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Stone Misses EPS as Expenses Rise

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Stone Energy Corp. (SGY - Analyst Report) has reported first-quarter 2012 earnings of $1.03 per share, which missed the Zacks Consensus Estimate of $1.07 due to 18.3% higher operating expenses from the year-earlier level. However, the quarterly figure jumped 27.2% from the year-earlier profit of 81 cents. The year-over-year growth was fueled by overall higher production volume and price realization.

Total operating revenue improved 22.5% year over year to $245.0 million in the quarter from the year-ago level of $200.0 million. The reported figure surpassed the Zacks Consensus Estimate of $236.0 million.

Operational Highlights

During the quarter, production averaged 245.8 million cubic feet of gas equivalent per day (MMcfe/d), up 13.2% from the year-earlier level of 217.2 MMcfe/d. Of the total production, natural gas accounted for nearly 45%, while 50% was oil and the remaining 5% natural gas liquids (NGL).

Overall realization on a per Mcfe basis amounted to $10.91 in the reported quarter versus $10.19 per Mcfe in first quarter 2011. Natural gas prices were down at $2.89 per Mcf from $4.53 per Mcf in the year-ago quarter, while Stone Energy sold oil at an average price of $108.36 per barrel (up 15.2% on an annualized basis).

On the costs front, unit lease operating expenses increased to $1.99 per Mcfe (versus $1.96 per Mcfe in the year-ago quarter). Depreciation, depletion and amortization was $3.75 per Mcfe (versus $3.40 per Mcfe), while salaries, general and administrative (SG&A) expenses were 61 cents per Mcfe (versus 60 cents per Mcfe).

Liquidity

At quarter end, the company had approximately $263.8 million in cash and $805.1 million in long-term debt, with a debt-to-capitalization ratio of 52.3% versus 48.0% in the preceding quarter. Discretionary cash flow was $174.7 million, up 24.5% year over year.

Guidance

For the upcoming quarter, the company expects net daily production of 240−260 MMcfe. For full-year 2012, the company anticipates total volume in the range of 245–270 MMcfe per day, up 15–26% from the 2011 level of 214 MMcfe/d.

The company had projected its capital outlay for the year at $625 million. The amount was distributed across Stone's foremost areas with approximately 34% for the Gulf of Mexico (GoM) conventional shelf, 24% for Deep Water/Deep Gas projects, 30% for the Marcellus Shale and 12% for Onshore Oil projects and new ventures. 

Outlook

Lafayette, Louisiana-based Stone Energy Corporation is an independent oil and gas exploration and production company engaged in the acquisition and subsequent exploration, development, operation and production of oil and gas properties located primarily in the GoM. The company has an effective business strategy in place to leverage cash flow from existing assets to sustain relatively stable GoM shelf production, as well as to expediently grow oil and gas production in price advantaged basins such as Appalachia and the Gulf Coast Basin and material impact areas such as the deep water GoM and onshore oil. This will help in stabilizing cash flow and increasing value for shareholders in the long term.

During the quarter, the La Cantera/LaPosada onshore deep gas discovery — in which Stone Energy holds 34.5% working interest — came on stream at approximately 10 MMcfe/d. The company also remains on track with the second well currently drilling at 15,000 feet, in the same pay sands. Again, Stone Energy’s Pyrenees deep water subsea tie-back well at Garden Banks 293 also commenced production with a daily production of 13 MMcfe. Its Wideberth deep water subsea tie-back well also started production late last month.

Given the opportunities in new well production and continuous activity in the Deep Gas play, including continued drilling at the LaPosada project, the company is expected to significantly improve revenues going forward.

Hence, we maintain our long-term Neutral recommendation for the company, which competes with Forest Oil Corporation (FST - Analyst Report). Stone holds a Zacks #3 Rank, which is equivalent to a short-term Hold rating.

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