Interactive 2009 Annual Report (PDF 7.56 MB) - Denbury Resources ...

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84 Denbury Resources Inc. 2009 Annual Reportthe Hastings Field acquisition is also due to the decrease in the NYMEX oil and natural gas futures prices between theeffective date of January 1, 2009, which is the date at which the acquisition price was determined, and the acquisitiondate of February 2, 2009, which is the date at which the assets were valued for accounting purposes. The purchaseagreement provided that the Hastings Field reserves be valued using the NYMEX oil and gas futures prices on theeffective date of January 1, 2009.The fair value of Conroe Field and Hastings Field was based on significant inputs not observable in the market, whichFASC “Fair Value Measurements and Disclosures” topic defines as Level 3 inputs. Key assumptions include (1) NYMEXoil and natural gas futures (this input is observable), (2) projections of the estimated quantities of oil and natural gasreserves, (3) projections of future rates of production, (4) timing and amount of future development and operating costs,(5) projected cost of CO 2 to a market participant, (6) projected recovery factors and, (7) risk adjusted discount rates.Goodwill is deductible for tax purposes. The Conroe Field purchase price allocation is preliminary and subject tochanges resulting from final closing adjustments.Unaudited Pro Forma Information. Had our acquisitions of both Conroe Field and Hastings Fields occurred onJanuary 1, 2009 and January 1, 2008, Denbury’s combined pro forma revenue and net income (loss) would have beenas follows:Year Ended December 31,In thousands 2009 2008Revenues $ 937,986 $ 1,547,776Net income (loss) (71,774) 422,7072009 DispositionsMay 2009 Sale of 60% of Denbury’s Barnett Shale Natural Gas Assets. In May 2009, we entered into anagreement to sell 60% of our Barnett Shale natural gas assets to Talon Oil and Gas LLC (“Talon”), a privately heldcompany, for $270 million (before closing adjustments). We closed on approximately three-quarters of the sale inJune 2009 and closed on the remainder of the sale in July 2009. Net proceeds were $259.8 million (after preliminaryclosing adjustments, and net of $8.1 million for natural gas swaps transferred in the sale). The agreement has aneffective date of June 1, 2009, and consequently operating net revenues after June 1, net of capital expenditures, alongwith any other purchase price adjustments, were adjustments to the selling price. We did not record a gain or loss onthe sale in accordance with the full cost method of accounting.December 2009 Sale of Remaining 40% of Denbury’s Barnett Shale Natural Gas Assets. In December 2009,Denbury closed the sale of its remaining 40% interest in Barnett Shale natural gas assets to Talon for $210 million(before closing adjustments). The effective date under the agreement was December 1, 2009. Denbury did not recorda gain or loss on the sale in accordance with the full cost method of accounting.2007 Acquisitions and DispositionsSale of Louisiana Natural Gas Asset. In October 2007, we entered into an agreement to sell our Louisiana naturalgas assets to a privately held company for approximately $180 million (before closing adjustments) plus we retained anet profits interest in one well. In late December 2007, we closed on approximately 70% of that sale with net proceedsof approximately $108.6 million (including estimated final purchase price adjustments). We closed on the remainingportion of the sale in February 2008 and received net proceeds of approximately $48.9 million. The agreement waseffective August 1, 2007, and consequently operating net revenue after August 1, net of capital expenditures, along withany other minor closing items were adjustments to the purchase price. The potential net profits interest relates to a wellin the South Chauvin field and is only earned if operating income from that well exceeds certain levels. During 2009, webegan receiving revenue payments related to the net profits interest in this well. The operating results of these soldproperties are included in our financial statements through the applicable closing dates of the sold properties. We did notrecord any gain or loss on the sale in accordance with the full cost method of accounting.Purchase of Seabreeze Complex. On March 30, 2007, Denbury completed the acquisition of the SeabreezeComplex, which is composed of two significant fields and four smaller fields in the general area of Houston, Texas. Twoof these fields are future potential CO 2 tertiary flood candidates. Tertiary flooding at one of these fields, Oyster Bayou,Form 10-K Part IINotes to Consolidated Financial Statements
Denbury Resources Inc. 2009 Annual Report 85is expected to begin during 2010. The adjusted purchase price was approximately $39.4 million, of which $33.9 millionwas assigned to unevaluated properties.Note 3. Related Party Transactions – GenesisInterest in and Transactions with GenesisDenbury’s former subsidiary, Genesis Energy, LLC, is the general partner of, and together with Denbury’s othersubsidiaries, at December 31, 2009, owned an aggregate 12% interest in Genesis, a publicly traded master limitedpartnership. On February 5, 2010, we sold our interest in Genesis Energy, LLC (see Note 15, “Subsequent Events”).Genesis’ business is focused on the mid stream segment of the oil and gas industry in the Gulf Coast area of theUnited States, and its activities include gathering, marketing and transportation of crude oil and natural gas, refineryservices, wholesale marketing of CO 2 , and supply and logistic services.Prior to the sale, we accounted for our 12% ownership in Genesis under the equity method of accounting as wehad significant influence over the limited partnership; however, our control was limited under the limited partnershipagreement and therefore we did not consolidate Genesis. Denbury received cash distributions from Genesis of$11.6 million in 2009, $7.1 million in 2008, and $1.7 million in 2007. We also received $0.2 million in 2009 and 2008 and$0.1 million in 2007, in directors’ fees for certain officers of Denbury that were board members of Genesis prior tothe February 5, 2010 sale of our General Partner ownership. There are no guarantees by Denbury or any of our othersubsidiaries of the debt of Genesis or of Genesis Energy, LLC.We continue to own an aggregate of 4,028,096 common units of Genesis, representing an approximate 10% limitedpartnership interest, for which a resale registration statement was filed in January 2010. We also continue to accountfor our remaining 10% ownership interest in Genesis under the equity method of accounting. Our cumulativeinvestments in Genesis of $85.5 million exceeded our percentage of net equity in the limited partnership at the timeof acquisition by approximately $15.7 million, which represents goodwill and is not subject to amortization. AtDecember 31, 2009, the balance of our total equity investment in Genesis was $75.0 million (see Note 15, “SubsequentEvents – Sale of General Partner Interest in Ownership in Genesis”). Based on quoted market values of Genesis’publicly traded limited partnership units at December 31, 2009, the estimated market value of our publicly tradedcommon units of Genesis was approximately $76.1 million.Incentive Compensation AgreementIn late December 2008, our subsidiary, Genesis Energy, LLC, entered into agreements with three members ofGenesis management, for the purpose of providing them incentive compensation, which agreements make them ClassB Members in Genesis Energy, LLC, and each an owner of a Class B ownership interest. The awards are mandatorilyredeemable upon a change in control and require the membership interests of the holders of the awards to beredeemed for cash (or in certain circumstances Genesis limited partnership units) by Genesis Energy, LLC. Upon thesale by Denbury of our interest in Genesis Energy, LLC in February 2010, the change in control provision of eachmember’s compensation agreement was triggered. As such, the awards were settled for cash in February 2010 for$14.9 million. As of December 31, 2009, we had approximately $13.8 million recorded under “Accounts payable andaccrued liabilities” for these awards in our Consolidated Balance Sheet. We recorded approximately $14.2 million forthe year ended December 31, 2009, in “General and administrative” expenses on our Consolidated Statement ofOperations, of which $0.4 million relates to cash payments made under these awards and $13.8 million is associatedwith the fair value of the award.NEJD Pipeline and Free State Pipeline TransactionsOn May 30, 2008, we closed on two transactions with Genesis involving our Northeast Jackson Dome (“NEJD”) pipelinesystem and Free State Pipeline, which included a 20-year financing lease for the NEJD system and a long-termtransportation service agreement for the Free State Pipeline. We have recorded both of these transactions as financingleases. At December 31, 2009, we have recorded $170.6 million for the NEJD financing and $80.0 million for the Free StatePipeline as debt, of which $3.8 million was included in current liabilities in our Consolidated Balance Sheet. At December31, 2008, we had recorded $173.6 million for the NEJD financing and $76.6 million for the Free State Pipeline as debt, ofwhich $3.0 million was included in current liabilities in our Consolidated Balance Sheet (see Note 6, “Long-term Debt”).Notes to Consolidated Financial StatementsForm 10-K Part II
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