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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
(Mark One)

   Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2021
OR

   Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from _______ to ________

Commission file number: 001-12935
den-20210930_g1.jpg
DENBURY INC.
(Exact name of registrant as specified in its charter)

Delaware   20-0467835
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
5851 Legacy Circle,
Plano, TX   75024
(Address of principal executive offices)   (Zip Code)
Registrant’s telephone number, including area code:   (972) 673-2000

Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class: Trading Symbol: Name of Each Exchange on Which Registered:
Common Stock $.001 Par Value DEN New York Stock Exchange

Not applicable
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑  No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☑  No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer Accelerated filer Non-accelerated filer Smaller reporting company Emerging growth company
    (Do not check if a smaller reporting company)  

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ☐  No ☑

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.  Yes ☑   No ☐

The number of shares outstanding of the registrant’s Common Stock, $.001 par value, as of October 31, 2021, was 50,122,417.





Denbury Inc.

Table of Contents

Page
3
4
6
7
8
 
 


2


PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Denbury Inc.
Unaudited Condensed Consolidated Balance Sheets
(In thousands, except par value and share data)
Successor
September 30, 2021 December 31, 2020
Assets
Current assets    
Cash and cash equivalents $ 1,783  $ 518 
Restricted cash —  1,000 
Accrued production receivable 144,370  91,421 
Trade and other receivables, net 20,867  19,682 
Derivative assets —  187 
Prepaids 10,872  14,038 
Total current assets 177,892  126,846 
Property and equipment    
Oil and natural gas properties (using full cost accounting)    
Proved properties 1,011,545  851,208 
Unevaluated properties 108,258  85,304 
CO2 properties
188,752  188,288 
Pipelines 193,669  133,485 
Other property and equipment 94,763  86,610 
Less accumulated depletion, depreciation, amortization and impairment (151,844) (41,095)
Net property and equipment 1,445,143  1,303,800 
Operating lease right-of-use assets 18,253  20,342 
Intangible assets, net 90,533  97,362 
Other assets 80,444  86,408 
Total assets $ 1,812,265  $ 1,634,758 
Liabilities and Stockholders’ Equity
Current liabilities    
Accounts payable and accrued liabilities $ 211,894  $ 112,671 
Oil and gas production payable 69,717  49,165 
Derivative liabilities 193,015  53,865 
Current maturities of long-term debt 17,332  68,008 
Operating lease liabilities 3,338  1,350 
Total current liabilities 495,296  285,059 
Long-term liabilities    
Long-term debt, net of current portion —  70,000 
Asset retirement obligations 243,184  179,338 
Derivative liabilities 16,435  5,087 
Deferred tax liabilities, net 1,241  1,274 
Operating lease liabilities 17,362  19,460 
Other liabilities 25,954  20,872 
Total long-term liabilities 304,176  296,031 
Commitments and contingencies (Note 8)
Stockholders’ equity
Preferred stock, $.001 par value, 50,000,000 shares authorized, none issued and outstanding —  — 
Common stock, $.001 par value, 250,000,000 shares authorized; 50,120,895 and 49,999,999 shares issued, respectively 50  50 
Paid-in capital in excess of par 1,128,030  1,104,276 
Accumulated deficit (115,287) (50,658)
Total stockholders equity
1,012,793  1,053,668 
Total liabilities and stockholders’ equity $ 1,812,265  $ 1,634,758 
 
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

3


Denbury Inc.
Unaudited Condensed Consolidated Statements of Operations
(In thousands, except per-share data)
Successor Predecessor
Three Months Ended
Sept. 30, 2021
Period from Sept. 19, 2020 through
Sept. 30, 2020
Period from July 1, 2020 through
Sept. 18, 2020
Revenues and other income    
Oil, natural gas, and related product sales $ 308,454  $ 22,321  $ 153,090 
CO2 sales and transportation fees
12,237  967  6,517 
Oil marketing revenues 12,593  151  3,332 
Other income 10,451  94  7,097 
Total revenues and other income 343,735  23,533  170,036 
Expenses    
Lease operating expenses 116,536  11,484  59,708 
Transportation and marketing expenses 5,985  1,344  8,155 
CO2 operating and discovery expenses
1,963  242  955 
Taxes other than income 24,154  2,073  13,473 
Oil marketing purchases 11,940  139  3,288 
General and administrative expenses 15,388  1,735  15,013 
Interest, net of amounts capitalized of $1,249, $183 and $4,704, respectively 669  334  7,704 
Depletion, depreciation, and amortization 37,691  5,283  36,317 
Commodity derivatives expense (income) 41,745  (4,035) 4,609 
Write-down of oil and natural gas properties —  —  261,677 
Reorganization items, net —  —  849,980 
Other expenses 4,553  2,164  22,084 
Total expenses 260,624  20,763  1,282,963 
Income (loss) before income taxes 83,111  2,770  (1,112,927)
Income tax provision (benefit) 403  12  (303,807)
Net income (loss) $ 82,708  $ 2,758  $ (809,120)
Net income (loss) per common share
Basic $ 1.62  $ 0.06  $ (1.63)
Diluted $ 1.51  $ 0.06  $ (1.63)
Weighted average common shares outstanding    
Basic 51,094  50,000  497,398 
Diluted 54,714  50,000  497,398 

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

4


Denbury Inc.
Unaudited Condensed Consolidated Statements of Operations
(In thousands, except per-share data)
Successor Predecessor
Nine Months Ended
Sept. 30, 2021
Period from Sept. 19, 2020 through
Sept. 30, 2020
Period from Jan. 1, 2020 through
Sept. 18, 2020
Revenues and other income      
Oil, natural gas, and related product sales $ 826,607  $ 22,321  $ 492,101 
CO2 sales and transportation fees
31,599  967  21,049 
Oil marketing revenues 26,538  151  8,543 
Other income 11,518  94  8,419 
Total revenues and other income 896,262  23,533  530,112 
Expenses      
Lease operating expenses 308,731  11,484  250,271 
Transportation and marketing expenses 22,304  1,344  27,164 
CO2 operating and discovery expenses
4,487  242  2,592 
Taxes other than income 65,499  2,073  43,531 
Oil marketing purchases 25,763  139  8,399 
General and administrative expenses 62,821  1,735  48,522 
Interest, net of amounts capitalized of $3,500, $183 and $22,885, respectively 3,457  334  48,267 
Depletion, depreciation, and amortization 113,522  5,283  188,593 
Commodity derivatives expense (income) 330,152  (4,035) (102,032)
Gain on debt extinguishment —  —  (18,994)
Write-down of oil and natural gas properties 14,377  —  996,658 
Reorganization items, net —  —  849,980 
Other expenses 9,913  2,164  35,868 
Total expenses 961,026  20,763  2,378,819 
Income (loss) before income taxes (64,764) 2,770  (1,848,707)
Income tax provision (benefit) (135) 12  (416,129)
Net income (loss) $ (64,629) $ 2,758  $ (1,432,578)
Net income (loss) per common share
Basic $ (1.27) $ 0.06  $ (2.89)
Diluted $ (1.27) $ 0.06  $ (2.89)
Weighted average common shares outstanding      
Basic 50,807  50,000  495,560 
Diluted 50,807  50,000  495,560 

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

5


Denbury Inc.
Unaudited Condensed Consolidated Statements of Cash Flows
(In thousands)
Successor Predecessor
  Nine Months Ended
Sept. 30, 2021
Period from Sept. 19, 2020 through
Sept. 30, 2020
Period from Jan. 1, 2020 through
Sept. 18, 2020
Cash flows from operating activities    
Net income (loss) $ (64,629) $ 2,758  $ (1,432,578)
Adjustments to reconcile net income (loss) to cash flows from operating activities  
Noncash reorganization items, net —  —  810,909 
Depletion, depreciation, and amortization 113,522  5,283  188,593 
Write-down of oil and natural gas properties 14,377  —  996,658 
Deferred income taxes (34) (408,869)
Stock-based compensation 22,788  —  4,111 
Commodity derivatives expense (income) 330,152  (4,035) (102,032)
Receipt (payment) on settlements of commodity derivatives (179,466) 6,660  81,396 
Gain on debt extinguishment —  —  (18,994)
Debt issuance costs and discounts 2,055  114  11,571 
Gain from asset sales and other (7,026) —  (6,723)
Other, net (2,448) 589  7,162 
Changes in assets and liabilities, net of effects from acquisitions    
Accrued production receivable (52,948) 38,537  26,575 
Trade and other receivables (1,809) 1,366  (22,343)
Other current and long-term assets 7,337  705  743 
Accounts payable and accrued liabilities 47,484  (7,980) (16,102)
Oil and natural gas production payable 23,168  (11,064) (6,792)
Other liabilities (4,966) (29) 123 
Net cash provided by operating activities 247,557  32,910  113,408 
Cash flows from investing activities    
Oil and natural gas capital expenditures (113,041) (2,125) (99,582)
Acquisitions of oil and natural gas properties (10,927) (1) — 
Pipelines and plants capital expenditures (19,123) (6) (11,601)
Net proceeds from sales of oil and natural gas properties and equipment 19,053  880  41,322 
Other 5,797  (308) 12,747 
Net cash used in investing activities (118,241) (1,560) (57,114)
Cash flows from financing activities    
Bank repayments (697,000) (55,000) (551,000)
Bank borrowings 627,000  —  691,000 
Interest payments treated as a reduction of debt —  —  (46,417)
Cash paid in conjunction with debt repurchases —  —  (14,171)
Costs of debt financing —  —  (12,482)
Pipeline financing repayments (50,676) (54) (51,792)
Other (2,426) —  (9,363)
Net cash provided by (used in) financing activities (123,102) (55,054) 5,775 
Net increase (decrease) in cash, cash equivalents, and restricted cash 6,214  (23,704) 62,069 
Cash, cash equivalents, and restricted cash at beginning of period 42,248  95,114  33,045 
Cash, cash equivalents, and restricted cash at end of period $ 48,462  $ 71,410  $ 95,114 

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

6


Denbury Inc.
Unaudited Condensed Consolidated Statements of Changes in Stockholders' Equity
(Dollar amounts in thousands)
Common Stock
($.001 Par Value)
Paid-In
Capital in
Excess of
Par
Retained
Earnings (Accumulated Deficit)
Treasury Stock
(at cost)
Shares Amount Shares Amount Total Equity
Balance – December 31, 2020 (Successor) 49,999,999  $ 50  $ 1,104,276  $ (50,658) —  $ —  $ 1,053,668 
Stock-based compensation —  —  19,172  —  —  —  19,172 
Tax withholding for stock compensation plans —  —  (1,467) —  —  —  (1,467)
Issued pursuant to exercise of warrants 5,620  195  —  —  —  195 
Net loss —  —  —  (69,642) —  —  (69,642)
Balance – March 31, 2021 (Successor) 50,005,619  50  1,122,176  (120,300) —  —  1,001,926 
Stock-based compensation —  —  2,682  —  —  —  2,682 
Tax withholding for stock compensation plans —  —  (7) —  —  —  (7)
Issued pursuant to exercise of warrants 11,872  292  —  —  —  292 
Net loss —  —  —  (77,695) —  —  (77,695)
Balance – June 30, 2021 (Successor) 50,017,491  50  1,125,143  (197,995) —  —  927,198 
Stock-based compensation —  —  2,686  —  —  —  2,686 
Issued pursuant to exercise of warrants 103,404  201  —  —  —  201 
Net income —  —  —  82,708  —  —  82,708 
Balance – September 30, 2021 (Successor) 50,120,895  $ 50  $ 1,128,030  $ (115,287) —  $ —  $ 1,012,793 

Common Stock
($.001 Par Value)
Paid-In
Capital in
Excess of
Par
Retained
Earnings (Accumulated Deficit)
Treasury Stock
(at cost)
Shares Amount Shares Amount Total Equity
Balance – December 31, 2019 (Predecessor) 508,065,495  $ 508  $ 2,739,099  $ (1,321,314) 1,652,771  $ (6,034) $ 1,412,259 
Issued pursuant to stock compensation plans 312,516  —  —  —  —  —  — 
Issued pursuant to directors’ compensation plan 37,367  —  —  —  —  —  — 
Stock-based compensation —  —  3,204  —  —  —  3,204 
Tax withholding for stock compensation plans —  —  —  —  175,673  (34) (34)
Net income —  —  —  74,016  —  —  74,016 
Balance – March 31, 2020 (Predecessor) 508,415,378  508  2,742,303  (1,247,298) 1,828,444  (6,068) 1,489,445 
Canceled pursuant to stock compensation plans (6,218,868) (6) —  —  —  — 
Issued pursuant to notes conversion 7,357,450  11,453  —  —  —  11,461 
Stock-based compensation —  —  987  —  —  —  987 
Net loss —  —  —  (697,474) —  —  (697,474)
Balance – June 30, 2020 (Predecessor) 509,553,960  510  2,754,749  (1,944,772) 1,828,444  (6,068) 804,419 
Canceled pursuant to stock compensation plans (95,016) —  —  —  —  —  — 
Issued pursuant to notes conversion 14,800  —  40  —  —  —  40 
Stock-based compensation —  —  10,126  —  —  —  10,126 
Tax withholding for stock compensation plans —  —  —  —  567,189  (134) (134)
Net loss —  —  —  (809,120) —  —  (809,120)
Cancellation of Predecessor equity (509,473,744) (510) (2,764,915) 2,753,892  (2,395,633) 6,202  (5,331)
Issuance of Successor equity 49,999,999  50  1,095,369  —  —  —  1,095,419 
Balance – September 18, 2020 (Predecessor) 49,999,999  $ 50  $ 1,095,369  $ —  —  $ —  $ 1,095,419 
Balance – September 19, 2020 (Successor) 49,999,999  $ 50  $ 1,095,369  $ —  —  $ —  $ 1,095,419 
Net income —  —  —  2,758  —  —  2,758 
Balance – September 30, 2020 (Successor) 49,999,999  50  1,095,369  2,758  —  —  1,098,177 
Stock-based compensation —  —  8,907  —  —  —  8,907 
Net loss —  —  —  (53,416) —  —  (53,416)
Balance – December 31, 2020 (Successor) 49,999,999  $ 50  $ 1,104,276  $ (50,658) —  $ —  $ 1,053,668 

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

7


Denbury Inc.
Notes to Unaudited Condensed Consolidated Financial Statements

Note 1. Basis of Presentation

Organization and Nature of Operations

Denbury Inc. (“Denbury,” “Company” or the “Successor”), a Delaware corporation, is an independent energy company with operations focused in the Gulf Coast and Rocky Mountain regions. The Company is differentiated by its focus on CO2 enhanced oil recovery (“EOR”) and the emerging carbon capture, use, and storage (“CCUS”) industry, supported by the Company’s CO2 EOR technical and operational expertise and its extensive CO2 pipeline infrastructure. The utilization of captured industrial-sourced CO2 in EOR significantly reduces the carbon footprint of the oil that Denbury produces, making the Company’s scope 1 and 2 CO2 emissions negative today, with a goal to also fully offset scope 3 CO2 emissions within this decade, primarily through increasing the amount of captured industrial-sourced CO2 used in its operations.

Emergence from Voluntary Reorganization Under Chapter 11 of the Bankruptcy Code

On July 30, 2020 (the “Petition Date”), Denbury Resources Inc. (the “Predecessor”) and its subsidiaries filed petitions for reorganization in a “prepackaged” voluntary bankruptcy (the “Chapter 11 Restructuring”) under chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the Southern District of Texas (the “Bankruptcy Court”) under the caption “In re Denbury Resources Inc., et al., Case No. 20-33801”. On September 2, 2020, the Bankruptcy Court entered an order (the “Confirmation Order”) confirming the prepackaged joint plan of reorganization (the “Plan”) and approving the Disclosure Statement, and on September 18, 2020 (the “Emergence Date”), the Plan became effective in accordance with its terms and the Company emerged from Chapter 11 as the successor reporting company of Denbury Resources Inc. On April 23, 2021, the Bankruptcy Court entered a final decree closing the Chapter 11 case captioned “In re Denbury Resources Inc., et al., Case No. 20-33801”; therefore, we have no remaining obligations related to this reorganization.

Upon emergence from bankruptcy, we met the criteria and were required to adopt fresh start accounting in accordance with Financial Accounting Standards Board Codification (“FASC”) Topic 852, Reorganizations. Fresh start accounting requires that new fair values be established for the Company’s assets, liabilities and equity as of the Emergence Date, and therefore certain values and operational results of the condensed consolidated financial statements subsequent to September 18, 2020 are not comparable to those in the Company’s condensed consolidated financial statements prior to, and including September 18, 2020. The Emergence Date fair values of the Successor’s assets and liabilities differ materially from their recorded values as reflected on the historical balance sheets of the Predecessor contained in periodic reports previously filed with the Securities and Exchange Commission. References to “Successor” relate to the financial position and results of operations of the Company subsequent to September 18, 2020, and references to “Predecessor” relate to the financial position and results of operations of the Company prior to, and including, September 18, 2020.

Reorganization Items, Net

Reorganization items, net, include (i) expenses incurred during the Chapter 11 Restructuring subsequent to the Petition Date as a direct result of the Plan, (ii) gains or losses from liabilities settled and (iii) fresh start accounting adjustments and are recorded in “Reorganization items, net” in our Unaudited Condensed Consolidated Statements of Operations. Professional service provider charges associated with our restructuring that were incurred before the Petition Date and after the Emergence Date are recorded in “Other expenses” in our Unaudited Condensed Consolidated Statements of Operations.


8


Denbury Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
The following table summarizes the losses (gains) on reorganization items, net:
Predecessor
In thousands Period from July 1, 2020 through
Sept. 18, 2020
Gain on settlement of liabilities subject to compromise $ (1,024,864)
Fresh start accounting adjustments 1,834,423 
Professional service provider fees and other expenses 11,267 
Success fees for professional service providers 9,700 
Loss on rejected contracts and leases 10,989 
Valuation adjustments to debt classified as subject to compromise 757 
Debtor-in-possession credit agreement fees 3,107 
Acceleration of Predecessor stock compensation expense 4,601 
Total reorganization items, net $ 849,980 

Interim Financial Statements

The accompanying unaudited condensed consolidated financial statements of Denbury Inc. and its subsidiaries have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) and do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.  These financial statements and the notes thereto should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2020 (the “Form 10-K”).  Unless indicated otherwise or the context requires, the terms “we,” “our,” “us,” “Company” or “Denbury,” refer to Denbury Inc. and its subsidiaries.

Accounting measurements at interim dates inherently involve greater reliance on estimates than at year end, and the results of operations for the interim periods shown in this report are not necessarily indicative of results to be expected for the year.  In management’s opinion, the accompanying unaudited condensed consolidated financial statements include all adjustments of a normal recurring nature necessary for a fair presentation of our consolidated financial position as of September 30, 2021 (Successor); our consolidated results of operations and consolidated statement of changes in stockholders’ equity for the three and nine months ended September 30, 2021 (Successor), for the period September 19, 2020 through September 30, 2020 (Successor), for the period July 1, 2020 through September 18, 2020 (Predecessor) and January 1, 2020 through September 18, 2020 (Predecessor); and our consolidated cash flows for the nine months ended September 30, 2021 (Successor), for the period September 19, 2020 through September 30, 2020 (Successor) and for the period January 1, 2020 through September 18, 2020 (Predecessor). Upon the adoption of fresh start accounting, the Company’s assets and liabilities were recorded at their fair values as of the fresh start reporting date. As a result of the adoption of fresh start accounting, certain values and operational results of the Company’s condensed consolidated financial statements subsequent to September 18, 2020 are not comparable to those in its condensed consolidated financial statements prior to, and including September 18, 2020.

Reclassifications

Certain prior period amounts have been reclassified to conform to the current year presentation. Such reclassifications had no impact on our reported net income (loss), current assets, total assets, current liabilities, total liabilities or stockholders’ equity.

9


Denbury Inc.
Notes to Unaudited Condensed Consolidated Financial Statements

Cash, Cash Equivalents, and Restricted Cash

The following table provides a reconciliation of cash, cash equivalents, and restricted cash as reported within the Unaudited Condensed Consolidated Balance Sheets to “Cash, cash equivalents, and restricted cash at end of period” as reported within the Unaudited Condensed Consolidated Statements of Cash Flows:
Successor
In thousands September 30, 2021 December 31, 2020
Cash and cash equivalents $ 1,783  $ 518 
Restricted cash, current —  1,000 
Restricted cash included in other assets 46,679  40,730 
Total cash, cash equivalents, and restricted cash shown in the Unaudited Condensed Consolidated Statements of Cash Flows $ 48,462  $ 42,248 

Restricted cash included in other assets in the table above consists of escrow accounts that are legally restricted for certain of our asset retirement obligations, and are included in “Other assets” in the accompanying Unaudited Condensed Consolidated Balance Sheets.

Net Income (Loss) per Common Share

Basic net income (loss) per common share is computed by dividing the net income (loss) attributable to common stockholders by the weighted average number of shares of common stock outstanding during the period.  Diluted net income per common share is calculated in the same manner but includes the impact of potentially dilutive securities.  Potentially dilutive securities during the Successor periods consist of nonvested restricted stock units and outstanding series A and series B warrants, and during the Predecessor periods consisted of nonvested restricted stock, nonvested performance-based equity awards, and convertible senior notes. For each of the three and nine months ended September 30, 2021 and for the periods September 19, 2020 through September 30, 2020 (Successor), July 1, 2020 through September 18, 2020 (Predecessor) and January 1, 2020 through September 18, 2020 (Predecessor), there were no adjustments to net income (loss) for purposes of calculating basic and diluted net income (loss) per common share.

The following table reconciles the weighted average shares used in the basic and diluted net income (loss) per common share calculations for the periods indicated:
Successor Predecessor
In thousands Three Months Ended
Sept. 30, 2021
Period from Sept. 19, 2020 through
Sept. 30, 2020
Period from July 1, 2020 through
Sept. 18, 2020
Weighted average common shares outstanding – basic 51,094  50,000  497,398 
Effect of potentially dilutive securities
Restricted stock units 908  —  — 
Warrants 2,712  —  — 
Weighted average common shares outstanding – diluted 54,714  50,000  497,398 

For the nine months ended September 30, 2021 and for each of the periods from July 1, 2020 through September 18, 2020 (Predecessor) and from January 1, 2020 through September 18, 2020 (Predecessor), the weighted average common shares outstanding used to calculate basic earnings per share and diluted earnings per share were the same, since the Company generated a net loss during those periods. The weighted average diluted shares outstanding would have been 53.4 million for the nine months ended September 30, 2021, 580.0 million for the period July 1, 2020 through September 18, 2020, and 584.4 million for the period January 1, 2020 through September 18, 2020 if the Company had recognized net income during those periods.


10


Denbury Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
Basic weighted average common shares during the Successor periods includes 987,987 and 767,228 performance stock units during the three and nine months ended September 30, 2021, respectively, with vesting parameters tied to the Company’s common stock trading prices and which became fully vested on March 3, 2021. Although the performance measures for vesting of these awards have been achieved, the shares underlying these awards are not currently outstanding as actual delivery of the shares is not scheduled to occur until after the end of the performance period, December 4, 2023. Basic weighted average common shares includes time-vesting restricted stock units during the Successor periods and restricted stock during the Predecessor periods that vested during the periods.

For purposes of calculating diluted weighted average common shares for the three months ended September 30, 2021, the nonvested restricted stock units and warrants are included in the computation using the treasury stock method.

The following outstanding securities were excluded from the computation of diluted net loss per share for the nine months ended September 30, 2021 and from diluted net income per share for the period September 19, 2020 to September 30, 2020, as their effect would have been antidilutive, as of the respective dates:
Successor
In thousands September 30, 2021 September 30, 2020
Restricted stock units 1,255  — 
Warrants 5,314  5,526 

For the nine months ended September 30, 2021 Successor period, the Company’s restricted stock units and series A and series B warrants were antidilutive based on the Company’s net loss position for the period. Despite the Company’s net income position for the period September 19, 2020 to September 30, 2020, the Company’s series A and series B warrants were antidilutive because the Company’s stock price during the period was lower than the warrant exercise prices. At September 30, 2021, the Company had approximately 5.3 million warrants outstanding that can be exercised for shares of the Successor’s common stock, at an exercise price of $32.59 per share for the 2.6 million series A warrants outstanding and at an exercise price of $35.41 per share for the 2.7 million series B warrants outstanding. The series A warrants are exercisable until September 18, 2025, and the series B warrants are exercisable until September 18, 2023, at which time the warrants expire. The warrants were issued pursuant to the Plan to holders of the Predecessor’s convertible senior notes, senior subordinated notes, and equity. As of September 30, 2021, 8,390 series A warrants and 203,501 series B warrants had been exercised. The warrants may be exercised for cash or on a cashless basis. If warrants are exercised on a cashless basis, the amount of dilution will be less than 5.3 million shares.

Oil and Natural Gas Properties

Unevaluated Costs. Under full cost accounting, we exclude certain unevaluated costs from the amortization base and full cost ceiling test pending the determination of whether proved reserves can be assigned to such properties. These costs are transferred to the full cost amortization base as these properties are developed, tested and evaluated. At least annually, we test these assets for impairment based on an evaluation of management’s expectations of future pricing, evaluation of lease expiration terms, and planned development activities. In the first quarter of 2020 Predecessor period, given the significant declines in NYMEX oil prices in March and April 2020, we reassessed our development plans and transferred $244.9 million of our unevaluated costs to the full cost amortization base. Upon emergence from bankruptcy, the Company adopted fresh start accounting which resulted in our oil and natural gas properties, including unevaluated properties, being recorded at their fair values at the Emergence Date.

Write-Down of Oil and Natural Gas Properties. Under full cost accounting, the net capitalized costs of oil and natural gas properties are limited to the lower of unamortized cost or the cost center ceiling. The cost center ceiling is defined as (1) the present value of estimated future net revenues from proved oil and natural gas reserves before future abandonment costs (discounted at 10%), based on the average first-day-of-the-month oil and natural gas price for each month during a 12-month rolling period prior to the end of a particular reporting period; plus (2) the cost of properties not being amortized; plus (3) the lower of cost or estimated fair value of unproved properties included in the costs being amortized, if any; less (4) related income tax effects. Our future net revenues from proved oil and natural gas reserves are not reduced for development costs related to the cost of drilling for and developing CO2 reserves nor those related to the cost of constructing CO2 pipelines, as we do not have to incur additional CO2 capital costs to develop the proved oil and natural gas reserves. Therefore, we include in the ceiling test, as a reduction of future net revenues, that portion of our capitalized CO2 costs related to CO2 reserves and CO2

11


Denbury Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
pipelines that we estimate will be consumed in the process of producing our proved oil and natural gas reserves. The fair value of our oil and natural gas derivative contracts is not included in the ceiling test, as we do not designate these contracts as hedge instruments for accounting purposes. The cost center ceiling test is prepared quarterly.

We recognized a full cost pool ceiling test write-down of $14.4 million during the three months ended March 31, 2021, with first-day-of-the-month NYMEX oil prices for the preceding 12 months averaging $36.40 per Bbl, after adjustments for market differentials and transportation expenses by field. The write-down was primarily a result of the March 2021 acquisition of Wyoming property interests (see Note 2, Acquisition and Divestitures) which was recorded based on a valuation that utilized NYMEX strip oil prices at the acquisition date, which were significantly higher than the average first-day-of-the-month NYMEX oil prices used to value the cost ceiling.

The Predecessor also recognized full cost pool ceiling test write-downs of $261.7 million during the period from July 1, 2020 through September 18, 2020, $662.4 million during the three months ended June 30, 2020 and $72.5 million during the three months ended March 31, 2020. We did not record any ceiling test write-downs during the Successor periods from September 19, 2020 through September 30, 2020, for the three months ended June 30, 2021, or for the three months ended September 30, 2021.

Recent Accounting Pronouncements

Recently Adopted

Income Taxes. In December 2019, the Financial Accounting Standards Board (“FASB”) issued ASU 2019-12, Income Taxes (Topic 740) – Simplifying the Accounting for Income Taxes (“ASU 2019-12”). The objective of ASU 2019-12 is to simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740 and to provide more consistent application to improve the comparability of financial statements. Effective January 1, 2021, we adopted ASU 2019-02. The implementation of this standard did not have a material impact on our consolidated financial statements and related footnote disclosures.

Note 2. Acquisition and Divestitures

Acquisition of Wyoming CO2 EOR Fields

On March 3, 2021, we acquired a nearly 100% working interest (approximately 83% net revenue interest) in the Big Sand Draw and Beaver Creek EOR fields located in Wyoming from a subsidiary of Devon Energy Corporation for $10.9 million cash (after final closing adjustments), including surface facilities and a 46-mile CO2 transportation pipeline to the acquired fields. The acquisition agreement provides for us to make two contingent cash payments, one in January 2022 and one in January 2023, of $4 million each, conditioned on NYMEX WTI oil prices averaging at least $50 per Bbl during each of 2021 and 2022. The fair value of the contingent consideration on the acquisition date was $5.3 million, and as of September 30, 2021, the fair value of the contingent consideration recorded on our Unaudited Condensed Consolidated Balance Sheets was $7.4 million. The $2.1 million increase at September 30, 2021 from the March 2021 acquisition date fair value was the result of higher NYMEX WTI oil prices and was recorded to “Other expenses” in our Unaudited Condensed Consolidated Statements of Operations.

The fair values allocated to our assets acquired and liabilities assumed for the acquisition were based on significant inputs not observable in the market and considered level 3 inputs. The fair value of the assets acquired and liabilities assumed was finalized during the third quarter of 2021, after consideration of final closing adjustments and evaluation of reserves and

12


Denbury Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
liabilities assumed. The following table presents a summary of the fair value of assets acquired and liabilities assumed in the acquisition:

In thousands
Consideration:
Cash consideration $ 10,906 
Less: Fair value of assets acquired and liabilities assumed:
Proved oil and natural gas properties 60,101 
Other property and equipment 1,685 
Asset retirement obligations (39,794)
Contingent consideration (5,320)
Other liabilities (5,766)
Fair value of net assets acquired $ 10,906 

Divestitures

Hartzog Draw Deep Mineral Rights

On June 30, 2021, we closed the sale of undeveloped, unconventional deep mineral rights in Hartzog Draw Field in Wyoming. The cash proceeds of $18 million were recorded to “Proved properties” in our Unaudited Condensed Consolidated Balance Sheets. The proceeds reduced our full cost pool; therefore, no gain or loss was recorded on the transaction, and the sale had no impact on our production or reserves.

Houston Area Land Sales

During the third quarter of 2021, we completed sales of a portion of certain non-producing surface acreage in the Houston area. We recognized cash proceeds of $11.8 million from the sales and recorded a $7.0 million gain to “Other income” in our Unaudited Condensed Consolidated Statements of Operations.

Note 3. Revenue Recognition

We record revenue in accordance with FASC Topic 606, Revenue from Contracts with Customers. The core principle of FASC Topic 606 is that an entity should recognize revenue for the transfer of goods or services equal to the amount of consideration that it expects to be entitled to receive for those goods or services. Once we have delivered the volume of commodity to the delivery point and the customer takes delivery and possession, we are entitled to payment and we invoice the customer for such delivered production. Payment under most oil and CO2 contracts is received within a month following product delivery, and for natural gas and NGL contracts, payment is generally received within two months following delivery. Timing of revenue recognition may differ from the timing of invoicing to customers; however, as the right to consideration after delivery is unconditional based on only the passage of time before payment of the consideration is due, upon delivery we record a receivable in “Accrued production receivable” in our Unaudited Condensed Consolidated Balance Sheets. From time to time, the Company enters into marketing arrangements for the purchase and sale of crude oil for third parties. Revenues and expenses from these transactions are presented on a gross basis, as we act as a principal in the transaction by assuming control of the commodities purchased and responsibility to deliver the commodities sold. Revenue is recognized when control transfers to the purchaser at the delivery point based on the price received from the purchaser.


13


Denbury Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
Disaggregation of Revenue

The following tables summarize our revenues by product type for the periods indicated:
Successor Predecessor
In thousands Three Months Ended
Sept. 30, 2021
Period from Sept. 19, 2020 through
Sept. 30, 2020
Period from July 1, 2020 through
Sept. 18, 2020
Oil sales $ 305,093  $ 22,311  $ 152,136 
Natural gas sales 3,361  10  954 
CO2 sales and transportation fees
12,237  967  6,517 
Oil marketing revenues 12,593  151  3,332 
Total revenues $ 333,284  $ 23,439  $ 162,939 

Successor Predecessor
In thousands Nine Months Ended
Sept. 30, 2021
Period from Sept. 19, 2020 through
Sept. 30, 2020
Period from Jan. 1, 2020 through
Sept. 18, 2020
Oil sales $ 818,714  $ 22,311  $ 489,251 
Natural gas sales 7,893  10  2,850 
CO2 sales and transportation fees
31,599  967  21,049 
Oil marketing revenues 26,538  151  8,543 
Total revenues $ 884,744  $ 23,439  $ 521,693 

Note 4. Long-Term Debt

The table below reflects long-term debt outstanding as of the dates indicated:
Successor
In thousands September 30, 2021 December 31, 2020
Senior Secured Bank Credit Agreement $ —  $ 70,000 
Pipeline financings 17,332  68,008 
Total debt principal balance 17,332  138,008 
Less: current maturities of long-term debt (17,332) (68,008)
Long-term debt $ —  $ 70,000 

Senior Secured Bank Credit Agreement

On the Emergence Date, we entered into a credit agreement with JPMorgan Chase Bank, N.A., as administrative agent, and other lenders party thereto (the “Bank Credit Agreement”). The Bank Credit Agreement is a senior secured revolving credit facility with a borrowing base and lender commitments of $575 million. Availability under the Bank Credit Agreement is subject to a borrowing base, which is redetermined semiannually on or around May 1 and November 1 of each year, with our next scheduled redetermination around May 1, 2022. The borrowing base is adjusted at the lenders’ discretion and is based, in part, upon external factors over which we have no control. If our outstanding debt under the Bank Credit Agreement exceeds the then-effective borrowing base, we would be required to repay the excess amount over a period not to exceed six months. The Bank Credit Agreement matures on January 30, 2024. The undrawn portion of the aggregate lender commitments under the Bank Credit Agreement is subject to a commitment fee of 0.5% per annum.


14


Denbury Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
The Bank Credit Agreement limits our ability to pay dividends on our common stock or make other restricted payments in an amount not to exceed “Distributable Free Cash Flow”, but only if (1) no event of default or borrowing base deficiency exists; (2) our total leverage ratio is 2 to 1 or lower; and (3) availability under the Bank Credit Agreement is at least 20%. The Bank Credit Agreement also limits our ability to, among other things, incur and repay other indebtedness; grant liens; engage in certain mergers, consolidations, liquidations and dissolutions; engage in sales of assets; make acquisitions and investments; make other restricted payments (including redeeming, repurchasing or retiring our common stock); and enter into commodity derivative agreements, in each case subject to customary exceptions.

The Bank Credit Agreement is secured by (1) our proved oil and natural gas properties, which are held through our restricted subsidiaries; (2) the pledge of equity interests of such subsidiaries; (3) a pledge of our commodity derivative agreements; (4) a pledge of deposit accounts, securities accounts and our commodity accounts; and (5) a security interest in substantially all other collateral that may be perfected by a Uniform Commercial Code filing, subject to certain exceptions.

The Bank Credit Agreement contains certain financial performance covenants including the following:

A Consolidated Total Debt to Consolidated EBITDAX covenant (as defined in the Bank Credit Agreement), with such ratio not to exceed 3.5 times; and
A requirement to maintain a current ratio (i.e., Consolidated Current Assets to Consolidated Current Liabilities) of 1.0.

For purposes of computing the current ratio per the Bank Credit Agreement, Consolidated Current Assets exclude the current portion of derivative assets but include available borrowing capacity under the Bank Credit Agreement, and Consolidated Current Liabilities exclude the current portion of derivative liabilities as well as the current portions of long-term indebtedness outstanding. As of September 30, 2021, we were in compliance with all debt covenants under the Bank Credit Agreement.

The above description of our Bank Credit Agreement is qualified by the express language and defined terms contained in the Bank Credit Agreement.

Pipeline Financing Transactions

During the first nine months of 2021, Denbury paid $52.5 million to Genesis Energy, L.P. in accordance with the October 2020 restructuring of the financing arrangements of our NEJD CO2 pipeline system. The final quarterly installment of $17.5 million was paid on October 29, 2021.

Note 5. Income Taxes

As of September 30, 2021, the tax basis of our assets, primarily our oil and gas properties, is in excess of their carrying value, as adjusted for fresh start accounting on September 18, 2020; therefore, we are currently in a net deferred tax asset position. Based on all available evidence, both positive and negative, we continue to record a valuation allowance on our underlying deferred tax assets as of September 30, 2021, as we believe our deferred tax assets are not more-likely-than-not to be realized. We intend to maintain the valuation allowances on our deferred tax assets until there is sufficient evidence to support the reversal of all or some portion of the allowances, which will largely be determined based on oil prices and the Company’s ability to generate positive pre-tax income.

We evaluate our estimated annual effective income tax rate based on current and forecasted business results and enacted tax laws on a quarterly basis and apply this tax rate to our ordinary income or loss to calculate our estimated tax liability or benefit. Our income taxes are based on an estimated combined federal and state statutory rate of approximately 25% in 2021 and 2020. Our effective tax rates for the three and nine months ended September 30, 2021 (Successor) differed from our estimated statutory rate as the deferred tax expense generated by the operating income for the three months ended September 30, 2021 and the deferred tax benefit generated from our operating loss for the nine months ended September 30, 2021 were offset by a valuation allowance applied to our underlying federal and state deferred tax assets.


15


Denbury Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
Note 6. Commodity Derivative Contracts

We do not apply hedge accounting treatment to our oil and natural gas derivative contracts; therefore, the changes in the fair values of these instruments are recognized in income in the period of change.  These fair value changes, along with the settlements of expired contracts, are shown under “Commodity derivatives expense (income)” in our Unaudited Condensed Consolidated Statements of Operations.

Historically, we have entered into various oil and natural gas derivative contracts to provide an economic hedge of our exposure to commodity price risk associated with anticipated future oil and natural gas production and to provide more certainty to our future cash flows. We do not hold or issue derivative financial instruments for trading purposes. Generally, these contracts have consisted of various combinations of price floors, collars, three-way collars, fixed-price swaps, fixed-price swaps enhanced with a sold put, and basis swaps. The production that we hedge has varied from year to year depending on our levels of debt, financial strength, expectation of future commodity prices, and occasionally requirements under our bank credit facility. As of December 31, 2020, we were in compliance with the hedging requirements under our Bank Credit Agreement requiring certain minimum commodity hedge levels through July 31, 2022, and we do not have any additional hedging requirements under the Bank Credit Agreement.

We manage and control market and counterparty credit risk through established internal control procedures that are reviewed on an ongoing basis.  We attempt to minimize credit risk exposure to counterparties through formal credit policies, monitoring procedures and diversification, and all of our commodity derivative contracts are with parties that are lenders under our Bank Credit Agreement (or affiliates of such lenders). As of September 30, 2021, all of our outstanding derivative contracts were subject to enforceable master netting arrangements whereby payables on those contracts can be offset against receivables from separate derivative contracts with the same counterparty. It is our policy to classify derivative assets and liabilities on a gross basis on our balance sheets, even if the contracts are subject to enforceable master netting arrangements.

The following table summarizes our commodity derivative contracts as of September 30, 2021, none of which are classified as hedging instruments in accordance with the FASC Derivatives and Hedging topic:
Months Index Price Volume (Barrels per day) Contract Prices ($/Bbl)
Range(1)
Weighted Average Price
Swap Floor Ceiling
Oil Contracts:        
2021 Fixed-Price Swaps
Oct – Dec NYMEX 29,000 $ 38.68  56.00  $ 43.86  $ —  $ — 
2021 Collars
Oct – Dec NYMEX 4,000 $ 45.00  59.30  $ —  $ 46.25  $ 53.04 
2022 Fixed-Price Swaps
Jan – June NYMEX 15,500 $ 42.65  58.15  $ 49.01  $ —  $ — 
July – Dec NYMEX 9,000 50.13  60.35  56.35  —  — 
2022 Collars
Jan – June NYMEX 11,000 $ 47.50  70.75  $ —  $ 49.77  $ 64.31 
July – Dec NYMEX 10,000 47.50  70.75  —  49.75  64.18 

(1)Ranges presented for fixed-price swaps represent the lowest and highest fixed prices of all open contracts for the period presented. For collars, ranges represent the lowest floor price and highest ceiling price for all open contracts for the period presented.

Note 7. Fair Value Measurements

The FASC Fair Value Measurement topic defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (often referred to as the “exit price”). We utilize market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated or generally unobservable. We primarily apply the income approach for recurring fair value measurements

16


Denbury Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
and endeavor to utilize the best available information. Accordingly, we utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. We are able to classify fair value balances based on the observability of those inputs. The FASC establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). The three levels of the fair value hierarchy are as follows:

Level 1 – Quoted prices in active markets for identical assets or liabilities as of the reporting date.

Level 2 – Pricing inputs are other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reported date. Level 2 includes those financial instruments that are valued using models or other valuation methodologies. Instruments in this category include non-exchange-traded oil derivatives that are based on NYMEX and regional pricing other than NYMEX (e.g., Light Louisiana Sweet). Our costless collars and the sold put features of our three-way collars are valued using the Black-Scholes model, an industry standard option valuation model that takes into account inputs such as contractual prices for the underlying instruments, maturity, quoted forward prices for commodities, interest rates, volatility factors and credit worthiness, as well as other relevant economic measures. Substantially all of these assumptions are observable in the marketplace throughout the full term of the instrument, can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace.

Level 3 – Pricing inputs include significant inputs that are generally less observable. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value.

We adjust the valuations from the valuation model for nonperformance risk, using our estimate of the counterparty’s credit quality for asset positions and our credit quality for liability positions. We use multiple sources of third-party credit data in determining counterparty nonperformance risk, including credit default swaps.

The following table sets forth, by level within the fair value hierarchy, our financial assets and liabilities that were accounted for at fair value on a recurring basis as of the periods indicated:
  Fair Value Measurements Using:
In thousands Quoted Prices
in Active
Markets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total
September 30, 2021  
Liabilities
Oil derivative contracts – current $ —  $ (193,015) $ —  $ (193,015)
Oil derivative contracts – long-term —  (16,435) —  (16,435)
Total Liabilities $ —  $ (209,450) $ —  $ (209,450)
December 31, 2020        
Assets        
Oil derivative contracts – current $ —  $ 187  $ —  $ 187 
Total Assets $ —  $ 187  $ —  $ 187 
Liabilities
Oil derivative contracts – current $ —  $ (53,865) $ —  $ (53,865)
Oil derivative contracts – long-term —  (5,087) —  (5,087)
Total Liabilities $ —  $ (58,952) $ —  $ (58,952)


17


Denbury Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
Since we do not apply hedge accounting for our commodity derivative contracts, any gains and losses on our assets and liabilities are included in “Commodity derivatives expense (income)” in the accompanying Unaudited Condensed Consolidated Statements of Operations.

Other Fair Value Measurements

The carrying value of our loans under our Bank Credit Agreement approximate fair value, as they are subject to short-term floating interest rates that approximate the rates available to us for those periods. The estimated fair value of the principal amount of our debt as of December 31, 2020, excluding pipeline financing obligations, was $70.0 million. We have other financial instruments consisting primarily of cash, cash equivalents, U.S. Treasury notes, short-term receivables and payables that approximate fair value due to the nature of the instrument and the relatively short maturities.

Note 8. Commitments and Contingencies

Litigation

We are involved in various lawsuits, claims and regulatory proceedings incidental to our businesses.  We are also subject to audits for various taxes (income, sales and use, and severance) in the various states in which we operate, and from time to time receive assessments for potential taxes that we may owe. While we currently believe that the ultimate outcome of these proceedings, individually and in the aggregate, will not have a material adverse effect on our financial position, results of operations or cash flows, litigation is subject to inherent uncertainties.  We accrue for losses from litigation and claims if we determine that a loss is probable and the amount can be reasonably estimated.

Note 9. Additional Balance Sheet Details

Accounts Payable and Accrued Liabilities
Successor
In thousands September 30, 2021 December 31, 2020
Accounts payable $ 38,578  $ 18,629 
Accrued compensation 33,961  7,512 
Accrued derivative settlements 26,311  3,908 
Accrued lease operating expenses 25,724  21,294 
Accrued exploration and development costs 20,728  1,861 
Taxes payable 14,468  17,221 
Accrued general and administrative expenses 2,595  21,825 
Other 49,529  20,421 
Total $ 211,894  $ 112,671 


18


Denbury Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with our Unaudited Condensed Consolidated Financial Statements and Notes thereto included herein and our Consolidated Financial Statements and Notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2020 (the “Form 10-K”), along with Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in the Form 10-K.  Any terms used but not defined herein have the same meaning given to them in the Form 10-K.  

As a result of the Company’s emergence from bankruptcy and adoption of fresh start accounting on September 18, 2020 (the “Emergence Date”), certain values and operational results of the condensed consolidated financial statements subsequent to September 18, 2020 are not comparable to those in the Company’s condensed consolidated financial statements prior to, and including September 18, 2020. The Emergence Date fair values of the Successor’s assets and liabilities differ materially from their recorded values as reflected on the historical balance sheets of the Predecessor contained in periodic reports previously filed with the Securities and Exchange Commission. References to “Successor” relate to the financial position and results of operations of the Company subsequent to September 18, 2020, and references to “Predecessor” relate to the financial position and results of operations of the Company prior to, and including, September 18, 2020.

Our discussion and analysis includes forward-looking information that involves risks and uncertainties and should be read in conjunction with Risk Factors under Item 1A of the Form 10-K, along with Forward-Looking Information at the end of this section for information on the risks and uncertainties that could cause our actual results to be materially different than our forward-looking statements.

OVERVIEW

Denbury is an independent energy company with operations focused in the Gulf Coast and Rocky Mountain regions. The Company is differentiated by its focus on CO2 enhanced oil recovery (“EOR”) and the emerging carbon capture, use, and storage (“CCUS”) industry, supported by the Company’s CO2 EOR technical and operational expertise and its extensive CO2 pipeline infrastructure. The utilization of captured industrial-sourced CO2 in EOR significantly reduces the carbon footprint of the oil that Denbury produces, making the Company’s scope 1 and 2 CO2 emissions negative today, with a goal to also fully offset its scope 1, 2, and 3 CO2 emissions within this decade, primarily through increasing the amount of captured industrial-sourced CO2 used in its operations.

Oil Price Impact on Our Business.  Our financial results are significantly impacted by changes in oil prices, as 97% of our sales volumes are oil. Changes in oil prices impact all aspects of our business; most notably our cash flows from operations, revenues, capital allocation and budgeting decisions, and oil and natural gas reserves volumes. The table below

19


Denbury Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
outlines selected financial items and sales volumes, along with changes in our realized oil prices, before and after commodity derivative impacts, for our most recent comparative quarterly periods:
Three Months Ended
In thousands, except per-unit data Sept. 30, 2021 June 30, 2021 March 31, 2021 Dec. 31, 2020 Sept. 30, 2020
Oil, natural gas, and related product sales $ 308,454  $ 282,708  $ 235,445  $ 178,787  $ 175,411 
Receipt (payment) on settlements of commodity derivatives (77,670) (63,343) (38,453) 14,429  17,789 
Oil, natural gas, and related product sales and commodity settlements, combined $ 230,784  $ 219,365  $ 196,992  $ 193,216  $ 193,200 
Average daily sales (BOE/d) 49,682  49,133  47,357  48,805  49,686 
Average net realized oil prices      
Oil price per Bbl - excluding impact of derivative settlements
$ 68.88  $ 64.70  $ 56.28  $ 40.63  $ 39.23 
Oil price per Bbl - including impact of derivative settlements
51.35  50.10  47.00  43.94  43.23 

NYMEX WTI oil prices strengthened from the mid-$40s per Bbl range in December 2020 to an average of approximately $71 per Bbl during the third quarter of 2021, reaching highs of over $75 per Bbl in early-July 2021 and late-September 2021.

The benefit of the steady growth in our oil sales over the last four quarters due to rising oil prices has been offset in part by our payments on settlement of commodity derivative contracts, especially in the second and third quarters of 2021, principally due to the strike prices of our fixed-price swaps which were entered into in late 2020 based on the hedging requirements we were obligated to meet under our bank credit facility. During the first nine months of 2021, we paid $179.5 million related to the expiration of commodity derivative contracts and expect to make additional payments on the settlement of our contracts expiring during the fourth quarter of 2021. Our current hedging levels decrease significantly in 2022, and we are hedged at more favorable prices and with a greater mix of collars, allowing for additional upside. We do not have any additional hedging requirements under our bank credit facility.

Third Quarter 2021 Financial Results and Highlights. We recognized net income of $82.7 million, or $1.51 per diluted common share, during the third quarter of 2021. As a result of Denbury filing for bankruptcy and emerging from bankruptcy during the same quarter, our prior-year quarterly financial results are broken out between the predecessor period (July 1, 2020 through September 18, 2020) and the successor period (September 19, 2020 through September 30, 2020). For the predecessor period from July 1, 2020 through September 18, 2020, we recognized a net loss of $809.1 million, and for the successor period from September 19, 2020 through September 30, 2020, we recognized net income of $2.8 million. The principal determinant of our comparative third quarter results between 2020 and 2021 were (a) an $850.0 million charge for reorganization items, net, during the prior-year predecessor period, primarily consisting of fresh start accounting adjustments and (b) a $261.7 million full cost pool ceiling test write-down during the prior-year predecessor period. Additional drivers of the comparative operating results include the following:

Oil and natural gas revenues increased $133.0 million (76%), nearly entirely due to an increase in commodity prices;
Lease operating expenses increased $45.3 million, primarily due to (a) a $15.4 million insurance reimbursement that reduced lease operating expenses in the prior-year period, (b) an increase of $8.1 million related to the March 2021 Wind River Basin acquisition, and (c) higher expenses across all lease operating expense categories, largely driven by higher commodity prices and increased workover activity; and
Commodity derivatives expense increased by $41.2 million consisting of a $95.5 million decrease in cash receipts upon contract settlements ($77.7 million in payments during the third quarter of 2021 compared to $17.8 million in receipts upon settlements during the third quarter of 2020), partially offset by a $54.3 million improvement in noncash fair value changes ($35.9 million of income in the current period compared to $18.4 million of expense in the prior-year period).

20


Denbury Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations

Third Quarter 2021 Houston Area Land Sales. During the third quarter of 2021, we completed sales of a portion of certain non-producing surface acreage in the Houston area. We recognized cash proceeds of $11.8 million from the sales and recorded a $7.0 million gain to “Other income” in our Unaudited Condensed Consolidated Statements of Operations.

June 2021 Divestiture of Hartzog Draw Deep Mineral Rights. On June 30, 2021, we closed the sale of undeveloped, unconventional deep mineral rights in Hartzog Draw Field in Wyoming. The cash proceeds of $18 million were recorded to “Proved properties” in our Unaudited Condensed Consolidated Balance Sheets. The proceeds reduced our full cost pool; therefore, no gain or loss was recorded on the transaction, and the sale had no impact on our production or reserves.

March 2021 Acquisition of Wyoming CO2 EOR Fields. On March 3, 2021, we acquired a nearly 100% working interest (approximately 83% net revenue interest) in the Big Sand Draw and Beaver Creek EOR fields (collectively “Wind River Basin”) located in Wyoming from a subsidiary of Devon Energy Corporation for $10.9 million cash (after final closing adjustments), including surface facilities and a 46-mile CO2 transportation pipeline to the acquired fields. The acquisition agreement provides for us to make two contingent cash payments, one in January 2022 and one in January 2023, of $4 million each, conditioned on NYMEX WTI oil prices averaging at least $50 per Bbl during each of 2021 and 2022. As of September 30, 2021, the contingent consideration was recorded on our unaudited condensed consolidated balance sheets at its fair value of $7.4 million, a $2.1 million increase from the March 2021 acquisition date fair value. This $2.1 million increase at September 30, 2021 was the result of higher NYMEX WTI oil prices and was recorded to “Other expenses” in our Unaudited Condensed Consolidated Statements of Operations. Wind River Basin sales averaged approximately 3,015 BOE/d during the third quarter of 2021 and utilize 100% industrial-sourced CO2.

Carbon Capture, Use and Storage. CCUS is a process that captures CO2 from industrial sources and reuses it or stores the CO2 in geologic formations in order to prevent its release into the atmosphere. We utilize CO2 from industrial sources in our EOR operations, and our extensive CO2 pipeline infrastructure and operations, particularly in the Gulf Coast, are strategically located in close proximity to large sources of industrial emissions. We believe that the assets and technical expertise required for CCUS are highly aligned with our existing CO2 EOR operations, providing us with a significant advantage and opportunity to participate in the emerging CCUS industry, as the building of a permanent carbon sequestration business requires both time and capital to build assets such as those we own and have been operating for years. During the nine months ended September 30, 2021, approximately 34% of the CO2 utilized in our oil and gas operations was industrial-sourced CO2, and we anticipate this percentage could increase in the future as supportive U.S. government policy and public pressure on industrial CO2 emitters will provide strong incentives for these entities to capture their CO2 emissions.

As we seek to grow our CCUS business and pursue new CCUS opportunities, we have been engaged in discussions with existing and potential third-party industrial CO2 emitters regarding transportation and storage solutions, while also identifying potential future sequestration sites and landowners of those locations. We continue to make progress in these discussions and have recently executed several term sheets for the future transportation and sequestration of CO2. While EOR is the only CCUS operation reflected in our current and historical financial and operational results, and development of our permanent carbon sequestration business is likely to take several years, we believe Denbury is well positioned to leverage our existing CO2 pipeline infrastructure and EOR expertise to be a leader in this industry.

CAPITAL RESOURCES AND LIQUIDITY

Overview. Our cash flows from operations and availability under our senior secured bank credit facility are our primary sources of capital and liquidity. Our most significant cash capital outlays in 2021 relate to our budgeted development capital expenditures and payment of $70 million of pipeline financing obligations associated with the NEJD pipeline. Based on our current 2021 full-year projections using recent oil price futures, our cash flow from operations in 2021 should be more than adequate to cover our remaining budgeted development capital expenditures and also cover a significant portion of our $70 million repayment of pipeline financing obligations. In addition, $29.8 million of non-producing property sales in the first nine months of 2021 provided cash to further reduce our debt.

As of September 30, 2021, we had no outstanding borrowings on our $575 million senior secured bank credit facility, leaving us with $563.2 million of borrowing base availability after consideration of $11.8 million of outstanding letters of credit. Our borrowing base availability, coupled with unrestricted cash of $1.8 million provides us total liquidity of

21


Denbury Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
$565.0 million as of September 30, 2021, which is more than adequate to meet our currently planned operating and capital needs.

2021 Capital Expenditures. Capital expenditures during the first nine months of 2021 were $173.8 million. We continue to anticipate that our full-year 2021 development capital spending, excluding capitalized interest and acquisitions, will be in a range of $250 million to $270 million.  Approximately 45% of our 2021 capital expenditures through September 30, 2021 have been focused on the previously announced development of the EOR CO2 flood at Cedar Creek Anticline (“CCA”). The project is currently underway, with completion of the 105-mile extension of the Greencore CO2 pipeline from Bell Creek to CCA expected before the end of November 2021, first CO2 injection planned during the first quarter of 2022, and first tertiary production expected in the second half of 2023.

Capital Expenditure Summary. The following table reflects incurred capital expenditures for the nine months ended September 30, 2021 and 2020:
Nine Months Ended
September 30,
In thousands 2021 2020
Capital expenditure summary(1)
 
Tertiary and non-tertiary fields $ 102,640  $ 41,679 
Capitalized internal costs(2)
22,639  26,695 
Oil and natural gas capital expenditures 125,279  68,374 
CCA CO2 pipeline
48,542  9,192 
Development capital expenditures 173,821  77,566 
Acquisitions of oil and natural gas properties(3)
10,927  95 
Capital expenditures, before capitalized interest 184,748  77,661 
Capitalized interest 3,500  23,068 
Capital expenditures, total $ 188,248  $ 100,729 

(1)Capital expenditures in this summary are presented on an as-incurred basis (including accruals), and are $45.2 million higher than the capital expenditures in the Unaudited Condensed Consolidated Statements of Cash Flows which are presented on a cash basis.
(2)Includes capitalized internal acquisition, exploration and development costs and pre-production tertiary startup costs.
(3)Primarily consists of working interest positions in the Wind River Basin enhanced oil recovery fields acquired on March 3, 2021.

Supply Chain Issues and Potential Cost Inflation. Recent worldwide and U.S. supply chain issues, together with rising commodity prices and tight labor markets in the U.S., could increase our costs in 2022 and future periods. Most of the cost inflation pressures we have experienced during 2021 have been tied to rising fuel and power costs in our operations; however, there is the potential for more significant increases in the cost of goods and services and wages in our operations which could negatively impact our results of operations and cash flows in future periods.


22


Denbury Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Senior Secured Bank Credit Agreement. In September 2020, we entered into a bank credit agreement with JPMorgan Chase Bank, N.A., as administrative agent, and other lenders party thereto (the “Bank Credit Agreement”). The Bank Credit Agreement is a senior secured revolving credit facility with a maturity date of January 30, 2024. As part of our fall 2021 semiannual borrowing base redetermination, the borrowing base and lender commitments for our Bank Credit Agreement were reaffirmed at $575 million, with our next scheduled redetermination around May 1, 2022. The borrowing base is adjusted at the lenders’ discretion and is based, in part, upon external factors over which we have no control. If our outstanding debt under the Bank Credit Agreement exceeds the then-effective borrowing base, we would be required to repay the excess amount over a period not to exceed six months. The Bank Credit Agreement contains certain financial performance covenants including the following:

A Consolidated Total Debt to Consolidated EBITDAX covenant (as defined in the Bank Credit Agreement), with such ratio not to exceed 3.5 times; and
A requirement to maintain a current ratio (i.e., Consolidated Current Assets to Consolidated Current Liabilities) of 1.0.

For purposes of computing the current ratio per the Bank Credit Agreement, Consolidated Current Assets exclude the current portion of derivative assets but include available borrowing capacity under the Bank Credit Agreement, and Consolidated Current Liabilities exclude the current portion of derivative liabilities as well as the current portions of long-term indebtedness outstanding. Under these financial performance covenant calculations, as of September 30, 2021, our ratio of consolidated total debt to consolidated EBITDAX was 0.05 to 1.0 (with a maximum permitted ratio of 3.5 to 1.0) and our current ratio was 2.60 to 1.0 (with a required ratio of not less than 1.0 to 1.0). Based upon our currently forecasted levels of production and costs, hedges in place as of November 3, 2021, and current oil commodity derivative futures prices, we currently anticipate continuing to be in compliance with our financial performance covenants during the foreseeable future.

The above description of our Bank Credit Agreement is qualified by the express language and defined terms contained in the Bank Credit Agreement, which is an exhibit to our Form 8-K Report filed with the SEC on September 18, 2020.

Commitments and Obligations. We have numerous contractual commitments in the ordinary course of business including debt service requirements, operating and finance leases, purchase obligations, and asset retirement obligations. Our operating leases primarily consist of our office leases. Our purchase obligations represent future cash commitments primarily for purchase contracts for CO2 captured from industrial sources, CO2 processing fees, transportation agreements and well-related costs.

Our commitments and obligations consist of those detailed as of December 31, 2020, in our Form 10-K under Management’s Discussion and Analysis of Financial Condition and Results of Operations Capital Resources and Liquidity Commitments, Obligations and Off-Balance Sheet Arrangements. During the nine months ended September 30, 2021, our long-term asset retirement obligations increased by $63.8 million, primarily related to our acquisition of working interest positions in Wyoming CO2 EOR fields (see Note 2, Acquisition and Divestitures).

Off-Balance Sheet Arrangements. Our off-balance sheet arrangements include obligations for various development and exploratory expenditures that arise from our normal capital expenditure program or from other transactions common to our industry, none of which are recorded on our balance sheet.  In addition, in order to recover our undeveloped proved reserves, we must also fund the associated future development costs estimated in our proved reserve reports.


23


Denbury Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
RESULTS OF OPERATIONS

Certain of our financial results for our Successor and Predecessor periods are presented in the following tables:
Successor Predecessor
In thousands, except per-share and unit data Three Months Ended
Sept. 30, 2021
Period from Sept. 19, 2020 through
Sept. 30, 2020
Period from July 1, 2020 through
Sept. 18, 2020
Operating results    
Net income (loss)(1)
$ 82,708  $ 2,758  $ (809,120)
Net income (loss) per common share – basic(1)
1.62  0.06  (1.63)
Net income (loss) per common share – diluted(1)
1.51  0.06  (1.63)
Net cash provided by operating activities 104,019  32,910  40,597 

Successor Predecessor
In thousands, except per-share and unit data Nine Months Ended
Sept. 30, 2021
Period from Sept. 19, 2020 through
Sept. 30, 2020
Period from Jan. 1, 2020 through
Sept. 18, 2020
Operating results      
Net income (loss)(1)
$ (64,629) $ 2,758  $ (1,432,578)
Net income (loss) per common share – basic(1)
(1.27) 0.06  (2.89)
Net income (loss) per common share – diluted(1)
(1.27) 0.06  (2.89)
Net cash provided by operating activities 247,557  32,910  113,408 

(1)Includes a pre-tax full cost pool ceiling test write-down of our oil and natural gas properties of $14.4 million during the first quarter of 2021, as compared to write-downs of $261.7 million and $996.7 million for the Predecessor periods July 1, 2020 through September 18, 2020 and January 1, 2020 through September 18, 2020, respectively. In addition, includes reorganization adjustments, net totaling $850.0 million during the 2020 Predecessor periods.

24


Denbury Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Certain of our operating results and statistics for the comparative three and nine months ended September 30, 2021 and 2020 are included in the following table:
Three Months Ended Nine Months Ended
September 30 September 30
In thousands, except per-share and unit data 2021 2020 2021 2020
Average daily sales volumes      
Bbls/d 48,145  48,334  47,276  50,619 
Mcf/d 9,222  8,110  8,739  7,916 
BOE/d(1)
49,682  49,686  48,732  51,939 
Oil and natural gas sales      
Oil sales
$ 305,093  $ 174,447  $ 818,714  $ 511,562 
Natural gas sales 3,361  964  7,893  2,860 
Total oil and natural gas sales
$ 308,454  $ 175,411  $ 826,607  $ 514,422 
Commodity derivative contracts(2)
     
Receipt (payment) on settlements of commodity derivatives $ (77,670) $ 17,789  $ (179,466) $ 88,056 
Noncash fair value gains (losses) on commodity derivatives 35,925  (18,363) (150,686) 18,011 
Commodity derivatives income (expense) $ (41,745) $ (574) $ (330,152) $ 106,067 
Unit prices – excluding impact of derivative settlements      
Oil price per Bbl $ 68.88  $ 39.23  $ 63.44  $ 36.88 
Natural gas price per Mcf 3.96  1.29  3.31  1.32 
Unit prices – including impact of derivative settlements(2)
 
Oil price per Bbl $ 51.35  $ 43.23  $ 49.53  $ 43.23 
Natural gas price per Mcf 3.96  1.29  3.31  1.32 
Oil and natural gas operating expenses    
Lease operating expenses $ 116,536  $ 71,192  $ 308,731  $ 261,755 
Transportation and marketing expenses 5,985  9,499  22,304  28,508 
Production and ad valorem taxes 23,464  13,697  63,195  40,450 
Oil and natural gas operating revenues and expenses per BOE    
Oil and natural gas revenues $ 67.48  $ 38.37  $ 62.13  $ 36.15 
Lease operating expenses 25.50  15.57  23.21  18.39 
Transportation and marketing expenses 1.31  2.08  1.68  2.00 
Production and ad valorem taxes 5.13  3.00  4.75  2.84 
CO2 – revenues and expenses
     
CO2 sales and transportation fees
$ 12,237  $ 7,484  $ 31,599  $ 22,016 
CO2 operating and discovery expenses
(1,963) (1,197) (4,487) (2,834)
CO2 revenue and expenses, net
$ 10,274  $ 6,287  $ 27,112  $ 19,182 

(1)Barrel of oil equivalent using the ratio of one barrel of oil to six Mcf of natural gas (“BOE”).
(2)See also Commodity Derivative Contracts below and Item 3. Quantitative and Qualitative Disclosures about Market Risk for information concerning our derivative transactions.




25


Denbury Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Sales Volumes

Average daily sales volumes by area for each of the four quarters of 2020 and for the first three quarters of 2021 is shown below:
  Average Daily Sales Volumes (BOE/d)
First
Quarter
Second
Quarter
Third
Quarter
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
Operating Area 2021 2021 2021 2020 2020 2020 2020
Tertiary oil sales        
Gulf Coast region
Delhi 2,925  2,931  2,859  3,813  3,529  3,208  3,132 
Hastings 4,226  4,487  4,343  5,232  4,722  4,473  4,598 
Heidelberg 4,054  3,942  3,895  4,371  4,366  4,256  4,198 
Oyster Bayou 3,554  3,791  3,942  3,999  3,871  3,526  3,880 
Tinsley 3,424  3,455  3,390  4,355  3,788  4,042  3,654 
Other(1)
6,098  6,074  5,907  7,161  5,944  6,271  6,332 
Total Gulf Coast region 24,281  24,680  24,336  28,931  26,220  25,776  25,794 
Rocky Mountain region
Bell Creek 4,614  4,394  4,330  5,731  5,715  5,551  5,079 
Other(2)
2,573  4,378  4,703  2,199  1,393  2,167  2,007 
Total Rocky Mountain region 7,187  8,772  9,033  7,930  7,108  7,718  7,086 
Total tertiary oil sales 31,468  33,452  33,369  36,861  33,328  33,494  32,880 
Non-tertiary oil and gas sales
Gulf Coast region
Total Gulf Coast region 3,621  3,415  3,763  4,173  3,805  3,728  3,523 
Rocky Mountain region
Cedar Creek Anticline 11,150  10,918  11,182  13,046  11,988  11,485  11,433 
Other(2)
1,118  1,348  1,368  1,105  1,069  979  969 
Total Rocky Mountain region 12,268  12,266  12,550  14,151  13,057  12,464  12,402 
Total non-tertiary sales 15,889  15,681  16,313  18,324  16,862  16,192  15,925 
Total continuing sales 47,357  49,133  49,682  55,185  50,190  49,686  48,805 
Property sales
Gulf Coast Working Interests Sale(3)
—  —  —  780  —  —  — 
Total sales 47,357  49,133  49,682  55,965  50,190  49,686  48,805 

(1)Includes our mature properties (Brookhaven, Cranfield, Eucutta, Little Creek, Mallalieu, Martinville, McComb and Soso fields) and West Yellow Creek Field.
(2)Includes sales volumes related to our working interest positions in the Big Sand Draw and Beaver Creek fields acquired on March 3, 2021.
(3)Includes non-tertiary sales related to the March