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

38 Denbury Resources Inc. 2009 Annual ReportItem 7. Management’s Discussion and Analysis of Financial Condition andResults of OperationsThe following discussion and analysis should be read in conjunction with our Consolidated Financial Statements andNotes thereto included in Item 8, “Financial Statements and Supplementary Data.” Our discussion and analysisincludes forward looking information that involves risks and uncertainties and should be read in conjunction with “RiskFactors” under Item 1A of this report, along with “Forward Looking Information” at the end of this section for informationon the risks and uncertainties that could cause our actual results to be materially different than our forward lookingstatements. The following discussion and analysis does not include information regarding results of operations andfinancial condition of Encore, which is contained in Encore’s Form 10-K for the year ended December 31, 2009, filed byEncore with the SEC on February 25, 2010.OverviewWe are a growing independent oil and natural gas company engaged in acquisition, development and explorationactivities in the U.S. Gulf Coast region. We are the largest oil and natural gas producer in Mississippi, own the largestcarbon dioxide (“CO 2 ”) reserves east of the Mississippi River used for tertiary oil recovery, and hold significant operatingacreage in properties onshore in Louisiana, Alabama and Southeast Texas. Our goal is to increase the value ofacquired properties through a combination of exploitation, drilling, and proven engineering extraction processes, withour most significant emphasis relating to tertiary recovery operations. Our corporate headquarters are in Plano, Texas(a suburb of Dallas), and we have four primary field offices located in Laurel, Mississippi; Jackson, Mississippi; LittleCreek, Mississippi; and Alvin, Texas.During 2009, we entered into several strategic transactions to expand our primary business of CO 2 tertiaryoperations, as follows:• purchased Hastings Field in southeast Texas in February;• purchased Conroe Field in the same area in December;• on October 31st agreed to acquire Encore Acquisition Company, subject to approval of each company’sshareholders on March 9, 2010;• divested non-strategic operations in the Barnett Shale; and• entered into an agreement to sell our interests in the General Partner of Genesis Energy, L.P. and subsequentlyclosed this transaction in February 2010.Each of these transactions, which are further discussed below, supports our strategic emphasis on further developingand expanding our CO 2 tertiary operations and should provide future growth in our CO 2 tertiary operations for many yearsto come. In addition, during 2009 we invested approximately $538 million in our Green Pipeline, which when finished willtransport CO 2 from the end of our NEJD Pipeline, in Louisiana, to our tertiary floods in southeast Texas.2009 Operating Highlights. We recognized a net loss of $75.2 million during 2009, or ($0.30) per common share,compared to net income of $388.4 million, or $1.59 per common share earned during 2008. The reduction in netincome between the two years is primarily due to lower oil and natural gas commodity prices and non-cash expense of$383.0 million ($237.4 million after tax) in 2009 due to the changes in fair value of our commodity derivative contracts.In 2008, we recorded a non-cash gain of $257.6 million ($159.7 million after tax) on the fair value changes in ourcommodity derivative contracts, which was primarily offset by a $226.0 million ($140.1 million after tax) full cost ceilingtest write-down at December 31, 2008.Oil and natural gas prices continued to be volatile during 2009, but generally trended upward during the year, ascompared to the latter part of 2008 when oil and natural gas prices dropped significantly from their highs in mid-2008.Our average revenue per BOE, excluding the impact of oil and natural gas derivative contracts, was $49.16 per BOE in2009, as compared to $79.42 per BOE in 2008, a 38% decrease between the two periods. Although our productionincreased between 2008 and 2009, the significant drop in commodity prices resulted in a 36% decrease in our oiland natural gas revenues during 2009 as compared to 2008.Form 10-K Part IIManagement’s Discussion and Analysis of Financial Condition and Results of Operations