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Denbury Resources Inc. (DNR)

Q2 2007 Earnings Call

August 02, 2007, 11:00 AM ET

Executives

Phil Rykhoek - Sr. VP and CFO

Gareth Roberts - President, CEO

Robert Cornelius - Sr. VP of Operations

Analysts

Scott Hanold - RBC Capital Market

Michael Scialla - AG Edwards

David Casler - Simmons and Company

Brad Bruno - Merrill Lynch

Jack Aydin - KeyBanc

Jeffrey Hayden - Pritchard Capital Partners

Presentation

Operator

Good day everyone, and welcome to this Denbury Resources 2007 Second Quarter Results Conference Call. Today's conference is being recorded. The following discussion contains forward-looking statements and our actual results may different materially from those discussed here.

Additional information concerning factors such as price volatility, production forecast, drilling results and current market condition that could cause such difference can be found in our report filed with the Securities and Exchange Commission, including our reports on Form 10-K and 10-Q.

At this time, for opening remarks and introductions, I would like to turn the conference over to Mr. Gareth Roberts, President and Chief Executive Officer of Denbury Resources Incorporated. Please go ahead, sir.

Gareth Roberts - President, Chief Executive Officer

Thank you. Welcome everybody to the Denbury second quarter 2007 conference call. I have with me here today, Phil Rykhoek, our Chief Financial Officer; and Bob Cornelius, our Senior Vice President of Operations. Tracy Evans is traveling today, but may call in later.

We had a very good second quarter, excellent work by our teams in all areas, but particularly the Barnett Shale and our CO2 operations. Overall, we have reported the production of 41,916 barrels of oil equivalent per day. That’s a new quarterly record for us, which in turn helped us achieve earnings of $62.6 million for the quarter or $0.52 per basic common share. So excellent quarter overall.

I am going to turn it over to Phil now to discuss some of the details.

Phil Rykhoek - Senior Vice President and Chief Financial Officer

Thank you, Gareth. Obviously, we are stunned to have a quarter where we can beat the First Call consensus estimates. And I think even adjusting for the mark-to-market value, I think we are $0.6 to $0.7 ahead on earnings.

Bob is going to go over production data a little bit later in his operations report. So I don’t spend too much time on that. Obviously, the key points are that our production continues to increase. We set a quarterly production record, and our tertiary production is on track for a prior guidance of 14,750 barrels a day in 2007, that being a projected increases of 46% over the last year's production levels.

We are reaffirming that tertiary guidance, but we are increasing our overall production guidance to account for the production results in the Barnett Shale. If you recall, the first year, we were projecting 40,700 BOEs a day for 2007. We've increased it by 300 barrels a day to account for the Seabury's acquisition we made at March 31st, and now we are adding an additional 1,000 BOEs a day primarily because of the Barnett Shale, giving us the revised production forecast for 2007 of 42,000 BOEs a day.

This gives us a total production growth of 14% over 2006 rather than 10% as in our prior guidance. And note that's firstly our internal growth. You might note that this guidance does not adjust for any potential sale of our Louisiana properties. Our data room is opening soon on this potential sale. And assuming we achieve adequate price for the properties, we would expect closing on that transaction early in the fourth quarter.

Perhaps the next biggest thing in this quarter was the non-cash mark-to-market value adjustments. I know most of you exclude the numbers and probably rightly so. This quarter, we had $13.3 million pre-tax gains primarily because natural gas prices declined between March 31st, and June 30th. There were adjustments of about $8.1 million after-tax or about $0.06 or $0.07 per diluted share.

In comparison last quarter, first quarter of '07, we had $35.2 million pre-tax expenses. And in the comparative of '06, we had $9.3 million pre-tax expense. Obviously, the adjustments caused significant net income changes between the quarters, and most of that relates to the 2007 natural gas swaps we put in place in late '06.

If you recall, we hedged 80% or 90% of our projected natural gas production for 2007 at an average price of $7.96, just under $8. The reason for the significant mark-to-market value adjustments is that natural gas prices for lower yearend increased in early 2000 and then declined again at the end of second quarter. In sense, these adjustment are based on prices on the balance sheet date they are causing the significant fluctuations.

If you look at our cash settlement on these contracts, during the second quarter we collected $1.7 million on our derivative contracts less than the $8.3 million we collected in the first quarter, but better than $2.2 million we paid out last year... second quarter of last year. Thus far, the third quarter is looking more like the first quarter as we have already had significant cash receipts on these contracts with the recent decline in natural gas prices.

Our total revenue increased 15% between the respective second quarters as the 12% higher production was supplemented by 3% higher commodity prices. We outlined this in the press release, but you might note that our oil and NYMEX differentials were probably the lowest that I know of in our corporate history, coming in at $1.61 below NYMEX compared $3.73 below NYMEX in the first quarter of '07 and $6.64 in the second quarter of last year.

This is primarily as a result of the pressure on the WTI benchmark prices, I am sure you are aware, principally caused by the lack of storage in mid-continent, issues of moving oil out of the Cushing and so forth.

Based of July of 2007 prices, it appears that most of that's been resolved, and the differentials appear to be heading back to a more normal historic levels. So I won’t account on this thing at least in the third and fourth quarters. On the natural gas side, there wasn't a lot of change in the differentials.

Our operating cost increased from $14.66 per BOE last quarter to $15 per BOE this quarter due to the various factors outlined in the press release. Like to briefly expand on one aspect I mentioned in the press release, that being our cost increases caused by continued operation, expansion of tertiary operations along with all the rationales we have talked about before, but let me just give you some of the numbers.

This quarter, our overall tertiary operating expenses per barrel were $20.47. This is slightly higher than they were in the first quarter. If you look at the cost by the Phase, the LOE on our Phase I properties were $17.52 per BOE and LOE per BOE on our Phase II properties were $33.89.

These costs per BOE are significantly different, because our Phase I properties are generally more developed with the few exceptions, and our Phase II properties well started last year. In comparison, the operating costs per BOE for West Mallalieu olive field, which is currently our highest point in tertiary producer was $10.42. The reason I gave you these numbers is just to illustrate how our operating cost per BOE decreased as the flag [ph] matures.

Going back to overall operating expense, I expected this quarter to be one of highest on per BOE basis. In fact, it was kind of interesting, because amazingly we were exactly what we had forecast internally on a per BOE basis, that being $15 a barrel. Looking forward, we'd anticipate a slight improvement in our cost per BOE for the rest of the year, but I'd still put them between $14 and $15 and probably closer to $15 than the $14.

G&A came in pretty much as expected, slightly less than the first quarter, averaging $3.7 per BOE as compared to $3.32. The balance from Q2 of last year relates mainly to the non-recurring stock compensation just under $5.3 million we recognized last year related to the departure of our former VP of Operations.

Our administrative costs are continuing to increase as we continue to see inflationary pressure in our industry when it comes to obtaining and retaining qualified experienced personal. Further, we continue to add new employees as we increased our employee count by 30% in 2006. And thus far in the first six months of '07, we have increased some additional 13%. So looking-forward, I don’t expect our G&A per BOE to decrease below $3 a barrel. And we'd probably suggest a rate of between $3 and $3.5 quarter for the rest of the year.

We continue to borrow funds for acquisitions and in capital spending that’s in excess of cash flow, which means our debt levels have been rising and correspondingly our interest expense. Our average debt level this quarter was 23% higher than last quarter and 47% higher than it was in the second quarter of '06.

Partially offsetting this higher gross cost is a significant level of interest capitalization primarily related to the unevaluated properties we acquired during the last two years. Currently, we have $725 million of total debt outstanding, which consist of $525 million of sub-debt and $200 million of bad debt drawn on our $500 million revolver base.

As you probably saw, Genesis last week closed on their $563 million acquisition. So we do plan to do our drop down of the two existing CO2 pipelines for them, most likely early in the fourth quarter. We have done a bit more research on this transaction, and we believe these drop downs would likely be a combination of property sales with an associated transportation and service agreement and direct financing leases.

This will provide us with $200 million to $250 million of capital, probably more than we need to fund the projected shortfall, at least based on current prices, between our current capital budget of $690 million on our estimated net cash flow.

Note that while we are closer to determine the general structure of this transaction, it is still subject to negotiation of the specific terms, approval by the board, various opinions to both entities and so far. As we have discussed before, we will likely account for these transactions on our books as capital leases.

I might mention that historically we have said we'd probably have some significant income taxes during these transactions. We now believe it will be considerably less than originally thought and probably not significant. Obviously, the reason we want to do this deal is that the incentive cash distribution that we expect to get back as general partner make our imputed cost to financing in this manner a very attractive proposition.

Further, these transactions had incremental value to both Genesis unitholder and our GP interest. We plan to do similar types of transactions with our Jackson and Tinsley CO2 line in 2008 when it's completed. And assuming Genesis is successful in acquiring other assets of a sufficient size and profitability, we'd plan to alternately finance our Green Line from Louisiana and Texas in the same manner, subject, of course, to all the same types of conditions.

I might also mention that last week as part of their acquisition we exercised our right to maintain our proportional ownership in Genesis. And that's when they closed our Davison acquisition. We bought an additional $1.1 million limited units... capital units of Genesis for $22.4 million on the same terms as the units ratio to the Davison, just part of that acquisition. We also spent an additional 6.2 million to maintain our GP interest.

Looking at DD&A, DD&A increase slightly on our oil and gas properties increase slightly this quarter averaging $10.94 per BOE as of 3% increase over the first quarter rate of $10.64. We did book a portion of our tertiary reserves and Phase II this quarter we had about $7.2 million which is primarily at Soso and we added about $10.7 million additional that BOE’s in the Barnett.

However, with the incremental of future development cost associated with these additions, the other capital spending and we had to reclassify some of the costs unevaluated to evaluated. The DD&A rate increase little bit over the first quarter.

Lastly, looking in income taxes our net effective tax rate this quarter was remains around 39%. Our current taxes as the percentage of the total provision went up slightly this quarter along with the higher income and in the forecast this quarter representing about 18% of the total tax provision. So for the remind of the year based on current prices are expect to maintain that total tax rate of 39% with the cash or current taxes running between 15% and 20% as the total provision.

With that I will give it back to Gareth.

Gareth Roberts - President, Chief Executive Officer

Thanks. Well, now, I'm going to turn it right back Bob here and ask him to give you some details on the operations.

Robert Cornelius - Senior Vice President of Operations

Thank you, Gareth. I will give you an operation on update on several major projects. But first, again, I'd like to touch on the second quarter production rates. It was a record. We end the second quarter with an average production rate of 41,916 BOE’s that is a 9% increase over our first quarter production rate.

Enhanced all recover projects in the Barnett Shale growth at quarter-to-quarter increases. The Barnett Shale production on a barrel of oil equivalent increased approximately 41,100 BOE’s per day, about 20% over in the first quarter. While the CO2 enhanced oil projects showed an increase of 1,898 net BOEs or 16% increase over the first quarter. We have forecasted continue monthly rate increases for the reminder of the year.

I would like to now run for some of the major CO2 projects with the current rates and discuss some of the operational improvements and our plans for the future. The majority of the tertiary oil increases from our Phase II projects. Those are Eucutta, Martinville and Soso. We will start with Eucutta.

Located in East Mississippi and since the first enhanced oil production in late 2006, the project has ramped up to an average of 1,337 net BOEs a day during the second quarter. And it continues to increase. Presently, Eucutta is injecting approximately 100 million cubic feet of CO2 per day into 29 injectors.

The team plans to drill three additional wells along with well work on over 20 wells by year-end. This activity along with test sites are being completed and all of these activities should continue to improve the run rate in Eucutta.

Soso and Martinville are the other two Phase II recovery projects that are performing very well. Soso average 370 net BOE during the second quarter and it can continuos to increase nicely. In Soso 21 additional wells would be worked over 2 wells will be driven for year-end. And that will add an additional production to that well expectations are good for Soso and it will continue to perform a ramp up our tertiary oil production.

During the second quarter, Martinville average 521 BOE per day, the smaller flood that increase with 64% over the first quarter of productions rate and that flood is also clamp. Mallalieu is a largest flood as far as volume goes it’s in Southwest Mississippi and it is the Phase I flood. This average production for the quarter was 5,802 net BOEs, the rise expected to ramp-up to 6,200 BOE before year-end.

Early this year as you recall, we had some operational problems with over compressors and undersize separation facilities. During March, we install new high pressure compression upgraded the oil water production equipment to handle this increase volume that we extract from the field. Production is now improved since that equipment installation, we planed to add additional wells and that rate is also expected to continue forward.

Brookhaven is another flooded in Phase 1. It exhibit a nice 26% production increase when compared to the first quarter of '07, it is now averaging 1,794 net BOE’s during the second quarter. The team improves CO2 profile in Brookhaven injection rates have increased in July activity all are credited for those increase. We are planning another production test side to added soon now at four wells and production will increase.

Tinsley is located... Tinsley's Phase III, I am wondered now it's kind of shipped over to some other projects we have going forward. Tinsley is in Phase III. And it's in the Northeast part of the state of Mississippi. And this is the one largest tertiary field that we operate with potential and enhanced all reserves of 41 million barrels of oil.

CO2 injection began in January of this year at approximately 11 million a day, the CO2 rate is higher now... has increased to 20 million a day and we are using an existing 8 inch pipeline to accommodate the volumes of CO2 we plan to put in there. Construction is underway for the larger 24 inch pipeline and that’s about 56% complete right now.

A big rate of this pipeline will be able to transport 600 million cubic feet per day of CO2 for Tinsley deal high and possibly other project we have in the future. Construction of the Tinsley CO2 recycling in production facilities is also long schedule and we expect the first enhance oil production to be established early 2008.

We have, several other Enhance Oil Recovery projects. They are under the construction plays or planning stage right now. And we expect production out of these... out of these projects during 2008. One of mix is Lockhart crossing. A CO2 supply lines in Lockhart crossing, which is located in Livingston County, Louisiana is expect to be commissioned by October of this year allowing us to gain CO2 injections.

Development of 19 workovers are completed on the existing wells in field the CO2 recycles fairly is now under construction and enhance oil scheduled for production sometime during 2008. We also completing smart pigging or pipeline integrity work on a 40 mile 18 inch line we come up to soon that line from our Northeast Jackson Dome pipeline to Cranfield that’s locating on the far West Mississippi.

Our expectation to have this pipeline the CO2 supply is ready for injections in late 2007, 116 inch cubic feet a day recycles a fairly is now under construction and we are preparing for first two... to prepare for first tertiary production sometime in mid 2008.

What we are showing is we are been our planning ready we also with the success of East Mississippi floods in Eucutta, Soso, Martinville we are working to secure facility sites and CO2 pipeline right away for Heidelberg. The following well you will recall Heidelberg is currently our largest down field to producing field, producing excess of 7,500 net BOEs per day.

This is successful ongoing water flood Heidelberg, we are excited about the possibility of the tertiary flood in that field. Tertiary reserves are estimated at 26 million BOEs. Our first CO2 injection is predicted for the first quarter of 2008, but because of the man power and equipment required we start this planning Phase right now.

As moving ahead to secure enough CO2 is important for us because that’s our strategy. Jackson Dome courses our CO2 source. It now produced is an excess of 500 million cubic feet a day. That a significant milestone, because if you recall with improved CO2 production rates that 17% those of rest of the year.

But, even with this record production allow me to point out that our capacity to produce is greater than our present production rates down the pipeline. With drawing the complexion of our Provo river 38 number-one, that’s about a 100 million a day well the Provo river 1-4 number-one that's about the 70 million per day well and the Provo river 2-51 a 90 million a day well.

First modification to the various facilities that we operated at Jackson Dome area, we now have deliverability of 650 million to 700 million cubic feet per day from our well and our facilities. If you add our complete pipeline and plant facilities, we have the capability in the near future to look 800 million cubic feet per day.

So even though we are just utilizing 500 million cubic feet per day, we have the capacity to do much more, and we working to maintain our CO2 supplies and capacity ahead of our proposed CO2 clients.

One more point to that, and we just finished drilling the Pearl River 13-10 number one. This is a new well, it's on a new geological structure if you want to call to exploratory well, we just found approximately 225 feet of pay it was logged.

So additional CO2 production capacity and reserves to maybe added in 2008 after the completion and testing of this well. Turning this facility into pipeline are going to be required to bring this CO2 online just another step to ensure CO2 supply.

Finally, let me conclude with the Barnett Shale. As we've pointed out a 20% increase in our overall production was achieved from quarter-to-quarter. Our Barnett Shale continues to exceed production forecast and expects result.

Several factors contributed to their success. First, they continued to reduce drilling and completion time allowing for an acceleration of production. Last year the team was averaging 21 days from wells to remove it, now consistently performing that same routine, to the same depth in 15 to 16 days.

The second reason for the production increase is our fuel production team. They have made great strides in reducing the completion and connection time to first production. They reduce the cycle time from 50 days to 40 days, so this full cycle improvement of drilling completion and tying in the first sales has helped us realize the volume is faster and sooner.

Finally, in addition to that what’s going on in the field in the mechanical efficiency they have achieved, our technical team the geophysicist, geologist and engineers continued to high grade our prospects, high grade our acreage and improve our fracture techniques.

The team has been able to analyze the geology, directionally drill and fracture the wells properly to maximizing production rates. With the Barnett Shale reserve coupled with the enhanced oil recovery projects and there are improvements that we have seen the companies have told them production should continue to experience a month-to-month increase through the fourth quarter of 2007. Thank you, Gareth.

Gareth Roberts - President, Chief Executive Officer

Thanks Bob. Well I think they only... it was obviously a very good quarter overall and they only thing that we might have that would be in the slight negative category would be that Jim Sinclair of VP of Explorations decide to leave us.

Jim is being with the company for 14 years, he was with us when the company was just two men and the dog and very, very tiny indeed. He took a real chance to come up where I think at the time that we will, will certainly miss his geological expertise, but at the same time I think that he lead us in excellent shape. We have got plenty of talented employees here in Denbury that are going to help us continue this production growth, so we wish him well and best for the future.

I also would like to announce that we are going to have an Analyst Meeting in November 7th and 8th of November, call Laurie for details. That's going to be in Jackson. I don't have any details yet of actually where in Jackson, but we are excited about the idea of going up to Tinsley Field, which by November should be a whole high of activity of flood just about ready to start with all facilities being finalized.

So that should be a pretty exciting because there is only about 40 minutes south side of Jackson and it's very, very interesting field because it was one of the, it was the first oil field found in Mississippi it's got a long history.

So you can see some of the old time derricks and some of the old time equipments to issue the field and then all of a sudden here some nearly 70 years after the field was found, a whole new lease of life is coming though it. So it's just... it's going to be a wonderful story so I hope you better join us.

With that I would like to turn it back to Sheila to ask if we have questions.

Question and Answer

Operator

[Operator Instructions]

And we'll take our first question from Scott Hanold RBC Capital Market please go a head.

Scott Hanold - RBC Capital Market

Good morning.

Gareth Roberts - President, Chief Executive Officer

Good morning, Scott.

Scott Hanold - RBC Capital Market

Could you guys talk a little bit about the Barnett Shale, it looks like results are running, you know, very good there just in terms of what kind of rates are you seeing out of some of these recent wells you've been drilling, and you know what kind of down spacing have you tried at this time, and where do you think you can go on your acreage?

Gareth Roberts - President, Chief Executive Officer

Well, we are just trying some of this down spacing right now, some of these wells are 60 acre down spacing is what we are doing... I don't know do we how many…

Phil Rykhoek - Senior Vice President and Chief Financial Officer

Yeah. Scott... yeah. I was going to mention the rate. Scott, you know in the Barnett Shale your rates vary as to how the fracture treatments go. Overall, we've seen a huge... we've seen a nice increase in those rates.

Recently we had some wells come on in size 5 million a day, on the other hand every now and then, we find one that doesn't come on as well, and we have struggle with 600, 700 a day until we cannot unload some water. So the rates vary quite a bit I don't know that there is, there is one particular thing.

Gareth Roberts - President, Chief Executive Officer

Now the down spacing is being achieved by tracking these wells simultaneously, and those... that's really improved the total combined rate of two or even three wells that reflect at the same time.

And so that’s a very, very encouraging and is a very efficient way of down spacing but we haven't drilled that many on this down space yet, but I think we drilled enough to make clear that there is... I think, that, you know, by yearend, we should have a very good idea about... there is no potential upside this year, but at the moment we haven't evaluated it even ourselves.

Scott Hanold - RBC Capital Market

Okay. So it's suffice to say, it looks like your rates are definitely up from, say, where you were a year ago on average, and then it sound like you guys could be drilling here pretty steadily at least through you know, at least to '08 and then maybe into early '09?

Gareth Roberts - President, Chief Executive Officer

Well, yeah. Yeah. I mean we haven't done our budget to get it yet for 08, I'm going to plan... but I think that would be a pretty fair assumption, and clearly the three rigs that we have planned to maintain this year have been able to drill a heck of a lot more wells than we originally have in our budget, and that's causes to have to increase the budget.

Because obviously the biggest part of the costs are actually the cracking the wells, so you know we doing more cracks because there is more wells, but we're not... obviously if we're getting these kind of results it's not a problem at all.

So expect it is probably, I, you know, I wouldn't guess we would... all of the things been equal we'll keep three rigs next year as well.

Scott Hanold - RBC Capital Market

Okay. Moving over I guess Heidelberg, you know, I guess can you kind of tell me what needs to be done there I guess to that potentially up and running and with the fourth quarter '08, do you expect first potential injection or did you say first response?

Gareth Roberts - President, Chief Executive Officer

I think you're talking about Tinsley, aren't you?

Robert Cornelius - Senior Vice President of Operations

Which one, yeah.

Gareth Roberts - President, Chief Executive Officer

You're talking about our Tinsley, Scott?

Scott Hanold - RBC Capital Market

I thought you guys mentioned you are evaluating Heidelberg at the same --

Gareth Roberts - President, Chief Executive Officer

We are but... that's just that we're going to start spending some money to get the pipeline started, we are not planning to be injected there until sometime next year. But in Tinsley, we hope to be sign injection in the big line, what sort of date that we --

Scott Hanold - RBC Capital Market

Well, late this year.

Gareth Roberts - President, Chief Executive Officer

Yes. Late this year, Scott

Robert Cornelius - Senior Vice President of Operations

We don't expect first productions in SOL [ph] and Tinsley early 2000?

Gareth Roberts - President, Chief Executive Officer

Yeah. Because we have been reporting some CO2 in the ground.

Scott Hanold - RBC Capital Market

Yes sir.

Gareth Roberts - President, Chief Executive Officer

With the 8 inch line, so you know the start of full injection probably won't need the full sort of six months that we normally allow for it'd probably be sooner than that, so, early next fingers crossed, we should see some of our first oil production at Tinsley Field.

Scott Hanold - RBC Capital Market

Okay... understood, if I get sort of, you know, kind of turn again on in towards Heidelberg, which Mallalieu it seems like it has a nice potential... tertiary, potential and I though that there is somewhat fourth quarter of ‘08 was that for potentially giving injections in the Heidelberg?

Gareth Roberts - President, Chief Executive Officer

Yes. That would be the injection, we have to put... we have to lay a pipeline to it. We have to build facilities and test sites. And so I was just trying to emphasizing the necessity for planning, and so for right now, even though we're not going put CO2 in the ground until next year, we... late next year.

We have to start the planning now, we are getting test sites facility located, we are starting broader ways, we are acquiring and looking that the design of pipe in those facilities at this point and starting to look ahead at equipment requirements and putting that equipment on order…

Robert Cornelius - Senior Vice President of Operations

Yeah. Let me…

Gareth Roberts - President, Chief Executive Officer

…right now, so we'll be ready.

Robert Cornelius - Senior Vice President of Operations

Yeah. Now I think we got over 26 million barrels, I think in Phase II model for Heidelberg.

Scott Hanold - RBC Capital Market

Okay.

Gareth Roberts - President, Chief Executive Officer

But, it’s you know, the real... that’s only a limited a number of rising on pools. You know, the true potential of Heidelberg considerably larger, but we haven’t done the engineering, were necessary to determine what those reserves might be on these other zones, but it is very significant.

Scott Hanold - RBC Capital Market

Okay. And you know, just based on a 26 could you sort of venture to guess, what kind of peak rate you see at a Heidelberg?

Gareth Roberts - President, Chief Executive Officer

Along that’s what in the model is what we are forecasting and that’s a pretty conservative timing model, but based on the success that we had at Eucutta and the confidence that we now feel, I would advent to say that at some point we might revise that program offers, but I don’t have that yet.

Scott Hanold - RBC Capital Market

Okay, okay it was…

Gareth Roberts - President, Chief Executive Officer

And we find it little premature, but good. So we would be very optimistic that we could get some very high peak rates out of it.

Scott Hanold - RBC Capital Market

Okay. So higher budgets in your current production outlook?

Gareth Roberts - President, Chief Executive Officer

Pretty conservative timing, I know. We can beat that timing and we can get some higher rates.

Scott Hanold - RBC Capital Market

Okay. And Gareth, one last question on you know your views on hedging in oil, I know you are sort of both long term on oil, but that seeing sort of $75 to $80 of barrel on sort of in the short term you guys have pretty opened on the hedge side, you know what are your thoughts there. Would you think about putting in some hedges just in the short runs of walking some of the current prices or what is your view at this time?

Gareth Roberts - President, Chief Executive Officer

Didn’t you ask me this question last quarter?

Scott Hanold - RBC Capital Market

Yes I did.

Gareth Roberts - President, Chief Executive Officer

Well, refer to the answer there.

Scott Hanold - RBC Capital Market

Fair enough?

Gareth Roberts - President, Chief Executive Officer

Okay.

Operator

And we’ll take our next question from Michael Scialla, AG Edwards. Please go ahead.

Michael Scialla - AG Edwards

Good morning everyone.

Gareth Roberts - President, Chief Executive Officer

Hey good morning.

Michael Scialla - AG Edwards

Question on the Barnett, you know, if seeing you’re successful with the sale of the Gulf Coast assets later this year, is there any thought of going to a fourth rig in the Barnett?

Operator

Standby one moment please. Please go ahead.

Gareth Roberts - President, Chief Executive Officer

Okay. Mike, you’re there?

Michael Scialla - AG Edwards

Well, go ahead and answer the question.

Gareth Roberts - President, Chief Executive Officer

I’ll answer the question obviously, if we are able to sell the Gulf Coast assets it does gives us a financial flexibility to do lots of things. I mean, and so we haven’t done our budget for ‘08 yet.

So wouldn’t say that we’ve decided one way or the other on what we’re going to on the Barnett Shale, overall it just gives us that flexibility. All right. So Janet tonight we are calling in can we check those.

Operator

Yes sir, one moment please and we’ll go ahead and take our... if you could have... David Casler [ph] if you could re-signal for a question please press “star” “one”, and he is with Simmons & Company we’ll take his question next.

David Casler - Simmons and Company

Good morning, guys.

Gareth Roberts - President, Chief Executive Officer

Hey David, how are you doing?

David Casler - Simmons and Company

Well thanks, hey in your press release you guys mentioned the potential ratio going forward with shortages of goods and services. I was hopping maybe you could just talk through that a little bit and what you guys are doing or try to do to prevent any possibility of that going forward so things can remain kind of on schedule on time et cetera?

Gareth Roberts - President, Chief Executive Officer

I think we’ve done a pretty job, it will certainly improve... situations certainly improve over last year and part of it is we’ve done more planning to handle it and part of it is because I think you know, some parts of the industry has become less stretched and at least give me the rates, but I don’t know if you…

Robert Cornelius - Senior Vice President of Operations

Yeah, I mean, what we’ve done we of course, now are trying to do a little more preplanning we’re out there like on Heidelberg, we discussed we’re out there a year in advance we have trade alliances with certain of our suppliers and vendors and we’re working with them to insure that they realize what our needs are as far as equipment goes.

So, I think we’re ahead of the curve now, I also think in the past what we had, we recalled we had a couple of major Hurricanes go to the Gulf and that caused us forecast the industry in a whole shortage of supply to reveal those platforms. But again, we’re ahead of the curve now, we want to stay ahead of that curve as far as our supplies in personal go.

Gareth Roberts - President, Chief Executive Officer

Right. And there is still a lot... and there is still some cost creep, I think... to say in general, I think if you’re active in our industry, you’re going to see some cost creep. I think the only way you can keep cost down, is to just basically do nothing. You know, and obviously, you know, we got to look at that as a growth in company and we’re going to be going out doing things, we’re going to be exposed to that... to some of this increase in overall costs.

David Casler - Simmons and Company

Okay. That makes sense. Looking more towards the pipeline development or the right away that you’re working on from the Louisiana to Texas and kind of cost creep activities, we’d seen a little of that in the past, maybe hoping to get an update, if you know you read out any of the budgets associated with that and if you’re seeing cost creep there?

And then also, if you foresee any problems as you’re going through this right away process right now?

Gareth Roberts - President, Chief Executive Officer

And planning is going very well.

Robert Cornelius - Senior Vice President of Operations

Yeah. What we’ve done, we really not start negotiating writing ways we’re up now, survey in a line, we start to see the different state local and federal agencies that are required to putting a line at this time, but we’ve not really start negotiating any writing ways as of yet, we’re doing a survey in preplanning on that we’ll start that shortly in lot of ways in Shales.

David Casler - Simmons and Company

Okay. So premature to jump again, and try to figure out what the construction process start day would be and timing for completion that?

Gareth Roberts - President, Chief Executive Officer

But you know, picking the route has been the major you know, was the major delight, but we’ve basically done that you know…

David Casler - Simmons and Company

Okay. And then kind of feeding into that question a little bit, if I can get an update on the transactions you entered into with Faustina specifically you know what the status and then thinking about doing the plan in Donaldsonville, and Wellmark?

Gareth Roberts - President, Chief Executive Officer

They are... as far as we know, they are on go, they haven’t gone in ground yet, and I think that’s scheduled towards the end of the year. I think taking a press release so and month or so ago I believe, and said that they expect to break ground and the Donaldsonville here like ‘07 and early ‘08, but that’s kind of latest that we hear from them.

David Casler - Simmons and Company

Great, great. Just switching real quick to the Barnett, can you give us an update on the non-core acreage and where you guys are in the process of determining if that’s commercial or not?

Gareth Roberts - President, Chief Executive Officer

We’ve really not done anymore further drilling down there since the last quarter. So, we really don’t... and we have seen some better results maybe from some other operators, if that’s towards in that general area, but nothing you know, specific to our leases. So, I don’t think our position has changed there and we still are putting all our resources into the Northern area.

David Casler - Simmons and Company

Great. Well, thank you guys so much and look forward to keeping in touch.

Gareth Roberts - President, Chief Executive Officer

All right. Thanks.

Operator

[Operator Instructions]

We’ll take our next question from Brad Bruno of Merrill Lynch. Please go ahead.

Brad Bruno - Merrill Lynch

Hey guys. In Little Creek, how your decline has been relative to the previous expectations and what do you think that implies for your other fields and doesn’t have implications for your other fields?

Gareth Roberts - President, Chief Executive Officer

I don’t think it really has any implications for other fields at all. I mean, Little Creek is over 20 years old, I guess, when they start 85 or something 84.

Phil Rykhoek - Senior Vice President and Chief Financial Officer

Yeah, I think we can assume that oil field they don't imply.

Gareth Roberts - President, Chief Executive Officer

Yeah. They all decline eventually. I mean if they keep going as long as this one, I mean would have to look at this sort of recovery factor and we've been using the 17% recovery factor which is based on parts of Little Creek. But I can tell... but what we're seeing as we continue to operate Little Creek, we're operating beyond that 17% recovery factor.

So the field is gone on longer than the original engineering would have suggested. So we think that this is what we're getting out now is already on basically and every additional barrel this time to improve the potential recovery from all other fields.

Brad Bruno - Merrill Lynch

Okay. That's kind of getting of sort bit somewhat shallower then I guess over the long run?

Gareth Roberts - President, Chief Executive Officer

Yes. I think, some more reserves that are coming out, and part of that is easy to understand if you think of it is the sort of value higher oil price today, then say they had 15 years ago.

Brad Bruno - Merrill Lynch

Okay.

Gareth Roberts - President, Chief Executive Officer

Has allowed these patterns... individual patterns, individual operations to go on longer at the profitable level, so means more recovery.

Brad Bruno - Merrill Lynch

Okay, great thanks.

Operator

Thank you. And we'll take our next question from Michael Scialla, AG Edwards. Please go ahead.

Gareth Roberts - President, Chief Executive Officer

Hi, Mike.

Michael Scialla - AG Edwards

Hey. When I was processing, it connected.

Gareth Roberts - President, Chief Executive Officer

Did you have a chamber orchestra in your office room, when you last called in.

Michael Scialla - AG Edwards

Well, I had to entertainment myself.

Phil Rykhoek - Senior Vice President and Chief Financial Officer

I'm going to say, no, he used to be an analyst.

Michael Scialla - AG Edwards

It's getting tougher all the time. Question for Bob, you mentioned on the Pearl River 13-1, could you say again what in terms of CO2 reserves you added with that one?

Robert Cornelius - Senior Vice President of Operations

We haven't.

Michael Scialla - AG Edwards

Okay, I'm sorry.

Gareth Roberts - President, Chief Executive Officer

Well we haven't disclosed this. That's because, with one well it's pretty hard to tell most of these reserves that we have here are based on POVG [ph], which means you have to have some production.

Michael Scialla - AG Edwards

Correct.

Gareth Roberts - President, Chief Executive Officer

You know, we do some volumetric, initially but, eventually POVG is what we really use. So we probably will be might give volumetric estimate, I think at some point. But that will depend on... that will be sort of next year.

Michael Scialla - AG Edwards

I guess, can you say anything about that you said this is kind of separate structure, is it likely there is going to be some follow-up well is on that structure?

Robert Cornelius - Senior Vice President of Operations

It's probably at least one.

Michael Scialla - AG Edwards

Okay.

Robert Cornelius - Senior Vice President of Operations

Yeah. I mean these additional structures are not I don't think any of those is going to be as big as the dry eye structure which is really quite staggeringly large base for a single structure. But they are going to be very significant volumes for us, each one of these particularly... each one of these little structures like this is going to allow you to basically flood, a 100 million barrel filed some where. So it's all good stuff.

Michael Scialla - AG Edwards

Yeah, okay.

Gareth Roberts - President, Chief Executive Officer

But no definitive reserves, yet.

Michael Scialla - AG Edwards

I just have one other question, as you look at the CO2 play now and potential acquisitions in the future. Do you think what heat existing phases out there now you think, you concentrate on adding field within those phases or are you still looking outside the box?

Gareth Roberts - President, Chief Executive Officer

Well we tend to think of the phases... the fields that we haven't bought are surrounded by this pipelines and our initial floods has been kind of captured our reserves that we, probably don't have to go and buy right away, until we are absolutely ready to and we have enough CO2 to flood them, otherwise, its kind of dead money if you buy these things, to many years out.

It's nice to have... give, Bob here a little running start on these things. So we don't want to buy them, so the day before and than just tell him to get on with it.

Michael Scialla - AG Edwards

So... is it likely you play to do another acquisition and may be looking to kind of extend, the play beyond the eight phases that you've got right now?

Robert Cornelius - Senior Vice President of Operations

I'm sorry, could you repeat that.

Michael Scialla - AG Edwards

Yeah. It was a little bit fumble there. But if you are going to another acquisition for the play than I guess you indicating that you might be looking to kind of extend the play outside of those eight existing phases?

Robert Cornelius - Senior Vice President of Operations

Yeah, yeah, we are always looking to extend and expand this thing. I think that the eight phases that we have, will expand as we get. And the key driver of course is the CO2 volumes and the confidence that we have is going to be there. And we're confident and we'll go make an acquisition to take those volumes.

Michael Scialla - AG Edwards

Great thanks, Bob.

Robert Cornelius - Senior Vice President of Operations

Thanks, Michael.

Operator

And we will take our next question from Jack Aydin with KeyBanc. Please go ahead. Sir, your line is open please check your mute function.

Jack Aydin - KeyBanc

Okay. Is it open now?

Gareth Roberts - President, Chief Executive Officer

It is.

Jack Aydin - KeyBanc

Hi, guys. I am looking at your presentation May 24th 2007 and you have the summary of the economics if you look at that page with those economics, did the change in terms of cost in terms of finding cost and development... it is on page 51.

Phil Rykhoek - Senior Vice President and Chief Financial Officer

Yeah, no... I mean, well the finding cost for them that's actually historical and we haven't actually released any new numbers yet. We used to do that annually, but we don't expect that to be much different.

And the least operating expenses I can't give those numbers. But we would expect them over the life of the flood is still be in that 15 range very much as was indicated there. And actually the NYMEX differential has improved a bit more, but that may come back. So no, I mean, materially I think, that's still very representative.

Robert Cornelius - Senior Vice President of Operations

Yeah. It's still the right range at 20. And for the people who are not familiar with that, the total cup breakeven in oil prices historically poses 2694 and that's based on the sort of 2006 the average oil price was 6627.

Jack Aydin - KeyBanc

Okay. Another question I have, this is may be you might answer it be able to answer I know you doing CO2, did you ever look at the chemical flooding possibilities on some of the fields?

Phil Rykhoek - Senior Vice President and Chief Financial Officer

Not seriously, no, they are sort of recovery factor that you can get using chemical I think are may be in order of magnitude lower than what we're getting. I mean we're getting 17% plus of the original on in place out with the CO2 flood.

And I would just have to guess that the number for chemical flooding which is basically improving as sweet efficiency of water floods can't be more than 1 or 2% at the best. It's an enhancement that some companies can do that when they don't have CO2. But I can guarantee you if they had CO2 next door they'll be doing that not chemical flooding.

Jack Aydin - KeyBanc

But did you ever give it a thought at all to acquire some of those oil fields and have CO2 possibility?

Phil Rykhoek - Senior Vice President and Chief Financial Officer

We looked at all the kinds of techniques over the year, yes. And I can't say that we looked at any of the more recent compounds that people will not be using, but basically that we looked at this over the years, yes.

Jack Aydin - KeyBanc

Thank you.

Operator

And we will take our next question from Jeff Hayden, Pritchard Capital Partners. Please go ahead.

Jeffrey Hayden - Pritchard Capital Partners

Hi guys. Just circling back to the Barnett, now you talked about some of the recent solid performance, you've been having in your Northern area. Wondering if you could give us any color on... and I know there variability up there, but what kind of the average well looking like recently both in terms of IP rates you're seeing and what you kind of thinking of in terms of URs from those wells?

Robert Cornelius - Senior Vice President of Operations

I think we are a little lower a 2 million a day initial rates. But again, the Barnett comes on very strong and in decline... sort of decline and than it levels out as, you know, over several years of level out. But we're 2 to 2.5 million a day per well at the new fraction techniques, on an average.

Phil Rykhoek - Senior Vice President and Chief Financial Officer

On an average, I mean there's some very nice initial rates. But they don't mean a damn thing, over the longer haul what's, and so you'll have to look at the total overall production and it's, this statistics that you need to get will say something meaningful about this play.

Jeffrey Hayden - Pritchard Capital Partners

Okay. And then, will that translate probably roughly may be 2 2.5 means gross?

Robert Cornelius - Senior Vice President of Operations

Yeah that... that relationship holds pretty good still.

Jeffrey Hayden - Pritchard Capital Partners

Okay. And than dripping down to your Southern acreage you haven't been doing much there with the drill bit arm, are you thinking about may be putting it up for sale or I mean how are you just thinking about that as far out of your portfolio?

Gareth Roberts - President, Chief Executive Officer

Well, I mean we have had discussions with the potential partners, all the people who might want to drill it, because obviously we've been stretched, because we got so many good opportunities in the Company its very, very difficult to break money freely for anything other than some slam-dunk some what. So and of course that's the reason why we're... the real reason why we were thinking we might get that sold.

But again... because we generate a lot of great ideas down there, but we really cant take to manage of them because our budget is we've got so many good things to do. So it's the same sort of thing there, in the Southern Barnett.

Jeffrey Hayden - Pritchard Capital Partners

Okay and the Southern, is about 30,000 of your 50,000 net acres?

Gareth Roberts - President, Chief Executive Officer

Yes.

Jeffrey Hayden - Pritchard Capital Partners

Okay. Thanks a lot guys, great quarter.

Operator

[Operator Instructions]

And this time we have no further question. I would like turn the conference back over to, Mr. Robert for any additional or closing remarks.

Gareth Roberts - President, Chief Executive Officer

All right. Well, thank you everybody. We will see on next quarter.

Operator

And that does conclude today’s presentation. We thank you for your participation. You may disconnect at this time.

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Source: Denbury Resources Q2 2007 Earnings Call Transcript
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