Feb 22, 2008
Executives
Brent A. Collins - Director of IR Anthony J.
Best - President and CEO David W. Honeyfield - Sr.
VP, CFO and Secretary Javan D. Ottoson - EVP and COO
Analysts
Subash Chandra - Jefferies & Company, Inc. Larry Busnardo - Tristone Capital David Tameron - Wachovia Capital Markets Ellen K.
Hannan - Bear Stearns & Co.
Operator
Good morning. My name is Dushanta and I will be your conference operator today.
At this time I would like to welcome everyone to Fourth Quarter 2007 Earnings Conference Call. All lines have been placed on mute to prevent any background noise.
After the speakers remarks there will be a question-and-answer session. [Operator Instructions].
Thank you. Mr.
Collins, you may begin your conference.
Brent A. Collins - Director of Investor Relations
Thank you Dushanta [ph], and good morning to all of you joining us by phone and online for St. Mary Land & Exploration Company's fourth quarter and full year 2007 earnings call.
Before we start I would like to advise you that we will be making forward-looking statements during this call about our plans, expectations and assumptions regarding our future performance. These statements involve risks, which may cause our actual results to differ materially from the results expressed or implied in our forward-looking statements.
For a discussion of these risks you should have referred to the information about forward-looking statements in our press release from yesterday and the 'Risk Factor' section of our 2007 Form 10-K which will be filed later today with the SEC. We'll also discuss certain non-GAAP financial measures that we believe are useful in evaluating our performance.
A reconciliation of those measures to the most directly comparable GAAP measures and other information about these non-GAAP metrics are described in our earnings press release from yesterday. Additionally, we may use in this call the terms probable, possible and 3P reserves, estimated ultimate recovery or EUR, contingent resources...
and contingent resources. Definitions of these terms are included in our latest operations update press release, estimates of unapproved reserves and contingent resources are by their nature more uncertain than estimates of proved reserves and accordingly are subject to substantially greater risk of not actually being realized by the company.
The company officials on the call this morning are Tony Best, President and Chief Executive Officer; Jay Ottoson, Executive Vice President and Chief Operating Officer; Dave Honeyfield, Senior Vice President and Chief Financial Officer; Dennis Zubietta, Manager of Reservoir Engineering; Matthew Purchase, Budget and Planning Director; and Brent Collins, Director of Investor Relations. I'll now turn the call over to Tony.
Anthony J. Best - President and Chief Executive Officer
Good morning and thank you for joining us for our 2007 earnings conference call. After a few brief opening remarks I will turn the call over to Dave Honeyfield for a review of our financial results.
After that Jay Ottoson will provide a quick update of our operations. Looking back, a lot happened during 2007 for St.
Mary. Some of these highlights include record year-end reserves of 1,087 billion cubic feet equivalent, annual production of 107.5 Bcf equivalent or an annual daily average of 294.5 million cubic feet per day.
Discretionary cash flow of $636.9 million, which in an increase of 21% from last year. We also had net income per diluted share of $2.94 which ties the annual record that we set last year.
All-in reserve replacement of 248%, which is an increase from 244% in 2006, and this also meets our annual goal of replacing at least 200% of our production every year. All-in F&D cost were $3.48 per Mcf equivalent down from $3.56 in 2006.
Last year we also entered a new basin with two acquisitions in southwestern Texas which target the almost shallow gas formation. We also underwent a number of senior and regional management changes throughout the year and we also opened a new regional office in Midland, Texas which is now fully staffed.
And lastly, we've now reached our 100th anniversary, which we will be celebrating throughout the first part of 2008. Clearly, 2007 was a very active year for St.
Mary and it sets a very good foundation for future growth. We have entered 2008, generating strong cash flows and with a strong balance sheet.
Our focus is on advancing our key projects and pursuing ways to add to our project inventory. I am pleased with how the company is positioned operationally and financially and I have a high confidence that our 2008 program will deliver growth and value to our shareholders.
With that introduction I'll now turn the call over to Dave Honeyfield for his financial overview. Dave?
David W. Honeyfield - Senior Vice President, Chief Financial Officer and Secretary
Thank you, Tony, and good morning. Since I know many of you on the call this morning follow the results of St.
Mary on a regular basis, I'll focus my financial commentary on the company's quarterly performance. For the fourth quarter of 2007, St.
Mary reported net income of $32.9 million or $0.51 per diluted share. This compares to $43.5 million or $0.69 per diluted share for the comparable period in 2006.
As alluded to earlier, our fourth quarter production rate was quite strong as were realized commodity prices, resulting in discretionary cash flow for the quarter of $176.4 million. Tempering the benefit from the strong revenues was relatively large non-cash charge related to the change in the net profits plan liabilities that occurred in the quarter.
The increase in the long-term NPP liability reflects the significant increase in oil prices during the year as well as the impact of lowering the discount rate used to value the liability for 15% to 12%. We made this change to the estimate to better reflect market trends regarding the valuation of these types of assets.
Adjusted net income, which adjusts for NPP... the NPP item and other significant non-cash or non-recurring items was $64.4 million versus $49.1 million in the fourth quarter last year.
On a diluted share basis, adjusted net income was $1 per share in the fourth quarter of 2007, an increase of 30% compared to the same period in 2006. I'll now touch on a few significant income statement line items in a bit more detail.
Oil and gas production revenue for the fourth quarter of 2007 was $273.7 million compared to $180.6 million in the comparable period of '06. The fourth quarter daily production rate of 310.2 million cubic feet equivalent and a realized equivalent price including the effect of hedging of $9.18 per Mcfe drove this increase.
For the fourth quarter of 2007 the average realized prices net of the effects of hedging were $69.99 per barrel of oil and $7.80 per Mcfe of gas. These net realized prices were up 36% and 8% respectively, fourth quarter of 2006.
On a quarterly comparison, our lease operating expense increased 7% year-over-year from $1.36 per Mcfe in '06 to $1.45 per Mcfe in '07. With our production mix being just under 40% oil, we tend to feel the cost pressure for services such as fluid disposal, well maintenance, labor, and trucking more acutely than others that are more heavily weighted towards natural gas.
The offset to this cost pressure continues to be the current oil prices which result in strong margins and returns from our oil properties. We did see an increase in general and administrative expense from the prior year.
This is driven by an overall increase in the number of employees we have both in Denver as well as our regional offices. Additionally, the higher revenues driven by commodity prices also mean that we will have higher payments from the net profits plan which was a significant factor in the G&A increase.
At the end of the yea, our balance sheet is in good shape with a debt-to-book capitalization ratio of 40%. If you consider this on a pro forma basis for the proceeds from our divestiture of non-core properties that closed on January 31st this year, our debt-to-cap ratio would have been approximately 34%.
Lastly, the company currently has a board authorization to repurchase roughly 5.2 million shares of our common stock. Clearly we need to be aware of trading window restrictions as well as the impact of the balance sheet repurchases.
But given the recent trading performance of the stock in the market and the strength of the commodity strip, the acquisition of our own shares looks to be a very attractive investment. With that I will turn it over to Jay Ottoson.
Javan D. Ottoson - Executive Vice President and Chief Operating Officer
Thank you, Dave. Along with our earnings release last evening we also released a brief operations update.
2008 capital program is actively underway. We have 13 rigs running currently throughout our operating regions.
Some notable highlights of our current operations include the following. In the horizontal Woodford, we have seen positive results on our last several wells.
We are becoming more confident in our appreciation of the geotechnical issues and believe we have learned the best way to drill and complete these wells. Our average EUR currently is 2.7 Bcfe for horizontal Woodford and we've recently had a well that we project to have an EUR in excess of 5 Bcf.
Also in the mid-continent we had a very good well in the Atoka/Granite Wash program with an optimized completion that also reduced cost. In the ArkLaTex, we continue to be an active horizontal driller.
In the operator James Lime program, we are operating 2 rigs and continue to see favorable results in a play. At Elm Grove our operating partner drilled an excellent horizontal well in which we have a 20% working interest.
The target of the Taylor Sand and the Cotton Valley formation. The operator publicly reported an IP of 16.5 million cubic feet a day and we have been very impressed with how the well's performed based on field reports; an offset well is currently drilling.
St. Mary has recently drilled its first horizontal Cotton Valley well at Carthage field, which is scheduled to be completed in March.
Our programs in the Permian, Gulf Coast and Rockies regions continue to move ahead. I will refer you to last night's release for updates on those regional programs.
In previous calls and filings we have noted that our 2008 capital program is within our projected cash flows. With free cash flow we will have the opportunity to accelerate drilling programs or pursue other attractive opportunities which will be accretive to our NAV per share.
With that I'll turn it back over to Tony.
Anthony J. Best - President and Chief Executive Officer
Thanks Jay. I am pleased with our performance for 2007 and we believe that we are off to a great start for 2008.
We've lots of irons in the fire and are focused on the execution and delivery of our business plan for 2008. Finally, it is with regret that I mentioned that this will be Dave Honeyfield's last call as a member of St.
Mary's management team. Dave has been a great contributor to the success of St.
Mary over the years and we truly wish him the best of luck in his new endeavor. We'll now turn the call over for your questions.
Thank you. Question And Answer
Operator
[Operator Instructions]. Your first question comes from the line of Subash Chandra with Jefferies.
Subash Chandra - Jefferies & Company, Inc.
Yes, hi. Good morning.
First on the Woodford. I was curious the 5 Bcf EUR, what sort of your 10 day average or 30 day average do you need to see to feel comfortable with the number like that.
David W. Honeyfield - Senior Vice President, Chief Financial Officer and Secretary
Well we wouldn't do it on a 10 day or 30 day average. We got three months of production or so on that well.
I think that the particular well was the Duncan Shores and my recollection was it IP-ed of about 3.3 million a day on a 10-day average.
Subash Chandra - Jefferies & Company, Inc.
Okay, and then it cleans up after that, I imagine?
Javan D. Ottoson - Executive Vice President and Chief Operating Officer
Well, no, not for me. These wells all have hyperbolic declines, it hung in there pretty well...
it's hung in there pretty well above 3, but all of them declined.
Subash Chandra - Jefferies & Company, Inc.
Got it. In the '07 reserve report is sort of...
what kind of credit did you get for Woodford wells and what sort of offset credit do you get in the Woodford?
Javan D. Ottoson - Executive Vice President and Chief Operating Officer
Are you asking us where we book our PUDs at?
Subash Chandra - Jefferies & Company, Inc.
Yeah. What you booked...
are you producing wells and what you might have booked the PUDs at? Did you get sort of 80 acre spacing or --?
Javan D. Ottoson - Executive Vice President and Chief Operating Officer
No, we don't book to 80s
Anthony J. Best - President and Chief Executive Officer
We booked at 320s.
Javan D. Ottoson - Executive Vice President and Chief Operating Officer
We're booking 320s at this point, and we just... as I just mentioned we have booked 2.7 Bcf a well, that's our expectation.
Subash Chandra - Jefferies & Company, Inc.
Okay. So with that 2.7 is actual what was booked for the locations.
Javan D. Ottoson - Executive Vice President and Chief Operating Officer
That's our expected PUD number.
Subash Chandra - Jefferies & Company, Inc.
Got it.Okay. In the James Line, I guess we talked about this before, but Cabot obviously put up...
well Cabot put up some pretty good ambitions for this year and some results. Any sort of further flavor in the repeatability of this and maybe how continuous be...
the reservoir might be, or the target might be, I guess, how continuous it might be for sort of an 80 acre development or are you going to see the sweet spots that fairly far apart?
Javan D. Ottoson - Executive Vice President and Chief Operating Officer
Dave, you would have to ask Cabot about their views of their development. But we are still and pretty much in exploration mode, we've got a lot of acreage.
We drilled a couple, three wells across a big area. I don't think we are ready to talk about spacing it here.
We have drilled a number... several successful wells.
I think there are going to sweet spots in the play, I think... it looks like Cabot found one.
We have some the Spider field has always worked well for us as well so we expect that to occur. It is a large play and there's probably some structural component to it.
I don't think we really know the answers to all that yet.
Subash Chandra - Jefferies & Company, Inc.
Okay. And one final one.
The Bakken, when you say participated, I imagine it's non-operated. Do you anticipate operating in '08?
And then what is this reference? Can you be more specific about this reference on the completion technology?
Javan D. Ottoson - Executive Vice President and Chief Operating Officer
Well yes it's a non-operated well. We don't have any particular...
we don't a plan right now to drill a Bakken well in the... what you might consider to be the hot part of the partial-type play at this point and although we are looking at it.
I think in terms of the newer technology, you are looking at more Barnett style, multi-stage external casing packer-type completions.
Subash Chandra - Jefferies & Company, Inc.
And now you said that so this well, okay, and utilize new drilling that are previously not been used by St. Mary.
Is that --?
Javan D. Ottoson - Executive Vice President and Chief Operating Officer
No we... the technique...
we didn't drill the well.
Subash Chandra - Jefferies & Company, Inc.
But... right.
Yes, as you said, it wasn't previously used by the company, that's why I was curious.
David W. Honeyfield - Senior Vice President, Chief Financial Officer and Secretary
[Indiscernible] Montana.
Javan D. Ottoson - Executive Vice President and Chief Operating Officer
Yes. The answer to that is if you look at the Montana Bakken where we have been mostly active, most of those wells were completed either open hole and they weren't treated in this fashion.
Unidentified Company Representative
So Subash that reference was specifically to the way we've developed the market in the past so we haven't used it in that area.
Javan D. Ottoson - Executive Vice President and Chief Operating Officer
We've obviously drilled packer... done a bunch of packers plus completion work and other types in other places.
But this is a relatively new technique in the Bakken.
Subash Chandra - Jefferies & Company, Inc.
Right, got it, okay. I understand.
And just a kind of quick note here on when you -- when you do these plays like the Woodford possibly and at the Bakken and you saw the open hole stimulation. I mean, is it better to sort of case the holes off to do refracs in the future?
Or how does someone weight the current impact versus sort of the future potential in refracing wells?
Javan D. Ottoson - Executive Vice President and Chief Operating Officer
Well I think if you truly have an open hole in a barefoot completion, there is a number of issues about when you frac and where are you placing the frac and how that... whether you actually know where the thing's going.
Clearly, if you have an external casing packer completion, you at least have some confinement or some ability to do that. Cemented liners; I think we used cemented liners in the Woodford, for example.
And a lot of case... in most cases, I think, that's probably the...
your best ability to control where the frac is actually going to go. But it's not an appropriate initial completion in a lot of cases.
So, it's just very depended on the play and in terms of refracs we haven't worked a lot yet on refracing wells in the shales but people have refraced wells in the Bakken and done some successfully.
Subash Chandra - Jefferies & Company, Inc.
Okay, thanks so much.
Anthony J. Best - President and Chief Executive Officer
Thanks, Subash.
Operator
The next question comes from the line of Larry Busnardo with Tristone Capital.
Larry Busnardo - Tristone Capital
Hey, good morning.
Anthony J. Best - President and Chief Executive Officer
Hi, Larry.
Javan D. Ottoson - Executive Vice President and Chief Operating Officer
Hi, Larry.
Larry Busnardo - Tristone Capital
In the James Lime trend it looks like you continue to add acreage there. I know competition's heating up.
But how much more additional acreage do you think is still up for grabs there? Is there still quite a bit or is the play getting pretty locked up?
Javan D. Ottoson - Executive Vice President and Chief Operating Officer
Well, that whole east Texas area, when you get out there, is an interesting land situation. There is a lot...
a lot of it is held by production and there are people who own big acreage positions that are probably not going to drill these wells. So I don't think it would be...
it would be true to say that it's locked up or that you're not going to be able to get acreage. You're correct in that it is getting more competitive.
Anthony J. Best - President and Chief Executive Officer
Well, Larry, you got to work it hard and really focus some resources to acquire additional acreage at this point.
Larry Busnardo - Tristone Capital
What was the recent acreage been going forward in terms of cost-wise?
Javan D. Ottoson - Executive Vice President and Chief Operating Officer
Well we bought acreage for $500 an acre. It varies depending on how close you are to production.
Larry Busnardo - Tristone Capital
Okay. When you talked about expanding the...
potentially expanding the drilling program this year and depending on programs, I was just wondering how you got 2 rigs there, I guess, operating right now. Where do you see this program going this year?
I mean, provided results continue to meet expectations and all that, could we see... you add maybe a rig or two here and expand out this program.
Brent A. Collins - Director of Investor Relations
You are talking specifically the Cotton Valley.
Larry Busnardo - Tristone Capital
Yes.
Anthony J. Best - President and Chief Executive Officer
So I can see the James Lime was of course --
Larry Busnardo - Tristone Capital
Just in the James Lime trend.
Javan D. Ottoson - Executive Vice President and Chief Operating Officer
I think the James Lime two rigs about... is about where we will end up.
We are... as we talked about we just finished a Cotton Valley horizontal well, we have a couple of more queued up behind that.
I would probably expect to see that expand if anything else in that region.
Larry Busnardo - Tristone Capital
That's the one over at Carthage, correct?
Javan D. Ottoson - Executive Vice President and Chief Operating Officer
Right.
Larry Busnardo - Tristone Capital
And looking at that I think you said you have got two other wells or at least two other horizontals planed there. If those end up successful with that kind of...
increase the number of horizontals you look to drill there later this year.
Javan D. Ottoson - Executive Vice President and Chief Operating Officer
Yes, potentially.
Larry Busnardo - Tristone Capital
Okay. Anything being done differently within this program drilling or completion-wise or is it just kind of slight tweaks or modifications to drilling in completions within the program?
Javan D. Ottoson - Executive Vice President and Chief Operating Officer
Well I think we pretty much think we know how to complete the wells; our costs are coming down. We've have done some good work with some of our vendors to get our costs driven down, our drilling rate, we are getting the wells down faster.
I think in general our costs are going down in the place, so that's... it's positive from that standpoint.
Larry Busnardo - Tristone Capital
What does it take to drill on the vertical side, what does it take or how long does it take to drill and complete?
Javan D. Ottoson - Executive Vice President and Chief Operating Officer
Are you talking about a horizontal?
Larry Busnardo - Tristone Capital
Number of days, yes... number of days?
Javan D. Ottoson - Executive Vice President and Chief Operating Officer
They are about day 30-day wells.
Larry Busnardo - Tristone Capital
Okay. And what are they costing right now?
Javan D. Ottoson - Executive Vice President and Chief Operating Officer
I think the last number we talked about was $3.5 million.
Larry Busnardo - Tristone Capital
Okay. All right, great.
Thanks a lot guys.
Javan D. Ottoson - Executive Vice President and Chief Operating Officer
Thanks Larry.
Operator
Your next question comes from the line of David Tameron with Wachovia.
David Tameron - Wachovia Capital Markets
Hi, good morning.
David W. Honeyfield - Senior Vice President, Chief Financial Officer and Secretary
Good morning, David.
David Tameron - Wachovia Capital Markets
Most of my questions have been answered, but a couple of questions. David you mentioned share repurchase authorization.
Did you throw out numbers and I just missed them or can you talk about how much you guys have available?
Javan D. Ottoson - Executive Vice President and Chief Operating Officer
Sure David. We have an authorization that has 5.2 million shares remaining at the current time.
David Tameron - Wachovia Capital Markets
Okay. And you are comfortable with it...
well obviously with your debt-to-cap, right now you just go ahead and you feel comfortable just taking that up a little bit to repurchase shares.
David W. Honeyfield - Senior Vice President, Chief Financial Officer and Secretary
Yes. I think it's important to keep in mind as well that the way the capital program was built this year, intentionally there's some flexibility there.
We intended to stay within cash flow. So we have good opportunity to look at number of things.
Increase in the drilling program that I was talking about earlier, accretive acquisitions, the share prices at a point that we think it's attractive to repurchase those alternatives and then also keep in mind the proceeds that came in from the sale of the non-core properties at the end of January was 131 million. So that debt-to-cap levels are pretty manageable and then you look at the flexibility under the credit line.
As of right now we still have over about $320 million available under that facility.
David Tameron - Wachovia Capital Markets
All right, thanks. Actually a couple more questions.
Tony and... can you talk about your acquisitions Catarina and then the Gold River, I guess, was it Rockford that you did in the shallow gas?
Can you talk about what you are seeing now versus when you bought that thing six months ago, any changes you are making on the operational front or just kind where you're headed in '08, '09?
Anthony J. Best - President and Chief Executive Officer
Yes, all right, now, David, and Jay can chime in as well. But basically it's a three-rig program.
The transition has gone very, very smoothly, I've been very pleased with that. So the program is continued, transition's been smooth.
We are very focused on that and very pleased with where we are today and that's going to be a significant component to our 2008 program especially out of our Gulf Cost region. It also positions us well for potential opportunities elsewhere in the Maverick Basin, and we see additional zones of interest beyond just the almost gas.
We continue to look at those opportunities and we'll continue to assess that new basin. Jay, anything else from your perspective?
Javan D. Ottoson - Executive Vice President and Chief Operating Officer
Just note we have I think the number 66 recompletion scheduled for this year down there as well so that's a real opportunity to add some nice little reserve adds at low cost. I think we've mentioned that there's 56,000 acres associated with those deals and so we think there a lot of upside opportunity in.
David Tameron - Wachovia Capital Markets
Okay, and are you still talking... these wells are possibly as recompletes or what $600,000, $700,000?
Anthony J. Best - President and Chief Executive Officer
I don't even think they're that much.
David Tameron - Wachovia Capital Markets
Okay.
David W. Honeyfield - Senior Vice President, Chief Financial Officer and Secretary
That has pretty good cost on it... on the greenfield, well, Dave, the recompletes are significantly less.
Javan D. Ottoson - Executive Vice President and Chief Operating Officer
Probably more like half that, yes.
David Tameron - Wachovia Capital Markets
All right. And then one more question, Hanging Woman Basin.
You moved that out of 3P, can you just talk a little bit about the outlook there?
Javan D. Ottoson - Executive Vice President and Chief Operating Officer
We moved about half of it out of 3P into contingent resources.
David Tameron - Wachovia Capital Markets
Yes.
Javan D. Ottoson - Executive Vice President and Chief Operating Officer
So we basically retained half of that in the 3P category and as you've heard me say in a number of different forums, I think the key long term is to right-size the Hanging Woman Basin development and clearly we are focused on that. A lot of activity last year, a lot of new wells, lot of technical work being done and we'll continue that effort in 2008 as we continue to focus on the technical aspects of this play.
But that original 3P number we had out there was somewhere around 800 BC of equivalent and a good portion of that as we mentioned before was in the possible category. So I mean, yes, we shifted some from possible to contingent.
But I don't view that as a huge shift. I think what's most important is to understand the technical aspects of this play and optimize the ultimate development.
Javan D. Ottoson - Executive Vice President and Chief Operating Officer
Let me just chime in a little on that. I think when you look at definitions for what's reserves and what's resources, our view was that after looking at it for a while, the...
there are a number of regulatory issues there, there's a number of bird issues, just habitat issues in that area, and our view was that it was more appropriately categorized as contingent as apposed to... in the 3P category.
There is no change in the resource and there is really no change in our view of it. We just thought it was more appropriately categorized in that way.
David Tameron - Wachovia Capital Markets
Okay.
Anthony J. Best - President and Chief Executive Officer
And also... David, it also allows us to focus on higher growth programs that we have got in our business plan for this year.
So, I am not taking anything away from that, but we want to be sure that we focus on those that have the most growth potential as well.
David Tameron - Wachovia Capital Markets
Okay. Yes, that's where I was going with that.
And can you talk at all about the legislative... my understanding is that CBM ruling is now going to the Supreme Court.
Again, remind me, and I ask this question every couple of months, but remind me again in Montana how much of your acreage is prospective for CBM and what impact if any would this ruling have on your position?
Anthony J. Best - President and Chief Executive Officer
Yes, we have got total of... about 220,000 gross acres, 70% of that is on the Wyoming side.
So we've got plenty to say grace over in Wyoming, and while there's issues in Montana, we haven't particularly focused on those as far as our program plans for the year. Those things are going to run their own course.
You may remember a couple of years ago, we were trying to determine the timing for that to be resolved, and we gave up on doing that last year. So we will let that take its course.
In the meantime, we will focus on our 70% acreage position.
David Tameron - Wachovia Capital Markets
All right, thanks.
Unidentified Company Representative
Thanks, David.
Operator
Your next question comes from the line of Ronnie Iceman [ph] with J.P. Morgan.
Unidentified Analyst
Hi, I have a... just a quick question.
What are you seeing as trends in each of your operating areas in terms of drilling and completion costs?
Javan D. Ottoson - Executive Vice President and Chief Operating Officer
Well, I think it's fair to say that drilling costs are coming down. Rig rates have dropped probably 10%, 15%, almost 20% in some areas.
We have had some recent relief on pumping services which was something we were looking for and didn't see last year. We're starting to see some improvements in that as well and we are encouraged by that.
So, I think in general, we're pretty upbeat on our cost structure in terms of the... on the drilling side.
On the LOE side, in the... at the end of the last year we were still seeing some increases in LOE, mostly related to labor-related costs, as Dave mentioned earlier.
We don't think that's going to continue much beyond this, and we think we will have a pretty good LOE year. But it is little more pressure on issues that have labors associated with it.
Unidentified Analyst
So you are still seeing drilling costs coming down?
Javan D. Ottoson - Executive Vice President and Chief Operating Officer
Yes, we think our drilling costs are coming down some relative to last year.
Unidentified Analyst
Okay. Thank you, that's all I had.
Javan D. Ottoson - Executive Vice President and Chief Operating Officer
Thanks Ron.
Operator
[Operator Instructions]. Your next question comes from the line of Ellen Hannan with Bear Stearns.
Ellen K. Hannan - Bear Stearns & Co.
Hi, good morning.
Javan D. Ottoson - Executive Vice President and Chief Operating Officer
Good morning, Ellen.
Ellen K. Hannan - Bear Stearns & Co.
Good morning. Just a couple of follow-ups, I guess, kind of bigger picture question here.
You mentioned in your operating update that you are continuing to kind of evaluate your position in the Rocky Mountains and that you've got another package of properties up for sale. How...
should we continue to think along the lines of your goal being the 200% reserve replacement every year and what if anything, does that play into this? And then I guess further is there a gas price that would change your mind or is it simply you see better returns or more opportunity in some of the areas...
other areas that you've been investing in?
Javan D. Ottoson - Executive Vice President and Chief Operating Officer
Ellen, I think as we look at the Rockies, our intent there is to be sure that we've cored up the assets that can provide the most growth potential for the company. As we went through our significant divestiture and close on that in January, that was a large part of that that came out of the Rockies, and it was simply properties that we thought maybe better off in someone else hands.
They were not going to provide the growth that we are looking for year-in-year-out. And I think it allows us to be much more efficient with our resources to sell those into a -- what we think was a very attractive market.
I will continue to do that going forward. It's not just the Rockies, it's in all of our locations where we think we have assets that may be well beyond their prime and don't provide a growth trajectory for us.
But we will do that every year.
Ellen K. Hannan - Bear Stearns & Co.
But I guess coming to my other question about 200% reserve replacement, I mean what does this do? What are you targeting kind of for sale or for rationalization in terms of percentage-wise as to what you have today?
Javan D. Ottoson - Executive Vice President and Chief Operating Officer
Yes, I think... certainly there's a number of metrics that we look at.
Part of that as I mentioned is the growth potential, the other is the level of cost associated with those proprieties, the level of resource support required for those. In terms of that 200% target, to me that's where the focus is on those properties that can provide that growth and allow us year-in and year-out to achieve that level.
Over the last three year's we have been around 250% reserve replacement. The same held true in 2007.
So I think the key is to find those new opportunities which you can bring into inventory that give you a better opportunity to repeat that level of reserve replacement year-in and year-out. So, to me it's kind of a process of bringing in stronger, more growth focused kinds of opportunities on the front-end.
On the backend you are getting those others to divest market when they have gone well beyond their prime.
Ellen K. Hannan - Bear Stearns & Co.
Great. One last question for me and you may have touched on this earlier, I just want to make sure I heard this correctly.
I... it doesn't look like you have got anything on an operated basis that you are going to drill this year in the North Dakota Bakken, is that correct?
You have participated with others that you don't have anything you are operating yourself?
Javan D. Ottoson - Executive Vice President and Chief Operating Officer
Yes, I think that's a fair characterization. We are looking at it, we may drill one, but in the plan or in the budget right now we not have a North Dakota operated well.
Ellen K. Hannan - Bear Stearns & Co.
Okay. Thank you.
That's it for me.
Javan D. Ottoson - Executive Vice President and Chief Operating Officer
Thanks, Ellen.
Operator
At this time you have no further questions.
Anthony J. Best - President and Chief Executive Officer
Thank you very much for joining us this morning. As I mentioned earlier, 2007 was a very active and solid year for St.
Mary. We're clearly focused on delivery of our business plan this year.
I'm very pleased with where we are. At this point we have gotten off to a very strong start and we are anxious to see the results of our programs and drilling programs through the end of the 2008.
Thank you for joining us this morning. We will talk to you next quarter.
Operator
Thank you. This concludes today's fourth quarter 2007 earnings conference call.
You may now disconnect.