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Don't Play St. Mary For A Rebound

Posted: Mar 06, 2009 13:50 PM by Eric Fox

Tickers in this Article: HK, SM, TXCO, XOP

The sharp drop in the share price of St. Mary Land and Exploration (NYSE:SM) might make it an attractive play in energy for long-term bulls, but other companies have more developed acreage in emerging shale plays in North America that investors should consider first.

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St. Mary is an oil and gas exploration and production company with operations in several different areas in North America, including the Gulf Coast, Mid-continent and Rocky Mountains. The company ended 2008 with 865.5 Bcfe (billion cubic feet of natural gas equivalent) of proved reserves.

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Look Out Below
St. Mary has been beaten up badly during the energy bear market, possibly due to negative reserve revisions and general market pessimism on natural gas prices. As of the close on March 4, the stock is down 81% from its 52-week high, compared to the S&P Oil & Gas Exploration & Production SPDR(NYSE:XOP), which is down only 66%.

Shales R Us
Although St. Mary has prospective acreage in several shale plays including the Haynesville, Marcellus and lesser-known Eagle Ford Shale, it has not done as much development in these areas as its peers, and the fall in oil and gas prices may delay that further.

The company has 50,000 acres in the Haynesville Shale and is completing its first horizontal well there. Results are expected sometime in March.

The Eagle Ford Shale is located in South Texas, and it has not generated the same buzz as other emerging shale plays so far, although initial results are promising. St. Mary doesn't say how many acres it has there, only that it can lease up to 210,000.

Other Companies In Eagle Ford Shale
Other exploration and production companies involved in this area include Petrohawk Energy (NYSE:HK), which announced positive results on a well back in October 2008. The company reported a second successful well in January. A smaller company targeting the shale is TXCO Resources (Nasdaq:TXCO), which drilled four wells there in 2008 and plans to complete a frac stimulation on one in 2009.

In the Marcellus Shale, St. Mary has not completed any wells yet and plans two test wells in the second quarter of 2009. (Be sure to check out our Oil Services Industry Handbook to learn more about investing in oil and gas drillers.)

Reserve Issue
St. Mary's reserves fell sharply from the 1.08 Tcfe (trillion cubic feet equivalent) reported at the end of 2007. This was due to the drop in commodity prices at year-end, which caused the company to write down the amount of its reserves by 199.7 Bcfe. The accounting theory behind the revision is that the reserves can't be economically produced at the price at year-end, so an adjustment must be made to account for that.

Financials
St. Mary disclosed updated financials at its last earnings report. The company had $587.5 million in outstanding debt at the end of 2008, comprised of a $275 million convertible bond issue and a $300 million credit facility. The credit facility matures in April 2010, and the first put allowed by investors who own the convertible is 2012. It doesn't seem that St. Mary is under any immediate financial distress barring a complete collapse in commodity prices down to levels in the late 1990s.

Other Companies Have More Developed Shale Properties
While St. Mary has certainly dropped enough in price to excite bottom fishers in the energy sector, other exploration and production companies have more developed properties in the emerging shale plays that will power production growth once the economy and commodity prices recover.

For further reading on investing in this industry, see our Oil And Gas Industry Primer.

By Eric Fox

Eric J. Fox, is the founder of Brittain Capital Management, LLC., which manages the Alesia Fund, LP., a Value oriented long/short investment partnership. You can read more of his views on investments at his blog - Stock Market Prognosticator.

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