St. Mary Sees Record 2Q07 Income

St. Mary Land & Exploration (NYSE:SM - News) reports record net income of $59.2 million, or $0.91 per diluted share, for the second quarter of 2007. The Company also announces that it has entered into an agreement for the acquisition of additional oil and natural gas assets in South Texas for $153.1 million.

"In the second quarter of 2007, St. Mary set new quarterly records for net income, discretionary cash flow and production. Importantly, these were records both in absolute terms and on a per share basis. These financial results emphasize the benefits we derive from our balanced oil and natural gas portfolio, while our production results demonstrate our focus on executing our 2007 business plan," commented Tony Best, President and CEO. "The South Texas acquisition we are announcing is a great fit with our existing South Texas assets. The assets will be acquired at an attractive cost and provide us with meaningful running room in an area where we are increasing our presence. I am pleased with what we have accomplished during this quarter and the first half of 2007, and am looking forward to what I believe will be a successful second half of 2007."


St. Mary announces second quarter 2007 earnings of $59.2 million or $0.91 per diluted share. Second quarter 2006 earnings were $40.1 million or $0.61 per diluted share. Year over year, the second quarter of 2007 benefited from a higher average realized equivalent price than the comparable quarter last year. Total lease operating and transportation expense was flat between the two periods. General and administrative expense increased as a result of increased headcount and the recognition of compensation expense attributable to vesting of equity compensation costs in the quarter. Depletion and depreciation expense rose significantly from the second quarter of 2006 to the second quarter of 2007 as properties that have been drilled or acquired in a higher finding cost environment become a larger portion of our production. The largest variance between the second quarters of 2006 and 2007 was the significant charge related to the change in the Net Profits Plan liability in the second quarter of 2006. In the second quarter of 2007, the Company recognized a slight benefit related to the change in the Net Profits Plan liability as a result of higher operating costs impacting the underlying reserves attributed to the program. Adjusted net income, which adjusts for significant non-cash and non-recurring items, was $55.3 million or $0.85 per diluted share for the second quarter of 2007 compared to $47.8 million or $0.73 per diluted share for the comparable period in 2006. Revenues for the second quarter of 2007 were $247.2 million, which includes $6.3 million of gain related to our global settlement with insurers for properties damaged or destroyed by Hurricane Rita in 2005. Revenues in the second quarter of 2006 were $193.4 million and included $6.4 million related to the sale of proved properties. Discretionary cash flow increased to $163.6 million in the second quarter of 2007 from $135.5 million in the same period of the preceding year, an increase of 21 percent. Net cash provided by operating activities increased to $156.2 million in the second quarter of 2007 from $87.1 million in the second quarter of 2006. Adjusted net income and discretionary cash flow are non-GAAP financial measures - please refer to the respective reconciliations to their nearest comparable GAAP financial measures in the Financial Highlights section at the end of this release for explanations as to why the Company believes these non-GAAP measures are meaningful.

Oil and gas production during the second quarter of 2007 averaged 286.1 million cubic feet of gas equivalent per day (MMCFE/d), an increase of 15% from 248.3 MMCFE/d in the comparable 2006 period and 1% higher than the 283.1 MMCFE/d in the first quarter of 2007. This is the sixth consecutive quarter in which the Company has increased production. Average prices realized, inclusive of hedging activities, during the quarter were $7.68 per Mcf and $59.97 per barrel, 10% and 1% higher, respectively, than the realized prices in the second quarter of 2006. Average prices excluding hedging activities were $7.09 per Mcf and $61.11 per barrel during the quarter, which are 14% higher and 4% lower, respectively, than the same quarter last year.


St. Mary has entered into an agreement for the acquisition of additional oil and natural gas properties in South Texas for $153.1 million. The transaction is scheduled to close in early October of 2007. The properties target natural gas in the Olmos formation and are adjacent to our recently acquired Catarina Field assets located in Webb and Dimmit Counties, Texas. Highlights of the acquisition are as follows:

  • Purchase price of $153.1 million to be funded with cash on hand and bank borrowings under the Company's existing credit facility.
  • Average working interest of 98% and average net revenue interest of 77%.
  • Net leasehold of 56,799 net acres.
  • 259 producing wells with current net daily production of 9.2 MMCFE/d (97% natural gas).
  • Significant inventory of proved drilling locations, with probable and possible upside potential as follows:

                                           Est. Net
                            Gross          Resource
    Resource Category     Locations         (BCFE)

PROVED DEVELOPED                 259             37.8
PROVED UNDEVELOPED               151             57.0
    TOTAL PROVED                 410             94.8

PROBABLE                          48             41.1
POSSIBLE                          58             24.9
    TOTAL 3P                     516            160.8

  • Estimated completed well cost of $0.6 million per well with $1.55 per MCFE in operating costs, inclusive of severance taxes.
  • Capital expenditure related to drilling activity in 2007 is expected to be approximately $6.0 million.
  • The acquisition is expected to add approximately 0.7 BCFE to our 2007 production forecast, resulting in an increase of our production guidance for the year, to a range of 104.5 BCFE to 106.5 BCFE.
  • Consistent with historical practice, the Company has hedged the first three years of risked natural gas production related to this acquisition using swaps at weighted-average NYMEX prices on a per MMBtu basis of $7.22, $8.54, $8.74, and $8.51 for the remainder of 2007, 2008, 2009, and through August 2010, respectively. Natural gas liquids have been hedged for a period of one year.
  • The initial plan will be to operate one drilling rig in the field for the remainder of 2007 and increasing to two rigs in January of 2008.


The Company's forecasts for the third quarter and the full year 2007 are shown below. This guidance includes the impact of the South Texas acquisition referred to above.

                                   3rd Quarter             Year
                                ------------------  ------------------
Oil and gas production           25.5 - 27.5 BCFE   104.5 - 106.5 BCFE
Lease operating expenses,
 including transportation       $1.36 - $1.41/MCFE  $1.37 - $1.43/MCFE
Production taxes                $0.60 - $0.65/MCFE  $0.57 - $0.62/MCFE
General and administrative exp. $0.46 - $0.52/MCFE  $0.46 - $0.51/MCFE
Depreciation, depletion, &
 amort.                         $2.17 - $2.22/MCFE  $2.13 - $2.18/MCFE

St. Mary estimates the basis differential (the difference between estimated realized oil and gas prices, before hedging, and the applicable NYMEX prices) for the third quarter of 2007 will be $5.50 to $6.50 per barrel of oil and $0.60 to $0.70 per Mcf of gas.

Below is an updated summary hedging schedule for the Company, which includes hedges associated with the South Texas acquisition mentioned above. All the prices in the table below have been converted to a NYMEX equivalent for ease of comparison using current quality and transportation differentials. The majority of the oil trades are settled against NYMEX. The gas contracts have been executed to settle against regional delivery points that correspond with production areas of the Company, thereby reducing basis risk. For detailed schedules on the Company's hedging program, please refer to the Form 10-Q for the period ended June 30, 2007, which is expected to be filed with the Securities and Exchange Commission on or about August 3, 2007.

Oil Swaps - NYMEX Equivalent   Oil Collars - NYMEX Equivalent
----------------------------   ---------------------------------------

          Bbls       $/Bbl                Bbls       $/Bbl     $/Bbl
      ------------  --------          ------------  --------  --------
  2007                           2007
    Q3     437,684    $62.86       Q3      716,000    $51.58    $72.78
    Q4     474,620    $64.68       Q4      689,000    $51.58    $72.81
  2008   1,795,000    $69.17     2008    1,668,000    $50.00    $69.82
  2009   1,363,000    $67.74     2009    1,526,000    $50.00    $67.31
  2010   1,239,000    $66.47     2010    1,367,500    $50.00    $64.91
  2011   1,032,000    $65.36     2011    1,236,000    $50.00    $63.70

Natural Gas Swaps - NYMEX
 Equivalent                    Natural Gas Collars - NYMEX Equivalent
-----------------------------  ---------------------------------------

         MMBTU      $/MMBTU              MMBTU      $/MMBTU   $/MMBTU
      ------------  --------          ------------  --------  --------
  2007                           2007
    Q3   4,600,000     $8.69       Q3    3,180,000     $8.32    $10.23
    Q4   4,990,000     $9.12       Q4    3,000,000     $8.34    $10.29
  2008  14,760,000     $8.89     2008   10,920,000     $7.34    $10.49
  2009  12,030,000     $8.64     2009    9,110,000     $6.00    $10.00
  2010   4,670,000     $8.27     2010    7,825,000     $5.87     $8.16
  2011     880,000     $6.93     2011    6,625,000     $5.83     $7.07

Natural Gas Liquid Swaps -
 Mont. Belvieu

          Bbls       $/Bbl
      ------------  --------
    Q3      91,255    $38.53
    Q4     132,888    $39.49
  2008     589,081    $38.80
  2009     292,202    $36.17


St. Mary provided an operational update in its July 16, 2007 press release. Since that update, the Company has had additional results in several of its highlighted plays.

In the Arkoma program in the Mid-Continent, one of the four horizontal wells that were completing in the Woodford Shale as of the last operational update has now been completed. The Duncan Shores 1-1 (SM 81% WI) was drilled and completed using a design similar to that used for successful industry wells in the play. The well had an average initial 10-day sales rate of 2.3 MMCFE/d, which compares favorably to the average rates of better wells in the field. The horizontal Woodford Shale program is still in its early stages and the majority of the potential in this play is classified as either probable or possible. The Company is encouraged by the results from this new well and is continuing to work on determining the optimal drilling and completion techniques for the play. Two of the three remaining wells being completed utilize a similar drilling and completion design as the Duncan Shores well and the third is experimenting with an alternative completion design. St. Mary anticipates two operated rigs running in the play for the remainder of the year.

In the James Lime play in the ArkLaTex region, the Company continues to realize positive results. In recent months St. Mary has successfully completed wells which validate areas outside of where the Company has traditionally operated in the James Lime trend. The St. Mary operated George Smith 1 well (SM 67% WI) was completed at an average 10-day rate of 3.6 MMCFE/d. The Company-operated Middlebrook 1-H (SM 29% WI) was completed last week and has been producing to sales at an average rate of 4.5 MMCFE/d. The Middlebrook well was completed in fewer days and for less cost than had been budgeted. St. Mary continues to be a leader in this play and is actively working to expand its presence in the trend.

Below is an updated schedule as of June 30, 2007 detailing the Company's 3P Drilling Potential and Estimated Future Gross Locations, which is intended to give visibility to and a sense of scale of some of St. Mary's larger drilling programs. See the section "Information About Reserves" below for descriptions of these terms.

                                        3P Drilling
                                         Potential   Estimated Future
        Program             Region         (Bcfe)    Gross Locations
Elm Grove              ArkLaTex                  173               642
Atoka/Granite Wash     Mid-Continent             218               533
James Lime             ArkLaTex                   92                78
Sweetie Peck           Permian                   139               248
Olmos Gas              Gulf Coast                130               345
Hanging Woman Basin    Rockies                   790  approx. 3,000(1)
Horizontal Arkoma      Mid-Continent             594               537

(1) This number could vary significantly depending on implementation
 of multi-seam completion techniques.