SM Energy Co (SM) 2003 Q2 法說會逐字稿

Good afternoon my name is Kelly and I will be your conference facilitator today.

At this time I would like to welcome everyone to the St. Mary Land & Exploration Company's second quarter 2003 earnings conference call. (CALLER INSTRUCTIONS) Mr. Hanley, you may begin your conference.

Thank you Kelly.

And good morning to all of you joining us by phone and online for St. Mary Land & Exploration Company's second quarter 2003 earnings 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 in oil and natural gas prices, the need to replace reserves depleted by production, competition, and the potential impact of government regulations, litigation in environmental matters.

The Company officers on the call this morning are Mark Hellerstein, Chairman and President and Chief Executive Officer, Ronald Boone, Executive Vice President and Chief Operating Officer, and Doug York, Executive Vice President, Dave Honeyfield, Vice President of Finance, and myself, Bob Hanley, Vice President Investor Relations and Management Reporting.

I will now turn the call over to Mark.

Good morning.

A combination of good prices, a 51 percent increase in production, and reasonable costs is a formula for excellent profit in the second quarter of this year.

St. Mary earned $24.3 million or 74 cents per diluted share compared to $10.6 million or 38 cents per diluted share in the second quarter of 2002.

Included in the current quarter results is a $3.6 million pretax gain resulting from a favorable settlement of litigation associated with the underground blowout of the South Horseshoe Bayou well years ago.

Oil and gas equivalent production increased 51 percent for the second quarter to 20.6 Bcf equivalent or 226 million cubic feet equivalent a day, of which 66 percent was gas production.

Higher production reflects the Burlington Resources acquisition, the Flying J acquisition, and a ramping up of production at Northeast Mayfield where we have had a tremendous success with the drill bit.

Production net to St. Mary of Northeast Mayfield has increased from 9.5 million cubic feet a day a year ago to 26.6 million cubic feet a day currently.

The Parlance Number 4 well at Judge Digby paid out about March 1st, and St. Mary's reversionary interest added 3 million cubic feet a day.

Overall, acquisitions represented approximately 55 percent of the increase in production.

We are particularly pleased that we've had significant growth in production organically through the drill bit.

The average price realized for the quarter increased 38 percent to $4.67 per MCFE.

Cost generally remain moderate, but are being compared to a low number in 2002 due to reclassification of an expenditure last year for work over to capital base on a revised from the operator.

Oil and gas production costs, excluding taxes, increased 18 cents per MCFE to 83 cents.

Taxes increased 11 cents to 30 cents per MCFE due to higher prices.

Our G&A expense increased 7 cents to 29 cents per MCFE as a result of higher net profits, pool costs due to higher oil and gas prices, which impact both the current payout amount, as well as the mark-to-market adjustment.

We also had higher cash bonus accruals due to our excellent drilling and acquisition results this year, higher charitable contributions, which increased with higher earnings, and then some higher corporate -- general corporate expense associated with increased insurance and governance costs.

The DD&A increased 8 cents per MCFE, while our exploration expense increased 2.3 million.

We earned a record $57.1 million or $1.67 per share for the first six months of 2003 compared to 12.9 million or 46 cents per share last year.

The six months earnings are higher than any fiscal year earnings in our history.

The results are driven by a 40 percent increase in volumes, a 57 percent increase in average price realized, and only a modest increase in cost per MCFE.

Discretionary cash flow for the six months increased 114 percent to $117.2 million.

We closed approximately 80 million of our $90 million acquisition budget.

Our balance sheet remains very strong.

At June 30th we had 44 million outstanding on our bank facility.

Today we only have 24 million outstanding on our facility.

Our current calculated borrowing base is $275 million, and we have elected a current commitment of 150 million.

Acquisitions remain opportunity dependent, and because of our strong balance sheet, we're not limited to the targeted $90 million budget.

We have hedged 30 percent of our gas production for the remainder of 2003 at a NYNEX equivalent price of $4.74 per MMBTU.

We have hedged about 50 percent of our oil for the remainder of year at a NYNEX equivalent of 25.50.

And our forecast is shown in the press release.

With that I will turn it over to Ronald Boone, who will go over our drilling activities.

I would refer the listeners to our July 11th release outlining specific completions in the second quarter.

St. Mary participated in a total of 38 wells completed in the quarter, of which 36 were completed as producers.

Northeast Mayfield continues to be very active with noteworthy completions at the Dykes 1-17where we have a 19 percent interest for 20.6 million a today, the Best 1-26 where we have a 53 percent interest for 14.2 million a day, and Heinsohn 4-36 where we have a 31 percent interest for 7.1 million a day.

Two St. Mary operator rigs are running in the field at the Dean 119 where we had a 53 percent on the Kathy 11 where we have a 54 percent interest.

St. Mary also has interest in three outset operating wells currently drilling at Northeast Mayfield.

And in total the Mid-Continent region has ownership in 15 currently drilling locations, 5 of which are operated by St. Mary.

In the Shreveport region we're continuing our development in the James Lime, in the ArkLaTex region with two wells drilled at the Spider Prospect area during the quarter, and completing at the end of the quarter.

The rigg is moving to the Huxley Field, which is also James Lime horizontal drilling, and we will continue development offsetting our U.S.

N number 2-H completed for 3.8 million a day in the first quarter.

The second successful well at Terryville, the Cook Number one alternate where St. Mary has 100 percent working interest completed for 3.1 million a day and 150 barrels of common seed during the quarter.

We have spudded our third well at Terryville and anticipate keeping a rig drilling in that field well into next year.

At the Trinidad Field the Arnold Number 5 where St. Mary has 25 percent working interest, completed a 4.2 million a day at the northernmost extension of the field, potentially extending the field and setting up additional locations to the north in that prolific field.

In the Gulf Coast the St. Mary Matthew Guidry Number 1 where we have a 54 percent interest completed at 3.9 million a day.

At the Judge Digby Field there are currently two rigs running, the LeJune wildcat well where St. Mary has an 11.5 percent interest has set casing through the C1.

And is currently drilling below 22,000 feet towards C-1 through C-5 targets.

And the major Number 3 where St. Mary has an 11.5 percent interest has been deep into evaluate B8 and C1 objectives, and is his currently complete.

Also of note, as Mark mentioned, at Judge Digby is the payout of the Parlance Number 4 late in the first quarter where St. Mary has a 20 percent working interest in this well, making slightly less than 20 million cubic feet of gas a day.

Production at Judge Digby averaged 125 million a day in July, 17.1 million a day at the St. Mary.

At the Duchesne Deep project, as reported in our July 28th release, production testing has been completed in the lower Mesaverde Castlegate and the Black Heart formations.

This section of the whole dig sands.

However, did not result in commercial production.

A total of 4 intervals were tested and 3 hydraulically fractured testing in the remaining Mesaverde section is underway and as reported in the releases expected to take the next 60 to 90 days to complete.

In the Handle Basin coalbed methane project we have budgeted $1.6 million for 2003.

Two new wells have been drilled, and extensive coring at both wells of the primary coal objectives, as well as some coals has been completed.

In our pilot area we have successfully recompleted using conventional through-to tubing -- being excuse me, through casing techniques, and are evaluating the possibility of co-mingling multiple coal seams in a single well bore in the project.

We're projecting a 2004 development of the project, assuming our ongoing technical evaluation continues to be positive.

The project also is progressing on the environmental front, with the Wyoming DLM now issuing drilling permits on federal acreage.

And although no federal permits have been granted in Montana as yet, we believe that those permits are also imminent.

And finally, recording is nearing completion across St. Mary's 25,000 acre feed property in a brand-new 3-D, which will be completely the entire feed property for the first time.

The new survey will provided modern data over areas originally shot in 1990, and data over fully half of the property unshod or are poorly imaged by previous data.

The new data should become available in the first quarter of 2004.

With that let me turn it back to Mark.

2003 has gotten off to an excellent start.

Rarely is it possible to increase production dramatically during a period of high prices and moderate costs.

We have done that.

More importantly, we had an excellent drilling results, together with sound acquisitions, which are the building blocks for the future.

In addition, we have two larger potential plays whose future should be come fairly clear later this year.

As most of you know, Ronald Boone will be retiring this year.

I thoroughly enjoyed our relationship and appreciate his part in helping to build St. Mary into a Company we can both be proud of, both in terms of economics and maintaining the highest ethical and moral standards.

Over the past twelve years Ron has been instrumental in helping to assemble the talent base that has built St. Mary into a highly respected public company with an enterprise value of about $1 billion.

More importantly, we have become close and trusted friends.

I'm delighted to have worked with Ron.

He is a person of the absolute highest quality in all senses of the word.

His technical managerial and business skills are best-in-class and his integrity and loyalty are beyond reproach.

At the same time I'm pleased for Ron that he has achieved his career goals and has the opportunity to pursue a variety of interest and passions.

I'm also pleased that Ron will continue as a St. Mary Board member.

Over the past few years we have implemented a plan for succession that has resulted in very strong regional managers, and in whom I have great confidence, along with increased responsibilities for Doug York, who has recently named Executive Vice President, and will become Chief Operating Officer in September.

I'm very pleased that Doug will be the person to succeed Ron.

Not only has he learned the St. Mary way of doing things, but he has a full set of skills to take on this challenging position in a seamless manner and help us provide future growth, and take us to the next level of performance.

With that, I will turn it over for our Q&A period.

Joseph Allman .

Ron or Mark, could you talk about what your plans are going forward at Northeast Mayfield?

I think, if I am correct, you're drilling about 16 wells there this year?

What is your acreage position, and how much more running room do you think you have there?

We think we have quite a bit, especially in the Atoka which is clearly moving to the west where we have a very substantial acreage position.

I don't have the specifics on a gross and net basis, but there are significant number of locations moving to the west in the township immediately to the west of Northeast Mayfield.

And we continue to identify additional Toca intervals that are clearly productive and have -- are seen in a number of well logs, but have not been tested extensively across the field.

So that is going to be very active.

Additionally, as we set up additional marrow intervals we have nearly two dozen different marrow intervals which will result in a lot of infill and exploitation type development.

So we see locations in Mayfield well into the future.

Okay.

Am I right, the plan is about 16 wells this year?

It will be a little bit more than that actually.

It will probably be more in the 18 to 20 range.

Okay.

Do you see the same level of activity say in 2004 and then beyond, or might you be able to get some more rigs out there and step it up some?

I don't see it really ramping up significantly.

I think it will probably be in this 5 or 6 well, or 5 or 6 rig program probably through next year.

But that is a bit of a guess at this point in time because it is such a dynamic area.

Are there opportunities to acquire more acreage out there?

There really aren't.

Acreage is just absolutely locked down.

And it has been very -- it is probably the hottest play in the Mid-Continent right now, and as a result acreage in that whole area and acreage extending beyond anything that is definitely prospective, has been leased for quite a while.

A then just a little bit of history.

I think, if I'm not mistaken, you started drilling there in 1997.

And before this year you drilled, what, like 10 to 12 wells?

Is that right?

What was it last year, Mark, it was 10?

That sounds correct.

And I think -- I think if you added it altogether previously it is probably more in the 20 range from '97 through the beginning of this year.

Okay, great.

And then switching over to Judge Digby.

Is there not a whole left to do at Judge Digby?

I think Judge Digby is going to be a continued effort to just fight the natural decline, which is pretty substantial.

Obviously, with two rigs running in the field we are hopeful that we can make a couple of nice completions and take that production back up.

But it is a bit of a treadmill because of the past declines.

We have -- we do have some additional things we have set up to the South as a result of the newest drilling down there.

But I think we're just hoping that the next two completions at Judge Digby get the production backup a bit, and that we don't really expect more than maybe one or two additional locations.

But hopefully we will set up some additional things that is fairly developed.

We do have a number of behind pipe zones.

In total there is probably about 15 producing horizons, and we're working our way up the hole.

So as individual zones might deplete, we're able to move up holes so that the whole field, although individual zones are on a rapid decline, the field itself is more moderated because of the behind pipe pace.

The most interesting development is Parlance 4, which is actually a recompetition to an A zone, which has been a minor producing interval in the field.

It is than and the primary producing production of the BMOC .

It is turning into the one of the best wells in the field.

And has been a bit of a surprise which has caused us to take another look geologically at exactly where we might have some of that recompletion potential Mark is talking about in the A, that well which is still making nearly 20 million a day after a year's production, is now the second-best well in the field.

And then I think you said you are producing just over 17 million today net to you guys?

That's correct.

What was your peak net production at Judge Digby?

Oh, probably about twice that.

Okay.

And then I think, Mark, switching over to something else.

You made a reference to -- did you make a reference to some new areas that will we learn about later this year or...?

Those are the Hanging Woman and the Duchesne.

Ellen Hannan.

A couple of questions, Mark, on your CapEx budget.

You spoke a little quickly.

Is your drilling budget 90 million for the year?

And what have you spent year-to-date, excluding acquisitions.

Our drilling budget is actually 135, and the acquisitions is 90.

And let me just get what we spent year-to-date.

Year-to-date, including the acquisitions, is 143 million.

And in terms of acquisitions, excluding the nonproducing acreage, was booked at about 75.

So you spent 75 million so far drilling I guess?

Drilling, together with some nonproducing leasehold acquisitions.

Okay.

You also mentioned, I think maybe I misheard.

Did you say you had 30 percent of your gas hedged for the rest of year?

That's correct.

And that would be something on the order of 65 million a day or so for the second half of the year hedged?

The 225 or so number, that is an equivalent number.

Okay.

So it is 30 percent of total production or just gas?

Just gas.

And our gas represents about two-thirds of our production.

Doug Aden.

Mark, two questions.

You mentioned that you get a supplement but on the revenue side you have 4.2 million of other?

Could you break it down for me what that is all about?

Sure, hold on one second.

Yes, let me just -- give me one second here.

Yes, we have -- there is about $900,000 that was our seismic option fee on our fee acreage to shoot that 3-D.

And we have a variety of items.

Just for historical sake, as you know, we bought this property back in 1908.

We continue to have $32,000 of trapping income.

.

Pardon me?

of that 4.2 million was the 2. -- whatever you (multiple speakers).

3.6 million was the Cliff settlement.

Second question, could you break down what was the operating expense production taxes and transportation costs you had?

Sure.

On a MCFE basis, we had 75 cents is just operating expense, 9 cents is transportation, and 31 cents is production taxes.

Richard Blair.

Mark, can you help us, what were the production increase have been without the acquisition?

About 45 percent.

Of the total, 51 percent -- I am sorry, 45 percent of the 51 percent was through the drill bit.

So it would still would have been over 20 percent internally.

Right.

At this time there are no further questions.

We will let people have a few moments to call in, and then we will end the call if we don't hear from anybody.

Ken Cassidy.

How much financial exposure do you have on this Duchesne Deep prospect if it doesn't work out?

This one well is probably, I think we have between 5.5, $6 million in the well bore currently and about $2 million dollars on acreage.

And what happens if you decide in the next 90 days that it isn't happening?

Just write it all off for this quarter?

That is correct.

Jack Aydin.

With your better than expected production, especially from internal growth, organic growth, do you think there's a good chance that you might raise expectations again in terms of production?

And second question is, are you thinking about raising your capital expenditures this year?

And could you give us a hint for next year in terms of capital expenditures?

Relative to our forecast, you know I think the forecast that we just put out is our best guess at this point in time.

And we have tried to, when we do see that things are looking differently, we will definitely put out an updated forecast.

And just as a routine, as soon as we have two months of information internally, we do keep a current press release and we will do an updated forecast at that point in time.

In terms of our CapEx budget, we are actually looking at that currently.

We're actually spending probably a little more than was originally budgeted in the Mid-Continent.

We may or may not spent quite the amount we had originally budgeted in the Rockies.

So my expectation is we're probably going to be up a little bit on our budget.

And we're looking at that currently.

In terms of next year, we really generally wait until the end of year to do that, and when we have her updated engineering to make that forecast.

And then we do our budgeting process in terms of CapEx at the end of November, beginning of December period is when we finalize that.

So it is a little premature to speculate.

For the first half, did you replace your production?

Yes, we did.

At this time there are no further questions.

We thank you all for joining us and look forward to our next quarterly visit.

Thank you.

This concludes today's conference call.

You may now disconnect.