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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 September 30, 2000
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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 November 9, 2000, the registrant had 28,024,586 shares of Common Stock,
$.01 par value, outstanding, which reflects the two-for-one stock split effected
in the form of a stock dividend in August 2000.
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<PAGE>
ST. MARY LAND & EXPLORATION COMPANY
INDEX
Part I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements (Unaudited)
Consolidated Balance
Sheets - September 30, 2000 and
December 31, 1999............................................3
Consolidated Statements of
Operations - Three Months Ended
September 30, 2000 and 1999: Nine Months
Ended September 30, 2000 and 1999............................4
Consolidated Statements of
Cash Flows - Nine Months Ended
September 30, 2000 and 1999..................................5
Notes to Consolidated Financial
Statements - September 30, 2000..............................7
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations................................................9
Item 3. Quantitative and Qualitative Disclosures
About Market Risk (Included with the
content of Item 2.).........................................19
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K............................20
Exhibits
27.1 Financial Data Schedule
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
ST. MARY LAND & EXPLORATION COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In thousands, except share amounts)
ASSETS September 30, December 31,
-------------- -------------
2000 1999
-------------- -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 6,571 $ 14,195
Accounts receivable 53,185 22,971
Prepaid expenses and other 1,393 2,173
Refundable income taxes 2,895 26
Deferred income taxes 164 90
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Total current assets 64,208 39,455
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Property and equipment (successful efforts method), at cost:
Proved oil and gas properties 339,341 292,323
Less accumulated depletion, depreciation, amortization and impairment (166,595) (142,680)
Unproved oil and gas properties, net of impairment
allowance of $9,275 in 2000 and $8,984 in 1999 31,924 28,556
Other property and equipment, net of accumulated depreciation of $3,399
in 2000 and $3,033 in 1999 3,211 2,465
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Total property and equipment 207,881 180,664
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Other assets:
Khanty Mansiysk Oil Corporation receivable and stock 5,110 5,110
Summo Minerals Corporation investment and receivable 1,861 1,655
Other assets 2,623 3,554
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Total other assets 9,594 10,319
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Total Assets $ 281,683 $ 230,438
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 23,093 $ 25,743
Current portion of stock appreciation rights 467 272
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Total current liabilities 23,560 26,015
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Long-term liabilities:
Long-term debt 3,000 13,000
Deferred income taxes 21,086 501
Stock appreciation rights - 455
Other noncurrent liabilities 1,095 1,380
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Total long-term liabilities 25,181 15,336
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Commitments and contingencies
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Minority interest 348 315
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Stockholders' equity:
Common stock, $.01 par value: authorized - 50,000,000 shares: issued and
outstanding - 28,405,502 shares in 2000 and 27,893,910 shares in 1999 284 279
Additional paid-in capital 130,500 123,974
Treasury stock - at cost: 395,600 shares in 2000 and 365,600 shares in 1999 (3,339) (2,995)
Retained earnings 104,778 67,230
Unrealized gain on marketable equity securities-available for sale 371 284
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Total stockholders' equity 232,594 188,772
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Total Liabilities and Stockholders' Equity $ 281,683 $ 230,438
============== =============
The accompanying notes are an integral part
of these consolidated financial statements.
</TABLE> -3-
<PAGE>
<TABLE>
<CAPTION>
ST. MARY LAND & EXPLORATION COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In thousands, except per share amounts)
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
--------------------------- -------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Operating revenues:
Oil and gas production $ 53,596 $ 19,275 $ 133,604 $ 48,853
Gain (loss) on sale of proved properties 8 (75) 2,340 39
Other oil and gas revenue 188 12 1,062 166
Other revenues 52 691 247 860
---------- ---------- ---------- ----------
Total operating revenues 53,844 19,903 137,253 49,918
---------- ---------- ---------- ----------
Operating expenses:
Oil and gas production 9,837 5,181 26,061 13,135
Depletion, depreciation and amortization 9,627 5,312 26,805 15,995
Impairment of proved properties 852 116 2,802 363
Exploration 2,346 1,497 6,749 4,439
Abandonment and impairment of unproved properties 732 1,443 2,021 2,243
General and administrative 2,343 1,763 7,438 5,401
Loss in equity investees - - - 58
Minority interest and other (56) 548 1,178 886
---------- ---------- ---------- ----------
Total operating expenses 25,681 15,860 73,054 42,520
---------- ---------- ---------- ----------
Income from operations 28,163 4,043 64,199 7,398
Nonoperating income and (expense):
Interest income 252 148 655 786
Interest expense (25) (344) (148) (860)
---------- ---------- ---------- ----------
Income before income taxes 28,390 3,847 64,706 7,324
Income tax expense 11,251 1,354 25,084 2,515
---------- ---------- ---------- ----------
Net income $ 17,139 $ 2,493 $ 39,622 $ 4,809
========== ========== ========== ==========
Basic net income per common share $ .61 $ .11 $ 1.43 $ .22
========== ========== ========== ==========
Diluted net income per common share $ .60 $ .11 $ 1.41 $ .22
========== ========== ========== ==========
Basic weighted average common shares outstanding 27,920 22,193 27,690 21,905
========== ========== ========== ==========
Diluted weighted average common shares outstanding 28,535 22,456 28,151 21,999
========== ========== ========== ==========
Cash dividends declared per share $ 0.025 $ 0.025 $ 0.075 $ 0.075
========== ========== ========== ==========
The accompanying notes are an integral part
of these consolidated financial statements.
</TABLE>
-4-
<PAGE>
<TABLE>
<CAPTION>
ST. MARY LAND & EXPLORATION COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
For the Nine Months Ended
September 30,
---------------------------
2000 1999
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<S> <C> <C>
Reconciliation of net income to net cash provided by operating activities:
Net income $ 39,622 $ 4,809
Adjustments to reconcile net income to net
cash provided by operating activities:
Gain on sale of proved properties (2,340) (39)
Depletion, depreciation and amortization 26,805 15,995
Impairment of proved properties 2,802 363
Exploration 1,302 499
Abandonment and impairment of unproved properties 2,021 2,243
Loss in equity investees - 58
Deferred income taxes 20,585 1,983
Minority interest and other 430 (604)
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91,227 25,307
Changes in current assets and liabilities:
Accounts receivable (30,333) 3,802
Prepaid expenses and other (2,165) 3,141
Accounts payable and accrued expenses (3,193) (5,926)
Stock appreciation rights 195 (86)
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Net cash provided by operating activities 55,731 26,238
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Cash flows from investing activities:
Proceeds from sale of oil and gas properties 1,819 725
Capital expenditures (45,509) (29,471)
Acquisition of oil and gas properties (13,529) (4,163)
Sale of Chelsea Corporation - 2,066
Investment in and loans to Summo Minerals Corporation - (220)
Collections on loan to Summo Minerals Corporation - 2,096
Receipts from restricted cash - 720
Investment in Nance Petroleum Corporation - 684
Other 931 (348)
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Net cash used in investing activities (56,288) (27,911)
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Cash flows from financing activities:
Proceeds from long-term debt 22,700 24,550
Repayment of long-term debt (32,700) (22,337)
Proceeds from sale of common stock 5,351 190
Repurchase of common stock (345) (525)
Dividends paid (2,073) (1,639)
Other - 207
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Net cash provided by (used in) financing activities (7,067) 446
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Net decrease in cash and cash equivalents (7,624) (1,227)
Cash and cash equivalents at beginning of period 14,195 7,821
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Cash and cash equivalents at end of period $ 6,571 $ 6,594
=========== ==========
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 investing and financing activities:
For the Nine Months Ended
September 30,
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2000 1999
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(In thousands)
Cash paid for interest $ 745 $ 844
Cash paid for income taxes 7,127 300
Cash paid for exploration expenses 6,711 4,938
In January 1999 the Company issued 7,200 shares of common stock to its directors and recorded
compensation expense of $54,612.
In June 1999 the Company acquired Nance Petroleum Corporation and Quanterra Alpha Limited Partnership
for 518,988 shares of the Company's common stock valued at $3,091,000 together with the assumption of
$3,389,000 of Nance Petroleum Corporation debt. The acquisition was accounted for as a purchase.
Following is a table of the noncash items acquired in the 1999 purchase of Nance Petroleum Corporation:
Accounts receivable & other assets $ 789
Property and equipment 6,365
Accounts payable (642)
Deferred income taxes (667)
Long-term debt (3,389)
In January 2000 the Company issued 8,400 shares of common stock to its directors and recorded
compensation expense of $88,368.
In June 2000 the Company received equipment valued at $1,201,000 as partial proceeds for property sold.
The accompanying notes are an integral part
of these consolidated financial statements.
</TABLE>
-6-
<PAGE>
ST. MARY LAND & EXPLORATION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
---------------------------
September 30, 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 ("St. Mary" or 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 the 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 under
the cost method of accounting. St. Mary's ownership percentage was 16% as of
September 30, 2000.
In February 2000 St. Mary exercised its option to convert its Khanty
Mansiysk Oil Corporation ("KMOC") production payment receivable into common
stock of KMOC. In July 2000 the Company finalized a negotiated value for the
receivable that equates to 21,583 shares of KMOC common stock under the terms of
the original agreement. Management believes that the current fair market value
of the stock is in excess of its carrying value.
Note 3 - Capital Stock
In July 2000 St. Mary's Board of Directors approved a two-for-one stock
split effected in the form of a stock dividend whereby one additional common
share of stock was distributed for each common share outstanding. The stock
split was distributed on September 5, 2000, to shareholders of record as of the
close of business on August 21, 2000. All share and per share amounts for all
periods presented herein have been restated to reflect this stock split.
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 two million shares of its common stock.
During the first quarter of 2000 the Company repurchased 30,000 shares of its
common stock under the program at a weighted average price of $11.50 per share,
bringing the total number of shares repurchased under the program to 395,600 at
a weighted-average price of $8.45 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.
-7-
<PAGE>
Note 4 - Income Taxes
Federal income tax expense for the three-month and nine-month periods ended
September 30, 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, the effect of
state income taxes, and the effect of a 1% Federal rate increase on the
Company's total temporary differences.
Note 5 - Long-term Debt
On June 27, 2000, the Company entered into an agreement to amend the
current long-term revolving credit agreement dated June 30, 1998, and amended in
December 1998. Under the second amendment the maximum loan amount was maintained
at $200.0 million, and the aggregate borrowing base was set at $140.0 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. At
September 30, 2000, the accepted borrowing base was $40.0 million. The second
amendment extends the maturity date to December 31, 2006 and includes a
revolving period that matures June 30, 2003. The Company can elect to allocate
up to 50% of available borrowings to a short-term tranche that is due June 26,
2001. No borrowings are outstanding under this short-term election. The Company
must comply with certain covenants including maintenance of stockholders' equity
at a specified level and limitations on additional indebtedness. The interest
rate schedule was also changed with the second amendment. 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 3/4% 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
3/4% or the Prime Rate plus 1/4%, or (b) LIBOR plus 1-3/8% when the Company's
debt to total capitalization is equal to or greater than 50%. The Company's debt
to total capitalization as defined under the agreement was 1.3%.
Note 6 - Financial Instruments
In June 2000 the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 138, "Accounting for
Certain Derivative Instruments and Certain Hedging Activities," as an amendment
to SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities."
SFAS No. 138 amends and clarifies certain elements of SFAS No. 133, including
expansion of the normal purchases and normal sales exception. SFAS No. 133
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. Management is currently reviewing the effects
these Statements will have on the financial statements in relation to the
Company's derivative activities and will implement SFAS No. 133 on January 1,
2001.
Note 7 - Subsequent Event
In October 2000 St. Mary entered into a purchase and sale agreement to
acquire oil and gas properties from JN Exploration and Production Limited
Partnership, Colt Resources Corporation, Princeps Partners Inc., and The William
G. Helis Company, LLC for $37.2 million in cash. The properties are primarily
located in the Anadarko Basin of Oklahoma and currently produce an estimated 8.5
million cubic feet of gas equivalent per day, net to the interests to be
acquired. The acquisition is expected to close in late December 2000 upon
completion of due diligence procedures. The transaction will be accounted for as
a purchase.
-8-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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 acquisition 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
forward-looking statements are not guarantees of future performance and that
actual results or developments may differ materially from those expressed or
implied in the forward-looking statements.
-9-
<PAGE>
Results of Operations
The results of operations for 2000 include two significant acquisitions
made during 1999. On June 1, 1999, the Company acquired Nance Petroleum
Corporation ("Nance") and Quanterra Alpha Limited Partnership and then acquired
various other Williston Basin properties later in 1999. On December 17, 1999,
the Company acquired King Ranch Energy, Inc ("KRE"). After the acquisition,
KRE's name was changed to St. Mary Energy Company ("SMEC").
The following table sets forth selected operating data for the periods
indicated:
<TABLE>
<CAPTION>
Three Months Nine months
Ended September 30, Ended September 30,
----------------------------- -----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Oil and gas production
revenues (in thousands):
Gas production $ 35,822 $ 6,596 $ 90,105 $ 14,683
Oil production 17,774 12,679 43,499 34,170
------------ ------------ ------------ ------------
Total $ 53,596 $ 19,275 $ 133,604 $ 48,853
============ ============ ============ ============
Net production:
Gas (MMcf) 9,929 5,503 28,710 16,247
Oil (MBbls) 711 378 1,825 974
------------ ------------ ------------ ------------
MMCFE 14,195 7,771 39,660 22,091
============ ============ ============ ============
Average sales price (1):
Gas (per Mcf) $ 3.61 $ 2.30 $ 3.14 $ 2.10
Oil (per Bbl) 24.99 17.43 23.83 15.07
Oil and gas production costs
(in thousands):
Lease operating expense $ 6,750 $ 3,668 $ 18,259 $ 9,643
Production taxes 3,087 1,513 7,802 3,492
------------ ------------ ------------ ------------
Total $ 9,837 $ 5,181 $ 26,061 $ 13,135
============ ============ ============ ============
Additional per MCFE data:
Sales price $ 3.78 $ 2.48 $ 3.37 $ 2.21
Lease operating expense .48 .47 .46 .43
Production taxes .22 .19 .20 .16
------------ ------------ ------------ ------------
Operating margin $ 3.08 $ 1.82 $ 2.71 $ 1.60
============ ============ ============ ============
Depreciation, depletion and
amortization $ .68 $ .68 $ .68 $ .72
Impairment of proved
properties .06 .01 .07 .02
General and administrative .17 .23 .19 .24
----------------------------
<FN>
(1) Includes the effects of the Company's hedging activities.
</FN>
</TABLE>
-10-
<PAGE>
Three-Month Comparison
Oil and Gas Production Revenues. St. Mary experienced another record
quarter for oil and gas production revenues as reflected by an increase of $34.3
million, or 178% to $53.6 million for the three months ended September 30, 2000,
compared with $19.3 million for the same period in 1999. The increase was the
result of an oil production volume increase of 88%, a gas production increase of
80% and increases in the average price received for both oil and gas in the
third quarter of 2000 compared to 1999. The average realized oil price increased
43% to $24.99 per Bbl, while the average realized gas price increased 57% to
$3.61 per Mcf. Average net daily production increased to a new record of 154.3
MMCFE for the third quarter of 2000 compared with 84.5 MMCFE in the third
quarter of 1999. St Mary's acquisitions since June 1999 have added $31.2 million
of revenue and average net daily production of 66.7 MMCFE to the third quarter
of 2000 as compared to 1999. A positive response to a waterflood at Parkway
Delaware Unit and a successful gas well completion and current pricing in the
Permian Basin have added 4.7 MMCFE to average net daily production and $3.2
million of revenue from 1999 to 2000.
St. Mary hedged approximately 49% or 350.8 MBbls of its oil production for
the three months ended September 30, 2000, and realized a $3.7 million decrease
in oil revenue attributable to hedging compared with a $643,000 decrease in
1999. Without these contracts the Company would have received an average price
of $30.13 per Bbl in the third quarter of 2000 compared to $19.13 per Bbl in
1999. St. Mary also hedged 47% of its 2000 third quarter gas production or 10.9
million MMBtu and realized a $6.6 million decrease in gas revenue compared with
a $1.2 million decrease in gas revenue in 1999. Without these contracts in place
the Company would have received an average price of $4.27 per Mcf for the three
months ended September 30, 2000, compared to $2.52 per Mcf for the same period
in 1999.
Gain (Loss) on Sale of Proved Properties. Gain on sale of proved properties
increased $83,000 to $8,000 for the quarter ended September 30, 2000, from a
loss of $75,000 for the same period in 1999.
Oil and Gas Production Costs. Oil and gas production costs consist of lease
operating expense and production taxes. Total production costs increased $4.6
million or 90% to $9.8 million for the three months ended September 30, 2000,
from $5.2 million in 1999. Acquisitions since June 1999 have added $4.0 million
of production costs over the comparable 1999 third quarter. Production costs
have also increased by $313,000 in the Permian Basin as a result of waterflood
activities. Total oil and gas production costs per MCFE increased 3% to $.69 for
the third quarter of 2000 compared with $.67 for the third quarter of 1999. An
$.11 per MCFE increase is due to lease operating expenses and increased
production taxes on increased revenue in the higher-cost Williston and Permian
Basins. These increases were offset by a $.09 per MCFE decrease caused by lower
than average production costs from the KRE acquisition properties and the
Mid-Continent region properties.
Depreciation, Depletion, Amortization and Impairment. Depreciation,
depletion and amortization expense ("DD&A") increased $4.3 million or 81% to
$9.6 million for the three months ended September 30, 2000, from $5.3 million in
1999. DD&A expense per MCFE was unchanged at $.68 for the third quarter of 2000
compared with 1999. The 2000 decrease resulting from the acquisition of lower
than average cost per unit properties from the KRE and Nance acquisitions in
1999 and the effect of producing property impairments the Company recognized in
the fourth quarter of 1999 and the first quarter of 2000 were offset by downward
adjustments to reserves due to pricing adjustments and higher-cost drilling
results in the third quarter of 2000 as well as producing property impairments
the Company recognized in the third quarter of 1999.
-11-
<PAGE>
St. Mary 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 an $852,000 impairment of proved oil and gas
properties in the third quarter of 2000 compared with $116,000 in 1999.
Impairments relate to marginal well adjustments of $122,000 from the Lake
Dardanelle prospect in Arkansas, $269,000 from the Heil II prospect in Texas and
$371,000 from the Boggy Creek prospect and $90,000 from the SW Weatherford
prospect, both in Oklahoma.
Abandonment and impairment of unproved properties decreased $711,000 or 49%
to $732,000 for the three months ended September 30, 2000, compared with $1.4
million in 1999. This decrease is due to a reduction in abandonment of expired
leases in 2000.
Exploration. Exploration expense increased $849,000 or 57% to $2.3 million
for the three months ended September 30, 2000, compared with $1.5 million in
1999. The increase is a result of an increase in personnel costs associated with
exploration activity of $517,000 and a $232,000 increase in geological and
geophysical expenses.
General and Administrative. General and administrative expenses increased
$580,000 or 33% to $2.3 million for the three months ended September 30, 2000,
compared with $1.8 million in 1999. Increases in general and administrative
expenses resulting from the KRE and Nance acquisitions and a $232,000 increase
in charitable contributions were partially offset by a $1.4 million increase in
COPAS overhead reimbursement from operations of the KRE properties and
assumption of Permian Basin operations.
Minority Interest and Other Operating Expenses. Minority interest and other
operating expense decreased $603,000 to income of $55,000 from expense of
$548,000 in 1999. In 1999 St. Mary incurred costs to recover damages from the
drilling contractor in connection with the St. Mary Land and Exploration 1-24
well at South Horseshoe Bayou. In the third quarter of 2000 the Company recorded
a $250,000 credit adjustment related to a lawsuit regarding its Oklahoma
operations that offset $174,000 of expense related to minority interest.
Non-Operating Income and Expense. Net non-operating income increased
$423,000 to $227,000 for the three months ended September 30, 2000, compared
with expense of $196,000 in 1999. The change is a result of a decrease in
outstanding debt and a difference in interest expense capitalized for the third
quarter of 2000 when compared to 1999.
Income Taxes. Income tax expense totaled $11.3 million for the three months
ended September 30, 2000, and $1.4 million in 1999, resulting in effective tax
rates of 39.6% and 35.2%, respectively. The effective rate change for the
quarter reflects a diminished effect from alternative fuel credits allowed under
Internal Revenue Code Section 29 due to higher net income before tax, additional
accrued state income taxes from income generated by the properties acquired from
KRE and an increase in deferred federal income tax from a 1% rate increase to
the highest Federal marginal rate.
Net Income. Net income for the three months ended September 30, 2000,
increased $15.6 million or 587% to $17.1 million compared with $2.5 million in
1999. A 57% increase in gas prices and a 43% increase in oil prices combined
with an 88% increase in oil production and an 80% increase in gas production
resulted in a record $34.3 million increase in oil and gas production revenue.
These increases were partially offset by corresponding increases in oil and gas
production costs and DD&A as well as a $9.9 million increase in income tax
expense.
-12-
<PAGE>
Nine-Month Comparison
Oil and Gas Production Revenues. St. Mary has experienced record growth in
oil and gas production revenues as reflected by an increase of $84.7 million, or
173% to $133.6 million for the nine months ended September 30, 2000, compared
with $48.9 million for the same period in 1999. The increase was a result of an
oil production volume increase of 87%, a gas production increase of 77% and
increases in the average price received for both oil and gas in 2000 compared to
1999. The average realized oil price increased 58% to $23.83 per Bbl, while the
average realized gas price increased 50% to $3.14 per Mcf. Average net daily
production increased to a nine month record of 144.7 MMCFE for 2000 compared
with 80.9 MMCFE in 1999. St Mary's acquisitions since June 1999 have added $71.7
million of revenue and average net daily production of 61.2 MMCFE current year
to date over 1999. A positive response to a waterflood at Parkway Delaware Unit
combined with a successful gas well completion and current pricing in the
Permian Basin has added 4.7 MMCFE to average net daily production and $8.6
million of revenue from 1999 to 2000.
St. Mary hedged approximately 55% or 1.0 MMBbls of its oil production for
the nine months ended September 30, 2000, and realized a $9.0 million decrease
in oil revenue attributable to hedging compared with a $685,000 decrease in
1999. Without these contracts the Company would have received an average price
of $28.77 per Bbl in 2000 compared to $15.77 per Bbl in 1999. St. Mary also
hedged 42% of its 2000 gas production or 13.3 million MMBtu and realized a $9.4
million decrease in gas revenue compared with a $263,000 increase in gas revenue
in 1999. Without these contracts in place the Company would have received an
average price of $3.47 per Mcf for the nine months ended September 30, 2000,
compared to $2.08 per Mcf for the same period in 1999.
Gain (Loss) on Sale of Proved Properties. Gain on sale of proved properties
increased to $2.3 million for the nine months ended September 30, 2000, from
$39,000 for the same period in 1999. In 2000 St. Mary has recognized a $1.8
million gain on the sale of its share of the shallow production from the HJSA
top lease to the previous operator and recognized a $455,000 gain on the sale of
its share of the Rock Penn Unit in West Texas.
Oil and Gas Production Costs. Total production costs increased $13.0
million or 98% to $26.1 million for the nine months ended September 30, 2000,
from $13.1 million in 1999. Acquisitions since June 1999 have added $11.0
million of production costs over the comparable 1999 period. Production costs
have also increased by $1.0 million in the Permian Basin as a result of
waterflood activities. Total oil and gas production costs per MCFE increased 12%
to $.66 for 2000 compared with $.59 for 1999. A $.14 per MCFE increase due to
lease operating expenses and increased production taxes on increased revenue in
the higher-cost Williston and Permian Basins was partially offset by a $.06 per
MCFE decrease caused by lower than average production costs from the KRE
acquisition properties and a $.01 per MCFE decrease from other factors.
Depreciation, Depletion, Amortization and Impairment. DD&A increased $10.8
million or 68% to $26.8 million for the nine months ended September 30, 2000,
from $16.0 million in 1999. DD&A expense per MCFE decreased 7% to $.68 for the
nine months ended September 30, 2000, compared with $.72 in 1999. The decrease
is due to the acquisition of lower than average cost per unit properties from
KRE and Nance in 1999, the addition of lower-cost reserves as a result of 1999
drilling activities and effect of producing property impairments the Company
recognized in the fourth quarter of 1999 and the first quarter of 2000.
-13-
<PAGE>
The Company recorded a $2.8 million impairment of proved oil and gas
properties for the first nine months of 2000 compared with $363,000 in 1999.
Impairments in 2000 include a declining performance adjustment of $703,000 from
the West Cameron Block 39 prospect in the Gulf of Mexico. Marginal well
impairments include $220,000 from the Midland prospect in South Louisiana,
$269,000 from the Heil II prospect in Texas and, in Oklahoma, $478,000 from the
Buffalo Wallow prospect, $371,000 from the Boggy Creek prospect and $490,000
from the SW Weatherford prospect.
Abandonment and impairment of unproved properties decreased $222,000 or 10%
to $2.0 million for the nine months ended September 30, 2000, compared with $2.2
million in 1999. This decrease is due to a reduction in abandonment of expired
leases in 2000.
Exploration. Exploration expense increased $2.3 million or 52% to $6.7
million for the nine months ended September 30, 2000, compared with $4.4 million
in 1999. St. Mary increased its spending on geological and geophysical expenses
by $487,000, incurred an additional $631,000 of dry hole expense related to its
unsuccessful 1999 test well drilled at South Horseshoe Bayou and increased
personnel expenses related to exploration activity.
General and Administrative. General and administrative expenses increased
$2.0 million or 38% to $7.4 million for the nine months ended September 30,
2000, compared with $5.4 million in 1999. Increases in general and
administrative expenses resulting from the KRE and Nance acquisitions and
charitable contributions of $579,000 were partially offset by a $3.5 million
COPAS overhead reimbursement increase related to operations of the KRE
properties and assumption of Permian Basin operations.
Minority Interest and Other Operating Expenses. Minority interest and other
operating expense increased $292,000 to $1.2 million from $886,000 in 1999 due
to increased litigation expenses and costs associated with minority interest.
Through 1999 and the first quarter of 2000 the Company was seeking to recover
damages from the drilling contractor in connection with the St. Mary Land and
Exploration 1-24 well at South Horseshoe Bayou. Through the nine months ended
September 30, 2000, St. Mary recorded $164,000 in conjunction with a lawsuit
related to its Oklahoma operations and incurred an additional $545,000 of
expense related to minority interest investments.
Non-Operating Income and Expense. Net non-operating income increased to
$507,000 for the nine months ended September 30, 2000, compared with expense of
$74,000 in 1999. This increase is due to an increase in cash available for
investment and $512,000 of capitalized interest. These increases were partially
offset by the 1999 recognition of interest income on the Company's loan to
Summo.
Income Taxes. Income tax expense totaled $25.1 million for the nine months
ended September 30, 2000, and $2.5 million in 1999, resulting in effective tax
rates of 38.8% and 34.3%, respectively. The effective rate change reflects a
diminished effect from alternative fuel credits allowed under Internal Revenue
Code Section 29 due to higher net income before tax, additional accrued state
income taxes from income generated by the properties acquired from KRE and an
increase in deferred federal income tax from a 1% rate increase to the highest
Federal marginal rate.
Net Income. Net income for the nine months ended September 30, 2000,
increased $34.8 million or 724% to $39.6 million compared with $4.8 million in
1999. A 50% increase in gas prices, a 58% increase in oil prices combined with
an 87% increase in oil production and a 77% increase in gas production resulted
in a nine month record $84.7 million increase in oil and gas production revenue.
A $2.3 million increase in gain on the sale of proved properties contributed to
the $87.3 million increase in total operating revenues. These increases were
partially offset by corresponding increases in oil and gas production costs and
DD&A as well as a $2.4 million increase in impairment of proved properties, a
$2.3 million increase in exploration expense, a $2.0 million increase in general
and administrative expense, a $293,000 increase in minority interest and other
operating expense and a $22.6 million increase in income tax expense.
-14-
<PAGE>
Liquidity and Capital Resources
St. Mary'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. Exploration and
development programs are generally financed from internally generated cash flow,
bank debt and cash and cash equivalents on hand. The capital expenditure budget
is continually reviewed based on changes in cash flow and other factors.
Cash Flow. St. Mary's net cash provided by operating activities increased
$29.5 million or 113% to $55.7 million for the nine months ended September 30,
2000 compared with $26.2 million in 1999. The net change was caused by a $31.1
million increase in total non-cash expenses for the nine months ended September
30, 2000, when compared to 1999. The $34.8 million increase in net income was
partially offset by a $34.1 million decrease in the change 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 $54.4 million and $25.7 million in 2000 and
1999, respectively.
Net cash used in investing activities increased $28.4 million or 102% to
$56.3 million for the nine months ended September 30, 2000, compared with $27.9
million in 1999. This increase is due to capital expenditures and a net $3.0
million change resulting from a combination of other activity that is partly
offset by cash received from sales of property. Total capital expenditures,
including acquisitions of oil and gas properties, in the first nine months of
2000 increased $25.4 million or 76% to $59.0 million compared with $33.6 million
in the first nine months 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 $55.0 million and $27.4 million in 2000 and 1999, respectively.
Net cash used in financing activities increased $7.5 million to $7.1
million for the nine months ended September 30, 2000, compared with net cash
provided by financing activities of $446,000 in 1999. This increase is due to a
$10.0 million repayment of debt in 2000 compared to a $2.9 million debt increase
in 1999 and a net change between 1999 and 2000 in proceeds from the sale of
common stock of $5.2 million through the Company's stock option and employee
stock purchase plans.
The Company had $6.6 million in cash and cash equivalents and had working
capital of $40.6 million as of September 30, 2000, compared with $14.2 million
in cash and cash equivalents and working capital of $13.4 million as of December
31, 1999. The reduction in cash and cash equivalents reflects the large increase
in accounts receivable and decreases in current liabilities and long-term debt
at September 30, 2000.
-15-
<PAGE>
Credit Facility. On June 27, 2000, St. Mary entered into an agreement to
amend the existing long-term revolving credit agreement. The maximum loan amount
remains at $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 March 2000 the borrowing base was increased $39
million by the lender to $140 million. The accepted borrowing base was $40
million at September 30, 2000. The credit agreement now has a maturity date of
December 31, 2006, and includes a revolving period that matures on June 30,
2003. St. Mary can elect to allocate up to 50% of available borrowings to a
short-term tranche due June 26, 2001. The Company must comply with certain
covenants including maintenance of stockholders' equity at a specified level and
limitations on additional indebtedness. As of September 30, 2000 and December
31, 1999, $3.0 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 3/4% 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 3/4% or the prime rate plus 1/4%, or (b) LIBOR plus 1-3/8% when the
Company's debt to total capitalization is equal to or greater than 50%. At
September 30, 2000, St. Mary's debt to total capitalization ratio as defined
under the credit agreement was 1.3%.
Common Stock. St. Mary is authorized to issue up to 50,000,000 shares of
its common stock.
In July 2000 St. Mary's Board of Directors approved a two-for-one stock
split effected in the form of a stock dividend whereby one additional common
share of stock was distributed for each common share outstanding. The stock
split was distributed on September 5, 2000, to shareholders of record as of the
close of business on August 21, 2000. All share and per share amounts for all
periods presented herein have been restated to reflect this stock split.
In August 1998 St. Mary's Board of Directors authorized a stock repurchase
program whereby the Company may purchase from time-to-time, in open market
transactions or negotiated sales, up to two million of its common shares.
Through December 31, 1999 the Company repurchased a total of 365,600 shares of
its common stock under the program for $3.0 million at a weighted-average price
of $8.19 per share. During the first three quarters of 2000 St. Mary repurchased
an additional 30,000 shares for a weighted average price of $11.50 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 Incurred. St. Mary's expenditures for
exploration and development of oil and gas properties and acquisitions are the
primary use of its capital resources. The following table sets forth certain
information regarding the costs incurred by St. Mary in its oil and gas
activities during the periods indicated.
<TABLE>
<CAPTION>
Capital and Exploration Expenditures
------------------------------------
For the Periods Ended
September 30,
2000 1999
--------- ---------
(In thousands)
<S> <C> <C>
Development $ 34,004 $ 13,188
Exploration:
Domestic Exploration 12,326 11,808
Acquisitions:
Proved 13,349 10,414
Unproved 3,464 2,982
--------- ---------
Total $ 63,143 $ 38,392
========= =========
</TABLE>
-16-
<PAGE>
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.
In March 2000 St. Mary acquired an additional interest in the
Newberg-Spearfish Unit located in the Williston Basin for an adjusted cash
purchase price of $880,000.
In May 2000 St. Mary acquired the Williston Basin assets of Tipperary
Corporation, a Denver-based operator, for $7.3 million. The Company also
acquired additional properties in the Williston Basin for $1.7 million in July
2000.
In June 2000 St. Mary incurred an additional $1.3 million related to its
HJSA property located in West Texas and acquired an additional interest in the
East Cameron Block 56/57 offshore Gulf Coast property for $246,000.
In October 2000 St. Mary entered into a purchase and sale agreement to
acquire oil and gas properties from JN Exploration and Production Limited
Partnership, Colt Resources Corporation, Princeps Partners Inc., and The William
G. Helis Company, LLC for $37.2 million in cash. The Company plans to utilize a
portion of its credit facility for the acquisition, and the transaction will be
accounted for as a purchase. The properties are primarily located in the
Anadarko Basin of Oklahoma and currently produce an estimated 8.5 million cubic
feet of gas equivalent per day, net to the interests to be acquired. The
acquisition is expected to close in late December 2000 after completion of due
diligence procedures.
Outlook. St Mary believes that its existing capital resources, cash flows
from operations and available borrowings are sufficient to meet its anticipated
capital and operating requirements for the remainder of 2000.
St. Mary anticipates incurring approximately $110.0 million to $115.0
million for capital and exploration expenditures in 2000. Of this amount
approximately $49.0 million is anticipated to be incurred for niche acquisitions
of producing properties.
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, competition for available
drilling rigs and personnel, and the success of its development and exploratory
activity which 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. Due to the Company's growth in
other core areas, royalty income has a much smaller relative impact. Royalty
revenues from the fee lands were $5.0 million or 3.7% of total oil and gas
revenues for the nine months ended September 30, 2000, and $2.3 million or 4.7%
of total oil and gas revenues for the same period in 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.
-17-
<PAGE>
St. Mary 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 when
investments require higher price assumptions to be economic. St. Mary has
generally limited its aggregate hedge position to no more than 50% of its total
production but may change this policy in the future. 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 September 30, 2000, the Company has hedged as follows:
<TABLE>
<CAPTION>
Swaps - Averaged by year
Average Quantity Average
Product Volumes/month Type Fixed price Duration
------- ------------- ---- ----------- --------
<S> <C> <C> <C> <C>
Natural Gas 699,000 MMBtu $2.78 10/00 - 12/00
Natural Gas 118,000 MMBtu $4.42 01/01 - 12/01
Natural Gas 84,000 MMBtu $4.16 01/02 - 12/02
Oil 58,400 Bbls $18.07 10/00 - 12/00
Oil 13,900 Bbls $22.12 01/01 - 12/01
Oil 3,000 Bbls $22.48 01/02 - 12/02
</TABLE>
<TABLE>
<CAPTION>
Collar Contracts Table
Average
Product Volumes/month Ceiling Price Floor Price Duration
------- ------------- ------------- ----------- --------
<S> <C> <C> <C> <C>
Natural Gas 200,000 MMBtu $ 2.6500 $ 2.0000 10/00 - 12/00
Natural Gas 150,000 MMBtu $ 2.5000 $ 2.0000 10/00 - 12/00
Natural Gas 199,000 MMBtu $ 2.9400 $ 2.3000 10/00 - 12/00
Natural Gas 196,500 MMBtu $ 2.9000 $ 2.3000 10/00 - 12/00
Natural Gas 340,000 MMBtu $ 5.0000 $ 3.9700 10/00 - 12/00
Natural Gas 150,000 MMBtu $ 2.9400 $ 2.3000 1/01 - 12/01
Natural Gas 150,000 MMBtu $ 2.9000 $ 2.3000 1/01 - 12/01
Natural Gas 250,000 MMBtu $ 2.8775 $ 2.3540 1/01 - 12/01
Natural Gas 250,000 MMBtu $ 2.8192 $ 2.3540 1/01 - 12/01
Natural Gas 250,000 MMBtu $ 3.5000 $ 2.4000 1/01 - 12/01
Natural Gas 350,000 MMBtu $ 5.8000 $ 3.0000 1/01 - 12/01
Oil 7,000 Bbls $17.7500 $15.0000 10/00 - 12/00
Oil 7,000 Bbls $21.0000 $18.0000 10/00 - 12/00
Oil 9,500 Bbls $20.6400 $16.4400 10/00 - 12/00
Oil 9,500 Bbls $20.9000 $16.7000 10/00 - 12/00
Oil 10,000 Bbls $25.1000 $19.5000 10/00 - 12/00
Oil 12,500 Bbls $27.0000 $17.0000 10/00 - 12/00
Oil 7,500 Bbls $20.6400 $16.4400 1/01 - 12/01
Oil 7,500 Bbls $20.9000 $16.7000 1/01 - 12/01
Oil 15,000 Bbls $27.2200 $19.0000 1/01 - 12/01
Oil 7,000 Bbls $21.0000 $18.0000 1/01 - 12/01
</TABLE>
If these commodity hedging contracts had closed on September 30, 2000, St.
Mary would have been required to pay approximately $37.5 million based on
quarter-end pricing. As of that date the Company had $2.9 million in margin
deposits outstanding to a counterparty. These margin deposits are included in
accounts receivable.
-18-
<PAGE>
In February 2000 St. Mary exercised its option to convert its Khanty
Mansiysk Oil Corporation ("KMOC") production payment receivable into common
stock of KMOC. In July 2000 the Company finalized a negotiated value for the
receivable that equates to 21,583 shares of KMOC common stock under the terms of
the original agreement. Management believes that the current fair market value
of the stock is in excess of its carrying value.
On August 5, 2000, St. Mary and its partners (the Group) assumed control of
a 30,450-acre top lease in the North Ward Estes Field in Ward County, Texas. In
June 2000 the Group sold the rights to approximately 260 shallow producing wells
in this field to the previous operator. St. Mary recognized $2.0 million in
proceeds from the sale. The Company now has a 21.4% working interest in the
production from 95 wellbores 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 6.59 million shares of Summo as
of September 30, 2000.
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--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. In
June 2000 the FASB issued SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities." SFAS 138 amends and clarifies
certain elements of SFAS No. 133, including expansion of the normal purchases
and normal sales exception. Management is currently reviewing the effects these
Statements will have on the financial statements in relation to the Company's
hedging activities and will implement SFAS No. 133 on January 1, 2001.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT 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 Company's Board of Directors periodically reviews these
programs.
-19-
<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 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 $.10 per MMBtu change in the Company's quarter-end market
prices for natural gas swaps and futures contracts on a notional amount of 24.6
million MMBtu would cause a potential $1.7 million change in net income before
income taxes for contracts in place on September 30, 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 986 MBbls would cause a potential
$1.0 million change in net income before income taxes for oil contracts in place
on September 30, 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.
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 September 30, 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 September 30, 2000, the Company had floating
rate debt of $3.0 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 $7,500 before taxes.
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 September 30, 2000.
-20-
<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
November 10, 2000 By /s/ MARK A. HELLERSTEIN
-------------------------------------
Mark A. Hellerstein
President and Chief Executive Officer
November 10, 2000 By /s/ RICHARD C. NORRIS
-------------------------------------
Richard C. Norris
Vice President - Finance, Secretary
and Treasurer
November 10, 2000 By /s/ GARRY A. WILKENING
-------------------------------------
Garry A. Wilkening
Vice President - Administration and
Controller
