SM

Business Context and Reporting Period

This Form 10-Q covers St. Mary Land & Exploration Company for the quarter and six months ended June 30, 1997. The company is an independent oil and gas exploration and production firm operating primarily in the United States, with significant interests in the Williston Basin, Permian Basin, and other core areas. The reporting period includes the impact of a major equity offering and the divestiture of its Russian joint venture.

Key Financial Metrics

Note: Total Operating Revenues include a $9.7 million gain on the sale of the Russian joint venture and a $4.2 million gain on the sale of proved properties.

Material Changes vs. Prior Period

• Revenue Growth: Oil and gas production revenue increased 47% to $36.3 million for the six months ended June 30, 1997, compared to $24.7 million in 1996. This was driven by a 55% increase in gas production volumes and an 11% increase in average oil prices.
• Profitability Surge: Net income jumped 514% to $17.5 million from $2.8 million in the prior year period. This increase is largely attributable to non-recurring gains: $9.7 million from the sale of the Russian joint venture and $4.2 million from the sale of South Texas properties.
• Debt Reduction: Long-term debt decreased significantly from $43.6 million at year-end 1996 to $7.4 million at June 30, 1997. The company used proceeds from a $51.2 million common stock offering to repay borrowings under its credit facility.
• Liquidity Improvement: Cash and cash equivalents rose from $3.3 million to $23.6 million, bolstered by the equity offering and asset sales.

Guidance, Outlook, and Risks

Management Commentary and Outlook

Management anticipates spending approximately $65 million on capital and exploration expenditures for the full year 1997. The allocation includes $15 million for domestic acquisitions, $40 million for low-to-moderate risk exploration/development, and $10 million for higher-risk exploration. The company believes current capital resources and cash flow are sufficient to meet 1997 requirements.

Hedging Strategy

The company hedges up to 50% of total production to ensure minimum operating cash flow. As of the filing, approximately 15% of remaining 1997 oil production is hedged at $18.36/Bbl, and 24% of gas production is hedged at $2.07/MMBtu.

Risks and Contingencies

• Commodity Price Risk: Results are sensitive to oil and gas price fluctuations, though hedging mitigates some exposure.
• Foreign Operations: While the Russian joint venture was sold, the company retains a receivable and stock in Ural Petroleum Corporation, exposing it to potential inflation and economic instability in Russia.
• Project Execution: The company entered a new agreement for the Lisbon Valley Copper Project, subject to shareholder approval and environmental permits.

Investor Verification Checklist

• Non-Recurring Gains: Verify the sustainability of earnings by excluding the $13.9 million in gains from asset sales (Russian venture and Texas properties) when assessing core operational performance.
• Debt Covenants: Confirm the status of the credit facility, which was voluntarily reduced to a $10 million commitment, and ensure compliance with covenants regarding stockholders' equity and dividend payments.
• Capital Expenditure Execution: Monitor the $65 million 1997 capital budget against actual spending, particularly the $40 million allocated to exploration and development.
• Receivable Collection: Track the collection of the $10.1 million receivable from the Russian joint venture sale, which is structured as a retained production payment with 10% interest.
• Summo Minerals Transaction: Verify the closing conditions for the Lisbon Valley Copper Project, including the $45 million senior debt financing commitment by Summo.