UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2007

or

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from            to           

STONE ENERGY CORPORATION

(Exact Name of Registrant as Specified in Its Charter)

Delaware		72-1235413
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

625 E. Kaliste Saloom Road Lafayette, Louisiana (Address of Principal Executive Offices)		70508 (Zip Code)

Registrant’s Telephone Number, Including Area Code: (337) 237-0410

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes  þ  No  o 

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer  þ  Accelerated filer  o  Non-accelerated filer  o 

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes  o  No  þ 

     As of May 2, 2007, there were 28,030,892 shares of the registrant’s Common Stock, par value $.01 per share, outstanding.

 

 

TABLE OF CONTENTS

						Page
PART I — FINANCIAL INFORMATION
Item 1.				Financial Statements:
				Condensed Consolidated Balance Sheet as of March 31, 2007 and December 31, 2006			1
				Condensed Consolidated Statement of Operations for the Three Months Ended March 31, 2007 and 2006			2
				Condensed Consolidated Statement of Cash Flows for the Three Months Ended March 31, 2007 and 2006			3
				Notes to Condensed Consolidated Financial Statements			4
				Report of Independent Registered Public Accounting Firm			9
Item 2.				Management’s Discussion and Analysis of Financial Condition and Results of Operations			10
Item 3.				Quantitative and Qualitative Disclosures About Market Risk			14
Item 4.				Controls and Procedures			14
PART II — OTHER INFORMATION
Item 1.				Legal Proceedings			15
Item 6.				Exhibits			17
				Signature			18
Letter from Ernst & Young LLP
Certification of PEO Pursuant to Rule 13a-14(a)
Certification of PFO Pursuant to Rule 13a-14(a)
Certification of CEO & CFO Pursuant to Section 1350

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

STONE ENERGY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(In thousands of dollars)

		March 31,				December 31,
		2007				2006
		(Unaudited)				(Note 1)
Assets
Current assets:
Cash and cash equivalents		$	65,345			$	58,862
Accounts receivable			190,470				241,829
Fair value of hedging contracts			1,718				11,017
Deferred tax asset			1,014				—
Other current assets			1,032				965
Total current assets			259,579				312,673
Oil and gas properties — United States — full cost method of accounting:
Proved, net of accumulated depreciation, depletion and amortization of $2,784,771 and $2,706,936, respectively			1,534,319				1,569,947
Unevaluated			186,572				173,925
Oil and gas properties — China (unevaluated)			36,477				40,553
Building and land, net			5,773				5,811
Fixed assets, net			7,965				8,302
Other assets, net			64,083				14,244
Fair value of hedging contracts			1,433				3,016
Total assets		$	2,096,201			$	2,128,471
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable to vendors		$	87,743			$	120,532
Undistributed oil and gas proceeds			46,131				39,540
Fair value of hedging contracts			4,184				—
Asset retirement obligations			32,586				130,341
Deferred taxes			—				3,706
Other current liabilities			15,642				16,709
Total current liabilities			186,286				310,828
Long-term debt			777,000				797,000
Deferred taxes			99,910				94,560
Asset retirement obligations			312,206				210,035
Other long-term liabilities			5,393				4,408
Total liabilities			1,380,795				1,416,831
Commitments and contingencies
Common stock			276				276
Treasury stock			(1,161	)			(1,161	)
Additional paid-in capital			505,477				502,747
Retained earnings			211,405				200,929
Accumulated other comprehensive income (loss)			(591	)			8,849
Total stockholders’ equity			715,406				711,640
Total liabilities and stockholders’ equity		$	2,096,201			$	2,128,471

The accompanying notes are an integral part of this balance sheet.

STONE ENERGY CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands of dollars, except per share amounts)
(Unaudited)

		Three Months Ended
		March 31,
		2007				2006
Operating revenue:
Oil production		$	93,584			$	61,512
Gas production			79,749				96,922
Total operating revenue			173,333				158,434
Operating expenses:
Lease operating expenses			51,086				34,876
Production taxes			3,864				4,217
Depreciation, depletion and amortization			78,839				65,571
Accretion expense			4,416				3,043
Salaries, general and administrative expenses			8,233				8,477
Incentive compensation expense			846				232
Derivative expenses			500				—
Total operating expenses			147,784				116,416
Income from operations			25,549				42,018
Other (income) expenses:
Interest			11,191				5,915
Other income, net			(1,875	)			(922	)
Total other expenses			9,316				4,993
Income before taxes			16,233				37,025
Provision for income taxes:
Current			—				—
Deferred			5,757				13,017
Total income taxes			5,757				13,017
Net income		$	10,476			$	24,008
Basic earnings per share		$	0.38			$	0.88
Diluted earnings per share		$	0.38			$	0.88
Average shares outstanding			27,541				27,169
Average shares outstanding assuming dilution			27,577				27,352

The accompanying notes are an integral part of this statement.

STONE ENERGY CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands of dollars)
(Unaudited)

		Three Months Ended
		March 31,
		2007				2006
Cash flows from operating activities:
Net income		$	10,476			$	24,008
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, depletion and amortization			78,839				65,571
Accretion expense			4,416				3,043
Deferred income tax provision			5,757				13,017
Non-cash stock compensation expense			1,368				1,379
Non-cash derivative expense			500				—
Other non-cash expenses			778				200
(Increase) decrease in accounts receivable			1,552				(20,397	)
(Increase) decrease in other current assets			(80	)			482
Increase in accounts payable			600				351
Increase (decrease) in other current liabilities			5,524				(6,351	)
Other			(4	)			3
Net cash provided by operating activities			109,726				81,306
Cash flows from investing activities:
Investment in oil and gas properties			(83,246	)			(138,964	)
Investment in fixed and other assets			(447	)			(1,593	)
Net cash used in investing activities			(83,693	)			(140,557	)
Cash flows from financing activities:
Repayment of bank borrowings			(20,000	)			—
Net proceeds from exercise of stock options and vesting of restricted stock			450				1,631
Net cash provided by (used in) financing activities			(19,550	)			1,631
Net increase (decrease) in cash and cash equivalents			6,483				(57,620	)
Cash and cash equivalents, beginning of period			58,862				79,708
Cash and cash equivalents, end of period		$	65,345			$	22,088

The accompanying notes are an integral part of this statement.

STONE ENERGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 1 — Interim Financial Statements

     The condensed consolidated financial statements of Stone Energy Corporation and subsidiary as of March 31, 2007 and for the three-month periods ended March 31, 2007 and 2006 are unaudited and reflect all adjustments (consisting only of normal recurring adjustments), which are, in the opinion of management, necessary for a fair presentation of the financial position and operating results for the interim periods. The condensed consolidated balance sheet at December 31, 2006 has been derived from the audited financial statements at that date. The consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto, together with management’s discussion and analysis of financial condition and results of operations, contained in our Annual Report on Form 10-K for the year ended December 31, 2006. The results of operations for the three-month period ended March 31, 2007 are not necessarily indicative of future financial results.

Note 2 — Earnings Per Share

     Basic net income per share of common stock was calculated by dividing net income applicable to common stock by the weighted-average number of common shares outstanding during the period. Diluted net income per share of common stock was calculated by dividing net income applicable to common stock by the weighted-average number of common shares outstanding during the period plus the weighted-average number of dilutive stock options and restricted stock granted to outside directors and employees. There were approximately 36,000 and 183,000 dilutive shares for the three months ended March 31, 2007 and 2006, respectively.

     Stock options that were considered antidilutive because the exercise price of the option exceeded the average price of our stock for the applicable period totaled approximately 1,186,000 and 712,000 shares in the three months ended March 31, 2007 and 2006, respectively.

     During the three months ended March 31, 2007 and 2006, approximately 27,000 and 54,000 shares, respectively, were issued upon the exercise of stock options and vesting of restricted stock by employees and nonemployee directors and the awarding of employee bonus stock pursuant to the 2004 Amended and Restated Stock Incentive Plan.

Note 3 — Hedging Activities

     We enter into hedging transactions to secure a commodity price for a portion of future production that is acceptable at the time of the transaction. The primary objective of these activities is to reduce our exposure to the risk of declining oil and natural gas prices during the term of the hedge. We do not enter into hedging transactions for trading purposes. We currently utilize zero-premium collars for hedging purposes.

     The following table illustrates our hedging positions as of May 2, 2007:

		Zero-Premium Collars
		Natural Gas												Oil
		Daily												Daily
		Volume				Floor				Ceiling				Volume				Floor				Ceiling
		(MMBtus/d)				Price				Price				(Bbls/d)				Price				Price
2007			20,000			$	7.50			$	10.40				3,000			$	60.00			$	78.35
2007			60,000				7.00				9.40				3,000				60.00				93.05
2008			30,000	*			8.00				14.05				3,000				60.00				90.20

     Under Statement of Financial Accounting Standards (“SFAS”) No. 133, the nature of a derivative instrument must be evaluated to determine if it qualifies for hedge accounting treatment. If the instrument qualifies for hedge accounting treatment, it is recorded as either an asset or liability measured at fair value and subsequent changes in the derivative’s fair value are recognized in equity through other comprehensive income, to the extent the hedge is considered effective. Additionally, monthly settlements of effective hedges are reflected in revenue from oil and gas production. Instruments not qualifying for hedge accounting are recorded in the balance sheet at fair value and changes in fair value are recognized in earnings. Monthly settlements of ineffective hedges are recognized in earnings through derivative expense (income) and are not reflected as revenue from oil and natural gas production.

     During the three months ended March 31, 2007 and 2006, we realized a net increase in natural gas revenue related to our effective zero-premium collars of $1.1 million and $4.2 million, respectively. We realized a net increase of $1.1 million in oil revenue

related to our effective zero-premium collars for the three months ended March 31, 2007. Effective hedging transactions did not impact oil revenue for the three months ended March 31, 2006.

     During the quarter ended March 31, 2007, certain of our derivative contracts were determined to be partially ineffective because of differences in the relationship between the fixed price in the derivative contract and actual prices realized. The change in the fair market value of the ineffective portion of these derivatives was $0.5 million and was recognized as derivative expense in the income statement during the quarter ended March 31, 2007. There were no ineffective hedging transactions during the quarter ended March 31, 2006.

Note 4 — Long-Term Debt

     Long-term debt consisted of the following at:

		March 31,				December 31,
		2007				2006
		(In millions)
81/4% Senior Subordinated Notes due 2011		$	200			$	200
63/4% Senior Subordinated Notes due 2014			200				200
Senior Floating Rate Notes due 2010			225				225
Bank credit facility			152				172
Total long-term debt		$	777			$	797

     Borrowings outstanding at March 31, 2007 under the facility totaled $152 million, and letters of credit totaling $52.8 million had been issued under the facility. At March 31, 2007, we had $120.2 million of borrowings available under the credit facility and the weighted average interest rate was approximately 6.8% per annum. The borrowing base under the credit facility is re-determined periodically based on the bank group’s evaluation of our proved oil and gas reserves.

Note 5 — Comprehensive Income

     The following table illustrates the components of comprehensive income for the three months ended March 31, 2007 and 2006:

		Three Months Ended
		March 31,
		2007				2006
		(In millions)
Net income		$	10.5			$	24.0
Other comprehensive income (loss), net of tax effect:
Adjustment for fair value accounting of derivatives			(9.4	)			8.3
Comprehensive income		$	1.1			$	32.3

Note 6 — Asset Retirement Obligations

     During the first quarter of 2007 and 2006, we recognized non-cash expenses of $4.4 million and $3.0 million, respectively, related to the accretion of our asset retirement obligations. As of March 31, 2007, accretion expense represents the only change in our asset retirement obligations since December 31, 2006.

     During the first quarter of 2007, we obtained the consent of the Minerals Management Service to a multi-year plan for the plugging and abandoning of wells and the removal of wreckage and debris from offshore platforms destroyed by Hurricane Rita. Prior to obtaining this consent, the estimated costs of these activities were included in the current portion of asset retirement obligations. Subsequent to obtaining the consent, we have reclassified the costs of these activities estimated to occur after March 31, 2008 to long-term asset retirement obligations. Costs reclassified in the first quarter of 2007 to long-term amounted to $98.2 million. Additionally, accrued hurricane insurance reimbursements in the amount of $49.8 million attributable to these activities have been similarly reclassified to long-term assets.

Note 7 — Income Taxes

     We adopted the provisions of FASB Interpretation No. 48 Accounting for Uncertainty in Income Taxes (“FIN 48”) on January 1, 2007. The net effect of the implementation of FIN 48 on our financial statements was immaterial. As of March 31, 2007 and December 31, 2006, we had unrecognized tax benefits of $1.2 million. All of our unrecognized tax benefits will impact our tax rate upon recognition.

     It is our policy to classify interest and penalties associated with underpayment of income taxes as interest expense and general

and administrative expenses, respectively. For the quarter ended March 31, 2007, no interest or penalties were incurred related to underpayment of income taxes. As of March 31, 2007 and December 31, 2006, there were no accrued interest and penalties relating to prior periods.

     The tax years 2003 through 2006 remain subject to examination by major tax jurisdictions.

Note 8 — International Operations

     During 2006, we entered into an agreement to participate in the drilling of exploratory wells on two offshore concessions in Bohai Bay, China. After the drilling of three wells, it has been determined that additional drilling will be necessary to evaluate the commercial viability of this project. We have the potential to earn an interest in 750,000 acres on these two concessions. Included in unevaluated oil and gas property costs at March 31, 2007 are $36.5 million of capital expenditures related to our properties in Bohai Bay, China.

Note 9 — Divestiture Program

     In December 2006, we announced that our Board of Directors had approved and endorsed a strategic plan to re-focus on our Gulf of Mexico conventional shelf properties. As part of this strategy, we expect to divest selected properties in the Rocky Mountain Region and the Gulf Coast Basin in 2007. We anticipate that the proceeds from the planned asset sales would be used to materially reduce our debt. We expect the closing of the sale of a majority of our Rocky Mountain properties to occur late in the second quarter or early in the third quarter of 2007.

Note 10 — Commitments and Contingencies

     On April 23, 2007, Stone received notification from the Staff of the SEC that its inquiry into the revision of Stone’s proved reserves had been terminated and no enforcement action had been recommended. In 2005, Stone had received notice that the Staff of the SEC was conducting an inquiry into the revision of Stone’s proved reserves and the financial statement restatement.

     On December 30, 2004, Stone was served with two petitions (civil action numbers 2004-6227 and 2004-6228) filed by the Louisiana Department of Revenue (“LDR”) in the 15th Judicial District Court (Parish of Lafayette, Louisiana) claiming additional franchise taxes due. In one case, the LDR is seeking additional franchise taxes from Stone in the amount of $640,000, plus accrued interest of $352,000 (calculated through December 15, 2004), for the franchise year 2001. In the other case, the LDR is seeking additional franchise taxes from Stone (as successor to Basin Exploration, Inc.) in the amount of $274,000, plus accrued interest of $159,000 (calculated through December 15, 2004), for the franchise years 1999, 2000 and 2001. Further, on December 29, 2005, the LDR filed another petition in the 15^th Judicial District Court claiming additional franchise taxes due for the taxable years ended December 31, 2002 and 2003 in the amount of $2.6 million plus accrued interest calculated through December 15, 2005 in the amount of $1.2 million. These assessments all relate to the LDR’s assertion that sales of crude oil and natural gas from properties located on the Outer Continental Shelf, which are transported through the state of Louisiana, should be sourced to the state of Louisiana for purposes of computing the Louisiana franchise tax apportionment ratio. The Company disagrees with these contentions and intends to vigorously defend itself against these claims. Stone has not yet been given any indication that the LDR plans to review franchise taxes for the franchise tax years 2004 and 2005.

     Stone has received an inquiry from the Philadelphia Stock Exchange investigating matters including trading prior to Stone’s October 6, 2005 announcement regarding the revision of Stone’s proved reserves. Stone cooperated fully with this inquiry.

     On or around November 30, 2005, George Porch filed a putative class action in the United States District Court for the Western District of Louisiana (the “Federal Court”) against Stone, David Welch, Kenneth Beer, D. Peter Canty and James Prince purporting to allege violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. Three similar complaints were filed soon thereafter. All complaints had asserted a putative class period commencing on June 17, 2005 and ending on October 6, 2005. All complaints contended that, during the putative class period, defendants, among other things, misstated or failed to disclose (i) that Stone had materially overstated Stone’s financial results by overvaluing its oil reserves through improper and aggressive reserve methodologies; (ii) that the Company lacked adequate internal controls and was therefore unable to ascertain its true financial condition; and (iii) that as a result of the foregoing, the values of the Company’s proved reserves, assets and future net cash flows were materially overstated at all relevant times. On March 17, 2006, these purported class actions were consolidated, with El Paso Fireman & Policeman’s Pension Fund designated as Lead Plaintiff (“Securities Action”). Lead plaintiff filed a consolidated class action complaint on or about June 14, 2006. The consolidated complaint alleges claims similar to those described above and expands the putative class period to commence on May 2, 2001 and to end on March 10, 2006. On September 13, 2006, Stone and the individual defendants filed motions seeking dismissal of that action. The motion has since been fully briefed by the parties, but — as of this date — has not been decided by the Federal Court.

     In addition, on or about December 16, 2005, Robert Farer and Priscilla Fisk filed respective complaints in the Federal Court purportedly alleging claims derivatively on behalf of Stone. Similar complaints were filed thereafter in the Federal Court by Joint Pension Fund, Local No. 164, I.B.E.W., and in the 15^th Judicial District Court, Parish of Lafayette, Louisiana (the “State Court”) by Gregory Sakhno. Stone was named as a nominal defendant and David Welch, Kenneth Beer, D. Peter Canty, James Prince, James

Stone, John Laborde, Peter Barker, George Christmas, Richard Pattarozzi, David Voelker, Raymond Gary, B.J. Duplantis and Robert Bernhard were named as defendants in these actions. The State Court action purportedly alleged claims of breach of fiduciary duty, abuse of control, gross mismanagement, and waste of corporate assets against all defendants, and claims of unjust enrichment and insider selling against certain individual defendants. The Federal Court derivative actions asserted purported claims against all defendants for breach of fiduciary duty, abuse of control, gross mismanagement, waste of corporate assets and unjust enrichment and claims against certain individual defendants for breach of fiduciary duty and violations of the Sarbanes-Oxley Act of 2002.

     On March 30, 2006, the Federal Court entered an order naming Robert Farer, Priscilla Fisk and Joint Pension Fund, Local No. 164, I.B.E.W. as co-lead plaintiffs in the Federal Court derivative action and directed the lead plaintiffs to file a consolidated amended complaint within forty-five days. On April 22, 2006, the complaint in the State Court derivative action was amended to also assert claims on behalf of a purported class of shareholders of Stone. In addition to the above mentioned claims, the amended State Court derivative action complaint purported to allege breaches of fiduciary duty by the director defendants in connection with the then proposed merger transaction with Plains and seeks an order enjoining the director defendants from entering into the then proposed transaction with Plains. On May 15, 2006, the first consolidated complaint in the Federal Court derivative action was filed; it contained a similar injunctive claim. On September 15, 2006, co-lead plaintiffs’ in the Federal Court derivative action further amended their complaint to seek an order enjoining Stone’s proposed merger with EPL based on substantially the same grounds previously asserted regarding the prior proposed transaction with Plains. On October 2, 2006, each of the defendants in the Federal Court derivative action filed or joined in motions seeking dismissal of all or part of that action. Those motions were denied without prejudice on November 30, 2006 when the Federal Court granted the co-lead plaintiffs leave to file a third amended complaint. Following the filing of the third amended complaint in the Federal Court derivative action, defendants filed motions seeking to have that action either dismissed or stayed until resolution of the pending motion to dismiss the Securities Action before the Federal Court. On December 21, 2006 the Federal Court stayed the Federal Court derivative action at least until resolution of the pending motion to dismiss the Securities Action after which time a hearing will be conducted by the Federal Court to determine the propriety of maintaining that stay.

     On or around August 28, 2006, ATS instituted an action (the “ATS Litigation”) in the Delaware Court of Chancery for New Castle County (the “Delaware Court”). The initial complaint in the ATS Litigation, among other things, challenged certain provisions of the EPL Merger Agreement pursuant to which EPL (i) paid the $43.5 million Plains Termination Fee; and (ii) agreed, under certain contractually specified conditions, to pay Stone $25.6 million in the event of a future termination of the Merger Agreement (the “EPL Termination Fee”). On or around September 12, 2006, a purported shareholder of EPL filed a purported class action in the Delaware Court (the “Farrington Action”). The initial Farrington Action complaint asserted claims similar to those in the ATS Litigation and sought, among other things, a damages recovery in the amount of the Plains Termination Fee.

     On or around September 7, 2006, EPL commenced an action against Stone in the Delaware Court (the “Declaratory Action”), in which EPL sought a declaratory judgment with respect to EPL’s rights and obligations under Section 6.2(e) of the Merger Agreement. On September 11, 2006, the Delaware Court expedited the Declaratory Action and consolidated with the Declaratory Action a portion of the ATS Litigation in which ATS likewise asserted claims respecting Section 6.2(e) of the Merger Agreement. By oral ruling on September 27, 2006, and subsequent written opinion dated October 11, 2006, the Delaware Court ruled, among other things, that Section 6.2(e) of the Merger Agreement did not limit the ability of EPL to explore and negotiate, in good faith, with respect to any Third Party Acquisition Proposals (as defined in the Merger Agreement), including the tender offer by ATS, Inc. for all of the outstanding shares of EPL stock at $23.00 per share (“ATS Offer”). The Delaware Court dismissed without prejudice the remainder of the claims raised by EPL in the Declaratory Action as not ripe for a judicial determination.

     On October 11, 2006, EPL and Stone entered into an agreement (the “Termination and Release Agreement”) pursuant to which they agreed, among other things, (i) to enter into a mutual termination of the Merger Agreement, (ii) to mutually release certain actual or potential claims or rights of action, (iii) to mutually seek a dismissal of the Declaratory Action, and (iv) that EPL would make a payment of $8 million to Stone (the “$8 Million Payment”). EPL made the $8 Million Payment to Stone. On October 13, 2006, the Declaratory Action was dismissed by stipulation of the parties and order of the Delaware Court.

     On or around October 16, 2006, following the execution of the Termination and Release Agreement, plaintiffs in both the ATS Litigation and the Farrington Litigation sought (and were later granted leave by the Court) to file Second Amended Complaints that, among other things, added claims seeking a recovery in the amount of the $8 Million Payment. On October 26, 2006, ATS voluntarily dismissed the ATS Litigation without prejudice, while — as of this date — the Farrington Action remains pending. On November 2, 2006, Stone and EPL filed motions to dismiss the Farrington Action. The Delaware Court has yet to reach a determination as to the merits of the claims asserted in the Farrington Action with respect to the Plains Termination Fee or the $8 Million Payment.

     Stone’s Certificate of Incorporation and/or its Restated Bylaws provide, to the extent permissible under the law of Delaware (Stone’s state of incorporation), for indemnification of and advancement of defense costs to Stone’s current and former directors and officers for potential liabilities related to their service to Stone. Stone has purchased directors and officers insurance policies that, under certain circumstances, may provide coverage to Stone and/or its officers and directors for certain losses resulting from securities-related civil liabilities and/or the satisfaction of indemnification and advancement obligations owed to directors and officers. These insurance policies may not cover all costs and liabilities incurred by Stone and its current and former officers and directors in these regulatory and civil proceedings.

     The foregoing pending actions are at an early stage and subject to substantial uncertainties concerning the outcome of material factual and legal issues relating to the litigation and the regulatory proceedings. Accordingly, based on the current status of the litigation and inquiries, we cannot currently predict the manner and timing of the resolution of these matters and are unable to estimate a range of possible losses or any minimum loss from such matters. Furthermore, to the extent that our insurance policies are ultimately available to cover any costs and/or liabilities resulting from these actions, they may not be sufficient to cover all costs and liabilities incurred by us and our current and former officers and directors in these regulatory and civil proceedings.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

TO THE STOCKHOLDERS OF
STONE ENERGY CORPORATION:

We have reviewed the condensed consolidated balance sheet of Stone Energy Corporation as of March 31, 2007, and the related condensed consolidated statements of operations and cash flows for the three-month periods ended March 31, 2007 and 2006. These financial statements are the responsibility of the Company’s management.

We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with standards of the Public Company Accounting Oversight Board, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to the condensed consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Stone Energy Corporation as of December 31, 2006, and the related consolidated statements of operations, cash flows, changes in stockholders’ equity and comprehensive income for the year then ended (not presented herein) and in our report dated February 23, 2007, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2006, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

New Orleans, Louisiana
May 8, 2007

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     This Form 10-Q and the information referenced herein contain statements that constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The words “plan,” “expect,” “project,” “estimate,” “assume,” “believe,” “anticipate,” “intend,” “budget,” “forecast,” “predict” and other similar expressions are intended to identify forward-looking statements. These statements appear in a number of places and include statements regarding our plans, beliefs or current expectations, including the plans, beliefs and expectations of our officers and directors. We use the terms “Stone,” “Stone Energy,” “Company,” “we,” “us” and “our” to refer to Stone Energy Corporation.

     When considering any forward-looking statement, you should keep in mind the risk factors that could cause our actual results to differ materially from those contained in any forward-looking statement. Important factors that could cause actual results to differ materially from those in the forward-looking statements herein include the timing and extent of changes in commodity prices for oil and gas, operating risks and other risk factors as described in our Annual Report on Form 10-K. Furthermore, the assumptions that support our forward-looking statements are based upon information that is currently available and is subject to change. We specifically disclaim all responsibility to publicly update any information contained in a forward-looking statement or any forward-looking statement in its entirety and therefore disclaim any resulting liability for potentially related damages. All forward-looking statements attributable to Stone Energy Corporation are expressly qualified in their entirety by this cautionary statement.

     Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) contained in this Form 10-Q should be read in conjunction with the MD&A contained in our Annual Report on Form 10-K for the year ended December 31, 2006.

Overview

     Stone Energy Corporation is an independent oil and gas company engaged in the acquisition, exploration, exploitation, development and operation of oil and gas properties located in the conventional shelf of the Gulf of Mexico (the “GOM”), the deep shelf of the GOM, deep water of the GOM and several basins in the Rocky Mountain Region. We are also engaged in an exploratory joint venture in Bohai Bay, China. Our business strategy is to increase reserves, production and cash flow through the acquisition, exploitation and development of mature properties in the Gulf Coast Basin and exploring opportunities in the deep water environment of the Gulf of Mexico, Rocky Mountain Region and other potential areas. Throughout this document, reference to our “Gulf Coast Basin” properties includes our onshore, shelf, deep shelf and deep water properties. Reference to our “Rocky Mountain Region” includes our properties in several Rocky Mountain Basins and the Williston Basin.

Critical Accounting Policies

     Our Annual Report on Form 10-K describes the accounting policies that we believe are critical to the reporting of our financial position and operating results and that require management’s most difficult, subjective or complex judgments. Our most significant estimates are:

	•		remaining proved oil and gas reserves volumes and the timing of their production;
	•		estimated costs to develop and produce proved oil and gas reserves;
	•		accruals of exploration costs, development costs, operating costs and production revenue;
	•		timing and future costs to abandon our oil and gas properties;
	•		the effectiveness and estimated fair value of derivative positions;
	•		classification of unevaluated property costs;
	•		capitalized general and administrative costs and interest;
	•		insurance recoveries related to hurricanes; and
	•		contingencies.

     This Quarterly Report on Form 10-Q should be read together with the discussion contained in our Annual Report on Form 10-K regarding these critical accounting policies.

Other Factors Affecting Our Business and Financial Results

     In addition to the matters discussed above, our business, financial condition and results of operations are affected by a number of other factors. This Quarterly Report on Form 10-Q should be read in conjunction with the discussion in our Annual Report on Form 10-K regarding these other risk factors.

Known Trends and Uncertainties

     International Operations. Included in unevaluated oil and gas property costs at March 31, 2007 are $36.5 million of capital expenditures related to our properties in Bohai Bay, China. Under full cost accounting, investments in individual countries represent separate cost centers for computation of depreciation, depletion and amortization as well as for full cost ceiling test evaluations. Given that this is our sole investment in the Peoples Republic of China, it is possible that upon a more complete evaluation of this project that some or all of this investment would be reclassed as a charge to expense on our income statement.

     Potential Gain or Loss on Divestiture. We anticipate the completion of our Rocky Mountain divestiture program in late second quarter or early third quarter 2007. If the nature and extent of the divestiture is deemed to significantly alter the relationship between capitalized costs and proved reserves attributable to our United States full cost pool, then full cost accounting rules require us to recognize a gain or loss on the sale. We can provide no assurances at this time that such divestiture will occur or whether the recognition of a gain or loss will be required.

Liquidity and Capital Resources

     Cash Flow and Working Capital. Net cash flow provided by operating activities for the three months ended March 31, 2007 was $109.7 million compared to $81.3 million reported in the comparable period in 2006. Based on our outlook of commodity prices and our estimated production, we expect to fund our 2007 capital expenditures with cash flow provided by operating activities.

     Net cash flow used in investing activities totaled $83.7 million and $140.6 million during the first quarter of 2007 and 2006, respectively, which primarily represents our investment in oil and gas properties.

     Net cash flow used in financing activities totaled $19.6 million for the quarter ended March 31, 2007, which represents repayments of borrowings under our credit facility net of proceeds from the exercise of stock options. For the quarter ended March 31, 2006, net cash flow provided by financing activities totaled $1.6 million, which represents proceeds from the exercise of stock options.

     During the first quarter of 2007, we obtained the consent of the Minerals Management Service to a multi-year plan for the plugging and abandoning of wells and the removal of wreckage and debris from offshore platforms destroyed by Hurricane Rita. Prior to obtaining this consent, the estimated costs of these activities were included in the current portion of asset retirement obligations. Subsequent to obtaining the consent, we have reclassified the costs of these activities estimated to occur after March 31, 2008 to long-term asset retirement obligations. Costs reclassified in the first quarter of 2007 to long-term amounted to $98.2 million. Additionally, accrued hurricane insurance reimbursements in the amount of $49.8 million attributable to these activities have been similarly reclassified to long-term assets.

     We had working capital at March 31, 2007 of $73.3 million. We believe that our working capital balance should be viewed in conjunction with availability of borrowings under our bank credit facility when measuring liquidity. “Liquidity” is defined as the ability to obtain cash quickly either through the conversion of assets or incurrence of liabilities. See “Bank Credit Facility”.

     Capital Expenditures. First quarter 2007 additions to oil and gas property costs of $50.8 million included $7.5 million of acquisition costs, $5.2 million of capitalized salaries, general and administrative expenses (inclusive of incentive compensation) and $4.3 million of capitalized interest. These investments were financed by cash flow from operating activities.

     Our 2007 capital expenditures budget, excluding acquisitions, asset retirement costs and capitalized interest and salaries, general and administrative expenses, is approximately $320 million. Based upon our outlook of commodity prices and our estimated production, we expect to fund our 2007 capital program with cash flow provided by operating activities. To the extent that 2007 cash flow from operating activities exceeds our estimated 2007 capital expenditures, we may pay down a portion of our existing debt. If cash flow from operating activities during 2007 is not sufficient to fund estimated 2007 capital expenditures, we believe that our bank credit facility will provide us with adequate liquidity. See “Bank Credit Facility”.

     Bank Credit Facility. Borrowings outstanding at March 31, 2007 under our bank credit facility totaled $152 million, and letters of credit totaling $52.8 million had been issued under the facility. At March 31, 2007, we had $120.2 million of borrowings available under the credit facility and the weighted average interest rate was approximately 6.8%. The borrowing base under the credit facility is re-determined periodically based on the bank group’s evaluation of our proved oil and gas reserves.

     Our credit facility is set to expire on April 30, 2008 and became a current liability on May 1, 2007. We anticipate that we will be able to negotiate a comparable facility before the expiration date.

Results of Operations

     The following tables set forth certain information with respect to our oil and gas operations.

		Three Months Ended
		March 31,
		2007				2006				Variance				% Change
Production:
Oil (MBbls)			1,652				1,037				615				59	%
Natural gas (MMcf)			11,474				11,269				205				2	%
Oil and natural gas (MMcfe)			21,386				17,492				3,894				22	%
Revenue data (in thousands) (a):
Oil revenue		$	93,584			$	61,512			$	32,072				52	%
Natural gas revenue			79,749				96,922				(17,173	)			(18	%)
Total oil and natural gas revenue		$	173,333			$	158,434			$	14,899				9	%
Average prices (a):
Oil (per Bbl)		$	56.65			$	59.32				($2.67	)			(5	%)
Natural gas (per Mcf)			6.95				8.60				(1.65	)			(19	%)
Oil and natural gas (per Mcfe)			8.11				9.06				(0.95	)			(10	%)
Expenses (per Mcfe):
Lease operating expenses		$	2.39			$	1.99			$	0.40				20	%
Salaries, general and administrative expenses (b)			0.39				0.48				(0.09	)			(19	%)
DD&A expense on oil and gas properties			3.64				3.69				(0.05	)			(1	%)

     During the first quarter of 2007, net income totaled $10.5 million, or $0.38 per share, compared to $24.0 million, or $0.88 per share for the first quarter of 2006. All per share amounts are on a diluted basis. The variance in quarterly results was due to the following components:

     Production. During the first quarter of 2007, total production volumes increased 22% to 21.4 Bcfe compared to 17.5 Bcfe produced during the first quarter of 2006. Oil production during the first quarter of 2007 totaled approximately 1,652,000 barrels compared to 1,037,000 barrels produced during the first quarter of 2006, while natural gas production totaled 11.5 Bcf during the first quarter of 2007 compared to 11.3 Bcf produced during the first quarter of 2006. Extended Gulf Coast production shut-ins due to Hurricanes Katrina and Rita negatively impacted first quarter 2007 and 2006 production rates resulting in production deferrals of 1.3 Bcfe (14 MMcfe per day) and 6.6 Bcfe (73 MMcfe per day), respectively. Without the effects of the hurricane production deferrals, quarter to quarter production volumes decreased approximately 1.4 Bcfe, as a result of natural production declines.

     Approximately 83% of our first quarter 2007 production volumes were generated from our Gulf Coast Basin properties while the remaining 17% came from our Rocky Mountain Region properties.

     Prices. Prices realized during the first quarter of 2007 averaged $56.65 per Bbl of oil and $6.95 per Mcf of natural gas, or 10% less, on an Mcfe basis, than first quarter 2006 average realized prices of $59.32 per Bbl of oil and $8.60 per Mcf of natural gas. All unit pricing amounts include the cash settlement of effective hedging contracts.

     We enter into various hedging contracts in order to reduce our exposure to the possibility of declining oil and gas prices. During the three months ended March 31, 2007, we realized a net increase in natural gas revenue related to our effective zero-premium collars of $1.1 million ($0.09 per Mcf) and a net increase in oil revenue of $1.1 million ($0.66 per barrel). We realized a net increase of $4.2 million ($0.38 per Mcf) in natural gas revenue related to our effective zero-premium collars for the three months ended March 31, 2006. Hedging transactions did not impact realized oil prices during the first quarter of 2006.

     Oil and Natural Gas Revenue. First quarter 2007 oil and natural gas revenue totaled $173.3.3 million, compared to first quarter 2006 oil and natural gas revenue of $158.4 million. The increase in oil and gas revenue is attributable to a 22% increase in oil and gas production volumes on a gas equivalent basis offset by a 10% decrease in realized oil and natural gas prices for the first quarter of 2007 compared to the comparable period in 2006.

     Expenses. Lease operating expenses during the first quarter of 2007 totaled $51.1 million compared to $34.9 million for the first quarter of 2006. On a unit of production basis, first quarter 2007 lease operating expenses were $2.39 per Mcfe as compared to $1.99 per Mcfe for the first quarter of 2006. The increase in first quarter 2007 lease operating expenses over the comparable quarter of 2006 was attributable primarily to a $6.4 million increase in insurance premiums and increased major maintenance repair activity, which included the drilling of a $9.9 million replacement well at South Marsh Island Block 108.

     Depreciation, depletion and amortization (“DD&A”) on oil and gas properties for the first quarter of 2007 totaled $77.8 million, or $3.64 per Mcfe compared to $64.6 million, or $3.69 per Mcfe for the first quarter of 2006. At December 31, 2006, we recorded a ceiling test write-down, which reduced our net investment in oil and gas properties and resulted in a reduction of the going forward unit cost of DD&A.

     Interest expense for the first quarter of 2007 totaled $11.2 million, net of $4.3 million of capitalized interest, compared to interest of $5.9 million, net of $4.3 million of capitalized interest, during the first quarter of 2006. The increase in interest expense in the first quarter of 2007 is primarily the result of the issuance of our senior floating rate notes in June 2006.

     During the three months ended March 31, 2007 and 2006, we incurred $4.4 million and $3.0 million, respectively, of accretion expense related to asset retirement obligations. The increase in first quarter 2007 accretion expense is due to increases in estimated asset retirement costs determined in late 2006.

     During the quarter ended March 31, 2007, certain of our derivative contracts were determined to be partially ineffective because of differences in the relationship between the fixed price in the derivative contract and actual prices realized. The change in the fair market value of the ineffective portion of these derivatives was $0.5 million and was recognized as derivative expense in the income statement during the quarter ended March 31, 2007. There were no ineffective hedging transactions during the quarter ended March 31, 2006.

     Production taxes during the first quarter of 2007 totaled $3.9 million compared to $4.2 million in the first quarter of 2006. Despite increases in gas production volumes and oil production revenue in the first quarter of 2007, production taxes decreased due to an ad valorem tax adjustment on certain of our Rocky Mountain properties expensed in the first quarter of 2006.

Recent Accounting Developments

     Fair Value Accounting. On September 15, 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”. SFAS No.157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosure about fair value measurements. SFAS No.157 will be effective for financial statements issued for fiscal years beginning after November 15, 2007.

     The Fair Value Option for Certain Items. In February of 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Liabilities — Including an amendment of FASB Statement No. 115”. SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value. This statement will be effective for us January 1, 2008.

     We do not anticipate that the implementation of these new standards will have a material effect on our financial statements.

Defined Terms

     Oil and condensate are stated in barrels (“Bbls”) or thousand barrels (“MBbls”). Natural gas is stated herein in billion cubic feet (“Bcf”), million cubic feet (“MMcf”) or thousand cubic feet (“Mcf”). Oil and condensate are converted to natural gas at a ratio of one barrel of liquids per six Mcf of gas. Bcfe, MMcfe, and Mcfe represent one billion cubic feet, one million cubic feet and one thousand cubic feet of gas equivalent, respectively. MMBtu represents one million British Thermal Units and BBtu represents one billion British Thermal Units. An active property is an oil and gas property with existing production. A primary term lease is an oil and gas property with no existing production, in which we have a specific time frame to establish production without losing the rights to explore the property. Liquidity is defined as the ability to obtain cash quickly either through the conversion of assets or incurrence of liabilities.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Commodity Price Risk

     Our major market risk exposure continues to be the pricing applicable to our oil and natural gas production. Our revenues, profitability and future rate of growth depend substantially upon the market prices of oil and natural gas, which fluctuate widely. Oil and natural gas price declines and volatility could adversely affect our revenues, cash flows and profitability. Price volatility is expected to continue. In order to manage our exposure to oil and natural gas price declines, we occasionally enter into oil and natural gas price hedging arrangements to secure a price for a portion of our expected future production.

     Our hedging policy provides that not more than 50% of our estimated production quantities can be hedged without the consent of the board of directors. We believe our current hedging positions have hedged approximately 50% of our estimated 2007 production and 12% of our estimated 2008 production. See Item 1. Financial Statements — Note 3 — Hedging Activities for a detailed discussion of hedges in place to manage our exposure to oil and natural gas price declines.

     Since the filing of our 2006 Annual Report on Form 10-K, there have been no material changes in reported market risk as it relates to commodity prices.

Interest Rate Risk

     We had long-term debt outstanding of $777 million at March 31, 2007, of which $400 million, or approximately 51%, bears interest at fixed rates. The $400 million of fixed-rate debt is comprised of $200 million of 8¹/4% Senior Subordinated Notes due 2011 and $200 million of 6³/4% Senior Subordinated Notes due 2014. At March 31, 2007, the remaining $377 million of our outstanding long-term debt bears interest at a floating rate and consists of $152 million of borrowings outstanding under our bank credit facility and $225 million aggregate principal amount of senior floating rate notes. At March 31, 2007, the weighted average interest rate under our bank credit facility was approximately 6.82% per annum. The interest rate under our senior floating rate notes is equal to three-month LIBOR (as defined in the indenture governing the notes) plus an applicable margin of 2.75%. The applicable margin will increase by 1% on July 15, 2007. At March 31, 2007, the interest rate was 8.12%. We currently have no interest rate hedge positions in place to reduce our exposure to changes in interest rates.

     Since the filing of our 2006 Annual Report on Form 10-K, there have been no material changes in reported market risk as it relates to interest rates.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

     We have established disclosure controls and procedures to ensure that material information relating to Stone Energy Corporation and its consolidated subsidiary (collectively “Stone”) is made known to the Officers who certify Stone’s financial reports and the Board of Directors. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives.

     Our chief executive officer and our chief financial officer, with the participation of other members of our senior management, reviewed and evaluated the effectiveness of Stone’s disclosure controls and procedures as of the end of the quarterly period ended March 31, 2007. Based on this evaluation, our chief executive officer and chief financial officer believe:

•

Stone’s disclosure controls and procedures were effective to ensure that information required to be disclosed by Stone in the reports it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms; and

•

Stone’s disclosure controls and procedures were effective to ensure that information required to be disclosed by Stone in the reports that it files or submits under the Securities Exchange Act of 1934 was accumulated and communicated to Stone’s management, including Stone’s chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Controls Over Financial Reporting

     There has not been any change in our internal control over financial reporting that occurred during our quarterly period ended March 31, 2007 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

     On April 23, 2007, Stone received notification from the Staff of the SEC that its inquiry into the revision of Stone’s proved reserves had been terminated and no enforcement action had been recommended. In 2005, Stone had received notice that the Staff of the SEC was conducting an inquiry into the revision of Stone’s proved reserves and the financial statement restatement.

     On December 30, 2004, Stone was served with two petitions (civil action numbers 2004-6227 and 2004-6228) filed by the Louisiana Department of Revenue (“LDR”) in the 15th Judicial District Court (Parish of Lafayette, Louisiana) claiming additional franchise taxes due. In one case, the LDR is seeking additional franchise taxes from Stone in the amount of $640,000, plus accrued interest of $352,000 (calculated through December 15, 2004), for the franchise year 2001. In the other case, the LDR is seeking additional franchise taxes from Stone (as successor to Basin Exploration, Inc.) in the amount of $274,000, plus accrued interest of $159,000 (calculated through December 15, 2004), for the franchise years 1999, 2000 and 2001. Further, on December 29, 2005, the LDR filed another petition in the 15^th Judicial District Court claiming additional franchise taxes due for the taxable years ended December 31, 2002 and 2003 in the amount of $2.6 million plus accrued interest calculated through December 15, 2005 in the amount of $1.2 million. These assessments all relate to the LDR’s assertion that sales of crude oil and natural gas from properties located on the Outer Continental Shelf, which are transported through the state of Louisiana, should be sourced to the state of Louisiana for purposes of computing the Louisiana franchise tax apportionment ratio. The Company disagrees with these contentions and intends to vigorously defend itself against these claims. Stone has not yet been given any indication that the LDR plans to review franchise taxes for the franchise tax years 2004 and 2005.

     Stone has received an inquiry from the Philadelphia Stock Exchange investigating matters including trading prior to Stone’s October 6, 2005 announcement regarding the revision of Stone’s proved reserves. Stone cooperated fully with this inquiry.

     On or around November 30, 2005, George Porch filed a putative class action in the United States District Court for the Western District of Louisiana (the “Federal Court”) against Stone, David Welch, Kenneth Beer, D. Peter Canty and James Prince purporting to allege violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. Three similar complaints were filed soon thereafter. All complaints had asserted a putative class period commencing on June 17, 2005 and ending on October 6, 2005. All complaints contended that, during the putative class period, defendants, among other things, misstated or failed to disclose (i) that Stone had materially overstated Stone’s financial results by overvaluing its oil reserves through improper and aggressive reserve methodologies; (ii) that the Company lacked adequate internal controls and was therefore unable to ascertain its true financial condition; and (iii) that as a result of the foregoing, the values of the Company’s proved reserves, assets and future net cash flows were materially overstated at all relevant times. On March 17, 2006, these purported class actions were consolidated, with El Paso Fireman & Policeman’s Pension Fund designated as Lead Plaintiff (“Securities Action”). Lead plaintiff filed a consolidated class action complaint on or about June 14, 2006. The consolidated complaint alleges claims similar to those described above and expands the putative class period to commence on May 2, 2001 and to end on March 10, 2006. On September 13, 2006, Stone and the individual defendants filed motions seeking dismissal of that action. The motion has since been fully briefed by the parties, but — as of this date — has not been decided by the Federal Court.

     In addition, on or about December 16, 2005, Robert Farer and Priscilla Fisk filed respective complaints in the Federal Court purportedly alleging claims derivatively on behalf of Stone. Similar complaints were filed thereafter in the Federal Court by Joint Pension Fund, Local No. 164, I.B.E.W., and in the 15^th Judicial District Court, Parish of Lafayette, Louisiana (the “State Court”) by Gregory Sakhno. Stone was named as a nominal defendant and David Welch, Kenneth Beer, D. Peter Canty, James Prince, James Stone, John Laborde, Peter Barker, George Christmas, Richard Pattarozzi, David Voelker, Raymond Gary, B.J. Duplantis and Robert Bernhard were named as defendants in these actions. The State Court action purportedly alleged claims of breach of fiduciary duty, abuse of control, gross mismanagement, and waste of corporate assets against all defendants, and claims of unjust enrichment and insider selling against certain individual defendants. The Federal Court derivative actions asserted purported claims against all defendants for breach of fiduciary duty, abuse of control, gross mismanagement, waste of corporate assets and unjust enrichment and claims against certain individual defendants for breach of fiduciary duty and violations of the Sarbanes-Oxley Act of 2002.

     On March 30, 2006, the Federal Court entered an order naming Robert Farer, Priscilla Fisk and Joint Pension Fund, Local No. 164, I.B.E.W. as co-lead plaintiffs in the Federal Court derivative action and directed the lead plaintiffs to file a consolidated amended complaint within forty-five days. On April 22, 2006, the complaint in the State Court derivative action was amended to also assert

claims on behalf of a purported class of shareholders of Stone. In addition to the above mentioned claims, the amended State Court derivative action complaint purported to allege breaches of fiduciary duty by the director defendants in connection with the then proposed merger transaction with Plains and seeks an order enjoining the director defendants from entering into the then proposed transaction with Plains. On May 15, 2006, the first consolidated complaint in the Federal Court derivative action was filed; it contained a similar injunctive claim. On September 15, 2006, co-lead plaintiffs’ in the Federal Court derivative action further amended their complaint to seek an order enjoining Stone’s proposed merger with EPL based on substantially the same grounds previously asserted regarding the prior proposed transaction with Plains. On October 2, 2006, each of the defendants in the Federal Court derivative action filed or joined in motions seeking dismissal of all or part of that action. Those motions were denied without prejudice on November 30, 2006 when the Federal Court granted the co-lead plaintiffs leave to file a third amended complaint. Following the filing of the third amended complaint in the Federal Court derivative action, defendants filed motions seeking to have that action either dismissed or stayed until resolution of the pending motion to dismiss the Securities Action before the Federal Court. On December 21, 2006 the Federal Court stayed the Federal Court derivative action at least until resolution of the pending motion to dismiss the Securities Action after which time a hearing will be conducted by the Federal Court to determine the propriety of maintaining that stay.

     On or around August 28, 2006, ATS instituted an action (the “ATS Litigation”) in the Delaware Court of Chancery for New Castle County (the “Delaware Court”). The initial complaint in the ATS Litigation, among other things, challenged certain provisions of the EPL Merger Agreement pursuant to which EPL (i) paid the $43.5 million Plains Termination Fee; and (ii) agreed, under certain contractually specified conditions, to pay Stone $25.6 million in the event of a future termination of the Merger Agreement (the “EPL Termination Fee”). On or around September 12, 2006, a purported shareholder of EPL filed a purported class action in the Delaware Court (the “Farrington Action”). The initial Farrington Action complaint asserted claims similar to those in the ATS Litigation and sought, among other things, a damages recovery in the amount of the Plains Termination Fee.

     On or around September 7, 2006, EPL commenced an action against Stone in the Delaware Court (the “Declaratory Action”), in which EPL sought a declaratory judgment with respect to EPL’s rights and obligations under Section 6.2(e) of the Merger Agreement. On September 11, 2006, the Delaware Court expedited the Declaratory Action and consolidated with the Declaratory Action a portion of the ATS Litigation in which ATS likewise asserted claims respecting Section 6.2(e) of the Merger Agreement. By oral ruling on September 27, 2006, and subsequent written opinion dated October 11, 2006, the Delaware Court ruled, among other things, that Section 6.2(e) of the Merger Agreement did not limit the ability of EPL to explore and negotiate, in good faith, with respect to any Third Party Acquisition Proposals (as defined in the Merger Agreement), including the tender offer by ATS, Inc. for all of the outstanding shares of EPL stock at $23.00 per share (“ATS Offer”). The Delaware Court dismissed without prejudice the remainder of the claims raised by EPL in the Declaratory Action as not ripe for a judicial determination.

     On October 11, 2006, EPL and Stone entered into an agreement (the “Termination and Release Agreement”) pursuant to which they agreed, among other things, (i) to enter into a mutual termination of the Merger Agreement, (ii) to mutually release certain actual or potential claims or rights of action, (iii) to mutually seek a dismissal of the Declaratory Action, and (iv) that EPL would make a payment of $8 million to Stone (the “$8 Million Payment”). EPL made the $8 Million Payment to Stone. On October 13, 2006, the Declaratory Action was dismissed by stipulation of the parties and order of the Delaware Court.

     On or around October 16, 2006, following the execution of the Termination and Release Agreement, plaintiffs in both the ATS Litigation and the Farrington Litigation sought (and were later granted leave by the Court) to file Second Amended Complaints that, among other things, added claims seeking a recovery in the amount of the $8 Million Payment. On October 26, 2006, ATS voluntarily dismissed the ATS Litigation without prejudice, while — as of this date — the Farrington Action remains pending. On November 2, 2006, Stone and EPL filed motions to dismiss the Farrington Action. The Delaware Court has yet to reach a determination as to the merits of the claims asserted in the Farrington Action with respect to the Plains Termination Fee or the $8 Million Payment.

     Stone’s Certificate of Incorporation and/or its Restated Bylaws provide, to the extent permissible under the law of Delaware (Stone’s state of incorporation), for indemnification of and advancement of defense costs to Stone’s current and former directors and officers for potential liabilities related to their service to Stone. Stone has purchased directors and officers insurance policies that, under certain circumstances, may provide coverage to Stone and/or its officers and directors for certain losses resulting from securities-related civil liabilities and/or the satisfaction of indemnification and advancement obligations owed to directors and officers. These insurance policies may not cover all costs and liabilities incurred by Stone and its current and former officers and directors in these regulatory and civil proceedings.

     The foregoing pending actions are at an early stage and subject to substantial uncertainties concerning the outcome of material factual and legal issues relating to the litigation and the regulatory proceedings. Accordingly, based on the current status of the litigation and inquiries, we cannot currently predict the manner and timing of the resolution of these matters and are unable to estimate a range of possible losses or any minimum loss from such matters. Furthermore, to the extent that our insurance policies are ultimately available to cover any costs and/or liabilities resulting from these actions, they may not be sufficient to cover all costs and liabilities incurred by us and our current and former officers and directors in these regulatory and civil proceedings.

Item 6. Exhibits

*15.1		—		Letter from Ernst & Young LLP dated May 8, 2007, regarding unaudited interim financial information.
*31.1		—		Certification of Principal Executive Officer of Stone Energy Corporation as required by Rule 13a-14(a) of the Securities Exchange Act of 1934.
*31.2		—		Certification of Principal Financial Officer of Stone Energy Corporation as required by Rule 13a-14(a) of the Securities Exchange Act of 1934.
*†32.1		—		Certification of Chief Executive Officer and Chief Financial Officer of Stone Energy Corporation pursuant to 18 U.S.C. § 1350.

SIGNATURE

     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

EXHIBIT INDEX

*15.1		—		Letter from Ernst & Young LLP dated May 8, 2007, regarding unaudited interim financial information.
*31.1		—		Certification of Principal Executive Officer of Stone Energy Corporation as required by Rule 13a-14(a) of the Securities Exchange Act of 1934.
*31.2		—		Certification of Principal Financial Officer of Stone Energy Corporation as required by Rule 13a-14(a) of the Securities Exchange Act of 1934.
*†32.1		—		Certification of Chief Executive Officer and Chief Financial Officer of Stone Energy Corporation pursuant to 18 U.S.C. § 1350.