Stone Energy (SGY) 10-Q 2005 Q2 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2005

or

o 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
(State or Other Jurisdiction of Incorporation or Organization) 72-1235413
(I.R.S. Employer Identification No.)

625 E. Kaliste Saloom Road
Lafayette, Louisiana
(Address of Principal Executive Offices) 70508
(Zip Code)

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.

Yesx Noo

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yesx Noo

     As of August 1, 2005, there were 26,931,733 shares of the registrant’s Common Stock, par value $.01 per share, outstanding.

TABLE OF CONTENTS

			Page
PART I — FINANCIAL INFORMATION
Item 1.	Financial Statements:
		Condensed Consolidated Balance Sheet as of June 30, 2005 and December 31, 2004		1
		Condensed Consolidated Statement of Income for the Three and Six Months Ended June 30, 2005 and 2004		2
		Condensed Consolidated Statement of Cash Flows for the Six Months Ended June 30, 2005 and 2004		3
		Notes to Condensed Consolidated Financial Statements		4
		Report of Independent Registered Public Accounting Firm		7
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations		8
Item 3.		Quantitative and Qualitative Disclosures About Market Risk		12
Item 4.		Controls and Procedures		12
PART II — OTHER INFORMATION
Item 4.		Submission of Matters to a Vote of Security Holders		13
Item 5.		Other Information		13
Item 6.		Exhibits		13
		Signature		14
Letter from Ernst & Young LLP
Certification of Principal Executive Officer
Certification of Principal Financial Officer
Certification of CEO and CFO pursuant to 18 U.S.C. Section 1350

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

STONE ENERGY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(In thousands of dollars)

	June 30,			December 31,
Assets	2005			2004
	(Unaudited)			(Note 1)
Current assets:
Cash and cash equivalents	$	65,912		$	24,257
Accounts receivable		128,590			111,398
Deferred taxes		7,336			7,267
Other current assets		6,768			2,101
Total current assets		208,606			145,023
Oil and gas properties — full cost method of accounting:
Proved, net of accumulated depreciation, depletion and amortization of $1,638,625 and $1,516,620 respectively.		1,597,933			1,489,498
Unevaluated		227,716			153,041
Building and land, net		5,583			5,416
Fixed assets, net		6,721			4,761
Other assets, net		12,443			23,156
Total assets	$	2,059,002		$	1,820,895
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable to vendors	$	115,982		$	110,845
Undistributed oil and gas proceeds		52,556			36,457
Fair value of hedging contracts		20,038			14,346
Other accrued liabilities		9,802			11,973
Total current liabilities		198,378			173,621
Long-term debt		558,000			482,000
Deferred taxes		247,700			205,331
Asset retirement obligations		106,973			103,179
Other long-term liabilities		2,508			2,430
Total liabilities		1,113,559			966,561
Commitments and contingencies
Common stock		270			267
Treasury stock		(1,348	)		(1,462	)
Additional paid-in capital		477,922			466,478
Unearned compensation		(4,019	)		(1,486	)
Retained earnings		485,643			399,825
Accumulated other comprehensive loss		(13,025	)		(9,288	)
Total stockholders’ equity		945,443			854,334
Total liabilities and stockholders’ equity	$	2,059,002		$	1,820,895

The accompanying notes are an integral part of this balance sheet.

1

STONE ENERGY CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(In thousands of dollars, except per share amounts)
(Unaudited)

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2005			2004			2005			2004
Operating revenue:
Oil production	$	79,476		$	57,557		$	144,107		$	110,796
Gas production		105,762			84,667			197,284			165,008
Total operating revenue		185,238			142,224			341,391			275,804
Operating expenses:
Lease operating expenses		29,684			22,859			57,608			42,750
Production taxes		3,998			1,912			6,425			3,723
Depreciation, depletion and amortization		65,676			50,060			121,868			96,804
Accretion expense		1,789			1,463			3,579			2,926
Salaries, general and administrative expenses		4,667			3,549			9,493			7,290
Incentive compensation expense		367			424			1,013			1,117
Derivative expenses		—			1,058			—			1,960
Total operating expenses		106,181			81,325			199,986			156,570
Income from operations		79,057			60,899			141,405			119,234
Other (income) expenses:
Interest		5,721			3,988			11,345			7,937
Other income		(1,242	)		(708	)		(1,831	)		(1,357	)
Other expense		—			2,383			—			2,383
Total other expenses		4,479			5,663			9,514			8,963
Income before taxes		74,578			55,236			131,891			110,271
Provision for income taxes:
Current		—			—			—			—
Deferred		26,102			19,333			46,067			38,595
Total income taxes		26,102			19,333			46,067			38,595
Net income	$	48,476		$	35,903		$	85,824		$	71,676
Basic earnings per share	$	1.80		$	1.35		$	3.20		$	2.70
Diluted earnings per share	$	1.79		$	1.33		$	3.17		$	2.67
Average shares outstanding		26,887			26,598			26,809			26,521
Average shares outstanding assuming dilution.		27,149			26,954			27,094			26,876

The accompanying notes are an integral part of this statement.

2

STONE ENERGY CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands of dollars)
(Unaudited)

	Six Months Ended
	June 30,
	2005			2004
Cash flows from operating activities:
Net income	$	85,824		$	71,676
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, depletion and amortization.		121,868			96,804
Accretion expense		3,579			2,926
Provision for deferred income taxes		46,067			38,595
Derivative expenses		—			1,960
Other non-cash items		928			1,057
Increase in accounts receivable		(17,192	)		(22,928	)
Increase in other current assets		(4,700	)		(3,658	)
Increase in other accrued liabilities		14,154			3,593
Investment in derivative contracts		—			(1,683	)
Other		127			(10	)
Net cash provided by operating activities		250,655			188,332
Cash flows from investing activities:
Investment in oil and gas properties		(289,612	)		(204,299	)
Proceeds from sale of oil and gas properties		1,600			5,005
Investment in fixed and other assets		(3,338	)		(970	)
Net cash used in investing activities		(291,350	)		(200,264	)
Cash flows from financing activities:
Proceeds from bank borrowings		76,000			22,000
Deferred financing costs		(186	)		(2,277	)
Proceeds from the exercise of stock options		6,536			6,354
Net cash provided by financing activities		82,350			26,077
Net increase in cash and cash equivalents		41,655			14,145
Cash and cash equivalents, beginning of period		24,257			17,100
Cash and cash equivalents, end of period	$	65,912		$	31,245

The accompanying notes are an integral part of this statement.

3

STONE ENERGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1 — Interim Financial Statements

     The condensed consolidated financial statements of Stone Energy Corporation and subsidiary as of June 30, 2005 and for the three and six-month periods ended June 30, 2005 and 2004 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 balance sheet at December 31, 2004 has been derived from the audited financial statements at that date. The 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, 2004. The results of operations for the three and six-month periods ended June 30, 2005 are not necessarily indicative of future financial results.

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 and restricted stock granted to outside directors and employees. There were approximately 262,000 and 356,000 dilutive shares for the three months ended June 30, 2005 and 2004, respectively, and 285,000 and 355,000 dilutive shares for the six months ended June 30, 2005 and 2004, respectively.

     Stock options that were considered antidilutive because the exercise price of the option exceeded the average price of our stock for the applicable period totaled approximately 613,000 and 652,000 shares in the three months ended June 30, 2005 and 2004, respectively, and 610,000 and 600,000 shares in the six months ended June 30, 2005 and 2004, respectively.

     During the three months ended June 30, 2005 and 2004, approximately 63,000 and 148,000 shares of common stock, respectively, were issued upon the exercise of stock options and vesting of restricted stock by employees and nonemployee directors. For the six months ended June 30, 2005 and 2004, approximately 251,000 and 229,000 shares of common stock, respectively, were issued upon the exercise of stock options and vesting of restricted stock by employees and nonemployee directors and the awarding of employee bonus stock pursuant to the 2004 Amended and Restated Stock Incentive Plan.

Note 3 — Hedging Activities

     We enter into hedging transactions to secure a commodity price for a portion of future production that is acceptable at the time of the transaction. The primary objective of these activities is to reduce our exposure to the risk of declining oil and natural gas prices during the term of the hedge. We do not enter into hedging transactions for trading purposes. We currently utilize two forms of hedging contracts: fixed price swaps and zero-premium collars.

     The following table illustrates our hedging positions as August 1, 2005:

	Zero-Premium Collars
	Natural Gas						Oil
	Daily						Daily
	Volume						Volume
	(MMBtus/d)		Floor		Ceiling		(Bbls/d)		Floor		Ceiling
2005		20,000	$	4.50	$	10.25		4,000	$	28.00	$	52.90
2005		20,000		4.00		13.50		4,000		28.00		52.75
2005		10,000		5.00		10.00		—		—		—
2005		10,000		5.00		10.85		—		—		—
2005		10,000		5.50		10.80		—		—		—
2006		—		—		—		3,000		55.00		76.40

	Fixed Price Gas Swaps
	Daily
	Volume
	(MMBtus/d)		Price(1)
2005		15,000	$	3.42

     (1) Based upon Inside FERC published prices for natural gas deliveries at Kern River.

4

     During the three months ended June 30, 2005 and 2004, we realized net decreases in gas revenue related to swaps of $3.6 million and $2.2 million, respectively. During the six months ended June 30, 2005 and 2004, we realized net decreases in gas revenue related to swaps of $6.5 million and $4.3 million, respectively. In addition, we realized a net decrease in oil revenue related to our zero-premium collars in the amount of $1.0 million during the three months ended June 30, 2005 and $1.4 million during the six months ended June 30, 2005.

Note 4 — Long-Term Debt

     Long-term debt consisted of the following:

	June 30,		December 31,
	2005		2004
	(Unaudited)
	(In millions)
81/4% Senior Subordinated Notes due 2011	$	200	$	200
63/4% Senior Subordinated Notes due 2014		200		200
Bank debt		158		82
Total long-term debt	$	558	$	482

     Borrowings outstanding at June 30, 2005 under our bank credit facility totaled $158.0 million, and letters of credit totaling $13.1 million have been issued under the facility. At June 30, 2005, we had $253.9 million of borrowings available under the credit facility and the weighted average interest rate was approximately 4.8%. On July 29, 2005 we repaid $20.0 million of outstanding borrowings under the credit facility increasing the availability to $273.9 million. The borrowing base under the new credit facility is re-determined periodically based on the bank group’s evaluation of our proved oil and gas reserves.

Note 5 — Comprehensive Income

     The following table illustrates the components of comprehensive income for the three and six months ended June 30, 2005 and 2004:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2005		2004		2005			2004
	(In millions)
	(Unaudited)
Net income	$	48.5	$	35.9	$	85.8		$	71.7
Other comprehensive income (loss), net of tax effect:
Net change in fair value of derivatives		7.4		0.2		(3.7	)		(3.1	)
Total other comprehensive income (loss)		7.4		0.2		(3.7	)		(3.1	)
Comprehensive income	$	55.9	$	36.1	$	82.1		$	68.6

Note 6 — Asset Retirement Obligations

     During the second quarter of 2005 and 2004, we recognized non-cash expenses of $1.8 million and $1.5 million, respectively, related to the accretion of our asset retirement obligation. For the six-month periods ended June 30, 2005 and 2004, we recognized accretion expense of $3.6 million and $2.9 million, respectively. As of June 30, 2005, accretion expense represented the only change in the asset retirement obligation since December 31, 2004.

5

Note 7 — Stock-Based Compensation

     In October 1995, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123, Accounting for Stock-Based Compensation, which became effective with respect to us in 1996. Under SFAS No. 123, companies can either record expense based on the fair value of stock-based compensation upon issuance or elect to remain under the current method, Accounting Principles Board Opinion No. 25 (“APB 25”) Accounting for Stock Issued to Employees, whereby no compensation cost is recognized upon grant if certain requirements are met. We have continued to account for our stock-based compensation under APB 25.

     If the compensation expense for stock-based compensation plans had been determined consistent with the expense recognition provisions under SFAS No. 123, our net income and earnings per common share and earnings per common share assuming dilution for the years presented would have approximated the pro forma amounts below:

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2005			2004			2005			2004
	(In millions, except per share amounts)
	(Unaudited)
Net income	$	48.5		$	35.9		$	85.8		$	71.7
Add: Stock-based compensation expense included in net income, net of tax		0.2			—			0.6			—
Less: Stock-based compensation expense using fair value method, net of tax		(1.1	)		(1.5	)		(2.6	)		(2.7	)
Pro forma net income	$	47.6		$	34.4		$	83.8		$	69.0
Basic earnings per share	$	1.80		$	1.35		$	3.20		$	2.70
Pro forma basic earnings per share		1.77			1.29			3.13			2.60
Diluted earnings per share	$	1.79		$	1.33		$	3.17		$	2.67
Pro forma diluted earnings per share		1.75			1.27			3.09			2.56

     On December 16, 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based Payment, which is a revision of SFAS No. 123. SFAS No. 123(R) supersedes APB 25 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.

the “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; or

2.

the “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.

6

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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 June 30, 2005, and the related condensed consolidated statement of income for the three- and six-month periods ended June 30, 2005 and 2004, and the condensed consolidated statement of cash flows for the six-month periods ended June 30, 2005 and 2004. These financial statements are the responsibility of the Company’s management.

We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with standards the Public Company Accounting Oversight Board (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 review, we are not aware of any material modifications that should be made to the condensed consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Stone Energy Corporation as of December 31, 2004, and the related consolidated statement of operations, changes in stockholders’ equity and cash flows for the year then ended (not presented herein) and in our report dated March 4, 2005, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2004, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

/s/ Ernst & Young LLP  

New Orleans, Louisiana
August 1, 2005

7

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     ThisForm 10-Q and the information referenced herein contain statements that constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The words “plan,” “expect,” “project,” “estimate,” “assume,” “believe,” “anticipate,” “intend,” “budget,” “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. We use the terms “Stone,” “Stone Energy,” “Company,” “we,” “us” and “our” to refer to Stone Energy Corporation.

     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, operating risks and other risk factors as described in our 2004 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.

Overview

     Stone Energy Corporation is an independent oil and gas company engaged in the acquisition and subsequent exploration, development, production and operation of oil and gas properties located in the conventional shelf of the Gulf of Mexico (the “GOM”), the deep shelf of the GOM, the deep water of the GOM, several basins of the Rocky Mountains and the Williston Basin. Currently, our property base consists of 79 active properties, 58 in the Gulf Coast Basin and 21 in the Rocky Mountains, and 54 primary term leases in the Gulf of Mexico. We serve as operator on 47 of our active properties, which enables us to better control the timing and cost of rejuvenation activities. We believe that there will continue to be opportunities to acquire properties in the Gulf Coast Basin due to the increased focus by many of our competitors on projects away from the Gulf of Mexico.

Critical Accounting Policies

     Our 2004 Annual Report on Form 10-K describes the accounting policies that we believe are critical to the reporting of our financial position and operating results and that require management’s most difficult, subjective or complex judgments. Our most significant estimates are:

• remaining proved oil and gas reserves;

• timing of our future drilling activities;

• accruals of exploration costs, development costs, operating costs and production revenue;

• timing and future costs to develop and abandon our oil and gas properties;

• the effectiveness and estimated fair value of derivative positions; and

• classification of unevaluated property costs.

     This Quarterly Report on Form 10-Q should be read together with the discussion contained in our 2004 Annual Report on Form 10-K regarding these critical accounting policies.

Other Factors Affecting Our Business and Financial Results

     In addition to the matters discussed above, our business, financial condition and results of operations are affected by a number of other factors. This Quarterly Report on Form 10-Q should be read in conjunction with the discussion in our 2004 Annual Report on Form 10-K regarding these other risk factors.

8

Results of Operations

     The following tables set forth certain information with respect to our oil and gas operations.

	Three Months Ended
	June 30,
	2005		2004		Variance		% change
Production:
Oil (MBbls)		1,612		1,552		60		4	%
Gas (MMcf)		16,282		14,443		1,839		13	%
Oil and gas (MMcfe)		25,954		23,755		2,199		9	%
Revenue data (in thousands) (a):
Oil revenue	$	79,476	$	57,557	$	21,919		38	%
Gas revenue		105,762		84,667		21,095		25	%
Total oil and gas revenue	$	185,238	$	142,224	$	43,014		30	%
Average prices (a):
Oil (per Bbl)	$	49.30	$	37.09	$	12.21		33	%
Gas (per Mcf)		6.50		5.86		0.64		11	%
Oil and gas (per Mcfe)		7.14		5.99		1.15		19	%
Expenses (per Mcfe):
Lease operating expenses	$	1.14	$	0.96	$	0.18		19	%
Salaries, general and administrative expenses (b)		0.18		0.15		0.03		20	%
DD&A expense on oil and gas properties		2.50		2.08		0.42		20	%

	Six Months Ended
	June 30,
	2005		2004		Variance			% change
Production:
Oil (MBbls)		2,969		3,096		(127	)		(4	%)
Gas (MMcf)		31,531		29,081		2,450			8	%
Oil and gas (MMcfe)		49,345		47,657		1,688			4	%
Revenue data (in thousands) (a):
Oil revenue	$	144,107	$	110,796	$	33,311			30	%
Gas revenue		197,284		165,008		32,276			20	%
Total oil and gas revenue	$	341,391	$	275,804		65,587			24	%
Average prices (a):
Oil (per Bbl)	$	48.54	$	35.79	$	12.75			36	%
Gas (per Mcf)		6.26		5.67		0.59			10	%
Oil and gas (per Mcfe)		6.92		5.79		1.13			20	%
Expenses (per Mcfe):
Lease operating expenses	$	1.17	$	0.90	$	0.27			30	%
Salaries, general and administrative expenses (b)		0.19		0.15		0.04			27	%
DD&A expense on oil and gas properties		2.44		2.00		0.44			22	%

(a)	Includes the cash settlement of hedging contracts.
(b)	Exclusive of incentive compensation expense.

     Net Income.During the second quarter of 2005, net income totaled $48.5 million, or $1.79 per share, compared to $35.9 million, or $1.33 per share reported for the second quarter of 2004. The increase in second quarter net income was primarily due to a combination of increases in oil and natural gas production volumes and realized oil and natural gas prices. For the six months ended June 30, 2005, net income totaled $85.8 million, or $3.17 per share, compared to $71.7 million, or $2.67 per share, during the comparable 2004 period. The increase in year-to-date net income was primarily due to an increase in natural gas production volumes and an increase in realized oil and natural gas prices. All per share amounts are on a diluted basis.

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     Prices. Prices realized during the second quarter of 2005 averaged $49.30 per Bbl of oil and $6.50 per Mcf of natural gas, or 19% higher, on an Mcfe basis, than second quarter 2004 average realized prices of $37.09 per Bbl of oil and $5.86 per Mcf of natural gas. Average realized prices during the first half of 2005 were $48.54 per Bbl of oil and $6.26 per Mcf of natural gas compared to $35.79 per Bbl of oil and $5.67 per Mcf of natural gas realized during the first half of 2004. All unit pricing amounts include the cash settlement of hedging contracts.

     During the second quarters of 2005 and 2004, hedging transactions reduced the average price we received for natural gas by $0.22 and $0.16 per Mcf, respectively. In addition, average realized oil prices were reduced by $0.59 per Bbl during the second quarter of 2005 as a result of hedges. Hedging transactions did not impact realized oil prices during the second quarter of 2004. Hedging transactions for natural gas during the first half of 2005 and 2004 decreased the average price we received for natural gas by $0.21 and $0.15 per Mcf, respectively. Average realized oil prices for the first half of 2005 were reduced by $0.47 as a result of hedges. There was no hedging impact on realized oil prices for the first half of 2004.

     Production.Oil production during the second quarter of 2005 totaled approximately 1,612,000 barrels compared to 1,552,000 barrels produced during the second quarter of 2004, representing a 4% increase over 2004. Natural gas production during the second quarter of 2005 totaled 16.3 Bcf or 13% above the 14.4 Bcf produced during the second quarter of 2004. The 26.0 Bcfe produced in the second quarter of 2005 represents a 9% increase over second quarter 2004 production volumes of 23.8 Bcfe. Year-to-date 2005 production totaled 2,969,000 barrels of oil and 31.5 Bcf of natural gas compared to 3,096,000 barrels of oil and 29.1 Bcf of natural gas produced during the comparable 2004 period, a 4% increase on an Mcfe basis.

     Oil and Gas Revenue.Second quarter 2005 oil and gas revenue totaled $185.2 million, compared to second quarter 2004 oil and gas revenue of $142.2 million. The increase is attributable to a combination of increases in oil and natural gas production volumes and realized oil and natural gas prices. Year-to-date 2005 oil and gas revenue totaled $341.4 million compared to $275.8 million during the comparable 2004 period primarily due to an increase in realized oil and natural gas prices and an increase in natural gas production volumes.

     Expenses.Lease operating expenses during the second quarter of 2005 totaled $29.7 million or 30% higher than lease operating expenses of $22.9 million for the second quarter of 2004. For the first six months of 2005, lease operating expenses totaled $57.6 million compared to $42.8 million during the comparable period of 2004. The increase in lease operating costs in 2005 is primarily attributable to an increase in the number of active wells and increases in overall industry service costs over 2004. Additionally, during the six months ended June 30, 2005 lease operating expenses included $3.8 million of repairs in excess of estimated insurance recoveries related to Hurricane Ivan.

     Depreciation, depletion and amortization (“DD&A”) on oil and gas properties for the second quarter of 2005 totaled $65.0 million compared to $49.4 million for the second quarter of 2004. For the six months ended June 30, 2005 and 2004, DD&A expense totaled $120.4 million and $95.4 million, respectively. The increase in 2005 DD&A on a unit basis is the result of increases in the full-cycle cost of finding and developing proved reserves and the impact of drilling results.

     Salaries, general and administrative (SG&A) expenses (exclusive of incentive compensation) for the second quarter of 2005 were $4.7 million compared to $3.5 million in the second quarter of 2004. For the six months ended June 30, 2005 and 2004, SG&A totaled $9.5 million and $7.3 million, respectively. The increase in SG&A is due primarily to an increase in employment of technical personnel during 2005 and salary adjustments.

     As of August 1, 2005, we have a borrowing base under the new bank credit facility of $425 million, of which $273.9 million of borrowings are currently available.As a result of increased bank borrowings and the issuance of our $200 million 6³/4% Senior Subordinated Notes during December 2004, interest expense increased to $5.7 million, net of $4.0 million of capitalized interest, in the second quarter of 2005 compared to $4.0 million, net of $1.6 million capitalized interest, in the second quarter of 2004. For the six months ended June 30, 2005, interest expense totaled $11.3 million, net of $7.3 million of capitalized interest, compared to $7.9 million, net of capitalized interest of $3.2 for the comparable period 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.

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     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 six months ended June 30, 2005 was $250.7 million compared to $188.3 million reported in the comparable period in 2004. Net cash flow used in investing activities totaled $291.4 million and $200.3 million during the first half of 2005 and 2004, respectively, which primarily represents our investment in oil and gas properties. Net cash flow provided by financing activities totaled $82.3 million and $26.1 million for the six months ended June 30, 2005 and 2004, respectively, which primarily represents borrowings under our bank credit facility and proceeds from the exercise of stock options. In total, cash and cash equivalents increased from $24.3 million as of December 31, 2004 to $65.9 million as of June 30, 2005. We had working capital at June 30, 2005 in the amount of $10.2 million.

     Capital Expenditures.Second quarter 2005 additions to oil and gas property costs of $103.2 million included $23.0 million of acquisition costs, $4.7 million of capitalized salaries, general and administrative expenses (inclusive of incentive compensation) and $4.0 million of capitalized interest. Year-to-date 2005 additions to oil and gas property costs of $305.1 million include $125.6 million of acquisition costs, $9.9 million of capitalized salaries, general and administrative expenses (inclusive of incentive compensation) and $7.3 million of capitalized interest. These investments were financed by cash flow from operating activities, borrowings under our credit facility and working capital.

     Budgeted Capital Expenditures.Our current estimated 2005 capital expenditures budget, excluding acquisitions and capitalized salaries, general and administrative expenses and interest, is approximately $390 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 June 30, 2005, we had $158.0 million of borrowings outstanding under our bank credit facility and letters of credit totaling $13.1 million have been issued under the facility. We currently have a loan base under the credit facility of $425 million. At June 30, 2005, we had $253.9 million of borrowings available under the credit facility and the weighted average interest rate was approximately 4.8%. On July 29, 2005 we repaid $20.0 million of outstanding borrowings under the credit facility increasing the availability to $273.9 million. 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 (“Bbls”) or thousand barrels (“MBbls”). 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.

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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. SeeItem 1. Financial Statements — Note 3 — Hedging Activitiesfor a detailed discussion of hedges in place to manage our exposure to oil and natural gas price declines.

Interest Rate Risk

     Stone had long-term debt outstanding of $558.0 million at June 30, 2005, of which $400.0 million, or approximately 72%, bears interest at a fixed rates. The fixed rate debt as of June 30, 2005 consists of $200.0 million of 8¹/4% senior subordinated notes due 2011 and $200.0 million of 6³/4% senior subordinated notes due 2014. The remaining $158.0 million of debt outstanding at June 30, 2005 bears interest at a floating rate. At June 30, 2005, the weighted average interest rate under our floating-rate debt was approximately 4.8%. We currently have 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.

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 June 30, 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 it 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 June 30, 2005 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II — OTHER INFORMATION

Item 4. Submission of Matters to a Vote of Security Holders

     The following matters were submitted to a vote of security holders during Stone’s Annual Meeting of Stockholders held on May 18, 2005:

1. Election of Directors — The following nominees were elected to serves as Directors of Stone Energy Corporation until the 2008 Annual Meeting of Stockholders:

	Votes Cast For		Votes Withheld
Robert A. Bernhard		24,954,431		964,438
James H. Stone		24,736,762		1,182,107
David H. Welch		24,804,429		1,114,440

     No other Director was standing for election. Peter K. Barker, D. Peter Canty, Raymond B. Gary and David R. Voelker are Class I Directors whose terms expire with the 2006 Annual Meeting of stockholders. George R. Christmas, B. J. Duplantis, John P. Laborde and Richard A. Pattarozzi are Class II Directors whose terms expire with the 2007 Annual Meeting of Stockholders.

								Broker
		For		Against		Abstentions		Non-Votes
2.	Ratification of the appointment of Ernst &
	Young as independent accountants		25,887,888		30,284		697	—

Item 5. Other Information

     Effective August 1, 2005, James H. Prince resigned his position as Executive Vice President and Chief Financial Officer of Stone. In addition, the board elected Kenneth H. Beer as Senior Vice President and Chief Financial Officer of Stone effective August 1, 2005. Mr. Beer most recently served as director of research and a senior energy analyst at the investment banking firm of Johnson Rice & Company. Prior to joining Johnson Rice in 1992, he spent five years as an energy analyst and investment banker at Howard Weil Incorporated.

Item 6. Exhibits

*15.1	—	Letter from Ernst & Young LLP dated August 1, 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: August 5, 2005	By:	/s/ J. Kent Pierret
		J. Kent Pierret
		Senior Vice President, Chief Accounting Officer and Treasurer (On behalf of the Registrant and as Chief Accounting Officer)

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EXHIBIT INDEX

*15.1	—	Letter from Ernst & Young LLP dated August 1, 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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