April 26, 2006
Mr. Kenneth H. Beer
Senior Vice President and Chief Financial Officer
Stone Energy Corporation
625 E. Kaliste Saloom Road
Lafayette, LA 70508
Re: Stone Energy Corporation
Form 10-K for the Fiscal Year Ended December 31, 2005
Filed March 13, 2006
File No. 001-12074
Dear Mr. Beer:
We have reviewed your Form 10-K for the Fiscal Year Ended
December 31, 2005 and have the following comments. Please provide
a
written response to our comments. Please be as detailed as
necessary
in your explanation. In some of our comments, we may ask you to
provide us with information so we may better understand your
disclosure. After reviewing this information, we may raise
additional
comments.
Please understand that the purpose of our review process is
to
assist you in your compliance with the applicable disclosure
requirements and to enhance the overall disclosure in your filing.
We
look forward to working with you in these respects. We welcome
any
questions you may have about our comments or any other aspect of
our
review. Feel free to call us at the telephone numbers listed at
the
end of this letter.
10-K for the Fiscal Year Ended December 31, 2005
Properties, page 14
Oil and Natural Gas Reserves, page 15
1. We note that you disclose the measure Discounted future net
cash
flows before tax (PV-10) in your tabular presentation. As this
financial measure is not defined in U.S. GAAP, it will be
necessary to
either remove the measure from your filing, or to comply with the
disclosure requirements of Item 10(e) of Regulation S-K. Under
this
guidance, you would need to include a reconciliation of this
measure
to the most directly comparable GAAP-based measure, which we
believe
would be the standardized measure of future net discounted cash
flows,
as set forth in paragraph 30 of SFAS 69.
Acquisition, Production and Drilling Activity, page 16
2. We note that you identify asset retirement costs as a separate
line
item in your table of capitalized costs for each year, which is
contrary to the guidance in paragraph 11 of SFAS 143, requiring
adjustment to the asset to which an asset retirement liability
relates. Accordingly, we believe that you should reclassify the
asset
retirement costs to the related asset line items to which the
corresponding asset retirement obligation relates. The amount of
asset retirement costs included may be described in a footnote to
the
schedule, if so desired. You may refer to our February 2004
industry
letter for guidance on related topics, accessible on our website
at
the following address:
http://www.sec.gov/divisions/corpfin/guidance/oilgasletter.htm
Management`s Discussion and Analysis, page 22
Executive Overview, page 22
3. You state that hurricanes Katrina and Rita caused "significant
disruption" in your operations, and "significant damage to [y]our
offshore facilities." Given your characterization of the effects
of
these events, we believe that you should expand your disclosure to
discuss the financial statement impact of these events, the timing
of
production deferrals coming back on-line, and the extent to which
the
level of damage will preclude the recommencement of production
from
specific properties.
4. The table in Note 6 within the notes to the consolidated
financial
statements shows an increase in asset retirement obligations
related
to revisions in estimates of approximately $50 million, which is a
47
percent increase from the beginning of the year balance. Given
the
significance of the increase, explain the reasons for the increase
including changes in timing and amounts needed to settle the
obligations.
Contractual Obligations and Other Commitments, page 24
5. The amount of asset retirement obligations identified in the
table
is approximately $189 million higher than the amount reported in
the
balance sheet. Please revise your disclosure as necessary to
explain
the reasons for this difference.
Results of Operations, page 25
6. Given the restatement of historical financial statements
discussed
in Note 1, it seems that it would be necessary to label the tables
on
page 25 and 26 as restated for the years ended December 31, 2004
and
2003.
Controls and Procedures, page 31
Management`s Report on Internal Controls over Financial Reporting,
page 32
7. You report that because of the material weakness identified,
you
did not maintain effective internal control over financial
reporting
as of December 31, 2005. We understand that because of the same
material weakness, your Chief Executive Officer and Chief
Financial
Officer concluded that your disclosure controls and procedures
were
not effective as of December 31, 2005 and December 31, 2004.
Please
revise your disclosure to clarify how you were able to conclude
the
disclosure controls and procedures were not effective as of
December
31, 2004, while being able to maintain effective internal controls
over financial reporting for that same period, if consistent with
your
view.
Changes in Internal Control Over Financial Reporting, page 32
8. In your discussion of the material weakness identified, you
explain
that you have implemented several actions to mitigate the
weaknesses.
Please revise your disclosure under this heading to discuss the
changes made to your internal controls over financial reporting
during
the year ended December 31, 2005, rather than referring the reader
to
the actions discussed in the adjacent section of your filing.
Financial Statements
Note 1 - Restatement of Historical Financial Statements, page F-8
9. As you are presenting the effects of the restatement on your
previous quarterly financial statements in a note to the Form 10-
K,
rather than filing amendments to your interim reports on Form 10-
Q, we
believe that you should provide interim financial statements
within
your amended filing having detail comparable to that required
under
Article 10 of Regulation S-X. Please revise your disclosures to
include all financial statements, line items, and year-to-date
periods
specified in Article 10.
Note 2 - Organization and Summary of Significant Accounting
Policies,
page F-12
Oil and Gas Properties, page F-12
10. In your description of the ceiling test calculation, it
appears
you attempt to define how the present value of future net cash
flows
from proved reserves is calculated. However, it is not clear from
your disclosure if you have deducted future expenditures to be
incurred in developing and producing the proved reserves, as
required
in Rule 4-10(c)(4) of Regulation S-X. Please revise your
disclosure
to clarify whether such expenditures have been deducted in
calculating
the present value of future net cash flows from proved reserves
that
are used in performing your ceiling test calculations.
Stock Based Compensation, page F-15
11. Your labeling in the table presenting the impact on the
financial
statements of applying the recognition provisions of SFAS 123
indicates that the 2004 information is unaudited. Please explain
to
us why you have labeled the table as such. If the labeling was
intended to apply only to the pro-forma line items, that fact
should
be disclosed.
Note 8 - Long Term Debt, page F-20
12. Expand your disclosure to describe the circumstances under
which
your credit facility or notes payable would become immediately
callable by the holders, thus requiring classification of the
instruments as short term; sufficiently to understand the
significance
of the waivers and notices of non-compliance you mention.
Note 13 - Oil and Gas Reserve Information - Unaudited, page F-27
13. We note your disclosure stating that your proved oil and gas
reserves at December 31, 2005 have been "...engineered and/or
audited
by engineering firms in accordance with guidelines established by
the
SEC." As the terms "engineered" and "audited," applied to
information
about oil and gas reserves, are not defined terms; please revise
your
disclosures to describe the work that the engineering firms
performed,
as it relates to the information disclosed about your proved oil
and
gas reserves at December 31, 2005; and identify the firms
conducting
the work that you reference.
Also note that while the SEC has adopted certain oil and gas
reserve
definitions (set forth in Rule 4-10(a) of Regulation S-X and
Appendix
C of SFAS 19), and established disclosure requirements pertaining
to
oil and gas operations in Industry Guide 2, it has not provided
guidance specifically covering the auditing or engineering of oil
and
gas reserves. Therefore, stating compliance with such guidelines
is
not appropriate. Please remove this statement from you
disclosure.
Engineering Comments
10-K for the Fiscal Year Ended December 31, 2005
Management`s Discussion and Analysis, page 22
Known Trends and Uncertainties, page 23
14. You state that one of the reasons for difficulty in past
production replacement in the Gulf of Mexico Basin is inadequate
risking of projects. Explain to us your meaning of this and if
this
implies that you have, or will in the future, report risked
reserves.
You also state that you have employed a new risk management system
for
project evaluation that you believe will result in more efficient
portfolio management. Also further explain this to us.
Controls and Procedures, page 31
Remedial Actions, page 31
15. Provide us with a copy of the written policy and guidelines
for
booking estimated proved reserves that you have recently adopted
and
distributed to all personnel involved in the reserve estimation
policy.
Closing Comments
Please respond to these comments within 10 business days or
tell us when you will provide us with a response. Please furnish
a
letter that keys your responses to our comments and provides any
requested information. Detailed letters greatly facilitate our
review. Please understand that we may have additional comments
after
reviewing your responses to our comments.
You may contact Mark A. Wojciechowski at (202) 551-3759 or,
in
his absence, Karl Hiller at (202) 551-3686 if you have questions
regarding comments on the financial statements and related
matters.
You may contact James Murphy, Petroleum Engineer, at (202) 551-
3703 if
you have questions related to engineering issues and related
disclosures. Please contact me at (202) 551-3740 with any other
questions.
Sincerely,
H. Roger Schwall
Assistant Director
Mr. Kenneth H. Beer
Stone Energy Corporation
April 26, 2006
Page 6
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549-7010
DIVISION OF
CORPORATION FINANCE
MAIL STOP 7010