Stone Energy Outperforms in 3Q

Stone Energy Corp. (SGY - Analyst Report) has reported third-quarter 2011 earnings of $1.06 per share, outpacing the Zacks Consensus Estimate of 78 cents and improving from the year-earlier profit of 40 cents. The outperformance was primarily based on production growth and higher oil price realizations.

Total oil and gas revenue improved 35.6% year over year to $207.7 million in the quarter from the year-ago level of $153.2 million.

Operational Highlights

During the quarter, production averaged 205 million cubic feet of gas equivalent per day (MMcfe/d), up 3.5% from the year-earlier level of 198 MMcfe/d. Of the total production, natural gas accounted for 52%.

Overall realization on a per Mcfe basis amounted to $11.02 versus $8.41 per Mcfe in third quarter 2010. Realized prices averaged $66.14 per barrel of oil equivalent (Boe), up 31.0% from the year-ago level of $50.48 per Boe.

Natural gas prices were down at $5.17 per Mcf from $5.48 per Mcf in the year-ago quarter, while Stone Energy sold oil at an average price of $103.51 per barrel (up 42.7% on an annualized basis).

On the costs front, unit lease operating expenses increased to $2.54 per Mcfe (versus $2.03 per Mcfe in the year-ago quarter). Depreciation, depletion and amortization was $3.38 per Mcfe (versus $3.24 per Mcfe), while salaries, general and administrative (SG&A) expenses were 38 cents per Mcfe (versus 54 cents per Mcfe).

Liquidity

At quarter end, the company had approximately $65.5 million in cash and $575 million in long-term debt, with a debt-to-capitalization ratio of 46.4%. Discretionary cash flow was $161.2 million, up 74.3% year over year.

Guidance

For the fourth quarter of 2011, the company expects net daily production of 210−230 MMcfe.

The company anticipates its full-year 2011 volume in the 210–220 MMcfe range. Capital outlay for the year is projected at $500 million.

Outlook

The production in the quarter was affected by greater-than-expected downtime due to various natural calamities and unplanned third party pipeline downtime in the Gulf of Mexico (GoM). However, the company continues to pursue Appalachia, the Gulf Coast Basin and the Deep Gas/Deepwater projects to sustain the growth momentum in 2011.

The company has an extensive capital project inventory and is generating surplus cash flow with no bank debt. Although Stone Energy aims to apportion the capital across its portfolio, focus will be on the GoM shelf as well as the Marcellus region. Again, the company remains optimistic on further deepwater opportunities in the near term.

Moroever, Stone Energy announced the testing results for a well discovery at its LaPosada Prospect (also called La Cantera) –– an oil and gas field sprawling over 2899 acres provided a production estimate of 20–30 MMcf/d (gross). The asset is located in Vermilion Parish, Louisiana. The company expects production from the field to commence by second quarter 2012.

Stone is the third largest lease owner in the GoM shelf, where it has recognized Deep Gas prospects and plans to drill these in 2012 and 2013.

However, natural gas prices remain concerns. Additionally, Stone’s growing exploration exposure to the mature, low reserve and the capital intensive GoM shelf is expected to aggravate its risk profile. Further, competition from peers like Bill Barrett Corporation (BBG - Snapshot Report) is a threat.

Hence, we maintain our long-term Neutral recommendation for the company. Stone holds a Zacks #3 Rank, which is equivalent to a short-term Hold rating.

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