SM Energy Co (SM) 2002 Q3 法說會逐字稿

Good morning.

I'll be your conference facilitator today.

Welcome to the 3rd quarter St. Mary Land & Exploration Company call.

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Thank you.

Good morning, and thank you for joining us by phone and on-line for St. Mary Land & Exploration Company 3rd 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.

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

With me are Mark Hellerstein, Chairman and Chief Executive Officer, Ronald Boone, Executive Vice President and Chief Operating Officer, and Richard Norris, Vice President of Finance, and myself, Bob Hanley, Vice President Business Development.

I'll now turn the call over to Mark.

Good morning.

St. Mary earned $7.7 million or 28 cents per share in the quarter ended September 30, 22 compared to 4.9 million, or 17 cents in the third quarter of 2001.

Discretionary cash flow decreased from 29.3 million to 27.8 million the 3rd quarter of 2002.

We had a market to market gain on our interest rate swap of 2.6 million on a pretax basis.

Production was relatively flat, decreasing from13.4 BCF equivalent to 13.2 BCF equivalent.

We lost approximately 28 BCF as a result of Hurricane Isadore.

In addition, the workover of Parlange 11was unsuccessful and the well was temporarily abandoned.

This well produced 319,000 MCF in the quarter ended June 30 with a diminimous production in the third quarter.

Although we have a temporary loss in production, but we're hopeful we'll recover a significant portion of Parlange 11's reserves, either from recompleting an existing well bore - recompleting in existing well bores, or sidetracking the Number 11.

St. Mary's net book remaining reserves for Number 11 are about two BCF.

On the positive side, the Worktell Number 3 production has increased to 60 million cube feet a day and Parlange 10 was successfully recompleted in the B3, B4 sand for approximately 9 million cubic feet a day.

Judge Digby averaged 17.7 million a day net to St. Mary in October, compared to 15.4 million a day average for the 3rd quarter.

The gas price realized increased 7% to $2.97 per MCF and oil price increased 9% to $26.53 per barrel.

Overall, the net realized price rose 10% to $3.42 per MCF equivalent.

These are net of a hedging loss of 727,000 on a pretax basis for the quarter.

Lease operating expenses continue to fall as compared to last year.

Production costs, including taxes declined 16 cents per MCF equivalent from $1.10 per MCF equivalent to 94 cents when comparing the two quarters between years.

None of this decline related to production taxes which remain stable at 20 cents.

DD&A decreased 5 cents to 97 cents per MCFE.

Expiration expense decreased modestly by $100,000 to 4.2 million.

GNA increased 12 cents per MCF to 33 cents.

Most of this increase or $710,000 on a pretax basis was the result of a noncash mark to market adjustment of the net profits pool liability.

We are updating the 12-month forecast as follows.

Oil and gas production, 55 to 56 BCF equivalent for the year, LLE including taxes and transportation 93 to 98 cents per MCF equivalent, GNA, 23 cents to 27 cents, DD&A, 95 cents to $1.05, and the current portion of income tax is estimated to be 5 to 10%.

The forecast to reflex positive well completions, including the Labon 1-20, 16 million cubic feet a day, of which we have a 35% working interest.

The Vermilion 281, that's been producing over a thousand barrels a day, we have a 75-1/2% working interest.

The Worktell number 3 is 60 million a day where we have a 14.35% working interest, and the Benton 1 X-21 at 5.7 million a day, where we have a 50% working interest.

In addition, production in the Artomah Basin was increased as a result of increasing the gathering capacity and compression.

It increased by almost 4 million a day and we have virtually 100% working interest in most of this.

Ron will discuss these and new completions in more detail.

Unfortunately, Hurricane Lili caused the temporary shut in of some of our coast production which is estimated to reduce production by 250 million cubic feet.

We are scheduled to close the previously announced $76 million Burlington Resources Williston acquisition on December 3rd.

Our balance sheet remains pristine with 59.5 million of cash and cash equivalent, and no bank debt outstanding.

We'll finance the Burlington acquisition with this cash and use of our bank facility for the remainder

Ron will discuss our more important wells and problems that we're working on.

The well completions for the quarter as mentioned were discussed in detail in the October 2 release.

The company participated in 76 completions in the 3rd quarter with a 79% success rate.

An additional 29 wells were actively drilling or completing at the end of the quarter.

Also, announced in the October 2 release was the acquisition of the Burlington resources well as some basin properties.

This property of 2 hundred turn producing properties will be managed by St. Mary's petroleum subsidiary.

The properties are producing 21 million a day on an equivalent basis, and are a perfect geological fit for our current properties.

Of the total well count 155 wells were operated by Burlington and 37 already operated by [Nanse].

We believe with the acquisition of BR, Nanse will become the second largest producer in Montana and one of the top five producers in the entire Williston Basin.

We anticipate closing as Mark mentioned the first week of December.

The most exciting news on the well completions is the Atoka development of Northeast Mayfield.

The Lavon 1-20 where St. Mary has a 35% working interest was a discovery well for the Atoka development on the northern flank of the northeast Mayfield field, completed flowing over 15 million a day into the pipeline in September.

Subsequent to the completion of the Lavon, the production zones have been identified on well logs in wells in five different sections.

The same St. Mary Henderson 1-19, where St. Mary has a 57% working interest, tested 3-1/2 to 4 million a day from the Atoka and is being completed to comingle the Atoka and [Morrel] intervals.

The brothers 2-20 where St. Mary has a 33.6% interest offsetting Labonte to the west has been proposed for completion to the Atoka.

To the east, the St. Mary Benton 1 A-21 is flow-testing at a restricted rate of 6 million a day into the pipeline and is currently restricted by production facilities and pipeline capacity.

This well appears to be capable of making as much as 10 million a day when the pipeline and equipment problems can be resolved.

St. Mary's is also testing Atoka perforations in the Baker 1-28 where we have a 93% interest immediately to the south of Benton well.

In addition to the Lavon, other notable completions were the Vermilion 281-A4, that Mark mentioned where we completed with a 78% interest producing 800 barrels a day and 320 MCFE; the Brady 336, where we have a 31% interest for 5.9 million a a day and the Worktell number 3 at Judge Digby where we had a 12% interest for 45 million a day.

At Judge Digby, total field production struggled during the quarter with field production dropping to 109 million a day in July and 101 million a day in August on a gross basis due primarily to rapid decline in production from the Parlange 10.

Production rebounded to 125 million a day in September and is up in October to 132 million a day with completions of the Parlange 10 and Worktell number 3.

Worktell number 1 which was off production in October has been approved for recompletion in the C-1 and the Majors number 4 has run production casings total depth and completion operations are under way.

We are drilling ahead below 7200 feet at the St. Mary Ute Tribal KMV number 1-28 in [Duchane] County, Utah.

This 16,200-foot test is targeting basins that are gas objectives in the Mesa Verde formation, in the Uinta Basin.

We expect this well to reach total depth by the end of the year and to be production testing in the 1st quarter of 2003.

St. Mary currently controls 12,000 acres there in the play and anticipates additional exploratory drilling in 2003 on the block.

In our coal bed methane project where we control 123,000 net acres in Montana and Wyoming, testing continues from our 17 pilot wells with favorable gas and water production rates, environmental impact statements are now anticipated in January for both Wyoming and Montana with final records of decisions now expected for both states by early March 2003.

Although we are encouraged by the pilot results today, it's clear that all the Rocky Mountain coal bed methane projects are going to be very sensitive to gas prices and project economics are going to be sensitive to well head net prices.

Thank you.

Tom Condon retired as chairman of St. Mary recently.

Under his guidance we grew from a small private company to a very successful public company.

Tom's values will be an ongoing legacy that is ingrained in St. Mary's culture.

We've always believed in honesty and fair dealings which can be seen in the long-term partners we've had over the years.

We've also been honest to ourselves when making decisions in light of the facts, even if they aren't pretty.

This value has brought a social conscience to the company, where we not only respect the environment, our employees and our shareholders, but we give back to the community through dollars and deeds.

We have followed these principals of corporate governance for generations, long before it was necessary or fashionable for the government to impose governance standards and procedures.

I am pleased that Tom will remain on our board for the foreseeable future and want to publicly thank him for the richness of character that he brought to St. Mary.

With that, we'd like to open it up for questions.

At this time, I would like to remind everyone, in order to ask a question, please press star then the number 1 on your touch-tone phone.

We'll pause for just a moment.

Your first question, Joe Allman.

Good morning, guys.

Good morning.

Maybe I missed this in a previous release or conference call, but whatever happened to that carrier process?

It's actually still out there.

We really had a lot of trouble with a variety of problems with additional working interest on the group.

We've resolved most of those and we're very actively building the final prospect montage there in anticipation of trying to go out to the two or three people we think would be partners in that project between now and the end of the year.

We haven't talked a lot because of the problems we've had in the various delays, but the lease position is there, we still believe in the prospect, but it's wild, it's big, it's deep, it's expensive and we're just not sure what the marketplace is going to be, but it's very much alive

Can you say who your partners are in this project, or you're working on getting partners?

Yes, the original partner group has changed considerably and St. Mary is very much carrying the ball right now.

We don't -- it would be difficult to talk about the current partner group right now.

Thank you.

Could you again say what the status is with that Parlange 11?

I missed that.

It's been temporarily abandoned because of mechanical problems fairly shallow.

We don't know whether it's going to make sense to reenter and sidetrack that well bore to get reserves that are still there, but for mechanical reasons, we can't get back to them, and that decision is kind of up in the air while BP makes a decision on the best way to go back down, but right now that well is shut in and incapable of production due to mechanical problems and the attempts to repair the well borer unsuccessful and we basically had to stop.

There are several well bores a little bit down dip of that well, and they're looking at the possibility of recompleting those to recover a portion of the reserves, and I think they could recover somewhat more than half, possibly again, net to St. Mary, the reserves on our books aren't real big, relevant to that, it's about 2 BCF.

And at Judge Digby, what is the plan going forward?

Still a lot to do in that field?

And are you going to keep production flat, increased, increase reserves, what do you see happening there?

Well our internal forecast, it's going to be a depleting resource.

We have some exploration ideas.

The Majors number 4 well, which is completing, has set up an additional potential to the south of the main field area.

We have a wildcat idea on the western flank of the field that we continue to want to get drilled, so I think our internal numbers are declining, depleting asset with exploration potential that remains to be seen for 2003.

What's your net production right now from that field?

It was a little over 17 million a day.

As a percentage of our total production, it's come down.

That represents about 11 or 12% of our total production now, and so it doesn't nearly have the impact on St. Mary as it once did.

How about -- what's the total current production for the company net?

We really haven't disclosed that.

If you look at our forecast, that's our best guess of what's going to happen in the 4th quarter.

And then are you done with acquisitions for the year, or still looking?

We continue to look.

With a strong balance sheet and being in several different regions, we do have the ability to continue to do that, and we try to be opportunistic and we maintain our discipline on how we look at things and if more opportunities come, that's certainly fine with us.

We don't stop looking because we've made a significant transaction.

Do you see a lot of good niche acquisitions for you out there?

I think it's been recently good lately.

I think I mentioned this at our last conference call, but prior to getting the Burlington transaction, we've been right in the pack and very, very close on a number of transactions.

It isn't maybe as many transactions as we've seen at certain times, but it doesn't seem like we're seeing as many crazy people out there.

It's a little bizarre, but because we use the strip pricing when it's a little higher than it has been, we hedge it so we don't take pricing risk, but other people aren't putting in much higher price decks in this environment.

They are putting in higher price decks?

They are not.

When the strip is a little lower, a lot of people put in much higher price decks, and because we basically follow the NIMEX strip, we don't play a pricing game.

When prices move up a little bit, it tends to make up a little more competitive relative to others.

Thank you.

Next question, David Tameron

Good morning.

Congratulations on a good quarter.

What was your cash on hand in the quarter?

59-1/2 million with equivalent.

And where I'm going with this is your borrowing base following the Burlington acquisition, you had 160 million is what your credit facility was.

How much room will you have under that following following the close of December?

We're going through a mid-year review of our facility, and the preliminary, they're in the 200 million range.

We expect we'll end up using 20ish million of our facility.

The cash balance does vary during the month.

So nonetheless, still plenty of room for an acquisition if something came across your plate?

Yeah.

A couple other quick questions.

The GNA in the quarter, it looks like it picked up a little bit.

Is that an accrual for the year?

What was driving that?

The big item was we had actually announced in our last quarter that we changed our accounting policy where we have to do a mark to market on our net profits pool every quarter, so if prices go up or there's a change in performance of properties or whatever, we have do kind of a truing up every quarter.

So we'll see that moving, kind of bouncing around a little bit.

It's an immediate noncash item that ultimate turns into cash.

Okay, so it's going to continue to bounce depending on what happens in the quarter.

Right.

Okay.

And last question, can you give me a little more detail on what you're doing on the Uinta, just more detail on -- I guess you did the well the end of September, and when can you expect results, can you go into a little more detail?

We're drilling ahead.

We have a specific prospect idea that we've developed, we put together a position that is somewhere north of 12,000 acres.

It's a deep Mesa Verde target.

We were drilling below 7200 feet today and expect to be at total depth sometime around the end of the year, depending on just how everything goes, which will put us completing in the 1st quarter.

We have a large acreage block, we have potential for multiple wells, and as I mentioned we'll be doing some additional exploratory drilling on that block in 2003.

And this acreage, was it originally - there's been drilling there before, back in the '80s?

What's the history at this field?

It's a fairly undrilled block.

There is one key well that is driving our prospect that had -- was drilled back in the late '80s and had an excellent show that we're kind of keying off of.

It was old enough that it was before the type of completion successes were made, and that's very much driving the idea.

Is there any spacing ideas out there yet, is it 160 or 80 or it's still too early to --

it's really too early to tell.

Basically we visualize and initial development on 6 40s and down spacing from that, but it's still an exploratory well and it's a little premature to talk about that.

Any concerns around the IS, will that hamper you until - assuming we get a decision here at the end of the 1st quarter?

You mean with respect to the Uinta Project?

Yes.

No, none whatsoever.

Thank you very much.

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

Next question,, Ellen Hannan.

Good morning.

What's the status -- on the Judge Digby field, what's the status on the Majors number 4 well?

It's reached total depth, and casing has been run, there's multiple pay intervals and BP is initiating completion.

So do we look for productions from that in the 4th quarter or --

I wouldn't think so.

If so, it would be very light.

Could you tell us what the Uinta Basin, what the cost of that well is estimated?

That well will be in the 3-1/2 to 4 million completed range.

And one last question, back on the Hanging Woman Basin, what do you estimate that the well head needs to be to make the project economic?

I don't think we have a final number there, but I think it will have to be something north of $3.50 to make all that work is my personal opinion.

Actually, that 350 I believe was nor of a NIMEX number.

It's the basis differential coming off of that.

And the basis is a very rubber band number in the Rocky Mountains today, obviously.

Do you have any firm transportation capacity that you've signed up for in that area?

No, we don't.

When do you think you'll make a decision to go commercial?

In March do you think when you receive the final EIS?

We really haven't talked about that a lot internally.

A majority of the lease position are 10 year leases, so we have the luxury of not having a gun to our head with respect to lease expirations.

There's a lot of questions, there's some big numbers and we're very much in the middle of that evaluation right now.

One last question for you.

This may be too early to ask.

Any thoughts on production outlook for 2003?

I think it's probably premature.

We wait until we get our final year-end engineering before we make forecasts for the following year.

In some ways your guess is similar to ours in that we've forecasted through the end of the year, but we'll wait until we get our final engineering.

Thanks very much.

Next question, Jack Aydin.

Hi.

Hi.

A couple of questions.

On the production replacement, your goal was 200% internal organic, could you care to comment on how it's shaping, excluding the BR Acquisition?

Our overall goal is 200% which would include acquisitions.

Organically, it's fairly typical to be in the 135% range, and again, I think it's premature to comment on where we are this year, but so far, this is a general statement, we're having a reasonably good year, but it would be premature to comment on specific percentages.

Cap ex on the 3rd quarter and for the full year, any changes?

I think the only real significant change will be on the acquisition side.

We originally budgeted $60 million and we're currently with BR on what we've closed at about $90 million.

I don't think the rest of it will change significantly.

Our organic drilling was in the 104 range and give or take just a small amount, it will be real close to that I think.

Exploration expenses, did you have a good success, because it looks like it was lower than anticipated, or some delays of projects.

That number tends to be more your unsuccess as as opposed to your success.

It's basically dry holes that you've had, and so it -- the timing of that is less driven by success as it is by failure.

So it tends to bounce around a little bit.

On the Uinta Basin, if you are successful, how tough is it to get the production from there, or that area is, you know, infrastructure wise that you could ship your gas?

It is in good shape.

We anticipate to test this well into a sales line in our completions in early 2003, and the main line capacity through that area, although it's Rocky Mountain type net backs, is very good from a volume standpoint.

Last question.

Mark, you saw probably two announcement in the 24 hours.

One for acquiring the El Paso properties and Patina Quarry and Gravel, private companies.

Did you look at those properties, and if you did, could you give us, you know, some color on this acquisition if you're aware of them?

I did see the press releases.

It's probably not appropriate for us to kind of go into other people's acquisitions on the conference call.

I don't mean, you know, did you review those properties?

I don't want you to comment on them in a sense it's good or bad.

We were aware of the Bravo properties.

This is in Texas?

Yeah.

We were aware of that.

You were aware.

Okay.

Thanks.

Again, I'll remind you, in order to ask a question, please press star, then the number 1 on your touch-tone phone.

We'll pause for just a moment.

Next question, Joe Allman.

Hi again.

Just a follow-up on the CBM play and the Hanging Woman Basin.

Is all your acreage there federal acreage?

No, we have a good mix of federal and fee.

So could you still give enough of the fee acreage to pursue it even without kind of federal permit?

That's what we're doing on our pilots, but it would really be difficult to do the project on a total basis, which is what you're going to have to do to make have it make sense without the federal, but I you really think the federal is moving along kind of the way we expected.

The delays have been reasonably modest and it really looks like by this spring that we'll be well along in having that resolved.

The resource base is so large, it's just hard for us to imagine that that problem isn't going to get solved.

And then you said that you would need 3.50 NIMEX for that to be economics.

What kind of costs are there well and what kind of reserves per well do you anticipate based on what you've seen so far?

These are small, shallow wells, in the $50 to 100,000 range, and relatively small per well both production rates and reserves, but lots and lots of them.

It's a typical CBN.

what kind he reserves and production rate?

Those numbers are still being determined.

It's premature to toss out specific numbers at this point in time.

Thank you.

Next question, David Tameron

Good Morning.

Two easy follow-up-up questions.

What is your actual cap ex in the quarter?

Did I miss that in the press release?

No, but I can get it for you I think.

Okay.

And why you're tracking that down.

Any update on your hedging position?

I know you locked in everything at the Williston, at least the Burlington piece of that acquisition.

Right, I think our last press release brought you current on the hedging.

On the gas side for next year, approximately 15%, and on the oil side, 40% expectation.

Okay.

On the EIS, briefly, I know we're hearing that things are progressing along, APA have been talking.

Do you guys see any significant changes coming out of that as far as for your cost structure going forward, or do you think they'll adopt what the -- the industry standards that are out there and go forward with that?

I think that's our expectation that the industry standard has been quite acceptable and demonstrated to be the appropriate way to conduct the development, so we would be surprised if there's anything dramatically different than that.

Okay.

Kind of answering your other question, it looks like the 3rd quarter was about 29 million.

Great.

Thanks.

Next question, Jack Aydin.

Some of the questions are answered, but Mark, you said 15% of the gas for 2003's hedged and 40 of the oil -- could you give us a number what kind of hedges, what price level?

I'm sure can.

When you look at the gas side, it's approximately on the NIMEX basis, about a 367.

And then on the oil side, it's about 24.50 if I remember that right.

It's just under 25.

Okay.

But you don't care to give volume wise?

On the oil, again, we haven't finalized our projections for next year in production, but we're thinking we're probably going to be probably 41, 42% oil hedged and about 15% on the gas and we have -- and we'll put it in the queue, we do outline exactly what those hedges are and the exact volumes, so that is outlined for you.

Thanks.

At this time there are no further questions.

Do you have any closing remarks?

Just appreciate your joining us today, and thank you again.