e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2008
or
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 1-12074
STONE ENERGY CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
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Delaware
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72-1235413 |
(State or Other Jurisdiction of Incorporation or Organization)
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(I.R.S. Employer Identification No.) |
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625 E. Kaliste Saloom Road
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70508 |
Lafayette, Louisiana
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(Zip Code) |
(Address of Principal Executive Offices) |
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Registrants 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,
a non-accelerated filer, or a smaller reporting company.
See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer þ |
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Accelerated filer o |
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Non-accelerated filer o
(Do not check if a smaller reporting company) |
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Smaller Reporting Company
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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 August 1, 2008, there were 28,740,328 shares of the registrants Common Stock, par value $.01
per share, outstanding.
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
STONE ENERGY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(In thousands of dollars)
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June 30, |
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December 31, |
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2008 |
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2007 |
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(Unaudited) |
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(Note 1) |
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Assets |
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Current assets: |
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Cash and cash equivalents |
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$ |
568,117 |
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$ |
475,126 |
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Accounts receivable |
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192,314 |
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186,853 |
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Fair value of hedging contracts |
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272 |
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2,163 |
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Deferred tax asset |
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52,188 |
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9,039 |
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Other current assets |
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1,044 |
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521 |
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Total current assets |
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813,935 |
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673,702 |
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Oil and gas properties United States full cost method of
accounting: |
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Proved, net of accumulated depreciation, depletion and
amortization of $2,337,853 and $2,158,327, respectively |
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1,001,271 |
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1,001,179 |
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Unevaluated |
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204,985 |
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150,568 |
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Oil and gas properties China full cost method of accounting: |
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Unevaluated, net of accumulated depreciation, depletion and
amortization of $18,264 and $8,164, respectively |
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20,659 |
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29,565 |
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Building and land, net |
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5,620 |
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5,667 |
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Fixed assets, net |
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5,097 |
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5,584 |
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Other assets, net |
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24,530 |
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23,338 |
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Total assets |
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$ |
2,076,097 |
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$ |
1,889,603 |
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Liabilities and Stockholders Equity |
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Current liabilities: |
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Accounts payable to vendors |
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$ |
143,296 |
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$ |
88,801 |
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Undistributed oil and gas proceeds |
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42,530 |
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37,743 |
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Fair value of hedging contracts |
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118,922 |
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18,968 |
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Asset retirement obligations |
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31,349 |
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44,180 |
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Current income taxes payable |
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10,500 |
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57,631 |
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Other current liabilities |
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6,146 |
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13,934 |
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Total current liabilities |
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352,743 |
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261,257 |
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Long-term debt |
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400,000 |
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400,000 |
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Deferred taxes |
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110,461 |
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89,665 |
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Asset retirement obligations |
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200,249 |
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245,610 |
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Fair value of hedging contracts |
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34,602 |
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Other long-term liabilities |
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8,129 |
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7,269 |
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Total liabilities |
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1,106,184 |
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1,003,801 |
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Commitments and contingencies |
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Common stock |
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283 |
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278 |
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Treasury stock |
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(860 |
) |
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(1,161 |
) |
Additional paid-in capital |
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541,515 |
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515,055 |
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Retained earnings |
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527,297 |
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382,365 |
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Accumulated other comprehensive loss |
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(98,322 |
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(10,735 |
) |
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Total stockholders equity |
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969,913 |
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885,802 |
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Total liabilities and stockholders equity |
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$ |
2,076,097 |
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$ |
1,889,603 |
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The accompanying notes are an integral part of this balance sheet.
1
STONE ENERGY CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
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Three Months Ended |
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Six Months Ended |
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June 30, |
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June 30, |
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2008 |
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2007 |
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2008 |
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2007 |
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Operating revenue: |
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Oil production |
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$ |
156,569 |
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$ |
111,173 |
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$ |
279,276 |
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$ |
204,757 |
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Gas production |
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106,393 |
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88,718 |
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186,919 |
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168,467 |
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Derivative income, net |
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409 |
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Total operating revenue |
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262,962 |
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200,300 |
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466,195 |
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373,224 |
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Operating expenses: |
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Lease operating expenses |
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34,900 |
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40,510 |
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65,153 |
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91,596 |
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Production taxes |
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3,503 |
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2,808 |
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4,903 |
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6,672 |
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Depreciation, depletion and amortization |
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70,831 |
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81,340 |
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134,218 |
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160,179 |
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Write-down of oil and gas properties |
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10,100 |
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10,100 |
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Accretion expense |
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3,853 |
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4,416 |
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8,221 |
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8,832 |
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Salaries, general and administrative expenses |
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11,278 |
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9,402 |
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21,534 |
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17,635 |
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Incentive compensation expense |
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882 |
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515 |
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1,900 |
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1,361 |
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Derivative expenses, net |
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3,353 |
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3,612 |
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91 |
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Total operating expenses |
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138,700 |
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138,991 |
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249,641 |
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286,366 |
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Gain on Rocky Mountain Region properties divestiture |
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55,816 |
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55,816 |
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Income from operations |
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124,262 |
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117,125 |
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216,554 |
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142,674 |
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Other (income) expenses: |
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Interest expense |
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3,633 |
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10,284 |
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7,492 |
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21,475 |
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Interest income |
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(3,432 |
) |
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(1,036 |
) |
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(8,346 |
) |
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(1,609 |
) |
Other income, net |
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(1,313 |
) |
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(1,933 |
) |
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(2,354 |
) |
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(3,235 |
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Total other (income) expenses |
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(1,112 |
) |
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7,315 |
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(3,208 |
) |
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16,631 |
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Income before taxes |
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125,374 |
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109,810 |
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219,762 |
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126,043 |
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Provision for income taxes: |
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Current |
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33,028 |
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17,500 |
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46,978 |
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17,500 |
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Deferred |
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9,535 |
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20,327 |
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27,731 |
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26,084 |
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Total income taxes |
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42,563 |
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|
37,827 |
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74,709 |
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43,584 |
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Net income |
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$ |
82,811 |
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$ |
71,983 |
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$ |
145,053 |
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$ |
82,459 |
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Basic earnings per share |
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$ |
2.95 |
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$ |
2.61 |
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$ |
5.19 |
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$ |
2.99 |
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Diluted earnings per share |
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$ |
2.91 |
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$ |
2.60 |
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$ |
5.13 |
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$ |
2.98 |
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Average shares outstanding |
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28,077 |
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|
27,578 |
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|
27,948 |
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|
27,560 |
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Average shares outstanding assuming dilution |
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28,459 |
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|
27,706 |
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|
28,260 |
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|
27,642 |
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The accompanying notes are an integral part of this statement.
2
STONE ENERGY CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands of dollars)
(Unaudited)
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Six Months Ended |
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June 30, |
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2008 |
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2007 |
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Cash flows from operating activities: |
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Net income |
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$ |
145,053 |
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$ |
82,459 |
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Adjustments to reconcile net income to net cash
provided by operating activities: |
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Depreciation, depletion and amortization |
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134,218 |
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|
160,179 |
|
Write-down of oil and gas properties |
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|
10,100 |
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|
Accretion expense |
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|
8,221 |
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|
8,832 |
|
Deferred income tax provision |
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|
27,731 |
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|
26,084 |
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Gain on sale of oil and gas properties |
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(55,816 |
) |
Settlement of asset retirement obligations |
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(33,651 |
) |
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(18,773 |
) |
Non-cash stock compensation expense |
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|
4,322 |
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|
2,530 |
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Excess tax benefits |
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(2,950 |
) |
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Non-cash derivative expense |
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|
3,612 |
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|
91 |
|
Other non-cash expenses |
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|
470 |
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|
1,587 |
|
Increase (decrease) in current income taxes payable |
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(47,131 |
) |
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|
16,569 |
|
Increase in accounts receivable |
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(4,722 |
) |
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(13,495 |
) |
Increase in other current assets |
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|
(543 |
) |
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|
(441 |
) |
Increase (decrease) in accounts payable |
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(400 |
) |
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|
200 |
|
Increase (decrease) in other current liabilities |
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(3,001 |
) |
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|
7,408 |
|
Investment in hedging contracts |
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(1,914 |
) |
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Other |
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(26 |
) |
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|
6 |
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Net cash provided by operating activities |
|
|
239,389 |
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|
217,420 |
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|
Cash flows from investing activities: |
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Investment in oil and gas properties |
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|
(177,955 |
) |
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|
(139,845 |
) |
Proceeds from sale of oil and gas properties, net of expenses |
|
|
14,090 |
|
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|
571,945 |
|
Sale of fixed assets |
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|
|
|
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|
691 |
|
Investment in fixed and other assets |
|
|
(2,503 |
) |
|
|
(776 |
) |
|
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|
|
|
|
|
Net cash provided by (used in) investing activities |
|
|
(166,368 |
) |
|
|
432,015 |
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Cash flows from financing activities: |
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|
|
|
|
|
|
Repayments of bank borrowings |
|
|
|
|
|
|
(172,000 |
) |
Excess tax benefits |
|
|
2,950 |
|
|
|
|
|
Net proceeds from exercise of stock options and vesting of
restricted stock |
|
|
17,020 |
|
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|
1,336 |
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
19,970 |
|
|
|
(170,664 |
) |
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|
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|
Net increase in cash and cash equivalents |
|
|
92,991 |
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|
|
478,771 |
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|
Cash and cash equivalents, beginning of period |
|
|
475,126 |
|
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|
58,862 |
|
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|
Cash and cash equivalents, end of period |
|
$ |
568,117 |
|
|
$ |
537,633 |
|
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|
The accompanying notes are an integral part of this statement.
3
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 its
subsidiaries as of June 30, 2008 and for the three and six-month periods ended June 30, 2008 and
2007 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, 2007 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 managements 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, 2007. The results of operations for the three and six-month periods ended June 30,
2008 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 382,000 and 128,000 dilutive shares for the three months
ended June 30, 2008 and 2007, respectively, and 312,000 and 82,000 dilutive shares for the six
months ended June 30, 2008 and 2007, respectively.
Stock options that were considered antidilutive because the exercise price of the option
exceeded the average price of our common stock for the applicable period totaled approximately
1,072,000 shares in the three months ended June 30, 2007. There were no antidilutive stock options
in the three months ended June 30, 2008. Stock options that were considered antidilutive totaled
65,000 and 1,072,000 shares in the six months ended June 30, 2008 and 2007, respectively.
During the three months ended June 30, 2008 and 2007, approximately 327,000 and 33,000 shares
of common stock, respectively, were issued upon the exercise of stock options and vesting of
restricted stock by employees and nonemployee directors. For the six months ended June 30, 2008
and 2007, approximately 503,000 and 60,000 shares of common stock, 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 Acquisitions and Divestitures
Acquisitions
On April 30, 2008, we announced that we had entered into a definitive merger agreement to
acquire Bois dArc Energy, Inc. (Bois dArc). Under the terms of the merger agreement, Bois
dArc stockholders will receive $13.65 in cash and 0.165 shares of Stone common stock for each
share of Bois dArc common stock. The transaction is subject to stockholder approval of both
companies and other customary conditions. On July 18, 2008, a purported Bois dArc stockholder, on
behalf of a putative class of Bois dArc stockholders, filed a lawsuit seeking to enjoin the named
defendants from proceeding with the proposed merger (see Note 10 Commitments and Contingencies).
We expect to fund the transaction utilizing existing cash on our balance sheet, approximately
$400 million to $600 million of borrowings from a proposed amended and restated $700 million credit
facility, and the issuance of approximately 11.3 million shares of Stone common stock. The
companies anticipate completing the transaction in the third quarter of 2008. Post closing, it is
anticipated that the Stone stockholders will own approximately 72% of the combined company, and the
Bois dArc stockholders will own approximately 28% of the combined company.
Included in other assets at June 30, 2008 are $1.9 million of direct merger costs. Such costs
will be included as consideration paid for Bois dArcs net assets assuming the merger is
consummated. In the event that the merger is not consummated, these costs will be recognized as a
charge to earnings in the period such determination is made.
Divestitures
During 2008, we completed the divesture of a small package of Gulf of Mexico properties which
totaled 17.4 billion cubic feet of natural gas equivalent (Bcfe) of reserves at December 31, 2007
for a cash consideration of approximately $14.1 million after closing adjustments. The properties that were sold had estimated asset retirement obligations of
$32.7 million. These properties were mature, high cost properties with minimal exploitation or
exploration opportunities. The sale of these oil and gas properties was accounted for
4
as an adjustment of capitalized costs with no gain or loss recognized.
On June 29, 2007, we completed the sale of substantially all of our Rocky Mountain Region
properties and related assets to Newfield Exploration Company in two separate transactions for a
total cash consideration of $582 million. At December 31, 2006, the estimated proved reserves
associated with these assets totaled 182.4 Bcfe, which represented 31% of our estimated proved oil
and natural gas reserves. Sales of oil and gas properties under the full cost method of accounting
are accounted for as adjustments of capitalized costs with no gain or loss recognized, unless the
adjustment significantly alters the relationship between capitalized costs and reserves. Since the
sale of these oil and gas properties would significantly alter that relationship, we recognized a
net gain on the sale in 2007 in the amount of $59.8 million.
Note 4 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, fixed-price swaps and puts for hedging purposes.
The following tables illustrate our hedging positions for calendar years 2008 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Zero-Premium Collars |
|
|
Natural Gas |
|
Oil |
|
|
Daily |
|
|
|
|
|
|
|
|
|
|
|
|
Volume |
|
Floor |
|
Ceiling |
|
Daily Volume |
|
Floor |
|
Ceiling |
|
|
(MMBtus/d) |
|
Price |
|
Price |
|
(Bbls/d) |
|
Price |
|
Price |
2008 |
|
|
30,000 |
* |
|
$ |
8.00 |
|
|
$ |
14.05 |
|
|
|
3,000 |
|
|
$ |
60.00 |
|
|
$ |
90.20 |
|
2008 |
|
|
20,000 |
** |
|
|
7.50 |
|
|
|
11.35 |
|
|
|
2,000 |
|
|
|
65.00 |
|
|
|
81.00 |
|
2008 |
|
|
20,000 |
*** |
|
|
9.00 |
|
|
|
17.90 |
|
|
|
3,000 |
|
|
|
70.00 |
|
|
|
110.25 |
|
2008 |
|
|
20,000 |
*** |
|
|
9.00 |
|
|
|
18.45 |
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
20,000 |
|
|
|
8.00 |
|
|
|
14.30 |
|
|
|
3,000 |
|
|
|
80.00 |
|
|
|
135.00 |
|
2009 |
|
|
20,000 |
|
|
|
9.00 |
|
|
|
14.63 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
January March |
|
** |
|
April December |
|
*** |
|
July December |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-Price Swaps |
|
|
Natural Gas |
|
Oil |
|
|
Daily |
|
|
|
|
|
|
|
|
Volume |
|
Swap |
|
Daily Volume |
|
Swap |
|
|
(MMBtus/d) |
|
Price |
|
(Bbls/d) |
|
Price |
2009 |
|
|
20,000 |
|
|
$ |
10.15 |
|
|
|
2,000 |
|
|
$ |
107.90 |
|
|
|
|
|
|
|
|
|
|
|
|
Put Contracts |
|
|
Natural Gas |
|
|
Daily |
|
|
|
|
|
|
Volume |
|
Floor |
|
Unamortized |
|
|
(MMBtus/d) |
|
Price |
|
Cost |
2008
|
|
20,000
|
* |
$ |
10.00 |
|
|
$0.52/MMBtu |
Effective hedging transactions reduced our natural gas revenue by $0.3 million and reduced oil
revenue by $20.8 million during the three months ended June 30, 2008. During the three months
ended June 30, 2007, effective hedging transactions increased our natural gas revenue by $37,000
and had no impact on oil revenue. During the six months ended June 30, 2008, we realized a net increase of $0.5 million in natural gas revenue and a net decrease of $26.0 million in
oil revenue related to our effective hedging transactions. We realized a net increase of $1.1
million in natural gas revenue and a net increase of $1.1 million in oil revenue related to our
effective hedging transactions during the six months ended June 30, 2007.
During the six months ended June 30, 2008 and 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. Derivative income (expense) for the
three months ended June 30, 2008 and 2007 totaled ($3.4) million and $0.4 million, respectively,
representing changes in the fair market value of the ineffective portion of the derivatives.
Derivative income (expense) for the six months ended June 30, 2008 and 2007 totaled ($3.6) million
and ($0.1) million, respectively, representing changes in the fair market value of the ineffective
portion of the derivatives.
5
Note 5 Long-Term Debt
Long-term debt consisted of the following at:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
|
($ in millions) |
|
81/4% Senior Subordinated Notes due 2011 |
|
$ |
200.0 |
|
|
$ |
200.0 |
|
63/4% Senior Subordinated Notes due 2014 |
|
|
200.0 |
|
|
|
200.0 |
|
|
|
|
|
|
|
|
Total long-term debt |
|
$ |
400.0 |
|
|
$ |
400.0 |
|
|
|
|
|
|
|
|
At June 30, 2008, we had no outstanding borrowings under our bank credit facility and letters
of credit totaling $46.1 million had been issued pursuant to the facility. On November 1, 2007, we
entered into a new $300 million senior secured credit facility, maturing July 1, 2011, with a
syndicated bank group. The new facility has an initial borrowing base of $175 million and replaces
the previous $500 million credit facility. As of August 1, 2008, after accounting for the $46.1
million of letters of credit, we had $128.9 million of borrowings available under the new credit
facility. The borrowing base under the credit facility is re-determined periodically based on the
bank groups evaluation of our proved oil and gas reserves. Under the financial covenants of our
new credit facility, we must (i) maintain a ratio of consolidated debt to consolidated EBITDA, as
defined in the credit agreement, for the preceding four quarterly periods of not greater than 3.25
to 1.0 and (ii) maintain a ratio of EBITDA to consolidated Net Interest, as defined in the credit
agreement, for the preceding four quarterly periods of not less than 3.0 to 1.0. In addition, the
new credit facility places certain customary restrictions or requirements with respect to
disposition of properties, incurrence of additional debt, change of ownership and reporting
responsibilities. These covenants may limit or prohibit us from paying cash dividends but do allow
for limited stock repurchases.
Note 6 Comprehensive Income
The following table illustrates the components of comprehensive income for the three and six
months ended June 30, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
|
($ in millions) |
|
Net income |
|
$ |
82.8 |
|
|
$ |
72.0 |
|
|
$ |
145.1 |
|
|
$ |
82.5 |
|
Other comprehensive income (loss), net of tax effect: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment for fair value accounting of
derivatives |
|
|
(83.3 |
) |
|
|
4.8 |
|
|
|
(87.6 |
) |
|
|
(4.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss) |
|
|
($0.5 |
) |
|
$ |
76.8 |
|
|
$ |
57.5 |
|
|
$ |
77.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 7 Asset Retirement Obligations
During the second quarter of 2008 and 2007, we recognized non-cash expenses of $3.9 million
and $4.4 million, respectively, related to the accretion of our asset retirement obligations. For
the six-month periods ended June 30, 2008 and 2007, we recognized accretion expense of $8.2 million
and $8.8 million, respectively.
The change in our asset retirement obligations during the six months ended June 30, 2008 is
set forth below:
|
|
|
|
|
|
|
Six Months |
|
|
|
Ended |
|
|
|
June 30, 2008 |
|
|
|
($ in millions) |
|
Asset retirement obligations as of the beginning of the period, including current portion |
|
$ |
289.8 |
|
Liabilities incurred |
|
|
|
|
Liabilities settled |
|
|
(33.7 |
) |
Divestment of properties |
|
|
(32.7 |
) |
Accretion expense |
|
|
8.2 |
|
Revision of estimates |
|
|
|
|
|
|
|
|
Asset retirement obligations as of the end of the period, including current portion |
|
$ |
231.6 |
|
|
|
|
|
6
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. During the fourth quarter of 2007, our investment was deemed to be impaired in the amount
of $8.2 million. During the second quarter of 2008, our investment was deemed to be impaired in
the amount of $10.1 million. Included in unevaluated oil and gas property costs at June 30, 2008
are $20.7 million of capital expenditures related to our properties in Bohai Bay, China.
Note 9 Fair Value Measurements
We adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 157,
Fair Value Measurements, on January 1, 2008. SFAS No. 157 defines fair value, establishes a
framework for measuring fair value in generally accepted accounting principles and expands
disclosure about fair value measurements. The net effect of the implementation of SFAS No. 157 on
our financial statements was immaterial.
The following tables present our assets and liabilities that are measured at fair value on a
recurring basis during the six months ended June 30, 2008 and are categorized using the fair value
hierarchy. The fair value hierarchy has three levels based on the reliability of the inputs used
to determine the fair value.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at June 30, 2008 |
|
|
|
|
|
|
|
Quoted Prices in |
|
|
Significant |
|
|
|
|
|
|
|
|
|
|
Active Markets |
|
|
Other |
|
|
Significant |
|
|
|
|
|
|
|
for Identical |
|
|
Observable |
|
|
Unobservable |
|
|
|
|
|
|
|
Assets |
|
|
Inputs |
|
|
Inputs |
|
Assets |
|
Total |
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
|
|
($ in millions) |
|
Money market funds |
|
$ |
498.3 |
|
|
$ |
498.3 |
|
|
$ |
|
|
|
$ |
|
|
Hedging contracts |
|
|
0.3 |
|
|
|
|
|
|
|
|
|
|
|
0.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
498.6 |
|
|
$ |
498.3 |
|
|
$ |
|
|
|
$ |
0.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at June 30, 2008 |
|
|
|
|
|
|
|
Quoted Prices in |
|
|
Significant |
|
|
|
|
|
|
|
|
|
|
Active Markets |
|
|
Other |
|
|
Significant |
|
|
|
|
|
|
|
for Identical |
|
|
Observable |
|
|
Unobservable |
|
|
|
|
|
|
|
Liabilities |
|
|
Inputs |
|
|
Inputs |
|
Liabilities |
|
Total |
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
|
|
($ in millions) |
|
Hedging contracts |
|
$ |
(153.5 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
(153.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
(153.5 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
(153.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
The table below presents a reconciliation for assets and liabilities measured at fair value on
a recurring basis using significant unobservable inputs (Level 3) during the six months ended June
30, 2008.
|
|
|
|
|
|
|
Hedging |
|
|
|
Contracts, net |
|
|
|
($ in millions) |
|
Balance as of January 1, 2008 |
|
$ |
(16.8 |
) |
Total gains/(losses) (realized or unrealized): |
|
|
|
|
Included in earnings |
|
|
(3.6 |
) |
Included in other comprehensive income |
|
|
(160.2 |
) |
Purchases, issuances and settlements |
|
|
27.4 |
|
Transfers in and out of Level 3 |
|
|
|
|
|
|
|
|
Balance as of June 30, 2008 |
|
$ |
(153.2 |
) |
|
|
|
|
|
|
|
|
|
The amount of total gains/(losses) for the period included in
earnings attributable to the change in unrealized gains/
(losses) relating to derivatives still held at June 30, 2008 |
|
$ |
(3.6 |
) |
|
|
|
|
In February 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 became effective for us on January 1, 2008. We did not elect the fair value option
for any of our existing financial instruments other than those mandated by other FASB standards and
accordingly the impact of the adoption of SFAS No. 159 on our financial statements was immaterial. We have not determined whether or not
we will elect this option for financial instruments we may acquire in the future.
7
Note 10 Commitments and Contingencies
In June 2008, we approved a commitment to purchase $46 million of long-lead items, mainly
tubular goods, to allow for the efficient execution of our drilling program in late 2008 and early
2009.
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 tax 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 tax years 1999, 2000 and 2001. Further, on December 29, 2005, the LDR
filed another petition in the 15th 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. Also, on
January 2, 2008, Stone was served with a petition (civil action number 2007-6754) claiming $1.5
million of additional franchise taxes due for the 2004 franchise tax year, plus accrued interest of
$800,000 calculated through November 30, 2007. These assessments all relate to the LDRs 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. The franchise
tax years 2005, 2006 and 2007 remain subject to examination.
In 2005, Stone received an inquiry from the Philadelphia Stock Exchange investigating matters
including trading prior to Stones October 6, 2005 announcement regarding the revision of Stones
proved reserves. Stone cooperated fully with this inquiry. Stone has not received any further
inquiries from the Philadelphia Exchange since the original request for information.
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 Stones 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 Companys 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 & Policemans 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.
On August 17, 2007, a Federal Magistrate Judge issued a report and recommendation (the
Report) recommending that the Federal Court grant in part and deny in part the Motions to
Dismiss. The Report recommended that (i) the claims asserted against defendants Kenneth Beer and
James Prince pursuant to Section 10(b) of the Securities Exchange Act and Rule 10b-5 promulgated
thereunder and (ii) claims asserted on behalf of putative class members who sold their Company
shares prior to October 6, 2005 be dismissed and that the Motions to Dismiss be denied with respect
to the other claims against Stone and the individual defendants.
On October 1, 2007, the Federal Court issued an Order directing that judgment on the Motions
to Dismiss be entered in accordance with the recommendations of the Report. On October 23, 2007,
Stone and the individual defendants filed a motion seeking permission to appeal the denial of the
Motions to Dismiss to the Fifth Circuit Court of Appeals, which motion was denied. The discovery
process is now underway. The parties have exchanged initial disclosures, document requests, and
interrogatories and have begun producing documents. On or about May 12, 2008, Lead Plaintiff filed
a motion to certify the Securities Action as a class action under Rule 23 of the Federal Rules of
Civil Procedure (Class Certification Motion). Defendants filed their opposition to the Class
Certification Motion on June 27, 2008. Defendants also filed a Motion for Judgment on the
Pleadings and a related Motion to Amend Answer to the Consolidated Class Action Complaint on or
about June 11, 2008. The Court has not yet ruled on any of these three motions. The Federal Court
has entered the parties agreed Joint Plan of Work and Proposed Scheduling Order, which provides
deadlines for additional pre-trial proceedings, including discovery, expert reports, and
dispositive motions. The Federal Court has set trial to begin in the Securities Action on
September 21, 2009.
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 15th 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,
8
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 Exploration and Production Company (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 Stones proposed
merger with Energy Partners, Ltd. (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
then-pending motion to dismiss the Securities Action after which time a hearing was to be conducted
by the Federal Court to determine the propriety of maintaining that stay. As of the date hereof,
the Federal Court has yet to consider any potential modification of the stay.
On July 18, 2008, each of Stone, Stone Energy Offshore, L.L.C. (Merger Sub), Bois dArc
Energy, Inc. (Bois dArc) and Comstock Resources (Comstock) was served with a summons and complaint
in which Bois dArc, its directors and certain of its officers, as well as Comstock, Stone and
Merger Sub, have been named as defendants in a putative class action lawsuit seeking certification
in the District Court of Clark County, Nevada, entitled Packard v. Allison, et al., Case No.
A567393. This lawsuit was brought by Gail Packard, a purported Bois dArc stockholder, on behalf of
a putative class of Bois dArc stockholders and, among other things, seeks to enjoin the named
defendants from proceeding with the proposed merger, seeks to have the merger agreement rescinded,
and seeks an award of monetary damages. Plaintiff asserts that the decisions by Bois dArcs
directors and Comstock to approve the proposed merger constituted breaches of their respective
fiduciary duties because, Ms. Packard alleges, they did not engage in a fair process to ensure the
highest possible purchase price for Bois dArcs stockholders, did not properly value Bois dArc,
failed to disclose material facts regarding the proposed merger, and did not protect against
conflicts of interest arising from the participation agreement to be entered into between Stone and
former executives of Bois dArc, parachute gross-up payments, and the change in control and
severance arrangements. Ms. Packard also contends that Stone and Merger Sub aided and abetted the
alleged breaches of fiduciary duty by Bois dArcs officers and directors. Stone and Merger Sub
intend to defend the lawsuit vigorously, and have been advised by the other defendants of their
intention to do the same.
Stones Certificate of Incorporation and/or its Restated Bylaws provide, to the extent
permissible under the law of Delaware (Stones state of incorporation), for indemnification of and
advancement of defense costs to Stones 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.
9
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 June
30, 2008, and the related condensed consolidated statement of operations for the three and
six-month periods ended June 30, 2008 and 2007, and the condensed consolidated statement of cash
flows for the six-month periods ended June 30, 2008 and 2007. These financial statements are the
responsibility of the Companys 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, 2007, 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 25, 2008, 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, 2007, is fairly stated, in all material respects, in
relation to the consolidated balance sheet from which it has been derived.
/s/ Ernst & Young LLP
New Orleans, Louisiana
August 5, 2008
10
Item 2. Managements 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.
Managements 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, 2007.
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 primarily in
the Gulf of Mexico. Prior to June 29, 2007, we also had significant operations 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,
Appalachia, Bohai Bay, China 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.
On June 29, 2007, we completed the sale of substantially all of our Rocky Mountain Region
properties and related assets to Newfield Exploration Company in two separate transactions for a
total cash consideration of $582 million. At December 31, 2006, the estimated proved reserves
associated with these assets totaled 182.4 billion cubic feet of gas equivalent (Bcfe), which
represented 31% of our estimated proved oil and natural gas reserves. The divested properties
included our interests in the Pinedale Anticline, the Jonah field, the Williston Basin, the Scott
field and several smaller producing areas. The sale also included net undeveloped acreage of
approximately 550,000 acres. We maintained a 35% proportional working interest in several
undeveloped plays in the Rocky Mountain Region totaling approximately 60,000 acres.
Pending Merger. On April 30, 2008, we announced that we had entered into a definitive merger
agreement to acquire Bois dArc Energy, Inc. Under the terms of the merger agreement, Bois dArc
stockholders will receive $13.65 in cash and 0.165 shares of Stone common stock for each share of
Bois dArc common stock. The transaction is subject to stockholder approval of both companies and
other customary conditions.
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 managements most
difficult, subjective or complex judgments. Our most significant estimates are:
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remaining proved oil and gas reserves volumes and the timing of their production; |
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estimated costs to develop and produce proved oil and gas reserves; |
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accruals of exploration costs, development costs, operating costs and production
revenue; |
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timing and future costs to abandon our oil and gas properties; |
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the effectiveness and estimated fair value of derivative positions; |
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classification of unevaluated property costs; |
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capitalized general and administrative costs and interest; |
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insurance recoveries related to hurricanes; |
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current income taxes; and |
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contingencies. |
11
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 June 30,
2008 are $20.7 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. During the fourth quarter of 2007, this investment was deemed to be impaired in the
amount of $8.2 million. During the second quarter of 2008, this investment was deemed to be
impaired in the amount of $10.1 million. This is our sole investment in the Peoples Republic of
China. It is possible that future evaluations of this project could result in additional impairment
charges to income on our income statement.
Liquidity and Capital Resources
Cash Flow and Working Capital. Net cash flow provided by operating activities totaled $239.4
million during the six months ended June 30, 2008 compared to $217.4 million in the comparable
period in 2007. Based on our outlook of commodity prices and our estimated production, we expect
to fund our 2008 capital expenditures (without consideration of the pending merger) with cash flow
provided by operating activities.
Net cash flow used in investing activities totaled $166.4 million during the six months ended
June 30, 2008, which primarily represents our investment in oil and natural gas properties offset
by proceeds from the sale of oil and gas properties. Net cash flow provided by investing
activities totaled $432.0 million during the first half of 2007, which primarily represents
proceeds received from the sale of substantially all of our Rocky Mountain Region properties offset
by our investment in oil and gas properties.
Net cash flow provided by financing activities totaled $20.0 million for the six months ended
June 30, 2008, which primarily represents proceeds from the exercise of stock options and vesting
of restricted stock. Net cash flow used in financing activities totaled $170.7 million for the six
months ended June 30, 2007, which primarily represents repayments of borrowings under our bank
credit facility.
We had working capital at June 30, 2008 of $461.2 million. A substantial portion of this
working capital was generated from the sale of our Rocky Mountain Region properties on June 29,
2007. 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. Second quarter 2008 additions to oil and gas property costs of $135.9
million included $18.0 million of lease acquisition costs, $4.8 million of capitalized salaries,
general and administrative expenses (inclusive of incentive compensation) and $4.7 million of
capitalized interest. Year-to-date 2008 additions to oil and gas property costs of $235.2 million
included $39.7 million of lease acquisition costs, $9.9 million of capitalized salaries, general
and administrative expenses (inclusive of incentive compensation) and $8.7 million of capitalized
interest. These investments were financed by cash flow from operating activities.
Our 2008 capital expenditures budget (without consideration of the pending merger), which
excludes acquisitions, asset retirement costs and capitalized interest and salaries, general and
administrative expenses, is approximately $395 million. To the extent that 2008 cash flow from
operating activities exceeds our estimated 2008 capital expenditures, we may repurchase shares of
common stock or invest in the money markets pending the completion of the pending merger or future
acquisitions. If cash flow from operating activities during 2008 is not sufficient to fund
estimated 2008 capital expenditures, we believe that our bank credit facility will provide us with
adequate liquidity. See Bank Credit Facility.
Bank Credit Facility. At June 30, 2008, we had no outstanding borrowings under our bank
credit facility and letters of credit totaling $46.1 million had been issued under the facility.
On November 1, 2007, we entered into a $300 million senior secured credit facility, maturing on
July 1, 2011, with a syndicated bank group. The new facility has an initial borrowing base of $175
million and replaces the previous $500 million credit facility. As of August 1, 2008, after accounting
for the $46.1 million of letters of credit, we had $128.9 million of borrowings available under the
new credit facility. The borrowing base under the credit facility is re-determined periodically
based on the bank groups evaluation of our proved oil and gas reserves.
12
On April 29, 2008, we entered into a commitment letter with Bank of America, N.A. and Banc of
America Securities LLC with respect to the financing of the proposed merger with Bois dArc and the
related transactions. The commitment letter provides for a commitment of an aggregate of up to $700
million in financing under a three-year amended and restated revolving credit facility. We expect
to finance the cash portion of the merger consideration, which is approximately $936 million (based
on the number of outstanding shares of Bois dArc common stock on July 11, 2008), with cash on hand
and approximately $400 million to $600 million in borrowings under the amended and restated credit
facility. We expect also to use the credit facility to pay for estimated direct merger costs, to
repay and retire certain indebtedness of Bois dArc, and for working capital purposes. The
commitment letter expires December 31, 2008 and is subject to customary closing conditions.
Share Repurchase Program. On September 24, 2007, our Board of Directors authorized a share
repurchase program for an aggregate amount of up to $100 million. The shares may be repurchased
from time to time in the open market or through privately negotiated transactions. The repurchase
program is subject to business and market conditions, and may be suspended or discontinued at any
time. Through June 30, 2008, no shares had been repurchased under this program.
Contractual Obligations and Other Commitments
In June 2008, we approved a commitment to purchase $46 million of long-lead items, mainly
tubular goods, to allow for the efficient execution of our drilling program in late 2008 and early
2009.
Results of Operations
The following tables set forth certain information with respect to our oil and gas operations.
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Three Months Ended |
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June 30, |
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2008 |
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2007 |
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Variance |
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% Change |
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Production: |
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|
|
|
|
|
|
|
|
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|
|
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|
Oil (MBbls) |
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1,422 |
|
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1,726 |
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(304 |
) |
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(18 |
%) |
Natural gas (MMcf) |
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9,284 |
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11,834 |
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(2,550 |
) |
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(22 |
%) |
Oil and natural gas (MMcfe) |
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17,816 |
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22,190 |
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(4,374 |
) |
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(20 |
%) |
Revenue data (in thousands) (a): |
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Oil revenue |
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$ |
156,569 |
|
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$ |
111,173 |
|
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$ |
45,396 |
|
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41 |
% |
Natural gas revenue |
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106,393 |
|
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|
88,718 |
|
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17,675 |
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20 |
% |
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Total oil and natural gas revenue |
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$ |
262,962 |
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$ |
199,891 |
|
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$ |
63,071 |
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32 |
% |
Average prices (a): |
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Oil (per Bbl) |
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$ |
110.10 |
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$ |
64.41 |
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$ |
45.69 |
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71 |
% |
Natural gas (per Mcf) |
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11.46 |
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7.50 |
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|
3.96 |
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|
|
53 |
% |
Oil and natural gas (per Mcfe) |
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|
14.76 |
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|
|
9.01 |
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|
|
5.75 |
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|
|
64 |
% |
Expenses (per Mcfe): |
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|
|
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Lease operating expenses |
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$ |
1.96 |
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|
$ |
1.83 |
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$ |
0.13 |
|
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|
7 |
% |
Salaries, general and administrative expenses (b) |
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0.63 |
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|
0.42 |
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|
0.21 |
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50 |
% |
DD & A expense on oil and gas properties |
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3.94 |
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3.62 |
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|
0.32 |
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9 |
% |
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(a) |
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Includes the cash settlement of effective hedging contracts. |
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(b) |
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Exclusive of incentive compensation expense. |
13
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Six Months Ended |
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June 30, |
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2008 |
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|
2007 |
|
|
Variance |
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|
% change |
|
Production: |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil (MBbls) |
|
|
2,704 |
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|
|
3,377 |
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|
|
(673 |
) |
|
|
(20 |
%) |
Natural gas (MMcf) |
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|
18,417 |
|
|
|
23,308 |
|
|
|
(4,891 |
) |
|
|
(21 |
%) |
Oil and natural gas (MMcfe) |
|
|
34,641 |
|
|
|
43,570 |
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|
|
(8,929 |
) |
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|
(20 |
%) |
Revenue data (in thousands) (a): |
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|
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Oil revenue |
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$ |
279,276 |
|
|
$ |
204,757 |
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|
|
74,519 |
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|
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36 |
% |
Natural gas revenue |
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|
186,919 |
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|
|
168,467 |
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|
|
18,452 |
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|
|
11 |
% |
|
|
|
|
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|
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Total oil and natural gas revenue |
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$ |
466,195 |
|
|
$ |
373,224 |
|
|
$ |
92,971 |
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|
|
25 |
% |
Average prices (a): |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil (per Bbl) |
|
$ |
103.28 |
|
|
$ |
60.63 |
|
|
$ |
42.65 |
|
|
|
70 |
% |
Natural gas (per Mcf) |
|
|
10.15 |
|
|
|
7.23 |
|
|
|
2.92 |
|
|
|
40 |
% |
Oil and natural gas (per Mcfe) |
|
|
13.46 |
|
|
|
8.57 |
|
|
|
4.89 |
|
|
|
57 |
% |
Expenses (per Mcfe): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease operating expenses |
|
$ |
1.88 |
|
|
$ |
2.10 |
|
|
$ |
(0.22 |
) |
|
|
(10 |
%) |
Salaries, general and administrative expenses (b) |
|
|
0.62 |
|
|
|
0.40 |
|
|
|
0.22 |
|
|
|
55 |
% |
DD&A expense on oil and gas properties |
|
|
3.84 |
|
|
|
3.63 |
|
|
|
0.21 |
|
|
|
6 |
% |
|
|
|
(a) |
|
Includes the cash settlement of effective hedging contracts. |
|
(b) |
|
Exclusive of incentive compensation expense. |
During the second quarter of 2008, net income totaled $82.8 million, or $2.91 per share,
compared to $72.0 million, or $2.60 per share for the second quarter of 2007. For the six months
ended June 30, 2008, net income totaled $145.1 million, or $5.13 per share, compared to $82.5
million, or $2.98 per share, during the comparable 2007 period. All per share amounts are on a
diluted basis.
We follow the full cost method of accounting for oil and gas properties. During the second
quarter of 2008, we recognized a ceiling test write-down of our oil and gas properties in China
totaling $10.1 million ($6.8 million after taxes). The write-down did not impact our cash flow
from operations but did reduce net income and stockholders equity.
Included in second quarter 2007 net income is a $55.8 million gain ($36.3 million net of tax)
on the sale of our Rocky Mountain Region properties, representing the excess of the proceeds from
the sale over the carrying value of the oil and gas properties and other assets sold and
transaction costs.
The variance in the three and six-month periods results was also due to the following
components:
Production. During the second quarter of 2008, total production volumes decreased 20% to 17.8
Bcfe compared to 22.2 Bcfe produced during the second quarter of 2007. Oil production during the
second quarter of 2008 totaled approximately 1,422,000 barrels compared to 1,726,000 barrels
produced during the second quarter of 2007, while natural gas production totaled 9.3 Bcf during the
second quarter of 2008 compared to 11.8 Bcf produced during the second quarter of 2007.
Year-to-date 2008 production totaled 2,704,000 barrels of oil and 18.4 Bcf of natural gas compared
to 3,377,000 barrels of oil and 23.3 Bcf of natural gas produced during the comparable 2007 period.
Production rates were negatively impacted during the second quarter of 2007 by extended Gulf
Coast shut-ins due to Hurricanes Katrina and Rita, amounting to volumes of approximately 0.9 Bcfe
(10 MMcfe per day). Without the effects of hurricane production deferrals, production volumes
decreased approximately 5.3 Bcfe for the second quarter of 2008 compared to the comparable 2007
period. Production deferrals due to hurricanes for the six months ended June 30, 2007 amounted to
2.2 Bcfe (12 MMcfe per day). Without the effect of production deferrals, year-to-date 2008
production volumes decreased approximately 11.2 Bcfe from year-to-date 2007 production volumes.
The decrease was primarily the result of the sale of substantially all of our Rocky Mountain Region
properties on June 29, 2007 and the divestiture of non-core Gulf of Mexico properties in the first
quarter of 2008. Rocky Mountain Region production was 3.0 Bcfe for the quarter ended June 30, 2007
and 6.6 Bcfe for the six months ended June 30, 2007.
Prices. Prices realized during the second quarter of 2008 averaged $110.10 per Bbl of oil and
$11.46 per Mcf of natural gas, or 64% higher, on an Mcfe basis, than second quarter 2007 average
realized prices of $64.41 per Bbl of oil and $7.50 per Mcf of natural gas. Average realized prices
during the first half of 2008 were $103.28 per Bbl of oil and $10.15 per Mcf of natural gas
compared to $60.63 per Bbl of oil and $7.23 per Mcf of natural gas realized during the first half
of 2007. All unit pricing amounts include the cash settlement of effective hedging contracts.
14
We enter into various hedging contracts in order to reduce our exposure to the possibility of
declining oil and gas prices. Our effective hedging transactions decreased our average realized
natural gas price by $0.03 per Mcf and decreased our average realized oil price by $14.63 per Bbl
in the second quarter of 2008. During the second quarter of 2007, our effective hedging
transactions did not have an impact on average realized oil or natural gas prices. Effective
hedging transactions for the first half of 2008 increased our average realized natural gas price by
$0.03 per Mcf and decreased our average realized oil price by $9.62 per Bbl. Natural gas prices
realized during the first half of 2007 were increased by $0.05 per Mcf and oil prices were
increased by $0.32 per Bbl as a result of effective hedging transactions.
Income. Second quarter 2008 oil and natural gas revenue totaled $263.0 million, compared to
second quarter 2007 oil and natural gas revenue of $199.9 million. The increase is attributable to
a 64% increase in average realized prices on a gas equivalent basis, partially offset by a 20%
decline in production volumes. Year-to-date 2008 oil and natural gas revenue totaled $466.2
million compared to $373.2 million during the comparable 2007 period. The increase was due to a
57% increase in average realized prices on a gas equivalent basis, partially offset by a 20%
decline in production volumes. We sold substantially all of our Rocky Mountain Region properties
on June 29, 2007. Rocky Mountain Region oil and natural gas revenue amounted to $21.8 million for
the second quarter of 2007 and $46.9 million for the six months ended June 30, 2007.
Interest income totaled $3.4 million during the second quarter of 2008 compared to $1.0
million during the comparable quarter of 2007 and $8.3 million during the six months ended June 30,
2008 compared to $1.6 million during the comparable 2007 period. The increase in interest income
is the result of an increase in our cash balances during the 2008 periods after the sale of
substantially all of our Rocky Mountain Region properties in June 2007.
Expenses. Lease operating expenses during the second quarter of 2008 totaled $34.9 million
compared to $40.5 million for the second quarter of 2007. For the first six months of 2008 and
2007, lease operating expenses totaled $65.2 million and $91.6 million, respectively. On a unit of
production basis, year-to-date 2008 lease operating expenses were $1.88 per Mcfe as compared to
$2.10 per Mcfe for the comparable period of 2007. The decrease in lease operating expenses in the
six months ended June 30, 2008 compared to the comparable period of 2007 was the result of
decreased major maintenance activity, the sale of substantially all of our Rocky Mountain Region
properties in late June 2007, and operational efficiencies. Rocky Mountain Region lease operating
expenses totaled $3.7 million during the quarter ended June 30, 2007 and $8.5 million during the
six months ended June 30, 2007.
Depreciation, depletion and amortization (DD&A) on oil and gas properties for the second
quarter of 2008 totaled $70.2 million, or $3.94 per Mcfe, compared to $80.4 million, or $3.62 per
Mcfe, for the second quarter of 2007. For the six months ended June 30, 2008 and 2007, DD&A
expense totaled $132.9 million and $158.2 million, respectively.
Salaries, general and administrative (SG&A) expenses (exclusive of incentive compensation) for
the second quarter of 2008 were $11.3 million compared to $9.4 million in the second quarter of
2007. For the six months ended June 30, 2008 and 2007, SG&A totaled $21.5 million and $17.6
million, respectively. The increase in SG&A is primarily due to additional compensation expense
associated with restricted stock issuances and higher legal fees. Second quarter 2007 SG&A included
severance and retention payments of $2.1 million made to employees in our Denver District which was
discontinued following the sale of substantially all of our Rocky Mountain Region properties in
June 2007. Second quarter 2007 SG&A expense for the Denver District was $2.9 million. For the six
months ended June 30, 2007, Denver District SG&A expense totaled $3.8 million.
During the year-to-date periods ended June 30, 2008 and 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. Derivative income
(expense) for the quarters ended June 30, 2008 and 2007, totaled ($3.4) million and $0.4 million,
respectively, representing changes in the fair market value of the ineffective portion of the
derivatives. Derivative income (expense) for the six months ended June 30, 2008 and 2007, totaled
($3.6) million and ($0.1) million, respectively, representing changes in the fair market value of
the ineffective portion of the derivatives.
Interest expense for the second quarter of 2008 totaled $3.6 million, net of $4.7 million of
capitalized interest, compared to interest expense of $10.3 million, net of $5.0 million of
capitalized interest, during the second quarter of 2007. For the six months ended June 30, 2008,
interest expense totaled $7.5 million, net of capitalized interest of $8.7 million, compared to
interest expense of $21.5 million, net of capitalized interest of $9.4 million for the six months
ended June 30, 2007. Interest expense for the first half of 2007 included interest on our senior
floating rate notes and interest on our bank credit facility. The senior floating rate notes were
redeemed in full in August 2007 and we had no outstanding borrowings under our bank credit facility
during the first half of 2008.
Production taxes during the second quarter of 2008 totaled $3.5 million compared to $2.8
million in the second quarter of 2007. For the six months ended June 30, 2008 and 2007, production
taxes totaled $4.9 million and $6.7 million, respectively. The increase in second quarter 2008
production taxes was the result of an ad valorem tax adjustment related to our Rocky Mountain
Region properties for periods prior to their sale. The overall decrease in production taxes for
the six months ended June 30, 2008 resulted from the sale of substantially all of our Rocky
Mountain Region properties in June 2007. Rocky Mountain Region production taxes totaled $1.2
million for the quarter ended June 30, 2007 and $3.9 million for the six months ended June 30,
2007.
15
We estimate that we have incurred $47.0 million of current federal income tax expense for the
six months ended June 30, 2008, $10.5 of which is unpaid through June 30, 2008.
Recent Accounting Developments
Non-controlling Interests & Business Combinations. In December 2007, the Financial Accounting
Standards Board (FASB) issued SFAS No. 160, Non-controlling Interests in Consolidated Financial
Statements an amendment of ARB No. 151 and SFAS No. 141(R), Business Combinations. These
statements are designed to improve, simplify and converge internationally the accounting for
business combinations and the reporting of non-controlling interests in consolidated financial
statements. These statements are effective for us beginning on January 1, 2009.
Derivative Instruments and Hedging Activities. In March 2008, the FASB issued SFAS No. 161,
Disclosures about Derivative Instruments and Hedging Activities an amendment of FASB Statement
No. 133. SFAS No. 161 requires enhanced disclosures about an entitys derivative and hedging
activities. SFAS No. 161 will be effective for financial statements issued for fiscal years
beginning after November 15, 2008.
We have not yet determined whether 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 45% 50% of our estimated 2008 production and 40% 50% of our estimated
2009 production without consideration of our pending merger. See Item 1. Financial Statements
Note 4 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 Annual Report on Form 10-K for the year ended December 31, 2007, 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 $400 million at June 30, 2008, all of which 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. We
had no outstanding borrowings under our bank credit facility, which bears interest at a variable
rate, at June 30, 2008.
Since the filing of our Annual Report on Form 10-K for the year ended December 31, 2007, there
have been no material changes in reported market risk as it relates to interest rates.
16
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 Stones 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 Stones disclosure
controls and procedures as of the end of the quarterly period ended June 30, 2008. Based on this
evaluation, our chief executive officer and chief financial officer believe:
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Stones 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 SECs rules and forms; and |
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Stones 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 Stones management, including Stones 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 June 30, 2008 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 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 tax 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 tax years 1999, 2000 and 2001. Further, on December 29, 2005, the LDR
filed another petition in the 15th 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. Also, on
January 2, 2008, Stone was served with a petition (civil action number 2007-6754) claiming $1.5
million of additional franchise taxes due for the 2004 franchise tax year, plus accrued interest of
$800,000 calculated through November 30, 2007. These assessments all relate to the LDRs 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. The franchise
tax years 2005, 2006 and 2007 remain subject to examination.
In 2005, Stone received an inquiry from the Philadelphia Stock Exchange investigating matters
including trading prior to Stones October 6, 2005 announcement regarding the revision of Stones
proved reserves. Stone cooperated fully with this inquiry. Stone has not received any further
inquiries from the Philadelphia Exchange since the original request for information.
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 Stones 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 Companys 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 & Policemans Pension Fund designated as Lead Plaintiff
(Securities Action). Lead Plaintiff filed a consolidated class action complaint on or about June
14, 2006. The consolidated
17
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.
On August 17, 2007, a Federal Magistrate Judge issued a report and recommendation (the
Report) recommending that the Federal Court grant in part and deny in part the Motions to
Dismiss. The Report recommended that (i) the claims asserted against defendants Kenneth Beer and
James Prince pursuant to Section 10(b) of the Securities Exchange Act and Rule 10b-5 promulgated
thereunder and (ii) claims asserted on behalf of putative class members who sold their Company
shares prior to October 6, 2005 be dismissed and that the Motions to Dismiss be denied with respect
to the other claims against Stone and the individual defendants.
On October 1, 2007, the Federal Court issued an Order directing that judgment on the Motions
to Dismiss be entered in accordance with the recommendations of the Report. On October 23, 2007,
Stone and the individual defendants filed a motion seeking permission to appeal the denial of the
Motions to Dismiss to the Fifth Circuit Court of Appeals, which motion was denied. The discovery
process is now underway. The parties have exchanged initial disclosures, document requests, and
interrogatories and have begun producing documents. On or about May 12, 2008, Lead Plaintiff filed
a motion to certify the Securities Action as a class action under Rule 23 of the Federal Rules of
Civil Procedure (Class Certification Motion). Defendants filed their opposition to the Class
Certification Motion on June 27, 2008. Defendants also filed a Motion for Judgment on the
Pleadings and a related Motion to Amend Answer to the Consolidated Class Action Complaint on or
about June 11, 2008. The Court has not yet ruled on any of these three motions. The Federal Court
has entered the parties agreed Joint Plan of Work and Proposed Scheduling Order, which provides
deadlines for additional pre-trial proceedings, including discovery, expert reports, and
dispositive motions. The Federal Court has set trial to begin in the Securities Action on
September 21, 2009.
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 15th 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 Exploration and Production Company (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 Stones proposed
merger with Energy Partners, Ltd. (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
then-pending motion to dismiss the Securities Action after which time a hearing was to be conducted
by the Federal Court to determine the propriety of maintaining that stay. As of the date hereof,
the Federal Court has yet to consider any potential modification of the stay.
On July 18, 2008, each of Stone, Stone Energy Offshore, L.L.C. (Merger Sub), Bois dArc
Energy, Inc. (Bois dArc) and Comstock Resources (Comstock) was served with a summons and complaint
in which Bois dArc, its directors and certain of its officers, as well as Comstock, Stone and
Merger Sub, have been named as defendants in a putative class action lawsuit seeking certification
in the District Court of Clark County, Nevada, entitled Packard v. Allison, et al., Case No.
A567393. This lawsuit was brought by Gail Packard, a purported Bois dArc stockholder, on behalf of
a putative class of Bois dArc stockholders and, among other things, seeks to enjoin the named
defendants from proceeding with the proposed merger, seeks to have the merger agreement rescinded,
and seeks an award of monetary damages. Plaintiff asserts that the decisions by Bois dArcs
directors and Comstock to approve the proposed merger constituted breaches of their respective
fiduciary duties because, Ms. Packard alleges, they did not engage in a fair process to ensure the
highest possible purchase price for Bois dArcs stockholders, did not properly value Bois dArc,
failed to disclose material facts regarding the proposed merger, and did not protect against
conflicts of interest arising from the participation agreement to be entered into between Stone and
former executives of Bois dArc, parachute gross-up payments, and the change in
18
control and
severance arrangements. Ms. Packard also contends that Stone and Merger Sub aided and abetted the
alleged breaches of fiduciary duty by Bois dArcs officers and directors.
Stone and Merger Sub intend to defend the lawsuit vigorously, and have been advised by the
other defendants of their intention to do the same.
Stones Certificate of Incorporation and/or its Restated Bylaws provide, to the extent
permissible under the law of Delaware (Stones state of incorporation), for indemnification of and
advancement of defense costs to Stones 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 1A. Risk Factors
The following risk factor updates the Risk Factors included in our Annual Report on Form 10-K
for the year ended December 31, 2007. Except as set forth below, there have been no material
changes to the risks described in Part I, Item 1A, of our Annual Report on Form 10-K for the year
ended December 31, 2007.
Our debt level and the covenants in the current and any future agreements governing our debt could
negatively impact our financial condition, results of operations and business prospects.
As of August 1, 2008, we had $400 million in outstanding indebtedness. We have a borrowing
base under our current bank credit facility of $175 million with availability of an additional
$128.9 million of borrowings as of August 1, 2008. In addition, we will incur substantial
additional indebtedness if we get stockholder approval of our merger with Bois dArc Energy. In
connection with the Bois dArc merger, we expect to amend and restate our current bank credit
facility to increase the borrowing base thereunder to $700 million in order to fund a part of the
cash portion of the merger consideration. We expect to borrow approximately $400 million to $600
million under the amended and restated bank credit facility for this purpose.
The terms of the current agreements governing our debt impose, and the terms of our future
debt agreements, including the amended and restated credit facility that we will enter into in
connection with the Bois dArc merger will impose, significant restrictions on our ability to take
a number of actions that we may otherwise desire to take, including:
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incurring additional debt; |
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paying dividends on stock, redeeming stock or redeeming subordinated debt; |
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making investments; |
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creating liens on our assets; |
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selling assets; |
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guaranteeing other indebtedness; |
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entering into agreements that restrict dividends from our subsidiary to us; |
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merging, consolidating or transferring all or substantially all of our assets; and |
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entering into transactions with affiliates. |
19
Our level of indebtedness, and the covenants contained in current and future agreements
governing our debt, could have important consequences on our operations, including:
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making it more difficult for us to satisfy our obligations under the indentures or other
debt and increasing the risk that we may default on our debt obligations; |
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requiring us to dedicate a substantial portion of our cash flow from operating
activities to required payments on debt, thereby reducing the availability of cash flow for
working capital, capital expenditures and other general business activities; |
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limiting our ability to obtain additional financing in the future for working capital,
capital expenditures, acquisitions and other general business activities; |
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limiting our flexibility in planning for, or reacting to, changes in our business and
the industry in which we operate; |
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detracting from our ability to successfully withstand a downturn in our business or the
economy generally; |
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placing us at a competitive disadvantage against other less leveraged competitors; and |
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making us vulnerable to increases in interest rates, because debt under our credit
facility is at variable rates. |
We may be required to repay all or a portion of our debt on an accelerated basis in certain
circumstances. If we fail to comply with the covenants and other restrictions in the agreements
governing our debt, it could lead to an event of default and the acceleration of our repayment of
outstanding debt. Our ability to comply with these covenants and other restrictions may be
affected by events beyond our control, including prevailing economic and financial conditions. Our
borrowing base under our bank credit facility, which is re-determined periodically, is based on an
amount established by the bank group after its evaluation of our proved oil and gas reserve values.
Upon a re-determination, if borrowings in excess of the revised borrowing capacity were
outstanding, we could be forced to repay a portion of our bank debt.
We may not have sufficient funds to make such repayments. If we are unable to repay our debt
out of cash on hand, we could attempt to refinance such debt, sell assets or repay such debt with
the proceeds from an equity offering. We cannot assure you that we will be able to generate
sufficient cash flow from operating activities to pay the interest on our debt or that future
borrowings, equity financings or proceeds from the sale of assets will be available to pay or
refinance such debt. The terms of our debt, including our credit facility and our indentures, may
also prohibit us from taking such actions. Factors that will affect our ability to raise cash
through an offering of our capital stock, a refinancing of our debt or a sale of assets include
financial market conditions and our market value and operating performance at the time of such
offering or other financing. We cannot assure you that any such offering, refinancing or sale of
assets can be successfully completed.
20
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On September 24, 2007, our Board of Directors authorized a share repurchase program for an
aggregate amount of up to $100 million. Through June 30, 2008, no shares had been repurchased
under this program; however, shares were withheld from certain employees to pay taxes associated
with the employees vesting of restricted stock. The following table sets forth information
regarding our repurchases or acquisitions of common stock during the second quarter of 2008:
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Total Number of |
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Maximum Number (or |
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Shares (or Units) |
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Approximate Dollar Value) |
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Total Number |
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Average |
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Purchased as Part |
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of Shares (or Units) that |
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of Shares (or |
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Price Paid |
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of Publicly |
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May Yet be Purchased |
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Units) |
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per Share |
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Announced Plans |
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Under the Plans or |
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Period |
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Purchased |
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(or Unit) |
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or Programs |
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Programs |
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Share Repurchase
Program: |
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April 2008 |
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$ |
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May 2008 |
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June 2008 |
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$ |
100,000,000 |
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Other: |
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April 2008 |
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2,967 |
(a) |
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53.00 |
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May 2008 |
|
|
|
|
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|
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|
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June 2008 |
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|
2,605 |
(a) |
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|
67.82 |
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|
|
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|
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5,572 |
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59.93 |
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N/A |
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Total |
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5,572 |
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$ |
59.93 |
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(a) |
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Amounts include shares withheld from employees upon the vesting of restricted stock in order
to satisfy the required tax withholding obligations. |
Item 4. Submission of Matters to a Vote of Security Holders
At the annual meeting of stockholders held on May 15, 2008, two directors, Robert A. Bernhard
and David H. Welch, were elected to serve as directors of the Company until the annual meeting of
stockholders in the year 2009. Robert A. Bernhard received the vote of 24,360,916 shares with the
vote of 833,940 shares withheld, and David H. Welch received the vote of 23,252,566 shares with the
vote of 1,942,290 shares withheld. No other director was standing for election. Donald E. Powell,
Kay G. Priestly and David R. Voelker are Class I Directors whose terms expire with the 2009 annual
meeting of stockholders. George R. Christmas, B. J. Duplantis, John P. Laborde and Richard A.
Pattarozzi are Class II Directors whose terms expire with the 2010 annual meeting of stockholders.
A management proposal to ratify the appointment by the Board of Directors of Ernst & Young LLP as
independent registered public accountants to the Company for the year 2008 was approved by the
stockholders. The vote was 24,051,494 shares for, 29,470 shares against, and 1,113,892 shares
abstained. A management proposal to approve amending the Companys Bylaws to eliminate over a
period of two years the classified structure of the Board was also approved by the stockholders.
The vote was 24,971,299 shares for, 216,478 shares against, and 7,079 shares abstained.
21
Item 6. Exhibits
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2.1
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Agreement and Plan of Merger, by and among Stone Energy Corporation, Stone
Energy Offshore, L.L.C. and Bois dArc Energy, Inc., dated as of April 30, 2008
(incorporated by reference to Exhibit 2.1 to the registrants Current Report on Form
8-K dated April 30, 2008 (File No. 001-12074)). |
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2.2
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Stockholder Agreement, by and among Stone Energy Corporation and Comstock
Resources, Inc., dated as of April 30, 2008 (incorporated by reference to Exhibit 2.2
to the registrants Current Report on Form 8-K dated April 30, 2008 (File No.
001-12074)). |
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2.3
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Stockholder Agreement, by and among Stone Energy Corporation and Wayne and
Gayle Laufer, dated as of April 30, 2008 (incorporated by reference to Exhibit 2.3 to
the registrants Current Report on Form 8-K dated April 30, 2008 (File No.
001-12074)). |
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2.4
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Stockholder Agreement, by and among Stone Energy Corporation and Gary
Blackie, dated as of April 30, 2008 (incorporated by reference to Exhibit 2.4 to the
registrants Current Report on Form 8-K dated April 30, 2008 (File No. 001-12074)). |
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2.5
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Participation Agreement, among Stone Energy Corporation, Gary W. Blackie,
William E. Holman, and Gregory T. Martin, dated as of April 30, 2008 (incorporated by
reference to Exhibit 2.5 to the registrants Current Report on Form 8-K dated April
30, 2008 (File No. 001-12074)). |
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3.1
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Amended & Restated Bylaws of Stone Energy Corporation dated May 15, 2008
(incorporated by reference to Exhibit 3.1 to the registrants Current Report on Form
8-K dated May 15, 2008 (File No. 001-12074)). |
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4.1
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Amendment No. 4 to Rights Agreement between Stone Energy Corporation and
Mellon Investor Services LLC, as rights agent, dated as of April 30, 2008
(incorporated by reference to Exhibit 4.1 to the registrants Current Report on Form
8-K dated April 30, 2008 (File No. 001-12074)). |
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*15.1
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Letter from Ernst & Young LLP dated August 5, 2008, regarding unaudited
interim financial information. |
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*31.1
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Certification of Principal Executive Officer of Stone Energy Corporation as
required by Rule 13a-14(a) of the Securities Exchange Act of 1934. |
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*31.2
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Certification of Principal Financial Officer of Stone Energy Corporation as
required by Rule 13a-14(a) of the Securities Exchange Act of 1934. |
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*32.1
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Certification of Chief Executive Officer and Chief Financial Officer of Stone
Energy Corporation pursuant to 18 U.S.C. § 1350. |
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99.1
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Summons and Complaint filed with the District Court of Clark Count, Nevada
entitled Packard v. Allison, et al., Case No. A567393 (incorporated by reference to
Exhibit 99.1 to the registrants Current Report on Form 8-K dated July 18, 2008 (File
No. 001-12074)). |
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* |
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Filed herewith |
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Not considered to be filed for the purposes of Section 18 of the Securities
Exchange Act of 1934 or otherwise subject to the liabilities of that section. |
22
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.
STONE ENERGY CORPORATION
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Date: August 5, 2008 |
By: |
/s/ J. Kent Pierret
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J. Kent Pierret |
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Senior Vice President,
Chief Accounting Officer and Treasurer
(On behalf of the Registrant and as
Chief
Accounting Officer) |
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23
EXHIBIT INDEX
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2.1
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Agreement and Plan of Merger, by and among Stone Energy Corporation, Stone
Energy Offshore, L.L.C. and Bois dArc Energy, Inc., dated as of April 30, 2008
(incorporated by reference to Exhibit 2.1 to the registrants Current Report on Form
8-K dated April 30, 2008 (File No. 001-12074)). |
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2.2
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Stockholder Agreement, by and among Stone Energy Corporation and
Comstock Resources, Inc., dated as of April 30, 2008 (incorporated by reference to
Exhibit 2.2 to the registrants Current Report on Form 8-K dated April 30, 2008 (File
No. 001-12074)). |
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2.3
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Stockholder Agreement, by and among Stone Energy Corporation and Wayne
and Gayle Laufer, dated as of April 30, 2008 (incorporated by reference to Exhibit
2.3 to the registrants Current Report on Form 8-K dated April 30, 2008 (File No.
001-12074)). |
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2.4
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Stockholder Agreement, by and among Stone Energy Corporation and Gary
Blackie, dated as of April 30, 2008 (incorporated by reference to Exhibit 2.4 to the
registrants Current Report on Form 8-K dated April 30, 2008 (File No. 001-12074)). |
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2.5
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Participation Agreement, among Stone Energy Corporation, Gary W.
Blackie, William E. Holman, and Gregory T. Martin, dated as of April 30, 2008
(incorporated by reference to Exhibit 2.5 to the registrants Current Report on Form
8-K dated April 30, 2008 (File No. 001-12074)). |
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3.1
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Amended & Restated Bylaws of Stone Energy Corporation dated May 15,
2008 (incorporated by reference to Exhibit 3.1 to the registrants Current Report
on Form 8-K dated May 15, 2008 (File No. 001-12074)). |
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4.1
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Amendment No. 4 to Rights Agreement between Stone Energy Corporation and
Mellon Investor Services LLC, as rights agent, dated as of April 30, 2008
(incorporated by reference to Exhibit 4.1 to the registrants Current Report on Form
8-K dated April 30, 2008 (File No. 001-12074)). |
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*15.1
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Letter from Ernst & Young LLP dated August 5, 2008, regarding unaudited
interim financial information. |
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*31.1
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Certification of Principal Executive Officer of Stone Energy Corporation
as required by Rule 13a-14(a) of the Securities Exchange Act of 1934. |
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*31.2
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Certification of Principal Financial Officer of Stone Energy Corporation
as required by Rule 13a-14(a) of the Securities Exchange Act of 1934. |
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*32.1
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Certification of Chief Executive Officer and Chief Financial Officer of Stone
Energy Corporation pursuant to 18 U.S.C. § 1350. |
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99.1
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Summons and Complaint filed with the District Court of Clark Count,
Nevada entitled Packard v. Allison, et al., Case No. A567393 (incorporated by
reference to Exhibit 99.1 to the registrants Current Report on Form 8-K dated July
18, 2008 (File No. 001-12074)). |
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* |
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Filed herewith |
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Not considered to be filed for the purposes of Section 18 of the Securities
Exchange Act of 1934 or otherwise subject to the liabilities of that section. |