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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 1999
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Commission File Number 0-20872
ST. MARY LAND & EXPLORATION COMPANY
(Exact name of Registrant as specified in its charter)
Delaware 41-0518430
(State or other Jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
1776 Lincoln Street, Suite 1100, Denver, Colorado 80203
(Address of principal executive offices) (Zip Code)
(303) 861-8140
(Registrant's telephone number, including area code)
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 [ u ] No [ ]
Indicate the number of shares outstanding of each of the Registrant's classes of
common stock as of the latest practicable date.
As of August 2, 1999 the registrant had 11,094,852 shares of Common Stock, $.01
par value, outstanding.
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<PAGE>
ST. MARY LAND & EXPLORATION COMPANY
-----------------------------------
INDEX
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Part I. FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements (Unaudited)
Consolidated Balance
Sheets - June 30, 1999 and
December 31, 1998 ............................... 3
Consolidated Statements of
Operations - Three Months Ended
June 30, 1999 and 1998: Six Months
Ended June 30, 1999 and 1998 .................... 4
Consolidated Statements of
Cash Flows - Six Months Ended
June 30, 1999 and 1998........................... 5
Notes to Consolidated Financial
Statements - June 30, 1999 ...................... 7
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations.................................... 9
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K ................ 23
Exhibits
--------
27.1 Financial Data Schedule
-2-
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ST. MARY LAND & EXPLORATION COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In thousands, except share amounts)
ASSETS
<TABLE>
<CAPTION>
June 30, December 31,
------------- -------------
1999 1998
------------- -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 5,244 $ 7,821
Accounts receivable 12,775 17,937
Prepaid expenses and other 816 795
Refundable income taxes 211 391
Deferred income taxes 91 125
------------- -------------
Total current assets 19,137 27,069
------------- -------------
Property and equipment (successful efforts method), at cost:
Proved oil and gas properties 252,803 241,021
Unproved oil and gas properties, net of impairment
allowance of $4,229 in 1999 and $5,987 in 1998 31,455 25,588
Other property and equipment 4,654 4,051
------------- -------------
288,912 270,660
Less accumulated depletion, depreciation, amortization and impairment (136,714) (126,835)
------------- -------------
152,198 143,825
------------- -------------
Other assets:
Khanty Mansiysk Oil Corporation receivable and stock 6,839 6,839
Summo Minerals Corporation investment and receivable 1,130 2,869
Restricted cash - 720
Other assets 3,527 3,175
------------- -------------
11,496 13,603
------------- -------------
$ 182,831 $ 184,497
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 10,307 $ 16,926
Current portion of stock appreciation rights 272 358
------------- -------------
Total current liabilities 10,579 17,284
------------- -------------
Long-term liabilities:
Long-term debt 20,087 19,398
Deferred income taxes 11,765 11,158
Stock appreciation rights 455 422
Other noncurrent liabilities 1,250 1,493
------------- -------------
33,557 32,471
------------- -------------
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value: authorized - 50,000,000 shares: issued and
outstanding - 11,269,361 shares in 1999 and 10,992,447 shares in 1998 113 110
Additional paid-in capital 71,083 67,761
Treasury stock - at cost: 182,800 shares in 1999 and 147,800 shares in 1998 (2,995) (2,470)
Retained earnings 70,299 69,341
Unrealized gain on marketable equity securities-available for sale 195 -
Total stockholders' equity 138,695 134,742
------------- -------------
$ 182,831 $ 184,497
============= =============
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
-3-
<PAGE>
ST. MARY LAND & EXPLORATION COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
For the Three Months Ended For the Six Months Ended
June 30, June 30,
-------------------------------- --------------------------------
1999 1998 1999 1998
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Operating revenues:
Oil and gas production $ 15,809 $ 20,233 $ 29,578 $ 39,258
Gain (loss) on sale of proved properties (81) (14) 114 (14)
Other revenues 127 88 273 202
-------------- -------------- -------------- --------------
Total operating revenues 15,855 20,307 29,965 39,446
-------------- -------------- -------------- --------------
Operating expenses:
Oil and gas production 3,960 4,173 7,954 8,116
Depletion, depreciation and amortization 5,281 6,503 10,683 11,880
Impairment of proved properties 247 1,077 247 1,445
Exploration 1,203 3,052 2,942 6,473
Abandonment and impairment of unproved properties 336 312 800 615
General and administrative 2,021 1,477 3,629 4,424
Loss in equity investees 13 510 58 571
Other 213 57 338 92
-------------- -------------- -------------- --------------
Total operating expenses 13,274 17,161 26,651 33,616
-------------- -------------- -------------- --------------
Income from operations 2,581 3,146 3,314 5,830
Nonoperating income and (expense):
Interest income 156 371 252 526
Interest expense (275) (360) (516) (754)
-------------- --------------- -------------- --------------
Income before income taxes 2,462 3,157 3,050 5,602
Income tax expense 829 1,121 1,008 1,896
-------------- -------------- -------------- --------------
Income from continuing operations 1,633 2,036 2,042 3,706
Gain on sale of discontinued operations, net of taxes - 34 - 34
-------------- -------------- -------------- --------------
Net income $ 1,633 $ 2,070 $ 2,042 $ 3,740
============== ============== ============== ==============
Basic earnings per common share:
Income from continuing operations $ .15 $ .19 $ .19 $ .34
Gain on sale of discontinued operations - - - -
============== ============== ============== ==============
Basic net income per common share $ .15 $ .19 $ .19 $ .34
============== ============== ============== ==============
Diluted earnings per common share:
Income from continuing operations $ .15 $ .18 $ .19 $ .33
Gain on sale of discontinued operations - - - -
============== ============== ============== ==============
Diluted net income per common share $ .15 $ .18 $ .19 $ .33
============== ============== ============== ==============
Basic weighted average common shares outstanding 10,913 10,984 10,879 10,984
============== ============== ============== ==============
Diluted weighted average common shares outstanding 10,934 11,079 10,892 11,102
============== ============== ============== ==============
Cash dividend declared per share $ 0.05 $ 0.05 $ 0.10 $ 0.10
============== ============== ============== ==============
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
-4-
<PAGE>
ST. MARY LAND & EXPLORATION COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
<TABLE>
<CAPTION>
For the Six Months Ended
June 30,
--------------------------------
1999 1998
------------- -------------
<S> <C> <C>
Reconciliation of net income to net cash provided by operating activities:
Net income $ 2,042 $ 3,740
Adjustments to reconcile net income to net
cash provided by operating activities:
(Gain) loss on sale of proved properties (114) 14
Depletion, depreciation and amortization 10,683 11,880
Impairment of proved properties 247 1,445
Exploration (119) 2,945
Abandonment and impairment of unproved properties 800 615
Loss in equity investees 58 571
Deferred income taxes 607 1,410
Other (132) 239
------------- -------------
14,072 22,859
Changes in current assets and liabilities:
Accounts receivable 5,947 7,081
Prepaid expenses and other 2,507 (986)
Accounts payable and accrued expenses (2,179) (1,600)
Stock appreciation rights (86) 7
------------- -------------
Net cash provided by operating activities 20,261 27,361
------------- -------------
Cash flows from investing activities:
Proceeds from sale of oil and gas properties 713 59
Capital expenditures (20,478) (29,391)
Acquisition of oil and gas properties (1,869) (2,026)
Investment in and loans to Summo Minerals Corporation (220) (566)
Collections on loan to Summo Minerals Corporation 2,096 -
Receipts from restricted cash 720 -
Investment in Nance Petroleum 684 -
Other (352) (922)
------------- -------------
Net cash used in investing activities (18,706) (32,846)
------------- -------------
Cash flows from financing activities:
Proceeds from long-term debt 7,550 24,395
Repayment of long-term debt (10,250) (20,387)
Proceeds from sale of common stock 177 -
Repurchase of common stock (525) -
Dividends paid (1,084) (1,098)
------------- -------------
Net cash provided by (used in) financing activities (4,132) 2,910
------------- -------------
Net decrease in cash and cash equivalents (2,577) (2,575)
Cash and cash equivalents at beginning of period 7,821 7,112
------------- -------------
Cash and cash equivalents at end of period $ 5,244 $ 4,537
============= =============
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
-5-
<PAGE>
ST. MARY LAND & EXPLORATION COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Continued)
Supplemental schedule of additional cash flow information and noncash
activities:
<TABLE>
<CAPTION>
For the Six Months Ended
June 30,
--------------------------------
1999 1998
------------- -------------
(In thousands)
<S> <C> <C>
Cash paid for interest $ 558 $ 771
Cash paid for income taxes 188 444
Cash paid for exploration expenses 2,596 6,425
</TABLE>
In June 1999, the Company acquired Nance Petroleum Corporation and Quanterra
Alpha Limited Partnership for 259,494 shares of the Company's common stock
valued at $3,091,000 together with the assumption of $3,189,000 of Nance
Petroleum Corporation debt. The acquisition was accounted for as a purchase.
The accompanying notes are an integral part
of these consolidated financial statements.
-6-
<PAGE>
ST. MARY LAND & EXPLORATION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
---------------------
June 30, 1999
Note 1 - Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information. They do not include all information and notes
required by generally accepted accounting principles for complete financial
statements. However, except as disclosed herein, there has been no material
change in the information disclosed in the notes to consolidated financial
statements included in the Annual Report on Form 10-K of St. Mary Land &
Exploration Company and Subsidiaries (the "Company") for the year ended December
31, 1998. In the opinion of Management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the periods presented are not necessarily
indicative of the results that may be expected for the full year.
The accounting policies followed by the Company are set forth in Note 1
to the Company's financial statements in Form 10-K for the year ended December
31, 1998. It is suggested that these financial statements be read in conjunction
with the financial statements and notes included in the Form 10-K.
Note 2 - Investments
In June 1999, the Company participated in a financing package
arrangement with Summo Minerals Corporation ("Summo") and Resource Capital Fund
L.P. ("RCF"). This package resulted in the Company receiving $2,096,000 in
exchange for reducing Summo's note receivable to $1,400,000 and transferring
4,962,047 Summo shares to RCF. The Summo share decrease reduced the Company's
ownership percentage from 37% to 18% and required the accounting for this
investment to change from the equity to the investment method at the time of
closing. The Company recorded $58,000 of equity in Summo's losses in 1999
through May 31, 1999 under the equity method. Also as part of the arrangement,
the Company was granted 17,500,000 warrants with an exercise price of CDN$0.12
per share that are fully vested and expire on June 25, 2004. No value has been
assigned to the warrants in the financial statements. All cash proceeds received
from RCF were applied to the outstanding principle balance of the Summo note
receivable resulting in a remaining net book value of $964,000, which management
believes is realizable. The loan is secured by Summo's interest in the Lisbon
Valley Project and bears interest at LIBOR plus 2.5%. The Company continuously
analyzes its net investment in Summo and the effect of persistent depressed
copper prices and increased worldwide copper inventory levels on Summo's stock
price.
In June 1999, the Company completed the purchase of Nance Petroleum
Corporation ("Nance") and Quanterra Alpha Limited Partnership for 259,494 shares
of the Company's common stock valued at $3,091,000 together with the assumption
of $3,189,000 of Nance debt. The acquisition included the 26% of Panterra
Petroleum the Company did not previously own as well as certain other
properties. The properties acquired are located in the Williston Basin of
Montana and North Dakota. The acquisition was accounted for as a purchase.
-7-
<PAGE>
Note 3 - Capital Stock
In August 1998, the Company's Board of Directors approved a stock
repurchase program whereby the Company may purchase from time to time, in open
market purchases or negotiated sales, up to one million shares of its common
stock. During the first quarter of 1999 the Company repurchased 35,000 shares of
its common stock under the program at a weighted average price of $15.00 per
share, bringing the total number of shares repurchased under the program to
182,800 at a weighted-average price of $16.38 per share. Management anticipates
that additional purchases of shares by the Company may occur as market
conditions warrant. Such purchases would be funded with internal cash flow and
borrowings under the Company's credit facility.
Note 4 - Income Taxes
Federal income tax expense for 1999 and 1998 differ from the amounts
that would be provided by applying the statutory U.S. Federal income tax rate to
income before income taxes primarily due to Section 29 credits, percentage
depletion, and the effect of state income taxes.
Note 5 - Subsequent Event
In July 1999 the Company signed an agreement to acquire King Ranch
Energy, Inc. ("KRE") in a merger in which the Company will issue 2,666,252
common shares in exchange for all of the outstanding shares of KRE. The
agreement is subject to approval by shareholders of both the Company and KRE.
-8-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
St. Mary Land & Exploration Company ("St. Mary" or the "Company") was
founded in 1908 and incorporated in Delaware in 1915. The Company is engaged in
the exploration, development, acquisition and production of natural gas and
crude oil with operations focused in five core operating areas in the United
States: the Mid-Continent region; the ArkLaTex region; south Louisiana; the
Williston Basin; and the Permian Basin.
The Company's objective is to build value per share by focusing its
resources within selected basins in the United States where management believes
established acreage positions, long-standing industry relationships and
specialized geotechnical and engineering expertise provide a significant
competitive advantage. The Company's ongoing development and exploration
programs are complemented by less predictable opportunities to acquire producing
properties having significant exploitation potential, to monetize assets at a
premium and to repurchase shares of its common stock at attractive values.
Internal exploration, drilling and production personnel conduct the
Company's activities in the Mid-Continent and ArkLaTex regions and in south
Louisiana. Prior to June 1, 1999, activities in the Williston Basin were
conducted through Panterra Petroleum ("Panterra"), a general partnership managed
by Nance Petroleum Corporation ("Nance"). The Company owned a 74% interest in
Panterra. On June 1, 1999, the Company closed on the acquisition of Nance which
owned the remaining 26% interest in Panterra. All of the Company's activities in
the Williston Basin are now conducted through Nance as a wholly owned subsidiary
of the Company. Activities in the Permian Basin are primarily contracted through
an oil and gas property management company with extensive experience in the
basin.
The Company's presence in south Louisiana includes active management of
its fee lands from which significant royalty income is derived. St. Mary has
encouraged development drilling by its lessees, facilitated the origination of
new prospects on acreage not held by production and stimulated exploration
interest in deeper, untested horizons. The Company's discovery on its fee lands
at South Horseshoe Bayou in early 1997 and the successful confirmation well in
early 1998 proved that significant accumulations of gas are sourced and trapped
at depths below 16,000 feet. In August 1998 one of the wells in the South
Horseshoe Bayou project experienced shut-in production due to mechanical
problems. These mechanical problems and premature water encroachment caused the
Company to reduce the project's proved reserves by 38.8 BCFE, of which 23.7 BCFE
were reclassified to the probable reserve category and 15.1 BCFE were written
off. An untested fault block to the north of the existing production is expected
to spud at South Horseshoe Bayou in the third quarter of 1999.
St. Mary seeks to make selective niche acquisitions of oil and gas
properties that complement its existing operations, offer economies of scale and
provide further development and exploration opportunities based on proprietary
geologic concepts. Management believes that the Company's focus on smaller
negotiated transactions where it has specialized geologic knowledge or operating
experience has enabled it to acquire attractively-priced and under-exploited
properties.
-9-
<PAGE>
The results of operations include several significant acquisitions made
during recent years and their subsequent further development by the Company. In
1996, 1997 and 1998 the Company purchased a series of interests totaling $15.8
million that formed a new core area of focus in the Permian Basin of New Mexico
and west Texas. In late 1998 St. Mary, through Panterra, acquired the interests
of Texaco, Inc. in several fields in the Williston Basin for $2.1 million. In
1997 the Company acquired an 85% working interest in certain Louisiana
properties of Henry Production Company for $3.9 million, and the remaining 15%
working interest in these properties was acquired in the first quarter of 1999.
In the first and second quarters of 1999, St. Mary acquired additional interests
in the West Cameron Block 39 property located offshore Louisiana and various
other properties in Louisiana and Oklahoma totaling $1.9 million.
In the second quarter of 1999, the Company acquired Nance and Quanterra
Alpha Limited Partnership for 259,494 shares of St. Mary common stock valued at
$3.1 million and the assumption of $3.2 million in debt. The acquisition was
accounted for as a purchase. This acquisition included Nance's 26% interest in
Panterra that the Company did not previously own.
In July 1999, the Company entered into an agreement to acquire King
Ranch Energy, Inc. ("KRE"), a subsidiary of King Ranch, Inc., in a merger in
which the Company will issue 2,666,252 shares of its common stock to
shareholders of King Ranch and KRE will become a wholly owned subsidiary of St.
Mary. KRE's properties are located primarily in the Gulf of Mexico and the
onshore Gulf Coast. KRE's 1998 production was 48.8 MMCF equivalent per day.
KRE's reported reserves at December 31, 1998, plus an acquisition made early in
1999, were 64.7 BCF equivalent and 82% natural gas. The merger agreement, which
has been unanimously approved by the Boards of Directors of both companies, is
subject to obtaining a favorable vote of the shareholders of St. Mary and King
Ranch.
The Company pursues opportunities to monetize selected assets at a
premium and as part of its continuing strategy to focus and rationalize its
operations. In December 1998 St. Mary sold a package of non-strategic properties
in Oklahoma to ONEOK Resources Company for $22.2 million and sold its remaining
minor interests in Canada for $1.2 million, realizing a pre-tax gain of $7.7
million.
St. Mary has one principal equity investment, Summo Minerals
Corporation ("Summo"). In the second quarter of 1999, the Company's ownership in
Summo was reduced to 17.7%, and the Company now uses the investment method to
account for this investment. Prior to this reduction, the Company accounted for
its investment in Summo under the equity method and included its share of the
income or loss from this entity in its consolidated results of operations. The
Company recorded $58,000 of equity in Summo's losses in 1999 through the date of
the ownership reduction.
In June 1998 the Company's stockholders approved an increase in the
number of authorized shares of the Company's common stock from 15,000,000 to
50,000,000 shares.
In August 1998 the Company's Board of Directors authorized a stock
repurchase program whereby St. Mary may purchase from time-to-time, in open
market transactions or negotiated sales, up to 1,000,000 of its own common
shares. The Company has repurchased a total of 182,800 shares of common stock
under this plan through the second quarter of 1999.
-10-
<PAGE>
The Company seeks to protect its rate of return on acquisitions of
producing properties by hedging up to the first 24 months of an acquisition's
production at prices approximately equal to those used in the Company's
acquisition evaluation and pricing model. The Company also periodically uses
hedging contracts to hedge or otherwise reduce the impact of oil and gas price
fluctuations on production from each of its core operating areas. The Company's
strategy is to ensure certain minimum levels of operating cash flow and to take
advantage of windows of favorable commodity prices. The Company generally limits
its aggregate hedge position to no more than 50% of its total production. The
Company seeks to minimize basis risk and indexes the majority of its oil hedges
to NYMEX prices and the majority of its gas hedges to various regional index
prices associated with pipelines in proximity to the Company's areas of gas
production. The Company has hedged approximately 38% of its remaining estimated
1999 gas production at an average fixed price of $2.09 per MMBtu, approximately
35% of its remaining estimated 1999 oil production at an average fixed price of
$16.13 per Bbl, approximately 15% of its estimated 2000 oil production at an
average fixed price of $15.51 per Bbl and 1% of its estimated 2001 oil
production at an average fixed price of $15.73. The Company has also purchased
options resulting in price collars on approximately 8% of the Company's
remaining estimated 1999 gas production with price ceilings between $1.90 and
$3.00 per MMBtu and price floors between $1.50 and $2.00 per MMBtu and price
collars on approximately 6% of its remaining estimated 1999 oil production with
a price floor of $15.00 and a price ceiling of $16.85. In 2000 the Company has
price collars on approximately 18% of its estimated gas production with price
ceilings between $2.50 and $2.65 and a price floor of $2.00 and approximately 6%
of its estimated oil production with a price floor of $15.00 and price ceilings
between $16.85 and $17.75.
This Quarterly Report on Form 10-Q includes certain statements that may
be deemed to be "forward-looking statements" within the meaning of Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. All statements, other than statements of
historical facts, included in this Form 10-Q that address activities, events or
developments that the Company expects, believes or anticipates will or may occur
in the future, including such matters as future capital, development and
exploration expenditures (including the amount and nature thereof), drilling of
wells, reserve estimates (including estimates of future net revenues associated
with such reserves and the present value of such future net revenues), future
production of oil and gas, repayment of debt, business strategies, expansion and
growth of the Company's operations, Year 2000 readiness and other such matters
are forward-looking statements. These statements are based on certain
assumptions and analyses made by the Company in light of its experience and its
perception of historical trends, current conditions, expected future
developments and other factors it believes are appropriate in the circumstances.
Such statements are subject to a number of assumptions, risks and uncertainties,
general economic and business conditions, the business opportunities (or lack
thereof) that may be presented to and pursued by the Company, changes in laws or
regulations and other factors, many of which are beyond the control of the
Company. Readers are cautioned that any such statements are not guarantees of
future performance and that actual results or developments may differ materially
from those projected in the forward-looking statements.
-11-
<PAGE>
Results of Operations
The following table sets forth selected operating data for the periods
indicated:
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
------------------------- ------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
(In thousands, except BOE data)
<S> <C> <C> <C> <C>
Oil and gas production
Revenues:
Working interests $ 14,921 $ 17,862 $ 28,060 $ 34,872
Louisiana royalties 888 2,371 1,518 4,386
---------- ---------- ---------- ----------
Total $ 15,809 $ 20,233 $ 29,578 $ 39,258
========== ========== ========== ==========
Net production:
Oil (MBbls) 313 370 596 692
Gas (MMcf) 5,404 7,255 10,744 13,614
---------- ---------- ---------- ----------
MBOE 1,214 1,579 2,387 2,961
========== ========== ========== ==========
Average sales price (1):
Oil (per Bbl) $ 15.44 $ 13.55 $ 13.57 $ 14.18
Gas (per 2.03 2.10 2.00 2.16
Mcf)
Oil and gas production costs:
Lease operating expense $ 2,878 $ 3,118 $ 5,975 $ 5,959
Production taxes 1,082 1,055 1,979 2,157
---------- ---------- ---------- ----------
Total $ 3,960 $ 4,173 $ 7,954 $ 8,116
========== ========== ========== ==========
Additional per BOE data:
Sales price $ 13.03 $ 12.81 $ 12.39 $ 13.26
Lease operating expense 2.37 1.97 2.50 2.01
Production taxes .89 .67 .83 .73
--------- ---------- ---------- ----------
Operating margin $ 9.77 $ 10.17 $ 9.06 $ 10.52
Depreciation, depletion and
amortization $ 4.35 $ 4.12 $ 4.48 $ 4.01
Impairment of proved
properties .20 .68 .10 .49
General and administrative 1.67 .94 1.52 1.49
</TABLE>
- -----------------------------
(1) Includes the effects of the Company's hedging activities.
Oil and Gas Production Revenues. Oil and gas production revenues
decreased $4.4 million, or 22% to $15.8 million for the second quarter of 1999
compared with $20.2 million in 1998. Oil production volumes decreased 16% and
gas production volumes decreased 26% for the second quarter of 1999 compared
with 1998. Average net daily production declined to 13.3 MBOE for the second
quarter of 1999 compared with 17.4 MBOE in 1998. The decline resulted from the
significant loss of production at the South Horseshoe Bayou Field in 1998 and
1999 and the sale of certain Oklahoma properties in December 1998. The average
realized oil price for the second quarter of 1999 increased 14% to $15.44 per
Bbl, while average realized gas prices decreased 3% to $2.03 per Mcf, from their
respective 1998 levels.
-12-
<PAGE>
Oil and gas production revenue decreased $9.7 million or 25% to $29.6
million for the six months ended June 30, 1999 compared with $39.3 million in
1998. Oil production volumes decreased 14% and gas production volumes decreased
21% for the six months ended June 30, 1999 compared with 1998. Average net daily
production was 13.2 MBOE for the six months ended June 30, 1999 compared with
16.4 in 1998. The production decrease resulted from the significant loss of
production at the South Horseshoe Bayou Field in 1998 and 1999 and the sale of
certain Oklahoma properties which occurred in late 1998. The average oil price
for the six months ended June 30, 1999 decreased 4% to $13.57 per Bbl, and gas
prices decreased 7% to $2.00 per Mcf from their respective 1998 levels.
The Company hedged approximately 38% of its oil production for the
second quarter of 1999 or 119.0 MBbls at an average NYMEX price of $16.32 and
realized a $41,000 decrease in oil revenue or $.13 per Bbl on these contracts
compared with a $113,000 increase or $.31 per Bbl in 1998. The Company also
hedged 68% of its 1999 second quarter gas production or 3.7 million MMBtu at an
average indexed price of $2.235 and realized a $67,000 increase in gas revenues
or $.01 per Mcf from these hedge contracts compared with a $246,000 increase in
gas revenues or $.04 per Mcf in 1998.
Oil and Gas Production Costs. Oil and gas production costs consist of
lease operating expense and production taxes. Total production costs decreased
$213,000 or 5% to $4.0 million for the second quarter of 1999 from $4.2 million
in 1998. Total oil and gas production costs per BOE increased 23% to $3.26 for
the second quarter of 1999 compared with $2.64 in 1998 due to increased workover
costs, reduction in production volumes at South Horseshoe Bayou and the December
1998 sale of producing properties in Oklahoma with lower production costs per
BOE.
Total production costs decreased $162,000 or 2% to $8.0 million for the
six months ended June 30, 1999 from $8.1 million in 1998. Total oil and gas
production costs per BOE increased 22% to $3.33 in the first six months of 1999
compared with $2.74 in 1998 due to increased workover costs, reduction in
production volumes at South Horseshoe Bayou and the December 1998 sale of
producing properties in Oklahoma with lower production costs per BOE.
Depreciation, Depletion, Amortization and Impairment. Depreciation,
depletion and amortization expense ("DD&A") decreased $1.2 million or 19% to
$5.3 million for the second quarter of 1999 from $6.5 million in 1998. DD&A
expense per BOE increased 6% to $4.35 in the second quarter of 1999 compared
with $4.12 in 1998. This increase is due to the reduction in volumes produced at
South Horseshoe Bayou, decreased royalty production from the Fee Lands and the
December 1998 sale of producing properties in Oklahoma with lower DD&A expense
per BOE. The Company recorded $247,000 of impairments of proved oil and gas
properties for the second quarter of 1999 compared with $1.1 million in 1998.
This decrease was due to marginal wells drilled in Oklahoma and Louisiana in
1998 and the adverse effects of low oil prices in the Williston Basin in 1998.
DD&A decreased $1.2 million or 10% to $10.7 million for the six months
ended June 30, 1999 compared with $11.9 million in 1998. DD&A expense per BOE
increased 12% to $4.48 in the six months ended June 30, 1999 compared with $4.01
in 1998. This increase is due to the reduction in volumes produced at South
Horseshoe Bayou, decreased royalty production from the Fee Lands, the effect of
continued low prices on the Company's oil and gas reserves in the first quarter
of 1999, and the December 1998 sale of producing properties in Oklahoma with
lower DD&A expense per BOE. The Company recorded $247,000 of impairments of
proved oil and gas properties for the six months ended June 30, 1999 compared
with $1.4 million in 1998. This decrease was due to marginal wells drilled in
Oklahoma and Louisiana in 1998 and the adverse effects of low oil prices in the
Williston Basin in 1998.
-13-
<PAGE>
Abandonment and impairment of unproved properties increased $24,000 or
8% to $336,000 for the second quarter of 1999 compared with $312,000 in 1998 due
to additional abandonment of expired leases in 1999.
Abandonment and impairment of unproved properties increased $185,000 or
30% to $800,000 for the six months ended June 30, 1999 compared with $615,000 in
1998 due to additional abandonment of expired leases in 1999.
Exploration. Exploration expense decreased $1.9 million or 61% to $1.2
million for the second quarter of 1999 compared with $3.1 million in 1998. The
decrease results primarily from delay rental payments on the Company's
Atchafalaya project in 1998, which did not occur in 1999, and improved
exploratory drilling results in 1999.
Exploration expense decreased $3.6 million or 55% to $2.9 million for
the six months ended June 30, 1999 compared with $6.5 million in 1998. The
decrease results from nonrecurring delay rental payments for the Atchafalaya
project in 1998 and improved exploratory drilling results in 1999.
General and Administrative. General and administrative expenses
increased $544,000 or 37% to $2.0 million in the second quarter of 1999 compared
with $1.5 million in 1998. This increase was primarily due to an increase in
compensation expense related to stock appreciation rights expenses.
General and administrative expenses decreased $795,000 or 18% to $3.6
million for the six months ended June 30, 1999 compared with $4.4 million in
1998. Compensation expense decreased primarily due to a decrease in bonus
expense in 1999. This decrease in compensation expense was partially offset by a
reduction in overhead reimbursements from outside interest owners in properties
operated by the Company.
Other Operating Expenses. Other operating expenses primarily consist of
legal expenses in connection with ongoing oil and gas activities. This expense
increased $156,000 or 274% to $213,000 for the second quarter of 1999 compared
with $57,000 in 1998. This increase was primarily due to increased activity in
the pending litigation that seeks to recover damages from the drilling
contractor for the St. Mary Land & Exploration No. 1 well at South Horseshoe
Bayou.
Other operating expenses increased $246,000 or 267% to $338,000 for the
six months ended June 30, 1999 compared with $92,000 in 1998. This increase was
primarily due to increased activity in the pending litigation that seeks to
recover damages from the drilling contractor for the St. Mary Land & Exploration
No. 1 well at South Horseshoe Bayou.
Equity in Loss of Summo Minerals Corporation. The Company accounted for
its investment in Summo under the equity method through May 31, 1999, and
included its share of Summo's loss in its results of operations. The Company
decreased its investment in Summo during the second quarter of 1999 and
consequently now accounts for its investment in Summo under the investment
method. The Company recorded equity in the net loss of Summo of $13,000 for the
second quarter of 1999 compared with $509,000 in 1998. This decrease was
primarily due to Summo's write-off of its investment in its Cashin and Champion
properties in the second quarter of 1998.
-14-
<PAGE>
The Company recorded equity in the net loss of Summo of $58,000 for the
six months ended June 30, 1999 compared with $571,000 in 1998. This decrease was
primarily due to Summo's write-off of its investment in its Cashin and Champion
properties in the second quarter of 1998.
Non-Operating Income and Expense. Net interest and other non-operating
expense increased $130,000 to $119,000 in the second quarter of 1999 compared
with net interest income of $11,000 in 1998 due to a decrease in interest earned
on invested funds and a corresponding increase in interest expense due to
increased debt.
Net interest and other non-operating expense increased $36,000 to
$264,000 for the six months ended June 30, 1999 compared with $228,000 in 1998
due to a decrease in interest earned on invested funds and a corresponding
increase in interest expense due to increased debt.
Income Taxes. Income tax expense totaled $829,000 in the second quarter
of 1999 and $1.1 million in 1998, resulting in effective tax rates of 33.7% and
35.5%, respectively. The reduced expense reflects lower net income from
operations before income taxes for 1999 due primarily to lower oil and gas
production and lower gas prices. The reduced rate reflects a higher impact on
lower net income from Section 29 credits and percentage depletion in 1999.
Income tax expense was $1.0 million for the six months ended June 30,
1999 and $1.9 million in 1998, resulting in effective tax rates of 33.0% and
33.8%, respectively. The reduced expense reflects lower net income from
operations before income taxes for 1999 due primarily to lower oil and gas
production and lower gas prices. The reduced rate reflects a higher impact on
lower net income from Section 29 credits and percentage depletion in 1999.
Net Income. Net income for the second quarter of 1999 decreased
$438,000 or 21% to $1.6 million compared with $2.1 million in 1998. The 22%
decrease in oil and gas revenues caused by reductions in produced volumes in the
second quarter of 1999 was partially offset by significant decreases in DD&A,
impairment of proved properties, exploration expense, and income tax expense.
Net income for the six months ended June 30, 1999 decreased $1.7
million or 45% to $2.0 million compared with $3.7 million in 1998. The 25%
decrease in oil and gas revenues caused by reductions in both price and produced
volumes was partially offset by significant decreases in DD&A, impairment of
proved properties, exploration expense, general and administrative expense and
income tax expense.
Liquidity and Capital Resources
The Company's primary sources of liquidity are the cash provided by
operating activities, debt financing, sales of non-strategic properties and
access to the capital markets. The Company's cash needs are for the acquisition,
exploration and development of oil and gas properties and for the payment of
debt obligations, trade payables and stockholder dividends. The Company
generally finances its exploration and development programs from internally
generated cash flow, bank debt and cash and cash equivalents on hand. The
Company continually reviews its capital expenditure budget based on changes in
cash flow and other factors.
-15-
<PAGE>
Cash Flow. The Company's net cash provided by operating activities
decreased $7.1 million or 26% to $20.3 million for the six months ended June 30,
1999 compared with $27.4 million in 1998. Revenues decreased significantly due
to decreased production at South Horseshoe Bayou and in Oklahoma from the sale
of producing properties and due to lower oil and gas prices. Additionally,
adjustments for non-cash expenses decreased significantly due to lower DD&A,
impairment of proved properties, and exploration expenses along with a decrease
in prepaid expenses and other.
Net cash used in investing activities decreased $14.1 million or 43% to
$18.7 million for the six months ended June 30, 1999 compared with $32.8 million
in 1998. The decrease is primarily due to an $8.9 million decrease in capital
expenditures, an $800,000 increase resulting from acquisitions, a $1.4 million
increase from property sales and a $2.4 million decrease resulting from the
reduction of the Company's investment in Summo in the first half of 1999. Total
capital expenditures, including acquisitions of oil and gas properties, in the
first half of 1999 decreased $9.1 million or 29% to $22.3 million compared with
$31.4 million in the first half of 1998.
A portion of the proceeds from sales of oil and gas properties in 1998
were applied to acquisitions of oil and gas properties in 1999 under tax-free
exchanges. In a tax-free exchange of properties the tax basis of the sold
property carries over to the acquired property for tax purposes. Gains or losses
for tax purposes are recognized by amortization of the lower tax basis of the
property throughout its remaining life or when the acquired property is sold or
abandoned.
Net cash used in financing activities increased $7.0 million or 242% to
$4.1 million for the six months ended June 30, 1999 compared with net cash
provided by financing activities of $2.9 million in 1998. The increase was
primarily due to a reduction of long-term debt in 1999 compared with an increase
in long-term debt in 1998.
The Company had $5.2 million in cash and cash equivalents and had
working capital of $8.6 million as of June 30, 1999 compared with $7.8 million
in cash and cash equivalents and working capital of $9.8 million as of December
31, 1998. The reduction in cash and cash equivalents is primarily the result of
payments to reduce debt levels.
Credit Facility. On June 30, 1998, the Company entered into a long-term
revolving credit agreement with a maximum loan amount of $200.0 million. The
lender may periodically re-determine the aggregate borrowing base depending upon
the value of the Company's oil and gas properties and other assets. In May 1999
the borrowing base was reduced $25.0 million by the lender to $80.0 million as a
result of reduced reserve pricing and the write down of South Horseshoe Bayou
reserves. The accepted borrowing base was $40.0 million at June 30, 1999. The
credit agreement has a maturity date of December 31, 2005, and includes a
revolving period that matures on December 31, 2000. The Company can elect to
allocate up to 50% of available borrowings to a short-term tranche due in 364
days. The Company must comply with certain covenants including maintenance of
stockholders' equity at a specified level and limitations on additional
indebtedness. As of June 30, 1999, and December 31, 1998, $8.0 million and $10.5
million, respectively, was outstanding under this credit agreement. These
outstanding balances accrue interest at rates determined by the Company's debt
to total capitalization ratio. During the revolving period of the loan, loan
balances accrue interest at the Company's option of either (a) the higher of the
Federal Funds Rate plus 1/2% or the prime rate, or (b) LIBOR plus 1/2% when the
Company's debt to total capitalization is less than 30%, up to a maximum of
either (a) the higher of the Federal Funds Rate plus 5/8% or the prime rate plus
1/8%, or (b) LIBOR plus 1-1/4% when the Company's debt to total capitalization
is equal to or greater than 50%.
-16-
<PAGE>
Panterra, in which the Company had a 74% general partnership interest,
maintained a separate credit facility with a $21.0 million borrowing base as of
December 31, 1998. Upon being acquired by the Company, Nance assumed the
responsibility for this credit facility in the second quarter of 1999.
Outstanding borrowings under this separate credit facility were $12.1 million as
of June 30, 1999 and $12.0 million as of December 31, 1998. St. Mary's portion
of the December 31, 1998 outstanding balance was $8.9 million. The credit
agreement includes a revolving period converting to a five-year amortizing loan
on June 30, 2000. During the revolving period of the loan, loan balances accrue
interest at Nance's option of either (a) the bank's prime rate or (b) LIBOR plus
3/4% when Nance's debt to capital ratio is less than 30%, up to a maximum of
either (a) the bank's prime rate or (b) LIBOR plus 1-1/4% when Nance's debt to
partners' capital ratio is greater than 100%. The Company anticipates using its
primary credit facility to retire the balance due on the Nance credit facility.
Common Stock. In June 1998 the Company's stockholders approved an
increase in the number of authorized shares of the Company's common stock from
15,000,000 to 50,000,000 shares.
In August 1998 the Company's Board of Directors authorized a stock
repurchase program whereby St. Mary may purchase from time-to-time, in open
market transactions or negotiated sales, up to 1,000,000 of its common shares.
During 1998 the Company repurchased a total of 147,800 shares of its common
stock under the program for $2.5 million at a weighted-average price of $16.71
per share. The Company repurchased 35,000 additional shares for $15.00 per share
during the first half of 1999. Management anticipates that additional purchases
of shares by the Company may occur as market conditions warrant. Such purchases
will be funded with internal cash flow and borrowings under the Company's credit
facility.
In June 1999 the Company completed the purchase of Nance and Quanterra
Alpha Limited Partnership for 259,494 shares of the Company's common stock
valued at $3.1 million and the assumption of $3.2 million of Nance debt.
Capital and Exploration Expenditures. The Company's expenditures for
exploration and development of oil and gas properties and acquisitions are the
primary use of its capital resources.
Outlook. The Company believes that its existing capital resources, cash
flows from operations and available borrowings are sufficient to meet its
anticipated capital and operating requirements for 1999.
The Company generally allocates approximately 85% of its capital budget
to low to moderate-risk exploration, development and niche acquisition programs
in its core operating areas. The remaining portion of the Company's capital
budget is directed to higher-risk, large exploration ideas that have the
potential to increase the Company's reserves by 25% or more in any single year.
The Company anticipates incurring approximately $101.0 million for
capital and exploration expenditures in 1999 with $37.0 million allocated for
ongoing exploration and development in its core operating areas, $9.0 million
for large-target, higher-risk exploration and development projects, and $55.0
million for acquisitions of producing properties. These anticipated expenditures
include the acquisition of Nance through the issuance of St. Mary common stock
and the assumption of Nance debt. These numbers also assume that the KRE
acquisition closes through the issuance of St. Mary common stock.
Anticipated ongoing exploration and development expenditures for each
of the Company's core areas include $22.0 million in the Mid-Continent region,
$6.5 million in the ArkLaTex region, $2.0 million in the Williston Basin and
$6.5 million allocated within the Permian Basin and south Louisiana regions.
-17-
<PAGE>
The results of operations also include the results of the Company's
large-target exploration ideas. During the first half of 1999 two discoveries
were found on the West Cameron Block 39 project. The Company has several
prospects in its pipeline of large-target exploration ideas. Drilling was
completed at the Stallion project in July 1999, and production tests have
recorded rates of 9.4 MMcf per day. The well is currently shut in awaiting
pipeline connection. The Company expects to commence the drilling of three
additional significant tests in 1999 at its South Horseshoe Bayou, North
Parcperdue and Patterson projects in south Louisiana.
The amount and allocation of future capital and exploration
expenditures will depend upon a number of factors including the number of
available acquisition opportunities, the Company's ability to assimilate such
acquisitions, the impact of oil and gas prices on investment opportunities, the
availability of capital and borrowing capability and the success of its
development and exploratory activity which could lead to funding requirements
for further development.
The Company continuously evaluates opportunities in the marketplace for
oil and gas properties and, accordingly, may be a buyer or a seller of
properties at various times. St. Mary will continue to emphasize smaller niche
acquisitions utilizing the Company's technical expertise, financial flexibility
and structuring experience. In addition, the Company is also actively seeking
larger acquisitions of assets or companies that would afford opportunities to
expand the Company's existing core areas, to acquire additional geoscientists or
to gain a significant acreage and production foothold in a new basin within the
United States.
The Company, through a subsidiary, owns 4.96 million shares or 17.7% of
Summo. The persistence of depressed commodity prices and increased worldwide
inventory levels of copper have caused Summo's stock price to decline.
Management believes that this stock price decline is not temporary and that its
value is impaired. Consequently, the Company wrote down its net investment in
Summo to net realizable value in the fourth quarter of 1998. Management believes
the recorded net investment is recoverable.
In June 1999, the Company participated in a financing package
arrangement with Summo Minerals Corporation ("Summo") and Resource Capital Fund
L.P. ("RCF"). This package resulted in the Company receiving $2,059,000 in
exchange for reducing Summo's note receivable to $1,400,000 and transferring
4,962,047 Summo shares to RCF. Also as part of the arrangement, the Company was
granted 17,500,000 warrants with an exercise price of CDN$0.12 per share that
are fully vested and expire on June 25, 2004. No value has been assigned to the
warrants in the financial statements. All cash proceeds received from RCF were
applied to the outstanding principle balance of the Summo note receivable
resulting in a remaining net book value of $964,000, which management believes
is realizable. The loan is secured by Summo's interest in the Lisbon Valley
Project and bears interest at LIBOR plus 2.5%. The Company continuously analyzes
its net investment in Summo and the effect of persistent depressed copper prices
and increased worldwide copper inventory levels on Summo's stock price.
Future development and financial success of the Lisbon Valley Project
are largely dependent on the market price of copper, which is determined in
world markets and is subject to significant fluctuations.
-18-
<PAGE>
Impact of the Year 2000 Issue. The following Year 2000 statements
constitute a Year 2000 Readiness Disclosure within the meaning of the Year 2000
Information and Readiness Disclosure Act of 1998.
The Year 2000 Issue is the result of computer programs and embedded
computer chips being written or manufactured using two digits rather than four,
or other methods, to define the applicable year. Computer programs and embedded
chips that are date-sensitive may recognize a date using "00" as the year 1900
rather than the year 2000. This could result in a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, operate equipment or
engage in normal business activities. Failure to correct a material Year 2000
compliance problem could result in an interruption in, or inability to conduct
normal business activities or operations. Such failures could materially and
adversely affect the Company's results of operations, cash flow and financial
condition.
The Company's approach to determining and mitigating the impact on the
Company of Year 2000 compliance issues is comprised of five phases:
i) Review and assessment of all internal information technology (IT)
systems and significant non-IT systems for Year 2000 compliance;
ii) Identify and prioritize systems with Year 2000 compliance issues;
iii) Repair or replace and test non-Year 2000 compliant systems;
iv) Survey and assess the Year 2000 readiness of the Company's significant
vendors, suppliers, purchasers and transporters of oil and natural gas;
and,
v) Design and implement contingency plans for those systems, if any, that
cannot be made Year 2000 compliant before December 31, 1999.
The Company completed phases i) and ii) of its plan by August 1998, and
has identified the systems requiring repair or replacement in order to be Year
2000 compliant. This review and assessment was completed using outside
consultants as well as Company personnel. The Company determined that of its
major systems, the software it uses for reservoir engineering, its telephone
system, a significant number of the personal computers used by Company personnel
and the computer system used by Panterra should be updated or replaced.
Phase iii) of the Company's plan of repair and replacement of non-Year
2000 compliant systems is approximately 95% complete. The telephone system and
personal computers have been replaced with Year 2000 compliant hardware and
software as part of the Company's ongoing upgrade program. The Company purchased
a Year 2000 compliant release of the reservoir engineering system and
anticipates conversion to and testing of the new system in the third quarter of
1999. In the fourth quarter of 1998 Panterra licensed a Year 2000 compliant
system and converted to the new system in January 1999. Nance is now using that
system. The systems that have been either upgraded or replaced will be further
tested to confirm their Year 2000 compliance. Testing of the Company's primary
accounting, lease records and production accounting system was performed during
the second quarter of 1999 as planned and confirmed the system to be Year 2000
compliant. The Company presently believes that other less significant IT and
non-IT systems can be upgraded to mitigate any Year 2000 issues with
modifications to existing software or conversions to new systems. Modifications
or conversions to new systems for the less significant systems, if not completed
timely, would have neither a material impact on the operations of the Company
nor on its results of operations.
-19-
<PAGE>
Under phase iv) of the plan, the Company initiated formal
communications with its significant vendors, suppliers and purchasers and
transporters of oil and natural gas to determine the extent to which the Company
is vulnerable to those third parties' failures to remediate their own Year 2000
issues. The process of collecting information from these third parties is over
50% complete. All of the responses received to date confirm that the respondents
will be Year 2000 compliant on a timely basis. Completion of phase iv) of the
plan is anticipated in the third quarter of 1999. Until this phase of the plan
is complete, management cannot currently predict if third party compliance
issues will materially affect the Company's operations. There can be no
assurance that the systems of these third parties will be converted timely, or
that a failure to remediate Year 2000 compliance issues by another company would
not have a material adverse effect on the Company.
Phase v) of the Company's Year 2000 plan, the design and implementation
of contingency plans for those systems, if any, that cannot be made Year 2000
compliant before December 31, 1999, will be addressed in the last half of 1999.
Through June 30, 1999, the Company has spent approximately $450,000 on
its Year 2000 efforts. This includes the costs of consultants as well as the
cost of repair or replacement of non-compliant hardware and software systems.
Additional costs to complete the Company's plan are estimated at approximately
$25,000. The Company has not specifically tracked its internal costs of
addressing the Year 2000 issue. However, management does not believe these costs
to be material.
The Company has not completed a comprehensive analysis of the
operational problems and costs that would be reasonably likely to result from
the Company or its significant third parties' failure to timely complete efforts
to remediate Year 2000 issues. Potential "worst case" impacts could include the
inability of the Company to deliver its production to, or receive payment from,
third parties purchasing or transporting the Company's production; the inability
of third party vendors to provide needed materials or services to the Company
for ongoing or future exploration, development or producing operations; and the
inability of the Company to execute financial transactions with its banks or
third parties whose systems fail or malfunction.
The Company currently has no reason to believe that any of these
contingencies will occur or that its principal vendors, customers and business
partners will not be Year 2000 compliant. However, there can be no assurance
that the Company will be able to identify and correct all Year 2000 problems or
implement a satisfactory contingency plan. Therefore, there can be no assurance
that the Year 2000 issue will not materially impact the Company's results of
operations or adversely affect its relationships with vendors, customers and
other business partners.
Accounting Matters
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities," effective for all fiscal
quarters of fiscal years beginning after June 15, 1999. The Statement requires
companies to report all derivatives at fair value as either assets or
liabilities and bases the accounting treatment of the derivatives on the reasons
an entity holds the instrument. The Company is currently reviewing the effects
this Statement will have on the financial statements in relation to the
Company's hedging activities.
In June 1999 the FASB issued SFAS No.137, "Accounting for Derivative
Instruments and Hedging Activities--Deferral of the Effective Date of FASB
Statement No. 133--An Amendment of FASB Statement No. 133." SFAS No. 137 delayed
the effective date of the requirements of SFAS No. 133 to all fiscal quarters
of fiscal years beginning after June 15, 2000.
-20-
<PAGE>
Effects of Inflation and Changing Prices
Within the United States inflation has had a minimal effect on the
Company. The Company cannot predict the future extent of any such effect.
The Company's results of operations and cash flows are affected by
material changes in oil and gas prices. Oil and gas prices are strongly impacted
by global influences on the supply and demand for petroleum products. Oil and
gas prices are further impacted by the quality of the oil and gas to be sold and
the location of the Company's producing properties in relation to markets for
the products. Oil and gas price increases or decreases have a corresponding
effect on the Company's revenues from oil and gas sales. Oil and gas prices also
affect the prices charged for drilling and related services. If oil and gas
prices increase, there could be a corresponding increase in the cost to the
Company for drilling and related services, although offset by an increase in
revenues. Also, as oil and gas prices increase, the cost of acquisitions of
producing properties increases, which could limit the number and accessibility
of quality properties on the market.
Material changes in oil and gas prices affect the current and future
value of the Company's estimated proved reserves and the borrowing capability of
the Company, which is largely based on the value of such proved reserves. Oil
and gas price changes have a corresponding effect on the value of the Company's
estimated proved reserves and the available borrowings under the Company's
credit facility.
The last half of 1998 and most of the first quarter of 1999 were
characterized by historically low oil prices and weakening gas markets. Capital
left the oil and gas industry and caused a significant decrease in the number of
working drilling rigs. Consequently, in early 1999 there was an abundance of
available drilling rigs, personnel, supplies and services with a corresponding
reduction of costs. Oil and gas prices have increased from December 31, 1998
levels during the second quarter of 1999. If prices continue to increase, there
could be a return to shortages and a corresponding increase in the costs to the
Company of exploration, drilling and production of oil and gas.
Financial Instrument Market Risk
The Company holds derivative contracts and financial instruments that
have cash flow and net income exposure to changes in commodity prices or
interest rates. Financial and commodity-based derivative contracts are used to
limit the risks inherent in some crude oil and natural gas price changes that
have an effect on the Company. In prior years the Company has occasionally
hedged interest rates, and may do so in the future should circumstances warrant.
The Company's Board of Directors has adopted a policy regarding the use
of derivative instruments. This policy requires every derivative used by the
Company to relate to underlying offsetting positions, anticipated transactions
or firm commitments. It prohibits the use of speculative, highly complex or
leveraged derivatives. Under the policy, the Chief Executive Officer and Vice
President of Finance must review and approve all risk management programs that
use derivatives. The Audit Committee of the Company's Board of Directors also
periodically reviews these programs.
-21-
<PAGE>
Commodity Price Risk. The Company uses various hedging arrangements to
manage the Company's exposure to price risk from its natural gas and crude oil
production. These hedging arrangements have the effect of locking in for
specified periods, at predetermined prices or ranges of prices, the prices the
Company will receive for the volumes to which the hedge relates. Consequently,
while these hedging arrangements are structured to reduce the Company's exposure
to decreases in prices associated with the hedged commodity, they also limit the
benefit the Company might otherwise receive from price increases associated with
the hedged commodity. A hypothetical 10% change in the quarter-end market prices
of commodity-based swaps and futures contracts on a notional amount of 9.5
million MMBtu would have caused a potential $141,000 change in net income before
income taxes for the Company for gas contracts in place on June 30, 1999. A 10%
change in the quarter-end market prices of commodity-based swaps and future
contracts on a notional amount of 675 MBbls would have caused a potential
$457,000 change in net income before income taxes for the Company for oil
contracts in place on June 30, 1999. These hypothetical changes were discounted
to present value using a 7.5% discount rate since the latest expected maturity
date of some of the swaps and futures contracts is greater than one year from
the reporting date. The derivative gain or loss effectively offsets the loss or
gain on the underlying commodity exposures that have been hedged. The fair
values of the swaps are estimated based on quoted market prices of comparable
contracts and approximate the net gains or losses that would have been realized
if the contracts had been closed out at quarter end. The fair values of the
futures are based on quoted market prices obtained from the New York Mercantile
Exchange.
Interest Rate Risk. Market risk is estimated as the potential change in
fair value resulting from an immediate hypothetical one percentage point
parallel shift in the yield curve. A sensitivity analysis presents the
hypothetical change in fair value of those financial instruments held by the
Company at June 30, 1999, which are sensitive to changes in interest rates. For
fixed-rate debt, interest rate changes affect the fair market value but do not
impact results of operations or cash flows. Conversely for floating rate debt,
interest rate changes generally do not affect the fair market value but do
impact future results of operations and cash flows, assuming other factors are
held constant. The carrying amount of the Company's floating rate debt
approximates its fair value. At June 30, 1999, the Company had floating rate
debt of $20.1 million and had no fixed rate debt. Assuming constant debt levels,
the results of operations and cash flows impact for the remainder of the year
resulting from a one percentage point change in interest rates would be
approximately $101,000 before taxes.
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<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
Exhibit Description
------- -----------
27.1 Financial Data Schedule
(b) There were no reports on Form 8-K filed during the quarter
ended June 30, 1999.
-23-
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities and Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned hereunto duly authorized.
ST. MARY LAND & EXPLORATION COMPANY
August 6, 1999 By /s/ MARK A. HELLERSTEIN
-------------------------------------
Mark A. Hellerstein
President and Chief Executive Officer
August 6, 1999 By /s/ RICHARD C. NORRIS
-------------------------------------
Richard C. Norris
Vice President - Finance, Secretary
and Treasurer
August 6, 1999 By /s/ GARRY A. WILKENING
-------------------------------------
Garry A. Wilkening
Vice President - Administration and
Controller
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
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0
0
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