| DENBURY RESOURCES INC Item 1A Risk Factors Risks Related To Our Business Our production will decline if our access to sufficient amounts of carbon dioxide is limited |
| Our current long-term growth strategy is focused on our CO[2] tertiary recovery operations, and we expect approximately 50prca of our 2006 capital expenditures to be in this area |
| 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 CO[2] producing wells and facilities, including compression equipment, or catastrophic pipeline failure |
| Our anticipated future crude oil production is also dependent on our ability to increase the production volumes of CO[2] |
| If our crude oil production were to decline, it could have a material adverse effect on our financial condition and results of operations and cash flows |
| A substantial decrease in oil and natural gas prices could adversely affect our financial results |
| Our future financial condition, results of operations and the carrying value of our oil and natural gas properties depend 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 |
| Oil prices are likely to affect us more than natural gas prices because approximately 70prca of our proved 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: • the level of consumer demand for oil and natural gas; • the domestic and foreign supply of oil and natural gas; • the ability of the members of the Organization of Petroleum Exporting Countries to agree to and maintain oil price and production controls; • the price of foreign oil and natural gas; • domestic governmental regulations and taxes; • the price and availability of alternative fuel sources; • weather conditions, including hurricanes and tropical storms in and around the Gulf of Mexico; • market uncertainty; • political conditions in oil and natural gas producing regions, including the Middle East; and • 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 |
| At the end of 1998, NYMEX oil prices were at historic lows of approximately dlra12dtta00 per Bbl, but have generally increased since that time, albeit with fluctuations |
| For 2005, NYMEX oil prices were high throughout the year, averaging over dlra56dtta00 per Bbl for 2005 |
| During 2004 and 2005, the price we received for our heavier, sour crude oil did not correlate as well with NYMEX prices as it has historically |
| During 2002 and 2003, our average discount to NYMEX was dlra3dtta73 per Bbl and dlra3dtta60 per Bbl respectively |
| During 2004, this differential increased to dlra4dtta91 per Bbl for the year as a result of the price deterioration for 19 _________________________________________________________________ [85]Table of Contents Denbury Resources Inc |
| heavier, sour crudes, and was even higher during the fourth quarter of 2004, averaging dlra6dtta48 per Bbl |
| While we attempt to obtain the best price for our crude in our marketing efforts, we cannot control these market price swings and are subject to the market volatility for this type of oil |
| These price differentials relative to NYMEX prices can have as much of an impact on our profitability as does the volatility in the NYMEX oil prices |
| Natural gas prices have also experienced volatility during the last few years |
| During 1999 natural gas prices averaged approximately dlra2dtta35 per Mcf and, like crude oil, have generally trended upward since that time, although with significant fluctuations along the way |
| During 2004 NYMEX natural gas prices averaged dlra6dtta23 per MMBtu and in 2005, averaged dlra8dtta97 per MMBtu |
| Product Price Derivative Contracts may expose us to potential financial loss |
| To reduce our exposure to fluctuations in the prices of oil and natural gas, we currently and may in the future enter into derivative contracts in order to economically hedge a portion of our oil and natural gas production |
| Derivative contracts expose us to risk of financial loss in some circumstances, including when: • production is less than expected; • the counter-party to the derivative contract defaults on its contract obligations; or • there is a change in the expected differential between the underlying price in the hedging agreement and actual prices received |
| In addition, these derivative contracts 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,” and in Note 9, “Derivative Contracts,” to the Consolidated Financial Statements |
| Shortages of oil field equipment, services and qualified personnel could reduce our cash flow and adversely affect results of operations |
| 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 |
| Due to the recent record high oil and gas prices, we have experienced shortages of drilling rigs and other equipment, as demand for rigs and equipment has increased along with the number of wells being drilled |
| Higher oil and natural gas prices generally stimulate increased demand and result in increased prices for drilling rigs, crews and associated supplies, oilfield equipment and services and personnel in our exploration and production operations |
| These types of shortages or price increases could significantly decrease our profit margin, cash flow and operating results or restrict or delay our ability to drill those wells and conduct those operations that we currently have planned and budgeted |
| Our future performance depends upon our ability to find or acquire additional oil and natural gas reserves that are economically recoverable |
| 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 |
| 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 CO[2] 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 20 _________________________________________________________________ [86]Table of Contents Denbury Resources Inc |
| 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 |
| In January 2006, we purchased three oil fields for dlra248 million that we believe have significant potential oil reserves that can be recovered through the use of tertiary flooding: Tinsley Field approximately 40 miles northwest of Jackson, Mississippi; Citronelle Field in Southwest Alabama, and the smaller South Cypress Creek Field near our Eucutta Field in Eastern Mississippi |
| These three fields are producing approximately 2cmam200 BOE/d net to the acquired interests, and have proved reserves of approximately 14dtta4 million BOEs |
| If we are unable to successfully develop the potential oil reserves and increase production at these three fields, it would negatively affect the return on our investment in these fields |
| We face competition from other oil and natural gas companies in all aspects of our business, including acquisition of producing properties and oil and gas leases |
| Many of our competitors have substantially larger financial and other resources |
| Other 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 |
| Oil and natural gas drilling and producing operations involve various risks |
| 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 |
| 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: • unexpected drilling conditions; • title problems; • pressure or irregularities in formations; • equipment failures or accidents; • adverse weather conditions, including hurricanes and tropical storms in and around the Gulf of Mexico that can damage oil and natural gas facilities and delivering systems and disrupt operations; • compliance with environmental and other governmental requirements; and • 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 |
| The nature of these risks is such that some liabilities could exceed our insurance 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, financial condition and cash flows |
| Our CO[2] tertiary recovery projects require a significant amount of electricity to operate the facilities |
| If these costs were to increase significantly, it could have an adverse effect upon the profitability of these operations |
| We depend on our key personnel |
| We believe our continued success depends on the collective abilities and efforts of our senior management |
| The loss of one or more key personnel could have a material adverse effect on our results of operations |
| We do not have any employment agreements and do not maintain any key man life insurance policies |
| Additionally, if we are unable to find, hire and retain needed key personnel in the future, our results of operations could be materially and adversely affected |
| The loss of more than one of our large oil and natural gas purchasers could have a material adverse effect on our operations |
| For the year ended December 31, 2005, three purchasers each accounted for more than 10prca of our oil and natural gas revenues and in the aggregate, for 61prca of these revenues |
| We would not expect the loss of any single purchaser 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 |
| Estimating our reserves, production and future net cash flow is difficult to do with any certainty |
| Estimating quantities of proved oil and natural gas reserves is a complex process |
| It requires interpretations of available technical data and various assumptions, including assumptions relating to economic factors, such as future commodity prices, production costs, severance and excise taxes, capital expenditures and workover and remedial costs, and the assumed effect of governmental regulation |
| There are numerous uncertainties about when a property may have proved reserves as compared to potential or probable reserves, particularly relating to our tertiary recovery operations |
| Actual results most likely will vary from our estimates |
| Also, the use of a 10prca discount factor for reporting purposes, as prescribed by the SEC, may not necessarily represent the most appropriate discount factor, given actual interest rates and risks to which our business or the oil and natural gas industry in general are subject |
| Any significant inaccuracies in these interpretations or assumptions or changes of conditions could result in a reduction of the quantities and net present value of our reserves |
| 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 our financial condition, operating results and cash flows |
| The reserve data included in documents incorporated by reference represent only estimates |
| 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 |
| As of December 31, 2005, approximately 44prca of our estimated proved reserves were 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 |
| We are subject to complex federal, state and local laws and regulations, including environmental laws, that could adversely affect our business |
| Exploration for and development, exploitation, production and sale of oil and natural gas in the United States are subject to extensive federal, state and local laws and regulations, including complex tax laws and environmental laws and regulations |
| Existing laws or regulations, as currently interpreted or reinterpreted in the future, or future laws, regulations or incremental taxes and fees, could harm our business, results of operations and financial condition |
| We may be required to make large expenditures to comply with environmental and other governmental regulations |
| Matters subject to regulation include oil and gas production and saltwater disposal operations and our processing, handling and disposal of hazardous materials, such as hydrocarbons and naturally occurring radioactive materials, discharge permits for drilling operations, spacing of wells, environmental protection and taxation |
| We could incur significant costs as a result of violations of or liabilities under environmental or other laws, including third-party claims for personal injuries and property damage, reclamation costs, remediation and clean-up costs resulting from oil spills and discharges of hazardous materials, fines and sanctions, and other environmental damages |
| Our level of indebtedness may adversely affect operations and limit our growth |
| As of January 31, 2006, we have approximately dlra100dtta0 million available on our borrowing base under our bank credit facility |
| The next semi-annual redetermination of the borrowing base for our bank credit facility will be on April 1, 2006 |
| Our bank borrowing base is adjusted at the banks’ discretion and is based in part upon external factors over which 22 _________________________________________________________________ [88]Table of Contents Denbury Resources Inc |
| If our then redetermined borrowing base is less than our outstanding borrowings under the facility, we will be required to repay the deficit over a period of six months |
| We may incur additional indebtedness in the future under our bank credit facility in connection with our acquisition, development, exploitation and exploration of oil and natural gas producing properties |
| Further, our cash flow from operations is highly dependent on the prices that we receive for oil and natural gas |
| If oil and natural gas prices were to decline significantly, particularly for an extended period of time, our degree of leverage could increase substantially |
| The level of our indebtedness could have important consequences, including but not limited to, the following: • a substantial portion of our cash flows from operations may be dedicated to servicing our indebtedness and would not be available for other purposes; • our business may not generate sufficient cash flow from operations to enable us to continue to meet our obligations under our indebtedness; • our level of indebtedness may impair our ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions or general corporate and other purposes; • our interest expense may increase in the event of increases in interest rates, because certain of our borrowings are at variable rates of interest; • our vulnerability to general adverse economic and industry conditions may increase, potentially restricting us from making acquisitions, introducing new technologies or exploiting business opportunities; • our ability to borrow additional funds, dispose of assets, pay dividends and make certain investments may be limited by the covenants contained in the agreements governing our outstanding indebtedness limit; and • our debt covenants may also affect our flexibility in planning for, and reacting to, changes in the economy and in our industry |
| Our failure to comply with such covenants could result in an event of default under such debt instruments which, if not cured or waived, could have a material adverse effect on us |
| If we are unable to generate sufficient cash flow or otherwise obtain funds necessary to make required payments on our indebtedness or if we otherwise fail to comply with the various covenants in such indebtedness, including covenants in our bank credit facility, we would be in default |
| This default would permit the holders of such indebtedness to accelerate the maturity of such indebtedness and could cause defaults under other indebtedness, including the subordinated notes, or result in our bankruptcy |
| Our ability to meet our obligations will depend upon our future performance, which will be subject to prevailing economic conditions and to financial, business and other factors, including factors beyond our control |