Energy Prospectus

As you read this keep in mind that DNR sells a high percentage of their oil in the Gulf Coast market where they are getting more than a $10/bbl premium to WTI.

CEO's comment from the 1st quarter CC:

"With the stronger oil prices, our stocks become a bargain relative to net asset value. I know that sometimes investors put their capital in the stock because of the limitation on the cash flow multiple, but I want to remind you that our proved net asset value is just over $20 a share at $100 oil, around $24 a share at $110 oil. Note this is a proved-only net asset value using the approximate 400 million BOEs of proved reserves that we had at year end. We have over 1.2 billion BOEs of 3P reserves, which is our proved plus probable and possible, but they're all relatively low-risk potential as they're almost all EOR except for Bakken. We even have additional potential running room beyond that as the DOE has suggested that up to 10 billion barrels of oil could be recovered with EOR in the 2 core operating areas (in the Bakken). That potential is significantly larger than the popular Bakken play, which I believe is generally regarded as around 4 billion barrels of total recoverable potential. Bottom line, with all of our potential incremental reserves, we should be trading well above our proved net asset value regardless of the cash flow multiple."

Why DNR will report strong 2nd quarter results:

From the CC:

"As I mentioned in the last quarter conference call, from late January 2011, the Light Louisiana Sweet or LLS oil price has traded at a significant premium to the WTI NYMEX oil price. Throughout most of 2010, LLS traded at slightly positive to $5 higher than WTI. Since near the end of January 2011, LLS has traded between $10 to $20 higher than WTI. The significance of this is that roughly 40% of our oil production is marketed on an oil price that incorporates this positive LLS differential. In general, the average of this differential goes into a pricing formula that is realized in the following month. For example, the current traded LLS differential is the June trade month and therefore, the current differential will impact our June pricing, i.e. it lags one month. Also there are other pricing components that go into the pricing formula, so we may likely not always realize the full benefit of this differential. But generally, it will be within a few dollars of it."

Fellow Sweet 16 member, Gulfport (GPOR) sells 85% of their oil into the Gulf Coast market and they get the premium price, even on their hedged oil.

Dan - I believe that 80% of Denbury's second half production is hedged with a ceiling price of $100. The hedges improve in 2012 (80% at a ceiling of $128 in the second half).

Adam

Hedges in place for 2011 to 2012 Floor Ceiling
Natural Gas Percent
2,011 90% $6.20 $6.35
2,012 55% $6.50 $6.65
Crude Oil
2,011 Q1 & Q2 85% $70.00 $100.00
2,011 Q3 & Q4 80% $70.00 $100.00

2,012 Q1 & Q2 70% $70.00 $102.00
2,012 Q3 & Q4 65% $70.00 $115.00

Depending on how the hedges are written, they may be getting the Gulf Coast premium on their hedged oil, just like Gulfport is.

I just talked to DNR. They are getting the Gulf Coast differential on all of their oil sold in that region, including the hedged volumns. They sell about 40% of their oil into the Gulf Coast market.

Today the differential is $13/bbl.

DNR is going to have a very strong 2nd quarter.