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+cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing
+0000893538,SM,SM Energy Co,10-K,2003-03-13,2002-12-31,2003-03-13T22:12:55.000Z,0000893538-03-000008,asci123102_10k.htm,ANNUAL REPORT FORM 10-K 12/31/02,805172,0,0,https://www.sec.gov/Archives/edgar/data/893538/000089353803000008/asci123102_10k.htm,https://www.sec.gov/Archives/edgar/data/893538/000089353803000008/,2002,2002,1

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+ITEM 1. BUSINESS
+Background
+St. Mary Land & Exploration Company is an independent energy
+company engaged in the exploration, development, acquisition and production of
+natural gas and crude oil. St. Mary was founded in 1908 and incorporated in
+Delaware in 1915. Our operations are focused in the following five core
+operating areas in the United States:
+o the Mid-Continent region in Oklahoma and northern Texas;
+o the ArkLaTex region that spans northern Louisiana and portions
+of Arkansas, Mississippi and eastern Texas;
+o the onshore Gulf Coast and offshore Gulf of Mexico;
+o the Rocky Mountain region consisting of the Williston Basin in
+eastern Montana and western North Dakota and the Powder River,
+Green River and Wind River Basins in Wyoming; and
+o the Permian Basin in eastern New Mexico and western Texas.
+As of December 31, 2002, we had estimated proved reserves of
+approximately 36.1 MMBbls of oil and 274.2 Bcf of natural gas, or a total of
+490.9 BCFE, 88% of which were proved developed and 56% of which were natural
+gas, with a PV-10 value of $824.8 million. For the year ended December 31, 2002,
+we produced 55.1 BCFE representing average daily production of 150.8 MMCFE per
+day.
+We focus our resources in selected domestic basins where we believe
+that our expertise in geology, geophysics and drilling and completion techniques
+provides us with competitive advantages. We have assembled a balanced program of
+low-to-medium-risk development and exploitation projects to provide the
+foundation for steady growth. In addition, we have a portfolio of
+higher-potential exploration projects and non-conventional gas plays in the
+Rocky Mountain region that we believe could significantly increase our reserves
+and production. We measure and rank our investment decisions based on their
+risk-adjusted impact on per share net asset value. In the past, we have sold
+selected assets when we believed attractive prices were available, and we will
+continue to evaluate such opportunities in the future.
+We seek to develop our existing property base and acquire acreage with
+additional potential in our core areas. From January 1, 2000, through December
+31, 2002, we participated in the drilling or recompletion of 623 gross wells
+with an average success rate of 82%. During that same period we added estimated
+1
+proved reserves of 347 BCFE at an average finding cost of $1.44 per MCFE. Our
+average annual production replacement was 214% during this three-year period,
+and our production has grown at an average rate of 21% per year over the same
+time period.
+As of December 31, 2002, we had an acreage position of 1,145,507 gross
+(542,736 net) acres of which 504,873 gross (325,290 net) acres were undeveloped.
+For 2003 we have budgeted capital expenditures of $135 million for ongoing
+development, exploitation and exploration programs in our core operating areas
+and $90 million for acquisitions of oil and gas properties.
+Our principal offices are located at 1776 Lincoln Street, Suite 700,
+Denver, Colorado 80203, and our telephone number is (303) 861-8140.
+Business Strategy
+Our objective is to build stockholder value through consistent economic
+growth in reserves and production that increase net asset value per share, cash
+flow per share and earnings per share. The principal elements of our strategy
+are as follows:
+o Maintain Focused Geographic Operations. We focus on
+exploration, development and acquisition activities in five
+core operating areas where we have built a balanced portfolio
+of proved reserves, development drilling opportunities and
+higher-potential exploration and non-conventional gas
+prospects. We believe that our leasehold position is a
+strategic asset. Our senior technical managers, each
+possessing over 20 years of experience, head up regional
+technical offices supported by centralized administration in
+our Denver office. We believe that our long-standing presence,
+our established networks of local industry relationships and
+our acreage holdings in our core operating areas provide us
+with a competitive advantage. In addition, we believe that we
+can continue to expand our operations without the need to
+proportionately increase the number of employees.
+o Continue Exploitation and Development of Existing Properties.
+We use our comprehensive base of geological, geophysical,
+engineering and production experience in each of our core
+operating areas to source prospects for our ongoing
+low-to-medium-risk development and exploitation programs. We
+conduct detailed geologic studies and use an array of
+technologies and tools including 2-D and 3-D seismic imaging,
+hydraulic fracturing and reservoir stimulation techniques, and
+specialized logging tools to enhance the potential of our
+existing properties. In 2002 we participated in the drilling
+or recompletion of 168 gross wells with a 79% success rate.
+o Pursue Higher-Risk Higher-Potential Exploration Projects. We
+have allocated approximately 7% of our 2003 drilling and
+exploration capital expenditures budget to higher-potential
+exploration and unconventional gas projects. Our strategy is
+to test several of these prospects each year that in total
+have the potential to significantly increase our reserves. We
+seek to invest in a diversified mix of projects and generally
+limit our capital exposure by participating with other
+experienced industry partners. We plan to test projects in the
+Mid-Continent region and Rocky Mountain area during 2003.
+o Make Selective Acquisitions. We seek to make selective niche
+acquisitions of oil and gas properties that complement our
+existing operations, offer economies of scale and provide
+2
+further development, exploitation and exploration
+opportunities based on proprietary geologic concepts. We
+believe that the focus on smaller, negotiated transactions
+where we have specialized geologic knowledge or operating
+experience has enabled us to acquire attractively priced and
+under-exploited properties. In addition, we will pursue
+corporate acquisitions that we believe will be accretive.
+Examples of this type of acquisition include our 1999 Nance
+Petroleum Corporation and King Ranch Energy, Inc.
+acquisitions, both of which were acquired with our common
+stock. We have budgeted $90.0 million for acquisitions in
+2003, of which $74.0 million closed in January 2003, including
+the acquisition of properties from Flying J Oil & Gas Inc.
+and Big West Oil & Gas Inc. in exchange for the issuance
+of 3,380,818 restricted shares of St. Mary common stock.
+o Control Operations. We believe it is important to control
+geologic and operational decisions as well as the timing of
+those decisions. At December 31, 2002, we operated 31% of our
+properties on a volume basis and 66% on a PV-10 value basis.
+We are the operator of properties representing approximately
+81% of our 2003 capital budget.
+o Maintain Financial Flexibility. Conservative use of financial
+leverage has long been a critical element of our strategy. We
+believe that maintaining a strong balance sheet is a
+significant competitive advantage that enables us to pursue
+acquisition and other opportunities, especially in weaker
+price environments. It also provides us with the financial
+resources to weather periods of volatile commodity prices or
+escalating costs.
+Significant Developments Since December 31, 2001
+o 2002 Acquisitions of Oil and Gas Properties. In December 2002
+St. Mary completed a $69.5 million acquisition of properties
+in the Williston Basin from Burlington Resources Oil & Gas
+Company LP. The properties are located in Montana and North
+Dakota and produce approximately 3,100 barrels of oil and
+3,300 Mcf of gas per day. Smaller acquisitions during 2002
+included the $7.5 million Mid-Continent acquisition from
+Merchant Resources LP, the $4.9 million acquisition in the
+Huxley Field located in east Texas and $5.8 million in various
+other properties. We used cash from our March 2002 senior
+convertible note placement and borrowings under our bank
+credit facility to fund these acquisitions.
+o 2003 Acquisition of Oil and Gas Properties. In January 2003
+St. Mary issued 3,380,818 shares of its restricted common
+stock valued at $71.6 million to acquire Rocky Mountain
+properties from Flying J Oil & Gas Inc. and Big West Oil
+& Gas Inc. This acquisition included properties located in
+the Williston, Powder River and Green River Basins with 66.9
+BCFE of proved reserves and production of approximately 2,100
+barrels of oil and 8,200 Mcf of gas per day. We also received
+a net amount of $2.8 million in cash for normal purchase price
+adjustments. In addition, St. Mary made a non-recourse loan to
+Flying J and Big West of $71.6 million at LIBOR plus 2% for up
+to a 39-month period. The loan is secured by a pledge of the
+shares of St. Mary stock issued to Flying J and Big West. The
+loan was funded through borrowings under our bank credit
+facility.
+3
+o Increase in 2002 Year-End Reserves. Proved reserves increased
+28% from December 31, 2001 to 490.9 BCFE as of December 31,
+2002. We added 101.6 BCFE through acquisitions for cash and
+40.3 BCFE from drilling activities. There were net upward
+revisions of previous reserves totaling 26.4 BCFE. This upward
+revision was the result of a 33.9 BCFE increase from price
+revisions, which was partially offset by 7.5 BCFE in negative
+performance revisions.
+o New York Stock Exchange Listing. On November 20, 2002 St. Mary
+Land & Exploration Company's common stock began trading on
+the New York Stock Exchange. The Company believes the NYSE
+will improve visibility with investors and the auction market
+structure will help reduce intra-day volatility and increase
+the liquidity in St. Mary's stock. Prior to November 20, 2002
+St. Mary's common stock was traded on the Nasdaq National
+Market System.
+o Senior Convertible Notes. In March 2002 we issued in a private
+placement a total of $100.0 million of our 5.75% senior
+convertible notes due 2022 with a1/2% contingent interest
+provision. We received net proceeds of $96.7 million after
+deducting the initial purchasers' discount and offering
+expenses paid by us. The notes are general unsecured
+obligations and rank on a parity in right of payment with all
+our existing and future senior indebtedness and other general
+unsecured obligations. They are senior in right of payment to
+all our future subordinated indebtedness. The notes are
+convertible into our common stock at a conversion price of
+$26.00 per share, subject to adjustment. We can redeem the
+notes with cash in whole or in part at a repurchase price of
+100% of the principal amount plus accrued and unpaid interest
+beginning on March 20, 2007. The note holders have the option
+of requiring us to repurchase the notes for cash at 100% of
+the principal amount plus accrued and unpaid interest
+(including contingent interest) upon (1) a change in control
+of St. Mary or (2) on March 20, 2007, March 15, 2012 and March
+15, 2017. On March 20, 2007, we may pay the repurchase price
+with cash, shares of our common stock or any combination of
+cash and our common stock. We are not restricted from paying
+dividends, incurring debt, or issuing or repurchasing our
+securities under the indenture for the notes. There are no
+financial covenants in the indenture. We used a portion of the
+net proceeds from the notes to repay our credit facility
+balance and used the remaining net proceeds to fund a portion
+of our 2002 capital expenditures.
+o Revolving Credit Agreement. In January 2003 we entered into a
+new long-term revolving credit agreement with nine banks. The
+maximum loan amount is $300 million with a calculated
+borrowing base of $250 million. We have reduced the commitment
+amount to $150 million to meet our projected needs. The
+maturity date is January 27, 2006. Interest is accrued based
+on the borrowing base utilization and is currently LIBOR plus
+1.25%.
+Major Customers
+During 2002 there were no sales to individual customers that accounted
+for more than 10% of our total oil and gas production revenue. During 2001 sales
+to Transok Gas Company accounted for 12.0% and sales to BP Amoco accounted for
+11.3% of our total oil and gas production revenue. During 2000 sales to BP Amoco
+accounted for 22.3% of our total oil and gas production revenue.
+4
+Employees and Office Space
+As of December 31, 2002, St. Mary had 185 full-time employees. None of
+our employees are subject to a collective bargaining agreement. We consider our
+relations with our employees to be good. We lease approximately 42,660 square
+feet of office space in Denver, Colorado for our executive and administrative
+offices, of which 9,479 square feet is subleased. We also lease approximately
+14,990 square feet of office space in Tulsa, Oklahoma; approximately 11,740
+square feet in Shreveport, Louisiana; approximately 7,500 square feet in
+Lafayette, Louisiana; and approximately 15,830 square feet in Billings, Montana.
+Title to Properties
+Substantially all of our working interests are held pursuant to leases
+from third parties. A title opinion is usually obtained prior to the
+commencement of drilling operations on properties. We have obtained title
+opinions or conducted a thorough title review on substantially all of our
+producing properties and believe that we have satisfactory title to such
+properties in accordance with standards generally accepted in the oil and gas
+industry. Our properties are subject to a mortgage under our credit facility,
+customary royalty interests, liens for current taxes, and other burdens that we
+believe do not materially interfere with the use of or affect the value of such
+properties. We perform only a minimal title investigation before acquiring
+undeveloped properties.
+Competition
+The oil and gas industry is intensely competitive. Competition is
+particularly intense in the acquisition of prospective oil and natural gas
+properties and oil and gas reserves. Our competitive position depends on our
+geological, geophysical and engineering expertise, our financial resources, and
+our ability to select, acquire and develop proved reserves. We believe that the
+locations of our leasehold acreage, our exploration, drilling and production
+capabilities and the experience of our management and that of our industry
+partners generally enable us to compete effectively in our core operating areas.
+However, we compete with a substantial number of major and independent oil and
+gas companies that have larger technical staffs and greater financial and
+operational resources than we do. Many of these companies not only engage in the
+acquisition, exploration, development and production of oil and natural gas
+reserves, but also have refining operations, market refined products and
+generate electricity. We also compete with other oil and natural gas companies
+in attempting to secure drilling rigs and other equipment necessary for drilling
+and completion of wells. Drilling equipment may be in short supply from time to
+time.
+Government Regulations
+Our business is subject to various federal, state and local laws and
+governmental regulations that may be changed from time to time in response to
+economic or political conditions. Matters subject to regulation include
+discharge permits for drilling operations, drilling bonds, reports concerning
+operations, the spacing of wells, unitization and pooling of properties,
+taxation and environmental protection. From time to time, regulatory agencies
+have imposed price controls and limitations on production by restricting the
+rate of flow of oil and gas wells below actual production capacity in order to
+conserve supplies of oil and gas.
+St. Mary's operations could result in liability for personal injuries,
+property damage, oil spills, discharge of hazardous materials, remediation and
+clean-up costs and other environmental damages. We could be liable for
+environmental damages caused by previous property owners. As a result,
+substantial liabilities to third parties or governmental entities may be
+5
+incurred, and the payment of such liabilities could have a material adverse
+effect on our financial condition and results of operations. We maintain
+insurance coverage for our operations, including limited coverage for sudden
+environmental damages, but we do not believe that insurance coverage for
+environmental damage that occurs over time is available at a reasonable cost.
+Moreover, we do not believe that insurance coverage for the full potential
+liability that could be caused by sudden environmental damages is available at a
+reasonable cost. Accordingly, we may be subject to liability or may lose
+substantial portions of our properties in the event of certain environmental
+damages. St. Mary could incur substantial costs to comply with environmental
+laws and regulations.
+Energy Regulations. With respect to federal energy regulation, the
+transportation and sale for resale of natural gas in interstate commerce have
+historically been regulated pursuant to several laws enacted by Congress and
+regulations promulgated under these laws by the Federal Energy Regulatory
+Commission and its predecessor. In the past the federal government has regulated
+the prices at which gas could be sold. Congress removed all price and non-price
+controls affecting wellhead sales of natural gas effective January 1, 1993.
+However, Congress could reenact price controls in the future.
+Our sales of natural gas are affected by the availability, terms and
+cost of transportation. The price and terms of access to pipeline transportation
+are subject to extensive federal and state regulation. From 1985 to the present,
+several major regulatory changes have been implemented by Congress and the FERC
+that affect the economics of natural gas production, transportation and sales.
+In addition, the FERC is continually proposing and implementing new rules and
+regulations affecting those segments of the natural gas industry that remain
+subject to the FERC's jurisdiction, most notably interstate natural gas
+transmission companies. These initiatives may also affect the intrastate
+transportation of gas under certain circumstances. The stated purpose of many of
+these regulatory changes is to promote competition among the various sectors of
+the natural gas industry, and these initiatives generally reflect more
+light-handed regulation.
+The ultimate impact of the complex rules and regulations issued by the
+FERC since 1985 cannot be predicted. In addition, many aspects of these
+regulatory developments have not become final but are still pending judicial and
+final FERC decisions. We cannot predict what further action the FERC will take
+on these matters. Some of the FERC's more recent proposals may, however,
+adversely affect the availability and reliability of interruptible
+transportation service on interstate pipelines. Additional proposals and
+proceedings that might affect the natural gas industry are pending before
+Congress and the courts. The natural gas industry historically has been very
+heavily regulated; therefore, there is no assurance that the less stringent
+regulatory approach recently pursued by the FERC and Congress will continue. We
+do not believe that we will be affected by any action taken that differs
+materially from other natural gas producers and marketers with whom we compete.
+Our sales of crude oil, condensate and natural gas liquids are
+currently not regulated and are made at market prices. However, in a number of
+instances the ability to transport and sell such products are dependent on
+pipelines whose rates, terms and conditions of service are subject to FERC
+jurisdiction under the Interstate Commerce Act. Certain regulations implemented
+by the FERC in recent years could result in an increase in the cost of
+transportation service on certain petroleum product pipelines. We do not believe
+that these regulations affect us any differently than other producers of these
+products.
+Certain operations we conduct are on federal oil and gas leases that
+the Minerals Management Service administers. The MMS issues such leases through
+6
+competitive bidding. These leases contain relatively standardized terms and
+require compliance with detailed MMS regulations and, for offshore leases,
+orders pursuant to the Outer Continental Shelf Lands Act, which are subject to
+change by the MMS. For offshore operations, lessees must obtain MMS approval for
+exploration plans and development and production plans prior to the commencement
+of such operations. In addition to permits required from other agencies such as
+the Coast Guard, the Army Corps of Engineers and the Environmental Protection
+Agency, lessees must obtain a permit from the MMS prior to the commencement of
+drilling. Lessees must also comply with detailed MMS regulations governing,
+among other things:
+o engineering and construction specifications for offshore
+production facilities;
+o safety procedures;
+o flaring of production;
+o plugging and abandonment of Outer Continental Shelf or OCS
+wells;
+o calculation of royalty payments and the valuation of
+production for this purpose; and
+o removal of facilities.
+To cover the various obligations of lessees on the OCS, the MMS
+generally requires that lessees post substantial bonds or other acceptable
+assurances that such obligations will be met. The cost of such bonds or other
+surety can be substantial, and we cannot assure that we can continue to obtain
+bonds or other surety in all cases. Under certain circumstances the MMS may
+require our operations on federal leases to be suspended or terminated.
+Many of the states in which we conduct our oil and gas drilling and
+production activities regulate such activities by requiring, among other things,
+drilling permits and bonds and reports concerning operations. The laws of these
+states also govern a number of environmental and conservation matters, including
+the handling and disposing of waste material, plugging and abandonment of wells,
+restoration requirements, unitization and pooling of natural gas and oil
+properties and establishment of maximum rates of production from natural gas and
+oil wells. Some states prorate production to the market demand for oil and
+natural gas.
+Environmental Regulations. Our operations are subject to numerous laws
+and regulations governing the discharge of materials into the environment or
+otherwise relating to environmental protection. These laws and regulations may
+require the acquisition of a permit before drilling commences, restrict the
+types, quantities and concentration of various substances that can be released
+into the environment in connection with drilling and production activities,
+limit or prohibit drilling activities on certain lands lying within wilderness,
+wetlands and other protected areas, and impose substantial liabilities for any
+pollution resulting from our operations.
+Public interest in the protection of the environment has increased
+dramatically in recent years. Onshore and offshore drilling in some areas has
+been opposed by environmental groups and, in some areas, has been restricted.
+Legislation has also been proposed in Congress from time to time that would
+reclassify certain oil and gas exploration and production wastes as "hazardous
+wastes," which would make the reclassified wastes subject to much more stringent
+handling, disposal and clean-up requirements. To the extent laws are enacted or
+other governmental actions are taken that prohibit or restrict offshore drilling
+7
+or impose environmental protection requirements that result in increased costs
+to the natural gas and oil industry (both onshore and offshore), our business
+and prospects could be adversely affected. We believe that we are in substantial
+compliance with current applicable environmental laws and regulations and that
+continued compliance with existing requirements would not have a material
+adverse impact on us.
+Violation of environmental laws and regulations can lead to the
+imposition of administrative, civil or criminal penalties; remedial obligations;
+and in some instances injunctive relief. In addition, violations of
+environmental laws or the discharge of hazardous materials or oil could result
+in liability for personal injuries, property damage, remediation and cleanup
+costs, and other environmental damages. As a result, substantial liabilities to
+third parties or governmental entities may be incurred, and the payment of such
+liabilities could have a material adverse effect on our financial condition and
+results of operations.
+The Oil Pollution Act and regulations thereunder impose a variety of
+regulations on "responsible parties" related to the prevention of oil spills and
+liability for damages resulting from such spills in United States waters. A
+"responsible party" includes the owner or operator of an onshore facility,
+pipeline or vessel, or the lessee or permittee of the area in which an offshore
+facility is located. The OPA assigns liability to each responsible party for oil
+cleanup costs and a variety of public and private damages. While liability
+limits apply in some circumstances, a party cannot take advantage of liability
+limits if the spill was caused by gross negligence or willful misconduct or
+resulted from violation of a federal safety, construction or operating
+regulation. Likewise, if the party fails to report a spill or to cooperate fully
+in the cleanup, liability limits do not apply. Even if applicable, the liability
+limits for offshore facilities require the responsible party to pay all removal
+costs, plus up to $75 million in other damages. Few defenses exist to the
+liability imposed by the OPA.
+The OPA imposes ongoing requirements on a responsible party, including
+the preparation of oil spill response plans and proof of financial
+responsibility to cover environmental cleanup and restoration costs that could
+be incurred in connection with an oil spill. As amended by the Coast Guard
+Authorization Act of 1996, the OPA requires responsible parties for covered
+offshore facilities that have a worst case oil spill of more than 1,000 barrels
+to demonstrate financial responsibility in amounts ranging from at least $10
+million in specified state waters to at least $35 million in federal outer
+continental shelf waters, with higher amounts of up to $150 million if a formal
+risk assessment indicates that a higher amount should be required based on
+specific risks posed by the operations or if the worst case oil spill discharge
+volume possible at the facility may exceed the applicable threshold volumes
+specified under the final rule of the MMS implementing these financial
+responsibility requirements as enacted in August 1998. We do not anticipate that
+we will experience any difficulty in continuing to satisfy the MMS requirements
+for demonstrating financial responsibility under the OPA.
+The Federal Water Pollution Control Act, also known as the Clean Water
+Act, imposes restrictions and strict controls regarding the discharge of
+produced waters and other oil and gas wastes into navigable waters. Permits must
+be obtained to discharge pollutants into waters and to conduct construction
+activities in waters and wetlands. The FWPCA and similar state laws provide for
+civil, criminal and administrative penalties for any unauthorized discharges of
+pollutants and unauthorized discharges of reportable quantities of oil and other
+hazardous substances. Many state discharge regulations and the general permits
+from the Federal National Pollutant Discharge Elimination System prohibit the
+discharge of produced water and sand, drilling fluids, drill cuttings and
+certain other substances related to the oil and gas industry into coastal
+waters. Although the costs to comply with zero discharge mandates under federal
+or state law may be significant, the entire industry is expected to experience
+similar costs, and we believe that these costs will not have a material adverse
+8
+impact on our results of operations or financial position. The United States
+Environmental Protection Agency has adopted regulations requiring certain oil
+and gas exploration and production facilities to obtain permits for storm water
+discharges. Costs may be associated with the treatment of wastewater or
+developing and implementing storm water pollution prevention plans.
+The Comprehensive Environmental Response, Compensation, and Liability
+Act, also known as the "Superfund" law, imposes liability, without regard to
+fault or the legality of the original conduct, on certain classes of persons
+that are considered to be responsible for the release of a "hazardous substance"
+into the environment. These persons, including the owner or operator of the
+disposal site or sites where the release occurred and companies that transported
+or disposed or arranged for the transport or disposal of the hazardous
+substances under CERCLA, may be subject to joint and several liability for the
+costs of cleaning up the hazardous substances that have been released into the
+environment and for damages to natural resources. It is not uncommon for
+neighboring landowners and other third parties to file claims for personal
+injury and property damage allegedly caused by the hazardous substances released
+into the environment.
+We generate both hazardous and nonhazardous solid wastes which are
+subject to requirements of the Federal Resource Conservation and Recovery Act
+and comparable state statutes. From time to time, the EPA has considered making
+changes in nonhazardous waste standards that would result in stricter disposal
+requirements for these wastes. Furthermore, it is possible that some wastes that
+we generate that are currently classified as nonhazardous may be in the future
+be designated as "hazardous wastes," resulting in the wastes being subject to
+more rigorous and costly disposal requirements. Changes in applicable
+regulations may result in an increase in our capital expenditures or operating
+expenses.
+We currently own or lease, and have in the past owned or leased,
+onshore properties that for many years have been utilized for or associated with
+the exploration and production of oil and gas. Although we have utilized
+operating and disposal practices that were standard in the industry at the time,
+hydrocarbons or other wastes may have been disposed of or released on or under
+the properties owned or leased by us or on or under other locations where such
+wastes have been taken for disposal. These properties and the wastes disposed
+thereon may be subject to CERCLA, RCRA and analogous state laws. Under such
+laws, we could be required to remove or remediate previously disposed wastes
+(including waste disposed of or released by prior owners or operators) or
+property contamination (including groundwater contamination by prior owners or
+operators), or to perform remedial plugging or closure operations to prevent
+future contamination.
+Our operations are also subject to the Federal Clean Air Act and
+comparable state statutes. Amendments to the Clean Air Act adopted in 1990
+contain provisions that may result in the imposition of increasingly stringent
+pollution control requirements with respect to air emissions from the operations
+of stationary and mobile source equipment. Such air pollution control
+requirements may include specific equipment or technologies, permits with
+emissions and operational limitations, pre-approval of new or modified projects
+or facilities producing air emissions, and similar measures. Failure to comply
+with applicable air statutes or regulations may lead to the assessment of
+administrative, civil or criminal penalties, and/or result in the limitation or
+cessation of construction or operation of certain air emission sources.
+9
+Risk Factors
+Risks Related to Our Business
+In addition to the other information set forth elsewhere in this Form
+10-K, the following factors should be carefully considered when evaluating St.
+Mary.
+Oil and natural gas prices are volatile, and an extended decline in prices would
+hurt our profitability and financial condition.
+Our revenues, operating results, profitability, future rate of growth
+and the carrying value of our oil and gas properties depend heavily on
+prevailing market prices for oil and gas. We expect the markets for oil and gas
+to continue to be volatile. Any substantial or extended decline in the price of
+oil or gas would have a material adverse effect on our financial condition and
+results of operations. It could reduce our cash flow and borrowing capacity, as
+well as the value and the amount of our oil and gas reserves. Lower prices may
+also reduce the amount of oil and gas that we can economically produce.
+Historically, the markets for oil and gas have been volatile, and they
+are likely to continue to be volatile. Wide fluctuations in oil and gas prices
+may result from relatively minor changes in the supply of and demand for oil and
+gas, market uncertainty and other factors that are beyond our control,
+including:
+o worldwide and domestic supplies of oil and natural gas;
+o the ability of the members of the Organization of Petroleum
+Exporting Countries to agree to and maintain oil price and
+production controls;
+o political instability or armed conflict in oil or gas
+producing regions;
+o the price and level of foreign imports;
+o worldwide economic conditions;
+o marketability of production;
+o the level of consumer demand;
+o the price, availability and acceptance of alternative fuels;
+o the availability of pipeline capacity;
+o weather conditions; and
+o actions of federal, state, local and foreign authorities.
+These external factors and the volatile nature of the energy markets
+make it difficult to estimate future prices of oil and natural gas. Declines in
+oil and gas prices would reduce our revenue and could also reduce the amount of
+oil and gas that we can produce economically and, as a result, could have a
+material adverse effect on our financial condition, results of operations and
+reserves. Further, oil and gas prices do not necessarily move in tandem. Because
+10
+approximately 56% of our proved reserves were natural gas reserves as of
+December 31, 2002, our financial results are slightly more affected by changes
+in natural gas prices.
+A material portion of our production, revenues and cash flows are derived from
+one field.
+Production from the Judge Digby Field accounted for approximately 10%
+of our total oil and gas production volumes during 2002. If the level of
+production from this field substantially declines other than through normal
+depletion over the expected reserve life, it could have a material adverse
+impact on our overall production levels and our revenues.
+Our future success depends on our ability to replace reserves that we produce.
+Our future success depends on our ability to find, develop and acquire
+oil and gas reserves that are economically recoverable. As of December 31, 2002
+our proved reserves would last approximately 8.9 years if produced constantly at
+the 2002 rate of production. In order to maintain current production rates we
+must locate and develop or acquire new oil and gas reserves to replace those
+being depleted by production. We may do this even during periods of low oil and
+gas prices. Without successful exploration or acquisition activities, our
+reserves, production and revenues will decline rapidly. In addition,
+approximately 12% of our total estimated proved reserves at December 31, 2002,
+were undeveloped. By their nature, undeveloped reserves are less certain.
+Recovery of such reserves will require significant capital expenditures and
+successful drilling operations. We cannot assure you that we will be able to
+find and develop or acquire additional reserves at an acceptable cost.
+Our producing property acquisitions carry significant risks.
+Our recent growth is due in part to, and our growth strategy relies in
+part on, acquisitions of producing properties and exploration and production
+companies. Successful acquisitions require an assessment of a number of factors
+beyond our control. These factors include recoverable reserves, future oil and
+gas prices, operating costs and potential environmental and other liabilities.
+These assessments are inexact and their accuracy is inherently uncertain. In
+connection with these assessments, we perform a review of the subject properties
+that we believe is generally consistent with industry practices. However, such a
+review will not reveal all existing or potential problems. In addition, our
+review may not permit us to become sufficiently familiar with the properties to
+fully assess their deficiencies and capabilities. We do not inspect every well.
+Even when we do inspect a well, we may not always discover structural,
+subsurface or environmental problems that may exist or arise.
+In connection with our acquisitions, we may not be entitled to
+contractual indemnification for preclosing liabilities, including environmental
+liabilities. Normally, we acquire interests in properties on an "as is" basis
+with limited remedies for breaches of representations and warranties. In
+addition, competition for producing oil and gas properties is intense and many
+of our competitors have financial and other resources substantially greater than
+those available to us. Therefore, we cannot assure you that we will be able to
+acquire oil and gas properties that contain economically recoverable reserves or
+that we will acquire such properties at acceptable prices.
+Additionally, significant acquisitions can change the nature of our
+operations and business depending upon the character of the acquired properties,
+which may have substantially different operating and geological characteristics
+or be in different geographic locations than our existing properties. While it
+11
+is our current intention to continue to concentrate on acquiring properties with
+development, exploitation and exploration potential located in our five core
+operating areas, we cannot assure you that in the future we will not decide to
+pursue acquisitions of properties located in other geographic regions. To the
+extent that such acquired properties are substantially different than our
+existing properties, our ability to efficiently realize the expected economic
+benefits of such transactions may be limited.
+We may not be able to successfully integrate future property or corporate
+acquisitions.
+We seek to make selective niche acquisitions of oil and gas properties,
+and we will pursue corporate acquisitions that we believe will be accretive.
+However, integrating acquired properties and businesses involves a number of
+special risks. These risks include the possibility that management may be
+distracted from normal business concerns by the need to integrate operations and
+systems and in retaining and assimilating additional employees. Any of these or
+other similar risks could lead to potentially adverse short-term or long-term
+effects on our operating results. We cannot assure you that we will be able to
+obtain adequate funds for future property or corporate acquisitions,
+successfully integrate our future property or corporate acquisitions or that we
+will realize any of the anticipated benefits of the acquisitions.
+Substantial capital is required to replace and grow reserves.
+We make, and will continue to make, substantial expenditures to find,
+acquire, develop and produce oil and natural gas reserves. Our capital
+expenditures for oil and gas properties were $193.0 million for 2002 and $182.9
+million during 2001. We have budgeted total capital expenditures of $225.0
+million in 2003. With the cash provided by operating activities and borrowings
+under our credit facility, we believe we will have sufficient cash to fund
+budgeted capital expenditures in 2003. If additional development or attractive
+acquisition opportunities arise, we may consider other forms of financing,
+including the public offering or private placement of equity or debt securities.
+However, if oil and gas prices decrease or we encounter operating difficulties
+that result in our cash flow from operations being less than expected, we may
+have to reduce the capital we can spend in future years unless we raise
+additional funds through debt or equity financing. We cannot assure you that
+debt or equity financing, cash generated by operations or borrowing capacity
+will be available to us on acceptable terms to meet these requirements.
+Future cash flows and the availability of financing will be subject to
+a number of variables, such as:
+o our success in locating and producing new reserves;
+o the level of production from existing wells;
+o prices of oil and natural gas;
+o lease operating expense, including workovers and taxes; and
+o administrative expense.
+Issuing equity securities to satisfy our financing requirements could
+cause substantial dilution to existing stockholders. Debt financing could lead
+to:
+12
+o a substantial portion of our operating cash flow being
+dedicated to the payment of principal and interest;
+o us being more vulnerable to competitive pressures and economic
+downturns; and
+o restrictions on our operations.
+If our revenues were to decrease due to lower oil and natural gas
+prices, decreased production or other reasons, and if we could not obtain
+capital through our credit facility or otherwise, our ability to execute our
+development plans, replace our reserves or maintain production levels could be
+greatly limited.
+We may not obtain a bank credit facility borrowing base redetermination that
+adequately meets our anticipated financing needs.
+We closed a new long-term revolving credit facility in January 2003
+with a 9-bank group led by Wachovia Bank. Under the facility, the maximum loan
+amount is $300.0 million. The amount actually available from time to time
+depends on a borrowing base that the lenders periodically redetermine based on
+the value of our oil and gas properties and other assets. The stated total
+borrowing base is $215.0 million and will be increased to $250.0 million after
+sufficient mortgage collateral has been provided to the banks. Since we pay
+commitment fees based on the unused portion of the borrowing base, we have
+reduced the commitment that we have accepted under the borrowing base to $150.0
+million to correspond with our projected funding requirements.
+Our next borrowing base redetermination date is scheduled to occur on
+or about April 15, 2003. We cannot assure you that the banks will agree to a
+borrowing base redetermination that is adequate for our anticipated financing
+needs.
+If oil and gas prices decrease or exploration efforts are unsuccessful, we may
+be required to take additional writedowns.
+There is a risk that we will be required to write down the carrying
+value of our oil and gas properties. This could occur when oil and gas prices
+are low or if we have substantial downward adjustments to our estimated proved
+reserves, increases in our estimates of development costs or deterioration in
+our exploration results.
+We follow the successful efforts accounting method. All property
+acquisition costs and costs of exploratory and development wells are capitalized
+when incurred, pending the determination of whether proved reserves have been
+discovered. If proved reserves are not discovered with an exploratory well, the
+costs of drilling the well are expensed. All geological and geophysical costs on
+exploratory prospects are expensed as incurred. The capitalized costs of our oil
+and gas properties, on a field-by-field basis, may not exceed the estimated
+future net cash flows of that field. If capitalized costs exceed future net
+revenues we write down the costs of each such field to our estimate of fair
+market value. Unproved properties are evaluated at the lower of cost or fair
+market value. This type of charge will not affect our cash flow from operating
+activities, but it will reduce the book value of our stockholders' equity. We
+review the carrying value of our properties quarterly, based on prices in effect
+as of the end of each quarter or as of the time of reporting our results. Once
+incurred, a writedown of oil and gas properties is not reversible at a later
+13
+date even if oil or gas prices increase. St. Mary incurred impairment and
+abandonment charges on proved and unproved properties of $2.4 million, $4.7
+million and $6.3 million in 2002, 2001 and 2000, respectively.
+Information concerning our reserves and future net revenue estimates is
+uncertain.
+There are numerous uncertainties inherent in estimating quantities of
+proved oil and natural gas reserves and their values, including many factors
+beyond our control. Estimates of proved undeveloped reserves, which comprise a
+significant portion of our reserves, are by their nature uncertain. The reserve
+data included in this Annual Report on Form 10-K is estimated. Although we
+believe these estimates are reasonable, actual production, revenues and reserve
+expenditures will likely vary from estimates, and these variances may be
+material.
+Estimates of oil and natural gas reserves, by necessity, are
+projections based on geologic and engineering data, and there are uncertainties
+inherent in the interpretation of such data as well as the projection of future
+rates of production and the timing of development expenditures. Reserve
+engineering is a subjective process of estimating underground accumulations of
+oil and natural gas that are difficult to measure. The accuracy of any reserve
+estimate is a function of the quality of available data, engineering and
+geological interpretation and judgment. Estimates of economically recoverable
+oil and natural gas reserves and future net cash flows necessarily depend upon a
+number of variable factors and assumptions, such as historical production from
+the area compared with production from other producing areas, the assumed
+effects of regulations by governmental agencies and assumptions governing future
+oil and natural gas prices, future operating costs, severance and excise taxes,
+development costs and workover and remedial costs, all of which may in fact vary
+considerably from actual results. For these reasons, estimates of the
+economically recoverable quantities of oil and natural gas attributable to any
+particular group of properties, classifications of such reserves based on risk
+of recovery, and estimates of the future net cash flows may vary substantially.
+Any significant variance in the assumptions could materially affect the
+estimated quantity and value of the reserves. Actual production, revenues and
+expenditures with respect to our reserves will likely vary from estimates, and
+such variances may be material. See "Business and Properties--Reserves."
+In addition, you should not construe PV-10 value as the current market
+value of the estimated oil and natural gas reserves attributable to our
+properties. We have based the PV-10 value on prices and costs as of the date of
+the estimate, in accordance with applicable regulations, whereas actual future
+prices and costs may be materially higher or lower. For example, values of our
+reserves at December 31, 2002 were estimated starting with a calculated weighted
+average sales price of $31.20 per barrel of oil (NYMEX) and $4.74 per MMBtu of
+gas (Gulf Coast spot price), then adjusted for transportation, quality and basis
+differentials. During 2002 our monthly average realized gas prices were as high
+as $3.99 per Mcf and as low as $2.24 per Mcf. For the same period our monthly
+average realized oil prices were as high as $27.66 per Bbl and as low as $17.72
+per Bbl. Many factors will affect actual future net cash flows, including:
+o the amount and timing of actual production;
+o supply and demand for oil and natural gas;
+o curtailments or increases in consumption by natural gas
+purchasers; and
+o changes in governmental regulations or taxation.
+14
+The timing of the production of oil and natural gas properties and of
+the related expenses affect the timing of actual future net cash flows from
+proved reserves and, thus, their actual present value. In addition, the 10%
+discount factor, which we are required to use to calculate PV-10 value for
+reporting purposes, is not necessarily the most appropriate discount factor
+given actual interest rates and risks to which our business or the oil and
+natural gas industry in general are subject. As a result, our actual future net
+cash flows could be materially different from the estimates included in this
+Annual Report on Form 10-K.
+Our industry is highly competitive.
+Major oil companies, independent producers, and institutional and
+individual investors are actively seeking oil and gas properties throughout the
+world, along with the equipment, labor and materials required to operate
+properties. Many of our competitors have financial and technological resources
+vastly exceeding those available to us. Many oil and gas properties are sold in
+a competitive bidding process in which we may lack technological information or
+expertise available to other bidders. We cannot be sure that we will be
+successful in acquiring and developing profitable properties in the face of this
+competition.
+Exploration and development drilling may not result in commercially productive
+reserves.
+Oil and gas drilling and production activities are subject to numerous
+risks, including the risk that no commercially productive oil or natural gas
+will be found. The cost of drilling and completing wells is often uncertain, and
+oil and gas drilling and production activities may be shortened, delayed or
+canceled as a result of a variety of factors, many of which are beyond our
+control. These factors include:
+o unexpected drilling conditions;
+o pressure or irregularities in formations;
+o equipment failures or accidents;
+o adverse weather conditions;
+o shortages in experienced labor;
+o compliance with governmental requirements; and
+o shortages or delays in the availability of drilling rigs and
+the delivery of equipment.
+The prevailing prices of oil and gas also affect the cost of and the
+demand for drilling rigs, production equipment and related services.
+We cannot assure you that the wells we drill will be productive or that
+we will recover all or any portion of our investment in such wells. The seismic
+data and other technologies we use do not allow us to know conclusively prior to
+drilling a well that oil or gas is present or may be produced economically. The
+cost of drilling, completing and operating a well is often uncertain, and cost
+factors can adversely affect the economics of a project. Drilling activities can
+result in dry wells or wells that are productive but do not produce sufficient
+net revenues after operating and other costs to cover initial drilling costs.
+15
+Our future drilling activities may not be successful, nor can we be
+sure that our overall drilling success rate or our drilling success rate for
+activity within a particular area will not decline. Unsuccessful drilling
+activities could have a material adverse effect on our results of operations and
+financial condition. Also, we may not be able to obtain any options or lease
+rights in potential drilling locations that we identify. Although we have
+identified numerous potential drilling locations, we cannot be sure that we will
+ever drill them or that we will produce oil or natural gas from them or any
+other potential drilling locations.
+Our business is subject to operating hazards that could result in substantial
+losses.
+Oil and gas operations are subject to many risks, including well
+blowouts, craterings, explosions, uncontrollable flows of oil, natural gas or
+well fluids, fires, formations with abnormal pressures, pipeline ruptures or
+spills, pollution, releases of toxic gas and other environmental hazards and
+risks. If any of these hazards occurs, we could sustain substantial losses as a
+result of:
+o injury or loss of life;
+o severe damage to or destruction of property, natural resources
+and equipment;
+o pollution or other environmental damage;
+o clean-up responsibilities;
+o regulatory investigations and penalties; and/or
+o suspension of operations.
+In addition, we may be liable for environmental damage caused by
+previous owners of property we own or lease. As a result, we may face
+substantial liabilities to third parties or governmental entities, which could
+reduce or eliminate funds available for exploration, development or acquisitions
+or cause us to incur losses. An event that is not fully covered by insurance
+could have a material adverse effect on our financial condition and results of
+operations.
+We maintain insurance against some, but not all, of these potential
+risks and losses. We may elect not to obtain insurance if we believe that the
+cost of available insurance is excessive relative to the risks presented. In
+addition, pollution and environmental risks generally are not fully insurable.
+If a significant accident or other event occurs and is not fully covered by
+insurance, it could adversely affect us.
+Other independent oil and gas companies' limited access to capital may change
+our exploration and development plans.
+Many independent oil and gas companies have limited access to the
+capital necessary to finance their activities. As a result, some of the other
+working interest owners of our wells may be unwilling or unable to pay their
+share of the costs of projects as they become due. These problems could cause us
+to change, suspend or terminate our drilling and development plans with respect
+to the affected project.
+16
+Hedging transactions may limit our potential gains and involve other risks.
+To manage our exposure to price risks in the marketing of our oil and
+natural gas, we enter into commodity price risk management arrangements from
+time to time with respect to a portion of our current or future production.
+While intended to reduce the effects of volatile oil and natural gas prices,
+these transactions may limit our potential gains if oil or natural gas prices
+were to rise substantially over the price established by the hedge. In addition,
+such transactions may expose us to the risk of financial loss in certain
+circumstances, including instances in which:
+o our production is less than expected;
+o the counterparties to our futures contracts fail to perform
+under the contracts; or
+o a sudden, unexpected event materially impacts oil or natural
+gas prices.
+The terms of our hedging agreements may also require that we furnish
+cash collateral, letters of credit or other forms of performance assurance in
+the event that mark-to-market calculations result in settlement obligations by
+us to the counterparties, which would encumber our liquidity and capital
+resources.
+Our industry is heavily regulated.
+Federal, state and local authorities extensively regulate the oil and
+gas industry. Legislation and regulations affecting the industry are under
+constant review for amendment or expansion, raising the possibility of changes
+that may affect, among other things, the pricing or marketing of oil and gas
+production. Noncompliance with statutes and regulations may lead to substantial
+penalties, and the overall regulatory burden on the industry increases the cost
+of doing business and, in turn, decreases profitability. State and local
+authorities regulate various aspects of oil and gas drilling and production
+activities, including the drilling of wells (through permit and bonding
+requirements), the spacing of wells, the unitization or pooling of oil and gas
+properties, environmental matters, safety standards, the sharing of markets,
+production limitations, plugging and abandonment, and restoration. Federal
+authorities regulate many of these same activities for our drilling and
+production operations in federal offshore waters. To cover the various
+obligations of leaseholders in federal waters, federal authorities generally
+require that leaseholders have substantial net worth or post bonds or other
+acceptable assurances that such obligations will be met. The cost of these bonds
+or other surety can be substantial, and we cannot assure you that we will be
+able to obtain bonds or other surety in all cases. Under some circumstances,
+federal authorities may require any of our operations on federal leases be
+suspended or terminated. Any such suspension or termination could materially
+adversely affect our financial condition and results of operations.
+We must comply with complex environmental regulations.
+Our operations are subject to complex and constantly changing
+environmental laws and regulations adopted by federal, state and local
+governmental authorities where we are engaged in exploration or production
+operations. New laws or regulations, or changes to current requirements, could
+have a material adverse effect on our business. We will continue to be subject
+to uncertainty associated with new regulatory interpretations and inconsistent
+interpretations between state and federal agencies. We could face significant
+liabilities to the government and third parties for discharges of oil, natural
+gas or other pollutants into the air, soil or water, and we could have to spend
+substantial amounts on investigations, litigation and remediation. We cannot be
+sure that existing environmental laws or regulations, as currently interpreted
+17
+or enforced, or as they may be interpreted, enforced or altered in the future,
+will not materially adversely affect our results of operations and financial
+condition. As a result, we may face material indemnity claims with respect to
+properties we own or have owned.
+Our business depends on transportation facilities owned by others.
+The marketability of our oil and gas production depends in part on the
+availability, proximity and capacity of pipeline systems owned by third parties.
+The unavailability of or lack of available capacity on these systems and
+facilities could result in the shut-in of producing wells or the delay or
+discontinuance of development plans for properties. Although we have some
+contractual control over the transportation of our product, material changes in
+these business relationships could materially affect our operations. Federal and
+state regulation of oil and gas production and transportation, tax and energy
+policies, changes in supply and demand, pipeline pressures, damage to or
+destruction of pipelines and general economic conditions could adversely affect
+our ability to produce, gather and transport oil and natural gas.
+We depend on key personnel.
+Our success will continue to depend on the continued services of our
+executive officers and a limited number of other senior management and technical
+personnel with extensive experience and expertise in evaluating and analyzing
+producing oil and gas properties and drilling prospects, maximizing production
+from oil and gas properties and marketing oil and gas production. Loss of the
+services of any of these people could have a material adverse effect on our
+operations. We currently do not have employment agreements with our executive
+officers other than Mark Hellerstein, our Chief Executive Officer. We do not
+carry any key person life insurance policies.
+Ownership of working interests, royalty interests and other interests by some of
+our officers and directors may create conflicts of interest.
+As a result of their prior employment with another company with which
+St. Mary engaged in a number of transactions, Ronald D. Boone, the Executive
+Vice President and Chief Operating Officer and a director of St. Mary, and two
+other vice presidents of St. Mary own royalty interests in many of St. Mary's
+properties, which were earned as part of the prior employer's employee benefit
+programs. One vice president also owns certain working interests through
+participation in acquisitions made by his former employer. Those persons have no
+royalty participation in any new St. Mary properties.
+Mr. Boone also owns 25% of Princeton Resources LLC, which owns the oil
+and gas working interests that he acquired as a result of his prior employment.
+Although Mr. Boone does not manage this entity, he may participate in any
+investment decisions made by them.
+As a result of these transactions and relationships, conflicts of
+interest may exist between these persons and us. Although these persons owe
+fiduciary duties to our stockholders and to us, we cannot assure you that
+conflicts of interest will always be resolved in our favor.
+Risks Related to Our Common Stock
+Our certificate of incorporation and bylaws have provisions that discourage
+corporate takeovers and could prevent shareholders from realizing a premium on
+their investment.
+18
+Our certificate of incorporation and bylaws contain provisions that may
+have the effect of delaying or preventing a change of control. These provisions,
+among other things, provide for noncumulative voting in the election of the
+board of directors and impose procedural requirements on stockholders who wish
+to make nominations for the election of directors or propose other actions at
+stockholders' meetings. These provisions, alone or in combination with each
+other and with the rights plan described below, may discourage transactions
+involving actual or potential changes of control, including transactions that
+otherwise could involve payment of a premium over prevailing market prices to
+shareholders for their common stock
+On July 15, 1999, our board of directors adopted a stockholder rights
+plan. The plan is designed to enhance the board's ability to prevent an acquirer
+from depriving stockholders of the long-term value of their investment and to
+protect stockholders against attempts to acquire us by means of unfair or
+abusive takeover tactics. If the board of directors decides in accordance with
+its fiduciary obligations that the terms of a potential acquisition do not
+reflect the long-term value of St. Mary, under the plan the board of directors
+could allow the holder of each outstanding share of our common stock other than
+those held by the potential acquirer to purchase one additional share of our
+common stock with a market value of twice the exercise price. This prospective
+dilution to a potential acquirer would make the acquisition impracticable unless
+the terms were improved to the satisfaction of the board of directors. However,
+the existence of the plan may impede a takeover not supported by our board,
+including a takeover that may be desired by a majority of our stockholders or
+involving a premium over the prevailing stock price.
+Our shares that are eligible for future sale may have an adverse effect on the
+price of our common stock.
+At February 28, 2003, we had 31,433,900 shares of common stock
+outstanding. Of the shares outstanding, approximately 27,405,059 shares were
+freely tradable without substantial restriction or the requirement of future
+registration under the Securities Act. Also as of that date, options to purchase
+3,025,007 shares of our common stock were outstanding, of which 1,911,398 were
+exercisable. These options are exercisable at prices ranging from $9.25 to
+$33.3125 per share. Sales of substantial amounts of common stock, or a
+perception that such sales could occur, and the existence of options or warrants
+to purchase shares of commons stock at prices that may be below the then -
+current market price of the common stock could adversely affect the market price
+of the common stock and could impair our ability to raise capital through the
+sale of our equity securities.
+Our Former Chairman of the Board and his extended family may be able to control
+us.
+Thomas E. Congdon, a director and our former Chairman of the Board, and
+members of his extended family owned approximately 16% of the outstanding shares
+of our common stock as of February 28, 2003. While no formal arrangements exist,
+these extended family members may be inclined to act in concert with Mr. Congdon
+on matters related to control of St. Mary, including for example the election of
+directors or response to an unsolicited bid to acquire St. Mary. Accordingly,
+Mr. Congdon and his family may be able to control or influence matters presented
+to our stockholders.
+We may not always pay dividends on our common stock.
+Although we have paid cash dividends to stockholders every year since
+1940 and we expect that our practice of paying dividends will continue, the
+payment of future dividends remains in the discretion of the board of directors
+19
+and will continue to depend on our earnings, capital requirements, financial
+condition and other factors. In addition, the payment of dividends is subject to
+covenants in our bank credit facility, including the requirement that we
+maintain certain levels of stockholder's equity. The board of directors may
+determine in the future to reduce the current annual dividend rate of $0.10 per
+share or discontinue the payment of dividends altogether.
+Cautionary Statement about Forward-Looking Statements
+This Annual Report on Form 10-K includes certain statements that may be
+deemed to be "forward-looking statements" within the meaning of Section 27A of
+the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
+1934. All statements, other than statements of historical facts, included in
+this Form 10-K that address activities, events or developments that St. Mary's
+management expects, believes or anticipates will or may occur in the future are
+forward looking statements. Examples of forward-looking statements may include
+discussion of such matters as:
+o The amount and nature of future capital, development and
+exploration expenditures;
+o The drilling of wells;
+o Reserve estimates and the estimates of both future net
+revenues and the present value of future net revenues that are
+included in their calculation;
+o Future oil and gas production estimates;
+o Repayment of debt;
+o Business strategies;
+o Expansion and growth of operations; and
+o Other similar matters such as those discussed in Management's
+Discussion and Analysis of Financial Condition and Results of
+Operations.
+These statements are based on certain assumptions and analyses made by us in
+light of our experience and our perception of historical trends, current
+conditions, expected future developments and other factors we believe are
+appropriate in the circumstances. Such statements are subject to a number of
+assumptions, risks and uncertainties, including such factors as the volatility
+and level of oil and natural gas prices, uncertainties in cash flow, expected
+acquisition benefits, production rates and reserve replacement, reserve
+estimates, drilling and operating risks, competition, litigation, environmental
+matters, the potential impact of government regulations, and other matters
+discussed under the caption "Risk Factors", many of which are beyond our
+control. Readers are cautioned that forward-looking statements are not
+guarantees of future performance and that actual results or developments may
+differ materially from those expressed or implied in the forward-looking
+statements.
+20
+Available Information
+Our Internet website address is www.stmaryland.com. We make available
+free of charge through our website's financial information section our annual
+reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form
+8-K, and amendments to those reports filed with or furnished to the SEC under
+applicable securities laws as soon as reasonably practical after we
+electronically file such material with, or furnish it to, the SEC. Our web site
+information is not incorporated by reference into this Annual Report on Form
+10-K.
+Glossary
+The terms defined in this section are used throughout this Annual
+Report on Form 10-K.
+2-D seismic or 2-D data. Seismic data that are acquired and processed to yield a
+two-dimensional cross-section of the subsurface.
+3-D seismic or 3-D data. Seismic data that are acquired and processed to yield a
+three-dimensional picture of the subsurface.
+Bbl. One stock tank barrel, or 42 U.S. gallons liquid volume, used herein in
+reference to oil or other liquid hydrocarbons.
+Bcf. Billion cubic feet, used herein in reference to natural gas.
+BCFE. Billion cubic feet of gas equivalent. Gas equivalents are determined using
+the ratio of six Mcf of gas (including gas liquids) to one Bbl of oil.
+Behind pipe reserves. Estimated net proved reserves in a formation in which
+production casing has already been set in the wellbore but has not been
+perforated and production tested.
+BOE. Barrels of oil equivalent. Oil equivalents are determined using the ratio
+of six Mcf of gas (including gas liquids) to one Bbl of oil.
+Development well. A well drilled within the proved area of an oil or gas
+reservoir to the depth of a stratigraphic horizon known to be productive in an
+attempt to recover proved undeveloped reserves.
+Dry hole. A well found to be incapable of producing either oil or gas in
+sufficient quantities to justify completion as an oil or gas well.
+Estimated net proved reserves. The estimated quantities of oil, gas and gas
+liquids which geological and engineering data demonstrate with reasonable
+certainty to be recoverable in future years from known reservoirs under existing
+economic and operating conditions.
+Exploratory well. A well drilled to find and produce oil or gas in an unproved
+area, to find a new reservoir in a field previously found to be productive of
+oil or gas in another reservoir, or to extend a known reservoir.
+Fee land. The most extensive interest that can be owned in land, including
+surface and mineral (including oil and gas) rights.
+21
+Finding cost. Expressed in dollars per BOE or MCFE. Finding costs are calculated
+by dividing the amount of total capital expenditures for oil and gas activities
+by the amount of estimated net proved reserves added during the same period
+(including the effect on proved reserves of reserve revisions).
+Gross acres. An acre in which a working interest is owned.
+Gross well. A well in which a working interest is owned.
+Hydraulic fracturing. A procedure to stimulate production by forcing a mixture
+of fluid and proppant (usually sand) into the formation under high pressure.
+This creates artificial fractures in the reservoir rock, which increases
+permeability and porosity.
+MBbl. One thousand barrels of oil or other liquid hydrocarbons.
+MMBbl. One million barrels of oil or other liquid hydrocarbons.
+MBOE. One thousand barrels of oil equivalent.
+MMBOE. One million barrels of oil equivalent.
+Mcf. One thousand cubic feet.
+MCFE. One thousand cubic feet of gas equivalent. Gas equivalents are determined
+using the ratio of six Mcf of gas (including gas liquids) to one Bbl of oil.
+MMcf. One million cubic feet.
+MMCFE. One million cubic feet of gas equivalent. Gas equivalents are determined
+using the ratio of six Mcf of gas (including gas liquids) to one Bbl of oil.
+MMBtu. One million British Thermal Units. A British Thermal Unit is the heat
+required to raise the temperature of a one-pound mass of water one degree
+Fahrenheit.
+Net acres or net wells. The sum of the fractional working interests owned in
+gross acres or gross wells.
+Net asset value per share. The result of the fair market value of total assets
+less total liabilities, divided by the total number of outstanding shares of
+common stock.
+PV-10 value. The present value of estimated future gross revenue to be generated
+from the production of estimated net proved reserves, net of estimated
+production and future development costs, using prices and costs in effect as of
+the date indicated (unless such prices or costs are subject to change pursuant
+to contractual provisions), without giving effect to non-property related
+expenses such as general and administrative expenses, debt service and future
+income tax expenses or to depreciation, depletion and amortization, discounted
+using an annual discount rate of 10%.
+Productive well. A well that is producing oil or gas or that is capable of
+production.
+Proved developed reserves. Reserves that can be expected to be recovered through
+existing wells with existing equipment and operating methods.
+22
+Proved undeveloped reserves. Reserves that are expected to be recovered from new
+wells on undrilled acreage, or from existing wells where a relatively major
+expenditure is required for recompletion.
+Recompletion. The completion for production of an existing wellbore in another
+formation from that in which the well has previously been completed.
+Reserve life. Expressed in years, represents the estimated net proved reserves
+at a specified date divided by forecasted production for the preceding 12-month
+period.
+Royalty. The interest paid to the owner of mineral rights expressed as a
+percentage of gross income from oil and gas produced and sold unencumbered by
+expenses.
+Royalty interest. An interest in an oil and gas property entitling the owner to
+shares of oil and gas production free of costs of exploration, development and
+production. Royalty interests are approximate and are subject to adjustment.
+Undeveloped acreage. Lease acreage on which wells have not been drilled or
+completed to a point that would permit the production of commercial quantities
+of oil and gas, regardless of whether such acreage contains estimated net proved
+reserves.
+Working interest. The operating interest that gives the owner the right to
+drill, produce and conduct operating activities on the property and to share in
+the production.

raw/filings/0000893538/2002/0000893538-03-000008/item13.txt

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+ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
+The information required by this Item is incorporated by reference to
+the information provided under the caption "Certain Relationships and Related
+Transactions" in St. Mary's definitive proxy statement for the 2003 annual
+meeting of stockholders to be filed within 120 days from December 31, 2002.

raw/filings/0000893538/2002/0000893538-03-000008/rpt_disclosure.txt

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+CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
+Set forth below is a description of transactions entered into between St.
+Mary and certain of its officers and directors during the last fiscal year. Some
+of these transactions will continue in effect and may result in conflicts of
+interest between St. Mary and these individuals. Although these persons owe
+fiduciary duties to St. Mary and its stockholders, we cannot assure you that
+conflicts of interest will always be resolved in favor of St. Mary.
+As a result of their prior employment with another company with which St.
+Mary engaged in a number of transactions, Ronald D. Boone, the Executive Vice
+President and Chief Operating Officer and a director of St. Mary, and two other
+vice presidents of St. Mary own royalty interests in many of St. Mary's
+properties, which were earned as part of the prior employer's employee benefit
+18
+programs. One vice president also owns certain working interests through
+participation in acquisitions made by his former employer. Those persons have no
+royalty participation in any new St. Mary properties.
+Mr. Boone also owns 25% of Princeton Energy LLC, which owns the oil and gas
+working interests that he acquired as a result of his prior employment. Although
+Mr. Boone does not manage this entity, he may participate in any investment
+decisions made by them.
+In July 2000, St. Mary made an interest-free loan of $200,000 to Robert T.
+Hanley at the time he was appointed Vice President - Business Development of St.
+Mary. The loan was made to enable Mr. Hanley to purchase a residence in Denver,
+Colorado in connection with St. Mary's relocation of Mr. Hanley to Denver from
+Billings, Montana, where housing costs are substantially lower. Mr. Hanley was
+previously Chief Financial Officer of Nance Petroleum Corporation, a wholly
+owned subsidiary that St. Mary acquired in June 1999, which has its principal
+offices in Billings. This loan was repaid in October 2002.
+St. Mary's by-laws provide that no director may pursue a business or
+investment opportunity for himself if he has obtained knowledge of such
+opportunity through his affiliation with the Company. Moreover, no officer or
+employee of St. Mary may pursue for his own account an oil and gas opportunity
+irrespective of the source of his knowledge of the opportunity unless (a) with
+respect to an officer of St. Mary, the interest has been approved by the board
+of directors and (b) with respect to a non-officer of St. Mary, such interest of
+the employee has been approved by a senior officer of St. Mary with full
+knowledge of such opportunity. These restrictions do not apply to the
+acquisition of less than one percent of the publicly traded stock of another
+company.

raw/filings/0000893538/2003/0000893538-04-000044/filing_metadata.csv

@@ -0,0 +1,2 @@
+cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing
+0000893538,SM,SM Energy Co,10-K,2004-02-27,2003-12-31,2004-02-27T20:48:01.000Z,0000893538-04-000044,asci1203_10k.htm,12/31/03 FORM 10-K,468920,0,0,https://www.sec.gov/Archives/edgar/data/893538/000089353804000044/asci1203_10k.htm,https://www.sec.gov/Archives/edgar/data/893538/000089353804000044/,2003,2003,1

raw/filings/0000893538/2003/0000893538-04-000044/item1.txt

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+ITEM 1. BUSINESS
+Background
+We are an independent oil and gas company engaged in the exploration,
+exploitation, development, acquisition and production of natural gas and crude
+oil. We were founded in 1908 and incorporated in Delaware in 1915. Our primary
+objective is to invest in oil and gas producing assets that result in a superior
+return on equity while preserving underlying capital, resulting in a return on
+equity to stockholders that reflects capital appreciation as well as the payment
+of cash dividends. Our operations are focused in the following five core
+operating areas in the United States:
+o the Mid-Continent region in Oklahoma and northern Texas, primarily
+in the Anadarko and Arkoma basins, with significant activity in the
+Northeast Mayfield field in Beckham County, Oklahoma;
+o the ArkLaTex region that spans northern Louisiana and portions of
+Arkansas, Mississippi and eastern Texas, with the most recent
+activity in the James Lime Horizontal trend;
+o the Gulf Coast region, including the Judge Digby field and our
+fee property in St. Mary Parish, Louisiana;
+o the Rocky Mountain region consisting of the Williston Basin in
+eastern Montana and western North Dakota and the Powder River,
+Green River and Wind River basins in Wyoming. The most recent
+activity in the Rockies includes the dolomite formations under
+the Bakken Shale; continued exploration in the Red River
+formation, most recently in the Ridgelawn field; and our
+initiation of the development of coalbed methane reserves in the
+Hanging Woman Basin; and
+o the Permian Basin in eastern New Mexico and western Texas.
+As of December 31, 2003, we had estimated proved reserves of
+approximately 47.8 MMBbl of oil and 307.0 Bcf of natural gas, or a total of
+593.7 BCFE, 89 percent of which were proved developed and 52 percent of which
+were natural gas, with a PV-10 value of $1.3 billion. This represents a 21
+percent increase in reserve volumes and a 55 percent increase in PV-10 value
+from a year earlier. For the year ended December 31, 2003, we produced 76.9 BCFE
+representing average daily production of 210.7 MMCFE per day, a 40 percent
+increase over 2002.
+We focus our resources in selected domestic basins where we believe our
+expertise in geology, geophysics and drilling and completion techniques provides
+us with competitive advantages. We have assembled a balanced program of
+low-to-medium-risk development and exploitation projects to provide the
+foundation for steady growth, including a non-conventional gas play in the Rocky
+Mountain region. In 2003, we spent $146.5 million in capital expenditures
+related to drilling activities, $77.4 million on acquisition of oil and gas
+1
+properties and $7.5 million on acquisition of leasehold.
+We measure and rank our investment decisions based on their
+risk-adjusted estimated internal rate of return and return on investment. When
+we issue stock for the acquisition of properties or a corporate entity we base
+our investment decision on the transaction's impact on net asset value per
+share.
+In the past, we have sold selected assets when we believed attractive
+prices were available, and we will continue to evaluate such opportunities in
+the future. For example, in 2003 we sold certain oil and gas properties for
+total proceeds of approximately $23.5 million, resulting in a gain for financial
+reporting purposes of $7.3 million.
+We seek to develop our existing property base and acquire acreage with
+additional potential in our core areas. From January 1, 2001, through December
+31, 2003, we participated in the drilling or recompletion of 691 gross wells
+with an average success rate of 83 percent. During that same period we added
+estimated proved reserves of 483.5 BCFE at an average finding cost of $1.27 per
+MCFE. Our average annual production replacement was 260 percent during this
+three-year period, and our production has grown from an average daily rate of
+148.2 MMCFE per day in 2001 to 210.7 MMCFE per day in 2003.
+As of December 31, 2003, we had an acreage position of 2,004,749 gross
+(1,086,367 net) acres of which 1,284,367 gross (806,326 net) acres were
+undeveloped. Our current leasehold position represents a 75 percent increase on
+a gross acre basis and a 100 percent increase on a net acre basis over 2002. In
+addition to this acreage position, we have 24,914 net acres of fee properties in
+the highly prolific St. Mary Parish of Louisiana and mineral servitudes
+representing 14,296 gross (9,534 net) acres in Louisiana.
+For 2004 we have budgeted capital expenditures of $173.4 million for
+ongoing development, exploitation and exploration programs in our core operating
+areas and $100.0 million for the acquisition of oil and gas properties.
+Our principal offices are located at 1776 Lincoln Street, Suite 700,
+Denver, Colorado 80203, and our telephone number is (303) 861-8140.
+Business Strategy
+Our objective is to build stockholder value through consistent economic
+growth in reserves and production that increase net asset value and earnings per
+share. The principal elements of our strategy are as follows:
+o Maintain Focused Geographic Operations. We focus on exploration,
+development and acquisition activities in five core operating areas
+where we have built a balanced portfolio of proved reserves,
+development drilling opportunities, leasehold and non-conventional
+gas prospects. We believe that our increased leasehold position is a
+strategic asset. Our senior technical managers, each possessing over
+20 years of experience, head up regional technical offices supported
+by centralized administration from our Denver office. We believe
+that our long-standing presence, our established networks of local
+industry relationships and our acreage holdings in our core
+operating areas provide us with a competitive advantage. We believe
+these strengths and our organizational structure will allow us to
+continue to expand our operations without the need to
+proportionately increase the number of our employees.
+2
+o Continue Exploitation and Development of Existing Properties. We use
+our comprehensive base of geological, geophysical, engineering and
+production experience in each of our core operating areas to source
+prospects for our ongoing low-to-medium-risk development and
+exploitation programs. We conduct detailed geologic studies and use
+an array of technologies and tools including 2-D and 3-D seismic
+imaging, hydraulic fracturing and reservoir stimulation techniques,
+secondary recovery and specialized logging tools to enhance the
+potential of our existing properties. In 2003 we participated in the
+drilling or recompletion of 254 gross wells with an 83 percent
+success rate.
+o Make Selective Acquisitions. We seek to make selective niche
+acquisitions of oil and gas properties that complement our existing
+operations, offer economies of scale and provide further
+development, exploitation and exploration opportunities based on
+proprietary geologic concepts. We believe that the focus on
+relatively smaller negotiated transactions where we have specialized
+geologic knowledge or operating experience has enabled us to acquire
+attractively priced and under-exploited properties. In addition, we
+will pursue corporate acquisitions that we believe will be accretive
+and are capable of being integrated into the Company. Examples of
+this type of acquisition include our 1999 Nance Petroleum
+Corporation and King Ranch Energy, Inc. acquisitions, both of which
+were accomplished with the issuance of our common stock. A more
+recent example is the January 2003 acquisition of oil and gas
+properties from Flying J. Although this transaction was not a
+corporate acquisition, we used a combination of restricted stock, a
+loan to Flying J and options on our stock. We have budgeted $100
+million for acquisitions in 2004.
+o Control Operations. We believe it is important to control geologic
+and operational decisions as well as the timing of those decisions.
+As of December 31, 2003, we operated 70 percent of our properties on
+a reserve volume basis and 66 percent on a PV-10 value basis. We are
+the operator of properties representing approximately 75 percent of
+our 2004 capital budget.
+o Maintain Financial Flexibility. Conservative use of financial
+leverage has long been a critical element of our strategy. We
+believe that maintaining a strong balance sheet is a significant
+competitive advantage that enables us to pursue acquisition and
+other opportunities, especially in weaker price environments. It
+also provides us with the financial resources to weather periods of
+volatile commodity prices or escalating costs. Our debt to total
+capitalization ratio was less than 20 percent at the end of December
+2003.
+Significant Developments Since December 31, 2002
+o 2003 Acquisition of Oil and Gas Properties from Flying J. In January
+2003 St. Mary acquired oil and gas properties in our Rocky Mountain
+region from Flying J Oil & Gas Inc. and Big West Oil & Gas
+Inc. (collectively "Flying J"). This acquisition included properties
+located in the Williston, Powder River, Wind River and Green River
+basins with 91.4 BCFE of proved reserves as of the acquisition date
+and significant undeveloped leasehold acreage. During 2003 we
+produced 2,631 MMcf of gas and 778 MBbl of oil from the properties
+acquired from Flying J. As part of the transaction, we issued
+3,380,818 shares of restricted common stock, subject to a put and
+call option agreement. In addition, we made a nonrecourse loan to
+Flying J of $71.6 million, which was secured by a pledge of the
+shares issued. This transaction was valued for financial reporting
+purposes as an acquisition of oil and gas properties in exchange for
+$71.6 million in cash and a net option valued at $1.0 million. As
+discussed below, in February 2004 we repurchased the shares and
+Flying J repaid the loan.
+3
+o Increase in 2003 Year-End Reserves. Proved reserves increased 21
+percent to 593.7 BCFE at December 31, 2003, from 490.8 BCFE at
+December 31, 2002. We added 113.0 BCFE through acquisitions,
+primarily in the Rocky Mountain region, and 91.3 BCFE from drilling
+activities. There were net upward revisions of previous reserves
+totaling 21.0 BCFE. This upward revision was the result of a 6.7
+BCFE increase from price and a 14.3 BCFE increase from performance.
+The 21 percent increase in reserves over last year is net of current
+year sales of oil and gas properties with 45.6 BCFE of reserves.
+o Mid-Continent Drilling Results. The majority of the reserve
+additions from drilling came from our Mid-Continent region and were
+primarily attributable to activity in the Northeast Mayfield area.
+This drilling activity is in the Atoka and Upper Morrow / Springer
+formations.
+o Revolving Credit Agreement. In January 2003 we entered into a new
+long-term revolving credit agreement with nine banks. The facility
+has a maximum loan amount of $300 million and is subject to periodic
+borrowing base calculations. As of the end of 2003, our borrowing
+base is $275 million and we have elected a loan commitment amount of
+$150 million. The maturity date of the facility is January 27, 2006.
+Borrowings under the facility were $11.0 million as of December 31,
+2003.
+o Coal Bed Methane Project. In December 2003, we announced that we are
+proceeding with the development of coalbed methane reserves in the
+Hanging Woman Basin located in the northern part of the Powder River
+Basin along the border between Montana and Wyoming. We have
+approximately 139,000 net lease acres in total. Our development will
+initially concentrate on approximately 65,000 net acres in Wyoming.
+We have estimated probable reserves associated with this
+development, but we have not recorded any proved reserves through
+December 31, 2003.
+o Repurchase of Shares from Flying J. In February 2004, we repurchased
+the 3,380,818 restricted shares of our common stock held by Flying J
+for $91.0 million. In connection with this transaction, Flying J
+completely repaid our $71.6 million loan to them. The $19.4 million
+net cash outlay for the share repurchase was funded from our
+existing cash balances and borrowings under our bank credit
+facility.
+Major Customers
+During 2003 sales to BP America Production Company accounted for 13.6
+percent, sales to Midcoast Energy accounted for 13.1 percent and sales to Tesoro
+Refining and Marketing accounted for 11.4 percent of our total oil and gas
+production revenue. During 2002 there were no sales to individual customers that
+accounted for more than 10 percent of our total oil and gas production revenue.
+During 2001 sales to Transok Gas Company accounted for 12.0 percent and sales to
+BP Amoco accounted for 11.3 percent of our total oil and gas production revenue.
+Employees and Office Space
+As of December 31, 2003, we had 226 full-time employees. None of our
+employees are subject to a collective bargaining agreement, and we consider our
+relations with our employees to be good. We lease approximately 47,395 square
+feet of office space in Denver, Colorado for our executive and administrative
+offices, of which 9,479 square feet is subleased. We also lease approximately
+17,318 square feet of office space in Tulsa, Oklahoma; approximately 11,740
+square feet in Shreveport, Louisiana; approximately 7,500 square feet in
+Lafayette, Louisiana; and approximately 22,160 square feet in Billings, Montana.
+4
+As of March 1, 2004, our Lafayette, Louisiana office will relocate to
+Houston, Texas. The Lafayette lease expires on November 30, 2004, and we plan to
+continue making lease payments through the term of the lease. We will lease
+approximately 11,015 square feet in Houston.
+Title to Properties
+Substantially all of our working interests are held pursuant to leases
+from third parties. A title opinion is usually obtained prior to the
+commencement of drilling operations on properties. We have obtained title
+opinions or conducted a thorough title review on substantially all of our
+producing properties and believe that we have satisfactory title to such
+properties in accordance with standards generally accepted in the oil and gas
+industry. The majority of the value of our properties is subject to a mortgage
+under our credit facility, customary royalty interests, liens for current taxes,
+and other burdens that we believe do not materially interfere with the use of or
+affect the value of such properties. We perform only a minimal title
+investigation before acquiring undeveloped properties.
+Seasonality
+Generally, but not always, the demand and price levels for natural gas
+increase during the colder winter months and decrease during the warmer summer
+months. Seasonal anomalies such as mild winters sometimes lessen this
+fluctuation. In addition, pipelines, utilities, local distribution companies and
+industrial users utilize natural gas storage facilities and purchase some of
+their anticipated winter requirements during the summer, which can lessen
+seasonal demand fluctuations.
+Competition
+The oil and gas industry is intensely competitive. This is particularly
+so in the acquisition of prospective oil and natural gas properties and oil and
+gas reserves. The foundation for a strong drilling program is our leasehold
+position. Our competitive position depends on our geological, geophysical and
+engineering expertise, our financial resources, and our ability to select,
+acquire and develop proved reserves. We believe that the locations of our
+leasehold acreage, our exploration, drilling and production capabilities and the
+experience of our management and that of our industry partners generally enable
+us to compete effectively in our core operating areas. However, we compete with
+a substantial number of major and independent oil and gas companies that have
+larger technical staffs and greater financial and operational resources than we
+do. Many of these companies not only engage in the acquisition, exploration,
+development and production of oil and natural gas reserves, but also have
+refining operations, market refined products and generate electricity. We also
+compete with other oil and natural gas companies in attempting to secure
+drilling rigs and other equipment necessary for drilling and completion of
+wells. Consequently, drilling equipment may be in short supply from time to
+time.
+Government Regulations
+Our business is subject to various federal, state and local laws and
+governmental regulations that may be changed from time to time in response to
+economic or political conditions. Matters subject to regulation include
+discharge permits for drilling operations, drilling bonds, reports concerning
+operations, the spacing of wells, unitization and pooling of properties,
+taxation and environmental protection. From time to time, regulatory agencies
+have imposed price controls and limitations on production by restricting the
+rate of flow of oil and gas wells below actual production capacity in order to
+conserve supplies of oil and gas.
+Energy Regulations. Our sales of natural gas are affected by the
+availability, terms and cost of transportation. The price and terms of access to
+pipeline transportation are subject to extensive federal and state regulation.
+5
+From 1985 to the present, several major regulatory changes have been implemented
+by Congress and the Federal Energy Regulatory Commission that affect the
+economics of natural gas production, transportation and sales. In addition, the
+FERC is continually proposing and implementing new rules and regulations
+affecting those segments of the natural gas industry that remain subject to the
+FERC's jurisdiction, most notably interstate natural gas transmission companies.
+These initiatives may also affect the intrastate transportation of gas under
+certain circumstances. The stated purpose of many of these regulatory changes is
+to promote competition among the various sectors of the natural gas industry.
+The ultimate impact of the complex rules and regulations issued by the
+FERC since 1985 cannot be predicted. In addition, many aspects of these
+regulatory developments have not become final but are still pending judicial and
+final FERC decisions. Regulations implemented by the FERC in recent years could
+result in an increase in the cost of transportation service on certain petroleum
+product pipelines. In addition, some of the FERC's more recent proposals may,
+however, adversely affect the availability and reliability of interruptible
+transportation service on interstate pipelines. Additional proposals and
+proceedings that might affect the natural gas industry are pending before
+Congress and the courts. The natural gas industry historically has been very
+heavily regulated, and there is no assurance that the less stringent regulatory
+approach recently pursued by the FERC and Congress will continue. We do not
+believe that we will be affected by any action taken that differs materially
+from other natural gas producers and marketers with whom we compete.
+Certain operations we conduct involve federal minerals that the
+Minerals Management Service administers. The MMS issues leases covering such
+lands through competitive bidding. These leases contain relatively standardized
+terms and require compliance with federal laws and detailed MMS regulations. For
+offshore operations, lessees must obtain MMS approval for exploration plans and
+development and production plans prior to the commencement of such operations.
+In addition to permits required from other agencies such as the Coast Guard, the
+Army Corps of Engineers and the Environmental Protection Agency, lessees must
+obtain a permit from the MMS prior to the commencement of drilling. Lessees must
+also comply with detailed MMS regulations governing, among other things:
+o engineering and construction specifications for offshore production
+facilities;
+o safety procedures;
+o flaring of production;
+o plugging and abandonment of Outer Continental Shelf wells;
+o calculation of royalty payments and the valuation of production for
+this purpose; and
+o removal of facilities.
+To cover the various obligations of lessees on the OCS, the MMS
+generally requires that lessees post substantial bonds or other acceptable
+assurances that such obligations will be met. The cost of such bonds or other
+surety can be substantial, and we may not be able to continue to obtain bonds or
+other surety in all cases. Under certain circumstances the MMS may require our
+operations on federal leases to be suspended or terminated.
+Many of the states in which we conduct our oil and gas drilling and
+production activities regulate such activities by requiring, among other things,
+drilling permits and bonds and reports concerning operations. The laws of these
+states also govern a number of environmental and conservation matters, including
+6
+the handling and disposing of waste material, plugging and abandonment of wells,
+restoration requirements, unitization and pooling of natural gas and oil
+properties and establishment of maximum rates of production from natural gas and
+oil wells. Some states prorate production to the market demand for oil and
+natural gas.
+Our anticipated coalbed methane gas production from the Hanging Woman
+Basin will be similar to our traditional natural gas production as to the
+physical producing facilities and the product produced. However, the subsurface
+mechanisms that allow the gas to move to the wellbore and the producing
+characteristics of coalbed methane wells are very different from traditional
+natural gas production. Unlike conventional gas wells, which require a porous
+and permeable reservoir, hydrocarbon migration and a natural structural and/or
+stratigraphic trap, the coalbed methane gas is trapped in the molecular
+structure of the coal itself until released by pressure changes resulting from
+the removal of in situ water. Frequently, coalbeds are partly or completely
+saturated with water. As the water is removed, internal pressures on the coal
+are decreased, allowing the gas to desorb from the coal and flow to the
+wellbore. Unlike traditional gas wells, new coalbed methane wells often produce
+water for several months and then, as the water production decreases, natural
+gas production increases as the coal seams de-water.
+Coalbed methane gas production in the Hanging Woman Basin requires
+state permits for the use of well-site pits and evaporation ponds for the
+disposal of produced water. Groundwater produced from the coal seams can
+generally be discharged into arroyos, surface waters, well-site pits and
+evaporation ponds without a permit if it does not exceed surface discharge
+permit levels, and meets state and federal primary drinking water standards. All
+of these disposal options require an extensive third-party water sampling and
+laboratory analysis program to ensure compliance with state permit standards.
+Where water of lesser quality is involved or the wells produce water in excess
+of the applicable volumetric permit limits, additional disposal wells would have
+to be drilled to re-inject the produced water back into deep underground rock
+formations.
+Environmental Regulations. Our operations are subject to numerous
+existing federal, state and local laws and regulations governing environmental
+quality and pollution control. These laws and regulations may require that
+permits be obtained before drilling commences, restrict the types, quantities
+and concentration of various substances that can be released into the
+environment in connection with drilling and production activities, and limit or
+prohibit drilling activities on certain lands lying within wilderness, wetlands
+and other protected areas. As a result, these laws and regulations may
+substantially increase the costs of exploring, developing or producing oil and
+gas and may prevent or delay the commencement or continuation of a project. In
+addition, these laws and regulations may impose substantial clean-up,
+remediation and other obligations in the event of any discharges or emissions in
+violation of such laws and regulations.
+To date we have not experienced any material adverse effect on our
+financial condition or results of operations from obligations under
+environmental laws and regulations. We believe that we are in substantial
+compliance with currently applicable environmental laws and regulations and that
+continued compliance with existing requirements would not have a material
+adverse impact on us.
+Risk Factors
+Risks Related to Our Business
+In addition to the other information set forth elsewhere in this Form
+10-K, the following factors should be carefully considered when evaluating St.
+Mary.
+7
+Oil and natural gas prices are volatile, and an extended decline in prices would
+hurt our profitability and financial condition.
+Our revenues, operating results, profitability, future rate of growth
+and the carrying value of our oil and gas properties depend heavily on
+prevailing market prices for oil and gas. We expect the markets for oil and gas
+to continue to be volatile. Any substantial or extended decline in the price of
+oil or gas would have a material adverse effect on our financial condition and
+results of operations. It could reduce our cash flow and borrowing capacity, as
+well as the value and the amount of our oil and gas reserves. Lower prices may
+also reduce the amount of oil and gas that we can economically produce.
+Historically, the markets for oil and gas have been volatile, and they
+are likely to continue to be volatile. Wide fluctuations in oil and gas prices
+may result from relatively minor changes in the supply of and demand for oil and
+gas, market uncertainty and other factors that are beyond our control,
+including:
+o worldwide and domestic supplies of oil and natural gas;
+o the ability of the members of the Organization of Petroleum
+Exporting Countries to agree to and maintain oil price and
+production controls;
+o political instability or armed conflict in oil or gas producing
+regions;
+o the price and level of foreign imports;
+o worldwide economic conditions;
+o marketability of production;
+o the level of consumer demand;
+o the price, availability and acceptance of alternative fuels;
+o the availability of pipeline capacity;
+o weather conditions; and
+o actions of federal, state, local and foreign authorities.
+These external factors and the volatile nature of the energy markets
+make it difficult to estimate future prices of oil and natural gas. Declines in
+oil and gas prices would reduce our revenue and could also reduce the amount of
+oil and gas that we can produce economically and, as a result, could have a
+material adverse effect on our financial condition, results of operations and
+reserves. Further, oil and gas prices do not necessarily move in tandem. Since
+approximately 52 percent of our proved reserves were natural gas reserves as of
+December 31, 2003, our financial results are slightly more affected by changes
+in natural gas prices.
+Our future success depends on our ability to replace reserves.
+Our future success depends on our ability to find, develop and acquire
+oil and gas reserves that are economically recoverable. As of December 31, 2003,
+our proved reserves would last approximately 7.7 years if produced constantly at
+the 2003 rate of production. However, our properties do not produce at a
+8
+constant rate but rather at a declining rate over time. In order to maintain
+current production rates we must locate and develop or acquire new oil and gas
+reserves to replace those being depleted by production. We may do this even
+during periods of low oil and gas prices. Without successful exploration or
+acquisition activities, our reserves, production and revenues will decline
+rapidly. In addition, approximately 11 percent of our total estimated proved
+reserves as of December 31, 2003 were undeveloped. By their nature, undeveloped
+reserves are less certain. Recovery of such reserves requires significant
+capital expenditures and successful drilling operations. We may not be able to
+find and develop or acquire sufficient additional reserves at an acceptable
+cost.
+Our producing property acquisitions carry significant risks.
+Our recent growth is due in part to, and our growth strategy relies in
+part on, the economic acquisition of producing properties. Successful
+acquisitions require an assessment of a number of factors beyond our control.
+These factors include recoverable reserves, future oil and gas prices, operating
+costs and potential environmental and other liabilities. These assessments are
+inexact and their accuracy is inherently uncertain. In connection with these
+assessments, we perform a review of the subject properties that we believe is
+generally consistent with industry practices. However, such a review will not
+reveal all existing or potential problems. In addition, our review may not
+permit us to become sufficiently familiar with the properties to fully assess
+their deficiencies and capabilities. We do not inspect every well. Even when we
+do inspect a well, we may not always discover structural, subsurface or
+environmental problems that may exist or arise.
+In connection with our acquisitions, we may not be entitled to
+contractual indemnification for preclosing liabilities, including environmental
+liabilities. Normally, we acquire interests in properties on an "as is" basis
+with limited remedies for breaches of representations and warranties. In
+addition, competition for producing oil and gas properties is intense and many
+of our competitors have financial and other resources substantially greater than
+those available to us. Therefore, we may not be able to acquire oil and gas
+properties that contain economically recoverable reserves or we may not be able
+to acquire such properties at acceptable prices.
+Additionally, significant acquisitions can change the nature of our
+operations and business depending upon the character of the acquired properties,
+which may have substantially different operating and geological characteristics
+or be in different geographic locations than our existing properties. While it
+is our current intention to continue to concentrate on acquiring properties with
+development, exploitation and exploration potential located in our five core
+operating areas, we may in the future decide to pursue acquisitions of
+properties located in other geographic regions. To the extent that such acquired
+properties are substantially different than our existing properties, our ability
+to efficiently realize the expected economic benefits of such transactions may
+be limited.
+We may not be able to successfully integrate future property or corporate
+acquisitions.
+We seek to make selective niche acquisitions of oil and gas properties,
+and we will pursue corporate acquisitions that we believe will be accretive.
+However, integrating acquired properties and businesses involves a number of
+special risks. These risks include the possibility that management may be
+distracted from normal business concerns by the need to integrate operations and
+systems and in retaining and assimilating additional employees. Any of these or
+other similar risks could lead to potentially adverse short-term or long-term
+effects on our operating results. We may not be able to obtain adequate funds
+for future property or corporate acquisitions, successfully integrate our future
+property or corporate acquisitions or we may not realize any of the anticipated
+benefits of the acquisitions.
+9
+Substantial capital is required to replace and grow reserves.
+We make, and will continue to make, substantial expenditures to find,
+acquire, develop and produce oil and natural gas reserves. Our capital
+expenditures for oil and gas properties were $231.4 million for 2003 and $193.0
+million during 2002. We have budgeted total capital expenditures of $273.4
+million in 2004. With the cash provided by operating activities and borrowings
+under our credit facility, we believe we will have sufficient cash to fund
+budgeted capital expenditures in 2004. If additional development or attractive
+acquisition opportunities arise, we may consider other forms of financing,
+including the public offering or private placement of equity or debt securities.
+However, if oil and gas prices decrease or we encounter operating difficulties
+that result in our cash flow from operations being less than expected, we may
+have to reduce the capital we can spend in future years unless we raise
+additional funds through debt or equity financing. Debt or equity financing,
+cash generated by operations or borrowing capacity may not be available to us in
+sufficient amounts or on acceptable terms to meet these requirements.
+o Future cash flows and the availability of financing will be
+subject to a number of variables, such as:
+o our success in locating and producing new reserves;
+o the level of production from existing wells;
+o prices of oil and natural gas;
+o lease operating expense, including workovers and taxes; and
+o administrative expense.
+Issuing equity securities to satisfy our financing requirements could
+cause substantial dilution to existing stockholders. Debt financing could lead
+to:
+o a substantial portion of our operating cash flow being dedicated to
+the payment of principal and interest;
+o us being more vulnerable to competitive pressures and economic
+downturns; and
+o restrictions on our operations.
+If our revenues were to decrease due to lower oil and natural gas
+prices, decreased production or other reasons, and if we could not obtain
+capital through our credit facility or otherwise, our ability to execute our
+development plans, replace our reserves or maintain production levels could be
+greatly limited.
+We could incur substantial additional loans, which could negatively impact our
+financial condition, results of operations and business prospects.
+As of December 31, 2003, we had approximately $111.0 million in
+outstanding loans, including $100.0 million outstanding under our 5.75% Senior
+Convertible Notes due 2022. Our level of debt could have important consequences
+on our operations, including:
+10
+o making it more difficult for us to satisfy our debt obligations
+and, if we fail to comply with the requirements of any of our debt
+obligations, possibly resulting in an event of default;
+o requiring us to dedicate a substantial portion of our cash flow
+from operations to required payments on debt, thereby reducing the
+availability of cash flow for working capital, capital
+expenditures and other general business activities;
+o limiting our ability to obtain additional financing in the future
+for working capital, capital expenditures and other general
+business activities;
+o limiting our flexibility in planning for, or reacting to, changes in
+our business and the industry in which we operate;
+o detracting from our ability to withstand successfully a downturn in
+our business or the economy generally; and
+o placing us at a competitive disadvantage against other less
+leveraged competitors.
+The occurrence of any one of these events could have a material adverse effect
+on our business, financial condition, results of operations and business
+prospects.
+The indenture for our Convertible Notes does not limit our ability to
+incur additional debt. We may therefore incur additional debt, including secured
+debt under our bank credit facility or otherwise, in order to make future
+acquisitions or to develop our properties. A higher level of debt increases the
+risk that we may default on our debt obligations. We may not be able to generate
+sufficient cash flow to pay the interest on our debt, and future working
+capital, borrowings or equity financing may not be available to pay or refinance
+such debt.
+In addition, our credit facility borrowing base is subject to periodic
+borrowing base redeterminations. We could be forced to repay a portion of our
+bank borrowings due to redeterminations of our borrowing base. We may not have
+sufficient funds to make such repayments. If we do not have sufficient funds and
+are otherwise unable to negotiate renewals of our borrowing or arrange new
+financing, we may have to sell significant assets. Any such sale could have a
+material adverse effect on our business and financial results.
+We may not be able to obtain bank credit facility borrowing base
+redeterminations that adequately meet our anticipated financing needs.
+Our long-term revolving credit facility with a group of banks has a
+maximum loan amount of $300 million. The amount actually available from time to
+time depends on a borrowing base that the lenders periodically redetermine based
+on the value of our oil and gas properties and other assets. In October 2003 the
+banks conducted their normal semi-annual borrowing base redetermination that
+resulted in a borrowing base of $275 million. Since we pay commitment fees based
+on the unused portion of the borrowing base, we elected to retain a total loan
+commitment amount under the facility of $150 million to correspond with our
+projected funding requirements.
+Our next borrowing base redetermination is scheduled to occur by the
+end of April 2004. The banks may not agree to a borrowing base redetermination
+that is adequate for our financing needs at that time.
+11
+If oil and gas prices decrease or exploration efforts are unsuccessful, we may
+be required to take additional writedowns.
+There is a risk that we will be required to write down the carrying
+value of our oil and gas properties. This could occur when oil and gas prices
+are low or if we have substantial downward adjustments to our estimated proved
+reserves, increases in our estimates of development costs or deterioration in
+our exploration results.
+We follow the successful efforts accounting method. All property
+acquisition costs and costs of exploratory and development wells are capitalized
+when incurred, pending the determination of whether proved reserves have been
+discovered. If proved reserves are not discovered with an exploratory well, the
+costs of drilling the well are expensed. All geological and geophysical costs on
+exploratory prospects are expensed as incurred. The capitalized costs of our oil
+and gas properties, on a field-by-field basis, may not exceed the estimated
+future net cash flows of that field. If capitalized costs exceed future net
+revenues we write down the costs of each such field to our estimate of fair
+market value. Unproved properties are evaluated at the lower of cost or fair
+market value. This type of charge will not affect our cash flow from operating
+activities, but it will reduce the book value of our stockholders' equity. We
+review the carrying value of our properties quarterly, based on prices in effect
+as of the end of each quarter or as of the time of reporting our results. Once
+incurred, a writedown of oil and gas properties is not reversible at a later
+date even if oil or gas prices increase. St. Mary incurred impairment and
+abandonment charges on proved and unproved properties of $4.0 million, $2.4
+million and $4.7 million in 2003, 2002 and 2001, respectively.
+Estimates of oil and gas reserves are not precise.
+This report and other SEC filings by us contain estimates of our proved
+oil and gas reserves and the estimated future net revenues from those reserves.
+Actual results will likely vary from amounts estimated, and any significant
+negative variance could have a material adverse effect on our future results of
+operations.
+Reserve estimates are based on various assumptions, including
+assumptions required by the SEC relating to oil and gas prices, drilling and
+operating expenses, capital expenditures, taxes and availability of funds. The
+process of estimating reserves is complex. This process requires significant
+decisions and assumptions in the evaluation of available geological,
+geophysical, engineering and economic data for each reservoir. Therefore, these
+estimates are not precise. However, the likelihood of recovery of these reserves
+is considered more likely than not.
+Actual future production, oil and gas prices, revenues, taxes,
+development expenditures, operating expenses and quantities of recoverable oil
+and gas reserves will most likely vary from those estimated. Any significant
+variance could materially affect the estimated quantities and present value of
+reserves disclosed by us. In addition, we may adjust estimates of proved
+reserves to reflect production history, results of exploration and development,
+prevailing oil and gas prices and other factors, many of which are beyond our
+control.
+As of December 31, 2003, approximately 11 percent of our estimated
+proved reserves were proved undeveloped. Estimation of proved undeveloped
+reserves and proved developed non-producing reserves is nearly always based on
+volumetric calculations rather than the performance data used to estimate
+producing reserves. Recovery of proved undeveloped reserves requires significant
+capital expenditures and successful drilling operations. Production revenues
+from proved non-producing reserves will not be realized until some time in the
+future. The reserve data assumes that we will make significant capital
+expenditures to develop our reserves. Although we have prepared estimates of our
+reserves and the costs associated with these reserves in accordance with
+12
+industry standards, these estimated costs may not be accurate, development may
+not occur as scheduled and actual results may not be as estimated.
+You should not construe the present value of future net reserves, or
+PV-10, as the current market value of the estimated oil and natural gas reserves
+attributable to our properties. Management has based the estimated discounted
+future net cash flows from proved reserves on prices and costs as of the date of
+the estimate, in accordance with applicable regulations, whereas actual future
+prices and costs may be materially higher or lower. For example, values of our
+reserves as of December 31, 2003, were estimated using a calculated weighted
+average sales price of $31.01 per barrel of oil (NYMEX) and $5.70 per Mcf of gas
+(Gulf Coast spot price), after adjustment for transportation, quality and basis
+differentials. During 2003 our monthly average realized gas prices were as high
+as $9.28 per Mcf and as low as $4.49 per Mcf. For the same period our monthly
+average realized oil prices were as high as $35.73 per Bbl and as low as $28.07
+per Bbl. Many factors will affect actual future net cash flows, including:
+o the amount and timing of actual production,
+o supply and demand for oil and natural gas,
+o curtailments or increases in consumption by oil and natural gas
+purchasers, and
+o changes in governmental regulations or taxation.
+The timing of the production of oil and natural gas properties and of
+the related expenses affects the timing of actual future net cash flows from
+proved reserves and thus their actual present value. In addition, the 10 percent
+discount factor, which we are required to use to calculate PV-10 for reporting
+purposes, is not necessarily the most appropriate discount factor given actual
+interest rates and risks to which our business or the oil and natural gas
+industry in general are subject. As a result, our actual future net cash flows
+could be materially different from the estimates included in this report.
+Our industry is highly competitive.
+Major oil companies, independent producers, and institutional and
+individual investors are actively seeking oil and gas properties throughout the
+world, along with the equipment, labor and materials required to operate
+properties. Shortages for equipment, labor or materials may result in increased
+costs or the inability to obtain such resources as needed. Many of our
+competitors have financial and technological resources vastly exceeding those
+available to us. Many oil and gas properties are sold in a competitive bidding
+process in which we may lack technological information or expertise available to
+other bidders. We may not be successful in acquiring and developing profitable
+properties in the face of this competition.
+Exploration and development drilling may not result in commercially productive
+reserves.
+Oil and gas drilling and production activities are subject to numerous
+risks, including the risk that no commercially productive oil or natural gas
+will be found. The cost of drilling and completing wells is often uncertain, and
+oil and gas drilling and production activities may be shortened, delayed or
+canceled as a result of a variety of factors, many of which are beyond our
+control. These factors include:
+o unexpected drilling conditions;
+13
+o pressure or irregularities in formations;
+o equipment failures or accidents;
+o adverse weather conditions;
+o shortages in experienced labor;
+o compliance with governmental requirements; and
+o shortages or delays in the availability of drilling rigs and the
+delivery of equipment.
+The prevailing prices of oil and gas also affect the cost of and the
+demand for drilling rigs, production equipment and related services.
+The wells we drill may not be productive and we may not recover all or
+any portion of our investment in such wells. The seismic data and other
+technologies we use do not allow us to know conclusively prior to drilling a
+well that oil or gas is present or may be produced economically. The cost of
+drilling, completing and operating a well is often uncertain, and cost factors
+can adversely affect the economics of a project. Drilling activities can result
+in dry wells or wells that are productive but do not produce sufficient net
+revenues after operating and other costs to cover initial drilling costs.
+Our future drilling activities may not be successful, nor can we be
+sure that our overall drilling success rate or our drilling success rate for
+activity within a particular area will not decline. Unsuccessful drilling
+activities could have a material adverse effect on our results of operations and
+financial condition. Also, we may not be able to obtain any options or lease
+rights in potential drilling locations that we identify. Although we have
+identified numerous potential drilling locations, we may not be able to
+economically produce oil or natural gas from all of them.
+Our business is subject to operating and environmental risks and hazards that
+could result in substantial losses.
+Oil and gas operations are subject to many risks, including well
+blowouts, craterings, explosions, uncontrollable flows of oil, natural gas or
+well fluids, fires, formations with abnormal pressures, pipeline ruptures or
+spills, pollution, releases of toxic gas and other environmental risks and
+hazards. If any of these types of events occurs, we could sustain substantial
+losses as a result of:
+o personal injuries or loss of life;
+o severe damage to or destruction of property, natural resources and
+equipment;
+o pollution or other environmental damage due to spills or other
+discharges of hazardous materials;
+o clean-up and remediation responsibilities and costs;
+o regulatory investigations and penalties; and/or
+o suspension of operations.
+14
+Under certain limited circumstances we may be liable for environmental
+damage caused by previous owners or operators of properties that we own, lease
+or operate. As a result, we may incur substantial liabilities to third parties
+or governmental entities, which could reduce or eliminate funds available for
+exploration, development or acquisitions or cause us to incur losses.
+We maintain insurance against some, but not all, of these potential
+risks and losses. We have limited coverage for sudden environmental damages. We
+do not believe that insurance coverage for the full potential liability that
+could be caused by sudden environmental damages or insurance coverage for
+environmental damage that occurs over time is available at a reasonable cost. In
+addition, pollution and environmental risks generally are not fully insurable.
+Further, we may elect not to obtain other insurance coverage under circumstances
+where we believe that the cost of available insurance is excessive relative to
+the risks presented. Accordingly, we may be subject to liability or may lose
+substantial portions of our properties in the event of environmental or other
+damages. If a significant accident or other event occurs and is not fully
+covered by insurance, it could have a material adverse effect on our financial
+condition and results of operations.
+Other independent oil and gas companies' limited access to capital may change
+our exploration and development plans.
+Many independent oil and gas companies have limited access to the
+capital necessary to finance their activities. As a result, some of the other
+working interest owners of our wells may be unwilling or unable to pay their
+share of the costs of projects as they become due. These problems could cause us
+to change, suspend or terminate our drilling and development plans with respect
+to the affected project.
+Hedging transactions may limit our potential gains and involve other risks.
+To manage our exposure to price risks in the marketing of our oil and
+natural gas, we enter into commodity price risk management arrangements from
+time to time with respect to a portion of our current or future production.
+While intended to reduce the effects of volatile oil and natural gas prices,
+these transactions may limit our potential gains if oil or natural gas prices
+were to rise substantially over the price established by the hedge. In addition,
+such transactions may expose us to the risk of financial loss in certain
+circumstances, including instances in which:
+o our production is less than expected;
+o the counterparties to our futures contracts fail to perform under
+the contracts; or
+o a sudden, unexpected event materially impacts oil or natural gas
+prices.
+The terms of our hedging agreements may also require that we furnish
+cash collateral, letters of credit or other forms of performance assurance in
+the event that mark-to-market calculations result in settlement obligations by
+us to the counterparties, which would encumber our liquidity and capital
+resources.
+Our industry is heavily regulated.
+Federal, state and local authorities extensively regulate the oil and
+gas industry. Legislation and regulations affecting the industry are under
+constant review for amendment or expansion, raising the possibility of changes
+that may affect, among other things, the pricing or marketing of oil and gas
+production. Noncompliance with statutes and regulations may lead to substantial
+penalties, and the overall regulatory burden on the industry increases the cost
+of doing business and, in turn, decreases profitability. These authorities
+15
+regulate various aspects of oil and gas drilling and production activities,
+including the drilling of wells (through permit and bonding requirements), the
+spacing of wells, the unitization or pooling of oil and gas properties,
+environmental matters, safety standards, the sharing of markets, production
+limitations, plugging and abandonment, and restoration. To cover the various
+obligations of leaseholders in federal waters, federal authorities generally
+require that leaseholders have substantial net worth or post bonds or other
+acceptable assurances that such obligations will be met. The cost of these bonds
+or other surety can be substantial, and we may not be able to obtain bonds or
+other surety in all cases. Under limited circumstances, federal authorities may
+require any of our operations on federal leases to be suspended or terminated.
+Any such suspension or termination could materially adversely affect our
+financial condition and results of operations.
+We must comply with complex environmental regulations.
+Our operations are subject to complex and constantly changing
+environmental laws and regulations adopted by federal, state and local
+governmental authorities where we are engaged in exploration or production
+operations. New laws or regulations, or changes to current requirements, could
+have a material adverse effect on our business. We will continue to be subject
+to uncertainty associated with new regulatory interpretations and inconsistent
+interpretations between state and federal agencies. We could face significant
+liabilities to the government and third parties for discharges of oil, natural
+gas or other pollutants into the air, soil or water, and we could have to spend
+substantial amounts on investigations, litigation and remediation. Existing
+environmental laws or regulations, as currently interpreted or enforced, or as
+they may be interpreted, enforced or altered in the future, may have a material
+adverse effect on our results of operations and financial condition. As a
+result, we may face material claims with respect to properties we own or have
+owned.
+Our business depends on transportation facilities owned by others.
+The marketability of our oil and gas production depends in part on the
+availability, proximity and capacity of pipeline systems owned by third parties.
+The unavailability of or lack of available capacity on these systems and
+facilities could result in the shutting-in of producing wells or the delay or
+discontinuance of development plans for properties. Although we have some
+contractual control over the transportation of our product, material changes in
+these business relationships could materially affect our operations. Federal and
+state regulation of oil and gas production and transportation, tax and energy
+policies, changes in supply and demand, pipeline pressures, damage to or
+destruction of pipelines and general economic conditions could adversely affect
+our ability to produce, gather and transport oil and natural gas.
+We depend on key personnel.
+Our success will continue to depend on the continued services of our
+executive officers and a limited number of other senior management and technical
+personnel with extensive experience and expertise in evaluating and analyzing
+producing oil and gas properties and drilling prospects, maximizing production
+from oil and gas properties and marketing oil and gas production. Loss of the
+services of any of these people could have a material adverse effect on our
+operations. We currently do not have employment agreements with our executive
+officers other than Mark Hellerstein, our Chief Executive Officer. We do not
+carry any key person life insurance policies.
+Ownership of working interests, royalty interests and other interests by a
+director and some of our officers may create conflicts of interest.
+As a result of their prior employment with another company with which
+St. Mary engaged in a number of transactions, Ronald D. Boone, a director of St.
+Mary, and two vice presidents of St. Mary own royalty interests in a number of
+St. Mary's properties, which were earned as part of the prior employer's
+employee benefit programs. Those persons have no royalty participation in any
+16
+St. Mary properties acquired or developed subsequent to the beginning of their
+employment with St. Mary.
+Mr. Boone also owns 25 percent of Princeton Resources LLC, which owns
+the oil and gas working interests that he acquired as a result of his prior
+employment. Although Mr. Boone does not manage this entity, he may participate
+in any investment decisions made by it.
+As a result of these transactions and relationships, conflicts of
+interest may exist between these persons and us. Although these persons owe
+fiduciary duties to our stockholders and to us, conflicts of interest may not
+always be resolved in our favor.
+Risks Related to Our Common Stock
+The price of our common stock may fluctuate significantly, which may result in
+losses for investors.
+The market price of our common stock has been volatile. From January 1,
+2002, to February 20, 2004, the last daily sale price of our common stock
+reported by the New York Stock Exchange or the NASDAQ National Market ranged
+from a low of $18.75 per share to a high of $30.70 per share. We expect our
+stock to continue to be subject to fluctuations as a result of a variety of
+factors, including factors beyond our control. These include:
+o changes in oil and natural gas prices;
+o variations in quarterly drilling, recompletions, acquisitions and operating results;
+o changes in financial estimates by securities analysts;
+o changes in market valuations of comparable companies;
+o additions or departures of key personnel; and
+o future sales of our common stock.
+We may fail to meet expectations of our stockholders or of securities
+analysts at some time in the future, and our stock price could decline as a
+result.
+Our certificate of incorporation and bylaws have provisions that discourage
+corporate takeovers and could prevent shareholders from realizing a premium on
+their investment.
+Our certificate of incorporation and bylaws contain provisions that may
+have the effect of delaying or preventing a change of control. These provisions,
+among other things, provide for noncumulative voting in the election of the
+Board of Directors and impose procedural requirements on stockholders who wish
+to make nominations for the election of Directors or propose other actions at
+stockholders' meetings. These provisions, alone or in combination with each
+other and with the rights plan described below, may discourage transactions
+involving actual or potential changes of control, including transactions that
+otherwise could involve payment of a premium over prevailing market prices to
+shareholders for their common stock
+We have a stockholder rights plan that was adopted by our Board of
+Directors in 1999. The plan is designed to enhance the board's ability to
+prevent an acquirer from depriving stockholders of the long-term value of their
+investment and to protect stockholders against attempts to acquire us by means
+of unfair or abusive takeover tactics. If the Board of Directors decides in
+accordance with its fiduciary obligations that the terms of a potential
+acquisition do not reflect the long-term value of St. Mary, the Board of
+17
+Directors could allow the holder of each outstanding share of our common stock
+other than those held by the potential acquirer to purchase one additional share
+of our common stock with a market value of twice the exercise price. This
+prospective dilution to a potential acquirer would make the acquisition
+impracticable unless the terms were improved to the satisfaction of the Board of
+Directors. The existence of the plan may impede a takeover not supported by our
+board even though such takeover may be desired by a majority of our stockholders
+or may involve a premium over the prevailing stock price.
+Our shares that are eligible for future sale may have an adverse effect on the
+price of our common stock.
+At February 20, 2004, we had 28,339,963 shares of common stock
+outstanding. Of the shares outstanding, approximately 27,156,818 shares were
+freely tradable without substantial restriction or the requirement of future
+registration under the Securities Act. Also as of that date, options to purchase
+3,431,278 shares of our common stock were outstanding, of which 2,347,985 were
+exercisable. These options are exercisable at prices ranging from $9.25 to
+$33.31 per share. Sales of substantial amounts of common stock, or a perception
+that such sales could occur, and the existence of options or warrants to
+purchase shares of commons stock at prices that may be below the then-current
+market price of the common stock could adversely affect the market price of the
+common stock and could impair our ability to raise capital through the sale of
+our equity securities.
+A director and his extended family may be able to control us.
+Thomas E. Congdon, a director and our former Chairman of the Board, and
+members of his extended family owned approximately 14.4 percent of the
+outstanding shares of our common stock as of February 20, 2004. While no formal
+arrangements exist, these extended family members may be inclined to act in
+concert with Mr. Congdon on matters related to control of St. Mary, including
+for example the election of Directors or response to an unsolicited bid to
+acquire St. Mary. Accordingly, Mr. Congdon and his family may be able to control
+or influence matters presented to our Board of Directors and stockholders.
+We may not always pay dividends on our common stock.
+The payment of future dividends remains in the discretion of the Board
+of Directors and will continue to depend on our earnings, capital requirements,
+financial condition and other factors. In addition, the payment of dividends is
+subject to covenants in our bank credit facility, including the requirement that
+we maintain certain levels of stockholder's equity. The Board of Directors may
+determine in the future to reduce the current annual dividend rate of $0.10 per
+share or discontinue the payment of dividends altogether. Our credit facility
+limits the annual per share dividend rate that we may pay to $0.20.
+Cautionary Statement about Forward-Looking Statements
+This Annual Report on Form 10-K includes certain statements that may be
+deemed to be "forward-looking statements" within the meaning of Section 27A of
+the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
+1934. All statements, other than statements of historical facts, included in
+this Form 10-K that address activities, events or developments that St. Mary's
+management expects, believes or anticipates will or may occur in the future are
+forward looking statements. Examples of forward-looking statements may include
+discussion of such matters as:
+o The amount and nature of future capital, development and exploration
+expenditures;
+18
+o The drilling of wells;
+o Reserve estimates and the estimates of both future net revenues and
+the present value of future net revenues that are included in their
+calculation;
+o Future oil and gas production estimates;
+o Repayment of debt;
+o Business strategies;
+o Expansion and growth of operations; and
+o Other similar matters such as those discussed in Management's
+Discussion and Analysis of Financial Condition and Results of
+Operations.
+These statements are based on certain assumptions and analyses made by us in
+light of our experience and our perception of historical trends, current
+conditions, expected future developments and other factors we believe are
+appropriate in the circumstances. Such statements are subject to a number of
+assumptions, risks and uncertainties, including such factors as the volatility
+and level of oil and natural gas prices, uncertainties in cash flow, expected
+acquisition benefits, production rates and reserve replacement, reserve
+estimates, drilling and operating risks, competition, litigation, environmental
+matters, the potential impact of government regulations, and other matters
+discussed under the caption "Risk Factors", many of which are beyond our
+control. Readers are cautioned that forward-looking statements are not
+guarantees of future performance and that actual results or developments may
+differ materially from those expressed or implied in the forward-looking
+statements.
+Available Information
+Our Internet website address is www.stmaryland.com. Through our
+website's financial information section we make available free of charge our
+annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on
+Form 8-K, and amendments to those reports filed with or furnished to the SEC
+under applicable securities laws. These materials are made available as soon as
+reasonably practical after we electronically file such material with, or furnish
+it to, the SEC.
+We also make available through our website's corporate governance
+section our corporate governance guidelines, code of business conduct and
+ethics, and the charters for our Board of Directors' audit committee,
+compensation committee, executive committee and nominating and corporate
+governance committee. These documents are also available in print to any
+stockholder who requests them. Requests for these documents may be submitted to:
+St. Mary Land & Exploration Company
+Investor Relations
+1776 Lincoln Street, Suite 700
+Denver, Colorado 80203
+Telephone: (303) 863-4322
+Information on our website is not incorporated by reference into this
+Annual Report on Form 10-K and should not be considered part of this document.
+19
+Glossary
+The terms defined in this section are used throughout this Annual
+Report on Form 10-K.
+2-D seismic or 2-D data. Seismic data that are acquired and processed to yield a
+two-dimensional cross-section of the subsurface.
+3-D seismic or 3-D data. Seismic data that are acquired and processed to yield a
+three-dimensional picture of the subsurface.
+Bbl. One stock tank barrel, or 42 U.S. gallons liquid volume, used herein in
+reference to oil or other liquid hydrocarbons.
+Bcf. Billion cubic feet, used herein in reference to natural gas.
+BCFE. Billion cubic feet of gas equivalent. Gas equivalents are determined using
+the ratio of six Mcf of gas (including gas liquids) to one Bbl of oil.
+Behind pipe reserves. Estimated net proved reserves in a formation in which
+production casing has already been set in the wellbore but has not been
+perforated and production tested.
+BOE. Barrels of oil equivalent. Oil equivalents are determined using the ratio
+of six Mcf of gas (including gas liquids) to one Bbl of oil.
+Development well. A well drilled within the proved area of an oil or gas
+reservoir to the depth of a stratigraphic horizon known to be productive in an
+attempt to recover proved undeveloped reserves.
+Dry hole. A well found to be incapable of producing either oil or gas in
+sufficient quantities to justify completion as an oil or gas well.
+Estimated net proved reserves. The estimated quantities of oil, gas and gas
+liquids which geological and engineering data demonstrate with reasonable
+certainty to be recoverable in future years from known reservoirs under existing
+economic and operating conditions.
+Exploratory well. A well drilled to find and produce oil or gas in an unproved
+area, to find a new reservoir in a field previously found to be productive of
+oil or gas in another reservoir or to extend a known reservoir.
+Fee land. The most extensive interest that can be owned in land, including
+surface and mineral (including oil and gas) rights.
+Finding cost. Expressed in dollars per BOE or MCFE. Finding costs are calculated
+by dividing the amount of total capital expenditures for oil and gas activities
+by the amount of estimated net proved reserves added during the same period
+(including the effect on proved reserves of reserve revisions).
+Gross acres. An acre in which a working interest is owned.
+Gross well. A well in which a working interest is owned.
+Hydraulic fracturing. A procedure to stimulate production by forcing a mixture
+of fluid and proppant (usually sand) into the formation under high pressure.
+This creates artificial fractures in the reservoir rock, which increases
+permeability and porosity.
+20
+MBbl. One thousand barrels of oil or other liquid hydrocarbons.
+MMBbl. One million barrels of oil or other liquid hydrocarbons.
+MBOE. One thousand barrels of oil equivalent.
+MMBOE. One million barrels of oil equivalent.
+Mcf. One thousand cubic feet.
+MCFE. One thousand cubic feet of gas equivalent. Gas equivalents are determined
+using the ratio of six Mcf of gas (including gas liquids) to one Bbl of oil.
+MMcf. One million cubic feet.
+MMCFE. One million cubic feet of gas equivalent. Gas equivalents are determined
+using the ratio of six Mcf of gas (including gas liquids) to one Bbl of oil.
+MMBtu. One million British Thermal Units. A British Thermal Unit is the heat
+required to raise the temperature of a one-pound mass of water one degree
+Fahrenheit.
+Net acres or net wells. The sum of our fractional working interests owned in
+gross acres or gross wells.
+Net asset value per share. The result of the fair market value of total assets
+less total liabilities, divided by the total number of outstanding shares of
+common stock.
+PV-10 value. The present value of estimated future gross revenue to be generated
+from the production of estimated net proved reserves, net of estimated
+production and future development costs, using prices and costs in effect as of
+the date indicated (unless such prices or costs are subject to change pursuant
+to contractual provisions), without giving effect to non-property related
+expenses such as general and administrative expenses, debt service and future
+income tax expenses or to depreciation, depletion and amortization, discounted
+using an annual discount rate of 10 percent.
+Productive well. A well that is producing oil or gas or that is capable of
+production.
+Proved developed reserves. Reserves that can be expected to be recovered through
+existing wells with existing equipment and operating methods.
+Proved undeveloped reserves. Reserves that are expected to be recovered from new
+wells on undrilled acreage, or from existing wells where a relatively major
+expenditure is required for recompletion.
+Recompletion. The completion for production from an existing wellbore in another
+formation other than that in which the well has previously been completed.
+Reserve life. Expressed in years, represents the estimated net proved reserves
+at a specified date divided by forecasted production for the preceding 12-month
+period.
+Royalty. The share paid to the owner of mineral rights expressed as a percentage
+of gross income from oil and gas produced and sold unencumbered by expenses
+relating to the drilling, completing and operating of the affected well.
+Royalty interest. An interest in an oil and gas property entitling the owner to
+shares of oil and gas production free of costs of exploration, development and
+production.
+21
+Undeveloped acreage. Lease acreage on which wells have not been drilled or
+completed to a point that would permit the production of commercial quantities
+of oil and gas, regardless of whether such acreage contains estimated net proved
+reserves.
+Working interest. The operating interest that gives the owner the right to
+drill, produce and conduct operating activities on the property and to share in
+the production.

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+ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
+The information required by this Item is incorporated by reference to
+the information provided under the caption "Certain Relationships and Related
+Transactions" in St. Mary's definitive proxy statement for the 2004 annual
+meeting of stockholders to be filed within 120 days from December 31, 2003.

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+ITEM 9A. CONTROLS AND PROCEDURES
+We maintain a system of disclosure controls and procedures that are
+designed for the purposes of ensuring that information required to be disclosed
+in our SEC reports is recorded, processed, summarized and reported within the
+time periods specified in the SEC's rules and forms, and that such information
+is accumulated and communicated to our management, including the Chief Executive
+Officer and the Vice-President - Finance, as appropriate to allow timely
+decisions regarding required disclosure.
+We carried out an evaluation, under the supervision and with the
+participation of our management, including the Chief Executive Officer and the
+Vice-President - Finance, of the effectiveness of the design and operation of
+our disclosure controls and procedures as of the end of the period covered by
+this Annual Report on Form 10-K. Based upon that evaluation, the Chief Executive
+Officer and the Vice-President - Finance concluded that our disclosure controls
+and procedures are effective for the purposes discussed above as of the end of
+the period covered by this Annual Report on Form 10-K. There was no significant
+change in our internal control over financial reporting that occurred during our
+most recent fiscal quarter that has materially affected, or is reasonably likely
+to materially affect, our internal control over financial reporting.
+57
+PART III

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+CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 
+Set forth below is a description of transactions entered into between St. Mary and certain of its officers and directors during the last fiscal year. Some of
+these transactions will continue in effect and may result in conflicts of interest between St. Mary and these individuals. Although these persons owe fiduciary duties to St. Mary and its stockholders,
+we cannot assure you that conflicts of interest will always be resolved in favor of St. Mary. 
+As
+a result of their prior employment with another company with which St. Mary engaged in a number of transactions, Ronald D. Boone, a director of St. Mary, and two vice presidents of
+St. Mary own royalty interests in certain of St. Mary's properties, which were earned as part of the prior employer's employee benefit programs. One vice president also owns certain working interests
+through participation in acquisitions made by his former employer. Those persons have no royalty participation or working interest in any new St. Mary properties. 
+18 
+Mr. Boone
+also owns 25% of Princeton Energy LLC, which owns the oil and gas working interests that he acquired as a result of his prior employment. Although Mr. Boone does
+not manage this entity, he may participate in any investment decisions made by them. 
+St.
+Mary's by-laws provide that no director, officer or employee may pursue for his or her own account a business or investment opportunity if he or she has obtained
+knowledge of such opportunity through his or her affiliation with the Company. In addition, no officer or employee of St. Mary may pursue for his or her own account an oil and gas opportunity as to
+which his or her knowledge of the opportunity was not obtained through his or her affiliation with the Company unless (a) with respect to an officer of St. Mary, the officer's pursuit of the
+opportunity has been approved by the Board of Directors and (b) with respect to a non-officer of St. Mary, the employee's pursuit of the opportunity has been approved by a senior
+officer of St. Mary with full knowledge of such opportunity. These restrictions do not apply to the acquisition of less than one percent of the publicly traded stock of another company.

raw/filings/0000893538/2004/0000893538-05-000026/filing_metadata.csv

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+0000893538,SM,SM Energy Co,10-K,2005-02-25,2004-12-31,2005-02-25T18:38:05.000Z,0000893538-05-000026,asci1204_10k.htm,10-K 12/31/04 ST MARY LAND & EXPLORATION,443522,0,0,https://www.sec.gov/Archives/edgar/data/893538/000089353805000026/asci1204_10k.htm,https://www.sec.gov/Archives/edgar/data/893538/000089353805000026/,2004,2004,1

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+ITEM 1. BUSINESS
+Background
+We are an independent oil and gas company engaged in the exploration,
+exploitation, development, acquisition and production of natural gas and crude
+oil. We were founded in 1908 and incorporated in Delaware in 1915. Our primary
+objective is to invest in oil and gas producing assets that result in a superior
+return on equity while preserving underlying capital, resulting in a return on
+equity to stockholders that reflects capital appreciation as well as the payment
+of cash dividends. Our operations are focused in the following five core
+operating areas in the United States:
+o the Mid-Continent region in western Arkansas, Oklahoma and
+northern Texas, primarily in the Anadarko and Arkoma basins,
+with significant activity in the Northeast Mayfield field;
+o the Rocky Mountain region consisting of the Williston Basin in
+eastern Montana and western North Dakota and the Powder River,
+Green River, Wind River and Big Horn basins in Wyoming. The
+most recent activity in the Rockies includes drilling in the
+Middle Bakken formations, continued exploration in the Red
+River formation, and the development of coalbed methane
+reserves in the Hanging Woman Basin;
+o the ArkLaTex region that spans northern Louisiana and southern
+Arkansas, Mississippi and eastern Texas, with the most recent
+activity drilling horizontal wells in the James and Pettet
+Limestones;
+o the Gulf Coast region, including the Judge Digby field and our
+fee property in St. Mary Parish, Louisiana;
+o the Permian Basin in eastern New Mexico and western Texas;
+included in this area is the Parkway Delaware Unit and the
+East Shugart Delaware Unit in New Mexico.
+As of December 31, 2004, we had estimated proved reserves of
+approximately 56.6 MMBbl of oil and 319.2 Bcf of natural gas, or a total of
+658.6 BCFE with a PV-10 value of $1.5 billion. Of these reserves, 85 percent
+were proved developed and 52 percent were crude oil. This represents an
+increase in reserve volumes of 11 percent and a 17 percent increase in PV-10
+value from a year earlier. For the year ended December 31, 2004, we produced
+75.4 BCFE representing average daily production of 206.0 MMCFE, a two percent
+decrease from 2003. Our reserve replacement in 2004 was 190 percent of
+production. Included in the proved reserve total at December 31, 2004 is 9.4
+BCFE in our coalbed methane projects in the Hanging Woman Basin and the Atlantic
+Rim field.
+We attempt to focus our resources in selected domestic basins where we
+believe our expertise in geology, geophysics and drilling and completion
+techniques provides us with competitive advantages. We have assembled a balanced
+program of low-to-medium-risk development and exploitation projects to provide
+1
+the foundation for steady growth, including non-conventional gas plays in the
+Rocky Mountain region. In 2004 we spent $228.8 million in capital expenditures
+related to drilling activities, $76.7 million on acquisition of oil and gas
+properties and $7.9 million on leasing activity.
+We measure and rank our investment decisions based on their
+risk-adjusted estimated internal rate of return and return on investment. In
+2004 all acquisitions were funded with available cash and funding from our
+revolving credit facility. When we issue stock for the acquisition of properties
+or a corporate entity, we base our investment decision primarily on the
+transaction's impact on net asset value per share.
+We divest selected non-core assets when market conditions and prices
+are attractive, and we will continue to evaluate such opportunities in the
+future. For example, in 2004 we sold certain oil and gas properties for total
+proceeds of approximately $2.8 million, resulting in a gain of $1.8 million.
+We seek to develop our existing property base and acquire acreage with
+additional potential in our core areas. From January 1, 2002, through December
+31, 2004, we participated in the drilling or recompletion of 777 gross wells
+with a success rate of 84 percent. During that same period we added estimated
+proved reserves of 537.0 BCFE at an average finding cost of $1.38 per MCFE. Our
+average annual production replacement was 259 percent during this three-year
+period, and our production has grown from an average daily rate of 150.8 MMCFE
+per day in 2002 to 206.0 MMCFE per day in 2004. Production in December 2004
+averaged 216.7 MMCFE per day.
+As of December 31, 2004, we had an acreage position of 1,969,808 gross
+(1,037,522 net) acres of which 1,184,086 gross (722,396 net) acres were
+undeveloped. Our current leasehold position represents a 2 percent decrease on a
+gross acre basis and a 5 percent decrease on a net acre basis from 2003. In
+addition to the leased acreage position, we own 24,914 net acres of fee
+properties in St. Mary Parish, Louisiana and mineral servitudes representing
+14,316 gross (9,514 net) acres in other portions of Louisiana.
+For 2005 we have budgeted capital expenditures of $293 million for
+ongoing development, exploitation and exploration programs in our core operating
+areas and $125 million for the acquisition of oil and gas properties.
+Our principal offices are located at 1776 Lincoln Street, Suite 700,
+Denver, Colorado 80203, and our telephone number is (303) 861-8140.
+Business Strategy
+Our objective is to build stockholder value through consistent economic
+growth in reserves and production that increase net asset value and earnings per
+share. The principal elements of our strategy are as follows:
+o Maintain Focused Geographic Operations. We focus on
+exploration, development and acquisition activities in five
+core operating areas where we have built a balanced portfolio
+of proved reserves, development drilling opportunities,
+leasehold, and non-conventional gas prospects. We believe that
+our significant leasehold position is a strategic asset. Our
+senior technical managers, each possessing over 15 years of
+industry experience, head up fully-staffed regional technical
+offices that are supported by centralized administration from
+our Denver office. We believe that our long-standing presence,
+our application of technology, our established networks of
+2
+local industry relationships and our acreage holdings in our
+core operating areas provide us with a competitive advantage.
+o Continue Exploitation and Development of Existing Properties.
+We use our comprehensive base of geological, geophysical,
+engineering and production experience in each of our core
+operating areas to source prospects for our ongoing
+low-to-medium-risk development and exploitation programs. We
+conduct detailed geologic studies and use an array of
+technologies and tools including 2-D and 3-D seismic imaging,
+hydraulic fracturing and reservoir stimulation techniques,
+horizontal drilling, secondary recovery and specialized
+logging tools to enhance the potential of our existing
+properties. In 2004 we participated in the drilling or
+recompletion of 368 gross wells with an 88 percent success
+rate.
+o Make Selective Acquisitions. We make selective acquisitions of
+oil and gas properties that complement our existing
+operations, offer economies of scale and provide further
+development, exploitation and exploration opportunities based
+on proprietary geologic concepts. We focus on relatively small
+transactions where we have specialized geologic knowledge or
+operating experience to enable us to acquire attractively
+priced properties. In addition, we pursue corporate
+acquisitions that we believe are accretive and capable of
+being integrated into the Company. In 2004, we acquired the
+stock of Goldmark Engineering, Inc., and in early 2005 we
+completed the acquisition of Agate Petroleum, Inc. Other
+examples of corporate acquisitions include our 1999 Nance
+Petroleum Corporation and King Ranch Energy, Inc.
+acquisitions, both of which were accomplished with the
+issuance of our common stock. The Flying J Oil & Gas Inc.
+et al. property acquisition transaction completed in 2003 was
+not a corporate acquisition. We used a combination of
+restricted stock, a loan to Flying J and options on our common
+stock to consummate this transaction. We have budgeted $125
+million for acquisitions in 2005.
+o Control Operations. We believe it is important to control
+geologic and operational decisions as well as the timing of
+those decisions. As of December 31, 2004, we operated 69
+percent of our properties on a reserve volume basis and 66
+percent on a PV-10 value basis. We are the operator of
+properties representing approximately 71 percent of our 2005
+capital budget.
+o Maintain Financial Flexibility. Conservative use of financial
+leverage has long been a critical element of our strategy. We
+believe that maintaining a strong balance sheet is a
+significant competitive advantage that enables us to pursue
+acquisition and other opportunities, especially in weaker
+price environments. It also provides us with the financial
+resources to weather periods of volatile commodity prices or
+escalating costs. Our debt to total capitalization ratio was
+22 percent at the end of December 2004.
+Significant Developments since December 31, 2003
+o 2004 Acquisition of Oil and Gas Properties. Our total
+acquisitions of proved and unproved oil and gas properties in
+2004 were $76.7 million. The two most significant acquisitions
+were the Goldmark Engineering, Inc. et al. acquisition that
+closed on November 1, 2004 for $23.3 million and the Border
+Company et al. acquisition that closed on December 15, 2004
+for $37.8 million. The primary asset acquired in the Goldmark
+transaction was the operations and majority ownership in the
+Fourbear Field, located in the Big Horn Basin of Wyoming. We
+anticipate that the development program in this field will be
+quite active in 2005 and will include infill drilling,
+recompletion of additional pay zones, workovers and the
+possible employment of enhanced recovery techniques. The
+3
+Border Company acquisition primarily included a non-operated
+interest in the very active Elm Grove Field, located in
+Northern Louisiana where we expect to participate in numerous
+development locations.
+o Coalbed Methane Development. We realized our first commercial
+production for the Hanging Woman Basin coalbed methane project
+in 2004. Our total proved reserves at Hanging Woman Basin at
+the end of 2004 were 8 BCFE. During 2004 we drilled and
+completed 57 wells. The non-operated pipeline and compression
+station connecting the wells to the main trunk line became
+operational in mid-December 2004. The 2005 capital program for
+the Hanging Woman Basin development is currently budgeted at
+$24 million. We also participated in a coalbed methane
+development project at Atlantic Rim in the Green River Basin
+of Wyoming.
+o Increase in 2004 Year-End Reserves. Proved reserves increased
+11 percent to 658.6 BCFE at December 31, 2004, from 593.7 BCFE
+at December 31, 2003. We added 52 BCFE through acquisitions,
+primarily in the Rocky Mountain and ArkLaTex regions, and 101
+BCFE from drilling activities. There were net downward
+revisions of previous reserves totaling 10 BCFE. These
+downward revisions were the combination of a 16 BCFE increase
+resulting from price adjustments and a 26 BCFE decrease due to
+performance revisions. The 11 percent increase in reserves
+over last year is net of current year sales of oil and gas
+properties of 3 BCFE.
+o Drilling Results. The majority of the reserve additions
+attributed to drilling operations came from our Rocky Mountain
+and Mid-Continent regions. The increase in the Rockies can be
+attributed primarily to continued development of the Middle
+Bakken play. This is one of the most active plays in the
+United States. Currently concentrated in Montana, the play is
+thought to extend into North Dakota. As of year end, we have
+approximately 181,000 net acres leased in Richland County,
+Montana, and McKenzie and Billings Counties, North Dakota, of
+which we believe approximately 74,000 net acres is in the
+primary trend. The Red River formation continues to result in
+reserve additions in the Rockies as we take full advantage of
+3-D seismic to identify multi-pay structures. Mid-Continent
+reserve additions were primarily from the continued
+exploitation and development of the Northeast Mayfield area,
+although the results were less significant than in the prior
+year. The finding costs resulting from the Mid-Continent area
+were higher than the Company average as a whole.
+o Repurchase of Common Stock. In February 2004, we repurchased
+3,380,818 shares of our common stock from Flying J for a total
+of $91.0 million. We originally issued these shares to Flying
+J on January 29, 2003, in connection with our acquisition of
+oil and gas properties. We also loaned Flying J $71.6 million
+in connection with the property acquisition. Flying J used the
+proceeds from the share repurchase to repay the outstanding
+loan balance. The net $19.4 million difference was funded from
+our available cash and from borrowings under our credit
+facility. The amount funded from borrowings under our credit
+facility was repaid during the second quarter of 2004. In the
+third quarter of 2004, we re-initiated our stock repurchase
+program. Since that time we have repurchased a total of
+489,300 shares of our common stock at an average cost of
+$33.39 per share. These repurchases were funded from available
+cash. As of December 31, 2004, the number of additional shares
+that may be repurchased under the program is 2,510,700.
+4
+Major Customers
+During 2004, sales to Tesoro Refining and Marketing accounted for 20
+percent of our total oil and gas production revenue. During 2003, sales to BP
+America Production Company accounted for 14 percent, sales to Midcoast Energy
+accounted for 13 percent and sales to Tesoro Refining and Marketing accounted
+for 11 percent of our total oil and gas production revenue. During 2002, there
+were no sales to individual customers that accounted for more than 10 percent of
+our total oil and gas production revenue.
+Employees and Office Space
+As of February 15, 2005, we had 256 full-time employees. None of our
+employees are subject to a collective bargaining agreement, and we consider our
+relations with our employees to be good. We lease approximately 47,400 square
+feet of office space in Denver, Colorado, for our executive and administrative
+offices, of which 9,500 square feet is subleased. We also lease approximately
+18,600 square feet of office space in Tulsa, Oklahoma; approximately 11,700
+square feet in Shreveport, Louisiana; approximately 13,700 square feet in
+Houston, Texas; and approximately 22,200 square feet in Billings, Montana.
+Title to Properties
+Substantially all of our working interests are held pursuant to leases
+from third parties. A title opinion is usually obtained prior to the
+commencement of drilling operations on properties. We have obtained title
+opinions or conducted a thorough title review on substantially all of our
+producing properties and believe that we have satisfactory title to such
+properties in accordance with standards generally accepted in the oil and gas
+industry. The majority of the value of our properties is subject to a mortgage
+under our credit facility, customary royalty interests, liens for current taxes,
+and other burdens that we believe do not materially interfere with the use of or
+affect the value of such properties. We perform only a minimal title
+investigation before acquiring undeveloped leasehold.
+Seasonality
+Generally, but not always, the demand and price levels for natural gas
+increase during the colder winter months and decrease during the warmer summer
+months. In addition, pipelines, utilities, local distribution companies and
+industrial users utilize natural gas storage facilities and purchase some of
+their anticipated winter requirements during the summer, which can lessen
+seasonal demand fluctuations. Crude oil and the demand for heating oil are also
+impacted with generally higher prices in the winter. Seasonal anomalies such as
+mild winters sometimes lessen these fluctuations.
+Competition
+The oil and gas industry is intensely competitive. This is particularly
+so in the acquisition of prospective oil and natural gas properties and oil and
+gas reserves. We believe that our leasehold position provides the foundation for
+a strong drilling program. Our competitive position also depends on our
+geological, geophysical and engineering expertise, and our financial resources.
+We believe that the location of our leasehold acreage, our exploration, drilling
+and production expertise and the experience and knowledge of our management and
+industry partners enable us to compete effectively in our core operating areas.
+Notwithstanding our talents and assets, we still face stiff competition from a
+substantial number of major and independent oil and gas companies that have
+larger technical staffs and greater financial and operational resources than we
+do. Many of these companies not only engage in the acquisition, exploration,
+development and production of oil and natural gas reserves, but also have
+5
+refining operations, market refined products and generate electricity. We also
+compete with other oil and natural gas companies in attempting to secure
+drilling rigs and other equipment necessary for drilling and completion of
+wells. Consequently, drilling equipment may be in short supply from time to
+time. Currently, access to incremental drilling equipment in certain regions is
+difficult.
+Government Regulations
+Our business is subject to various federal, state and local laws and
+governmental regulations that may be changed from time to time in response to
+economic or political conditions. Matters subject to regulation include
+discharge permits for drilling operations, drilling bonds, reports concerning
+operations, the spacing of wells, unitization and pooling of properties,
+taxation and environmental protection. From time to time, regulatory agencies
+have imposed price controls and limitations on production by restricting the
+rate of flow of oil and gas wells below actual production capacity in order to
+conserve supplies of oil and gas.
+Energy Regulations. Our sales of natural gas are affected by the
+availability, terms and cost of transportation. The price and terms of access to
+pipeline transportation are subject to extensive federal and state regulation.
+From 1985 to the present, several major regulatory changes have been implemented
+by Congress and the Federal Energy Regulatory Commission that affect the
+economics of natural gas production, transportation and sales. In addition, the
+FERC is continually proposing and implementing new rules and regulations
+affecting those segments of the natural gas industry that remain subject to the
+FERC's jurisdiction, most notably interstate natural gas transmission companies.
+These initiatives may also affect the intrastate transportation of gas under
+certain circumstances. The stated purpose of many of these regulatory changes is
+to promote competition among the various sectors of the natural gas industry.
+The ultimate impact of the complex rules and regulations issued by the
+FERC since 1985 cannot be predicted. In addition, many aspects of these
+regulatory developments have not become final but are still pending judicial and
+final FERC decisions. Regulations implemented by the FERC in recent years could
+result in an increase in the cost of transportation service on certain petroleum
+product pipelines. In addition, some of the FERC's more recent proposals may,
+however, adversely affect the availability and reliability of interruptible
+transportation service on interstate pipelines. Additional proposals and
+proceedings that might affect the natural gas industry are pending before
+Congress and the courts. The natural gas industry historically has been very
+heavily regulated, and there is no assurance that the less stringent regulatory
+approach recently pursued by the FERC and Congress will continue. We do not
+believe that we will be affected by any action taken that differs materially
+from other natural gas producers and marketers with whom we compete.
+Certain operations we conduct involve federal minerals that the
+Minerals Management Service administers. The MMS issues leases covering such
+lands through competitive bidding. These leases contain relatively standardized
+terms and require compliance with federal laws and detailed MMS regulations. For
+offshore operations, lessees must obtain MMS approval for exploration plans and
+development and production plans prior to the commencement of such operations.
+In addition to permits required from other agencies such as the Coast Guard, the
+Army Corps of Engineers and the Environmental Protection Agency, lessees must
+obtain a permit from the MMS prior to the commencement of drilling. Lessees must
+also comply with detailed MMS regulations governing, among other things:
+o engineering and construction specifications for offshore
+production facilities;
+o safety procedures;
+6
+o flaring of production;
+o plugging and abandonment of Outer Continental Shelf wells;
+o calculation of royalty payments and the valuation of
+production for this purpose; and
+o removal of facilities.
+To cover the various obligations of lessees on the OCS, the MMS
+generally requires that lessees post substantial bonds or other acceptable
+assurances that such obligations will be met. The cost of such bonds or other
+surety can be substantial, and we may not be able to continue to obtain bonds or
+other surety in all cases. Under certain circumstances the MMS may require our
+operations on federal leases to be suspended or terminated.
+Many of the states in which we conduct our oil and gas drilling and
+production activities regulate such activities by requiring, among other things,
+drilling permits and bonds and reports concerning operations. The laws of these
+states also govern a number of environmental and conservation matters, including
+the handling and disposing of waste material, plugging and abandonment of wells,
+restoration requirements, unitization and pooling of natural gas and oil
+properties and establishment of maximum rates of production from natural gas and
+oil wells. Some states prorate production to the market demand for oil and
+natural gas.
+Our anticipated coalbed methane gas production from the Hanging Woman
+Basin will be similar to our traditional natural gas production as to the
+physical producing facilities and the product produced. However, the subsurface
+mechanisms that allow the gas to move to the wellbore and the producing
+characteristics of coalbed methane wells are very different from traditional
+natural gas production. Unlike conventional gas wells, which require a porous
+and permeable reservoir, hydrocarbon migration and a natural structural and/or
+stratigraphic trap, the coalbed methane gas is trapped in the molecular
+structure of the coal itself until released by pressure changes resulting from
+the removal of in situ water. Frequently, coalbeds are partly or completely
+saturated with water. As the water is removed, internal pressures on the coal
+are decreased, allowing the gas to desorb from the coal and flow to the
+wellbore. Unlike traditional gas wells, new coalbed methane wells often produce
+water for several months and then, as the water production decreases, natural
+gas production increases as the coal seams de-water.
+Coalbed methane gas production in the Hanging Woman Basin requires
+state permits for the use of well-site pits and evaporation ponds for the
+disposal of produced water. Groundwater produced from the coal seams can
+generally be discharged into arroyos, surface waters, well-site pits and
+evaporation ponds without a permit if it does not exceed surface discharge
+permit levels, and meets state and federal primary drinking water standards. All
+of these disposal options require an extensive third-party water sampling and
+laboratory analysis program to ensure compliance with state permit standards.
+Where water of lesser quality is involved or the wells produce water in excess
+of the applicable volumetric permit limits, additional disposal wells would have
+to be drilled to re-inject the produced water back into deep underground rock
+formations.
+Environmental Regulations. Our operations are subject to numerous
+existing federal, state and local laws and regulations governing environmental
+quality and pollution control. These laws and regulations may require that
+permits be obtained before drilling commences, restrict the types, quantities
+and concentration of various substances that can be released into the
+environment in connection with drilling and production activities, and limit or
+prohibit drilling activities on certain lands lying within wilderness, wetlands
+and other protected areas, including areas containing endangered animal species.
+As a result, these laws and regulations may substantially increase the costs of
+7
+exploring, developing or producing oil and gas and may prevent or delay the
+commencement or continuation of a project. In addition, these laws and
+regulations may impose substantial clean-up, remediation and other obligations
+in the event of any discharges or emissions in violation of such laws and
+regulations.
+To date we have not experienced any material adverse effect on our
+financial condition or results of operations from obligations under
+environmental laws and regulations. We believe that we are in substantial
+compliance with currently applicable environmental laws and regulations and that
+continued compliance with existing requirements would not have a material
+adverse impact on us.
+Risk Factors
+In addition to the other information set forth elsewhere in this Form
+10-K, the following factors should be carefully considered when evaluating St.
+Mary.
+Risks Related to Our Business
+Oil and natural gas prices are volatile, and an extended decline in
+prices would hurt our profitability and financial condition.
+Our revenues, operating results, profitability, future rate of growth
+and the carrying value of our oil and gas properties depend heavily on
+prevailing market prices for oil and gas. Any substantial or extended decline in
+the price of oil or gas would have a material adverse effect on us. It could
+reduce our cash flow and borrowing capacity, as well as the value and the amount
+of our oil and gas reserves.
+Historically, the markets for oil and gas have been volatile, and they
+are likely to continue to be volatile. Wide fluctuations in oil and gas prices
+may result from relatively minor changes in the supply of and demand for oil and
+gas, market uncertainty and other factors that are beyond our control,
+including:
+o worldwide and domestic supplies of oil and natural gas;
+o the ability of the members of the Organization of Petroleum
+Exporting Countries to agree to and maintain oil price and
+production controls;
+o political instability or armed conflict in oil or gas
+producing regions;
+o worldwide economic conditions;
+o the availability of transportation facilities;
+o weather conditions; and
+o actions of governmental authorities.
+Declines in oil and gas prices would reduce our revenue and could also
+reduce the amount of oil and gas that we can produce economically and, as a
+result, could have a material adverse effect on us.
+8
+Our future success depends on our ability to replace reserves.
+Our future success depends on our ability to find, develop and acquire
+oil and gas reserves that are economically recoverable. Our properties produce
+at a declining rate over time. In order to maintain current production rates we
+must locate and develop or acquire new oil and gas reserves to replace those
+being depleted by production. We may do this even during periods of low oil and
+gas prices. In addition, competition for producing oil and gas properties is
+intense and many of our competitors have financial and other resources
+substantially greater than those available to us. Therefore, we may not be able
+to acquire oil and gas properties that contain economically recoverable reserves
+or we may not be able to acquire such properties at acceptable prices. Without
+successful exploration or acquisition activities, our reserves, production and
+revenues will decline rapidly.
+Our producing property acquisitions carry significant risks.
+Successful property acquisitions require an assessment of a number of
+factors beyond our control. These factors include recoverable reserves, future
+oil and gas prices, operating costs and potential environmental and other
+liabilities. These assessments are inexact and their accuracy is inherently
+uncertain. A customary review of subject properties will not necessarily reveal
+all existing or potential problems.
+In connection with our acquisitions, we may not be entitled to
+contractual indemnification for pre-closing liabilities, including environmental
+liabilities. Normally, we acquire interests in properties on an "as is" basis
+with limited remedies for breaches of representations and warranties.
+o Additionally, significant acquisitions can change the nature of our operations
+and business depending upon the character of the acquired properties if they
+have substantially different operating and geological characteristics or are in
+different geographic locations than our existing properties. To the extent that
+acquired properties are substantially different than our existing properties,
+our ability to efficiently realize the expected economic benefits of such
+transactions may be limited.
+We may not be able to successfully integrate future property or corporate
+acquisitions.
+Integrating acquired properties and businesses involves a number of
+special risks, including the possibility that management may be distracted from
+normal business concerns by the need to integrate operations and systems and in
+retaining and assimilating additional employees. Therefore, we may not be able
+to realize all of the anticipated benefits of the acquisitions.
+Substantial capital is required to replace and grow reserves.
+We make, and will continue to make, substantial expenditures to find,
+acquire, develop and produce oil and natural gas reserves. Our capital
+expenditures for oil and gas properties were $313 million for 2004, and we have
+budgeted total capital expenditures of $418 million in 2005. If oil and gas
+prices decrease or we encounter operating difficulties that result in our cash
+flow from operations being less than expected, we may have to reduce the capital
+we can spend unless we raise additional funds through debt or equity financing.
+Debt or equity financing, cash generated by operations or borrowing capacity may
+not be available to us in sufficient amounts or on acceptable terms to meet
+these requirements.
+9
+Future cash flows and the availability of financing will be subject to
+a number of variables, such as:
+o our success in locating and producing new reserves;
+o the level of production from existing wells; and
+o prices of oil and natural gas;
+Issuing equity securities to satisfy our financing requirements could
+cause substantial dilution to existing stockholders. Debt financing could lead
+to us being more vulnerable to competitive pressures and economic downturns.
+If our revenues were to decrease due to lower oil and natural gas
+prices, decreased production or other reasons, and if we could not obtain
+capital through our credit facility or otherwise, our ability to execute our
+development plans, replace our reserves or maintain production levels could be
+greatly limited.
+We could incur substantial additional loans, which could negatively impact our
+financial condition, results of operations and business prospects.
+As of December 31, 2004, we had $137 million in outstanding loans,
+including $100 million outstanding under our 5.75% Senior Convertible Notes due
+2022. Our level of debt could have important consequences on our operations,
+including:
+o requiring us to dedicate a substantial portion of our cash
+flow from operations to required payments on debt, thereby
+reducing the availability of cash flow for working capital,
+capital expenditures and other general business activities;
+o limiting our ability to obtain additional financing in the
+future for working capital, capital expenditures and other
+general business activities;
+o limiting our flexibility in planning for, or reacting to,
+changes in our business and the industry in which we operate;
+and
+o detracting from our ability to successfully withstand a
+downturn in our business or the economy generally.
+The occurrence of any one of these events could have a material adverse
+effect on our business, financial condition, results of operations and business
+prospects.
+We may incur additional debt, including secured debt under our credit
+facility or otherwise, in order to make future acquisitions or to develop our
+properties. We may not be able to generate sufficient cash flow to pay the
+interest on additional debt. Future working capital, borrowings or equity
+financing may not be available to pay or refinance such debt.
+In addition, our credit facility borrowing base is subject to periodic
+borrowing base redeterminations. We could be forced to repay a portion of our
+bank borrowings due to a downward redetermination of our borrowing base. We may
+not have sufficient funds to make such repayment. If we do not have sufficient
+funds and are otherwise unable to negotiate renewals of our borrowing or arrange
+new financing, we may have to sell significant assets. Any such sale could have
+a material adverse effect on our business and financial results.
+10
+We may not be able to obtain credit facility borrowing base redeterminations
+that adequately meet our anticipated financing needs.
+Our current long-term credit facility with a group of banks has a
+maximum loan amount of $300 million. The amount actually available from time to
+time depends on a borrowing base that the lenders periodically redetermine based
+on the value of our oil and gas properties and other assets. In October 2004 the
+banks conducted their normal semi-annual borrowing base redetermination that
+resulted in a borrowing base of $325 million. Since we pay commitment fees based
+on the unused portion of the borrowing base, we elected to retain a total loan
+commitment amount under the facility of $150 million to correspond with our
+projected funding requirements. Our next borrowing base redetermination is
+scheduled to occur by the end of April 2005. The banks may not agree to a
+borrowing base redetermination that is adequate for our planned financing
+requirements.
+Our long term credit facility is scheduled to expire in January 2006.
+We anticipate renegotiating the terms of our facility in the first quarter of
+2005 to ensure that we have a credit facility in place beyond the current
+expiry.
+If oil and gas prices decrease or exploration efforts are unsuccessful, we may
+be required to take additional writedowns.
+There is a risk that we will be required to write down the carrying
+value of our oil and gas properties. This could occur when oil and gas prices
+are low or if we have substantial downward adjustments to our estimated proved
+reserves, increases in our estimates of development costs or deterioration in
+our exploration results.
+We follow the successful efforts accounting method. All property
+acquisition costs and costs of exploratory and development wells are capitalized
+when incurred, pending the determination of whether proved reserves have been
+discovered. If proved reserves are not discovered with an exploratory well, the
+costs of drilling the well are expensed. All geological and geophysical costs on
+exploratory prospects and the costs of carrying and retaining unproved
+properties are expensed as incurred.
+The capitalized costs of our oil and gas properties, on a
+field-by-field basis, may not exceed the estimated future net cash flows of that
+field. If capitalized costs exceed future net revenues, we write down the costs
+of each such field to our estimate of fair market value. Unproved properties are
+evaluated at the lower of cost or fair market value. This type of charge will
+not affect our cash flow from operating activities, but it will reduce the book
+value of our stockholders' equity.
+We review the carrying value of our properties quarterly based on
+prices in effect as of the end of each quarter or as of the time of reporting
+our results. Once incurred, a writedown of oil and gas properties is not
+reversible at a later date even if oil or gas prices increase. St. Mary incurred
+impairment and abandonment charges on proved and unproved properties of $1.9
+million, $4.0 million and $2.4 million in 2004, 2003 and 2002, respectively.
+Estimates of oil and gas reserves are not precise.
+This report and other SEC filings by us contain estimates of our proved
+oil and gas reserves and the estimated future net revenues from those reserves.
+Actual results will likely vary from amounts estimated, and any significant
+negative variance could have a material adverse effect on our future results of
+operations.
+11
+Reserve estimates are based on various assumptions, including
+assumptions required by the SEC relating to oil and gas prices, drilling and
+operating expenses, capital expenditures, taxes and availability of funds. The
+process of estimating reserves is complex. This process requires significant
+decisions and assumptions in the evaluation of available geological,
+geophysical, engineering and economic data for each reservoir. These estimates
+are dependent on many variables and therefore changes often occur as these
+variables evolve and commodity prices fluctuate. However, the likelihood of
+recovery of these reserves is considered more likely than not.
+Actual future production, oil and gas prices, revenues, taxes,
+development expenditures, operating expenses and quantities of recoverable oil
+and gas reserves will most likely vary from those estimated. Any significant
+variance could materially affect the estimated quantities and present value of
+reserves disclosed by us. In addition, we may adjust estimates of proved
+reserves to reflect production history, results of exploration and development,
+prevailing oil and gas prices and other factors, many of which are beyond our
+control.
+As of December 31, 2004, approximately 15 percent of our estimated
+proved reserves were proved undeveloped. Estimation of proved undeveloped
+reserves and proved developed non-producing reserves is nearly always based on
+volumetric calculations rather than the performance data used to estimate
+producing reserves. Recovery of proved undeveloped reserves requires significant
+capital expenditures and successful drilling operations. Production revenues
+from proved developed non-producing reserves will not be realized until some
+time in the future. The reserve data assumes that we will make significant
+capital expenditures to develop our reserves. Although we have prepared
+estimates of our reserves and the costs associated with these reserves in
+accordance with industry standards, these estimated costs may not be accurate,
+development may not occur as scheduled and actual results may not occur as
+estimated.
+You should not construe the present value of future net reserves, or
+PV-10, as the current market value of the estimated oil and natural gas reserves
+attributable to our properties. Management has based the estimated discounted
+future net cash flows from proved reserves on prices and costs as of the date of
+the estimate, in accordance with applicable regulations, whereas actual future
+prices and costs may be materially higher or lower. For example, values of our
+reserves as of December 31, 2004, were estimated using a calculated weighted
+average sales price of $43.45 per barrel of oil (NYMEX) and $6.18 per Mcf of gas
+(Gulf Coast spot price). During 2004 our monthly average realized gas prices,
+excluding the effect of hedging, were as high as $7.27 per Mcf and as low as
+$4.90 per Mcf. For the same period our monthly average realized oil prices were
+as high as $51.21 per Bbl and as low as $32.26 per Bbl. Many factors will affect
+actual future net cash flows, including:
+o the amount and timing of actual production,
+o supply and demand for oil and natural gas,
+o curtailments or increases in consumption by oil and natural
+gas purchasers, and
+o changes in governmental regulations or taxation.
+The timing of the production of oil and natural gas properties and of
+the related expenses affects the timing of actual future net cash flows from
+proved reserves and thus their actual present value. In addition, the 10 percent
+discount factor, which we are required to use to calculate PV-10 for reporting
+purposes, is not necessarily the most appropriate discount factor given actual
+interest rates and risks to which our business or the oil and natural gas
+12
+industry in general are subject. As a result, our actual future net cash flows
+could be materially different from the estimates included in this report.
+Our industry is highly competitive.
+Major oil companies, independent producers, and institutional and
+individual investors are actively seeking oil and gas properties throughout the
+world, along with the equipment, labor and materials required to operate
+properties. Shortages for equipment, labor or materials may result in increased
+costs or the inability to obtain such resources as needed. Many of our
+competitors have financial and technological resources vastly exceeding those
+available to us. Many oil and gas properties are sold in a competitive bidding
+process in which we may lack technological information or expertise available to
+other bidders. We may not be successful in acquiring and developing profitable
+properties in the face of this competition.
+Exploration and development drilling may not result in commercially productive
+reserves.
+Oil and gas drilling and production activities are subject to numerous
+risks, including the risk that no commercially productive oil or natural gas
+will be found. The cost of drilling and completing wells is often uncertain, and
+oil and gas drilling and production activities may be shortened, delayed or
+canceled as a result of a variety of factors, many of which are beyond our
+control. These factors include:
+o unexpected drilling conditions;
+o pressure or irregularities in formations;
+o equipment failures or accidents; and
+o shortages or delays in the availability of drilling rigs and
+the delivery of equipment.
+The prevailing prices of oil and gas also affect the cost of and the
+demand for drilling rigs, production equipment and related services. The
+availability of drilling rigs can vary significantly from region to region at
+any particular time. Although land drilling rigs can be moved from one region to
+another in response to changes in levels of demand, an undersupply of rigs in
+any region may result in drilling delays and higher drilling costs for the rigs
+that are available in that region.
+Another significant risk inherent in our drilling plans is the need to
+obtain drilling permits from state, local and other governmental authorities.
+Delays in obtaining regulatory approvals and drilling permits, including delays
+which jeopardize our ability to realize the potential benefits from leased
+properties within the applicable lease periods, the failure to obtain a drilling
+permit for a well or the receipt of a permit with unreasonable conditions or
+costs could have a material adverse effect on our ability to explore on or
+develop our properties.
+The wells we drill may not be productive and we may not recover all or
+any portion of our investment in such wells. The seismic data and other
+technologies we use do not allow us to know conclusively prior to drilling a
+well that oil or gas is present or may be produced economically. The cost of
+drilling, completing and operating a well is often uncertain, and cost factors
+can adversely affect the economics of a project. Drilling activities can result
+in dry wells or wells that are productive but do not produce sufficient net
+revenues after operating and other costs to cover initial drilling costs.
+13
+Our future drilling activities may not be successful, nor can we be
+sure that our overall drilling success rate or our drilling success rate for
+activity within a particular area will not decline. Unsuccessful drilling
+activities could have a material adverse effect on our results of operations and
+financial condition. Also, we may not be able to obtain any options or lease
+rights in potential drilling locations that we identify. Although we have
+identified numerous potential drilling locations, we may not be able to
+economically produce oil or natural gas from all of them.
+Our business is subject to operating and environmental risks and hazards that
+could result in substantial losses.
+Oil and gas operations are subject to many risks, including well
+blowouts, craterings, explosions, uncontrollable flows of oil, natural gas or
+well fluids, fires, formations with abnormal pressures, pipeline ruptures or
+spills, pollution, releases of toxic gas and other environmental risks and
+hazards. If any of these types of events occurs, we could sustain substantial
+losses.
+Under certain limited circumstances we may be liable for environmental
+damage caused by previous owners or operators of properties that we own, lease
+or operate. As a result, we may incur substantial liabilities to third parties
+or governmental entities, which could reduce or eliminate funds available for
+exploration, development or acquisitions or cause us to incur losses.
+We maintain insurance against some, but not all, of these potential
+risks and losses. We have limited coverage for sudden environmental damages. We
+do not believe that insurance coverage for the full potential liability that
+could be caused by sudden environmental damages or insurance coverage for
+environmental damage that occurs over time is available at a reasonable cost. In
+addition, pollution and environmental risks generally are not fully insurable.
+Further, we may elect not to obtain other insurance coverage under circumstances
+where we believe that the cost of available insurance is excessive relative to
+the risks presented. Accordingly, we may be subject to liability or may lose
+substantial portions of certain properties in the event of environmental or
+other damages. If a significant accident or other event occurs and is not fully
+covered by insurance, it could have a material adverse effect on our financial
+condition and results of operations.
+Hedging transactions may limit our potential gains and involve other risks.
+To manage our exposure to price risks in the marketing of our oil and
+natural gas, we enter into commodity price risk management arrangements from
+time to time with respect to a portion of our current or future production.
+While intended to reduce the effects of volatile oil and natural gas prices,
+these transactions may limit our potential gains if oil or natural gas prices
+were to rise substantially over the price established by the hedge. In addition,
+such transactions may expose us to the risk of financial loss in certain
+circumstances, including instances in which:
+o our production is less than expected;
+o the counterparties to our futures contracts fail to perform
+under the contracts; or
+o a sudden, unexpected event materially impacts oil or natural
+gas prices.
+The terms of our hedging agreements may also require that we furnish
+cash collateral, letters of credit or other forms of performance assurance in
+the event that mark-to-market calculations result in settlement obligations by
+us to the counterparties, which would encumber our liquidity and capital
+resources.
+14
+In addition, hedging transactions using derivative instruments involve
+basis risk. Basis risk in a hedging contract occurs when the index upon which
+the contract is based is more or less variable than the index upon which the
+hedged asset is based, thereby making the hedge less effective. For example, a
+NYMEX index used for hedging certain volumes of production may have more or less
+variability than the regional price index used for the sale of that production.
+Our industry is heavily regulated.
+Federal, state and local authorities extensively regulate the oil and
+gas industry. Legislation and regulations affecting the industry are under
+constant review for amendment or expansion, raising the possibility of changes
+that may affect, among other things, the pricing or marketing of oil and gas
+production. Noncompliance with statutes and regulations may lead to substantial
+penalties, and the overall regulatory burden on the industry increases the cost
+of doing business and, in turn, decreases profitability. These authorities
+regulate various aspects of oil and gas drilling and production activities,
+including the drilling of wells (through permit and bonding requirements), the
+spacing of wells, the unitization or pooling of oil and gas properties,
+environmental matters, safety standards, the sharing of markets, production
+limitations, plugging and abandonment, and restoration. To cover the various
+obligations of leaseholders in federal waters, federal authorities generally
+require that leaseholders have substantial net worth or post bonds or other
+acceptable assurances that such obligations will be met. The cost of these bonds
+or other surety can be substantial, and we may not be able to obtain bonds or
+other surety in all cases. Under limited circumstances, federal authorities may
+require any of our operations on federal leases to be suspended or terminated.
+Any such suspension or termination could materially adversely affect our
+financial condition and results of operations.
+We must comply with complex environmental regulations.
+Our operations are subject to complex and constantly changing
+environmental laws and regulations adopted by federal, state and local
+governmental authorities where we are engaged in exploration or production
+operations. New laws or regulations, or changes to current requirements, could
+have a material adverse effect on our business. We will continue to be subject
+to uncertainty associated with new regulatory interpretations and inconsistent
+interpretations between state and federal agencies. We could face significant
+liabilities to the government and third parties for discharges of oil, natural
+gas or other pollutants into the air, soil or water, and we could have to spend
+substantial amounts on investigations, litigation and remediation. Existing
+environmental laws or regulations, as currently interpreted or enforced, or as
+they may be interpreted, enforced or altered in the future, may have a material
+adverse effect on our results of operations and financial condition. As a
+result, we may face material claims with respect to properties we own or have
+owned.
+Our business depends on transportation facilities owned by others.
+The marketability of our oil and gas production depends in part on the
+availability, proximity and capacity of pipeline systems owned by third parties.
+The unavailability of or lack of available capacity on these systems and
+facilities could result in the shutting-in of producing wells or the delay or
+discontinuance of development plans for properties. Although we have some
+contractual control over the transportation of our product, material changes in
+these business relationships could materially affect our operations. Federal and
+state regulation of oil and gas production and transportation, tax and energy
+policies, changes in supply and demand, pipeline pressures, damage to or
+destruction of pipelines and general economic conditions could adversely affect
+our ability to produce, gather and transport oil and natural gas.
+15
+We depend on key personnel.
+Our success will continue to depend on the continued services of our
+executive officers and a limited number of other senior management and technical
+personnel with extensive experience and expertise in evaluating and analyzing
+producing oil and gas properties and drilling prospects, maximizing production
+from oil and gas properties and marketing oil and gas production. Loss of the
+services of any of these people could have a material adverse effect on our
+operations.
+Ownership of working interests, royalty interests and other interests by a
+director and some of our officers may create conflicts of interest.
+As a result of their prior employment with another company with which
+St. Mary engaged in a number of transactions, Ronald D. Boone, a director of St.
+Mary, and two vice presidents of St. Mary own royalty interests in a number of
+St. Mary's properties, which were earned as part of the prior employer's
+employee benefit programs. Those persons have no royalty participation in any
+St. Mary properties acquired or developed subsequent to the beginning of their
+employment with St. Mary.
+Mr. Boone also owns 25 percent of Princeton Resources LLC, which owns
+the oil and gas working interests that he acquired as a result of his prior
+employment. Although Mr. Boone does not manage this entity, he may participate
+in any investment decisions made by it.
+As a result of these transactions and relationships, conflicts of
+interest may exist between these persons and us. Although these persons owe
+fiduciary duties to our stockholders and to us, conflicts of interest may not
+always be resolved in our favor.
+Risks Related to Our Common Stock
+The price of our common stock may fluctuate significantly, which may result in
+losses for investors.
+From January 1, 2003, to February 15, 2005, the last daily sale price
+of our common stock reported by the New York Stock Exchange ranged from a low of
+$23.83 per share to a high of $49.47 per share. We expect our stock to continue
+to be subject to fluctuations as a result of a variety of factors, including
+factors beyond our control. These include:
+o changes in oil and natural gas prices;
+o variations in quarterly drilling, recompletions, acquisitions
+and operating results;
+o changes in financial estimates by securities analysts;
+o changes in market valuations of comparable companies;
+o additions or departures of key personnel; and
+o future sales of our common stock.
+We may fail to meet expectations of our stockholders or of securities
+analysts at some time in the future, and our stock price could decline as a
+result.
+Our certificate of incorporation and bylaws have provisions that discourage
+corporate takeovers and could prevent shareholders from realizing a premium on
+their investment.
+16
+Our certificate of incorporation and bylaws contain provisions that may
+have the effect of delaying or preventing a change of control. These provisions,
+among other things, provide for non-cumulative voting in the election of the
+Board of Directors and impose procedural requirements on stockholders who wish
+to make nominations for the election of Directors or propose other actions at
+stockholders' meetings. These provisions, alone or in combination with each
+other and with the rights plan described below, may discourage transactions
+involving actual or potential changes of control, including transactions that
+otherwise could involve payment of a premium over prevailing market prices to
+shareholders for their common stock.
+Under our stockholder rights plan, if the Board of Directors determines
+that the terms of a potential acquisition do not reflect the long-term value of
+St. Mary, the Board of Directors could allow the holder of each outstanding
+share of our common stock other than those held by the potential acquirer to
+purchase one additional share of our common stock with a market value of twice
+the exercise price. This prospective dilution to a potential acquirer would make
+the acquisition impracticable unless the terms were improved to the satisfaction
+of the Board of Directors. The existence of the plan may impede a takeover not
+supported by our board even though such takeover may be desired by a majority of
+our stockholders or may involve a premium over the prevailing stock price.
+Our shares that are eligible for future sale may have an adverse effect on the
+price of our common stock.
+At February 15, 2005, we had 28,548,362 shares of common stock
+outstanding. Of the shares outstanding, approximately 28,234,000 shares were
+freely tradable without substantial restriction or the requirement of future
+registration under the Securities Act. Also as of that date, options to purchase
+2,756,436 shares of our common stock were outstanding, of which 2,152,871 were
+exercisable. These options are exercisable at prices ranging from $9.25 to
+$41.74 per share. In addition, restricted stock units providing for the issuance
+of up to a total of 227,831 shares of our common stock were outstanding. Sales
+of substantial amounts of common stock, or a perception that such sales could
+occur, and the existence of options or restricted stock units to issue shares of
+common stock at prices that may be below the then-current market price of the
+common stock could adversely affect the market price of the common stock and
+could impair our ability to raise capital through the sale of our equity
+securities.
+A director and his extended family may be able to control us.
+Thomas E. Congdon, a director and our former Chairman of the Board, and
+members of his extended family owned greater than 10 percent of the outstanding
+shares of our common stock as of February 15, 2005. While no formal arrangements
+exist, these extended family members could be inclined to act in concert with
+Mr. Congdon on matters related to control of St. Mary, including for example the
+election of Directors or response to an unsolicited bid to acquire St. Mary.
+Accordingly, Mr. Congdon and his family may be able to control or influence
+matters presented to our Board of Directors and stockholders.
+We may not always pay dividends on our common stock.
+The payment of future dividends remains in the discretion of the Board
+of Directors and will continue to depend on our earnings, capital requirements,
+financial condition and other factors. In addition, the payment of dividends is
+subject to covenants in our credit facility, including the requirement that we
+maintain certain levels of stockholder's equity. The Board of Directors may
+determine in the future to reduce the current annual dividend rate of $0.10 per
+17
+share or discontinue the payment of dividends altogether. Our credit facility
+limits the annual dividend rate that we may pay to $0.20 per share.
+Cautionary Statement about Forward-Looking Statements
+This Annual Report on Form 10-K includes certain statements that may be
+deemed to be "forward-looking statements" within the meaning of Section 27A of
+the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
+1934. All statements, other than statements of historical facts, included in
+this Form 10-K that address activities, events or developments that St. Mary's
+management expects, believes or anticipates will or may occur in the future are
+forward looking statements. Examples of forward-looking statements may include
+discussion of such matters as:
+o The amount and nature of future capital, development and
+exploration expenditures;
+o The drilling of wells;
+o Reserve estimates and the estimates of both future net
+revenues and the present value of future net revenues that are
+included in their calculation;
+o Future oil and gas production estimates;
+o Repayment of debt;
+o Business strategies;
+o Expansion and growth of operations; and
+o Other similar matters such as those discussed in Management's
+Discussion and Analysis of Financial Condition and Results of
+Operations.
+These statements are based on certain assumptions and analyses made by us in
+light of our experience and our perception of historical trends, current
+conditions, expected future developments and other factors we believe are
+appropriate in the circumstances. Such statements are subject to a number of
+assumptions, risks and uncertainties, including such factors as the volatility
+and level of oil and natural gas prices, uncertainties in cash flow, the
+uncertain nature of the expected benefits from the acquisition of oil and gas
+properties, production rates and reserve replacement, the imprecise nature of
+oil and gas reserve estimates, drilling and operating service availability,
+unexpected drilling conditions and results, the risks of various exploration
+strategies, competition, the availability of economically attractive exploration
+and development and property acquisition opportunities and any necessary
+financing, litigation, environmental matters, the potential impact of government
+regulations, and other matters discussed under the caption "Risk Factors", many
+of which are beyond our control. Readers are cautioned that forward-looking
+statements are not guarantees of future performance and that actual results or
+developments may differ materially from those expressed or implied in the
+forward-looking statements.
+Available Information
+Our Internet website address is www.stmaryland.com. Through our
+------------------
+website's financial information section we make available free of charge our
+annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on
+Form 8-K, and amendments to those reports filed with or furnished to the SEC
+under applicable securities laws. These materials are made available as soon as
+reasonably practical after we electronically file such material with, or furnish
+it to, the SEC.
+18
+We also make available through our website's corporate governance
+section our corporate governance guidelines, code of business conduct and
+ethics, and the charters for our Board of Directors' audit committee,
+compensation committee, executive committee and nominating and corporate
+governance committee. These documents are also available in print to any
+stockholder who requests them. Requests for these documents may be submitted to:
+St. Mary Land & Exploration Company
+Investor Relations
+1776 Lincoln Street, Suite 700
+Denver, Colorado 80203
+Telephone: (303) 863-4322
+Information on our website is not incorporated by reference into this
+Annual Report on Form 10-K and should not be considered part of this document.
+Glossary
+The terms defined in this section are used throughout this Annual
+Report on Form 10-K.
+2-D seismic or 2-D data. Seismic data that are acquired and processed to yield a
+two-dimensional cross-section of the subsurface.
+3-D seismic or 3-D data. Seismic data that are acquired and processed to yield a
+three-dimensional picture of the subsurface.
+Bbl. One stock tank barrel, or 42 U.S. gallons liquid volume, used herein in
+reference to oil or other liquid hydrocarbons.
+Bcf. Billion cubic feet, used herein in reference to natural gas.
+BCFE. Billion cubic feet of gas equivalent. Gas equivalents are determined using
+the ratio of six Mcf of gas (including gas liquids) to one Bbl of oil.
+Behind pipe reserves. Estimated net proved reserves in a formation in which
+production casing has already been set in the wellbore but has not been
+perforated and production tested.
+BOE. Barrels of oil equivalent. Oil equivalents are determined using the ratio
+of six Mcf of gas (including gas liquids) to one Bbl of oil.
+Development well. A well drilled within the proved area of an oil or gas
+reservoir to the depth of a stratigraphic horizon known to be productive in an
+attempt to recover proved undeveloped reserves.
+Dry hole. A well found to be incapable of producing either oil or gas in
+sufficient quantities to justify completion as an oil or gas well.
+Estimated net proved reserves. The estimated quantities of oil, gas and gas
+liquids which geological and engineering data demonstrate with reasonable
+certainty to be recoverable in future years from known reservoirs under existing
+economic and operating conditions.
+Exploratory well. A well drilled to find and produce oil or gas in an unproved
+area, to find a new reservoir in a field previously found to be productive of
+oil or gas in another reservoir or to extend a known reservoir beyond its known
+horizon.
+19
+Fee land. The most extensive interest that can be owned in land, including
+surface and mineral (including oil and gas) rights.
+Finding cost. Expressed in dollars per BOE or MCFE. Finding costs are calculated
+by dividing the amount of total capital expenditures for oil and gas activities,
+including the effect of asset retirement obligations, by the amount of estimated
+net proved reserves added through revisions of previous estimates, discoveries
+and purchases during the same period. The information for this calculation will
+be found in the disclosures about oil and gas producing activities in Item 15 of

raw/filings/0000893538/2004/0000893538-05-000026/item13.txt

@@ -0,0 +1,5 @@
+ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
+The information required by this Item is incorporated by reference to
+the information provided under the caption "Certain Relationships and Related
+Transactions" in St. Mary's definitive proxy statement for the 2005 annual
+meeting of stockholders to be filed within 120 days from December 31, 2004.

raw/filings/0000893538/2004/0000893538-05-000026/item9a.txt

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+ITEM 9A. CONTROLS AND PROCEDURES
+We maintain a system of disclosure controls and procedures that are
+designed to ensure that information required to be disclosed in our SEC reports
+is recorded, processed, summarized and reported within the time periods
+specified in the SEC's rules and forms, and to ensure that such information is
+accumulated and communicated to our management, including the Chief Executive
+Officer and the Vice-President - Finance, as appropriate to allow timely
+decisions regarding required disclosure.
+We carried out an evaluation, under the supervision and with the
+participation of our management, including the Chief Executive Officer and the
+Vice-President - Finance, of the effectiveness of the design and operation of
+our disclosure controls and procedures as of the end of the period covered by
+this Annual Report on Form 10-K. Based upon that evaluation, the Chief Executive
+Officer and the Vice-President - Finance concluded that our disclosure controls
+and procedures are effective for the purposes discussed above as of the end of
+the period covered by this Annual Report on Form 10-K. There was no significant
+change in our internal control over financial reporting that occurred during our
+most recent fiscal quarter that has materially affected, or is reasonably likely
+to materially affect, our internal control over financial reporting.
+MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
+To the Stockholders' of St. Mary Land & Exploration Company
+Management of the Company is responsible for establishing and maintaining
+adequate internal control over financial reporting as defined in Rules 13a-15(f)
+and 15d-15(f) under the Securities Exchange Act of 1934, as amended. The
+Company's internal control over financial reporting is designed to provide
+reasonable assurance regarding the reliability of financial reporting and the
+preparation of financial statements for external purposes in accordance with
+generally accepted accounting principles. The Company's internal control over
+financial reporting includes those policies and procedures that:
+(i) pertain to the maintenance of records that, in reasonable detail,
+accurately and fairly reflect the transactions and dispositions of the
+assets of the Company;
+(ii) provide reasonable assurance that transactions are recorded as
+necessary to permit preparation of financial statements in accordance
+with generally accepted accounting principles, and that receipts and
+58
+expenditures of the Company are being made only in accordance with
+authorizations of management and directors of the Company; and
+(iii) provide reasonable assurance regarding prevention or timely detection
+of unauthorized acquisition, use or disposition of the Company's
+assets that could have a material effect on the financial statements.
+Because of the inherent limitations, internal control over financial
+reporting may not prevent or detect misstatements. Also, projections of any
+evaluation of effectiveness to future periods are subject to the risk that
+controls may become inadequate because of changes in conditions, or that the
+degree of compliance with the policies or procedures may deteriorate.
+Management assessed the effectiveness of the Company's internal control
+over financial reporting as of December 31, 2004. In making this assessment,
+management used the criteria set forth by the Committee of Sponsoring
+Organizations of the Treadway Commission in Internal Control-Integrated
+Framework.
+Based on our assessment and those criteria, management believes that the
+Company maintained effective internal control over financial reporting as of
+December 31, 2004.
+The Company's independent auditors have issued an attestation report on
+management's assessment of the Company's internal controls over financial
+reporting. That report immediately follows this report.
+/S/ MARK A. HELLERSTEIN /S/ DAVID W. HONEYFIELD
+----------------------- -----------------------
+Mark A. Hellerstein David W. Honeyfield
+Chairman, CEO and President Vice President-Finance, Secretary &
+February 23, 2005 Treasurer
+February 23, 2005
+REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
+To the Board of Directors and Stockholders of
+St. Mary Land & Exploration Company and Subsidiaries
+We have audited management's assessment, included in the accompanying
+Management's Report on Internal Control over Financial Reporting, that St. Mary
+Land & Exploration Company and subsidiaries (the "Company") maintained
+effective internal control over financial reporting as of December 31, 2004,
+based on criteria established in Internal Control--Integrated Framework issued
+by the Committee of Sponsoring Organizations of the Treadway Commission. The
+Company's management is responsible for maintaining effective internal control
+over financial reporting and for its assessment of the effectiveness of internal
+control over financial reporting. Our responsibility is to express an opinion on
+management's assessment and an opinion on the effectiveness of the Company's
+internal control over financial reporting based on our audit.
+We conducted our audit in accordance with the standards of the Public Company
+Accounting Oversight Board (United States). Those standards require that we plan
+and perform the audit to obtain reasonable assurance about whether effective
+internal control over financial reporting was maintained in all material
+respects. Our audit included obtaining an understanding of internal control over
+59
+financial reporting, evaluating management's assessment, testing and evaluating
+the design and operating effectiveness of internal control, and performing such
+other procedures as we considered necessary in the circumstances. We believe
+that our audit provides a reasonable basis for our opinions.
+A company's internal control over financial reporting is a process designed by,
+or under the supervision of, the company's principal executive and principal
+financial officers, or persons performing similar functions, and effected by the
+company's board of directors, management, and other personnel to provide
+reasonable assurance regarding the reliability of financial reporting and the
+preparation of financial statements for external purposes in accordance with
+generally accepted accounting principles. A company's internal control over
+financial reporting includes those policies and procedures that (1) pertain to
+the maintenance of records that, in reasonable detail, accurately and fairly
+reflect the transactions and dispositions of the assets of the company; (2)
+provide reasonable assurance that transactions are recorded as necessary to
+permit preparation of financial statements in accordance with generally accepted
+accounting principles, and that receipts and expenditures of the company are
+being made only in accordance with authorizations of management and directors of
+the company; and (3) provide reasonable assurance regarding prevention or timely
+detection of unauthorized acquisition, use, or disposition of the company's
+assets that could have a material effect on the financial statements.
+Because of the inherent limitations of internal control over financial
+reporting, including the possibility of collusion or improper management
+override of controls, material misstatements due to error or fraud may not be
+prevented or detected on a timely basis. Also, projections of any evaluation of
+the effectiveness of the internal control over financial reporting to future
+periods are subject to the risk that the controls may become inadequate because
+of changes in conditions, or that the degree of compliance with the policies or
+procedures may deteriorate.
+In our opinion, management's assessment that the Company maintained effective
+internal control over financial reporting as of December 31, 2004, is fairly
+stated, in all material respects, based on the criteria established in Internal
+Control--Integrated Framework issued by the Committee of Sponsoring
+Organizations of the Treadway Commission. Also in our opinion, the Company
+maintained, in all material respects, effective internal control over financial
+reporting as of December 31, 2004, based on the criteria established in Internal
+Control--Integrated Framework issued by the Committee of Sponsoring
+Organizations of the Treadway Commission.
+We have also audited, in accordance with the standards of the Public Company
+Accounting Oversight Board (United States), the consolidated financial
+statements as of and for the year ended December 31, 2004, of the Company, and
+our report dated February 23, 2005, expressed an unqualified opinion on those
+financial statements.
+/S/ DELOITTE & TOUCHE LLP
+Denver, Colorado
+February 23, 2005
+60
+PART III

raw/filings/0000893538/2004/0000893538-05-000026/rpt_disclosure.txt

@@ -0,0 +1,19 @@
+CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 
+Set forth below is a description of transactions entered into between St. Mary and certain of its officers and directors during the last fiscal year. Some of
+these transactions will continue in effect and may result in conflicts of interest between St. Mary and these individuals. Although these persons owe 
+18 
+fiduciary
+duties to St. Mary and its stockholders, we cannot assure you that conflicts of interest will always be resolved in favor of St. Mary. 
+As
+a result of their prior employment with another company with which St. Mary engaged in a number of transactions, Ronald D. Boone, a director of St. Mary, and two vice presidents of
+St. Mary own royalty interests in certain of St. Mary's properties, which were earned as part of the prior employer's employee benefit programs. One vice president also owns certain working interests
+through participation in acquisitions made by his former employer. Those persons have no royalty participation or working interest in any new St. Mary properties. 
+Mr. Boone
+also owns 25% of Princeton Energy LLC, which owns the oil and gas working interests that he acquired as a result of his prior employment. Although Mr. Boone does
+not manage this entity, he may participate in any investment decisions made by them. 
+St.
+Mary's Bylaws provide that no director, officer or employee may pursue for his or her own account a business or investment opportunity if he or she has obtained knowledge of such
+opportunity through his or her affiliation with the Company. In addition, no officer or employee of St. Mary may pursue for his or her own account an oil and gas opportunity as to which his or her
+knowledge of the opportunity was not obtained through his or her affiliation with the Company unless (a) with respect to an officer of St. Mary, the officer's pursuit of the opportunity has
+been approved by the Board of Directors and (b) with respect to a non-officer of St. Mary, the employee's pursuit of the opportunity has been approved by a senior officer of St.
+Mary with full knowledge of such opportunity. These restrictions do not apply to the acquisition of less than one percent of the publicly traded stock of another company.

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raw/filings/0000893538/2005/0001144204-06-007665/item13.txt

@@ -0,0 +1,10 @@
+ITEM 13. 
+CERTAIN RELATIONSHIPS AND
+RELATED
+TRANSACTIONS 
+The
+information required by this Item is incorporated by reference to the
+information provided under the caption “Certain Relationships and Related
+Transactions” in St. Mary’s definitive proxy statement for the 2006 annual
+meeting of stockholders to be filed within 120 days from
+December 31, 2005.

raw/filings/0000893538/2005/0001144204-06-007665/rpt_disclosure.txt

@@ -0,0 +1,16 @@
+CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 
+Set forth below is a description of a related transaction between St. Mary and one of its officers during the last fiscal year. Some of the aspects of this
+transaction will continue in effect and may result in conflicts of interest between St. Mary and the individual. Although the person owes a fiduciary duty to St. Mary and its stockholders, we cannot
+assure you that conflicts of interest will always be resolved in favor of St. Mary. 
+As
+a result of his employment with another company prior to 1995, with which St. Mary engaged in a number of transactions, Kevin E. Willson, an executive officer of St. Mary during 2005
+and the first quarter of 2006, owns royalty interests in a number of our properties, which were earned as part of the prior employer's employee benefit programs. 
+St.
+Mary's Bylaws provide that no director, officer, or employee may pursue for his or her own account a business or investment opportunity if he or she has obtained knowledge of such
+opportunity through his or her affiliation with the Company. In addition, no officer or employee of St. Mary may pursue for his or her own account an oil and gas opportunity as to which his or her
+knowledge of the opportunity was not obtained through his or her affiliation with the Company unless (a) with respect to an officer of St. Mary, the officer's pursuit of the opportunity has
+been approved by the Board of Directors and (b) with respect to a nonofficer of St. Mary, the employee's pursuit of the opportunity has been approved by a senior officer of St. Mary with full
+knowledge of such opportunity. These 
+26 
+restrictions
+do not apply to the acquisition of less than one percent of the publicly traded stock of another company.

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raw/filings/0000893538/2007/0000893538-08-000013/rpt_disclosure.txt

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+CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 
+Policy on Transactions with Related Persons 
+The Company has adopted a written policy and procedures for the Audit Committee's review of any transaction, arrangement, or
+relationship (including any indebtedness or guarantee of indebtedness) or series of similar transactions, arrangements, or relationships in which (i) the Company is a participant,
+(ii) the aggregate amount involved will or may be expected to exceed $120,000, and (iii) a related person has or will have a direct or indirect material interest. For purposes of this
+policy, a "related person" means (i) any of our directors, executive officers or nominees for director, (ii) any stockholder that beneficially owns more than five percent of the
+Company's outstanding shares of common stock, and (iii) any immediate family member of the foregoing. The Audit Committee approves or ratifies only those transactions that it determines in good
+faith are in, or are not inconsistent with, the best interests of the Company and its stockholders. 
+In
+determining whether to approve or ratify a transaction, the Audit Committee takes into account the factors it deems appropriate, which may include, among others, the benefits to the
+Company, the availability of other sources for comparable products or services, the impact on a director's independence in the event the related person is a director, and the extent of the related
+person's interest in the transaction. The policy also provides for the delegation of its authority to the Chairman of the Audit Committee for any related person transaction requiring
+pre-approval or ratification between meetings of the Audit Committee. The Audit Committee reviews and assesses ongoing relationships with a related person on at least an annual basis to
+see that they are in compliance with the policy and remain appropriate. 
+In
+addition, the By-Laws provide that no director, officer, or employee may pursue for his or her own account a business or investment opportunity if he or she has obtained
+knowledge of such opportunity through his or her affiliation with the Company. In addition, no officer or employee of St. Mary may pursue for his or her own account an oil and gas opportunity
+as to which his or her knowledge of the opportunity was not obtained through his or her affiliation with the Company unless (a) with respect to an officer of St. Mary, the officer's
+pursuit of the opportunity has been approved by the Board of Directors, and (b) with respect to a non-officer of St. Mary, the employee's pursuit of the opportunity has been
+approved by a senior officer of St. Mary with full knowledge of such opportunity. These restrictions do not apply to the acquisition of less than one percent of the publicly traded stock of
+another company. 
+Related Person Transactions 
+Set forth below is a description of a related transaction between St. Mary and one of its directors during the last fiscal year.
+Some of the aspects of this transaction will continue in effect and may result in conflicts of interest between St. Mary and the individual. We cannot assure you that conflicts of interest will
+always be resolved in favor of St. Mary. 
+Mr. Hellerstein,
+who currently serves as Chairman of the Board of Directors of St. Mary and is retiring from the Board of Directors effective at the annual meeting on
+May 20, 2009, is a participant in the NPP as a result of his prior service to the Company as an executive officer, including service as President from 1992 to June 2006 and Chief Executive
+Officer from 1995 to February 2007. As a result of Mr. Hellerstein's vested participation interests in the NPP arising from his prior service, the Company made NPP payments to
+Mr. Hellerstein during 2008 in the total amount of $6,172,098. The Audit Committee has reviewed this relationship and determined that it is not in conflict with the Company's Policies and
+Procedures with Respect to Related Person Transactions, since Mr. Hellerstein's NPP participation interests were awarded to him while he was an employee of St. Mary in order to provide
+for future incentive bonus compensation for his services as an executive officer. For a description of the NPP, please see the section entitled "Net Profits Interest Bonus Plan (NPP)" in the
+"Compensation Discussion and Analysis" section of this proxy statement. 
+54 
+Table of Contents

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raw/filings/0000893538/2009/0000893538-10-000011/rpt_disclosure.txt

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+CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 
+Policies and Procedures on Transactions with Related Persons 
+We have adopted a Policy and Procedures With Respect to Related Person Transactions (the "Related Person Policy"), which sets forth the
+policies and procedures for the Audit Committee's review of any transaction, arrangement, or relationship (including any indebtedness or guarantee of indebtedness) or series of similar transactions,
+arrangements, or relationships in which (1) we are a participant, (2) the aggregate amount involved will or may be expected to exceed $120,000, and (3) a related person has or
+will have a direct or indirect material interest. For purposes of the Related Person Policy, a "related person" means (1) any of our directors, executive officers, or nominees for director,
+(2) any stockholder that beneficially owns more than 5% of our outstanding shares of common stock, and (3) any immediate family member of any of the foregoing. The Audit
+Committee approves or ratifies only those transactions that it determines in good faith are in, or are not inconsistent with, the best interests of our company and its stockholders. 
+In
+determining whether to approve or ratify a transaction with a related person, the Audit Committee takes into account the factors it deems appropriate, which may include, among others,
+the benefits to us, the availability of other sources for comparable products or services, the impact on a director's independence in the event the related person is a director, and the extent of the
+related person's interest in the transaction. The policy also provides for the delegation of Audit Committee authority to the Chairman of the Audit Committee for any related person transaction
+requiring pre-approval or ratification between meetings of the Audit Committee. The Audit Committee reviews and assesses ongoing relationships with a related person on at least an annual
+basis to see that they are in compliance with the policy and remain appropriate. 
+In
+addition, our By-Laws provide that a director, officer, or employee of our company may not pursue for his or her own account a business or investment opportunity that he
+or she learned about through his or her affiliation with our company. Our By-Laws also provide that our officers or employees may not pursue for his or her own account an oil and gas
+opportunity that he or she independently learned about unless (1) with respect to an officer of our company, the officer's pursuit of the opportunity has been approved by the Board, and
+(2) with respect to a non-officer of our company, the employee's pursuit of the opportunity has been approved by a senior officer of our company with full knowledge of that
+opportunity. These restrictions do not apply to the acquisition of less than 1% of the publicly traded stock of another company. 
+Related Person Transactions 
+We recognize that transactions with related persons may raise questions among stockholders as to whether those transactions are
+consistent with our best interests and the interests of our stockholders. It is our policy to enter into or ratify such transactions only when the Board, acting through the Audit Committee or as
+otherwise described herein, determines that the transaction in question is in, or is not inconsistent with, the best interests of our company and its stockholders, including but not limited to
+situations where we may obtain products or services of a nature, quantity or quality, or on other terms, that are not readily available from alternative sources or when we provide products or services
+to related persons on an arm's length basis on terms comparable to those provided to unrelated third parties or on terms comparable to those provided to employees generally. Set forth below is a
+description of all transactions between our company and related persons since the beginning of January 1, 2010. 
+11 
+Table of Contents 
+Mr. Quintana
+is the President, Chief Executive Officer, and a director of TESCO Corporation, which designs, manufactures, and delivers technology based solutions for the upstream
+energy industry, including oilfield drilling technology, services, and equipment. We have an agreement with TESCO for the provision of services to us in connection with our drilling and completion
+operations. This agreement continues until canceled by either us or TESCO on 30 days advance written notice. Pursuant to this agreement, we are obligated to pay TESCO only for services actually
+performed. This agreement does not require us to make any other payments to TESCO. Prior to 2010, the services provided by TESCO and the amounts we paid did not exceed the threshold amount for review
+under our Related Person Policy. In May 2010, as part of its annual review of related party transactions, the Audit Committee reviewed the relationship between TESCO and our company and determined at
+such time that we had not paid any amounts to TESCO during 2010. During August 2010 through December 2010, TESCO provided services to us in our ArkLaTex region. In December 2010, the Audit Committee
+again reviewed the relationship between our company and TESCO, but the final 2010 amounts paid to or incurred to be paid to TESCO were not then available for review. Upon the later calculation of the
+final 2010 amounts paid to TESCO, we determined that we had paid TESCO $346,683 for services rendered after August 2010. In addition, as of March 31, 2011, we had paid TESCO $291,635 for
+services in 2011. Based upon these amounts, the Audit Committee reviewed the relationship between our company and TESCO and determined that the relationship is in the best interests of our company and
+its stockholders. 
+12 
+Table of Contents

raw/filings/0000893538/2010/0001104659-11-010268/filing_metadata.csv

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raw/filings/0000893538/2010/0001104659-11-010268/item13.txt

@@ -0,0 +1,5 @@
+ITEM 13. 
+CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE 
+The information required by this Item is incorporated by reference to the information provided under the caption “Certain Relationships and Related Transactions,” and “Corporate Governance,” in SM Energy’s definitive proxy statement for the 2011 annual meeting of stockholders to be filed within 120 days from December 31, 2010. 
+89 
+Table of Contents

raw/filings/0000893538/2010/0001104659-11-010268/item9a.txt

@@ -0,0 +1,43 @@
+ITEM 9A. 
+CONTROLS AND PROCEDURES 
+We maintain a system of disclosure controls and procedures that are designed to ensure that information required to be disclosed in our SEC reports is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and to ensure that such information is accumulated and communicated to our management, including the Chief Executive Officer and the Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. 
+85 
+Table of Contents 
+We carried out an evaluation, under the supervision and with the participation of our management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this Annual Report on Form 10-K. Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that our disclosure controls and procedures are effective for the purpose discussed above as of the end of the period covered by this Annual Report on Form 10-K. There was no change in our internal control over financial reporting that occurred during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. 
+86 
+Table of Contents 
+MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING 
+To the Stockholders’ of SM Energy Company 
+Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended. The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company’s internal control over financial reporting includes those policies and procedures that: 
+(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; 
+(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and 
+(iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that have a material effect on the financial statements. 
+Because of the inherent limitations, internal controls over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of the changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate. 
+Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2010. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control—Integrated Framework. 
+Based on our assessment and those criteria, management believes that the Company maintained effective internal control over financial reporting as of December 31, 2010. 
+The Company’s independent registered public accounting firm has issued an attestation report on the Company’s internal controls over financial reporting. That report immediately follows this report. 
+/s/ ANTHONY J. BEST 
+/s/ A. WADE PURSELL 
+Anthony J. Best 
+A. Wade Pursell 
+President and Chief Executive Officer 
+Executive Vice President and Chief Financial Officer 
+February 25, 2011 
+February 25, 2011 
+87 
+Table of Contents 
+REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 
+To the Board of Directors and Stockholders of 
+SM Energy Company and Subsidiaries 
+Denver, Colorado 
+We have audited the internal control over financial reporting of SM Energy Company and subsidiaries (the “Company”) as of December 31, 2010, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. 
+We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. 
+A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. 
+Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. 
+In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2010, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. 
+We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the year ended December 31, 2010, of the Company and our report dated February 25, 2011, expressed an unqualified opinion on those financial statements and included an explanatory paragraph regarding the Company’s adoption of new accounting guidance. 
+/s/ DELOITTE & TOUCHE LLP 
+Denver, Colorado 
+February 25, 2011 
+88 
+Table of Contents

raw/filings/0000893538/2010/0001104659-11-010268/rpt_disclosure.txt

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+CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 
+Policies and Procedures on Transactions with Related Persons 
+We have adopted a Policy and Procedures With Respect to Related Person Transactions (the "Related Person Policy"), which sets forth the
+policies and procedures for the Audit Committee's review of any transaction, arrangement, or relationship (including any indebtedness or guarantee of indebtedness) or series of similar transactions,
+arrangements, or relationships in which (1) we are a participant, (2) the aggregate amount involved will or may be expected to exceed $120,000, and (3) a related person has or
+will have a direct or indirect material interest. For purposes of the Related Person Policy, a "related person" means (1) any of our directors, executive officers, or nominees for director,
+(2) any stockholder that beneficially owns more than 5% of our outstanding shares of common stock, and (3) any immediate family member of any of the foregoing. The Audit
+Committee approves or ratifies only those transactions that it determines in good faith are in, or are not inconsistent with, the best interests of our company and its stockholders. 
+In
+determining whether to approve or ratify a transaction with a related person, the Audit Committee takes into account the factors it deems appropriate, which may include, among others,
+the benefits to us, the availability of other sources for comparable products or services, the impact on a director's independence in the event the related person is a director, and the extent of the
+related person's interest in the transaction. The policy also provides for the delegation of Audit Committee authority to the Chairman of the Audit Committee for any related person transaction
+requiring pre-approval or ratification between meetings of the Audit Committee. The Audit Committee reviews and assesses ongoing relationships with a related person on at least an annual
+basis to see that they are in compliance with the policy and remain appropriate. 
+In
+addition, our By-Laws provide that a director, officer, or employee of our company may not pursue for his or her own account a business or investment opportunity that he
+or she learned about through his or her affiliation with our company. Our By-Laws also provide that our officers or employees may not pursue for his or her own account an oil and gas
+opportunity that he or she independently learned about unless (1) with respect to an officer of our company, the officer's pursuit of the opportunity has been approved by the Board, and
+(2) with respect to a non-officer of our company, the employee's pursuit of the opportunity has been approved by a senior officer of our company with full knowledge of that
+opportunity. These restrictions do not apply to the acquisition of less than 1% of the publicly traded stock of another company. 
+Related Person Transactions 
+We recognize that transactions with related persons may raise questions among stockholders as to whether those transactions are
+consistent with our best interests and the interests of our stockholders. It is our policy to enter into or ratify such transactions only when the Board, acting through the Audit Committee or as
+otherwise described herein, determines that the transaction in question is in, or is not inconsistent with, the best interests of our company and its stockholders, including but not limited to
+situations where we may obtain products or services of a nature, quantity or quality, or on other terms, that are not readily available from alternative sources or when we provide products or services
+to related persons on an arm's length basis on terms comparable to those provided to unrelated third parties or on terms comparable to those provided to employees generally. Set forth below is a
+description of all transactions between our company and related persons since the beginning of January 1, 2010. 
+11 
+Table of Contents 
+Mr. Quintana
+is the President, Chief Executive Officer, and a director of TESCO Corporation, which designs, manufactures, and delivers technology based solutions for the upstream
+energy industry, including oilfield drilling technology, services, and equipment. We have an agreement with TESCO for the provision of services to us in connection with our drilling and completion
+operations. This agreement continues until canceled by either us or TESCO on 30 days advance written notice. Pursuant to this agreement, we are obligated to pay TESCO only for services actually
+performed. This agreement does not require us to make any other payments to TESCO. Prior to 2010, the services provided by TESCO and the amounts we paid did not exceed the threshold amount for review
+under our Related Person Policy. In May 2010, as part of its annual review of related party transactions, the Audit Committee reviewed the relationship between TESCO and our company and determined at
+such time that we had not paid any amounts to TESCO during 2010. During August 2010 through December 2010, TESCO provided services to us in our ArkLaTex region. In December 2010, the Audit Committee
+again reviewed the relationship between our company and TESCO, but the final 2010 amounts paid to or incurred to be paid to TESCO were not then available for review. Upon the later calculation of the
+final 2010 amounts paid to TESCO, we determined that we had paid TESCO $346,683 for services rendered after August 2010. In addition, as of March 31, 2011, we had paid TESCO $291,635 for
+services in 2011. Based upon these amounts, the Audit Committee reviewed the relationship between our company and TESCO and determined that the relationship is in the best interests of our company and
+its stockholders. 
+12 
+Table of Contents