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We are upgraded our recommendation on Stone Energy Corporation (SGY - Analyst Report) to Outperform from Neutral on Oct 3, 2013. The company’s strategy of offloading its non-core upstream properties will prove beneficial over time while creating a portfolio with stronger growth from a smaller base.

Why Outperform?

Stone Energy holds an opportune place in the industry with widespread high yielding inventory. The company has an extensive capital project inventory. Although Stone Energy aims to apportion the capital across its portfolio, the focus will be on the GoM shelf as well as the Marcellus region.

Recently, the company inked a joint venture deal with ConocoPhillips (COP - Analyst Report) for the exploration of four deepwater prospects in the GoM. This minimizes Stone Energy’s burden in these capital intensive prospects and provides the company with an experienced partner boasting technical expertise in the GoM.

Stone Energy’s Gulf operations are back on track and its U.S. land activities (additional Marcellus results, deep onshore exploration results, and Alberta Bakken results) are also significant tailwinds. Importantly, year-end reserves are expected to grow with success in the Pompano field, Appalachia and the Marcellus Shale programs.

A number of opportunities in new well production (like Parmer well in Wideberth prospect) and continued activity in the La Cantera prospect, including drilling commencement at the Taildancer prospect in Ship Shoal 113, the Taggart prospect in Mississippi Canyon 816 and San Marcos prospect at Mississippi Canyon 983 could significantly improve revenues.

Further, permits for the Phinisi, and Floyd prospects along with the interests purchased in Pompano and Mica fields in the GoM from BP plc (BP - Analyst Report) and Anadarko Petroleum Corp. are expected to place the company favorably.

In view of the several bullish prospects, Stone Energy raised the production guidance for both the third quarter and full year 2013. Third quarter production guidance was raised from 42–45 Mboe per day (252–270 MMcfe per day) to 46–49 Mboe per day (276–294 MMcfe per day). The full-year guidance has been increased from 41–44 Mboe per day (246–264 MMcfe per day) to 43.5–45.0 Mboe per day (261–270 MMcfe per day).

Other Stocks to Consider

A better-placed company in the oil & gas sector with a Zacks Rank #1 (Strong Buy) is TransGlobe Energy Corp. (TGA - Snapshot Report). 

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