Stone Energy Corp. (SGY) reported fourth-quarter 2010 earnings of 49 cents per share, beating the Zacks Consensus Estimate of 44 cents, but falling below the year-earlier adjusted profit of 89 cents per share.

The year-over-year decline was primarily due to lower production volumes and weak commodity price realizations. Total oil and gas revenue decreased 14.7% year over year to $170.0 million in the fourth quarter.

Operational Highlights

Production during the quarter averaged 208 million cubic feet of gas equivalent per day (MMcfe/d), down 5.5% from the year-earlier level. Of the total production, natural gas accounted for 52%. Production volumes averaged 209 MMcfe/d in 2010, down 3% year over year, due to recompletion and permit delays for the Macondo incident.

Prices realized during the quarter averaged $76.92 per barrel of oil (down marginally from the year-ago level of $77.01) and $5.32 per Mcf of natural gas (down nearly 24.9%). Overall realization, on a per Mcfe basis, decreased 9.9% to $8.88.

On the costs front, in the fourth quarter, unit lease operating expenses increased 43.5% to $2.08 per Mcfe. Depreciation, depletion and amortization was down about 8.7% year over year at $3.25 per Mcfe and salaries, general and administrative (SG&A) expenses were up 29% at 66 cents per Mcfe.


At the end of the quarter, the company had approximately $107 million in cash and $575 million in long-term debt with debt-to-capitalization ratio of 57.2%. Discretionary cash flow was $113.8 million during the quarter, down 9.5% year over year.


For the first quarter of 2011, the company expects net daily production of 200−210 MMcfe, and maintained its full year 2011 expectation in the 200–220 MMcfe range.

Stone also reiterated its 2011 capex guidance at $425 million to account for specific Appalachian lease acreage acquisitions, but excludes material acquisitions and capitalized SG&A and interest.


Although production in the year was hurt by project-related delays, the company continues to pursue Marcellus development, Rockies oil exploration, and ultra deep gas wildcatting, which are expected to sustain the growth momentum in 2011. Stone’s estimated year-end 2010 proved reserves stood at 474 billion cubic feet of natural gas equivalent, up 15% from the 2009 level.

While natural gas price is a concern, Stone’s growing exploration exposure to the mature, low reserve and capital intensive Gulf of Mexico shelf is expected to aggravate its risk profile. Further, competition from peers like Cabot Oil & Gas Corporation (COG) is a threat to the company.

We maintain our long-term Neutral recommendation for the company. Stone also holds a Zacks #3 Rank, which is equivalent to a short-term Hold rating.

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