The focus of activity continues to be on the testing of emerging resource plays in the Eagle Ford, Haynesville, and Marcellus shales.
St. Mary Land & Exploration now has five operated drilling rigs running throughout the company. Three rigs are operating in the Mid-Continent region where two rigs are drilling deep Springer targets in the Anadarko basin and one rig is drilling in the horizontal Woodford shale program. Recently, the company has successfully concluded four well simul-fracing pilots in the Woodford program, consequential to the five horizontal wells producing in one section. The four recently accomplished wells are currently flowing back load water. Results from this pilot will be significant in the determination of the optimum spacing for further development.
In the Maverick basin in South Texas St. Mary Land & Exploration is currently drilling in the horizontal lateral of its first operated well targeting the Eagle Ford shale. The Eagle Ford section was cored earlier to plugging back and kicking off the lateral and St. Mary Land & Exploration intends to conduct a micro-seismic study during fracture stimulation of the well. Three additional horizontal Eagle Ford wells are now planned for the remainder of 2009. The company also intends to carry on taking part in the joint venture targeting the Pearsall and Eagle Ford shales with TXCO Resources Inc. and Anadarko Petroleum Corporation.
In the Haynesville shale program, St. Mary Land & Exploration is now drilling its second well targeting the Haynesville shale formation. The well is situated in northern San Augustine county, Texas. After coring the James lime and Haynesville shale sections, this well will be drilled to the deeper Haynesville/Cotton Valley lime formation for evaluation purposes. St. Mary Land & Exploration at present anticipates completing the well as a vertical Haynesville shale test. One additional well targeting the Haynesville shale is planned for later in 2009.
St. Mary Land & Exploration plans to begin testing activities in the Marcellus shale in the third quarter of 2009. Two horizontal wells are intended to be concluded in 2009.
Since the last guidance update, St. Mary Land & Exploration has seen significant decreases in the costs to drill and complete wells in some areas of operations as well as considerably lower natural gas prices. St. Mary Land & Exploration continues to actively monitor the service cost environment and may reallocate remaining 2009 development capital to oil development activities.
Performance Guidance Update:
Production- St. Mary Land & Exploration at present expects that production will decline consecutively in the remaining quarters of 2009 as a result of St. Mary Land & Exploration decreased level of development drilling. Full year production guidance is being increased as a result of better than expected rate additions in the horizontal Woodford and deep Springer programs in the mid-continent region and strong production performance in the Permian region. St. Mary Land & Exploration continues to believe that it is appropriate during this period of depressed commodity prices and declining costs to be investing in exploration activities while deferring most development investment.
The guidance above does not comprise any production volume impact from future acquisitions or divestitures. Lease operating expense – St. Mary Land & Exploration expects that in absolute dollars, LOE will be relatively flat for the remainder of the year. St. Mary Land & Exploration continues to anticipate some softening in service costs in future quarters as a result of the slowdown in the exploration and production sector. However, aggressive pricing reductions have not been assumed in this guidance.
Production taxes- On a sequential basis, production taxes are anticipated to rise each quarter in 2009 on a per unit basis, which is a reflection of the futures market view of commodity prices.
General and administrative expense- Presently, St. Mary Land & Exploration anticipates total general and administrative expense for 2009 to be basically flat with 2008 amounts in absolute dollars. On a per MCFE basis, G&A should raise throughout the year as a result of the company’s declining production profile. Generally, commodity prices are currently forecast to increase throughout the remainder of 2009, which increases expenses that are tied to profitability and cash flow.
The principal driver of the decrease in G&A guidance is lower estimates of compensation-related costs, mainly lower projected payments under the legacy Net Profits Plan. St. Mary Land & Exploration’s general and administrative expenses can be highly volatile, since major portions of the company’s general and administrative cost structure are directly or indirectly related to commodity prices.
Depreciation, depletion, and amortization expense- St. Mary Land & Exploration is expecting DD&A to be lower for the remainder of 2009 as a result of the non-cash impairments of proved properties recognized in the fourth quarter of 2008 and first quarter of 2009 that reduced the depreciable book value of St. Mary Land & Exploration’s properties. The computation of DD&A is sensitive to changes to the internal estimate of proved reserves, which are impacted significantly by the commodity prices and differentials in effect at the end of each reporting period.
Interest expense- As a result of the adoption of a new accounting pronouncement on January 1, 2009, St. Mary Land & Exploration is now required to separately account for the liability and equity components of the company’s 3.50% senior convertible notes since those notes may be settled in cash. As a result, St. Mary Land & Exploration retrospectively recorded a debt discount and an increase to additional paid-in capital in the company’s consolidated balance sheets to reflect the value of the equity option in these notes.
St. Mary Land & Exploration will identify about $2.1 million of non-cash interest expense each quarter due to the amortization of the debt discount through the date at which the notes can first be called in April 2012.
Income taxes- St. Mary Land & Exploration approximates that its effective tax rate will be about 38% for the second quarter and full year of 2009. Based on its current forecast, St. Mary Land & Exploration does not expect it will pay cash taxes in 2009.
Hedging update- All the prices in the table have been converted to an average NYMEX equivalent for ease of comparison using quality and transportation differentials as of March 31, 2009. No hedges have been added between the end of the first quarter of 2009 and the date of this release. All of the oil trades are settled against NYMEX. The gas contracts settle against regional delivery points that correspond with the company’s production areas, thereby reducing basis risk. About 50% of both St. Mary Land & Exploration anticipated oil and natural gas production are hedged for the remainder of 2009.
