Denbury Resources, Inc.

5100 Tennyson Parkway, Suite 3000
Plano, Texas 75024
U.S.A.
Telephone: (972) 673-2000
Fax: (972) 673-2150
Web site: http://www.denbury.com

Public Company
Incorporated: 1951 as Key Lake Mines Limited (N.P.L.)
Employees: 374
Sales: $393.70 million (2003)
Stock Exchanges: New York
Ticker Symbol: DNR
NAIC: 211111 Crude Petroleum and Natural Gas Exploration

Denbury Resources, Inc. is an independent oil and gas company that ranks as the largest operator in Mississippi. Denbury also owns producing fields in Louisiana, but its signature properties are in Mississippi, where the company owns the largest reserves of carbon dioxide. Carbon dioxide, when injected into an oilfield, acts as a type of solvent for the oil, causing it to expand and become mobile, easing its recovery. Denbury began using carbon dioxide to extract oil from proven oilfields in the late 1990s, a move that led to the transformation of the company into what is known as a tertiary exploitation producer, as opposed to an exploration and production company reliant on traditional acquire-drill-exploit tactics. Denbury's carbon dioxide properties are located in western Mississippi. In eastern Mississippi, the company owns interests in 504 wells, deriving the majority of its business from the largest field in the region, the Heidelberg field. Denbury owns interests in 87 wells in Louisiana, maintaining a presence in the southern part of the state.

Origins

Denbury underwent significant changes during its first half-century of business, changing its name, its corporate structure, its nationality, and its business strategy. The outward inconstancy of the company developed from one common characteristic, however—its involvement in oil and gas exploration and development. Denbury began its business life as "Key Lake Mines Limited (N.P.L.)," a company incorporated under the laws of Manitoba, Canada, in March 1951. During this era of the company's existence, it was focused on developing oil and natural gas properties in Manitoba, although it did maintain a small presence in Saskatchewan. For the next three decades, the company's geographic scope of operations remained essentially the same, with the bulk of its business being conducted in Manitoba and, to a lesser extent, in Saskatchewan.

The company changed its name to "Newscope Resources Limited" in September 1984, a somewhat superficial event, to be sure, but one that symbolized the sweeping changes about to take place. After adopting Newport Resources as its corporate title, the company changed its name three more times during the ensuing nine years, eventually settling on Denbury Resources, Inc. in December 1995. During this period, the profile of the company changed dramatically, as Denbury's predecessor sold its assets, abandoned its home country, and chose a new geographic base.

The company spent more than 35 years earning its living in Manitoba and Saskatchewan. After 1987, however, the unvarying quality of its existence began to change. Between 1988 and 1990, the majority of the company's exploration and development activities shifted west, to Alberta. The change in geographic stance marked the beginning of a far more dramatic alteration in the company's geographic focus.

Divesting Canadian Operations: Early 1990s

During the early 1990s, Newscope's management decided to divest its Canadian operations and focus on operating in the United States instead. In March 1992, the company sold its Manitoba oil and gas properties—the historical roots of the organization. In a transaction completed four months later, the company acquired all the outstanding shares of Denbury Management, a Mississippi-based company formed in 1990, and appointed its leader, Gareth Roberts, president and chief executive officer of Newscope. The acquisition pointed the company in a new direction, giving it oil and gas properties in Texas, Louisiana, and Mississippi. In September 1993, the geographic transformation was completed when Newscope sold all its remaining Canadian oil and gas properties, operations that consisted primarily of producing oil and gas properties in Saskatchewan and Alberta, as well as undeveloped lands in British Columbia, Alberta, and Saskatchewan.

Following a new business strategy, Newscope, in the years immediately following its last Canadian divestiture, focused primarily on onshore properties in Louisiana and Mississippi. It was two years before Newscope changed its name to Denbury to reflect the name of its U.S. subsidiary, and another six years before the company moved its headquarters to the United States (Denbury moved to Texas in April 1999). As these events occurred in the background, Gareth Roberts and his executives worked to build the company's presence in the southern United States. They bolstered Denbury's position largely through the acquisition of oil and gas properties. As a rule, roughly three-quarters of the company's oil and gas reserves during the 1990s were obtained from acquisitions. During the second half of the decade, Denbury completed four acquisitions that provided the base for its rapid expansion as it entered the new century.

The first of Denbury's signal purchases occurred in May 1996. The company paid $37 million for properties owned by Amerada Hess Corp. that averaged nearly 3,000 barrels of oil equivalent per day, or BOE/D, a measurement that quantified both oil and gas production into one figure. Next, the company completed the largest acquisition in its history. In December 1997, Denbury paid $202 million to Chevron U.S.A., Inc. for the Heidelberg field in Jasper County, Mississippi. The purchase, which gave the company the vast majority of holdings in the Mississippi Salt Flats Basin, more than doubled the company's total reserves. Before the acquisition, the company's reserves totaled 27.4 million barrels of oil equivalent (BOE), a volume that exponentially increased after the addition of Heidelberg's 30.2 million BOE.

Additional acquisitions were completed during the late 1990s, but before the deals were concluded, Denbury's management needed to resolve a difficult situation. The company's cash flow declined sharply in 1998, when depressed oil prices delivered a stinging blow to its operations. Low oil prices continued into 1999, further draining the company's cash flow and increasing debt levels. To resolve the problem, Denbury sought an infusion of capital from its largest shareholder, Texas Pacific Group. In April 1999, the deal was concluded, when Texas Pacific gave Denbury $100 million in return for increasing its ownership in the company from 32 percent to 60 percent.

Denbury Acquiring First Carbon Dioxide Asset in 1999

By the end of the 1990s, the properties acquired from Amerada Hess and Chevron ranked as two of the five largest fields supporting Denbury. Of the other three largest fields, two were acquired in 1999, including one that gave the company a new strategic focus for the 21st century. Denbury paid nearly $5 million for the King Bee oilfield in Mississippi and $12.3 million for the Little Creek tertiary recovery oilfield, also located in Mississippi. Although the Little Creek purchase paled in stature to the Heidelberg acquisition, its addition to Denbury's property portfolio had a tremendous influence on the company. With Little Creek, a project originally developed by Shell Oil Company, Denbury acquired its first carbon dioxide assets, leading the company to begin approaching its production efforts in a new way.

The use of carbon dioxide in oil extraction gave Denbury a new way of conducting its business and new potential to old oil wells. When injected, or "flooded," into an oil well, carbon dioxide acted as a solvent, causing oil to expand and become mobile, which eased the recovery of both the oil and the carbon dioxide. Once recovered, the carbon dioxide was extracted from the oil, compressed back into a liquid state, and reinjected into the oil reservoir. After repeating this cycle several times, nearly as much oil could be recovered as in the primary production phase of an oil reservoir.

Pilot studies sponsored by major oil companies during the 1970s and 1980s demonstrated carbon dioxide-induced oil extraction could work. However, its financial feasibility was contingent on there being a sufficient supply of carbon dioxide available at a reasonable cost. There were few regions that possessed abundant supplies of carbon dioxide, but Mississippi was one of them, rich in reserves produced from a volcano near Jackson, Mississippi. The carbon dioxide reserves were discovered during the 1960s, when exploration efforts to find oil and gas revealed large volumes of carbon dioxide. Denbury, situated ideally to take advantage of a bountiful supply of inexpensive carbon dioxide, seized an opportunity available to few other oil producers. After the August 1999 acquisition of Little Creek—a momentous event in the company's history—Denbury moved to acquire additional carbon dioxide assets and to breathe new life into its business and into established oilfields.

By 2000, Denbury dominated ownership of carbon dioxide properties in Mississippi. In February 2001, the company paid $42 million for properties that assured its supply of carbon dioxide, confirming the company as the leader in its niche. The acquisition, purchased from a business unit of Airgas, Inc., gave Denbury 800 billion cubic feet of carbon dioxide—most of the carbon dioxide supply in Mississippi—and ownership of a 183-mile carbon dioxide pipeline. With the ability to control the price and availability of carbon dioxide, the company acquired oil wells within its carbon-dioxide service area, typically purchasing old oil properties for a low price relative to their tertiary recovery value. In two such cases, Denbury paid $4 million for the West Mallalieu and Olive fields in southwestern Mississippi in 2001. In 2002, the company acquired the McComb field for $2.3 million.

Company Perspectives:

Where will our children get their energy in the future? Denbury has the solution. By using naturally occurring carbon dioxide to recover more oil from depleted oilfields in the United States, Denbury's strategy will not only benefit current shareholders but also create resources our children will inherit.

Denbury also expanded its business in other areas at this time. In mid-2001, the company acquired Matrix Oil & Gas, Inc., a Louisiana-based company with most of its properties located offshore in the Gulf of Mexico. The acquisition, completed for $158 million, increased Denbury's reserves by approximately 12 percent and its production by approximately 22 percent. In August 2002, the company added to its offshore portfolio, acquiring COHO Energy Inc.'s Gulf Coast properties for $48 million. Denbury eventually divested its interests in the Gulf of Mexico, selling its offshore subsidiary, Denbury Offshore, Inc., for $200 million in July 2004.

Denbury recorded explosive growth in the years following its decision to extract oil with carbon dioxide. The company exited the 1990s with less than $90 million in annual revenue. By 2003, the company was generating nearly $400 million in revenue. The effectiveness of carbon dioxide extraction contributed greatly to the company's growth. Its original carbon dioxide property, Little Creek, served as a prime example of the gains to be achieved by employing carbon dioxide. When Denbury acquired the property, it was producing 1,350 barrels of oil per day. By 2003, after carbon dioxide flooding of the property, Little Creek was averaging 3,201 barrels of oil per day. The company by this point owned every carbon dioxide producing well in western Mississippi, vanquishing any competitor's hope of following Denbury's lead. Further, in the area stretching from eastern Texas to Florida, the company owned all the natural sources of carbon dioxide.

As Denbury prepared for the future, the company's stranglehold on carbon dioxide assets boded well for growth in the coming years. The company was preparing to expand the geographic scope of its operations by building new carbon dioxide pipelines to service other oilfields. In February 2004, the company initiated feasibility studies concerning extending carbon dioxide recovery operations into eastern Mississippi. In August 2004, after arriving at positive conclusions, Denbury announced it had begun to acquire leases for the construction of an 84-mile pipeline to transport carbon dioxide eastward from its source near Jackson. The pipeline, which was expected to be completed by 2006, was designed to carry carbon dioxide into the company's Eucutta field, the primary producing property acquired in the 1996 Amerada Hess purchase. In the years ahead, Denbury was expected to increase the coverage of its pipeline system and to acquire oil properties in proximity to its supply of carbon dioxide, as the company endeavored to leverage its power and record robust growth.

Principal Subsidiaries

Denbury Gathering & Marketing, Inc.; Genesis Energy, Inc.; Denbury Operating Company; Denbury Onshore, L.L.C.; Denbury Marine, L.L.C.; Tuscaloosa Royalty Fund L.L.C.

Principal Competitors

The Meridian Resource Corporation; Newfield Exploration Company; Swift Energy Company.

Key Dates:

1951:

Denbury's predecessor organization, Key Lake Mines Limited (N.P.L.), is incorporated in Manitoba, Canada.

1984:

Key Lake changes its name to Newscope Resources Limited.

1992:

Newscope decides to divest its Canadian holdings and turn its focus to the southern United States.

1995:

Newscope changes its name to Denbury Resources, Inc.

1997:

Denbury acquires the Heidelberg field from Chevron.

1999:

The acquisition of the Little Creek field moves Denbury into the carbon dioxide business.

2001:

The acquisition of carbon dioxide properties from Airgas, Inc. confirms Denbury as the region's dominant carbon dioxide owner.

2004:

Denbury sells its properties in the Gulf Coast, divesting Denbury Offshore, Inc.

Further Reading

Cleveland, Crystal, "Denbury Resources Inc., Dallas, Has Acquired Coho Energy Inc.'s Gulf Coast Properties from Bankruptcy Court for $50.3 Million," Oil and Gas Investor, September 2002, p. 105.

"Denbury Closes $42 Million Acquisition of CO2 Assets," Canadian Corporate News, February 6, 2001.

"Denbury Resources Announces Internal Holding Company Reorganization," Canadian Corporate News, December 23, 2003, p. 32.

"Denbury Resources Announces Plans to De-List from the Toronto Stock Exchange," Canadian Corporate News, March 21, 2002.

"Denbury Resources Announces Record Quarterly and Annual Earnings," Canadian Corporate News, February 23, 2001.

"Denbury Resources Completes Matrix Oil & Gas Acquisition," Canadian Corporate News, July 13, 2001.

"Denbury Resources Inc.," Market News Publishing, May 1, 2001.

"Denbury Resources Inc. Announces New CO2 Pipeline," Canadian Corporate News, August 31, 2004, p. 45.

"Denbury Sells Offshore Assets," Mississippi Business Journal, August 2, 2004, p. 10.

"Denbury to Acquire Matrix," Oil Daily, June 6, 2001.

Fletcher, Sam, "HS Resources, Denbury Snap Up Properties from Majors in Multi-Million-Dollar Deals," Oil Daily, November 26, 1997, p. 1.

—Jeffrey L. Covell