Item 1. Business - ----------------
Website Access to Reports
We make our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports, filed or furnished pursuant to section 13(a) or 15(d) of the Securities Exchange Act of 1934 available free of charge on or through our internet website, www.denbury.com, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.
The Company
Denbury Resources Inc. is a Delaware corporation, organized under Delaware General Corporation Law ("DGCL") engaged in the acquisition, development, operation and exploration of oil and natural gas properties in the Gulf Coast region of the United States, primarily in Louisiana, Mississippi and in the Gulf of Mexico. Our corporate headquarters is located at 5100 Tennyson Parkway, Suite 3000, Plano, Texas 75024, and our phone number is 972-673-2000. At December 31, 2003, we had 374 employees, 249 of which were employed in field operations or at the field offices. Our employee count does not include 200 employees of Genesis Energy, Inc. as of December 31, 2003 as its employees exclusively carry out the business activities of Genesis Energy, L.P., which we do not consolidate in our financial statements (See Note 1 to the Consolidated Financial Statements).
Incorporation and Organization
Denbury was originally incorporated in Canada in 1951. In 1992, we acquired all of the shares of a United States operating company, Denbury Management, Inc. ("DMI"), and subsequent to the merger we sold all of its Canadian assets. Since that time, all of our operations have been in the United States.
In April 1999, our stockholders approved a move of our corporate domicile from Canada to the United States as a Delaware corporation. Along with the move, our wholly owned subsidiary, DMI, was merged into the new Delaware parent company, Denbury Resources Inc. This move of domicile did not have any effect on our operations or assets.
Effective December 29, 2003, Denbury Resources Inc. changed its corporate structure to a holding company format. The purposes of creating the holding company structure were to better reflect the operating practices and methods of Denbury, to improve its economics, and to provide greater administrative and operational flexibility. As part of this restructure, Denbury Resources Inc. (predecessor entity) merged into a newly formed limited liability company, and survived as, Denbury Onshore, LLC, a Delaware limited liability company and an indirect subsidiary of the newly formed holding company, Denbury Holdings, Inc. Denbury Holdings, Inc. subsequently assumed the name Denbury Resources Inc. (new entity). The reorganization was structured as a tax free reorganization to Denbury's stockholders and all outstanding capital stock of the original public company was automatically converted into the identical number of and type of shares of the new public holding company. Stockholders' ownership interests in the business did not change as a result of the new structure and shares of the Company remain publicly traded under the same symbol (DNR) on the New York Stock Exchange. The new parent holding company is co-obligor (or guarantor, as appropriate) regarding the payment of principal and interest on Denbury's outstanding debt securities.
Business Strategy
As part of our corporate strategy, we believe in the following fundamental principles:
o remain focused in specific regions;
o acquire properties where we believe additional value can be created through a combination of exploitation, development, exploration and marketing;
Denbury Resources Inc.
o acquire properties that give us a majority working interest and operational control or where we believe we can ultimately obtain it;
o maximize the value of our properties by increasing production and reserves while reducing cost; and
o maintain a highly competitive team of experienced and incentivized personnel.
Acquisitions
Information as to recent acquisitions by Denbury is set forth under Note 2, "Acquisitions," to the Consolidated Financial Statements. Such information is incorporated herein by reference.
Oil and Gas Operations
Information regarding selected operating data and a discussion of our significant operating areas and the primary properties within those three areas are set forth under "Selected Operating Data," appearing on pages 9 through 13 of the Annual Report to Shareholders and the Operations Sections appearing on pages 17 through 30 of the Annual Report. Such information is incorporated herein by reference.
Oil and Gas Acreage, Productive Wells, Drilling Activity
Information regarding oil and gas acreage, productive wells and drilling activity are set forth under "Selected Operating Data," appearing on page 13 of the Annual Report.
Title to Properties
Customarily in the oil and gas industry, only a perfunctory title examination is conducted at the time properties believed to be suitable for drilling operations are first acquired. Prior to commencement of drilling operations, a thorough drill site title examination is normally conducted, and curative work is performed with respect to significant defects. During acquisitions, title reviews are performed on all properties; however, formal title opinions are obtained on only the higher value properties. We believe that we have good title to our oil and natural gas properties, some of which are subject to minor encumbrances, easements and restrictions.
Production
Information regarding average production rates, unit sale prices and unit costs per BOE are set forth under "Management's Discussion and Analysis of Financial Condition and Results of Operations" appearing on pages 43 through 46 of the Annual Report.
Geographic Segments
All of our operations are in the United States.
Significant Oil and Gas Purchasers and Product Marketing
Oil and gas sales are made on a day-to-day basis under short-term contracts at the current area market price. The loss of any single purchaser would not be expected to have a material adverse effect upon our operations; however, the loss of a large single purchaser could potentially reduce the competition for our oil and natural gas production, which in turn could negatively impact the prices we receive. For the year ended December 31, 2003, we had two significant purchasers that each accounted for more than 10% of our total oil and natural gas revenues: Hunt Refining (15%) and Genesis Energy, L.P. (12%). For the year ended December 31, 2002, two purchasers each accounted for 10% or more of our oil and natural gas revenues: Hunt Refining (14%) and Genesis Energy, L.P. (11%). For the year ended December 31, 2001, four purchasers each accounted for 10% or more of our oil and natural gas revenues: Conoco (14%), Hunt Refining (13%), EOTT Energy (12%), and Dynegy (12%).
Denbury Resources Inc.
Our ability to market oil and natural gas depends on many factors beyond our control, including the extent of domestic production and imports of oil and gas, the proximity of our gas production to pipelines, the available capacity in such pipelines, the demand for oil and natural gas, the effects of weather, and the effects of state and federal regulation. Our production is primarily from developed fields close to major pipelines or refineries and established infrastructure. As a result, we have not experienced any difficulty to date in finding a market for all of our production as it becomes available or in transporting our production to those markets; however, there is no assurance that we will always be able to market all of our production or obtain favorable prices.
Oil Marketing
The quality of our crude oil varies by area as well as the corresponding price received. In Heidelberg Field, our single largest field, and our other Eastern Mississippi properties, our oil production is primarily light to medium sour crude and sells at a significant discount to the NYMEX prices. In Western Mississippi, our CO2 operations, and in Louisiana, our oil production is primarily light sweet crude, which typically sells at a small discount or even at a premium to NYMEX. For the year ended December 31, 2003, the discount for our oil production from Heidelberg Field averaged $5.92 per Bbl and for our Eastern Mississippi properties as a whole the discount averaged $5.50 per Bbl relative to NYMEX oil prices. For Little Creek Field, the largest of our CO2 properties in Western Mississippi, we averaged a premium of $0.70 per Bbl over NYMEX oil prices, and for our Western Mississippi properties and Louisiana properties as a whole, we averaged a discount of $0.29 per Bbl relative to NYMEX oil prices.
Natural Gas Marketing
Virtually all of our natural gas production is close to existing pipelines and consequently, we generally have a variety of options to market our natural gas. We sell the majority of our natural gas on one year contracts with prices fluctuating month-to-month based on published pipeline indices with slight premiums or discounts to the index.
Product Price Derivative Hedging Contracts
To reduce our exposure to fluctuations in the prices of oil and natural gas, we currently and may in the future enter into hedging arrangements for a portion of our oil and natural gas production. Hedging arrangements expose us to risk of financial loss in some circumstances, including when:
o production is less than expected;
o the counter-party to the hedging contract defaults on its contract obligations (as was the case with respect to our hedges placed in 2001 with an Enron subsidiary as counterparty, which resulted in our suffering a loss); or
o there is a change in the expected differential between the underlying price in the hedging agreement and actual prices received.
In addition, these hedging arrangements may limit the benefit we would receive from increases in the prices for oil and natural gas. Information as to these activities is set forth under "Management's Discussion and Analysis of Financial Condition and Results of Operations - Market Risk Management," appearing on pages 51 through 52 of the Annual Report and in Note 9, "Derivative Hedging Contracts," to the Consolidated Financial Statements. Such information is incorporated herein by reference.
Denbury Resources Inc.
Operating Environment Risk Factors
Oil and Natural Gas Price Volatility
Our future financial condition, results of operations and the carrying value of our oil and natural gas properties depends primarily upon the prices we receive for our oil and natural gas production. Oil and natural gas prices historically have been volatile and likely will continue to be volatile in the future, especially given current world geopolitical conditions. Our cash flow from operations is highly dependent on the prices that we receive for oil and natural gas. This price volatility also affects the amount of our cash flow available for capital expenditures and our ability to borrow money or raise additional capital. The amount we can borrow or have outstanding under our bank credit facility is subject to semi-annual redeterminations. In the short-term, our production is relatively balanced between oil and natural gas, but long-term, oil prices are likely to affect us more than natural gas prices because approximately 71% of our reserves are oil. The prices for oil and natural gas are subject to a variety of additional factors that are beyond our control. These factors include:
o the level of consumer demand for oil and natural gas;
o the domestic and foreign supply of oil and natural gas;
o the ability of the members of the Organization of Petroleum Exporting Countries to agree to and maintain oil price and production controls;
o the price of foreign oil and natural gas;
o domestic governmental regulations and taxes;
o the price and availability of alternative fuel sources;
o weather conditions;
o market uncertainty;
o political conditions in oil and natural gas producing regions, including the Middle East; and
o worldwide economic conditions.
These factors and the volatility of the energy markets generally make it extremely difficult to predict future oil and natural gas price movements with any certainty. Also, oil and natural gas prices do not necessarily move in tandem. Declines in oil and natural gas prices would not only reduce revenue, but could reduce the amount of oil and natural gas that we can produce economically and, as a result, could have a material adverse effect upon our financial condition, results of operations, oil and natural gas reserves and the carrying values of our oil and natural gas properties. If the oil and natural gas industry experiences significant price declines, we may, among other things, be unable to meet our financial obligations or make planned expenditures.
Since the end of 1998, oil prices have gone from near historic low prices to higher prices not experienced for over ten years. At the end of 1998, NYMEX oil prices were at historic lows of approximately $12.00 per Bbl, but during 1999 and 2000 NYMEX oil prices increased to an average of approximately $19.30 and $30.25 per Bbl, respectively. During 2001, NYMEX oil prices declined to an average of approximately $26.00 per Bbl and were at $19.84 per Bbl at the end of 2001. In 2002, NYMEX oil prices increased to average approximately $26.10 per Bbl and ended the year at $31.20 per Bbl. Throughout 2003, NYMEX oil prices remained at these higher prices, averaging approximately $31.00 per Bbl and ending the year at $32.52 per Bbl.
Natural gas prices have experienced even more volatility over the same five year period. During 1999 natural gas prices averaged approximately $2.35 per Mcf and increased to an average of approximately $4.05 per Mcf during 2001,
Denbury Resources Inc.
primarily due to low storage levels. At December 31, 2000, NYMEX natural gas prices were almost $10.00 per Mcf but declined steadily during 2001 as supplies of natural gas increased. As of year-end 2001, natural gas prices declined to $2.57 per Mcf. For 2002 and 2003, natural gas prices generally increased, averaging approximately $3.35 and $5.45 per Mcf, respectively, and ending 2002 at $4.79 per Mcf, and ending 2003 at $6.19 per Mcf.
Oil and Natural Gas Drilling and Producing Operations
Drilling activities are subject to many risks, including the risk that no commercially productive reservoirs will be discovered. There can be no assurance that new wells drilled by us will be productive or that we will recover all or any portion of our investment in such wells. Drilling for oil and natural gas may involve unprofitable efforts, not only from dry wells but also from wells that are productive but do not produce sufficient net reserves to return a profit after deducting drilling, operating and other costs. The seismic data and other technologies used by us do not provide conclusive knowledge, prior to drilling a well, that oil or natural gas is present or may be produced economically. The cost of drilling, completing and operating a well is often uncertain, and cost factors can adversely affect the economics of a project. Further, our drilling operations may be curtailed, delayed or canceled as a result of numerous factors, including:
o unexpected drilling conditions;
o title problems;
o pressure or irregularities in formations;
o equipment failures or accidents;
o adverse weather conditions;
o compliance with environmental and other governmental requirements; and
o cost of, or shortages or delays in the availability of, drilling rigs, equipment and services.
Our operations are subject to all the risks normally incident to the operation and development of oil and natural gas properties and the drilling of oil and natural gas wells, including encountering well blowouts, cratering and explosions, pipe failure, fires, formations with abnormal pressures, uncontrollable flows of oil, natural gas, brine or well fluids, release of contaminants into the environment and other environmental hazards and risks.
In accordance with industry practice, we maintain insurance against some, but not all, of the risks described above in an amount we believe is adequate. However, the nature of these risks is such that some liabilities could exceed our policy limits, or, as in the case of environmental fines and penalties, cannot be insured. We could incur significant costs, related to these risks, that could have a material adverse effect on our results of operations and financial condition.
Use of Carbon Dioxide in Tertiary Recovery Operations
The crude oil production from our tertiary recovery projects depends on having access to sufficient amounts of carbon dioxide. Our ability to produce this oil would be hindered if our supply of carbon dioxide were limited due to problems with our current CO2 producing wells and facilities, including compression equipment, or catastrophic pipeline failure. Our anticipated future production is also dependent on our ability to increase the production volumes of CO2. If our crude oil production were to decline, it could have a material adverse effect on our financial condition and results of operations. Our CO2 tertiary recovery projects require a significant amount of electricity to operate the facilities. If these costs were to increase significantly, it could have a material adverse effect upon the profitability of these operations.
Denbury Resources Inc.
Future Performance and Acquisitions
Unless we can successfully replace the reserves that we produce, our reserves will decline, resulting eventually in a decrease in oil and natural gas production and lower revenues and cash flows from operations. We have historically replaced reserves through both drilling and acquisitions. In the future we may not be able to continue to replace reserves at acceptable costs. The business of exploring for, developing or acquiring reserves is capital intensive. We may not be able to make the necessary capital investment to maintain or expand our oil and natural gas reserves if our cash flows from operations are reduced, due to lower oil or natural gas prices or otherwise, or if external sources of capital become limited or unavailable. Further, the process of using CO2 for tertiary recovery and the related infrastructure requires significant capital investment, often one to two years prior to any resulting production and cash flows from these projects, heightening potential capital constraints. If we do not continue to make significant capital expenditures, or if outside capital resources become limited, we may not be able to maintain our growth rate. In addition, our drilling activities are subject to numerous risks, including the risk that no commercially productive oil or natural gas reserves will be encountered. Exploratory drilling involves more risk than development drilling because exploratory drilling is designed to test formations for which proved reserves have not been discovered.
We are continually identifying and evaluating acquisition opportunities and we have successfully completed acquisitions throughout our history. Estimating the reserves and forecasted production from acquired properties is inherently difficult and may result in our inability to achieve or maintain targeted production levels. In that case, our ability to realize the total economic benefit from the acquisition may be reduced or eliminated. There can be no assurance that we will successfully consummate any future acquisitions or that such acquisitions of oil and natural gas properties will contain economically recoverable reserves or that any future acquisition will be profitably integrated into our operations.
Competition and Markets
We face competition from other oil and natural gas companies in all aspects of its business, including acquisition of producing properties and oil and gas leases, marketing of oil and gas, and obtaining goods, services and labor. Many of our competitors have substantially larger financial and other resources. Factors that affect our ability to acquire producing properties include available funds, available information about prospective properties and our standards established for minimum projected return on investment. Gathering systems are the only practical method for the intermediate transportation of natural gas. Therefore, competition for natural gas delivery is presented by other pipelines and gas gathering systems. Competition is also presented by alternative fuel sources, including heating oil and other fossil fuels. Because of the long-lived, high margin nature of our oil and gas reserves and management's experience and expertise in exploiting these reserves, we believe that we are effective in competing in the market.
The demand for qualified and experienced field personnel to drill wells and conduct field operations, geologists, geophysicists, engineers and other professionals in the oil and natural gas industry can fluctuate significantly, often in correlation with oil and natural gas prices, causing periodic shortages. There have also been shortages of drilling rigs and other equipment, as demand for rigs and equipment has increased along with the number of wells being drilled. These factors also cause significant increases in costs for equipment, services and personnel. Higher oil and natural gas prices generally stimulate increased demand and result in increased prices for drilling rigs, crews and associated supplies, equipment and services. We cannot be certain when we will experience these issues and these types of shortages or price increases could significantly decrease our profit margin, cash flow and operating results or restrict our ability to drill those wells and conduct those operations that we currently have planned and budgeted.
Federal and State Regulations
Numerous federal and state laws and regulations govern the oil and gas industry. These laws and regulations are often changed in response to changes in the political or economic environment. Compliance with this evolving regulatory burden is often difficult and costly, and substantial penalties may be incurred for noncompliance. The following section describes some specific laws and regulations that may affect us. We cannot predict the impact of these or future legislative or regulatory initiatives.
Denbury Resources Inc.
Management believes that we are in substantial compliance with all laws and regulations applicable to our operations and that continued compliance with existing requirements will not have a material adverse impact on us. The future annual capital costs of complying with the regulations applicable to our operations is uncertain and will be governed by several factors, including future changes to regulatory requirements. However, management does not currently anticipate that future compliance will have a materially adverse effect on our consolidated financial position or results of operations.
Regulation of Natural Gas and Oil Exploration and Production
Our operations are subject to various types of regulation at the federal, state and local levels. Such regulation includes requiring permits for drilling wells, maintaining bonding requirements in order to drill or operate wells and regulating the location of wells, the method of drilling and casing wells, the surface use and restoration of properties upon which wells are drilled, the plugging and abandoning of wells and the disposal of fluids used in connection with operations. Our operations are also subject to various conservation laws and regulations. These include the regulation of the size of drilling and spacing units or proration units and the density of wells which may be drilled in those units and the unitization or pooling of oil and gas properties. In addition, state conservation laws establish maximum rates of production from oil and gas wells, generally prohibit the venting or flaring of gas and impose certain requirements regarding the ratability of production. The effect of these regulations may limit the amount of oil and gas we can produce from its wells and may limit the number of wells or the locations at which we can drill. The regulatory burden on the oil and gas industry increases our costs of doing business and, consequently, affects its profitability.
Federal Regulation of Sales Prices and Transportation
The transportation and certain sales of natural gas in interstate commerce are heavily regulated by agencies of the U.S. federal government and are affected by the availability, terms and cost of transportation. In particular, the price and terms of access to pipeline transportation are subject to extensive U.S. federal and state regulation. The Federal Energy Regulatory Commission ("FERC") is continually proposing and implementing new rules and regulations affecting the natural gas industry. The stated purpose of many of these regulatory changes is to promote competition among the various sectors of the natural gas industry. The ultimate impact of the complex rules and regulations issued by FERC cannot be predicted. Some of FERC's proposals may, however, adversely affect the availability and reliability of interruptible transportation service on interstate pipelines. While our sales of crude oil, condensate and natural gas liquids are not currently subject to FERC regulation, our ability to transport and sell such products is dependent on certain pipelines whose rates, terms and conditions of service are subject to FERC regulation. Additional proposals and proceedings that might affect the natural gas industry are considered from time to time by Congress, FERC, state regulatory bodies and the courts. We cannot predict when or if any such proposals might become effective and their effect, if any, on our operations. Historically, the natural gas industry has been heavily regulated; therefore, there is no assurance that the less stringent regulatory approach recently pursued by FERC, Congress and the states will continue indefinitely into the future.
Natural Gas Gathering Regulations
State regulation of natural gas gathering facilities generally includes various safety, environmental and, in some circumstances, nondiscriminatory-take requirements. Although such regulation has not generally been affirmatively applied by state agencies, natural gas gathering may receive greater regulatory scrutiny in the future.
Federal, State or Indian Leases
Our operations on federal, state or Indian oil and gas leases are subject to numerous restrictions, including nondiscrimination statutes. Such operations must be conducted pursuant to certain on-site security regulations and other permits and authorizations issued by the Bureau of Land Management, Minerals Management Service ("MMS") and other agencies.
Denbury Resources Inc.
Environmental Regulations
Public interest in the protection of the environment has increased dramatically in recent years. In addition, over the last two years we have acquired significant assets offshore in the Gulf of Mexico which are regulated by the MMS. Our oil and natural gas production and saltwater disposal operations and our processing, handling and disposal of hazardous materials, such as hydrocarbons and naturally occurring radioactive materials are subject to stringent regulation. We could incur significant costs, including cleanup costs resulting from a release of hazardous material, third-party claims for property damage and personal injuries fines and sanctions, as a result of any violations or liabilities under environmental or other laws. Changes in or more stringent enforcement of environmental laws could also result in additional operating costs and capital expenditures.
Various federal, state and local laws regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, directly impact oil and gas exploration, development and production operations, and consequently may impact the Company's operations and costs. These regulations include, among others, (i) regulations by the EPA and various state agencies regarding approved methods of disposal for certain hazardous and nonhazardous wastes; (ii) the Comprehensive Environmental Response, Compensation, and Liability Act, Federal Resource Conservation and Recovery Act and analogous state laws which regulate the removal or remediation of previously disposed wastes (including wastes disposed of or released by prior owners or operators), property contamination (including groundwater contamination), and remedial plugging operations to prevent future contamination; (iii) the Clean Air Act and comparable state and local requirements which may result in the gradual imposition of certain pollution control requirements with respect to air emissions from the operations of the Company; (iv) the Oil Pollution Act of 1990 which contains numerous requirements relating to the prevention of and response to oil spills into waters of the United States; (v) the Resource Conservation and Recovery Act which is the principal federal statute governing the treatment, storage and disposal of hazardous wastes; and (vi) state regulations and statutes governing the handling, treatment, storage and disposal of naturally occurring radioactive material ("NORM").
Management believes that we are in substantial compliance with applicable environmental laws and regulations. To date, we have not expended any material amounts to comply with such regulations, and management does not currently anticipate that future compliance will have a materially adverse effect on our consolidated financial position or results of operations.
Estimated Net Quantities of Proved Oil and Gas Reserves and Present Value of Estimated Future Net Revenues
Estimates of net proved oil and gas reserves as of December 31, 2003, 2002 and 2001 have been prepared by DeGolyer and MacNaughton, independent petroleum engineers located in Dallas, Texas. See Note 12, "Supplemental Oil and Natural Gas Disclosures," to the Consolidated Financial Statements and pages 9 and 10 of the Annual Report for disclosure of reserve data. Such information is incorporated herein by reference.
There are numerous uncertainties inherent in estimating quantities of proved oil and natural gas reserves and their values, including many factors beyond our control. The reserve data included herein represents only estimates. Reserve engineering is a subjective process of estimating underground accumulations of oil and natural gas that cannot be measured in an exact manner. The accuracy of any reserve estimate is a function of the quality of available geological, geophysical, engineering and economic data, the precision of the engineering and judgment. As a result, estimates of different engineers often vary. The estimates of reserves, future cash flows and present value are based on various assumptions, including those prescribed by the SEC relating to oil and natural gas prices, drilling and operating expenses, capital expenditures, taxes and availability of funds, and are inherently imprecise. Actual future production, cash flows, taxes, development expenditures, operating expenses and quantities of recoverable oil and natural gas reserves may vary substantially from our estimates. Such variations may be significant and could materially affect estimated quantities and the present value of our proved reserves. Also, the use of a 10% discount factor for reporting purposes may not necessarily represent the most appropriate discount factor, given actual interest rates and risks to which Denbury or the oil and natural gas industry in general are subject.
Denbury Resources Inc.
You should not assume that the present values referred to herein represent the current market value of our estimated oil and natural gas reserves. In accordance with requirements of the SEC, the estimates of present values are based on prices and costs as of the date of the estimates. Actual future prices and costs may be materially higher or lower than the prices and cost as of the date of the estimate.
At December 31, 2003, approximately 39% of our estimated proved reserves are undeveloped. Recovery of undeveloped reserves requires significant capital expenditures and may require successful drilling operations. The reserve data assumes that we can and will make these expenditures and conduct these operations successfully, but these assumptions may not be accurate, and this may not occur.
Quantities of proved reserves are estimated based on economic conditions, including oil and natural gas prices in existence at the date of assessment. Our reserves and future cash flows may be subject to revisions based upon changes in economic conditions, including oil and natural gas prices, as well as due to production results, results of future development, operating and development costs and other factors. Downward revisions of our reserves could have an adverse affect on its financial condition and operating results.
Item 2.
Item 2. Properties - -------------------
See Item 1. Business - "Oil and Gas Operations." We also have various operating leases for rental of office space, office and field equipment, and vehicles. See Note "Off-Balance Sheet Arrangements-Commitments and Obligations" in Management's Discussion and Analysis of Financial Condition and 10, "Commitments and Contingencies," to the Consolidated Financial Statements for the future minimum rental payments. Such information is incorporated herein by reference.
Item 3.
Item 3. Legal Proceedings - --------------------------
In the opinion of management, there are no material pending legal proceedings in the ordinary course of business to which Denbury or any of our subsidiaries is a party or of which any of their property is the subject. However, due to the nature of its business, certain legal or administrative proceedings arise from time to time in the ordinary course of its business. See Note 10, "Commitments and Contingencies," to the Consolidated Financial Statements for further disclosure regarding legal proceedings and contingencies. Such information is incorporated herein by reference.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders - ------------------------------------------------------------
No matters were submitted for a vote of security holders during the fourth quarter of 2003.
PART II
Item 5.
Item 5. Market for the Common Stock and Related Matters - --------------------------------------------------------
Information as to the markets in which Denbury's common stock is traded, the quarterly high and low prices for such stock during the last two years, the restriction on the payment of dividends with respect to the common stock, and the approximate number of stockholders of record at March 1, 2004, is set forth under "Common Stock Trading Summary" appearing on page 86 of the Annual Report. Such information is incorporated herein by reference.
As of March 1, 2004, affiliates of the Texas Pacific Group beneficially own approximately 17% of the Company's outstanding common stock and their representatives hold three of eight seats on Denbury's Board of Directors. As a result of its ownership and provisions of our certificate of incorporation and bylaws, the Texas Pacific Group has historically had the effective ability to elect all our directors and to control our business and affairs, including decisions with respect to the acquisition or disposition of assets, the future issuance of our common stock or other securities, dividend policy and decisions with respect to our drilling, operating and acquisition expenditure plans. While the Texas Pacific Group owns less than 50% of our outstanding common stock, they still are our largest single stockholder and still control such a large portion of our stock that their effective control will not be significantly diminished. Since our certificate of incorporation requires a two-thirds majority vote by the board of directors on most significant transactions, such as significant asset purchases and sales, issuances of equity and debt, changes in the board of directors and other matters, assuming that representatives of the Texas
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Pacific Group continue to hold over one-third of the board seats as they currently do, they will still be able to veto any decisions on these matters solely by themselves.
Item 6.
Item 6. Selected Financial Data - --------------------------------
Selected Financial Data for Denbury for each of the last five years are set forth under "Financial Highlights" appearing on page 2 of the Annual Report. All such information is incorporated herein by reference.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - --------------------------------------------------------------------------------
Information as to Denbury's financial condition, changes in financial condition and results of operations and other matters is set forth in "Management's Discussion and Analysis of Financial Condition and Results of Operations," appearing on pages 33 through 55 of the Annual Report and is incorporated herein by reference.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk - -------------------------------------------------------------------
The information required by Item 7A is set forth under "Market Risk Management" in "Management's Discussion and Analysis of Financial Condition and Results of Operations," appearing on pages 51 through 52 of the Annual Report and is incorporated herein by reference.
Item 8.
Item 8. Financial Statements and Supplementary Data - ---------------------------------------------------
Denbury's consolidated financial statements, accounting policy disclosures, notes to financial statements, business segment information, unaudited quarterly information and independent auditors' report are presented on pages 56 through 86 of the Annual Report. All such information is incorporated herein by reference.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure - --------------------------------------------------------------------------------
None.
Item 9A.
Item 9A. Controls and Procedures - --------------------------------
We maintain disclosure controls and procedures and internal controls designed to ensure that information required to be disclosed in our filings under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. Our chief executive officer and chief financial officer have evaluated our disclosure controls and procedures as of the end of the period covered by this annual report on Form 10-K and have determined that such disclosure controls and procedures are effective in all material respects in providing to them on a timely basis material information required to be disclosed in this annual report.
There have been no changes in internal controls over financial reporting during the period covered by this annual report on Form 10-K that have materially affected, or are reasonably likely to materially affect, Denbury's internal controls over financial reporting.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Company - --------------------------------------------------------
Directors of the Company
Information as to the names, ages, positions and offices with Denbury, terms of office, periods of service, business experience during the past five years and certain other directorships held by each director or person nominated to become
Denbury Resources Inc.
a director of Denbury will be set forth in the "Election of Directors" segment of the Proxy Statement ("Proxy Statement") for the Annual Meeting of Shareholders to be held May 12, 2004, ("Annual Meeting") and is incorporated herein by reference.
Executive Officers of the Company
Information concerning the executive officers of Denbury will be set forth in the "Management" section of the Proxy Statement for the Annual Meeting and is incorporated herein by reference.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 and the rules thereunder require the Company's executive officers and directors, and persons who beneficially own more than ten percent (10%) of a registered class of the Company's equity securities, to file reports of ownership and changes in ownership with the Securities and Exchange Commission and exchanges and to furnish the Company with copies. Based solely on its review of the copies of such forms received by it, or written representations from such persons, the Company is not aware of any person who failed to file any reports required by Section 16(a) to be filed for fiscal 2003.
Code of Ethics
We have adopted a Code of Ethics for Senior Financial Officers and Principal Executive Officer. This Code of Ethics, including any amendments or waivers, is posted on our website at www.denbury.com.
Item 11.
Item 11. Executive Compensation - -------------------------------
Information concerning remuneration received by Denbury's executive officers and directors will be presented under the caption "Statement of Executive Compensation" in the Proxy Statement for the Annual Meeting and is incorporated herein by reference.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management - -----------------------------------------------------------------------
Information as to Denbury's common stock that may be issued under our equity compensation plans, which plans have been approved by shareholders, and the number of shares of Denbury's common stock beneficially owned as of March 1, 2004, by each of its directors and nominees for director, its five most highly compensated executive officers and its directors and executive officers as a group will be presented under the captions "Equity Compensation Plan Information" and "Security Ownership of Certain Beneficial Owners and Management" in the Proxy Statement for the Annual Meeting and is incorporated herein by reference.
Item 13.
Item 13. Certain Relationships and Related Transactions - -------------------------------------------------------
Information on related transactions will be presented under the caption "Compensation Committee Interlocks and Insider Participation" and "Interests of Insiders in Material Transactions" in the Proxy Statement for the Annual Meeting and is incorporated herein by reference.
Item 14.
Item 14. Principal Accountant Fees and Services - -----------------------------------------------
Information required to be presented on principal accountant fees and services will be presented under the caption "Relationship with Independent Accountants" in the Proxy Statement for the Annual Meeting and is incorporated herein by reference.
Denbury Resources Inc.
PART IV
Item 15.
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K - ------------------------------------------------------------------------
(a) Financial Statements and Schedules. Financial statements and schedules filed as a part of this report are presented on pages 33 through 86 of the Annual Report and are incorporated herein by reference.
Exhibits. The following exhibits are filed as a part of this report.
Denbury Resources Inc.
* Filed herewith. ** Compensation arrangements.
(b) Reports on Form 8-K.
On November 3, 2003 we filed a Form 8-K, which included our press release on our third quarter earnings.
On December 19, 2003 we filed a Form 8-K, which announced that Denbury and TPG entered into an underwriting agreement, pursuant to which TPG would sell 8 million shares of Denbury's common stock. Denbury did not receive any proceeds from this transaction.
On December 29, 2003 we filed a Form 8-K, which announced that Denbury had completed an internal reorganization to a holding-company-organizational structure.
Denbury Resources Inc.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Denbury Resources Inc. has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
DENBURY RESOURCES INC.
March 10, 2004 /s/ Phil Rykhoek ----------------------------------------------- Phil Rykhoek Sr. Vice President and Chief Financial Officer
March 10, 2004 /s/ Mark C. Allen ----------------------------------------------- Mark C. Allen Vice President and Chief Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of Denbury Resources Inc. and in the capacities and on the dates indicated.
March 10, 2004 /s/ Gareth Roberts ----------------------------------------------- Gareth Roberts Director, President and Chief Executive Officer (Principal Executive Officer)
March 10, 2004 /s/ Phil Rykhoek ----------------------------------------------- Phil Rykhoek Sr. Vice President and Chief Financial Officer (Principal Financial Officer)
March 10, 2004 /s/ Mark C. Allen ----------------------------------------------- Mark C. Allen Vice President and Chief Accounting Officer (Principal Accounting Officer)
March 10, 2004 /s/ Wieland F. Wettstein ----------------------------------------------- Wieland F. Wettstein Director
March 10, 2004 /s/ David I. Heather ----------------------------------------------- David I. Heather Director
March 10, 2004 /s/ Carrie A. Wheeler ----------------------------------------------- Carrie A. Wheeler Director
March 10, 2004 /s/ David B. Miller ----------------------------------------------- David B. Miller Director