The following table sets forth certain information with respect to our oil and gas operations.
Salaries, general and administrative expenses for the first quarter of 2005 were $4.8 million compared to $3.7 million in the first quarter of 2004. The increase was primarily the result of a 10% increase in employment levels over the same period in 2004.
During the first quarter of 2005, we borrowed $76 million under our bank credit facility in connection with the closing of the previously announced acquisition of acreage in the Williston Basin of Montana and North Dakota. As of May 4, 2005, we have a borrowing base under the new bank credit facility of $425 million, of which $253.9 million of borrowings are currently available. As a result of bank borrowings and the issuance of our $200 million 6¾% Senior Subordinated Notes during December 2004, interest expense increased to $5.6 million, net of $3.3 million of capitalized interest, in the first quarter of 2005 compared to $3.9 million, net of $1.6 million capitalized interest, in the first quarter of 2004.
Recent Accounting Developments
Stock-Based Compensation. On December 16, 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based Payment, which is a revision of SFAS No. 123, Accounting for Stock-Based Compensation. SFAS No. 123(R) supersedes Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and amends SFAS No. 95, Statement of Cash Flows. Generally, the approach in SFAS No. 123(R) is similar to the approach described in SFAS No. 123; however, SFAS No. 123(R) requires all share-based payments to employees, including grants of employee stock options, be recognized in the income statement based on their fair values. Pro forma disclosure will no longer be an alternative.
SFAS No. 123(R) permits public companies to adopt its requirements using one of two methods:
1. | A “modified prospective” method in which compensation cost is recognized beginning with the effective date (a) based on the requirements of Statement 123(R) for all share-based payments granted after the effective date and (b) based on the requirements of Statement 123 for all awards granted to employees prior to the effective date of Statement 123(R) that remain unvested on the effective date. |
2. | A “modified retrospective” method which includes the requirements of the modified prospective method described above, but also permits entities to restate based on the amounts previously recognized under Statement 123 for purposes of pro forma disclosures either (a) all prior periods presented or (b) prior interim periods of the year of adoption. |
In March 2005, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin (SAB) No. 107 which expressed the views of the SEC regarding the interaction between SFAS No. 123(R) and certain SEC rules and regulations. SAB No. 107 provides guidance related to the valuation of share-based payment arrangements for public companies, including assumptions such as expected volatility and expected term. Stone is assessing the impact SFAS No. 123(R) and SAB No. 107 will have on its consolidated financial statements and which transition methods allowed by SFAS No. 123(R) will be elected. In April 2005, the SEC approved a rule that delayed the effective date of SFAS No. 123(R) for public companies. As a result, SFAS No. 123(R) will be effective for us on January 1, 2006.
Liquidity and Capital Resources
Cash Flow. Net cash flow provided by operating activities for the three months ended March 31, 2005 was $111.2 million compared to $99.2 million reported in the comparable period in 2004. The increase in net cash flow provided by operating activities during the first quarter of 2005 was primarily attributable to increased oil and gas revenue caused by a 19% increase in average realized oil and gas prices on a gas equivalent basis from the respective period in 2004. Net cash flow used in investing activities totaled $180.8 million and $87.1 million during the first quarter of 2005 and 2004, respectively, which primarily represents our investment in oil and gas properties. The increase in cash flow used in investing activities is due in part to the Williston Basin acquisition completed in the first quarter of 2005. Net cash flow provided by financing activities totaled $80.9 million and $11.1 million for the three months ended March 31, 2005 and 2004, respectively. In total, cash and cash equivalents increased from $24.3 million as of December 31, 2004 to $35.6 million as of March 31, 2005.
We had a working capital deficit at March 31, 2005 of $34.9 million. Working capital deficits are not unusual at the end of a period, and are usually the result of accounts payable related to exploration and development costs. We believe that our working capital balance should be viewed in conjunction with availability of borrowings under our bank credit facility when measuring liquidity. See Bank Credit Facility.
Capital Expenditures. First quarter 2005 additions to oil and gas property costs of $201.9 million included $102.5 million of acquisition costs, $5.2 million of capitalized salaries, general and administrative expenses and $3.3 million of capitalized interest. These investments were financed by cash flow from operating activities, borrowings under our credit facility and working capital.
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Budgeted Capital Expenditures. Our current estimated 2005 capital expenditures budget, excluding acquisitions and capitalized salaries, general and administrative expenses and interest, is approximately $315 million. While the 2005 capital expenditures budget does not include any projected acquisitions, we continue to seek growth opportunities that fit our specific acquisition profile.
Based upon our outlook for oil and gas prices and production rates, we expect cash flow from operations to be more than sufficient to fund the remaining 2005 capital expenditures budget. However, 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.
Bank Credit Facility. At March 31, 2005, we had $158.0 million of borrowings outstanding under our bank credit facility. Letters of credit totaling $13.1 million have been issued under the facility. On April 30, 2004, the Company entered into a new $500 million senior unsecured credit facility with a syndicated bank group that matures on April 30, 2008. We currently have a loan base under the new credit facility of $425 million with availability of an additional $253.9 million in borrowings as of May 3, 2005. Our borrowing base under the credit facility is re-determined periodically based on the bank group’s evaluation of our proved oil and gas reserves.
Defined Terms
Oil and condensate are stated in barrels (“Bbl”) or thousand barrels (“MBbl”). Natural gas is stated herein in billion cubic feet (“Bcf”), million cubic feet (“MMcf”) or thousand cubic feet (“Mcf”). Oil and condensate are converted to natural gas at a ratio of one barrel of liquids per six Mcf of gas. Bcfe, MMcfe, and Mcfe represent one billion cubic feet, one million cubic feet and one thousand cubic feet of gas equivalent, respectively. MMBtu represents one million British Thermal Units and BBtu represents one billion British Thermal Units. An active property is an oil and gas property with existing production. A primary term lease is an oil and gas property with no existing production, in which we have a specific time frame to establish production without losing the rights to explore the property. Liquidity is defined as the ability to obtain cash quickly either through the conversion of assets or incurrence of liabilities.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Commodity Price Risk
Our major market risk exposure continues to be the pricing applicable to our oil and gas production. Our revenues, profitability and future rate of growth depend substantially upon the market prices of oil and natural gas, which fluctuate widely. Oil and gas price declines and volatility could adversely affect our revenues, cash flows and profitability. Price volatility is expected to continue. In order to manage our exposure to oil and gas price declines, we occasionally enter into oil and gas price hedging arrangements to secure a price for a portion of our expected future production. We do not enter into hedging transactions for trading purposes.
Our hedging policy provides that not more than one-half of our estimated production quantities can be hedged without the consent of the Board of Directors. See Item 1. Financial Statements – Note 3 – Hedging Activities for a detailed discussion of hedges in place to manage our exposure to oil and gas price declines.
Interest Rate Risk
Stone had long-term debt outstanding of $558.0 million at March 31, 2005, of which $400.0 million, or approximately 72%, bears interest at fixed rates. The fixed rate debt as of March 31, 2005 consists of $200.0 million of 8¼% senior subordinated notes due 2011 and $200.0 million of 6¾% senior subordinated notes due 2014. The remaining $158.0 million of debt outstanding at March 31, 2005 bears interest at a floating rate. At May 3, 2005, the weighted average interest rate under our floating-rate debt was approximately 4.2%. At March 31, 2005, we had no interest rate hedge positions in place to reduce our exposure to changes in interest rates.
Since the filing of our 2004 Annual Report on Form 10-K, there have been no material changes in reported market risk as it relates to interest rates and commodity prices.
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Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We have established disclosure controls and procedures to ensure that material information relating to Stone Energy Corporation and its consolidated subsidiary (collectively “Stone”) is made known to the Officers who certify Stone’s financial reports and the Board of Directors. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives.
Our chief executive officer and our chief financial officer, with the participation of other members of our senior management, reviewed and evaluated the effectiveness of Stone’s disclosure controls and procedures as of the end of the quarterly period ended March 31, 2005. Based on this evaluation, our chief executive officer and chief financial officer believe:
• | Stone’s disclosure controls and procedures were effective to ensure that information required to be disclosed by Stone in the reports it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms; and |
• | Stone’s disclosure controls and procedures were effective to ensure that information required to be disclosed by Stone in the reports that is files or submits under the Securities Exchange Act of 1934 was accumulated and communicated to Stone’s management, including Stone’s chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure. |
Internal Controls Over Financial Reporting
There has not been any change in our internal control over financial reporting that occurred during our quarterly period ended March 31, 2005 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II – OTHER INFORMATION
Item 6. Exhibits
*15.1 –Letter from Ernst & Young LLP dated May 3, 2005, regarding unaudited interim financial information.
*31.1 –Certification of Principal Executive Officer of Stone Energy Corporation as required by Rule 13a-14(a) of the Securities Exchange Act of 1934.
*31.2 –Certification of Principal Financial Officer of Stone Energy Corporation as required by Rule 13a-14(a) of the Securities Exchange Act of 1934.
*†32.1 –Certification of Chief Executive Officer and Chief Financial Officer of Stone Energy Corporation pursuant to 18 U.S.C. § 1350.
* | Filed herewith |
† | Not considered to be “filed” for the purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liabilities of that section. |
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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 hereunto duly authorized.
| STONE ENERGY CORPORATION |
| | |
| | |
Date: May 6, 2005 | By: | /s/ James H. Prince |
| | James H. Prince |
| | Executive Vice President and |
| | Chief Financial Officer |
| | (On behalf of the Registrant and as |
| | Principal Financial Officer) |
| | |
| | |
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