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: Quarterly period ended September 30, 1999 (Form 10-Q).

Operations: The Company is engaged in the exploration, development, acquisition, and production of natural gas and crude oil. Core operating areas include the Mid-Continent, ArkLaTex, South Louisiana, Williston Basin, and Permian Basin. In June 1999, the Company acquired Nance Petroleum Corporation, consolidating its Williston Basin operations. In July 1999, it signed an agreement to acquire King Ranch Energy, Inc. (KRE).

Key Financial Metrics (Nine Months Ended Sept 30, 1999)

Material Changes vs. Prior Period

• Profitability Turnaround: The Company reported a net income of $4.8 million for the nine months ended September 30, 1999, compared to a net loss of $4.0 million in the same period of 1998. This improvement was driven by a $10.2 million decrease in depletion, depreciation, amortization (DD&A), and impairment charges, and a $5.0 million decrease in exploration expenses.
• Revenue Decline: Total operating revenues decreased 11% to $49.9 million from $56.2 million. This was primarily due to an 18% decrease in gas production volumes and a 2% decrease in oil volumes, attributed to the loss of production at the South Horseshoe Bayou Field and the sale of Oklahoma properties in late 1998.
• Price Realization: Despite volume declines, average realized oil prices increased 12% to $15.07 per barrel, while gas prices remained relatively flat at $2.10 per Mcf.
• Impairment Reduction: Impairment of proved properties dropped significantly to $363,000 in 1999 from $8.2 million in 1998, reflecting better drilling results and the absence of the 1998 deep test failure at Atchafalaya Bay.
• Investment Accounting Change: The Company reduced its ownership in Summo Minerals Corporation from 37% to 18% in June 1999, changing the accounting method from equity to cost. This eliminated the recognition of Summo's operating losses in the Company's income statement for the remainder of the period.

Guidance, Outlook, and Risks

• Capital Expenditure Outlook: The Company anticipates total capital and exploration expenditures of approximately $95.0 million for 1999. This includes $33.0 million for core area development, $10.0 million for high-risk exploration, and $52.0 million for acquisitions (including the pending KRE merger).
• Liquidity and Debt: The Company maintains a $200 million revolving credit facility. However, the borrowing base was reduced to $40.0 million as of September 30, 1999, due to reduced reserve pricing and write-downs at South Horseshoe Bayou. Outstanding debt under this facility was $25.0 million.
• Acquisitions: The merger with King Ranch Energy, Inc. (KRE) is subject to shareholder approval and is expected to close in the fourth quarter of 1999. KRE adds significant Gulf of Mexico and onshore Gulf Coast assets.
• Commodity Hedging: The Company has hedged approximately 24% of remaining 1999 gas production and 32% of remaining 1999 oil production. It utilizes price collars to manage downside risk while retaining some upside potential.
• Year 2000 Readiness: The Company reports 100% completion of system repairs and replacements for major IT systems. Approximately $450,000 has been spent on Y2K compliance, with no additional material costs anticipated.
• Risks: Key risks include the volatility of oil and gas prices, the success of high-risk exploration projects (e.g., South Horseshoe Bayou, North Parcperdue), and the potential impact of third-party Y2K failures on operations.

Investor Verification Checklist

• South Horseshoe Bayou Status: Verify the current production levels and reserve estimates for the South Horseshoe Bayou field, which has experienced significant mechanical issues and water encroachment.
• KRE Merger Approval: Confirm the status of shareholder votes for the King Ranch Energy, Inc. merger, as this transaction is critical to the 1999 acquisition budget.
• Borrowing Base Constraints: Monitor the $40.0 million borrowing base limit on the credit facility and its impact on future capital flexibility given the $95.0 million expenditure plan.
• Summo Minerals Exposure: Review the recoverability of the $1.6 million net investment in Summo Minerals, which is sensitive to global copper prices.
• Exploration Success Rates: Track the results of the high-risk exploration wells drilled in the third quarter (Stallion, South Horseshoe Bayou, North Parcperdue) to validate the $10.0 million high-risk budget allocation.