Denbury Resources Inc. (DNR), last month, announced 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(1) 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 (a non-GAAP measure) 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 8¼% senior subordinated notes due 2020, which were refinanced during the quarter with the issuance of 5½% senior subordinated notes due 2022.
Second Quarter of 2014 Highlights:
- Increased adjusted cash flow from operations (a non-GAAP measure)(1)(3) by 9% sequentially;
- Increased tertiary production by 3% and total production by 2% sequentially;
- Lowered lease operating expense per barrel of oil equivalent ("BOE") by 7% sequentially; and
- Year-to-date, generated an excess of $62 million of adjusted cash flow from operations(1)(3) after capital expenditures of $498 million and dividend payments of $43 million.
Sequentially, adjusted net income(1) for the second quarter of 2014 increased by $4 million and adjusted cash flow from operations(1)(3) 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(1) 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 ("DD&A") 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.
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.
Production:
Production for the second quarter of 2014 averaged 75,320 barrels of oil equivalent per day ("BOE/d"), which included 40,897 barrels per day ("Bbls/d") 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:
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 CO2costs 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 5½% Notes to replace our $996 million in 8¼% 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 8¼% Notes) during the second quarter of 2014.
2014 Production and Capital Expenditure 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.
