricted Cash

The following table provides a reconciliation of cash, cash equivalents, and restricted cash as reported within the Unaudited Condensed Consolidated Balance Sheets to “Cash, cash equivalents, and restricted cash at end of period” as reported within the Unaudited Condensed Consolidated Statements of Cash Flows:
In thousands
 
June 30, 2019
 
December 31, 2018
Cash and cash equivalents
 
$
341

 
$
38,560

Restricted cash included in other assets
 
22,198

 
16,389

Total cash, cash equivalents, and restricted cash shown in the Unaudited Condensed Consolidated Statements of Cash Flows
 
$
22,539

 
$
54,949



Amounts included in restricted cash included in “Other assets” in the accompanying Unaudited Condensed Consolidated Balance Sheets represent escrow accounts that are legally restricted for certain of our asset retirement obligations.



7


Denbury Resources Inc.
Notes to Unaudited Condensed Consolidated Financial Statements

Our prior-year quarterly report on Form 10-Q for the period ended June 30, 2018, filed with the SEC on August 9, 2018, previously disclosed balances of certain U.S. Treasury Notes of $24.6 million and $25.4 million as of January 1, 2018 and June 30, 2018, respectively, that should have been excluded from “Cash, cash equivalents, and restricted cash” on the Consolidated Statements of Cash Flows. Accordingly, “Cash, cash equivalents, and restricted cash” as of January 1, 2018 and June 30, 2018, originally reported as $40.6 million and $41.6 million, respectively, should have been reported as $16.0 million and $16.2 million, respectively. In addition, changes in the U.S. Treasury Notes of $0.8 million during the six months ended June 30, 2018 should have been included in net cash used in investing activities. Accordingly, 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. These revisions had no impact on the Company’s financial condition or results of operations for the periods presented.

Net Income per Common Share

Basic net income per common share is computed by dividing the net income attributable to common stockholders by the weighted average number of shares of common stock outstanding during the period.  Diluted net income 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, nonvested performance-based equity awards, and shares into which our convertible senior notes are convertible.

The following table sets forth the reconciliations of net income and weighted average shares used for purposes of calculating the basic and diluted net income per common share for the periods indicated:
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
In thousands
 
2019
 
2018
 
2019
 
2018
Numerator
 
 
 
 
 
 
 
 
Net income – basic
 
$
146,692

 
$
30,222

 
$
121,018

 
$
69,800

Effect of potentially dilutive securities
 
 
 
 

 
 
 
 

Interest on convertible senior notes including amortization of discount, net of tax
 
548

 
130

 
548

 
539

Net income – diluted
 
$
147,240

 
$
30,352

 
$
121,566

 
$
70,339

 
 
 
 
 
 
 
 
 
Denominator
 
 
 
 
 
 
 
 
Weighted average common shares outstanding – basic
 
452,612

 
433,467

 
452,169

 
413,217

Effect of potentially dilutive securities
 
 
 
 
 
 
 
 
Restricted stock and performance-based equity awards
 
2,835

 
8,586

 
3,301

 
6,877

Convertible senior notes(1)
 
11,980

 
15,112

 
5,990

 
34,372

Weighted average common shares outstanding – diluted
 
467,427

 
457,165

 
461,460

 
454,466



(1)
For the three and six months ended June 30, 2019, shares shown under “convertible senior notes” represent the prorated portion of the approximately 90.9 million shares of the Company’s common stock issuable upon full conversion of our convertible senior notes (see Note 4, Long-Term Debt 2019 Note Exchanges).

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 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 three and six months ended June 30, 2019 and 2018, 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 convertible senior notes as if the convertible senior notes were converted at the beginning of the 2018 and 2019 periods.



8


Denbury Resources Inc.
Notes to Unaudited Condensed 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 per share, as their effect would have been antidilutive:
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
In thousands
 
2019
 
2018
 
2019
 
2018
Stock appreciation rights
 
2,026

 
2,827

 
2,059

 
2,891

Restricted stock and performance-based equity awards
 
4,998

 
179

 
4,790

 
305



Recent Accounting Pronouncements

Recently Adopted

Leases. Effective January 1, 2019, we adopted Accounting Standards Update (“ASU”) 2016-02, Leases (“ASU 2016-02”), and ASU 2018-01, Leases (Topic 842) – Land Easement Practical Expedient for Transition to Topic 842, using the modified retrospective method with an application date of January 1, 2019. ASU 2016-02 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. We elected 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, allow lease and non-lease components to be combined, and carry forward our accounting treatment for existing land easement agreements. The adoption of the new standards resulted in the recognition of $39.1 million of lease assets and $55.8 million of lease liabilities ($16.7 million of which related to previously-existing lease obligations) as of January 1, 2019, in our Unaudited Condensed Consolidated Balance Sheets, but did not materially impact our results of operations and had no impact on our cash flows. The additional lease assets and liabilities recorded on our balance sheet primarily related to our operating leases for office space, as the accounting for our financing leases and pipeline financings was relatively unchanged.

Not Yet Adopted

Financial Instruments – Credit Losses. In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (“ASU 2016-13”). ASU 2016-13 changes the impairment model for most financial assets and certain other instruments, including trade and other receivables, and requires the use of a new forward-looking expected loss model that will result in the earlier recognition of allowances for losses. 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 amendment using a modified retrospective approach to the first reporting period in which the guidance is effective. The adoption of ASU 2016-13 is currently not expected to have a material effect on our consolidated financial statements.

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 for Level 3 fair value measurements, 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.

Note 2. Revenue Recognition

We record revenue in accordance with Financial Accounting Standards Board Codification (“FASC”) Topic 606, Revenue from Contracts with Customers. 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. 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.


9


Denbury Resources Inc.
Notes to Unaudited Condensed Consolidated Financial Statements

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 Unaudited Condensed Consolidated Balance Sheets, which was $135.7 million and $125.8 million as of June 30, 2019 and December 31, 2018, respectively. The Company enters into purchase transactions with third parties and separate sale transactions with third parties in the Gulf Coast region. Revenues and expenses from these transactions are presented on a gross basis, as we act as a principal in the transaction by assuming control of the commodities purchased and the responsibility to deliver the commodities sold. Revenue is recognized when control transfers to the purchaser at the delivery point based on the price received from the purchaser.

Disaggregation of Revenue

The following table summarizes our revenues by product type for the three and six months ended June 30, 2019 and 2018:
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
In thousands
 
2019
 
2018
 
2019
 
2018
Oil sales
 
$
328,571

 
$
373,286

 
$
620,536

 
$
710,692

Natural gas sales
 
1,850

 
2,279

 
4,462

 
4,894

CO2 sales and transportation fees
 
7,986

 
6,715

 
16,556

 
14,267

Purchased oil sales
 
2,591

 
346

 
2,806

 
1,403

Total revenues
 
$
340,998

 
$
382,626

 
$
644,360

 
$
731,256



Note 3. Leases

We evaluate contracts for leasing arrangements at inception. We lease office space, equipment, and vehicles that have non-cancelable lease terms. Leases with a term of 12 months or less are not recorded on our balance sheet. The table below reflects our operating lease assets and liabilities, which primarily consists of our office leases, and finance lease assets and liabilities:
 
 
June 30,
In thousands
 
2019
Operating leases
Operating lease right-of-use assets
 
$
36,421

 
 
 
Operating lease liabilities - current
 
$
6,739

Operating lease liabilities - long-term
 
45,391

Total operating lease liabilities
 
$
52,130

 
 
 
Finance leases
Other property and equipment
 
$
1,736

Accumulated depreciation
 
(1,465
)
Other property and equipment, net
 
$
271

 
 
 
Current maturities of long-term debt
 
$
233

Long-term debt, net of current portion
 
59

Total finance lease liabilities
 
$
292



The majority of our leases contain renewal options, typically exercisable at our sole discretion. We record right-of-use assets and liabilities based on the present value of lease payments over the initial lease term, unless the option to extend the lease is


10


Denbury Resources Inc.
Notes to Unaudited Condensed Consolidated Financial Statements

reasonably certain, and utilize our incremental borrowing rate based on information available at the lease commencement date. The following weighted average remaining lease terms and discount rates related to our outstanding leases:
 
 
June 30,
 
 
2019
Weighted Average Remaining Lease Term
Operating leases
 
6.2 years

Finance leases
 
1.3 years

 
 
 
Weighted Average Discount Rate
Operating leases
 
6.8
%
Finance leases
 
2.3
%


Lease costs for operating leases or leases with a term of 12 months or less are recognized on a straight-line basis over the lease term. For finance leases, interest on the lease liability and the amortization of the right-of-use asset are recognized separately, with the depreciable life reflective of the expected lease term. We have subleased part of the office space included in our operating leases for which we receive rental payments. The following table summarizes the components of lease costs and sublease income:
 
 
 
 
Three Months Ended
 
Six Months Ended
In thousands
 
Income Statement Presentation
 
June 30, 2019
 
June 30, 2019
Operating lease cost
 
General and administrative expenses
 
$
2,412

 
$
4,827

 
 
 
 
 
 
 
Finance lease cost
 
 
 
 
 
 
Amortization of right-of-use assets
 
Depletion, depreciation, and amortization
 
$
264

 
$
1,134

Interest on lease liabilities
 
Interest expense
 
8

 
38

Total finance lease cost
 
 
 
$
272

 
$
1,172

 
 
 
 
 
 
 
Sublease income
 
General and administrative expenses
 
$
1,331

 
$
2,367



Our statement of cash flows included the following activity related to our operating and finance leases:
 
 
Six Months Ended
In thousands
 
June 30, 2019
Cash paid for amounts included in the measurement of lease liabilities
 
 
Operating cash flows from operating leases
 
$
5,854

Operating cash flows from interest on finance leases
 
38

Financing cash flows from finance leases
 
1,217

 
 
 
Right-of-use assets obtained in exchange for lease obligations
 


Operating leases
 
294

Finance leases
 





11


Denbury Resources Inc.
Notes to Unaudited Condensed Consolidated Financial Statements

The following table summarizes by year the maturities of our lease liabilities as of June 30, 2019:
 
 
Operating
 
Finance
In thousands
 
Leases
 
Leases
2019
 
$
5,063

 
$
118

2020
 
9,874

 
178

2021
 
10,042

 

2022
 
10,259

 

2023
 
10,300

 

Thereafter
 
18,537

 

Total minimum lease payments
 
64,075

 
296

Less: Amount representing interest
 
(11,945
)
 
(4
)
Present value of minimum lease payments
 
$
52,130

 
$
292


The following table summarizes by year the remaining non-cancelable future payments under our leases, as accounted for under previous accounting guidance under FASC Topic 840, Leases, as of December 31, 2018:
 
 
Operating
In thousands
 
Leases
2019
 
$
10,690

2020
 
9,776

2021
 
10,007

2022
 
10,223

2023
 
10,262

Thereafter
 
18,169

Total minimum lease payments
 
$
69,127





12


Denbury Resources Inc.
Notes to Unaudited Condensed Consolidated Financial Statements

Note 4. Long-Term Debt

The table below reflects long-term debt and capital lease obligations outstanding as of the dates indicated:
 
 
June 30,
 
December 31,
In thousands
 
2019
 
2018
Senior Secured Bank Credit Agreement
 
$
80,000

 
$

9% Senior Secured Second Lien Notes due 2021
 
614,919

 
614,919

9¼% Senior Secured Second Lien Notes due 2022
 
455,668

 
455,668

7¾% Senior Secured Second Lien Notes due 2024
 
528,026

 

7½% Senior Secured Second Lien Notes due 2024
 
24,638

 
450,000

6⅜% Convertible Senior Notes due 2024
 
245,548

 

6⅜% Senior Subordinated Notes due 2021
 
51,304

 
203,545

5½% Senior Subordinated Notes due 2022
 
94,784

 
314,662

4⅝% Senior Subordinated Notes due 2023
 
211,695

 
307,978

Pipeline financings
 
174,018

 
180,073

Capital lease obligations
 
292

 
5,362

Total debt principal balance
 
2,480,892

 
2,532,207

Debt discount(1)
 
(109,072
)
 

Future interest payable(2)
 
207,659

 
250,218

Debt issuance costs
 
(11,523
)
 
(13,089
)
Total debt, net of debt issuance costs and discount
 
2,567,956

 
2,769,336

Less: current maturities of long-term debt(3)
 
(101,829
)
 
(105,125
)
Long-term debt and capital lease obligations
 
$
2,466,127

 
$
2,664,211



(1)
Consists of discounts related to the issuance during June 2019 of our new 7¾% Senior Secured Second Lien Notes due 2024 (the “7¾% Senior Secured Notes”) and new 6⅜% Convertible Senior Notes due 2024 (the “2024 Convertible Senior Notes”) of $29.4 million and $79.6 million, respectively (see 2019 Note Exchanges below) as of June 30, 2019.
(2)
Future interest payable represents most of the interest due over the terms of our 9% Senior Secured Second Lien Notes due 2021 (the “2021 Senior Secured Notes”) and 9¼% Senior Secured Second Lien Notes due 2022 (the “2022 Senior Secured Notes”) and has been accounted for as debt in accordance with FASC 470-60, Troubled Debt Restructuring by Debtors.
(3)
Our current maturities of long-term debt as of June 30, 2019 include $85.7 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.

The ultimate parent company in our corporate structure, Denbury Resources Inc. (“DRI”), is the sole issuer of all of our outstanding senior secured, convertible senior, 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”), which has been amended periodically since that time. The Bank Credit Agreement is a senior secured revolving credit facility with a maturity date of 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 6⅜% Senior Subordinated Notes due in August 2021, respectively, are not repaid or refinanced by each of their respective maturity dates. As part of our spring 2019 semiannual redetermination, the borrowing base and lender commitments for our Bank Credit Agreement were reaffirmed at $615 million, with the next such redetermination being scheduled for November 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. The weighted average interest rate on borrowings


13


Denbury Resources Inc.
Notes to Unaudited Condensed Consolidated Financial Statements

under the Bank Credit Agreement was 5.1% as of June 30, 2019. We incur a commitment fee of 0.50% on the undrawn portion of the aggregate lender commitments under the Bank Credit Agreement.

The Bank Credit Agreement contains certain financial performance covenants through the maturity of the facility, including the following:

A Consolidated Total Debt to Consolidated EBITDAX covenant, with such ratio not to exceed 5.25 to 1.0 through December 31, 2020, and 4.50 to 1.0 thereafter;
A consolidated senior secured debt to consolidated EBITDAX covenant, with such ratio not to exceed 2.5 to 1.0. 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 June 30, 2019, we were in compliance with all debt covenants under the Bank Credit Agreement. The above description of our Bank Credit Agreement and defined terms are contained in the Bank Credit Agreement and the amendments thereto.

2019 Note Exchanges

During June 2019, we closed a series of debt exchanges to extend the maturities of our outstanding long-term debt and reduce our debt principal. As part of these transactions, we exchanged a total of $468.4 million aggregate principal amount of our then existing senior subordinated notes for $102.6 million aggregate principal amount of new 7¾% Senior Secured Notes, $245.5 million aggregate principal amount of new 2024 Convertible Senior Notes and $120.0 million of cash. The exchanged subordinated notes consisted of $152.2 million aggregate principal amount of our 6⅜% Senior Subordinated Notes due 2021, $219.9 million aggregate principal amount of our 5½% Senior Subordinated Notes due 2022 and $96.3 million aggregate principal amount of our 4⅝% Senior Subordinated Notes due 2023. In addition, we also exchanged $425.4 million of 7½% Senior Secured Second Lien Notes due 2024 (the “7½% Senior Secured Notes”) for $425.4 million aggregate principal amount of 7¾% Senior Secured Notes.

In July 2019, we closed transactions to exchange an additional$4.0 million aggregate principal amount of 7½% Senior Secured Notes for $3.8 million aggregate principal amount of 7¾% Senior Secured Notes.

In accordance with FASC 470-50, Modifications and Extinguishments, the June 2019 exchange of our existing senior subordinated notes was accounted for as a debt extinguishment. Therefore, our new 7¾% Senior Secured Notes and new 2024 Convertible Senior Notes were recorded on our balance sheet at fair market value based upon initial trading prices following their issuance, resulting in a discount to their principal amount of $22.6 million and $79.9 million, respectively. These debt discounts will be amortized as interest expense over the terms of these notes. As a result, we recognized a noncash gain on debt extinguishment, net of transaction costs, totaling $100.3 million for the three and six months ended June 30, 2019, in our Unaudited Condensed Consolidated Statements of Operations.

Separately, the exchange of our existing senior secured second lien notes was accounted for as a modification of those notes. Therefore, no gain or loss was recognized, and previously deferred debt issuance costs of $6.9 million were treated as a discount to the principal amount of the new 7¾% Senior Secured Notes, which discount will be amortized as interest expense over the term of these notes.

7¾% Senior Secured Second Lien Notes due 2024

As part of the notes exchanges discussed above, in June 2019 we issued $528.0 million of 7¾% Senior Secured Notes in connection with exchanges with certain holders of the Company’s outstanding senior subordinated notes and existing 7½% Senior Secured Notes (see 2019 Note Exchanges above). The 7¾% Senior Secured Notes, which carry a stated interest rate of 7.75% per annum, were recorded at approximately 94% of their principal amount in accordance with FASC 470-50, Modifications and Extinguishments, which equates to an effective yield to maturity of approximately 9.39%. Interest on the 7¾% Senior Secured Notes is payable semiannually in arrears on February 15 and August 15 of each year, and mature on February 15, 2024. We may redeem the 7¾% Senior Secured Notes in whole or in part at our option beginning August 15, 2020, at a redemption price of 103.875% of the principal amount, and at declining redemption prices thereafter, as specified in the indenture governing the 7¾% 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 7¾% Senior Secured Notes at a price of 107.75% of par with the proceeds of certain equity offerings. In addition, at any


14


Denbury Resources Inc.
Notes to Unaudited Condensed Consolidated Financial Statements

time prior to August 15, 2020, we may redeem the 7¾% 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 7¾% Senior Secured Notes are not subject to any sinking fund requirements.

The 7¾% 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.

6⅜% Convertible Senior Notes due 2024

As part of the notes exchanges discussed above, in June 2019 we issued $245.5 million of 2024 Convertible Senior Notes in connection with exchanges with certain holders of the Company’s existing senior subordinated notes (see 2019 Note Exchanges above). The 2024 Convertible Senior Notes, which carry a stated interest rate of 6.375% per annum, were recorded at approximately 67% of their principal amount in accordance with FASC 470-50, Modifications and Extinguishments, which equates to an effective yield to maturity of approximately 15.31%. Interest on the 2024 Convertible Senior Notes is payable semiannually in arrears on June 30 and December 30 of each year, beginning in December 2019, and mature on December 31, 2024. We do not have the right to redeem the 2024 Convertible Senior Notes prior to their maturity. The 2024 Convertible Senior Notes are convertible into shares of our common stock at any time, at the option of the holders, at a rate of 370 shares of common stock per $1,000 principal amount of 2024 Convertible Senior Notes, which is equivalent to up to approximately 90.9 million shares of the Company’s common stock, subject to customary adjustments to the conversion rate and threshold price with respect to, among other things, stock dividends and distributions, mergers and reclassifications. The 2024 Convertible Senior Notes will be automatically converted into shares of common stock at this rate if the volume weighted average trading price of the Company’s common stock equals or exceeds the threshold price, which initially is $2.43 per share, for 10 trading days in any period of 15 consecutive trading days, subject to satisfaction of certain other conditions. Additionally, the Company may, based on a determination of its Board of Directors that such changes are in the best interests of the Company, and subject to certain limitations, increase the conversion rate. Any such conversion rate increase would cause a proportional decrease in the threshold price for mandatory conversions, and thereby would enable the Company to require a mandatory conversion into common stock at a lower price than the initial or then-prevailing threshold price.

Note 5. 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 Unaudited Condensed 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 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 June 30, 2019, 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.



15


Denbury Resources Inc.
Notes to Unaudited Condensed Consolidated Financial Statements

The following table summarizes our commodity derivative contracts as of June 30, 2019, none of which are classified as hedging instruments in accordance with the FASC Derivatives and Hedging topic:
Months
 
Index Price
 
Volume (Barrels per day)
 
Contract Prices ($/Bbl)
Range(1)
 
Weighted Average Price
Swap
 
Sold Put
 
Floor
 
Ceiling
Oil Contracts:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2019 Fixed-Price Swaps
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
July – Dec
 
Argus LLS
 
13,000
 
$
60.00

74.90

 
$
64.69

 
$

 
$

 
$

2019 Three-Way Collars(2)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
July – Dec
 
NYMEX
 
22,000
 
$
55.00

75.45

 
$

 
$
48.55

 
$
56.55

 
$