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, 2000
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 3, 2000, there were 18,531,725 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, 2000 and December 31, 1999...... 1
Condensed Consolidated Statement of Operations
for the Three and Nine Months Ended
September 30, 2000 and 1999......................... 2
Condensed Consolidated Statement of Cash Flows
for the Nine Months Ended
September 30, 2000 and 1999......................... 3
Notes to Condensed Consolidated Financial Statements 4
Auditors' Review Report............................... 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................... 8
PART II
Item 6. Exhibits and Reports on Form 8-K...................... 12
<PAGE>
STONE ENERGY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(In thousands)
<TABLE>
<CAPTION>
September 30,
Assets 2000 December 31, 1999
--------------------- --------------------
(Unaudited)
<S>
Current assets: <C> <C>
Cash and cash equivalents.................................... $64,379 $13,874
Marketable securities, at market............................. 300 34,906
Accounts receivable.......................................... 53,916 29,729
Other current assets......................................... 130 297
--------------------- --------------------
Total current assets....................................... 118,725 78,806
Oil and gas properties, net:
Proved....................................................... 395,508 335,959
Unevaluated.................................................. 19,617 17,182
Building and land, net........................................... 4,792 3,864
Fixed assets, net................................................ 2,952 2,850
Other assets, net................................................ 3,388 3,077
--------------------- --------------------
Total assets............................................... $544,982 $441,738
===================== ====================
Liabilities and Stockholders' Equity
Current liabilities - accounts payable and
accrued liabilities.......................................... $78,693 $55,919
Long-term debt................................................... 100,000 100,000
Production payments.............................................. 12,549 17,284
Deferred tax liability........................................... 27,679 746
Other long-term liabilities...................................... 1,196 2,202
--------------------- --------------------
Total liabilities.......................................... 220,117 176,151
--------------------- --------------------
Common stock..................................................... 185 183
Additional paid in capital....................................... 257,951 252,941
Retained earnings................................................ 66,729 12,463
--------------------- --------------------
Total stockholders' equity................................. 324,865 265,587
--------------------- --------------------
Total liabilities and stockholders' equity $544,982 $441,738
===================== ====================
</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,
------------------------------------- ------------------------------------
2000 1999 2000 1999
---------------- ---------------- --------------- -----------
<S>
Revenues <C> <C> <C> <C>
Oil and gas production..................... $71,807 $40,504 $177,839 $106,858
Overhead reimbursements
and management fees..................... 179 161 540 510
Other income............................... 783 359 2,165 851
---------------- ---------------- --------------- -----------
Total revenues...................... 72,769 41,024 180,544 108,219
---------------- ---------------- --------------- -----------
Expenses
Normal lease operating expenses 6,894 5,967 19,563 16,026
Major maintenance expenses 2,831 437 5,046 618
Production taxes........................... 1,587 983 4,301 2,168
Depreciation, depletion and
amortization............................. 20,364 16,189 56,528 50,708
Interest................................... 1,868 2,968 6,263 10,677
Salaries, general and administrative 1,384 1,083 4,265 3,282
Incentive compensation plan 504 632 1,092 1,053
---------------- ---------------- --------------- -----------
Total expenses...................... 35,432 28,259 97,058 84,532
---------------- ---------------- --------------- -----------
Net income before income taxes 37,337 12,765 83,486 23,687
---------------- ---------------- --------------- -----------
Provision for income taxes:
Current.................................... 205 - 272 5
Deferred.................................. 12,863 4,477 28,948 8,303
---------------- ---------------- --------------- -----------
13,068 4,477 29,220 8,308
---------------- ---------------- --------------- -----------
Net income................................... $24,269 $8,288 $54,266 $15,379
=============== =============== =============== ===========
Earnings per common share:
Basic earnings per share $1.31 $0.48 $2.95 $0.97
================ =============== =============== ===========
Diluted earnings per share $1.29 $0.47 $2.89 $0.95
================ =============== =============== ===========
Average shares outstanding 18,484 17,332 18,421 15,841
================ =============== =============== ===========
Average shares outstanding assuming
dilution............................... 18,869 17,711 18,796 16,157
================ ============== =============== ===========
</TABLE>
<PAGE>
STONE ENERGY CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------------------------------------
2000 1999
--------------------- ---------------------
<S>
Cash flows from operating activities: <C> <C>
Net income...................................................... $54,266 $15,379
Adjustments to reconcile net income to net cash
provided by operating activities:
DD&A and other non-cash expenses 56,702 50,708
Provision for deferred income taxes 28,948 8,303
Non-cash effect of production payments (4,279) (1,443)
--------------------- ---------------------
135,637 72,947
(Increase) Decrease in marketable securities 34,606 (2,469)
Increase in accounts receivable (24,187) (3,308)
(Increase) Decrease in other current assets 167 (273)
Increase (Decrease) in accrued liabilities 11,443 (341)
Other................................................. (48) 45
--------------------- ---------------------
Net cash provided by operating activities 157,618 66,601
--------------------- ---------------------
Cash flows from investing activities:
Investment in oil and gas properties (107,614) (74,306)
Building additions and renovations (1,007) (367)
Increase in other assets .................................. (833) (2,062)
--------------------- ---------------------
Net cash used in investing activities (109,454) (76,735)
--------------------- ---------------------
Cash flows from financing activities:
Proceeds from borrowings..................................... - 13,000
Repayment of debt............................................ - (123,024)
Production payments.......................................... (456) -
Deferred financing costs..................................... (200) -
Proceeds from stock offering................................. - 131,139
Expenses for stock offering.................................. - (373)
Proceeds from the exercise of stock options 2,997 1,353
--------------------- ---------------------
Net cash provided by financing activities 2,341 22,095
--------------------- ---------------------
Net increase in cash and cash equivalents 50,505 11,961
Cash and cash equivalents, beginning of period 13,874 10,550
--------------------- ---------------------
Cash and cash equivalents, end of period $64,379 $22,511
==================== =====================
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest (net of amount capitalized) $8,085 $13,041
Income taxes.............................................. 272 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
at September 30, 2000 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
period. 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 our Annual Report on Form 10-K for the year
ended December 31, 1999. The results of operations for the three- and nine-month
periods ended September 30, 2000 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 employees. There were approximately 385,000 dilutive shares and 379,000
dilutive shares for the third quarters of 2000 and 1999, respectively, and
375,000 dilutive shares and 316,000 dilutive shares for the first nine months of
2000 and 1999, respectively.
Options which were considered antidilutive because the exercise price of
the option exceeded the average price of our stock for the applicable period
totaled 12,635 shares and 274 shares in the third quarters of 2000 and 1999,
respectively, and 18,499 shares and 1,445 shares in the first nine months of
2000 and 1999, respectively.
Note 3 - HEDGING ACTIVITIES
In order to reduce our exposure to the possibility of declining oil and gas
prices, from time to time we hedge with third parties certain of our crude oil
and natural gas production. We currently utilize two forms of hedging contracts:
fixed price swaps and collars. Fixed price swaps typically provide for monthly
payments by us (if prices rise) or to us (if prices fall) based on the
difference between the strike price and the agreed-upon average of NYMEX prices.
For collars, monthly payments are made by us if NYMEX prices rise above the
ceiling price and to us if NYMEX prices fall below the floor price. Oil
contracts typically settle using the average of the daily closing prices for a
calendar month. Natural gas contracts typically settle using the average closing
prices of near month NYMEX futures contracts for the three days prior to the
settlement date. Because our properties are located in the Gulf Coast Basin, we
believe that fluctuations in NYMEX prices will closely match changes in market
prices for our production.
Our current forward positions are summarized as follows:
Fixed Price Swaps
-----------------------------------------------------
Gas Oil
----------------------- --------------------------
Volume Volume
(BBtus) Price (Bbls) Price
--------- --------- --------- ------------
Fourth Quarter, 2000 1,840 $2.518 230,000 $19.21
<PAGE>
Collars
----------------------------------------------------------
Gas Oil
---------------------------- --------------------------
Volume Volume
(BBtus) Floor Ceiling (Bbls) Floor Ceiling
--------- --------- -------- -------- ------- --------
Fourth Quarter, 2000 3,680 $2.60 $3.50 230,000 $21.00 $27.53
During the third quarters of 2000 and 1999, we realized net decreases in
oil and gas revenues related to hedging transactions of $10 million and $3.8
million, respectively. Nine-month 2000 and 1999 oil and gas revenues included
net decreases of $19.9 million and $1.2 million, respectively.
Note 4 - LONG-TERM DEBT
Our borrowing base at September 30, 2000 was $200 million with outstanding
letters of credit totaling $7.5 million and no outstanding borrowings.
Note 5 - PRODUCTION PAYMENTS
In 1999, we acquired a 51% 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. Based
on the quarterly revaluation of this transaction, at September 30, 2000, the
production payment associated with this purchase totaled $2.1 million.
In July 1999, we 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 South Pelto Block 23 until 8 Bcf of gas have
been distributed. We amortize the volumetric production payment as specified
deliveries of gas are made to the seller and recognize non-cash revenue in the
form of gas production revenues. At September 30, 2000, the volumetric
production payment was $10.4 million and we recognized gas revenues of $1.5
million and $4.5 million during the third quarter and nine-month 2000 periods,
respectively. For the comparable periods of 1999, we recognized gas revenues of
$1.5 million.
Note 6 - NEW ACCOUNTING STANDARDS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The Statement establishes accounting and
reporting standards that require every derivative instrument (including certain
derivative instruments embedded in other contracts) to be recorded in the
balance sheet as either an asset or liability measured at its fair value and
that changes in the derivative's fair value be recognized currently in earnings
unless specific hedge accounting criteria are met. If those criteria are met,
the instruments are treated as cash flow hedges under SFAS No. 133 creating
volatility in equity through changes in other comprehensive income due to the
marking to market of the hedging contracts. We will adopt SFAS No. 133 on
January 1, 2001.
We are currently not obligated to any derivative instrument or hedging
contract past December 31, 2000 and therefore would not be subject to SFAS No.
133 disclosure requirements. However, in connection with the recent announcement
of a pending merger with Basin Exploration, Inc., we indicated that we would
enter into two-year hedging contracts for approximately 25%-30% of the
combined company's estimated production.
Depending on the nature of our future hedging contracts and the fluctuation
of oil and gas prices over the term of the hedges, the adoption of SFAS No. 133
may create volatility in our results of operations and/or stockholders' equity.
<PAGE>
Note 7 - SUBSEQUENT EVENTS
In an agreement dated October 28, 2000, Stone and Basin Exploration, Inc.
have agreed to combine the two companies in a tax-free, stock-for-stock merger.
Under the merger agreement, Basin Exploration stockholders will receive 0.3974
of a Stone Energy common share for each share of common stock they own, which
translates into the issuance of approximately 7.6 million shares of Stone stock.
Our stockholders will own approximately 71% of the combined company and Basin's
stockholders will own approximately 29%. The combination is expected to be
accounted for as a pooling of interests. This transaction is subject to approval
by the stockholders of both companies, customary regulatory approvals and other
customary conditions.
<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, 2000, and
the related condensed consolidated statements of operations for the three-month
and nine-month periods ended September 30, 2000 and 1999, and the condensed
consolidated statements of cash flows for the nine-month periods ended September
30, 2000 and 1999. 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 auditing standards generally accepted in the United States, 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 accounting principles generally accepted in the United States.
We have previously audited, in accordance with auditing standards generally
accepted in the United States, the balance sheet of Stone Energy Corporation as
of December 31, 1999 (not presented herein), and, in our report dated March 6,
2000, 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, 1999, 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
October 28, 2000
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Throughout this document we make statements that are classified as
"forward-looking". Please refer to the "Forward-Looking Statements" section on
page 12 of this document for an explanation of these types of assertions. We use
the terms "Stone", "Stone Energy", "Company", "we", "us" and "our" to refer to
Stone Energy Corporation. We also use the terms "Basin" and "Basin Exploration"
to refer to Basin Exploration, Inc.
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. We have been active
in the Gulf Coast Basin since 1973 and have established extensive geophysical,
technical and operational expertise in this area.
Our 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 our business strategy in 1990, we have acquired
interests in 21 fields in the Gulf Coast Basin from major and large independent
oil and gas companies. At September 30, 2000, we served as operator on all of
our properties, which enables us to better control the timing and cost of
rejuvenation activities. We believe 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 away
from the onshore and shallow water shelf regions of the Gulf.
RESULTS OF OPERATIONS
The following table sets forth certain information with respect to our oil
and gas operations.
<TABLE>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------------- ---------------------------------------
2000 1999 2000 1999
<S> --------------- ------------- ----------------- --------------
PRODUCTION: <C> <C> <C> <C>
Oil (MBbls) 855 925 2,494 2,631
Gas (MMcf):
Produced excluding volumetric
production payment 11,605 8,970 32,353 28,463
Volumetric production payment 667 667 2,000 667
--------------- ------------- ----------------- -------------
Total gas volumes produced 12,272 9,637 34,353 29,130
Oil and gas (MMcfe):
Produced excluding volumetric
production payment 16,735 14,520 47,317 44,249
Volumetric production payment 667 667 2,000 667
-------------- -------------- ---------------- -------------
Total oil and gas volumes
produced 17,402 15,187 49,317 44,916
SALES DATA (in thousands) (a):
Oil $23,684 $16,042 $62,638 $39,396
Gas:
Gas sales excluding
volumetric production
payment 46,629 22,968 110,719 65,968
Volumetric production payment 1,494 1,494 4,482 1,494
--------------- -------------- -------------- -------------
Total gas sales 48,123 24,462 115,201 67,462
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------------- ---------------------------------------
2000 1999 2000 1999
<S> --------------- ------------- ----------------- --------------
AVERAGE SALES PRICES (a): <C> <C> <C> <C>
Oil (per Bbl) $27.70 $17.34 $25.12 $14.97
Gas (per Mcf):
Price excluding volumetric
production payment 4.02 2.56 3.42 2.32
Volumetric production payment 2.24 2.24 2.24 2.24
Net average price 3.92 2.54 3.35 2.32
Oil and gas (per Mcfe):
Price excluding volumetric
production payment 4.20 2.69 3.66 2.38
Volumetric production payment 2.24 2.24 2.24 2.24
Net average price 4.13 2.67 3.61 2.38
EXPENSES (per Mcfe):
Normal lease operating expenses (b) $0.40 $0.39 $0.40 $0.36
Salaries, general and administrative 0.08 0.07 0.09 0.07
DD&A on oil and gas properties 1.15 1.05 1.13 1.11
</TABLE>
(a) Includes the effects of hedging
(b) Excludes major maintenance expenses
For the third quarter of 2000, we reported net income totaling $24.3
million, or $1.29 per share, compared to net income reported for the third
quarter of 1999 of $8.3 million, or $0.47 per share. Net income for the first
nine months of 2000 and 1999 totaled $54.3 million and $15.4 million,
respectively. The favorable results in net income were due to improvements in
the following components:
PRODUCTION. Natural gas production during the third quarter of 2000
increased to approximately 12.3 billion cubic feet as compared to third quarter
1999 gas production of 9.6 billion cubic feet, while oil production during the
third quarter of 2000 totaled approximately 855,000 barrels as compared to
925,000 barrels of oil produced during the third quarter of 1999. Year-to-date
2000 production totaled 2.5 million barrels of oil and 34.4 billion cubic feet
of gas while nine-month 1999 production totaled 2.6 million barrels of oil and
29.1 billion cubic feet of gas.
Our average daily production rate during the third quarter of 2000 was
189.2 MMcfe. This represented a 17% increase from our 1999 annual average daily
production rate. Currently, our average daily production rate is approximately
200 MMcfe. Based on current production, we estimate that our average daily
production rate for the fourth quarter of 2000 will be in the range of 196-204
MMcfe.
The increase in 2000 production rates, as compared to 1999, was due
primarily to increases at four of our fields. At the end of the second quarter
of 1999, we acquired a 51% working interest in the Lafitte Field. Since then, we
have successfully completed one exploratory well, two workovers and improved the
capacity of the facilities to accommodate additional production at that field.
In July 1999, we increased our interest, and therefore our share of production,
at East Cameron Block 64 through the acquisition of an additional 62.5% working
interest in the block. Since acquisition, we have successfully completed four
workovers that boosted production volumes at that field. Pursuant to a joint
exploration agreement at the Iberia Prospect, we participated in the successful
drilling and completion of three exploratory wells at Weeks Island Field. Since
the fourth quarter of 1999, we have successfully completed and placed on
production one exploratory well and two development wells at Eugene Island Block
243.
PRICES. Prices realized during the third quarter of 2000 averaged $27.70
per barrel of oil and $3.92 per Mcf of gas. This represents a 55% increase, on a
thousand cubic feet of gas equivalent (Mcfe) basis, over third quarter 1999
average realized prices of $17.34 per barrel of oil and $2.54 per Mcf of gas.
Average realized prices during the first nine months of 2000 were $25.12 per
barrel of oil and $3.35 per Mcf of gas as compared to $14.97 per barrel of oil
and $2.32 per Mcf of gas realized during the 1999 period. All unit pricing
amounts include the effects of hedging.
<PAGE>
From time to time, we enter into various hedging contracts in order to
reduce our exposure to the possibility of declining oil and gas prices. During
the third quarter of 2000, hedging transactions reduced the average price we
received for oil by $4.40 per barrel and for gas by $0.54 per Mcf as compared to
net decreases of $2.85 per barrel and $0.12 per Mcf for the third quarter of
1999. Hedging transactions for the first nine months of 2000 reduced the average
price we received for oil by $4.59 per barrel and for gas by $0.26 per Mcf as
compared to a net decrease of $1.15 per barrel and a net increase of $0.06 per
Mcf for the comparable 1999 period.
We are currently not obligated to any derivative instrument or hedging
contract past December 31, 2000. However, in connection with the recent
announcement of a pending merger with Basin Exploration, Inc., we indicated that
we would enter into two-year hedging contracts for approximately 25%-30% of
the combined company's estimated production. We may experience volatility in our
results of operations and/or stockholder's equity depending on the nature of our
future hedging contracts and the fluctuation of oil and gas prices over the term
of the hedges.
OIL AND GAS REVENUES. As a result of higher production rates and realized
prices, third quarter 2000 oil and gas revenues increased 77% to $71.8 million,
compared to third quarter 1999 oil and gas revenues of $40.5 million. Oil and
gas revenues for the first nine months of 2000 increased to $177.8 million as
compared to $106.9 million during the comparable 1999 period.
EXPENSES. Normal operating costs, on a unit of production basis, for the
third quarter of 2000 were $0.40 per Mcfe as compared to $0.39 per Mcfe for the
third quarter of 1999. This variance primarily relates to an overall increase in
the costs of oil field services in addition to normal platform painting
expenditures made during the quarter.
During the third quarter of 2000, we performed significant workover
operations on two wells at Clovelly Field and one well at Cut Off Field. As a
result, major maintenance expenses for the quarter totaled $2.8 million compared
to $0.4 million for the comparable period of 1999. We currently expect major
maintenance expenses to approximate $1 million during the fourth quarter of
2000. Production taxes for the third quarter of 2000 increased to $1.6 million
compared to $1 million for the third quarter of 1999, due to higher oil prices
and increased onshore production volumes.
General and administrative expenses for the third quarter of 2000 increased
in total to $1.4 million, or $0.08 per Mcfe, from $1.1 million, or $0.07 per
Mcfe, for the third quarter of 1999. General and administrative expenses for the
third quarter of 2000 were affected by a 14% increase in our staff level over
the third quarter of 1999. We currently estimate that our general and
administrative expenses in the fourth quarter of 2000 will be comparable to
expenses reported for the preceding quarter, except for non-recurring expenses
incurred in connection with the recently announced pending merger with Basin
Exploration, Inc.
Depreciation, depletion and amortization (DD&A) expense on our oil and gas
properties increased to $20.1 million or $1.15 per Mcfe during the third quarter
of 2000, compared to $15.9 million or $1.05 per Mcfe for the third quarter of
1999.
As a result of the repayment of the borrowings under our bank credit
facility in August 1999, interest expense for the three-month period ended
September 30, 2000 decreased to $1.9 million, compared to $3 million for the
1999 period.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOW AND WORKING CAPITAL. Net cash flow from operations before working
capital changes for the third quarter and first nine months of 2000 was $56
million and $135.6 million, compared to $27.5 million and $72.9 million reported
for the respective periods of 1999. Working capital at September 30, 2000
totaled $40 million.
CAPITAL EXPENDITURES. Capital expenditures during the third quarter of 2000
totaled $39.1 million and included $2.2 million of capitalized general and
administrative costs and $0.4 million of capitalized interest. This brought
capital expenditures for the first nine months of 2000 to a total of $117.7
million including $6.1 million of capitalized general and administrative costs
and $0.9 million of capitalized interest. These investments were financed by a
combination of cash flow from operations and working capital.
<PAGE>
DEVELOPMENT COSTS. During the third quarter of 2000, we completed numerous
development drilling, workover and recompletion operations and facilities
installations in an effort to develop our property base and to increase cash
flow from proved reserves. Our workover/recompletion program continued to
generate positive results with the successful completion of seven projects
during the third quarter. The most significant of these operations included the
recompletions of the E-2 Well at South Pelto Block 23 and the No. 4 Well at
South Marsh Island Block 249 and the workovers of the Clovelly No. 37 and
Clovelly No. 40 wells at Clovelly Field. Our development drilling program
experienced its first dry hole of the year with the evaluation of the LLDSB No.
1 Sidetrack 3 Well on the Post Oak Prospect at Lake Hermitage Field. Including
this well, our 2000 development drilling program has achieved an 80% success
rate.
EXPLORATORY COSTS. In an effort to provide additions to our existing oil
and gas reserve base, during the third quarter of 2000, we completed drilling
operations on five exploratory wells, two of which were successful. These two
wells include the OCS-G 0089 No. 13 Well at East Cameron Block 64's Phogbound
Prospect and the Myles Salt No. 47 Well (formerly the Myles Salt No. 2 Well) at
Weeks Island Field's Andrew Prospect. Although drilling was not completed during
the quarter, we encountered two pay sands that were deemed commercially
productive in the J-3 Well at Vermilion Block 255 Field's Aetna Prospect. In
addition to these wells, we spudded the OCS-G 2899 No. D-2 Well at Eugene Island
Block 243's Narwhal Prospect where we announced on October 16, 2000 the
discovery of 155 net feet of pay in two sands.
BUDGETED CAPITAL EXPENDITURES AND LONG-TERM FINANCING. For the year 2000,
we expect to drill and evaluate 31 wells, which is an annual record for our
drilling program. We have currently budgeted $165.1 million for our 2000
exploration and development plans of which approximately 54% has been allocated
for activities at the Vermilion Block 255, Eugene Island Block 243, South
Timbalier Block 8, East Cameron Block 64, Vermilion Block 131 and Lake Hermitage
Fields.
We are currently evaluating a capital expenditures budget for 2001 in light
of the proposed Basin merger. We anticipate the combined company's 2001 capital
expenditure budget would be in the range of $240 million. However, the ultimate
2001 capital expenditure budget for the combined company is subject to
management review and approval upon consummation of the merger.
Based upon our outlook of oil and gas prices and production rates, we
believe that our cash flow from operations and existing working capital will be
sufficient to fund the current 2000 and 2001 capital expenditures budgets. If
oil and gas prices or production rates fall below our current expectations, we
believe that the available borrowings under our bank credit facility will be
sufficient to fund the capital expenditures in excess of operating cash flow.
Our borrowing base is currently $200 million with outstanding letters of
credit totaling $7.5 million and no outstanding borrowings.
MERGER WITH BASIN EXPLORATION, INC. In an agreement dated October 28, 2000,
Stone and Basin Exploration have agreed to combine the two companies in a
tax-free, stock-for-stock merger. Under the merger agreement, Basin Exploration
stockholders will receive 0.3974 of a Stone Energy common share for each share
of common stock they own, which translates into the issuance of approximately
7.6 million shares of Stone stock. Our stockholders will own approximately 71%
of the combined company and Basin's stockholders will own approximately 29%. The
combination is expected to be accounted for as a pooling of interests and is
anticipated to be immediately accretive on a per share basis to cash flow,
earnings and reserves. This transaction is subject to approval by the
stockholders of both companies, customary regulatory approvals and other
customary conditions.
<PAGE>
FORWARD-LOOKING STATEMENTS. This Form 10-Q and the information incorporated
by reference contain statements that constitute "forward-looking statements"
within the meaning of Section 27A of the Securities Act and Section 21E of the
Securities Exchange Act. The words "expect", "project", "estimate", "believe",
"anticipate", "intend", "budget", "plan", "forecast", "predict" and other
similar expressions are intended to identify forward-looking statements. These
statements appear in a number of places and include statements regarding our
plans, beliefs or current expectations, including the plans, beliefs and
expectations of our officers and directors.
When considering any forward-looking statement, you should keep in mind the
risk factors that could cause our actual results to differ materially from those
contained in any forward-looking statement. 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, the risk of completing the Basin merger, operating risks and other risk
factors as described in our Annual Report on Form 10-K as filed with the
Securities and Exchange Commission. Furthermore, the assumptions that support
our forward-looking statements are based upon information that is currently
available and is subject to change. We specifically disclaim all responsibility
to publicly update any information contained in a forward-looking statement or
any forward-looking statement in its entirety and therefore disclaim any
resulting liability for potentially related damages.
All forward-looking statements attributable to Stone Energy Corporation are
expressly qualified in their entirety by this cautionary statement.
PART II
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
*15.1 - Letter from Arthur Andersen LLP dated
November 3, 2000, regarding unaudited interim
financial information.
*27.1 - Financial Data Schedule
* Filed herewith
(b) The following report on Form 8-K was filed after
September 30, 2000:
Date of Report Item Reported
---------------- ------------------
October 31, 2000 Item 5 and Item 7
<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 3, 2000 By: /s/ James H. Prince
------------------------------
James H. Prince
Vice President, Chief Financial
Officer and Treasurer
(Principal Financial Officer)
<PAGE>
