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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
[x] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarter ended March 31, 2000.
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934.
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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 [ x ] 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 May 10, 2000, the registrant had 13,964,176 shares of common stock, $.01
par value, outstanding.
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<PAGE>
ST. MARY LAND & EXPLORATION COMPANY
INDEX
Part I. FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements (Unaudited)
Consolidated Balance
Sheets - March 31, 2000 and
December 31, 1999..............................................3
Consolidated Statements of
Operations - Three Months Ended
March 31, 2000 and 1999........................................4
Consolidated Statements of
Cash Flows - Three Months Ended
March 31, 2000 and 1999........................................5
Notes to Consolidated Financial
Statements - March 31, 2000....................................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..............................19
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)
<TABLE>
<CAPTION>
ASSETS
March 31, December 31,
------------- -------------
2000 1999
------------- -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 8,651 $ 14,195
Accounts receivable 30,894 22,971
Prepaid expenses and other 1,602 2,173
Refundable income taxes - 26
Deferred income taxes 158 90
------------- -------------
Total current assets 41,305 39,455
------------- -------------
Property and equipment (successful efforts method), at cost:
Proved oil and gas properties 301,056 292,323
Less accumulated depletion, depreciation, amortization and impairment (150,243) (142,680)
Unproved oil and gas properties, net of impairment
allowance of $8,321 in 2000 and $8,984 in 1999 29,888 28,556
Other property and equipment, net of accumulated depreciation of $3,166
in 2000 and $3,033 in 1999 2,545 2,465
------------- -------------
183,246 180,664
------------- -------------
Other assets:
Khanty Mansiysk Oil Corporation receivable and stock 5,110 5,110
Summo Minerals Corporation investment and receivable 1,943 1,655
Other assets 3,619 3,554
------------- -------------
10,672 10,319
------------- -------------
$ 235,223 $ 230,438
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 19,165 $ 25,743
Current portion of stock appreciation rights 447 272
------------- -------------
Total current liabilities 19,612 26,015
------------- -------------
Long-term liabilities:
Long-term debt 14,000 13,000
Deferred income taxes 3,784 501
Stock appreciation rights - 455
Other noncurrent liabilities 1,383 1,380
------------- -------------
19,167 15,336
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Commitments and contingencies
------------- -------------
Minority interest 338 315
------------- -------------
Stockholders' equity:
Common stock, $.01 par value: authorized - 50,000,000 shares: issued and
outstanding - 13,964,176 shares in 2000 and 13,946,955 shares in 1999 140 139
Additional paid-in capital 124,364 124,114
Treasury stock - at cost: 197,800 shares in 2000 and 182,800 shares in 1999 (3,339) (2,995)
Retained earnings 74,427 67,230
Unrealized gain on marketable equity securities-available for sale 514 284
------------- -------------
Total stockholders' equity 196,106 188,772
------------- -------------
$ 235,223 $ 230,438
============= =============
</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
March 31,
------------- -------------
2000 1999
------------- -------------
<S> <C> <C>
Operating revenues:
Oil and gas production $ 36,669 $ 13,769
Gain on sale of proved properties 39 195
Other oil and gas revenue 280 151
Other revenues 80 (5)
------------- -------------
Total operating revenues 37,068 14,110
------------- -------------
Operating expenses:
Oil and gas production 8,083 3,994
Depletion, depreciation and amortization 8,857 5,402
Impairment of proved properties 1,087 -
Exploration 2,745 1,739
Abandonment and impairment of unproved properties 680 464
General and administrative 2,764 1,608
Loss in equity investees - 45
Minority interest and other 642 125
------------- -------------
Total operating expenses 24,858 13,377
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Income from operations 12,210 733
Nonoperating income and (expense):
Interest income 226 96
Interest expense (86) (241)
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Income before income taxes 12,350 588
Income tax expense 4,464 179
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Net income $ 7,886 $ 409
============= =============
Basic net income per common share $ .57 $ .04
============= =============
Diluted net income per common share $ .57 $ .04
============= =============
Basic weighted average common shares outstanding 13,762 10,846
============= =============
Diluted weighted average common shares outstanding 13,921 10,858
============= =============
Cash dividend declared per share $ 0.05 $ 0.05
============= =============
</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 Three Months Ended
March 31,
--------------------------------
2000 1999
------------- -------------
<S> <C> <C>
Reconciliation of net income to net cash provided by operating activities:
Net income $ 7,886 $ 409
Adjustments to reconcile net income to net
cash provided by operating activities:
Gain on sale of proved properties (39) (195)
Depletion, depreciation and amortization 8,857 5,402
Impairment of proved properties 1,087 -
Exploration 699 (95)
Abandonment and impairment of unproved properties 680 464
Loss in equity investees - 45
Deferred income taxes 3,283 (5)
Minority interest and other (333) 166
------------- -------------
22,120 6,191
Changes in current assets and liabilities:
Accounts receivable (7,981) 3,549
Prepaid expenses and other 587 1,050
Accounts payable and accrued expenses (509) (2,738)
Stock appreciation rights 175 -
------------- -------------
Net cash provided by operating activities 14,392 8,052
------------- -------------
Cash flows from investing activities:
Proceeds from sale of oil and gas properties 40 804
Capital expenditures (18,841) (7,159)
Acquisition of oil and gas properties (1,192) (1,475)
Investment in and loans to Summo Minerals Corporation - (188)
Receipts from restricted cash - 720
Other (66) (297)
------------- -------------
Net cash used in investing activities (20,059) (7,595)
------------- -------------
Cash flows from financing activities:
Proceeds from long-term debt 5,325 4,175
Repayment of long-term debt (4,325) (5,675)
Proceeds from sale of common stock 157 17
Repurchase of common stock (345) (525)
Dividends paid (689) (543)
------------- -------------
Net cash provided by (used in) financing activities 123 (2,551)
------------- -------------
Net decrease in cash and cash equivalents (5,544) (2,094)
Cash and cash equivalents at beginning of period 14,195 7,821
------------- -------------
Cash and cash equivalents at end of period $ 8,651 $ 5,727
============= =============
</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)
<TABLE>
<CAPTION>
Supplemental schedule of additional cash flow information and noncash activities:
For the Three Months Ended
March 31,
--------------------------------
2000 1999
------------- -------------
(In thousands)
<S> <C> <C>
Cash paid for interest $ 122 $ 270
Cash paid for income taxes 153 115
Cash paid for exploration expenses 2,689 1,485
</TABLE>
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)
---------------------------------
March 31, 2000
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, 1999. 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,
1999. It is suggested that these unaudited condensed consolidated financial
statements be read in conjunction with the financial statements and notes
included in the Form 10-K.
Note 2 - Investments
The Company accounts for its investment in Summo Minerals Corporation
("Summo") under the cost method of accounting. The accounting for this
investment was changed from the equity method to the cost method in June 1999
due to a transfer of common shares that reduced the Company's ownership
percentage from 37% to 18%. In January 2000, Summo issued 1,016,594 shares of
its common stock to the Company as payment of interest on the Company's note
receivable from Summo. Due to the receipt of these shares, the Company's
ownership percentage increased to 19%. For the first quarter of 2000, the
unrealized gain on the Company's investment in Summo common stock was $229,000.
This represents the difference in trading value of the Company's ownership in
Summo common stock and the recorded basis of the common stock owned by the
Company, net of taxes.
In February 2000 St. Mary exercised its option to convert its Khanty
Mansiysk Oil Corporation ("KMOC") production payment receivable into stock of
KMOC at a price in excess of the receivable's carrying value. Negotiations are
ongoing to determine the final value and number of shares St. Mary will
receive.
-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 2000 the Company repurchased 15,000 shares of
its common stock under the program at a weighted average price of $22.99 per
share, bringing the total number of shares repurchased under the program to
197,800 at a weighted-average price of $16.89 per share. 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 2000 and 1999 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 - Earnings Per Share
Basic net income per share of common stock is calculated by dividing net
income by the weighted average of common shares outstanding during each period.
Diluted net income per common share of stock is calculated by dividing net
income by the weighted average of outstanding common shares and other dilutive
securities. Dilutive securities of the Company consist entirely of outstanding
options to purchase the Company's common stock. The outstanding dilutive
securities were 158,676 for the first quarter of 2000 and 12,205 for the first
quarter of 1999. All net income of the Company is available to common
stockholders. Basic and diluted net income per share were $0.57 for the first
quarter of 2000 and $0.04 for the first quarter of 1999.
Note 6 - Contingent Gain
In February 2000 the Company won a jury verdict in litigation seeking to
recover damages from the drilling contractor related to the St. Mary Land &
Exploration No. 1 and No. 2 wells in South Horseshoe Bayou, Louisiana. This
verdict may have a material positive effect on the Company's results of
operations.
-8-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
The results of operations include two significant acquisitions made during
1999. On June 1, 1999, the Company acquired Nance Petroleum Corporation
("Nance") and Quanterra Alpha Limited Partnership for 259,494 shares of St. Mary
common stock valued at $3.1 million, the assumption of $3.2 million in debt and
transaction costs of $56,000. This acquisition was accounted for as a purchase
and included Nance's 26% interest in Panterra Petroleum that the Company did not
previously own. Through the remainder of 1999, Nance acquired various Williston
Basin properties for $948,000.
On December 17, 1999, in a transaction accounted for as a purchase, the
Company acquired King Ranch Energy, Inc ("KRE") for 2,666,187 shares of common
stock valued at $52.8 million and transaction costs of $2.3 million. After the
acquisition, KRE's name was changed to St. Mary Energy Company ("SMEC"). The
acquired properties are located primarily in the Gulf of Mexico and the onshore
Gulf Coast.
Box Church Gas Gathering, LLC and Roswell, LLC are small majority owned
support entities that service the ArkLaTex region and the Permian Basin,
respectively. The activities of these entities are fully consolidated, and the
minority interest is recorded. Minority interest is the ownership portion of
these two entities held by parties other than the Company.
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 and Section 21E of the Securities Exchange Act of
1934. 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 oil and gas production estimates,
repayment of debt, business strategies, expansion and growth of the Company's
operations 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, including such factors as uncertainties in
cash flow, expected merger benefits, the volatility and level of oil and natural
gas prices, production rates and reserve replacement, reserve estimates,
drilling and operating risks, competition, litigation, environmental matters,
the potential impact of government regulations, and other such matters, many of
which are beyond the control of the Company. Readers are cautioned that our
forward-looking statements are not guarantees of future performance and that
actual results or developments may differ materially from those projected in the
forward-looking statements.
-9-
<PAGE>
Results of Operations
The following table sets forth selected operating data for the periods
indicated:
<TABLE>
<CAPTION>
Three Months Ended March 31,
-------------------------------
2000 1999
------------ ------------
(In thousands, except production,
sales price and per MCFE data)
<S> <C> <C>
Oil and gas production
revenues:
Gas production $ 23,714 $ 10,515
Oil production 12,955 3,254
------------ ------------
Total $ 36,669 $ 13,769
============ ============
Net production:
Oil (MBbls) 541 283
Gas (MMcf) 9,246 5,340
------------ ------------
MMCFE 12,491 7,037
============ ============
Average sales price (1):
Oil (per Bbl) $ 23.95 $ 11.51
Gas (per Mcf) 2.56 1.97
Oil and gas production costs:
Lease operating expense $ 5,915 $ 3,096
Production taxes 2,168 898
------------ ------------
Total $ 8,083 $ 3,994
============ ============
Additional per MCFE data:
Sales price $ 2.94 $ 1.96
Lease operating expense .48 .44
Production taxes .17 .13
------------ ------------
Operating margin $ 2.29 $ 1.39
Depletion, depreciation and
amortization $ .71 $ .77
Impairment of proved
Properties $ .09 -
General and administrative $ .22 $ .23
</TABLE>
[FN]
-----------------------
(1)Includes the effects of the Company's hedging activities.
</FN>
-10-
<PAGE>
Oil and Gas Production Revenues. St. Mary experienced a record quarter for
oil and gas production revenues as reflected by an increase of $22.9 million, or
166% to $36.7 million for the first quarter of 2000 compared to $13.8 million
for the first quarter of 1999. The increase was a result of an oil production
volume increase of 91%, a gas production volume increase of 73% and increases in
the average price received for both oil and gas in the first quarter of 2000
compared to 1999. The average realized oil price increased 108% to $23.95 per
Bbl, while the average realized gas price increased 30% to $2.56 per Mcf.
Average net daily production increased to a record 137.3 MMCFE for the first
quarter of 2000 compared to 78.2 MMCFE for the first quarter of 1999. The
Company's acquisition of KRE added $12.0 million of revenue and average net
daily production of 47.2 MMCFE to the current quarter. The Nance acquisition
increased Williston Basin revenue by $4.9 million and added average net daily
production of 9.3 MMCFE to the first quarter of 2000 when compared to the first
quarter of 1999. Oil and gas production in the Permian Basin increased as a
result of positive response to the waterflood at Parkway Delaware Unit combined
with a successful gas well completion and added 4.8 MMCFE to average net daily
production from 1999 to 2000.
The Company hedged approximately 57.3% of its oil production for the first
quarter of 2000 or 310 MBbls at an average NYMEX price of $21.48 per Bbl and
realized a $2.2 million decrease in oil revenue or $4.02 per Bbl for the first
quarter of 2000 on these contracts compared to a $51,000 increase or $.18 per
Bbl for the first quarter of 1999. The Company also hedged 40.1% of its 2000
first quarter gas production or 4.1 million MMBtu at an average indexed price of
$2.37 per MMBtu and realized a $410,000 increase in gas revenues or $0.04 per
Mcf for the first quarter of 2000 from these hedge contracts compared to a $1.4
million increase in gas revenues or $.25 per Mcf for the first quarter 1999.
Oil and Gas Production Costs. Oil and gas production costs consist of lease
operating expense and production taxes. Total production costs increased $4.1
million or 102% to $8.1 million for the first quarter of 2000 compared to $4.0
million for the first quarter of 1999. The KRE acquisition added $2.2 million of
production costs and Williston Basin production costs increased by $1.5 million
over the comparable 1999 first quarter due to the Nance acquisition. Lease
operating expense increased by $400,000 in the Permian Basin as a result of
waterflood activities. Total oil and gas production costs per MCFE increased 14%
to $0.65 for the first quarter of 2000 compared to $0.57 for the first quarter
of 1999. An $0.11 increase is due to increased production and revenue in the
higher cost Williston Basin and was offset by a $0.03 decrease caused by lower
than average production costs from the KRE acquisition properties.
Depreciation, Depletion, Amortization and Impairment. Depreciation,
depletion and amortization expense ("DD&A") increased $3.5 million or 64% to
$8.9 million for the first quarter of 2000 compared to $5.4 million for the
first quarter of 1999. DD&A expense per MCFE decreased 8% to $0.71 for the first
quarter of 2000 compared to $0.77 for the first quarter of 1999. This decrease
is due to the acquisition of lower than average cost properties from the KRE and
Nance acquisitions in the latter half of 1999, the addition of lower cost
reserves as a result of 1999 drilling activities and the effect of producing
property impairments the Company recognized in the fourth quarter of 1999.
-11-
<PAGE>
The Company reviews its producing properties for impairments when events or
changes in circumstances indicate that an impairment in value may have occurred.
The impairment test compares the expected undiscounted future net revenues on a
field-by-field basis with the related net capitalized costs at the end of each
period. When the net capitalized costs exceed the undiscounted future net
revenues, the cost of the property is written down to fair value, which is
determined using future net revenues for the producing property discounted at
15%. Future net revenues are estimated using escalated prices and include the
estimated effects of the Company's hedging contracts in place at December 31,
1999. The Company recorded a $1.1 million impairment of proved oil and gas
properties for the first quarter of 2000 and none for the first quarter of 1999.
Impairments in 2000 include a declining performance adjustment of $703,000 from
the West Cameron Block 39 prospect in the Gulf of Mexico, and marginal well
adjustments of $220,000 from the Midland prospect in South Louisiana and
$164,000 from the Buffalo Wallow prospect in Oklahoma.
Abandonment and impairment of unproved properties increased $216,000 or 47%
to $680,000 for the first quarter of 2000 compared to $464,000 for the first
quarter of 1999. This increase is due to additional abandonments of expired
leases in 2000.
Exploration. Exploration expense increased $1.0 million or 58% to $2.7
million for the first quarter of 2000 compared to $1.7 million for the first
quarter of 1999. St. Mary increased its spending on geological and geophysical
expenses by $314,000 and incurred an additional $613,000 of dry hole expense
related to its unsuccessful 1999 test well drilled at South Horseshoe Bayou.
General and Administrative. General and administrative expenses increased
$1.2 million or 75% to $2.8 million for the first quarter of 2000 compared to
$1.6 million for the first quarter of 1999. Increases in general and
administrative expenses resulting from the KRE and Nance acquisitions were
partially offset by an $800,000 COPAS overhead reimbursement increase caused by
operations of the KRE properties and assumption of Permian Basin operations.
Minority Interest and Other Operating Expenses. This expense increased
$517,000 to $642,000 from $125,000 in 1999 due to increased activity in St.
Mary's litigation activities. The Company was seeking to recover damages from
the drilling contractor in connection with the St. Mary Land & Exploration well
at South Horseshoe Bayou and recorded the anticipated settlement of a minor
lawsuit related to its Oklahoma operations. This trend is expected to reverse
through the remainder of 2000 since the Company won a jury verdict in its South
Horseshoe Bayou lawsuit in February 2000.
Equity in Loss of Summo Minerals Corporation. The Company accounted for its
investment in Summo under the equity method and included its share of Summo's
losses in its results of operations until the Company's ownership was reduced
from 37% to 18% in June 1999. Consequently, the Company began accounting for its
investment in Summo under the cost method. In January 2000, Summo issued
1,016,594 shares of its common stock to the Company as payment of interest on
the Company's note receivable from Summo. This issuance of shares increased the
Company's ownership percentage to 19% but does not impact the Company's
accounting method. The Company did not record equity in the net loss of Summo
for the first quarter of 2000 compared with a loss of $45,000 for the first
quarter of 1999. The difference was due to the change to the cost method.
Non-Operating Income and Expense. Net non-operating income increased
$285,000 to $140,000 for the first quarter of 2000 compared to net expense of
$145,000 for the first quarter of 1999. This decrease is due to an increase in
cash available for investment and the recording of $122,000 of capitalized
interest expense in the first quarter of 2000.
-12-
<PAGE>
Income Taxes. Income tax expense increased to $4.5 million for the first
quarter of 2000 compared to $179,000 for the first quarter of 1999, resulting in
effective tax rates of 36% and 30%, respectively. The effective rate change
reflects a diminished effect from alternative fuel credits allowed under
Internal Revenue Code Section 29 in the first quarter of 2000 due to higher net
income before tax and additional accrued state income taxes from income
generated by the properties acquired from KRE.
Net Income. Net income increased to $7.9 million for the first quarter of
2000 compared to $409,000 for the first quarter of 1999. A 30% increase in gas
prices, a 108% increase in oil prices combined with a 91% increase in oil
production and a 73% increase in gas production resulted in a record $22.9
million increase in oil and gas production revenue. This increase was reduced by
corresponding increases in oil and gas production costs and DD&A as well as a
$1.3 million increase in proved and unproved impairments, a $1.0 million
increase in exploration expense, a $1.2 million increase in general and
administrative expense and a $4.3 million increase in 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 and
occasionally with proceeds from issuance of its common stock. The Company
continually reviews its capital expenditure budget based on changes in cash flow
and other factors.
Cash Flow. The Company's net cash provided by operating activities
increased $6.3 million or 79% to $14.4 million for the first quarter of 2000
compared to $8.1 million for the first quarter of 1999. The change was caused by
an overall increase in non-cash expenses in the first quarter of 2000 compared
to 1999. The increase in net income of $7.5 million was offset by a first
quarter 2000 increase in accounts receivable.
Exploratory dry hole costs are included in cash flows from investing
activities even though these costs are expensed as incurred. If exploratory dry
hole costs had been included in operating cash flows, the net cash provided by
operating activities would have been $13.7 million and $8.1 million in the first
quarter of 2000 and 1999, respectively.
Net cash used in investing activities increased $12.5 million or 164% to
$20.1 million for the first quarter of 2000 compared to $7.6 million for the
first quarter of 1999. This increase is due to capital expenditures and a net
$1.0 million change resulting from a combination of other activity and cash
received from sales of property. Cash used for capital expenditures, including
acquisitions of oil and gas properties, increased $11.4 million or 132% to $20.0
million for the first quarter of 2000 compared to $8.6 million for the first
quarter of 1999.
If exploratory dry hole costs had been included in operating cash flows
rather than in investing cash flows, net cash used in investing activities would
have been $19.4 million and $7.7 million in 2000 and 1999, respectively.
Net cash provided by financing activities increased $2.7 million to
$123,000 for the first quarter of 2000 compared to net cash used of $2.6 million
for the first quarter of 1999. This increase is due to increased borrowing of
$1.0 million in the first quarter of 2000 compared to a $1.5 million debt
decrease in the first quarter of 1999.
-13-
<PAGE>
The Company had $8.7 million in cash and cash equivalents and had working
capital of $21.7 million as of March 31, 2000 compared to $14.2 million in cash
and cash equivalents and working capital of $13.4 million as of December 31,
1999. A $7.9 million increase in accounts receivable and a $6.6 million decrease
in accounts payable and accrued expenses were offset by a $5.5 million decrease
in cash and cash equivalents.
Credit Facility. On June 30, 1998, the Company entered into a long-term
revolving credit agreement with a maximum loan amount of $200 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 March
2000 the borrowing base was increased $39 million by the lender to $140 million.
The accepted borrowing base was $40 million at March 31, 2000. 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 March 31, 2000 and December 31, 1999, $14.0 million and
$13.0 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%. At March 31, 2000 the Company's debt to
capitalization ratio as defined under the credit agreement was 6.7%.
Common Stock. The Company is authorized to issue up to 50,000,000 shares of
its stock which enables it to make acquisitions without the use of its cash or
credit facility.
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.
Through 1999 the Company repurchased a total of 182,800 shares of its common
stock under the program for $3.0 million at a weighted-average price of $16.38
per share. During the first quarter of 2000 the Company repurchased an
additional 15,000 shares for a weighted-average price of $22.99 per share.
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.
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. Expenditures in the first quarter of 2000
were $14.5 million and included $1.2 million for acquisitions. The comparable
amounts for 1999 were $10.6 million and $1.5 million, respectively.
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 acquisition of KRE in 1999 is an example of this strategy.
-14-
<PAGE>
In March 2000 the Company acquired an additional interest in the
Nearburg-Spearfish Unit located in the Williston Basin for $950,000.
In May 2000 the Company through its Nance subsidiary acquired the Williston
Basin assets of Tipperary Corporation, a Denver-based operator, for
approximately $7.3 million. The Company is also committed to an additional
unrelated acquisition in the Williston Basin for $2.0 million.
The results of operations also include the results of the Company's
large-target exploration efforts. An additional well at the Company's Stallion
prospect was completed in 2000 and the Company continues to evaluate additional
prospective areas. Several additional prospects in the pipeline of large-target
exploration ideas continue to be evaluated. Management expects that some of
these prospects will be tested through the rest of 2000.
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 2000.
The Company generally allocates approximately 85% of its capital budget for
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 in total have the
potential to increase the Company's reserves by 25% or more in any single year.
The Company anticipates spending approximately $105.0 million for capital
and exploration expenditures in 2000 with $60.5 million allocated for ongoing
exploration and development in its core operating areas, $32.5 million for niche
acquisitions of producing properties and $12.0 million for large-target,
higher-risk exploration and development.
Anticipated ongoing exploration and development expenditures for each of
the Company's core areas include $21.0 million in the Mid-Continent region,
$13.0 million in the Gulf Coast and Gulf of Mexico region, $10.0 million in the
ArkLaTex region, $12.0 million in the Williston Basin and $4.5 million allocated
within the Permian Basin and other.
The amount and allocation of future capital and exploration expenditures
will depend upon a number of factors, including the number of available
acquisition opportunities and the Company's ability to assimilate such
acquisitions. Also, the impact of oil and gas prices on investment
opportunities, the availability of capital and borrowing capability and the
success of the Company's development and exploratory activities could lead to
funding requirements for further development.
St. Mary's presence in south Louisiana includes active management of its
fee lands from which royalty income is derived. Royalty revenues from the fee
lands were $1.0 million or 2.7% of total oil and gas revenues for the first
quarter of 2000 and $630,000 or 4.6% of total oil and gas revenues for the first
quarter of 1999. 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.
-15-
<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. Including hedges entered into since March 31, 2000, the Company has
hedged as follows:
Swaps:
<TABLE>
<CAPTION>
Average
Year Product Percentage Fixed Price Pricing
---- ------- ---------- ----------- -------
<S> <C> <C> <C> <C> <C>
2000 Natural Gas 17% $2.43 MMBtu
2001 Natural Gas <1% $2.46 MMBtu
2000 Oil 27% $22.93 Bbl
2001 Oil 5% $21.45 Bbl
2002 Oil 1% $20.70 Bbl
</TABLE>
Collars:
<TABLE>
<CAPTION>
Highest Lowest
Year Product Percentage Ceiling Price Floor Price Pricing
---- ------- ---------- ------------- ----------- -------
<S> <C> <C> <C> <C> <C> <C>
2000 Natural Gas 21% $2.94 $2.00 MMBtu
2001 Natural Gas 29% $3.50 $2.30 MMBtu
2000 Oil 26% $27.00 $15.00 Bbl
2001 Oil 13% $27.22 $16.44 Bbl
</TABLE>
The fair value of St. Mary's commodity hedging contracts based on
quarter-end pricing would have caused St. Mary to pay approximately $5.2 million
if these contracts had been terminated on March 31, 2000.
In February 2000 St. Mary exercised its option to convert its Khanty
Mansiysk Oil Corporation ("KMOC") production payment receivable into stock of
KMOC at a price in excess of the receivable's carrying value. Negotiations are
ongoing to determine the final value and number of shares St. Mary will
receive.
On August 5, 2000, the Company and its partners will assume control of a
30,450-acre top lease in the North Ward Estes Field in Ward County, Texas. The
Company will have a 21.2% working interest in the production from approximately
400 wells and the future development and production rights on this 50 square
mile property. The top lease will continue in effect for as long as oil and/or
gas is produced in paying quantities.
The Company continually analyzes its net investment in Summo and the effect
of worldwide copper price and inventory fluctuations on Summo's stock price.
Future development and financial success of Lisbon Valley, Summo's primary
project, are dependent upon these factors. Management believes its $1.4 million
note receivable is realizable. The Company owned 5.98 million shares of Summo as
of March 31, 2000.
-16-
<PAGE>
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. 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" which extended the effective date of
SFAS No. 133 to all fiscal quarters of all fiscal years beginning after June 15,
2000. The Company is currently reviewing the effects this Statement will have on
the financial statements in relation to the Company's hedging activities.
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 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.
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 any price increases associated
with the hedged commodity. 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.
A hypothetical $0.10 per MMBtu change in the Company's quarter-end market
prices for natural gas swaps and futures contracts on a notional amount of 25.0
million MMBtu would cause a potential $1.3 million change in net income (loss)
before income taxes for contracts in place on March 31, 2000. A hypothetical
$1.00 per Bbl change in the Company's quarter-end market prices for crude oil
swaps and future contracts on a notional amount of 1,550 MBbls would cause a
potential $1.2 million change in net income (loss) before income taxes for oil
contracts in place on March 31, 2000. These hypothetical changes were discounted
to present value using a 7.5% discount rate since the latest expected maturity
date of certain swaps and futures contracts is greater than one year from the
reporting date.
-17-
<PAGE>
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. The sensitivity analysis presents the
hypothetical change in fair value of those financial instruments held by the
Company at March 31, 2000, 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 March 31, 2000, the Company had floating rate
debt of $14.0 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 $105,000 before taxes.
-18-
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit Description
------- -----------
27.1 Financial Data Schedule
(b) One amended report on Form 8-K/A dated February 25, 2000
regarding the acquisition of King Ranch Energy, Inc. was filed
during the quarter ended March 31, 2000.
-19-
<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
May 12, 2000 By /s/ MARK HELLERSTEIN
--------------------
Mark A. Hellerstein
President and Chief Executive Officer
May 12, 2000 By /s/ RICHARD C. NORRIS
---------------------
Richard C. Norris
Vice President - Finance, Secretary
and Treasurer
May 12, 2000 By /s/ GARRY A. WILKENING
----------------------
Garry A. Wilkening
Vice President - Administration and
Controller
<TABLE> <S> <C>
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<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-01-2000
<EXCHANGE-RATE> 1
<CASH> 8,651
<SECURITIES> 0
<RECEIVABLES> 30,894
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 41,305
<PP&E> 336,655
<DEPRECIATION> 153,409
<TOTAL-ASSETS> 235,223
<CURRENT-LIABILITIES> 19,612
<BONDS> 14,000
0
0
<COMMON> 140
<OTHER-SE> 195,966
<TOTAL-LIABILITY-AND-EQUITY> 235,223
<SALES> 36,669
<TOTAL-REVENUES> 37,068
<CGS> 8,083
<TOTAL-COSTS> 8,083
<OTHER-EXPENSES> 642
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 86
<INCOME-PRETAX> 12,350
<INCOME-TAX> 4,464
<INCOME-CONTINUING> 7,886
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,886
<EPS-BASIC> 0.57
<EPS-DILUTED> 0.57
</TABLE>
