2009-05-13-2009-05-13-2009-07-06

Bought 60% interest in 19,457 net acres in Parker, Wise, Tarrant & Johnson cos. in TX Barnett shale, gaining 45.7 MMcfe/d.

Dallas-based, privately held Talon Oil & Gas LLC, an EnCap Investments LP-backed company formed in 2007 and led by Grant Henderson, has acquired a 60% interest in Denbury Resources Inc., Dallas, (NYSE: DNR) Barnett shale assets for $259.8 million. The assets include approximately 20,441 gross acres (19,457 net) in the Barnett shale in north-central Texas in Parker, Wise, Tarrant and Johnson counties. At year-end 2008, proved reserves were approximately 458 billion cubic feet equivalent, including 77 proved undeveloped locations, plus an additional 64 probable undeveloped locations based on 500-foot spacing. Production net to Talon's interest averaged approximately 45.7 million cubic feet equivalent per day (77% gas) during 2008, representing approximately 16% of Denbury's 2008 production and approximately 18% of its total proved reserves as of year-end. Additionally, Talon acquired a portion of Denbury's gas swaps. Swaps for 2010 total 16 million cubic feet per day at an average price of approximately $5.65 per million Btu. Swaps for 2011 total 13 million per day at an average price of approximately $6.16 per million Btu. "We're excited about the transaction and think this will be a great relationship with Denbury going forward," says Talon president Henderson. "They've got an excellent position in an excellent resource play." Denbury CEO Phil Rykhoek says, "This sale further enables us to concentrate our investment and management focus on our tertiary operations where we have lower risk, virtually no competition in our areas of operation and higher profitability. We plan to use these funds to increase our 2010 tertiary-related spending beyond what we could accomplish using only cash flow. At current oil prices our tertiary investments provide a better rate-of-return than the Barnett Shale, and we are more optimistic about near-term oil prices than natural gas prices. This has prompted us to further concentrate our focus on our core tertiary oil assets." The effective date is June 1. In addition to the Barnett, Denbury also owns CO2 reserves for tertiary oil recovery in Mississippi, with additional interests onshore Louisiana and Alabama, and in southeastern Texas. Talon has interests in East Texas in Nacogdoches County targeting the Travis Peak formation, and in the Texas Panhandle in Hemphill and Wheeler counties targeting the Granite wash. Including this deal, the company has made $345 million in acquisitions since inception. KeyBanc Capital Markets Inc. vice president Mitchell Wurschmidt values the deal at approximately $0.98 per proved Mcfe based on year-end 2008 proved reserves for the interest in the properties and $7,450 per flowing Mcfe per day based on first-quarter production. "With this noncore asset sale, we believe Denbury further enhances its financial liquidity position. In our opinion, this allows the company to concentrate on its core asset base, its tertiary operations. The transaction appears to be just slightly above the PV-10 value of the interest in the Barnett shale properties at year-end 2008 of $258 million based on $5.71 per MMbtu." Tudor, Pickering, Holt & Co. Securities Inc. analysts value the deal at $1 per Mcfe and $35,000 per barrel of oil equivalent per day. The analysts reiterate the sale price is in line with year-end PV-10 value while giving no value for probable reserves, but as "winning the noncore E&P valuation battle." Pritchard Capital Partners analysts value the deal at $5,900 per daily flowing Mcfe $22,500 per net acre, "which is relatively in line with prices paid for raw acreage last year," noting that Denbury has just 64 undrilled locations on their Barnett holdings.