SM

Business Context and Reporting Period

Company: St. Mary Land & Exploration Company (Note: Input metadata referenced "SM Energy Co," but the filing text identifies the registrant as St. Mary Land & Exploration Company).

Reporting Period: Fiscal year ended December 31, 2002.

Business Overview: An independent energy company engaged in the exploration, development, acquisition, and production of natural gas and crude oil. Operations are focused in five core U.S. regions: Mid-Continent, ArkLaTex, Gulf Coast/Gulf of Mexico, Rocky Mountain, and Permian Basin.

Key Operational Metrics (2002):

• Proved Reserves: 490.9 BCFE (36.1 MMBbls oil, 274.2 Bcf gas), representing a 28% increase from 2001.
• Production: 55.1 BCFE total (average daily production of 150.8 MMCFE).
• Reserve Life: 8.9 years.
• Production Replacement: 306%.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Total operating revenues decreased 5% to $196.4 million, driven primarily by a 20% decrease in realized natural gas prices ($3.00/Mcf vs. $3.73/Mcf in 2001) and a 3% decline in gas production volumes. This was partially offset by a 16% increase in oil production and a 9% increase in oil prices.
• Net Income Decrease: Net income fell 32% to $27.6 million. Contributing factors included lower production revenues, a $2.6 million loss on the sale of the Flour Bluff field, increased depreciation/depletion ($54.4 million), and higher general and administrative expenses.
• Debt Increase: Long-term obligations increased significantly to $113.6 million due to the March 2002 issuance of $100 million in 5.75% senior convertible notes and borrowings under the credit facility to fund acquisitions.
• Reserve Growth: Proved reserves grew 28% to 490.9 BCFE, driven by acquisitions (101.6 BCFE added) and drilling activities (40.3 BCFE added).

Guidance, Outlook, and Risks

Management Commentary and Outlook

• 2003 Capital Budget: Budgeted at $225 million ($135 million for development/exploration, $90 million for acquisitions).
• Price Outlook: Management projects higher revenues and net income for 2003, citing less gas in storage, cold weather, and geopolitical factors supporting higher commodity prices.
• Acquisitions: Significant activity occurred in early 2003, including a $71.6 million stock-for-stock acquisition of Rocky Mountain properties from Flying J and Big West Oil & Gas.
• Dividends: The company has paid dividends since 1940; the 2002 rate was $0.10 per share.

Risks and Contingencies

• Commodity Price Volatility: Approximately 56% of reserves are natural gas; results are highly sensitive to price fluctuations.
• Concentration Risk: The Judge Digby Field accounted for approximately 10% of total production in 2002.
• Legal Proceedings: An environmental lawsuit filed by the Northern Plains Resource Council seeks cancellation of federal leases related to coalbed methane development in Montana, potentially affecting 47,000 net acres.
• Accounting Change: The company dismissed Arthur Andersen LLP in May 2002 and engaged Deloitte & Touche LLP.

Investor Verification Checklist

• Reserve Estimates: Verify the 28% reserve increase and the PV-10 value of $824.8 million, noting the sensitivity to the benchmark prices used ($31.20/bbl oil, $4.74/MMBtu gas).
• Debt Covenants: Review the new $300 million credit facility entered in January 2003 and the borrowing base redetermination requirements.
• Hedging Impact: Assess the impact of hedging contracts, which resulted in a $4.1 million decrease in gas revenue and a $1.9 million increase in oil revenue for 2002.
• Acquisition Integration: Monitor the integration of the Burlington Resources ($69.5 million) and Flying J/Big West ($71.6 million) acquisitions and their contribution to 2003 production.
• Legal Exposure: Track the status of the Northern Plains Resource Council lawsuit regarding coalbed methane leases in Montana.