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Denbury Resources Inc (DNR)
Q1 2020 Earnings Call
May 18, 2020, 9:00 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good day, ladies and gentlemen, and welcome to the Denbury Resources' First Quarter 2020 Results Conference Call. My name is Dana, and I'll be your operator for today's call. At this time, all participants are in a listen-only mode.
I would now like to turn the conference over to your host for today's call, John Mayer, Denbury's Director of Investor Relations. Please proceed, sir.
John Mayer -- Director of Investor Relations
Good morning, everyone, and thank you for joining us today. With me on the call are Chris Kendall, our President and Chief Executive Officer; Mark Allen, our Executive Vice President and Chief Financial Officer; and David Sheppard, our Senior Vice President of Operations.
Before we begin, I want to point out that we have slides, which will accompany today's discussion. Should you encounter any issues with slides advancing during the webcast portion of the presentation, please refresh your browser. For those of you that are not accessing the call via the webcast, these slides may be found on our homepage at denbury.com by clicking on the Quarterly Earnings Center link under Resources.
I would also like to remind you that today's call will include forward-looking statements that are based on the best and most reasonable information we have today. There are numerous factors that could cause actual results to differ materially from what is discussed on today's call. You can read our full disclosure on forward-looking statements and the risk factors associated with our business in the slides accompanying today's presentation, our most recent SEC filings, including our Form 10-Q filed with the SEC this morning, and today's news release, all of which are posted on our website at denbury.com.
Also, please note that, during the course of today's call, we will reference certain non-GAAP measures. Reconciliation and disclosure relative to these measures are provided in today's news release, as well as on our website.
With that, I will turn the call over to Chris.
Chris Kendall -- Director, President and Chief Executive Officer
Thanks, John. Good morning, everyone, and thank you for joining us today. I'd like to first note that we will not be holding our traditional Q&A session at the end of this call. As we have withdrawn our 2020 guidance and because we are working with advisors to evaluate a range of strategic alternatives, we are limited in our ability to provide additional information beyond what we have included in our prepared remarks. Having said that, we will do our best on this call to provide good color on our strong quarterly results and our focus for the remainder of 2020.
I'd like to begin by taking this opportunity to specifically thank our operations' teams. Even during these difficult times, our field employees have shown unwavering dedication to ensuring our fields are operating safely and efficiently. The well-being of our team remains our top priority, and we have taken numerous steps to protect the health and safety of our employees during the COVID-19 pandemic.
Beginning in mid-March, we implemented work-from-home measures for all employees who can work remotely. We quickly adapted to the challenges created by the virus, maintaining connectivity with the help of our technology, and I am pleased to report we have no reported cases of employees or their immediate family members testing positive for the virus today. While we are cautiously preparing to bring office employees back into the workplace over the next several months, we will continue to monitor conditions and government orders across the areas where the Company operates, and the safety of our employees will continue to come first.
Moving to the current oil price environment. With half the world's population subject to varying degrees of shelter-in-place restrictions over the past few months, oil demand has suffered an unprecedented collapse leading to record builds in oil inventories. This has led to oil prices trading at record lows and has placed significant pressure on the entire energy sector. While there is a great deal of uncertainty regarding the timing and degree of oil demand recovery, I believe that we are starting to see signs that the worst is behind us.
U.S. rig counts have fallen to historic lows over the past few weeks, and companies have dramatically reduced planned capital expenditures for 2020, which I believe will lead to a significant reduction in U.S. oil supply. Like many producers, we are selectively curtailing and shutting in uneconomic production, and collectively, these actions have a near-term impact on U.S. oil supply. Economies are slowly opening and oil demand is beginning to rise. Nonetheless, we anticipate continued volatility in the oil markets, and we are highly focused on doing everything we can to reduce costs and adjust our operations to preserve capital.
We've taken several notable measures to adjust our business due to low oil prices and to enhance the Company's liquidity position. In early March, we closed our previously announced transaction to farm down half of our nearly 100% working interests in four conventional Southeast Texas oil fields, generating net cash of approximately $40 million for Denbury. In late March, we announced additional measures, including reducing our previously planned 2020 capital budget by approximately $80 million or 44%, bringing our revised capital budget, excluding acquisitions and capitalized interests, to an estimated range of between $95 million to $105 million.
Our Board of Directors also determined to defer the Company's Cedar Creek Anticline CO2 tertiary flood development project beyond 2020. Additionally, in order to increase downside protection against current and potential further declines in oil prices, we restructured a portion of our three-way collars into fixed price swaps for the remainder of 2020. Mark will touch more on our hedge portfolio a bit later.
Finally, we are scrutinizing all costs in particular lease operating expenses and general and administrative expenses, and we expect to continue to find ways to meaningfully reduce costs across our business. Denbury's operating margin remained strong in the first quarter at just over $18 per BOE, despite the significant reduction in oil prices during the quarter, which is a testament to the operations team's continued focus on managing costs in smart sustainable ways. Thanks to their outstanding work. We achieved a further decrease in our operating cost during the first quarter, helping us maximize the value generated from every barrel of oil we produce.
Now, I'll pass the call over to David for an update on Denbury's operations.
David Sheppard -- Senior Vice President, Operations
Thank you, Chris, and good morning, everyone. As Chris mentioned, our revised capital budget, excluding acquisitions and capitalized interest, is between $95 million and $105 million. Our first quarter spend was roughly 40% of the midpoint of this guided range. Quarterly spending included substantial progress toward the Oyster Bayou A2 development expansion, as well as limited spending related to the CCA CO2 pipeline, whereby the rolled and coated pipe was transported for storage near the project location to wait [Phonetic] installation. As the reduction in capital spending was announced in late March, quarterly capital spending is expected to be significantly lower throughout the remainder of 2020, with the second quarter being a bit higher than subsequent quarters due to carryover projects that were ongoing at the time of the announcement.
Turning to production, continuing production in the first quarter was down slightly from the fourth quarter production level and down approximately 4% from a year-ago period. The sequential and year-over-year decreases were mainly attributable to production declines at Cedar Creek Anticline, as a result of lower exploitation spin levels, and were partially offset by production increases from Bell Creek Field's Phase 5 development. Our response to the significant decline in oil prices began to impact production by the end of the first quarter, and we expect this impact to result in production in the second quarter to come in significantly lower than the first quarter.
To provide some color around this, as oil prices began to fall in March, we updated our economic evaluation criteria to reflect the dynamic Pricing environment, which resulted in a small amount of production shut-in by the end of the month. For April, we estimate that approximately 2,000 BOE per day of production was shut-in due to wells that were either uneconomic to repair or were uneconomic to produce, based on our expectations for wellhead oil prices and variable production cost. In May, similar economic evaluations resulted in an estimated total of 8,500 BOE per day being shut-in. We will continue this evaluation for June, and based on our current expectations for June oil pricing, we may decide to reactivate a portion of our shut-in production. Reduced capital spending and ongoing operational cost reduction efforts will likely impact our production volumes beyond the second quarter, and production could be further constrained by future regulatory actions or limitations in storage and/or take-away capacity.
Lease operating expenses during the first quarter decreased from the fourth quarter and prior-year first quarter on both an absolute and on per BOE basis. Quarterly LOE of $109 million was $16 million below last year's first quarter, with cost lower in nearly every category. We believe this demonstrates our long-term focus on controlling cost, while delivering solid production results. We are highly focused on achieving further cost reduction measures across all expense categories and are already seeing positive results.
We are scrutinizing every aspect of our operations and making changes to maximize the cash we were able to generate. This includes evaluating power consumption sources to economically justify their use. For example, we currently have 23 compressors shutdown across our assets, optimizing CO2 utilization, delaying well repairs that are currently uneconomic and extending preventative maintenance periods where practical, among many others.
Turning your attention to Slide 11, first quarter 2020 net tertiary production at Bell Creek field was over 5,700 barrels per day, up from just over 5,600 barrels per day in the fourth quarter, with continued response from Phase 5 and initial response from Phase 6 beginning as predicted in the first quarter. We are very pleased with how well the performance of these two phases has matched our expectations, which we see as another great demonstration of the capabilities of our strong technical and operational teams.
Slide 12 provides an update on progress toward the sale of our valuable surface land. I'm pleased to share that since last quarter's call, we have successfully negotiated the acceleration of closing of certain acreage sales under contract, with total proceeds of $32 million expected in 2020. We continued to see significant interest in the remaining surface acreage, and we believe future land sales could generate an additional $30 million to $50 million of cash beyond the roughly $50 million we currently have under contract or have sold.
Next, I'll turn it over to Mark for a financial update.
Mark C. Allen -- Executive Vice President, Chief Financial Officer, Treasurer and Assistant Secretary
Thank you, David. My comments today will highlight some of the financial items in our release and 10-Q filing, primarily focusing on the sequential changes from the fourth quarter of 2019. Considering the highly volatile and unpredictable market conditions at this time, we are not providing detailed quarterly and full-year guidance. Although we will provide additional detail, we are appropriate and possible to help you with your financial models.
Starting on Slide 14, first quarter 2020 adjusted net income was $27 million or $0.06 per diluted share, ahead of analyst expectations. This quarter's largest differences between adjusted and GAAP net income included $122 million of non-cash income from fair value changes in commodity derivatives, a $73 million full cost pool ceiling test writedown, a $37 million accelerated depreciation charge and a $19 million gain on debt extinguishment.
Turning to Slide 15, our non-GAAP adjusted cash flow from operations, which excludes working capital changes, was $105 million for the first quarter, down $10 million from last quarter, driven primarily by lower realized oil prices. We generated free cash flow of $35 million in the first quarter after considering $21 million of interest that is included as repayment of debt in our financial statements and $49 million of development capital, including capitalized interest. Our first quarter average realized oil price of $51 per barrel, after hedges, was down 13% from our realized price in the fourth quarter.
Slide 16 provides a summary of our oil price differentials, excluding any impact from hedges. Our realized oil price averaged $0.38 per barrel below NYMEX prices in the first quarter, which is a slight improvement from last quarter. In April, price differentials relative to NYMEX weakened significantly from recent historical levels and we even saw LLS trade below WTI for a period of time. Since April, differentials have moderated and are more reflective of recent historical levels, but we expect they will continue to fluctuate significantly depending on all inventory levels and supply and demand dynamics across various locations.
Slide 17 provides a review of certain expense line items. Since David already addressed LOE, I will start with G&A. Our G&A expense was $10 million for the first quarter, better than our expectations due to lower performance-based compensation and equal with the last quarter after excluding $19 million of severance expense associated with our December 2019 voluntary separation program. Our net G&A related to stock-based compensation was approximately $2 million this quarter.
Interest was relatively unchanged from last quarter, and on the bottom portion of this slide, there is a detailed breakout of the components of interest expense. We recognized the full cost pool ceiling test writedown of $73 million this quarter and recorded accelerated depreciation of $37 million, with both items related to impairment of un-evaluated property costs, stemming from the significant drop in oil prices. Excluding the accelerated depreciation charge in full cost ceiling test writedown, our depletion and depreciation expense was $60 million in the first quarter. We expect that we could report a significantly larger ceiling test writedown in next quarter, as recent oil price levels indicate that the trailing 12 months' average oil price used in the ceiling test calculation will continue to average down.
The next slide provides a current summary of our oil price hedges. In late March, we restructured approximately 50% of our three-way collars covering 14,500 barrels per day into fixed price swaps for the second through fourth quarters of this year, in order to increase our downside protection. The value embedded in those three-way collars allowed us to convert those contracts into swaps at levels above market prices at that time. The weighted average swap price for our NYMEX WTI based oil hedges for the second through fourth quarters is around $40.50 per barrel and slightly less than $52 per barrel for LLS-based contracts. The weighted average spread between the floor prices and sold put levels from our remaining three-way collars is around $9 per barrel, which is the value we would realize under those contracts assuming oil prices remain below the sold put levels.
Turning to my last slide, we reduced our debt principal by $34 million in the first quarter, primarily through open market repurchases of $30 million in aggregate principal amount of our 9% senior secured second-lien notes due 2021. In connection with these transactions, we recorded a $19 million gain on debt extinguishment. As we have discussed in the past, improving the Company's balance sheet has been a top priority, and as Chris mentioned, we are working with advisors to evaluate a range of strategic alternatives. As part of that process we are engaging in discussions with our lenders and bondholders, regarding a potential comprehensive restructuring of the Company's indebtedness.
Lastly, I want to briefly discuss some new disclosures in the 10-Q that we filed this morning. As you know, and as you have heard from us this morning, the COVID-19 pandemic has -- had a major impact on in creating significant uncertainty for our entire industry. A number of factors including the materially adverse change in industry market conditions and our cash flow over the past few months, along with the fact that we have $585 million of second-lien debt that matures within 12 months, coupled with the potential to exceed the total leverage ratio covenant under our bank facility as early as the second or third quarter of this year, have necessitated that we include language in our filing, indicating substantial doubt about our ability to continue as a going concern.
We have already touched on many of the actions we are taking to mitigate the effects of the current environment on our business, and we will continue to take actions to strengthen the Company's financial position moving forward. From a peer liquidity standpoint, we are comfortable that Denbury has sufficient cash and liquidity to continue to fund our operations, capital expenditures and working capital requirements at this time.
And now, I'll turn it back to Chris.
Chris Kendall -- Director, President and Chief Executive Officer
Thank you, Mark. In closing, I want to reiterate that we are laser focused on taking the right steps to reduce costs, enhance operational efficiency and improve the Company's financial condition. We look forward to keeping you apprised of our progress. This concludes our prepared remarks, and I want to thank everyone for joining us on the call today.
Operator
[Operator Closing Remarks]
Questions and Answers:
Duration: 19 minutes
Call participants:
John Mayer -- Director of Investor Relations
Chris Kendall -- Director, President and Chief Executive Officer
David Sheppard -- Senior Vice President, Operations
Mark C. Allen -- Executive Vice President, Chief Financial Officer, Treasurer and Assistant Secretary
