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    Growing through competitive advantages

    Why are assets worth more to us than they are to others? Being able to answer that question is the key to creating economic value and opportunity at St. Mary Land & Exploration Co.

    We believe the answer to this question begins at the core of St. Mary: our value systems; our risk/reward profile; our incentive programs that help us attract, motivate, and retain top talent; and our reporting and feedback systems that help us understand our business better.

    At the regional level, the answer may lie in better application of 3-D seismic and geologic knowledge; a large and strategic acreage position; the ability to apply new technologies; judgment to drill and stimulate wells more effectively and at a lower cost; the ability to market our oil and gas at a premium over others; and our ability to operate at a lower cost or obtain financing at a lower cost.

    It takes a combination of talent, creativity, focus, attention to detail, and proper application of technology to accomplish what we have accomplished. In each of our regions, we strive to establish clear competitive advantages. Once we establish a substantial competitive edge, opportunities follow.

    At the core of our company are our employees. We have highly talented and motivated employees who embrace St. Mary’s values. Our employees are motivated by unique incentive plans that match compensation with performance. We believe our incentive plans provide a competitive advantage that allows us to compete and grow in the current environment.


    St. Mary Land & Exploration Co. employee checks a gauge at a wellhead in the Williston basin. (Photo courtesy St. Mary Land & Exploration Co.)
    Click here to enlarge image

    Our performance-based cash bonus and restricted stock plans are based on the growth of St. Mary’s net asset value per share. Our net profit pool incentive plan rewards selected employees with a portion of cash flow from a pool of assets once St. Mary has recovered 100 percent of its costs. It is a unique plan that creates the proper tension between growth and economics. Over the years, we have been able to retain our employees and, at the same time, attract talented professionals to our company.

    In each of our five core areas, we have developed competitive advantages that provide the edge we need to create value.

    In the Williston basin, we have been able to map porosity as well as structure in the Red River formation using 3-D seismic imaging, which has resulted in an 86 percent drilling success rate since 1991.

    Other operators in the Williston basin that were not able to achieve a high success rate began leaving the basin. This allowed St. Mary to become a consolidator through a series of property acquisitions.

    These acquisitions provided us with our next major competitive advantage: a large and strategic acreage position covering more than 1.3 million gross acres, 80 percent of which is undeveloped. This acreage provided an entrée into the Middle Bakken dolomite play, the hottest oil play in the Rockies.

    Our 80,000 net acres in the fairway of the Middle Bakken play have created significant value for St. Mary, as we recently completed our 21st well without a dry hole. We see this as a multi-year development project that has resulted from our competitive advantage of being able to map porosity and structure using 3-D seismic imaging.

    The competitive advantage we have developed in our Hanging Woman basin coalbed natural gas play in the northern Powder River basin answers the question: “Why are these assets worth more in our hands than in someone else’s?”

    Our mostly contiguous 154,000-net-acre lease position in the play allows us to drill on 160-acre spacing rather than on 80 acres, which would be necessary to protect our properties from drainage by other operators, if our properties were not contiguous. Since each well drains 160 acres, drilling on 160-acre spacing is the most economically efficient way to develop the property.

    One of our employees has developed a packer tool that separates the water from each coal seam. This enables us to complete multiple coal seams through the same wellbore. These two advantages will allow us to reduce the number of wells drilled per 640-acre section from 24 to eight, offering a dramatic reduction in capital costs as well as less environmental impact.

    In a business where approximately 50 percent of the companies are routinely gone after five years, St. Mary has survived and thrived since our inception in 1908. Establishing competitive advantages is the key.

    Growing through competitive advantages is a work in progress. The battle never ends, but with each competitive advantage, we are building the tools that grow our company and create shareholder value.OGFJ

    The author

    Click here to enlarge image

    Mark A. Hellerstein is chairman, CEO, and president of Denver-based St. Mary Land & Exploration Co. He has served as president and a director since 1992, as CEO since 1995, and was appointed chairman of the board in September 2002.

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