SM Energy Co (SM) 2002 Q1 法說會逐字稿

Good morning. My name is Chris. At this time, I would like to welcome everyone to the St. Mary Land & Exploration first quarter 2002 conference call. All lines are on mute to prevent any background noise-a the remarks, there will be a question and answer period. If you would like to ask a question, simply press star and 1 on the telephone key pad. If you would like to withdraw the question, press the pound key. Thank you. Mr. Hannelly, you may begin your conference.

Thank you, Chris. Welcome to all of you joining us on phone and on line for St. Mary Land & Exploration first quarter 2002 conference. I need to read the following statement. Except for historical information, statements made in the conference call information business of the company, maybe forward-looking statements. These statements involve known and unknown risks causing the results to differ materially from forecasted results. These risks include factors like uncertainties in cash flow and reserves, oil and gas operating risks, volatility, natural gas prices, need to replace reserves depleted and government regulations, litigation and environmental matters.

On line this morning, Mark Hellerstein, President and Chief Executive Officer, Ron Boone, Executive Vice President and Chief Operating Office, Richard Norris, Vice President of Finance and myself, Bob Hannelly, Vice President of Business Development. Now turn the call over to Mark.

Thank you, Bob. Good morning. Oil and gas prices dominated compared first quarter 2002 first quarter to 2001. Net income 2.3 million dollars or 8 cents per share compared with 20.4 million dollars or 72 cents a share a year ago.

Although production increased 4% to 13.8 BCF equivalent, gas price realize declined 3% to 258 BCF equivalent and oil to 23.37 per barrel. At the same time, costs increased on a MCFE basis. Although excluding taxes increased 22 cents for equivalent. Primarily the oil region, the Williston Basin highest at 28 cents BCF. The increase total in LOE for become of with the Williston Basin. 1 cents of this increase is due to the Williston's growth percentage of total production increased to 26%.

This growth came primarily as a result of the chalk that two acquisition late last year. Costs increased in the Williston accounting for 3 cents impact on total LOE costs. Box church almost fully developed in 2001 resulting in normal production declines and increased answer salute costs associated with approximates. 136,000 dollars of taxes paid for box church in early 2002.

DD&E increased to 95 cents reflecting higher finding costs in 2001 relative to prior years. The first quarter rate was equal with the annual rate for 2001. Exploration expense declined by 1.4 million to 6.9 million. G&A declined 7 cents or 879,000 dollars to 23 cents. This reflects a reduction in net profits pool expense of 126,000 existing pools production declined together with lower oil and gas prices. Copus income increased by 464 thousand dollars. Production for first quarter of 2002, flat with first quarter production at 13.8 BCF. Completed 13 million of acquisitions in the first quarter including 7.75 million in Oklahoma. These are properties in the Tacoma Basin and 4.9 million with two acquisitions in east Texas. The acquisitions primarily included undeveloped locations and added approximately 2 million mcf a day of production.

We currently or we completed $100 million senior convertible note offering in the quarter. They have a coupon of 5.75% and convertible $26 per sure. Callable after five years and put them to St. Mary on each five year anniversary date. At quarter end, $63 million of cash and cash equivalence with $20 million outstanding on the bank line subsequently paid off. The bank updated the borrowing base to $160 million of which none is utilized.

The outlook high lighted in the press. Ron will discuss the wells we're working on.

Good morning. The successful development extension of the field limits is continuing in northeast mail field with the completion of 1-232 where St. Mary had a 46% working interest in the well for 4.86 million a day and reached total depth on 58.9% Carlson number 1-26 and logged pay at eight different intervals. The Carlson rig moving to another St. Mary operation and picking up a second rig and two in the field going forward W. The addition of the second St. Mary rig, five total rigs running in northeast Mayfield.

At Elk City, a second zone added to the easily 1-5 with 77% originally completed in the fourth quarter for 3.1 million a day. From the springer formation. Well is now completed in the lower marrow 8.4 million a day. The springer perforations currently below bridge plug and add at a later date and pressure declined somewhat. In the ark tech region, the Trinidad field continue with the completion of the Arnold number 3 for 1.9 million a day. The Arnold is the 14th new well in the field since St. Mary's initial participation in 2002.

St. Mary had a 25% interest, completed in the quarter for 10 million a day. The well is recently increased to 13 million a day and continues to flow at an excess of 10,000 pounds flowing to new pressure. In the Hanging Woman Basin project, we're in the field placing the initial 17 wells in the two pilot projects, one production and expect to have all the wells producing in the next three to four weeks.

Necessary permits to produce the pilot wells from the commission in April. Two pilots designed to test the potential of five primary coal seams varying from 130 feet to 230 feet. Initial listing in April increased the play to 125,000 acres.

At Judge Digby, production continues to decline as well as deplete and due to mechanical problems in the field. Production in the field in April averaged 135.7 million a day. This rate is essentially in line with our year end projections which projecting the decline being observed in the field.

A number of things are happening in the field which we expect to have positive impact on field production. The par lines 11 completed in late April from the c-1 St. Mary had a 11.5% interest to the b-8 with a 20% working interest, nearly doubling St. Mary's revenue interest in the well. The well was slow due to the pipeline at rates as high as 42 million a day.

In conjunction with the recompletion of the number 11, the par launch 8 producing at a down dip position from the same ba reservoir with a high water cut was shut in and recompleted to the b-3 and b-4.

Bp is proposed recompletion on two additional wells, both of which off line in April. The we are tell number 3 with a St. Mary 9.76% interest drilling in the field below 20,000 feet and the major number 4 location put in March 8th and drilling at 15,800 feet. At the mad core 7 to 1 prospect, a rig under contract and towing location to split the well within the next week.

St. Mary will carry 35% working interest in this 13,000 foot mark a Davis site.

St. Mary is poised for an excellent year. Our organic growth allows us to grow. We're exposed to several larger

ideas to impact the company like hanging woman, mad core 701,

carrier, as well as a basin center gas play that's in process.

We have the strongest balance sheet in our history giving us an ability to make a large acquisition for the right situation. With that, we'll open it up to questions.

At this time, I would like to remind everyone in order to ask a question, please press star and 1 on the telephone key pad. Please hold for your first question.

Your first question is from Joe Almond of RBC Capital markets.

Morning. What is the other revenue on income statements?

Several items. Had about $800,000 classified as gain from the sale of other properties and most of that or all of that essentially from the sale of the remaining portion of our Russian stock that we had. In addition, we do have marketed gas revenue and some gathering income at our box church. Those are pretty much offset by other expenses. There's slight profit in there but the net of the two isn't very big.

Doesn't sound like it's recurring. The gathering revenue are recurring but the 800,000 of gain on properties is not recurring.

Okay. Thank you.

Your next question is from Adrian gill of is a dotty.

Did you say all 17 wells in hanging woman will be on production in the next three to four weeks?

That's correct.

Okay. Thanks.

Again, I would like to remind everyone to ask a question, please press the star and number 1 on the telephone key pad.

A follow up question from Joe Almond of RBC Capital Markets.

Hi, again, guys. Mark, I missed the initial comments on the Williston.

Basically, when you look at our cost per CMFE excluding taxes, gone up a total of 21 cents. If you look

at a common total breaking out each region, accounting for 14 cents

from the Williston and 11 of that is really the result of the Williston becoming more significant as a region. Because it's an oil producing area, has a higher cost associated with it than our other regions.

And, its proportion of the total grown from last year from 18% to 26%, and that increase to a large extent was the result of our acquisition of the Chawtawa Field.

And with the Hanging Woman Basin, or just the rockies in general, do you see regulatory issues becoming more of a concern going forward or environmental issues more of a concern as we go forward?

I don't think that there's an increase in

concern. The issues that are out there today are the ones that

have been there for quite a while. The process is fairly slow but

I think it's well defined, and I think basically we're on track. Some of the recent decisions we think are not a huge deal. Most everything that we're working on in the Hanging Woman Basin is dictated by two environmental impact statements which are currently underway which we see as coming to fruition and dove tailing pretty nicely when we think we'll be at a point moving forward with commercial development.

But do you see anymore activism on groups that want to stop development of well and gas in the rockies? Especially since it seems like we're not developing ANWR. I've heard that the attention now being focused on the rocky mountain region.

Well, I don't see the new groups. I see

the existing groups getting more press and feeling like they've

had some victories. And maybe we'll see some refocus. But I really think the process is defined and go through the formal process and I think the formal process will ultimately recognize the development of the resources can be done in a prudent and environmentally friendly way, and we're going to get there. It's not going to be easy.

One thing to note is the time frames. We have a substantial amount of sea acreage. 30,000 net acres and possible for us to begin development of the project even prior to all the federal acreage issues resolved.

That's what we're doing with the pilot projects. Located on sea acreage and gives the ability to gather the technical information to establish the economics of this play. They're very much pilot projects and the commercial ability to produce commercially in the Hanging Woman Basin has not yet been established. We're very optimistic and clearly the information we've gathered to date is encouraging but it's important to emphasize that this is a pilot project but we're still testing.

All right. Thank you.

Next question is from May Childron Of JP Morgan.

What's the project size at Madgore 701?

It's a very significant prospect. You can do your p-10 and p-50 and p-90's. We think of it in terms of 100 to 150 BCF, total potential prospect. There are -- we're targeting two primary zones that have quemed gas in the area from similar types of traps. Recoveries in excess of those numbers.

Okay. And, are you planning still on drilling the carrier prospects sometime this year as well?

Carrier looks about as good as it has in a couple of years. We have partner problems we have resolved and we're moving forward very aggressively with carrier. I think we're going to be in a position to drill that well maybe third or fourth quarter this year.

Okay. And Mark, maybe sort of a larger question for you in terms of strategy on your gulf coast area, just given the recent disappointments on the exploration front there, what are you thinking for that particular area and given the reserve life declining pretty quickly there, what are you looking at in the future?

We've reduced the budget there by half of what it was a year ago. The budget is $18 million about and we've recognized the fact that some of the conventional exploration ideas disappointing although the Miami well is a very, very nice success.

What we have seen happen in the gulf over the years we've kind of been involved there is there's been a diminishing of prospect size and in order to justify the risk involved, we're trying to limit our conventional exploration ideas to those that are legitimate, 100 BCF plus prospect sizes such as the mad go that and trying to keep an eye on exploration and geared up to do that type of thing.

Then we're shifting our larger potential ideas to the rockies where there are more unconventional plays with very, very large potential but if successful, tend to have a lot of room to run and more rate of type of return more than single wells having phenomenal returns but without a lot of room to run.

Okay. And, what are you seeing right now on the acquisitions market?

Quite frankly, it's a little slow on the side. We've, I think, with gas prices being a lot stronger than people expected them to be, I think one, I think expectations are very, very high. And, I think right now, it's probably a little on the slower side. I think the opportunities that we're seeing are more the niche acquisitions such as the ones we did this year. We did complete a couple acquisitions, the merchant one is pretty typical of kind of the opportunities where we will be successful. There it was in the argue coma basin. The acreage basically surrounded by our acreage and had a gathering system that benefited our existing acreage so we had a nice synergistic affect and those are the things to add value to the situation.

Do you think your 60 million target for acquisitions this year is still achievable?

Yeah. It's not a ridiculously sized number. Consistent with percentage wise historically and ahead of schedule with the $13 million we closed.

Great, thank you.

Your next question is from Harrison Self of AG Edwards.

It's Mike Seala. I may have missed it but want to ask about Judge Digby. Where do you think production could go there this year?

Such a tough question. If you look at what we have actually put on our books and what's billed into forecast, Judge Digby Is showing to decline. But, if you look at the two wells that are drilling neither of which are booked, you look at the two recompletions that are proposed in a deepening proposed, we certainly see the possibility that the field production could remain flat or go up.

But you have wells that complete for 40 to 60 million a day and you have a total field producing 140 million a day, so it's just very, very difficult to predict because so much is driven by one completion and by the timing of one completion.

Right now, I think we see the potentials to vary from the current forecast has primarily on the upside of the numbers, and I could see the production staying at the current level or maybe even increasing a bit although we're forecasting it to continue a decline through the rest of the year.

One thing to note in general where several years ago when we had a hiccup relative to one of the wells developing a casing leak, the difference is that.

Judge Digby today is smaller than Judge Digby's sort of absolute size making it smaller and St. Mary is growing, and so, relative to our total production, it's not nearly as significant as it wasn't once and the ups and downs don't have the impact they did.

Total field capacity in the 240, 250 million a day. I don't see us pushing that number in the next 12 months.

So it's probably going to jump up and down sort of the current rate, but average the current rate or slightly below that for the year?

That's what we're projects. I think we could be pleasantly surprised but we're kind of planning for that type of a scenario, yes.

Okay. And then in northeast Mayfield, did you mention the activity level you see there going forward?

Very busy. We're picking up a second rig and two rigs running in the field. There are three other rigs running in the field, so that level of activity will be as high as we've seen in the last two years.

We're recently completing the wells in a different way. We have a lot gross marrow section there. Historically, we had essentially and we being the operators in the field, completed individual zones and depleted those and recompleted. We have starting to comingling and perforating the comingling zones and the completion we have seen in the last 12 months dramatically improved from historical. We've now identified 24 potential marrow pay zones in that entire 2,000 foot interval and we've actually completed and perforated 14 successfully in the field that field continues to get larger to add pace and we think it's a very exciting project that will be very significant in the future.

Okay. And then just one final question, Mark, you had mentioned that you're looking now for some things in the rockies. Can you elaborate at all on any of your prospect ideas there?

Essentially, we're still in a cumulating acreage so we really have been careful not to talk specifically. We did have one press release that alluded to a play we're involved with that's basically a basin-centered gas play, but we're with holding any sort of details just because we're active on the acreage side.

Okay. Thank you.

Your next question is from Phil Dodge of Ryans Beck.

Good morning, everybody. General question and a specific question.

First, a couple of months ago you raised the budget for 2002 by about $30 million. And, curious where that increase is focusing, and how much of it is actual drilling. I assume part of it's northeast Mayfield.

I'm not sure we did. We've actually kept the same budget that we had originally so I'm not -- to be honest, I'm not 100% certain where that's coming from.

Okay. Then, the other question is, the Andorco coproduction trend overall that you see going forward over the next few months.

Yeah, the Andorco and the Williston the production drivers over time. We see that continue in both areas we've increased our technical groups on kind of a ratable growth range and we've been increasing their budgets. We actually in the Andorco this year, if we do outspend the budget, it would probably be to some extent in the Andorco.

And, by doing that, do you expect the increase production or maintain it at the current level?

I think we expect to increase our production in both those areas.

Yeah. Okay. Thank you.

Your next question is from Jennifer Drake of Nomura.

Hi. Thanks. I had a question on acquisitions which was answered a little bit earlier, but thank you.

At this time, there are no further questions.

We thank you all for joining us today. I think we certainly will see improved earnings in the future with the increase in prices, but we'll stay by our guns and I think with rig rates down, we're looking forward to having a very, very good year. Thank you.

Thank you for participating in today's conference call. You may now disconnect.