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We retained our Outperform recommendation on Stone Energy Corporation (SGY - Analyst Report) on Jan 8, 2014. The company’s strategy of offloading its non-core upstream properties will prove beneficial over time, simultaneously creating a portfolio with stronger growth from a smaller base.

Why Outperform?

Stone Energy, a Zacks Rank #2 (Buy) stock, has a favorable position 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 Gulf of Mexico (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 the burden of capital intensive prospects on Stone Energy and provides it 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 the 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) are expected to place the company in favorable light.

In view of the several bullish prospects, Stone Energy raised the production guidance for the fourth quarter and full-year 2013. The company estimates 42.5–45.5 Mboe (255–273 MMcfe per day) yield per day for the fourth quarter. The full-year guidance has been increased from 43.5–45.0 Mboe (261–270 MMcfe per day) to 44.5–45.5 Mboe per day (267–273 MMcfe per day).

Other Stocks to Consider

Another stock worth considering in the oil & gas sector is Athlon Energy Inc. (ATHL - Snapshot Report) with a Zacks Rank #1 (Strong Buy).

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