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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 March 31, 2004
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Commission file number 001-31539
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 700, 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 by check mark whether the registrant is an accelerated filer (as
defined by Rule 12b-2 of the Exchange Act). Yes [ x ] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
As of April 12, 2004, the registrant had 28,540,682 shares of common stock,
$0.01 par value, outstanding.
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ST. MARY LAND & EXPLORATION COMPANY
---------------------------------------
INDEX
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Part I. FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements (Unaudited)
Consolidated Balance
Sheets - March 31, 2004 and
December 31, 2003...........................................3
Consolidated Statements of
Operations - Three Months Ended
March 31, 2004 and 2003.....................................4
Consolidated Statements of
Cash Flows - Three Months Ended
March 31, 2004 and 2003.....................................5
Consolidated Statements of
Stockholders' Equity and
Comprehensive Income - March 31, 2004
and December 31, 2003.......................................7
Notes to Consolidated Financial
Statements - March 31, 2004.................................8
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations..............................................19
Item 3. Quantitative and Qualitative Disclosures
About Market Risk (included within
the content of Item 2).....................................31
Item 4. Controls and Procedures....................................31
Part II. OTHER INFORMATION
Item 1. Legal Proceedings..........................................32
Item 2. Changes in Securities, Use of Proceeds and
Issuer Purchases of Equity Securities......................32
Item 6. Exhibits and Reports on Form 8-K...........................34
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ST. MARY LAND & EXPLORATION COMPANY AND
SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In thousands, except share amounts)
March 31, December 31,
-------------------------------
ASSETS 2004 2003
------------- -------------
Current assets:
Cash and cash equivalents $ 17,806 $ 14,827
Short-term investments 11,500 12,509
Accounts receivable 70,375 65,084
Prepaid expenses and other 5,318 6,020
Deferred income taxes 9,856 8,872
Other 6,274 611
------------- -------------
Total current assets 121,129 107,923
------------- -------------
Property and equipment (successful efforts method), at cost:
Proved oil and gas properties 880,592 858,246
Less - accumulated depletion, depreciation and amortization (331,563) (312,719)
Unproved oil and gas properties, net of impairment allowance
of $10,871 in 2004 and $10,776 in 2003 75,716 61,484
Other property and equipment, net of accumulated depreciation
of $4,925 in 2004 and $4,656 in 2003 4,291 4,276
------------- -------------
629,036 611,287
------------- -------------
Noncurrent assets:
Restricted cash subject to Section 1031 Exchange 10,387 10,353
Other noncurrent assets 5,926 6,291
------------- -------------
Total noncurrent assets 16,313 16,644
------------- -------------
Total Assets $ 766,478 $ 735,854
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 74,278 $ 81,217
Accrued derivative liability 25,708 23,605
------------- -------------
Total current liabilities 99,986 104,822
------------- -------------
Noncurrent liabilities:
Long-term credit facility 31,000 11,000
Convertible notes 99,720 99,696
Deferred income taxes 98,126 90,947
Asset retirement obligation 26,036 25,485
Other noncurrent liabilities and minority interest 14,963 13,251
------------- -------------
Total noncurrent liabilities 269,845 240,379
------------- -------------
Commitments and contingencies
Temporary equity (Note 3):
Common stock subject to put and call options, $0.01 par value; issued
and outstanding - -0- shares in 2004 and 3,380,818 shares in 2003 - 71,594
Note receivable from Flying J - (71,594)
------------- -------------
Total temporary equity - -
------------- -------------
Stockholders' equity:
Common stock, $0.01 par value: authorized - 100,000,000 shares; issued
- 29,502,873 shares in 2004 and 29,245,123 shares in 2003; outstanding,
net of treasury shares - 28,504,373 shares in 2004 and 28,242,423
shares in 2003 295 292
Additional paid-in capital 132,356 146,362
Treasury stock - at cost: 998,500 shares in 2004 and 1,002,700 shares
in 2003 (15,950) (16,057)
Retained earnings 296,386 274,937
Accumulated other comprehensive loss (16,440) (14,881)
------------- -------------
Total stockholders' equity 396,647 390,653
------------- -------------
Total Liabilities and Stockholders' Equity $ 766,478 $ 735,854
============= =============
The accompanying notes are an intergral 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
March 31,
------------------------------
2004 2003
------------------------------
Operating revenues:
Oil and gas production $ 92,607 $ 95,688
Gain on sale of proved properties 195 36
Marketed gas revenue 3,573 3,775
Other oil and gas revenue 67 1,445
Derivative gain 852 115
Other revenues 120 145
-------------- -------------
Total operating revenues 97,414 101,204
-------------- -------------
Operating expenses:
Oil and gas production 23,543 21,130
Depletion, depreciation, amortization
and abandonment liability accretion 20,626 18,885
Exploration 5,704 4,150
Abandonment and impairment of unproved properties 922 919
General and administrative 6,664 6,146
Marketed gas system operating expense 3,411 3,359
Minority interest and other 665 196
-------------- -------------
Total operating expenses 61,535 54,785
-------------- -------------
Income from operations 35,879 46,419
Nonoperating income and (expense):
Interest income 144 230
Interest expense (1,488) (2,216)
-------------- -------------
Income before income taxes and cumulative
effect of change in accounting principle 34,535 44,433
Income tax expense (13,086) (17,071)
-------------- -------------
Income before cumulative effect of change in accounting principle 21,449 27,362
Cumulative effect of change in accounting principal, net of income tax - 5,435
-------------- -------------
Net income $ 21,449 $ 32,797
============== =============
Basic weighted average common shares outstanding 29,775 30,354
Diluted weighted average common shares outstanding 34,191 34,861
Basic earnings per common share:
- --------------------------------
Income before cumulative effect of change in accounting principle $ 0.72 $ 0.90
Cumulative effect of change in accounting principle - 0.18
-------------- -------------
Basic net income per common share $ 0.72 $ 1.08
============== =============
Diluted earnings per common share:
- ----------------------------------
Income before cumulative effect of change in accounting principle $ 0.66 $ 0.81
Cumulative effect of change in accounting principle - 0.16
-------------- -------------
Diluted net income per common share $ 0.66 $ 0.97
============== =============
Cash dividends declared per common share $ - $ -
============== =============
The accompanying notes are an intergral part
of these consolidated financial statements.
-4-
ST. MARY LAND & EXPLORATION COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
For the Three Months Ended
March 31,
--------------------------------
2004 2003
-------------- --------------
Reconciliation of net income to net cash provided
by operating activities:
Net income $ 21,449 $ 32,797
Adjustments to reconcile net income to net
cash provided by operating activities:
Gain on sale of proved properties (195) (36)
Depletion, depreciation and amortization 20,626 18,885
Exploratory dry hole expense 44 461
Abandonment and impairment of unproved properties 922 919
Unrealized derivative gain (852) (115)
Mark to market of long-term compensation plans 2,160 774
Deferred income taxes 8,645 5,685
Minority interest and other 159 (570)
Cumulative effect of change in accounting principle, net of tax - (5,435)
-------------- --------------
52,958 53,365
Changes in current assets and liabilities:
Accounts receivable (5,292) (32,647)
Prepaid expenses and other 702 771
Refundable income taxes (5,820) 1,031
Accounts payable and accrued expenses (2,630) 19,666
Current deferred income taxes - 68
-------------- --------------
Net cash provided by operating activities 39,918 42,254
-------------- --------------
Cash flows from investing activities:
Proceeds from sale of oil and gas properties 483 108
Capital expenditures (42,482) (21,023)
Acquisition of oil and gas properties, including related
$71,594 loan to Flying J in 2003 (522) (73,151)
Proceeds from short-term investments available-for-sale 1,000 -
Other 49 13
-------------- --------------
Net cash used in investing activities (41,472) (94,053)
-------------- --------------
Cash flows from financing activities:
Proceeds from credit facility 76,497 95,820
Repayment of credit facility (56,500) (38,820)
Costs from issuance of convertible notes - (62)
Proceeds from sale of common stock 3,942 998
Repurchase of common stock (19,406) -
-------------- --------------
Net cash provided by financing activities 4,533 57,936
-------------- --------------
Net change in cash and cash equivalents 2,979 6,137
Cash and cash equivalents at beginning of period 14,827 11,154
-------------- --------------
Cash and cash equivalents at end of period $ 17,806 $ 17,291
============== ==============
The accompanying notes are an intergral 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 Three Months Ended
March 31,
--------------------------------
2004 2003
-------------- --------------
(In thousands)
Cash paid for interest, including amounts capitalized $ 3,778 $ 3,809
Cash (received) paid for income taxes $ 9,883 $ (714)
Cash paid for exploration expenses $ 3,613 $ 4,150
Interest income included in restricted cash $ 33 $ -
In January 2004 the Company issued a total of 4,200 shares of common stock from
treasury to its non-employee directors pursuant to the Company's non-employee
director stock compensation plan. Compensation expense related to the shares
issued is expensed over the period to which they relate. The Company recorded
compensation expense of $64,260 for the first quarter of 2004.
In January 2003 the Company issued 7,200 shares of common stock from treasury to
its non-employee directors and recorded compensation expense of $153,000.
In January 2003 the Company issued 3,380,818 restricted shares of common stock
to Flying J Oil & Gas Inc. and Big West Oil & Gas Inc. (collectively,
"Flying J") and entered into a put and call option agreement, valued at $995,000
for financial reporting purposes, with Flying J with respect to those shares in
connection with the acquisition of oil and gas properties and related assets and
liabilities.
The accompanying notes are an intergral part
of these consolidated financial statements.
-6-
ST. MARY LAND & EXPLORATION COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (UNAUDITED)
(In thousands, except share amounts)
Accumulated
Common Stock Additional Treasury Stock Other Total
------------------ Paid-in --------------------- Retained Comprehensive Stockholders'
Shares Amount Capital Shares Amount Earnings Income (Loss) Equity
---------- ------- ---------- ---------- --------- ---------- ------------- -------------
Balances, December 31, 2002 28,983,110 $ 290 $ 140,688 (1,009,900) $(16,210) $ 182,512 $ (7,767) $ 299,513
---------- ------- ---------- ---------- --------- ---------- ------------- -------------
Comprehensive income:
Net Income - - - - - 95,575 - 95,575
Unrealized net gain on marketable
equity securities available for
sale - - - - - - 716 716
Change in derivative instrument
fair value - - - - - - (21,873) (21,873)
Reclassification to earnings - - - - - - 13,846 13,846
Minimum pension liability
adjustment - - - - - - 197 197
------------- -------------
Total comprehensive income 88,461
-------------
Cash dividends, $ 0.10 per share - - - - - (3,150) - (3,150)
Issuance of stock under Employee
Stock Purchase Plan 16,994 - 375 - - - - 375
Value of option right granted to
Flying J - - 995 - - - - 995
Sale of common stock, including
income tax benefit of stock
option exercises 245,019 2 4,304 - - - - 4,306
Directors' stock compensation - - - 7,200 153 - - 153
---------- ------- ---------- ---------- --------- ---------- ------------- -------------
Balances, December 31, 2003 29,245,123 $ 292 $ 146,362 (1,002,700) $(16,057) $ 274,937 $ (14,881) $ 390,653
---------- ------- ---------- ---------- --------- ---------- ------------- -------------
Comprehensive income:
Net Income - - - - - 21,449 - 21,449
Change in derivative instrument
fair value - - - - - - (6,899) (6,899)
Reclassification to earnings - - - - - - 5,340 5,340
-------------
Total comprehensive income 19,890
-------------
Repurchase of common stock - - (19,406) - - - - (19,406)
Sale of common stock, including
income tax benefit of stock option
exercises 257,750 3 5,400 - - - - 5,403
Directors' stock compensation - - - 4,200 107 - - 107
---------- ------- ---------- ---------- --------- ---------- ------------- -------------
Balances, March 31, 2004 29,502,873 $ 295 $ 132,356 (998,500) $(15,950) $ 296,386 $ (16,440) $ 396,647
========== ======= ========== ========== ========= ========== ============= =============
The accompanying notes are an intergral part
of these consolidated financial statements.
-7-
ST. MARY LAND & EXPLORATION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
--------------------------
March 31, 2004
Note 1 - The Company and Business
St. Mary Land & Exploration Company ("St. Mary" or the "Company")
is an independent energy company engaged in the exploration, development,
acquisition and production of natural gas and crude oil. The Company's
operations are conducted entirely in the continental United States.
Note 2 - Basis of Presentation and Significant Accounting Policies
The accompanying unaudited condensed consolidated financial statements
of St. Mary 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, 2003. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation of the interim financial information 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, 2003. 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 3 - Earnings Per Share
Basic net income per common share of stock is calculated by dividing
net income available to common stockholders by the weighted-average of common
shares outstanding during each period. During the first quarter of 2003, the
Company issued 3,380,818 shares of common stock as part of an acquisition. On
February 9, 2004, the Company repurchased these shares, and the shares were
retired (see Note 10). These shares were considered outstanding for purposes of
calculating basic and diluted net income per common share and were weighted
accordingly in the calculation of common shares outstanding. The shares were
included in the temporary equity section of the accompanying consolidated
balance sheets as of December 31, 2003.
Diluted net income per common share of stock is calculated by dividing
adjusted net income by the weighted-average of common shares outstanding and
other dilutive securities. Adjusted net income is used for the if-converted
method discussed below and is derived by adding interest expense paid on the
Company's 5.75% Senior Convertible Notes due 2022 (the "Convertible Notes") back
to net income and then adjusting for nondiscretionary items including the
related income tax effect. Potentially dilutive securities of the Company
consist of in-the-money outstanding options to purchase the Company's common
stock and shares into which the Convertible Notes may be converted.
The treasury stock method is used to measure the dilutive impact of
stock options. The table details the weighted-average dilutive and anti-dilutive
securities related to stock options for the periods presented.
-8-
The dilutive effect of stock options is considered in the detailed
calculation below. There were 611,678 and 616,014 anti-dilutive securities
related to stock options for the three-month periods ended March 31, 2004 and
2003, respectively.
Shares associated with the conversion feature of the Convertible Notes
are accounted for using the if-converted method. Under the if-converted method,
income used to calculate diluted earnings per share is adjusted for the interest
charges and nondiscretionary adjustments based on income that would have changed
had the Convertible Notes been converted at the beginning of the period.
Potentially dilutive shares of 3,846,153 related to the Convertible Notes were
included in the calculation of diluted net income per share for the three-month
periods ended March 31, 2004 and 2003. The Convertible Notes were issued in
March 2002.
The following table sets forth the calculation of basic and diluted
earnings per share:
For the Three Months Ended
March 31,
------------------------------
2004 2003
------------- -------------
(In thousands, except
per share amounts)
Income before cumulative effect of change in accounting
principle $ 21,449 $ 27,362
Cumulative effect of change in accounting principle, net
of income tax - 5,435
------------- -------------
Net income 21,449 32,797
------------- -------------
Adjustments to net income for dilution:
Add: Interest expense not incurred if Convertible Notes
converted 1,580 1,563
Less: Other adjustments (16) (16)
Less: Income tax effect of dilution items (593) (587)
------------- -------------
Net income adjusted for the effect of dilution $ 22,420 $ 33,757
============= =============
Basic weighted-average common shares outstanding
in period 29,775 30,354
Add: Dilutive effects of stock option 570 661
Add: Dilutive effect of Convertible Notes using if-
converted method 3,846 3,846
------------- -------------
Diluted weighted-average common shares outstanding
in period 34,191 34,861
============= =============
Basic earnings per common share:
Income before cumulative effect of change in
accounting principle $ 0.72 $ 0.90
Cumulative effect of change in accounting principle - 0.18
------------- -------------
Total $ 0.72 $ 1.08
============= =============
Diluted earnings per common share:
Income before cumulative effect of change in
accounting principle $ 0.66 $ 0.81
Cumulative effect of change in accounting principle - 0.16
------------- -------------
Total $ 0.66 $ 0.97
============= =============
-9-
Note 4 - Compensation Plans
The Company accounts for stock-based compensation using the intrinsic
value recognition and measurement principles prescribed in Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25"),
and related interpretations. No stock-based employee compensation expense is
reflected in net income as all options granted under the Company's plans had an
exercise price equal to the market value of the underlying common stock on the
date of grant. The following table illustrates the effect on net income and
earnings per share if the Company had applied the fair value recognition
provisions of Statement of Financial Accounting Standards ("SFAS") No. 123,
"Accounting for Stock-Based Compensation," to stock-based employee compensation
for the periods presented (in thousands, except per share amounts).
For The Three Months Ended March
31,
--------------------------------
2004 2003
--------------- --------------
(In thousands, except per share
amounts)
Net income -
As reported: $ 21,449 $ 32,797
Add: Stock-based employee compensation expense
included in reported net income, net of related tax effects - -
Less: Stock-based employee compensation expense
determined under fair value based method for all awards,
net of related income tax effects (883) (300)
--------------- --------------
Pro forma net income $ 20,566 $ 32,497
=============== ==============
Basic earnings per share -
As reported:
Income before cumulative effect of change in accounting
principle $ 0.72 $ 0.90
Cumulative effect of change in accounting principle - 0.18
--------------- --------------
Total $ 0.72 $ 1.08
=============== ==============
Pro forma:
Income before cumulative effect of change in accounting
principle $ 0.69 $ 0.90
Cumulative effect of change in accounting principle - 0.18
--------------- --------------
Total $ 0.69 $ 1.08
=============== ==============
Diluted earnings per share -
As reported:
Income before cumulative effect of change in accounting
principle $ 0.66 $ 0.81
Cumulative effect of change in accounting principle - 0.16
--------------- --------------
Total $ 0.66 $ 0.97
=============== ==============
Pro forma:
Income before cumulative effect of change in accounting
principle $ 0.63 $ 0.80
Cumulative effect of change in accounting principle - 0.16
--------------- --------------
Total $ 0.63 $ 0.96
=============== ==============
-10-
For purposes of these pro forma disclosures, the estimated fair values
of the options are amortized to expense over the options' vesting periods. The
effects of applying SFAS No. 123 in the pro forma disclosure are not necessarily
indicative of actual future amounts.
The fair value of options is measured at the date of grant using the
Black-Scholes option-pricing model. The fair value of options granted in the
three month periods ended March 31, 2004 and 2003 were estimated using the
following weighted-average assumptions.
For the Three Months
Ended March 31,
----------------------------
2004 2003
----------------------------
Risk free interest rate 3.6% 2.8%
Dividend yield 0.3% 0.4%
Volatility factor of the
expected market price of
the Company's common stock 38.7% 39.9%
Expected life of the options (in years) 7.6 5.0
The Black-Scholes option-pricing model was developed for use in
estimating the fair value of traded options that have no vesting restrictions,
are fully transferable, and are not subject to trading restrictions or black out
periods. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Since the
Company's employee stock options have characteristics significantly different
from those of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, it is management's
opinion that the existing models do not necessarily provide a reliable single
measure of the fair value of St Mary's employee stock options.
The Company has not adopted any of the early transition methods
provided for in SFAS No. 148, "Accounting for Stock-Based
Compensation--Transition and Disclosure: and amendment of FASB Statement No.
123." The FASB has issued a final exposure draft that will require companies to
recognize the fair value of stock options and other stock-based compensation as
expense for reporting periods beginning in 2005. For awards issued prior to the
effective date, the standard will require companies to utilize prior valuation
models of fair value and recognize as expense the remaining unvested portion of
the awards over the remaining vesting periods.
Note 5 - Income Taxes
Income tax expense for the three months ended March 31, 2004 and 2003
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 the
effect of state income taxes, percentage depletion, changes in the composition
of income tax rates and other permanent differences. For the three month period
ended March 31, 2004, the Company's current portion of income tax expense was
$5.9 million compared to $11.3 million for the same period in 2003.
Note 6 - Long-term Debt
Revolving Credit Facility
The Company has a revolving credit facility with a group of banks. The
credit facility specifies a maximum loan amount of $300.0 million and has a
maturity date of January 27, 2006. Borrowings under the facility are secured by
a pledge in favor of the lenders of collateral that includes certain oil and gas
properties and the common stock of the material subsidiaries of the Company. The
bank group authorized a borrowing base of $300.0 million in April 2004 under a
-11-
normal semi-annual redetermination. The borrowing base redetermination process
considers the value of St. Mary's oil and gas properties and other assets, as
determined by the bank syndicate. The Company elected an aggregate commitment
amount of $150.0 million. The Company must comply with certain financial and
non-financial covenants. Interest and commitment fees are accrued based on the
borrowing base utilization percentage table below. Eurodollar loans accrue
interest at LIBOR plus the applicable margin from the utilization table, and
Alternative Base Rate (ABR) loans accrue interest at Prime plus the applicable
margin from the utilization table. Commitment fees are accrued on the unused
portion of the aggregate commitment amount and are included in interest expense
in the consolidated statements of operations.
Borrowing base
utilization percentage <50% =>50%<75% =>75%<90% >90%
- ---------------------------------------------------------------------------
Eurodollar Loans 1.25% 1.50% 1.75% 2.00%
ABR Loans 0.00% 0.25% 0.50% 0.75%
Commitment Fee Rate 0.30% 0.38% 0.38% 0.50%
At March 31, 2004, the Company's borrowing base utilization percentage
as defined under the credit agreement was 10.3%. The Company had $17.0 million
in Eurodollar loans and $14.0 million in ABR loans outstanding under its
revolving credit agreement as of March 31, 2004.
5.75% Senior Convertible Notes Due 2022
As of March 31, 2004, the Company also had $100.0 million in
outstanding borrowings under the Convertible Notes. The Convertible Notes
provide for the payment of contingent interest of up to an additional 0.5%
during six-month interest periods based on the note trading price before the
beginning of the particular six-month period. Under that provision, interest was
accrued at a total rate of 6.25% for the three-month period ending March 31,
2004. Based on the trading price of the Convertible Notes over the determination
periods, the Company was subject to the contingent interest payments for the
period from September 16, 2003, to March 15, 2004 and will be subject to the
contingent interest payments for the period from March 16, 2004 to September 15,
2004.
The Convertible Notes contain a provision for payment of contingent
interest if certain conditions are met. Under SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," this provision is considered an
embedded equity-related derivative that is not clearly and closely related to
the fair value of an equity interest and therefore must be separately treated as
a derivative instrument. The value of the derivative at issuance of the
Convertible Notes in March 2002 was $474,000. This amount was recorded as a
decrease to the Convertible Notes payable in the consolidated balance sheets. Of
this amount, $24,000 was amortized through interest expense for the three-month
periods ended March 31, 2004 and 2003. Derivative gain in the consolidated
statements of operations for the three months periods ended March 31, 2004 and
2003 includes net gain of $4,000 and $128,000, respectively, from mark-to-market
adjustments for this derivative.
On October 3, 2003, the Company entered into fixed-to-floating interest
rate swaps for a total notional amount of $50.0 million through March 20, 2007.
Under the swaps St. Mary will be paid a fixed interest rate of 5.75% and will
pay a variable interest rate of 235 basis points above the six-month LIBOR rate
as determined on the semi-annual settlement date. The 6-month LIBOR rate on
March 15, 2004 was 1.16%, and the Company received proceeds of $484,000 from the
semi-annual settlement of the swaps on that date. The payment dates of the swaps
match exactly with the interest payment dates of the Convertible Notes. The fair
value of the swaps was an asset of $728,000 as of March 31, 2004, and was a
liability of $104,000 as of December 31, 2003. The swaps do not qualify for fair
value hedge treatment under SFAS No. 133 and related pronouncements. For the
three-month period ended March 31, 2004, the Company recorded a net gain of
approximately $834,000 included in derivative gain in the consolidated statement
of operations from mark-to-market adjustments for this derivative.
-12-
Weighted-average Interest Rate Paid
The weighted-average interest rates paid for the first quarters of 2004
and 2003 were 6.0% and 4.9%, respectively, including commitment fees paid on the
unused portion of the credit facility aggregate commitment, amortization of
deferred financing costs, and amortization of the contingent interest embedded
derivative. The impact of the commitment fees over a lower average outstanding
balance results in a higher weighted-average interest rate despite lower LIBOR
interest rates than in previous quarters.
Note 7 - Derivative Financial Instruments
The Company recognized a net loss of $8.6 million from its oil and gas
derivative contracts for the three months ended March 31, 2004, compared to a
net loss of $10.6 million for the same period in 2003.
The Company has in place derivative contracts for the sale of oil and
natural gas. The Company attempts to qualify the majority of these instruments
as cash flow hedges for accounting purposes. The table below describes the
volumes and average contract prices of hedges we have in place including hedges
entered into after March 31, 2004. All of our oil and gas derivatives are swap
agreements. The gas swaps are indexed to a variety of regional indexes, and the
oil swaps are indexed to NYMEX.
Gas (per MMBtu) Oil (per Bbl)
--------------- -------------
Weighted-Average Weighted-Average
Contract Contract Price Contract Price
Month Volumes (Regional Index) Volumes (NYMEX)
- ----- ------- ---------------- ------- -------
April 738,900 $ 3.72 178,000 $ 24.66
May 802,000 3.88 174,800 24.67
June 926,500 4.13 173,000 24.67
July 922,700 4.14 172,500 24.65
August 915,000 4.14 170,900 24.65
September 909,600 4.14 169,300 24.64
October 907,100 4.15 167,700 24.64
November 816,800 4.26 165,200 24.64
December 812,600 4.26 163,100 24.64
------------ ------------------ ------------ -----------------
Total 2004 7,751,200 4.10 1,534,500 24.65
------------ ------------------ ------------ -----------------
2005
January 195,600 5.61 27,000 29.20
February 195,600 5.61 27,000 29.20
March 195,600 5.61 5,900 29.20
April 195,600 5.61 - -
May 132,000 5.65 - -
------------ ------------------ ----------- -----------------
Total 2005 914,400 5.61 59,900 29.20
------------ ------------------ ----------- -----------------
All Contracts 8,665,600 $ 4.26 1,594,400 $ 24.82
============ ================== =========== =================
-13-
The Company seeks to minimize basis risk and indexes its oil hedges to
NYMEX prices and its gas hedges to various regional index prices associated with
pipelines in proximity to the Company's areas of gas production. The natural gas
volumes associated with specific Inside FERC ("IF") regional indexes are as
follows:
Index MMBtu
----- -----
IF ANR OK 4,170,600
IF CIG N System 2,023,600
IF Henry Hub 1,571,400
IF Reliant N/S 540,000
IF HSC 360,000
-------------
Total 8,665,600
=============
The following table summarizes all derivative instrument activity (in
thousands).
For the Three Months Ended
March 31,
----------------------------
2004 2003
-------------- -------------
Gain (Loss)
Derivative contract settlements included in
oil and gas production revenues $ (8,599) $ (10,638)
Ineffective portion of hedges qualifying for
hedge accounting included in derivative gain 15 (13)
Non-qualified derivative contracts included
in derivative gain (loss) 837 128
Amortization of contingent interest derivative
through interest expense (24) (24)
-------------- -------------
Total $ (7,771) $ (10,547)
============== =============
On March 31, 2004, St. Mary's remaining cash flow hedge positions from
oil and gas derivatives had an estimated net pre-tax liability of $25.9 million.
The Company anticipates it will reclassify this amount to gains or losses
included in oil and gas production operating revenues as the hedged production
quantity is produced. Based on current prices the net amount of existing
unrealized after-tax loss as of March 31, 2004, to be reclassified from
accumulated other comprehensive income to oil and gas production operating
revenues in the next twelve months would be $16.1 million, net of deferred
income taxes. The Company anticipates that all original forecasted transactions
will occur by the end of the originally specified time periods.
Note 8 - Pension Benefits
In December 2003, the FASB issued SFAS No. 132 (revised 2003),
"Employers' Disclosures about Pensions and Other Postretirement Benefits." This
statement replaces FASB Statement No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits", and adds certain annual and interim
period disclosure requirements. The provisions of this statement do not change
the measurement and recognition provisions of FASB No. 87, "Employers'
Accounting for Pensions", No. 88, "Employers' Accounting for Settlements and
Curtailments of Defined Benefit Pension Plans and for Termination Benefits", and
No. 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions." Interim period disclosure requirements have been incorporated herein.
The Company's employees participate in a non-contributory pension plan
covering substantially all employees who meet age and service requirements (the
"Qualified Pension Plan"). The Company also has a supplemental non-contributory
pension plan covering certain management employees (the "Nonqualified Pension
Plan").
-14-
Components of Net Periodic Benefit Cost
For the Three Months Ended March 31,
------------------------------------
2004 2003
--------------- ---------------
(in thousands)
Components of net periodic benefit cost:
Service cost $ 285 $ 241
Interest cost 122 107
Expected return on plan assets (74) (43)
Amortization of prior service cost (4) (6)
Amortization of net actuarial loss 54 82
--------------- ---------------
Net periodic benefit cost $ 383 $ 381
=============== ===============
Prior service costs are amortized on a straight-line basis over the
average remaining service period of active participants. Gains and losses in
excess of 10% of the greater of the benefit obligation and the market-related
value of assets are amortized over the average remaining service period of
active participants.
Contributions
St. Mary previously disclosed in its financial statements for the year
ended December 31, 2003, that it expected to contribute approximately $987,000
to the pension plans in 2004. Presently, the Company still believes it will
contribute this amount during 2004.
Note 9 - Asset Retirement Obligations
Effective January 1, 2003, the Company adopted the provisions of SFAS
No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 generally
applies to legal obligations associated with the retirement of long-lived assets
that result from the acquisition, construction, development and/or the normal
operation of a long-lived asset. SFAS No. 143 requires the Company to recognize
an estimated liability for costs associated with the abandonment of its oil and
gas properties.
As of January 1, 2003, the Company recognized the future cost to
abandon oil and gas properties over the estimated economic life of the oil and
gas properties in accordance with the provisions of SFAS No. 143. A liability
for the fair value of an asset retirement obligation with a corresponding
increase to the carrying value of the related long-lived asset is recorded at
the time a well is completed or acquired. The Company depletes the amount added
to proved oil and gas property costs and recognizes accretion expense in
connection with the discounted liability over the remaining life of the
respective oil and gas properties. Prior to the adoption of SFAS No. 143 the
Company had recognized an abandonment liability for its offshore wells. These
offshore liabilities were reversed upon adoption of SFAS No. 143, and the
methodology described above was used to determine the liability associated with
abandoning all wells, including those offshore.
The estimated liability is based on historical experience in abandoning
wells, estimated economic lives, external estimates as to the cost to abandon
the wells in the future, and federal and state regulatory requirements. The
liability is discounted using a credit-adjusted risk-free rate. Revisions to the
liability could occur due to changes in estimated abandonment costs or well
economic lives, or if federal or state regulators enact new requirements
regarding the abandonment of wells.
Upon adoption of SFAS No. 143, the Company recorded a discounted
liability of $21.4 million, reversed the existing offshore abandonment liability
of $9.1 million, increased property and equipment by $12.8 million, decreased
accumulated Depreciation, Depletion and Amortization ("DD&A") by $8.3
-15-
million and recognized a one-time cumulative effect gain of $5.4 million (net of
deferred tax benefit of $3.4 million). The Company depletes the amount added to
property costs and recognized accretion expense in connection with the
discontinued liability over the remaining estimated economic lives of the
respective oil and gas properties.
As of March 31, 2004, the Company's capitalized proved oil and gas
properties included $41.1 million of estimated salvage value, which is excluded
from the Company's DD&A calculation.
A reconciliation of the Company's liability for the three months ended
March 31, 2004, is as follows (in thousands).
For the Three Months Ended
March 31,
-------------------------------------
2004 2003
----------------- ------------------
Beginning asset retirement obligation $ 25,485 $ 21,403
Liabilities incurred 172 1,936
Liabilities settled (86) -
Accretion expense 465 395
----------------- ------------------
Ending asset retirement obligation $ 26,036 $ 23,734
================= ==================
Note 10 - Repurchase of Common Stock
On February 9, 2004, the Company repurchased 3,380,818 restricted
shares of its common stock from Flying J Oil & Gas and Big West Oil &
Gas, Inc. (collectively "Flying J") for a total of $91.0 million. St. Mary
originally issued these shares to Flying J on January 29, 2003, in connection
with St. Mary's acquisition of oil and gas properties. In addition to issuing
the shares in the acquisition, St. Mary loaned Flying J $71.6 million. Flying J
used the proceeds of the stock repurchase to repay their outstanding loan
balance of $71.6 million. Accrued interest, which had not been recorded by the
Company for financial reporting purposes due to the non-recourse nature of the
loan, was forgiven. The net $19.4 million cash outlay for the repurchase was
funded from the Company's existing cash balances and borrowings under its bank
credit facility.
-16-
The following table shows the unaudited pro forma effects on the
summarized consolidated balance sheet if the transactions had occurred on
December 31, 2003. The table assumes that the Company would have borrowed the
necessary cash payment from its existing credit facility.
Unaudited
pro forma
December 31, Pro forma December 31,
2003 adjustments 2003
-----------------------------------------------
Summarized Balance Sheet: (In thousands)
Current assets $ 107,923 $ 107,923
Property and equipment, net 611,287 611,287
Other noncurrent assets 16,644 16,644
-------------- ---------------
Total Assets $ 735,854 $ 735,854
============== ===============
Current liabilities $ 104,822 $ 104,822
Debt, including senior debt 110,696 $ 19,406 130,102
Other noncurrent liabilities,
including minority interest 129,683 129,683
-------------- ---------------
Total Liabilities 345,201 364,607
Restricted common stock held by Flying J 71,594 (71,594) -
Note receivable from Flying J (71,594) 71,594 -
-------------- ---------------
Total Temporary Equity - -
-------------- ---------------
Total Equity 390,653 (19,406) 371,247
-------------- ---------------
Total Liabilities and Stockholders' Equity $ 735,854 $ 735,854
============== ===============
Selected Share Information:
Total common shares outstanding, net of
treasury shares including restricted shares 31,623 (3,381) 28,242
============== ===============
-17-
Note 11 - Recently Issued Accounting Standards
A reporting issue has arisen regarding the application of certain
provisions of SFAS No. 141, "Business Combinations", and SFAS No. 142, "Goodwill
and Other Intangible Assets", to companies in the extractive industries,
including oil and gas companies. The issue is whether the Financial Accounting
Standards Board ("FASB") intended to require companies to classify the costs of
mineral rights held under lease or other contractual arrangements associated
with extracting oil and gas as intangible assets in the balance sheet, apart
from other capitalized oil and gas property costs, and provide specific footnote
disclosures. Historically, St. Mary has included the costs of such mineral
rights associated with extracting oil and gas as a component of oil and gas
properties. The FASB has issued an exposure draft of a FASB Interpretation
Release clarifying that leasehold costs may be considered an identifiable asset
rather than an intangible. However, as the release is not yet final, the Company
has presented the following unaudited pro forma information disclosing what the
effect of classifying the costs of mineral rights held under lease or other
contractual arrangements associated with extracting oil and gas as a separate
intangible assets line item on the balance sheet:
Unaudited Pro Forma Presentation
---------------------------------------
March 31, 2004 December 31, 2003
------------------ ------------------
(In thousands)
Total current assets $ 121,129 $ 107,923
Property and equipment
Proved oil and gas properties 537,070 514,919
Less-accumulated depletion, depreciation
and amortization (211,430) (198,717)
Unproved oil and gas properties, net of
impairment allowance 37,603 24,691
Other property and equipment, net of
accumulated depreciation 4,291 4,276
------------------ ------------------
367,534 345,169
Restricted cash subject to Section 1031 Exchange 10,387 10,353
Intangible leasehold, net 261,502 266,117
Other noncurrent assets 5,926 6,292
------------------ ------------------
Total Assets $ 766,478 $ 735,854
================== ==================
-18-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview of the Company
General Overview
We are an independent energy company focused on the exploration,
exploitation, acquisition and production of natural gas and crude oil in the
United States. We earn our revenues and generate our cash flows from operations
primarily from the sale at the wellhead of produced natural gas and crude oil.
Our oil and gas reserves and operations are concentrated primarily in the
Anadarko, Arkoma, Permian and various Rocky Mountain basins and the onshore Gulf
Coast and offshore Gulf of Mexico. We maintain a balanced portfolio of proved
reserves, development drilling opportunities and non-conventional gas prospects.
As of December 31, 2003, we had estimated proved reserves of 593.7 BCFE, 89% of
which were proved developed producing.
This report contains forward-looking statements. You should review our
cautionary note about forward-looking statements at the end of this section.
Oil and Gas Prices
Our results of operations and financial condition are significantly
affected by oil and natural gas commodity prices, which can fluctuate
dramatically. We continued to benefit from robust oil and gas prices through the
first quarter of 2004.
First Quarter 2004 Highlights
Gas prices have remained relatively high due to supply and
transportation constraints resulting from the continuing maturity of gas
producing basins of North America and from difficulties encountered in both
obtaining access to the vast public lands of the western United States and
building a pipeline to transport Alaskan natural gas to the lower 48 states. Oil
prices continued to be very strong, reflecting low inventories, uncertainties
resulting from OPEC announcements regarding their actions to curtail production,
and crude oil refining constraints in the United States. NYMEX prices for the
first quarter of 2004 averaged $5.69 per MMBtu and $35.15 per barrel, an
increase of 24 percent for gas and 13 percent for oil compared to fourth quarter
2003. These prices were 14 percent lower for gas and 4 percent higher for oil
than for the comparable period a year ago. As of March 31, 2004, the NYMEX strip
for the remainder of the year was $33.42 per barrel for oil and $5.57 per MMBtu
for gas.
Net income for the quarter ended March 31, 2004, was $21.4 million or
$0.66 per diluted share compared to the 2003 results of $27.4 million or $0.81
per diluted share before the cumulative effect of change in accounting principle
of an additional $5.4 million or $0.16 per diluted share of income. Net cash
provided by operating activities was $ 39.9 million, down 6 percent, from the
$42.3 million provided in 2003. Production increased 3 percent to 18.5 BCFE on a
comparative quarter basis. Compared to the same period a year earlier, our
average realized price decreased 6 percent to $5.02 per MCFE. Unit costs
increased for the period as lease operating expense (including taxes) increased
$0.10 to $1.28 per MCFE, DD&A (including impairments) increased $0.07 to
$1.12 per MCFE, and general and administrative expense increased $0.02 to $0.36
per MCFE.
-19-
On February 9, 2004, we repurchased 3,380,818 shares of our common
stock from Flying J for a total of $91.0 million. We originally issued these
shares to Flying J on January 29, 2003, in connection with our acquisition of
oil and gas properties. At that time we also loaned Flying J $71.6 million.
Flying J used the proceeds from the share repurchase to repay the outstanding
loan balance. Accrued interest, which we had not been recording due to the
non-recourse nature of the note, was forgiven as part of the transaction. The
net $19.4 million difference was funded from our available cash and from
borrowings under our bank credit facility.
Outlook for the Remainder of 2004
Over the remainder of 2004, we will continue to execute our business
plan, which includes:
o Capital expenditures increased to $288 million. This $15
million increase is due to drilling activity in the Andarko
Basin in our Mid-Continent region. Of this amount, $188
million is allocated to drilling. A table of budgeted amounts
by core area is detailed under the caption Capital Expenditure
Budget. The 2004 exploration and development budget represents
a 39 percent increase over the 2003 budget. We have not
completed any acquisitions to date in 2004, but we continue to
aggressively evaluate property acquisition packages, and as of
the date of this filing our $100 million acquisition budget is
unchanged for 2004.
o Continuing development of our Hanging Woman Basin coalbed
methane project. We have secured a contract for construction
of a high-pressure pipeline to the project and are working on
the remaining infrastructure items. We plan to commence
drilling in May of 2004. An estimated 108 Wyoming wells are
targeted for drilling this year. Roughly one-half of the wells
to be drilled this year will be located on fee lands. We
believe that non-fee permits will begin to be issued in August
2004, and we expect production of natural gas in commercial
quantities to begin in 2005.
o Evaluation of 3-D seismic. In the first quarter of 2004, we
received the processed 3-D seismic data that covers our entire
24,914 fee acreage position in St. Mary Parish, Louisiana. We
are actively evaluating this data. In conjunction with the 3-D
seismic shoot, we optioned 14,969 acres for lease primarily in
the middle portion of our property where little exploration
has historically taken place. Elections under the option
agreement are due May 1, 2004.
-20-
A quarter-to-quarter overview of selected reserve, production and
financial information, including trends:
Selected Operations Data (In Thousands, Except Price and Per MCFE Amounts):
- ---------------------------------------------------------------------------
Three Months Ended March 31, % of Change
----------------------------
2004 2003 Between Periods
------------- -------------- ---------------
Net Production Volumes
- ----------------------
Natural Gas (Mcf) 11,613 11,704
Oil (Bbl) 1,141 1,041
MCFE 18,456 17,951 3%
Average Daily Production
- ------------------------
Natural Gas (Mcf per day) 127,614 130,043
Oil (Bbls per day) 12,533 11,568
MCFE per day (6:1) 202,812 199,453 2%
Oil & Gas Production Revenues
- ---------------------------------
Gas Production $ 60,439 $ 65,931
Oil Production 32,168 29,757
------------- --------------
Total $ 92,607 $ 95,688 (3)%
============= ==============
Oil & Gas Production Costs
- ------------------------------
Lease Operating Expenses $ 15,177 $ 13,872
Transportation Costs 1,737 1,389
Production Taxes 6,629 5,869
------------- --------------
Total $ 23,543 $ 21,130 11%
============= ==============
Average Realized Sales Price, net of hedging
- --------------------------------------------
Natural Gas (Per Mcf) $ 5.20 $ 5.63 (8)%
Oil (Per Bbl) $ 28.20 $ 28.58 (1)%
Per MCFE Data:
- --------------
Net Realized Price $ 5.02 $ 5.33 (6)%
Lease Operating Expense (0.83) (0.77) 8%
Transportation Costs (0.09) (0.08) 13%
Production Taxes (0.36) (0.33) 9%
General and Administrative (0.36) (0.34) 6%
------------- ----------------
Operating Profit $ 3.38 $ 3.81 (11)%
============= ================
Depletion, Depreciation and
Amortization $ 1.12 $ 1.05 7%
Financial Information (In Thousands, Except Per Share Amounts):
- ---------------------------------------------------------------
For the Periods Ended % of Change
-------------------------------------
March 31, 2004 December 31, 2003 Between Periods
--------------- ------------------ ---------------
Working Capital $ 21,143 $ 3,101
Long-Term Debt $ 130,720 $ 110,696 18%
Stockholders' Equity $ 396,647 $ 390,653 2%
For the Periods Ended March 31, % of Change
-------------------------------
2004 2003 Between Periods
------------- -------------- ---------------
Basic Net Income Per Common Share $ 0.72 $ 1.08 (33)%
Diluted Net Income Per Common Share $ 0.66 $ 0.97 (32)%
Basic Weighted-Average Shares Outstanding 29,775 30,354 (2)%
Diluted Weighted-Average Shares Outstanding 34,191 34,861 (2)%
Net Cash Provided By Operating Activities $ 39,918 $ 42,254 (6)%
Net Cash Used In Investing Activities $ (41,472) $ (94,053) (56)%
Net Cash Provided By Financing Activities $ 4,533 $ 57,936 (92)%
-21-
We present the preceding table as a summary of information relating to
those key indicators of financial condition and operating performance that we
believe to be important.
We present per MCFE information since we use this information to
evaluate our performance relative to our peers and to measure trends that we
believe require analysis. Our period-to-period comparison of financial results
presented later provides additional details for the per MCFE differences between
quarters. For the rest of this year we expect oil and gas production expenses
will remain fairly constant with respect to recurring costs and will decrease
slightly for planned workover activity. Production taxes will likely be higher
as a percentage in 2004 as a result of the benefit of severance tax holidays we
realized in 2003. Depreciation, depletion and amortization will likely increase
due to the higher costs associated with finding and acquiring crude oil and
natural gas. General and administrative expense is projected to increase in the
second quarter of 2004 following the anticipated grant of restricted stock.
Assuming the restricted stock plan is approved by our stockholders, grants of
restricted stock will replace grants of stock options beginning in June 2004. We
expect G&A per MCFE for all of 2004 will decrease relative to the first
quarter.
The remaining information in the table relates to information we have
provided in operations update press releases and is intended to supplement the
discussion above.
Overview of Liquidity and Capital Resources
We continue to believe that we have sufficient liquidity and capital
resources to execute our business plans for the foreseeable future.
Sources of cash
Our primary sources of liquidity are the cash provided by operating
activities, debt financing, sales of non-strategic properties and access to the
capital markets.
As of March 31, 2004, we had $10.4 million of cash that is restricted.
This cash is held in a 1031 deferred exchange account and is available for
purchase of oil and gas properties.
Our current credit facility. The calculated borrowing base for our
credit facility was increased to $300.0 million in April 2004 following a normal
semi-annual borrowing base review. We have elected a commitment amount of $150.0
million under this facility, which results in lower commitment fees payable to
the bank syndicate. We believe this commitment level is adequate for our
near-term liquidity requirements. We must comply with certain financial and
non-financial covenants, and we are currently in compliance with all of these
covenants. Interest and commitment fees are accrued based on the borrowing base
utilization percentage. LIBOR-based borrowings accrue interest at LIBOR plus the
applicable margin from the utilization table, and Alternate Base Rate borrowings
accrue interest at prime plus the applicable margin from the utilization table
located in Note 5 of Part IV, Item 15 of our December 31, 2003 report.
Commitment fees are accrued on the unused portion of the aggregate commitment
amount and are included in interest expense in the consolidated statements of
operations. Our loan balance of $31.0 million on March 31, 2004, was comprised
of $17.0 million of LIBOR based borrowing and $14.0 million of ABR borrowing. As
of April 28, 2004, our total outstanding borrowings under the credit facility
had been reduced to $6.0 million.
We increased our net borrowings by $20 million to $130.7 million in the
first quarter of 2004 primarily to fund the repurchase of our common stock from
Flying J. Our weighted-average interest rate paid in the first quarter of 2004
was 6.0 percent and included commitment fees paid on the unused portion of the
credit facility borrowing base, amortization of deferred financing costs, and
amortization of the contingent interest embedded derivative associated with the
convertible notes.
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. On October 3, 2003, we executed interest rate
-22-
swaps on a total notional amount of $50.0 million of the convertible notes,
which we expect will continue to result in lower interest expense through
September of 2004 compared to last year unless interest rates rise
significantly. The sensitivity analysis discussed below presents the
hypothetical change in fair value of those financial instruments we held at
March 31, 2004, that 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, interest rate changes for
floating-rate debt 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. Giving consideration to the interest rate swaps, we had floating-rate
debt of $81.0 million and had $50.0 million of fixed-rate debt at March 31,
2004. Assuming constant debt levels, the cash flow impact for the remainder of
the year resulting from a one-percentage point change in interest rates would be
approximately $607,500 before taxes. The results of operations impact might be
less than this amount as a direct effect of the capitalization of interest to
wells drilled during the year. In prior years when our debt amount was at a
reduced level we capitalized a larger percentage of our interest expense. Since
we cannot predict the exact amount that would be capitalized, we cannot predict
the exact effect that a one-percentage point shift would have on the results of
operations.
Uses of cash
We use cash for the acquisition, exploration and development of oil and
gas properties and for the payment of debt obligations, trade payables and
stockholder dividends. In the first quarter of 2004 we spent $42.4 million on
capital development and a net $19.4 million to acquire shares of our common
stock using cash flows from operations and debt financing. Our net payables
decreased by $2.6 million, and we made $9.9 million in cash payments for income
taxes.
The following table presents amounts and percentage changes between the
quarters ended March 31, 2004 and 2003 from our operating, investing and
financing activities. The analysis following the table should be read in
conjunction with our consolidated statements of cash flows in Part I, Item 1 of
this report.
Amount of Change Percent of Change
2004/2003 Between Periods
Net cash provided by operating activities $ (2,336) (6)%
Net cash used in investing activities $ 52,581 (56)%
Net cash provided by financing activities $ (53,403) (92)%
Analysis of cash flow changes between the quarters ending March 31, 2004 and
March 31, 2003
Operating activities. The difference above reflects a net decrease in
sources of cash flow of approximately $1.9 million caused by decreases in
realized prices for both oil and gas between the quarters. Another $1.9 million
difference relates to net payments of income taxes, partially offset by net
collections of accounts receivable in excess of decreased accounts payable
balances. These amounts were partially offset by a $1.4 million increase in the
effect of the non-cash mark to market accrual of compensation expense under our
long-term net profits interest bonus plan on net income between the two
quarters.
Investing Activities. The decrease in net cash used results from the
Flying J acquisition in the first quarter of 2003. Total 2004 capital
expenditures, including acquisitions of oil and gas properties, decreased $51.2
million or 54 percent to $43.0 million compared to $94.2 million in 2003.
Financing activities. The $53.4 million decrease in cash provided
reflects the net $19.4 million we paid to repurchase our shares from Flying J on
February 9, 2004 and decreased borrowing against our credit facility. In 2003 we
borrowed to fund our acquisition of properties from Flying J. In 2004 we
borrowed to fund the difference between the amount we paid to repurchase our
-23-
shares and the amount we received from Flying J when they repaid their loan. In
2004, we also received $2.9 million more of proceeds from stock option exercises
as compared to 2003.
St. Mary had $17.8 million in cash and cash equivalents and had working
capital of $21.1 million as of March 31, 2004, compared to $14.8 million in cash
and cash equivalents and working capital of $3.1 million as of December 31,
2003.
Capital Expenditure Budget
Expenditures for exploration and development of oil and gas properties
and acquisitions are the primary use of our capital resources. We anticipate
spending approximately $288 million for capital and exploration expenditures in
2004 with $100 million allocated for acquisitions of producing properties.
Anticipated ongoing exploration and development expenditures and budgeted gross
wells for each of our core areas are as follows. The timing of drilling and
completion of wells is variable and will differ from these estimates.
In millions Well count
----------- ----------
o Mid-Continent region $ 73.7 60
o Rocky Mountain region 51.7 66
o ArkLaTex region 21.6 40
o Gulf Coast region 18.4 16
o Coal Bed Methane 12.2 108
o Permian Basin region 10.0 30
--------
$ 187.6
========
We regularly review our capital expenditure budget to reflect changes
in current and projected cash flow, acquisition opportunities, debt requirements
and other factors. The above allocations are subject to change based on various
factors and results.
The following table sets forth certain information regarding the costs
incurred by us in our oil and gas activities during the periods indicated.
Three Months Ended March 31,
----------------------------------
2004 2003
---------------- --------------
(In thousands)
Development costs $ 34,446 $ 20,575
Exploration costs 6,616 7,507
Acquisitions:
Proved 694 76,466
Unproved 2,792 1,891
---------------- --------------
Total including asset retirement obligation $ 44,548 $ 106,439
================ ==============
Our costs incurred for capital and exploration activities in the
quarter ended March 31, 2004, decreased $61.9 million or 58 percent compared to
the same period in 2003. This decrease reflects our closing of the Flying J
property acquisition in the first quarter of 2003.
We spent $43.9 million in 2004 for unproved property acquisitions and
exploration and development costs compared to $30.0 million in 2003, a 46%
increase. This increase over 2003 reflects the planned increase in our drilling
activity budget. We still have $100.0 million of our budget allocated for
acquisitions in 2004.
We are proceeding with the development of coalbed methane reserves in
our Hanging Woman Basin project. We have 139,000 net lease acres in the basin
and are concentrating our initial development on 65,000 net acres located in
Wyoming. Our current development plan for this project considers only the
Wyoming acreage. Outstanding legal challenges filed by environmental public
-24-
interest groups affect 47,000 net acres in Montana relating to this project. See
Legal Proceedings under Part II, Item 1 of this report.
We believe that internally generated cash flow and our credit facility
will be utilized in 2004 to fund our capital expenditures budget. 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, whether we can make an economic acquisition and our ability to
assimilate acquisitions we are considering. 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.
Financing alternatives
In 2004 we are seeing that the debt and equity financing capital
markets remain very attractive to energy companies who operate in the
exploration and production segment. This is a result of relatively strong
commodity prices and the general strength reflected in the balance sheets of the
companies in this segment. We are not currently considering accessing the
capital markets in 2004. However, if additional development or attractive
acquisition opportunities arise that exceed our currently available resources,
we may consider other forms of financing, including the public offering or
private placement of equity or debt securities.
Sensitivity Analysis
There has been no material change to the natural gas and crude oil
price sensitivity analysis previously disclosed. Please see the corresponding
section under Part II Item 7 of our Annual Report on Form 10-K for the year
ended December 31, 2003.
Summary of oil and gas production hedges in place
Our net realized oil and gas prices are impacted by hedges we have
placed on future forecasted transactions. We have historically entered into
hedges of existing production around the time we make acquisitions of producing
oil and gas properties. Our intent is to lock-in a significant portion of an
equivalent amount of production to the prices we used to evaluate the economics
of our acquisition. The percentage of our production that is hedged currently is
a direct result of the timing of our acquisitions from Burlington and Flying J
in late 2002 and early 2003, respectively. Aside from major acquisitions our
discretionary hedging activity has been limited.
-25-
The table below describes the volumes and average contract prices of
hedges we have in place including hedges entered into after March 31, 2004. All
of our oil and gas derivatives are swap agreements. These hedges tend to make
our earnings less sensitive to movements in commodity price and were factored in
the analysis of sensitivity below.
Gas (per MMBtu) Oil (per Bbl)
--------------- -------------
Weighted-Average Weighted-Average
Contract Contract Price Contract Price
Month Volumes (Regional Index) Volumes (NYMEX)
- ----- ------- ---------------- ------- -------
April 738,900 $ 3.72 178,000 $ 24.66
May 802,000 3.88 174,800 24.67
June 926,500 4.13 173,000 24.67
July 922,700 4.14 172,500 24.65
August 915,000 4.14 170,900 24.65
September 909,600 4.14 169,300 24.64
October 907,100 4.15 167,700 24.64
November 816,800 4.26 165,200 24.64
December 812,600 4.26 163,100 24.64
------------ ------------------ ------------ ------------------
Total 2004 7,751,200 4.10 1,534,500 24.65
------------ ------------------ ------------ ------------------
2005
January 195,600 5.61 27,000 29.20
February 195,600 5.61 27,000 29.20
March 195,600 5.61 5,900 29.20
April 195,600 5.61 - -
May 132,000 5.65 - -
------------ ------------------ ----------- ------------------
Total 2005 914,400 5.61 59,900 29.20
------------ ------------------ ----------- ------------------
All Contracts 8,665,600 $ 4.26 1,594,400 $ 24.82
============ ================== =========== ==================
We anticipate that all hedge transactions will occur as expected.
The Company seeks to minimize basis risk and indexes its oil hedges to
NYMEX prices and its gas hedges to various regional index prices associated with
pipelines in proximity to the Company's areas of gas production. The natural gas
volumes associated with specific Inside FERC regional indexes are as follows:
Index MMBtu
----- -----
IF ANR OK 4,170,600
IF CIG N System 2,023,600
IF Henry Hub 1,571,400
IF Reliant N/S 540,000
IF HSC 360,000
--------------
Total 8,665,600
==============
For contracts in place on March 31, 2004, a hypothetical change of 10
percent in future gas strip prices representing a $0.56 increase per MMBtu
applied to a notional amount of 7.3 million MMBtu covered by natural gas swaps
would cause a change in hedge gain or loss included in gas revenue of $3.9
million in 2004 and $209,000 in 2005. A hypothetical change of 10 percent in the
future NYMEX strip oil prices representing a $3.36 increase per Bbl applied to a
notional amount of 1.6 MMBbl covered by crude oil swaps would cause a change in
hedge gain or loss included in oil revenue of $5.2 million in 2004 and $190,000
in 2005.
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Summary of interest rate hedges in place
We entered into fixed-rate to floating-rate interest rate swaps on
$50.0 million of convertible notes on October 3, 2003. As we do not believe we
have the ability to predict interest rates, we attempt to maintain a balanced
allocation between fixed and floating rate debt. As our usage of the credit
facility at that time was nearing zero we elected to exchange fixed rate
payments for floating rate payments on a portion of the interest on our
convertible notes. This hedge does not qualify for fair value hedge treatment
under Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities." Excluding accrued payments due
to us at March 31, 2004, the interest rate swaps had a fair value asset of
$728,000. Derivative gain in the consolidated statements of operations at March
31, 2004, includes $833,000 of income related to the fair value asset increase.
Unless we access our credit facility to make an acquisition or interest rates
increase dramatically, interest expense through September 2004 should decrease
compared to last year due to these fixed-to-floating interest rate swaps.
Schedule of contractual obligations
The following table summarizes our future estimated principal payments
and minimum lease payments for the periods specified (in millions):
Less than More than 5
Contractual Obligations Total 1 year 1-3 years 3-5 years years
- --------------------------- ---------- ---------- ----------- ----------- -------------
Long-Term Debt $ 131.0 $ - $ 31.0 $ 100.0 $ -
Operating Leases 10.6 2.4 3.2 2.1 2.9
Other Long-Term Liabilities 10.4 1.0 0.5 0.2 8.7
---------- ---------- ----------- ----------- -------------
Total $ 152.0 $ 3.4 $ 34.7 $ 102.3 $ 11.6
========== ========== =========== =========== =============
This table includes our 2004 estimated pension liability payment of
approximately $987,000, but excludes the remaining unfunded portion of $1.7
million, as we cannot determine with accuracy the timing of future payments. The
table does not include estimated payments associated with our net profits
interest bonus plan. Although we record a liability for the estimated future
payments, we are not able to precisely predict the timing of these amounts. We
have not included asset retirement obligations for the same reason. Pension
liabilities and asset retirement obligations are discussed in Note 8 and Note 9,
respectively, of Part IV Item 15 of our Form 10-K for the year ending December
31, 2003, and also in Part I Item 1 of this report.
Two leases for office space will expire in year 2, and a third office
space lease will expire in year 3. Estimated costs to replace these leases are
not included in the table above. For purposes of the table we assume that the
holders of our convertible notes will not exercise the conversion feature. If
the holders do exercise their conversion feature, we will not have to repay the
$100.0 million. However, our common shares outstanding would increase by
3,846,150 shares.
Our projected requirements for cash to pay interest and dividends for
the remainder of 2004 are $5.6 million and $3.0 million, respectively. We will
also make cash payments for income taxes, dependent on net income and capital
spending.
Off-Balance Sheet Arrangements
Aside from operating leases we do not have any off-balance sheet
financing nor do we have any unconsolidated subsidiaries.
-27-
Critical Accounting Policies and Estimates
We refer you to the corresponding section of our Annual Report on Form
10-K for the year ended December 31, 2003.
Additional Comparative Data in Tabular Format:
Change Between the
Three Months Ended
Oil and Gas Production Revenues March 31, 2004 and 2003
- ------------------------------- --------------------------
Decrease in oil and gas production revenues (in thousands) $ (3,081)
Components of Revenue Increases (Decreases):
Natural Gas
- -----------
Realized price change per Mcf $ (0.43)
Realized price percentage change (8)%
Production change (MMcf) (91)
Production percentage change (1)%
Oil
- ---
Realized price change per Bbl $ (0.38)
Realized price percentage change (1)%
Production change (MBbl) 99
Production percentage change 10%
Our product mix as a percentage of total oil and gas revenue and production:
Three Months Ended March 31,
----------------------------------------
Revenue 2004 2003
- ------- ------------------ ------------------
Natural Gas 65% 69%
Oil 35% 31%
Production
Natural Gas 63% 65%
Oil 37% 35%
Information regarding the effects of oil and gas hedging activity:
Three Months Ended March 31,
---------------------------------
Natural Gas Hedging 2004 2003
- ------------------- ---------------- ---------------
Percentage of gas production hedged 32% 29%
Natural gas MMBtu hedged 4.1 million 3.8 million
Decrease in gas revenue ($3.1 million) ($6.7 million)
Average realized gas price per Mcf before hedging $ 5.48 $ 6.20
Average realized gas price per Mcf after hedging 5.20 5.63
Oil Hedging
- -----------
Percentage of oil production hedged 41% 58%
Oil volumes hedged (MBbl) 462 600
Decrease in oil revenue ($5.5 million) ($3.9 million)
Average realized oil price per Bbl before hedging $ 32.98 $ 32.35
Average realized oil price per Bbl after hedging 28.20 28.58
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Information regarding the components of exploration expense:
Summary of Exploration Expense (In millions) 2004 2003
- -------------------------------------------- -------------- --------------
Geological and geophysical expenses $ 0.7 $ 1.4
Exploratory dry holes 0.2 0.5
Overhead and other expenses 4.8 2.3
-------------- --------------
$ 5.7 $ 4.2
============== ==============
Comparison of Financial Results and Trends between the Quarters ended March 31,
2004 and 2003
Oil and Gas Production Revenues. Average net daily production increased
2 percent to 202.8 MMCFE for the quarter ended March 31, 2004 compared with
199.5 MMCFE for the quarter ended March 31, 2003. Wells completed in 2003 and
2004 combined with wells from acquisitions in 2003, including Flying J, have
added revenue of $23.1 million and average net daily production of 50.0 MMCFE in
2004 compared to 2003. These increases are offset by natural declines in
production from older properties and result in the modest increase in production
between the quarters presented.
Other Oil and Gas Revenue. Other oil and gas revenue decreased 95% to
$67,000 for the quarter ended March 31, 2004, compared with $1.4 million for the
comparative quarter ended March 31, 2003. In 2003 we sold access rights to
seismic data for $900,000 and on a comparative basis estimated accrued income
relating to settlement of future natural gas imbalances with our partners
decreased $417,000 from 2003 to 2004.
Oil and Gas Production Expenses. Total production costs increased $2.4
million, or 11 percent, to $23.5 million for the first quarter of 2004, from
$21.1 million in the comparable period of 2003. Wells completed in 2003 and 2004
combined with wells from acquisitions in 2003, including Flying J, added $4.1
million of incremental production costs in 2004 that were not reflected in 2003.
We expect to see the results of increased production from these wells in future
periods. Additionally, we experienced an increase in production taxes consistent
with an increase in revenue from crude oil.
Total oil and gas production costs per MCFE increased $0.10 to $1.28
for 2004, compared with $1.18 for 2003. This increase is comprised of the
following:
o A $0.03 increase in production taxes due to higher revenue from crude oil in
our Rocky Mountain region; o A $0.01 increase due to rising transportation costs
in our Mid-Continent region; o A $0.01 increase reflecting general increases in
LOE per MCFE in our other core areas. o A $0.06 increase in LOE that reflects
our additions of higher cost oil properties in our; Rocky Mountain
region through our acquisitions from Burlington and Flying J and o
A $0.01 overall decrease in LOE relating to workover charges.
General and Administrative. General and administrative expenses
increased $518,000 or 8 percent to $6.7 million for the quarter ended March 31
2004, compared with $6.1 million for the respective 2003 timeframe.
Approximately $2.2 million of the 2004 cost and $774,000 of the 2003 cost
is non-cash and relates to the mark-to-market effect of accruing compensation
expense under our net profits interest bonus plan. The increase in cost on a per
MCFE basis reflects a higher percentage increase in G&A, primarily due to an
increase in our compensation expense, than the proportionate increase in
production of 3 percent for the period.
From December 31, 2002 to December 31, 2003 our employee count
increased from 185 to 226. This increase has resulted in a general increase in
G&A of $2.3 million between the first quarter of 2004 and the first quarter
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of 2003. That increase plus a $1.0 million increase in expense associated with
our incentive compensation plans was partially offset by a $2.6 million increase
in COPAS overhead reimbursement from operations and G&A we allocated to
exploration expense. The increase in expense associated with our incentive
compensation plans reflects both the benefit we have received from the current
price environment for past employee performance and the performance of our
employees during the current year. The increase in exploration expense reflects
our increase in skilled technical staff. The technical staff was increased in
order to integrate our acquisitions from 2002 and 2003 and to implement an
increased drilling budget. The budget increase results from new projects
identified from these acquisitions as well as other new drilling projects and
discoveries during that timeframe.
Interest Expense. Interest expense decreased by $728,000 to $1.5
million for 2004 compared to $2.2 million for 2003. The decrease reflects the
benefit of the interest rate swap that we entered into on October 3, 2003,
offset in part by decreased average borrowings under our credit facility in 2004
relative to the prior year.
Income Taxes. Income tax expense totaled $13.1 million for the first
quarter of 2004 and $17.1 million for the first quarter of 2003, resulting in
effective tax rates of 37.9 percent and 38.4 percent, respectively. The
effective rate change from 2003 reflects changes in the composition of the
highest marginal state tax rates as a result of acquisition and drilling
activity, percentage depletion and other permanent differences.
The current portion of the income tax expense in 2004 is $5.9 million
compared to $11.3 million in 2003. These amounts are 45 percent and 66 percent
of the total tax for the respective periods. We increased our 2004 budget for
drilling expenditures over 2003 amounts but revenues are projected for a slight
increase in 2004 over 2003. Therefore, we believe that current taxable income
and the resulting current portion of income tax as a percentage of total income
tax will be lower in 2004 than it was in 2003.
Accounting Matters
We recognized a $5.4 million gain net of income tax in 2003 from the
adoption of SFAS No. 143 effective January 1, 2003.
We refer you to Note 9 of Part I, Item 1 of this report for additional
information.
Environmental
St. Mary's compliance with applicable environmental regulations has not
resulted in any significant capital expenditures or materially adverse effects
on our liquidity or results of operations. We believe that we are in substantial
compliance with environmental regulations and do not currently expect that any
material expenditures will be required in the foreseeable future. However, we
are unable to predict the impact that future compliance with regulations may
have on future capital expenditures, liquidity and results of operations.
-30-
Cautionary Note About Forward - Looking Statements
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 expects, believes or anticipates will or may occur in the future are
forward-looking statements. The words "will," "believe," "anticipate," "intend,"
"estimate," "expect," "project," and similar expressions are intended to
identify forward - looking statements, although not all forward - looking
statements contain such identifying words. Examples of forward-looking
statements may include discussion of such matters as:
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,
o recent legal developments, 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 under 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, unexpected drilling conditions and
results, production rates and reserve replacement, the imprecise nature of oil
and gas reserve estimates, drilling and operating service availability and
risks, uncertainties in cash flow, the financial strength of hedge contract
counterparties, the availability of attractive exploration, development and
property acquisition opportunities, financing requirements, expected acquisition
benefits, competition, litigation, environmental matters, the potential impact
of government regulations, and other matters discussed in the "Risk Factors"
section of our 2003 Annual Report on Form 10-K. 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. Although we may from time to time
voluntarily update our prior forward - looking statements, we disclaim any
commitment to do so except as required by securities laws.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this item is provided under the captions
"Interest Rate Risk" and "Sensitivity Analysis" in Item 2 above and is
incorporated herein by reference.
ITEM 4. CONTROLS AND PROCEDURES
We maintain a system of disclosure controls and procedures that are
designed for the purposes of ensuring that information required to be disclosed
in our SEC reports is recorded, processed, summarized and reported within the
time periods specified in the SEC's rules and forms, and that such information
is accumulated and communicated to our management, including the Chief Executive
Officer and the Vice-President - Finance, as appropriate to allow timely
decisions regarding required disclosure.
We carried out an evaluation, under the supervision and with the
participation of our management, including the Chief Executive Officer and the
-31-
Vice-President - Finance, of the effectiveness of the design and operation of
our disclosure controls and procedures as of the end of the period covered by
this Quarterly Report on Form 10-Q. Based upon that evaluation, the Chief
Executive Officer and the Vice-President - Finance concluded that our disclosure
controls and procedures are effective for the purposes discussed above as of the
end of the period covered by this Quarterly Report on Form 10-Q. There was no
significant change in our internal control over financial reporting that
occurred during our most recent fiscal quarter that has materially affected, or
is reasonably likely to materially affect, our internal control over financial
reporting.
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
-----------------
From time to time, we may be involved in litigation relating to claims
arising out of our operations in the normal course of business. As of the date
of this report, no legal proceedings are pending against us that individually or
collectively could have a material adverse effect upon our financial condition
or results of operations.
As previously reported Nance Petroleum Corporation, a wholly owned
subsidiary is named along with several other leaseholders and interested parties
as an additional co-defendant in a lawsuit that was originally filed in the U.S.
District Court for the District of Montana on June 12, 2001. The plaintiff, the
Northern Plains Resource Council, Inc., an environmental public interest group,
sued the U.S. Bureau of Land Management, the U.S. Secretary of the Interior, the
Montana BLM State Director and Fidelity Exploration & Production Company.
The lawsuit seeks the cancellation of all federal leases related to coalbed
methane development in Montana issued by the BLM since January 1, 1997. This
cancellation is sought primarily on the grounds of an alleged failure of the BLM
to comply with federal environmental laws. NPRC alleges that the environmental
impacts of coalbed methane development were not properly analyzed before the
challenged leases were issued. The Montana portion of our Hanging Woman Basin
coalbed methane project contains approximately 74,000 total net acres. The
lawsuit potentially affects approximately 47,000 net acres that are subject to
federal leases. Based on information presently available, we believe that the
BLM complied with the applicable environmental laws, and the District Court
agreed by granting the defendants' motion for summary judgment in December 2003.
The court held that the issuance process regarding the federal leases in
question complied with the applicable environmental laws. The plaintiff has
appealed this decision and the Ninth Circuit Court of Appeals has granted
expedited status to this appeal. Briefing in this case is now complete. No
decision has been made as to whether this matter will be set for oral argument.
We have no current indications as to when the Ninth Circuit Court of Appeals
will render a decision. Notwithstanding our success in the lower court, there is
no assurance as to the ultimate outcome of the lawsuit, and therefore, there is
no assurance that it will not adversely affect our coalbed methane project. Even
if the federal leases in Montana become unavailable, we are proceeding with this
project on non-federal leases in Wyoming, and we anticipate acquiring additional
non-federal leases in Montana and Wyoming.
ITEM 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities
(c) In January 2004, St. Mary issued a total of 4,200 restricted shares of
common stock valued at $107,000 from treasury to its non-employee
directors pursuant to the Company's non-employee director stock
compensation plan. Compensation expense related to the shares issued is
amortized over the period of service as members of the board of
directors to which the stock grant relates. St. Mary recorded
compensation expense of $64,000 related to the issuance of these shares
during the quarter ended March 31, 2004. These shares were not
registered under the Securities Act of 1933 in reliance on Rule 506 of
Regulation D promulgated under the Securities Act since the directors
are accredited investors and certificates representing the shares bear
a legend restricting the transfer of those shares.
-32-
(e) The following table provides information about purchases by the Company
during the quarter ended March 31, 2004, of shares of the Company's
common stock, which is the sole class of equity securities registered
by the Company pursuant to Section 12 of the Exchange Act.
ISSUER PURCHASES OF EQUITY SECURITIES
- ------------ ------------------ ------------------------ --------------------- ------------------------
(a) (b) (c) (d)
Total Number of Maximum number of
Shares Purchased as Shares that May Yet Be
Total Number of Average Price Paid per Part of Publicly Purchased Under the
Period Shares Purchased Share Announced Program (1) Program (1)
- ------------ ------------------ ------------------------ --------------------- ------------------------
01/01/04 - - 0 - $ - 0 - - 0 - 990,100
01/31/04
- ------------ ------------------ ------------------------ --------------------- ------------------------
02/01/04 - 3,380,818 (2) $ 26.92 (2) - 0 - 990,100
02/29/04
- ------------ ------------------ ------------------------ --------------------- ------------------------
03/01/04 - - 0 - - 0 - - 0 - 990,100
03/31/04
- ------------ ------------------ ------------------------ --------------------- ------------------------
Total: 3,380,818 $ 26.92 - 0 - 990,100
- ------------ ------------------ ------------------------ --------------------- ------------------------
(1) On August 7, 1998, we announced that our 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 2,000,000 shares
of our common stock (as adjusted to reflect a two-for-one stock split
effected in the form of a stock dividend distributed in September
2000). Through 2001 we had repurchased a total of 1,009,900 shares
under this program for $16.2 million at a weighted-average price of
$15.86 per share. We have not made any purchases under this program
since 2001. Additional purchases of shares may occur as market
conditions warrant. We expect future purchases will be funded with
internal cash flow and borrowings under our credit facility.
(2) Apart from our publicly announced share repurchase program, on February
9, 2004, we repurchased from Flying J Oil & Gas Inc. and Big West
Oil & Gas Inc. 3,380,818 restricted shares of our common stock for
a total of $91,000,000, or $26.92 per share. The repurchase was the
result of exercising a call option on our stock. We had issued the
shares to Flying J and Big West on January 29, 2003, in connection with
our acquisition of oil and gas properties. In addition to issuing the
shares, we had loaned Flying J and Big West $71,594,000. This loan was
completely repaid by Flying J and Big West as part of the share
repurchase transaction. The $19,406,000 cash payment for the share
repurchase, net of the loan repayment from Flying J and Big West, was
funded from our existing cash balances and borrowings under our bank
credit facility.
The payment of dividends and stock repurchases are subject to covenants
in our bank credit facility, including the requirement that we maintain certain
levels of stockholders' equity and the limitations of our annual dividend rate
to no more than $0.20 per share.
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ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The following exhibits are furnished as part of this report:
Exhibit Description
31.1* Certification of Chief Executive Officer pursuant to Section
302 of the Sarbanes - Oxley Act of 2002
31.2* Certification of Vice President - Finance pursuant to Section
302 of the Sarbanes - Oxley Act of 2002
32.1* Certification pursuant to U.S.C. Section 1350 as adopted
pursuant to Section 906 of the Sarbanes - Oxley Act of 2002
--------------------------
* Filed with this Form 10-Q.
(b) Reports on Form 8-K
St. Mary Land & Exploration Company filed the following current
reports on Form 8-K during the quarter ended March 31, 2004:
On January 23, 2004, we filed a current report on Form 8-K reporting under Item
12 that we had issued a press release on January 22, 2004, announcing our 2004
capital expenditures budget, year-end 2003 reserves and an update on our
operations for the fourth quarter and full year of 2003.
On February 10, 2004, we filed a current report on Form 8-K reporting under Item
5 that we had issued a press release on February 9, 2004, announcing our
repurchase of 3,380,818 restricted shares of St Mary common stock from Flying J
Oil & Gas Inc. and Big West Oil & Gas Inc for $91,000,000 or $26.92 per
share.
On February 26, 2004, we filed a current report on Form 8-K reporting under Item
12 that we had issued a press release February 26, 2004, announcing our full
year and fourth quarter 2003 financial results and reaffirming our forecast for
the first quarter and full year of 2004.
On March 15, 2004, we filed a current report on Form 8-K reporting under Item 5
that we had issued a press release dated March 12, 2004, announcing the accrual
of additional contingent interest on our 5.75% senior convertible notes due
2022.
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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
April 30, 2004 By: /s/ MARK A. HELLERSTEIN
-----------------------
Mark A. Hellerstein
President and Chief Executive Officer
April 30, 2004 By: /s/ DAVID W. HONEYFIELD
-----------------------
David W. Honeyfield
Vice President - Finance, Secretary
and Treasurer
April 30, 2004 By: /s/ GARRY A. WILKENING
----------------------
Garry A. Wilkening
Vice President - Administration and
Controller
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