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 September 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
(State or Other Jurisdiction of Incorporation or Organization)
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72-1235413 (I.R.S. Employer Identification No.) |
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625 E. Kaliste Saloom Road
Lafayette, Louisiana
(Address of Principal Executive Offices)
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70508
(Zip Code) |
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 |
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Smaller reporting company o |
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(Do not check if a 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 November 3, 2008, there were 39,873,710 shares of the registrants Common Stock, par value
$.01 per share, outstanding.
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
STONE ENERGY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(In thousands of dollars)
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September 30, |
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December 31, |
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2008 |
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2007 |
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(Unaudited) |
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(Note 1) |
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Assets |
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Current assets: |
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Cash and cash equivalents |
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$ |
172,643 |
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$ |
475,126 |
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Accounts receivable |
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146,792 |
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186,853 |
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Fair value of hedging contracts |
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37,578 |
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2,163 |
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Deferred tax asset |
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9,039 |
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Current income tax receivable |
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36,323 |
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Inventory |
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15,457 |
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Other current assets |
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2,046 |
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521 |
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Total current assets |
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410,839 |
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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 $2,389,315 and $2,158,327,
respectively |
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2,588,132 |
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1,001,179 |
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Unevaluated |
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663,491 |
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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 $27,023 and $8,164,
respectively |
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12,123 |
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29,565 |
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Building and land, net |
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5,632 |
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5,667 |
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Fixed assets, net |
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5,674 |
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5,584 |
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Other assets, net |
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32,601 |
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23,338 |
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Fair value of hedging contracts |
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6,863 |
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Goodwill |
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337,886 |
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Total assets |
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$ |
4,063,241 |
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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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$ |
123,676 |
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$ |
88,801 |
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Undistributed oil and gas proceeds |
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73,873 |
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37,743 |
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Fair value of hedging contracts |
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8,560 |
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18,968 |
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Asset retirement obligations |
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65,411 |
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44,180 |
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Current income taxes payable |
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57,631 |
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Deferred income taxes |
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2,394 |
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Other current liabilities |
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27,673 |
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13,934 |
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Total current liabilities |
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301,587 |
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261,257 |
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Long-term debt |
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825,000 |
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400,000 |
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Deferred taxes |
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721,584 |
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89,665 |
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Asset retirement obligations |
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362,845 |
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245,610 |
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Fair value of hedging contracts |
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434 |
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Other long-term liabilities |
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11,829 |
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7,269 |
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Total liabilities |
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2,223,279 |
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1,003,801 |
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Minority interest |
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163 |
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Commitments and contingencies |
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Common stock |
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396 |
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278 |
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Treasury stock |
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(2,878 |
) |
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(1,161 |
) |
Additional paid-in capital |
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1,259,331 |
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515,055 |
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Retained earnings |
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561,418 |
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382,365 |
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Accumulated other comprehensive income (loss) |
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21,532 |
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(10,735 |
) |
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Total stockholders equity |
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1,839,799 |
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885,802 |
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Total liabilities and stockholders equity |
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$ |
4,063,241 |
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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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Nine Months Ended |
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September 30, |
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September 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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$ |
100,726 |
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$ |
100,759 |
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$ |
380,002 |
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$ |
305,516 |
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Gas production |
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66,584 |
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77,653 |
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253,503 |
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246,120 |
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Derivative income, net |
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5,045 |
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1,433 |
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Total operating revenue |
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172,355 |
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178,412 |
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634,938 |
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551,636 |
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Operating expenses: |
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Lease operating expenses |
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40,149 |
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39,476 |
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105,302 |
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131,072 |
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Production taxes |
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1,325 |
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1,542 |
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6,228 |
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8,214 |
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Depreciation, depletion and amortization |
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51,962 |
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71,096 |
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186,180 |
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231,275 |
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Write-down of oil and gas properties |
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8,759 |
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18,859 |
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Accretion expense |
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4,146 |
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4,394 |
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12,367 |
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|
13,226 |
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Salaries, general and administrative expenses |
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10,481 |
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7,844 |
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32,015 |
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25,479 |
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Incentive compensation expense |
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283 |
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1,319 |
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2,183 |
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2,680 |
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Derivative expenses, net |
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36 |
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127 |
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Total operating expenses |
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117,105 |
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125,707 |
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363,134 |
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412,073 |
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Gain on Rocky Mountain Region properties divestiture |
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(89 |
) |
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55,727 |
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Income from operations |
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55,250 |
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52,616 |
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271,804 |
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195,290 |
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Other (income) expenses: |
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Interest expense |
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3,036 |
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|
6,281 |
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10,528 |
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|
27,756 |
|
Interest income |
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|
(2,255 |
) |
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(5,314 |
) |
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(10,601 |
) |
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(6,923 |
) |
Other income, net |
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(1,421 |
) |
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(1,356 |
) |
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(3,775 |
) |
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(4,591 |
) |
Early extinguishment of debt |
|
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|
592 |
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|
592 |
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Total other (income) expenses |
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(640 |
) |
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|
203 |
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(3,848 |
) |
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16,834 |
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Income before taxes |
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55,890 |
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|
52,413 |
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275,652 |
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178,456 |
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Provision (benefit) for income taxes: |
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Current |
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(45,583 |
) |
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29,000 |
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|
1,395 |
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|
46,500 |
|
Deferred |
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|
67,352 |
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(10,655 |
) |
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|
95,083 |
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|
15,429 |
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Total income taxes |
|
|
21,769 |
|
|
|
18,345 |
|
|
|
96,478 |
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|
61,929 |
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Net income |
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$ |
34,121 |
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|
$ |
34,068 |
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|
$ |
179,174 |
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$ |
116,527 |
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Basic earnings per share |
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$ |
1.05 |
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$ |
1.23 |
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$ |
6.08 |
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$ |
4.22 |
|
Diluted earnings per share |
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|
1.04 |
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|
1.23 |
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|
6.02 |
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|
4.21 |
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Average shares outstanding |
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|
32,441 |
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|
27,630 |
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|
|
29,457 |
|
|
|
27,583 |
|
Average shares outstanding assuming dilution |
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|
32,670 |
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|
27,722 |
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|
29,740 |
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|
27,669 |
|
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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Nine Months Ended |
|
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|
September 30, |
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|
2008 |
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|
2007 |
|
Cash flows from operating activities: |
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|
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Net income |
|
$ |
179,174 |
|
|
$ |
116,527 |
|
Adjustments to reconcile net income to net cash provided by operating
activities: |
|
|
|
|
|
|
|
|
Depreciation, depletion and amortization |
|
|
186,180 |
|
|
|
231,275 |
|
Write-down of oil and gas properties |
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|
18,859 |
|
|
|
|
|
Accretion expense |
|
|
12,367 |
|
|
|
13,226 |
|
Deferred income tax provision |
|
|
95,083 |
|
|
|
15,429 |
|
Gain on sale of oil and gas properties |
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|
|
|
|
(55,727 |
) |
Settlement of asset retirement obligations |
|
|
(42,202 |
) |
|
|
(53,668 |
) |
Non-cash stock compensation expense |
|
|
6,286 |
|
|
|
3,342 |
|
Excess tax benefits |
|
|
(3,045 |
) |
|
|
(959 |
) |
Non-cash derivative expense |
|
|
(1,654 |
) |
|
|
127 |
|
Early extinguishment of debt |
|
|
|
|
|
|
592 |
|
Other non-cash expenses |
|
|
1,307 |
|
|
|
1,968 |
|
Increase (decrease) in current income taxes payable |
|
|
(92,714 |
) |
|
|
46,500 |
|
Decrease in accounts receivable |
|
|
101,428 |
|
|
|
58,893 |
|
Increase in other current assets |
|
|
(1,483 |
) |
|
|
(505 |
) |
Increase (decrease) in accounts payable |
|
|
(300 |
) |
|
|
(700 |
) |
Increase (decrease) in other current liabilities |
|
|
30,069 |
|
|
|
(1,986 |
) |
Investment in hedging contracts |
|
|
(1,914 |
) |
|
|
|
|
Other |
|
|
(243 |
) |
|
|
(3 |
) |
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
487,198 |
|
|
|
374,331 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Acquisition of Bois dArc Energy, Inc., net of cash acquired (Note 2) |
|
|
(922,538 |
) |
|
|
|
|
Investment in oil and gas properties |
|
|
(311,338 |
) |
|
|
(194,290 |
) |
Proceeds from sale of oil and gas properties, net of expenses |
|
|
14,090 |
|
|
|
571,862 |
|
Sale of fixed assets |
|
|
4 |
|
|
|
691 |
|
Investment in fixed and other assets |
|
|
(1,176 |
) |
|
|
(1,039 |
) |
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities |
|
|
(1,220,958 |
) |
|
|
377,224 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Proceeds from bank borrowings |
|
|
425,000 |
|
|
|
|
|
Repayments of bank borrowings |
|
|
|
|
|
|
(172,000 |
) |
Redemption of senior floating rate notes |
|
|
|
|
|
|
(225,000 |
) |
Deferred financing costs |
|
|
(8,738 |
) |
|
|
|
|
Excess tax benefits |
|
|
3,045 |
|
|
|
|
|
Purchase of treasury stock |
|
|
(4,185 |
) |
|
|
|
|
Net proceeds from exercise of stock options and vesting of restricted stock |
|
|
16,155 |
|
|
|
2,054 |
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
431,277 |
|
|
|
(394,946 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
(302,483 |
) |
|
|
356,609 |
|
Cash and cash equivalents, beginning of period |
|
|
475,126 |
|
|
|
58,862 |
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
172,643 |
|
|
$ |
415,471 |
|
|
|
|
|
|
|
|
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 (Stone) and its
subsidiaries as of September 30, 2008 and for the three and nine-month periods ended September 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 nine-month periods ended
September 30, 2008 are not necessarily indicative of future financial results.
Note 2 Acquisitions and Divestitures
Acquisitions
On August 28, 2008, we completed the acquisition of Bois dArc Energy, Inc. (Bois dArc) in
a cash and stock transaction totaling approximately $1.7 billion. Bois dArc was an independent
exploration company engaged in the discovery and production of oil and natural gas in the Gulf of
Mexico. The primary factors considered by management in making the acquisition included the belief
that the merger would position the combined company as one of the largest independent Gulf of
Mexico-focused exploration and production companies, with a solid production base, a strong
portfolio for continued development of proved and probable reserves, and an extensive inventory of
exploration opportunities. At the time of the transaction, management expected the merger would be
accretive to our stockholders during 2008 and 2009 with respect to earnings per share, reserves and
production. Pursuant to the terms and conditions of the agreement and plan of merger, Stone paid
total merger consideration of approximately $935 million in cash and issued approximately 11.3
million common shares, valued at $63.52 per share. The per share value of the Stone common shares
issued was calculated as the average of Stones closing share price for the two days prior to
through the two days after the merger announcement date of April 30, 2008. The cash component of
the merger consideration was funded with approximately $510 million of cash on hand and $425
million of borrowings from our amended and restated bank credit facility.
The acquisition was accounted for using the purchase method of accounting for business
combinations. The acquisition has been included in Stones Condensed Consolidated Financial
Statements since August 28, 2008, the date the acquisition closed. The following table represents
the allocation of the total purchase price of Bois dArc to the acquired assets and liabilities of
Bois dArc. The allocation represents the fair values assigned to each of the assets acquired and
liabilities assumed. The purchase price allocation is preliminary, subject to finalized fair value
appraisals and completed evaluations of proved and unproved oil and natural gas properties and
deferred income taxes. These and other estimates are subject to change as additional information
becomes available and is assessed by Stone.
|
|
|
|
|
|
|
(In thousands) |
|
Fair value of Bois dArcs net assets: |
|
|
|
|
Net working capital, including cash of $15,333 |
|
$ |
30,563 |
|
Proved oil and gas properties |
|
|
1,471,747 |
|
Unevaluated oil and gas properties |
|
|
425,115 |
|
Fixed and other assets |
|
|
333 |
|
Goodwill |
|
|
337,886 |
|
Deferred tax liability |
|
|
(533,869 |
) |
Dismantlement reserve |
|
|
(4,239 |
) |
Asset retirement obligations |
|
|
(71,720 |
) |
|
|
|
|
Total fair value of net assets |
|
$ |
1,655,816 |
|
|
|
|
|
4
The following table represents the breakdown of the consideration paid for Bois dArcs net
assets.
|
|
|
|
|
|
|
(In thousands) |
|
Consideration paid for Bois dArcs net assets: |
|
|
|
|
Cash consideration paid |
|
$ |
935,425 |
|
Stone common stock issued |
|
|
717,887 |
|
|
|
|
|
Aggregate purchase consideration issued to Bois dArc stockholders |
|
|
1,653,312 |
|
Plus: |
|
|
|
|
Estimated direct merger costs * |
|
|
2,504 |
|
|
|
|
|
Total purchase price |
|
$ |
1,655,816 |
|
|
|
|
|
|
|
|
* |
|
Estimated direct merger costs include legal and accounting fees,
printing fees, investment banking expenses and other merger-related costs. |
The allocation of the purchase price includes $337.9 million of asset valuation attributable
to goodwill. Goodwill has been determined in accordance with Statement of Financial Accounting
Standards (SFAS) No. 141, Business Combinations, and represents the amount by which the total
purchase price exceeds the aggregate fair values of the assets acquired and liabilities assumed in
the merger, other than goodwill. Goodwill will not be deductible for tax purposes.
The following summary pro forma combined statement of operations data of Stone for the three
and nine-month periods ended September 30, 2008 and 2007 has been prepared to give effect to the
merger as if it had occurred on January 1, 2008 and 2007, respectively. The pro forma financial
information is not necessarily indicative of the results that might have occurred had the
transaction taken place on January 1, 2008 and 2007 and is not intended to be a projection of
future results. Future results may vary significantly from the results reflected in the following
pro forma financial information because of normal production declines, changes in commodity prices,
future acquisitions and divestitures, future development and exploration activities, and other
factors.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
September 30, |
|
September 30, |
|
|
2008 |
|
2007 |
|
2008 |
|
2007 |
|
|
(In thousands, except per share amounts) |
Revenues |
|
$ |
271,818 |
|
|
$ |
266,399 |
|
|
$ |
995,657 |
|
|
$ |
806,851 |
|
Income from operations |
|
|
87,107 |
|
|
|
48,404 |
|
|
|
376,477 |
|
|
|
189,477 |
|
Net income |
|
|
48,820 |
|
|
|
29,321 |
|
|
|
239,142 |
|
|
|
106,788 |
|
Basic earnings per share |
|
$ |
1.23 |
|
|
$ |
0.75 |
|
|
$ |
6.08 |
|
|
$ |
2.75 |
|
Diluted earnings per share |
|
$ |
1.23 |
|
|
$ |
0.75 |
|
|
$ |
6.03 |
|
|
$ |
2.74 |
|
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 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 3 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 228,000 and 92,000 dilutive shares for the three months
ended September 30, 2008 and 2007, respectively, and 284,000 and 86,000 dilutive shares for the
nine months ended September 30, 2008 and 2007, respectively.
5
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
105,000 and 837,000 shares in the three months ended September 30, 2008 and 2007, respectively.
Stock options that were considered antidilutive totaled 65,000 and 1,010,000 shares in the nine
months ended September 30, 2008 and 2007, respectively.
During the three months ended September 30, 2008, approximately 41,000 shares of common stock
were issued upon the vesting of restricted stock by employees and nonemployee directors and 100,000
shares of common stock were repurchased under our stock repurchase program. During the nine months
ended September 30, 2008, approximately 545,000 shares of common stock 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 and 100,000 shares of common stock were repurchased under our stock repurchase program. On
August 28, 2008, 11,301,751 shares of common stock were issued upon the completion of our
acquisition of Bois dArc (see Note 2).
During the three months ended September 30, 2007, approximately 74,000 shares of common stock
were issued upon the exercise of stock options and vesting of restricted stock by employees and
nonemployee directors. During the nine months ended September 30, 2007, approximately 133,000
shares of common stock 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 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 |
|
|
|
|
|
|
|
|
|
Daily |
|
|
|
|
|
|
Volume |
|
Floor |
|
Ceiling |
|
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 |
|
|
|
|
|
Daily |
|
|
|
|
Volume |
|
Swap |
|
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 |
6
Effective hedging transactions reduced our natural gas revenue by $0.5 million and reduced oil
revenue by $15.9 million during the three months ended September 30, 2008. During the three months
ended September 30, 2007, effective hedging transactions increased our natural gas revenue by $7.3
million and reduced oil revenue by $0.1 million. During the nine months ended September 30, 2008,
we realized a net increase of $0.1 million in natural gas revenue and a net decrease of $41.9
million in oil revenue related to
our effective hedging transactions. We realized a net increase of $8.4 million in natural gas
revenue and a net increase of $1.0 million in oil revenue related to our effective hedging
transactions during the nine months ended September 30, 2007.
During the quarter ended September 30, 2008, as a result of extended shut-ins of production
after Hurricanes Gustav and Ike, our September 2008 crude oil and natural gas production levels
were below the volumes that we had hedged. Consequently, some of our crude oil and natural gas
hedges for the month of September 2008 were deemed to be ineffective. During the quarter ended
September 30, 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 expense (income) for the three and nine months ended September
30, 2008 and 2007 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
|
(In thousands) |
|
Cash settlement on the ineffective portion of derivatives |
|
$ |
736 |
|
|
$ |
|
|
|
$ |
736 |
|
|
$ |
|
|
Amortization of the cost of puts |
|
|
(957 |
) |
|
|
|
|
|
|
(957 |
) |
|
|
|
|
Changes in fair market value of ineffective portion of
derivatives |
|
|
5,266 |
|
|
|
(36 |
) |
|
|
1,654 |
|
|
|
(127 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivative income (expense) |
|
$ |
5,045 |
|
|
$ |
(36 |
) |
|
$ |
1,433 |
|
|
$ |
(127 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2008, our outstanding derivative contracts are with JPMorgan Chase Bank,
N.A., BNP Paribas and Bank of America, N.A.
Note 5 Long-Term Debt
Long-term debt consisted of the following at:
|
|
|
|
|
|
|
|
|
|
|
September 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 |
|
Bank debt |
|
|
425.0 |
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt |
|
$ |
825.0 |
|
|
$ |
400.0 |
|
|
|
|
|
|
|
|
At September 30, 2008, we had $425.0 million in borrowings under our bank credit facility and
letters of credit totaling $46.1 million had been issued pursuant to the facility. On August 28,
2008, we entered into an amended and restated revolving credit facility totaling $700 million,
maturing on July 1, 2011, through a syndicated bank group. The new facility has an initial
borrowing base of $700 million and replaces the previous $300 million facility. At September 30,
2008, the weighted average interest rate under the credit facility was approximately 5.5%. As of
November 3, 2008, after accounting for the $46.1 million of letters of credit, we had $228.9
million of borrowings available under the new credit facility. The facility is required to be
guaranteed by all of our material direct and indirect subsidiaries. As of August 28, 2008 the
facility is guaranteed by Stone Energy Offshore, L.L.C. (Stone Offshore), a wholly owned
subsidiary of Stone.
The borrowing base under the credit facility is redetermined semi-annually, in May and
November, by the lenders taking into consideration the estimated value of our oil and gas
properties and those of our direct and indirect material subsidiaries in accordance with the
lenders customary practices for oil and gas loans. In addition, we and the lenders each have
discretion at any time, but not more than two additional times in any calendar year, to have the
borrowing base redetermined. The bank group is currently conducting its scheduled November review
of the borrowing base.
The credit facility is collateralized by substantially all of Stones and Stone Offshores
assets. Stone and Stone Offshore are required to mortgage, and grant a security interest in, their
oil and gas reserves representing at least 80% of the discounted present value of the future
consolidated net income of Stone, Stone Offshore and their material subsidiaries oil and gas
reserves reviewed in determining the borrowing base. At Stones option, loans under the credit
facility will bear interest at a rate based on the adjusted London Interbank Offering Rate plus an
applicable margin, or a rate based on the prime rate or Federal funds rate plus an applicable
margin. The credit facility provides for optional and mandatory prepayments, affirmative and
negative covenants, and interest
7
coverage ratio and leverage ratio maintenance covenants.
On August 28, 2008, we entered into supplemental indentures governing the terms of our 8 1/4%
Senior Subordinated Notes due 2011 (the 2011 Notes) and our 6 3/4% Senior Subordinated Notes due
2014 (the 2014 Notes). The 2011 Notes and the 2014 Notes are now guaranteed by Stone Offshore on
an unsecured senior subordinated basis.
Note 6 Comprehensive Income
The following table illustrates the components of comprehensive income for the three and nine
months ended September 30, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
(In millions) |
|
|
|
|
|
Net income |
|
$ |
34.1 |
|
|
$ |
34.1 |
|
|
$ |
179.2 |
|
|
$ |
116.5 |
|
Other comprehensive
income (loss), net
of tax effect: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment for fair
value accounting of
derivatives |
|
|
119.9 |
|
|
|
(2.1 |
) |
|
|
32.3 |
|
|
|
(6.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
$ |
154.0 |
|
|
$ |
32.0 |
|
|
$ |
211.5 |
|
|
$ |
109.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 7 Asset Retirement Obligations
During the third quarter of 2008 and 2007, we recognized non-cash expenses of $4.1 million and
$4.4 million, respectively, related to the accretion of our asset retirement obligations. For the
nine-month periods ended September 30, 2008 and 2007, we recognized accretion expense of $12.4
million and $13.2 million, respectively.
The change in our asset retirement obligations during the nine months ended September 30, 2008
is set forth below:
|
|
|
|
|
|
|
Nine Months |
|
|
|
Ended |
|
|
|
September 30, |
|
|
|
2008 |
|
|
|
($ in millions) |
|
Asset retirement obligations as of the beginning of the period, including current portion |
|
$ |
289.8 |
|
Liabilities incurred |
|
|
|
|
Liabilities settled |
|
|
(42.2 |
) |
Liabilities assumed |
|
|
72.4 |
|
Divestment of properties |
|
|
(32.7 |
) |
Accretion expense |
|
|
12.4 |
|
Revision of estimates |
|
|
128.6 |
|
|
|
|
|
Asset retirement obligations as of the end of the period, including current portion |
|
$ |
428.3 |
|
|
|
|
|
The revision of estimates primarily relates to increases in estimates of plugging and
abandoning the structures that were lost in Hurricane Ike.
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 three and nine-month periods ended September 30, 2008, our investment
was deemed to be impaired in the amount of $8.8 million and $18.9 million, respectively. Included
in unevaluated oil and gas property costs at September 30, 2008 are $12.1 million of remaining
capital expenditures related to our properties in Bohai Bay, China.
8
Note 9 Fair Value Measurements
We adopted the provisions of 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 nine months ended September 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 September 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 |
|
$ |
14.2 |
|
|
$ |
14.2 |
|
|
$ |
|
|
|
$ |
|
|
Hedging contracts |
|
|
44.4 |
|
|
|
|
|
|
|
|
|
|
|
44.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
58.6 |
|
|
$ |
14.2 |
|
|
$ |
|
|
|
$ |
44.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at September 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 |
|
$ |
(9.0 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
(9.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
(9.0 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
(9.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
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 nine months ended
September 30, 2008.
|
|
|
|
|
|
|
Hedging |
|
|
|
Contracts, net |
|
|
|
(In millions) |
|
Balance as of January 1, 2008 |
|
$ |
(16.8 |
) |
Total gains/(losses) (realized or unrealized): |
|
|
|
|
Included in earnings |
|
|
1.4 |
|
Included in other comprehensive income |
|
|
9.6 |
|
Purchases, issuances and settlements |
|
|
41.2 |
|
Transfers in and out of Level 3 |
|
|
|
|
|
|
|
|
Balance as of September 30, 2008 |
|
$ |
35.4 |
|
|
|
|
|
|
|
|
|
|
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 September 30, 2008 |
|
$ |
1.7 |
|
|
|
|
|
In February 2007, the Financial Accounting Standards Board (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.
Note
10 Commitments and Contingencies
In June 2008, management 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. We have paid out approximately $19.5 million to date on these long-lead items,
leaving a remaining commitment of $26.5 million. Tubular goods held for use in our oil and gas
operations at September 30, 2008 totaled approximately $15.5 million and have been classified as a
current asset on our balance sheet. After the closing of the merger with Bois dArc, we currently
have rig commitments totaling approximately $34.6 million due within six months or less.
On December 30, 2004, Stone was served with two petitions (civil action numbers 2004-6227 and
2004-6228) filed by the
9
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, 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. On December 21, 2006, the Federal Court stayed the Federal
10
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. The complaint was subsequently amended to substitute Thomas Packard as
plaintiff in lieu of Gail Packard, and the amended complaint eliminated Stone and Merger Sub as
defendants. On August 21, 2008, the court denied plaintiffs motions for a preliminary injunction
and for expedited discovery, noting that a likelihood of plaintiffs success on the merits is
questionable. Each of the remaining defendants filed a motion to dismiss plaintiffs complaint,
which motions are currently pending.
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.
Note 11 Guarantor Financial Statements
Stone Offshore is an unconditional guarantor (the Guarantor Subsidiary) of our 81/4% Senior
Subordinated Notes due 2011 and 63/4% Senior Subordinated Notes due 2014 (see Note 5 Long-Term
Debt). Our remaining subsidiaries (the Non-Guarantor Subsidiaries) have not provided guarantees.
The following presents condensed consolidating financial information as of September 30, 2008 and
for the three and nine months ended September 30, 2008 on an issuer (parent company), guarantor
subsidiary, non-guarantor subsidiary, and consolidated basis. Elimination entries presented are
necessary to combine the entities. There were no subsidiary guarantees of any of our debt as of
December 31, 2007 or for the three or nine month periods ended September 30, 2007.
11
CONDENSED CONSOLIDATING BALANCE SHEET (UNAUDITED)
SEPTEMBER 30, 2008
(In thousands of dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non- |
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor |
|
|
Guarantor |
|
|
|
|
|
|
|
|
|
Parent |
|
|
Subsidiary |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Consolidated |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
131,116 |
|
|
$ |
41,409 |
|
|
$ |
118 |
|
|
$ |
|
|
|
$ |
172,643 |
|
Accounts receivable |
|
|
112,923 |
|
|
|
33,586 |
|
|
|
283 |
|
|
|
|
|
|
|
146,792 |
|
Fair value of hedging contracts |
|
|
37,578 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37,578 |
|
Current income tax receivable |
|
|
35,610 |
|
|
|
713 |
|
|
|
|
|
|
|
|
|
|
|
36,323 |
|
Inventory |
|
|
12,747 |
|
|
|
2,710 |
|
|
|
|
|
|
|
|
|
|
|
15,457 |
|
Other current assets |
|
|
2,030 |
|
|
|
16 |
|
|
|
|
|
|
|
|
|
|
|
2,046 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
332,004 |
|
|
|
78,434 |
|
|
|
401 |
|
|
|
|
|
|
|
410,839 |
|
Oil and gas properties United
States |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proved, net |
|
|
1,119,907 |
|
|
|
1,466,182 |
|
|
|
2,043 |
|
|
|
|
|
|
|
2,588,132 |
|
Unevaluated |
|
|
235,940 |
|
|
|
427,551 |
|
|
|
|
|
|
|
|
|
|
|
663,491 |
|
Oil and gas properties China |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unevaluated |
|
|
12,123 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,123 |
|
Building and land, net |
|
|
5,632 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,632 |
|
Fixed assets, net |
|
|
5,404 |
|
|
|
270 |
|
|
|
|
|
|
|
|
|
|
|
5,674 |
|
Other assets, net |
|
|
29,086 |
|
|
|
3,515 |
|
|
|
|
|
|
|
|
|
|
|
32,601 |
|
Fair value of hedging contracts |
|
|
6,863 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,863 |
|
Investment in subsidiary |
|
|
1,647,254 |
|
|
|
1,475 |
|
|
|
|
|
|
|
(1,648,729 |
) |
|
|
|
|
Goodwill |
|
|
|
|
|
|
337,886 |
|
|
|
|
|
|
|
|
|
|
|
337,886 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
3,394,213 |
|
|
$ |
2,315,313 |
|
|
$ |
2,444 |
|
|
$ |
(1,648,729 |
) |
|
$ |
4,063,241 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders
Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable to vendors |
|
$ |
108,140 |
|
|
$ |
15,536 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
123,676 |
|
Undistributed oil and gas
proceeds |
|
|
27,322 |
|
|
|
46,384 |
|
|
|
167 |
|
|
|
|
|
|
|
73,873 |
|
Fair value of hedging contracts |
|
|
8,560 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,560 |
|
Asset retirement obligations |
|
|
65,411 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
65,411 |
|
Deferred income taxes |
|
|
2,394 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,394 |
|
Other current liabilities |
|
|
24,687 |
|
|
|
2,986 |
|
|
|
|
|
|
|
|
|
|
|
27,673 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
236,514 |
|
|
|
64,906 |
|
|
|
167 |
|
|
|
|
|
|
|
301,587 |
|
Long-term debt |
|
|
825,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
825,000 |
|
Deferred taxes * |
|
|
187,714 |
|
|
|
533,870 |
|
|
|
|
|
|
|
|
|
|
|
721,584 |
|
Asset retirement obligations |
|
|
290,106 |
|
|
|
72,092 |
|
|
|
647 |
|
|
|
|
|
|
|
362,845 |
|
Fair value of hedging contracts |
|
|
434 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
434 |
|
Other long-term liabilities |
|
|
11,827 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
11,829 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
1,551,595 |
|
|
|
670,870 |
|
|
|
814 |
|
|
|
|
|
|
|
2,223,279 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority interest |
|
|
|
|
|
|
|
|
|
|
163 |
|
|
|
|
|
|
|
163 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock |
|
|
396 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
396 |
|
Treasury stock |
|
|
(2,878 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,878 |
) |
Additional paid-in capital |
|
|
1,259,331 |
|
|
|
1,647,254 |
|
|
|
1,475 |
|
|
|
(1,648,729 |
) |
|
|
1,259,331 |
|
Retained earnings (deficit) |
|
|
564,237 |
|
|
|
(2,811 |
) |
|
|
(8 |
) |
|
|
|
|
|
|
561,418 |
|
Accumulated other comprehensive
income |
|
|
21,532 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,532 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity |
|
|
1,842,618 |
|
|
|
1,644,443 |
|
|
|
1,467 |
|
|
|
(1,648,729 |
) |
|
|
1,839,799 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
stockholders equity |
|
$ |
3,394,213 |
|
|
$ |
2,315,313 |
|
|
$ |
2,444 |
|
|
$ |
(1,648,729 |
) |
|
$ |
4,063,241 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Deferred income taxes have been allocated to guarantor subsidiary where related oil and gas properties reside. |
12
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED SEPTEMBER 30, 2008
(In thousands of dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non- |
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor |
|
|
Guarantor |
|
|
|
|
|
|
|
|
|
Parent |
|
|
Subsidiary |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Consolidated |
|
Operating revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil production |
|
$ |
99,501 |
|
|
$ |
1,225 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
100,726 |
|
Gas production |
|
|
63,373 |
|
|
|
3,211 |
|
|
|
|
|
|
|
|
|
|
|
66,584 |
|
Derivative income, net |
|
|
5,045 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,045 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenue |
|
|
167,919 |
|
|
|
4,436 |
|
|
|
|
|
|
|
|
|
|
|
172,355 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease operating expenses |
|
|
35,873 |
|
|
|
4,276 |
|
|
|
|
|
|
|
|
|
|
|
40,149 |
|
Production taxes |
|
|
1,339 |
|
|
|
(14 |
) |
|
|
|
|
|
|
|
|
|
|
1,325 |
|
Depreciation, depletion, amortization |
|
|
49,382 |
|
|
|
2,580 |
|
|
|
|
|
|
|
|
|
|
|
51,962 |
|
Write-down of oil and gas properties |
|
|
8,759 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,759 |
|
Accretion expense |
|
|
3,770 |
|
|
|
373 |
|
|
|
3 |
|
|
|
|
|
|
|
4,146 |
|
Salaries, general and administrative |
|
|
10,436 |
|
|
|
45 |
|
|
|
|
|
|
|
|
|
|
|
10,481 |
|
Incentive compensation expense |
|
|
283 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
283 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
109,842 |
|
|
|
7,260 |
|
|
|
3 |
|
|
|
|
|
|
|
117,105 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations |
|
|
58,077 |
|
|
|
(2,824 |
) |
|
|
(3 |
) |
|
|
|
|
|
|
55,250 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (income) expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
3,028 |
|
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
3,036 |
|
Interest income |
|
|
(2,233 |
) |
|
|
(22 |
) |
|
|
|
|
|
|
|
|
|
|
(2,255 |
) |
Other (income) expense, net |
|
|
(1,427 |
) |
|
|
1 |
|
|
|
5 |
|
|
|
|
|
|
|
(1,421 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other (income) expenses |
|
|
(632 |
) |
|
|
(13 |
) |
|
|
5 |
|
|
|
|
|
|
|
(640 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before taxes |
|
|
58,709 |
|
|
|
(2,811 |
) |
|
|
(8 |
) |
|
|
|
|
|
|
55,890 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision (benefit) for income taxes: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current |
|
|
(45,583 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(45,583 |
) |
Deferred |
|
|
67,352 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
67,352 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income taxes |
|
|
21,769 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,769 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
36,940 |
|
|
$ |
(2,811 |
) |
|
$ |
(8 |
) |
|
$ |
|
|
|
$ |
34,121 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 2008
(In thousands of dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non- |
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor |
|
|
Guarantor |
|
|
|
|
|
|
|
|
|
Parent |
|
|
Subsidiary |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Consolidated |
|
Operating revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil production |
|
$ |
378,777 |
|
|
$ |
1,225 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
380,002 |
|
Gas production |
|
|
250,292 |
|
|
|
3,211 |
|
|
|
|
|
|
|
|
|
|
|
253,503 |
|
Derivative income, net |
|
|
1,433 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,433 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenue |
|
|
630,502 |
|
|
|
4,436 |
|
|
|
|
|
|
|
|
|
|
|
634,938 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease operating expenses |
|
|
101,026 |
|
|
|
4,276 |
|
|
|
|
|
|
|
|
|
|
|
105,302 |
|
Production taxes |
|
|
6,242 |
|
|
|
(14 |
) |
|
|
|
|
|
|
|
|
|
|
6,228 |
|
Depreciation, depletion, amortization |
|
|
183,600 |
|
|
|
2,580 |
|
|
|
|
|
|
|
|
|
|
|
186,180 |
|
Write-down of oil and gas properties |
|
|
18,859 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,859 |
|
Accretion expense |
|
|
11,991 |
|
|
|
373 |
|
|
|
3 |
|
|
|
|
|
|
|
12,367 |
|
Salaries, general and administrative |
|
|
31,970 |
|
|
|
45 |
|
|
|
|
|
|
|
|
|
|
|
32,015 |
|
Incentive compensation expense |
|
|
2,183 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,183 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
355,871 |
|
|
|
7,260 |
|
|
|
3 |
|
|
|
|
|
|
|
363,134 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations |
|
|
274,631 |
|
|
|
(2,824 |
) |
|
|
(3 |
) |
|
|
|
|
|
|
271,804 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (income) expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
10,520 |
|
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
10,528 |
|
Interest income |
|
|
(10,579 |
) |
|
|
(22 |
) |
|
|
|
|
|
|
|
|
|
|
(10,601 |
) |
Other (income) expense, net |
|
|
(3,781 |
) |
|
|
1 |
|
|
|
5 |
|
|
|
|
|
|
|
(3,775 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other (income) expenses |
|
|
(3,840 |
) |
|
|
(13 |
) |
|
|
5 |
|
|
|
|
|
|
|
(3,848 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before taxes |
|
|
278,471 |
|
|
|
(2,811 |
) |
|
|
(8 |
) |
|
|
|
|
|
|
275,652 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision (benefit) for income taxes: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current |
|
|
1,395 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,395 |
|
Deferred |
|
|
95,083 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
95,083 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income taxes |
|
|
96,478 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
96,478 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
181,993 |
|
|
$ |
(2,811 |
) |
|
$ |
(8 |
) |
|
$ |
|
|
|
$ |
179,174 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 2008
(In thousands of dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non- |
|
|
|
|
|
|
|
|
|
|
Guarantor |
|
|
Guarantor |
|
|
|
|
|
|
Parent |
|
|
Subsidiary |
|
|
Subsidiaries |
|
|
Consolidated |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
181,993 |
|
|
$ |
(2,811 |
) |
|
$ |
(8 |
) |
|
$ |
179,174 |
|
Adjustments to reconcile net income to net cash
provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation, depletion and amortization |
|
|
183,600 |
|
|
|
2,580 |
|
|
|
|
|
|
|
186,180 |
|
Write-down of oil and gas properties |
|
|
18,859 |
|
|
|
|
|
|
|
|
|
|
|
18,859 |
|
Accretion expense |
|
|
11,991 |
|
|
|
373 |
|
|
|
3 |
|
|
|
12,367 |
|
Deferred income tax provision |
|
|
95,083 |
|
|
|
|
|
|
|
|
|
|
|
95,083 |
|
Settlement of asset retirement obligations |
|
|
(42,202 |
) |
|
|
|
|
|
|
|
|
|
|
(42,202 |
) |
Non-cash stock compensation expense |
|
|
6,286 |
|
|
|
|
|
|
|
|
|
|
|
6,286 |
|
Excess tax benefits |
|
|
(3,045 |
) |
|
|
|
|
|
|
|
|
|
|
(3,045 |
) |
Non-cash derivative expense |
|
|
(1,654 |
) |
|
|
|
|
|
|
|
|
|
|
(1,654 |
) |
Other non-cash expenses |
|
|
1,307 |
|
|
|
|
|
|
|
|
|
|
|
1,307 |
|
Decrease in current income taxes payable |
|
|
(92,714 |
) |
|
|
|
|
|
|
|
|
|
|
(92,714 |
) |
(Increase) decrease in accounts receivable |
|
|
75,913 |
|
|
|
25,632 |
|
|
|
(117 |
) |
|
|
101,428 |
|
Increase in other current assets |
|
|
(204 |
) |
|
|
(1,279 |
) |
|
|
|
|
|
|
(1,483 |
) |
Decrease in accounts payable |
|
|
(300 |
) |
|
|
|
|
|
|
|
|
|
|
(300 |
) |
Increase in other current liabilities |
|
|
14,578 |
|
|
|
15,309 |
|
|
|
182 |
|
|
|
30,069 |
|
Investment in hedging contracts |
|
|
(1,914 |
) |
|
|
|
|
|
|
|
|
|
|
(1,914 |
) |
Other |
|
|
3,994 |
|
|
|
(4,237 |
) |
|
|
|
|
|
|
(243 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
451,571 |
|
|
|
35,567 |
|
|
|
60 |
|
|
|
487,198 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of Bois dArc Energy, Inc. |
|
|
(929,364 |
) |
|
|
6,768 |
|
|
|
58 |
|
|
|
(922,538 |
) |
Investment in oil and gas properties |
|
|
(310,412 |
) |
|
|
(926 |
) |
|
|
|
|
|
|
(311,338 |
) |
Proceeds from sale of oil and gas properties, net
of expenses |
|
|
14,090 |
|
|
|
|
|
|
|
|
|
|
|
14,090 |
|
Sale of fixed assets |
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
4 |
|
Investment in fixed and other assets |
|
|
(1,176 |
) |
|
|
|
|
|
|
|
|
|
|
(1,176 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities |
|
|
(1,226,858 |
) |
|
|
5,842 |
|
|
|
58 |
|
|
|
(1,220,958 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from bank borrowings |
|
|
425,000 |
|
|
|
|
|
|
|
|
|
|
|
425,000 |
|
Deferred financing costs |
|
|
(8,738 |
) |
|
|
|
|
|
|
|
|
|
|
(8,738 |
) |
Excess tax benefits |
|
|
3,045 |
|
|
|
|
|
|
|
|
|
|
|
3,045 |
|
Purchase of treasury stock |
|
|
(4,185 |
) |
|
|
|
|
|
|
|
|
|
|
(4,185 |
) |
Net proceeds from exercise of stock options and
vesting of restricted stock |
|
|
16,155 |
|
|
|
|
|
|
|
|
|
|
|
16,155 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
431,277 |
|
|
|
|
|
|
|
|
|
|
|
431,277 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
(344,010 |
) |
|
|
41,409 |
|
|
|
118 |
|
|
|
(302,483 |
) |
Cash and cash equivalents, beginning of period |
|
|
475,126 |
|
|
|
|
|
|
|
|
|
|
|
475,126 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
131,116 |
|
|
$ |
41,409 |
|
|
$ |
118 |
|
|
$ |
172,643 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15
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
September 30, 2008, and the related condensed consolidated statement of operations for the three
and nine-month periods ended September 30, 2008 and 2007, and the condensed consolidated statement
of cash flows for the nine-month periods ended September 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.
New Orleans, Louisiana
November 5, 2008
16
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.
Acquisition
On August 28, 2008, we completed the acquisition of Bois dArc Energy, Inc. (Bois dArc) in
a cash and stock transaction totaling approximately $1.7 billion. Bois dArc was an independent
exploration company engaged in the discovery and production of oil and natural gas in the Gulf of
Mexico. The primary factors considered by management in making the acquisition included the belief
that the merger would position the combined company as one of the largest independent Gulf of
Mexico-focused exploration and production companies, with a solid production base, a strong
portfolio for continued development of proved and probable reserves, and an extensive inventory of
exploration opportunities. At the time of the transaction, management expected the merger would be
accretive to our stockholders during 2008 and 2009 with respect to earnings per share, reserves and
production. Pursuant to the terms and conditions of the agreement and plan of merger, Stone paid
total merger consideration of approximately $935 million in cash and issued approximately 11.3
million common shares, valued at $63.52 per share. The per share value of the Stone common shares
issued was calculated as the average of Stones closing share price for the two days prior to
through the two days after the merger announcement date of April 30, 2008. The cash component of
the merger consideration was funded with approximately $510 million of cash on hand and $425
million of borrowings from our amended and restated bank credit facility. The revenues and expenses
associated with Bois dArc have been included in Stones Condensed Consolidated Financial
Statements since August 28, 2008, the date the acquisition closed. The subsequent shut-ins from
Hurricanes Gustav and Ike minimized the effects of the Bois dArc revenues on third quarter 2008
results.
Amended Credit Facility
In connection with the acquisition of Bois dArc on August 28, 2008, we entered into an
amended and restated revolving credit facility, maturing on July 1, 2011, through a syndicated bank
group. The new facility has an initial borrowing base of $700 million. See Bank Credit Facility
below for additional information regarding the amended and restated credit facility.
Hurricanes
Hurricanes Gustav and Ike caused significant disruption in our operations for the quarter
resulting in production deferrals approximating 7.1 Bcfe and significant damage to our offshore
facilities. Although we are still quantifying the financial impact of the damage we anticipate it
will exceed our insurance coverage limits.
17
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:
|
|
|
remaining proved oil and gas reserves volumes and the timing of their production; |
|
|
|
|
estimated costs to develop and produce proved oil and gas reserves; |
|
|
|
|
accruals of exploration costs, development costs, operating costs and production
revenue; |
|
|
|
|
timing and future costs to abandon our oil and gas properties; |
|
|
|
|
the effectiveness and estimated fair value of derivative positions; |
|
|
|
|
classification of unevaluated property costs; |
|
|
|
|
capitalized general and administrative costs and interest; |
|
|
|
|
insurance recoveries related to hurricanes; |
|
|
|
|
estimates of fair value in business combinations; |
|
|
|
|
goodwill impairment testing and measurement; |
|
|
|
|
current income taxes; and |
|
|
|
|
contingencies. |
This Quarterly Report on Form 10-Q should be read together with the discussion contained in
our Annual Report on Form 10-K regarding these critical accounting policies.
Other Factors Affecting Our Business and Financial Results
In addition to the matters discussed above, our business, financial condition and results of
operations are affected by a number of other factors. This Quarterly Report on Form 10-Q should be
read in conjunction with the discussion in our Annual Report on Form 10-K regarding these other
risk factors.
Known Trends and Uncertainties
International Operations. Included in unevaluated oil and gas property costs at September
30, 2008 are $12.1 million of remaining 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 three and nine-month periods ended September
30, 2008, this investment was deemed to be impaired in the amount of $8.8 million and $18.9
million, respectively. 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.
Credit Crisis. During the quarter ended September 30, 2008, world financial markets
experienced a severe reduction in the availability of credit. Although we have not been severely
impacted by this condition in the short-term, it is difficult to predict its impact on us in future
quarters. Possible negative impacts could include a decrease in the availability of borrowings
under our credit facility, an increased counterparty credit risk on our derivatives contracts and
the requirement by contractual counterparties of us to post collateral guaranteeing performance.
Goodwill. The acquisition of Bois d Arc resulted in the recording of goodwill on our balance
sheet in the amount of $337.9 million. Generally accepted accounting principles require that we
periodically test goodwill for impairment. If we were to determine that goodwill is impaired this
would result in a charge on our income statement in future periods.
Lease Operating Expenses. Although we have not completely quantified the damage caused by
Hurricanes Gustav and Ike, we expect that lease operating expenses will increase in the coming
quarters as repairs are initiated.
Declining Commodity Prices. We have experienced a significant decline in oil and natural gas
prices in the last several months. If this trend were to continue it could increase the likelihood
of goodwill impairments and write-downs of oil and gas properties, reduce the available borrowings
under our credit facility and severely impact our cash flows used to fund operations and capital
expenditures.
18
Liquidity and Capital Resources
Cash Flow and Working Capital. Net cash flow provided by operating activities totaled $487.2
million during the nine months ended September 30, 2008 compared to $374.3 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 with cash flow provided by operating activities.
Net cash flow used in investing activities totaled $1.2 billion during the nine months ended
September 30, 2008, which primarily represents cash used in the acquisition of Bois dArc and our
investment in oil and natural gas properties. Net cash flow provided by investing activities
totaled $377.2 million during the first nine months 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 $431.3 million for the nine months
ended September 30, 2008, which primarily represents borrowings under our bank credit facility in
conjunction with the acquisition of Bois dArc and proceeds from the exercise of stock options and
vesting of restricted stock. Net cash flow used in financing activities totaled $394.9 million for
the nine months ended September 30, 2007, which primarily represents the redemption of our senior
floating rate notes and repayments of borrowings under our bank credit facility.
We had working capital at September 30, 2008 of $109.3 million. We believe that our working
capital balance should be viewed in conjunction with the 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. Third quarter 2008 additions to oil and gas property costs of $2.1
billion included $29.4 million of lease acquisition costs, $1.9 billion of property acquisition
costs, $4.3 million of capitalized salaries, general and administrative expenses (inclusive of
incentive compensation) and $7.0 million of capitalized interest. Year-to-date 2008 additions to
oil and gas property costs of $2.3 billion included $69.1 million of lease acquisition costs, $1.9
billion of property acquisition costs, $14.2 million of capitalized salaries, general and
administrative expenses (inclusive of incentive compensation) and $15.7 million of capitalized
interest. These investments were financed by cash flow from operating activities, borrowings under
our bank credit facility and the issuance of common stock.
Our 2008 capital expenditures budget, which excludes acquisitions, asset retirement costs and
capitalized interest, salaries, general and administrative expenses, was approximately $395 million
prior to the Bois dArc acquisition. After adjusting for the Bois dArc acquisition and the impact
of the hurricanes, we now expect 2008 capital expenditures to be approximately $425 to $450
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. 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 September 30, 2008, we had $425 million of outstanding borrowings
under our bank credit facility and letters of credit totaling $46.1 million had been issued under
the facility. On August 28, 2008, we entered into an amended and restated revolving credit
facility totaling $700 million, maturing on July 1, 2011, through a syndicated bank group. The new
facility has an initial borrowing base of $700 million and replaces the previous $300 million
facility. At September 30, 2008, the weighted average interest rate under the credit facility was
approximately 5.5%. As of November 3, 2008, after accounting for the $46.1 million of letters of
credit, we had $228.9 million of borrowings available under the new credit facility. The facility
is required to be guaranteed by all of our material direct and indirect subsidiaries. As of August
28, 2008 the facility is guaranteed by Stone Energy Offshore, L.L.C. (Stone Offshore), a wholly
owned subsidiary of Stone.
The borrowing base under the credit facility is redetermined semi-annually, in May and
November, by the lenders taking into consideration the estimated value of our oil and gas
properties and those of our direct and indirect material subsidiaries in accordance with the
lenders customary practices for oil and gas loans. In addition, we and the lenders each have
discretion at any time, but not more than two additional times in any calendar year, to have the
borrowing base redetermined. The bank group is currently conducting its scheduled November review
of the borrowing base.
The credit facility is collateralized by substantially all of Stones and Stone Offshores
assets. Stone and Stone Offshore are required to mortgage, and grant a security interest in, their
oil and gas reserves representing at least 80% of the discounted present value of the future
consolidated net income of Stone, Stone Offshore and their material subsidiaries oil and gas
reserves reviewed in determining the borrowing base. At Stones option, loans under the credit
facility will bear interest at a rate based on the adjusted London Interbank Offering Rate plus an
applicable margin, or a rate based on the prime rate or Federal funds rate plus an applicable
margin. The credit facility provides for optional and mandatory prepayments, affirmative and
negative covenants, and interest coverage ratio and leverage ratio maintenance covenants.
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
19
negotiated transactions. The repurchase
program is subject to business and market conditions, and may be suspended or discontinued at any
time. Through September 30, 2008, 100,000 shares had been repurchased under this program at a
total cost of $4.2 million.
Contractual Obligations and Other Commitments
In June 2008, management 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. We have paid out approximately $19.5 million to date on these long-lead items,
leaving a remaining commitment of $26.5 million. After the closing of the merger with Bois dArc,
we currently have rig commitments totaling approximately $34.6 million due within six months or
less.
Results of Operations
The following tables set forth certain information with respect to our oil and gas operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
|
|
|
September 30, |
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
Variance |
|
|
% Change |
|
Production: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil (MBbls) |
|
|
943 |
|
|
|
1,313 |
|
|
|
(370 |
) |
|
|
(28 |
%) |
Natural gas (MMcf) |
|
|
6,213 |
|
|
|
10,801 |
|
|
|
(4,588 |
) |
|
|
(42 |
%) |
Oil and natural gas (MMcfe) |
|
|
11,871 |
|
|
|
18,679 |
|
|
|
(6,808 |
) |
|
|
(36 |
%) |
Revenue data (in thousands) (a): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil revenue |
|
$ |
100,726 |
|
|
$ |
100,759 |
|
|
$ |
(33 |
) |
|
|
|
|
Natural gas revenue |
|
|
66,584 |
|
|
|
77,653 |
|
|
|
(11,069 |
) |
|
|
(14 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total oil and natural gas revenue |
|
$ |
167,310 |
|
|
$ |
178,412 |
|
|
$ |
(11,102 |
) |
|
|
(6 |
%) |
Average prices (a): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil (per Bbl) |
|
$ |
106.81 |
|
|
$ |
76.74 |
|
|
$ |
30.07 |
|
|
|
39 |
% |
Natural gas (per Mcf) |
|
|
10.72 |
|
|
|
7.19 |
|
|
|
3.53 |
|
|
|
49 |
% |
Oil and natural gas (per Mcfe) |
|
|
14.09 |
|
|
|
9.55 |
|
|
|
4.54 |
|
|
|
48 |
% |
Expenses (per Mcfe): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease operating expenses |
|
$ |
3.38 |
|
|
$ |
2.11 |
|
|
$ |
1.27 |
|
|
|
60 |
% |
Salaries, general and administrative expenses (b) |
|
|
0.88 |
|
|
|
0.42 |
|
|
|
0.46 |
|
|
|
110 |
% |
DD&A expense on oil and gas properties |
|
|
4.30 |
|
|
|
3.76 |
|
|
|
0.54 |
|
|
|
14 |
% |
|
|
|
(a) |
|
Includes the cash settlement of effective hedging contracts. |
|
(b) |
|
Exclusive of incentive compensation expense. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
|
|
|
|
|
|
September 30, |
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
Variance |
|
|
% change |
|
Production: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil (MBbls) |
|
|
3,647 |
|
|
|
4,691 |
|
|
|
(1,044 |
) |
|
|
(22 |
%) |
Natural gas (MMcf) |
|
|
24,631 |
|
|
|
34,109 |
|
|
|
(9,478 |
) |
|
|
(28 |
%) |
Oil and natural gas (MMcfe) |
|
|
46,513 |
|
|
|
62,255 |
|
|
|
(15,742 |
) |
|
|
(25 |
%) |
Revenue data (in thousands) (a): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil revenue |
|
$ |
380,002 |
|
|
$ |
305,516 |
|
|
$ |
74,486 |
|
|
|
24 |
% |
Natural gas revenue |
|
|
253,503 |
|
|
|
246,120 |
|
|
|
7,383 |
|
|
|
3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total oil and natural gas revenue |
|
$ |
633,505 |
|
|
$ |
551,636 |
|
|
$ |
81,869 |
|
|
|
15 |
% |
Average prices (a): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil (per Bbl) |
|
$ |
104.20 |
|
|
$ |
65.13 |
|
|
$ |
39.07 |
|
|
|
60 |
% |
Natural gas (per Mcf) |
|
|
10.29 |
|
|
|
7.22 |
|
|
|
3.07 |
|
|
|
43 |
% |
Oil and natural gas (per Mcfe) |
|
|
13.62 |
|
|
|
8.86 |
|
|
|
4.76 |
|
|
|
54 |
% |
Expenses (per Mcfe): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease operating expenses |
|
$ |
2.26 |
|
|
$ |
2.11 |
|
|
$ |
0.15 |
|
|
|
7 |
% |
Salaries, general and administrative expenses (b) |
|
|
0.69 |
|
|
|
0.41 |
|
|
|
0.28 |
|
|
|
68 |
% |
DD&A expense on oil and gas properties |
|
|
3.95 |
|
|
|
3.67 |
|
|
|
0.28 |
|
|
|
8 |
% |
|
|
|
(a) |
|
Includes the cash settlement of effective hedging contracts. |
|
(b) |
|
Exclusive of incentive compensation expense. |
20
During the third quarter of 2008, net income totaled $34.1 million, or $1.04 per share,
compared to $34.1 million, or $1.23 per share for the third quarter of 2007. For the nine months
ended September 30, 2008, net income totaled $179.2 million, or $6.02 per share, compared to $116.5
million, or $4.21 per share, during the comparable 2007 period. All per share amounts are on a
diluted basis. On August 28, 2008, we completed the acquisition of Bois dArc. The revenues and
expenses associated with Bois dArc have been included in Stones Condensed Consolidated Financial
Statements since August 28, 2008.
We follow the full cost method of accounting for oil and gas properties. During the third
quarter of 2008, we recognized a ceiling test write-down of our oil and gas properties in China
totaling $8.8 million ($5.7 million after taxes). During the nine months ended September 30, 2008,
we recognized a ceiling test write-down of our oil and gas properties in China totaling $18.9
million ($12.3 million after taxes). The write-down did not impact our cash flow from operations
but did reduce net income and stockholders equity.
Included in the nine month 2007 net income is a $55.7 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 nine-month periods results was also due to the following
components:
Production. During the third quarter of 2008, total production volumes decreased 36% to 11.9
Bcfe compared to 18.7 Bcfe produced during the third quarter of 2007. Oil production during the
third quarter of 2008 totaled approximately 943,000 barrels compared to 1,313,000 barrels produced
during the third quarter of 2007, while natural gas production totaled 6.2 Bcf during the third
quarter of 2008 compared to 10.8 Bcf produced during the third quarter of 2007. Year-to-date 2008
production totaled 3,647,000 barrels of oil and 24.6 Bcf of natural gas compared to 4,691,000
barrels of oil and 34.1 Bcf of natural gas produced during the comparable 2007 period.
Production rates were negatively impacted during the third quarter of 2008 by Gulf Coast
shut-ins due to Hurricanes Gustav and Ike, amounting to volumes of approximately 7.1 Bcfe (77 MMcfe
per day). Production rates were negatively impacted during the third 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 0.6 Bcfe for the third quarter of 2008 compared to the comparable 2007
quarter. Slightly offsetting this decrease was production associated with the Bois dArc
acquisition, which closed on August 28, 2008, totaling approximately 0.6 Bcfe through September 30,
2008. Production deferrals due to hurricanes for the nine months ended September 30, 2008 and
2007, amounted to 7.1 Bcfe (26 MMcfe per day) and 3.1 Bcfe (17 MMcfe per day), respectively.
Without the effect of production deferrals, year-to-date 2008 production volumes decreased
approximately 11.8 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 6.6 Bcfe for the nine months ended September 30, 2007.
Prices. Prices realized during the third quarter of 2008 averaged $106.81 per Bbl of oil and
$10.72 per Mcf of natural gas, or 48% higher, on an Mcfe basis, than third quarter 2007 average
realized prices of $76.74 per Bbl of oil and $7.19 per Mcf of natural gas. Average realized prices
during the first nine months of 2008 were $104.20 per Bbl of oil and $10.29 per Mcf of natural gas
compared to $65.13 per Bbl of oil and $7.22 per Mcf of natural gas realized during the first nine
months of 2007. All unit pricing amounts include the cash settlement of effective hedging
contracts.
We enter into various hedging contracts in order to reduce our exposure to the possibility of
declining oil and gas prices. Our effective hedging transactions decreased our average realized
natural gas price by $0.07 per Mcf and decreased our average realized oil price by $16.89 per Bbl
in the third quarter of 2008. During the third quarter of 2007, our effective hedging transactions
increased our average realized natural gas price by $0.68 per Mcf and decreased our average
realized oil price by $0.09 per Bbl. Effective hedging transactions for the first nine months of
2008 decreased our average realized oil price by $11.50 per Bbl and had no impact on average
realized natural gas prices. Natural gas prices realized during the first nine months of 2007 were
increased by $0.25 per Mcf and oil prices were increased by $0.21 per Bbl as a result of effective
hedging transactions.
Income. Third quarter 2008 oil and natural gas revenue totaled $167.3 million, compared to
third quarter 2007 oil and natural gas revenue of $178.4 million. The decrease is attributable to
a 36% decrease in production volumes slightly offset by a 48% increase in average realized prices
on a gas equivalent basis. Year-to-date 2008 oil and natural gas revenue totaled $633.5 million
compared to $551.6 million during the comparable 2007 period. The increase was due to a 54%
increase in average realized prices on a gas equivalent basis, partially offset by a 25% decline in
production volumes. Oil and natural gas revenue related to the properties acquired from Bois dArc
totaled $4.4 million from August 28, 2008 through September 30, 2008. We sold substantially all of
our Rocky Mountain Region properties on June 29, 2007. Rocky Mountain Region oil and natural gas
revenue amounted to $47.1 million for the nine months ended September 30, 2007.
Interest income totaled $2.3 million during the third quarter of 2008 compared to $5.3 million
during the comparable quarter of 2007 and $10.6 million during the nine months ended September 30,
2008 compared to $6.9 million during the comparable 2007 period. The increase in interest income
for the nine months ended September 30, 2008 is the result of an increase in our cash balances
21
during the 2008 periods after the sale of substantially all of our Rocky Mountain Region
properties in June 2007. During the third quarter of 2008, interest income decreased as a result
of a decrease in our cash balances after the acquisition of Bois dArc.
During
the quarter ended September 30, 2008, as a result of extended shut-ins of production
after Hurricanes Gustav and Ike, our September 2008 crude oil and natural gas production levels
were below the volumes that we had hedged. Consequently, some of our crude oil and natural gas
hedges for the month of September 2008 were deemed to be ineffective. Net derivative income for
the quarter ended September 30, 2008, totaled $5.0 million, consisting of $0.7 million of cash
settlements on the ineffective derivative contracts, $5.3 million of changes in the fair market
value of the ineffective portion of derivative contracts, less $1.0 million of amortization of the cost of
puts. Net derivative income for the nine months ended September 30, 2008, totaled $1.4 million,
consisting of $0.7 million of cash settlements on the ineffective derivative contracts, $1.7
million of changes in the fair market value of the ineffective portion of derivative contracts, less $1.0
million of amortization of the cost of puts.
During the quarter ended September 30, 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. Net derivative expense for the three
and nine-month periods ended September 30, 2007, totaled $36,000 and $0.1 million, respectively,
representing changes in the fair market value of the ineffective portion of the derivatives.
Expenses. Lease operating expenses during the third quarter of 2008 totaled $40.1 million
compared to $39.5 million for the third quarter of 2007. Primarily as a result of the production
disruption from Hurricanes Gustav and Ike, however, unit costs increased to $3.38 per Mcfe during
the third quarter of 2008 compared to $2.11per Mcfe for the comparable period of 2007. For the
first nine months of 2008 and 2007, lease operating expenses totaled $105.3 million and $131.1
million, respectively. The decrease in lease operating expenses in the nine months ended September
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 $8.6 million
during the nine months ended September 30, 2007. Included in lease operating expenses from August
28, 2008 through September 30, 2008 are $4.3 million of expenses for the properties acquired from
Bois dArc. Additionally, third quarter 2008 lease operating expenses included approximately $6.8
million of repairs in excess of estimated insurance recoveries related to damage from Hurricanes
Gustav and Ike. On a unit of production basis, year-to-date 2008 lease operating expenses were
$2.26 per Mcfe as compared to $2.11 per Mcfe for the comparable period of 2007 due to the
production disruption from Hurricanes Gustav and Ike.
Depreciation, depletion and amortization (DD&A) on oil and gas properties for the third
quarter of 2008 totaled $51.0 million, or $4.30 per Mcfe, compared to $70.3 million, or $3.76 per
Mcfe, for the third quarter of 2007. For the nine months ended September 30, 2008 and 2007, DD&A
expense totaled $183.9 million and $228.5 million, respectively.
Salaries, general and administrative (SG&A) expenses (exclusive of incentive compensation) for
the third quarter of 2008 were $10.5 million compared to $7.8 million in the third quarter of 2007.
For the nine months ended September 30, 2008 and 2007, SG&A totaled $32.0 million and $25.5
million, respectively. The increase in SG&A is primarily due to additional compensation expense
associated with restricted stock issuances, higher legal fees, and the expensing of deferred
financing costs associated with our credit facility which was amended. Year-to-date 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. For the nine months ended September 30, 2007, Denver District SG&A
expense totaled $3.8 million.
Interest expense for the third quarter of 2008 totaled $3.0 million, net of $7.0 million of
capitalized interest, compared to interest expense of $6.3 million, net of $3.3 million of
capitalized interest, during the third quarter of 2007. For the nine months ended September 30,
2008, interest expense totaled $10.5 million, net of capitalized interest of $15.7 million,
compared to interest expense of $27.8 million, net of capitalized interest of $12.7 million for the
nine months ended June 30, 2007. The decrease in interest expense in 2008 primarily relates to
the redemption of our senior floating rate notes in August 2007. The decrease also results from an
increase in capitalized interest related to the unevaluated properties acquired from Bois dArc on
August 28, 2008. Slightly offsetting these decreases is interest expense associated with $425
million of borrowings under our bank credit facility on August 28, 2008 in conjunction with the
acquisition of Bois dArc.
Production taxes during the third quarter of 2008 totaled $1.3 million compared to $1.5
million in the third quarter of 2007. For the nine months ended September 30, 2008 and 2007,
production taxes totaled $6.2 million and $8.2 million, respectively. The overall decrease in
production taxes for the nine months ended September 30, 2008 resulted from the sale of
substantially all of our Rocky Mountain Region properties in June 2007. Rocky Mountain Region
production taxes totaled $4.0 million for the nine months ended September 30, 2007.
We estimate that we have incurred $1.4 million of current federal income tax expense for the
nine months ended September 30, 2008. We have a
$36.3 million current income tax receivable at September
30, 2008 as a result of current year estimated tax payments exceeding our current estimated federal
income tax liability. Our previous estimate of current taxes was adjusted downward as a result of
production deferrals associated with the hurricanes as well as a decline in commodity prices.
22
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 50% of our estimated 2008 production and 30% 40% of our estimated 2009
production. 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 $825 million at September 30, 2008, of which $400
million, or approximately 48%, bears interest at fixed rates. The $400 million of fixed-rate debt
is comprised of $200 million of 81/4% Senior Subordinated Notes due 2011 and $200 million of 63/4%
Senior Subordinated Notes due 2014. At September 30, 2008, the remaining $425 million of our
outstanding long-term debt bears interest at a floating rate and consists of borrowings outstanding
under our bank credit facility. At September 30, 2008, the weighted average interest rate under
our bank credit facility was approximately 5.5% per annum. We currently have no interest rate
hedge positions in place to reduce our exposure to changes in interest rates.
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.
23
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 subsidiaries (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 September 30, 2008. Based on
this evaluation, our chief executive officer and chief financial officer believe:
|
|
|
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 |
|
|
|
|
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
As a result of the acquisition of Bois d Arc, the Company has expanded its controls over
financial reporting to encompass the acquired organization. There were no other significant changes
in our internal control over financial reporting that occurred during our quarterly period ended
September 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
24
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, 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. 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. The complaint was subsequently amended to substitute Thomas Packard as
plaintiff in lieu of Gail Packard, and the amended complaint eliminated Stone and Merger Sub as
defendants. On August 21, 2008, the court denied plaintiffs motions for a preliminary injunction
and for expedited discovery, noting that a likelihood of plaintiffs success on the merits is
questionable. Each of the remaining defendants filed a motion to dismiss plaintiffs complaint,
which motions are currently pending.
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.
25
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.
The terms of the current agreements governing our debt 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. |
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
26
values.
Upon a redetermination, 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.
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 $100 million. Additionally, shares were withheld from certain employees
to pay taxes associated with the employees vesting of restricted stock. The following table sets
forth information regarding our repurchases or acquisitions of common stock during the third
quarter of 2008:
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Total Number of |
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Shares (or Units) |
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Maximum Number (or |
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Purchased as Part |
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Approximate Dollar Value) |
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Total Number of |
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Average Price |
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of Publicly |
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of Shares (or Units) that May |
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Shares (or Units) |
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Paid per Share |
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Announced Plans or |
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Yet be Purchased Under the |
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Period |
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Purchased |
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(or Unit) |
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Programs |
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Plans or Programs |
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Share Repurchase Program: |
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July 2008 |
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$ |
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August 2008 |
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September 2008 |
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100,000 |
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41.85 |
(b) |
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100,000 |
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100,000 |
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41.85 |
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100,000 |
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$ |
95,814,720 |
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Other: |
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July 2008 |
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3,399 |
(a) |
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62.80 |
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August 2008 |
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12,937 |
(a) |
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49.02 |
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September 2008 |
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16,336 |
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51.89 |
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N/A |
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Total |
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116,336 |
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$ |
43.26 |
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100,000 |
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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. |
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(b) |
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This amount represents the weighted average price paid per share and includes a per share
commission for all repurchases. |
Item 4. Submission of Matters to a Vote of Security Holders
At a special meeting of stockholders held on August 27, 2008, a proposal by Stones Board of
Directors to approve the issuance of additional shares of common stock of Stone pursuant to the
Agreement and Plan of Merger dated as of April 30, 2008, by and among Stone, Stone Energy Offshore,
L.L.C., and Bois dArc Energy, Inc., was approved by the stockholders. The vote was 23,126,790
shares for, 578,849 shares against, and 59,338 shares abstained; 97.31% of the quorum shares voted
in favor of this proposal.
27
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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4.2
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First Supplemental Indenture, dated August 28, 2008, to the Indenture
between Stone Energy Corporation and JPMorgan Chase Bank dated December 10, 2001
(incorporated by reference to Exhibit 4.1 to the registrants Current Report on Form
8-K dated August 27, 2008 (File No. 001-12074)). |
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4.3
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First Supplemental Indenture, dated August 28, 2008, to the Indenture
between Stone Energy Corporation and JPMorgan Chase Bank, National Association, as
trustee, dated December 15, 2004 (incorporated by reference to Exhibit 4.2 to the
registrants Current Report on Form 8-K dated August 27, 2008 (File No. 001-12074)). |
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*4.4
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$700,000,000 Second Amended and Restated Credit Agreement between Stone
Energy Corporation and the financial institutions named therein, dated August 28, 2008. |
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*4.5
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Amended and Restated Security Agreement, dated as of August 28, 2008,
among Stone Energy Corporation and the other Debtors parties hereto in favor of Bank of
America, N.A., as Administrative Agent. |
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*15.1
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Letter from Ernst & Young LLP dated November 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. |
28
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.
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STONE ENERGY CORPORATION
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Date: November 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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29
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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4.2
|
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First Supplemental Indenture, dated August 28, 2008, to the Indenture
between Stone Energy Corporation and JPMorgan Chase Bank dated December 10, 2001
(incorporated by reference to Exhibit 4.1 to the registrants Current Report on Form
8-K dated August 27, 2008 (File No. 001-12074)). |
|
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4.3
|
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|
First Supplemental Indenture, dated August 28, 2008, to the Indenture
between Stone Energy Corporation and JPMorgan Chase Bank, National Association, as
trustee, dated December 15, 2004 (incorporated by reference to Exhibit 4.2 to the
registrants Current Report on Form 8-K dated August 27, 2008 (File No. 001-12074)). |
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*4.4
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$700,000,000 Second Amended and Restated Credit Agreement between Stone
Energy Corporation and the financial institutions named therein, dated August 28, 2008. |
|
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*4.5
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Amended and Restated Security Agreement, dated as of August 28, 2008,
among Stone Energy Corporation and the other Debtors parties hereto in favor of Bank of
America, N.A., as Administrative Agent. |
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*15.1
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|
Letter from Ernst & Young LLP dated November 5, 2008, regarding unaudited
interim financial information. |
|
|
|
|
|
*31.1
|
|
|
|
Certification of Principal Executive Officer of Stone Energy Corporation as
required by Rule 13a-14(a) of the Securities Exchange Act of 1934. |
|
|
|
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|
*31.2
|
|
|
|
Certification of Principal Financial Officer of Stone Energy Corporation as
required by Rule 13a-14(a) of the Securities Exchange Act of 1934. |
|
|
|
|
|
*32.1
|
|
|
|
Certification of Chief Executive Officer and Chief Financial Officer of Stone Energy
Corporation pursuant to 18 U.S.C. § 1350. |
|
|
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99.1
|
|
|
|
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. |