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, 1999
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Commission File Number 0-20872
ST. MARY LAND & EXPLORATION COMPANY
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(Exact name of Registrant as specified in its charter)
Delaware 41-0518430
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(State or other Jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
1776 Lincoln Street, Suite 1100, Denver, Colorado 80203
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(Address of principal executive offices) (Zip Code)
(303) 861-8140
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(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [ X ] No [ ]
Indicate the number of shares outstanding of each of the Registrant's classes of
common stock as of the latest practicable date.
As of May 13, 1999 the registrant had 10,827,067 shares of Common Stock, $.01
par value, outstanding.
ST. MARY LAND & EXPLORATION COMPANY
INDEX
Part I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements (Unaudited)
Consolidated Balance
Sheets - March 31, 1999 and
December 31, 1998 ........................................ 3
Consolidated Statements of
Operations - Three Months Ended
March 31, 1999 and 1998................................... 4
Consolidated Statements of
Cash Flows - Three Months Ended
March 31, 1999 and 1998 ....... .......................... 5
Notes to Consolidated Financial
Statements - March 31, 1999 .............................. 7
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations............................................. 9
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K ........................ 22
Exhibits
10.1 St. Mary Land & Exploration Company Incentive Stock
Option Plan, As Amended on March 25, 1999
10.2 St. Mary Land & Exploration Company Stock Option
Plan, As Amended on March 25, 1999
10.3 Net Profits Interest Bonus Plan, As Amended on
September 19, 1996 and July 24, 1997 and
January 28, 1999
27.1 Financial Data Schedule
-2-
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ST. MARY LAND & EXPLORATION COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In thousands, except share amounts)
ASSETS
March 31, December 31,
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1999 1998
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Current assets:
Cash and cash equivalents $ 5,727 $ 7,821
Accounts receivable 14,388 17,937
Prepaid expenses and other 564 795
Refundable income taxes 322 391
Deferred income taxes 125 125
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Total current assets 21,126 27,069
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Property and equipment (successful efforts method), at cost:
Proved oil and gas properties 245,334 241,021
Unproved oil and gas properties, net of impairment
allowance of $4,155 in 1999 and $5,987 in 1998 28,422 25,588
Other property and equipment 4,081 4,051
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277,837 270,660
Less accumulated depletion, depreciation, amortization and impairment (131,546) (126,835)
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146,291 143,825
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Other assets:
Khanty Mansiysk Oil Corporation receivable and stock 6,839 6,839
Summo Minerals Corporation investment and receivable 3,012 2,869
Restricted cash - 720
Other assets 3,471 3,175
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13,322 13,603
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$ 180,739 $ 184,497
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 15,183 $ 16,926
Current portion of stock appreciation rights 358 358
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Total current liabilities 15,541 17,284
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Long-term liabilities:
Long-term debt 17,898 19,398
Deferred income taxes 11,153 11,158
Stock appreciation rights 279 422
Other noncurrent liabilities 1,690 1,493
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31,020 32,471
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Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value: authorized - 50,000,000 shares: issued and
outstanding - 11,009,867 shares in 1999 and 10,992,447 shares in 1998 110 110
Additional paid-in capital 67,856 67,761
Treasury stock - at cost: 182,800 shares in 1999 and 147,800 shares in 1998 (2,995) (2,470)
Retained earnings 69,207 69,341
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Total stockholders' equity 134,178 134,742
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$ 180,739 $ 184,497
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The accompanying notes are an integral part
of these consolidated financial statements.
-3-
ST. MARY LAND & EXPLORATION COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In thousands, except per share amounts)
For the Three Months Ended
March 31,
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1999 1998
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Operating revenues:
Oil and gas production $ 13,769 $ 19,025
Gain on sale of proved properties 195 -
Other revenues 146 114
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Total operating revenues 14,110 19,139
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Operating expenses:
Oil and gas production 3,994 3,943
Depletion, depreciation and amortization 5,402 5,377
Impairment of proved properties - 368
Exploration 1,739 3,421
Abandonment and impairment of unproved properties 464 303
General and administrative 1,608 2,947
Loss in equity investees 45 61
Other 125 35
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Total operating expenses 13,377 16,455
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Income from operations 733 2,684
Nonoperating income and (expense):
Interest income 96 155
Interest expense (241) (394)
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Income before income taxes 588 2,445
Income tax expense 179 775
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Net income $ 409 $ 1,670
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Basic net income per common share $ .04 $ .15
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Diluted net income per common share $ .04 $ .15
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Basic weighted average common shares outstanding 10,846 10,983
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Diluted weighted average common shares outstanding 10,858 11,125
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Cash dividend declared per share $ 0.05 $ 0.05
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The accompanying notes are an integral part
of these consolidated financial statements.
-4-
ST. MARY LAND & EXPLORATION COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
For the Three Months Ended
March 31,
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1999 1998
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Reconciliation of net income to net cash provided by operating activities:
Net income $ 409 $ 1,670
Adjustments to reconcile net income to net
cash provided by operating activities:
Gain on sale of proved properties (195) -
Depletion, depreciation and amortization 5,402 5,377
Impairment of proved properties - 368
Exploration (95) 916
Abandonment and impairment of unproved properties 464 303
Loss in equity investees 45 61
Deferred income taxes (5) 285
Other 166 97
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6,191 9,077
Changes in current assets and liabilities:
Accounts receivable 3,549 2,300
Prepaid expenses and other 1,050 73
Accounts payable and accrued expenses (2,738) 6,169
Stock appreciation rights - (351)
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Net cash provided by operating activities 8,052 17,268
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Cash flows from investing activities:
Proceeds from sale of oil and gas properties 804 52
Capital expenditures (7,159) (18,108)
Acquisition of oil and gas properties (1,475) (1,189)
Investment in and loans to Summo Minerals Corporation (188) (235)
Receipts from restricted cash 720 -
Other (297) 618
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Net cash used in investing activities (7,595) (18,862)
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Cash flows from financing activities:
Proceeds from long-term debt 4,175 11,700
Repayment of long-term debt (5,675) (12,917)
Proceeds from sale of common stock 17 -
Repurchase of common stock (525) -
Dividends paid (543) (549)
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Net cash used in financing activities (2,551) (1,766)
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Net decrease in cash and cash equivalents (2,094) (3,360)
Cash and cash equivalents at beginning of period 7,821 7,112
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Cash and cash equivalents at end of period $ 5,727 $ 3,752
============ ============
The accompanying notes are an integral part
of these consolidated financial statements.
-5-
ST. MARY LAND & EXPLORATION COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Continued)
Supplemental schedule of additional cash flow information and noncash
activities:
For the Three Months Ended
March 31,
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1999 1998
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(In thousands)
Cash paid for interest $ 270 $ 326
Cash paid for income taxes 115 30
Cash paid for exploration expenses 1,485 3,266
The accompanying notes are an integral part
of these consolidated financial statements.
-6-
ST. MARY LAND & EXPLORATION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
March 31, 1999
Note 1 - Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information. They do not include all information and notes
required by generally accepted accounting principles for complete financial
statements. However, except as disclosed herein, there has been no material
change in the information disclosed in the notes to consolidated financial
statements included in the Annual Report on Form 10-K of St. Mary Land &
Exploration Company and Subsidiaries (the "Company") for the year ended December
31, 1998. In the opinion of Management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the periods presented are not necessarily
indicative of the results that may be expected for the full year.
The accounting policies followed by the Company are set forth in Note 1
to the Company's financial statements in Form 10-K for the year ended December
31, 1998. It is suggested that these financial statements be read in conjunction
with the financial statements and notes included in the Form 10-K.
Note 2 - Investments
The Company accounts for its 37% ownership interest in Summo Minerals
Corporation ("Summo") under the equity method of accounting. For the three
months ended March 31, 1999, the Company recorded a loss of $45,000 as its
equity in the losses of Summo. The Company has entered into agreements to
provide interim financing of up to $3,471,000 for Summo's Lisbon Valley Copper
Project (the "Project") in the form of a loan due in June 1999 bearing interest
at the prime rate plus 1%. As security for this loan, Summo has pledged its
interest in the Project. As of March 31, 1999, $3,057,000 was outstanding under
this loan. Additional amounts totaling $32,000 have been advanced to Summo under
this loan since March 31, 1999. The principal amount of advances made by the
Company to Summo are convertible into shares of Summo common stock at a defined
conversion price.
The Company has analyzed its net investment in Summo and the effect of
persistent depressed copper prices and increased worldwide copper inventory
levels on Summo's stock price. Management believes Summo's stock price decline
is not temporary and that its value is impaired. Consequently, the Company wrote
down its net investment in Summo to net realizable value in the fourth quarter
of 1998. Management believes the recorded net investment is recoverable.
-7-
Note 3 - Capital Stock
In August 1998, the Company's Board of Directors approved a stock
repurchase program whereby the Company may purchase from time to time, in open
market purchases or negotiated sales, up to one million shares of its common
stock. During the first quarter of 1999 the Company repurchased 35,000 shares of
its common stock under the program at a weighted average price of $15.00 per
share, bringing the total number of shares repurchased under the program to
182,800 at a weighted-average price of $16.38 per share. Management anticipates
that additional purchases of shares by the Company may occur as market
conditions warrant. Such purchases will be funded with internal cash flow and
borrowings under the Company's credit facility.
Note 4 - Income Taxes
Federal income tax expense for 1999 and 1998 differ from the amounts
that would be provided by applying the statutory U.S. Federal income tax rate to
income before income taxes primarily due to Section 29 credits, percentage
depletion, and the effect of state income taxes.
-8-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
St. Mary Land & Exploration Company ("St. Mary" or the "Company") was
founded in 1908 and incorporated in Delaware in 1915. The Company is engaged in
the exploration, development, acquisition and production of natural gas and
crude oil with operations focused in five core operating areas in the United
States: the Mid-Continent region; the ArkLaTex region; south Louisiana; the
Williston Basin; and the Permian Basin.
The Company's objective is to build value per share by focusing its
resources within selected basins in the United States where management believes
established acreage positions, long-standing industry relationships and
specialized geotechnical and engineering expertise provide a significant
competitive advantage. The Company's ongoing development and exploration
programs are complemented by less predictable opportunities to acquire producing
properties having significant exploitation potential, to monetize assets at a
premium and to repurchase shares of its common stock at attractive values.
Internal exploration, drilling and production personnel conduct the
Company's activities in the Mid-Continent and ArkLaTex regions and in south
Louisiana. Activities in the Williston Basin are conducted through Panterra
Petroleum ("Panterra"), a general partnership in which the Company owns a 74%
interest. The Company proportionally consolidates its interest in Panterra.
Activities in the Permian Basin are primarily contracted through an oil and gas
property management company with extensive experience in the basin.
The Company's presence in south Louisiana includes active management of
its fee lands from which significant royalty income is derived. St. Mary has
encouraged development drilling by its lessees, facilitated the origination of
new prospects on acreage not held by production and stimulated exploration
interest in deeper, untested horizons. The Company's discovery on its fee lands
at South Horseshoe Bayou in early 1997 and the successful confirmation well in
early 1998 proved that significant accumulations of gas are sourced and trapped
at depths below 16,000 feet. In August 1998 one of the wells in the South
Horseshoe Bayou project experienced shut-in production due to mechanical
problems. These mechanical problems and premature water encroachment caused the
Company to reduce the project's proved reserves by 38.8 BCFE, of which 23.7 BCFE
were reclassified to the probable reserve category and 15.1 BCFE were written
off. An untested fault block to the north of the existing production is expected
to spud at South Horseshoe Bayou in the third quarter of 1999.
-9-
St. Mary seeks to make selective niche acquisitions of oil and gas
properties that complement its existing operations, offer economies of scale and
provide further development and exploration opportunities based on proprietary
geologic concepts. Management believes that the Company's focus on smaller
negotiated transactions where it has specialized geologic knowledge or operating
experience has enabled it to acquire attractively-priced and under-exploited
properties.
The results of operations include several significant acquisitions made
during recent years and their subsequent further development by the Company. In
1996, 1997 and 1998 the Company purchased a series of interests totaling $15.8
million that formed a new core area of focus in the Permian Basin of New Mexico
and west Texas. In late 1998 St. Mary, through Panterra, acquired the interests
of Texaco, Inc. in several fields in the Williston Basin for $2.1 million. In
1997 the Company acquired an 85% working interest in certain Louisiana
properties of Henry Production Company for $3.9 million, and the remaining 15%
working interest in these properties was acquired in the first quarter of 1999.
Also in the first quarter of 1999 St. Mary acquired additional interests in the
West Cameron Block 39 property located offshore Louisiana and other properties
in Louisiana totaling $1.2 million.
The Company pursues opportunities to monetize selected assets at a
premium and as part of its continuing strategy to focus and rationalize its
operations. In late 1998 St. Mary sold a package of non-strategic properties in
Oklahoma to ONEOK Resources Company for $22.2 million and sold its remaining
minor interests in Canada for $1.2 million, realizing a pre-tax gain of
$7.7 million.
St. Mary has one principal equity investment, Summo Minerals
Corporation ("Summo"). The Company accounts for its investments in Summo under
the equity method and includes its share of the income or loss from this entity
in its consolidated results of operations.
In June 1998 the Company's stockholders approved an increase in the
number of authorized shares of the Company's common stock from 15,000,000 to
50,000,000 shares.
In August 1998 the Company's Board of Directors authorized a stock
repurchase program whereby St. Mary may purchase from time-to-time, in open
market transactions or negotiated sales, up to 1,000,000 of its own common
shares. The Company has repurchased a total of 182,800 shares of common stock
under this plan in 1998 and the first quarter of 1999.
-10-
The Company seeks to protect its rate of return on acquisitions of
producing properties by hedging up to the first 24 months of an acquisition's
production at prices approximately equal to those used in the Company's
acquisition evaluation and pricing model. The Company also periodically uses
hedging contracts to hedge or otherwise reduce the impact of oil and gas price
fluctuations on production from each of its core operating areas. The Company's
strategy is to ensure certain minimum levels of operating cash flow and to take
advantage of windows of favorable commodity prices. The Company generally limits
its aggregate hedge position to no more than 50% of its total production. The
Company seeks to minimize basis risk and indexes the majority of its oil hedges
to NYMEX prices and the majority of its gas hedges to various regional index
prices associated with pipelines in proximity to the Company's areas of gas
production. The Company has hedged approximately 41% of its remaining estimated
1999 gas production at an average fixed price of $2.09 per MMBtu, approximately
30% of its remaining estimated 1999 oil production at an average fixed price of
$16.16 per Bbl, approximately 15% of its estimated 2000 oil production at an
average fixed price of $15.54 per Bbl and less than 1% of its estimated 2001 oil
production at an average fixed price of $15.76. The Company has also purchased
options resulting in price collars on approximately 10% of the Company's
remaining estimated 1999 gas production with price ceilings between $2.00 and
$3.00 per MMBtu and price floors between $1.50 and $2.00 per MMBtu and price
collars on approximately 6% of its remaining estimated 1999 oil production with
a price floor of $15.00 and a price ceiling of $16.85. In 2000 the Company has
price collars on approximately 16% of its estimated gas production with price
ceilings between $2.50 and $2.65 and a price floor of $2.00 and approximately 6%
of its estimated oil production with a price floor of $15.00 and price ceilings
between $16.85 and $17.75.
This Quarterly Report on Form 10-Q includes certain statements that may
be deemed to be "forward-looking statements" within the meaning of Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. All statements, other than statements of
historical facts, included in this Form 10-Q that address activities, events or
developments that the Company expects, believes or anticipates will or may occur
in the future, including such matters as future capital, development and
exploration expenditures (including the amount and nature thereof), drilling of
wells, reserve estimates (including estimates of future net revenues associated
with such reserves and the present value of such future net revenues), future
production of oil and gas, repayment of debt, business strategies, expansion and
growth of the Company's operations, Year 2000 readiness and other such matters
are forward-looking statements. These statements are based on certain
assumptions and analyses made by the Company in light of its experience and its
perception of historical trends, current conditions, expected future
developments and other factors it believes are appropriate in the circumstances.
Such statements are subject to a number of assumptions, risks and uncertainties,
general economic and business conditions, the business opportunities (or lack
thereof) that may be presented to and pursued by the Company, changes in laws or
regulations and other factors, many of which are beyond the control of the
Company. Readers are cautioned that any such statements are not guarantees of
future performance and that actual results or developments may differ materially
from those projected in the forward-looking statements.
-11-
Results of Operations
The following table sets forth selected operating data for the periods
indicated:
Three Months Ended March 31,
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1999 1998
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(In thousands, except BOE data)
Oil and gas production
revenues:
Working interests $ 13,139 $ 17,010
Louisiana royalties 630 2,015
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Total $ 13,769 $ 19,025
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Net production:
Oil (MBbls) 283 321
Gas (MMcf) 5,340 6,359
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MBOE 1,173 1,381
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Average sales price (1):
Oil (per Bbl) $ 11.51 $ 14.90
Gas (per Mcf) 1.97 2.24
Oil and gas production costs:
Lease operating expense $ 3,096 $ 2,841
Production taxes 897 1,102
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Total $ 3,993 $ 3,943
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Additional per BOE data:
Sales price $ 11.74 $ 13.78
Lease operating expense 2.64 2.06
Production taxes .77 .80
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Operating margin $ 8.33 $ 10.92
Depletion, depreciation and
amortization $ 4.61 $ 3.89
Impairment of proved
Properties - .27
General and administrative 1.37 2.13
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(1) Includes the effects of the Company's hedging activities.
Oil and Gas Production Revenues. Oil and gas production revenues
decreased $5.2 million, or 28% to $13.8 million for the first quarter of 1999
compared to $19.0 million for the first quarter of 1998. Oil production volumes
decreased 12% and gas production volumes decreased 16% for the first quarter of
1999 compared to 1998. Average net daily production declined to 13.0 MBOE in
1999 compared to 15.3 MBOE in the comparable quarter of 1998. The decline
resulted from the significant loss of production at the South Horseshoe Bayou
Field in 1998 and 1999 and the sale of certain Oklahoma properties which
occurred in late 1998.
-12-
The average realized oil price for the first quarter of 1999 decreased
23% to $11.51 per Bbl, while average realized gas prices decreased 12% to $1.97
per Mcf, from their respective 1998 levels. The Company hedged approximately 6%
of its oil production for the first quarter of 1999 or 18.0 MBbls at an average
NYMEX price of $16.05 and realized a $51,000 increase in oil revenue or $.18 per
Bbl for the first quarter of 1999 on these contracts compared to a $200,000
increase or $.62 per Bbl in 1998. The Company also hedged 51% of its 1999 first
quarter gas production or 3.1 million MMBtu at an average indexed price of
$2.096 and realized a $1.4 million increase in gas revenues or $.25 per Mcf for
the first quarter of 1999 from these hedge contracts compared to a $78,000
increase in gas revenues or $.01 per Mcf in 1998.
Oil and Gas Production Costs. Oil and gas production costs consist of
lease operating expense and production taxes. Total production costs increased
$51,000 or 1% for the first quarter of 1999 from comparable levels in 1998.
Total oil and gas production costs per BOE increased 19% to $3.41 in 1999
compared with $2.86 for the 1998 first quarter due to increased workover costs
and the December 1998 sale of producing properties in Oklahoma with lower
production costs per BOE.
Depreciation, Depletion, Amortization and Impairment. Depreciation,
depletion and amortization expense ("DD&A") increased $25,000 or less than 1%
for the first quarter of 1999 from comparable levels in 1998. DD&A expense per
BOE increased 18% to $4.61 in the first quarter of 1999 compared to $3.89 in
1998 due to the reduction in volumes produced at South Horseshoe Bayou,
decreased royalty production from the Fee Lands, the effect of continued low
prices on the Company's oil and gas reserves at March 31, 1999 and the December
1998 sale of producing properties in Oklahoma with lower DD&A expense per BOE.
The Company recorded no impairments of proved oil and gas properties for the
first quarter of 1999 compared with $368,000 in 1998.
Abandonment and impairment of unproved properties increased $160,000 or
53% to $463,000 for the first quarter of 1999 compared to $303,000 in 1998 due
to additional abandonments of expired leases in 1999.
Exploration. Exploration expense decreased $1.7 million or 49% to $1.7
million for the first quarter of 1999 compared with $3.4 million in 1998. The
decrease results from lower delay rental payments and improved exploratory
drilling results.
General and Administrative. General and administrative expenses
decreased $1.3 million or 45% in the first quarter of 1999 compared to 1998
primarily due to a decrease in compensation expense related to decreases in
bonus and stock appreciation rights expenses. This decrease in compensation
expense was partially offset by an increase in rent expense and a reduction in
overhead reimbursements from outside interest owners in properties operated by
the Company.
Other operating expenses primarily consist of legal expenses in
connection with ongoing oil and gas activities. This expense increased $90,000
or 257% for the first quarter of 1999 compared with 1998, primarily due to
increased activity in the pending litigation that seeks to recover damages from
the drilling contractor for the St. Mary Land & Exploration No. 1 well at South
Horseshoe Bayou.
Equity in Loss of Summo Minerals Corporation. The Company accounts for
its investment in Summo under the equity method and includes its share of
Summo's income or loss in its results of operations. The equity in the net loss
of Summo was $45,000 for the first quarter of 1999 and $61,000 in 1998.
-13-
Non-Operating Income and Expense. Net interest and other non-operating
expense decreased $94,000 to $145,000 in the first quarter of 1999 compared to
$239,000 in 1998 due to decreased borrowings resulting from cash received from
the sale of Oklahoma properties in late 1998.
Income Taxes. Income tax expense was $179,000 in the first quarter of
1999 and $775,000 in 1998, resulting in effective tax rates of 30% and 32%,
respectively. The reduced expense reflects lower net income from operations
before income taxes for 1999 due primarily to lower oil and gas production and
prices. The reduced rate reflects a higher impact on lower net income from
Section 29 credits and percentage depletion in 1999.
Net Income. Net income for the first quarter of 1999 decreased $1.3
million or 76% to $409,000 compared to $1.7 million in 1998. The 28% decrease in
oil and gas revenues caused by reductions in both price and produced volumes in
the first quarter of 1999 was partially offset by significant decreases in
exploration expense, general and administrative expense and income tax expense.
Liquidity and Capital Resources
The Company's primary sources of liquidity are the cash provided by
operating activities, debt financing, sales of non-strategic properties and
access to the capital markets. The Company's cash needs are for the acquisition,
exploration and development of oil and gas properties and for the payment of
debt obligations, trade payables and stockholder dividends. The Company
generally finances its exploration and development programs from internally
generated cash flow, bank debt and cash and cash equivalents on hand. The
Company continually reviews its capital expenditure budget based on changes in
cash flow and other factors.
Cash Flow. The Company's net cash provided by operating activities
decreased $9.2 million or 53% to $8.1 million in the first quarter 1999 compared
to $17.3 million in the first quarter 1998. Revenues decreased significantly due
to decreased production at South Horseshoe Bayou and in Oklahoma from the sale
of producing properties and due to lower prices. Additionally, accounts payable
and accrued expenses decreased significantly in the first quarter 1999 compared
to a significant increase in the first quarter 1998 due to lower drilling
activity in 1999. These factors were only partially offset by decreases in
general and administrative expenses and exploration expense.
Net cash used in investing activities decreased $11.3 million or 60% to
$7.6 million in the first quarter 1999 compared to $18.9 million in the first
quarter 1998. The decrease is primarily due to a $10.9 million decrease in
capital expenditures in the first quarter 1999. Total first quarter 1999 capital
expenditures, including acquisitions of oil and gas properties, decreased $10.9
million or 60% to $7.2 million in the first quarter 1999 compared to $18.1
million in the first quarter 1998.
A portion of the proceeds from sales of oil and gas properties in 1998
were applied to acquisitions of oil and gas properties in 1999 under tax-free
exchanges. In a tax-free exchange of properties the tax basis of the sold
property carries over to the acquired property for tax purposes. Gains or losses
for tax purposes are recognized by amortization of the lower tax basis of the
property throughout its remaining life or when the acquired property is sold or
abandoned.
-14-
Net cash used in financing activities increased $785,000 or 44% to $2.6
million in the first quarter 1999 compared to $1.8 million in the first quarter
1998. The increase was primarily due to the repurchase of the Company's common
stock for $525,000 in the first quarter of 1999. No such repurchases were made
in the first quarter 1998.
The Company had $5.7 million in cash and cash equivalents and had
working capital of $5.6 million as of March 31, 1999 compared to $7.8 million in
cash and cash equivalents and working capital of $9.8 million as of December 31,
1998. Decreases in accounts receivable and in cash and cash equivalents were
partially offset by a decrease in accounts payable.
Credit Facility. On June 30, 1998, the Company entered into a new
long-term revolving credit agreement that replaced the agreement dated March 1,
1993 and amended in April 1996. The new credit agreement specifies a maximum
loan amount of $200.0 million. The lender may periodically re-determine the
aggregate borrowing base depending upon the value of the Company's oil and gas
properties and other assets. In May 1999 the borrowing base was reduced $25.0
million by the lender to $80.0 million as a result of reduced reserve pricing
and the write down of South Horseshoe Bayou. The accepted borrowing base was
$40.0 million at December 31, 1998. The credit agreement has a maturity date of
December 31, 2005, and includes a revolving period that matures on December 31,
2000. The Company can elect to allocate up to 50% of available borrowings to a
short-term tranche due in 364 days. The Company must comply with certain
covenants including maintenance of stockholders' equity at a specified level and
limitations on additional indebtedness. As of March 31, 1999, and December 31,
1998, $9.0 million and $10.5 million, respectively, was outstanding under this
credit agreement. These outstanding balances accrue interest at rates determined
by the Company's debt to total capitalization ratio. During the revolving period
of the loan, loan balances accrue interest at the Company's option of either (a)
the higher of the Federal Funds Rate plus 1/2% or the prime rate, or (b) LIBOR
plus 1/2% when the Company's debt to total capitalization is less than 30%, up
to a maximum of either (a) the higher of the Federal Funds Rate plus 5/8% or the
prime rate plus 1/8%, or (b) LIBOR plus 1-1/4% when the Company's debt to total
capitalization is equal to or greater than 50%.
Panterra, in which the Company has a 74% general partnership interest,
has a separate credit facility with a $21.0 million borrowing base as of
December 31, 1998, and $12.0 million outstanding as of March 31, 1999 and
December 31, 1998. In June 1997, Panterra entered into this credit agreement
replacing a previous agreement due March 31, 1999. The new credit agreement
includes a revolving period converting to a five-year amortizing loan on June
30, 2000. During the revolving period of the loan, loan balances accrue interest
at Panterra's option of either the bank's prime rate or LIBOR plus 3/4% when the
Partnership's debt to partners' capital ratio is less than 30%, up to a maximum
of either the bank's prime rate or LIBOR plus 1-1/4% when the Partnership's debt
to partners' capital ratio is greater than 100%.
Common Stock. In June 1998 the Company's stockholders approved an
increase in the number of authorized shares of the Company's common stock from
15,000,000 to 50,000,000 shares.
In August 1998 the Company's Board of Directors authorized a stock
repurchase program whereby St. Mary may purchase from time-to-time, in open
market transactions or negotiated sales, up to 1,000,000 of its common shares.
During 1998 the Company repurchased a total of 147,800 shares of its common
stock under the program for $2.5 million at a weighted-average price of $16.71
per share. The Company repurchased an additional 35,000 shares for $15.00 per
share during the first quarter of 1999. Management anticipates that additional
purchases of shares by the Company may occur as market conditions warrant. Such
purchases will be funded with internal cash flow and borrowings under the
Company's credit facility.
-15-
Capital and Exploration Expenditures. The Company's expenditures for
exploration and development of oil and gas properties and acquisitions are the
primary use of its capital resources.
Outlook. The Company believes that its existing capital resources, cash
flows from operations and available borrowings are sufficient to meet its
anticipated capital and operating requirements for 1999.
The Company generally allocates approximately 85% of its capital budget
to low to moderate-risk exploration, development and niche acquisition programs
in its core operating areas. The remaining portion of the Company's capital
budget is directed to higher-risk, large exploration ideas that have the
potential to increase the Company's reserves by 25% or more in any single year.
The Company anticipates spending approximately $71.0 million for
capital and exploration expenditures in 1999 with $37.0 million allocated for
ongoing exploration and development in its core operating areas, $25.0 million
for niche acquisitions of producing properties and $9.0 million for
large-target, higher-risk exploration and development.
Anticipated ongoing exploration and development expenditures for each
of the Company's core areas include $22.0 million in the Mid-Continent region,
$6.5 million in the ArkLaTex region, $2.0 million in the Williston Basin and
$6.5 million allocated within the Permian Basin and south Louisiana regions.
The Company has several prospects in its pipeline of large-target
exploration ideas. Tests are currently being drilled at the Stallion, West
Cameron Block 39 and Edgerly projects, and the Company expects to commence the
drilling of four additional significant tests in 1999 at its South Horseshoe
Bayou, North Parcperdue and Patterson projects in south Louisiana, and at its
Carrier project in east Texas.
The amount and allocation of future capital and exploration
expenditures will depend upon a number of factors including the number of
available acquisition opportunities, the Company's ability to assimilate such
acquisitions, the impact of oil and gas prices on investment opportunities, the
availability of capital and borrowing capability and the success of its
development and exploratory activity which could lead to funding requirements
for further development.
The Company continuously evaluates opportunities in the marketplace for
oil and gas properties and, accordingly, may be a buyer or a seller of
properties at various times. St. Mary will continue to emphasize smaller niche
acquisitions utilizing the Company's technical expertise, financial flexibility
and structuring experience. In addition, the Company is also actively seeking
larger acquisitions of assets or companies that would afford opportunities to
expand the Company's existing core areas, to acquire additional geoscientists or
to gain a significant acreage and production foothold in a new basin within the
United States.
The Company, through a subsidiary, owns 9.9 million shares or 37% of
Summo. The persistence of depressed commodity prices and increased worldwide
inventory levels of copper have caused Summo's stock price to decline.
Management believes that this stock price decline is not temporary and that its
value is impaired. Consequently, the Company wrote down its net investment in
Summo to net realizable value in the fourth quarter of 1998. Management believes
the recorded net investment is recoverable.
-16-
The Company has agreed to provide Summo with interim financing of up to
$3.5 million for Summo's Lisbon Valley Copper Project (the "Project") in the
form of a loan bearing interest at the prime rate plus 1% due in June 1999. As
security for this loan, Summo pledged its interest in the Project. As of
December 31, 1998 and March 31, 1999, $2.9 million and $3.1 million,
respectively, were outstanding under the loan. Additional amounts totaling
$32,000 have been advanced to Summo under this loan since March 31, 1999. At the
Company's option, the principal amounts advanced by the Company under the note
are convertible into shares of Summo common stock at a defined conversion price.
Future development and financial success of the Project are largely
dependent on the market price of copper, which is determined in world markets
and is subject to significant fluctuations. Management believes that copper
prices will recover and that the Project will have considerable value at that
time. The Company has the ability to fund the carrying costs of the property and
the intent to retain its interest in the Project until copper prices recover.
However, there can be no assurance that the Company will realize a return on its
investment in Summo or the Project.
In February 1997 the Company sold its interest in the Russian joint
venture to KMOC. The Company received cash consideration of approximately $5.6
million before transaction costs, KMOC common stock valued at approximately $1.9
million, and a receivable in a form equivalent to a retained production payment
of approximately $10.1 million plus interest at 10% per annum from the limited
liability company formed to hold the Russian joint venture. The Company's
receivable is collateralized by the partnership interest sold. The Company has
the right, subject to certain conditions, to require KMOC to purchase the
Company's receivable from the net proceeds of an initial public offering of KMOC
common stock. Alternatively, the Company may elect to convert all or a portion
of its receivable into KMOC common stock immediately prior to an initial public
offering of KMOC common stock or on or after February 11, 2000, whichever occurs
first. Uncertain economic conditions in Russia and lower oil prices have
affected the carrying value of the convertible receivable. Consequently, the
Company reduced the carrying amount of the receivable to its minimum conversion
value during 1998, incurring a pre-tax charge to operations of $4.6 million.
Impact of the Year 2000 Issue. The following Year 2000 statements
constitute a Year 2000 Readiness Disclosure within the meaning of the Year 2000
Information and Readiness Disclosure Act of 1998.
The Year 2000 Issue is the result of computer programs and embedded
computer chips being written or manufactured using two digits rather than four,
or other methods, to define the applicable year. Computer programs and embedded
chips that are date-sensitive may recognize a date using "00" as the year 1900
rather than the year 2000. This could result in a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, operate equipment or
engage in normal business activities. Failure to correct a material Year 2000
compliance problem could result in an interruption in, or inability to conduct
normal business activities or operations. Such failures could materially and
adversely affect the Company's results of operations, cash flow and financial
condition.
-17-
The Company's approach to determining and mitigating the impact on the
Company of Year 2000 compliance issues is comprised of five phases:
i) Review and assessment of all internal information technology (IT)
systems and significant non-IT systems for Year 2000 compliance;
ii) Identify and prioritize systems with Year 2000 compliance issues;
iii) Repair or replace and test non-Year 2000 compliant systems;
iv) Survey and assess the Year 2000 readiness of the Company's significant
vendors, suppliers, purchasers and transporters of oil and natural gas;
and,
v) Design and implement contingency plans for those systems, if any, that
cannot be made Year 2000 compliant before December 31, 1999.
The Company completed phases i) and ii) of its plan by August 1998, and
identified the systems requiring repair or replacement in order to be Year 2000
compliant. This review and assessment was completed using outside consultants as
well as Company personnel. The Company determined that of its major systems, the
software it uses for reservoir engineering, its telephone system, a significant
number of the personal computers used by Company personnel and the computer
system used by Panterra should be updated or replaced.
Phase iii) of the Company's plan of repair and replacement of non-Year
2000 compliant systems is approximately 90% complete. The telephone system and
personal computers have been replaced with Year 2000 compliant hardware and
software as part of the Company's ongoing upgrade program. The Company purchased
a Year 2000 compliant release of the reservoir engineering system and
anticipates conversion to and testing of the new system in the second quarter of
1999. In the fourth quarter of 1998 Panterra licensed a Year 2000 compliant
system and converted to the new system in January 1999. The systems that have
been either upgraded or replaced will be further tested to confirm their Year
2000 compliance. This testing is planned for completion in the second quarter of
1999. The Company presently believes that other less significant IT and non-IT
systems can be upgraded to mitigate any Year 2000 issues with modifications to
existing software or conversions to new systems. Modifications or conversions to
new systems for the less significant systems, if not completed timely, would
have neither a material impact on the operations of the Company nor on its
results of operations.
Under phase iv) of the plan, the Company initiated formal
communications with its significant vendors, suppliers and purchasers and
transporters of oil and natural gas to determine the extent to which the Company
is vulnerable to those third parties' failures to remediate their own Year 2000
issues. The process of collecting information from these third parties is
approximately 45% complete. All of the responses received to date are positive
in assuring that the respondents will be Year 2000 compliant on a timely basis.
Completion of phase iv) of the plan is anticipated in the third quarter of 1999.
Until this phase of the plan is complete, management cannot currently predict if
third party compliance issues will materially affect the Company's operations.
There can be no assurance that the systems of these third parties will be
converted timely, or that a failure to remediate Year 2000 compliance issues by
another company would not have a material adverse effect on the Company.
-18-
Phase v) of the Company's Year 2000 plan, the design and implementation
of contingency plans for those systems, if any, that cannot be made Year 2000
compliant before December 31, 1999, will be addressed in the last half of 1999.
Through March 31, 1999, the Company has spent approximately $450,000 on
its Year 2000 efforts. This includes the costs of consultants as well as the
cost of repair or replacement of non-compliant hardware and software systems.
Additional costs to complete the Company's plan are estimated at approximately
$50,000. The Company has not specifically tracked its internal costs of
addressing the Year 2000 issue. However, management does not believe these costs
to be material.
The Company has not completed a comprehensive analysis of the
operational problems and costs that would be reasonably likely to result from
the Company or its significant third parties' failure to timely complete efforts
to remediate Year 2000 issues. Potential "worst case" impacts could include the
inability of the Company to deliver its production to, or receive payment from,
third parties purchasing or transporting the Company's production; the inability
of third party vendors to provide needed materials or services to the Company
for ongoing or future exploration, development or producing operations; and the
inability of the Company to execute financial transactions with its banks or
third parties whose systems fail or malfunction.
The Company currently has no reason to believe that any of these
contingencies will occur or that its principal vendors, customers and business
partners will not be Year 2000 compliant. However, there can be no assurance
that the Company will be able to identify and correct all Year 2000 problems or
implement a satisfactory contingency plan. Therefore, there can be no assurance
that the Year 2000 issue will not materially impact the Company's results of
operations or adversely affect its relationships with vendors, customers and
other business partners.
Accounting Matters
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," effective for all fiscal quarters of fiscal
years beginning after June 15, 1999. The Statement requires companies to report
all derivatives at fair value as either assets or liabilities and bases the
accounting treatment of the derivatives on the reasons an entity holds the
instrument. The Company is currently reviewing the effects this Statement will
have on the financial statements in relation to the Company's hedging
activities.
Effects of Inflation and Changing Prices
Within the United States inflation has had a minimal effect on the
Company. The Company cannot predict the future extent of any such effect.
The Company's results of operations and cash flows are affected by
material changes in oil and gas prices. Oil and gas prices are strongly impacted
by global influences on the supply and demand for petroleum products. Oil and
gas prices are further impacted by the quality of the oil and gas to be sold and
the location of the Company's producing properties in relation to markets for
the products. Oil and gas price increases or decreases have a corresponding
effect on the Company's revenues from oil and gas sales. Oil and gas prices also
affect the prices charged for drilling and related services. If oil and gas
prices increase, there could be a corresponding increase in the cost to the
Company for drilling and related services, although offset by an increase in
revenues. Also, as oil and gas prices increase, the cost of acquisitions of
producing properties increases, which could limit the number and accessibility
of quality properties on the market.
-19-
Material changes in oil and gas prices affect the current and future
value of the Company's estimated proved reserves and the borrowing capability of
the Company, which is largely based on the value of such proved reserves. Oil
and gas price changes have a corresponding effect on the value of the Company's
estimated proved reserves and the available borrowings under the Company's
credit facility.
The last half of 1998 and most of the first quarter of 1999 were
characterized by historically low oil prices and weakening gas markets. Capital
has left the oil and gas industry and has caused a significant decrease in the
number of working drilling rigs. Consequently, in early 1999 there is an
abundance of available drilling rigs, personnel, supplies and services with a
corresponding reduction of costs. Oil and gas prices have begun to increase from
December 31, 1998 levels. If prices continue to increase, there could be a
return to shortages and corresponding increases in the cost to the Company of
exploration, drilling and production of oil and gas.
Financial Instrument Market Risk
Directly, and through its 74% investment in Panterra, the Company holds
derivative contracts and financial instruments that have cash flow and net
income exposure to changes in commodity prices or interest rates. Financial and
commodity-based derivative contracts are used to limit the risks inherent in
some crude oil and natural gas price changes that have an effect on the Company.
In prior years the Company has occasionally hedged interest rates, and may do so
in the future should circumstances warrant.
The Company's Board of Directors has adopted a policy regarding the use
of derivative instruments. This policy requires every derivative used by the
Company to relate to underlying offsetting positions, anticipated transactions
or firm commitments. It prohibits the use of speculative, highly complex or
leveraged derivatives. Under the policy, the Chief Executive Officer and Vice
President of Finance must review and approve all risk management programs that
use derivatives. The Audit Committee of the Company's Board of Directors also
periodically reviews these programs.
Commodity Price Risk. The Company uses various hedging arrangements to
manage the Company's exposure to price risk from its natural gas and crude oil
production. These hedging arrangements have the effect of locking in for
specified periods, at predetermined prices or ranges of prices, the prices the
Company will receive for the volumes to which the hedge relates. Consequently,
while these hedging arrangements are structured to reduce the Company's exposure
to decreases in prices associated with the hedged commodity, they also limit the
benefit the Company might otherwise receive from any price increases associated
with the hedged commodity. A hypothetical 10% change in the quarter-end market
prices of commodity-based swaps and futures contracts on a notional amount of
13.0 million MMBtu would have caused a potential $1.4 million change in net
income before income taxes for the Company for gas contracts in place on March
31, 1999. A 10% change in the quarter-end market prices of commodity-based swaps
and future contracts on a notional amount of 505 MBbls would have caused a
potential $615,000 change in net income before income taxes for the Company for
oil contracts in place on March 31, 1999. Results of operations for Panterra (a
non-taxable entity) would have changed by $337,000 on a notional amount of 216
MBbls. These changes were discounted to present value using a 7.5% discount rate
since the latest expected maturity date of some of the swaps and futures
contracts is greater than one year from the reporting date. The derivative gain
or loss effectively offsets the loss or gain on the underlying commodity
exposures that have been hedged. The fair values of the swaps are estimated
based on quoted market prices of comparable contracts and approximate the net
gains or losses that would have been realized if the contracts had been closed
out at quarter end. The fair values of the futures are based on quoted market
prices obtained from the New York Mercantile Exchange.
-20-
Interest Rate Risk. Market risk is estimated as the potential change in
fair value resulting from an immediate hypothetical one percentage point
parallel shift in the yield curve. A sensitivity analysis presents the
hypothetical change in fair value of those financial instruments held by the
Company at March 31, 1999, which are sensitive to changes in interest rates. For
fixed-rate debt, interest rate changes affect the fair market value but do not
impact results of operations or cash flows. Conversely for floating rate debt,
interest rate changes generally do not affect the fair market value but do
impact future results of operations and cash flows, assuming other factors are
held constant. The carrying amount of the Company's floating rate debt
approximates its fair value. At March 31, 1999, the Company had floating rate
debt of $17.9 million and had no fixed rate debt. Assuming constant debt levels,
the results of operations and cash flows impact for the remainder of the year
resulting from a one percentage point change in interest rates would be
approximately $134,000 before taxes.
-21-
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit Description
10.1 St. Mary Land & Exploration Company Incentive Stock
Option Plan, As Amended on March 25, 1999
10.2 St. Mary Land & Exploration Company Stock Option
Plan, As Amended on March 25, 1999
10.3 Net Profits Interest Bonus Plan, As Amended on
September 19, 1996 and July 24, 1997 and
January 28, 1999
27.1 Financial Data Schedule
(b) There were no reports on Form 8-K filed during the quarter
ended March 31, 1999.
-22-
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
St. Mary Land & Exploration Company
May 14, 1999 By /s/ MARK A. HELLERSTEIN
-----------------------------------
Mark A. Hellerstein
President and Chief Executive Officer
May 14, 1999 By /s/ RICHARD C. NORRIS
-----------------------------------
Richard C. Norris
Vice President - Finance, Secretary
and Treasurer
May 14, 1999 By /s/ GARRY A. WILKENING
-----------------------------------
Garry A. Wilkening
Vice President - Administration and
Controller