St. Mary Land (SM)

Objectives of the Company's Compensation Programs.

        The Company designs its compensation programs with the objectives of attracting, retaining, and motivating talented management and staff personnel at a reasonable cost and in a manner that aligns employee performance incentives with the long-term interests of stockholders. The Compensation Committee believes it has structured the compensation plans to encourage management to obtain superior returns for St. Mary's stockholders and to promote the preservation and growth of the Company's income-producing oil and natural gas assets. The majority of the value in the executive compensation plan design is incentive based and is driven by metrics that contribute to net asset value per share growth, which the Compensation Committee believes relates directly to stockholder returns.

        St. Mary's compensation framework is designed to take into consideration certain performance factors, and based upon these factors, reward behavior that achieves the Company's objectives stated above and that ultimately increases share value. These individual performance factors for executive officers include:

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The executive's contributions to the development and execution of the Company's business plan and strategies;



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The performance of the executive's department or region;

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Operational performance with respect to production, reserves, operating and finding costs, drilling results, environmental, health and safety, as well as asset and resource play acquisitions;



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Financial performance with respect to cash flows, net income, cost of capital, general and administrative expenses;



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Stock price performance;



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Level of responsibility; and



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Leadership ability, demonstrated commitment to the organization, motivational skills, attitude, and work ethic.

        In designing the compensation framework, the Compensation Committee endeavored to align management's interests with the long-term interests of stockholders. While the Company's incentive compensation framework changed for 2008, its overall objectives remained the same. The key performance measures for the short term incentive plan (the "STIP") are cash flow, investment performance, and reserve growth. For the LTIP the key performance measures are absolute compound TSR as well as the Company's relative performance versus the compound TSR of an index of peers. The Compensation Committee maintains the ability to use business judgment and appropriate discretion in the application of the criteria for structuring, evaluating, and setting executive compensation. Although there are established criteria in place, the Compensation Committee evaluates the results of the annual incentive compensation performance metrics against other business factors with the intent of making appropriate compensation decisions that are reflective of the overall business environment and contributions of the executive. In essence, the established criteria are used as objective measurement tools, to which subjective consideration is applied.

        We intend for our compensation plans to provide a level of compensation to an individual executive that is competitive with compensation provided by exploration and production companies performing at a level similar to St. Mary. Periodically, the Compensation Committee uses the services of third party compensation consultants to assess the overall executive compensation program. During 2007, the Compensation Committee retained Frederic W. Cook & Co. to formally review the Company's executive compensation program, and the Company used these reviews in its evaluation and development of the 2008 compensation program. During 2008, the Compensation Committee periodically consulted with Frederic W. Cook & Co. regarding design features of the STIP and LTIP, peer comparison for executive pay and various other compensation issues. As part of executive compensation reviews, the Compensation Committee compares St. Mary's compensation against survey data provided by a reputable third party, Effective Compensation, Incorporated's ("ECI") 2008 Oil & Gas Exploration and Production ("E&P") Industry Compensation Survey. Additionally, the Compensation Committee evaluates data from a select group of peer companies, as listed below. These peer companies are intended to represent companies of comparable size and performance in our industry sub-segment. The selection of the peer group is important, and the ability to measure the resulting return to stockholders is an integral part of the peer group selection criteria, as is the fact that this peer group is in large part the competition base for recruiting and retaining qualified management and other employees. We believe that total executive compensation should reflect the relative performance of the Company as compared to its peer group.

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Objectives of the Company's Compensation Programs.

        The Company uses compensation programs to attract, retain, and motivate talented management and staff personnel at a reasonable cost. The Committee believes it has structured the compensation plans to encourage management to obtain superior returns for St. Mary's stockholders and to promote the preservation and growth of the Company's income-producing assets. The majority of the value in the executive compensation plan design is incentive-based and driven by metrics tied to net asset value growth.

        The compensation program is designed to reward behavior that achieves these objectives and that ultimately increases stockholder value on a per share basis. The programs are believed to align management's interests with the long-term interests of stockholders. Although the structure of the incentive compensation program will change for 2008, the overall design objectives to the Company's compensation systems will remain the same, but in the opinion of the Compensation Committee and senior management, will be more visibly tied to key performance measures and more closely aligned with the long-term interest of stockholders. Commencing in 2008, the changes will include short term elements that are more closely aligned with achievement of the annual business plan, focusing on cash flow generation, investment performance against an approved budget, reserve growth, and a long term element aligned with TSR, modified for peer company performance. The changes to the program are described below in a manner that provides readers' context for the change, however it should be noted that the information presented for 2006 and 2007 are based on the plan design and awards in place during those periods.

        The Committee maintains the ability to use business judgment and appropriate discretion in the application of the criteria for structuring, evaluating, and setting executive compensation. Although there are defined criteria in place, the Committee evaluates the results of the annual incentive compensation performance metrics against other business factors with the intent of making appropriate compensation decisions that are reflective of the overall business environment and contribution of the executive. In essence, the defined criteria are used as objective measurement tools, relative to which subjective consideration can be applied.

        We intend for our compensation plans to provide a level of compensation to an individual executive that is competitive with compensation provided by companies performing at a level similar to St. Mary. Periodically, the Compensation Committee utilizes the services of third party compensation consultants to assess the overall executive compensation program. During 2007, the Compensation Committee retained FW Cook & Co. to formally review the Company's executive compensation program. Details of this review are described in more detail below. As part of compensation reviews, the Committee compares St. Mary's compensation against survey data provided by a reputable third party salary survey that is specific to the oil and gas industry. Additionally, the Committee evaluates data from a select group of peer companies, as listed below. These peer companies are intended to be representative of companies of comparable size and performance in our industry sub-segment. The selection of the peer group is important, and the ability to measure the resulting return to stockholders is an integral part of the peer group selection criteria, as is the fact that this peer group is in large part the competition base for recruiting and retaining qualified management and employees. We believe that total executive compensation should reflect the relative performance of the Company as compared to its peer group.

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