SEC Company Response from SM Energy Co (SM) (CIK 0000893538) (SM) — May 17, 2006
SM Energy Co (SM) (CIK 0000893538)
Date: May 17, 2006 · CIK: 0000893538 · Accession: 0000893538-06-000109
AI Filing Summary & Sentiment
Reasoning
Referenced dates: April 27, 2005, March 24, 2005, May 4, 2006
Letter
Division of Corporation Finance United States Securities and Exchange Commission Letter dated May 4, 2006 to St. Mary Land & Exploration Company Form 10-K for the fiscal year ended December 31, 2005 Filed February 27, 2006 File No. 1-31539
Dear Mr. Schwall:
Please find our response to the above captioned comment letter dated May 4, 2006. As a courtesy, we have reproduced the applicable portion of the letter in our responses. The comments are in bold text and our responses are incorporated within the document in normal text:
Accounting Comments
Form 10-K for the Fiscal Year Ended December 31.2005
Properties
Mr. Roger Schwall
Securities and Exchange Commission
May 17, 2006
Page 2
1. With regard to your disclosures of "PV-10 value," "Reserve replacement -including sales," and "Reserve replacement - excluding sales" on page 24 and elsewhere in your filing, please note that we consider these to be non-GAAP measures. As such, they must be accompanied by the appropriate disclosure required by Regulation S-K, Item 10(e). Your disclosure should include, among other things, a reconciliation to the most directly comparable GAAP measure. In the case of "PV-10 value," we consider the standardized measure of future net discounted cash flows, as set forth in paragraph 30 of SFAS 69, to be the most directly comparable GAAP measure.
With regard to your reserve replacement measures, please:
•
Describe how the ratios are calculated. We would expect the information used to calculate these ratios to be derived directly from the line items disclosed in the reconciliation of beginning and ending proved reserve quantities, which is required to be disclosed by paragraph 11 of SFAS 69.
•
Identify the status of the proved reserves that have been added (e.g., proved developed vs. proved undeveloped). It is not appropriate to calculate these ratios using:
•
non-proved reserve quantities, or,
•
proved reserve additions that include both proved reserve additions attributable to consolidated entities and investments accounted for using the equity method.
•
Identify the reasons why proved reserves were added.
•
The reconciliation of beginning and ending proved reserves, referred to above, includes several line items that could be identified as potential sources of proved reserve additions. Explain to investors the nature of the reserve additions, and whether or not the historical sources of reserve additions are expected to continue, and the extent to which external factors outside of managements' control impact the amount of reserve additions from that source from period to period.
•
Explain the nature of and the extent to which uncertainties still exist with respect to newly discovered reserves, including, but not limited to regulatory approval, changes in oil and gas prices, and the availability of additional development capital and the installation of additional infrastructure.
Mr. Roger Schwall
Securities and Exchange Commission
May 17, 2006
Page 3
•
Indicate the time horizon of when the reserve additions are expected to be produced to provide investors a better understanding of when these reserve additions could ultimately be converted to cash inflows.
•
Disclose how management uses these measures
•
Disclose the limitations of these measures.
Please note that we specifically discussed the reserve replacement disclosure with Mr. Schwall and Mr. Murphy last year on April 11 and 12, 2005, in connection with the response to the Staff’s comment letter dated March 24, 2005, with respect to our 2004 Form 10-K, and we believed that we had resolved the Staff’s desired form of disclosure of such items through changes made to the presentation of such items in the 2005 Form 10-K. We documented the agreed conclusions from the aforementioned telephone conversation in a letter dated April 27, 2005, which was addressed to Mr. Murphy.
We believe that the Form 10-K is an integrated document and that each section supports another, accordingly, we have disclosed in a variety of locations how the calculations work, why we believe these measures are relevant and how they are useful to a reader. The view we have taken is that the Form 10-K document would be unnecessarily redundant if we included the descriptive nature and justification for using these measures at each place in the document they are used. Arguably, these measures are operating measures that would normally be excluded from the definition of a non-GAAP financial measure. With regard to the disclosure of the Reserve Replacement – Including Sales and Reserve Replacement – Excluding Sales we direct the SEC Staff’s attention to the following areas of our Form 10-K filing.
•
Page 11 – The definitions of the measures as well as the method for calculating the resulting percentages.
•
Page 2 – A description of the resulting percentage measures in the context of how our reserves had changed during the year, as well as what components of our reserve replacement came from organic drilling operations and by acquisitions. Included in this section is relevant discussion of where the largest reserve additions were to the Company.
•
Page 24 – The measures are disclosed in the table of Proved Reserve Data. This disclosure provides the regulatory required items plus those measures that we believe to be important for measuring and benchmarking our performance. These measures are displayed with equal prominence to other data provided in the table as not to imply that the supplemental measures are more or less important than another.
Mr. Roger Schwall
Securities and Exchange Commission
May 17, 2006
Page 4
•
Page 34 – The MD&A disclosure includes management’s goals as related to reserve replacement, how we believe a 200 percent reserve replacement is important for growing net asset value per share, and then we describe how St. Mary has performed against those goals. This information is included in our disclosures, because we believe they are important metrics to understand the performance of our operations. Accordingly, we provided the information to the readers of our Form 10-K. These disclosures represent management’s belief as to why the presentation of these measures provides useful information to investors regarding our asset base, which then provides a basis for assessing the Company’s performance and financial condition.
We confirm that these measures are calculated using only proved reserves. We also note for the Staff’s understanding, that St. Mary has fully consolidated each of its subsidiaries and that it does not have any ownership structures that would provide for any percentage of reserves from entities using the equity method of accounting. Accordingly, the calculation of the reserve replacement metrics can be calculated directly from the line items in the oil and gas disclosures on page F-31.
Related to the time horizon over which the reserve additions are expected to be produced, reserves have been added as a result of drilling activity (including proved developed and proved undeveloped reserves) and acquisitions. Our additions have been in geographic areas where St. Mary had previously established core areas of operations and these reserve additions do not have substantially different characteristics than the existing assets. Please note the reserve life referenced in the Proved Reserves Data table on Page 24 which increased slightly over the last three years, indicating that the proved reserve additions are similar in character to the pre-existing proved reserves. Our Proved Undeveloped (“PUD”) Reserves increased from 15 percent to 18 percent of total proved reserves, indicating that a higher percentage of the proved reserves are currently undeveloped, and thus, will require a slightly longer time horizon to be produced. We believe that the disclosures in the first full paragraph on page 2 of the Business section as well as in the second paragraph of the Reserve Replacement and Growth topic covered in the opening section of our MD&A on pages 34 and 35 describing the increase in the PUD percentage provide a clear description of the location and factors related to the increase in the PUD percentage.
Mr. Roger Schwall
Securities and Exchange Commission
May 17, 2006
Page 5
As to the reconciliation of the PV-10 value disclosure, we have a definition of this measure on page 10 of our Form 10-K. The definition describes that it is being used as an “indicative representation of the relative value of the Company” so that it can be used as a comparison to other companies. Since we emphasize that this measurement is indicative towards measuring we do not believe that any further mitigating language is necessary for the disclosure. As you can see on page 24 in the Reserves section, we are not using this measure in lieu of the standardized measure of discounted future net cash flows; rather we are using it in addition to this GAAP defined measure. In terms of providing a reconciliation between the two measures, we believe that a reconciliation is not incrementally meaningful as the components of the calculation are fully described and the result is explicitly provided by the Company. In addition, there are no complex or unusual reconciling items. Therefore, we believe that a reasonably prudent reader can understand the difference between the two measures and reconcile the number without difficulty.
We do recognize the requirement of Regulation S-K, Item 10(e)(1)(i)(B) and note that St. Mary will prospectively include a tabular presentation as a footnote to the Reserves section on page 24 that presents the reconciliation between the PV-10 value measure and the standardized measure. We do not believe that the presentation in our Form 10-K, as it currently is presented is misleading or would cause a reasonably prudent reader to misunderstand St. Mary’s business, oil and gas reserves, asset base, financial position or results of operations. Accordingly, we respectfully request that the tabular presentation be included on a prospective basis only.
Lastly, with regard to disclosure as to uncertainties about reserve additions we refer the SEC Staff to our existing risk factors disclosures on page 12 titled -If we are not able to replace reserves, we will not be able to sustain production; and, The actual quantities and present value of our proved oil and gas reserves may be less than we have estimated; as well as on page 14 titled – Exploration and development drilling may not result in commercially productive reserves and Future oil and gas price declines or unsuccessful exploration efforts may result in write-downs of our asset carrying value on page 15. We believe that these disclosures, together with the Cautionary Information about Forward Looking Statements section beginning on page 7, allow a reader to be adequately aware of the risks to the industry as a whole as well as specifically to St. Mary. In the Reserve Replacement and Growth caption of our MD&A we talk about aberrations from period to period and why we believe that multi-year measures are more representative of the performance of companies in our business. We also point out to the SEC Staff that over the three years ended 2003, 2004 and 2005 our net revision is an upward 37.2 BCFE adjustment. Relative to our yearend reserves at each of the aforementioned period yearends, the revision line has represented less than 4.3 percent of the total period end reserve quantities. As such, we do not believe that the change from the revision line is of such a size to warrant any additional disclosure.
Mr. Roger Schwall
Securities and Exchange Commission
May 17, 2006
Page 6
Engineering Comments
Form 10-K for the Fiscal Year Ended December 31, 2005 General
2.
Please provide a copy of your 2004 and 2005 reserve reports. Also provide a copy of the reserve reports that includes the determination of the unproved reserves reported in your press release dated January 26, 2006.
The requested reports were supplementally submitted to Mr. Murphy of the Staff for delivery on May 17, 2006.
3.
Please tell us if you attributed proved reserves to locations that are not adjacent to productive wells. Submit to us the engineering and geologic justification for PUD reserves you have claimed that are not in legal, technically justified locations offsetting (adjacent to) productive wells. Otherwise, affirm to us that none of your claimed PUD reserves are attributed to such locations.
We confirm that with the exception of the coalbed methane (“CBM”) reserves in the Powder River Basin described in the next paragraph, that our PUD reserves are adjacent to existing productive wells.
In the CBM project area in the Powder River Basin, PUD reserves have been booked in sections offsetting sections of proved developed producing reserves. As of December 31, 2005, we had recorded 4 BCF of PUD reserves related to these CBM reserves of the total 794 BCFE of proved reserves for the Company. Although a portion of these PUD locations are not immediately offsetting productive wells, these sections have demonstrated with certainty that continuity of production exists as described based on the following criteria.
Mr. Roger Schwall
Securities and Exchange Commission
May 17, 2006
Page 7
To categorize the CBM locations as proved reserves, the Company and NSAI, the Company’s independent reserve evaluator for the Powder River Basin properties, require adequate documentation regarding (1) geologic lateral continuity of the coal members, (2) pressure data to confirm continuity of the coals, (3) test or production data, from any wells in the section or offsetting section regardless of operator, to establish the coal permeability and the capability of the coals to produce gas, (4) sufficient gas content data, and (5) commerciality of existing operations and planned future development. Even though the guidelines suggested by the Securities and Exchange Commission are restrictive on this issue, the Company and NSAI are of the opinion that the Powder River Basin represents one of the few examples in the United States where proved undeveloped reserves can be assigned beyond one direct offset spacing unit due to the demonstration of pressure communication (reservoir connectivity) over large distances as shown by water level tracking. This is only done in selected areas where coal continuity is established by existing well control and where pressure and permeability is established based on pressure and production information. Also, the offset or reference well for a PUD location assignment must be to an acceptable peak gas rate to support commerciality and to clearly support depletion of the assigned volumetric reserves for the spacing unit (either 80 or 160 acres). The producing well that establishes PUD reserves for an area may not necessarily be owned by St. Mary. The determination and classification of these reserves as proved is a case-specific decision based on the data available. Business, page 1
Significant Developments since December 31, 2004
4.
According to FASB 69 paragraph 30, revisions should include reserve additions from development drilling. We note your reserve revisions of 33.9 BCFE represent about a 5.5% increase over 2004 repo
Show Raw Text
CORRESP
1
filename1.htm
May 17, 2006
By EDGAR and by fax (202) 772-9369
Mr. H. Roger Schwall
Assistant Director
Division of Corporation Finance
United States Securities and Exchange Commission
100 F Street, N.E.
Washington, D.C.
20549-7010
Re:
Letter dated May 4, 2006 to St. Mary Land & Exploration Company
Form 10-K for the fiscal year ended December 31, 2005
Filed February 27, 2006
File No. 1-31539
Dear Mr. Schwall:
Please find our response to the above captioned comment letter dated May 4, 2006. As a courtesy, we have reproduced the applicable portion of the letter in our responses. The comments are in bold text and our responses are incorporated within the document in normal text:
Accounting Comments
Form 10-K for the Fiscal Year Ended December 31.2005
Properties
Mr. Roger Schwall
Securities and Exchange Commission
May 17, 2006
Page 2
1. With regard to your disclosures of "PV-10 value," "Reserve replacement -including sales," and "Reserve replacement - excluding sales" on page 24 and elsewhere in your filing, please note that we consider these to be non-GAAP measures. As such, they must be accompanied by the appropriate disclosure required by Regulation S-K, Item 10(e). Your disclosure should include, among other things, a reconciliation to the most directly comparable GAAP measure. In the case of "PV-10 value," we consider the standardized measure of future net discounted cash flows, as set forth in paragraph 30 of SFAS 69, to be the most directly comparable GAAP measure.
With regard to your reserve replacement measures, please:
•
Describe how the ratios are calculated. We would expect the information used to calculate these ratios to be derived directly from the line items disclosed in the reconciliation of beginning and ending proved reserve quantities, which is required to be disclosed by paragraph 11 of SFAS 69.
•
Identify the status of the proved reserves that have been added (e.g., proved developed vs. proved undeveloped). It is not appropriate to calculate these ratios using:
•
non-proved reserve quantities, or,
•
proved reserve additions that include both proved reserve additions attributable to consolidated entities and investments accounted for using the equity method.
•
Identify the reasons why proved reserves were added.
•
The reconciliation of beginning and ending proved reserves, referred to above, includes several line items that could be identified as potential sources of proved reserve additions. Explain to investors the nature of the reserve additions, and whether or not the historical sources of reserve additions are expected to continue, and the extent to which external factors outside of managements' control impact the amount of reserve additions from that source from period to period.
•
Explain the nature of and the extent to which uncertainties still exist with respect to newly discovered reserves, including, but not limited to regulatory approval, changes in oil and gas prices, and the availability of additional development capital and the installation of additional infrastructure.
Mr. Roger Schwall
Securities and Exchange Commission
May 17, 2006
Page 3
•
Indicate the time horizon of when the reserve additions are expected to be produced to provide investors a better understanding of when these reserve additions could ultimately be converted to cash inflows.
•
Disclose how management uses these measures
•
Disclose the limitations of these measures.
Please note that we specifically discussed the reserve replacement disclosure with Mr. Schwall and Mr. Murphy last year on April 11 and 12, 2005, in connection with the response to the Staff’s comment letter dated March 24, 2005, with respect to our 2004 Form 10-K, and we believed that we had resolved the Staff’s desired form of disclosure of such items through changes made to the presentation of such items in the 2005 Form 10-K. We documented the agreed conclusions from the aforementioned telephone conversation in a letter dated April 27, 2005, which was addressed to Mr. Murphy.
We believe that the Form 10-K is an integrated document and that each section supports another, accordingly, we have disclosed in a variety of locations how the calculations work, why we believe these measures are relevant and how they are useful to a reader. The view we have taken is that the Form 10-K document would be unnecessarily redundant if we included the descriptive nature and justification for using these measures at each place in the document they are used. Arguably, these measures are operating measures that would normally be excluded from the definition of a non-GAAP financial measure. With regard to the disclosure of the Reserve Replacement – Including Sales and Reserve Replacement – Excluding Sales we direct the SEC Staff’s attention to the following areas of our Form 10-K filing.
•
Page 11 – The definitions of the measures as well as the method for calculating the resulting percentages.
•
Page 2 – A description of the resulting percentage measures in the context of how our reserves had changed during the year, as well as what components of our reserve replacement came from organic drilling operations and by acquisitions. Included in this section is relevant discussion of where the largest reserve additions were to the Company.
•
Page 24 – The measures are disclosed in the table of Proved Reserve Data. This disclosure provides the regulatory required items plus those measures that we believe to be important for measuring and benchmarking our performance. These measures are displayed with equal prominence to other data provided in the table as not to imply that the supplemental measures are more or less important than another.
Mr. Roger Schwall
Securities and Exchange Commission
May 17, 2006
Page 4
•
Page 34 – The MD&A disclosure includes management’s goals as related to reserve replacement, how we believe a 200 percent reserve replacement is important for growing net asset value per share, and then we describe how St. Mary has performed against those goals. This information is included in our disclosures, because we believe they are important metrics to understand the performance of our operations. Accordingly, we provided the information to the readers of our Form 10-K. These disclosures represent management’s belief as to why the presentation of these measures provides useful information to investors regarding our asset base, which then provides a basis for assessing the Company’s performance and financial condition.
We confirm that these measures are calculated using only proved reserves. We also note for the Staff’s understanding, that St. Mary has fully consolidated each of its subsidiaries and that it does not have any ownership structures that would provide for any percentage of reserves from entities using the equity method of accounting. Accordingly, the calculation of the reserve replacement metrics can be calculated directly from the line items in the oil and gas disclosures on page F-31.
Related to the time horizon over which the reserve additions are expected to be produced, reserves have been added as a result of drilling activity (including proved developed and proved undeveloped reserves) and acquisitions. Our additions have been in geographic areas where St. Mary had previously established core areas of operations and these reserve additions do not have substantially different characteristics than the existing assets. Please note the reserve life referenced in the Proved Reserves Data table on Page 24 which increased slightly over the last three years, indicating that the proved reserve additions are similar in character to the pre-existing proved reserves. Our Proved Undeveloped (“PUD”) Reserves increased from 15 percent to 18 percent of total proved reserves, indicating that a higher percentage of the proved reserves are currently undeveloped, and thus, will require a
slightly longer time horizon to be produced. We believe that the disclosures in the first full paragraph on page 2 of the Business section as well as in the second paragraph of the Reserve Replacement and Growth topic covered in the opening section of our MD&A on pages 34 and 35 describing the increase in the PUD percentage provide a clear description of the location and factors related to the increase in the PUD percentage.
Mr. Roger Schwall
Securities and Exchange Commission
May 17, 2006
Page 5
As to the reconciliation of the PV-10 value disclosure, we have a definition of this measure on page 10 of our Form 10-K. The definition describes that it is being used as an “indicative representation of the relative value of the Company” so that it can be used as a comparison to other companies. Since we emphasize that this measurement is indicative towards measuring we do not believe that any further mitigating language is necessary for the disclosure. As you can see on page 24 in the Reserves section, we are not using this measure in lieu of the standardized measure of discounted future net cash flows; rather we are using it in addition to this GAAP defined measure. In terms of providing a reconciliation between the two measures, we believe that a reconciliation is not incrementally meaningful as the components of the calculation are fully
described and the result is explicitly provided by the Company. In addition, there are no complex or unusual reconciling items. Therefore, we believe that a reasonably prudent reader can understand the difference between the two measures and reconcile the number without difficulty.
We do recognize the requirement of Regulation S-K, Item 10(e)(1)(i)(B) and note that St. Mary will prospectively include a tabular presentation as a footnote to the Reserves section on page 24 that presents the reconciliation between the PV-10 value measure and the standardized measure. We do not believe that the presentation in our Form 10-K, as it currently is presented is misleading or would cause a reasonably prudent reader to misunderstand St. Mary’s business, oil and gas reserves, asset base, financial position or results of operations. Accordingly, we respectfully request that the tabular presentation be included on a prospective basis only.
Lastly, with regard to disclosure as to uncertainties about reserve additions we refer the SEC Staff to our existing risk factors disclosures on page 12 titled -If we are not able to replace reserves, we will not be able to sustain production; and, The actual quantities and present value of our proved oil and gas reserves may be less than we have estimated; as well as on page 14 titled – Exploration and development drilling may not result in commercially productive reserves and Future oil and gas price declines or unsuccessful exploration efforts may result in write-downs of our asset carrying value on page 15. We believe that these disclosures, together with the Cautionary Information about
Forward Looking Statements section beginning on page 7, allow a reader to be adequately aware of the risks to the industry as a whole as well as specifically to St. Mary. In the Reserve Replacement and Growth caption of our MD&A we talk about aberrations from period to period and why we believe that multi-year measures are more representative of the performance of companies in our business. We also point out to the SEC Staff that over the three years ended 2003, 2004 and 2005 our net revision is an upward 37.2 BCFE adjustment. Relative to our yearend reserves at each of the aforementioned period yearends, the revision line has represented less than 4.3 percent of the total period end reserve quantities. As such, we do not believe that the change from the revision line is of such a size to warrant any additional disclosure.
Mr. Roger Schwall
Securities and Exchange Commission
May 17, 2006
Page 6
Engineering Comments
Form 10-K for the Fiscal Year Ended December 31, 2005 General
2.
Please provide a copy of your 2004 and 2005 reserve reports. Also provide a copy of the reserve reports that includes the determination of the unproved reserves reported in your press release dated January 26, 2006.
The requested reports were supplementally submitted to Mr. Murphy of the Staff for delivery on May 17, 2006.
3.
Please tell us if you attributed proved reserves to locations that are not adjacent to productive wells. Submit to us the engineering and geologic justification for PUD reserves you have claimed that are not in legal, technically justified locations offsetting (adjacent to) productive wells. Otherwise, affirm to us that none of your claimed PUD reserves are attributed to such locations.
We confirm that with the exception of the coalbed methane (“CBM”) reserves in the Powder River Basin described in the next paragraph, that our PUD reserves are adjacent to existing productive wells.
In the CBM project area in the Powder River Basin, PUD reserves have been booked in sections offsetting sections of proved developed producing reserves. As of December 31, 2005, we had recorded 4 BCF of PUD reserves related to these CBM reserves of the total 794 BCFE of proved reserves for the Company. Although a portion of these PUD locations are not immediately offsetting productive wells, these sections have demonstrated with certainty that continuity of production exists as described based on the following criteria.
Mr. Roger Schwall
Securities and Exchange Commission
May 17, 2006
Page 7
To categorize the CBM locations as proved reserves, the Company and NSAI, the Company’s independent reserve evaluator for the Powder River Basin properties, require adequate documentation regarding (1) geologic lateral continuity of the coal members, (2) pressure data to confirm continuity of the coals, (3) test or production data, from any wells in the section or offsetting section regardless of operator, to establish the coal permeability and the capability of the coals to produce gas, (4) sufficient gas content data, and (5) commerciality of existing operations and planned future development. Even though the guidelines suggested by the Securities and Exchange Commission are restrictive on this issue, the Company and NSAI are of the opinion that the Powder River Basin represents one of the few examples in the United States where proved undeveloped reserves can be assigned beyond one direct
offset spacing unit due to the demonstration of pressure communication (reservoir connectivity) over large distances as shown by water level tracking. This is only done in selected areas where coal continuity is established by existing well control and where pressure and permeability is established based on pressure and production information. Also, the offset or reference well for a PUD location assignment must be to an acceptable peak gas rate to support commerciality and to clearly support depletion of the assigned volumetric reserves for the spacing unit (either 80 or 160 acres). The producing well that establishes PUD reserves for an area may not necessarily be owned by St. Mary. The determination and classification of these reserves as proved is a case-specific decision based on the data available. Business, page 1
Significant Developments since December 31, 2004
4.
According to FASB 69 paragraph 30, revisions should include reserve additions from development drilling. We note your reserve revisions of 33.9 BCFE represent about a 5.5% increase over 2004 repo