Zacks_Analysts' Blog : Stone Energy Beats on Oil Prices - Analyst Blog

Stone Energy Corp. (SGY) reported second-quarter 2011 earnings of $1.17 per share, outpacing the Zacks Consensus Estimate of 98 cents and improving from the year-earlier profit of 57 cents. The outperformance was primarily based on production growth and higher oil price realizations.

Total oil and gas revenue improved 41.4% year over year to $231.9 million in the quarter from the year-ago level of $164.0 million.

Operational Highlights

During the quarter, production averaged 227 million cubic feet of gas equivalent per day (MMcfe/d), up 4.6% from the year-earlier level of 217 MMcfe/d. Of the total production, natural gas accounted for 51.5%. Stone Energy’s total production exceeded its guidance of 213–225 MMcfe/d.

Realized prices averaged $67.48 per barrel of oil equivalent (Boe), up 35.3% from the year-ago level of $49.87 per Boe. Overall realization on a per Mcfe basis amounted to $11.25 versus $8.31 per Mcfe in second quarter 2010.

Natural gas prices were down at $5.32 per Mcf from $5.46 per Mcf in the year-ago quarter, while Stone Energy sold oil at an average price of $105.19 per barrel (up 45.8% on an annualized basis).

On the costs front, unit lease operating expenses increased to $2.27 per Mcfe (versus $1.87 per Mcfe in the year-ago quarter). Depreciation, depletion and amortization was $3.48 per Mcfe (versus $3.16 per Mcfe), while salaries, general and administrative (SG&A) expenses were 51 cents per Mcfe (flat year over year).

Liquidity

At quarter end, the company had approximately $82.0 million in cash and $575 million in long-term debt, with a debt-to-capitalization ratio of 51.8%. Discretionary cash flow was $172.5 million, up 48.2% year over year.

Guidance

For the third quarter of 2011, the company expects net daily production of 205−225 MMcfe. Stone Energy expects its gas production to account for 53% of the total expected volume and oil to account for the remaining 47%. The company anticipates its full-year 2011 volume in the 205–225 MMcfe range.

Stone Energy expects 2011 capital outlay at $500 million. Management aims to fund the capex agenda with operating cash flow.

Outlook

While production in the quarter showed a modest improvement, the company continues to pursue Appalachia, the Rockies and the Deep Gas/Deepwater projects to sustain the growth momentum in 2011. Stone holds a Zacks #3 Rank, which is equivalent to a short-term Hold rating.

The company has an extensive capital project inventory and is generating surplus cash flow with no bank debt. Although Stone Energy aims to apportion the capital across its portfolio, focus will be on the Gulf of Mexico (GoM) shelf as well as the Marcellus region. Again, the company remains optimistic on further deepwater opportunities in the near term.

Again, recently, Stone Energyannounced a well discovery at its LaPosada Prospect (also called La Cantera) –– an oil and gas field sprawling over 2899 acres. The asset is located in Vermilion Parish, Louisiana. The company expects production from the field to commence by early 2012.

Stone is the third largest lease owner in the GoM shelf, where it has recognized Deep Gas prospects and plans to drill these in 2012 and 2013.

However, natural gas prices remain concerns. Additionally, Stone’s growing exploration exposure to the mature, low reserve and capital intensive GoM shelf is expected to aggravate its risk profile. Further, competition from peers like Cabot Oil & Gas Corporation (COG) is a threat to the company. Hence, we maintain our long-term Neutral recommendation for the company.