Denbury Resources, Inc. Q4 2008 Earnings Call Transcript

Feb.25.09 | About: Denbury Resources (DNR)

Denbury Resources, Inc. (NYSE:DNR)

Q4 2008 Earnings Call

February 25, 2008 11:00 am ET

Executives

Gareth Roberts – Co-Chairman of the Board

Phil Rykhoek – Chief Executive Officer

Ronald Tracy Evans – President & Chief Operating Officer

Robert Cornelius – Senior Vice President Operations

Mark C. Allen – Chief Financial Officer & Senior Vice President

Analysts

Michael Scialla – Thomas Weisel Partners, LLC

[Unidentified Analyst] – UBS

Jin Lu – J.P. Morgan

[Scott Loomis] – Simmons & Company

Chris Gault – Barclays Capital

Operator

Welcome to the Denbury Resources Incorporated 2008 results call. At this time all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Mr. Gareth Roberts, President and CEO for Denbury Resources Incorporated.

Gareth Roberts

Welcome to Denbury’s fourth quarter and yearend 2008 conference call. I have with me today Phil Rykhoek, our Chief Financial Officer; Tracy Evans, our Senior Vice President of Reservoir Engineering; Bob Cornelius, our Senior Vice President of Operations; and Mark Allen, currently our VP and Chief Accounting Officer. I would remind everybody that we’ll be making forward-looking statements in this conference call so you should be aware of that fact and read the full disclaimer in the 10K.

For the full year Denbury recorded record annual earnings of $388 million or $1.59 per share with the fourth quarter net income coming in at $43.8 million or $0.18 per share. But, as you all know it’s truly a Jekyll and Hyde type of year. We’ve made and continue to make adjustments for the new environment that we find ourselves in. I will now turn the call over to Mark Allen to have him give us the financial numbers.

Mark C. Allen

I would hope that there weren’t any surprises in this earnings announcement since we had preannounced our production and most other things are in line with expectations as evidence that we were right on first call forecast if you exclude the two big non-cash items. As we have typically done, I’m going to focus on the comparison of the third and fourth quarters of 2008 rather than the comparative fourth quarter or annual results.

As you saw we had two significant but almost offsetting items in the fourth quarter of 2008. We had a $240.5 million pre-tax net fair value gain on our commodity derivative contracts almost offset by a $226 million pre-tax full cost pool ceiling test write down. I think you probably understand the mark-to-market gains on the hedges very well as we have these every quarter. As to the full cost ceiling test, this is the first ceiling test write down we’ve had since 1998.

Because we do not follow hedge accounting we were not able to use the fair value of our commodity derivatives at the yearend to offset the full cost write down. As you probably know, we are required to perform the ceiling test every quarter which in summary prepares the PB10 value of our proved reserves using quarter end prices and in this case $44.60 per barrel and $5.71 per BTU to the unamortized balance of our oil and gas assets in our full cost pool adjusting for income tax related affects.

Since commodity prices have not improved since yearend and are actually lower, we may be required to record additional write downs at March 31st and subsequent periods. Of course, this depends on the commodity prices at the end of each quarter, the reserves we add each quarter and the capital we spend.

Other than the two non-cash items there weren’t any big surprises this quarter. The big topic is the drop in commodity prices as our net realized price per BOE dropped almost in half between Q3 and Q4. Our production increased 5% sequentially between Q3 and Q4 but that only partially offsets the drop in commodity prices. Tertiary production increased 11% sequentially to 21,874 barrels a day generally on track with our forecast.

To date in 2009 we appear to be on track with our forecast and therefore are reaffirming our 2009 targeted production of 24,500 barrels per day from our tertiary operations and 50,000 BOEs per day for the total company. Our oil non-mix differentials improved to $3.59 per barrel below NYMEX this quarter as compared to $6.06 below NYMEX in the prior quarter. Most of this relates to the drop in overall oil prices although there have been some interesting things happening for us in 2009 with our oil price differentials.

As you may have read during the last month or so the NYMEX price has been a relatively poor indicator of true prices due to general lack of storage at Cushing Oklahoma. We have seen the [LOS] posting the reference price for most of our light sweet crude be as much as $10 above NYMEX when historically this was usually no more than $1 or $2. Although this fluctuates daily if this trend continues we could have a very low differential in the first quarter of 2009 somewhat like the anomalies of 2007.

Our total corporate operating costs decreased 11% sequentially on a BOE basis from $20.20 per BOE last quarter to $17.90 per BOE this quarter. As you might expect, this was driven by lower tertiary operating cost per BOE, an 18% sequential decline between Q3 and Q4 from $26.81 during Q3 to $21.86 in Q4.

I think Bob is going to discuss this further but in looking forward we expect to have some additional savings in our operating costs if commodity prices remain at current levels. You might want to review our analyst presentation for further details. But, we think our tertiary operating costs should be reduced to below $20 per barrel in this commodity price environment. But, that will vary depending on production response from our new tertiary floods.

G&A expenses also decreased from the Q3 levels down approximately 8% sequentially. The biggest single reduction in G&A was a reduced bonus accrual as 2008 bonuses were reduced to the 75th percentile. Going forward we expect our G&A costs to increase moderately during 2009 and are expected to be in the mid upper $3 BOE range although Q1 of each year is generally higher than the others. While we have taken some cost saving measures such as reducing our rate of hiring, we did give modest yearend raises and we do not plan to reduce our headcount.

Interest expense also decreased sequentially from $10.9 million to $8.6 million primarily related to an incremental capitalization of interest expense of $2.9 million in Q4. Going forward you will want to consider the higher financing costs associated with the recent sub debt offering that Phil is going to discuss momentarily and the generally higher overall debt levels. Although, this will be partially offset by an anticipated $3 to $5 million quarterly increase in the capitalization of interest expense over Q4. We are capitalizing interest on the CO2 pipelines and untrue properties but it is the going pipeline costs that are primarily driving this increase.

Tracy is going to review our proved reserves but in summary our proved reserves increased 29% during 2008. However, the biggest increase was from our tertiary operations and on these properties we typically recognize about 75% of what we believe will the ultimate recovery. Therefore, the initial recognition of these reserves usually doesn’t help produce our DD&A rate much when you take in to account the transfer of costs from under valuated properties at the time of booking proved reserves and the future development costs and the initial recognition of less than what we believe ultimately will be recoverable.

This quarter was also impacted by the exclusion of approximately 13.8 million BOEs of proved reserves due to the decline in commodity prices at yearend. This reduction of 13.8 million barrels we estimate increased our DD&A rate for the quarter by approximately $0.60 per BOE. With that, I’ll pass it over to Phil.

Phil Rykhoek

I’m going to spend my time discussing balance sheet liquidity, kind of a hot topic in today’s economy. First, let me briefly take you back to where we have been. During the last six months we’ve taken several steps to improve our liquidity as a result of the deterioration in the capital markets and the decrease in oil and natural gas prices.

First of all in October, 2008 we were able to obtain a $400 million increase to our bank commitment amount which raised our bank line from $350 million to $750 million which was originally intended to fund the proposed Conroe acquisition. However, because of the deterioration in the capital markets we became concerned we might not be able to sell our Barnett Shale properties and without that certainty we didn’t feel comfortable increasing our leverage so as you know we cancelled our Conroe acquisition forfeiting the $30 million deposit which we expensed in the third quarter.

At about the same time we purchased oil derivative contracts for 2009 that have a floor price of $75 and a ceiling of $115. These collars cover 30,000 barrels a day representing approximately 80% of our currently anticipated 2009 oil production. Those hedges are with five different counterparties all part of our 12 bank group that make up our credit line and it was these derivatives that were responsible for most of that fourth quarter mark-to-market gain that Mark discussed.

We’ve also trimmed our 2009 capital budget back significantly and just a couple of weeks ago we took another significant step improving our liquidity by issuing $420 million of 9.75% seven year senior sub notes. These notes were sold to the public at 92.85 of par an effective yield through maturity of approximately 11.25%. We used the net proceeds from that offering or approximately $380 million to repay most of our then outstanding debt on our bank credit facility. While these notes were not the cheapest form of capital we have ever accessed, we view this issuance as a great piece of liquidity insurance.

Our 2009 capital budget remains at $750 million plus the already closed Hastings acquisition of $201. Included in this capital budget is approximately $485 million related to our CO2 pipelines the majority of which is just above the Green CO2 pipeline. The budget also assumes we fund approximately $100 million of equipment purchases with operating leases a practice we had discontinued in 2008 when we received a favorable tax ruling on writing off tertiary related equipment and pipelines.

With the recent downturn in commodity prices we anticipate our cash income taxes for 2009 will be very minimal minimizing the benefit of the favorable tax ruling and with the lower projected cash income taxes for the near future and the advantageous interest rate we get with equipment lease financing, we are resuming our equipment lease program in 2009. We have budgeted a $100 million but would like to do up to $150 million if possible. However, the use of these operating leases is dependent on being able to secure acceptable financing and to date we have not yet secured most of this financing.

Based on current cash flow projections, we anticipate that our 2009 cap ex will likely exceed projected cash flow by $400 to $500 million including the Hastings acquisition. We anticipate funding this shortfall with the proceeds from our recent sub debt issuance and our bank credit line and we expect to have total bank debt at the end of 2009 of somewhere between $150 and $250 million. Now, that’s on a $750 million bank line.

At this point we believe our bank line is in very good shape although obviously things could change if prices decline further. We had a significant cushion of credit availability last fall when the line was set so even though the decline in commodity prices has reduced our borrowing capability, to date it has not affected our $1 billion borrowing base. Today we have $945 million of sub date with air less maturity in 2013 and we have $60 million outstanding on our bank line which isn’t due until September 2011.

We knew that 2009 was going to require a lot of capital with the Green CO2 pipeline construction but in the future our capital spending program is much more flexible. Therefore, we believe that we will be able to match our capital spending with cash flow from operations and preserve our liquidity to the extent we deem necessary. Of course, depending on commodity prices any reduction in capital spending could impact future production growth.

So, bottom line we have good liquidity, we are continuing to monitor the markets, monitor our spending and the average changing economic environment and we pledge to do our best to keep this company strong. With that, I’ll turn it over to Tracy.

Ronald Tracy Evans

As has been the case since yearend 2000 the [inaudible] performed an evaluation of our reserves as of yearend which is December 31, 2008. As we announced February 2, 2009 our proved reserves during 2008 increased to 250.4 million barrels of oil equivalents which consists of about 179 million barrels of oil, condensate and natural gas liquids and 428 BCF of natural gas. Reserves associated with the Hastings acquisition are not included in our yearend reserve estimates.

Our yearend reserves increased 295 from yearend 2007 in spite of a 13.8 million barrel decrease in reserves due to the lower commodity prices at which reserves were estimated at yearend. The net present value using a 10% discount rate of our proved reserves was $1.9 billion as of yearend 2008. In comparison our net present value of our proved reserves at yearend 2007 was $5.4 billion.

This decrease in net present value from year-to-year was primarily caused by the dramatic drop in oil price and to a lesser degree lower gas prices used to evaluate each yearend estimate and values. The proved reserve estimates at yearend 2008 were based on a NYMEX oil prices of $44.60 per barrel and a natural gas price of $5.71 per MCF compared to yearend 2000 oil prices of $95.98 per barrel and $6.80 per MCF.

Proved reserves associated with our CO2 tertiary operations now account for approximately 50% of our yearend total proved reserves or 125.8 million barrels of oil as of yearend. In comparison, our tertiary reserves at year end 2007 were 69.5 million barrels of oil. We added approximately 89 million barrels of oil of proved reserves during 2008 before netting out 2008 production, property sales and the reserve revision due to lower commodity prices replacing approximately 525% of our 2008 production. Virtually all of this growth was internal growth.

The most significant reserve additions during 2008 were 63.3 million barrels at our CO2 tertiary recovery operations and approximately 107 BCFE or 19.5 million barrels of oil equivalent in the Barnett shale. Both values are before netting out 2008 production. Our CO2 tertiary related oil reserves added during 2008 were primarily at Tinsley, 34.8 million barrels of oil equivalents in our Phase III operations, Heidelberg 22.4 million barrels of oil at our Phase II operations and 4 million barrels of oil equivalent at Lockhart Crossing which is a Phase I field. We also sold approximately 2.5 million barrels of oil equivalents of approved reserves during 2008 related to the last portion of our Louisiana natural gas properties.

Other than the downward revisions of proved reserves through the commodity price changes we discussed earlier our net revisions of proved reserves based on performance were positive of approximately 3 million barrels of oil. Thus, as of yearend 2008, approximately 72% of our free reserves were oil, condensate and natural gas liquids and 58% of our proved reserves are proved developed reserves.

In addition to our proved oil and gas reserves estimated by [D&M] at yearend. [D&M] also performed an evaluation of our proved CO2 reserves. Our CO2 reserves remained essentially unchanged as 5.6 TCF of CO2 as of yearend 2008. Our 2008 CO2 production of 233 BCF of CO2 was offset by reserves added during the year from our development activities in the Jackson Dome area.

I’d also like to make a brief comment concerning our previously announced Barnett shale divestiture. At the present time we have not received any acceptable offers to purchase our Barnett shale assets and thus have suspended our formal process of marketing these assets at this time. If we were to receive an acceptable offer, if market conditions were to improve or we were able to acquire additional fields that would have tertiary potential we will consider monetizing the Barnett assets at that time.

With that I’ll turn it over to Bob.

Robert Cornelius

I’ll give you guys a quick update on our major projects and fields. First of all I’d like to report or repeat what Mark said that the fourth quarter oil production averaged 48,237 net BOEs, that’s a 5% increase over the third quarter of 2008. EOR fields produced an average of 21,874 net BOEs during the quarter. That is an 11% increase over the third quarter of last year and a 26% increase over the fourth quarter of 2007.

Now, while we were implementing savings plans during the fourth quarter we also had a pretty robust quarter in terms of production growth and major project startups. Several of the major projects and events were that the majority of the construction of the 78 mile Delta pipeline which goes from Tinsley to Delhi was started and almost completed. We also started the construction of the 320 mile Green line. We began intense construction at Heidelberg and we initiated CO2 injection at Heidelberg. At Cranfield our Phase IV project should first tertiary response during January.

Several of our tertiary fields had really significant increases. In fact, 11 of the fields that we now operate exceeded production from prior quarters with the exception of one field and that was Mallalieu. Mallalieu’s fourth quarter production of 5,056 net BOEs was slightly less than last quarter due to compression issues. But, even with Mallalieu flat to last quarter our Southwest Mississippi or Phase I production exhibited a 5.7% increase quarter-to-quarter. If you recall, those fields consist of Little Creek, Brookhaven, Mallalieu, McComb-Smithdale and Lockhart. The better performers of the group were Brookhaven, McComb and Lockhart Crossing.

Brookhaven increased production by almost 15% or 406 net BOEs per day from 2,777 net BOEs to 3,178 net BOEs. The increase in production primarily came from new responding well in our fifth development area of the field. A reservoir and operation feed will continue to ensure CO2 is injected efficiently in to that reservoir. In fact, we injected polymer treatments in to several injection wells. Now, polymer treatments when injected redirect the CO2 flow in to the reservoir allowing more reservoir rock to be contacted by the CO2 thus increasing production in our offset wells.

The team also increased recycle facilities during the quarter and we plan to add 40 million cubic feet per day compressor at the facility that should be operation during March that is going to help us continuing handling fluid. Lockhart Crossing is our first CO2 field in Louisiana. That field increased 205% or 373 net BOEs per day quarter-to-quarter as production increased from an average of 182 BOEs per day to 555 net BOEs per day over the period. Now, this oil production increase is pretty typical of new responding floods as we open up chokes and improve our operations.

In Phase II which consists of Eucutta, Soso and Martinville, we increased production 17% quarter-to-quarter. Eucutta increased 8% over the quarter, production moved from 3,262 BOEs per day to a net 3,538 BOEs per say. We improved the operation efficient of the facility by removing several bottlenecks in the system, adding heat capacity to our oil and CO2 separation. We also continue work to increase the facilities recycle capacity by approximately 100 million cubic feet a day. Now, this additional capacity should be operational during the second quarter and help us ensure our forecast through the year.

Soso field continued to be one of the best performing units. We averaged 2,704 net BOEs per day during the fourth quarter a 15% increase. The team completed pipeline and vessel modifications to increase recyclable water capacity and several producing wells were converted to injections to support CO2 production. Martinville increased 65% or 476 net BOEs per day quarter-to-quarter. This production increase was the largest of any field on a BOE basis during the period. The unit averaged 1,212 BOEs per day during the fourth quarter. The response came from a CO2 injection well that was drilled and completed during the third quarter of 2008 that provided the injection support for this fourth quarter production increase.

Heidelberg of course is one of the largest or is the largest Phase II field. We completed the connection of the project to the free state pipeline during the quarter and we began injections in December 2008. The recycle facility is being constructed, it’s underway. Our first tertiary production in this pattern is forecasted during the second half of 2009.

Those who follow us know that Tinsley is the largest tertiary field and it’s really the only field in Phase III. We experienced a 21% increase quarter-to-quarter. Production moved from an average rate of approximately 1,518 BOEs per day in the third quarter to 1,832 net BOEs in the fourth quarter. During December we commissioned the third 20 million per day compressor, continued expansion of the CO2 recycle facility, began construction on a second test facility and rig completed wells in this Phase II of the field. We really think and know that Tinsley is going to be a great production in the future for us.

Cranfield is our Phase IV CO2 project. We began injection of the CO2 in July of 2008. We now have 11 injection wells placing approximately 60 million cubic feet a day in to the reservoir. Several of the eight wells began producing water during the fourth quarter and then initial oil production from four of these wells started or occurred in January and now we’re expecting our first sale of oil during February, slightly ahead of our schedule.

Jackson Dome is of course our source of CO2 and we averaged 767 million cubic feet per day during the fourth quarter. The majority of the increased CO2 volumes were injected in to Tinsley, Mallalieu, Brookhaven and McComb field. During the quarter we initiated capital projects in the Jackson Dome to continue to improve our production performance in the area. We started a new hydration facility, we started interconnecting pipelines to help us debottle and move CO2 from the various pipelines that we have and we drilled the Pearl River 13-7. It was an exploratory well drilled in the [Ralafin] field and that should lead to several development wells in the future.

We now have the capacity to produce and transport in excess of 900 million cubic feet a day to our various fields and we are on target to reach the goal of having the capacity produce in excess of a billion cubic feet during 2009. In phase IV Delhi in Louisiana our technical teams are completing geological geophysical work to finalize the flood patterns, site preparation for the main CO2 facility is underway and of course the 78 mile Delhi pipeline should be commissioned at some time during the second quarter.

We talked a little bit about our largest capital project, that is the Green pipeline. We began mobilizing construction crews during November of last year. We plan to add to additional construction crews to be engaged during March and recall that our plans are to install the Green pipeline from Donaldsonville to Oyster Bayou. We should have that work completed by the first quarter of 2010 and then complete the pipeline in to Hastings by the fourth quarter of 2010.

As Martin mentioned we are pleased to report that our teams continue to focus on lease operating expenses in this environment. We made some pretty good progress during the fourth quarter. During the quarter we dropped tertiary operating expenses by about 18% from $26.81 per barrel in the third quarter to $21.86 during the fourth quarter. On an actual dollar basis operating expenses were reduced by approximately 10% from quarter-to-quarter from $48.8 million to $44 million per quarter.

The major contributor to this reduction was the cost of CO2 that dropped from $0.26 an MCF to $0.15 per MCF. But, there were significant savings in work over expenses, fuel, contract labor and rental services. We continue to review operating expenses and drive those expenses out of our operations. I’m confident that you will see us continue to make improvements in these areas.

Our 2009 capital budget is estimated at $750 million and this capital budget focused on a strategy in which we invested in our core business CO2 and EOR projects. Our capital will be invested in these projects and these are going to prepare us for future production in late 2009 and early 2010 projects such as Tinsley, Delhi and Heidelberg all fit this criteria. We also evaluated and added long term investments that create value now and in to the future and of course the Green line is that long term investment that’s part of our strategy. The pipeline investments are key to our reserve growth and expansion in to the west and aside from the reserve growth in the Louisiana and Texas, the Green pipeline may also represent an opportunity to capture and sequester manmade CO2 which may be a business unto itself.

Gareth Roberts

Well obviously these challenging times and lower oil prices create a lot of work for us but another interesting aspect of this is that it really does highlight the benefits of our strategy because we are showing low cost predictable reserve growth, steady production growth and our operating costs we think are going to come down to be low enough that we can have a breakeven oil price of less than $30 per barrel and a cash flow breakeven oil price of less than $20 per barrel which is better than the majority of the domestic oil production in the United States.

So, meanwhile our strategy or building out our pipeline has put us in the position to capture manmade volumes of CO2. We expect this year to be a big year for progress on that front with of course our biggest cheerleader is President Obama and we hope to have some clarity on where we might see volumes of manmade CO2 sometime this year.

Looking forward the tighter budget and focus on big projects that Bob was mentioning promises to really improve our overall performance. The slower pace of investment allows our personnel time to do a better job I think and we’ll also take some time to improve our technical and operational training which again improves our ultimate performance.

So, 2009 is shaping up to be I think a year of really solid performance and so with that in mind we announced earlier in the month that I was going to step down as CEO in mid year. Now, because at Denbury we’ve been running the company by a committee of our top managers which is virtually like an office of the CEO anyway for the last two years, investors will see very little change in the running of the company.

What you’ll continue to see is I think conservative management and reasonably compensated management, some of the keys for our company. I do plan to take an active role in the strategic planning and I will become the co-chairman of the board and plan to be very active there to. A result of these changes as we announced earlier is that Phil Rykhoek will become the CEO, Tracy Evans will become the Chief Operating Officer and President and Mark Allen who you heard earlier on the call is going to become the CFO. I thought he did a good job on the call, a lot better than that old guy that did the previous job so you’ll be hearing a lot more of him in the future.

With that, I’ll ask our operator to come back on the line and open up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Michael Scialla – Thomas Weisel Partners, LLC.

Michael Scialla – Thomas Weisel Partners, LLC

Any update on potential alternative financing for the Green line?

Gareth Roberts

Well, I don’t think we really have anything to announce on that. I think we’ve mentioned that we were looking at some either straight financing and I don’t know if we’ve really got anything else to report other than that.

Phil Rykhoek

Mike, we looked at that a little but we kind of just looked at the cost of capital and even though sub debt was not cheap it was less expensive than probably a private equity financing or some other financing on the pipeline. So, with the sub debt offering we’ve kind of tabled the financing on the pipeline.

Gareth Roberts

The simplest way to look at it Mike is we basically financed the pipeline with sub debt. I mean, it’s virtually the same number of capital and that was the best rate we could get on financing that pipeline.

Michael Scialla – Thomas Weisel Partners, LLC

That $430 million estimate you got, has any cost savings been built in to that for the pipeline?

Mark C. Allen

No, for the Green pipeline $430 is a good number for us moving forward for this year.

Gareth Roberts

We’ve already trimmed it back a little bit from where it probably would have been. We are hoping I think that we’re going to save something on the rest of the budget but that’s really a hard number to come up with. We’re seeing some costs continue to fall, some costs have come down by 20% to 30% so the average I think will be somewhat less than that. But, we haven’t really built those kinds of potential savings in to the overall budget so there might be a little bit left over at the end of the year.

Michael Scialla – Thomas Weisel Partners, LLC

Then with a lot of companies still forecasting some pretty decent production growth this year despite cutting back their ’09 budgets but I think the real impact is going to be felt in 2010, I’m just wondering is that the case for you guys? It looks like you’re still going to have a ramping production probably from Heidelberg, Delhi and Cranfield?

Gareth Roberts

I think our delay is more like two years than in typical companies it’s either that year or maybe it’s built in to the next year. So, we’re still forecasting pretty decent growth in to 2010 and we haven’t really delved in to 2011 yet. But we’re basically forecasting pretty decent growth in 2010 with the money that we’re spending in 2009. What we actually spend in 2010 probably won’t have a whole heck of a lot to do with the production in 2010.

That’s with the caveat, we’re talking about tertiary oil here, the Barnett shale if we were to start drilling that again would be different. But, for right now just assume that we’re not going to be doing any more drilling in the Barnett shale until the gas price changes.

Michael Scialla – Thomas Weisel Partners, LLC

Then I think on the last call Tracy, you mentioned that you were looking at trying to get increased recovery rate booked for Mallalieu and Eucutta, I’m wondering if that happened? And if so, what kind of recovery rate you went to?

Ronald Tracy Evans

Well Mike we got a little bit at West Mallalieu but it didn’t really dramatically change the overall recovery factor there so we’re still in that 20% on average at Mallalieu and Eucutta. The visit with [D&M] we weren’t comfortable at this time increasing that one but I think that will probably be an increase we can expect in 2009 at this point.

We don’t have any agreed up on numbers with [D&M] on what that recovery will be but I think it’s possible that you could obviously see us tick that one up 2% or 3% on a recover factor basis at Eucutta. I think Mallalieu as well, I mean we still only have I think it’s a four year reserve life at Mallalieu and that’s an awful short Rover P ratio for a CO2 flood.

Gareth Roberts

One of the good things about what [D&M] has done for us is we didn’t have really any price related write downs in the CO2 floods because we’re booked on this very conservative level. The barrels that we loss due to prices were all in the conventional fields. So, it sort of indicates the idea of doing this in the conservative manner that they’re doing it because clearly at some stage later in these floods, the CO2 floods, the oil price is the determining factor of when you stop producing the pattern and the ultimate recovery is going to be dependent on oil prices. But, what we’ve not done is book any of that potential but we expect it to sort of come in to play eventually.

Operator

Your next question comes from [Unidentified Analyst] – UBS.

[Unidentified Analyst] – UBS

I just wanted to get a little bit of feedback real quick on your hedging outlook right now?

Gareth Roberts

You mean what we have got in place or what we might put in place?

[Unidentified Analyst] – UBS

If you’re think about taking a different track here what you might put in place?

Gareth Roberts

Well, as everybody knows I’m a great believer in hedging, especially when the price is going down. So, we usually hedge for very specific budget reasons so when we hedged last year the 2009 volumes we were hedging based on the fact that we knew we had a certain minimum budget that we needed to fund given the fact that we have these pipeline expenditures which were not really moveable, we couldn’t adjust them. It was all or nothing with the pipeline.

Now, as far as our regular investments go in other floods we’ve clearly got flexibility there and we plan to exercise that flexibility in 2010. So, as Phil mentioned, our game plan in 2010 is to basically stay within cash flow. So, we haven’t announced exactly what our spending is going to be because we don’t know yet where our cash flow is going to be. So, our need to hedge in 2010 will clearly be less than 2009.

But, we are subject to oil prices, I mean ultimately there’s always going to be some pain point somewhere when oil prices get so low that we do need to spend some money. So, we can’t say really that we don’t plan to hedge. We always look at it and see and compare it to our minimum needs.

[Unidentified Analyst] – UBS

I also wanted to get your opinion right now of what you think of the [LOS] differential and get a little color on how much of your oil prices are coming out of [LOS]?

Phil Rykhoek

Well, as Mark said it’s been an anomaly on the NYMEX prices. You’ve probably seen some of that in the paper, actually we had some of this in 2007 if you recall because we [inaudible] were shutdown. But, today it is bouncing around it’s more like $6 or $7 above right now. I haven’t checked it actually the last day or so but it’s been as high as $10. Historically as you know it was only $1 or $2.

The nice part of all that is we’re getting the difference between $75 and NYMEX price on our hedges but our physicals are being sold at posting that are better than historical deals so we’re probably really getting effectively $80 plus prices.

Gareth Roberts

$4 to $5 more exit prices than you’re seeing on the screen.

Phil Rykhoek

How soon that changes is hard to say. We’re just watching it because it moves around daily so it’s hard to forecast it. As far as the crude that we sell on that, almost all of our Phase I crude is sold on that basis. Tinsley is I’d say roughly two thirds maybe of our tertiary production. A lot of our conventional oil is actually heavier and it gets a discount to NYMEX.

Operator

Your next question comes from Jin Lu – J.P. Morgan.

Jin Lu – J.P. Morgan

You sort of alluded that you may make some acquisitions this year. You have plenty of liquidity to do that. Can you comment what your thoughts on the M&A market?

Gareth Roberts

There’s not a lot happening at the moment because I think it’s a little too early. Seller’s expectations are not meeting buyers expectations just yet and I think you’re seeing a complete lack of any kind of deals anywhere not just at Denbury. We feel that later this year that might come back in to balance so there might be the opportunity to do some deals.

In our case, our pace at which we do acquisitions is really dictated by the speed at which we think we’re going to get CO2 and when we’re going to get it. So, that’s a little bit of an unknown right now but as it becomes clearer then you’ll see us embark on some acquisitions. It will depend on the circumstances, we will protect the balance sheet and make sure we don’t overstretch ourselves to get the right kind of fields.

But, we do have an awful lot of fields that we could look at. There is no shortage of potential acquisitions out there and it may be that some of these potential acquisitions the current owners have bank debt and they may be suffering some stress from the current oil prices and it might make it easier to actually do some deals in the last half of the year.

Jin Lu – J.P. Morgan

On your Barnett gas, do you expect to have a higher differential this year? And, there was some talk about Barnett gas being price based on Waha gas prices.

Ronald Tracy Evans

That’s hard to say. I think right now the differentials on a percentage basis are a little wider than what we’ve historically seen and we haven’t seen the differential kind of narrow back in on a percentage basis as prices have fallen. But, just like the oil prices, generally that stuff works itself out over time. I’m not sure exactly what index our Barnett is actually priced on but I’m not sure it’s Waha. I think its Midcontinent actually.

Operator

Your next question comes from [Scott Loomis] – Simmons & Company.

[Scott Loomis] – Simmons & Company

A question on Mallalieu, obviously this is the second quarter in a row we’ve had sequential declines obviously, there’s some compression issues but are you expecting those declines or is it all compression related?

Mark C. Allen

We’re not really expecting the declines. Right now we do need to get more compression in there to add to recycle capacity. We do have quite a bit of oil shut in because as you get to your recycle capacity you’ve got to shut in the higher GOR wells to maintain the same recycle rate. Once we get our compression done which I believe is late in the second quarter, early third quarter we expect to see that narrow out. But, we are approaching the top of Mallalieu. I mean we’ve been pretty consistent there for several years now and as all fields do they eventually go on a decline.

[Scott Loomis] – Simmons & Company

Then with Jackson Dome what was the exit rate at yearend?

Ronald Tracy Evans

It was 800 cubic feet.

[Scott Loomis] – Simmons & Company

I know 800 to 850 was the range so you all made it to the range.

Ronald Tracy Evans

We made it.

[Scott Loomis] – Simmons & Company

When do you guys expect to reach the BCF a day?

Ronald Tracy Evans

I think we’ll get it by the end of the second quarter.

Gareth Roberts

That’s the theoretical capacity. Whether we need it all or not I’m not sure but we’ll certainly have that capacity.

[Scott Loomis] – Simmons & Company

Then you just you guys alluded to trimming the Green line construction costs, I think it is $430 and it was about $450. It looks like a little was accelerated but some was pushed back but overall CO2 pipeline costs look to remain the same. Are you guys filling that with something else or just overestimating?

Gareth Roberts

Mostly we’ve just deferred some of the cost. Any changes that you’ve seen have mostly been deferred costs.

[Scott Loomis] – Simmons & Company

Right but those deferred in Green line did you make up with other CO2 costs because the overall CO2 construction costs have remained the same?

Ronald Tracy Evans

I think what you’re saying is that our budget stayed at $750 million range for the year?

[Scott Loomis] – Simmons & Company

Right.

Gareth Roberts

I think these numbers are approximately and there’s a little bit of cushion there in the $750 but we just left it the same for now. We are sort of fiddling around with numbers but mostly because I can’t remember the numbers we keep changing it so often so we’ve kept it at $750 but you do point out that yes some of that might be a little bit less because of the pipeline adjustments.

Operator

Your next question comes from Chris Gault – Barclays Capital.

Chris Gault – Barclays Capital

Quickly, under the credit facility I think you said current borrowings were I believe $18 million or $16 million in the discussion, is that correct?

Mark C. Allen

We currently have $60 million outstanding on our bank debt.

Chris Gault – Barclays Capital

What is the current cash balance as well?

Mark C. Allen

It’s minimal. We run $10 to $20 kind of as working capital but it goes from zero to $20 or $25.

Chris Gault – Barclays Capital

Has there been a big cash use for working capital in the first quarter versus just normal working capital fluctuations? Do you expect to kind of end the quarter at some sort of level similar to this?

Mark C. Allen

If anything debt may go up a little bit more during this quarter. The expenditures for 2009 are heavily weighted towards the first half of the year. A lot of that is pipeline, we’re finishing the Delhi pipeline in the first half where probably two thirds or a little bit more of the Green line are in the first half so our spending is heavier the first six months than it will be on the last six months.

Gareth Roberts

And our hedge money comes in arrears so it tends to be you need a little bit of extra working capital but we’ll catch up towards the end of the year.

Chris Gault – Barclays Capital

Also for your credit facility when is your next ridge termination date? And, do you have any plans to kind of bring the commitments up to the borrowing base at all?

Mark C. Allen

The next ridge termination date is April 1st. No, we don’t plan to try and raise it. I think the environment is still pretty difficult to do that, to increase it above the $750 we would have to add more banks in to the group and at this point the majority of the banks still aren’t seeking any new business or accepting any new business. So, we’re pretty confident that our $750 is not at risk but to increase it to $1 billion would be difficult in today’s environment.

Gareth Roberts

I think you’d have a difficulty getting it through our board to be quite honest. You’ve got to look at overall debt levels and we just wouldn’t be interested in getting the debt to that kind of overall level. So it’s not something we plan on doing.

Operator

There are no additional questions at this time. I would like to turn the floor back over to management for any additional closing comments you may have.

Gareth Roberts

Just thank you everybody and we’ll talk again in May. Thank you.

Operator

Ladies and gentlemen this does conclude today’s conference. You may disconnect your lines at this time and thank you for your participation. May you all have a wonderful day.

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