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

The accompanying notes are an integral part of this statement.

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

The accompanying notes are an integral part of this statement.

STONE ENERGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1 – Interim Financial Statements

        The condensed consolidated financial statements of Stone Energy Corporation and subsidiary as of March 31, 2004 and for the three-month periods ended March 31, 2004 and 2003 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 period. The condensed consolidated balance sheet at December 31, 2003 has been derived from the audited financial statements at that date. The consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto, together with management’s discussion and analysis of financial condition and results of operations, contained in our Annual Report on Form 10-K for the year ended December 31, 2003. The results of operations for the three-month period ended March 31, 2004 are not necessarily indicative of future financial results.

Note 2 – Earnings Per Share

        Basic net income per share of common stock was calculated by dividing net income applicable to common stock by the weighted-average number of common shares outstanding during the period. Diluted net income per share of common stock was calculated by dividing net income applicable to common stock by the weighted-average number of common shares outstanding during the period plus the weighted-average number of dilutive stock options granted to outside directors and employees. There were approximately 354,000 and 144,000 dilutive shares for the three months ended March 31, 2004 and 2003, respectively.

        Options that were considered antidilutive because the exercise price of the option exceeded the average price of our stock for the applicable period totaled approximately 602,000 and 1,360,000 shares in the three months ended March 31, 2004 and 2003, respectively.

Note 3 – Hedging Activities

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

        During the three months ended March 31, 2004 and 2003, we recognized non-cash expenses of $0.9 million and $2.2 million, respectively, related to commodity derivatives. Derivative expense incurred in the first quarter of 2004 relates to the costs of put contracts that settled during the period. Derivative expense incurred during the first quarter of 2003 included $1.2 million of cost associated with settled put contracts and $1.0 million of amortization of previously recorded other comprehensive income from an ineffective swap contract with Enron.

        The following table illustrates our hedging positions as of March 31, 2004.

        During the three months ended March 31, 2004, we realized a net decrease in oil and gas revenue related to swaps of $2.1 million. During the three months ended March 31, 2003, hedging transactions had no impact on oil and gas revenue.

Note 4 – Long-Term Debt

        Long-term debt consisted of the following:

        Borrowings outstanding at March 31, 2004 under our bank credit facility totaled $179.0 million, and letters of credit totaling $13.1 million have been issued under the facility. At March 31, 2004, we had $157.9 million of borrowings available under the credit facility and the weighted average interest rate under the credit facility was approximately 2.5%. On April 30, 2004, we entered into a four-year $500 million senior unsecured credit facility with a syndicated bank group. The new facility has an initial borrowing base of $425 million and replaces the previous $350 million credit facility. The borrowing base under the new credit facility is re-determined periodically based on the bank group’s evaluation of our proved oil and gas reserves.

Note 5 – Comprehensive Income

        The following table illustrates the components of comprehensive income for the three months ended March 31, 2004 and 2003:

Note 6 – Asset Retirement Obligations

        We adopted Statement of Financial Accounting Standard (SFAS) No. 143, “Accounting for Asset Retirement Obligations” on January 1, 2003. Upon adoption, we recognized a credit for a cumulative transition adjustment of $5.3 million, net of tax, for existing asset retirement obligation liabilities, asset retirement costs and accumulated depreciation. In addition, we recorded a $32.1 million increase in the capitalized costs of our oil and gas properties, net of accumulated depreciation, and recognized $76.3 million in additional liabilities related to asset retirement obligations. During the first quarter of 2004 and 2003, we recognized non-cash expenses of $1.5 million and $1.6 million, respectively, related to the accretion of our asset retirement obligation. As of March 31, 2004, accretion expense represents the only change in the asset retirement obligation since December 31, 2003. As required by SFAS No. 143, our estimate of our asset retirement obligation does not give consideration to the value that the related assets could have to other parties.

Note 7 – Changes in Accounting Principle

        Units of Production Method. Effective January 1, 2003, management elected to change to the Units of Production (UOP) method of amortizing proved oil and gas property costs versus the formerly used Future Gross Revenue (FGR) method. Management believes that this change in method is preferable because it removes fluctuations in DD&A expense caused by product pricing volatility within a reporting period and is a method more widely used in the oil and gas industry. The cumulative effect of the change in accounting principle was $4.0 million, net of tax, and was recorded as a non-cash charge during the first quarter of 2003.

        Entitlement Method. Management elected to begin recognizing production revenue under the Entitlement method effective January 1, 2003. Management believes that this method is preferable because revenues and production are accounted for in the period in which the earnings process is complete. The cumulative effect of the change to the Entitlement method was immaterial.

Note 8 – Stock-Based Compensation

        In October 1995, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123, “Accounting for Stock-Based Compensation,” which became effective with respect to us in 1996. Under SFAS No. 123, companies can either record expense based on the fair value of stock-based compensation upon issuance or elect to remain under the current method prescribed by Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees,” whereby no compensation cost is recognized upon grant if certain requirements are met. The FASB has issued SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure,” which has amended APB Opinion 28, Interim Financial Reporting, to require a tabular presentation similar to that called for in annual statements in condensed quarterly statements if, for any period presented, the intrinsic value method is used. We have continued to account for our stock-based compensation under APB 25. However, we have adopted the disclosure provisions of SFAS No. 148 as presented below.

        If the compensation expense for stock-based compensation plans had been determined consistent with the expense recognition provisions under SFAS No. 123, our net income and basic and diluted earnings per common share for the three months ended March 31, 2004 and 2003 would have approximated the pro forma amounts below:

        On March 31, 2004, the FASB issued a proposed Statement, “Share-Based Payment,” that addresses the accounting for share-based payment transactions in which an enterprise receives employee services in exchange for equity instruments of the enterprise, such as stock options. The proposed Statement would eliminate the ability to account for share-based compensation transactions using the APB Opinion No. 25 and generally would require instead that such transactions be accounted for using a fair-value-based method. Stone currently accounts for stock-based compensation using APB Opinion No. 25. The proposed Statement, if adopted, would require us to begin accounting for stock options under this method beginning in fiscal year 2005.

Note 9 – Commitments and Contingencies

        Goodrich Petroleum Corporation, Goodrich Petroleum Company, L.L.C. and Goodrich Petroleum Company-Lafitte, L.L.C. filed civil action number 2000-06437, in Harris County, Texas, against Stone Energy Corporation, seeking seismic data at Lafitte Field and unspecified damages. On October 29, 2003, after a trial of this matter, the jury awarded Goodrich Petroleum Company-Lafitte, L.L.C. damages in the amount of approximately $0.5 million. As of May 3, 2004, the court had not entered a judgment in this case. There has been no indication whether the plaintiff will appeal this decision. We are evaluating whether we will file an appeal.

INDEPENDENT ACCOUNTANTS’ REVIEW REPORT

TO THE STOCKHOLDERS OF
STONE ENERGY CORPORATION:

We have reviewed the accompanying condensed consolidated balance sheet of Stone Energy Corporation (a Delaware corporation) as of March 31, 2004, and the related condensed consolidated statements of operations and cash flows for the three-month periods ended March 31, 2004 and 2003. These financial statements are the responsibility of the Company’s management.

We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data, and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States, which will be performed for the full year with the objective of expressing an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

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

We have previously audited, in accordance with auditing standards generally accepted in the United States, the consolidated balance sheet of Stone Energy Corporation as of December 31, 2003, and the related consolidated statements of operations, changes in stockholders’ equity and cash flows for the year then ended (not presented herein) and in our report dated February 27, 2004, 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, 2003, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

New Orleans, Louisiana
April 30, 2004

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

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

        When considering any forward-looking statement, you should keep in mind the risk factors that could cause our actual results to differ materially from those contained in any forward-looking statement. Important factors that could cause actual results to differ materially from those in the forward-looking statements herein include the timing and extent of changes in commodity prices for oil and gas, operating risks and other risk factors as described in our 2003 Annual Report on Form 10-K as filed with the Securities and Exchange Commission. 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.

Overview

        Stone Energy Corporation is an independent oil and gas company focused primarily in the Gulf Coast Basin and is engaged in the acquisition and subsequent exploration, development, production and operation of oil and gas properties.

        Our business strategy, which has remained consistent since 1990, is to increase production, cash flow and reserves through the acquisition, exploitation and development principally of mature oil and gas properties. Currently, our property base consists of 92 active properties, 60 in the Gulf Coast Basin and 32 in the Rocky Mountains, and 29 primary term leases in the Gulf of Mexico. We serve as operator on 55 of our active properties, which enables us to better control the timing and cost of rejuvenation activities. We believe that there will continue to be opportunities to acquire properties in the Gulf Coast Basin due to the increased focus by many of our competitors on projects away from the onshore and shallow water shelf regions of the Gulf of Mexico.

Critical Accounting Policies

        Our 2003 Annual Report on Form 10-K describes the accounting policies that we believe are critical to the reporting of our financial position and operating results and that require management’s most difficult, subjective or complex judgments. Our most significant estimates are:

• remaining proved oil and gas reserves;
• timing of our future drilling activities;
• accruals of operating costs and production revenue;
• future costs to develop and abandon our oil and gas properties;
• the effectiveness of derivative positions; and
• classification of unevaluated property costs.

        This Quarterly Report on Form 10-Q should be read together with the discussion contained in our 2003 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 2003 Annual Report on Form 10-K regarding these other risk factors.

Results of Operations

        The following table sets forth certain information with respect to our oil and gas operations.

        Net Income.    Net income for the first quarter of 2004 totaled $35.8 million, or $1.33 per share, compared to net income reported for the first quarter of 2003 of $55.9 million, or $2.11 per share. The decrease in net income was primarily due to the lower average prices received for our gas production and a decrease in gas volumes produced as discussed below.

        Prices.    Prices realized during the first quarter of 2004 averaged $34.48 per barrel of oil and $5.49 per Mcf of gas compared to first quarter 2003 average realized prices of $33.53 per barrel of oil and $6.66 per Mcf of gas. On a gas equivalent basis, prices realized during the first quarter of 2004 were 11% lower than prices realized during the first quarter of 2003. All unit pricing amounts include the cash effects of hedging. Hedging transactions in the first quarter of 2004 decreased the average realized price of natural gas by $0.14 per Mcf. During the first quarter of 2003, hedging transactions had no impact on the average realized price we received for our oil and natural gas production.

        Production.    Oil production during the first quarter of 2004 totaled approximately 1,544,000 barrels compared to first quarter 2003 production of 1,419,000 barrels, while natural gas production during the first quarter of 2004 totaled approximately 14.6 Bcf, compared to first quarter 2003 gas production of 16.5 Bcf. On a natural gas equivalent basis, production volumes for the first quarter of 2004 decreased 5% to 23.9 Bcfe compared to first quarter 2003 production of 25.0 Bcfe due to delays in initial production from certain discoveries made in 2003 and a pipeline interruption near major producing fields.

        Oil and Gas Revenue.    First quarter 2004 oil and gas revenue totaled $133.6 million, compared to first quarter 2003 oil and gas revenue of $157.5 million. The decline in oil a