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

58 Denbury Resources Inc. 2009 Annual ReportDepletion, Depreciation and Amortization (“DD&A”) and Full Cost Ceiling Test Write-downYear Ended December 31,In thousands, except per BOE data 2009 2008 2007Depletion and depreciation of oil and natural gas properties $ 203,719 $ 192,791 $ 174,356Depletion and depreciation of CO 2 assets 18,052 15,644 11,609Asset retirement obligations 3,280 3,048 2,977Depreciation of other fixed assets 13,272 10,309 6,958Total DD&A $ 238,323 $ 221,792 $ 195,900DD&A per BOE:Oil and natural gas properties $ 11.74 $ 11.55 $ 11.02CO 2 assets and other fixed assets 1.78 1.53 1.15Total DD&A cost per BOE $ 13.52 $ 13.08 $ 12.17Full cost ceiling test write-down $ — $ 226,000 $ —We adjust our DD&A rate each quarter for significant changes in our estimates of oil and natural gas reserves andcosts, and thus our DD&A rate could change significantly in the future. Our DD&A rate for oil and natural gas propertieson a per BOE basis increased slightly between 2008 and 2009 and increased approximately 5% between 2007 and2008, due primarily to capital spending and increasing costs. Our proved reserves increased from 194.7 MMBOE as ofDecember 31, 2007, to 250.5 MMBOE as of December 31, 2008, and decreased to 207.5 MMBOE as of December 31,2009, due primarily to the sale of our Barnett Shale properties during 2009.During 2009, we added approximately 48.8 MMBOE of proved reserves (before netting out 2009 production andproperty sales). The most significant additions were approximately 17.6 MMBOE related to our tertiary operations,18.4 MMBOE related to the acquisition of Conroe Field, and 9.6 MMBOE related to the acquisition of Hastings Field. Inthe second quarter of 2009, we booked approximately 10.9 million barrels of incremental oil reserves related to ourtertiary operations at Cranfield Field, as a result of the oil production response to the CO 2 injections in that field.Correspondingly, we moved approximately $82.4 million from unevaluated properties to the full cost pool relating toCranfield Field, representing the acquisition costs and development expenditures incurred on the field prior torecognizing proved reservesOur DD&A rate for our CO 2 and other fixed assets increased approximately 16% between 2008 and 2009, as a resultof the Heidelberg CO 2 pipeline being placed into service during 2008, expansion of our corporate offices during 2008,and field office expansion during 2009. At December 31, 2009, we had $779.1 million of costs related to CO 2 pipelinesunder construction. These costs were not being depreciated at December 31, 2009. Depreciation of these pipelineswill commence as each segment of pipeline is placed into service. Our DD&A rate for our CO 2 and other fixed assetsincreased in 2008 as compared to 2007, due primarily to the Heidelberg CO 2 pipeline being placed into service during2008, drilling costs for additional CO 2 wells, and the expansion of our corporate office space in 2008.As part of the requirements of the FASB guidance under the “Accounting for Asset Retirement Obligations” topic ofthe FASC, the fair value of a liability for an asset retirement obligation is recorded in the period in which it is incurred,discounted to its present value using our credit adjusted risk-free interest rate, with a corresponding capitalizedamount. The liability is accreted each period, and the capitalized cost is depreciated over the useful life of the relatedasset. On an undiscounted basis, we estimated our retirement obligations at December 31, 2007 to be $100.6 million($41.3 million present value), with an estimated salvage value of $67.3 million, and as of December 31, 2008, weestimated our retirement obligations to be $106.4 million ($45.1 million present value), with an estimated salvage valueof $76.4 million, the increase related to 2008 activity and higher cost estimates due to the inflation in our industry,partially offset by a decrease in our obligation of approximately $9.5 million, ($9.3 million present value) related to thesale of most of our Louisiana natural gas properties in late 2007 and early 2008. As of December 31, 2009, weestimated our retirement obligations to be $134.5 million ($54.3 million present value), with an estimated salvage valueof $81.4 million. The increase in our asset retirement obligations during 2009 was due to the acquisition of theHastings and Conroe Fields, partially offset by the disposition of our Barnett Shale assets. DD&A is calculated on theincrease in retirement obligations recorded as incremental oil and natural gas and CO 2 properties, net of its estimatedsalvage value. We also include the accretion of discount on the asset retirement obligation in our DD&A expense.Form 10-K Part IIManagement’s Discussion and Analysis of Financial Condition and Results of Operations