Business Context and Reporting Period
Company: St. Mary Land & Exploration Company (Note: Request metadata listed "SM Energy Co," but the filing text identifies the registrant as St. Mary Land & Exploration Company).
Reporting Period: Fiscal year ended December 31, 2009.
Business Overview: An independent oil and gas company engaged in exploration, exploitation, development, acquisition, and production of natural gas and crude oil in North America. The company shifted its strategy in 2009 from niche acquisitions to focusing on the exploration and development of onshore resource plays, specifically the Eagle Ford, Haynesville, and Marcellus shales.
Key Financial Metrics
| Metric | 2009 | 2008 |
|---|---|---|
| Total Operating Revenues | $832.2 million | $1,301.3 million |
| Net Income (Loss) | $(99.4) million | $87.3 million |
| Net Income (Loss) Per Share (Diluted) | $(1.59) | $1.38 |
| Cash Flow from Operating Activities | $436.1 million | $679.2 million |
| Capital Expenditures (Costs Incurred) | $419.0 million | $857.7 million |
| Proved Reserves (BCFE) | 772.2 | 865.5 |
| Long-Term Debt | $454.9 million | $558.7 million |
| Working Capital | $(87.6) million | $15.2 million |
Material Changes vs. Prior Period
- Revenue Decline: Total operating revenues decreased 36% to $832.2 million, driven primarily by a 31% decrease in net realized sales prices (oil and gas) and a 5% decrease in production volumes.
- Net Loss: The company recorded a net loss of $99.4 million in 2009, a reversal from the $87.3 million net income in 2008. This was largely due to significant non-cash impairments and lower commodity prices.
- Impairments: Recognized $174.8 million in pre-tax non-cash impairments of proved properties in 2009 (compared to $302.2 million in 2008). The largest portion ($97.3 million) related to Mid-Continent assets impacted by low natural gas prices and wide differentials in Q1 2009. Additionally, $45.4 million was abandoned or impaired related to unproved properties.
- Reserve Reduction: Proved reserves decreased 11% to 772.2 BCFE. This decline was caused by the divestiture of 44.2 BCFE (primarily coalbed methane), net downward performance revisions of 61.6 BCFE (notably in the Wolfberry tight oil program), and a change in SEC pricing methodology which resulted in a net negative impact of 125 BCFE compared to the prior year's methodology.
- Capital Discipline: Costs incurred for oil and gas producing activities dropped 51% to $419.0 million as the company scaled back development in response to low commodity prices.
Guidance, Outlook, and Risks
- 2010 Outlook: Management expects 2010 to be a promising year. The company plans to fund its exploration and development budget through current year operating cash flows and proceeds from pending divestitures of non-core assets. No new public debt or equity financing is anticipated in the near term.
- Strategic Focus: Capital allocation will prioritize the Eagle Ford shale program (receiving the largest portion of the budget), as well as oil-weighted projects in the Wolfberry (Permian) and Bakken/Three Forks (Rocky Mountain) regions. Horizontal drilling in the Haynesville shale has begun.
- Liquidity: As of February 16, 2010, the company had $467 million available under its revolving credit facility. The borrowing base was maintained at $900 million. There are no debt maturities until 2012.
- Key Risks:
- Commodity Price Volatility: Financial results are heavily dependent on oil and gas prices. A 10% decrease in average realized sales prices would reduce net cash flow from operations by approximately $41.4 million.
- Reserve Estimates: Estimates are inherently imprecise. The company noted significant downward performance revisions in the Wolfberry tight oil program, though it believes these reserves may eventually be produced.
- Regulatory Environment: Potential new federal regulations regarding hydraulic fracturing and climate change (greenhouse gas emissions) could increase operating costs and delay operations.
- Divestiture Completion: The company has entered into agreements to sell non-core properties in the Rocky Mountain region (approx. $255 million total value) but these are subject to closing conditions and post-closing adjustments.
Important Facts for Investor Verification
- Divestiture Proceeds: Verify the final closing and proceeds from the Rocky Mountain divestitures (Legacy Reserves and Sequel Energy Partners) announced subsequent to year-end, which are critical to funding the 2010 capital budget.
- Wolfberry Performance: Monitor production data from the Wolfberry tight oil program in the Permian Basin, as significant downward reserve revisions were recorded due to underperformance against decline forecasts.
- Resource Play Progress: Track the results of the Eagle Ford, Haynesville, and Marcellus shale drilling programs, which represent the company's primary growth strategy for 2010 and beyond.
- Commodity Hedging: Review the company's hedging position, which resulted in a net realized gain of $140.6 million in 2009. As of year-end, the company had a net accrued liability of approximately $81 million related to hedging activities.
- Working Capital Deficit: Note the shift from positive working capital in 2008 to a deficit of $87.6 million in 2009, driven by the classification of assets held for sale and changes in current liabilities.