Stone Energy Corporation (SGY)

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Stone Energy Corp. (SGY)

Q3 2010 Earnings Call

November 4, 2010 11:00 AM ET

Executives

David Welch – President and CEO

Ken Beer – Chief Financial Officer

Analysts

Brian Lively – Tudor, Pickering, Holt

Scott Wilmoth – Simmons & Co.

Gary Stromberg – Barclays Capital

Jeff Robertson – Barclays Capital

John Selser – Iberia Capital Partners

Jeff Davis – Waterstone Capital

Presentation

Operator

Good morning. My name is Sarah, and I will be your conference Operator today. At this time, I would like to welcome everyone to the Stone Energy Third Quarter Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers remarks there will be a question-and-answer session. (Operator Instructions)

Thank you. I would now like to turn the call over to Mr. David Welch, President and CEO of Stone Energy. Mr. Welch, you may go ahead

David Welch

Thank you, Sarah, and good morning, everyone. Welcome to our third quarter earnings call. Joining me this morning is our Chief Financial Officer, Ken Beer, who will discuss the financial highlights of the quarter. Then I’ll provide you a few general comments, followed by your questions. So, Ken?

Ken Beer

Thank you, Dave. Let me start-off with a forward-looking statement. In this conference call, we may make forward-looking statements within the meaning of the Securities Act of 1933, and the Securities and Exchange Act of 1934. These forward-looking statements are subject to all the risks and uncertainties normally incidents in the exploration for and development, production and sale of oil and natural gas.

We urge you to read our 2009 annual report on Form 10-K and the soon to be filed third quarter 10-Q, for a discussion of the risks that could cause our actual results to differ materially from those in any forward-looking statements we will make today.

In addition, in this call we may refer to financial measures that may be deemed to be non-GAAP financial measures as defined under the Exchange Act. Please refer to the press release we issued yesterday, which is posted on our website, for a reconciliation for the differences between these financial measures and the most directly comparable GAAP financial measures.

With that, rather than go through the financials in great detail, we’ll assume that everyone has seen the press release and the attached financials. From a financial reporting standpoint, there were no significant unusual items in this quarter, so my comments should be brief.

Our discretionary cash flow for the quarter was $92.5 million or about $1.93 per share and earnings of $20.3 million, or about $0.42 per share, both of which were within pennies of the first call estimates.

Production for the quarter came in at 198 million cubic equivalent a day. During the quarter, we had continued permit delays on recompletion and workover projects on some third-party pipeline repairs and inspection delays before recommencing our drilling at Amberjack, fortunately, much of the delay on non-drilling permits seemed to be behind us and manageable.

As noted in the press release, after being just under $200 million a day in October, we are now above $210 million a day for the past few days. Volumes from the Vili well at around 2,500 barrel equivalents a day have certainly helped.

Oil and gas price realization after hedging came in at around $72.50 per barrel and $5.50 per Mcf or a blended price of $8.41 for Mcfe. And again, oil represents about 65% of our revenues.

Our hedge position reduced oil prices by $2.79 per barrel for the quarter but boosted gas prices by just under $1 per Mcf, or a net game on hedging of about $6 million for the quarter.

On the cost side, our LOE was $37 million, on the lower side of our annual guidance. However, we expect a slight increase in major maintenance expenditures in the fourth quarter. So, we’re maintaining our $150 to $165 million guidance for the year.

Note that we also had a $3 million operational expense relating to the cost of warm stacking the H&P Amberjack platform rig during the moratorium and we had a small loss from tubular sales out of our inventory for the quarter.

Our quarterly estimated tax rate at 40% was higher than usual, as we had some adjustments to our annual tax estimates, which hit the third quarter. In fact, a swing from 35% to 40% effective tax rate for the quarter equated into about $0.03 or $0.04 per share.

The higher state income taxes are now part of the equation. So, we are expecting a higher overall effective tax rate. We would now expect to show a 36% effective tax rate for the year versus our previous run rate at 35% and the catch-up was put in the third quarter. In addition, we had a catch-up on our current taxes for the quarter, as well.

Some of the increase in current taxes stems from a shift in capital expenditures away from projects that generated IDCs, which offset current taxes and into acreage acquisition in low risk Marcellus wells, which do generate less IDCs.

Our total debt for the quarter remained at $525 million and was split again between the $200 million sub notes due December 2014, the $275 million of our 2017 senior notes and just $50 million in bank debt.

You might note in late October, our bank group reaffirmed our borrowing base at $395 million, which leaves us with just under, I’m sorry, with just over $280 million in availability after adjusting for the $63 million in LCs that we had outstanding.

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