SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q/A-1
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarter Ended September 30, 1996
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Commission File Number 0-20872
ST. MARY LAND & EXPLORATION COMPANY
(Exact name of Registrant as specified in its charter)
Delaware 41-0518430
(State or other Jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
1776 Lincoln Street, Suite 1100, Denver, Colorado 80203
(Address of principal executive offices) (Zip Code)
(303) 861-8140
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [ x ] No [ ]
Indicate the number of shares outstanding of each of the Registrant's classes of
common stock as of the latest practicable date.
As of November 11, 1996, the registrant had 8,759,214 shares of Common Stock,
$.01 par value, outstanding.
THIS AMENDMENT ON FORM 10-Q/A-1 TO THE REGISTRANT'S FORM 10-Q/A FOR THE QUARTER
ENDED SEPTEMBER 30, 1996 IS BEING FILED TO INCLUDE NOTE 3 TO THE FINANCIAL
STATEMENTS REGARDING THE COMPANY'S AMENDED AND RESTATED CREDIT FACILITY EXECUTED
IN JUNE 1996.THIS AMENDMENT ALSO INCLUDES A RECLASSIFICATION BETWEEN COMMON
STOCK AND ADDITIONAL PAID-IN CAPITAL AS OF SEPTEMBER 30, 1996 AND INCLUDES A
RECLASSIFICATION BETWEEN (INCOME) LOSS IN EQUITY INVESTEES AND OTHER IN THE
CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30,
1995. GAIN ON SALE OF DISCONTINUED OPERATIONS, NET OF TAXES AND NET INCOME FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 1995 HAS BEEN ADJUSTED WITH CORRESPONDING
ADJUSTMENTS IN THE CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1995. THIS AMENDMENT ALSO INCLUDES A RECLASSIFICATION OF A
PORTION OF THE STOCK APPRECIATION RIGHTS LIABILITY TO CURRENT FROM LONG-TERM AS
OF SEPTEMBER 30, 1996. ALL OTHER INFORMATION CONTAINED IN THE ORIGINAL FORM
10-Q/A IS UNCHANGED.
ST. MARY LAND & EXPLORATION COMPANY
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INDEX
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Part I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Consolidated Balance
Sheets - September 30, 1996 and
December 31, 1995 ........................... 3
Consolidated Statements of
Income - Nine Months Ended
September 30, 1996 and 1995 ................. 4
Consolidated Statements of
Cash Flows - Nine Months Ended
September 30, 1996 and 1995 ................. 5
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations ............................... 10
Part II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote
of Security Holders ......................... 16
Item 6. Exhibits and Reports on Form 8-K ............ 16
Exhibits
Exhibit No. 27 Financial Data Schedule
-2-
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ST. MARY LAND & EXPLORATION COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
ASSETS September 30, December 31,
------------------------------
1996 1995
---------- ----------
Current assets:
Cash and cash equivalents $ 4,405 $ 1,723
Accounts receivable 20,707 8,068
Prepaid expenses 2,146 850
Refundable income taxes 35 176
---------- ----------
Total current assets 27,293 10,817
---------- ----------
Property and equipment (successful efforts method), at cost:
Proved oil and gas properties 191,670 165,750
Unproved oil and gas properties, net 15,306 11,752
Other 3,414 2,535
---------- ----------
210,390 180,037
Less accumulated depletion, depreciation, amortization and impairment (117,586) (108,392)
---------- ----------
92,804 71,645
---------- ----------
Other assets:
Investment in Russian joint venture 4,788 4,140
Investment in Summo Minerals Corporation 4,483 4,842
Other assets 3,312 4,682
---------- ----------
12,583 13,664
---------- ----------
$ 132,680 $ 96,126
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 19,691 $ 7,715
Stock appreciation rights 1,183 -
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20,874 7,715
---------- ----------
Long-term liabilities:
Long-term debt 36,324 19,602
Deferred income taxes 3,427 1,228
Stock appreciation rights 599 1,178
Other noncurrent liabilities 316 121
---------- ----------
40,666 22,129
---------- ----------
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value: authorized - 15,000,000 shares;
issued and outstanding - 8,759,214 shares in 1996 and
8,761,855 shares in 1995 88 88
Additional paid-in capital 15,800 15,835
Retained earnings 55,248 50,378
Unrealized gain on marketable equity securities-available for sale 4 15
Treasury stock - 2,572 shares, at cost - (34)
---------- ----------
Total stockholders' equity 71,140 66,282
---------- ----------
$ 132,680 $ 96,126
========== ==========
The accompanying notes are an integral part
of these consolidated financial statements.
-3-
ST. MARY LAND & EXPORATION COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
Three months ended Nine months ended
September 30, September 30,
-------------------- -------------------
1996 1995 1996 1995
-------- -------- -------- --------
Operating revenues:
Oil and gas production $ 14,944 $ 8,308 $ 39,689 $ 25,860
Gain (loss) on sale of proved properties - (98) - 1,052
Gas contract settlements and other revenues 205 171 490 528
-------- -------- -------- --------
Total operating revenues 15,149 8,381 40,179 27,440
-------- -------- -------- --------
Operating expenses:
Oil and gas production 3,336 2,723 9,262 7,676
Depletion, depreciation and amortization 3,270 2,198 9,144 7,184
Impairment of proved properties - 11 - 1,673
Exploration 1,359 1,475 5,688 3,683
Abandonment and impairment of unproved properties 691 202 1,240 759
General and administrative 1,386 1,473 5,066 4,129
Gas contract disputes and other 18 56 111 184
(Income) loss in equity investees (48) 67 (47) 286
-------- -------- -------- --------
Total operating expenses 10,012 8,205 30,464 25,574
-------- -------- -------- --------
Income from operations 5,137 176 9,715 1,866
Nonoperating income and (expense):
Interest income 60 56 227 230
Interest expense (567) (268) (1,407) (744)
-------- -------- -------- --------
Income (loss) from continuing operations before
income taxes 4,630 (36) 8,535 1,352
Income tax expense (benefit) 1,556 (153) 2,773 (72)
-------- -------- -------- --------
Income from continuing operations 3,074 117 5,762 1,424
Gain on sale of discontinued operations, net of taxes - - 159 306
-------- -------- -------- --------
Net income $ 3,074 $ 117 $ 5,921 $ 1,730
======== ======== ======== ========
Net income per common share:
Income from continuing operations $ .35 $ .01 $ .66 $ .17
Gain on sale of discontinued operations - - .02 .03
-------- -------- -------- --------
Net income per share $ .35 $ .01 $ .68 $ .20
======== ======== ======== ========
Weighted average common shares outstanding 8,759 8,760 8,759 8,760
======== ======== ======== ========
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
(in thousands)
For the nine months
ended September 30,
-------------------------------
1996 1995
---------- ----------
Cash flows from operating activities:
Cash received from oil and gas operations $ 32,034 $ 24,206
Cash paid for oil and gas operations,
including general and administrative expenses (9,868) (9,323)
Exploration expenses (4,035) (2,764)
Interest and other receipts 381 393
Interest paid (1,300) (479)
Income taxes paid (102) (278)
---------- ----------
Net cash provided by operating activities 17,110 11,755
---------- ----------
Cash flows from investing activities:
Proceeds from sale of oil and gas properties 146 2,227
Capital expenditures, including dry hole costs (20,017) (14,609)
Acquisition of oil and gas properties (13,557) (9,005)
Investment in St. Mary Operating Company 3,059 -
Investment in Summo Minerals Corporation - (2,042)
Other 271 167
---------- ----------
Net cash used by investing activities (30,098) (23,262)
---------- ----------
Cash flows from financing activities:
Proceeds from long-term debt 23,650 5,380
Repayment of long-term debt (6,928) (1,745)
Dividends paid (1,051) (1,051)
Purchase of treasury and common stock (1) (44)
---------- ----------
Net cash provided by financing activities 15,670 2,540
---------- ----------
Net increase (decrease) in cash and cash equivalents 2,682 (8,967)
Cash and cash equivalents at beginning of period 1,723 9,976
---------- ----------
Cash and cash equivalents at end of period $ 4,405 $ 1,009
========== ==========
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 (continued)
(in thousands)
For the nine months
ended September 30,
-----------------------------
1996 1995
---------- ----------
Reconciliation of net income to net cash provided by operating activities:
Net income $ 5,921 $ 1,730
Adjustments to reconcile net income to net
cash provided by operating activities:
Depletion, depreciation and amortization 9,144 7,184
Impairment of proved properties - 1,673
(Income) Loss in equity investees (47) 286
Gain on sale of oil and gas properties - (1,052)
Dry hole costs 1,956 940
Abandonment and impairment of unproved properties 1,240 759
Deferred income taxes 2,271 42
Other 455 (417)
---------- ----------
20,940 11,145
Changes in assets and liabilities:
Accounts receivable (8,619) 466
Refundable income taxes 141 (437)
Accounts payable and accrued expenses 4,720 581
Deferred income taxes (72) -
---------- ----------
Net cash provided by operating activities $ 17,110 $ 11,755
========== ==========
Supplemental schedule of noncash investing and financing activities:
In March 1996, the Company acquired an additional 35% shareholder interest
in St. Mary Operating Company for $234,000 and assumed net liabilities of
$339,000.
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
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, 1995. 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,
1995. 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
In March 1996, the Company completed its purchase of the Anderman Group stock of
St. Mary Operating Company ("SMOC") at book value. The purchase increased the
Company's ownership in SMOC from 65% to 100%. Through March 31, 1996 the Company
accounted for its investment in SMOC using the equity method of accounting.
The Company accounts for its investment in the Russian joint venture using the
equity method of accounting. For the nine months ended September 30, 1996, the
Company has recorded a gain of $405,000 as its equity in income from the Russian
joint venture.
The Company accounts for its investment in Summo Minerals Corporation ("Summo")
using the equity method of accounting. For the nine months ended September 30,
1996, the Company has recorded a loss of $358,000 as its equity in the losses of
Summo.
In June 1996, the Company completed the purchase of a 90% interest in certain of
the assets of Siete Oil & Gas Corporation for approximately $10.0 million. The
assets purchased consist primarily of oil and gas producing properties in the
Permian Basin of west Texas and southeast New Mexico.
The accompanying unaudited pro forma condensed consolidated statements of income
from continuing operations for the nine months ended September 30, 1996 and 1995
are presented to illustrate the effect of the properties purchased from Siete
Oil & Gas Corporation on the Company's results of operations as if the
transaction had occurred as of January 1, 1995.
-7-
ST. MARY LAND & EXPLORATION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The pro forma adjustments included in the accompanying pro forma condensed
consolidated statements of income from continuing operations are based on
assumptions and estimates and are not necessarily indicative of the results of
operations of the Company as they may be in the future or as they might have
been had the transaction actually occurred as of January 1, 1995.
The pro forma adjustments reflect estimated depletion, depreciation and
amortization, estimated interest and income taxes relating to the acquired
properties for the nine month periods ended September 30, 1996 and 1995.
Pro Forma for the Nine Months Ended
September 30,
-----------------------------------
(in thousands, except per share amounts)
1996 1995
-------------- --------------
Total operating revenues $ 41,817 $ 30,036
============== ==============
Income from continuing operations $ 6,156 $ 2,005
============== ==============
Income per common share from
continuing operations $ .70 $ .23
============== ==============
Note 3 - Credit Facility
On April 1, 1996 the Company amended and restated its Credit Facility with two
banks to provide a $60 million collateralized three-year revolving loan facility
which thereafter converts at the Company's option to a five-year term loan. The
amount which may be borrowed from time to time will depend upon the value of the
Company's oil and gas properties and other assets. The Company's borrowing base,
which is re-determined annually, is currently $40 million and is expected to
increase for 1997 based on the increase in the Company's estimated net proved
reserves in 1996. Outstanding revolving loan balances under the Company's Credit
Facility, which were $25.4 million at September 30, 1996, 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 the banks' prime rate or LIBOR plus 1/2% when the Company's
debt to total capitalization is less than 30%, up to a maximum of either the
banks' prime rate plus 1/8% or LIBOR plus 1 1/4% when the Company's debt to
total capitalization ratio exceeds 50%. The Credit Facility is collateralized by
a mortgage of substantially all of the Company's domestic oil and gas
properties. The Credit Facility provides for, among other things, covenants
limiting additional recourse indebtedness of the Company, investments or
disposition of assets by the Company and certain restrictions on the payment of
cash dividends to holders of the Common Stock.
-8-
Note 4 - Contingencies
On August 23, 1995, a class action law suit was filed against the Company in the
Grady County, Oklahoma District Court. This suit was one of several class
actions filed against Oklahoma gas producers seeking payment of royalties on
amounts received in prior gas contract litigation settlements. This suit was
dismissed without prejudice on September 12, 1996 upon motion filed by counsel
for the plaintiff class.
Note 5 - Income Taxes
Federal income tax expense for 1996 and 1995 differs from the amount that would
be provided by applying the statutory U.S. Federal income tax rate to income
before income taxes primarily due to Section 29 tax credits and percentage
depletion. In 1995 the Company also utilized capital loss carryovers.
-9-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company receives significant royalty income from its Louisiana fee
lands. Revenues from the fee lands were $2.2 million for the third quarter 1996
and $5.9 million for the nine months ended September 30, 1996 compared to $1.1
million and $3.9 million for the comparable 1995 periods. Management anticipates
lower revenue from the Louisiana fee lands in future years unless the lessees
continue infill drilling, recompletions and further exploration and development
to offset the normal production decline of producing properties. Texaco, Vastar
and Oryx have completed several significant wells in 1996 and have notified the
Company of several geologic objectives they intend to test in the future as a
result of their 3-D seismic surveys.
Included in the 1996 results are the operations of several acquisitions
made during the past few years. In April 1995, the Company acquired interests in
Louisiana from Pennzoil for $1.7 million and in July 1995, acquired additional
Louisiana properties from Kelley Oil Corporation for $2.2 million. In December
1995, the Company acquired two different interests in the Box Church Field
located in Texas for $2.2 million. The Company completed several acquisitions
through September 1996 for $13.6 million including $10.0 million in June for a
90 percent interest in certain assets of Siete Oil and Gas Corporation and $1.0
million for additional interests in these properties.
The Company entered into several long-term take-or-pay gas sales contracts
in the late 1970s and early 1980s at prices substantially above current market
prices. When the purchasers failed to take the volumes required by the contracts
and began paying lower market prices, the Company commenced legal proceedings
against the purchasers. The Company settled these claims out of court, receiving
lump-sum payments as compensation for all prior claims and remaining contract
values. The Company has no future obligation to deliver gas to these purchasers.
The Company settled the last remaining disputes in 1994 for $5.7 million. As a
result of the purchasers' failure to take the required gas, the Company was
underproduced approximately 1.7 BCF relative to other working interest owners at
September 30, 1996. With all disputes now settled, the Company is selling
additional gas and beginning to reduce this imbalance.
The Company follows the "successful efforts" method of accounting for its
oil and gas properties. Under this method, all property acquisition costs and
costs of exploratory and development wells are capitalized when incurred,
pending determination of whether the well has proved reserves. If an exploratory
well does not have proved reserves, the costs of drilling the well are charged
to expense. The costs of development wells are capitalized, whether productive
or nonproductive. Exploratory geological and geophysical costs and the costs of
carrying and retaining undeveloped properties are expensed as incurred. An
impairment allowance is provided to the extent that capitalized costs of
unproved properties, on a property-by-property basis, are considered to be not
realizable. Prior to the adoption of Statement of Financial Accounting Standards
("SFAS") No. 121 effective October 1, 1995, the net capitalized costs of proved
oil and gas properties were limited to the aggregate undiscounted, after-tax,
future net revenues determined on a property-by-property basis (the "ceiling
test").
In March 1995, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of," which addresses the impairment of proved
oil and gas properties. The SFAS No. 121 impairment test compares the expected
undiscounted future net revenues from each producing field with the related net
capitalized costs at the end of each period. When the net capitalized costs
exceed the undiscounted future net revenues, the cost of the property is written
down to "fair value" using the discounted future net revenues for the producing
field. The Company adopted SFAS No. 121 as of October 1, 1995 and recorded an
additional impairment charge for proved properties of $1 million in the fourth
quarter of 1995.
-10-
In October 1995, the FASB issued SFAS No. 123 "Accounting for Stock-Based
Compensation." This standard establishes a fair value method of accounting for
stock-based compensation plans either through recognition or disclosure. The
Company will adopt this standard in 1996 through compliance with the disclosure
requirements set forth in SFAS No. 123. The Company does not believe the
adoption of this standard will have a material impact on the financial position
or results of operations of the Company. Results of Operations
RESULTS OF OPERATIONS
The following table sets forth selected operating and financial information
for the Company:
Three Months Nine Months
Ended September 30, Ended September 30,
1996 1995 1996 1995
------- ------- ------- -------
(In thousands, except BOE data)
Oil and gas production
revenues:
Working interests $12,705 $ 7,254 $33,783 $21,942
Louisiana royalties 2,239 1,054 5,906 3,918
------- ------- ------- -------
Total $14,944 $ 8,308 $39,689 $25,860
======= ======= ======= =======
Production:
Oil (Bbls) 321 270 865 764
Gas (Mcf) 4,159 2,819 11,249 8,961
------- ------- ------- -------
BOE equivalent (6:1) 1,014 740 2,739 2,258
======= ======= ======= =======
Prices:
Oil $ 19.21 $ 15.92 $ 18.27 $ 16.33
Gas 2.11 1.42 2.12 1.49
Oil and gas production costs:
Lease operating expense $ 2,189 $ 2,105 $ 6,238 $ 5,666
Production taxes 1,147 618 3,024 2,010
------- ------- ------- -------
Total $ 3,336 $ 2,723 $ 9,262 $ 7,676
======= ======= ======= =======
Statistics per BOE equivalent (6:1)
Sales price $ 14.73 $ 11.23 $ 14.49 $ 11.45
Lease operating expense 2.16 2.84 2.28 2.51
Production taxes 1.13 .84 1.10 .89
------- ------- ------- -------
Operating margin $ 11.44 $ 7.55 $ 11.11 $ 8.05
Depreciation, depletion and
amortization $ 3.22 $ 2.97 $ 3.34 $ 3.18
Impairment of producing
properties .01 .74
General and administrative 1.37 1.99 1.85 1.83
Oil and Gas Production Revenues. Oil and gas production revenues increased
$6.6 million or 80% to $14.9 million for the third quarter 1996 compared to $8.3
million in 1995. Oil production volumes increased 19% while gas production
increased 48% for the third quarter 1996 compared to the 1995 period. Average
net daily production was 11,018 BOE for the third quarter 1996 compared to 8,040
BOE in 1995. The production increased because of acquisitions and new drilling
activity in 1996, and gas sales were partially curtailed in 1995 due to the low
prices received. The average oil price for the third quarter 1996 increased 21%
to $19.21 per barrel, while gas prices increased 49% to $2.11 per Mcf, from
their respective 1995 levels.
-11-
Oil and gas production revenues increased $13.8 million, or 53% to $39.7
million for the nine months ended September 30, 1996 compared to $25.9 million
in 1995. Oil production volumes increased 13% while gas production increased 26%
for the first nine months of 1996 compared with the 1995 period. Average net
daily production was 9,998 BOE for the nine months ended September 30, 1996
compared to 8,270 BOE in 1995. This production increase resulted from new
properties acquired and drilled during the past year. The average oil price for
the nine months ended September 30, 1996 increased 12% to $18.27 per barrel,
while gas prices increased 42% to $2.12 per Mcf, from their respective 1995
levels. The Company has hedged approximately 68% of its 1996 oil production at
an average NYMEX price of $19.17 per barrel and 18% of its 1996 gas production
at an average $1.91 per MMBTU. For the nine months ended September 30, 1996 the
Company incurred an $846,000 loss or $.98 per barrel on its oil hedge since the
average NYMEX price was higher than the Company's hedged price. The Company
incurred a $647,000 loss on its gas hedge for the nine months ended September
30, 1996 which decreased the average gas price by $.06 per Mcf.
Oil and Gas Production Costs. Oil and gas production costs consist of lease
operating expense and production taxes. Total production costs increased
$613,000 or 23% to $3.3 million for the third quarter 1996. However, the lease
operating expense per BOE decreased 24% to $2.16 for the third quarter 1996
compared with $2.84 for 1995 primarily due to higher Louisiana royalty
production volume in 1996 and lower 1995 sales volumes stemming from low gas
prices.
Total production costs increased $1.6 million or 21% for the nine months
ended September 30, 1996 to $9.3 million. The lease operating expense per BOE
was $2.28 for the nine months ended September 30, 1996 compared with $2.51 for
1995 primarily due to higher Louisiana royalty production volume in 1996 and
lower 1995 sales volumes stemming from low gas prices.
Depreciation, Depletion, Amortization and Impairment. Depreciation,
depletion and amortization ("DD&A") increased 49% to $3.3 million for the third
quarter 1996 compared with $2.2 million in 1995 because of much higher
production. DD&A per BOE was $3.22 in the third quarter 1996 compared to $2.97
in 1995 because of the higher unit rate on reserve acquisitions. There was no
impairment of proved properties for the third quarter 1996 compared to $11,000
in 1995.
Depreciation, depletion and amortization expense ("DD&A") increased 27% to
$9.1 million for the nine months ended September 30, 1996 compared with $7.2
million in 1995 because of increased production from new drilling and reserve
acquisitions. DD&A per BOE was $3.34 in 1996 compared to $3.18 in 1995 because
of the higher unit rate on reserve acquisitions. There was no impairment of
proved properties for the nine months ended September 30, 1996 compared to $1.7
million in 1995 due to high cost marginal wells and low natural gas prices.
Abandonment and impairment expenses for unproved properties were $691,000
for the third quarter and $1.2 million for the nine months ended September 30,
1996 compared with $202,000 and $759,000 for the respective 1995 periods. The
remaining Mobile Bay leases expired in September 1996, and the Company impaired
the remaining Brigham program acreage.
Exploration. Exploration expense declined slightly to $1.4 million in the
third quarter 1996 compared to $1.5 million in 1995. Exploration expense
increased $2.0 million to $5.7 million for the nine months ended September 30,
1996 because of higher exploratory dry hole expense resulting from increased
drilling activity and one large 3-D seismic shoot in 1996.
General and Administrative. General and administrative expenses declined
$87,000 or 6% to $1.4 million in the third quarter 1996 compared to $1.5 million
in 1995 primarily because increased compensation and office expense were offset
by a $334,000 decline in the expense associated with the Company's stock
appreciation rights.
-12-
General and administrative expense increased $937,000 or 23% to $5.1
million for the nine months ended September 30, 1996 compared to $4.1 million in
1995 because of higher compensation costs, professional fees and a $361,000
increase in the expense associated with the Company's stock appreciation rights.
Gas Contract Disputes and Other. Gas contract disputes and other consist of
legal expenses in connection with gas contract disputes. This expense declined
to $18,000 in the third quarter 1996 compared to $56,000 in 1995 and declined to
$111,000 for the nine months ended September 30, 1996 compared to $184,000 for
the 1995 period because the legal disputes related to gas contracts with
purchasers have been settled.
Loss in Equity Investees. The Company accounts for its Russian joint
venture and investment in Summo Minerals Corporation under the equity method and
includes its share of the income or loss from these entities. The Company's
share of net income from the Russian joint venture was $181,000 for the third
quarter 1996 and $405,000 for the nine months ended September 30, 1996 compared
to net income of $92,000 and a net loss of $94,000 for the comparable 1995
periods because production and product prices increased significantly in 1996
from the 1995 levels. The Company's share of the net loss for Summo Minerals
Corporation was $133,000 for the third quarter 1996 and $358,000 for the nine
months ended September 30, 1996 compared to net losses of $159,000 and $192,000
for the comparable 1995 periods because of higher general and administrative
costs with the addition of personnel in anticipation of mine development and
financing. Summo Minerals Corporation has obtained the final feasibility study
and anticipates its permitting will be finalized before year-end. Summo has also
obtained a senior debt financing commitment for $30 million contingent on copper
prices of at least $.90 per pound and on equity financing of $16 million. The
equity financing has been delayed due to the drop in copper prices and market
uncertainties.
Non-Operating Income and Expense. Net interest expense increased $295,000
to $507,000 in the third quarter 1996 compared to $212,000 in 1995 because of
the higher debt incurred for acquisitions and increased drilling activity.
Net interest expense increased $666,000 to $1.2 million for the nine months
ended September 30, 1996 compared to $514,000 of net interest expense in 1995
because of the higher debt incurred for acquisitions and increased drilling
activity.
Income Taxes. Income tax expense was $1.6 million on $4.6 million pre-tax
income for the third quarter 1996 compared to a tax benefit of $153,000 on a
pre-tax loss of $36,000 in 1995. The effective tax rate for the nine months
ended September 30, 1996 increased to 34% compared to a 5% tax benefit in the
1995 period because the Company was able to use capital loss carryovers and
Section 29 tax credits against much lower net income in 1995.
Net Income. Net income increased $3.0 million or 2,527% to $3.1 million in
the third quarter 1996 compared to $117,000 in 1995 primarily as a result of
substantially higher sales volumes and product prices causing a $6.8 million
increase in total revenues.
Net income for the nine months ended September 30, 1996 increased $4.3
million or 242% to $5.9 million compared to $1.7 million in 1995 because of
higher production and prices resulting in a $7.2 million increase in oil and gas
production revenues, partially offset by the associated higher production
expenses and DD&A, a $2.0 million increase in exploration expense and a $937,000
increase in general and administrative expenses. The 1995 net income also
included a pre-tax gain of $1.1 million on the sale of producing properties.
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LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity are the cash provided by
operating activities, cash investments and debt financing. The Company's cash
needs are for the acquisition, exploration and development of oil and gas
properties, debt repayment, payment of trade obligations and payment of
dividends to stockholders. The Company generally finances its exploration and
development programs from internally generated cash flow and 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
increased $5.4 million or 46% to $17.1 million for the nine months ended
September 30, 1996 compared to $11.8 million for 1995 primarily due to increased
revenue from oil and gas sales.
Net cash used in investing activities increased $6.8 million or 29% to
$30.1 million for the nine months ended September 30, 1996 compared to $23.3
million in 1995. Increased capital expenditures from the Company's expanded
drilling programs and oil and gas property acquisitions accounted for the
increase.
Net cash provided by financing activities was $15.7 million for the nine
months ended September 30, 1996 consisting of net debt proceeds for acquisitions
and drilling activities, partially offset by dividends compared to net cash
provided of $2.5 million in 1995 for debt proceeds, partially offset by
dividends.
The Company had $4.4 million in cash and cash equivalents and working
capital of $6.4 million as of September 30, 1996 compared to $1.7 million of
cash and cash equivalents and working capital of $3.1 million at December 31,
1995.
Credit Facility. On April 1, 1996, the Company amended and extended its
credit facility with two banks to provide a $60 million secured three-year
revolving loan which thereafter converts at the Company's option to a five-year
term loan. The amount which may be borrowed from time to time will depend upon
the value of the Company's oil and gas properties and other assets. The
Company's borrowing base is currently $40 million and will be redetermined
annually. When the debt to capitalization ratio is less than 30% the loans
accrue interest at the Company's option of either the banks' prime rate or LIBOR
plus 1/2% and 3/4% for the revolving and term loans, respectively. The interest
rate increases as the Company's debt to capitalization ratio increases. The loan
under the credit facility is collateralized by substantially all of the
Company's domestic oil and gas properties. The credit facility provides for,
among other things, covenants limiting additional recourse indebtedness of the
Company and payment of dividends if the loan is in default or borrowings exceed
the applicable borrowing base.
Panterra, in which the Company has a 74% ownership, also has a credit
facility with an $18.5 million borrowing base and $11.0 million outstanding as
of September 30, 1996. The partnership intends to use the available credit to
fund a portion of the 1996 capital expenditures.
Outlook. The Company believes that its existing capital resources, cash
flow from operations and available borrowings are sufficient to meet its
anticipated capital and operating requirements for 1996.
For 1996, the Company anticipates spending approximately $45 million for
capital and exploration expenditures with $19 million allocated for domestic
acquisitions, $21 million for low to moderate risk domestic exploration and
development and $5 million for large target, higher risk domestic exploration
and development.
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The Company and the Anderman Group, through subsidiaries, are involved in a
joint venture with Chernogorneft Oil and Gas Enterprise, a local Russian oil
producing enterprise, to develop the Chernogorskoye Field in western Siberia.
The joint venture has obtained bank credit commitments from the European Bank
for Reconstruction and Development and the Overseas Private Investment
Corporation which are non-recourse to the Company. The joint venture has
received $42.5 million from loan advances through June 30, 1996 and the
committed balance of $10 million may be funded later when minimum production
tests are met. Through September 30, 1996, the Company had expended
approximately $7.7 million on the Russian project of which $4.8 million has been
capitalized as an investment in the venture. With the completion of bank funding
commitments, the Company anticipates that most of its future share of
expenditures for the project will be funded from cash flow generated by the
project and non-recourse bank financing. Because substantially all of the
revenues from the Russian joint venture will be applied initially to development
of the Chernogorskoye Field and repayment of associated bank debt, the Company
does not anticipate receiving significant cash flow from the Russian joint
venture for approximately five years. At December 31, 1995, the undiscounted
future net revenues attributable to the Company's share of the Russian joint
venture's proved reserves was $36.6 million (after debt repayment). The Russian
joint venture is now a fully operational project with financing commitments and
a reasonable tax structure. Because the Company's plans are to concentrate its
expenditures on domestic projects, combined with the always present uncertainty
of regulatory and other aspects of the Russian project, the Company is currently
considering the sale of its interest in the Russian joint venture if such a sale
can be made at a price substantially in excess of the Company's expenditures to
date for the project.
On August 23, 1995, a class action law suit was filed against the Company
in the Grady County, Oklahoma District Court. This suit was one of several class
actions filed against Oklahoma gas producers seeking payment of royalties on
amounts received in prior gas contract litigation settlements. This suit was
dismissed without prejudice on September 12, 1996 upon motion filed by counsel
for the plaintiff class.
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 the success of its exploratory activity which could
lead to funding requirements for further development.
EFFECTS OF INFLATION AND CHANGING PRICES
The Company's results of operations and cash flow are affected by changing oil
and gas prices. Within the United States, inflation has had a minimal effect on
the Company. The Company's foreign operations may be adversely affected by
inflation in Russia and other countries. The Company cannot predict the extent
of any such effect. If oil and gas prices increase, there could be a
corresponding increase in the cost to the Company for drilling and related
services as well as an increase in revenues.
-15-
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of shareholders.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit Description
27 Financial Data Schedule
(b) A report regarding acquisition or disposition of assets
dated June 28, 1996 was filed on Form 8-K/A.
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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
February 4, 1997 By /S/ MARK A. HELLERSTEIN
------------------------
Mark A. Hellerstein
President and Chief Executive Officer
February 4, 1997 By /S/ RICHARD C. NORRIS
------------------------
Richard C. Norris
Vice President - Accounting and
Administration and Chief Accounting
Officer