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

Denbury Resources Inc. 2009 Annual Report 39During 2009, our oil and natural gas production averaged 48,299 BOE/d, a 4% increase over the average productionfor 2008; however, our continuing production excluding the production from our Barnett Shale properties that weresold in 2009 increased 15%. Our largest production increases were attributable to our tertiary oil production andHastings Field, which we acquired in February 2009, partially offset by (a) the sale of our Barnett Shale natural gasproperties; and (b) expected declines in our Mississippi non-tertiary production primarily due to lower Selma Chalknatural gas production as a result of limited drilling activity in 2009, and to a lesser extent due to lower non-tertiaryHeidelberg oil production as additional areas of that field were shut-in in order to expand the tertiary flooding to thoseareas. See “Results of Operations – Operating Results – Production” for more information.Tertiary oil production averaged 24,343 BOE/d during 2009, representing a 26% increase over our tertiary oilproduction during 2008. We had strong production increases during 2009 from several of our existing tertiary oil fields,and had initial production response from CO 2 injections at Heidelberg Field during the second quarter of 2009 andat Cranfield Field during the first quarter of 2009. See “Results of Operations – CO 2 Operations” for more information.Cash settlements received on our commodity derivative contracts during 2009 were $146.7 million, compared topayments of $57.5 million made during 2008. During 2009, we had a non-cash fair value charge on our derivativecontracts of $383.0 million, compared to a non-cash fair value gain of $257.6 million in 2008. Coupled together, ourtotal adjustments on derivative contracts resulted in a net change between 2008 and 2009 of $436.3 million ofadditional expense in 2009.Our lease operating expenses increased 6% between 2008 and 2009, primarily due to our increasing emphasis ontertiary operations, increasing utility and electrical costs to operate our fields, and increasing lease payments for certainequipment in our tertiary operating facilities. General and administrative expenses increased significantly from 2008levels due to increased compensation and personnel related costs, incentive compensation awards for certainmembers of management of Genesis, $10.0 million paid under a Founder’s Retirement Agreement, and acquisitionrelated expenses associated with the Encore merger agreement. Interest expense also increased during 2009, dueprimarily to the February issuance of $420 million of 9.75% Senior Subordinated Notes due 2016 and the pipelinedropdown transactions with Genesis, which were completed mid-2008, offset in part by increasing interestcapitalization related to our CO 2 pipelines under construction.Definitive Merger Agreement to Acquire Encore Acquisition Company. On November 1, 2009, Denbury and Encoreannounced that we had entered into a definitive merger agreement providing for Encore to merge with and into Denbury,in a stock and cash transaction valued at approximately $4.5 billion at that time, including the assumption of debt and thevalue of the general partner units and limited partner units held by Encore in Encore MLP. The combined company willcontinue to be known as Denbury Resources Inc. and will be headquartered in Plano, Texas.The Merger Agreement was unanimously approved by the boards of directors of both Denbury and Encore. TheMerger Agreement contemplates a merger whereby Denbury and Encore have agreed to combine their businessessuch that Encore will be merged with and into Denbury, with Denbury surviving the Merger. The Merger is subject tothe stockholders of each of Denbury and Encore approving the Merger, including approval by Denbury’s stockholdersof the issuance of Denbury common stock to be used as Merger consideration. Each company has scheduled aspecial stockholder meeting on March 9, 2010, for stockholders to vote on the merger.Under the agreement, Encore stockholders will receive $50.00 per share for each share of Encore common stock,comprised of $15.00 in cash and $35.00 in Denbury common stock, subject to both an election feature and a collarmechanism on the stock portion of the consideration as set forth in more detail below.Merger AgreementIn calculating the exchange ratio range for the collar mechanism, the Denbury common stock was initially valued at$15.10 per share. The collar mechanism is limited to a 12% upward or downward movement in the Denbury shareprice. The final number of Denbury shares to be issued will be adjusted based on the volume weighted average price ofDenbury common stock on the NYSE for the 20-day trading period ending on the second day prior to closing. Basedon this mechanism, if Denbury stock trades between $13.29 and $16.91, the Encore stockholders will receive betweenManagement’s Discussion and Analysis of Financial Condition and Results of OperationsForm 10-K Part II