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 June 30, 2004 and for the three and six-month periods ended June 30, 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 and six-month periods ended June 30, 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 shares for stock options granted to nonemployee directors and employees. There were approximately 356,000 and 230,000 dilutive shares for the three months ended June 30, 2004 and 2003, respectively, and 355,000 and 185,000 dilutive shares for the six months ended June 30, 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 652,000 and 971,000 shares in the three months ended June 30, 2004 and 2003, respectively, and 600,000 and 1,063,000 shares in the six months ended June 30, 2004 and 2003, respectively.

        During the three months ended June 30, 2004 and 2003, approximately 148,000 and 20,000 shares of common stock, respectively, were issued upon the exercise of stock options by employees and nonemployee directors. For the six months ended June 30, 2004 and 2003, approximately 229,000 and 33,000 shares of common stock, respectively, were issued upon the exercise of stock options by employees and nonemployee directors.

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.

        Stone has entered into zero premium collars with various counterparties for a portion of our expected 2005 oil and natural gas production from the Gulf Coast Basin. The natural gas collars effectively hedge 20,000 MMBtu per day at a floor price of $4.00 per MMBtu and a ceiling price of $13.50 per MMBtu and an additional 20,000 MMBtu per day at a floor price of $4.50 per MMBtu and a ceiling price of $10.25 per MMBtu from January through December 2005. The natural gas collar settlements are based on an average of New York Mercantile Exchange (“NYMEX”) prices for the last three days of a respective month. The oil collars effectively hedge 8,000 barrels (“Bbls”) per day at a floor price of $28.00 per Bbl and an average ceiling price of $52.83 per Bbl from January through December 2005. The oil collar settlements are based upon an average of the NYMEX closing price for West Texas Intermediate (“WTI”) during the entire calendar month. The contracts require payments to the counterparties if the average price is above the ceiling price or payment from the counterparties if the average price is below the floor price. Settlements under the collar contracts are realized in oil and gas revenue.

        The following table illustrates our hedging positions as of August 1, 2004:

        During the three months ended June 30, 2004 and 2003, we realized net decreases in gas revenue related to swaps of $2.2 million and $0.5 million, respectively. During the six months ended June 30, 2004 and 2003, we realized net decreases in gas revenue related to swaps of $4.3 million and $0.5 million, respectively.

Note 4 – Long-Term Debt

        Long-term debt consisted of the following:

        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. Borrowings outstanding at June 30, 2004 under our bank credit facility totaled $192.0 million, and letters of credit totaling $13.1 million have been issued under the facility. At June 30, 2004, we had $219.9 million of borrowings available under the credit facility and the weighted average interest rate under the credit facility was approximately 2.5%. 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 and six months ended June 30, 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 second quarter of 2004 and 2003, we recognized expenses of $1.5 million and $1.6 million, respectively, related to the accretion of our asset retirement obligation. For the six-month periods ended June 30, 2004 and 2003, we recognized accretion expense of $2.9 million and $3.1 million, respectively. As of June 30, 2004, accretion expense represented 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 method of amortizing proved oil and gas property costs versus the formerly used future gross revenue method. Management believes that this change in method is preferable because it removes fluctuations in depreciation, depletion and amortization (“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 No., “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 of APB Opinion No. 25 is used. We have continued to account for our stock-based compensation under APB Opinion No. 25. However, we have adopted the disclosure provisions of SFAS No. 148.

        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 share for the three and six months ended June 30, 2004 and 2003 would have approximated the pro forma amounts below: