SM Energy Company
Annual Report 2000

Plain-text annual report

F I N A N C I A L H I G H L I G H T S In thousands except per share, as adjusted for 2 for 1 split on 9/5/00, production and price data 2000 1999 1998 1997 1996 Income Statement Data Oil and gas production revenues Gains on sales and other Total operating revenues Net income (loss) $ 188,407 7,259 $ 195,666 $ 55,620 $ 73,387 1,527 $ 74,914 $ 82 $ 71,413 8,096 $ 79,509 $ (8,797) $ 76,603 15,282 $ 91,885 $ 23,109 $ 57,207 2,777 $ 59,984 $ 10,326 Basic earnings (loss) per share $ 2.00 $ 0.00 $ (.40) $ 1.09 $ .59 Cash dividends per share $ .10 $ .10 $ .10 $ .10 $ .08 Basic weighted average common shares outstanding 27,781 22,198 21,874 21,240 17,518 Balance Sheet Data Working capital Total assets Long-term debt Stockholders’ equity Average Net Daily Production Oil (Barrels) Gas (Mcf) MCFE (6:1) Average Sales Price Oil (per Bbl) Gas (per Mcf) U.S. Reserves Oil (Barrels) Gas (Mcf) MCFE (6:1) Stockholders’ Equity (In thousands of dollars) 300,000 > 250,000 > 200,000 > 150,000 > 100,000 > 50,000 > 0 > $ 40,639 321,895 22,000 250,136 6,551 104,769 144,075 $ 13,440 230,438 13,000 188,772 3,790 62,478 85,218 $ 9,785 184,497 19,398 134,742 3,493 69,698 90,656 $ 9,618 212,135 22,607 147,932 $ 13,926 144,271 43,589 75,160 3,254 62,739 82,266 3,240 42,522 61,962 $ 23.53 $ 3.44 $ 16.56 $ 2.21 $ 12.98 $ 2.16 $ 18.87 $ 2.33 $ 18.64 $ 2.23 20,950 225,975 351,673 18,900 207,642 321,042 8,614 132,605 184,289 11,493 196,230 265,188 10,691 127,057 191,203 Production (Daily MCFE) 180,000 > 150,000 > 120,000 > 90,000 > 60,000 > 30,000 > 0 > 96 97 98 99 00 96 97 98 99 00 01 Budget 1 T O O U R S H A R E H O L D E R S Our mission has not changed. We must build value by adding value. Net income for the year 2000 was a record $55.6 million or $2.00 per share. Earnings before interest, taxes, depreciation, impairment and explo- ration were $138.3 million or $4.98 per share. Production increased 70% in 2000 to 52.7 BCFE. Oil and gas reserves grew by 10% to 352 BCFE and we replaced 168% of our reserves. Our capital expenditures budget has increased 24% in 2001 to $155 million. Production is forecast to grow to 56-58 BCFE. Production Replacement % 1997–1999 Average 2000 Oil Gas Oil Gas 375% > 300% > 225% > 150% > 75% > 0 > The gas bubble has burst. Oil prices have recovered. St. Mary had record production, earnings and cash flow in 2000. This is the best of times. But markets react and adjust. Our challenge is to grow and succeed in both good times and bad. We must add value at every phase of the business through creativity, technical competence, focus and attention to detail. We also must have the vision to identify and respond appropriately to new growth opportunities. Net income for the year 2000 was a record $55.6 million or $2.00 per share compared to $82,000 or $.00 per share for the prior year. Earnings before interest, taxes, depreciation, impairment and exploration were $138.3 million or $4.98 per share, up 309% and 228%, respectively, from 1999. These results reflect a 70% increase in production to 52.7 BCFE resulting from outstanding drilling and acquisition results in 1999 as well as a 51% increase in average price to $3.57 per MCFE. Oil and gas reserves grew by 10% to 352 BCFE. We replaced 168% of our production in 2000. This is below our long-term goal of 200%. We faced a daunting challenge as our production was up 70%, which moved our growth target up substantially in one year. Although our production increased 818% in the Gulf Coast/Gulf of Mexico region, our reserve additions in that region were quite modest for several reasons. We spent most of the year building our technical capability as we grew our Lafayette office from three people to 18 people. In addition, in that same region we converted 8.3 BCFE of undeveloped and behind the pipe reserves to a proved producing category which did not add new reserves. However, we now have the technical capability to exploit the large acreage and seismic positions obtained in the King Ranch acquisition and the 2001 budget for this region is the largest of our core areas. As oil and gas prices rise, we are seeing record rig utilization, cost increases and more expensive acquisition costs. Obviously, Reserves Per Share (MCFE/Share) Working Capital & Other Assets Less Long Term Liabilities ($/Share) 15.00 > 12.00 > 9.00 > 6.00 > 3.00 > 0 > < 5.00 < 4.00 < 3.00 < 2.00 < 1.00 < 0.00 St. Mary Peer Group 98 99 00 Peer Group is 125 companies included in Arthur Andersen Global E&P Trends 2000 2 (cid:1) (cid:1) • Production is forecast to grow to 56-58 BCFE, up from 52.7 BCFE in 2000. Based on a NYMEX strip price of $5.46 per MCFE we would realize approximately $4.73 per MCFE, after hedges. Assuming this price deck, lease operating expenses, including taxes, are forecast at $.80 – $.85 / MCFE and G&A is forecast at $.28 – $.30 / MCFE. Based on these assumptions discretionary cash flow is forecast at $6.00-$6.50 / share. • Of the $155 million budget, 39% is allocated for acquisitions, 24% for exploration and development in the Gulf Coast and Gulf of Mexico, 17% in the Mid-Continent, 12% in the Williston and Permian and 7% in the ArkLaTex region. The more important planned exploitation activity includes four wells at Northeast Mayfield in Oklahoma; ten Granite Wash wells in Oklahoma; eight Red River/Mission Canyon wells in the Williston Basin; 15 wells in East Texas primarily at the Box Church and Trinidad fields; and three wells at the Constitution field. In addition, we have 4-5 wells planned at our largest value property, Judge Digby, which would include both exploitation as well as exploration ideas. • In addition to Judge Digby, we have a large potential well planned at Matagorda 701. We are also evaluating several coal bed methane and other unconventional gas resources. • We will continue to control operations for approximately two-thirds of our capital expenditures and dominate our core areas with our technical expertise. Our mission has not changed. We must build value by adding value. This means we must add value at every phase of the business from geo-science, to engineering, to administration, to finance. We must outperform three quarters of our competi- tion in every basin in which we operate. We have selected those basins where we have a competitive edge through tech- nical skills, acreage positions and our relationships with current and prospective partners. We have outstanding people at St. Mary — across all disciplines and deep within the organization. We are driven to build value per share — not simply corporate bulk —and every incentive and reward program is geared to that end. Our financial strength and discipline combined with our technical expertise will allow us to succeed in good times and bad. March 9, 2001 Mark A. Hellerstein Thomas E. Congdon President and Chief Executive Officer Chairman of the Board 3 Thomas E. Congdon Chairman of the Board Mark A. Hellerstein President & Chief Executive Officer this will have an impact on our business. We believe we have a competitive advantage in securing drilling rigs in the Mid-Con- tinent, Williston and at Judge Digby where we have continuous drilling programs, long-term relationships and — surprisingly — because we have always paid our bills on time. In other regions where we cannot maintain continuous drilling programs we must plan activities further in advance. We are running our economics on all investments presuming a $3.25/Mcf and $22.50/barrel NYMEX price. Virtually our entire planned drilling program is economic at those prices. For acquisitions we generally must use the higher NYMEX strip pricing to be competitive. For economic decisions that require higher pricing assumptions, we will hedge those prices as necessary to protect our base rate of return. This is not a change in approach as we have always added value through geologic and operational ideas and not through price speculation. The difference is that our “finding costs” for such acquisitions will be higher. This is not of concern to us because we will maintain our internal rate of return and return on investment standards. We enter the year 2001 with one of the strongest balance sheets in our history as well as record projected cash flow. We have more prospects than ever before and a capital expenditure budget of $155 million, an increase of 24%. As noted, we may experience some delays in our activities due to a shortage of drilling and workover rigs and crews as well as other services and supplies. Here is our plan to build value in 2001: Succeeding A great geologic idea is only a success in finding and if it becomes an economic success. developing The cost to find and develop reserves must provide reserves. a positive full cycle economic return. 4 5 O P E R A T I O N S Summary of Budgeted Expenditures By Area for 2001 Operating in mature basins becomes routine and predictable once a company and its staff have spent years discovering and developing oil and gas reserves. The more mature a basin, the more information that is available to assist in finding additional reserves. Technology that is appropriate to a specific basin can be tested and perfected in order to improve economics. Land positions are built and refined over years of exploration and development. St. Mary is focused in five core areas headed by exploration professionals who have lived and worked in their respective areas for over 20 years. Year after year, Mid-Continent Gulf Coast/GOM ArkLaTex Williston Permian Other Acquisitions (Millions) $ 27.0 $ 37.5 $ 11.0 $ 12.0 $ 6.0 $ 1.5 $ 60.0 St. Mary focuses its exploration, development and acquisition activities in five core areas in the United States; the Mid- Continent region, onshore Gulf Coast and offshore Gulf of Mexico, the ArkLaTex region, the Williston Basin and the Permian Basin. In each of these areas St. Mary has built a balanced portfolio of proved reserves, development drilling opportunities and higher-risk higher-potential exploration projects. The Company believes that its extensive leasehold position is a strategic asset. Since 1990 St. Mary has expanded its technical and operating staff and increased its drilling, production and operating capabilities. Senior technical managers, each with over 20 years of professional experience, head up regional technical offices located near the core areas and are supported by centralized administration in the Company’s Denver office. St. Mary has knowledgeable and experienced professionals at every level of the organization. St. Mary believes that its long standing presence, its established network St. Mary’s exploration professionals Reserve Growth (MMCFE) produce economic results for the Company and its shareholders. 360,000 > 300,000 > 240,000 > 180,000 > 120,000 > 60,000 > 0 > 96 97 98 99 00 Price Adjustment OK Sales S. Horseshoe Ronald D. Boone Executive Vice President and Chief Operating Officer 6 (cid:1) (cid:1) (cid:1) of local industry relationships and its extensive acreage St. Mary is going into 2001 with the largest prospect holdings in its core operating areas provide a significant inventory in its history. The Company’s 2001 capital expenditures competitive advantage. budget is $155 million which includes $95 million for exploration Detailed geologic studies developed over years of operating and development and $60 million for property acquisitions. The in mature basins combined with state of the art technology exploration and development budget is a 32% increase over produces consistent and predictable results. Past success and the $71.7 million spent in 2000. St. Mary will operate approxi- failures add to the knowledge necessary to reduce risk and mately 65% of its capital expenditures budget in 2001. In improve economics. Use of technology can be expensive but addition to the overhead reimbursement, operating allows will improve economics if the proper technology is used in the St. Mary to control geologic and operational decisions. Growth in Technical Staff M I D - C O N T I N E N T R E G I O N 60 > 50 > 40 > 30 > 20 > 10 > 0 > 96 97 98 99 00 P E R C E N TA G E O F T O TA L R E S E R V E S — 3 4 % P R O V E D D E V E L O P E D R E S E R V E S — 8 4 % P R O V E D R E S E R V E S — 1 2 0 . 6 B C F E G A S / O I L M I X — 9 1 % – 9 % C A P I TA L E X P E N D I T U R E S — 1 7 % St. Mary has operated in the Mid-Continent region for over 25 years. The region is operated out of the Company’s Tulsa, Oklahoma office which has grown to 30 employees. Year after year the region has been able to produce consistent and predictable results. The knowledge and the geologic information gained by a staff that has spent the majority of its professional career in the region provides the foundation to generate new appropriate area. The cost of technology can destroy economics prospects each and every year. In addition St. Mary’s experience if it is used in an inappropriate manner. St. Mary’s many years in the area allows the Company to benefit from state of the art of experience and attention to detail maximizes the effectiveness technology to drill and complete wells in the tight sand reservoirs of the technologies that apply to each of its core areas. prevalent in the Mid-Continent region. The many years in A major challenge for the industry and St. Mary is to hire, the region has allowed St. Mary to accumulate interests in develop and retain a quality technical staff. St. Mary has quality more than 265,000 gross acres which is the source of professionals in each of the technical disciplines and has been continuing opportunities. able to grow its staff in each of its regional offices each year. During 2000 St. Mary spent $29.2 million in the Mid- St. Mary’s incentive programs are structured to reward economic Continent region on exploration and development. The Company performance and are an integral reason for the low turnover participated in 63 wells with a completion success rate of 79%. rate St. Mary has experienced with its technical staff. Two geologic plays made great progress in 2000. Northeast Production increased 70% in 2000 to a total of 52.7 BCFE, Mayfield and the Constitution field each had significant new or an average daily production of 144,100 mcfe per day. Net discoveries. In NE Mayfield the Stone 1-19 was completed proved reserves at December 31, 2000 increased 10% to 352 at 6,900 MCFE per day, the Benton 1X-21 was completed at BCFE with a reserve base of 64% natural gas and 36% oil. 1,500 MCFE per day and the Caroline 1-25 was completed at 40.6 BCFE were added through acquisitions and 47.9 BCFE 7,500 MCFE per day. Three Yegua sands were encountered from drilling activities. Reserve revisions from higher year end in the Constitution field where the Apache Gas Unit #1 was 2000 pricing were offset by negative performance. During completed at 3,700 MCFE per day. 2000 St. Mary participated in 124 gross wells with an 82% success rate and 79 recompletions with an 80% success rate. 7 On December 28, 2000 St. Mary completed a $32 million G U L F C O A S T & G U L F O F M E X I C O acquisition of oil and gas properties located primarily in the Anadarko Basin. The properties currently produce an estimated 8,500 MCFE per day and include additional development and P E R C E N TA G E O F T O TA L R E S E R V E S — 1 5 % exploitation opportunities. The 2001 Mid-Continent capital program totals $27 million. P R O V E D D E V E L O P E D R E S E R V E S — 8 2 % 22% of the program has been allocated to 8 wells to be drilled to the higher potential deeper Morrow and Springer formations P R O V E D R E S E R V E S — 5 3 . 1 B C F E G A S / O I L M I X — 8 7 % – 1 3 % C A P I TA L E X P E N D I T U R E S — 2 4 % including 4 wells in NE Mayfield. Ten wells, which represent St. Mary was founded in the early 1900s with the purchase of 21% of the 2001 budget, are planned to be drilled to the 24,900 acres of fee lands in St. Mary Parish, Louisiana on the Granite Wash formation. Three wells are budgeted in the shoreline of the Gulf of Mexico. The fee lands continue to be a Constitution field (11% of the capital program) and will test valuable asset with revenue from the lands totaling $7.2 million multiple Yegua sand objectives. in 2000. As the Company grows, revenue from its fee lands Over 70% of the Mid-Continent capital program will be represents a smaller portion of the Company’s revenue each operated by St. Mary in 2001. The Company has committed to year. St. Mary’s Gulf Coast and Gulf of Mexico region grew use 3-4 drilling rigs in the region continually during the year. significantly as a result of its 1999 acquisition of King Ranch Keeping the rigs committed to St. Mary prospects will minimize Energy. 40% of the Company’s 2000 production was from its any delays or disruptions from the tight rig environment that Gulf region. St. Mary’s regional office in Lafayette, Louisiana currently exists in the region. St. Mary will also use additional grew to a staff of 18 and the region accounted for 21% of the rigs, as needed, to drill the 32 operated wells planned for 2001. Company’s capital expenditures in 2000. The Judge Digby field located onshore in Pointe Coupe Parish, Louisiana is St. Mary’s largest value field. The Company’s working interest in the field ranges from 11.5% to 20% depending on the formation being drilled. During 2000 the Parlange #2 was deepened to a depth of 21,350 feet and was completed at a rate of 10,000 Mcf per day. The Parlange #11 drilled to a depth of 23,480 feet produced at a rate of 92,000 Mcf per day which is the highest rate ever recorded for onshore Louisiana. At year end 2000 the Parlange #11 was producing at a rate of 55,000 Mcf per day. During late 2000 the J. Wuertelle #1 was drilled to a total depth of 22,200 feet and was completed in 2001 at a rate of 25,000 Mcf per day. St. Mary is currently participating in the drilling of the Parlange #12 which is scheduled to be drilled to 23,100 feet and test the C-4 and C-5 sands which have never been tested at a structurally favorable position in the field. The Parlange #10 was producing 40,000 Mcf per day when the well was shut down in late November to Systematic Development of Two Anadarko Basin Prospects AREA OF DETAIL BRAITHWAITE MIDDLEBURG 1995 1996 1997 1998 1999 2000 2001 8 Gulf Coast/Gulf of Mexico CARRIER CENTENNIAL JUDGE DIGBY FIELD VERMILLION 273 MATAGORDA 701 Undeveloped Leasehold 3-D Seismic HBP Being Developed Large Target Prospects repair a tubing leak. When the well is put back on production to about 50% prior to drilling the wells. St. Mary is partici- late in the first quarter of 2001, production from Judge Digby pating in the Centennial Project, a 51 square mile 3-D seismic should approach production facility capacity of 230,000 – survey over the Spindletop field near Beaumont, Texas. 240,000 Mcf per day. St. Mary and its partners have leased over 19,000 acres Most of St. Mary’s large exploration ideas are in the Gulf and intend to exploit a variety of formations, including the Coast and Gulf of Mexico region. The Matagorda 701 prospect Miocene, Frio, Hackberry, Discorbis, Vicksburg and Yegua is located in 110 feet of federal waters, 50 miles northeast of sands. St. Mary has a 21.25% working interest in the Corpus Christi, Texas. Two wells to be operated by St. Mary are Centennial project which is planned to be a multi-year planned to be drilled in 2001 to a total depth of 11,800 feet. exploration and development program. The Company intends to reduce its current 80% working interest The Gulf Coast and Gulf of Mexico region should experi- Judge Digby Field ence the most growth of St. Mary’s five core areas during 2001 as its capital expenditures program is budgeted at $37.5 million, a 48% increase over the $25.3 million spent in 2000. In addition to the two wells to be drilled at Matagorda 701, six wells are planned for the Centennial program and five wells in Judge Digby. The region will continue to evaluate over 1,500 square miles of 3-D seismic data included in the King Ranch Energy acquisition along with conducting additional seismic surveys in selected areas. St. Mary continues to encourage the development of its fee lands by facilitating exploration interest in deeper, untested formations and encouraging additional 3-D seismic activity. Producing Wells Drilling 9 A R K L A T E X W I L L I S T O N B A S I N P E R C E N TA G E O F T O TA L R E S E R V E S — 1 5 % P E R C E N TA G E O F T O TA L R E S E R V E S — 2 5 % P R O V E D R E S E R V E S — 5 1 . 7 B C F E P R O V E D R E S E R V E S — 8 8 . 1 B C F E G A S / O I L M I X — 8 2 % – 1 8 % G A S / O I L M I X — 1 6 % – 8 4 % P R O V E D D E V E L O P E D R E S E R V E S — 8 6 % P R O V E D D E V E L O P E D R E S E R V E S — 9 6 % C A P I TA L E X P E N D I T U R E S — 7 % C A P I TA L E X P E N D I T U R E S — 8 % ArkLaTex Nance Petroleum Corporation, a wholly owned subsidiary of St. Mary, has conducted operations in the Williston Basin in eastern Montana and western North Dakota on behalf of St. Mary HAYNESVILLE since 1991. The Nance office in Billings, Montana includes a Shreveport BAYOU D‘ARBONNE MISSISSIPPI SALT PLAY BOX CHURCH Developed Fields New Exploration Area 22 person staff and is directed by geoscientists who have spent over 25 years and their entire careers in the Williston Basin. Exploration and development in the Williston Basin is based on the interpretation of 3-D seismic. Nance has successfully used 3-D seismic imaging to delineate structure and porosity development in the Red River formation. Since 1991 Nance has successfully completed 24 out of 25 wells it has drilled and operated. Nance’s prospect inventory continues to grow as the results from 3-D seismic surveys lead to additional areas to conduct more 3-D seismic surveys. Six 3-D surveys are planned St. Mary’s ArkLaTex office operates in southern Arkansas, for 2001 which exceeds the number of surveys conducted in northern Louisiana and eastern Texas and in 2000, extended its any prior year by Nance. operations into southern Mississippi. The region is managed by Nance spent $12.6 million on exploration and development St. Mary’s 14 person office in Shreveport, Louisiana. St. Mary’s in the Williston Basin in 2000. Its only dry hole since 1991 was ArkLaTex professionals have spent their careers in the region. drilled early in 2000 followed by 11 successful wells, 5 of which Since 1992 the strategy of leveraging St. Mary’s technical were operated by Nance. The Federal 16-28X (56.25% working expertise in an integrated acquisition and exploitation program interest) drilled to the Duperow formation had an initial has had major economic success developing fields such as production rate of 640 barrels of oil per day and 450 Mcf per Bayou D’Arbonne, Box Church and Haynesville. day. In addition to its exploration and development efforts, In its search for new opportunities and potential analog Nance acquired $13.3 million of oil and gas properties in fields, the ArkLaTex office expanded its area into southern five niche acquisitions which added 5,475 MCFE per day of Mississippi where the objective is to leverage its technical production to the Company. expertise in the Mississippi salt play. During 2000 St. Mary spent $6.9 million in the ArkLaTex region and participated in 37 wells with a 73% completion suc- cess rate. The Jones #1 and the Jones #2 wells were successful multi-lateral wells drilled in the East Bridges field, each with ini- tial production rates exceeding 4,000 mcf per day. The 2001 ArkLaTex capital program is $11 million which is a 59% increase over 2000 expenditures. The ArkLaTex office anticipates participating in 35 wells and will operate 77% of its 2001 capital expenditures budget. 10 Williston Basin (3-D Seismic Surveys) MO NTANA NORTH DAKOTA 1994 1995 1998 1999 2000 2001 Evaluating East Shugart Delaware Unit waterflood project was initiated in 2000. Although an initial response from the water injection is not anticipated until late 2001, the Company is hopeful the East Shugart waterflood will be an analog to the successful Parkway Delaware Unit waterflood that increased production from 450 bopd in 1998 when the waterflood was initiated to 1,150 bopd in 2000. The Permian Basin capital expenditures budget is $6 million. In addition to drilling four injection wells in the East Shugart Delaware waterflood, two Morrow tests are planned in the Parkway field and a Queen development well is planned at the Young North field. The HJSA toplease on 30,450 acres in Ward County, Texas became effective on August 5, 2000 and at year end was producing 3,250 mcfe per day. 3-D seismic data over the 50 square mile lease will be reprocessed during the first quarter of 2001 with exploitation drilling, based on the results Nance’s 2001 Williston Basin exploration and development of the 3-D seismic evaluation, anticipated throughout the year. capital program is $12 million. Nine operated wells with working The Company anticipates significant opportunities will develop interests ranging from 70% to 100% are planned to be drilled. from St. Mary’s 21.4% interest in this lease. Rig availability is limited in the Williston Basin. Nance has minimized the impact of the tight rig situation by committing to keep one drilling rig utilized throughout the year. Nance will Permian Basin operate 85% of its Williston Basin capital budget in 2001. P E R M I A N B A S I N P E R C E N TA G E O F T O TA L R E S E R V E S — 1 1 % P R O V E D D E V E L O P E D R E S E R V E S — 8 4 % P R O V E D R E S E R V E S — 3 8 . 1 B C F E G A S / O I L M I X — 3 4 % – 6 6 % C A P I TA L E X P E N D I T U R E S — 4 % In 1995 St. Mary began acquiring interests in the Permian Basin which is located in eastern New Mexico and western Texas. Because the Permian Basin is primarily carbonate oil reservoirs similar to the Williston Basin, Nance Petroleum began managing the Company’s interests in the Permian Basin in 2000. In addition to a significant overhead savings, Nance has been able to provide the Permian Basin exploration and development team the technical discipline and attention to detail that has been the foundation of its success in the Williston Basin. St. Mary participated in drilling 9 wells in 2000 with a 67% success rate. The $1.7 million spent on exploration and development resulted in adding reserves of 2,317 MMCFE. The EDDY Shugart Delaware Unit GAINES Parkway Delaware Unit O C I X E M W E N S A X E T LOVING Central Basin Platform Delaware Basin WARD HJSA Lease 11 Succeeding The economics of properties acquired through acquisitions in making are protected by hedging commodity prices. economic Additional value is added through St. Mary’s technical expertise. acquisitions. 12 13 A C Q U I S I T I O N S St. Mary’s growth strategy includes the acquisition of oil and gas properties that will add value and opportunities to the Company. Niche acquisitions in the Company’s core areas are typically based on a geologic or operational Acquisitions are becoming a more significant part of St. Mary’s growth strategy. The Company completed $53.5 million of acquisitions in 2000, which added reserves of 40.6 BCFE. Over the past three years, St. Mary has been able to close over $102 million of acquisitions which have included both niche and company acquisitions. Niche acquisitions are primarily within St. Mary’s core areas. In addition to earning an acceptable return from the acquisition of producing properties, St. Mary’s objective is to add value using its proprietary geologic concepts and well completion techniques. With the market for acquisi- tions being increasingly competitive, value must be added through exploitation in order to meet St. Mary’s return on idea that St. Mary believes will provide investment objectives. economic exploration and development opportunities. In addition, St. Mary targets private and under-valued public companies that can be acquired for cash and/or St. Mary stock on an accretive basis. The Company’s strong financial and technical capabilities, together with a strong balance sheet and a highly regarded stock, provide flexibility in structuring transactions to meet the requirements of the company and its shareholders looking for liquidity. During 1999 St. Mary acquired two private companies in exchange for St. Mary common stock. Company acquisitions have provided St. Mary with prospect inventories, geological and geophysical data including 3-D seismic surveys, technical expertise and lease inventories, in addition to the oil and gas production existing at the time a company is acquired. For a private company a merger with St. Mary can provide liquidity, management succession and access to capital markets. St. Mary believes its strong balance sheet and a common stock that consistently outperforms its peers provide a competitive Reserves Added Through Acquisitions (MMCFE) 120,000 > 100,000 > 80,000 > 60,000 > 40,000 > 20,000 > 0 > 96 97 98 99 00 14 advantage when dealing with private companies. St. Mary will continue to evaluate acquiring private companies that fit strategically with St. Mary’s operation. In addition the Company will pursue the acquisition of under-valued public companies. St. Mary will only make company acquisitions on a basis that is accretive. During 2000 St. Mary made niche acquisitions in each of its five core areas totaling $53.5 million. In December, 2000 the Company completed a $32.0 million acquisition of oil and gas properties in the Mid-Continent region. $13.3 million of niche acquisitions were made during 2000 in the Williston Basin in five separate transactions. The balance of $8.2 million of niche acquisitions were made in the ArkLaTex region, the Gulf Coast and Gulf of Mexico region and the Permian Basin. St. Mary has set aside $60 million or 39% of its 2001 capital expenditures program for property acquisitions. With its unused borrowing base and cash flow, the Company has the Regional Acquisitions financial capability to make acquisitions substantially greater than the planned amount. St. Mary’s policy of hedging up to 24 months of the acquired production from any acquisition allows the Company to acquire properties in the current high commodity BILLINGS price environment. St. Mary employs the same hedging policy in all price environments as the Company does not speculate on commodity prices when making acquisitions. Because St. Mary is willing to use aggressive prices to evaluate acquisitions and hedge those prices, the Company believes it will be competitive in 2001 in its pursuit of acquisitions. DENVER TULSA SHREVEPORT LAFAYETTE 1995 1996 1997 1999 2000 15 Succeeding Because of its strong balance sheet, St. Mary is able to take financial advantage of opportunities. Financial resources are available strategies. to weather periods of depressed commodity prices. 16 17 F I N A N C I A L S T R A T E G I E S St. Mary’s objective is to be ranked in the top quartile of its All of St. Mary’s financial strategies and goals are focused on building peer group in all areas. To be a top performer the Company must replace, on average, at least 200% of its annual production and must do so economically. Over the past five years, St. Mary has replaced 265% of its production at a finding cost of $.93 per MCFE which ranks the Company within the top quartile value per share. Growth is only an of its peer group. objective if the growth increases per share value. To build per share value requires the Company to add value through its technical, operational and financial expertise. To build per share value in good times and in bad requires the financial discipline to maintain the financial strength necessary to benefit from both the down-cycles and the up-cycles in the volatile oil and gas industry. 18 St. Mary measures its performance by internal rate of return, return on investment and full cycle economics calculations. The Company’s objective is to provide its shareholders with a minimum compounded 15% internal rate of return. Since St. Mary went public in December, 1992 through the end of 2000, St. Mary has provided its shareholders, with dividends and increase in per share value, an annual compounded return in excess of 25%. Full cycle economics compare current year cash margins with the average five year finding cost. St. Mary consistently ranks in the top quartile in its industry when measuring full cycle economics and in three of the last four years has been one of the top five performers in the Howard Weil surveys of approximately 60 top performing companies. As a part of St. Mary’s financial strategy to grow per share value, the Company has adopted financial strategies that will “right” size the Company if conditions warrant. St. Mary will periodically sell non-strategic assets if they can be sold at a substantial premium over what St. Mary will pay for them. Buying oil and gas properties at wholesale and selling at retail grows per share value. St. Mary has in place a stock repurchase plan whereby the Company will purchase its common shares 2001 Capital Program ($155 Million) 1% 12% 7% 24% 17% 39% Mid-Continent Gulf Coast/GOM (cid:1) ArkLaTex Williston/Permian Acquisitions Other (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) Reserve Summary Mid-Continent Region ArkLaTex Region Gulf Coast and Gulf of Mexico Williston Basin Permian Basin Total OIL (MBBLS) 1,766 1,510 1,168 12,339 4,167 20,950 GAS (MMCF) 110,033 42,689 46,087 14,105 13,061 MMCFE AMOUNT 120,627 51,749 53,094 88,137 38,066 PERCENT 34.3% 14.7% 15.1% 25.1% 10.8% PV-10 VALUE (IN THOUSANDS) $ 496,091 189,602 248,391 134,520 85,058 PERCENT 43.0% 16.4% 21.5% 11.7% 7.4% 225,975 351,673 100.0% $1,153,663 100.0% Full Cycle Economics 3.0 > 2.5 > 2.0 > 1.5 > 1.0 > .5 > 0 > 96 97 98 99 00 St. Mary Howard, Weil, Labouisse, Friedrichs Inc. Peer Group Mean when they are selling at attractive levels. This plan grows per share value. Adhering to insider “black out” periods limits the timeframe when the share repurchase strategy can be executed. St. Mary will evaluate opportunities in 2001 using a $3.25 per Mcf NYMEX gas price and a $22.50 per barrel NYMEX oil price. If a higher NYMEX price strip is necessary to meet the Company’s return on investment objectives, the higher prices will be hedged. Property acquisitions will be evaluated using NYMEX strip prices. St. Mary will hedge the first 24 months of production in order to protect a base return rate. At December 31, 2000 St. Mary had $22 million of bank debt and $118 million available to borrow from its $140 million borrowing base. The Company anticipates the borrowing base will be increased when the amount is redetermined during the second quarter of 2001. St. Mary’s policy is to limit bank borrowing to no more than 50 percent of its available borrowing base and to maintain a debt to capital ratio of less than 35 percent. The conservative use of debt and a strong balance sheet allows St. Mary to react quickly to opportunities as they become available. A strong balance sheet also provides the financial resources to survive poor market conditions in a cyclical industry. St. Mary is focused on per share growth. Company policy dictates that economics are prepared and evaluated for every opportunity. Every financial decision is based upon whether or not the opportunity will build shareholder value. Economic evaluation is engrained in every St. Mary employee. The technical, operational, administrative and financial employees work together every day to ensure the continued economic growth of St. Mary to ensure that St. Mary will always succeed in good times and in bad. 19 (cid:1) (cid:1) B O A R D O F D I R E C T O R S O F F I C E R S Larry W. Bickle Houston,Texas Managing Director Haddington Ventures LLC Ronald D. Boone Denver, Colorado Executive Vice President and Chief Operating Officer St. Mary Land & Exploration Company Thomas E. Congdon Denver, Colorado Chairman St. Mary Land & Exploration Company David C. Dudley Denver, Colorado Operating Manager Dudley & Associates, LLC William J. Gardiner Houston,Texas Chief Financial Officer King Ranch Inc. Mark A. Hellerstein Denver, Colorado President and Chief Executive Officer St. Mary Land & Exploration Company Jack Hunt Houston,Texas President King Ranch Inc. Robert L. Nance Billings, Montana President Nance Petroleum Corporation R. James Nicholson Washington, D.C. Chairman and Chief Executive Officer Nicholson Enterprises, Inc. Arend J. Sandbulte Duluth, Minnesota Director and Retired Chairman Minnesota Power John M. Seidl San Francisco, California Chairman MyHomeKey.com, Inc. 20 Thomas E. Congdon Chairman Mark A. Hellerstein President and Chief Executive Officer Ronald D. Boone Executive Vice President and Chief Operating Officer Robert T. Hanley Vice President– Business Development W. David Hart Vice President – Geology, ArkLaTex George M. Hearne IV Vice President – General Manager, ArkLaTex Charles M. Jones Vice President – General Manager, Gulf Coast Richard C. Norris Vice President – Finance,Treasurer and Secretary Milam Randolph Pharo Vice President – Land and Legal, Assistant Secretary Julian C. Pope Vice President – Mid-Continent, Land and Administration Michael H. Rosenzweig Vice President – Engineering, ArkLaTex Kevin E. Willson Vice President – Mid-Continent, Drilling and Production Douglas W. York Vice President – Acquisitions and Reservoir Engineering Garry A. Wilkening Vice President – Administration and Controller Linda A. Ditsworth Assistant Vice President – Land and Assistant Secretary David J. Whitcomb Assistant Vice President – Gas Marketing Darla Dorgan Landman and Assistant Secretary Patricia Flanigan Administrative Assistant and Assistant Secretary James C. Robertson Administrative Assistant and Assistant Secretary 

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