Stone Energy Corp. (SGY) has reported fourth-quarter 2011 earnings of 93 cents per share, outpacing the Zacks Consensus Estimate of 81 cents and almost doubling from the year-earlier profit of 49 cents. The outperformance was mainly aided by overall higher price realization. The purchase of the majority of working interest in the deep water Pompano field also contributed to the increase.

Total operating revenue improved 30.0% year over year to $222.7 million in the quarter from the year-ago level of $171.4 million. The reported figure also surpassed the Zacks Consensus Estimate of $198 million.

For full-year 2011, the company earned $3.97 per share compared with the year-earlier profit of $1.99. Total revenue was $864.6 million, representing an almost 31% increase from the year-ago level of $660.2 million.

Operational Highlights

During the quarter, production averaged 210 million cubic feet of gas equivalent per day (MMcfe/d), up marginally from the year-earlier level of 208 MMcfe/d. Of the total production, natural gas accounted for nearly 50%. For 2011, net production averaged 214 MMcfe/d versus 209 MMcfe/d in 2010.

Overall realization on a per Mcfe basis amounted to $11.46 in the reported quarter versus $8.88 per Mcfe in fourth quarter 2010. Natural gas prices were down at $4.44 per Mcf from $5.31 per Mcf in the year-ago quarter, while Stone Energy sold oil at an average price of $110.39 per barrel (up 43.5% on an annualized basis).

On the costs front, unit lease operating expenses increased to $2.39 per Mcfe (versus $2.08 per Mcfe in the year-ago quarter). Depreciation, depletion and amortization was $3.85 per Mcfe (versus $3.25 per Mcfe), while salaries, general and administrative (SG&A) expenses were 55 cents per Mcfe (versus 66 cents per Mcfe).

Liquidity

At quarter end, the company had approximately $38.5 million in cash and $620 million in long-term debt, with a debt-to-capitalization ratio of 48% versus 46.4% in the preceding quarter. Discretionary cash flow was $167.8 million, up 43.9% year over year.

Guidance

For the first quarter of 2012, the company expects net daily production of 220-240 MMcfe. For full-year 2012, the company anticipates its total volume to fall in the range of 240-275 MMcfe per day, up 12-29% from the 2011 level of 214 MMcfe/d.

Capital outlay for the year is projected at $625 million, which is apportioned across Stone’s foremost areas with approximately 34% for the GoM conventional shelf, 24% for Deep Water/Deep Gas projects, 30% for the Marcellus shale and 12% toward Onshore Oil projects and new venture opportunities.

Outlook

Lafayette, Louisiana-based Stone Energy Corporation is an independent oil and gas exploration and production company engaged in the acquisition and subsequent exploration, development, operation and production of oil and gas properties located primarily in the Gulf of Mexico (GoM). As of December 31, 2011, Stone had 602 billion cubic feet equivalent (Bcfe) of proved reserves, up 27% from year-end 2010. Of the total estimated proved reserve, 360 Bcfe was proved developed comprising 48% gas.

The company has an effective business strategy in place to leverage cash flow from existing assets to sustain relatively stable GoM shelf production, as well as to expediently grow oil and gas production in price advantaged basins such as Appalachia and the Gulf Coast Basin and material impact areas such as the deep water GoM and onshore oil. This will help in stabilizing cash flow and developing value for shareholders in the long term.

A number of opportunities in new well production (like Cane Creek test at the Hatch Point field in the Paradox Basin) and continuous activity in the Deep Gas play, including continued drilling at the Lighthouse Bayou and LaPosada projects, could significantly improve revenues. Further, the purchase of interests in Pompano and Mica fields in the GoM from BP Plc (BP) has placed the company favorably.

Hence, we maintain our long-term Outperform recommendation for the company. Stone also holds a Zacks #1 Rank, which is equivalent to a short-term Strong-Buy rating.

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