SM Energy Company
Annual Report 2001

Plain-text annual report

Annual Report 2001 St. Mary’s financial strength and discipline combined with our technical ex p e rtise allows us to succeed in good times and bad, the theme of our 2000 annual rep o rt .To succeed in a cy clical business where commodity prices are largely beyond the control of management, we must be able to find and develop natural gas and crude oil reserves efficiently and economically. Locating our technical expertise in regional offices and staffing the offices with premier professionals in all technical disciplines who have spent their careers in the same geologic basins allows us to be a top performer in each of the basins where we operate, the theme of this year’s a n nual rep o rt . Our home office in Denver provides capital and administra t i ve services and supports the efforts of our regional offices whose primary focus is on finding and developing natural gas and crude oil re s e rve s . The effi c i e n cy created by our decentra l i zed management structure has been an important reason why St. Mary is continually one of the top performing companies in its industry. Our Mission St. Mary Land & Exploration Company was founded in 1908 and incorporated in 1915. We ar e engaged in the exploration, development, acquisition and production of natural gas and crude oil in five core areas in the United States. Our mission is to build shareholder value by adding value at every phase of the business and creating consistent growth in net asset value and cash flow per share. St. Mary’s objective is to realize a long term return on equity in the top quartile of exploration and production companies. A program of low to medium risk exploration, development and niche acquisitions in each of our core areas, r e p resenting 85% or more of our budget, is designed to provide a foundation of steady growth. The balance of our budget is allocated to higher-risk higher-potential exploration, non-conventional exploration programs and o p p o rtunistic acquisitions. Operations Acquisitions Financial Strategies St. Mary operates in five core areas managed The acquisition of oil and gas assets and Through consistent economic growth in from four regional offices. The Mid-Continent, companies is an important part of St. Mary’s reserves and production, St. Mary’s objective ArkLaTex, Gulf Coast/Gulf of Mexico, Williston g rowth strategy. We largely focus our attention is to increase its per share value in excess of Basin, and Permian Basin are operated out of on smaller niche acquisitions in existing core 15% per year. To achieve this objective, our our offices in Tulsa, Oklahoma, Shreveport and a reas where we can utilize our geologic goal is to replace, on average, 200% of our Lafayette, Louisiana and Billings, Montana. knowledge of the area, our technical expertise production and to have full cycle economics in Each office is staffed with a full complement and our financial flexibility. At the same time the top quartile of our peer group. Over the of geologists/geophysicists, engineers and we are actively seeking larger acquisitions that past five years we have replaced, on average, landmen who have extensive experience in the would allow us to expand our existing core 220% of our production and have consistently region/basin where they work. Our Denver areas, acquire additional geoscientists, and/or remained in the top quartile of our peer group. headquarters provides administrative support gain significant interests in a new basin From December 1992, when we first became a and oversight for the regions. within the U.S. We are a dominant operator in each of our core areas and will operate pro p e rties representing approximately 77% of our $104 million exploration and development capital expenditures budget in 2002. By operating such a large percentage of our budget, we are able to maximize the benefit of the company’s expertise in the land, geological, and engineer- ing disciplines. In each core area we focus on cautious detailed land and legal work, disciplined geological interpretations, re s e rv o i r management, efficient completion and stimu- lation techniques, and the application of new technologies when warranted. Property Acquisitions ($ millions) 60 50 40 30 20 10 public company, through December 31, 2001, we have provided our shareholders, in dividends and stock value, a compounded rate of return of 17%. Our strategy is also to maintain a strong balance sheet by keeping our debt to capital ratio at 35% or less. A strong balance sheet allows us to weather cycles of low commodity prices and be opportunistic when capital is not available to our peers. We are willing to become aggressive and increase our debt to capital ratio during down cycles in order to make strategic acquisitions. 98 99 00 01 02 (budget) Reserves (mcfe) Per Share In 2001 we spent $41.2 million on niche acquisitions, which represented 22% of our capital expenditures program. In 2002 we are budgeting $60 million for acquisitions, which is 37% of our budget. Over the last five years we have completed over $171 million of acquisitions. 15 12 9 6 3 97 98 99 00 01 Financial Highlights In thousands except per share,as adjusted for 2 for 1 split on 9/5/00,production and price data 2001 2000 1999 1998 1997 Income Statement Data Oil and gas production revenues Gains on sales and other Total operating revenues Net income (loss) Basic earnings (loss) per shar e Cash dividends per basic shar e Basic weighted average common $ 203,973 3,496 $ 207,469 $ 40,459 $ $ 1.45 0.10 $ 188,407 7,259 $ 195,666 $ 55,620 $ $ 2.00 0.10 $ 73,387 1,527 $ 74,914 $ $ 82 0.00 $ 71,413 8,096 $ 79,509 $ (8,797) $ (0.40) $ 0.10 $ 0.10 $ 76,603 15,282 $ 91,885 $ 23,109 $ $ 1.09 0.10 Shares outstanding 27,973 27,781 22,198 21,874 21,240 Balance Sheet Data Working capital Total assets Long-term debt Stockholders’ equity Average Net Daily Production Oil (Bbls) Gas (Mcf) MCFE (6:1) Average Sales Price Oil (per Bbl) Gas (per Mcf) U.S. Reserves Oil (Bbls) Gas (Mcf) MCFE (6:1) Stockholders’ Equity ($ millions) 300 250 200 150 100 50 $ 34,000 $ 40,639 436,989 64,000 286,117 6,667 108,195 148,199 321,895 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 $ 9,618 184,497 19,398 134,742 3,493 69,698 90,656 212,135 22,607 147,932 3,254 62,739 82,266 $ $ 23.29 3.73 $ $ 23.53 3.44 $ $ 16.56 2.21 $ $ 12.98 2.16 $ 18.87 $ 2.33 23,669 241,231 383,247 Reserves (BCFE) 400 300 200 100 20,950 225,975 351,673 18,900 207,642 321,042 8,614 132,605 184,289 11,493 196,230 265,188 Production (Daily MMCFE) 160 120 80 40 97 98 99 00 01 97 98 99 00 01 97 98 99 00 01 02 (projected) 1 To Our Shareholders • • Thomas E. Congdon Chairman of the Board Mark A. Hellerstein President & Chief Executive Officer This is not an easy time. Year 2001 was Through this turbulent year we nonetheless prices from year-end 2000 to December 31, tumultuous. Oil and gas prices seesawed, grew our reserves by 9%, modestly 2001. We replaced 166% of our 2001 produc- gas ranging from $9.73 in the first quarter to i n c reased production, maintained our tion at an all-inclusive finding cost of $2.03 per $1.73 while oil wilted from a high of $32.00 to financial strength and re c o rded the MCFE. Excluding the $10.8 million spent on a low of $17.50 per barrel in the fourth quart e r. second highest earnings in the history pre-production costs at the Hanging Woman Gas storage by year-end was at a record level, of the Company. largely the result of the weak economy and Basin coalbed methane project and the negative pricing reserve reduction, our finding cost and the fact industrial users switched to cheaper Net income in 2001 was $40.5 million or $1.45 p roduction replacement percentage were $1.41 energy when prices soared in the 2000-01 per share compared to $55.6 million or $2.00 per MCFE and 225%, respectively. The 2001 w i n t e r. Rig utilization in the U.S. rose to per share in 2000. Earnings before interest, finding cost reflects a 33% increase from 2000 effective capacity early in the year, resulting taxes, depreciation, impairment and exploration in the completed cost of comparable wells. In in diminished service quality and substantial were $137.5 million or $4.91 per share, up view of our expectation that the long-term gas cost increases that were slow to recede as 2% from the prior year. Production increased price will be strong, this $1.41 finding cost drilling activity declined in the autumn. 3% to 54.1 BCFE. While our average price met our economic criteria. for gas rose 6% to $3.77 per MCFE, expenses n Further afield, St. Mary was among the increased at a greater rate. Lease operating Current gas prices have been weakened by thousands stiffed by Enron. But worse yet, the costs grew 46% to $1.02 per MCFE re f l e c t i n g mild weather, re c o rd storage and the economic sudden collapse of that corporation and the a $4.9 million increase in workover expense, downturn. We expect demand to recover with subsequent scrutiny of other major compa- largely on properties acquired in the Tipperary the economy and a return to normal weather. nies revealed business practices damaging to purchase and in the Judge Digby field. An But our industry’s accelerated pace of gas confidence in the integrity with which most example of escalating service costs is control- exploration over the last several years has business affairs are conducted in this country. of-well insurance rates, which tripled. failed to increase production and reserves. Exploration expense and depreciation, depletion Much of this activity has focused on the Gulf n Finally, on September 11 St. Mary nearly and amortization charges rose 100% and of Mexico where re s e rve lives are short . lost two of its senior members of management 29%, re s p e c t i v e l y, due to several exploration Technology gains — 3D seismic and new in World Trade Center 1 — a reminder that it disappointments and higher service and completion techniques — have made is the people of this Company that are its equipment rates. General and administrative possible the discovery and development of most valuable asset. costs per unit of production remained flat. smaller reservoirs. But, hey, they’re smaller. The moderately increased year-end reserves of natural gas reserves in the U.S. has risen of 383 BCFE were net of a reduction of 32 from 16% to 25% in just ten years. New and Consequently the average annual decline rate 2 BCFE caused by the decline of oil and gas • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • Full Cycle Economics Production Replacement (%) Capital Expenditures ($ millions) 3.0 2.5 2.0 1.5 1.0 0.5 350 300 250 200 150 100 50 200 150 100 50 97 98 99 00 01 Gas Oil 98– 00 AVG Oil Gas 2001 98 99 00 01 02 (projected) n St. Mary n Howard, Weil, Labouisse, Friedrichs Inc Peer Group Mean n St. Mary n Peer Group, 125 Companies included in Andersen Global E&P Trends 2001 unconventional sources of gas are more costly p rojects. The more important planned exploita- capital expenditures and dominate our core and require long lead times. We believe gas t i o n activity include: areas with our technical expertise. prices will return to the $3.00 to $3.50 range • nine wells at Northeast Mayfield — a view already reflected in the five-year • seven wells in the Arkoma Basin We continue to build value per share by NYMEX price strip. • eight Granite Wash wells in Oklahoma adding value to our assets in hand and those • ten operated Red River and Madison wells we acquire. Our strong and very real balance We begin the year 2002 with extraordinary in the Williston Basin sheet has proved valuable in the past during financial strength. Following our March • six Odom Lime wells at Ft. Chadbourne t rying times. We are seeing costs decline issuance of $100 million of senior convertible • six Strawn wells in the Permian Basin and pro p e rty packages sold by companies notes, we have $50 million in the bank and an • four injection wells at the Shugart water- who have traditionally been our purc h a s e unused borrowing capacity of $170 million. flood project in the Permian Basin competitors. This is the time that our financial We have more prospects than ever before and • thirty wells in east Texas, north Louisiana strength and technical capability allow us to a capital budget of $164 million and Mississippi in our ArkLaTex region take advantage of “opportunity leverage” as for 2002. Here is our plan to build value in • two wells at our largest value property, opposed to “financial leverage”. Accordingly, the year ahead: Judge Digby in the Gulf Coast. we view the present as a time of advantage n Production is forecast to grow to 57 to n We have large potential exploratory wells 59 BCFE. Based on NYMEX strip prices of planned at Matagorda 701 in the Gulf of Mexico March 12, 2002 for St. Mary. $2.40 per Mcf and $20.00 per barrel, we and at our Carrier prospect in east Texas. would realize approximately $2.75 per MCFE Each prospect has potential of over 100 BCF after hedges. Assuming this price deck and with working interests expected between lease operating costs, including taxes, of 25% and 40%. We will conduct production $1.00 to $1.05 per MCFE and G&A of $.20 to tests on the eighteen well pilot program in the Mark A. Hellerstein $.24 per MCFE, discretionary cash flow is Hanging Woman coalbed methane project in President and Chief Executive Officer forecast at $3.25 to $3.50 per share. Wyoming-Montana and hope to increase our n Of the $164 million capital budget, 37% is interest averages 92% over possible reserves 115,000 acre leasehold position. Our working allocated for acquisitions, 20% for exploration of 200 BCF. and development in the Mid-Continent, 19% in the Williston and Permian Basins, 11% in n We will continue to control operations of Thomas E. Congdon the Gulf Coast and 8% in the ArkLaTex region. properties representing approximately three- Chairman of the Board Another 5% is allocated to unconventional gas quarters of our exploration and development 3 Operations Ronald D. Boone Executive Vice President and Chief Operating Officer Reserve Base By Region Mid-Continent – 33% Gulf Coast/GOM – 13% ArkLaTex – 13% Williston – 32% Permian – 9% St. Mary focuses its exploration, development and acquisition activities It is our responsibility at St. Mary to manage a St. Mary operates in five core areas that p o rtfolio of oil and gas pro p e rties that pro v i d e s are managed out of our four regional offices. the foundation for our continuing growth. We Each of our regional offices has a full must find, develop and operate oil and gas complement of geoscientists, engineers, land in five core operating are a s : properties economically and in a socially and professionals and support personnel. A senior the Mid-Continent region; onshore Gulf Coast and o ff s h o re Gulf of Mexico; the ArkLaTex region; the Williston Basin in North Dakota and Montana; and the Permian Basin in west Texas and New Mexico. 4 environmentally responsible manner. technical manager with over 20 years of p rofessional experience manages each re g i o n a l We have focused our operations in mature office. The staff in each office is experienced basins in the United States where we have and hand picked. Each member of the profes- core expertise and a strong existing presence. sional staff in each office has spent most of In these mature basins we are better able to his or her career in the basin or region where manage risk and achieve our economic return he or she is working. Each regional office objectives. We also concentrate our operations is supported by centralized administration in in those mature basins where we can become our Denver office. a dominant operator. Being a dominant operator provides competitive advantages, which are In each of our regional offices we have important to improve economics, such as: detailed, and quite often proprietar y, geologic, 1. Preferential access to drilling and workover been accumulated over years of operating in geophysical and engineering data, which has rigs and experienced crews; 2. Extensive knowledge of local contractors and service providers; 3. Negotiated service cost rates and discounts; and 4. Oil and gas marketing strength. each of our core areas. This data, along with the use of state of the art technology, pro d u c e s consistent and predictable results year after y e a r. In addition, our extensive acreage holdings in each of our core areas allow us to drill and have a significant ownership in the prospects Capital Expenditures By Region Mid-Continent – 20% Gulf Coast/GOM – 11% ArkLaTex – 8% Williston/Permian – 19% Other Areas – 5% Acquisitions – 37% we generate. Our acreage holdings also allow reserves are proved developed. During 2001 us to participate in prospects drilled by we participated in drilling 196 wells with an i n d u s t ry part n e r s . 85% success rate and 77 recompletions with a 74% success rate. In 2001 we made an initial investment in unconventional gas pro p e rties. We have Our 2002 capital expenditures budget is $164 acquired leases and options to earn leases million, which includes $104 million for explo- on more than 135,000 acres of prospective gas ration and development, and $60 million for reserves in coal beds and tight gas sands in property acquisitions. The $60 million we are anticipation of improving commodity prices. allocating to acquisitions represents 37% of Using state of the art technology, we believe our capital expenditures program. With a these properties represent significant long life strong balance sheet and available credit, we reserve potential for our Company. We spent have the financial ability to spend significantly $11 million on these types of properties in more on acquisitions should larger opportuni- 2001 and have included $8 million for these ties become available. We will be actively eval- p ro p e rties in our capital expenditures uating larger value packages in 2002 due to program in 2002. the unusually large number of properties that are coming on the market. In 2001 production increased 3% to a total of 54.1 BCFE, or average daily production of 148.2 MMcfe per day. Net proved reserves at December 31, 2001 increased 9% to 383 BCFE with a reserve base of 63% natural gas and 37% oil. Eighty-six percent of our 5 Pictured left to right are Julian Pope, Vice President–Land and Administration, Kevin Willson, Vice President–Drilling and Production and Marlon Wells, Production Manager. They are standing outside the Frac Van after supervising the successful hydraulic fracturing of the Billy 7-20 well in our Mayfield S.W. field. Julian and Kevin are co-managers of our Mid-Continent region. 6 St. Mary has operated the Mid-Continent region out Our extensive geological, engineering and land data- of the Company’s Tulsa, Oklahoma, office for over bases create a competitive advantage for St. Mary. 25 years. The Mid-Continent is a mature re g i o n Centralization of accounting, gas marketing and placing a heavy emphasis on development drilling administration functions in Denver enable the Tulsa and technical expertise. Our technical staff averages o ffice to focus on drilling, production and acquisition over eighteen years of regional experience per person o p p o rtunities. This organizational stru c t u re generates and continues to generate and execute economic, a highly motivated staff and allows for quick decision low risk drilling programs year after year. making at the local level. Mid-Continent Region Mid-Continent Region • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • St. Mary has been operating in the Mid-Continent for over twenty-five years. Exploration, development and acquisition activities in the Mid-Continent region are focused in the Anadarko and Arkoma Basins. The multi-pay potential of the region has provided St. Mary with a consistent and predictable economic return. The Mid-Continent region is managed out of The Mid-Continent region accounted for 33% of our Tulsa, Oklahoma, office. Our 32 person our estimated proved re s e rves at December 31, staff conducts operations in the Anadarko 2001, or 126.3 BCFE. Natural gas represents and Arkoma Basins in Oklahoma, Texas and 94% of our reserves in the region. Eighty-five Arkansas, where we have been operating percent of our reserves in the region at since 1973. December 31, 2001 were proved developed. Over the years the Anadarko Basin has been During 2001 the Mid-Continent re g i o n the workhorse for us. Almost 50% of our core accounted for 31% of our capital expenditure s , capital expenditures have been in the Anadarko or $56.3 million. We participated in 88 gross Basin over the past four years. The Anadarko wells in the region, of which 83% were has provided us with a strong base of opera- completed as producers. We operated 30 of tions and growth. The multi-pay potential of the wells drilled and owned an average 65% 1 – Anadarko Basin 2– Arkoma Basin the region helps to provide consistent and working interest in these wells. We also PROVED RESERV E S P E R C E N TAGE OF TOTAL RESERV E S G AS / OIL MIX 126.3 BCFE 3 3 % 9 4% / 6% predictable results. Applying state of the art participated in the recompletion of 10 wells technology in drilling, hydraulic fracturing, and in this region with a success rate of 50%. innovative completion techniques to the re g i o n ’s PROVED DEVELOPED RESERV E S 8 5 % tight gas reservoirs enables the acceleration Our Northeast Mayfield exploration program C A P I TAL EXPENDITURES $33 MILLION of production and associated cash flow. We continued to grow in 2001 as we participated are able to generate prospects year after year in the completion of six wells during the year because of the knowledge and the geologic with no dry holes. We have had excellent i n f o rmation gained by a staff that has spent the success in this area exploring for both Lower majority of its professional career in the re g i o n . and Upper Morrow sands at depths between 7 • • • • • • • • • • • • • • • • • Hydraulic fracturing treatments pump proppants such as sand or high-strength ceramic material carried by jelled water, plus additives or nitrogen gas down a well at high pressures to create fissures for several hundred feet around the well bore. These fissure s / f r a c t u res enhance the ability of oil or gas to flow to the wellbore, there- by increasing the production, profitability and life of the well. 18,000 and 21,000 feet. The Brothers 1-20 well (18% St. Mary interest) was drilled in 2001 and has produced at a rate of 25,000 Mcf per day. The Ross 2-11 well (29% St. Mary interest) had an initial production rate of 3,800 Mcf per day. The Granite Wash play continues to be active with 16 new completions, five of which were in the Sixty-Six field and five more of which were in the Mayfield S.W. field. The Lillie 2-11 well (79% St. Mary interest) in the Sixty-Six field had an initial production rate of 3,500 Mcf per day. The H.B. 6-20 well (100% St. Mary interest) in the Mayfield S.W. field had an initial production rate of 1,900 Mcf and 280 Bbls per day. The Easley 1A (77% St. Mary interest), a Morrow/Springer well in the Elk City field, had an initial production rate of 3,000 Mcf per day from the deeper Springer zone and is currently producing at over 7,000 Mcf per day from Lower Morrow pay, which will ultimately be commingled with the Springer. 8 Mid-Continent Proved Reserves (BCFE) Mid-Continent Capital Expenditures ($ millions) Mid-Continent Technical Employees 140 120 100 80 60 40 20 70 60 50 40 30 20 10 18 15 12 9 6 3 97 98 99 00 01 98 99 00 01 02 (budget) 97 98 99 00 01 n Exploration & Development n Acquisitions Our large acreage position in the Anadarko contiguous sections. Drilling activities in Coal Basin is a significant asset that could not be County will focus on established plays in the replicated short of a major acquisition of Booch, Hartshorne, Wapanucka and Cromwell another large player in the Basin. This acreage f o rmations. The leases have deeper exploratory position and our long time presence in the potential below about 7,000 feet. Seven wells region allows us to compete in essentially all are planned for 2002 and our working interest of the significant plays that develop in the is expected to be in the 85% to 100% range. deep Anadarko Basin. Our acreage lease own- ership in the Basin is approximately 250,000 During 2002 we anticipate drilling an initial gross and 60,000 net acres. test well in our Carrier prospect in Leon County, Texas. Carrier is a high-risk, high- Our 2002 Mid-Continent capital expenditures potential platform reef prospect located near budget is $33 million. We plan to utilize three the industry’s prolific Cotton Valley pinnacle to four drilling rigs throughout the year to drill reef production in Leon, Limestone, and a p p roximately 28 St. Mary operated wells in the Robertson Counties. We will be seeking region. In addition, we anticipate participating industry participation in a 20,000 foot test in 100-125 wells to be drilled and operated by well and expect to have a working interest other entities. Nearly 50% of our budget in the in the range of 25% to 35%. Mid-Continent region will be allocated to NE Mayfield where we plan to drill nine wells in 2002. Our working interest in the 18,000 to 21,000 foot wells is expected to average 32%. Our 2002 capital expenditures budget is allocating $4.5 million to a developing new play in Coal County, Oklahoma, in the Arkoma Basin where we have acquired leases in twenty-five 9 Pictured left to right are Dan Bloomer, Exploration Manager, Chuck Jones, Vice President–Regional Manager, David Janise, Engineering Manager and Dwight Bowles, Land Manager. The Lafayette office operates wells drilled in the shelf area of the Gulf of Mexico and onshore in south Texas and south Louisiana. 10 The Lafayette office generates exploration and complex geology, opportunities still exist for those exploitation opportunities along the Gulf Coast and who are willing to work the details. Our technical offshore in the Gulf of Mexico. These areas are team in Lafayette has over 200 years of combined excellent settings for large accumulations of hydr o- local experience and is focused on the task of doing carbons in small areas. The thick sandstones are the detailed work necessary to be successful in a very porous and yield high production rates. Both difficult and geologically complex area. basins have been heavily explored, but due to Gulf Coast/ Gulf of Mexico Region Gulf Coast/ Gulf of Mexico Region • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • St. Mary’s origin was in South Louisiana with the purchase of 24,900 acres of fee land in St. Mary Parish. Our focus in the Gulf Coast/Gulf of Mexico region is to explore and develop the multiple basins of onshore Louisiana and in the shallow waters of the Gulf of Mexico. Our 16 person regional office in Lafayette, revitalizing exploration and development Louisiana, manages St. Mary ’s diverse activities activities in the Miocene trend along the in the onshore Gulf Coast and offshore Gulf Gulf Coast. of Mexico. Our presence in south Louisiana dates to the early 1900’s when our founders The Gulf region accounted for 13% of our acquired a franchise property in St. Mary estimated proved re s e rves at December 31, Parish on the shoreline of the Gulf of Mexico. 2001, or 50.3 BCFE. Ninety percent of our These 24,900 acres of fee lands yielded more reserves in the region at December 31, 2001, than $5.5 million of gross oil and gas royalty w e re proved developed and 88% were revenue in 2001. Our onshore Gulf Coast and natural gas. Gulf of Mexico presence increased significantly in 1999 with the acquisition of King Ranch During 2001 this region accounted for 21% E n e rg y. This acquisition included 260,000 of our capital expenditures or $38.4 million. PROVED RESERV E S 50.3 BCFE g ross undeveloped acres and a large 3-D We participated in 19 gross wells in the re g i o n P E R C E N TAGE OF TOTAL RESERV E S 1 3 % seismic database. of which 11 were completed as producers. G AS / OIL MIX PROVED DEVELOPED RESERV E S 8 8% / 12% 9 0 % C A P I TAL EXPENDITURES $18 MILLION Our focus in the region includes ongoing 24 wells in the Gulf region with a success We also participated in the recompletion of development and exploration programs in rate of 71%. multiple basins onshore south Louisiana as well as several offshore shallow water Gulf of The successful development of the Judge Mexico blocks. Advanced 3-D seismic imaging Digby field, where we have interests ranging and interpretation techniques and extensive from 10% to 20%, continued in 2001. The subsurface geological interpretations are interest in this outside-operated, ultra-deep 11 • • • • • • • • • • • • • • • • • • • • • • • Gulf Coast/GOM Technical Employees 15 12 9 6 3 97 98 99 00 01 Gulf Coast/GOM Proved Reserves (BCFE) 80 60 40 20 field located in Point Coupe Parish outside Our 2002 Gulf Coast/Gulf of Mexico capital Baton Rouge, Louisiana, was acquired in the expenditures budget is $18 million. In the Gulf King Ranch Energy acquisition. Three new of Mexico we plan to test a large re s e rv e Tuscaloosa sand wells were completed during potential 3-D target at Matagorda 701 during the year and a fourth well was drilling at year- 2002. Matagorda 701 is located 50 miles end. The Parlange #12 (11.5% St. Mary i n t e r- northeast of Corpus Christi, Texas, in 110 feet est) was drilled to 23,220 feet and of water. We also plan to test an additional completed in the C-2 zone, which was a new fault block on the east flank of the Matagorda field pay. During 2001 the well produced at 700 field in 2002. Two additional tests are 97 98 99 00 01 rates as high as 64,000 Mcf per day. The budgeted for the Judge Digby field in 2002, J. Wuertele #1 (15% St. Mary interest) was as well as the recompletion of several wells completed in the B-8 zone and produced at in this multi-pay geologically complex field. 41,000 Mcf per day. The J. Wu e rtele #2 (20% St. Mary interest) was completed in We own 24,900 acres of fee lands and the B-6/B-7 zones and produced at rates of associated mineral rights in St. Mary Parish, 45,000 Mcf per day. The J. Wuertele #3 (10% located approximately 85 miles southwest of St. Mary interest) was spud on November 15, New Orleans, Louisiana. Since the initial 2001, and was drilling at year-end to a total discovery on our fee lands in 1938, our depth of 22,000 feet. cumulative oil and gas revenues, primarily landowners’ royalty, from the Bayou Sale, The Miami Corp T-1 S/T (25% St. Mary Horseshoe Bayou and Belle Isle fields have interest) at High Island was completed in the exceeded $235 million. We have curently Camerina sand at an initial production rate leased 10,357 acres as we encourage develop- of 4,300 Mcf per day. ment of the properties. A discovery at South Gulf Coast/GOM Capital Expenditures ($ millions) 60 50 40 30 20 10 98 99 00 01 02 (budget) n Exploration & Development n Acquisitions 12 St. Mary will operate the drilling of a p p roximately 200 wells in 2002. Our long term relationships with drilling contractors and our commitment to continuous drilling programs allow us to use experienced crews that keep costly drilling problems to a minimum. Horseshoe Bayou in early 1998 and a subse- quent successfully completed well in early 1999 established that significant accumulations of gas are sourced and trapped at depths below 16,000 feet. St. Mary participated in a 51-square-mile 3-D seismic survey over the Spindletop field near Beaumont, Texas, which was completed in 2001. Our partner group has leased or optioned approximately 19,000 acres within the seismic outline. We have a 21.25% working interest in this project, which is planned to be a multi-year exploration and development program. Several wells are planned in this project during 2002. 13 Pictured left to right are David Hart, Vice President–Geology, George Hearne, Vice President–Regional Manager and Mike Rosenzweig, Vice President–Engineering. They are standing in the Box Church gas plant that processes gas from our largest field in the ArkLaTex region. 14 The strength of the Shreveport office begins with to producing facilities and expedites access to people, most of whom have spent virtually their entire historical and current data that is not always c a reers working in the ArkLaTex region. The technical commercially available. Being where the action is expertise and extensive regional experience of our and focused on the task of finding and producing E&P team, along with excellent working re l a t i o n s h i p s h y d rocarbons without financial, accounting and developed over the years with local independents, other administrative responsibilities makes for an landowners, and regulatory agencies are invaluable. efficient and cost effective E&P effort. The regional office concept facilitates easy access ArkLaTex Region • ArkLaTex Region • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • The large field discoveries at Haynesville and Box Church have made the ArkLaTex region a consistent top performing region of St. Mary. The ArkLaTex region is focused on searching for new opportunities and potential analog fields. The ArkLaTex region is operated out of our The ArkLaTex region accounted for 13%, or office in Shreveport, Louisiana. Our 18 person 48.7 BCFE of our estimated proved reserves staff focuses on eastern Texas, northern at December 31, 2001. Eighty-five percent of Louisiana, southern Arkansas and southern our reserves in the region at December 31, Mississippi. We have been operating in the 2001, were proved developed and 84% were ArkLaTex region since 1992 when we acquired natural gas. the oil and gas properties of T.L. James & Company. Since 1992 we have made $18.2 During 2001 the ArkLaTex region accounted million of niche acquisitions that have pro v i d e d for 11% of our capital expenditures or $20.3 access to strategic undeveloped acreage million. We participated in 35 gross wells in 1 – East Texas Basin 2– Northern Louisiana Basin 3 – Mississippi Salt Dome Basin and pro p r i e t a ry geologic and seismic data, the region of which 89% were completed as PROVED RESERV E S 48.7 BCFE P E R C E N TAGE OF TOTAL RESERV E S 1 3 % G AS / OIL MIX 8 4% / 16% which have resulted in an active program of p roducers. We operated nine of the wells drilled exploitation and development. and owned an average 54% working interest in these wells. St. Mary also participated in PROVED DEVELOPED RESERV E S 8 5 % We have had discoveries that became major the recompletion of 15 wells in the ArkLaTex C A P I TAL EXPENDITURES $14 MILLION development and operating fields such as region with a success rate of 87%. Bayou D’Arbonne, Haynesville and Box Churc h . We have recently expanded our operations Activities in the ArkLaTex region during 2001 into southern Mississippi where we anticipate focused on the search for new opportunities leveraging our technical expertise into new and potential analog fields to Box Church and prospects in the Mississippi Salt Dome Basin. Trinidad in the East Texas Travis Peak play as 15 • • • • • • • • • • • • • • • • • • • • • • • 16 ArkLaTex Technical Employees St. Mary operates the centralized gas 12 10 8 6 4 2 97 98 99 00 01 ArkLaTex Proved Reserves (BCFE) 60 50 40 30 20 10 gathering, compression and dehydration facility at our Box Church field. The plant compresses gas gathered from the 33 wells in the field to pipeline pre s s u re. The dehydration facility removes water from the gas to conform to pipeline quality standards. well as the continued development of the approximately 73,500 gross and 26,300 net major fields we operate in the region. We also a c res as well as 10,723 net acres of anticipate increasing activity in the James mineral servitudes. Lime horizontal play where we have added leasehold at the Huxley field offsetting excellent Our 2002 capital expenditures budget in the new completions. A r k L a Tex region is $14 million. We will continue to focus on the search for new opportunities Three successful new wells were drilled in our and potential analog fields in which to apply Box Church field, the Wilson #12, the Wilson our pro p r i e t a ry geologic models and pro d u c t i o n 97 98 99 00 01 #14 and the White #13. The Trinidad field techniques. We anticipate participating in 30 development where we have a 25% intere s t gross wells in the region during 2002 and will was also active in 2001 with the completion operate properties representing approximately of nine new wells. Six additional locations are 75% of our drilling capital expenditures budget. ArkLaTex Capital Expenditures ($ millions) budgeted at Trinidad in 2002. Our holdings in the ArkLaTex region are comprised of interests in approximately 502 producing wells, including 98 operated wells. Our lease ownership in the region totals 25 20 15 10 5 98 99 00 01 02 (budget) n Exploration & Development n Acquisitions 17 Pictured left to right are Terry Holzwarth, Engineer/Acquisitions Manager, Bob Nance, President–Nance Petroleum Corporation, Jim Bailey, Geophysicist and Gary Evertz, Engineer/Operations Manager. The rig in the background is drilling the successful Federal 7-35 well in the North Branch field in western North Dakota. 18 Our regional office in Billings is responsible for the personnel. Involving all disciplines, which consists Company’s activities in the Northern Rockies and of people who have essentially made their careers the greater Permian Basin of West Texas and New in their geographical areas of responsibility, gives Mexico. Within all of our areas of interest, the team us the edge needed in a very competitive industry. concept is stressed. Each team consists of geologists, Being in active mature geological provinces like much geophysicists, reservoir engineers, production of the lower 48 states, a seasoned and cohesive engineers, land persons and the appropriate support team of experts is essential to success. Williston/Permian Basins Williston/Permian Basins • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • Nance Petroleum Corporation has operated in the Williston Basin since 1969 and has managed St. Mary’s interest in the Williston Basin since 1991. Nance began managing St. Mary’s Permian Basin operations in 1999. Nance Petroleum’s ability to interpret 3-D seismic data has significantly improved the economics of these oil producing areas. Nance Petroleum Corporation, a wholly owned the region at December 31, 2001, were pro v e d subsidiary, manages our operations in the developed and 80% were oil. Williston Basin, the Permian Basin and Rocky Mountain areas. Our Nance office in Billings, During 2001 the Williston Basin re g i o n , Montana, includes a 28-person staff. Nance has including the coalbed methane properties in managed our interests in the Williston Basin Montana and Wyoming and other properties since 1991, initially under a joint venture managed in the rocky mountain states, a rrangement and as a wholly owned subsidiary accounted for 37% of our capital expenditures since June 1, 1999. Since 1999 the Nance or $68 million. We spent $16 million on e x p l o- office has also managed our interests in the ration and development and participated in 3 9 P e rmian Basin. In addition, Nance is re s p o n s i b l e g ross wells in the region of which 93% were for the development of our coalbed methane completed as producers. We also part i c i p a t e d properties and other oil and gas properties we in the recompletion of 24 wells with a success own in the rocky mountain states. rate of 83%. In November 2001 we completed a W IL LI S TO N B AS IN f rom Choctaw II Oil & Gas, Ltd. The pro p e rt i e s $41 million acquisition of oil and gas pro p e rt i e s are located in the Williston Basin and the 1 –Williston Basin 2 – Hanging Woman Basin PROVED RESERV E S 121.9 BCFE P E R C E N TAGE OF TOTAL RESERV E S 3 2 % G AS / OIL MIX PROVED DEVELOPED RESERV E S 2 0% / 80% 8 7 % C A P I TAL EXPENDITURES $22 MILLION The Williston Basin region, which includes the Green River Basin of Wyoming and produce Williston Basin in eastern Montana and western approximately 1,200 barrels of oil and 4,600 N o rth Dakota and certain other pro p e rt i e s Mcf of gas per day. The Williston Basin region managed in the rocky mountain states, replaced 435% of its reserves in 2001. accounted for 32% of our estimated proved reserves at December 31, 2001, or 121.9 Our exploration and development in the BCFE. Eighty-seven percent of our reserves in Williston Basin is primarily based on the 19 • • • • • • • • • • • • • • • • • • • • • • • Williston/Permian Proved Reserves (BCFE) 160 120 80 40 97 98 99 00 01 Pictured left to right are Bob Bachman, Geologist and Herb Thackeray, Operations Engineer. Bob and Herb, along with other members of the Nance Petroleum staff, manage and develop our properties in the Permian Basin. Williston/Permian Capital Expenditures ($ millions) i n t e r p retation of 3-D seismic data. We have P ER MI A N BA S IN been successful using 3-D seismic imaging to 60 50 40 30 20 10 98 99 00 01 02 (budget) n Exploration & Development n Acquisitions Williston/Permian Technical Employees 15 12 9 6 3 delineate stru c t u re and porosity development in Our operations in the Permian Basin of eastern the Red River formation. Since 1991 we have New Mexico and western Texas accounted successfully completed 30 out of 32 gross for 9% of our estimated proved reserves at wells we have drilled and operated in this Basin. December 31, 2001, or 36.1 BCFE. Eighty-one During 2001 we drilled and successfully percent of our reserves in the region at completed 7 new wells. December 31, 2001 were proved developed Our large acreage position in the Williston and 65% were oil. Basin allows us participation in wells drilled During 2001 we participated in 12 gross wells by other operators and to have a significant in the region of which 100% were completed ownership in prospects we develop and drill. as producers. We also participated in the We typically have working interests ranging recompletion of four wells with a success rate from 60% to 100% in wells we operate. Our of 50%. The East Shugart Delaware Unit acreage lease ownership is approximately waterflood project was initiated in 2000. The 467,000 gross and 291,000 net acres. initial response from the water injection is a n t i c i p a t e d in 2002. We are hopeful the East Our 2002 Williston Basin capital expenditures Shugart waterflood will be an analog to our budget is $22 million. We plan to drill 10 wells successful Parkway Delaware Unit waterflood and conduct seven 3-D surveys, exceeding that increased production from 325 Bbls per the number of surveys conducted in any prior day in 1996 when the property was acquired, year. Our prospect inventory continues to to 1,125 Bbls per day in February 2002. 97 98 99 00 01 expand as results from current activity lead to additional areas to explore. In addition we Our 2002 Permian Basin capital expenditures anticipate participating in eight – twelve wells budget is $9 million. In addition to drilling four 20 to be drilled and operated by other entities. injection wells in the East Shugart waterflood, $11 million, which included drilling 14 wells in two 3-D based Morrow tests are planned an 18 well pilot program. During 2002 drilling in the Parkway field and six in-fill wells are of the pilot well program will be completed. planned at Ft. Chadbourne. We anticipate The wells will be production tested and the drilling opportunities will develop in 2002 p e rmitting and environmental issues related from the reprocessed 3-D seismic data over to this project will be addre s s e d . Permian Basin the 30,450 acres on our 21.45% interest PROVED RESERV E S 36.1 BCFE P E R C E N TAGE OF TOTAL RESERV E S 9 % G AS / OIL MIX PROVED DEVELOPED RESERV E S 3 5% / 65% 8 1 % HJSA lease in Ward County, Texas. Our 2002 capital expenditures budget for the OT H ER AR EA S unconventional natural gas projects in the coalbed methane project and other potential rocky mountains is $8 million. C A P I TAL EXPENDITURES $9 MILLION In 2001 we acquired leases covering 115,000 acres in which we own an average 92% working interest in the Hanging Woman Basin of Montana and Wyoming for prospective coalbed methane development. Our capital e x p e n d i t u res for this project in 2001 were 21 • • • • • • • • • • • • • • • • • • • • • • • B O A R D O F D I R E C T O R S O F F I C E R S Thomas E. Congdon Chairman Mark A. Hellerstein President and Chief Executive Officer Ronald D. Boone Executive Vice President and Chief Operating Officer Robert L. Nance Senior Vice President 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 Secretar y James C. Robertson Assistant to the President and Assistant Secretary Lynn Ruffin District Landman and Assistant Secretar y Larry W. Bickle Houston, Texas Managing Director Haddington Ventures, L.L.C. 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 Arend J. Sandbulte Duluth, Minnesota Director and Retired Chairman ALLETE, Inc. John M. Seidl San Francisco, California Chief Program Officer, Environment Gordon and Betty Moore Foundation 22 Shareholder Information Investor Services Investor Relations Contact You can reach our corporate office at: St. Mary Land & Exploration Company 1776 Lincoln Street,Suite 1100 Denver, CO 80203 303-861-8140 We also have offices in Tulsa, Oklahoma, Billings, Montana and Shreveport and Lafayette, Louisiana: St. Mary Operating Company 7060 South Yale,Suite 800 Tulsa,OK 74136-5741 918-488-7600 St. Mary Land & Exploration Company 330 Marshall Street,Suite 1200 Shreveport,LA 71101 318-424-0804 Nance Petroleum Corporation 550 N. 31st Street,Suite 500 Billings,MT 59101 406-245-6248 St. Mary Energy Company 202 Rue Iberville,Suite 110 Lafayette,LA 70508-3295 337-232-3100 DESIGN BY: MARK MULVANY GRAPHIC DESIGN (DENVER, C O L O R A D O ) P H OTOGRAPHY BY: RON COPPOCK–KING (DENVER, C O L O R A D O ) Stockholders,securities analysts or portfolio managers who have questions or need info rmation concerning S t .M a ry m ay contact Bob Hanley Vice Pre s i d e nt–B u s i n e s s Development at 303-863-4377. E-mail: bhanley@stmaryland.com Annual Reports, 10-Ks, 10-Qs To receive an information packet on St.Mary, or to be added to our mailing list,contact: Investor Relations Coordinator, at 303-863-4322 E-mail: information@stmaryland.com Please visit our web site at:www.stmaryland.com Stock Transfer Agent Any stockholder with questions or inquiries regarding stock certificate holdings, changes in registration address, lost certificates,dividend payments and other stockholder account matters should be directed to St.Mary Land & Exploration Company’s transfer agent at the following address or phone number: Computershare Investor Services 350 Indiana Street,Suite 800 Golden,CO 80401 303-262-0600 Nasdaq: MARY The Company’s common stock is listed for trading on the Nasdaq National Market System under the symbol MARY. The price range of the Company’s common stock by quarters for the last two years are provided below. As of March 12,the Company had 27,805,529 shares of common stock outstanding. Market Prices 2001— Quarter Ended 2000— Quarter Ended March 31 June 30 September 30 December 31 high low high low $35.00 $20.63 $15.75 $11.19 25.24 21.81 22.20 19.25 14.58 14.65 21.03 24.31 34.31 14.78 14.75 19.00 

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