| ST MARY LAND & EXPLORATION CO Item 1A RISK FACTORS In addition to the other information included in this Form 10-K, the following risk factors should be carefully considered when evaluating St |
| Risks Related to Our Business Oil and natural gas prices are volatile, and a decline in prices could hurt our profitability, financial condition and ability to grow |
| Our revenues, operating results, profitability, future rate of growth and the carrying value of our oil and gas properties depend heavily on the prices we receive for oil and natural gas sales |
| Oil and gas prices also affect our cash flows and borrowing capacity, as well as the amount and value 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: · worldwide and domestic supplies of oil and natural gas; · the ability of the members of the Organization of Petroleum Exporting Countries to agree to and maintain oil price and production controls; 11 _________________________________________________________________ · pipeline, transportation, or refiner capacity constraints in a regional or localized area may put downward pressure on the realized price for oil or natural gas; · political instability or armed conflict in oil or gas producing regions; · worldwide and domestic economic conditions; · the level of consumer demand; · the availability of transportation facilities; · weather conditions; and · governmental regulations and taxes |
| These factors and the volatility of oil and gas markets make it very difficult to predict future oil and gas price movements with any certainty |
| Declines in oil or gas prices would reduce our revenues and could also reduce the amount of oil and gas that we can produce economically and therefore could have a material adverse effect on us |
| If we are not able to replace reserves, we will not be able to sustain production |
| Our future operations depend on our ability to find, develop and acquire oil and gas reserves that are economically recoverable |
| Our properties produce oil and gas 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 the acquisition of producing oil and gas properties is intense and many of our competitors have financial and other resources for acquisitions that are 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 prices acceptable to us |
| Without successful drilling or acquisition activities, our reserves, production and revenues will decline rapidly |
| Competition in our industry is intense, and many of our competitors have greater financial and technical resources than we do |
| We face intense competition from major oil companies, independent oil and gas exploration and production companies, financial buyers, and institutional and individual investors who are actively seeking oil and gas properties throughout the world, along with the equipment, expertise, labor and materials required to operate oil and gas properties |
| Many of our competitors have financial and technical resources vastly exceeding those available to us, and many oil and gas properties are sold in a competitive bidding process in which our competitors may be able to pay more for development prospects and productive properties or in which our competitors have technological information or expertise to evaluate and successfully bid for the properties that is not available to us |
| In addition, shortages of equipment, labor or materials as a result of intense competition may result in increased costs or the inability to obtain those resources as needed |
| We may not be successful in acquiring and developing profitable properties in the face of this competition |
| As drilling activities have accelerated, the need for talented people has grown at a time when the number of people available is constrained |
| The actual quantities and present values of our proved oil and gas reserves may be less than we have estimated |
| This Form 10-K and other SEC filings by us contain estimates of our proved oil and gas reserves and the estimated future net revenues from those reserves |
| 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 |
| 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 |
| Therefore, these estimates are inherently imprecise |
| 12 _________________________________________________________________ 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 values of proved reserves disclosed by us, and the actual quantities and present values may be less than we have previously estimated |
| 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, 2005, approximately 18 percent of our estimated proved reserves (by volume) were proved undeveloped |
| Estimates of proved undeveloped reserves and proved developed non-producing reserves are 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 |
| Our estimates of proved undeveloped reserves assume that we will make significant capital expenditures to develop these reserves, including an estimated dlra153 million in 2006 |
| Although we have estimated our reserves and the costs associated with these reserves in accordance with industry standards, estimated costs may not be accurate, development may not occur as scheduled and actual results may not occur as estimated |
| You should not assume that the PV-10 values included in this Form 10-K represent the current market value of our estimated oil and natural gas reserves |
| 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 SEC requirements, whereas actual future prices and costs may be materially higher or lower |
| For example, values of our reserves as of December 31, 2005, were estimated using a calculated weighted-average sales price of dlra10dtta08 per Mcf of gas (Gulf Coast spot price) and dlra61dtta04 per Bbl of oil (NYMEX) |
| We ensure that we consider basis and location differentials as of that date in estimating our reserves |
| During 2005 our monthly average realized gas prices, excluding the effect of hedging, were as high as dlra12dtta69 per Mcf and as low as dlra6dtta06 per Mcf For the same period our monthly average realized oil prices were as high as dlra61dtta59 per Bbl and as low as dlra44dtta38 per Bbl |
| Many other factors will affect actual future net cash flows, including: · the amount and timing of actual production; · supply and demand for oil and natural gas; · curtailments or increases in consumption by oil and natural gas purchasers; and · changes in governmental regulations or taxes |
| The timing of production from oil and natural gas properties and of related expenses affects the timing of actual future net cash flows from proved reserves and thus their actual present value |
| Our actual future net cash flows could be less than the estimated future net cash flows for purposes of computing PV-10 values |
| In addition, the ten percent discount factor required by the SEC to be used to calculate PV-10 values for reporting purposes is not necessarily the most appropriate discount factor given actual interest rates and risks to which our business and the oil and natural gas industry in general are subject |
| Our producing property acquisitions may not be worth what we paid due to uncertainties in evaluating recoverable reserves and other expected benefits, as well as potential liabilities |
| 13 _________________________________________________________________ Successful property acquisitions require an assessment of a number of factors beyond our control |
| These factors include exploration potential, future oil and gas prices, operating costs and potential environmental and other liabilities |
| These assessments are not precise and their accuracy is inherently uncertain |
| In connection with our acquisitions, we perform a customary review of the acquired properties that will not necessarily reveal all existing or potential problems |
| In addition, our review may not allow us to fully assess the deficiencies and potential of the properties |
| We do not inspect every well, and even when we inspect a well we may not discover structural, subsurface or environmental problems that may exist or arise |
| 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 |
| As a result of these factors, we may not be able to acquire oil and gas properties with economically recoverable reserves on acceptable terms |
| In addition, significant acquisitions can change the nature of our operations and business if the acquired properties 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 acquisitions may be limited |
| Integrating acquired properties and businesses involves a number of other special risks, including the risk that management may be distracted from normal business concerns by the need to integrate operations and systems as well as retain and assimilate additional employees |
| Therefore, we may not be able to realize all of the anticipated benefits of our acquisitions |
| 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: · unexpected drilling conditions; · title problems; · pressure or irregularities in formations; · equipment failures or accidents; · adverse weather conditions; · compliance with environmental and other governmental requirements; · shortages or delays in the availability of or increases in the cost of drilling rigs and the delivery of equipment; and · shortages in availability of experienced drilling crews |
| 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 |
| 14 _________________________________________________________________ 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 that 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, or our overall drilling success rate or our drilling success rate for activity within a particular area may decline |
| In addition, 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 hedging transactions may limit the prices that we receive for oil and gas sales and involve other risks |
| To manage our exposure to price risks in the sale 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 |
| We have hedged a significant portion of anticipated future production from our currently producing properties using zero-cost collars and swaps |
| Commodity price hedging may limit the prices that we receive for our oil and gas sales if oil or natural gas prices rise substantially over the price established by the hedge |
| In addition, these transactions may expose us to the risk of financial loss in certain circumstances, including instances in which: · our production is less than expected; or · the counterparties to our hedge contracts fail to perform under the contracts |
| Some of our hedging agreements may also require us to 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 |
| In addition, some of our hedging transactions use derivative instruments that may 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 |
| Future oil and gas price declines or unsuccessful exploration efforts may result in write-downs of our asset carrying values |
| We follow the successful efforts method of accounting for our oil and gas properties |
| 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 |
| The capitalized costs of our oil and gas properties, on a field basis, cannot exceed the estimated future net cash flows of that field |
| If net capitalized costs exceed future net revenues, we must 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 |
| Accordingly, a significant decline in oil or gas prices or unsuccessful exploration efforts could cause a future write-down of capitalized costs |
| 15 _________________________________________________________________ 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 cannot be reversed at a later date even if oil or gas prices increase |
| Substantial capital is required to replace our reserves |
| We need to make substantial capital expenditures to find, acquire, develop and produce oil and natural gas reserves |
| Future cash flows and the availability of financing are subject to a number of factors, such as the level of production from existing wells, our success in locating and producing new reserves and prices of oil and natural gas |
| If oil or gas prices decrease or we encounter operating difficulties that result in our cash flows from operations being less than expected, we may have to reduce our capital expenditures unless we can raise additional funds through debt or equity financing |
| If our revenues were to decrease due to lower oil or gas prices, decreased production or other reasons, and if we could not obtain capital through our credit facility or other acceptable debt or equity financing arrangements, our ability to execute our development plans, replace our reserves or maintain production levels could be greatly limited |
| A decrease in oil or gas prices could limit our ability to borrow under our credit facility |
| Our credit facility has a maximum loan amount of dlra500 million, subject to a borrowing base that the lenders periodically redetermine based on the value of our oil and gas properties, which in turn is based in part on oil and gas prices |
| Lower oil or gas prices in the future could limit our borrowing base and reduce our ability to borrow under the credit facility |
| We could incur substantial additional debt, which could limit our financial flexibility |
| As of December 31, 2005, we had dlra100dtta0 million in outstanding long-term debt under our 5dtta75 % Senior Convertible Notes due 2022 |
| Our long-term debt represented 15 percent of our total book capitalization as of December 31, 2005 |
| Our credit facility has a maximum loan amount and current borrowing base of dlra500 million, with a current commitment amount we have elected of dlra200 million, against which no borrowings were outstanding as of December 31, 2005 |
| Our level of debt could have important consequences for our operations, including: · requiring us to dedicate a substantial portion of our cash flows from operations to make required payments on debt, thereby reducing the availability of cash flows for working capital, capital expenditures and other general business activities; · limiting our ability to obtain additional financing in the future for working capital, capital expenditures and other general business activities, or increasing the costs for such additional financing; · limiting our flexibility in planning for, or reacting to, changes in our business and our industry; and · increasing our vulnerability to adverse effects from a downturn in our business or the general economy |
| 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 |
| An increased level of debt increases the risk that we may default on our debt obligations |
| We may not be able to generate sufficient cash flow from operations or be able to make other arrangements for the repayment or refinancing of the debt |
| 16 _________________________________________________________________ In addition, our credit facility is subject to periodic borrowing base redeterminations |
| We could be forced to repay a portion of our bank borrowings in the event of a downward redetermination of our borrowing base, and we may not have sufficient funds to make such repayment at that time |
| If we do not have sufficient funds and are otherwise unable to negotiate renewals of our borrowing or arrange new financing, we may be forced to sell significant assets |
| We are 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, adverse weather such as hurricanes in the Gulf Coast region, 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 |
| Following the hurricanes in 2004 and 2005, the insurance markets have suffered significant losses |
| As a result, the availability of coverage and the cost at which such coverage will be available in the future is uncertain |
| We maintain insurance against some, but not all, of these potential risks and losses |
| We have significant, but 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, we could suffer a material loss |
| Our operations are subject to complex laws and regulations, including environmental regulations, that result in substantial costs and other risks |
| 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 |
| Governmental authorities regulate various aspects of oil and gas drilling and production, 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 |
| 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 have a material adverse effect on our operations |
| Our development at Hanging Woman Basin is particularly affected, as a portion of our acreage is on federal lands |
| Our operations are also subject to complex and constantly changing environmental laws and regulations adopted by federal, state and local governmental authorities in jurisdictions where we are engaged in exploration or production operations |
| New laws or regulations, or changes to current requirements, could result in material costs or claims with respect to properties we own or have owned |
| 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 governmental authorities 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 us |
| 17 _________________________________________________________________ We depend 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 transportation systems owned by third parties |
| The lack of available transportation capacity on these systems and facilities could result in the shutting-in of producing wells, the delay or discontinuance of development plans for properties, or lower price realizations |
| Although we have some contractual control over the transportation of our production, 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 |
| Ownership of royalty interests by an executive officer may create conflicts of interest |
| 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, owns royalty interests in a number of our properties, which were earned as part of the prior employer’s employee benefit programs |
| Accordingly, conflicts of interest may exist between Mr |
| 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, 2004, to February 15, 2006, the last daily sale price of our common stock as reported by the New York Stock Exchange ranged from a low of dlra13dtta92 per share to a high of dlra44dtta23 per share, as adjusted to reflect our 2-for-1 stock split effected in the form of a stock dividend on March 31, 2005 |
| 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 factors include: · changes in oil or natural gas prices; · variations in quarterly drilling, recompletions, acquisitions and operating results; · changes in financial estimates by securities analysts; · changes in market valuations of comparable companies; · additions or departures of key personnel; and · 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 stockholders from receiving a takeover 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 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 stockholder meetings |
| These provisions, alone or in combination with each other and with the shareholder 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 stockholders for their common stock |
| 18 _________________________________________________________________ Under our shareholder 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 |
| As of February 15, 2006, we had 56cmam953cmam893 shares of common stock outstanding, net of 250cmam000 shares held in treasury |
| Of the net shares outstanding, 55cmam595cmam375 shares were freely tradable without substantial restriction or the requirement of future registration under the Securities Act of 1933 |
| Also as of that date, options to purchase 4cmam506cmam090 shares of our common stock were outstanding, of which 3cmam929cmam271 were exercisable |
| In addition, restricted stock units providing for the issuance of up to a total of 632cmam809 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 and 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 |
| 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 a covenant regarding the level of our current ratio of current assets to current liabilities and a limit on the annual dividend rate that we may pay no more than dlra0dtta25 per share |
| The Board of Directors may determine in the future to reduce the current annual dividend rate of dlra0dtta10 per share or discontinue the payment of dividends altogether |
| A director and his extended family may be able to exert influence over us |
| Thomas E Congdon, a director and our former Chairman of the Board, and members of his extended family are estimated to own between five and ten percent of the outstanding shares of our common stock as of February 15, 2006 |
| While no formal arrangements exist, these extended family members could be inclined to act in concert with Mr |
| Mary, including for example the election of directors or response to an unsolicited proposal to acquire St |
| Accordingly, Mr |
| Congdon and his family may be able to influence matters presented to our Board of Directors and stockholders |