UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 30, 1999
or
[ ] 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 (I.R.S. employer
of incorporation or organization) identification no.)
625 E. Kaliste Saloom Road 70508
Lafayette, Louisiana (Zip code)
(Address of principal executive offices)
Registrant's 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 X No ___
As of November 10, 1999, there were 18,331,458 shares of the Registrant's
Common Stock, par value $.01 per share, outstanding.
<PAGE>
TABLE OF CONTENTS
Page
PART I
Item 1. Financial Statements:
Condensed Consolidated Balance Sheet
as of September 30, 1999 and December 31, 1998................. 1
Condensed Consolidated Statement of Operations
for the Three and Nine Month Periods Ended
September 30, 1999 and 1998................................... 2
Condensed Consolidated Statement of Cash Flows
for the Nine Months Ended September 30, 1999 and 1998. ........ 3
Notes to Condensed Consolidated Financial Statements ........... 4
Auditors' Review Report......................................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................ 7
PART II
Item 6. Exhibits and Reports on Form 8-K................................ 11
<PAGE>
STONE ENERGY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(In thousands)
<TABLE>
<CAPTION>
September 30, December 31,
Assets 1999 1998
------------------ ----------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents.................................... $22,511 $10,550
Marketable securities, at market............................. 19,322 16,853
Accounts receivable.......................................... 30,111 26,803
Other current assets......................................... 430 184
------------------ ----------------
Total current assets....................................... 72,374 54,390
Oil and gas properties, net:
Proved....................................................... 321,379 286,098
Unevaluated.................................................. 18,040 7,726
Building and land, net........................................... 3,852 3,559
Fixed assets, net................................................ 2,884 1,336
Other assets, net................................................ 3,168 3,460
Deferred tax asset............................................... 1,518 9,821
------------------ ----------------
Total assets............................................... $423,215 $366,390
================== ================
Liabilities and Stockholders' Equity
Current liabilities - accounts payable and
accrued liabilities.......................................... $44,906 $44,506
Long-term debt................................................... 100,000 209,936
Production payment liabilities................................... 18,829 -
Other long-term liabilities...................................... 6,650 6,616
------------------ ----------------
Total liabilities.......................................... 170,385 261,058
------------------ ----------------
Common stock..................................................... 183 151
Additional paid in capital....................................... 251,295 119,208
Retained earnings (deficit)...................................... 1,352 (14,027)
------------------ ----------------
Total stockholders' equity................................. 252,830 105,332
------------------ ----------------
Total liabilities and stockholders' equity................. $423,215 $366,390
================== ================
</TABLE>
<PAGE>
STONE ENERGY CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- -----------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues
Oil and gas production..................... $40,504 $26,774 $106,858 $82,955
Overhead reimbursements
and management fees..................... 161 158 510 468
Other income............................... 359 480 851 1,258
----------- ----------- ----------- -----------
Total revenues...................... 41,024 27,412 108,219 84,681
----------- ----------- ----------- -----------
Expenses
Normal lease operating expenses............ 5,967 4,513 16,026 12,422
Major maintenance expenses................. 437 460 618 1,229
Production taxes........................... 983 552 2,168 1,596
Depreciation, depletion and
amortization............................. 16,189 15,984 50,708 47,088
Interest................................... 2,968 3,518 10,677 9,243
Salaries, general and administrative....... 1,083 956 3,282 3,163
Incentive compensation plan................ 632 275 1,053 825
----------- ----------- ----------- -----------
Total expenses...................... 28,259 26,258 84,532 75,566
----------- ----------- ----------- -----------
Net income before income taxes............... 12,765 1,154 23,687 9,115
----------- ----------- ----------- -----------
Provision for income taxes:
Current.................................... - - 5 -
Deferred................................... 4,477 409 8,303 3,240
----------- ----------- ----------- -----------
4,477 409 8,308 3,240
----------- ----------- ----------- -----------
Net income................................... $8,288 $745 $15,379 $5,875
=========== =========== =========== ===========
Earnings per common share:
Basic earnings per share ................. $0.48 $0.05 $0.97 $0.39
=========== =========== =========== ===========
Diluted earnings per share................ $0.47 $0.05 $0.95 $0.38
=========== =========== =========== ===========
Average shares outstanding................ 17,332 15,068 15,841 15,065
=========== =========== =========== ===========
Average shares outstanding assuming
dilution............................... 17,711 15,264 16,157 15,329
=========== =========== =========== ===========
</TABLE>
<PAGE>
STONE ENERGY CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------------------------------
1999 1998
--------------- ----------------
<S> <C> <C>
Cash flows from operating activities:
Net income.................................................... $15,379 $5,875
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, depletion and amortization.............. 50,708 47,088
Provision for deferred income taxes................... 8,303 3,240
Non-cash effects of production payment liabilities.... (1,443) -
--------------- ----------------
72,947 56,203
Increase in marketable securities..................... (2,469) (5,488)
(Increase) decrease in accounts receivable............ (3,308) 5,455
Increase in other current assets...................... (273) (321)
Increase (decrease) in accounts payable............... 829 (1,018)
Increase (decrease) in accrued liabilities............ (341) 4,543
Other................................................. 45 198
--------------- ----------------
Net cash provided by operating activities....................... 67,430 59,572
--------------- ----------------
Cash flows from investing activities:
Investment in oil and gas properties........................... (75,135) (129,905)
Building additions and renovations............................. (367) (17)
(Increase) decrease in other assets ........................... (2,062) 1,029
--------------- ----------------
Net cash used in investing activities........................... (77,564) (128,893)
--------------- ----------------
Cash flows from financing activities:
Proceeds from borrowings..................................... 13,000 70,000
Repayment of debt............................................ (123,024) (60)
Deferred financing costs..................................... - (160)
Proceeds from stock offering................................. 131,139 -
Expenses for stock offering.................................. (373) -
Proceeds from the exercise of stock options.................. 1,353 284
--------------- ----------------
Net cash provided by financing activities....................... 22,095 70,064
--------------- ----------------
Net increase in cash and cash equivalents....................... 11,961 743
Cash and cash equivalents, beginning of period.................. 10,550 10,304
--------------- ----------------
Cash and cash equivalents, end of period........................ $22,511 $11,047
=============== ================
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest (net of amount capitalized)...................... $13,041 $11,265
Income taxes.............................................. 5 -
</TABLE>
<PAGE>
STONE ENERGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - INTERIM FINANCIAL STATEMENTS
The condensed consolidated financial statements of Stone Energy Corporation
(the "Company") at September 30, 1999 and for the three- and nine-month periods
then ended 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 financial statements should be read
in conjunction with the consolidated financial statements and notes thereto,
together with management's discussion and analysis of financial condition and
results of operations, contained in the Company's Annual Report on Form 10-K for
the year ended December 31, 1998. The results of operations for the three- and
nine-month periods ended September 30, 1999 are not necessarily indicative of
future financial results. Certain prior period amounts have been reclassified to
conform to current period presentation.
Note 2 - EARNINGS PER SHARE
Basic net income per share of common stock was calculated by dividing net
income applicable to common stock by the weighted-average number of common
shares outstanding during the period. Diluted net income per share of common
stock was calculated by dividing net income applicable to common stock by the
weighted-average number of common shares outstanding during the period plus the
weighted-average number of dilutive stock options granted to outside directors
and certain employees which totaled approximately 379,000 shares and 196,000
shares in the third quarter of 1999 and 1998, respectively, and 316,000 shares
and 264,000 shares in the first nine months of 1999 and 1998, respectively.
Options which were considered antidilutive because the exercise price of the
options exceeded the average market price for the applicable period totaled 274
shares and 50,000 shares in the third quarter of 1999 and 1998, respectively,
and 1,445 shares and 13,000 shares in the first nine months of 1999 and 1998,
respectively.
Note 3 - HEDGING ACTIVITIES
In order to reduce its exposure to the possibility of declining oil and gas
prices, from time to time the Company hedges with third parties certain of its
crude oil and natural gas production in various swap agreement contracts. The
crude oil contracts are tied to the price of NYMEX light sweet crude oil futures
and are settled monthly based on the differences between the contract price and
the average NYMEX price for that month applied to the related contract volumes.
Settlement for gas swap contracts is based on the average closing price of
either the last three days or last full month of trading on the NYMEX for each
month of the swap.
The Company's current forward positions are summarized as follows:
<TABLE>
<CAPTION>
Oil Gas
-------------------------------- ------------------------------
Average Average
MBbls Price Bbtu Price
------------- ---------------- ------------ --------------
<S> <C> <C> <C> <C>
Fourth quarter, 1999 368.0 $19.30 4,600 $2.450
First quarter, 2000 409.5 19.31 4,550 2.528
Second quarter, 2000 409.5 19.31 1,820 2.518
Third quarter, 2000 230.0 19.21 1,840 2.518
Fourth quarter, 2000 230.0 19.21 1,840 2.518
</TABLE>
<PAGE>
For the three- and nine-month periods ended September 30, 1999, the Company
recognized net hedging losses of $3.8 million and $1.2 million, respectively,
which were recorded in the accompanying condensed consolidated statement of
operations as reductions to revenues from oil and gas production. Third quarter
and nine-month 1998 oil and gas revenues included net hedging gains of $1.4
million and $3.9 million, respectively.
Note 4 - LONG-TERM DEBT
On August 3, 1999, the Company used a portion of the net proceeds from its
recent stock offering to repay the outstanding borrowings under its credit
facility reducing long-term debt to $100.0 million, representing the Company's
Senior Subordinated Notes. At September 30, 1999, the Company's borrowing base,
which had no outstanding borrowings, was $140.0 million with outstanding letters
of credit totaling $7.5 million issued pursuant to the facility. The borrowing
base limitation is based on a borrowing base amount established by the banks for
the Company's oil and gas properties.
Note 5 - PRODUCTION PAYMENT LIABILITIES
In June 1999, the Company acquired a 100% working interest in the Lafitte
Field by executing an agreement that included a dollar-denominated production
payment to be satisfied through the sale of production from the purchased
property. At that time, the Company recorded a production payment liability of
$4.6 million representing the estimated discounted present value of production
payments to be made. As provided for in a separate agreement, on September 23,
1999, Goodrich Petroleum Company, L.L.C. exercised its option to participate for
a 49% working interest in the Lafitte Field resulting in a reduction of the
Company's production payment liability to $2.3 million at September 30, 1999.
In July 1999, the Company acquired an additional working interest in East
Cameron Block 64 and a 100% working interest in West Cameron Block 176 in
exchange for a volumetric production payment. This agreement requires that 7.3
Mmcf of gas per day be delivered to the seller from the Company's South Pelto
Block 23 until 8 Bcf of gas have been distributed. At the transaction date, the
Company recorded a volumetric production payment liability of $18.0 million
representing the estimated discounted cash flow associated with the specific
production volumes to be delivered. In accordance with Securities and Exchange
Commission rules and regulations, the Company amortizes the volumetric
production payment liability as specified deliveries of gas are made to the
seller and recognizes non-cash revenue in the form of gas production revenues.
At September 30, 1999, the volumetric production payment liability was $16.5
million and $1.5 million had been recognized as gas revenue. The Company has
recognized the underlying gas volumes produced, the per unit price effect and
the resulting gas revenues related to this agreement in all disclosure
schedules, unless otherwise indicated.
Note 6 - INCENTIVE COMPENSATION PLAN
Due to the Company's performance during the first nine months of 1999, the
employee incentive compensation accrual was re-evaluated resulting in third
quarter 1999 expense of $0.6 million and nine-month 1999 expense of $1.1 million
compared to $0.3 million and $0.8 million for the respective periods in 1998.
Note 7 - PUBLIC OFFERING OF COMMON STOCK
On July 28, 1999, the Company completed an offering of 3.16 million shares
of its common stock at a price to the public of $43.75 per share resulting in
net proceeds of $130.7 million which were reflected in the common stock and
additional paid in capital accounts of the Company's condensed consolidated
balance sheet at September 30, 1999.
Note 8 - NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The Company expects to adopt SFAS No. 133
during the first quarter of 2001. Because of the nature of the Company's
derivative instruments, the Company does not expect that the adoption will have
a material impact on the Company's results of operations. However, the adoption
may create volatility in equity through changes in other comprehensive income.
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE STOCKHOLDERS OF
STONE ENERGY CORPORATION:
We have reviewed the accompanying condensed consolidated balance sheet of
Stone Energy Corporation (a Delaware corporation) as of September 30, 1999, and
the related condensed consolidated statements of operations for the three-month
and nine-month periods ended September 30, 1999 and 1998, and the condensed
consolidated statements of cash flows for the nine-month periods ended September
30, 1999 and 1998. These financial statements are the responsibility of the
Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, 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 reviews, we are not aware of any material modifications that
should be made to the financial statements referred to above for them to be in
conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the balance sheet of Stone Energy Corporation as of December 31, 1998
(not presented herein), and, in our report dated March 2, 1999, we expressed an
unqualified opinion on that statement. In our opinion, the information set forth
in the accompanying condensed consolidated balance sheet as of December 31,
1998, is fairly stated, in all material respects, in relation to the balance
sheet from which it has been derived.
ARTHUR ANDERSEN LLP
New Orleans, Louisiana
November 1, 1999
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Stone Energy Corporation is an independent oil and gas company engaged in
the acquisition, exploration, development and operation of oil and gas
properties onshore and in shallow waters offshore Louisiana. The Company and its
predecessors have been active in the Gulf Coast Basin since 1973 and have
established extensive geophysical, technical and operational expertise in this
area.
The Company's business strategy is to increase production, cash flow and
reserves through the acquisition and development of mature properties located in
the Gulf Coast Basin. Since implementing its current business strategy in 1989,
the Company has acquired interests in 18 fields in the Gulf Coast Basin from
major and large independent oil and gas companies. The Company operates all of
its properties, which enables the Company to better control the timing,
selection and costs of its drilling and production activities. The Company
believes that there will continue to be numerous attractive opportunities to
acquire properties in the Gulf Coast Basin due to the increased focus by major
and large independent companies on projects in deeper waters and in foreign
countries.
RESULTS OF OPERATIONS
The following table sets forth certain operating information with respect
to the oil and gas operations of the Company for the three- and nine-month
periods ended September 30, 1999 and 1998.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ --------------------------
1999 1998 1999 1998
---------- ---------- ------------ ----------
<S> <C> <C> <C> <C>
Production:
Oil (MBbls)............................................... 925 700 2,631 2,012
Gas (MMcf):
Produced excluding volumetric production payment........ 8,970 7,926 28,463 23,127
Volumetric production payment........................... 667 - 667 -
---------- ---------- ------------ ----------
Total gas volumes produced.............................. 9,637 7,926 29,130 23,127
Oil and gas (MMcfe):
Produced excluding volumetric production payment........ 14,520 12,126 44,249 35,199
Volumetric production payment........................... 667 - 667 -
---------- ---------- ------------ ----------
Total volumes produced.................................. 15,187 12,126 44,916 35,199
Sales data (in thousands) (a):
Oil $16,042 $8,986 $39,396 $28,402
Gas:
Gas sales excluding volumetric production payment...... 22,968 17,788 65,968 54,553
Volumetric production payment.......................... 1,494 - 1,494 -
---------- ---------- ------------ ----------
Total gas sales........................................ 24,462 17,788 67,462 54,553
Average sales prices (a):
Oil (per Bbl)............................................ $17.34 $12.84 $14.97 $14.12
Gas (per Mcf):
Price excluding volumetric production payment.......... 2.56 2.24 2.32 2.36
Volumetric production payment.......................... 2.24 - 2.24 -
Net average price...................................... 2.54 2.24 2.32 2.36
Oil and gas (per Mcfe):
Price excluding volumetric production payment.......... 2.69 2.21 2.38 2.36
Volumetric production payment.......................... 2.24 - 2.24 -
Net average price ..................................... 2.67 2.21 2.38 2.36
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ---------------------------
1999 1998 1999 1998
---------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Expenses (per Mcfe):
Normal lease operating expenses (b)...................... $0.39 $0.37 $0.36 $0.35
Salaries, general and administrative..................... 0.07 0.08 0.07 0.09
DD&A on oil and gas properties........................... 1.05 1.30 1.11 1.32
</TABLE>
(a) Includes the effects of hedging
(b) Excludes major maintenance expenses
For the third quarter of 1999, the Company reported net income totaling
$8.3 million or $0.47 per share, compared to net income reported for the third
quarter of 1998 of $0.7 million, or $0.05 per share. Net income for the first
nine months of 1999 and 1998 totaled $15.4 million and $5.9 million,
respectively. The favorable results in net income were due to improvements in
the following components:
PRODUCTION. Production volumes of oil and gas during the third quarter of
1999, compared to the 1998 quarter, rose 32% and 22%, respectively, totaling
approximately 925,000 barrels of oil and 9.6 billion cubic feet of gas. On a
thousand cubic feet of gas equivalent (Mcfe) basis, production rates for the
third quarter of 1999 were 25% higher than the comparative 1998 period.
Year-to-date production volumes totaled 2.6 million barrels of oil and 29.1
billion cubic feet of gas, increases of 31% and 26%, respectively over the
nine-month 1998 period.
The increase in 1999 production rates, as compared to 1998, was due
primarily to increases at three of the Company's fields. First, the Company
successfully executed an aggressive exploration and development program at
Vermilion Block 255 by completing and placing on production three exploratory
wells and two development wells. At the end of last year, the Company began
producing two high pressured gas wells at the South Pelto Block 23 E Platform
which have significantly contributed to 1999's favorable production rates.
Finally, in May 1999, the Company increased its interest, and therefore its
share of production, at its Weeks Island Field through the acquisition of an
additional 32% working interest in 11 producing wells.
PRICES. Average realized prices during the third quarter of 1999 were
$17.34 per barrel of oil and $2.54 per Mcf of gas, compared to averages of
$12.84 per barrel and $2.24 per Mcf realized in the 1998 period, including the
effects of hedging. From time to time, the Company enters into various swap
agreement contracts in order to reduce its exposure to the possibility of
declining oil and gas prices. For the third quarter of 1999, hedging reduced
realized prices by $2.85 per barrel of oil and $0.12 per Mcf of gas as compared
to a net increase of $0.18 per Mcf of gas for the comparable period in 1998.
OIL AND GAS REVENUES. Despite a $3.8 million reduction in revenues as a
result of the Company's third quarter 1999 hedging transactions, the favorable
increases in oil and gas production rates combined with higher commodities
prices resulted in oil and gas revenues increasing 51% to $40.5 million,
compared to third quarter 1998 oil and gas revenues of $26.8 million. For the
first nine months of 1999, oil and gas revenues increased 29% to $106.9 million,
including a $1.2 million year-to-date net reduction in revenues from hedging
transactions, compared to oil and gas revenues of $83.0 million during the first
nine months of 1998. For the three- and nine-month periods of 1998, oil and gas
revenues included positive revenue adjustments from hedging transactions of $1.4
million and $3.9 million, respectively.
EXPENSES. Normal operating costs during the third quarter of 1999 increased
to $6.0 million, compared to $4.5 million during the 1998 period. On a unit of
production basis, third quarter 1999 operating costs were $0.39 per Mcfe as
compared to $0.37 per Mcfe for the third quarter of 1998. The increase in
operating costs was due primarily to a 31% increase in the number of producing
wells operated by the Company as a result of the acquisitions of the Lafitte
Field and West Cameron Block 176, the increases in working interest at East
Cameron Block 64, Eugene Island Block 243 and Weeks Island Field and discoveries
at many of the Company's fields including Vermilion Block 255, South Pelto Block
23, Vermilion Block 131 and Eugene Island Block 243.
<PAGE>
General and administrative expenses for the third quarter of 1999 increased
in total to $1.1 million from $1.0 million during the third quarter of 1998.
However, on a unit basis, these costs declined 13% during the 1999 quarter to
$0.07 per Mcfe, compared to $0.08 per Mcfe during the 1998 period. Due to the
Company's performance during the first nine months of 1999, the employee
incentive compensation accrual was re-evaluated resulting in third quarter 1999
expense of $0.6 million and nine month 1999 expense of $1.1 million compared to
$0.3 million and $0.8 million for the respective periods in 1998.
Depreciation, depletion and amortization (DD&A) expense on the Company's
oil and gas properties increased to $15.9 million during the third quarter of
1999, compared to $15.8 million for the 1998 period. However, on a per unit
basis, DD&A expense for 1999's third quarter declined to $1.05 per Mcfe versus
$1.30 per Mcfe for the comparable 1998 period.
As a result of the July 1999 stock offering and the subsequent repayment of
all outstanding borrowings under the Company's bank credit facility, interest
expense during the three-month period ended September 30, 1999 decreased to $3.0
million, compared to $3.5 million during the 1998 period.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOW AND WORKING CAPITAL. Pending the use of proceeds from the stock
offering, in August 1999 the Company retired all of the outstanding borrowings
under its revolving credit facility. Based upon the Company's outlook on oil and
gas prices and production rates, the Company believes that its cash flow from
operations will be sufficient to fund the current 1999 and 2000 capital
expenditures budget. If oil and gas prices or production rates fall below the
Company's current expectations, the Company believes that the available
borrowings under its bank credit facility will be sufficient to fund the capital
expenditures in excess of operating cash flow. Net cash flow from operations
before working capital changes for the third quarter and first nine months of
1999 was $27.5 million ($1.55 per share) and $72.9 million ($4.51 per share),
compared to $17.1 million ($1.12 per share) and $56.2 million ($3.67 per share)
reported for the same periods of 1998. Working capital at September 30, 1999
totaled $27.5 million.
CAPITAL EXPENDITURES. Capital expenditures during the third quarter of 1999
totaled $36.0 million and primarily consisted of exploration and development
expenditures at the Pylos, Triggerfish, Skate, and Orca 2 Prospects in addition
to acquisition costs for an additional interest in East Cameron Block 64 and a
100% working interest in West Cameron Block 176. The Company acquired these
additional interests through a non-cash volumetric production payment. The
accounting for this volumetric production payment resulted in the recording of
an $18.0 million asset based upon the estimated discounted cash flow associated
with the specific production volumes to be delivered. Capital expenditures
during the first nine months of 1999 totaled $95.4 million, compared to
expenditures of $129.9 million during the 1998 period. Capital expenditures for
the third quarter and nine-month periods of 1999 included $2.0 million and $4.9
million, respectively, of capitalized general and administrative costs and $0.1
million and $0.3 million, respectively, of capitalized interest. These
investments were financed by a combination of cash flow from operations,
production payment obligations and borrowings under the Company's bank revolver.
ACQUISITION COSTS. During 1999, the Company acquired additional interests
in three of its existing fields and completed the acquisition of two new fields.
In May 1999, the Company acquired an additional 32% working interest in a
portion of the Weeks Island Field for $5.7 million. In June 1999, the Company
acquired a majority interest and control of operations in the Lafitte Field for
$6.1 million in cash and a production payment to be satisfied through the sale
of production from the purchased property. During September 1999, Goodrich
Petroleum Company, L.L.C. exercised its option to participate for a 49% working
interest in the Lafitte Field resulting in a cash reimbursement to the Company
of approximately $3.0 million and a proportional reduction in the production
payment liability. In June 1999, the Company acquired from a co-owner a residual
interest, relative to a farmin interest, on a 29% working interest and 24.24%
net revenue interest in the Eugene Island Block 243 Field for $0.1 million. In
July 1999, the Company acquired a 62.5% working interest in the East Cameron
Block 64 Field and a 100% working interest in the West Cameron Block 176 Field,
as well as control of operations for both fields, in exchange for a volumetric
production payment of 8 Bcf of gas to be delivered over a three-year period from
the South Pelto Block 23 Field. With the 1999 acquisitions, the Company now
serves as operator on all of its 18 properties.
DEVELOPMENT COSTS. During 1999, the Company completed numerous development
drilling, workover and recompletion operations and facilities installations in
an effort to develop its property base and to increase cash flow from the
Company's proved reserves. During the first nine months of 1999, the development
drilling program achieved a 100% success rate consisting of the Eugene Island
Block 243 No. D-1 Well, the OCS-G 1152 No. H-5 and OCS-G 1153 No. D-3 wells at
Vermilion Block 255, the Clovelly Corporation No. 41 and Dereda Thomas No. 1
wells at Clovelly Field and the OCS-G 0775 No. 18 Well at Vermilion Block 131.
The year's most significant workover projects include the OCS-G 0079 No. 1 Well
at Vermilion Block 46 and the OCS-G 0089 No. 7 Well at East Cameron Block 64,
one of which was successful. The Company also installed saltwater injection
equipment at the Dereda Thomas No. 2 SWD Well at Clovelly Field and upgraded the
production facilities at Eugene Island Block 243 to accommodate current oil
production from the D-1 Well and any future oil production from additional
discoveries in the field.
EXPLORATORY COSTS. In an effort to provide additions to the Company's
existing oil and gas reserve base, during 1999, the Company has completed
drilling operations on six exploratory wells, five of which were successful.
These five wells include the OCS-G 1152 No. H-4 Well at Vermilion Block 255's
Slide Prospect, the OCS-G 1152 No. A-7 STK at Vermilion Block 255's Bubble
Prospect, the OCS-G 14519 No. 1 Well at South Timbalier Block 71's Triggerfish
Prospect, the OCS-G 3135 No. 2 Well at Vermilion Block 255's Pylos Prospect and
the OCS-G 0775 No. 19 Well at Vermilion Block 131's Skate Prospect. In the third
quarter, the Company spudded the OCS-G 2899 No. A-7 Well at Eugene Island Block
243's Orca 2 Prospect and the Myles Salt No. 1 Well at Weeks Island Field's
Iberia-Myles Salt No. 1 ITW Prospect.
BUDGETED CAPITAL EXPENDITURES. The Company has a capital expenditures
budget of approximately $32.2 million for the fourth quarter of 1999 bringing
the 1999 annual budget to a total of $127.6 million, including $28.6 million in
acquisition costs incurred during the first nine months of 1999. For the year
2000, the Company's budget totals $117.8 million for oil and gas properties it
now owns. The Company is currently evaluating a significant number of potential
acquisitions, although no future acquisitions can be assured. Significant
investments are budgeted at East Cameron Block 64, Lafitte Field, Vermilion
Block 255, South Timbalier Block 8, Eugene Island Block 243 and Weeks Island
Field for the remainder of 1999 with significant projects budgeted at Vermilion
Block 255, Eugene Island Block 243, Weeks Island Field, West Cameron Block 176,
Clovelly Field and Lake Hermitage Field for the year 2000. The budgeted
activities include projects which seek to increase cash flow from proved
reserves and provide additions to the Company's reserve base.
LONG-TERM FINANCING. On July 28, 1999, the Company completed an offering of
3.16 million shares of its common stock at a price to the public of $43.75 per
share. After payment of the underwriting discount and expenses, the Company
received net proceeds of $130.7 million. On August 3, 1999, the Company used a
portion of the net proceeds from its stock offering to repay the outstanding
borrowings of $120.0 million under its credit facility. This reduced long-term
debt to $100.0 million, representing the Company's Senior Subordinated Notes.
The proceeds from the stock offering will ultimately be used to fund
specifically identified exploration and development activities, to finance
potential property acquisitions and for other general corporate purposes.
The Company has a $150 million credit facility with a borrowing base
limitation of $140 million due July 30, 2001. At September 30, 1999, the Company
had no outstanding borrowings under its borrowing base and had outstanding
letters of credit totaling $7.5 million. The borrowing base limitation is based
on a borrowing base amount established by the banks for the Company's oil and
gas properties.
YEAR 2000 COMPLIANCE. The Year 2000 ("Y2K") issue is the result of
computerized systems being written to store and process the year portion of
dates from and after January 1, 2000 without critical systems failure. During
1998, the Company's executive management and Board of Directors implemented a
program to identify, evaluate and address the Company's Y2K risks to ensure that
its critical Information Technology ("IT") Systems and Non-IT Systems will be
Y2K compliant. The Company, with the assistance of outside consultants,
completed the evaluation of its IT Systems for Y2K compliance and began
replacing or modifying non-compliant systems during the first quarter of 1999.
The Company believes that its critical non-compliant IT Systems have been
replaced or modified to Y2K compliant systems.
Regarding the Company's Non-IT Systems, which primarily consist of systems
with embedded technology, the Company has completed its assessment of all
date-sensitive components and believes that it has replaced or modified all
critical non-compliant Non-IT Systems. Costs incurred as of September 30, 1999,
and estimated remaining costs related to Y2K compliance total approximately
$15,000. In addition to the expensed Y2K compliance costs, the Company
capitalized a total of $1.6 million of costs related to computer hardware and
software upgrades during the fourth quarter of 1998 and the first nine months of
1999. The upgrades were necessary due to the growth in the Company's number of
employees and level of operations over the past 24 months. The Company does not
separately track internal payroll costs incurred for employees involved in the
Y2K compliance effort.
Based on risk assessments, the Company believes the most likely Y2K related
failure would be a temporary disruption in certain materials and services
provided by third parties, which would not be expected to have a material
adverse effect on the Company's financial condition or results of operations.
Based on the Company's assessment of the Y2K risk associated with third parties'
systems, the Company believes that the probability of the occurrence of a
disruption is low. The Company will develop specific contingency plans to
address certain risk areas, as needed. There can be no assurance that the
Company will not be materially adversely affected by Y2K problems or related
costs.
FORWARD-LOOKING STATEMENTS. Certain of the statements in this Form 10-Q are
"forward-looking statements" within the meaning of Section 27A of the Securities
Act and Section 21E of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). All statements other than statements of historical facts
included in this Form 10-Q, regarding budgeted capital expenditures, increases
in oil and gas production, the Company's financial position, the assessment of
the Company's Year 2000 compliance, business strategy and other plans and
objectives for future operations, are forward-looking statements. Although the
Company believes that the expectations reflected in such forward-looking
statements are reasonable, it can give no assurance that such expectations will
prove to have been correct. Important factors that could cause actual results to
differ materially from those in the forward-looking statements herein include
the timing and extent of changes in commodity prices for oil and gas, operating
risks and other factors as disclosed under "Risk Factors" and elsewhere in the
Company's 1998 Annual Report on Form 10-K as filed with the Securities and
Exchange Commission. Should one or more of these risks or uncertainties occur,
or should underlying assumptions prove incorrect, the Company's actual results
and plans for 1999 and beyond could differ materially from those expressed in
forward-looking statements. All subsequent written and oral forward-looking
statements attributable to the Company or persons acting on its behalf are
expressly qualified in their entirety by such factors.
PART II
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
*15.1 - Letter from Arthur Andersen LLP dated November 8, 1999,
regarding unaudited interim financial information.
*27.1 - Financial Data Schedule
*27.2 - Financial Data Schedule-Restated
(b) Reports on Form 8-K
The following reports were filed after June 30, 1999:
Date of Report Item Reported
-------------- -------------
July 28, 1999 Items 5 and 7
* Filed with this report.
<PAGE>
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 thereunto duly authorized.
STONE ENERGY CORPORATION
Date: November 10, 1999 By: /s/James H. Prince
---------------------------------
James H. Prince
Vice President, Chief Financial
Officer and Treasurer
(Principal Financial Officer)
EXHIBIT 15.1
November 8, 1999
Stone Energy Corporation
Post Office Box 52807
Lafayette, LA 70505
Gentlemen:
We are aware that Stone Energy Corporation has incorporated by reference in
its registration statements (File Nos. 33-62362, 33-72236, 33-67332, 33-93486,
333-38425) its Form 10-Q for the quarter ended September 30, 1999, which
includes our report dated November 1, 1999, covering the unaudited interim
financial information contained therein. Pursuant to Regulation C of the
Securities Act of 1933 (the Act), this report is not considered a "part" of the
registration statements prepared or certified by our firm or a "report" prepared
or certified by our firm within the meaning of Sections 7 and 11 of the Act.
Very truly yours,
ARTHUR ANDERSEN LLP
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheet of Stone Energy Corporation as of September 30, 1999
and the related statement of operations for the nine months ended September 30,
1999 and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-mos
<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-START> Jan-01-1999
<PERIOD-END> Sep-30-1999
<CASH> 22,511
<SECURITIES> 19,322
<RECEIVABLES> 30,111
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 72,374
<PP&E> 12,340
<DEPRECIATION> 2,436
<TOTAL-ASSETS> 423,215
<CURRENT-LIABILITIES> 44,906
<BONDS> 100,000
0
0
<COMMON> 183
<OTHER-SE> 252,647
<TOTAL-LIABILITY-AND-EQUITY> 423,215
<SALES> 106,858
<TOTAL-REVENUES> 108,219
<CGS> 0
<TOTAL-COSTS> 69,520
<OTHER-EXPENSES> 4,335
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,677
<INCOME-PRETAX> 23,687
<INCOME-TAX> 8,308
<INCOME-CONTINUING> 15,379
<DISCONTINUED> 0
<EXTRAORDINARY> 0
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<NET-INCOME> 15,379
<EPS-BASIC> 0.97
<EPS-DILUTED> 0.95
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The purpose of this restated financial data schedule is to correct the
financial data schedule submitted in connection with the Company's quarterly
report on Form 10-Q for the quarter ended June 30, 1999.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-mos
<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-START> Jan-01-1999
<PERIOD-END> Jun-30-1999
<CASH> 17,765
<SECURITIES> 8,618
<RECEIVABLES> 27,152
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 54,056
<PP&E> 11,760
<DEPRECIATION> 2,129
<TOTAL-ASSETS> 388,940
<CURRENT-LIABILITIES> 44,841
<BONDS> 100,000
0
0
<COMMON> 151
<OTHER-SE> 112,726
<TOTAL-LIABILITY-AND-EQUITY> 388,940
<SALES> 66,354
<TOTAL-REVENUES> 67,195
<CGS> 0
<TOTAL-COSTS> 45,944
<OTHER-EXPENSES> 2,620
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,709
<INCOME-PRETAX> 10,922
<INCOME-TAX> 3,831
<INCOME-CONTINUING> 7,091
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<NET-INCOME> 7,091
<EPS-BASIC> 0.47
<EPS-DILUTED> 0.46
</TABLE>
