Denbury Resources acquires Matrix Oil & Gas for $163 million

Denbury Resources Inc. (Dallas) today announced that it has entered into a definitive agreement to acquire privately-held Matrix Oil & Gas, Inc. of Covington, Louisiana for approximately $163 million in cash and stock, including the assumption of Matrix's liabilities. Matrix is an exploration and production company that primarily focuses on the offshore Gulf of Mexico with an interest in 19 offshore blocks and two onshore fields. At April 1, 2001 based on initial company estimates, Matrix had an estimated proved reserve base of 78.7 billion cubic feet equivalent (Bcfe), 91% of which was natural gas and 70% of which was proved developed. Matrix produced 40 MMcfe/d during the first quarter of 2001, 94% of which was natural gas. The acquisition, accounted for as a purchase, increases Denbury's relative position in the Gulf of Mexico and is expected to close during July 2001, the effective date of the acquisition.

Transaction highlights

• The acquisition adds quality natural gas assets in the Gulf of Mexico shelf, a growing focus area for Denbury. After the closing of the transaction, approximately 15% of Denbury's reserves and 25% of its daily production will be offshore.
  
• The transaction is expected to be immediately accretive on a per share basis to Denbury's earnings, cash flow, production, net asset value and reserves.
  
• Matrix's business principles and culture are very similar to Denbury's. Matrix's experienced management and technical team have a proven track record of adding value in the offshore area and most are expected to be retained by Denbury.
  
• The adjusted 2001 average daily production for Denbury is now forecast to be 31,900 BOE/d, a 49% increase over 2000's record level.
  
• Pro forma combined reserves are over 100 million BOE, 29% of which is natural gas. In addition to Matrix's 78.7 Bcfe of estimated proved reserves, significant probable reserves have been identified.
  
• Matrix operates approximately 96% of its proved reserves and 88% of its current net production.
  
• Matrix's estimated inception to date finding and development cost through December 31, 2000 is approximately $0.82 per Mcfe ($1.35 per Mcfe including future development and abandonment cost).

Terms of the agreement
Under the agreement, Matrix's common shareholders will receive approximately $92.7 million, composed of 5,660,000 Denbury common shares, subject to adjustment, and $30.4 million in cash. The number of shares of Denbury common stock may be adjusted up or down, within certain limits, if the average stock price for Denbury during the twenty days prior to closing is outside of a range of $11.00 to $13.00 per share. In addition, Denbury will redeem Matrix's preferred stock at a cost of approximately $32.4 million, redeem outstanding stock options at a cost of approximately $7.3 million, and retire $25.0 million of Matrix's outstanding bank debt. The total estimated cash cost to Denbury, including estimated transaction expenses, of $101 million will be financed with debt available under the company's bank credit facility. Credit Suisse First Boston acted as Denbury's financial advisor in the transaction.

Gareth Roberts, CEO of Denbury, commented on the transaction, saying: "This is an excellent example of combining two like-minded companies for the benefit of shareholders. Matrix's strategic Gulf of Mexico properties fit perfectly into Denbury's, and greatly expand our efforts there. The Matrix properties are predominantly older large fields with development potential similar to that of Denbury's existing fields. Another benefit of this merger is our increased exposure to natural gas. Besides the strategic fit, this transaction brings to Denbury an experienced offshore management and technical group. Matrix's existing headquarters in Covington, Louisiana (just across Lake Pontchatrain from New Orleans) will become our new district office, handling all of our offshore Gulf of Mexico operations. We are also excited about adding a representative from EnCap Investments L.L.C., Matrix's single largest shareholder, to our Board of Directors, increasing the Board's size to nine members. We welcome their experience and insight. In summary, Denbury's financial strength, along with the technical talent of the combined companies provides a solid platform to aggressively exploit the acquired properties to their fullest potential."

Robin Mingo, President and CEO of Matrix, added "We are looking forward to becoming part of Denbury's current and future success. We're impressed by the similarities between the two companies' operating philosophies and cultures. The combination of our people, properties and prospects with those of Denbury allow us to accelerate the growth of this new core focus area for Denbury."

Denbury's total proved reserves, pro forma for this transaction, are expected to be 72 MMBbls of oil and 174 Bcf of natural gas for a total of just over 100 MMBOE. Following the completion of this transaction, Denbury's total proved reserves will be approximately 85% onshore and 15% offshore, 29% of which will be natural gas. Pro forma production for the second half of 2001 will be 75% onshore and 25% offshore, 50% of which will be natural gas.

Risk management for acquisition
In order to insure a minimum rate of return on these properties, Denbury has purchased price floors (i.e. puts) at an aggregate cost of approximately $18.0 million covering all of the forecasted proven natural gas production on the Matrix properties for the balance of 2001 and calendar years 2002 and 2003. The price floors are $4.25 for June 2001 through December 2002 and $3.75 for 2003. Gareth Roberts stated, "Although the acquisition initially appears to have a price-per-Mcfe cost above our historical levels, these price floors protect any unforeseen commodity price weakness and allow us to capture 100% of any price improvement. With these floors and the upside potential that our engineers and geologists have already identified, we expect to show an excellent rate of return on this acquisition."

Revised 2001 outlook
The transaction provides Denbury with significant drilling and exploitation opportunities. Although still under review, the company's 2001 development and exploration budget is expected to increase by approximately $30 million to $180 million, not including money spent for acquisitions. Denbury's pro forma total debt is expected to be approximately $315 million at closing, with $10 million expected to be available under its bank credit line before any adjustment to the credit line for the Matrix acquisition. The pro forma debt to cash flow ratio based on an annualized first quarter of 2001 will be approximately 1.1:1. Denbury's goal is to keep this ratio at or below 2:1.

Management now targets daily production for 2001 of 31,900 BOE/d, which is a 49% increase over 2000 rates. Third quarter production is now expected to average 36,000 BOE/d, comprised of 17,250 Bbls/d and 112.5 MMcf/d, and fourth quarter production is expected to average 37,000 BOE/d, comprised of 17,500 Bbls/d and 117.0 MMcf/d. Approximately 47% of 2001's average projected production should be natural gas, as compared to 29% of 2000's production.

Company background
Denbury Resources Inc. is a growing independent oil and gas company. The company is the largest oil and natural gas operator in Mississippi, holds key operating acreage onshore Louisiana and has a growing presence in the offshore Gulf of Mexico areas. The company increases the value of acquired properties in its core areas through a combination of exploitation drilling and proven engineering extraction practices.

Matrix Oil & Gas, Inc. is an independent oil and gas company founded by Robin Mingo in 1992. Matrix, which is based in Covington, Louisiana, evaluates and exploits proven oil and gas opportunities through the purchase and operation of producing oil and gas properties. EnCap Investments L.L.C., Matrix's largest shareholder, is a leading private equity provider of capital to the independent sector of the U.S. oil and gas industry. Encap was formed in 1988 and is now a wholly owned subsidiary of Houston-based El Paso Corporation. Encap is managed by David B. Miller, Gary R. Petersen, D. Martin Phillips and Robert L. Zorich, who collectively have over 100 years of oil and gas investment experience and have worked together for more than 25 years. Since 1988, EnCap has invested over $775 million in more than 40 investments. Encap has provided equity financing and has been an equity partner of Matrix since 1995. Post closing, EnCap will own approximately 3.4 million shares (6.6%) of Denbury's post-closing 51.8 million shares of common stock, making the firm Denbury's second largest shareholder.

Source: Denbury Resources Inc.