Stone Energy a Buy, Target Down

Stone Energy’s (SGY - Analyst Report) third-quarter 2008 earnings were hurt by production slowdowns caused by hurricanes Gustav and Ike, which more than offset the contribution from higher oil and gas price realizations.

On average, Stone produced 129 MMcfe/d during the quarter, down from 203 MMcfe/d during the year-ago period. We are keeping our Buy recommendation unchanged at this stage following the successful completion of the Bois d’Arc acquisition and steadily increasing production that is expected to reach about 275 MMcfe/d by year-end.

The company’s recurring earnings of $1.04 per diluted share, compared to $1.23 per diluted share in the year-earlier quarter. The year-over-year negative comparison was due to production slowdowns caused by Hurricanes Gustav and Ike, which more than offset the impact of higher oil and gas prices.

Discretionary cash flow was $163.8 million during the quarter, which was down approximately 9% sequentially but up more than 62% year-over-year. We have reduced our 2008 and 2009 EPS estimates to $8.04 and $7.52 from $10.85 and $11.94, respectively, to reflect a lower commodity price deck and higher operating expense assumptions (due to hurricane related repairs and the inclusion of the Bois d'Arc properties).

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