Stone Expects Flat 2011 Capex

Lafayette, Louisiana-based Stone Energy Corporation (SGY - Analyst Report) announced its capital budget for 2011. It expects to spend $425 million, essentially flat with the revised 2010 capital budget.

Of the total amount, approximately 50–55% is earmarked for the Gulf of Mexico (GoM) shelf activity and 25% for Appalachian drilling operations as well as land acquisitions. The remaining portion will be spent on exploration projects in the Rocky Mountain region, the deep shelf, the deepwater GoM and other new venture opportunities.

Stone expects a growth in year-end 2010 estimated proved reserves, with the release of final figures at the end of January 2011. The company also expects continued organic reserve growth at the end of 2011.

Previously, Stone declared its expected fourth quarter and full-year 2010 net daily production of 195−210 MMcfe and 205–215 MMcfe, respectively. Now the company anticipates a small increase in the upper limit for its 2011 production of 200–220 MMcfe per day.

This increase was mainly driven by perked up activity and specific Appalachian lease acreage acquisitions. Stone has drilled 14 horizontal wells and expects to drill one final horizontal well before the year ends. The 2011 Appalachian capital plan includes a single rig and a 16–18 horizontal well program.  

Stone shares jumped more than 38% in the last six weeks. We believe the upswing reflects the company’s broadened operations on the GoM assets with further increase in deepwater initiatives. However, the company faces competition from peers such as Concho Resources Inc. (CXO - Snapshot Report) and Penn Virginia Corp. (PVA - Snapshot Report).

While natural gas price is a concern, Stone’s growing exploration exposure to the mature, low reserve and capital intensive GoM shelf is expected to aggravate its risk profile. Our Neutral recommendation for Stone remains unchanged with the Zacks #3 Rank (Hold).

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