Attached files
file | filename |
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EX-31.1 - EX-31.1 - STONE ENERGY CORP | h81700exv31w1.htm |
EX-15.1 - EX-15.1 - STONE ENERGY CORP | h81700exv15w1.htm |
EX-32.1 - EX-32.1 - STONE ENERGY CORP | h81700exv32w1.htm |
EX-31.2 - EX-31.2 - STONE ENERGY CORP | h81700exv31w2.htm |
EX-10.1 - EX-10.1 - STONE ENERGY CORP | h81700exv10w1.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2011
or
o | 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)
Delaware | 72-1235413 | |
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) | |
625 E. Kaliste Saloom Road | ||
Lafayette, Louisiana | 70508 | |
(Address of Principal Executive Offices) | (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 has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). Yes o 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.
Large accelerated filer o | Accelerated filer þ | Non-accelerated filer o | Smaller reporting company o | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
As of May 3, 2011, there were 49,003,734 shares of the registrants common stock, par value $.01
per share, outstanding.
TABLE OF CONTENTS
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EX-10.1 | ||||||||
EX-15.1 | ||||||||
EX-31.1 | ||||||||
EX-31.2 | ||||||||
EX-32.1 |
Table of Contents
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
STONE ENERGY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(In thousands of dollars)
March 31, | December 31, | |||||||
2011 | 2010 | |||||||
(Unaudited) | ||||||||
Assets |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 45,906 | $ | 106,956 | ||||
Restricted cash |
| 5,500 | ||||||
Accounts receivable |
112,734 | 88,529 | ||||||
Fair value of hedging contracts |
9,632 | 12,955 | ||||||
Current income tax receivable |
3,517 | | ||||||
Deferred taxes |
42,660 | 27,274 | ||||||
Inventory |
6,100 | 6,465 | ||||||
Other current assets |
727 | 768 | ||||||
Total current assets |
221,276 | 248,447 | ||||||
Oil and gas properties United States full cost method of
accounting: |
||||||||
Proved, net of accumulated depreciation, depletion and
amortization of $4,873,527 and $4,804,949, respectively |
1,021,078 | 984,629 | ||||||
Unevaluated |
457,676 | 413,180 | ||||||
Building and land, net |
6,227 | 6,273 | ||||||
Fixed assets, net |
4,327 | 4,449 | ||||||
Other assets, net |
21,693 | 22,112 | ||||||
Total assets |
$ | 1,732,277 | $ | 1,679,090 | ||||
Liabilities and Stockholders Equity |
||||||||
Current liabilities: |
||||||||
Accounts payable to vendors |
$ | 100,670 | $ | 103,208 | ||||
Undistributed oil and gas proceeds |
9,880 | 10,037 | ||||||
Fair value of hedging contracts |
62,451 | 32,144 | ||||||
Asset retirement obligations |
53,347 | 42,300 | ||||||
Current income tax payable |
| 239 | ||||||
Other current liabilities |
20,236 | 30,137 | ||||||
Total current liabilities |
246,584 | 218,065 | ||||||
Long-term debt |
575,000 | 575,000 | ||||||
Deferred taxes |
118,729 | 99,227 | ||||||
Asset retirement obligations |
309,256 | 331,620 | ||||||
Fair value of hedging contracts |
22,521 | 3,606 | ||||||
Other long-term liabilities |
21,734 | 21,215 | ||||||
Total liabilities |
1,293,824 | 1,248,733 | ||||||
Commitments and contingencies |
||||||||
Stockholders equity: |
||||||||
Common stock, $.01 par value; authorized 100,000,000 shares;
issued 47,945,000 and 47,764,505 shares, respectively |
479 | 478 | ||||||
Treasury stock (16,582 shares, respectively, at cost) |
(860 | ) | (860 | ) | ||||
Additional paid-in capital |
1,332,277 | 1,331,500 | ||||||
Accumulated deficit |
(846,765 | ) | (886,557 | ) | ||||
Accumulated other comprehensive loss |
(46,678 | ) | (14,204 | ) | ||||
Total stockholders equity |
438,453 | 430,357 | ||||||
Total liabilities and stockholders equity |
$ | 1,732,277 | $ | 1,679,090 | ||||
The accompanying notes are an integral part of this balance sheet.
1
Table of Contents
STONE ENERGY CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
Three Months Ended | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
Operating revenue: |
||||||||
Oil production |
$ | 151,995 | $ | 100,565 | ||||
Gas production |
45,858 | 63,226 | ||||||
Derivative income, net |
| 1,188 | ||||||
Total operating revenue |
197,853 | 164,979 | ||||||
Operating expenses: |
||||||||
Lease operating expenses |
38,806 | 38,664 | ||||||
Other operational expense |
662 | | ||||||
Production taxes |
2,535 | 1,654 | ||||||
Depreciation, depletion and amortization |
67,669 | 60,653 | ||||||
Accretion expense |
7,717 | 8,462 | ||||||
Salaries, general and administrative expenses |
11,733 | 10,485 | ||||||
Incentive compensation expense |
2,684 | 925 | ||||||
Derivative expense, net |
2,180 | | ||||||
Total operating expenses |
133,986 | 120,843 | ||||||
Income from operations |
63,867 | 44,136 | ||||||
Other (income) expenses: |
||||||||
Interest expense |
3,111 | 4,066 | ||||||
Interest income |
(94 | ) | (57 | ) | ||||
Other income |
(1,449 | ) | (2,032 | ) | ||||
Loss on early extinguishment of debt |
| 1,820 | ||||||
Other expense |
124 | 280 | ||||||
Total other expenses |
1,692 | 4,077 | ||||||
Net income before income taxes |
62,175 | 40,059 | ||||||
Provision (benefit) for income taxes: |
||||||||
Current |
| (3,872 | ) | |||||
Deferred |
22,383 | 18,513 | ||||||
Total income taxes |
22,383 | 14,641 | ||||||
Net income |
$ | 39,792 | $ | 25,418 | ||||
Basic earnings per share |
$ | 0.81 | $ | 0.52 | ||||
Diluted earnings per share |
$ | 0.81 | $ | 0.52 | ||||
Average shares outstanding |
47,898 | 47,609 | ||||||
Average shares outstanding assuming dilution |
47,939 | 47,637 |
The accompanying notes are an integral part of this statement.
2
Table of Contents
STONE ENERGY CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands of dollars)
(Unaudited)
Three Months Ended | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
Cash flows from operating activities: |
||||||||
Net income |
$ | 39,792 | $ | 25,418 | ||||
Adjustments to reconcile net income to net cash provided
by operating activities: |
||||||||
Depreciation, depletion and amortization |
67,669 | 60,653 | ||||||
Accretion expense |
7,717 | 8,462 | ||||||
Deferred income tax provision |
22,383 | 18,513 | ||||||
Settlement of asset retirement obligations |
(19,034 | ) | (10,378 | ) | ||||
Non-cash stock compensation expense |
1,680 | 1,427 | ||||||
Excess tax benefits |
(649 | ) | (194 | ) | ||||
Non-cash derivative expense (income) |
1,804 | (855 | ) | |||||
Loss on early extinguishment of debt |
| 1,820 | ||||||
Other non-cash (income) expense |
(104 | ) | 335 | |||||
Change in current income taxes |
(3,681 | ) | (13,500 | ) | ||||
Increase in accounts receivable |
(21,555 | ) | (7,131 | ) | ||||
(Increase) decrease in other current assets |
25 | (53 | ) | |||||
Decrease in inventory |
365 | 123 | ||||||
Increase (decrease) in accounts payable |
2,690 | (864 | ) | |||||
Decrease in other current liabilities |
(10,059 | ) | (6,169 | ) | ||||
Other |
272 | 27 | ||||||
Net cash provided by operating activities |
89,315 | 77,634 | ||||||
Cash flows from investing activities: |
||||||||
Investment in oil and gas properties |
(156,535 | ) | (78,788 | ) | ||||
Proceeds from sale of oil and gas properties, net of expenses |
7,692 | | ||||||
Investment in fixed and other assets |
(262 | ) | (343 | ) | ||||
Net cash used in investing activities |
(149,105 | ) | (79,131 | ) | ||||
Cash flows from financing activities: |
||||||||
Repayments of bank borrowings |
| (75,000 | ) | |||||
Redemption of senior subordinated notes |
| (200,503 | ) | |||||
Proceeds from issuance of senior notes |
| 275,000 | ||||||
Deferred financing costs |
(66 | ) | (9,701 | ) | ||||
Excess tax benefits |
649 | 194 | ||||||
Net payments for share based compensation |
(1,843 | ) | (1,056 | ) | ||||
Net cash used in financing activities |
(1,260 | ) | (11,066 | ) | ||||
Net decrease in cash and cash equivalents |
(61,050 | ) | (12,563 | ) | ||||
Cash and cash equivalents, beginning of period |
106,956 | 69,293 | ||||||
Cash and cash equivalents, end of period |
$ | 45,906 | $ | 56,730 | ||||
The accompanying notes are an integral part of this statement.
3
Table of Contents
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 March 31, 2011 and for the three-month periods ended March 31, 2011 and 2010 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, 2010 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,
2010. The results of operations for the three-month period ended March 31, 2011 are not necessarily
indicative of future financial results. Certain first quarter 2010 amounts have been changed from
amounts originally presented to correct a prior period immaterial error.
Note 2 Earnings Per Share
The following table sets forth the calculation of basic and diluted weighted average shares
outstanding and earnings per share for the indicated periods.
Three Months Ended | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
(in thousands, except per share data) | ||||||||
Income (numerator): |
||||||||
Net income |
$ | 39,792 | $ | 25,418 | ||||
Net income attributable to participating securities |
(874 | ) | (436 | ) | ||||
Net income attributable to common stock basic and diluted |
$ | 38,918 | $ | 24,982 | ||||
Weighted average shares (denominator): |
||||||||
Weighted average shares basic |
47,898 | 47,609 | ||||||
Diluted effect of stock options |
41 | 28 | ||||||
Weighted average shares diluted |
47,939 | 47,637 | ||||||
Basic income per common share |
$ | 0.81 | $ | .0.52 | ||||
Diluted income per common share |
$ | 0.81 | $ | 0.52 | ||||
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
398,000 and 431,000 shares in the three months ended March 31, 2011 and 2010, respectively. During
the three months ended March 31, 2011 and 2010, respectively, approximately 180,000 and 140,000
shares of common stock were issued upon the vesting of restricted stock by employees and
nonemployee directors.
Note 3 Derivative Instruments and Hedging Activities
Our hedging strategy is designed to protect our near and intermediate term cash flow from
future declines in oil and natural gas prices. This protection is essential to capital budget
planning, which is sensitive to expenditures that must be committed to in advance such as rig
contracts and the purchase of tubular goods. 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. These hedges are designated as cash flow hedges upon entering into the contract. We
do not enter into hedging transactions for trading purposes. We have no fair value hedges.
The nature of a derivative instrument must be evaluated to determine if it qualifies for hedge
accounting treatment. If the instrument qualifies for hedge accounting treatment, it is recorded
as either an asset or liability measured at fair value and subsequent changes in the derivatives
fair value are recognized in equity through other comprehensive income (loss), net of related
taxes, to the extent the hedge is considered effective. Additionally, monthly settlements of
effective hedges are reflected in revenue from oil and gas production and cash flows from
operations. Instruments not qualifying for hedge accounting are recorded in the balance sheet at
fair value and changes in fair value are recognized in earnings through derivative expense (income). Typically, a small portion of our derivative
contracts are determined to be ineffective. This is because oil and natural gas price changes in
the markets in which we sell our products are not 100% correlative to changes in the underlying
price basis
4
Table of Contents
indicative in the derivative contracts. Monthly settlements of ineffective hedges are recognized
in earnings through derivative expense (income) and cash flows from operations.
We have entered into fixed-price swaps with various counterparties for a portion of our
expected 2011, 2012 and 2013 oil and natural gas production from the Gulf Coast Basin. The
fixed-price oil swap settlements are based upon an average of the New York Mercantile Exchange
(NYMEX) closing price for West Texas Intermediate (WTI) during the entire calendar month. Some
of our fixed-price gas swap settlements are based on an average of NYMEX prices for the last three
days of a respective month and some are based on the NYMEX price for the last day of a respective
month. Swaps typically provide for monthly payments by us if prices rise above the swap price or
to us if prices fall below the swap price. Our outstanding fixed-price swap contracts are with
J.P. Morgan Chase Bank, N.A., The Toronto-Dominion Bank, Barclays Bank PLC, BNP Paribas, The Bank
of Nova Scotia, Bank of America and Natixis.
During the three-month periods ended March 31, 2011 and 2010, 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. All of our
derivative instruments at March 31, 2011 and December 31, 2010 were designated as effective cash
flow hedges. The following tables disclose the location and fair value amounts of derivative
instruments reported in our balance sheet at March 31, 2011 and December 31, 2010.
Fair Value of Derivative Instruments at March 31, 2011 | ||||||||||||
(in millions) | ||||||||||||
Asset Derivatives | Liability Derivatives | |||||||||||
Description | Balance Sheet Location | Fair Value | Balance Sheet Location | Fair Value | ||||||||
Commodity contracts |
Current assets: Fair value of hedging contracts | $ | 9.6 | Current liabilities: Fair value of hedging contracts | ($62.5 | ) | ||||||
Long-term assets: Fair value of hedging contracts | | Long-term liabilities: Fair value of hedging contracts | (22.5 | ) | ||||||||
$ | 9.6 | ($85.0 | ) | |||||||||
Fair Value of Derivative Instruments at December 31, 2010 | ||||||||||||
(in millions) | ||||||||||||
Asset Derivatives | Liability Derivatives | |||||||||||
Description | Balance Sheet Location | Fair Value | Balance Sheet Location | Fair Value | ||||||||
Commodity contracts |
Current assets: Fair value of hedging contracts | $ | 13.0 | Current liabilities: Fair value of hedging contracts | ($32.1 | ) | ||||||
Long-term assets: Fair value of hedging contracts | | Long-term liabilities: Fair value of hedging contracts | (3.6 | ) | ||||||||
$ | 13.0 | ($35.7 | ) | |||||||||
The following table discloses the effect of derivative instruments in the statement of
operations for the three-month periods ended March 31, 2011 and 2010.
The Effect of Derivative Instruments on the Statement of Operations for the Three Months Ended March 31, 2011 and 2010 | ||||||||||||||||||||||||||||||||
(in millions) | ||||||||||||||||||||||||||||||||
Derivatives in | Amount of Gain | Gain (Loss) Reclassified from | Gain (Loss) Recognized in Income | |||||||||||||||||||||||||||||
Cash Flow Hedging | (Loss) Recognized | Accumulated OCI into Income | on Derivative | |||||||||||||||||||||||||||||
Relationships | in OCI on Derivative (a) | (Effective Portion) (b) | (Ineffective Portion) | |||||||||||||||||||||||||||||
2011 | 2010 | Location | 2011 | 2010 | Location | 2011 | 2010 | |||||||||||||||||||||||||
Commodity
contracts |
($32.5 | ) | $ | 13.1 | Operating revenue - oil/gas production | ($3.9 | ) | ($2.6 | ) | Derivative income (expense), net |
($2.2 | ) | $ | 1.2 | ||||||||||||||||||
Total |
($32.5 | ) | $ | 13.1 | ($3.9 | ) | ($2.6 | ) | ($2.2 | ) | $ | 1.2 | ||||||||||||||||||||
(a) | Net of related tax effect. | |
(b) | For the three months ended March 31, 2011, effective hedging contracts decreased oil revenue by $8.4 million and increased gas revenue by $4.5 million. For the three months ended March 31, 2010, effective hedging contracts decreased oil revenue by $8.3 million and increased gas revenue by $5.7 million. |
At March 31, 2011, we had an accumulated other comprehensive loss of $46.7 million, net
of tax, which related to the fair value of our 2011, 2012 and 2013 swap contracts that were
outstanding as of March 31, 2011. We believe that approximately $32.7 million of the accumulated
other comprehensive loss will be reclassified into earnings in the next twelve months.
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Table of Contents
The following table illustrates our hedging positions for calendar years 2011, 2012 and 2013
as of May 3, 2011:
Fixed-Price Swaps | ||||||||||||||||
Natural Gas | Oil | |||||||||||||||
Daily Volume | Swap | Daily Volume | Swap | |||||||||||||
(MMBtus/d) | Price | (Bbls/d) | Price | |||||||||||||
2011
|
10,000 | (a) | $ | 4.565 | 1,000 | $ | 70.05 | |||||||||
2011
|
20,000 | 5.200 | 1,000 | 78.20 | ||||||||||||
2011
|
10,000 | 6.830 | 1,000 | 80.20 | ||||||||||||
2011
|
1,000 | 83.00 | ||||||||||||||
2011
|
1,000 | 83.05 | ||||||||||||||
2011
|
1,000 | (b) | 85.20 | |||||||||||||
2011
|
1,000 | 85.25 | ||||||||||||||
2011
|
1,000 | 89.00 | ||||||||||||||
2011
|
1,000 | (c) | 97.75 | |||||||||||||
2011
|
1,000 | (c) | 104.30 | |||||||||||||
2012
|
10,000 | 5.035 | 1,000 | 90.30 | ||||||||||||
2012
|
10,000 | 5.040 | 1,000 | 90.41 | ||||||||||||
2012
|
10,000 | 5.050 | 1,000 | 90.45 | ||||||||||||
2012
|
1,000 | 95.50 | ||||||||||||||
2012
|
1,000 | 97.60 | ||||||||||||||
2012
|
1,000 | 100.00 | ||||||||||||||
2012
|
1,000 | 101.55 | ||||||||||||||
2012
|
1,000 | 104.25 | ||||||||||||||
2013
|
10,000 | 5.270 | 1,000 | 97.15 | ||||||||||||
2013
|
10,000 | 5.320 | 1,000 | 101.53 | ||||||||||||
2013
|
1,000 | 104.50 |
(a) | February December | |
(b) | January June | |
(c) | July December |
Note 4 Long-Term Debt
Long-term debt consisted of the following at:
March 31, 2011 | December 31, 2010 | |||||||
(in millions) | ||||||||
63/4% Senior Subordinated Notes due 2014 |
$ | 200.0 | $ | 200.0 | ||||
8⅝% Senior Notes due 2017 |
375.0 | 375.0 | ||||||
Bank debt |
| | ||||||
Total long-term debt |
$ | 575.0 | $ | 575.0 | ||||
On March 31, 2011, we had no outstanding borrowings under our bank credit facility and letters
of credit totaling $63.1 million had been issued pursuant to the facility. On April 26, 2011, we
entered into an amended and restated revolving credit facility totaling $700 million through a
syndicated bank group, replacing our previous $700 million facility. The new credit facility
matures on September 15, 2014 or, if the notes issued under our 2004 indenture are retired on or
before April 15, 2014, on April 26, 2015. Our initial borrowing base under the new credit
facility has been set at $400 million. The new credit facility decreases our borrowing base grid
by 25 basis points in respect of London Interbank Offering Rate (Libor Rate) advances and base
rate advances. As of May 3, 2011, we had no outstanding borrowings under our bank credit facility
and letters of credit totaling $61.1 million had been issued pursuant to the facility, leaving
$338.9 million of availability under the facility. Our bank credit facility is guaranteed by our
only material subsidiary, Stone Energy Offshore, L.L.C. (Stone Offshore).
The borrowing base under our bank credit facility is redetermined semi-annually, typically on
May 1 and November 1, 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. Our bank 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 net cash flows from their oil and gas reserves reviewed in determining
the borrowing base.
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Table of Contents
At Stones option, loans under our bank credit facility will bear interest at a rate based on the
adjusted Libor Rate plus an applicable margin, or a rate based on the prime rate or Federal funds
rate plus an applicable margin. Our bank credit facility provides for optional and mandatory
prepayments, affirmative and negative covenants, and interest coverage ratio and leverage ratio
maintenance covenants. We were in compliance with all such covenants as of March 31, 2011.
Note 5 Comprehensive Income
The following table illustrates the components of comprehensive income for the three-month
periods ended March 31, 2011 and 2010:
Three Months Ended | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
(in millions) | ||||||||
Net income |
$ | 39.8 | $ | 25.4 | ||||
Other comprehensive income (loss), net of tax effect: |
||||||||
Adjustment for fair value accounting of derivatives |
(32.5 | ) | 13.1 | |||||
Comprehensive income |
$ | 7.3 | $ | 38.5 | ||||
Note 6 Asset Retirement Obligations
The change in our asset retirement obligations during the three months ended March 31, 2011 is
set forth below:
Three Months | ||||
Ended | ||||
March 31, 2011 | ||||
(in millions) | ||||
Asset retirement obligations as of the beginning of the period, including current portion |
$ | 373.9 | ||
Liabilities settled |
(19.0 | ) | ||
Accretion expense |
7.7 | |||
Asset retirement obligations as of the end of the period, including current portion |
$ | 362.6 | ||
In October 2010, we received notification from the Bureau of Ocean Energy Management,
Regulation and Enforcement (BOEMRE) indicating that certain identified wells and facilities
operated by us will need to be retired on a timing schedule, which was accelerated from the timing
estimated in calculating liabilities for asset retirement obligations at December 31, 2009. In
February 2011, we submitted an abandonment plan addressing the identified wells and facilities.
The BOEMRE has indicated they will issue a final order upon review of the plan. During 2010, we
increased our asset retirement obligations in the amount of $54.4 million for the estimated impact
of the accelerated timing of the retirement of these assets and other factors. The final order
will ultimately determine the impact on our asset retirement obligations and could result in an
additional upward or downward revision.
Note 7 Fair Value Measurements
U.S. GAAP establishes a fair value hierarchy which has three levels based on the reliability
of the inputs used to determine the fair value. These levels include: Level 1, defined as inputs
such as unadjusted quoted prices in active markets for identical assets or liabilities; Level 2,
defined as inputs other than quoted prices in active markets that are either directly or indirectly
observable; and Level 3, defined as unobservable inputs for use when little or no market data
exists, therefore requiring an entity to develop its own assumptions.
As of March 31, 2011, we held certain financial assets and liabilities that are required to be
measured at fair value on a recurring basis, including our commodity derivative instruments and our
investments in money market funds. We utilize the services of an independent third party to assist us in valuing our derivative
instruments. We used the income approach in determining the fair value of our derivative
instruments utilizing a proprietary pricing model. The model accounts for the credit risk of Stone
and its counterparties in the discount rate applied to estimated future cash inflows and outflows.
Our swap contracts are included within the Level 2 fair value hierarchy. For a more detailed
description of our derivative instruments, see Note 3 Derivative Instruments and Hedging
Activities. We used the market approach in determining the fair value of our investments in money
market funds, which are included within the Level 1 fair value hierarchy.
7
Table of Contents
The following tables present our assets and liabilities that are measured at fair value on a
recurring basis:
Fair Value Measurements at March 31, 2011 | ||||||||||||||||
Quoted Prices in | ||||||||||||||||
Active Markets for | Significant Other | Significant | ||||||||||||||
Identical Assets | Observable Inputs | Unobservable Inputs | ||||||||||||||
Assets | Total | (Level 1) | (Level 2) | (Level 3) | ||||||||||||
(in millions) | ||||||||||||||||
Money market funds |
$ | 7.6 | $ | 7.6 | $ | | $ | | ||||||||
Hedging contracts. |
9.6 | | 9.6 | | ||||||||||||
Total |
$ | 17.2 | $ | 7.6 | $ | 9.6 | $ | | ||||||||
Fair Value Measurements at March 31, 2011 | ||||||||||||||||
Quoted Prices | ||||||||||||||||
in Active Markets | ||||||||||||||||
for Identical | Significant Other | Significant | ||||||||||||||
Liabilities | Observable Inputs | Unobservable Inputs | ||||||||||||||
Liabilities | Total | (Level 1) | (Level 2) | (Level 3) | ||||||||||||
(in millions) | ||||||||||||||||
Hedging contracts |
($85.0 | ) | $ | | ($85.0 | ) | $ | | ||||||||
Total |
($85.0 | ) | $ | | ($85.0 | ) | $ | | ||||||||
The fair value of cash and cash equivalents and our variable-rate bank debt approximated book
value at March 31, 2011 and December 31, 2010. As of March 31, 2011 and December 31, 2010, the
fair value of our $375 million 8⅝% Senior Notes due 2017 was approximately $393.8 million and
$380.6 million, respectively. As of March 31, 2011 and December 31, 2010, the fair value of our
$200 million 63/4% Senior Subordinated Notes due 2014 was approximately $199.3 million and $197.0
million, respectively. The fair values of our outstanding notes were determined based upon quotes
obtained from brokers.
Note 8 Commitments and Contingencies
We are named as a defendant in certain lawsuits and are a party to certain regulatory
proceedings arising in the ordinary course of business. We do not expect these matters,
individually or in the aggregate, will have a material adverse effect on our financial condition.
Franchise Tax Action. We have been served with several petitions filed by the Louisiana
Department of Revenue (LDR) in Louisiana state court claiming additional franchise taxes due. In
addition, we have received preliminary assessments from the LDR for additional franchise taxes
resulting from audits of a subsidiary. 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. Total asserted claims plus
estimated accrued interest amount to approximately $21.8 million. The franchise tax years 2007
through 2010 for Stone remain subject to examination, which potentially exposes us to additional
estimated assessments of $7.1 million including accrued interest.
Lafourche Parish, Louisiana, Landowner Action. In December 2008, Stephen E. Coignet, et al.,
filed civil action No. 110741 in the 17th Judicial District Court, Lafourche Parish,
Louisiana, against Stone. Plaintiffs have since filed three supplemental petitions, including a
third supplemental and restated petition on October 25, 2010. Plaintiffs are landowners of
approximately sixty acres that are subject to mineral leases in favor of Stone. Plaintiffs allege
that Stone conducted its mineral operations imprudently resulting in damages to plaintiffs in
excess of $60 million. The Company disagrees with plaintiffs contentions and intends to
vigorously defend itself against these claims.
8
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Note 9 Guarantor Financial Statements
Stone Offshore is an unconditional guarantor (the Guarantor Subsidiary) of our 63/4% Senior
Subordinated Notes due 2014 and our 8⅝% Senior Notes due 2017. Our remaining subsidiaries (the
Non-Guarantor Subsidiaries) have not provided guarantees. The following presents condensed
consolidating financial information as of March 31, 2011 and December 31, 2010 and for the
three-month periods ended March 31, 2011 and 2010 on an issuer (parent company), guarantor
subsidiary, non-guarantor subsidiaries, and consolidated basis. Elimination entries presented are
necessary to combine the entities.
CONDENSED CONSOLIDATING BALANCE SHEET (UNAUDITED)
MARCH 31, 2011
(In thousands of dollars)
MARCH 31, 2011
(In thousands of dollars)
Guarantor | Non-Guarantor | |||||||||||||||||||
Assets | Parent | Subsidiary | Subsidiaries | Eliminations | Consolidated | |||||||||||||||
Current assets: |
||||||||||||||||||||
Cash and cash equivalents |
$ | 45,746 | $ | 108 | $ | 52 | $ | | $ | 45,906 | ||||||||||
Accounts receivable |
244,482 | 92,719 | 1,207 | (225,674 | ) | 112,734 | ||||||||||||||
Fair value of hedging contracts |
| 9,632 | | | 9,632 | |||||||||||||||
Current income tax receivable |
3,517 | | | | 3,517 | |||||||||||||||
Deferred taxes * |
4,060 | 38,600 | | | 42,660 | |||||||||||||||
Inventory |
5,803 | 297 | | | 6,100 | |||||||||||||||
Other current assets |
712 | 15 | | | 727 | |||||||||||||||
Total current assets |
304,320 | 141,371 | 1,259 | (225,674 | ) | 221,276 | ||||||||||||||
Oil and gas properties United States
Proved, net |
100,969 | 916,437 | 3,672 | | 1,021,078 | |||||||||||||||
Unevaluated |
283,163 | 174,513 | | | 457,676 | |||||||||||||||
Building and land, net |
6,227 | | | | 6,227 | |||||||||||||||
Fixed assets, net |
4,327 | | | | 4,327 | |||||||||||||||
Other assets, net |
21,693 | | | | 21,693 | |||||||||||||||
Investment in subsidiary |
480,029 | 1,998 | | (482,027 | ) | | ||||||||||||||
Total assets |
$ | 1,200,728 | $ | 1,234,319 | $ | 4,931 | ($707,701 | ) | $ | 1,732,277 | ||||||||||
Liabilities and Stockholders Equity |
||||||||||||||||||||
Current liabilities: |
||||||||||||||||||||
Accounts payable to vendors |
$ | 50,136 | $ | 276,208 | $ | | ($225,674 | ) | $ | 100,670 | ||||||||||
Undistributed oil and gas proceeds |
8,695 | 1,185 | | | 9,880 | |||||||||||||||
Fair value of hedging contracts |
| 62,451 | | | 62,451 | |||||||||||||||
Asset retirement obligations |
| 53,347 | | | 53,347 | |||||||||||||||
Other current liabilities |
20,005 | 231 | | | 20,236 | |||||||||||||||
Total current liabilities |
78,836 | 393,422 | | (225,674 | ) | 246,584 | ||||||||||||||
Long-term debt |
575,000 | | | | 575,000 | |||||||||||||||
Deferred taxes * |
46,552 | 72,177 | | | 118,729 | |||||||||||||||
Asset retirement obligations |
187 | 304,563 | 4,506 | | 309,256 | |||||||||||||||
Fair value of hedging contracts |
| 22,521 | | | 22,521 | |||||||||||||||
Other long-term liabilities |
15,022 | 6,712 | | | 21,734 | |||||||||||||||
Total liabilities |
715,597 | 799,395 | 4,506 | (225,674 | ) | 1,293,824 | ||||||||||||||
Commitments and contingencies |
||||||||||||||||||||
Stockholders equity: |
||||||||||||||||||||
Common stock |
479 | | | | 479 | |||||||||||||||
Treasury stock |
(860 | ) | | | | (860 | ) | |||||||||||||
Additional paid-in capital |
1,332,277 | 1,673,597 | 1,639 | (1,675,236 | ) | 1,332,277 | ||||||||||||||
Accumulated earnings (deficit) |
(846,765 | ) | (1,191,995 | ) | (1,214 | ) | 1,193,209 | (846,765 | ) | |||||||||||
Accumulated other comprehensive loss |
| (46,678 | ) | | | (46,678 | ) | |||||||||||||
Total stockholders equity |
485,131 | 434,924 | 425 | (482,027 | ) | 438,453 | ||||||||||||||
Total liabilities and stockholders
equity |
$ | 1,200,728 | $ | 1,234,319 | $ | 4,931 | ($707,701 | ) | $ | 1,732,277 | ||||||||||
* | Deferred income taxes have been allocated to guarantor subsidiary where related oil and gas properties reside. |
9
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CONDENSED CONSOLIDATING BALANCE SHEET (UNAUDITED)
DECEMBER 31, 2010
(In thousands of dollars)
DECEMBER 31, 2010
(In thousands of dollars)
Guarantor | Non-Guarantor | |||||||||||||||||||
Assets | Parent | Subsidiary | Subsidiaries | Eliminations | Consolidated | |||||||||||||||
Current assets: |
||||||||||||||||||||
Cash and cash equivalents |
$ | 105,115 | $ | 1,659 | $ | 182 | $ | | $ | 106,956 | ||||||||||
Restricted cash |
5,500 | | | | 5,500 | |||||||||||||||
Accounts receivable |
26,760 | 61,560 | 902 | (693 | ) | 88,529 | ||||||||||||||
Fair value of hedging contracts |
12,955 | | | | 12,955 | |||||||||||||||
Deferred taxes * |
27,274 | | | | 27,274 | |||||||||||||||
Inventory |
6,168 | 297 | | | 6,465 | |||||||||||||||
Other current assets |
753 | 15 | | | 768 | |||||||||||||||
Total current assets |
184,525 | 63,531 | 1,084 | (693 | ) | 248,447 | ||||||||||||||
Oil and gas properties United States
Proved, net |
260,434 | 720,309 | 3,886 | | 984,629 | |||||||||||||||
Unevaluated |
337,725 | 75,455 | | | 413,180 | |||||||||||||||
Building and land, net |
6,273 | | | | 6,273 | |||||||||||||||
Fixed assets, net |
4,449 | | | | 4,449 | |||||||||||||||
Other assets, net |
22,112 | | | | 22,112 | |||||||||||||||
Investment in subsidiary |
427,273 | 1,561 | | (428,834 | ) | | ||||||||||||||
Total assets |
$ | 1,242,791 | $ | 860,856 | $ | 4,970 | ($429,527 | ) | $ | 1,679,090 | ||||||||||
Liabilities and Stockholders Equity |
||||||||||||||||||||
Current liabilities: |
||||||||||||||||||||
Accounts payable to vendors |
$ | 60,019 | $ | 43,881 | $ | | ($692 | ) | $ | 103,208 | ||||||||||
Undistributed oil and gas proceeds |
9,491 | 546 | | | 10,037 | |||||||||||||||
Fair value of hedging contracts |
32,144 | | | | 32,144 | |||||||||||||||
Asset retirement obligations |
| 42,300 | | | 42,300 | |||||||||||||||
Current income taxes payable |
239 | | | | 239 | |||||||||||||||
Other current liabilities |
30,137 | | | | 30,137 | |||||||||||||||
Total current liabilities |
132,030 | 86,727 | | (692 | ) | 218,065 | ||||||||||||||
Long-term debt |
575,000 | | | | 575,000 | |||||||||||||||
Deferred taxes * |
(41,804 | ) | 141,031 | | | 99,227 | ||||||||||||||
Asset retirement obligations |
129,100 | 198,105 | 4,415 | | 331,620 | |||||||||||||||
Fair value of hedging contracts |
3,606 | | | | 3,606 | |||||||||||||||
Other long-term liabilities |
14,502 | 6,713 | | | 21,215 | |||||||||||||||
Total liabilities |
812,434 | 432,576 | 4,415 | (692 | ) | 1,248,733 | ||||||||||||||
Commitments and contingencies |
||||||||||||||||||||
Stockholders equity: |
||||||||||||||||||||
Common stock |
478 | | | | 478 | |||||||||||||||
Treasury stock |
(860 | ) | | | | (860 | ) | |||||||||||||
Additional paid-in capital |
1,331,500 | 1,673,598 | 1,640 | (1,675,238 | ) | 1,331,500 | ||||||||||||||
Accumulated earnings (deficit) |
(886,557 | ) | (1,245,318 | ) | (1,085 | ) | 1,246,403 | (886,557 | ) | |||||||||||
Accumulated other comprehensive loss |
(14,204 | ) | | | | (14,204 | ) | |||||||||||||
Total stockholders equity |
430,357 | 428,280 | 555 | (428,835 | ) | 430,357 | ||||||||||||||
Total liabilities and stockholders
equity |
$ | 1,242,791 | $ | 860,856 | $ | 4,970 | ($429,527 | ) | $ | 1,679,090 | ||||||||||
* | Deferred income taxes have been allocated to guarantor subsidiary where related oil and gas properties reside. |
10
Table of Contents
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2011
(In thousands of dollars)
THREE MONTHS ENDED MARCH 31, 2011
(In thousands of dollars)
Non- | ||||||||||||||||||||
Guarantor | Guarantor | |||||||||||||||||||
Parent | Subsidiary | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
Operating revenue: |
||||||||||||||||||||
Oil production |
$ | 786 | $ | 151,209 | $ | | $ | | $ | 151,995 | ||||||||||
Gas production |
1,280 | 44,578 | | | 45,858 | |||||||||||||||
Total operating revenue |
2,066 | 195,787 | | | 197,853 | |||||||||||||||
Operating expenses: |
||||||||||||||||||||
Lease operating expenses |
356 | 38,450 | | | 38,806 | |||||||||||||||
Other operational expense |
| 662 | | | 662 | |||||||||||||||
Production taxes |
147 | 2,388 | | | 2,535 | |||||||||||||||
Depreciation, depletion, amortization |
5,942 | 61,510 | 217 | | 67,669 | |||||||||||||||
Accretion expense |
4 | 7,622 | 91 | | 7,717 | |||||||||||||||
Salaries, general and administrative |
11,731 | 2 | | | 11,733 | |||||||||||||||
Incentive compensation expense |
2,684 | | | | 2,684 | |||||||||||||||
Derivative expense, net |
| 2,180 | | | 2,180 | |||||||||||||||
Total operating expenses |
20,864 | 112,814 | 308 | | 133,986 | |||||||||||||||
Income (loss) from operations |
(18,798 | ) | 82,973 | (308 | ) | | 63,867 | |||||||||||||
Other (income) expenses: |
||||||||||||||||||||
Interest expense |
3,031 | 80 | | | 3,111 | |||||||||||||||
Interest income |
(88 | ) | (6 | ) | | | (94 | ) | ||||||||||||
Other (income) expense, net |
(1,166 | ) | 20 | (179 | ) | | (1,325 | ) | ||||||||||||
(Income) loss from investment in
subsidiary |
(52,756 | ) | (438 | ) | | 53,194 | | |||||||||||||
Total other (income) expenses |
(50,979 | ) | (344 | ) | (179 | ) | 53,194 | 1,692 | ||||||||||||
Income (loss) before taxes |
32,181 | 83,317 | (129 | ) | (53,194 | ) | 62,175 | |||||||||||||
Provision (benefit) for income taxes: |
||||||||||||||||||||
Current |
| | | | | |||||||||||||||
Deferred |
(7,611 | ) | 29,994 | | | 22,383 | ||||||||||||||
Total income taxes |
(7,611 | ) | 29,994 | | | 22,383 | ||||||||||||||
Net income (loss) |
$ | 39,792 | $ | 53,323 | ($129 | ) | ($53,194 | ) | $ | 39,792 | ||||||||||
11
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CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2010
(In thousands of dollars)
THREE MONTHS ENDED MARCH 31, 2010
(In thousands of dollars)
Non- | ||||||||||||||||||||
Guarantor | Guarantor | |||||||||||||||||||
Parent | Subsidiary | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
Operating revenue: |
||||||||||||||||||||
Oil production |
$ | 11,076 | $ | 89,489 | $ | | $ | | $ | 100,565 | ||||||||||
Gas production |
13,018 | 50,208 | | | 63,226 | |||||||||||||||
Derivative income, net |
1,188 | | | | 1,188 | |||||||||||||||
Total operating revenue |
25,282 | 139,697 | | | 164,979 | |||||||||||||||
Operating expenses: |
||||||||||||||||||||
Lease operating expenses |
10,911 | 27,753 | | | 38,664 | |||||||||||||||
Production taxes |
1,053 | 601 | | | 1,654 | |||||||||||||||
Depreciation, depletion, amortization |
10,508 | 49,879 | 266 | | 60,653 | |||||||||||||||
Accretion expense |
3,627 | 4,725 | 110 | | 8,462 | |||||||||||||||
Salaries, general and administrative |
10,482 | 3 | | | 10,485 | |||||||||||||||
Incentive compensation expense |
925 | | | | 925 | |||||||||||||||
Total operating expenses |
37,506 | 82,961 | 376 | | 120,843 | |||||||||||||||
Income (loss) from operations |
(12,224 | ) | 56,736 | (376 | ) | | 44,136 | |||||||||||||
Other (income) expenses: |
||||||||||||||||||||
Interest expense |
4,066 | | | | 4,066 | |||||||||||||||
Interest income |
(55 | ) | (2 | ) | | | (57 | ) | ||||||||||||
Other (income) expense, net |
(809 | ) | (659 | ) | (284 | ) | | (1,752 | ) | |||||||||||
Loss on early extinguishment of debt |
1,820 | | | | 1,820 | |||||||||||||||
(Income) loss from investment in
subsidiary |
(37,248 | ) | 92 | | 37,156 | | ||||||||||||||
Total other (income) expenses |
(32,226 | ) | (569 | ) | (284 | ) | 37,156 | 4,077 | ||||||||||||
Income
(loss) before taxes |
20,002 | 57,305 | (92 | ) | (37,156 | ) | 40,059 | |||||||||||||
Provision (benefit) for income taxes: |
||||||||||||||||||||
Current |
(3,872 | ) | | | | (3,872 | ) | |||||||||||||
Deferred |
(1,544 | ) | 20,057 | | | 18,513 | ||||||||||||||
Total income taxes |
(5,416 | ) | 20,057 | | | 14,641 | ||||||||||||||
Net income (loss) |
$ | 25,418 | $ | 37,248 | ($92 | ) | ($37,156 | ) | $ | 25,418 | ||||||||||
12
Table of Contents
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2011
(In thousands of dollars)
THREE MONTHS ENDED MARCH 31, 2011
(In thousands of dollars)
Guarantor | Non-Guarantor | |||||||||||||||||||
Parent | Subsidiary | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
Cash flows from operating activities: |
||||||||||||||||||||
Net income (loss) |
$ | 39,792 | $ | 53,323 | ($129 | ) | ($53,194 | ) | $ | 39,792 | ||||||||||
Adjustments to reconcile net income (loss) to
net cash provided by operating activities: |
||||||||||||||||||||
Depreciation, depletion and amortization |
5,942 | 61,510 | 217 | | 67,669 | |||||||||||||||
Accretion expense |
4 | 7,622 | 91 | | 7,717 | |||||||||||||||
Deferred income tax provision (benefit) |
(7,611 | ) | 29,994 | | | 22,383 | ||||||||||||||
Settlement of asset retirement obligations |
| (19,034 | ) | | | (19,034 | ) | |||||||||||||
Non-cash stock compensation expense |
1,680 | | | | 1,680 | |||||||||||||||
Excess tax benefits |
(649 | ) | | | | (649 | ) | |||||||||||||
Non-cash derivative expense |
| 1,804 | | | 1,804 | |||||||||||||||
Non-cash (income) loss from investment in
subsidiary |
(52,756 | ) | (438 | ) | | 53,194 | | |||||||||||||
Other non-cash income |
(104 | ) | | | | (104 | ) | |||||||||||||
Change in current income taxes |
(3,681 | ) | | | | (3,681 | ) | |||||||||||||
Change in intercompany receivables/payables |
44,230 | (43,804 | ) | (426 | ) | | | |||||||||||||
(Increase) decrease in accounts receivable |
6,833 | (28,509 | ) | 121 | | (21,555 | ) | |||||||||||||
Decrease in other current assets |
25 | | | | 25 | |||||||||||||||
Decrease in inventory |
365 | | | | 365 | |||||||||||||||
Increase in accounts payable |
2,609 | 81 | | | 2,690 | |||||||||||||||
Increase (decrease) in other current liabilities |
(10,929 | ) | 870 | | | (10,059 | ) | |||||||||||||
Other |
272 | | | | 272 | |||||||||||||||
Net cash provided by (used in) operating
activities |
26,022 | 63,419 | (126 | ) | | 89,315 | ||||||||||||||
Cash flows from investing activities: |
||||||||||||||||||||
Investment in oil and gas properties |
(89,444 | ) | (67,087 | ) | (4 | ) | | (156,535 | ) | |||||||||||
Proceeds from sale of oil and gas properties,
net of expenses |
5,575 | 2,117 | | | 7,692 | |||||||||||||||
Investment in fixed and other assets |
(262 | ) | | | | (262 | ) | |||||||||||||
Net cash used in investing activities |
(84,131 | ) | (64,970 | ) | (4 | ) | | (149,105 | ) | |||||||||||
Cash flows from financing activities: |
||||||||||||||||||||
Deferred financing costs |
(66 | ) | | | | (66 | ) | |||||||||||||
Excess tax benefits |
649 | | | | 649 | |||||||||||||||
Net payments for share based compensation |
(1,843 | ) | | | | (1,843 | ) | |||||||||||||
Net cash used in financing activities |
(1,260 | ) | | | | (1,260 | ) | |||||||||||||
Net decrease in cash and cash equivalents |
(59,369 | ) | (1,551 | ) | (130 | ) | | (61,050 | ) | |||||||||||
Cash and cash equivalents, beginning of period |
105,115 | 1,659 | 182 | | 106,956 | |||||||||||||||
Cash and cash equivalents, end of period |
$ | 45,746 | $ | 108 | $ | 52 | $ | | $ | 45,906 | ||||||||||
13
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CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2010
(In thousands of dollars)
THREE MONTHS ENDED MARCH 31, 2010
(In thousands of dollars)
Guarantor | Non-Guarantor | |||||||||||||||||||
Parent | Subsidiary | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
Cash flows from operating activities: |
||||||||||||||||||||
Net income (loss) |
$ | 25,418 | $ | 37,248 | ($92 | ) | ($37,156 | ) | $ | 25,418 | ||||||||||
Adjustments to reconcile net income (loss) to
net cash provided by operating activities: |
||||||||||||||||||||
Depreciation, depletion and amortization |
10,508 | 49,879 | 266 | | 60,653 | |||||||||||||||
Accretion expense |
3,627 | 4,725 | 110 | | 8,462 | |||||||||||||||
Deferred income tax provision (benefit) |
(1,544 | ) | 20,057 | | | 18,513 | ||||||||||||||
Settlement of asset retirement obligations |
(1,216 | ) | (9,162 | ) | | | (10,378 | ) | ||||||||||||
Non-cash stock compensation expense |
1,427 | | | | 1,427 | |||||||||||||||
Excess tax benefits |
(194 | ) | | | | (194 | ) | |||||||||||||
Non-cash derivative income |
(855 | ) | | | | (855 | ) | |||||||||||||
Loss on early extinguishment of debt |
1,820 | | | | 1,820 | |||||||||||||||
Non-cash (income) loss from investment in
subsidiary |
(37,248 | ) | 92 | | 37,156 | | ||||||||||||||
Other non-cash expenses |
335 | | | | 335 | |||||||||||||||
Change in current income taxes |
(13,500 | ) | | | | (13,500 | ) | |||||||||||||
(Increase) decrease in accounts receivable |
63,699 | (70,215 | ) | (615 | ) | | (7,131 | ) | ||||||||||||
(Increase) decrease in other current assets |
(80 | ) | 27 | | | (53 | ) | |||||||||||||
Decrease in inventory |
| 123 | | | 123 | |||||||||||||||
Increase (decrease) in accounts payable |
271 | (1,143 | ) | 8 | | (864 | ) | |||||||||||||
Increase (decrease) in other current liabilities |
(6,174 | ) | 5 | | | (6,169 | ) | |||||||||||||
Other |
54 | (27 | ) | | | 27 | ||||||||||||||
Net cash provided by (used in) operating
activities |
46,348 | 31,609 | (323 | ) | | 77,634 | ||||||||||||||
Cash flows from investing activities: |
||||||||||||||||||||
Investment in oil and gas properties |
(43,664 | ) | (35,048 | ) | (76 | ) | | (78,788 | ) | |||||||||||
Investment in fixed and other assets |
(343 | ) | | | | (343 | ) | |||||||||||||
Net cash used in investing activities |
(44,007 | ) | (35,048 | ) | (76 | ) | | (79,131 | ) | |||||||||||
Cash flows from financing activities: |
||||||||||||||||||||
Repayment of bank borrowings |
(75,000 | ) | | | | (75,000 | ) | |||||||||||||
Redemption of senior subordinated notes |
(200,503 | ) | | | | (200,503 | ) | |||||||||||||
Proceeds from issuance of senior notes |
275,000 | | | | 275,000 | |||||||||||||||
Deferred financing costs |
(9,701 | ) | | | | (9,701 | ) | |||||||||||||
Excess tax benefits |
194 | | | | 194 | |||||||||||||||
Net payments for share based compensation |
(1,056 | ) | | | | (1,056 | ) | |||||||||||||
Net cash used in financing activities |
(11,066 | ) | | | | (11,066 | ) | |||||||||||||
Net decrease in cash and cash equivalents |
(8,725 | ) | (3,439 | ) | (399 | ) | | (12,563 | ) | |||||||||||
Cash and cash equivalents, beginning of period |
64,830 | 3,963 | 500 | | 69,293 | |||||||||||||||
Cash and cash equivalents, end of period |
$ | 56,105 | $ | 524 | $ | 101 | $ | | $ | 56,730 | ||||||||||
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE STOCKHOLDERS OF
STONE ENERGY CORPORATION:
STONE ENERGY CORPORATION:
We have reviewed the condensed consolidated balance sheet of Stone Energy Corporation as of March
31, 2011, and the related condensed consolidated statements of operations and cash flows for the
three-month periods ended March 31, 2011 and 2010. 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, 2010, 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 March 3, 2011, 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, 2010, is fairly stated, in all material respects, in relation to
the consolidated balance sheet from which it has been derived.
/s/ Ernst & Young LLP | ||||
New Orleans, Louisiana
May 5, 2011
May 5, 2011
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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
The information in this Quarterly Report on Form 10-Q includes 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. All statements, other than statements of historical or current
facts, that address activities, events, outcomes and other matters that we plan, expect, intend,
assume, believe, budget, predict, forecast, project, estimate or anticipate (and other similar
expressions) will, should or may occur in the future are forward-looking statements. These
forward-looking statements are based on managements current belief, based on currently available
information, as to the outcome and timing of future events. When considering forward-looking
statements, you should keep in mind the risk factors and other cautionary statements as described
in our Annual Report on Form 10-K and in this Quarterly Report on Form 10-Q.
Forward-looking statements appear in a number of places and include statements with respect
to, among other things:
| any expected results or benefits associated with our acquisitions; | ||
| estimates of our future oil and natural gas production, including estimates of any increases in oil and gas production; | ||
| planned capital expenditures and the availability of capital resources to fund capital expenditures; | ||
| our outlook on oil and gas prices; | ||
| estimates of our oil and gas reserves; | ||
| any estimates of future earnings growth; | ||
| the impact of political and regulatory developments; | ||
| our outlook on the resolution of pending litigation and government inquiry; | ||
| estimates of the impact of new accounting pronouncements on earnings in future periods; | ||
| our future financial condition or results of operations and our future revenues and expenses; | ||
| our access to capital and our anticipated liquidity; | ||
| estimates of future income taxes; and | ||
| our business strategy and other plans and objectives for future operations. |
We caution you that these forward-looking statements are subject to risks and uncertainties,
many of which are beyond our control, incident to the exploration for and development, production
and marketing of oil and natural gas. These risks include, among other things:
| consequences of the Deepwater Horizon oil spill and resulting stringent regulatory requirements; | ||
| commodity price volatility; | ||
| domestic and worldwide economic conditions; | ||
| the availability of capital on economic terms to fund our capital expenditures and acquisitions; | ||
| our level of indebtedness; | ||
| declines in the value of our oil and gas properties resulting in a decrease in our borrowing base under our credit facility and ceiling test write-downs and impairments; | ||
| our ability to replace and sustain production; | ||
| the impact of a financial crisis on our business operations, financial condition and ability to raise capital; | ||
| the ability of financial counterparties to perform or fulfill their obligations under existing agreements; | ||
| third party interruption of sales to market; | ||
| lack of availability and cost of goods and services; | ||
| regulatory and environmental risks associated with drilling and production activities; | ||
| drilling and other operating risks; | ||
| unsuccessful exploration and development drilling activities; | ||
| hurricanes and other weather conditions; | ||
| the adverse effects of changes in applicable tax, environmental, derivatives and other regulatory legislation, including changes affecting our offshore and Appalachian operations; | ||
| the uncertainty inherent in estimating proved oil and natural gas reserves and in projecting future rates of production and timing of development expenditures; and | ||
| the other risks described in our Annual Report on Form 10-K and our Quarterly Reports on Form 10-Q. |
Should one or more of the risks or uncertainties described above, in our Annual Report on Form
10-K for the year ended December 31, 2010, or in our Quarterly Reports on Form 10-Q occur, or
should underlying assumptions prove incorrect, our actual results and plans could differ materially
from those expressed in any forward-looking
statements. We specifically disclaim all responsibility
to publicly update any information contained in a forward-looking
16
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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 us 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, 2010. Certain first quarter 2010 amounts have
been changed from amounts originally presented to correct a prior period immaterial error. All
period to period comparisons are based upon corrected amounts.
Overview
We are 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 (GOM). We have been operating in the Gulf Coast Basin since our incorporation in 1993 and
have established a technical and operational expertise in this area. More recently, we have made
strategic investments in the deep water and deep shelf GOM, which we have targeted as important
exploration areas. We are also active in the Appalachia region, where we have established a
significant acreage position and have development operations in the Marcellus Shale. We have also
targeted several exploratory oil projects in the Rocky Mountain region. Throughout this document,
reference to our Gulf Coast Basin properties includes our Gulf Coast onshore, shelf, deep shelf
and deep water properties.
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 and other events; | ||
| estimates of fair value in business combinations; | ||
| 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 Part I, Item 1A, of our Annual Report on Form 10-K
regarding these other risk factors and in this report under Part II, Item 1A, Risk Factors.
Known Trends and Uncertainties
Deepwater Horizon Explosion and Oil Spill - The April 2010 explosion and sinking of the
Deepwater Horizon drilling rig and resulting oil spill has created uncertainties about the impact
on our future operations in the GOM. Increased regulation in a number of areas could disrupt,
delay or prohibit future drilling programs and ultimately impact the fair value of our unevaluated
properties, a substantial portion of which is in the deep water of the GOM. As of March 31, 2011,
we have approximately $257 million of investments in unevaluated oil and gas properties that relate
to offshore leases, the majority of which are in the deep water GOM. If the fair value of these
investments were to fall below the recorded amounts, the excess would be transferred to evaluated
oil and gas properties thereby affecting the computation of amounts for depreciation, depletion and
amortization and potentially our ceiling test computation. As of March 31, 2011, the computation
of our ceiling test indicated a cushion of approximately $215 million.
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Asset Retirement Obligations In October 2010, we received notification from the BOEMRE
indicating that certain identified wells and facilities operated by us will need to be retired on a
timing schedule which was accelerated from the timing estimated in calculating liabilities for
asset retirement obligations at December 31, 2009. In February 2011, we submitted an abandonment
plan addressing the identified wells and facilities. The BOEMRE has indicated they will issue a
final order upon review of the plan. During 2010, we increased our asset retirement obligations in
the amount of $54.4 million for the estimated impact of the accelerated timing of the retirement of
these assets and other factors. The final order will ultimately determine the impact on our asset
retirement obligations and could result in an additional upward or downward revision.
Hurricanes Since the majority of our production originates in the GOM, we are particularly
vulnerable to the effects of hurricanes on production. Additionally, affordable insurance coverage
for property damage to our facilities for hurricanes is becoming more difficult to obtain. We have
narrowed our insurance coverage to selected properties, increased our deductibles and are
shouldering more hurricane related risk in the environment of rising insurance rates. Significant
hurricane impacts could include reductions and/or deferrals of future oil and natural gas
production and revenues, increased lease operating expenses for evacuations and repairs and
possible acceleration of plugging and abandonment costs.
Louisiana Franchise Taxes We have been involved in litigation with the state of Louisiana
over the proper computation of franchise taxes allocable to the state. This litigation relates to
the states position that sales of crude oil and natural gas from properties located on the Outer
Continental Shelf (OCS), which are transported through the state of Louisiana, should be sourced
to Louisiana for purposes of computing franchise taxes. We disagree with the states position.
However, if the states position were to be upheld, we could incur additional expense for alleged
underpaid franchise taxes in prior years and higher franchise tax expense in future years. See
Part II, Item 1. Legal Proceedings.
Liquidity and Capital Resources
At May 3, 2011, we had $338.9 million of availability under our bank credit facility and cash
on hand of approximately $69.8 million. Our capital expenditure budget for 2011 has been set at
$425 million, which excludes material acquisitions and capitalized salaries, general and
administrative expenses and interest. We intend to finance our capital expenditure budget
primarily with cash flow from operations and borrowings under our bank credit facility if
necessary. If we do not have sufficient cash flow from operations or availability under our bank
credit facility, we may be forced to reduce our capital expenditures. To the extent that 2011 cash
flow from operations exceeds our estimated 2011 capital expenditures, we may expand our capital
budget or invest in money markets.
There is a significant amount of uncertainty regarding our industry resulting from the
explosion and sinking of the Deepwater Horizon oil rig in the Gulf of Mexico and resulting oil
spill. Several bills have been introduced in Congress which would require us to demonstrate our
capabilities for greater financial responsibility in the event of spills. In addition, we are
subject to an annual evaluation for exemption from supplemental bonding on plugging and abandoning
obligations. It is possible that the resolution of these uncertainties could cause severe impacts
on our liquidity in the event we are required to post additional bonds or letters of credit.
Cash Flow and Working Capital. Net cash flow provided by operating activities totaled $89.3
million during the three months ended March 31, 2011 compared to $77.6 million in the comparable
period in 2010. Based on our outlook of commodity prices and our estimated production, we expect
to fund our 2011 capital expenditures with cash flow provided by operating activities and
borrowings under our bank credit facility.
Net cash flow used in investing activities totaled $149.1 million and $79.1 million during the
three months ended March 31, 2011and 2010, respectively, which primarily represents our investment
in oil and natural gas properties.
Net cash flow used in financing activities totaled $1.3 million for the three months ended
March 31, 2011, which primarily represents tax payments for vesting on share based compensation.
Net cash flow used in financing activities totaled $11.1 million for the three months ended March
31, 2010, which primarily represents repayments of borrowings under our bank credit facility of $75
million, the redemption of our 8 1/4% Senior Subordinated Notes due 2011 of $200.5 million, net of
proceeds from the public offering of our 8⅝% Senior Notes due 2017 of approximately $275 million
less $9.7 million of deferred financing costs.
Although we had a working capital deficit at March 31, 2011 of $25.3 million, we had $338.9
million of availability under our bank credit facility as of May 3, 2011.
Capital Expenditures. During the three months ended March 31, 2011, additions to oil and gas
property costs of $149.5 million included $29.0 million of lease and property acquisition costs,
$6.4 million of capitalized salaries, general and administrative expenses (inclusive of incentive
compensation) and $9.7 million of capitalized interest. These investments were financed by cash
flow from operations.
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Bank Credit Facility. On March 31, 2011, we had no outstanding borrowings under our bank
credit facility and letters of credit totaling $63.1 million had been issued pursuant to the
facility. On April 26, 2011, we entered into an amended and restated revolving credit facility
totaling $700 million through a syndicated bank group, replacing our previous $700 million
facility. The new credit facility matures on September 15, 2014 or, if the notes issued under our
2004 indenture are retired on or before April 15, 2014, on April 26, 2015. Our initial borrowing
base under the new credit facility has been set at $400 million. The new credit facility decreases
our borrowing base grid by 25 basis points in respect of London Interbank Offering Rate (Libor
Rate) advances and base rate advances. As of May 3, 2011, we had no outstanding borrowings under
our bank credit facility and letters of credit totaling $61.1 million had been issued pursuant to
the facility, leaving $338.9 million of availability under the facility. Our bank credit facility
is guaranteed by our only material subsidiary, Stone Energy Offshore, L.L.C. (Stone Offshore).
The borrowing base under our bank credit facility is redetermined semi-annually, on May 1 and
November 1, 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. Our bank 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 net cash flows from their 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. Our bank credit facility
provides for optional and mandatory prepayments, affirmative and negative covenants, and interest
coverage ratio and leverage ratio maintenance covenants. We were in compliance with all
such covenants as of March 31, 2011.
Share Repurchase Program. On September 24, 2007, our Board of Directors authorized a share
repurchase program for an aggregate amount of up to $100 million. The shares may be repurchased
from time to time in the open market or through privately negotiated transactions. The repurchase
program is subject to business and market conditions, and may be suspended or discontinued at any
time. Through March 31, 2011, 300,000 shares had been repurchased under this program at a total
cost of approximately $7.1 million, or an average price of $23.57 per share. No shares were
repurchased during the three months ended March 31, 2011.
Results of Operations
The following table sets forth certain information with respect to our oil and gas operations.
Three Months Ended | ||||||||||||||||
March 31, | ||||||||||||||||
2011 | 2010 | Variance | % Change | |||||||||||||
Production: |
||||||||||||||||
Oil (MBbls) |
1,616 | 1,422 | 194 | 14 | % | |||||||||||
Natural gas (MMcf) |
9,580 | 10,598 | (1,018 | ) | (10 | %) | ||||||||||
Oil and natural gas (MMcfe) |
19,276 | 19,130 | 146 | 1 | % | |||||||||||
Revenue data (in thousands) (a): |
||||||||||||||||
Oil revenue |
$ | 151,995 | $ | 100,565 | $ | 51,430 | 51 | % | ||||||||
Natural gas revenue |
45,858 | 63,226 | (17,368 | ) | (27 | %) | ||||||||||
Total oil and natural gas revenue |
$ | 197,853 | $ | 163,791 | $ | 34,062 | 21 | % | ||||||||
Average prices (a): |
||||||||||||||||
Oil (per Bbl) |
$ | 94.06 | $ | 70.72 | $ | 23.34 | 33 | % | ||||||||
Natural gas (per Mcf) |
4.79 | 5.97 | (1.18 | ) | (20 | %) | ||||||||||
Oil and natural gas (per Mcfe) |
10.26 | 8.56 | 1.70 | 20 | % | |||||||||||
Expenses (per Mcfe): |
||||||||||||||||
Lease operating expenses |
$ | 2.01 | $ | 2.02 | ($0.01 | ) | (1 | %) | ||||||||
Salaries, general and administrative expenses (b) |
0.61 | 0.55 | 0.06 | 11 | % | |||||||||||
DD&A expense on oil and gas properties |
3.44 | 3.09 | 0.35 | 11 | % |
(a) | Includes the cash settlement of effective hedging contracts. | |
(b) | Exclusive of incentive compensation expense. |
During the three months ended March 31, 2011, we reported net income totaling $39.8
million, or $0.81 per share, compared to net income for the three months ended March 31, 2010 of
$25.4 million, or $0.52 per share. All per share amounts are on a diluted basis.
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The variance in the three-month periods results was also due to the following components:
Production. During the three months ended March 31, 2011, total production volumes increased
to 19.3 Bcfe compared to 19.1 Bcfe produced during the comparable 2010 period. Oil production
during the three months ended March 31, 2011 totaled approximately 1,616,000 barrels compared to
1,422,000 barrels produced during the three months ended March 31, 2010, while natural gas
production totaled 9.6 Bcf during the three months ended March 31, 2011 compared to 10.6 Bcf
produced during the comparable period of 2010. The increase in oil production volumes was
primarily due to increases in production at our Amberjack field and Ship Shoal Block 113 where we
have development programs ongoing. The decrease in gas production volumes was primarily due to
natural production declines.
Prices. Prices realized during the three months ended March 31, 2011 averaged $94.06 per Bbl
of oil and $4.79 per Mcf of natural gas, or 20% higher, on an Mcfe basis, than average realized
prices of $70.72 per Bbl of oil and $5.97 per Mcf of natural gas during the comparable 2010 period.
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 increased our average realized
natural gas price by $0.48 per Mcf and decreased our average realized oil price by $5.23 per Bbl
during the three months ended March 31, 2011. During the three months ended March 31, 2010, our
effective hedging transactions increased our average realized natural gas price by $0.54 per Mcf
and decreased our average realized oil price by $5.87 per Bbl.
Revenue. Oil and natural gas revenue was $197.9 million during the three months ended March
31, 2011, compared to $163.8 million during the comparable period of 2010. The increase is
attributable to a 33% increase in average realized oil prices along with a 14% increase in oil
production volumes, partially offset by a decline in average realized gas prices and gas production
volumes.
Derivative Income/Expense. During the three months ended March 31, 2011 and 2010, 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 months ended March 31, 2011, totaled $2.2 million, consisting of
$0.4 million of cash settlements on the ineffective portion of derivative contracts, plus $1.8
million of changes in the fair market value of the ineffective portion of derivative contracts.
Net derivative income for the three months ended March 31, 2010, totaled $1.2 million, consisting
of $0.3 million of cash settlements on the ineffective derivative contracts, plus $0.9 million of
changes in the fair market value of the ineffective portion of derivative contracts.
Expenses. Lease operating expenses during the three months ended March 31, 2011 and 2010
totaled $38.8 million and $38.7 million, respectively. On a unit of production basis, lease
operating expenses were $2.01 per Mcfe and $2.02 per Mcfe for the three months ended March 31, 2011
and 2010, respectively.
Other operational
expense of $0.7 million
during the three months ended March 31, 2011 relates to the
settlement of litigation associated with an expensed operation.
Depreciation, depletion and amortization (DD&A) on oil and gas properties for the three
months ended March 31, 2011 totaled $66.4 million, or $3.44 per Mcfe, compared to $59.2 million, or
$3.09 per Mcfe, during the comparable period of 2010. DD&A expense for the three months ended
March 31, 2010 was lower as a result of a reduction in the carrying value of our oil and gas
properties after a 2009 ceiling test write-down.
Accretion expense for the three months ended March 31, 2011 was $7.7 million compared to $8.5
million for the comparable period of 2010. The decrease is primarily due to a change in the timing
on certain of our asset retirement obligations.
Salaries, general and administrative (SG&A) expenses (exclusive of incentive compensation)
for the three months ended March 31, 2011 were $11.7 million compared to $10.5 million for the
three months ended March 31, 2010. The increase primarily relates to salary adjustments.
For the three months ended March 31, 2011 and 2010, incentive compensation expense totaled
$2.7 million and $0.9 million, respectively. These amounts relate to the accrual of estimated
incentive compensation bonuses calculated based on the projected achievement of certain strategic
objectives for each fiscal year.
Interest expense for the three months ended March 31, 2011 totaled $3.1 million, net of $9.7
million of
capitalized interest, compared to interest expense of $4.1 million, net of $6.4 million of
capitalized interest, during the comparable 2010 period. The decrease in interest cost is
primarily the result of a decrease in outstanding borrowings under our bank credit facility.
Total income taxes for the first quarter of 2011 were $22.4 million, all of which were
deferred. The increased effective tax rate was due to an increase in the provision for state
income taxes as our onshore operational activities increase.
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Off Balance Sheet Arrangements
None.
Recent Accounting Developments
Fair Value Measurements and Disclosures. Accounting Standards Update (ASU) 2010-06 was
issued in January 2010 to improve disclosures about fair value measurements. The guidance provided
in ASU 2010-06 became effective for interim and annual periods beginning after December 15, 2009,
except for the disclosures about purchases, sales, issuances, and settlements in the roll forward
of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years
beginning after December 15, 2010, and for interim periods within those fiscal years. We had no
Level 3 fair value measurements during the quarter ended March 31, 2011.
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 43% of our estimated 2011 production from estimated proved reserves, 36%
of our estimated 2012 production from estimated proved reserves, and 21% of our estimated 2013
production from estimated proved reserves. See Item 1. Financial Statements Note 3
Derivative Instruments and 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, 2010, there
have been no material changes in reported market risk as it relates to commodity prices.
Interest Rate Risk
We had total debt outstanding of $575 million at March 31, 2011, all of which bears interest
at fixed rates. The $575 million of fixed-rate debt is comprised of $375 million of 8⅝% Senior
Notes due 2017 and $200 million of 63/4% Senior Subordinated Notes due 2014. We had no outstanding
borrowings under our variable-rate bank credit facility during the three months ended March 31,
2011. We currently have no interest rate hedge positions in place to reduce our exposure to
changes in interest rates.
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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.
Disclosure controls and procedures, as defined in the rules and regulations of the Securities
Exchange Act of 1934, means controls and other procedures of an issuer that are designed to ensure
that information required to be disclosed by the issuer in the reports that it files or submits
under the Act (15 U.S.C. 78a et seq.) is recorded, processed, summarized and reported, within the
time periods specified in the Commissions rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that information required
to be disclosed by an issuer in the reports that it files or submits under the Act is accumulated
and communicated to the issuers management, including its principal executive and principal
financial officers, or persons performing similar functions, as appropriate to allow timely
decisions regarding required disclosure. 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 principal executive officer and our principal 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 March 31, 2011.
Based on this evaluation, our principal executive officer and principal financial officer believe
that as of the end of the quarterly period ended March 31, 2011:
| 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 principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. |
Changes in Internal Controls Over Financial Reporting
There has not been any change in our internal control over financial reporting that occurred
during the quarter ended March 31, 2011 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
Franchise Tax Action. 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.
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. Further, on January 7,
2009, Stone was served with a petition (civil action number 2008-
7193) claiming additional franchise taxes due for the taxable years ended December 31, 2005
and 2006 in the amount of $4.0 million plus accrued interest calculated through October 21, 2008 in
the amount of $1.7 million. In addition, we have received assessments from the LDR for additional
franchise taxes in the amount of $2.9 million resulting from audits of a subsidiary. 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
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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 2007 through 2010 for Stone
remain subject to examination.
Lafourche Parish, Louisiana, Landowner Action. In December 2008, Stephen E. Coignet, et al.,
filed civil action No. 110741 in the 17th Judicial District Court, Lafourche Parish,
Louisiana, against Stone. Plaintiffs have since filed three supplemental petitions, including a
third supplemental and restated petition on October 25, 2010. Plaintiffs are landowners of
approximately sixty acres that are subject to mineral leases in favor of Stone. Plaintiffs allege
that Stone conducted its mineral operations imprudently resulting in damages to plaintiffs in
excess of $60 million. Plaintiffs expert witness provided his report, dated December 28, 2010,
stating his opinion that one well did not produce as much production as it should have, resulting
in a loss to plaintiffs in excess of $4 million, that imprudent operations destroyed hydrocarbon
bearing zones resulting in a loss to plaintiffs in excess of $20 million, and that imprudent
operation of a water injection secondary recovery project resulted in damages to plaintiffs of
approximately $4,755,000. There are also allegations of failure to protect from drainage from a
well on adjoining land, trespass, and various other breaches of the mineral leases. The Company
disagrees with plaintiffs contentions and intends to vigorously defend itself against these
claims.
Litigation is subject to substantial uncertainties concerning the outcome of material factual
and legal issues relating to the litigation. Accordingly, 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.
Item 1A. Risk Factors
There have been no material changes with respect to Stones risk factors previously
reported in Stones Annual Report on Form 10-K for the year ended December 31, 2010.
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. The shares may be repurchased from time to time in the
open market or through privately negotiated transactions. The repurchase program is subject to
business and market conditions, and may be suspended or discontinued at any time. 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 first quarter of 2011:
Maximum Number (or | ||||||||||||||||
Total Number of | Approximate Dollar | |||||||||||||||
Shares (or Units) | Value) of Shares | |||||||||||||||
Purchased as Part | (or Units) that May | |||||||||||||||
Total Number of | of Publicly | Yet be Purchased | ||||||||||||||
Shares (or Units) | Average Price Paid | Announced Plans or | Under the Plans or | |||||||||||||
Period | Purchased | per Share (or Unit) | Programs | Programs | ||||||||||||
Share
Repurchase Program: |
||||||||||||||||
January 2011 |
| | | |||||||||||||
February 2011 |
| | | |||||||||||||
March 2011 |
| | | |||||||||||||
| | | $ | 92,928,632 | ||||||||||||
Other: |
||||||||||||||||
January 2011 |
79,219 | (a) | $ | 23.26 | | |||||||||||
February 2011 |
| | | |||||||||||||
March 2011 |
| | | |||||||||||||
79,219 | $ | 23.26 | | N/A | ||||||||||||
Total |
79,219 | $ | 23.26 | | ||||||||||||
(a) | 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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Item 6. Exhibits
3.1 | Certificate of Incorporation of the Registrant, as amended
(incorporated by reference to Exhibit 3.1 to the Registrants
Registration Statement on Form S-1 (Registration No. 33-62362)). |
|||
3.2 | Certificate of Amendment of the Certificate of Incorporation of
Stone Energy Corporation, dated February 1, 2001 (incorporated by
reference to Exhibit 4.1 to the Registrants Form 8-K, filed
February 7, 2001). |
|||
3.3 | 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)). |
|||
4.1 | Indenture between Stone Energy Corporation and JPMorgan Chase
Bank, National Association, as trustee, dated December 15, 2004
(incorporated by reference to Exhibit 4.1 to the Registrants
Current Report on Form 8-K filed on December 15, 2004.) |
|||
4.2 | 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 filed August 29, 2008 (File No.
001-12074)). |
|||
4.3 | Second Supplemental Indenture, dated January 26, 2010, among
Stone Energy Corporation, Stone Energy Offshore, L.L.C., and The
Bank of New York Mellon Trust Company, N.A., successor to
JPMorgan Chase Bank, as trustee (incorporated by reference to
Exhibit 4.1 to the Registrants Current Report on Form 8-K filed
January 29, 2010 (File No. 001-12074)). |
|||
4.4 | Indenture, dated January 26, 2010, among Stone Energy
Corporation, Stone Energy Offshore, L.L.C., and The Bank of New
York Mellon Trust Company, N.A., as trustee (incorporated by
reference to Exhibit 4.2 to the Registrants Current Report on
Form 8-K filed January 29, 2010 (File No. 001-12074)). |
|||
4.5 | First Supplemental Indenture, dated January 26, 2010, among Stone
Energy Corporation, Stone Energy Offshore, L.L.C., and The Bank
of New York Mellon Trust Company, N.A., as trustee (incorporated
by reference to Exhibit 4.3 to the Registrants Current Report on
Form 8-K filed January 29, 2010 (File No. 001-12074)). |
|||
*10.1 | $700,000,000 Third Amended and Restated Credit Agreement among
Stone Energy Corporation as Borrower, Bank of America, N.A. as
Administrative Agent and Issuing Bank, and the financial
institutions named therein, dated April 26, 2011. |
|||
*15.1 | Letter from Ernst & Young LLP dated May 5, 2011, regarding
unaudited interim financial information. |
|||
*31.1 | Certification of Principal Executive Officer of Stone Energy
Corporation as required by Rule 13a-14(a) of the Securities
Exchange Act of 1934. |
|||
*31.2 | Certification of Principal Financial Officer of Stone Energy
Corporation as required by Rule 13a-14(a) of the Securities
Exchange Act of 1934. |
|||
*#32.1 | Certification of Chief Executive Officer and Chief Financial
Officer of Stone Energy Corporation pursuant to 18 U.S.C. § 1350. |
* | Filed herewith. | |
# | 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. |
24
Table of Contents
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
STONE ENERGY CORPORATION |
||||
Date: May 5, 2011 | By: | /s/ J. Kent Pierret | ||
J. Kent Pierret | ||||
Senior Vice President, Chief Accounting Officer and Treasurer (On behalf of the Registrant and as Chief Accounting Officer) |
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Table of Contents
EXHIBIT INDEX
Exhibit Number | Description | |||
3.1 | Certificate of Incorporation of the Registrant, as amended
(incorporated by reference to Exhibit 3.1 to the
Registrants Registration Statement on Form S-1
(Registration No. 33-62362)). |
|||
3.2 | Certificate of Amendment of the Certificate of
Incorporation of Stone Energy Corporation, dated February
1, 2001 (incorporated by reference to Exhibit 4.1 to the
Registrants Form 8-K, filed February 7, 2001). |
|||
3.3 | 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)). |
|||
4.1 | Indenture between Stone Energy Corporation and JPMorgan
Chase Bank, National Association, as trustee, dated
December 15, 2004 (incorporated by reference to Exhibit 4.1
to the Registrants Current Report on Form 8-K filed on
December 15, 2004.) |
|||
4.2 | 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 filed August
29, 2008 (File No. 001-12074)). |
|||
4.3 | Second Supplemental Indenture, dated January 26, 2010,
among Stone Energy Corporation, Stone Energy Offshore,
L.L.C., and The Bank of New York Mellon Trust Company,
N.A., successor to JPMorgan Chase Bank, as trustee
(incorporated by reference to Exhibit 4.1 to the
Registrants Current Report on Form 8-K filed January 29,
2010 (File No. 001-12074)). |
|||
4.4 | Indenture, dated January 26, 2010, among Stone Energy
Corporation, Stone Energy Offshore, L.L.C., and The Bank of
New York Mellon Trust Company, N.A., as trustee
(incorporated by reference to Exhibit 4.2 to the
Registrants Current Report on Form 8-K filed January 29,
2010 (File No. 001-12074)). |
|||
4.5 | First Supplemental Indenture, dated January 26, 2010, among
Stone Energy Corporation, Stone Energy Offshore, L.L.C.,
and The Bank of New York Mellon Trust Company, N.A., as
trustee (incorporated by reference to Exhibit 4.3 to the
Registrants Current Report on Form 8-K filed January 29,
2010 (File No. 001-12074)). |
|||
*10.1 | $700,000,000 Third Amended and Restated Credit Agreement
among Stone Energy Corporation as Borrower, Bank of
America, N.A. as Administrative Agent and Issuing Bank, and
the financial institutions named therein, dated April 26,
2011. |
|||
*15.1 | Letter from Ernst & Young LLP dated May 5, 2011, regarding
unaudited interim financial information. |
|||
*31.1 | Certification of Principal Executive Officer of Stone
Energy Corporation as required by Rule 13a-14(a) of the
Securities Exchange Act of 1934. |
|||
*31.2 | Certification of Principal Financial Officer of Stone
Energy Corporation as required by Rule 13a-14(a) of the
Securities Exchange Act of 1934. |
|||
*#32.1 | Certification of Chief Executive Officer and Chief
Financial Officer of Stone Energy Corporation pursuant to
18 U.S.C. § 1350. |
* | Filed herewith. | |
# | 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. |
26