SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarter Ended June 30, 1997
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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
of incorporation or organization) 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, 1997, the registrant had 10,980,423 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 - June 30, 1997 and
December 31, 1996.................................... 3
Consolidated Statements of
Income - Three Months Ended
June 30, 1997 and 1996; Six Months
Ended June 30, 1997 and 1996 ........................ 4
Consolidated Statements of
Cash Flows - Six Months Ended
June 30, 1997 and 1996............................... 5
Notes to Consolidated Financial
Statements - June 30, 1997 .......................... 7
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.................................. 17
Item 6. Exhibits and Reports on Form 8-K..................... 17
Exhibits
Exhibit No. 27.2 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,
1997 1996
------------- -------------
(Unaudited)
Current assets:
Cash and cash equivalents $ 23,584 $ 3,338
Accounts receivable 20,018 21,443
Prepaid expenses 3,564 1,115
Refundable income taxes 150 57
Investment in Russian joint venture held for sale - 6,151
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Total current assets 47,316 32,104
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Property and equipment (successful efforts method), at cost:
Proved oil and gas properties 211,131 198,652
Unproved oil and gas properties, net of impairment
allowance of $2,565 in 1997 and $2,330 in 1996 23,437 14,581
Other 3,731 3,509
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238,299 216,742
Less accumulated depletion, depreciation, amortization and impairment (116,645) (115,232)
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121,654 101,510
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Other assets:
Ural Petroleum receivable and stock 12,001 -
Investment in Summo Minerals Corporation 4,910 4,884
Restricted cash 1,615 2,918
Other assets 3,023 2,855
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21,549 10,657
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$ 190,519 $ 144,271
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 24,212 $ 16,628
Current portion of stock appreciation rights 351 1,550
------------- -------------
Total current liabilities 24,563 18,178
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Long-term liabilities:
Long-term debt 7,415 43,589
Deferred income taxes 14,225 5,790
Stock appreciation rights 925 1,195
Other noncurrent liabilities 451 359
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23,016 50,933
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Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value: authorized - 15,000,000 shares;
issued and outstanding - 10,973,116 shares in 1997 and
8,759,214 shares in 1996 110 88
Additional paid-in capital 67,028 15,801
Retained earnings 75,801 59,303
Unrealized gain (loss) on marketable equity securities-available for sale 1 (32)
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Total stockholders' equity 142,940 75,160
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$ 190,519 $ 144,271
============= =============
The accompanying notes are an integral part
of these consolidated financial statements.
-3-
ST. MARY LAND & EXPORATION COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In thousands, except per share amounts)
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------------- ---------------------------------
1997 1996 1997 1996
--------------- ------------- ------------- --------------
Operating revenues:
Oil and gas production $ 15,302 $ 13,337 $ 36,332 $ 24,745
Gain (loss) on sale of Russian joint venture - - 9,691 -
Gain on sale of proved properties 4,182 - 4,214 -
Other revenues 353 263 461 285
--------------- ------------- ------------- --------------
Total operating revenues 13,600 50,698 25,030
19,837
--------------- ------------- ------------- --------------
Operating expenses:
Oil and gas production 3,123 2,970 7,101 5,926
Depletion, depreciation and amortization 4,021 2,947 8,018 5,874
Impairment of proved properties 516 - 516 -
Exploration 1,630 1,792 3,019 4,329
Abandonment and impairment of unproved properties 332 299 482 549
General and administrative 1,547 1,596 4,568 3,680
Other 71 16 36 93
Loss in equity investees 109 112 22 1
--------------- ------------- ------------- --------------
Total operating expenses 11,349 9,732 23,762 20,452
--------------- ------------- ------------- --------------
Income from operations
8,488 3,868 26,936 4,578
Nonoperating income and (expense):
Interest income 289 110 467 167
Interest expense (143) (520) (725) (840)
--------------- ------------- ------------- --------------
Income from continuing operations before income taxes 8,634 3,458 26,678 3,905
Income tax expense 3,041 1,160 9,490 1,217
--------------- ------------- ------------- --------------
Income from continuing operations 5,593 2,298 17,188 2,688
Gain on sale of discontinued operations, net of taxes 296 81 296 159
--------------- ------------- ------------- --------------
Net income $ 5,889 $ 2,379 $ 17,484 $ 2,847
=============== ============= ============= ==============
Net income per common share:
Income from continuing operations $ .50 $ .27 $ 1.66 $ .31
Gain on sale of discontinued operations .03 .01 .03 .02
--------------- ------------- ------------- --------------
Net income per share $ .53 $ .28 $ 1.69 $ .33
=============== ============= ============= ==============
Weighted average common shares outstanding 11,057 8,759 10,355 8,759
=============== ============= ============= ==============
Cash dividend declared per share $ 0.05 $ 0.04 $ 0.10 $ 0.08
=============== ============= ============= ==============
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 Six Months Ended
June 30,
-------------------------------
1997 1996
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Reconciliation of net income to net cash provided by operating activities:
Net income $ 17,484 $ 2,847
Adjustments to reconcile net income to net
cash provided by operating activities:
Depletion, depreciation and amortization 8,018 5,874
Impairment of proved properties 516 -
Loss in equity investees 22 1
Gain on sale of proved properties (4,214) -
Gain on sale of Russian joint venture (9,691) -
Exploration (341) 1,526
Abandonment and impairment of unproved properties 482 549
Deferred income taxes 8,435 979
Other 256 642
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20,967 12,418
Changes in current assets and liabilities, net of effect of purchase
of interest in St. Mary Operating Company in 1996:
Accounts receivable 1,453 (2,568)
Prepaid expenses 468 (360)
Refundable income taxes (92) 111
Accounts payable and accrued expenses 2,552 (374)
Stock appreciation rights (1,567) 1,202
Deferred income taxes (123) 43
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Net cash provided by operating activities 23,658 10,472
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Cash flows from investing activities:
Proceeds from sale of oil and gas properties 7,144 13
Capital expenditures (23,688) (11,580)
Acquisition of oil and gas properties (7,386) (12,856)
Purchase of interest in St. Mary Operating Company - 3,059
Proceeds from sale of Russian joint venture 5,608 -
Investment in Summo Minerals Corporation (251) -
Receipts from restricted cash 7,854 -
Deposits to restricted cash (6,551) -
Other (164) (309)
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Net cash used in investing activities (17,434) (21,673)
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Cash flows from financing activities:
Proceeds from long-term debt 4,975 16,150
Repayment of long-term debt (41,149) (179)
Proceeds from sale of common stock, net of offering costs 51,190 -
Dividends paid (985) (701)
Other (9) (1)
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Net cash provided by financing activities 14,022 15,269
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Net increase in cash and cash equivalents 20,246 4,068
Cash and cash equivalents at beginning of period 3,338 1,723
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Cash and cash equivalents at end of period $ 23,584 $ 5,791
============ =============
The accompanying notes are an integral part
of these consolidated financial statements.
-5-
ST. MARY LAND & EXPLORATION COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Continued)
Supplemental schedule of additional cash flow information and noncash
activities:
For the Six Months Ended
June 30,
-------------------------------
1997 1996
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(In thousands)
Cash paid for interest 936 545
Cash paid for exploration expenses 2,541 3,118
Interest income included in restricted cash 32 -
In March 1996, the Company acquired the remaining 35% shareholder interest in
St. Mary Operating Company for $234,000 and assumed net liabilities of $339,000,
including acquired cash of $3.1 million.
In February 1997, the Company sold its interest in the Russian joint venture for
$17,609,000, receiving $5,608,000 of cash, $1,869,000 of Ural Petroleum
Corporation common stock, and a $10,132,000 receivable in a form equivalent to a
retained production payment.
In February 1997, the Company issued 3,600 shares of common stock to its
directors and recorded compensation expense of $68,175.
In June 1997, an officer of the Company exercised 14,072 options to buy common
stock at $20.50 per share. As payment of the exercise price and taxes due, the
Company accepted 11,022 of the exercised shares, resulting in an increase in
shares outstanding of 3,050.
-6-
ST. MARY LAND & EXPLORATION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
June 30, 1997
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, 1996. 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,
1996. It is suggested that these financial statements be read in conjunction
with the financial statements and notes included in the Form 10-K.
Certain amounts in the 1996 consolidated financial statements have been
reclassified to correspond to the 1997 presentation.
Note 2 - Investments
In March 1996, the Company completed its purchase of the remaining stock of St.
Mary Operating Company ("SMOC"). 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, through subsidiaries, owned an 18% interest in a venture which is
developing the Chernogorskoye oil field in western Siberia (the "Russian joint
venture"). The Company accounted for its investment in the Russian joint venture
using the equity method of accounting. In February 1997, the Company sold its
interest in the Russian joint venture to Ural Petroleum Corporation ("UPC"). In
accordance with the Acquisition Agreement, the Company received cash
consideration of $5,608,000 before transaction costs, UPC common stock valued at
$1,869,000, and a receivable in a form equivalent to a retained production
payment of $10,132,000 plus interest at 10% per annum from the limited liability
company formed to hold the Russian joint venture interest. The Company has
recorded a gain on the sale of the Russian joint venture interest of $9,691,000.
The Company had recorded income of $203,000 as its equity in income from the
Russian joint venture for the period prior to the sale.
-7-
ST. MARY LAND & EXPLORATION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)
The Company accounts for its investment in Summo Minerals Corporation ("Summo")
using the equity method of accounting. For the six months ended June 30, 1997,
the Company has recorded a loss of $225,000 as its equity in the losses of
Summo. In May 1997, the Company entered into an agreement to receive a 55%
interest in Summo's Lisbon Valley Copper Project (the "Project") in return for
the Company contributing $4,000,000 in cash, all of its outstanding stock in
Summo and $8,600,000 in letters of credit to a single purpose company, Lisbon
Valley Mining Company, formed to own and operate the Project. Summo will
contribute the property, all project permits and contracts, $3,200,000 in cash
and a commitment for $45,000,000 of senior debt financing in return for a 45%
interest in the new company. The agreement is subject to certain conditions,
including Summo shareholder approval and final resolution of permit approval. In
June and July 1997, the Company agreed to provide interim financing of $825,000
and $550,000, respectively, for the Project in the form of a loan due in June
1999. Upon capitalization of the new company the loans shall constitute a
capital contribution in partial satisfaction of the capital commitments set out
in the May 1997 agreement.
Note 3 - Capital Stock
On February 26, 1997, the Company closed the sale of 2,000,000 shares of common
stock at $25.00 per share. On March 12, 1997, the Company closed the sale of an
additional 180,000 shares pursuant to the underwriters' exercise of the
over-allotment option. These transactions resulted in aggregate net proceeds of
$51.2 million. The proceeds will be used to fund the Company's exploration,
development and acquisition programs, and pending such use were used to repay
borrowings under its credit facility.
Note 4 - Recently Issued Accounting Standards
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 129, "Disclosure of
Information about Capital Structure," effective for financial statements for
periods ending after December 15, 1997. The Statement requires disclosures about
certain preferences and rights of outstanding securities and certain information
about redeemable capital stock. At this time the Company has no preferential or
redeemable securities that will be subject to the new disclosure requirements of
the Statement.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income,"
effective for financial statements for periods beginning after December 15,
1997. The Statement establishes standards for reporting and display of
comprehensive income and its components in financial statements. Comprehensive
income for the Company will be affected by changes in unrealized gains or losses
on marketable equity securities available for sale.
-8-
ST. MARY LAND & EXPLORATION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)
Note 5 - Earnings per Share
In March 1997, the FASB issued SFAS No. 128, "Earnings Per Share," effective for
financial reports issued subsequent to December 15, 1997. SFAS No. 128 replaces
the calculation of Primary Earnings per Share with a calculation called Basic
Earnings per Share and replaces Fully Diluted Earnings per Share with a
calculation called Diluted Earnings per Share.
The following table shows the impact that adoption of SFAS No. 128, as of
January 1, 1996, would have had on the Company's reported earnings per share.
For the Three Months Ended For the Six Months Ended
June 30, June 30,
------------------------------- -------------------------------
1997 1996 1997 1996
------------- ------------- ------------ -------------
Primary earnings per share (as reported)
From continuing operations $ .50 $ .27 $ 1.66 $ .31
From discontinued operations $ .03 $ .01 $ .03 $ .02
Basic earnings per share
From continuing operations $ .51 $ .26 $ 1.68 $ .31
From discontinued operations $ .03 $ .01 $ .03 $ .02
Fully Diluted earnings per share
From continuing operations $ .50 $ .27 $ 1.66 $ .31
From discontinued operations $ .03 $ .01 $ .03 $ .02
Diluted earnings per share
From continuing operations $ .51 $ .26 $ 1.66 $ .31
From discontinued operations $ .03 $ .01 $ .03 $ .02
Note 6 - Income Taxes
Federal income tax expense for 1997 and 1996 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.
-9-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
St. Mary was founded in 1908 and incorporated in Delaware in 1915. Since
1992 St. Mary has expanded its technical and operating staff and increased its
drilling, production and operating capabilities in its five core operating areas
in the United States.
The Company's activities in the Williston Basin are conducted through
Panterra Petroleum ("Panterra") in which the Company owns a 74% general
partnership interest. The Company proportionally consolidates its interest in
Panterra.
The Company has two principal equity investments, Summo Minerals
Corporation ("Summo"), a Canadian copper mining company, and, until recently,
its Russian joint venture. The Company accounts for its Russian joint venture
and investment in Summo under the equity method and includes its share of the
income or loss from these entities. Effective February 12, 1997, the Company
sold its Russian joint venture.
Included in the 1997 results are the operations of several acquisitions
made during the past few years. In December 1995, the Company acquired two
different interests in the Box Church Field located in east Texas for $2.2
million and several additional interests in 1996 for $580,000. Subsequent
drilling in this field proved the upside potential the Company had identified
and added 26.4 billion cubic feet of net gas reserves at December 31, 1996. In
June 1996, the Company acquired a 90% interest in certain assets of Siete Oil
and Gas Corporation in the Permian Basin of west Texas and southeast New Mexico
for $10.0 million and completed a series of follow-on acquisitions of other
interests in the Siete properties totaling $5.1 million. In October 1996, the
Company acquired additional interests from Sonat Exploration Company in its Elk
City Field located in Oklahoma for $5.7 million. Several smaller acquisitions
were also completed during 1996 totaling $2.8 million. In May 1997, the Company
acquired its first operated interests in south Louisiana from Henry Production
Company for $3.9 million.
In May 1997, the Company sold its non-operated interests in south Texas for
$5.4 million as part of its continuing strategy to focus and rationalize its
operations.
In February 1997, the Company sold its interest in the Russian joint
venture to Ural Petroleum Corporation ("UPC") for $17.6 million. The Company
received $5.6 million in cash, before transaction costs, $1.9 million of UPC
common stock and a receivable in a form equivalent to a retained production
payment of $10.1 million plus interest at 10% per annum from the limited
liability company formed to hold the Russian joint venture interest.
In February 1997, the Company closed the sale of 2,000,000 shares of common
stock at $25.00 per share and closed the sale of an additional 180,000 shares in
March 1997, pursuant to the underwriters' exercise of the over-allotment option.
These transactions resulted in aggregate net proceeds of $51.2 million.
-10-
The Company seeks to protect its rate of return on acquisitions of
producing properties by hedging up to the first 24 months of an acquisition's
production at prices approximately equal to or greater than those used in the
Company's acquisition evaluation and pricing model. The Company also
periodically uses hedging contracts to hedge or otherwise reduce the impact of
oil and gas price fluctuations on production from each of its core operating
areas. The Company's strategy is to ensure certain minimum levels of operating
cash flow and to take advantage of windows of favorable commodity prices. The
Company generally limits its aggregate hedge position to no more than 50% of its
total production. The Company seeks to minimize basis risk and indexes the
majority of its oil hedges to NYMEX prices and the majority of its gas hedges to
various regional index prices associated with pipelines in proximity to the
Company's areas of gas production. The Company has hedged approximately 24% of
its estimated 1997 gas production at an average fixed price of $2.07 per MMBtu
and approximately 15% of its estimated 1997 oil production at an average fixed
NYMEX price of $18.36 per Bbl. The Company has also purchased options resulting
in price collars and price floors on approximately 30% of the Company's
estimated 1997 oil production with price ceilings between $21.00 and $27.00 per
Bbl and price floors between $18.00 and $21.00 per Bbl.
This Quarterly Report on Form 10-Q includes certain statements that may be
deemed to be "forward-looking statements" within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. All statements, other than statements of
historical facts, included in this Form 10-Q that address activities, events or
developments that the Company expects, believes or anticipates will or may occur
in the future, including such matters as future capital, development and
exploration expenditures (including the amount and nature thereof), drilling of
wells, reserve estimates (including estimates of future net revenues associated
with such reserves and the present value of such future net revenues), future
production of oil and gas, repayment of debt, business strategies, expansion and
growth of the Company's operations and other such matters are forward-looking
statements. These statements are based on certain assumptions and analyses made
by the Company in light of its experience and its perception of historical
trends, current conditions, expected future developments and other factors it
believes are appropriate in the circumstances. Such statements are subject to a
number of assumptions, risks and uncertainties, general economic and business
conditions, the business opportunities (or lack thereof) that may be presented
to and pursued by the Company, changes in laws or regulations and other factors,
many of which are beyond the control of the Company. Readers are cautioned that
any such statements are not guarantees of future performance and that actual
results or developments may differ materially from those projected in the
forward-looking statements.
-11-
Results of Operations
The following table sets forth selected operating and financial information
for the Company:
Three Months Six Months
Ended June 30, Ended June 30,
---------------------------- ----------------------------
1997 1996 1997 1996
------------ ------------ ------------- ------------
(In thousands, except BOE data)
Oil and gas production
revenues:
Working interests $ 13,323 $ 11,066 $ 31,834 $ 21,078
Louisiana royalties 1,979 2,271 4,498 3,667
------------ ------------ ------------- ------------
Total $ 15,302 $ 13,337 $ 36,332 $ 24,745
============ ============ ============= ============
Production:
Oil (Bbls) 276 283 572 544
Gas (Mcf) 5,529 3,772 10,999 7,090
------------ ------------ ------------- ------------
BOE equivalent (6:1) 1,197 912 2,405 1,726
============ ============ ============= ============
Prices:
Oil $ 18.91 $ 17.94 $ 19.67 $ 17.72
Gas 1.82 2.19 2.28 2.13
Oil and gas production costs:
Lease operating expense $ 2,339 $ 1,935 $ 4,762 $ 4,049
Production taxes 784 1,035 2,339 1,877
------------ ------------ ------------- ------------
Total $ 3,123 $2,970 $ 7,101 $ 5,926
============ ============ ============= ============
Statistics per BOE equivalent (6:1)
Sales price $ 12.78 $ 14.62 $ 15.10 $ 14.34
Lease operating expense 1.95 2.12 1.98 2.35
Production taxes .65 1.13 .97 1.09
------------ ------------ ------------- ------------
Operating margin $ 10.18 $ 11.37 $ 12.15 $ 10.90
============ ============ ============= ============
Depreciation, depletion and
amortization $ 3.36 $ 3.34 $ 3.33 $ 3.40
Impairment of producing
properties .43 - .21 -
General and administrative 1.29 1.75 1.90 2.13
Oil and Gas Production Revenues. Oil and gas production revenue increased
$2.0 million, or 15% to $15.3 million for the second quarter 1997 compared to
$13.3 million in 1996. Oil production volumes decreased 2% and gas production
increased 47% for the second quarter 1997 compared to the 1996 period. Average
net daily production was 13,157 BOE for the second quarter 1997 compared to
10,022 BOE in 1996. The production increase resulted from new properties
acquired and drilled during the past year. The Company also experienced some
production loss due to freezing during the first quarter of 1996. The average
oil price for the second quarter 1997 increased 5% to $18.91 per barrel, while
gas prices decreased 17% to $1.82 per Mcf, from their respective 1996 levels.
-12-
Oil and gas production revenue increased $11.6 million, or 47% to $36.3
million for the six months ended June 30, 1997 compared to $24.7 million in
1996. Oil production volumes increased 5% and gas production increased 55% for
the first six months of 1997 compared with the comparable 1996 period. Average
net daily production was 13,290 BOE for the six months ended June 30, 1997
compared to 9,482 BOE in 1996. 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, 1997 increased 11% to $19.67 per barrel, while gas
prices increased 7% to $2.28 per Mcf, from their respective 1996 levels.
The Company has hedged approximately 15% of its remaining 1997 oil
production at an average $18.36 per barrel NYMEX price. The Company realized a
$219,000 decrease in oil revenue or $.38 per barrel for 1997 on these contracts
compared to a $376,000 decrease or $.69 per barrel in 1996. The Company has also
hedged approximately 24% of its remaining 1997 gas production at an average
price of $2.07 per MCF. The Company realized a $1.0 million decrease in gas
revenues or $.10 per MCF for 1997 from these hedge contracts compared to a
$577,000 decrease in 1996.
Oil and Gas Production Costs. Oil and gas production costs consist of lease
operating expense and production taxes. Total production costs increased
$153,000, or 5% to $3.1 million in the second quarter 1997 compared to $3.0
million in 1996 as a result of new properties acquired and drilled during the
past year. However, total production costs per BOE decreased 20% to $2.60 for
the second quarter 1997 compared with $3.26 for 1996, primarily due to state
production tax incentive programs.
Total production costs increased $1.2 million or 20% for the six months
ended June 30, 1997 to $7.1 million as a result of new properties acquired and
drilled during the past year. However, total production costs per BOE declined
14% to $2.95 for the six months ended June 30, 1997 compared to $3.44 for the
six months ended June 30, 1996, primarily due to lower lease operating expenses
per BOE.
Depreciation, Depletion, Amortization and Impairment. Depreciation,
depletion and amortization ("DD&A") increased 36% to $4.0 million for the second
quarter 1997 compared with $2.9 million in 1996 because of increased production
from reserve acquisitions and new wells drilled. DD&A per BOE increased slightly
to $3.36 in the second quarter 1997 compared to $3.34 in 1996. Impairment of
producing oil and gas properties was $516,000 for the second quarter of 1997 due
to several high cost marginal wells and lower product prices. There was no
impairment of proved properties for the second quarter in 1996.
DD&A increased 36% to $8.0 million for the six months ended June 30, 1997
compared with $5.9 million in 1996 because of increased production. DD&A per BOE
decreased to $3.33 in the six months ended June 30, 1997 compared to $3.40 in
1996. Impairment of producing oil and gas properties was $516,000 for the six
months ended June 30, 1997 due to several high cost marginal wells and lower
product prices. There was no impairment of proved properties for the six months
ended June 30, 1996.
Abandonment and impairment expenses for unproved properties increased 11%
to $332,000 in the second quarter 1997 compared with $299,000 in 1996.
Abandonment and impairment expenses for unproved properties was $482,000 for the
six months ended June 30, 1997 compared with $549,000 in 1996.
Exploration. Exploration expense decreased $162,000 to $1.6 million in the
second quarter 1997 compared to $1.8 million in 1996. Exploration expense
decreased $1.3 million to $3.0 million for the six months ended June 30, 1997
compared to $4.3 million in 1996 because several larger 3-D seismic programs
were completed in 1996 combined with better exploratory drilling results in the
six months ended June 30, 1997 compared with 1996.
-13-
General and Administrative. General and administrative expenses decreased
3% to $1.5 million in the second quarter 1997 compared to $1.6 million in 1996.
General and administrative expenses increased $888,000 or 24% to $4.6 million
for the six months ended June 30, 1997 compared to $3.7 million in 1996
primarily because of increased compensation expense associated with the
Company's incentive plans and charitable contributions..
Legal disputes and other consist of legal and settlement expenses in
connection with disputes in the normal course of business. This expense
increased to $71,000 in the second quarter 1997 compared to $16,000 in 1996.
Non-Operating Income and Expense. Net interest income increased $556,000 to
$146,000 in the second quarter 1997 compared to $410,000 of net interest expense
in 1996 as a result of the repayment of debt with the proceeds of the sale of
common stock.
Net interest expense decreased $415,000 to $258,000 for the six months
ended June 30, 1997 compared to $673,000 of net interest expense in 1996 as a
result of the repayment of debt with the proceeds of the sale of common stock.
Income Taxes. The effective income tax rate for the second quarter 1997
increased to 35% compared to 34% in 1996. The effective tax rate for the six
months ended June 30, 1997 increased to 36% compared to 31% in the 1996 period
because of the decreased impact of Section 29 tax credits and percentage
depletion, and because of higher state income taxes which resulted from the $5.2
million increase in net income from continuing operations before income taxes
compared to the 1996 period.
Net Income. Net income for the second quarter 1997 increased $3.5 million
to $5.9 million compared to $2.4 million in 1996. This increase resulted from
higher operating income resulting from significantly increased production
partially offset by increased operating expenses and from the $4.2 million gain
on the sale of the Company's south Texas properties in 1997.
Net income for the six months ended June 30, 1997 increased $14.6 million
to $17.5 million compared to $2.8 million in 1996. This increase resulted from
higher operating income resulting from significantly increased production
partially offset by increased operating expenses and from the $9.7 million gain
on the sale of the Company's interest in the Russian joint venture and the $4.2
million gain on the sale of the Company's south Texas properties in 1997.
Liquidity and Capital Resources
The Company's primary sources of liquidity are the cash provided by
operating activities, debt financing and, during the first quarter 1997, the
issuance of common stock. The Company's cash needs are for the acquisition,
exploration and development of oil and gas properties and for the payment of
debt obligations, trade payables and stockholder dividends. The Company
generally finances its exploration and development programs from internally
generated cash flow, bank debt, and cash and cash equivalents on hand, and
continually reviews its capital expenditure budget based on changes in cash flow
and other factors.
Cash Flow. Net cash provided by operating activities increased $13.2
million to $23.7 million for the six months ended June 30, 1997 compared to
$10.5 million for 1996 primarily due to increased revenue from oil and gas
sales.
Net cash used in investing activities decreased 20% to $17.4 million for
the six months ended June 30, 1997 compared with $21.7 million in 1996 due to a
$5.5 million decrease in acquisitions and the proceeds from sale of properties,
partially offset by increased capital expenditures. Total capital expenditures
for the six months ended June 30, 1997 increased $12.1 million to $23.7 million
compared to $11.6 million in 1996 due to increased drilling activity.
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Net cash provided by financing activities was $14.0 million for the six
months ended June 30, 1997 compared to $15.3 million in 1996. In February 1997,
the Company closed the sale of 2,000,000 shares of common stock at $25.00 per
share. In March 1997, the Company closed the sale of an additional 180,000
shares pursuant to the underwriters' exercise of the over-allotment option.
These transactions resulted in aggregate net cash proceeds of $51.2 million.
During the six months ended June 30, 1997, the Company received $5.0 million
from borrowings under the Company's credit facility and used $41.1 million to
repay the Company's and Panterra's credit facilities, compared to a net increase
in borrowings of $16.0 million for the six months ended June 30, 1996.
The Company had $23.6 million in cash and cash equivalents and working
capital of $22.8 million as of June 30, 1997 compared to $3.3 million of cash
and cash equivalents and working capital of $13.9 million at December 31, 1996.
This increase resulted primarily from the proceeds of the equity offering and
sale of the Company's Russian joint venture interest in February 1997, offset by
an increase in trade accounts payable due to increased drilling activity.
Credit Facility. In April 1996, the Company 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 amortizing 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 $60 million and is redetermined annually. In 1997 the Company
voluntarily reduced the commitment under the credit facility to $10 million
until the next redetermination. The Company may increase the commitment up to
the amount of the borrowing base at its option before the next redetermination.
During the first quarter 1997, the Company repaid the outstanding debt under
this facility of $33.9 million at December 31, 1996. 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 producing oil
and gas properties. The credit facility provides for, among other things,
covenants including maintenance of stockholders' equity at a specified level,
limitations on additional indebtedness and payment of dividends.
Panterra, in which the Company has a 74% ownership, has a separate credit
facility with a $26 million borrowing base and $10.0 million outstanding as of
June 30, 1997. The partnership intends to use the available credit to fund a
portion of the 1997 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 1997.
For 1997, the Company anticipates spending approximately $65 million for
capital and exploration expenditures with $15 million allocated for domestic
acquisitions, $40 million for low to moderate risk domestic exploration and
development and $10 million for large target, higher risk domestic exploration
and development.
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.
-15-
On February 12, 1997, the Company sold its Russian joint venture to Ural
Petroleum Corporation ("UPC"). The Company received cash consideration of
approximately $5.6 million, before transaction costs, UPC common stock valued at
approximately $1.9 million, and a receivable in a form equivalent to a retained
production payment of approximately $10.1 million plus interest at 10% per annum
from the limited liability company formed to hold the Russian joint venture. The
Company's receivable is collateralized by the partnership interest sold. The
Company has the right, subject to certain conditions, to require UPC to purchase
the Company's receivable from the net proceeds of an initial public offering of
UPC common stock or alternatively, the Company may elect to convert all or a
portion of its receivable into UPC common stock immediately prior to an initial
public offering of UPC common stock.
In May 1997, the Company entered into an agreement to receive a 55%
interest in Summo's Lisbon Valley Copper Project (the "Project") in return for
the Company contributing $4.0 million in cash, all of its outstanding stock in
Summo, and $8.6 million in letters of credit to a single purpose company, Lisbon
Valley Mining Company, formed to own and operate the Project. Summo will
contribute the property, all project permits and contracts, $3.2 million in cash
and a commitment for $45.0 million of senior debt financing in return for a 45%
interest in the new company. The agreement is subject to certain conditions,
including Summo shareholder approval and final resolution of environmental
approval. In June and July 1997, the Company agreed to provide interim financing
of $825,000 and $550,000, respectively, for the Project in the form of a loan
due in June 1999. Upon capitalization of the new company the loan shall
constitute a capital contribution in partial satisfaction of the capital
commitments set out in the May 1997 agreement.
Effects of Inflation and Changing Prices
The Company's results of operations and cash flow are affected by changing
oil and gas prices. 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. Within the United States, inflation
has had a minimal effect on the Company. The Company's foreign interests may be
adversely affected by inflation in Russia and other countries. The Company
cannot predict the extent of any such effect.
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PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
At the Company's annual stockholders' meeting on May 21, 1997,
the shareholders approved management's current slate of directors
and approved the Stock Option Plan (adopted November 21, 1996 and
previously submitted as Exhibit 10.47) and the Incentive Stock
Option Plan (adopted March 27, 1997 and previously submitted as
Exhibit 10.48).
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit Description
27.2 Financial Data Schedule
(b) A report dated April 8, 1997 was filed on Form 8-K to report
the change of the Company's certifying accountant.
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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
August 13, 1997 By /s/ MARK A. HELLERSTEIN
----------------------------
Mark A. Hellerstein
President and Chief Executive Officer
August 13, 1997 By /s/ RICHARD C. NORRIS
----------------------------
Richard C. Norris
Vice President - Accounting and
Administration and Chief Accounting
Officer