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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2001
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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 August 7, 2001, the registrant had 27,783,774 shares of common stock, $.01
par value, outstanding.
ST. MARY LAND & EXPLORATION COMPANY
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INDEX
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Part I. FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements (Unaudited)
Consolidated Balance
Sheets - June 30, 2001 and
December 31, 2000........................................3
Consolidated Statements of
Operations - Three and Six Months Ended
June 30, 2001 and 2000...................................4
Consolidated Statements of
Cash Flows - Six Months Ended
June 30, 2001 and 2000...................................5
Consolidated Statements of
Stockholders' Equity - June 30, 2001
and December 31, 2000....................................7
Notes to Consolidated Financial
Statements - June 30, 2001...............................8
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations...........................................11
Item 3. Quantitative and Qualitative Disclosures
About Market Risk.......................................20
Part II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds...............22
Item 4. Submission of Matters to a Vote of Security Holders.....22
Item 6. Exhibits and Reports on Form 8-K........................23
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ST. MARY LAND & EXPLORATION COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In thousands, except share amounts)
ASSETS June 30, December 31,
----------- -----------
2001 2000
----------- -----------
Current assets:
Cash and cash equivalents $ 6,245 $ 6,619
Accounts receivable 47,722 55,068
Prepaid expenses and other 3,866 2,134
Deferred income taxes 747 163
----------- -----------
Total current assets 58,580 63,984
----------- -----------
Property and equipment (successful efforts method), at cost:
Proved oil and gas properties 435,053 385,076
Less accumulated depletion, depreciation and amortization (194,195) (171,412)
Unproved oil and gas properties, net of impairment
allowance of $8,151 in 2001 and $7,956 in 2000 41,002 35,497
Other property and equipment, net of accumulated depreciation of $4,064
in 2001 and $3,600 in 2000 3,170 3,250
----------- -----------
Total property and equipment 285,030 252,411
----------- -----------
Other assets:
Khanty Mansiysk Oil Corporation stock 1,651 1,651
Other assets 4,013 3,849
----------- -----------
Total other assets 5,664 5,500
----------- -----------
Total Assets $ 349,274 $ 321,895
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 23,141 $ 23,345
Accrued hedge liability 2,329 -
----------- -----------
Total current liabilities 25,470 23,345
----------- -----------
Long-term liabilities:
Long-term debt 13,400 22,000
Deferred income taxes 35,067 24,820
Other noncurrent liabilities 985 987
----------- -----------
Total long-term liabilities 49,452 47,807
----------- -----------
Commitments and contingencies
----------- -----------
Minority interest 483 607
----------- -----------
Stockholders' equity:
Common stock, $.01 par value: authorized - 100,000,000 shares:
Issued and outstanding - 28,682,670 shares in 2001 and
28,553,826 shares in 2000 287 286
Additional paid-in capital 135,624 132,973
Treasury stock - at cost: 909,900 shares in 2001 and 395,600
shares in 2000 (14,288) (3,339)
Retained earnings 153,289 120,075
Unrealized net gain on marketable equity securities-available for sale 309 141
Unrealized hedge loss (1,352) -
----------- -----------
Total stockholders' equity 273,869 250,136
----------- -----------
Total Liabilities and Stockholders' Equity $ 349,274 $ 321,895
=========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
-3-
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 Six Months Ended
June 30, June 30,
------------------------------ ----------------------------
2001 2000 2001 2000
------------- ------------ ------------ -----------
Operating revenues:
Oil and gas production $ 55,421 $ 43,820 $123,336 $ 80,832
Gain on sale of proved properties 48 2,293 50 2,332
Other oil and gas revenue 203 594 565 874
Other revenues 104 115 172 195
------------- ------------ ------------ -----------
Total operating revenues 55,776 46,822 124,123 84,233
------------- ------------ ------------ -----------
Operating expenses:
Oil and gas production 13,436 8,622 25,493 17,048
Depletion, depreciation and amortization 12,884 8,321 24,172 17,178
Impairment of proved properties 73 863 244 1,950
Exploration 2,149 1,658 10,511 4,403
Abandonment and impairment of unproved properties 608 609 1,074 1,289
General and administrative 3,536 2,331 7,557 5,095
Minority interest and other 118 592 379 1,234
------------- ------------ ------------ -----------
Total operating expenses 32,804 22,996 69,430 48,197
------------- ------------ ------------ -----------
Income from operations 22,972 23,826 54,693 36,036
Nonoperating income and (expense):
Interest income 147 177 335 403
Interest expense - (37) (35) (123)
------------- ------------ ------------ -----------
Income before income taxes 23,119 23,966 54,993 36,316
Income tax expense 8,885 9,369 20,366 13,833
------------- ------------ ------------ -----------
Net income $ 14,234 $ 14,597 $ 34,627 $ 22,483
============= ============ ============ ===========
Basic net income per common share $ 0.51 $ 0.53 $ 1.23 $ 0.82
============= ============ ============ ===========
Diluted net income per common share $ 0.50 $ 0.52 $ 1.20 $ 0.80
============= ============ ============ ===========
Basic weighted average common shares outstanding 28,135 27,622 28,185 27,573
============= ============ ============ ===========
Diluted weighted average common shares outstanding 28,717 28,170 28,826 27,985
============= ============ ============ ===========
Cash dividends declared per share $ 0.050 $ 0.025 $ 0.050 $ 0.050
============= ============ ============ ===========
The accompanying notes are an integral part of these
consolidated financial statements.
-4-
ST. MARY LAND & EXPLORATION COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
For the Six Months Ended
June 30,
-------------------------
2001 2000
---------- ----------
Reconciliation of net income to net cash provided by operating activities:
Net income $ 34,627 $ 22,483
Adjustments to reconcile net income to net
cash provided by operating activities:
Gain on sale of proved properties (50) (2,332)
Depletion, depreciation and amortization 24,172 17,178
Impairment of proved properties 244 1,950
Exploration, including exploratory dry hole expense 4,418 782
Abandonment and impairment of unproved properties 1,074 1,289
Deferred income taxes 10,841 6,698
Minority interest and other 442 148
---------- ----------
75,768 48,196
Changes in current assets and liabilities:
Accounts receivable (2,394) (23,858)
Prepaid expenses and other (2,030) 426
Accounts payable and accrued expenses 1,530 (2,219)
---------- ----------
Net cash provided by operating activities 72,874 22,545
---------- ----------
Cash flows from investing activities:
Proceeds from sale of oil and gas properties 660 1,660
Capital expenditures (63,335) (28,572)
Acquisition of oil and gas properties 1,590 (10,387)
Sale of KMOC stock 7,009 -
Other 69 956
---------- ----------
Net cash used in investing activities (54,007) (36,343)
---------- ----------
Cash flows from financing activities:
Proceeds from long-term debt 41,750 18,000
Repayment of long-term debt (50,350) (17,150)
Proceeds from sale of common stock 1,721 3,340
Repurchase of common stock (10,949) (344)
Dividends paid (1,413) (1,376)
---------- ----------
Net cash provided by (used in) financing activities (19,241) 2,470
---------- ----------
Net decrease in cash and cash equivalents (374) (11,328)
Cash and cash equivalents at beginning of period 6,619 14,195
---------- ----------
Cash and cash equivalents at end of period $ 6,245 $ 2,867
========== ==========
The accompanying notes are an integral part of these
consolidated financial statements.
-5-
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 Six Months Ended
June 30,
-------------------------
2001 2000
---------- ----------
(In thousands)
Cash paid for interest $ 284 $ 503
Cash paid for income taxes 10,386 2,120
Cash paid for exploration expenses 10,499 4,346
In January 2000 the Company issued 8,400 shares of common stock to its directors
and recorded compensation expense of $88,368.
In January 2001 the Company issued 8,400 shares of common stock to its directors
and recorded compensation expense of $237,852
The accompanying notes are an integral part of these
consolidated financial statements.
-6-
ST. MARY LAND & EXPLORATION COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
(In thousands, except share amounts)
Accumulated
Common Stock Additional Treasury Stock Other Total
------------------ Paid-in Retained -------------------- Comprehensive Stockholders'
Shares Amount Capital Earnings Shares Amount Income Equity
---------- ------ ---------- ---------- --------- ---------- ------------- -------------
Balance, December 31, 1999 27,893,910 $ 279 $ 123,974 $ 67,230 (365,600) $ (2,995) $ 284 $ 188,772
Comprehensive income:
Net Income - - - 55,620 - - - 55,620
Unrealized net loss on marketable equity
securities available for sale - - - - - - (143) (143)
-------------
Total comprehensive income 55,477
-------------
Cash dividends, $ 0.10 per share - - - (2,775) - - - (2,775)
Treasury stock purchases - - - - (30,000) (344) - (344)
Issuance for Employee Stock Purchase 32,296 - 311 - - - - 311
ESPP disqualified distribution - - 3 - - - - 3
Sale of common stock, including income tax
benefit of stock option exercises 619,220 6 8,597 - - - - 8,603
Directors' stock compensation 8,400 1 88 - - - - 89
---------- ------ ---------- ---------- --------- --------- -------------- -------------
Balance, December 31, 2000 28,553,826 $ 286 $ 132,973 $ 120,075 (395,600) $ (3,339) $ 141 $ 250,136
Comprehensive income:
Net Income - - - 34,627 - - - 34,627
Unrealized net gain on marketable equity
securities available for sale - - - - - - 168 168
Unrealized hedge loss - - - - - - (1,352) (1,352)
-------------
Total comprehensive income 33,443
-------------
Cash dividends, $ 0.05 per share - - - (1,413) - - - (1,413)
Treasury stock purchases - - - - 514,300) (10,949) - (10,949)
Issuance for Employee Stock Purchase Plan 8,333 - 149 - - - - 149
Sale of common stock, including income tax
benefit of stock option exercises 112,111 1 2,264 - - - - 2,265
Directors' stock compensation 8,400 - 238 - - - - 238
---------- ------ ---------- ---------- --------- --------- -------------- -------------
Balance, June 30, 2001 28,682,670 $ 287 $ 135,624 $ 153,289 (909,900) $(14,288) $ (1,043) $ 273,869
========== ====== ========== ========== ========= ========= ============== =============
The accompanying notes are an integral part of these
consolidated financial statements.
-7-
ST. MARY LAND & EXPLORATION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
----------------
June 30, 2001
Note 1 - Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of
St. Mary Land & Exploration Company and Subsidiaries ("St. Mary" or the
"Company") have been prepared in accordance with accounting principles generally
accepted in the United States 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 St. Mary's Annual Report
on Form 10-K for the year ended December 31, 2000. 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 consolidated financial statements in the Form 10-K for the year
ended December 31, 2000. It is suggested that these unaudited condensed
consolidated financial statements be read in conjunction with the consolidated
financial statements and notes included in the Form 10-K.
Note 2 - 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 second quarter of 2001 the Company repurchased 434,000 shares of its
common stock under the program at a weighted average price of $20.67 per share,
bringing the total number of shares repurchased under the program to 909,900 at
a weighted average price of $15.49 per share. Additional purchases of shares by
the Company may occur as market conditions warrant. Such purchases would be
funded with internal cash flows and borrowings under the Company's credit
facility.
In April 2001 the Company sold 100,000 put options on its own common stock
for $99,000 in cash. These put options gave the holder the right to require the
Company to purchase up to 100,000 shares of its own common stock from the holder
at $20.22 per share on July 11, 2001. These options expired unexercised. In June
2001 the Company sold 100,000 put options on its own common stock for $94,000 in
cash. These put options give the holder the right to require the Company to
purchase up to 100,000 shares of its own common stock from the holder at $19.22
per share on September 24, 2001.
-8-
Note 3 - Income Taxes
Federal income tax expense for the three and six months ended June 30, 2001
and 2000 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. During 2000 the Company utilized its net operating loss carryover and
resulting deferred tax asset from 1999. At June 30, 2001 the Company's current
portion of income tax expense was $9,361,000. Accounts payable and accrued
expenses includes income tax payable of $137,000 at June 2001.
Note 4 - Long-term Debt
On April 30, 2001 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 St. Mary's oil and gas properties and
other assets. The amendment increases the borrowing base by $30.0 million to
$170.0 million. The accepted borrowing base was $40.0 million at June 30, 2001.
The credit agreement has a maturity date of December 31, 2006, and includes a
revolving period that matures on June 30, 2003. The amended agreement deletes
all references to and provisions of the short-term tranche previously available
to St. Mary. The Company must comply with certain covenants including
maintenance of stockholders' equity at a specified level and limitations on
additional indebtedness. The Company had $13,400,000 in outstanding borrowings
under its revolving credit agreement as of June 30, 2001, and the weighted
average interest rate paid for the six months ended June 30, 2001 was 9.0%
including commitment fees paid on the unused portion of the borrowing base. The
Company's debt to total capitalization ratio as defined under the agreement was
4.7% as of June 30, 2001.
Note 5 - Financial Instruments
On January 1, 2001 the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities." The adoption of SFAS No. 133 resulted in the Company recording a
liability of $45,699,000 for the fair value of the derivative instruments at
January 1, 2001. The Company's adoption entry resulted in deferral of the
recognition of this liability to accumulated other comprehensive loss of
$28,587,000 at January 1, 2001. During the first six months of 2001 the Company
recognized no additional hedge loss from hedge ineffectiveness on derivative
instruments that were designated and qualified as cash flow hedging instruments.
The Company anticipates that all hedge transactions will occur as expected.
Based on current prices we anticipate that $1.6 million of the after tax loss
amount included in accumulated and other comprehensive income will be included
in earnings during the next 12 months.
The Company seeks to protect its rate of return on acquisitions of
producing properties by hedging cash flow when the economic criteria from its
evaluation and pricing model indicate it would be appropriate. Management's
strategy is to hedge cash flows from investments requiring a gas price in excess
of $3.25 per Mcf and an oil price in excess of $22.50 per Bbl in order to meet
minimum rate-of-return criteria. The Company anticipates this strategy will
result in the hedging of future cash flow from acquisitions. St. Mary generally
limits its aggregate hedge position to no more than 35% of its total production
but will hedge up to 50% of total production in certain circumstances. The
Company seeks to minimize basis risk and index the majority of oil hedges to
NYMEX prices and the majority of gas hedges to various regional index prices
associated with pipelines in proximity to its areas of gas production.
Note 6 - Newly Issued Accounting Standards
In June 2001 the Financial Accounting Standards Board ("FASB") issued SFAS
No. 141, "Business Combinations." Under this statement all business combinations
must be accounted for under the purchase method. The pooling method is no longer
allowed. The statement also establishes criteria to assess when to recognize
intangible assets separately from goodwill. SFAS No. 141 is effective for
business combinations initiated after June 30, 2001 and for all business
combinations using the purchase method for which the date of acquisition is
after June 30, 2001. At this time the Company has no pending business
combinations that would be affected by the adoption of this statement.
-9-
In June 2001 the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets." This statement addresses the accounting for goodwill and other
intangible assets and provides specific guidance for testing goodwill and other
intangible assets for impairment. This statement is effective for fiscal years
beginning after December 15, 2001. The Company does not anticipate that the
adoption of this statement will have a material effect on the Company's
financial position or results of operations.
In July 2001 the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." This statement requires companies to recognize the fair value of
an asset retirement liability in the financial statements by capitalizing that
cost as part of the cost of the related long-lived asset. The asset retirement
liability should then be allocated to expense by using a systematic and rational
method. The statement is effective for fiscal years beginning after June 15,
2002. The Company has not yet determined the impact of adoption of this
statement.
-10-
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 St. Mary
management forecasts, expects, believes or anticipates will or may occur in the
future are forward-looking statements. Examples of forward-looking statements
may include discussion of such matters as:
o forecasted production, lease operating expenses, transportation costs,
DD&A, general and administrative expenses, and current income taxes for
future periods,
o the amount and nature of future capital, development and exploration
expenditures,
o the drilling of wells,
o reserve estimates and the estimates of both future net revenues and the
present value of future net revenues that are included in their
calculation,
o future oil and gas production estimates,
o repayment of debt,
o business strategies,
o expansion and growth of operations, and
o other similar matters.
These statements are based on certain assumptions and analyses made by us
in light of our experience and our perception of historical trends, current
conditions, expected future developments and other factors we believe are
appropriate in the circumstances. Such statements are subject to a number of
assumptions, risks and uncertainties, including such factors as the volatility
and level of oil and natural gas prices, uncertainties in cash flow, expected
acquisition benefits, production rates and reserve replacement, reserve
estimates, drilling and operating risks, competition, litigation, environmental
matters, the potential impact of government regulations, and other matters such
as those discussed in the "Risk Factors" section of St. Mary's 2000 Annual
Report on Form 10-K, many of which are beyond our control. 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.
-11-
Results of Operations
The following table sets forth selected operating data for the periods
indicated:
Three Months Six Months
------------ ----------
Ended June 30, Ended June 30,
-------------- --------------
2001 2000 2001 2000
---- ---- ---- ----
(In thousands, except per (In thousands, except per
volume data) volume data)
Oil and gas production revenues:
Gas production $ 40,970 $ 31,050 $ 93,350 $ 55,106
Oil production 14,451 12,770 29,986 25,726
-------- -------- -------- --------
Total $ 55,421 $ 43,820 $123,336 $ 80,832
======== ======== ======== ========
Net production:
Gas (MMcf) 10,041 9,535 19,650 18,781
Oil (MBbls) 595 573 1,203 1,114
-------- -------- -------- -------
MCFE 13,611 12,973 26,868 25,464
======== ======== ======== =======
Average sales price (1):
Gas (per Mcf) $ 4.08 $ 3.26 $ 4.75 $ 2.93
Oil (per Bbl) $ 24.30 $ 22.29 $ 24.92 $ 23.10
Oil and gas production costs:
Lease operating expense $ 9,826 $ 5,594 $ 17,364 $ 11,509
Transportation costs 541 481 1,138 824
Production taxes 3,069 2,547 6,991 4,715
-------- -------- -------- --------
Total $ 13,436 $ 8,622 $ 25,493 $ 17,048
======== ======== ======== ========
Additional per MCFE data:
Sales price $ 4.07 $ 3.38 $ 4.59 $ 3.17
Lease operating expense 0.72 0.43 0.65 0.45
Transportation costs 0.04 0.04 0.04 0.03
Production taxes 0.23 0.20 0.26 0.19
-------- -------- -------- --------
Operating margin $ 3.08 $ 2.71 $ 3.64 $ 2.50
======== ======== ======== ========
Depletion, depreciation and amortization $ 0.95 $ 0.64 $ 0.90 $ 0.67
Impairment of proved properties $ 0.01 $ 0.07 $ 0.01 $ 0.08
General and administrative $ 0.26 $ 0.18 $ 0.28 $ 0.20
--------------------------------
(1)Includes the effects of St. Mary's hedging activities.
Three-Month Comparison
Oil and Gas Production Revenues. St. Mary's quarterly oil and gas
production revenues increased $11.6 million, or 26% to $55.4 million for the
three months ended June 30, 2001, compared with $43.8 million for the same
period in 2000. The increase was the result of an oil production volume increase
of 4%, a gas production increase of 5% and increases in the average price
received for both oil and gas in the second quarter of 2001 compared to 2000.
The average realized gas price increased 25% to $4.08 per Mcf, while the average
realized oil price increased 9% to $24.30 per Bbl. Average net daily production
increased to 149.6 MMCFE for 2001 compared with 142.6 MMCFE in 2000. Our
December 2000 acquisition of JN Exploration et al properties added $3.5 million
of revenue and average net daily production of 8.2 MMCFE to the second quarter
of 2001.
-12-
St. Mary hedged approximately 32% or 190 MBbls of its oil production for
the three months ended June 30, 2001, and realized a $775,000 decrease in oil
revenue attributable to hedging compared with a $3.2 million decrease in 2000.
Without these contracts we would have received an average price of $25.60 per
Bbl in the second quarter of 2001 compared to $27.83 per Bbl in 2000. St. Mary
also hedged 42% of its 2001 second quarter gas production or 4.6 million MMBtu
and realized a $5.1 million decrease in gas revenue compared with a $3.2 million
decrease in gas revenue in 2000. Without these contracts we would have received
an average price of $4.51 per Mcf for the three months ended June 30, 2001,
compared to $3.84 per Mcf for the same period in 2000.
Gain on sale of proved properties. Gain on sale of proved properties
decreased $2.3 million for the quarter ended June 30, 2001 compared to the same
period in 2000. There have been no significant sales of proved properties in
2001.
Oil and Gas Production Costs. Oil and gas production costs consist of lease
operating expense, production taxes and transportation expenses. Total
production costs increased $4.8 million or 56% to $13.4 million for the three
months ended June 30, 2001, from $8.6 million in 2000. In the second quarter of
2001 we experienced a $1.5 million increase in non-recurring LOE as we took
advantage of workover rig availability. Williston basin acquisitions in the last
half of 2000 added an additional $600,000 of LOE to 2001. Our JN Exploration et
al acquisition properties represented $566,000 of the total increase. We have
also experienced higher recurring LOE costs in the Williston basin, the Permian
basin and the Gulf Coast/GOM as a result of increased competition for limited
availability of services. In addition, higher production taxes and
transportation expenses resulting from higher oil and gas revenues account for
the remaining 12% of the increase. Total oil and gas production costs per MCFE
increased 50% to $0.99 for the six months ended June 30, 2001 compared with
$0.66 for 2000. An $0.11 per MCFE increase was due to the increase in
non-recurring LOE. A $0.09 per MCFE increase was due to the acquisitions
previously discussed. Another $0.04 per MCFE increase was due to increased
production taxes and transportation expenses.
Depreciation, Depletion, Amortization and Impairment. Depreciation,
depletion and amortization expense ("DD&A") increased $4.6 million or 55% to
$12.9 million for the three months ended June 30, 2001, from $8.3 million in
2000. DD&A per MCFE increased by 48% to $0.95 for the second quarter of 2001
compared with $0.64 in 2000. This increase reflects acquisitions and drilling
results in 2000 and 2001 that have added costs at a higher per-unit rate. The
unit rate was further affected by downward adjustments to reserves due to
pricing adjustments at June 30, 2001.
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 prices based on NYMEX strip that
are then escalated for each of the next 5 years and include the estimated
effects of hedging contracts in place at December 31, 2000. We recorded a
$73,000 impairment of proved oil and gas properties in the second quarter of
2001 compared with $863,000 in 2000.
Abandonment and impairment of unproved properties was $608,000 for the
three months ended June 30, 2001, compared with $609,000 in 2000.
-13-
Exploration. Exploration expense increased $491,000 or 30% to $2.1 million
for the three months ended June 30, 2001, compared with $1.7 million in 2000.
The increase resulted from an increase in personnel costs associated with
exploration activity.
General and Administrative. General and administrative expenses increased
$1.2 million or 52% to $3.5 million for the three months ended June 30, 2001,
compared with $2.3 million in 2000. Increases in compensation expense associated
with increased personnel, our incentive plans and general cost inflation were
partially offset by a $247,000 increase in COPAS overhead reimbursement from
operations.
Income Taxes. Income tax expense totaled $8.9 million for the three months
ended June 30, 2001, and $9.4 million in 2000, resulting in effective tax rates
of 38.4% and 39.1%, respectively.
Net Income. Net income for the three months ended June 30, 2001 decreased
$363,000 to $14.2 million compared with $14.6 million in 2000. A 25% increase in
gas prices and a 9% increase in oil prices combined with a 4% increase in oil
production and a 5% increase in gas production resulted in an $11.6 million
increase in oil and gas production revenue. This increase was offset by a $4.8
million increase in oil and gas production costs, a $4.6 million increase in
DD&A as well as a $1.2 million increase in general and administrative
expense. Net income for the three months ended June 30, 2000 also included a
$2.3 million pre-tax nonrecurring gain on the sale of proved property.
Six-Month Comparison
Oil and Gas Production Revenues. St. Mary experienced an increase in oil
and gas production revenues of $42.5 million, or 53% to $123.3 million for the
six months ended June 30, 2001, compared with $80.8 million for the same period
in 2000. The increase was the result of an oil production volume increase of 8%,
a gas production increase of 5% and increases in the average price received for
both oil and gas in the first six months of 2001 compared to 2000. The average
realized gas price increased 62% to $4.75 per Mcf, while the average realized
oil price increased 8% to $24.92 per Bbl. Average net daily production increased
to 148.4 MMCFE for the first six months of 2001 compared with 139.9 MMCFE in
2000. Our December 2000 acquisition of JN Exploration et al properties added
$8.4 million of revenue and average net daily production of 8.0 MMCFE for the
six months ended June 30, 2001.
St. Mary hedged approximately 32% or 384 MBbls of its oil production for
the six months ended June 30, 2001, and realized a $1.9 million decrease in oil
revenue attributable to hedging compared with a $5.3 million decrease in 2000.
Without these contracts we would have received an average price of $26.48 per
Bbl for the six months ended June 30, 2001 compared to $27.90 per Bbl in 2000.
St. Mary also hedged 43% of its gas production or 9.2 million MMBtu and realized
a $20.4 million decrease in gas revenue for the six months ended June 30, 2001
compared with a $3.2 million decrease in gas revenue in 2000. Without these
contracts we would have received an average price of $5.79 per Mcf for the six
months ended June 30, 2001, compared to $3.04 per Mcf for the same period in
2000.
Gain on sale of proved properties. Gain on sale of proved properties
decreased $2.3 million for the six months ended June 30, 2001 compared to the
same period in 2000. There have been no significant sales of proved properties
in 2001.
Oil and Gas Production Costs. Oil and gas production costs consist of lease
operating expense, production taxes and transportation expenses. Total
production costs increased $8.4 million or 50% to $25.5 million for the six
months ended June 30, 2001, from $17.0 million in 2000. In the first six months
of 2001 we experienced a $1.3 million increase in non-recurring LOE as we took
advantage of workover rig availability. Williston basin acquisitions in the last
half of 2000 added an additional $1.3 million of LOE to 2001. Our JN Exploration
et al acquisition properties represented $1.2 million of the total increase. We
have also experienced higher recurring LOE costs in the Williston basin, the
Permian basin and the Gulf Coast/GOM as a result of increased competition for
limited availability of services. In addition, higher production taxes and
transportation expenses resulting from higher oil and gas revenues account for
the remaining 31% of the increase. Total oil and gas production costs per MCFE
increased 42% to $0.95 for the six months ended June 30, 2001 compared with
$0.67 for 2000. A $0.09 per MCFE increase was due to the acquisitions previously
discussed. Another $0.09 per MCFE increase was due to increased production taxes
and transportation expenses. A $0.05 per MCFE increase was due to the increase
in non-recurring LOE.
-14-
Depreciation, Depletion, Amortization and Impairment. DD&A increased
$7.0 million or 41% to $24.2 million for the six months ended June 30, 2001,
from $17.2 million in 2000. DD&A per MCFE increased by 33% to $0.90 for the
six months ended June 30, 2001 compared with $.67 in 2000. This increase
reflects acquisitions and drilling results in 2000 and 2001 that added costs at
a higher per unit rate. The unit rate was further affected by downward
adjustments to reserves due to pricing adjustments at June 30, 2001.
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 prices based on NYMEX strip that
are then escalated for each of the next 5 years and include the estimated
effects of hedging contracts in place at December 31, 2000. We recorded a
$244,000 impairment of proved oil and gas properties for the six months ended
June 30, 2001 compared with $2.0 million in 2000.
Abandonment and impairment of unproved properties were $1.1 million for the
six months ended June 30, 2001, compared with $1.3 million in 2000.
Exploration. Exploration expense increased $6.1 million or 139% to $10.5
million for the six months ended June 30, 2001, compared with $4.4 million in
2000. The increase resulted from a $3.6 million increase in exploratory dry
holes, an $875,000 increase in geological and geophysical expense and an
increase in personnel costs associated with exploration activity of $1.6
million.
General and Administrative. General and administrative expenses increased
$2.5 million or 48% to $7.6 million for the six months ended June 30, 2001,
compared with $5.1 million in 2000. Increases in compensation expense associated
with increased personnel, our incentive plans and general cost inflation were
partially offset by a $557,000 increase in COPAS overhead reimbursement from
operations.
Income Taxes. Income tax expense totaled $20.4 million for the six months
ended June 30, 2001, and $13.8 million in 2000, resulting in effective tax rates
of 37.0% and 38.1%, respectively.
Net Income. Net income for the six months ended June 30, 2001 increased
$12.1 million or 54% to $34.6 million compared with $22.5 million in 2000. A 62%
increase in gas prices and an 8% increase in oil prices combined with an 8%
increase in oil production and a 5% increase in gas production resulted in a
$42.5 million increase in oil and gas production revenue. This increase was
offset by corresponding increases in oil and gas production costs and DD&A
as well as a $6.1 million increase in exploration expense, a $2.5 million
increase in general and administrative expense and a $6.5 million increase in
income tax expense. A re-tax gain on the sale of proved properties of $2.3
million in 2000 was partially offset by decreases in proved and unproved
property impairments.
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. Our 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.
-15-
Cash Flow. St. Mary's net cash provided by operating activities increased
$50.3 million or 223% to $72.9 million for the six months ended June 30, 2001
compared with $22.5 million in 2000. The increase reflects the effect of the
increase in oil and gas production revenues, a general increase in non-cash
expenses and an increase in accounts payable for the period ended June 30, 2001
that are offset by an increase in accounts receivable for the period ended June
30, 2000.
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 $62.4 million and $18.2 million in the
first six months of 2001 and 2000, respectively.
Net cash used in investing activities increased $17.7 million or 49% to
$54.0 million for the six months ended June 30, 2001, compared with $36.3
million in 2000. This increase is due to increased capital expenditures and a
decrease in proceeds from the sale of oil and gas properties that are partially
offset by the receipt of $7.0 million of proceeds from the December 2000 sale of
KMOC stock. Total capital expenditures, including acquisitions of oil and gas
properties, in the first six months of 2001 increased $22.7 million or 58% to
$61.7 million compared with $39.0 million in the first half of 2000.
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 $43.5 million and $32.0 million in the first six months of 2001 and
2000, respectively.
Net cash used in financing activities increased $21.7 million to $19.2
million for the six months ended June 30, 2001, compared with net cash provided
by financing activities of $2.5 million in 2000. St. Mary made net repayments of
$8.6 million of debt in 2001 compared to an $850,000 debt increase in 2000.
Additionally, we repurchased $10.6 million more of our own common stock and
received $1.6 million less in proceeds from the sale of our common stock during
the first two quarters of 2001 compared to 2000. All sales of our common stock
resulted from stock option exercises and sales under St. Mary's employee stock
purchase plan.
St. Mary had $6.2 million in cash and cash equivalents and had working
capital of $33.1 million as of June 30, 2001, compared with $6.6 million in cash
and cash equivalents and working capital of $40.6 million at December 31, 2000.
The small change in cash and cash equivalents reflects that our cash provided by
operations was sufficient to cover our increased capital expenditures, our debt
repayment and our repurchase of St. Mary's common stock during the first six
months of 2001.
Credit Facility. On April 30, 2001 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 St. Mary's oil and gas
properties and other assets. The amendment increases the borrowing base by $30.0
million to $170.0 million. The accepted borrowing base was $40.0 million at June
30, 2001. The credit agreement has a maturity date of December 31, 2006, and
includes a revolving period that matures on June 30, 2003. The amended agreement
deletes all references to and provisions of the short-term tranche previously
available to St. Mary. We must comply with certain covenants including
maintenance of stockholders' equity at a specified level and limitations on
additional indebtedness. As of June 30, 2001 and December 31, 2000, $13.4
million and $22.0 million, respectively, was outstanding under this credit
agreement. These outstanding balances accrue interest at rates determined by St
Mary's debt to total capitalization ratio. During the revolving period of the
loan, loan balances accrue interest at our option of either (1) the higher of
the federal funds rate plus 1/2% or the prime rate, or (2) LIBOR plus 3/4% when
our 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 our debt to total capitalization is equal to or
greater than 50%. The debt to total capitalization ratio as defined under the
agreement was 4.7% as of June 30, 2001.
-16-
Common Stock. At the annual shareholder meeting on May 23, 2001 the
shareholders of St. Mary voted to increase the amount of authorized common
shares to 100,000,000.
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 we may purchase from time-to-time, in open market transactions
or negotiated sales, up to two million of our common shares. Through December
31, 2000 we had repurchased a total of 395,600 shares of St. Mary's common
stock under the program for $3.3 million at a weighted average price of $8.44
per share. To date in 2001 we have repurchased an additional 514,300 shares for
a weighted average price of $20.91 per share. We anticipate that additional
purchases of shares may occur as market conditions warrant. As part of this
program we sold put options in April 2001 whereby the holder had the right to
require St. Mary to purchase up to 100,000 shares of St. Mary's common stock
from the holder at $20.22 per share on July 11, 2001. We received a $99,000
premium from this sale. These options expired unexercised. In June 2001 we sold
additional put options whereby we could be required to purchase up to 100,000
shares of our common stock from the holder at $19.22 per share on September 24,
2001. We received a $94,000 premium from this sale. Any future purchases will be
funded with internal cash flow and borrowings under St. Mary'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.
Capital and Exploration Expenditures
------------------------------------
Six Months Ended June 30,
-------------------------
2001 2000
---- ----
(In thousands)
Development $ 43,451 $ 20,336
Domestic Exploration 14,639 5,939
Acquisitions:
Proved 301 10,792
Unproved 10,110 1,944
-------- --------
Total $ 68,501 $ 39,011
======== ========
We continuously evaluate opportunities in the marketplace for oil and gas
properties and, accordingly, may be a buyer or a seller of properties at various
times. We will continue to emphasize smaller niche acquisitions utilizing St.
Mary's technical expertise, financial flexibility and structuring experience. In
addition, we are also actively seeking larger acquisitions of assets or
companies that would afford opportunities to expand our existing core areas, to
acquire additional geoscientists or to gain a significant acreage and production
foothold in a new basin.
St. Mary's total costs incurred in the first six months of 2001 increased
$29.5 million or 76% compared to the first six months of 2000. Unproved property
acquisitions increased by $8.2 million as a result of an increase in general
leasing activity and our acquisition of leases in the Hanging Woman Basin of
Montana and Wyoming for coalbed methane development. We spent $68.2 million in
the first six months of 2001 for unproved property acquisitions and domestic
exploration and development compared to $28.2 million for the comparable period
in 2000. This increase is primarily the result of increased drilling activity.
-17-
Outlook. Management believes that St Mary's existing capital resources,
cash flows from operations and available borrowings are sufficient to meet its
anticipated capital and operating requirements for the remainder of 2001.
We now anticipate spending approximately $160.0 million for capital and
exploration expenditures in 2001 with $130.0 million allocated for ongoing
exploration and development and $30.0 million for acquisitions of producing
properties. Anticipated ongoing exploration and development expenditures for
each of St. Mary's core areas is as follows:
o Mid-Continent region $ 46.0 million
o Gulf Coast and Gulf of Mexico region $ 38.0 million
o ArkLaTex region $ 14.0 million
o Williston Basin $ 26.0 million
o Permian Basin and other $ 6.0 million
The amount not funded from our internally generated cash flow in 2001 can
be funded from our credit facility. The amount and allocation of future capital
and exploration expenditures will depend upon a number of factors including the
number and size of available acquisition opportunities and our ability to
assimilate these acquisitions. Also, the impact of oil and gas prices on
investment opportunities, the availability of capital and borrowing capability
and the success of our development and exploratory activity could lead to
funding requirements for further development.
Natural gas prices continue to decline, but still remain at a high level of
approximately $3.00 per MMBTU while oil prices remain good. Our production base
and balance sheet are strong. We are seeing rig and service availability ease
and costs flattening, and in some cases declining modestly. However, the
acquisition market for properties remains overheated. We remain disciplined and
patient and have reduced our forecast of added production from acquisitions from
2.6 BCFE to 0.5 BCFE. We are currently forecasting the following information for
St. Mary for 2001:
o Production 55-57 BCFE
o Lease operating expense, including
production taxes and transportation $0.85-0.95/MCFE
o Depreciation, depletion and amortization $0.95-1.00/MCFE
o General and administrative expense $0.26-0.30/MCFE
o Current income taxes paid are expected
to approximate between 20% and 25% of
total tax expense and will depend
upon prices we receive and actual
expenditures for intangible drilling costs
o Discretionary cash flows-a common industry
financial measure computed as net income
using a NYMEX gas price of $4.70 and a NYMEX
oil price of $27.40 plus depreciation,
depletion, amortization, impairments,
deferred taxes and exploration expense $5.00-$5.50/common share
St. Mary seeks to protect its rate of return on acquisitions of producing
properties by hedging cash flow when the economic criteria from its evaluation
and pricing model indicate it would be appropriate. Management's strategy is to
hedge cash flows from investments requiring a gas price in excess of $3.25 per
Mcf and an oil price in excess of $22.50 per Bbl in order to meet minimum
rate-of-return criteria. We anticipate this strategy will result in the hedging
of future cash flow from acquisitions. We generally limit St. Mary's aggregate
hedge position to no more than 35% of total production but will hedge up to 50%
of total production in certain circumstances. We seek to minimize basis risk and
index the majority of oil hedges to NYMEX prices and the majority of gas hedges
to various regional index prices associated with pipelines in proximity to St.
Mary's areas of gas production. Please see the discussion in Accounting Matters
below. Including hedges entered into since June 30, 2001 we have hedged as
follows:
-18-
Swaps:
- ------ Average Quantity Average
Product Volumes/month Type Fixed price Duration
------- ------------- -------- ----------- --------
Natural Gas 96,000 MMBtu $4.71 06/01 - 12/01
Natural Gas 84,000 MMBtu $4.16 01/02 - 12/02
Oil 12,400 Bbls $23.49 06/01 - 12/01
Oil 4,600 Bbls $23.23 01/02 - 12/02
Collars:
- -------- Average
Product Volumes/month Ceiling Price Floor Price Duration
------- ------------- ------------- ----------- --------
Natural Gas 150,000 MMBtu $2.9400 $2.3000 06/01 - 12/01
Natural Gas 150,000 MMBtu $2.9000 $2.3000 06/01 - 12/01
Natural Gas 250,000 MMBtu $2.8775 $2.3540 06/01 - 12/01
Natural Gas 250,000 MMBtu $2.8192 $2.3540 06/01 - 12/01
Natural Gas 250,000 MMBtu $3.5000 $2.4000 06/01 - 12/01
Natural Gas 350,000 MMBtu $5.8000 $3.0000 06/01 - 12/01
Oil 7,500 Bbls $20.6400 $16.4400 06/01 - 12/01
Oil 7,500 Bbls $20.9000 $16.7000 06/01 - 12/01
Oil 15,000 Bbls $27.2200 $19.0000 06/01 - 12/01
Oil 7,000 Bbls $21.0000 $18.0000 06/01 - 12/01
Oil 10,000 Bbls $25.1000 $19.5000 06/01 - 12/01
If all these commodity hedging contracts had closed on June 30, 2001 St.
Mary would have been required to pay approximately $2.0 million based on
quarter-end pricing. As of that date we had no margin deposits outstanding to
counterparties.
On June 30, 2001 St. Mary owned shares of KMOC stock that Management
believes has a current market value in excess of its carrying value.
Accounting Matters
On January 1, 2001 we adopted Statement of Financial Accounting Standards
("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities." The adoption of SFAS No. 133 resulted in St. Mary recording a
liability of $45.7 million for the fair value of the derivative instruments at
January 1, 2001. The adoption entry resulted in deferral of the recognition of
this liability to accumulated other comprehensive loss of $28.6 million at
January 1, 2001. During the first six months of 2001 we recognized no additional
hedge gain or loss from hedge ineffectiveness on derivative instruments that
were designated and qualified as cash flow hedging instruments. We anticipate
that all hedge transactions will occur as expected. Based on current prices we
anticipate that $1.6 million of the after tax loss amount included in
accumulated and other comprehensive income will be included in earnings during
the next 12 months.
-19-
In June 2001 the Financial Accounting Standards Board ("FASB") issued SFAS
No. 141, "Business Combinations." Under this statement all business combinations
must be accounted for under the purchase method. The pooling method is no longer
allowed. The statement also establishes criteria to assess when to recognize
intangible assets separately from goodwill. SFAS No. 141 is effective for
business combinations initiated after June 30, 2001 and for all business
combinations using the purchase method for which the date of acquisition is
after June 30, 2001. At this time we have no pending business combinations that
would be affected by the adoption of this statement.
In June 2001 the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets." This statement addresses the accounting for goodwill and other
intangible assets and provides specific guidance for testing goodwill and other
intangible assets for impairment. This statement is effective for fiscal years
beginning after December 15, 2001. We do not anticipate that the adoption of
this statement will have a material effect on our financial position or results
of operations.
In July 2001 the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." This statement requires companies to recognize the fair value of
an asset retirement liability in the financial statements by capitalizing that
cost as part of the cost of the related long-lived asset. The asset retirement
liability should then be allocated to expense by using a systematic and rational
method. The statement is effective for fiscal years beginning after June 15,
2002. St. Mary has not yet determined the impact of adoption of this statement.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
St. Mary 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 us. In prior years we have occasionally hedged interest rates, and may
do so in the future should circumstances warrant.
Our board of directors has adopted a policy regarding the use of derivative
instruments. This policy requires every derivative used by St. Mary 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 board
of directors periodically reviews these programs.
Commodity Price Risk. St. Mary uses various hedging arrangements to manage
its 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 we will receive for the
volumes to which the hedge relates. Consequently, while these hedging
arrangements are structured to reduce our exposure to decreases in prices
associated with the hedged commodity, they also limit the benefit we 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 St. Mary's quarter-end market
prices for natural gas swaps and futures contracts on a notional amount of 10.0
million MMBtu would cause a potential $419,000 change in net income before
income taxes for contracts in place on June 30, 2001. A hypothetical $1.00 per
Bbl change in our quarter-end market prices for crude oil swaps and future
contracts on a notional amount of 423 MBbls would cause a potential $305,000
change in net income before income taxes for oil contracts in place on June 30,
2001. 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.
-20-
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 St.
Mary at June 30, 2001, 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 our floating rate debt approximates its
fair value. At June 30, 2001, we had floating rate debt of $13.4 million and had
no fixed rate debt. Assuming constant debt levels, the impact on results of
operations and cash flows for the remainder of the year resulting from a
one-percentage-point change in interest rates would be approximately $67,000
before taxes.
-21-
PART II. OTHER INFORMATION
ITEM 2. Changes in Securities and Use of Proceeds
-----------------------------------------
(c) In April 2001 St. Mary sold to a single purchaser 100,000 put
options on its own common stock for $99,000 in cash. Those put options
gave the holder the right to require St. Mary to purchase up to 100,000
shares of its own common stock from the holder at $20.22 per share on
July 11, 2001. Those options expired unexercised. In June 2001 St. Mary
sold to a different single purchaser 100,000 put options on its own
common stock for $94,000 in cash. These put options give the holder the
right to require St. Mary to purchase up to 100,000 shares of its own
common stock from the holder at $19.22 per share on September 24, 2001.
The above securities were not registered under the Securities Act of
1933 in reliance on the exemption from registration provided by Section
4(2) of the Securities Act for transactions by an issuer not involving
any public offering since the two purchasers are accredited investors
and the option documents reflect the fact that the purchasers purchased
the securities for their own account without a view to the distribution
thereof.
ITEM 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
At the Company's annual stockholders' meeting on May 23, 2001, the
shareholders approved management's current slate of directors. The
directors elected and the vote tabulation for each director are as
follows:
Director For Withheld
-------- --- --------
Larry W. Bickle 20,697,508 192,867
William J. Gardiner 20,697,508 192,867
R. James Nicholson 20,697,508 192,867
Ronald D. Boone 20,697,508 192,867
Mark A. Hellerstein 20,697,508 192,867
Arend J. Sandbulte 20,697,508 192,867
Thomas E. Congdon 20,697,508 192,867
Jack Hunt 20,660,993 229,382
John M. Seidl 20,697,508 192,867
David C. Dudley 20,697,508 192,867
Robert L. Nance 20,697,508 192,867
Also at the Company's annual stockholders' meeting on May 23, 2001, the
shareholders approved an amendment to the Company's certificate of
incorporation to increase the number of authorized shares of common
stock from 50,000,000 to 100,000,000. The proposal was approved by a
majority of the stockholders as indicated by the following tabulation
of votes:
For: 18,216,189
Against: 2,466,815
Abstain: 207,369
Broker non-votes: 2
-22-
Also at the Company's annual stockholders' meeting on May 23, 2001, the
shareholders approved amendments to the Company's stock option plans to
increase the number of shares of common stock authorized for issuance
under the plans from 3,300,000 to 4,300,000. The proposal was approved
by a majority of the stockholders as indicated by the following
tabulation of votes:
For: 15,012,428
Against: 5,702,421
Abstain: 175,524
Broker non-votes: 2
ITEM 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibit Description
------- -----------
3.1 Restated Certificate of Incorporation of St Mary
Land & Exploration Company as amended in
May 2001
3.2 Certificate of Amendment to Restated Certificate
of Incorporation of St Mary Land & Exploration
Company dated May 23, 2001
10.1 First Amendment to St. Mary Land & Expoloration
Company Employee Stock Purchase Plan dated
February 27, 2001
10.2 Third Amendment to Credit Agreement dated
April 30, 2001
(b) No reports on Form 8-K were filed during the quarter ended
June 30, 2001.
-23-
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
ST. MARY LAND & EXPLORATION COMPANY
August 10, 2001 By /s/ MARK A. HELLERSTEIN
-----------------------
Mark A. Hellerstein
President and Chief Executive Officer
August 10, 2001 By /s/ RICHARD C. NORRIS
---------------------
Richard C. Norris
Vice President - Finance, Secretary
and Treasurer
August 10, 2001 By /s/ GARRY A. WILKENING
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Garry A. Wilkening
Vice President - Administration and
Controller