SM Energy Co (SM) 2002 Q2 法說會逐字稿

Good morning.

My name is Lisa and I will be your conference facilitator today.

At this time I would like to welcome everyone to St. Mary Land and Exploration's second quarter 2002 earnings conference call.

At lines have been placed on mute to prevent any background noise.

After the speakers' remarks there will be a question and answer period.

If you would like to ask a question during this time, simply press star then the number one on your telephone keypad.

If you would like to withdraw your question, press the pound key.

Thank you.

Mr. Hannelly, you may begin your conference call.

Thank you, Lisa, and good morning to all of you joining us by phone and on line for St. Mary Land and Exploration's second quarter 2002 conference call.

Before we start I need to read the following statement.

Except for historical information, statements made during this conference call, including information regarding the business of the company, may be forward-looking statements.

These statements involve known and unknown risks which may cause the company's actual results to differ materially from forecasted results.

These risks include such factors as uncertainties in cash flow and reserves, oil and gas operating risks, volatility of oil and natural gas prices, the need to replace reserves depleted by production, the competition and the potential impact of government regulations, litigation, and environmental matters.

On line this morning are Tom Congdon, chairman of the board, Mark Hellerstein, president and chief executive officer, Ron Boone, executive vice-president and chief operating officer, Rick Norris, vice-president of finance, and myself, Bob Hannelly, vice president of business development.

I will now turn the call over to Tom.

I won't take a lot of your time except to say that a wit recently said that earnings are just a matter of opinion but cash is a fact.

And I think when you hear what Mark has to say now, you will understand better what this man was jesting about.

Mark, why don't you go ahead.

Thanks, Tom.

St. Mary earned 10.6 million or 38 cents per share in the quarter ended June 30th, 2002, compared to 14.2 million or 51 cents per share in the second quarter of last year.

Discretionary cash flow decreased from 34.3 million in the second quarter of last year to 33.2 million in the second quarter of this year.

Once again oil and gas prices dominate the difference in performance between the two quarters.

Production is relatively flat.

Once again, oil and gas prices dominate the difference in performance between the two quarters.

Production was relatively flat increasing from 13.6 BCF equivalent to 13.7.

Price realized declined 26 percent to 3.03 per MCF.

And oil price realized rose four percent to 25.39 per barrel, our net realized price declined 17 percent to 3.38 cent per MCF equivalent.

Lease operating expense cost continued to decline on a sequential basis as well compared to last year.

Production costs including taxes declined 15 cents per MCFE from 99 cents to 84 cents when comparing the second quarters of 2001 and 2002.

However, it should be noted that at Judge Digby we received a revised AFE which reclassified workover expenses incurred in last 2002 to property, plant and equipment this quarter for approximately five cents per MCF equivalent.

Production taxes declined by four cents per MCF equivalent due to lower gas prices.

BD and A increased two cents to 97 cents per MCFE.

Exploration expense increased by 2.1 million to 2.3 million reflecting the previously announced dry hole at madgorda 700 and 701 for 1.4 million.

GA declined four cents per MCFE or 518,000 to 22 cents per MCFE.

This reflects a reduction in net profits pool expense of 500,000 as existing pools production declined together with lower gas prices. [Inaudible] income also increased by $491,000.

Included in pretax earnings is an unrealized derivative gain of 2.3 million.

At noted previously, we executed a five-year interest rate swap for 50 million dollars at LIBOR plus point 36 percent in connection with our 100 million dollars convertible note offering in March.

This transaction does not meet the FASB definition of a hedge, and therefore requires us to market on the income statement each quarter because the yield curve has come down, we are recognizing a gain.

With the merchant acquisition completed in February of this year, we are recognizing market revenue and expense associated with that gathering system.

Production for the second quarter of 2002 was flat with the first quarter production at 13.7 BCF equivalent.

No additional acquisitions were completed in the second quarter.

We did have three very near misses on opportunities in the 20 to 35 or 40 million dollar range which suggests to us that the market may be coming a little more rationale.

Consequently we remain confident of meeting or acquisition budget for the year.

We are updating our 12 month forecast as follows.

Oil and gas production 56 to 59 BCF equivalent, LOE including taxes and transportation of 90 to dollar MCFE, G and A of 20 cents to 24 cents per MCFE, DDNA 95 cents to 1.5 per MCFE.

In addition we estimate that the current portion of our income tax expense will be about ten to 20 percent.

We are hesitant to provide a detailed forecast for the third quarter due to several events at Judge Digby.

Net production for the month of July at Judge Digby dropped from 21.3 million cubic feet a day in June to 15.5 million cubic feet a day, primarily as a result of the prolance 11 sanding up as well as normal designs associated with other wells.

The work over rig to bring the number 11 back on production, it previously was producing about 22 million cubic feet a day, is scheduled to be completed now September 1st.

As an aside, year to date production at Judge Digby exceeds the 2001 engineering report.

In June production that actually dropped, is actually in line with that same report.

So it's not a reserve issue.

It's just a timing and work over issue.

The worktell no. 3 which is good news is being completed and expected to commence production in September.

Initial rates are expected to occur in the 40 to 60 million cubic feet a day.

Timing is always difficult to predict at Judge Digby.

In addition there are several recent wells being tested and due the come on line that Ron will discuss in more detail.

If there is any detail in bringing these various wells line we may see a small decline this the third quarter production followed by an increase in the fourth quarter.

The 13 million of acquisitions that we made this year were focused on development ideas that are currently being pursued but which add only nominal production in the first six months.

Therefore, acquisitions have provided minimal contribution to the first half production but should become more important in the future.

Included in our forecast for the remainder of the year on the lower end of our forecast is about one BCFE equivalent of production from acquisitions and then two BCF on the higher end of the forecast.

Our balance sheet remains pristine with 54 million of cash and cash equivalents and no bank debt outstanding.

We continue to have an unused calculated borrowing base of 160 million dollars.

As you know we changed our auditing firm from Arthur Andersen to Deloitte and Touche.

As part of that process delight is currently in the process of reviewing all of our accounting policies.

Yesterday they identified one procedure involving our accounting for our net profits pool which may require modification.

Based on a very rough analysis, we do not believe this significantly impacts our operating results for the periods presented.

Their analysis and review will be completed prior to filing our 10-Q.

At this time I'd like to have Ron discuss our more important wells and projects that we're working on.

Thank you, Mark.

A detailed summary of the second quarter drilling activity was released in our July 8 operations update so I won't go into as much detail on this call.

There were 18 wells completed during the quarter with a 67 percent success rate.

We also had nine recompletions during the quarter including three prolific recompletions at Judge Digby.

Production at Judge Digby for the quarter averaged above our forecasted numbers due to successful recompletion at the parlance eight, ten and 11 wells.

Volumes were down as Mark mentioned in July to a level more in line with our original projections due to mechanical problems experienced at parlance no. 11 well in late June.

Repair of the 11 is underway as well as the completion of the wortell three well which reached total depth in July.

With the completion of the wartell 23 and hopefully successful repair of the parlance 11 volumes, should again be above our projections in the fourth quarter.

The major no. 4 well is also drilling in the field below 20,000 field to predicted depth of 23,500 feet.

Well testing began at our two pilot areas in the hangon basin cobalt methane project during the quarter.

St. Mary controls a total of approximately 125,000 acres in the hangon basin project where a total of 17 producing wells have been drilled and two pilots targeting five different poles at depths varying between 130 feet and 2,260 feet.

Production at the antelope drop pilot indicates excellent permeability in the Anderson, canyon and cook poles.

We're also pleased with early gas production during the dewatering phase.

At the west prong pilot, the deeper roberts pole and the shallow roll on coal at 150 feet in one well.

The west prong pilot is also seeing early gas production.

The water pro production rates have been more erratic, during to some early problems with production and formation fines.

Generally we're pleased with the development of the project at this early stage.

At northeast may field in western Oklahoma tyler B 125 where St. Mary had a 10.9 percent interest was drilled as a twin to the Emily B 125 marrow discovery targeting at toka formations identified in the Emily well bore.

The toka completed for 10 million a day creating a new shallower play in the northeast play field area.

A second toka completion at the lavonne 1-20 where St. Mary has a 24 percent working interest is flowing at 7.2 million a day under test.

Also in the field is St. Mary Brady 3-36 where we have a 31.5 percent interest is testing in the morrow at 5.8 million a day.

And the St. Mary la grande 2-32 where we have a 41 and a half percent interest, and the St. Mary Anderson 1-19 where we have a 57.2 percent interest are both drawing ahead in marrow below 17,000 feet to projected depths of just below 18,000 feet.

Both of these wells will probably reach TB within the next two weeks.

In the offshore South Louisiana region and the Chevron operating G island A16 well where St. Mary has a 50 percent working interest also was recompleted during the quarter and is flowing at a test rate of 690 barrels a day and 380 MCFE.

With that I'd like the turn it back to Tom for some closing remarks.

Okay.

Even taking into account the battering our stock has taken in this bear market, St. Mary has been able to generate for its shareholders a return of 15 percent compounded annually for the almost ten years since we went public.

But still more important, we have grown our asset base and grown our technical, financial, legal and administrative expertise.

And these assets together with our strong balance sheet continue to allow us to grow organically and opportunistically.

We are certainly hopeful that in these times of uncertainty opportunities will flow to quality companies like our own. 00:12:12 Thank you for your interest.

Now we're ready for your questions.

At this time I would like to remind everyone, in order to ask a question, please press star then the number one on your telephone keypad.

Your first question comes from Joe Almond.

Good morning.

Mark, can you talk about lease operating costs.

They were down quit a bit.

Yeah, what happened there, it's actually a combination of things.

A portion is taxes, obviously, were down the four cents because prices were off.

And that's pretty much a variable expense.

We have seen costs also coming down a bit.

In addition we did have an adjustment that related to an AFD, an adjusted AFD that we got from BT Amoco in this quarter and it indicated that an expense or something that we had expensed last year should have been capitalized.

And that was about five cents.

So it's really a combination of some costs coming down, that adjustment, and the fact that production tax is low with gas prices.

And on the parlance 11, when do you expect that work over to be done.

: It's difficult to predict.

We moved the work over rig in late July.

And they are trying to clean out a lot of sand in the well bore.

And they have had to cut the tubing and they are fishing.

So those type of operations are pretty unpredictable.

But we think toward the beginning of September is probably a reasonable estimate at this point.

And you're hopeful that it will return to its previous rate.

: Yes, we really are.

It was an unusual situation.

The well apparently had something break down in the hole and actually flowed at much higher rates than the 22 million a day it was making before for an overnight period, they found it in the morning.

And by the time that they realized what had happened, it had already made a bunch of sand.

But there's apparently a higher pressure zone that started contributing which hopefully will also contribute when we get it back together.

All righty.

Thank you.

Your next question comes from David camera.

Good morning.

Congratulations on a great quarter.

Couple questions for you.

On the acquisition front, you mentioned I think about 160 million left in the borrowing base.

What size acquisitions - you said you dismissed three.

What size were those and what size are you looking to go for?

Can you get to like a 400 million dollars position?

Or what's the current?

Thank you.

: In our budget we actually have 60 million of which we completed 13.

The 60 is basically based on what percentage acquisition there can be historically.

Obviously, I can guarantee we won't very well hit 60 on the button.

It will be higher or lower.

We look at acquisitions on a variety of sizes.

The ones we missed out on and were very close were in the 20 to 38 million dollars range.

And those are three separate transactions.

And this year we have bid on a 250 million dollar acquisition.

I think as a general statement, we're probably, you know, we kind of do those niche acquisitions that tend to be under 25 million where they are less competitive and we're able to really identify an idea that really adds substantial value to it.

At the same time we periodically do look at some other transactions.

It's not inconceivable that we would look at something in the 100 to 200 million dollar range.

We're constantly looking.

We look at properties as well as corporate opportunities.

And you just never know.

A lot of times it's hard to generalize because each specific situation varies.

Okay.

Another quick question.

You guys had talked in the past about leasing some land in an undetermined, I guess unnamed area.

Any color that?

You might have mentioned that.

I just mention it.

: Yeah.

We put together about 12,000 acres and we did get the key lease that we were most concerned about.

And we do plan to drill wells the second half of the year.

And we're hopeful that we'll be able to fill in some addition [inaudible].

So you're still not going to tell us where it's at.

: Right.

Okay.

Couple more quick questions.

What I'm hearing kind of from a production standpoint, it sounds like things are going to be flat in the third quarter and the ramp up occurs in the fourth.

Is that a correct interpretation.

: Yeah.

This is one of the harder periods to look the because with Judge Digby, those are still fairly significant volumes.

And when the 11 came off and uncertainty on the exact timing of them coming back, I think we could potentially see a small dip in the third quarter or flat.

That's probably what's happened.

Way really don't know for sure.

And then with the work she will of 3 coming on and the 11 coming on and some of the expansion [inaudible] I think we will expect our production to come up some.

And I think to reach the higher end of that range of forecast we would have to have some acquisition to come together as well.

Okay.

One last quick question.

You mentioned your guidance there is BCFE acquisitions on the low side, kind of two on the high side.

That just from the 60 million dollars that's in the capex.

: [Inaudible] remains for the last half of the year.

Thanks you very much.

Your next question comes from Larry bus car go.

You put together an acreage position in the Huxley field down along the James line trend.

Do you think you'll be able to get any wells down there in the second half of this year.

: We have two wells budgeted and we think we'll get those late in the year.

And on the major score, what's the timing on that from when you will possibly have results.

: It's still got quite a ways because the last 3500 feet is real slow.

So off the top of my head I would guess it's probably going to be mid September.

Okay.

And last item.

Just on the gas [inaudible].

What's your expectations of that going forward.

I know it wasn't much, just net income was a few hundred thousand dollars in the second quarter.

Is that what's it's expected to be going forward.

: I think that's representative.

Okay.

Thanks.

At this time there are no further questions.

Thank you all for your interest.

And we look forward to talking with you next quarter.

[Inaudible] that ends today's conference.

You may now disconnect.