UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2001
------------
Commission File Number 0-20872
ST. MARY LAND & EXPLORATION COMPANY
(Exact name of registrant as specified in its charter)
Delaware 41-0518430
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
1776 Lincoln Street, Suite 1100, Denver, Colorado 80203
(Address of principal executive offices) (Zip Code)
(303) 861-8140
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [ |X| ] No [ ]
Indicate the number of shares outstanding of each of the registrant's classes of
common stock as of the latest practicable date.
As of November 7, 2001 the registrant had 27,733,684 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 - September 30, 2001 and
December 31, 2000...................................3
Consolidated Statements of
Operations - Three and Nine Months Ended
September 30, 2001 and 2000.........................4
Consolidated Statements of
Cash Flows - Nine Months Ended
September 30, 2001 and 2000.........................5
Consolidated Statements of
Stockholders' Equity - September 30, 2001
and December 31, 2000...............................7
Notes to Consolidated Financial
Statements - September 30, 2001.....................8
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations......................................11
Item 3. Quantitative and Qualitative Disclosures
About Market Risk..................................21
Part II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds..........22
Item 5. Other Information..................................22
Item 6. Exhibits and Reports on Form 8-K...................22
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 September 30, December 31,
-------------- -------------
2001 2000
-------------- -------------
Current assets:
Cash and cash equivalents $ 6,198 $ 6,619
Accounts receivable 36,207 55,068
Prepaid expenses and other 2,414 2,134
Refundable income taxes 7,029 -
Accrued hedge asset 5,342 -
Deferred income taxes - 163
-------------- -------------
Total current assets 57,190 63,984
-------------- -------------
Property and equipment (successful efforts method), at cost:
Proved oil and gas properties 457,983 385,076
Less accumulated depletion, depreciation and amortization (204,200) (171,412)
Unproved oil and gas properties, net of impairment
allowance of $8,270 in 2001 and $7,956 in 2000 54,957 35,497
Other property and equipment, net of accumulated
depreciation of $2,944 in 2001 and $3,600 in 2000 3,244 3,250
-------------- -------------
Total property and equipment 311,984 252,411
-------------- -------------
Other assets:
Khanty Mansiysk Oil Corporation stock 1,651 1,651
Other assets 3,907 3,849
-------------- -------------
Total other assets 5,558 5,500
-------------- -------------
Total Assets $ 374,732 $ 321,895
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 31,935 $ 23,345
Deferred income taxes 1,860 -
-------------- -------------
Total current liabilities 33,795 23,345
-------------- -------------
Long-term liabilities:
Long-term debt 14,350 22,000
Deferred income taxes 42,494 24,820
Other noncurrent liabilities 616 987
-------------- -------------
Total long-term liabilities 57,460 47,807
-------------- -------------
Commitments and contingencies
-------------- -------------
Minority interest 581 607
-------------- -------------
Stockholders' equity:
Common stock, $.01 par value: authorized - 100,000,000 shares:
Issued and outstanding - 28,740,184 shares in 2001
and 28,553,826 shares in 2000 287 286
Additional paid-in capital 136,743 132,973
Treasury stock - at cost: 1,009,900 shares in 2001
and 395,600 shares in 2000 (16,210) (3,339)
Retained earnings 158,155 120,075
Unrealized net gain on marketable equity
securities-available for sale 82 141
Unrealized hedge gain 3,839 -
-------------- -------------
Total stockholders' equity 282,896 250,136
-------------- -------------
Total Liabilities and Stockholders' Equity $ 374,732 $ 321,895
============== =============
The accompanying notes are an integral part of these
consolidated financial statements.
-3-
ST. MARY LAND & EXPLORATION COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In thousands, except per share amounts)
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
--------------------------- -------------------------
2001 2000 2001 2000
------------- ------------- ------------ ------------
Operating revenues:
Oil and gas production $ 41,859 $ 54,066 $ 165,195 $ 134,898
Gain (loss) on sale of proved properties (71) 8 (21) 2,340
Other oil and gas revenue 374 188 939 1,062
Other revenues 494 52 666 247
------------- ------------- ------------ ------------
Total operating revenues 42,656 54,314 166,779 138,547
------------- ------------- ------------ ------------
Operating expenses:
Oil and gas production 14,756 10,307 40,249 27,355
Depletion, depreciation and amortization 13,704 9,627 37,876 26,805
Exploration 4,347 2,346 14,858 6,749
Impairment of proved properties 576 852 820 2,802
Abandonment and impairment of unproved properties 659 732 1,733 2,021
General and administrative 2,804 2,343 10,361 7,438
Minority interest and other 283 (56) 662 1,178
------------- ------------- ------------ ------------
Total operating expenses 37,129 26,151 106,559 74,348
------------- ------------- ------------ ------------
Income from operations 5,527 28,163 60,220 64,199
Nonoperating income and (expense):
Interest income 73 252 408 655
Interest expense (5) (25) (40) (148)
------------- ------------- ------------ ------------
Income before income taxes 5,595 28,390 60,588 64,706
Income tax expense 734 11,251 21,100 25,084
------------- ------------- ------------ ------------
Net income $ 4,861 $ 17,139 $ 39,488 $ 39,622
============= ============= ============ ============
Basic net income per common share $ 0.17 $ 0.61 $ 1.41 $ 1.43
============= ============= ============ ============
Diluted net income per common share $ 0.17 $ 0.60 $ 1.38 $ 1.41
============= ============= ============ ============
Basic weighted average common shares outstanding 27,790 27,920 28,052 27,690
============= ============= ============ ============
Diluted weighted average common shares outstanding 28,252 28,535 28,620 28,151
============= ============ ============ ============
Cash dividends declared per share $ - $ 0.025 $ 0.050 $ 0.075
============= ============= ============ ============
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 Nine Months Ended
September 30,
---------------------------------
2001 2000
------------- -------------
Reconciliation of net income to net cash provided by operating activities:
Net income $ 39,488 $ 39,622
Adjustments to reconcile net income to net
cash provided by operating activities:
Loss (gain) on sale of proved properties 21 (2,340)
Depletion, depreciation and amortization 37,876 26,805
Impairment of proved properties 820 2,802
Exploration, including exploratory dry hole expense 5,847 1,302
Abandonment and impairment of unproved properties 1,733 2,021
Deferred income taxes 18,700 20,585
Minority interest and other (199) 430
------------- -------------
104,286 91,227
Changes in current assets and liabilities:
Accounts receivable 9,647 (30,333)
Prepaid expenses and other (7,607) (1,970)
Accounts payable and accrued expenses 5,543 (3,193)
------------- -------------
Net cash provided by operating activities 111,869 55,731
------------- -------------
Cash flows from investing activities:
Proceeds from sale of oil and gas properties 1,469 1,819
Capital expenditures (99,844) (45,509)
Acquisition of oil and gas properties (1,620) (13,529)
Proceeds from distribution of KMOC stock 7,371 -
Other (118) 931
------------- -------------
Net cash used in investing activities (92,742) (56,288)
------------- -------------
Cash flows from financing activities:
Proceeds from long-term debt 75,200 22,700
Repayment of long-term debt (82,850) (32,700)
Proceeds from sale of common stock 2,381 5,351
Repurchase of common stock (12,871) (345)
Dividends paid (1,408) (2,073)
------------- -------------
Net cash used in financing activities (19,548) (7,067)
------------- -------------
Net decrease in cash and cash equivalents (421) (7,624)
Cash and cash equivalents at beginning of period 6,619 14,195
------------- -------------
Cash and cash equivalents at end of period $ 6,198 $ 6,571
============= =============
The accompanying notes are an integral part of these
consolidated financial statements.
-5-
ST. MARY LAND & EXPLORATION COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Continued)
Supplemental schedule of additional cash flow information and noncash investing
and financing activities:
For the Nine Months Ended
September 30,
--------------------------------
2001 2000
------------- ------------
(In thousands)
Cash paid for interest $ 356 $ 745
Cash paid for income taxes 10,428 7,127
Cash paid for exploration expenses 14,926 6,711
In January 2000 the Company issued 8,400 shares of common stock to its directors
and recorded compensation expense of $88,368.
In June 2000 the Company received equipment valued at $1,201,000 as partial
proceeds for property sold.
In January 2001 the Company issued 8,400 shares of common stock to its directors
and recorded compensation expense of $237,852
The accompanying notes are an integral part of these
consolidated financial statements.
-6-
ST. MARY LAND & EXPLORATION COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
(In thousands, except share amounts)
Accumulated
Common Stock Additional Treasury Stock Other Total
------------------ Paid-in Retained --------------------- Comprehensive Stockholders'
Shares Amount Capital Earnings Shares Amount Income Equity
---------- ------ ---------- --------- ----------- --------- ------------- -------------
Balance, December 31, 1999 27,893,910 $ 279 $ 123,974 $ 67,230 (365,600) $ (2,995) $ 284 $ 188,772
Comprehensive income:
Net Income - - - 55,620 - - - 55,620
Unrealized net loss on marketable equity
securities available for sale - - - - - - (143) (143)
------------
Total comprehensive income 55,477
------------
Cash dividends, $ 0.10 per share - - - (2,775) - - - (2,775)
Treasury stock purchases - - - - (30,000) (344) - (344)
Issuance for Employee Stock Purchase 32,296 - 311 - - - - 311
ESPP disqualified distribution - - 3 - - - - 3
Sale of common stock, including income tax
benefit of stock option exercises 619,220 6 8,597 - - - - 8,603
Directors' stock compensation 8,400 1 88 - - - - 89
---------- ------ ---------- --------- ----------- --------- -------------- ------------
Balance, December 31, 2000 28,553,826 $ 286 $ 132,973 $120,075 (395,600) $ (3,339) $ 141 $ 250,136
Comprehensive income:
Net Income - - - 39,488 - - - 34,627
Unrealized net loss on marketable equity
securities available for sale - - - - - - (59) (59)
Unrealized hedge gain - - - - - - 3,839 3,839
------------
Total comprehensive income 43,628
------------
Cash dividends, $ 0.05 per share - - - (1,408) - - - (1,413)
Treasury stock purchases - - - - (614,300) (12,871) - (10,949)
Issuance for Employee Stock Purchase Plan 19,337 - 367 - - - - 149
Sale of common stock, including income tax
benefit of stock option exercises 158,621 1 3,165 - - - - 2,265
Directors' stock compensation 8,400 - 238 - - - - 238
---------- ------ ---------- --------- ----------- --------- -------------- ------------
Balance, September 30, 2001 28,740,184 $ 287 $ 136,743 $158,155 (1,009,900) $(16,210) $ (1,043) $ 273,869
========== ====== ========== ========= =========== ========= ============== ============
The accompanying notes are an integral part of these
consolidated financial statements.
-7-
ST. MARY LAND & EXPLORATION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
-----------
September 30, 2001
Note 1 - Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
of St. Mary Land & Exploration Company and Subsidiaries ("St. Mary" or the
"Company") have been prepared in accordance with accounting principles generally
accepted in the United States for interim financial information. They do not
include all information and notes required by generally accepted accounting
principles for complete financial statements. However, except as disclosed
herein, there has been no material change in the information disclosed in the
notes to consolidated financial statements included in St. Mary's Annual Report
on Form 10-K for the year ended December 31, 2000. In the opinion of Management,
all adjustments (consisting of normal recurring accruals) considered necessary
for a fair presentation have been included. Operating results for the periods
presented are not necessarily indicative of the results that may be expected for
the full year.
The accounting policies followed by the Company are set forth in Note
1 to the Company's consolidated financial statements in the Form 10-K for the
year ended December 31, 2000. It is suggested that these unaudited condensed
consolidated financial statements be read in conjunction with the consolidated
financial statements and notes included in the Form 10-K.
Note 2 - Capital Stock
In July 2000 St. Mary's board of directors approved a two-for-one
stock split effected in the form of a stock dividend whereby one additional
common share of stock was distributed for each common share outstanding. The
stock split was distributed on September 5, 2000 to shareholders of record as of
the close of business on August 21, 2000. All share and per share amounts for
all periods presented herein have been restated to reflect this stock split.
In August 1998 the Company's board of directors approved a stock
repurchase program whereby the Company may purchase from time to time, in open
market purchases or negotiated sales, up to two million shares of its common
stock. During the third quarter of 2001 the Company repurchased 100,000 shares
of its common stock under the program at a weighted average price of $19.22 per
share. To date in 2001 we have purchased 614,300 shares at a weighted average
price of $20.64 per share, bringing the total number of shares repurchased under
the program to 1,009,900 at a weighted average price of $15.86 per share.
Additional purchases of shares by the Company may occur as market conditions
warrant. Such purchases would be funded with internal cash flows and borrowings
under the Company's credit facility.
In April 2001 the Company sold 100,000 put options on its own common
stock for $99,000 in cash. These put options gave the holder the right to
require the Company to purchase up to 100,000 shares of its own common stock
from the holder at $20.22 per share on July 11, 2001. These options expired
unexercised. In June 2001 the Company sold 100,000 put options on its own common
stock for $94,000 in cash. These put options gave the holder the right to
require the Company to purchase up to 100,000 shares of its own common stock
from the holder at $19.22 per share on September 24, 2001. The holder exercised
these options, and the Company purchased 100,000 shares of its own common stock
at $19.22 per share on September 24, 2001.
-8-
Note 3 - Income Taxes
Federal income tax expense for the three and nine months ended
September 30, 2001 and 2000 differ from the amounts that would be provided by
applying the statutory U.S. Federal income tax rate to income before income
taxes primarily due to Section 29 credits, percentage depletion, and the effect
of state income taxes. During 2000 the Company utilized its net operating loss
carryover and resulting deferred tax asset from 1999. At September 30, 2001 the
Company's current portion of income tax expense was $4,910,000.
Note 4 - Long-term Debt
On April 30, 2001 St. Mary entered into an agreement to amend the
existing long-term revolving credit agreement. The maximum loan amount remains
at $200.0 million. The lender may periodically re-determine the aggregate
borrowing base depending upon the value of St. Mary's oil and gas properties and
other assets. The amendment increases the borrowing base by $30.0 million to
$170.0 million. The accepted borrowing base was $40.0 million at September 30,
2001. The credit agreement has a maturity date of December 31, 2006 and includes
a revolving period that matures on June 30, 2003. The amended agreement deletes
all references to and provisions of the short-term tranche previously available
to St. Mary. The Company must comply with certain covenants including
maintenance of stockholders' equity at a specified level and limitations on
additional indebtedness. The Company had $14,350,000 in outstanding borrowings
under its revolving credit agreement as of September 30, 2001 and the weighted
average interest rate paid for the nine months ended September 30, 2001 was 8.8%
including commitment fees paid on the unused portion of the borrowing base. The
Company's debt to total capitalization ratio as defined under the agreement was
4.8% as of September 30, 2001.
Note 5 - Financial Instruments
On January 1, 2001 the Company adopted statement of Financial
Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments
and Hedging Activities." The adoption of SFAS No. 133 resulted in the Company
recording a liability of $45,699,000 for the fair value of the derivative
instruments at January 1, 2001. The Company's adoption entry resulted in
deferral of the recognition of this liability to accumulated other comprehensive
loss of $28,587,000 at January 1, 2001. For the first nine months of 2001 the
Company recognized no net hedge loss from hedge ineffectiveness on derivative
instruments that were designated and qualified as cash flow hedging instruments.
St. Mary anticipates that all hedge transactions will occur as expected. Based
on current prices the Company anticipates that $3,482,000 of the after-tax gain
amount included in accumulated and other comprehensive income will be included
in earnings during the next 12 months.
The Company seeks to protect its rate of return on acquisitions of
producing properties by hedging cash flow when the economic criteria from its
evaluation and pricing model indicate it would be appropriate. Management's
strategy is to hedge cash flows from investments requiring a gas price in excess
of $2.75 per Mcf and an oil price in excess of $22.00 per Bbl in order to meet
minimum rate-of-return criteria. The Company anticipates this strategy will
result in the hedging of future cash flow from acquisitions. St. Mary generally
limits its aggregate hedge position to no more than 35% of its total production
but will hedge up to 50% of total production in certain circumstances. The
Company seeks to minimize basis risk and index the majority of oil hedges to
NYMEX prices and the majority of gas hedges to various regional index prices
associated with pipelines in proximity to its areas of gas production.
-9-
Note 6 - Newly Issued Accounting Standards
In June 2001 the Financial Accounting Standards Board ("FASB") issued
SFAS No. 141, "Business Combinations." Under this statement all business
combinations must be accounted for under the purchase method. The pooling method
is no longer allowed. The statement also establishes criteria to assess when to
recognize intangible assets separately from goodwill. SFAS No. 141 is effective
for business combinations initiated after June 30, 2001 and for all business
combinations using the purchase method for which the date of acquisition is
after June 30, 2001. At this time the Company has no pending business
combinations that would be affected by the adoption of this statement.
In June 2001 the FASB issued SFAS No. 142, "Goodwill and Other
Intangible Assets." This statement addresses the accounting for goodwill and
other intangible assets and provides specific guidance for testing goodwill and
other intangible assets for impairment. This statement is effective for fiscal
years beginning after December 15, 2001. The Company does not anticipate that
the adoption of this statement will have a material effect on the Company's
financial position or results of operations.
In July 2001 the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." This statement requires companies to recognize the fair
value of an asset retirement liability in the financial statements by
capitalizing that cost as part of the cost of the related long-lived asset. The
asset retirement liability should then be allocated to expense by using a
systematic and rational method. The statement is effective for fiscal years
beginning after June 15, 2002. The Company has not yet determined the impact of
adoption of this statement.
In August 2001 the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." This statement provides a single
accounting model for long-lived assets to be disposed of and changes the
criteria that would have to be met to classify an asset as held-for-sale. The
statement also requires expected future operating losses from discontinued
operations to be recognized in the periods in which the losses are incurred,
which is a change from the current requirement of recognizing such operating
losses as of the measurement date. The statement is effective for fiscal years
beginning after December 15, 2001. The Company does not anticipate that the
adoption of the statement will have a material effect on the Company's financial
position or results of operations.
-10-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Quarterly Report on Form 10-Q includes certain statements that
may be deemed to be "forward-looking statements" within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. All statements, other than statements of historical facts, included in
this Form 10-Q that address activities, events or developments that St. Mary
management forecasts, expects, believes or anticipates will or may occur in the
future are forward-looking statements. Examples of forward-looking statements
may include discussion of such matters as:
o Production forecasts, lease operating expenses, transportation costs,
DD&A, general and administrative expenses, and current income
taxes for future periods,
o the amount and nature of future capital, development and exploration
expenditures,
o the drilling of wells,
o reserve estimates and the estimates of both future net revenues and
the present value of future net revenues that are included in their
calculation,
o future oil and gas production estimates,
o repayment of debt,
o business strategies,
o expansion and growth of operations, and
o other similar matters.
These statements are based on certain assumptions and analyses made by
us in light of our experience and our perception of historical trends, current
conditions, expected future developments and other factors we believe are
appropriate in the circumstances. Such statements are subject to a number of
assumptions, risks and uncertainties, including such factors as the volatility
and level of oil and natural gas prices, uncertainties in cash flow, expected
acquisition benefits, production rates and reserve replacement, reserve
estimates, drilling and operating risks, competition, litigation, environmental
matters, the potential impact of government regulations, and other matters such
as those discussed in the "Risk Factors" section of St. Mary's 2000 Annual
Report on Form 10-K, many of which are beyond our control. Readers are cautioned
that forward-looking statements are not guarantees of future performance and
that actual results or developments may differ materially from those expressed
or implied in the forward-looking statements.
-11-
Results of Operations
The following table sets forth selected operating data for the periods
indicated:
Three Months Nine Months
------------ -----------
Ended September 30, Ended September 30,
------------------- -------------------
2001 2000 2001 2000
----- ----- ----- ----
(In thousands, except per volume (In thousands, except per
data) volume data)
Oil and gas production revenues:
Gas production $ 27,044 $ 36,244 $ 120,394 $ 91,224
Oil production 14,815 17,821 44,801 43,674
--------- --------- --------- ---------
Total $ 41,859 $ 54,066 $ 165,195 $ 134,897
========= ========= ========= =========
Net production:
Gas (Mcf) 9,754 9,929 29,404 28,710
Oil (Bbls) 609 711 1,812 1,825
--------- --------- --------- ---------
MCFE 13,405 14,195 40,274 39,660
========= ========= ========= =========
Average sales price (1):
Gas (per Mcf) $ 2.77 $ 3.65 $ 4.09 $ 3.18
Oil (per Bbl) $ 24.35 $ 25.05 $ 24.73 $ 23.93
Oil and gas production costs:
Lease operating expense $ 11,441 $ 6,750 $ 28,805 $ 18,259
Transportation costs 601 470
1,739 1,294
Production taxes 2,714 3,087 9,705 7,802
--------- --------- --------- ---------
Total $ 14,756 $ 10,307 $ 40,249 $ 27,355
========= ========= ========= =========
Additional per MCFE data:
Sales price $ 3.12 $ 3.81 $ 4.10 $ 3.40
Lease operating expense 0.85 0.48 0.72 0.46
Transportation costs 0.04 0.03 0.04 0.03
Production taxes 0.20 0.22 0.24 0.20
--------- --------- --------- ---------
Operating margin $ 2.03 $ 3.08 $ 3.10 $ 2.71
========= ========= ========= =========
Depletion, depreciation and amortization $ 1.02 $ 0.68 $ 0.94 $ 0.68
Impairment of proved properties $ 0.04 $ 0.06 $ 0.02 $ 0.07
General and administrative $ 0.21 $ 0.17 $ 0.26 $ 0.19
(1)Includes the effects of St. Mary's hedging activities.
-12-
Three-Month Comparison
Oil and Gas Production Revenues. St. Mary's quarterly oil and gas
production revenues decreased $12.2 million or 23% to $41.9 million for the
three months ended September 30, 2001 compared with $54.1 million for the same
period in 2000. This decrease was the result of an oil production volume
decrease of 14%, a gas production decrease of 2% and decreases in the average
price received for both oil and gas in the third quarter of 2001 compared to
2000. The oil production decrease reflects catch-up production amounts received
from our interest in the Eugene Island 341 well in the third quarter of 2000.
The average realized gas price decreased 24% to $2.77 per Mcf, while the average
realized oil price decreased 3% to $24.35 per Bbl. These decreases were
partially offset by St. Mary's share of revenue from wells completed in 2000 and
2001 that added $4.6 million of revenue, and our December 2000 acquisition of JN
Exploration et al properties that added $1.4 million of revenue. Average net
daily production decreased to 145.7 MMCFE for 2001 compared with 154.3 MMCFE in
2000. A general decrease in daily production from older properties was partially
offset by our December 2000 acquisition of JN Exploration et al properties that
added 6.1 MMCFE per day and wells completed in 2000 and 2001 that added 18.6
MMCFE per day for the three months ended September 30, 2001.
St. Mary hedged approximately 30% or 184 MBbls of its oil production
for the three months ended September 30, 2001 and realized a $460,000 decrease
in oil revenue attributable to hedging compared with a $3.7 million decrease in
2000. Without these contracts we would have received an average price of $25.11
per Bbl in the third quarter of 2001 compared to $30.20 per Bbl in 2000. St.
Mary also hedged 41% of its 2001 third quarter gas production or 4.4 million
MMBtu and realized a $187,000 increase in gas revenue from hedging compared with
a $6.6 million decrease in 2000. Without these contracts we would have received
an average price of $2.75 per Mcf for the three months ended September 30, 2001
compared to $4.31 per Mcf for the same period in 2000.
Oil and Gas Production Costs. Oil and gas production costs consist of
lease operating expense, production taxes and transportation expenses. Total
production costs increased $4.4 million or 43% to $14.8 million for the three
months ended September 30, 2001 from $10.3 million in 2000. In the third quarter
of 2001 we experienced a $2.4 million increase in non-recurring LOE as we
continued to take advantage of workover rig availability. Williston basin
acquisitions in 2000 have added $483,000 of production costs. Our JN Exploration
et al acquisition properties represented $441,000 of the total increase. St.
Mary's share of recurring LOE from wells completed in 2000 and 2001 added
another $557,000. We have also experienced higher recurring LOE costs in the
Williston basin, the Permian basin and the Gulf Coast/Gulf of Mexico as a result
of increased competition for limited availability of services and general cost
inflation. Total oil and gas production costs per MCFE increased 51% to $1.10
for the three months ended September 30, 2001 compared with $0.73 for 2000. An
$0.18 per MCFE increase was due to non-recurring LOE. The remaining increase was
due to transportation costs and general cost inflation partially offset by lower
production taxes for the three months ended September 30, 2001.
Depreciation, Depletion, Amortization and Impairment. Depreciation,
depletion and amortization expense ("DD&A") increased $4.1 million or 42% to
$13.7 million for the three months ended September 30, 2001 from $9.6 million in
2000. DD&A per MCFE increased by 51% to $1.02 for the third quarter of 2001
compared with $0.68 in 2000. This increase reflects acquisitions and drilling
results in 2000 and 2001 that have added costs at a higher per-unit rate. The
unit rate was further affected by downward adjustments to reserves due to the
impact of pricing on the economic quantities of reserves at September 30, 2001.
Exploration. Exploration expense increased $2.0 million or 85% to $4.3
million for the three months ended September 30, 2001 compared with $2.3 million
in 2000. The increase resulted from an $849,000 increase in exploratory dry hole
costs, a $629,000 increase in personnel costs associated with exploration
activity and a $478,000 increase in geological and geophysical expenses.
General and Administrative. General and administrative expenses
increased $461,000 or 20% to $2.8 million for the three months ended September
30, 2001 compared with $2.3 million in 2000. Increases in compensation expense
associated with increased personnel, our incentive plans and general cost
inflation were partially offset by a $432,000 increase in COPAS overhead
reimbursement from operations.
-13-
Income Taxes. Income tax expense totaled $734,000 for the three months
ended September 30, 2001 and $11.3 million in 2000, resulting in effective tax
rates of 13.1% and 39.6%, respectively. The difference in rates between the two
periods reflects the cumulative effect on temporary differences of changes to
estimates of percentage depletion and our state income tax rate based on recent
tax filings.
Net Income. Net income for the three months ended September 30, 2001
decreased $12.3 million or 72% to $4.9 million compared with $17.1 million in
2000. A 24% decrease in realized average gas prices and a 3% decrease in
realized average oil prices combined with a 2% decrease in gas production and a
14% decrease in oil production resulted in a $12.2 million decrease in oil and
gas production revenue. The increases in production expenses, DD&A,
exploration expense and general and administrative expenses were offset by the
decrease in income tax expense.
Nine-Month Comparison
Oil and Gas Production Revenues. St. Mary experienced an increase in
oil and gas production revenues of $30.3 million, or 22% to $165.2 million for
the nine months ended September 30, 2001 compared with $134.9 million for the
same period in 2000. The increase was the result of a gas production volume
increase of 2% and increases in the average price received for both oil and gas
in the first nine months of 2001 compared to 2000. This increase was partially
offset by an oil production decrease of 1%. The average realized gas price
increased 29% to $4.09 per Mcf, while the average realized oil price increased
3% to $24.73 per Bbl. St. Mary's share of revenue from wells completed in 2000
and 2001 added $27.8 million of revenue, and our December 2000 acquisition of JN
Exploration et al properties added $9.8 million of revenue. Average net daily
production increased to 147.5 MMCFE for the first nine months of 2001 compared
with 144.7 MMCFE in 2000. Our December 2000 acquisition of JN Exploration et al
properties added daily production of 7.4 MMCFE for the nine months ended
September 30, 2001. Wells completed in 2000 and 2001 offset 20.7 MMCFE of
decline in daily production from older properties.
St. Mary hedged approximately 31% or 568 MBbls of its oil production
for the nine months ended September 30, 2001 and realized a $2.3 million
decrease in oil revenue attributable to hedging compared with a $9.0 million
decrease in 2000. Without these contracts we would have received an average
price of $26.02 per Bbl for the nine months ended September 30, 2001 compared to
$28.87 per Bbl in 2000. St. Mary also hedged 42% of its gas production or 13.7
million MMBtu and realized a $20.3 million decrease in gas revenue for the nine
months ended September 30, 2001 compared with a $9.4 million decrease in gas
revenue in 2000. Without these contracts we would have received an average price
of $4.78 per Mcf for the nine months ended September 30, 2001 compared to $3.51
per Mcf for the same period in 2000.
Oil and Gas Production Costs. Oil and gas production costs consist of
lease operating expense, production taxes and transportation expenses. Total
production costs increased $12.9 million or 47% to $40.2 million for the nine
months ended September 30, 2001 from $27.4 million in 2000. In the first nine
months of 2001 we experienced a $3.7 million increase in non-recurring LOE as we
took advantage of workover rig availability. Williston basin acquisitions in the
last half of 2000 added $1.7 million of production costs. Our JN Exploration et
al acquisition properties represented $1.6 million of the total oil and gas
production cost increase. St. Mary's share of recurring LOE from wells completed
in 2000 and 2001 added another $1.5 million. We have also experienced higher
recurring LOE costs in the Williston basin, the Permian basin and the Gulf
Coast/Gulf of Mexico as a result of increased competition for limited
availability of services and general cost inflation. In addition, higher
production taxes and transportation expenses resulting from higher oil and gas
revenues account for $1.5 million of the increase. Total oil and gas production
costs per MCFE increased 45% to $1.00 for the nine months ended September 30,
2001 compared with $0.69 for 2000. A $0.09 per MCFE increase was due to the
increase in non-recurring LOE. Another $0.06 per MCFE increase was due to
increased production taxes and transportation expenses. The remaining increase
is due to general cost inflation.
-14-
Depreciation, Depletion, Amortization and Impairment. DD&A
increased $11.1 million or 41% to $37.9 million for the nine months ended
September 30, 2001 from $26.8 million in 2000. DD&A per MCFE increased by
39% to $0.94 for the nine months ended September 30, 2001 compared with $0.68 in
2000. This increase reflects acquisitions and drilling results in 2000 and 2001
that added costs at a higher per unit rate. The DD&A per MCFE rate was
further affected by downward adjustments to reserves due to pricing adjustments
at September 30, 2001.
Exploration. Exploration expense increased $8.1 million or 120% to
$14.9 million for the nine months ended September 30, 2001 compared with $6.7
million in 2000. The increase resulted from a $4.4 million increase in
exploratory dry holes, a $1.4 million increase in geological and geophysical
expense and an increase of $2.3 million in personnel costs associated with
exploration activity.
General and Administrative. General and administrative expenses
increased $2.9 million or 39% to $10.4 million for the nine months ended
September 30, 2001 compared with $7.4 million in 2000. Increases in compensation
expense associated with increased personnel, our incentive plans and general
cost inflation were partially offset by a $3.2 million increase in COPAS
overhead reimbursement from operations and costs allocated to exploration
expense.
Income Taxes. Income tax expense totaled $21.1 million for the nine
months ended September 30, 2001 and $25.1 million in 2000, resulting in
effective tax rates of 34.8% and 38.8%, respectively. The difference in rates
between the two periods reflects the cumulative effect on temporary differences
of changes to estimates of percentage depletion and our state income tax rate
based on recent tax filings.
Net Income. Net income for the nine months ended September 30, 2001
decreased $134,000 to $39.5 million compared with $39.6 million in 2000. A 29%
increase in gas prices and a 3% increase in oil prices combined with a 2%
increase in gas production offset by a 1% decrease in oil production resulted in
a $30.3 million increase in oil and gas production revenue. This increase was
offset by corresponding increases in oil and gas production costs and DD&A
as well as an $8.1 million increase in exploration expense, and a $2.9 million
increase in general and administrative expense but also reflects a $4.0 million
decrease in income tax expense. A decrease in the pre-tax gain on the sale of
proved properties was exactly offset by decreases in proved and unproved
property impairments in 2001.
Liquidity and Capital Resources
St. Mary's primary sources of liquidity are the cash provided by
operating activities, debt financing, sales of non-strategic properties and
access to the capital markets. Our cash needs are for the acquisition,
exploration and development of oil and gas properties and for the payment of
debt obligations, trade payables and stockholder dividends. Exploration and
development programs are generally financed from internally generated cash flow,
bank debt and cash and cash equivalents on hand. The capital expenditure budget
is continually reviewed based on changes in cash flow and other factors.
Cash Flow. St. Mary's net cash provided by operating activities
increased $56.1 million or 101% to $111.9 million for the nine months ended
September 30, 2001 compared with $55.7 million in 2000. The increase reflects
the effect of higher oil and gas production revenues, an increase in accounts
payable and a decrease in accounts receivable for the period ended September 30,
2001.
Exploratory dry hole costs are included in cash flows from investing
activities even though these costs are expensed as incurred. If exploratory dry
hole costs had been included in operating cash flows, the net cash provided by
operating activities would have been $106.0 million and $54.4 million in the
first nine months of 2001 and 2000, respectively.
-15-
Net cash used in investing activities increased $36.5 million or 65%
to $92.7 million for the nine months ended September 30, 2001 compared with
$56.3 million in 2000. This increase is due to increased capital expenditures
and a decrease in proceeds from the sale of oil and gas properties that are
partially offset by the receipt of $7.4 million of proceeds from the December
2000 sale of KMOC stock. Total capital expenditures, including acquisitions of
oil and gas properties, in the first nine months of 2001 increased $42.4 million
or 72% to $101.5 million compared with $59.0 million in the first nine months of
2000.
If exploratory dry hole costs had been included in operating cash
flows rather than in investing cash flows, net cash used in investing activities
would have been $86.9 million and $55.0 million in the first nine months of 2001
and 2000, respectively.
Net cash used in financing activities increased $12.5 million or 177%
to $19.5 million for the nine months ended September 30, 2001 compared with $7.1
million in 2000. St. Mary made net repayments of $7.7 million of debt in 2001
compared to a $10.0 net debt repayment in 2000. Additionally, we repurchased
$12.5 million more of our own common stock and received $3.0 million less in
proceeds from the sale of our common stock during the first three quarters of
2001 compared to 2000. All sales of our common stock resulted from stock option
exercises and sales under St. Mary's employee stock purchase plan.
St. Mary had $6.2 million in cash and cash equivalents and had working
capital of $23.4 million as of September 30, 2001 compared with $6.6 million in
cash and cash equivalents and working capital of $40.6 million at December 31,
2000. The small change in cash and cash equivalents reflects that our cash
provided by operations was sufficient to cover our increased capital
expenditures, our debt repayment and our repurchase of St. Mary's common stock
during the first nine months of 2001.
Credit Facility. On April 30, 2001 St. Mary entered into an agreement
to amend the existing long-term revolving credit agreement. The maximum loan
amount remains at $200.0 million. The lender may periodically re-determine the
aggregate borrowing base depending upon the value of St. Mary's oil and gas
properties and other assets. The amendment increases the borrowing base by $30.0
million to $170.0 million. The accepted borrowing base was $40.0 million at
September 30, 2001. The credit agreement has a maturity date of December 31,
2006, and includes a revolving period that matures on June 30, 2003. The amended
agreement deletes all references to and provisions of the short-term tranche
previously available to St. Mary. We must comply with certain covenants
including maintenance of stockholders' equity at a specified level and
limitations on additional indebtedness. As of September 30, 2001 and December
31, 2000, $14.3 million and $22.0 million, respectively, was outstanding under
this credit agreement. These outstanding balances accrue interest at rates
determined by St Mary's debt to total capitalization ratio. During the revolving
period of the loan, loan balances accrue interest at our option of either (1)
the higher of the federal funds rate plus 1/2% or the prime rate, or (2) LIBOR
plus 3/4% when our debt to total capitalization is less than 30%, up to a
maximum of either (a) the higher of the federal funds rate plus 3/4% or the
prime rate plus 1/4%, or (b) LIBOR plus 1-3/8% when our debt to total
capitalization is equal to or greater than 50%. The debt to total capitalization
ratio as defined under the agreement was 4.8% as of September 30, 2001.
Common Stock. At the annual shareholder meeting on May 23, 2001 the
shareholders of St. Mary voted to increase the amount of authorized common
shares to 100,000,000.
In July 2000 St. Mary's board of directors approved a two-for-one
stock split effected in the form of a stock dividend whereby one additional
common share of stock was distributed for each common share outstanding. The
stock split was distributed on September 5, 2000 to shareholders of record as of
the close of business on August 21, 2000. All share and per share amounts for
all periods presented herein have been restated to reflect this stock split.
-16-
In August 1998 St. Mary's board of directors authorized a stock
repurchase program whereby we may purchase from time-to-time, in open market
transactions or negotiated sales, up to two million of our common shares.
Through December 31, 2000 we had repurchased a total of 395,600 shares of St.
Mary's common stock under the program for $3.3 million at a weighted average
price of $8.44 per share. To date in 2001 we have repurchased an additional
614,300 shares for a weighted average price of $20.64 per share. We anticipate
that additional purchases of shares may occur as market conditions warrant. As
part of this program we sold put options in April 2001 whereby the holder had
the right to require St. Mary to purchase up to 100,000 shares of St. Mary's
common stock from the holder at $20.22 per share on July 11, 2001. We received a
$99,000 premium from this sale. These options expired unexercised. In June 2001
we sold additional put options whereby we could be required to purchase up to
100,000 shares of our common stock from the holder at $19.22 per share on
September 24, 2001. We received a $94,000 premium from this sale. The holder
exercised these options, and we repurchased the stock on September 24, 2001. Any
future purchases will be funded with internal cash flow and borrowings under St.
Mary's credit facility.
Capital and Exploration Expenditures Incurred. St. Mary's expenditures
for exploration and development of oil and gas properties and acquisitions are
the primary use of its capital resources. The following table sets forth certain
information regarding the costs incurred by St. Mary in its oil and gas
activities during the periods indicated:
Capital and Exploration Expenditures
------------------------------------
Nine Months Ended September 30,
-------------------------------
2001 2000
---- ----
(In thousands)
Development $ 74,346 $ 34,004
Domestic Exploration 18,451 12,326
Acquisitions:
Proved 3,819 13,349
Unproved 18,188 3,464
---------- ---------
Total $ 114,804 $ 63,143
========== =========
We continuously evaluate opportunities in the marketplace for oil and
gas properties and, accordingly, may be a buyer or a seller of properties at
various times. We will continue to emphasize smaller niche acquisitions
utilizing St. Mary's technical expertise, financial flexibility and structuring
experience. In addition, we are also actively seeking larger acquisitions of
assets or companies that would afford opportunities to expand our existing core
areas, to acquire additional geoscientists or to gain a significant acreage and
production foothold in a new basin.
St. Mary's total costs incurred for capital and exploration activities
in the first nine months of 2001 increased $51.7 million or 82% compared to the
first nine months of 2000. We spent $111.0 million in the first nine months of
2001 for unproved property acquisitions and domestic exploration and development
compared to $49.8 million for the comparable period in 2000. Unproved property
acquisitions increased by $14.7 million as a result of general leasing activity
and our acquisition of leases in the Hanging Woman Basin of Montana and Wyoming
for coalbed methane development. A 17 well pilot drilling program will commence
on this property in the fourth quarter of 2001. The remaining increase is
primarily the result of increased drilling activity.
-17-
In October 2001 we entered into a purchase and sale agreement to
acquire oil and gas properties from Choctaw II Oil & Gas, Ltd. for $41
million in cash. We plan to utilize a portion of our credit facility for the
acquisition. The properties are primarily located in the Williston basin of
Montana and North Dakota and the Green River basin in Wyoming and currently
produce an estimated 1,200 Bbls of oil and 4,600 Mcf of gas per day, net to the
interests to be acquired. The acquisition is expected to close in late November
2001 after completion of due diligence procedures.
Outlook. Management believes that St Mary's existing capital
resources, cash flows from operations and available borrowings are sufficient to
meet its anticipated capital and operating requirements for the remainder of
2001.
We now anticipate spending approximately $180.0 million for capital
and exploration expenditures in 2001 with $138.0 million allocated for ongoing
exploration and development and $42.0 million for acquisitions of producing
properties. Anticipated ongoing exploration and development expenditures for
each of St. Mary's core areas is as follows:
o Mid-Continent region $55.0 million
o Gulf Coast and Gulf of Mexico region $39.0 million
o ArkLaTex region $15.0 million
o Williston Basin $26.0 million
o Permian Basin and other $ 3.0 million
The amount not funded from our internally generated cash flow in 2001
can be funded from our credit facility. The amount and allocation of future
capital and exploration expenditures will depend upon a number of factors
including the number and size of available acquisition opportunities and our
ability to assimilate these acquisitions. Also, the impact of oil and gas prices
on investment opportunities, the availability of capital and borrowing
capability and the success of our development and exploratory activity could
lead to funding requirements for further development.
Natural gas prices declined further during the quarter reflecting a
drop in demand associated with the downturn in the economy as well as high gas
volumes in storage relative to prior years. We enter this winter season with
very high storage. Stronger prices will depend on a colder winter and a
recovering economy. Oil prices fell some at the end of the quarter but still
remain in historically normal ranges. With declining demand we anticipate that
oil prices we receive in the future will reflect OPEC policy and discipline. Our
production base and balance sheet continue to be strong. We have experienced
general cost inflation in both the drilling and service sector of our industry.
We note however that rig and service availability are easing and that costs have
flattened or declined modestly. Our recent experience in the acquisition market
for properties has been varied. We were successful in our bid for properties
from Choctaw II Oil & Gas, Ltd., but we generally feel that the market
continues to be overheated. We remain disciplined and patient. We are currently
forecasting the following information for St. Mary for 2001:
o Production 53-55 BCFE
o Lease operating expense, including
production taxes and transportation $0.95-1.05/MCFE
o Depreciation, depletion and amortization $0.95-1.05/MCFE
o General and administrative expense $0.24-0.28/MCFE
o Income taxes to be paid in the current year
are expected to approximate between 5% and
10% of total tax expense and will depend
upon prices we receive and actual expenditures
for intangible drilling costs
o Discretionary cash flows-a common industry
financial measure computed as net income
using a NYMEX gas price of $4.44 and a NYMEX
oil price of $26.38 plus depreciation,
depletion, amortization, impairments,
deferred taxes and exploration expense $4.75-$5.25/common share
-18-
St. Mary seeks to protect its rate of return on acquisitions of
producing properties by hedging cash flow when the economic criteria from its
evaluation and pricing model indicate it would be appropriate. Management's
strategy is to hedge cash flows from investments requiring a gas price in excess
of $2.75 per Mcf and an oil price in excess of $22.00 per Bbl in order to meet
minimum rate-of-return criteria. We anticipate this strategy will result in the
hedging of future cash flow from acquisitions. We generally limit St. Mary's
aggregate hedge position to no more than 35% of total production but will hedge
up to 50% of total production in certain circumstances. We seek to minimize
basis risk and index the majority of oil hedges to NYMEX prices and the majority
of gas hedges to various regional index prices associated with pipelines in
proximity to St. Mary's areas of gas production. Please see the discussion in
Accounting Matters below. Including hedges entered into since September 30, 2001
we have hedged as follows:
Swaps:
Average Quantity Average
Product Volumes/month Type Fixed price Duration
------- ------------- ---- ----------- --------
Natural Gas 193,000 MMBtu $3.56 10/01 - 12/01
Natural Gas 204,000 MMBtu $3.15 01/02 - 12/02
Natural Gas 100,000 MMBtu $2.74 01/03 - 12/03
Oil 49,400 Bbls $25.66 10/01 - 12/01
Oil 119,600 Bbls $24.73 01/02 - 12/02
Oil 79,800 Bbls $22.71 01/03 - 12/03
Collars:
Average
Product Volumes/month Ceiling Price Floor Price Duration
------- ------------- ------------- ----------- --------
Natural Gas 150,000 MMBtu $2.9400 $2.3000 10/01 - 12/01
Natural Gas 150,000 MMBtu $2.9000 $2.3000 10/01 - 12/01
Natural Gas 250,000 MMBtu $2.8775 $2.3540 10/01 - 12/01
Natural Gas 250,000 MMBtu $2.8192 $2.3540 10/01 - 12/01
Natural Gas 250,000 MMBtu $3.5000 $2.4000 10/01 - 12/01
Natural Gas 350,000 MMBtu $5.8000 $3.0000 10/01 - 12/01
Oil 7,500 Bbls $20.6400 $16.4400 10/01 - 12/01
Oil 7,500 Bbls $20.9000 $16.7000 10/01 - 12/01
Oil 15,000 Bbls $27.2200 $19.0000 10/01 - 12/01
Oil 7,000 Bbls $21.0000 $18.0000 10/01 - 12/01
Oil 10,000 Bbls $25.1000 $19.5000 10/01 - 12/01
If all these commodity hedging contracts had closed on September 30,
2001 St. Mary would have received approximately $5.8 million based on
quarter-end pricing. As of that date we had no margin deposits outstanding to
counterparties.
-19-
Accounting Matters
On January 1, 2001 we adopted Statement of Financial Accounting
Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities." The adoption of SFAS No. 133 resulted in St. Mary recording a
liability of $45.7 million for the fair value of the derivative instruments at
January 1, 2001. The adoption entry resulted in deferral of the recognition of
this liability to accumulated other comprehensive loss of $28.6 million at
January 1, 2001. For the first nine months of 2001 we recognized no net hedge
gain or loss from hedge ineffectiveness on derivative instruments that were
designated and qualified as cash flow hedging instruments. We anticipate that
all hedge transactions will occur as expected. Based on current prices we
anticipate that $3.5 million of the after tax income amount included in
accumulated and other comprehensive income will be included in earnings during
the next 12 months.
In June 2001 the FASB issued SFAS No. 141, "Business Combinations."
Under this statement all business combinations must be accounted for under the
purchase method. The pooling method is no longer allowed. The statement also
establishes criteria to assess when to recognize intangible assets separately
from goodwill. SFAS No. 141 is effective for business combinations initiated
after June 30, 2001 and for all business combinations using the purchase method
for which the date of acquisition is after June 30, 2001. At this time we have
no pending business combinations that would be affected by the adoption of this
statement.
In June 2001 the FASB issued SFAS No. 142, "Goodwill and Other
Intangible Assets." This statement addresses the accounting for goodwill and
other intangible assets and provides specific guidance for testing goodwill and
other intangible assets for impairment. This statement is effective for fiscal
years beginning after December 15, 2001. We do not anticipate that the adoption
of this statement will have a material effect on our financial position or
results of operations.
In July 2001 the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." This statement requires companies to recognize the fair
value of an asset retirement liability in the financial statements by
capitalizing that cost as part of the cost of the related long-lived asset. The
asset retirement liability should then be allocated to expense by using a
systematic and rational method. The statement is effective for fiscal years
beginning after June 15, 2002. We have not determined the impact of adoption of
this statement.
In August 2001 the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." This statement provides a single
accounting model for long-lived assets to be disposed of and changes the
criteria that would have to be met to classify an asset as held-for-sale. The
statement also requires expected future operating losses from discontinued
operations to be recognized in the periods in which the losses are incurred,
which is a change from the current requirement of recognizing such operating
losses as of the measurement date. The statement is effective for fiscal years
beginning after December 15, 2001. We do not anticipate that the adoption of the
statement will have a material effect on St. Mary's financial position or
results of operations.
-20-
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
St. Mary holds derivative contracts and financial instruments that
have cash flow and net income exposure to changes in commodity prices or
interest rates. Financial and commodity-based derivative contracts are used to
limit the risks inherent in some crude oil and natural gas price changes that
have an effect on us. In prior years we have occasionally hedged interest rates,
and may do so in the future should circumstances warrant.
Our board of directors has adopted a policy regarding the use of
derivative instruments. This policy requires every derivative used by St. Mary
to relate to underlying offsetting positions, anticipated transactions or firm
commitments. It prohibits the use of speculative, highly complex or leveraged
derivatives. Under the policy, the Chief Executive Officer and Vice President of
Finance must review and approve all risk management programs that use
derivatives. The board of directors periodically reviews these programs.
Commodity Price Risk. St. Mary uses various hedging arrangements to
manage its exposure to price risk from its natural gas and crude oil production.
These hedging arrangements have the effect of locking in for specified periods,
at predetermined prices or ranges of prices, the prices we will receive for the
volumes to which the hedge relates. Consequently, while these hedging
arrangements are structured to reduce our exposure to decreases in prices
associated with the hedged commodity, they also limit the benefit we might
otherwise receive from any price increases associated with the hedged commodity.
The derivative gain or loss effectively offsets the loss or gain on the
underlying commodity exposures that have been hedged. The fair values of the
swaps are estimated based on quoted market prices of comparable contracts and
approximate the net gains or losses that would have been realized if the
contracts had been closed out at quarter-end. The fair values of the futures are
based on quoted market prices obtained from the New York Mercantile Exchange.
A hypothetical $0.10 per MMBtu change in St. Mary's quarter-end market
prices for natural gas swaps and futures contracts on a notional amount of 8.4
million MMBtu would cause a potential $416,000 change in net income before
income taxes for contracts in place on September 30, 2001. A hypothetical $1.00
per Bbl change in our quarter-end market prices for crude oil swaps and future
contracts on a notional amount of 2.7 MMBbls would cause a potential $2.3
million change in net income before income taxes for oil contracts in place on
September 30, 2001. These hypothetical changes were discounted to present value
using a 7.5% discount rate since the latest expected maturity date of certain
swaps and futures contracts is greater than one year from the reporting date.
Interest Rate Risk. Market risk is estimated as the potential change
in fair value resulting from an immediate hypothetical one percentage point
parallel shift in the yield curve. A sensitivity analysis presents the
hypothetical change in fair value of those financial instruments held by St.
Mary at September 30, 2001 which are sensitive to changes in interest rates. For
fixed-rate debt, interest rate changes affect the fair market value but do not
impact results of operations or cash flows. Conversely for floating rate debt,
interest rate changes generally do not affect the fair market value but do
impact future results of operations and cash flows, assuming other factors are
held constant. The carrying amount of our floating rate debt approximates its
fair value. At September 30, 2001 we had floating rate debt of $14.4 million and
had no fixed rate debt. Assuming constant debt levels, the impact on results of
operations and cash flows for the remainder of the year resulting from a
one-percentage-point change in interest rates would be approximately $36,000
before taxes.
-21-
PART II. OTHER INFORMATION
ITEM 2. Changes in Securities and Use of Proceeds
------------------------------------------
(c) In June 2001 St. Mary sold to a different single purchaser 100,000
put options on its own common stock for $94,000 in cash. Those put
options gave the holder the right to require St. Mary to purchase up
to 100,000 shares of its own common stock from the holder at $19.22
per share on September 24, 2001. The holder exercised those options,
and St. Mary was required to purchase 100,000 shares of its own common
stock at 19.22 per share. The above securities were not registered
under the Securities Act of 1933 in reliance on the exemption from
registration provided by Section 4(2) of the Securities Act for
transactions by an issuer not involving any public offering since the
two purchasers are accredited investors and the option documents
reflect the fact that the purchasers purchased the securities for
their own account without a view to the distribution thereof.
ITEM 5. Other Information
-----------------
In St. Mary's proxy statement dated April 12, 2001 for the
2001 annual meeting of stockholders held on May 23, 2001, St. Mary
disclosed under the caption "Future Stockholder Proposals" that if
notice of a St. Mary stockholder proposal for the annual meeting of
stockholders in 2002 for which the stockholder will conduct his or her
own proxy solicitation is not received by March 1, 2002, proxies
solicited by the St. Mary board of directors may use their
discretionary voting authority when the matter is raised at the
meeting, without including any discussion of the matter in the proxy
statement.
However, on July 19, 2001, the St. Mary board of directors
adopted amendments to the St. Mary by-laws to establish advance notice
requirements and deadlines for notice of business (including director
nominations) to be properly presented by a stockholder at an annual
meeting of stockholders that supersedes the deadline disclosed in the
April 12, 2001 proxy statement. Those by-law provisions generally
require that advance written notice in proper form (as set forth in
the by-laws) of stockholder proposals for matters to be brought before
the next regularly scheduled annual stockholders meeting, including
the nominations of directors be received by St. Mary not less than 75
days nor more than 105 days before the first anniversary date of the
immediately preceding annual meeting of stockholders. Accordingly,
notice of stockholder proposals for the annual meeting of stockholders
in 2002 must be received by St. Mary between February 7, 2002 and
March 9, 2002. If a stockholder proposal or director nomination is not
made in accordance with the by-laws, as amended, such proposal or
nomination shall be disregarded at the meeting of stockholders.
ITEM 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibit Description
------- -----------
3.1 Restated By-Laws of St Mary Land &
Exploration Company as amended in July 2001
10.1 Form of Change of Control Severance Agreements
(b) No reports on Form 8-K were filed during the quarter ended
September 30, 2001.
-22-
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
November 9, 2001 By /s/ MARK A. HELLERSTEIN
-----------------------------------
Mark A. Hellerstein
President and Chief Executive Officer
November 9, 2001 By /s/ RICHARD C. NORRIS
-----------------------------------
Richard C. Norris
Vice President - Finance, Secretary
and Treasurer
November 9, 2001 By /s/ GARRY A. WILKENING
-----------------------------------
Garry A. Wilkening
Vice President - Administration and
Controller