SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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 June 30, 1996
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
of incorporation or organization) (I.R.S. Employer Identification No.)
1776 Lincoln Street, Suite 1100, Denver, Colorado 80203
(Address of principal executive offices) (Zip Code)
(303) 861-8140
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [ x ] No [ ]
Indicate the number of shares outstanding of each of the Registrant's classes of
common stock as of the latest practicable date.
As of August 12, 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 JUNE 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 ADJUSTMENTS TO GAIN ON SALE OF DISCONTINUED
OPERATIONS, NET OF INCOME TAXES, AND NET INCOME FOR THE THREE MONTHS ENDED JUNE
30,1995 AND FOR THE SIX MONTHS ENDED JUNE 30, 1995, WITH CORRESPONDING
ADJUSTMENTS TO NET INCOME PER COMMON SHARE AS NECESSARY. ALSO INCLUDED ARE
CORRESPONDING ADJUSTMENTS TO NET INCOME AND OTHER ON THE CONSOLIDATED STATEMENTS
OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 1995. THIS AMENDMENT ALSO
INCLUDES A RECLASSIFICATION OF A PORTION OF THE STOCK APPRECIATION RIGHTS
LIABILITY TO CURRENT FROM LONG TERM AS OF JUNE 30, 1996. ALL OTHER INFORMATION
IN THE ORIGINAL FORM 10-Q/A IS UNCHANGED.
ST. MARY LAND & EXPLORATION
---------------------------
INDEX
-----
Part I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Consolidated Balance
Sheets - June 30, 1996 and
December 31, 1995 ................. 3
Consolidated Statements of
Income - Six Months Ended
June 30, 1996 and 1995 ............ 4
Consolidated Statements of
Cash Flows - Six Months Ended
June 30, 1996 and 1995 ............ 5
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations ...................... 9
Part II OTHER INFORMATION
Item 4. Submission of Matters to a Vote
of Security Holders ................ 15
Item 6. Exhibits and Reports on Form 8-K ... 15
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 June 30, December 31,
-------------------------------------
1996 1995
---------------- ------------------
Current assets:
Cash and cash equivalents $ 5,791 $ 1,723
Accounts receivable 15,268 8,068
Prepaid expenses 1,431 850
Refundable income taxes 65 176
---------------- ---------------
Total current assets 22,555 10,817
---------------- ---------------
Property and equipment (successful efforts method), at cost:
Proved oil and gas properties 185,078 165,750
Unproved oil and gas properties, net 14,533 11,752
Other 3,318 2,535
---------------- ---------------
202,929 180,037
Less accumulated depletion, depreciation, amortization and impairment (114,329) (108,392)
---------------- ---------------
88,600 71,645
---------------- ---------------
Other assets:
Investment in Russian joint venture 4,607 4,140
Investment in Summo Minerals Corporation 4,616 4,842
Other assets 3,829 4,682
---------------- ---------------
13,052 13,664
---------------- ---------------
$ 124,207 $ 96,126
================ ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 15,834 $ 7,715
Stock appreciation rights 1,202 -
---------------- ---------------
17,036 7,715
---------------- ---------------
Long-term liabilities:
Long-term debt 35,573 19,602
Deferred income taxes 2,251 1,228
Stock appreciation rights 597 1,178
Other noncurrent liabilities 282 121
---------------- ---------------
38,703 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 85 88
Additional paid-in capital 15,803 15,835
Retained earnings 52,524 50,378
Unrealized gain on marketable equity securities-available for sale 56 15
Treasury stock - 2,572 shares, at cost - (34)
---------------- ---------------
Total stockholders' equity 68,468 66,282
---------------- ---------------
$ 124,207 $ 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 Six months ended
June 30, June 30,
-------------------------------- -----------------------------
1996 1995 1996 1995
------------- ------------- ------------ ------------
Operating revenues:
Oil and gas production $ 13,337 $ 8,931 $ 24,745 $ 17,552
Gain (loss) on sale of proved properties - - - 1,150
Gas contract settlements and other revenues 263 94 285 357
------------- ------------- ------------ ------------
Total operating revenues 13,600 9,025 25,030 19,059
------------- ------------- ------------ ------------
Operating expenses:
Oil and gas production 2,970 2,564 5,926 4,953
Depletion, depreciation and amortization 2,947 2,417 5,874 4,986
Impairment of proved properties - 1,219 - 1,662
Exploration 1,792 1,102 4,329 2,208
Abandonment and impairment of unproved properties 299 319 549 557
General and administrative 1,596 981 3,680 2,656
Gas contract disputes and other 16 62 93 129
Loss in equity investees 112 147 1 218
------------- ------------- ------------ ------------
Total operating expenses 9,732 8,811 20,452 17,369
------------- ------------- ------------ ------------
Income from operations 3,868 214 4,578 1,690
Nonoperating income and (expense):
Interest income 110 98 167 174
Interest expense (520) (250) (840) (476)
------------- ------------- ------------ ------------
Income from continuing operations before income taxes 3,458 62 3,905 1,388
Income tax expense (1,160) (11) (1,217) (81)
------------- ------------- ------------ ------------
Income from continuing operations 2,298 51 2,688 1,307
Gain on sale of discontinued operations, net of income taxes 81 306 159 306
------------- ------------- ------------ ------------
Net income $ 2,379 $ 357 $ 2,847 $ 1,613
============= ============= ============ ============
Net income per common share:
Income from continuing operations $ .27 $ .01 $ .31 $ .15
Gain on sale of discontinued operations .01 .03 .02 .03
------------- ------------- ------------ ------------
Net income per share $ .28 $ .04 $ .33 $ .18
============= ============= ============ ============
Weighted average common shares outstanding 8,759 8,760 8,759 8,761
============= ============= ============ ============
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 six months ended June 30,
----------------------------------------
1996 1995
---------------- -----------------
Cash flows from operating activities:
Cash received from oil and gas operations $ 19,854 $ 15,990
Cash paid for oil and gas operations,
including general and administrative expenses (6,137) (5,971)
Exploration expenses (3,118) (1,838)
Interest and other receipts 259 328
Interest paid (545) (310)
Income taxes paid 159 (295)
---------------- -----------------
Net cash provided by operating activities 10,472 7,904
---------------- -----------------
Cash flows from investing activities:
Proceeds from sale of oil and gas properties 13 2,098
Capital expenditures, including dry hole costs (11,580) (8,194)
Acquisition of oil and gas properties (12,856) (6,862)
Investment in St. Mary Operating Company 3,059 -
Investment in Summo Minerals Corporation - (1,977)
Other (309) (454)
---------------- -----------------
Net cash used by investing activities (21,673) (15,389)
---------------- -----------------
Cash flows from financing activities:
Proceeds from long-term debt 16,150 1,880
Repayment of long-term debt (179) (1,472)
Dividends paid (701) (41)
Purchase of treasury and common stock (1) (701)
---------------- -----------------
Net cash provided (used) by financing activities 15,269 (334)
---------------- -----------------
Net increase (decrease) in cash and cash equivalents 4,068 (7,819)
Cash and cash equivalents at beginning of period 1,723 9,976
---------------- -----------------
Cash and cash equivalents at end of period $ 5,791 $ 2,157
================ =================
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 six months ended June 30,
-----------------------------------------
1996 1995
--------------- ---------------
Reconciliation of net income to net cash provided by operating activities:
Net income $ 2,847 $ 1,613
Adjustments to reconcile net income to net
cash provided by operating activities:
Depletion, depreciation and amortization 5,874 4,986
Impairment of proved properties - 1,662
Loss in equity investees 1 -
Gain on sale of oil and gas properties - (1,150)
Dry hole costs 1,526 193
Abandonment and impairment of unproved properties 549 557
Deferred income taxes 979 (214)
Other 642 (306)
--------------- ---------------
12,418 7,341
Changes in assets and liabilities:
Accounts receivable (2,928) (48)
Refundable income taxes 111 110
Accounts payable and accrued expenses 828 501
Deferred income taxes 43 -
--------------- ---------------
Net cash provided by operating activities $ 10,472 $ 7,904
=============== ===============
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.
In June 1996, the Company completed the purchase of a 90% interest in certain of
the assets of Siete Oil & Gas Corporation for approximately $9.8 million. The
assets purchased consist primarily of oil and gas producing properties in the
Permian Basin of west Texas and New Mexico.
The Company accounts for its investment in the Russian joint venture using the
equity method of accounting. For the six months ended June 30, 1996, the Company
has recorded a gain of $224,000 as its equity in income from the Russia joint
venture.
The Company accounts for its investment in Summo Minerals Corporation ("Summo")
using the equity method of accounting. For the six months ended June 30, 1996,
the Company has recorded a loss of $225,000 as its equity in the losses of
Summo.
7
ST. MARY LAND & EXPLORATION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
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 $24.5 million at June 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.
Note 4 - Contingencies
During 1995, the Company and other unrelated parties were named as defendants in
a class action suit filed in Oklahoma seeking payment of royalties on amounts
received in prior gas contract settlements. While the Company's leases state
that royalties are paid only on oil and gas produced and sold, the end result of
any litigation seeking royalty payments on amounts received in oil and gas
settlements cannot be known in advance, and it is possible that a judgment
adverse to the Company could result even though gas was not produced and sold.
Management believes its position is legally correct and plans a vigorous defense
of this suit. In the event of adverse judgment, however, management believes the
maximum exposure of the Company in this litigation, exclusive of interest, if
any, would be approximately $4.5 million. The Company has no material exposure
to claims for such payments outside of Oklahoma.
The Company is also aware that, in two appellate proceedings in which the
Company is not involved, the Oklahoma Supreme Court has been asked to address
issues regarding the entitlement of lessors to royalty payments on amounts
received by oil and gas working interest owners as a result of gas contract
claims. While the Company believes that royalties are not owed until oil and gas
is produced and sold, the decision of the Oklahoma Supreme Court cannot be known
in advance and it is possible that the ruling will establish a right of royalty
owners to payment. Such a ruling could adversely affect the Company's position
in the royalty litigation described above.
Note 5 - Income Taxes
Federal income tax expense differs 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 and the
utilization of capital loss carryovers in 1995.
8
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 $2.3 for the second quarter 1996 and
$3.7 million for the six months ended June 30, 1996 compared to $1.6 million and
$2.8 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 the first half of 1996 and have
notified the Company of several geologic objectives they intend to test in the
second half 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 in
June 1996 for $12.8 million including $9.8 million for a 90 percent interest in
certain assets of Siete Oil and Gas Company and additional interests in the Box
Church Field.
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
June 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.
9
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. 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
The following table sets forth selected operating and financial information
for the Company:
Three Months Six Months
Ended June 30, Ended June 30,
1996 1995 1996 1995
---- ---- ---- ----
(In thousands, except BOE data)
Oil and gas production
revenues:
Working interests $11,066 $ 7,290 $21,078 $14,717
Louisiana royalties 2,271 1,641 3,667 2,835
------- ------- ------- -------
Total $13,337 $ 8,931 $24,745 $17,552
======= ======= ======= =======
Production:
Oil (Bbls) 283 251 544 494
Gas (Mcf) 3,772 2,796 7,090 6,142
------- ------- ------- -------
BOE equivalent (6:1) 912 717 1,726 1,518
======= ======= ======= =======
Prices:
Oil $ 17.94 $ 16.28 $ 17.72 $ 16.55
Gas 2.19 1.52 2.13 1.43
Oil and gas production costs:
Lease operating expense $ 1,935 $ 1,886 $ 4,049 $ 3,561
Production taxes 1,035 678 1,877 1,392
------- ------- ------- -------
Total $ 2,970 $ 2,564 $ 5,926 $ 4,953
======= ======= ======= =======
Statistics per BOE equivalent (6:1)
Sales price $ 14.62 $ 12.46 $ 14.34 $ 11.56
Lease operating expense 2.12 2.63 2.35 2.35
Production taxes 1.13 .95 1.09 .92
------- ------- ------- -------
Operating margin $ 11.37 $ 8.88 $ 10.90 $ 8.29
Depreciation, depletion
and amortization 3.34 3.37 3.40 3.28
Impairment of producing
properties - 1.70 - 1.10
General and administrative 1.75 1.37 2.13 1.75
Oil and Gas Production Revenues. Oil and gas production revenue increased
$4.4 million or 49% to $13.3 million for the second quarter 1996 compared to
$8.9 million in 1995. Oil production volumes increased 13% while gas production
increased 35% for the second quarter 1996 compared to the 1995 period. Average
net daily production was 10,022 BOE for the second quarter 1996 compared to
7,879 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 second quarter 1996
increased 10% to $17.94 per barrel, while gas prices increased 44% to $2.19 per
Mcf, from their respective 1995 levels.
10
Oil and gas production revenue increased $7.2 million, or 41% to $24.7
million for the six months ended June 30, 1996 compared to $17.6 million in
1995. Oil production volumes increased 10% while gas production increased 15%
for the first six months of 1996 compared with the 1995 period. Average net
daily production was 9,482 BOE for the six months ended June 30, 1996 compared
to 8,387 BOE in 1995. This production increase resulted from new properties
acquired and drilled during the past year. The average oil price for the six
months ended June 30, 1996 increased 7% to $17.72 per barrel, while gas prices
increased 49% to $2.13 per Mcf, from their respective 1995 levels. The Company
has hedged approximately 55% of its 1996 oil production at an average NYMEX
price of $18.59 per barrel and 19% of its gas production at an average $1.92 per
MMBTU for 1996. For the six months ended June 30, 1996 the Company incurred a
$544,000 loss or $.69 per barrel on its oil hedge since the average NYMEX price
was higher than the Company's hedged price. The Company incurred a $577,000 loss
on its gas hedge for the six months ended June 30, 1996 which decreased the
average gas price by $.08 per Mcf.
Oil and Gas Production Costs. Oil and gas production costs consist of lease
operating expense and production taxes. Total production costs increased
$406,000 or 16% to $3.0 million for the second quarter 1996. However, the lease
operating expense per BOE decreased 19% to $2.12 for the second quarter 1996
compared with $2.63 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 $973,000 or 20% for the six months ended
June 30, 1996 to $5.9 million. The lease operating expense per BOE was $2.35 for
the six months ended June 30, 1996 and 1995.
Depreciation, Depletion, Amortization and Impairment. Depreciation,
depletion and amortization ("DD&A") increased 22% to $2.9 million for the second
quarter 1996 compared with $2.4 million in 1995 because of much higher
production. However, DD&A per BOE was $3.34 in the second quarter 1996 compared
to $3.37 in 1995. There was no impairment of proved properties for the second
quarter in 1996 compared to $1.2 million in 1995 due to several high cost
marginal wells and low natural gas prices.
Depreciation, depletion and amortization expense ("DD&A") increased 18% to
$5.9 million for the six months ended June 30, 1996 compared with $5.0 million
in 1995 because of increased production from new drilling and reserve
acquisitions. DD&A per BOE was $3.40 in 1996 compared to $3.28 in 1995. There
was no impairment of proved properties for the six months ended June 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 was $549,000 for
the six months ended June 30, 1996 compared with $557,000 in 1995.
Exploration. Exploration expense increased $690,000 to $1.8 million and $2.1
million to $4.3 million for the three and six months ended June 30, 1996,
respectively, because of increased 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 increased
$615,000 or 63% to $1.6 million in the second quarter 1996 compared to $1.0
million in 1995 primarily because of increased compensation costs and $306,000
of expense associated with the Company's stock appreciation rights.
General and administrative expense increased $1.0 million or 39% to $3.7
million for the six months ended June 30, 1996 compared to $2.7 million in 1995
because of higher compensation costs, professional fees and $638,000 of 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 $16,000 in the second quarter 1996 compared to $62,000 in 1995 and declined
to $93,000 for the six months ended June 30, 1996 compared to $129,000 for the
1995 period because the legal disputes related to gas contracts with purchasers
have been settled.
11
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 $28,000 for the second
quarter 1996 and $224,000 for the six months ended June 30, 1996 compared to a
net loss of $127,000 and $186,000 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
$140,000 for the second quarter 1996 and $225,000 for the six months ended June
30, 1996 compared to a net loss of $20,000 and $32,000 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 $258,000 to
$410,000 in the second quarter 1996 compared to $152,000 in 1995 because of the
higher debt incurred for acquisitions and increased drilling activity.
Net interest expense increased $371,000 to $673,000 for the six months ended
June 30, 1996 compared to $302,000 of net interest expense in 1995 because of
the higher debt incurred for acquisitions and increased drilling activity.
Income Taxes. The effective rate for the second quarter 1996 increased to
34% compared to 19% in 1995 because of the low impact of Section 29 tax credits
on the $3.5 million pre-tax income in 1996. The effective tax rate for the six
months ended June 30, 1996 increased to 31% compared to 6% 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 $2.0 million or 566% to $2.4 million in
the second quarter 1996 compared to $357,000 in 1995 primarily as a result of
substantially higher sales volumes and product prices causing a $4.6 million
increase in total revenues.
Net income for the six months ended June 30, 1996 increased $1.2 million or
77% to $2.8 million compared to $1.6 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 a $2.1 million increase in exploration
expense and a $1.0 million increase in general and administrative expenses. The
1995 net income also included a pre-tax gain of $1.2 million on the sale of
producing properties.
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
$2.6 million to $10.5 million for the six months ended June 30, 1996 compared to
$7.9 million for 1995 primarily due to increased revenue from oil and gas sales.
Net cash used in investing activities increased $6.3 million or 41% to
$21.7 million for the six months ended June 30, 1996 compared to $15.4 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 $15.3 million for the six
months ended June 30, 1996 consisting of net debt proceeds for acquisitions and
drilling activities, partially offset by dividends compared to cash used of
$334,000 in 1995 for debt repayment and dividends.
12
The Company had $5.8 million in cash and cash equivalents and working
capital of $5.5 million as of June 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 $11.1 million outstanding as
of June 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.
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 in 1996 if the minimum
production test is met. Through June 30, 1996, the Company had expended
approximately $7.7 million on the Russian project of which $4.6 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.
13
During 1995, the Company and other unrelated parties were named as
defendants in a class action suit filed in Oklahoma seeking payment of royalties
on amounts received in prior gas contract settlements. While the Company's
leases state that royalties are paid only on oil and gas produced and sold, the
end result of any litigation seeking royalty payments on amounts received in oil
and gas settlements cannot be known in advance, and it is possible that a
judgment adverse to the Company could result even though gas was not produced
and sold. Management believes its position is legally correct and plans a
vigorous defense of this suit. In the event of adverse judgment, however,
management believes the maximum exposure of the Company in this litigation,
exclusive of interest, if any, would be approximately $4.5 million. The Company
has no material exposure to claims for such payments outside of Oklahoma.
The Company is also aware that, in two appellate proceedings in which the
Company is not involved, the Oklahoma Supreme Court has been asked to address
issues regarding the entitlement of lessors to royalty payments on amounts
received by oil and gas working interest owners as a result of gas contract
claims. While the Company believes that royalties are not owed until oil and gas
is produced and sold, the decision of the Oklahoma Supreme Court cannot be known
in advance and it is possible that the ruling will establish a right of royalty
owners to payment. Such a ruling could adversely affect the Company's position
in the royalty litigation described above.
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.
14
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.
15
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