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 March 31, 2001
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 May 11, 2001, there were 26,085,209 shares of the Registrant's Common
Stock, par value $.01 per share, outstanding.
TABLE OF CONTENTS
Page
PART I
Item 1. Financial Statements:
Condensed Consolidated Balance Sheet
as of March 31, 2001 and December 31, 2000.......... 1
Condensed Consolidated Statement of Operations
for the Three Months Ended March 31, 2001 and 2000.. 2
Condensed Consolidated Statement of Cash Flows
for the Three Months Ended March 31, 2001 and 2000.. 3
Notes to Condensed Consolidated Financial Statements.. 4
Auditors' Review Report............................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................... 7
PART II
Item 4. Submission of Matters to a Vote of Security Holders.... 12
Item 6. Exhibits and Reports on Form 8-K....................... 12
-2-
STONE ENERGY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(In thousands)
(Unaudited)
March 31, December 31,
ASSETS 2001 2000
------------------ ----------------
Current assets:
Cash and cash equivalents.................................... $35,017 $78,557
Marketable securities, at market............................. 300 300
Accounts receivable.......................................... 94,543 95,722
Put contracts................................................ 4,226 1,847
Other current assets......................................... 917 2,916
------------------ ----------------
Total current assets....................................... 135,003 179,342
Oil and gas properties, net:
Proved....................................................... 742,055 691,882
Unevaluated.................................................. 70,202 55,691
Building and land, net........................................... 5,243 4,914
Fixed assets, net................................................ 4,820 4,441
Put contracts.................................................... 6,304 3,152
Other assets, net................................................ 6,318 4,681
------------------ ----------------
Total assets............................................... $969,945 $944,103
================== ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.............................................. $135,968 $116,281
Fair value of swap contracts.................................. 18,029 -
Other current liabilities..................................... 6,182 9,996
------------------ ----------------
Total current liabilities.................................. 160,179 126,277
Long-term debt................................................... 100,000 148,000
Production payments.............................................. 9,209 10,906
Deferred tax liability........................................... 74,610 64,271
Fair value of swap contracts..................................... 12,463 -
Other long-term liabilities...................................... 1,572 2,418
------------------ ----------------
Total liabilities.......................................... 358,033 351,872
------------------ ----------------
Common stock..................................................... 260 260
Additional paid in capital....................................... 441,282 440,729
Retained earnings................................................ 190,501 151,242
Other comprehensive loss......................................... (20,131) -
------------------ ----------------
Total stockholders' equity................................. 611,912 592,231
------------------ ----------------
Total liabilities and stockholders' equity................. $969,945 $944,103
================== ================
STONE ENERGY CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
Three Months Ended
March 31,
-------------------------------------
2001 2000
--------------- ---------------
Revenues
Oil and gas production....................................... $142,994 $69,928
Other income................................................. 1,007 941
--------------- ---------------
Total revenues............................................. 144,001 70,869
--------------- ---------------
Expenses
Normal lease operating expenses.............................. 10,682 9,172
Major maintenance expenses................................... 1,347 548
Production taxes............................................. 1,862 1,681
Depreciation, depletion and amortization..................... 36,636 26,513
Interest..................................................... 1,075 2,642
Salaries, general and administrative......................... 2,724 2,719
Incentive compensation plan.................................. 523 252
Hedge premium expense........................................ 455 -
Merger expenses.............................................. 25,523 -
--------------- ---------------
Total expenses............................................. 80,827 43,527
--------------- ---------------
Net income before income taxes................................... 63,174 27,342
--------------- ---------------
Provision for income taxes
Current...................................................... 2,726 -
Deferred..................................................... 21,189 8,053
--------------- ---------------
23,915 8,053
--------------- ---------------
Net income....................................................... $39,259 $19,289
=============== ===============
Earnings per common share:
Basic earnings per share..................................... $1.51 $0.75
=============== ===============
Diluted earnings per share................................... $1.49 $0.74
=============== ===============
Average shares outstanding................................... 25,982 25,692
=============== ===============
Average shares outstanding assuming dilution................. 26,437 26,092
=============== ===============
-13-
STONE ENERGY CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
(Unaudited)
Three Months Ended
March 31,
--------------------------------------
2001 2000
---------------- ----------------
Cash flows from operating activities:
Net income.................................................... $39,259 $19,289
Adjustments to reconcile net income to net cash
provided by operating activities:
DD&A.................................................... 36,636 26,513
Provision for deferred income taxes..................... 21,189 8,053
Non-cash effect of production payments.................. (1,585) (1,336)
Other non-cash expenses................................. 1,181 4
---------------- ----------------
96,680 52,523
Decrease in marketable securities..................... - 3,871
(Increase) decrease in accounts receivable............ 1,179 (1,315)
Decrease in other current assets...................... 1,999 1,442
Increase (decrease) in accrued liabilities............ 10,797 (5,608)
Purchase of put contracts............................. (6,466) -
Other................................................. (1,334) (166)
---------------- ----------------
Net cash provided by operating activities....................... 102,855 50,747
---------------- ----------------
Cash flows from investing activities:
Investment in oil and gas properties....................... (97,342) (60,001)
Building additions and renovations......................... (360) (20)
Sale of oil and gas properties............................. 1,366 1,846
Increase in other assets .................................. (2,428) (1,084)
---------------- ----------------
Net cash used in investing activities........................... (98,764) (59,259)
---------------- ----------------
Cash flows from financing activities:
Proceeds from borrowings..................................... 5,000 23,000
Repayment of debt............................................ (53,000) (17,000)
Deferred financing costs..................................... - (200)
Purchase of treasury stock................................... (45) (648)
Proceeds from the exercise of stock options.................. 414 721
---------------- ----------------
Net cash provided by (used in) financing activities............. (47,631) 5,873
---------------- ----------------
Net decrease in cash and cash equivalents........................ (43,540) (2,639)
Cash and cash equivalents, beginning of period................... 78,557 17,651
---------------- ----------------
Cash and cash equivalents, end of period......................... $35,017 $15,012
================ ================
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest (net of amount capitalized)...................... $3,218 $4,544
Income taxes.............................................. 2,726 -
STONE ENERGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - INTERIM FINANCIAL STATEMENTS
The condensed consolidated financial statements of Stone Energy Corporation
at March 31, 2001 and for the three-month period 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
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, 2000. The results of
operations for the three-month period ended March 31, 2001 are not necessarily
indicative of future financial results.
In accordance with the pooling of interests method of accounting for a
merger transaction, all results were combined to give effect to the combination
of Stone and Basin as if the merger (see Note 2) occurred at the beginning of
the first period presented. Prior to the merger, Basin accounted for
depreciation, depletion and amortization (DD&A) of oil and gas properties using
the units of production method. In connection with the restatement of our
financial statements on a pooling of interests basis, Basin's historical
provision for DD&A was restated to conform to the future gross revenue method
used by us. All periods presented reflect the effect of this adjustment.
In addition to the DD&A adjustment, we reclassified Basin's financial
statements to conform to Stone's presentation.
NOTE 2 - MERGER WITH BASIN EXPLORATION
On February 1, 2001, the stockholders of Stone Energy Corporation and Basin
Exploration, Inc. voted in favor of, and thereby consummated, the combination,
through a pooling of interests, of the two companies in a tax-free,
stock-for-stock transaction. In connection with the approval of the merger,
stockholders of Stone Energy also approved a proposal to increase the authorized
shares of Stone common stock from 25 million to 100 million shares. Under the
merger agreement, Basin stockholders received 0.3974 of a share of Stone common
stock for each share of Basin common stock they owned. As such, Stone issued
approximately 7.4 million shares of common stock, which, based upon Stone's
closing price of $53.70 on February 1, 2001, resulted in total equity value
related to the transaction of approximately $400 million. In addition, Stone
assumed, and subsequently retired with cash on hand, approximately $48 million
of Basin bank debt. The expenses incurred in relation to the merger are a
non-recurring item.
NOTE 3 - 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 by the weighted-average number of
common shares outstanding during the period plus the weighted-average number of
dilutive stock options granted to outside directors and certain employees. There
were approximately 455,000 dilutive shares and 400,000 dilutive shares for the
first quarters of 2001 and 2000, respectively.
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 389,000 shares and 366,000 shares in the first quarters of 2001
and 2000, respectively.
NOTE 4 - HEDGING ACTIVITIES
We enter into hedging transactions to secure a price for a portion of
future production that is acceptable at the time the transaction is entered
into. The primary objective of these activities is to reduce our exposure to the
possibility of declining oil and 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 puts.
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.
Put contracts are not costless; they are purchased at a rate per unit of
hedged production that fluctuates with the commodity futures market. The
historical cost of the put contracts represents our maximum cash exposure. We
are not obligated to make any further payments under the put contracts
regardless of future commodity price fluctuations. Under put contracts, monthly
payments are made to us if NYMEX prices fall below the agreed upon floor price,
while allowing us to fully participate in commodity prices above that floor. 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. Since the majority of 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 hedge positions as of April 1, 2001 are summarized as follows:
Puts
------------------------------------------------------------
Gas Oil
--------------------------- ----------------------------
Volume Volume
(BBtus) Floor (Bbls) Floor
----------- ----------- ----------- -------------
2001 22,000 $3.50 962,500 $25.00
2002 21,900 $3.50 1,277,500 $24.00
Fixed Price Gas Swaps
------------------------------------------
Volume (BBtus) Price
------------------- ------------------
2001 5,500 $2.33
2002 3,650 $2.15
2003 3,650 $2.15
During the first quarters of 2001 and 2000, we realized net decreases in
oil and gas revenues related to hedging transactions of $8.8 million and $3.9
million, respectively.
NOTE 5 - LONG-TERM DEBT
On February 1, 2001, we retired approximately $48 million of bank debt
assumed in the merger with Basin. Our borrowing base at March 31, 2001 was $200
million with outstanding letters of credit totaling $7.5 million and no
outstanding borrowings.
NOTE 6 - 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 March 31, 2001, the
production payment associated with this purchase totaled $1.7 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 March 31, 2001, the volumetric production
payment was $7.5 million, and we recognized $1.5 million as gas revenue during
each of the first quarters of 2001 and 2000.
NOTE 7 - ADOPTION OF SFAS NO. 133
We adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," effective January 1, 2001. Under SFAS No. 133, as amended, the
nature of a derivative instrument must be evaluated to determine if it qualifies
for special hedge accounting treatment. If the instrument qualifies for hedge
accounting treatment, it would be recorded as either an asset or liability
measured at fair value and subsequent changes in the derivative's fair value
would be recognized in equity through other comprehensive income, to the extent
the hedge is considered effective.
Under this statement, our current hedge instruments are considered
effective cash flow hedges and changes in fair value of the hedge instruments,
to the extent the hedges are effective, are reflected in other comprehensive
income.
At December 31, 2000, the oil put contracts were recorded as assets at a
historical cost of $5 million and, in accordance with generally accepted
accounting principles in effect at year-end 2000, the fixed price gas swap
contracts were not recorded since they were costless. The gas put contracts were
purchased in February 2001 and therefore were not recorded at December 31, 2000.
At December 31, 2000, the fair values of our oil put contracts and fixed price
gas swaps were $7.7 million and ($42.8) million, respectively.
Upon adoption of SFAS No. 133, as amended, the increase in fair value over
historical cost of our oil put contracts of $2.7 million was a transition
adjustment that was recorded as a gain in equity through other comprehensive
income. In addition, the fair market value of the fixed price gas swaps was
recorded as a liability and the corresponding loss of $42.8 million was recorded
in equity through other comprehensive income. In February 2001, the gas puts
were purchased and recorded as assets at a historical cost of $6.5 million.
At March 31, 2001, we recognized $0.5 million of hedge premium expenses,
which represents the cost associated with oil put contracts that settled during
the first quarter of 2001. At March 31, 2001, the unsettled put contracts were
recorded as assets totaling $10.5 million and the unsettled gas swaps were
recorded as liabilities totaling $30.5 million. All changes in fair values of
the puts and the swaps were recorded in equity through other comprehensive
income (See Note 8).
NOTE 8 - COMPREHENSIVE INCOME
Prior to the adoption of SFAS No. 133, our only component of Comprehensive
Income was our net income. Effective January 1, 2001, we adopted SFAS No. 133
the impact of which created other components of Comprehensive Income. The
following table presents the components of Comprehensive Income for the first
quarters of 2001 and 2000.
Three Months Ended
March 31,
-------------------------------------
2001 2000
---------------- ---------------
(In millions)
Net income.......................................................... $39.3 $19.3
Other comprehensive income (loss), net of tax effect:
Cumulative effect of accounting change for derivatives.......... (26.0) -
Net change in fair value of derivatives......................... 5.9 -
---------------- ----------------
(20.1) -
---------------- ----------------
Comprehensive income................................................ $19.2 $19.3
================ ================
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 March 31, 2001, and the
related condensed consolidated statements of operations and cash flows for the
three-month periods ended March 31, 2001 and 2000. 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.
ARTHUR ANDERSEN LLP
New Orleans, Louisiana
April 28, 2001
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
beginning on page 11 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. Results for all periods reflect the
combination of Stone and Basin.
OVERVIEW
Stone Energy Corporation is an independent oil and gas company engaged in
the acquisition, exploration, development and operation of oil and gas
properties in the Gulf Coast Basin and Rocky Mountains.
Our business strategy is to increase production, cash flow and reserves
through the acquisition and development of mature properties. Currently, our
property base consists of 80 producing properties, 47 in the Gulf Coast Basin
and 33 in the Rocky Mountains. We serve as operator on 53 of our 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 major and large
independent companies on projects away from the onshore and shallow water shelf
regions of the Gulf of Mexico.
MERGER WITH BASIN EXPLORATION
On February 1, 2001, the stockholders of Stone Energy Corporation and Basin
Exploration, Inc. voted in favor of, and thereby consummated, the combination,
through a pooling of interests, of the two companies in a tax-free,
stock-for-stock transaction. In connection with the approval of the merger,
stockholders of Stone Energy also approved a proposal to increase the authorized
shares of Stone common stock from 25 million to 100 million shares. Under the
merger agreement, Basin stockholders received 0.3974 of a share of Stone common
stock for each share of Basin common stock they owned. As such, Stone issued
approximately 7.4 million shares of common stock, which, based upon Stone's
closing price of $53.70 on February 1, 2001, resulted in total equity value
related to the transaction of approximately $400 million. In addition, Stone
assumed, and subsequently retired with cash on hand, approximately $48 million
of Basin bank debt.
BASIS OF PRESENTATION
In accordance with the pooling of interests method of accounting for a
merger transaction, all results were combined to give effect to the combination
of Stone and Basin as if the merger occurred at the beginning of the first
period presented. Prior to the merger, Basin accounted for depreciation,
depletion and amortization (DD&A) of oil and gas properties using the units of
production method. In connection with the restatement of our financial
statements on a pooling of interests basis, Basin's historical provision for
DD&A was restated to conform to the future gross revenue method used by us. All
periods presented reflect the effect of this adjustment.
In addition to the DD&A adjustment, we reclassified Basin's financial
statements to conform to Stone's presentation.
RESULTS OF OPERATIONS
The following table sets forth certain operating information with respect
to our oil and gas operations.
Three Months Ended
March 31,
----------------------------
2001 2000
------------ ------------
PRODUCTION:
Oil (MBbls)............................................... 1,010 988
Gas (MMcf):
Produced excluding volumetric production payment........ 16,368 16,756
Volumetric production payment........................... 657 667
------------ ------------
Total gas volumes produced............................. 17,025 17,423
Oil and gas (MMcfe):
Produced excluding volumetric production payment........ 22,428 22,684
Volumetric production payment........................... 657 667
------------ ------------
Total volumes produced................................. 23,085 23,351
SALES DATA (IN THOUSANDS) (a):
Oil....................................................... $29,588 $24,598
Gas:
Gas sales excluding volumetric production payment...... 111,912 43,836
Volumetric production payment.......................... 1,494 1,494
------------ ------------
Total gas sales........................................ 113,406 45,330
AVERAGE SALES PRICES (a):
Oil (per Bbl)............................................. $29.30 $24.90
Gas (per Mcf):
Price excluding volumetric production payment.......... 6.84 2.62
Volumetric production payment.......................... 2.24 2.24
Net average price...................................... 6.66 2.60
Oil and gas (per Mcfe):
Price excluding volumetric production payment.......... 6.31 3.02
Volumetric production payment.......................... 2.24 2.24
Net average price ..................................... 6.19 2.99
EXPENSES (PER MCFE):
Normal lease operating expenses (b)...................... $0.46 $0.39
Salaries, general and administrative..................... 0.12 0.12
DD&A on oil and gas properties........................... 1.57 1.12
(a) Includes the effects of hedging
(b) Excludes major maintenance expenses
NET INCOME. Net income for the first quarter of 2001 totaled $39.3 million,
or $1.49 per share, compared to net income reported for the first quarter of
2000 of $19.3 million, or $0.74 per share.
In connection with the Basin merger, during the first quarter of 2001, we
incurred non-recurring merger expenses of $25.5 million, or $18.4 million
after-taxes. Excluding the impact of the non-recurring merger expenses, net
income for the quarter ended March 31, 2001 totaled $57.7 million or $2.18 per
share.
OIL AND GAS REVENUES. As a result of higher realized prices, first quarter
2001 oil and gas revenues increased 104% to $143 million, compared to first
quarter 2000 oil and gas revenues of $69.9 million.
PRICES. Prices realized during the first quarter of 2001 averaged $29.30
per barrel of oil and $6.66 per Mcf of gas. This represents a 107% increase, on
an Mcfe basis, over first quarter 2000 average realized prices of $24.90 per
barrel of oil and $2.60 per Mcf of gas. All unit pricing amounts include the
effects of hedging. During the first quarter of 2001, hedging transactions
reduced the average price we received for gas by $0.54 per Mcf compared to a net
reduction in the price of oil of $4.06 per barrel and a net increase in the
price of gas of $0.01 per Mcf for the comparable period in 2000.
PRODUCTION. Oil production during the first quarter of 2001 increased to
approximately 1,010,000 barrels compared to first quarter 2000 production of
988,000 barrels, while natural gas production during the first quarter of 2001
decreased to approximately 17 billion cubic feet, compared to first quarter 2000
gas production of 17.4 billion cubic feet. On a gas equivalent basis, production
volumes for the first quarter of 2001 totaled 23.1 Bcfe compared to first
quarter 2000 production of 23.4 Bcfe.
Based on current projections, Stone estimates second quarter 2001 average
daily production will approximate 281 MMcfe or 10% higher than the average daily
production rate achieved during the first quarter of 2001.
EXPENSES. Normal operating costs during the first quarter of 2001 increased
to $10.7 million, compared to $9.2 million for the comparable quarter in 2000,
due primarily to industry-wide increases in the costs of oil field products and
services.
Salaries, general and administrative expenses for the first quarter of 2001
were unchanged from the 2000 amount of $2.7 million, or $0.12 per Mcfe. The
increase in the number of employees eligible to participate in the incentive
compensation plan resulted in incentive compensation expense of $0.5 million
compared to $0.3 million for the first quarter of 2000.
Depreciation, depletion and amortization (DD&A) expense on oil and gas
properties for the first quarter of 2001 totaled $36.2 million, or $1.57 per
Mcfe. DD&A expense was $26.1 million, or $1.12 per Mcfe, for the first quarter
of 2000. The higher 2001 DD&A rate was partially attributable to the rising
costs of oil and gas exploration and development activities, as well as the
decline in oil and gas prices since the end of 2000.
On February 1, 2001, we retired approximately $48 million of bank debt
assumed in the merger with Basin. As a result of the reduction in debt and the
increase in capitalized interest on unevaluated properties, interest expense for
the first quarter of 2001 decreased to $1.1 million from $2.6 million for the
comparable 2000 period.
Stone's estimated effective tax rate is 35%. However, we estimated that
approximately $5.2 million of merger-related expenses were not tax deductible.
This resulted in an effective tax rate of 38% during the first quarter of 2001.
ADOPTION OF SFAS NO. 133
We adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," effective January 1, 2001. Under SFAS No. 133, as amended, the
nature of a derivative instrument must be evaluated to determine if it qualifies
for special hedge accounting treatment. If the instrument qualifies for hedge
accounting treatment, it would be recorded as either an asset or liability
measured at fair value and subsequent changes in the derivative's fair value
would be recognized in equity through other comprehensive income, to the extent
the hedge is considered effective.
Under this statement, our current hedge instruments are considered
effective cash flow hedges and changes in fair value of the hedge instruments,
to the extent the hedges are effective, are reflected in other comprehensive
income.
At December 31, 2000, the oil put contracts were recorded as assets at a
historical cost of $5 million and, in accordance with generally accepted
accounting principles in effect at year-end 2000, the fixed price gas swap
contracts were not recorded since they were costless. The gas put contracts were
purchased in February 2001 and therefore were not recorded at December 31, 2000.
At December 31, 2000, the fair values of our oil put contracts and fixed price
gas swaps were $7.7 million and ($42.8) million, respectively.
Upon adoption of SFAS No. 133, as amended, the increase in fair value over
historical cost of our oil put contracts of $2.7 million was a transition
adjustment that was recorded as a gain in equity through other comprehensive
income. In addition, the fair market value of the fixed price gas swaps was
recorded as a liability and the corresponding loss of $42.8 million was recorded
in equity through other comprehensive income. In February 2001, the gas puts
were purchased and recorded as assets at a historical cost of $6.5 million.
At March 31, 2001, we recognized $0.5 million of hedge premium expenses,
which represents the cost associated with oil put contracts that settled during
the first quarter of 2001. At March 31, 2001, the unsettled put contracts were
recorded as assets totaling $10.5 million and the unsettled gas swaps were
recorded as liabilities totaling $30.5 million. All changes in fair values of
the puts and the swaps were recorded in equity through other comprehensive
income.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOW. Net cash flow from operations before working capital changes for
the first quarter of 2001 was $96.7 million, or $3.66 per share, compared to
$52.5 million, or $2.01 per share, reported for the same period of 2000.
Excluding the effect of non-recurring merger expenses, net cash flow from
operations for the first quarter of 2001 was $115.1 million, or $4.35 per share.
CAPITAL EXPENDITURES. Capital expenditures during the first quarter of 2001
totaled $102.1 million, as we achieved an 85% drilling success rate with 23
successful wells and four dry holes. First quarter 2001 capital expenditures
included $3.1 million of capitalized salaries, general and administrative
expenses and $1.5 million of capitalized interest. These investments were
financed by cash flow from operations and working capital.
BUDGETED CAPITAL EXPENDITURES. Our current estimated 2001 capital
expenditures budget of approximately $270 million is expected to be allocated
90% to Gulf Coast operations and 10% to Rocky Mountain activities. We expect to
drill 73 gross wells during 2001, 43 in the onshore and shallow water offshore
regions of the Gulf Coast Basin and 30 in the Rocky Mountains. While the 2001
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 on oil and gas prices and production rates, we
believe that our cash flow from operations will be sufficient to fund the
current 2001 capital expenditures budget. 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.
Although we do not budget acquisitions, we continue to evaluate properties
and transaction alternatives to add to our existing property base. One or a
combination of certain of these possible transactions could fully utilize our
existing sources of capital. Although we have no plans to access the public
markets for purposes of capital, if the opportunity arose, we would consider
such funding sources to provide capital in excess of what is currently available
to us. We would compare and contrast the cost of debt financing with the
potential dilution of equity offerings to determine the appropriate financing
vehicle to maximize stockholder value.
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, 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the special meeting of stockholders held on February 1, 2001, our
certificate of incorporation was amended to increase the authorized shares of
Stone's common stock from 25,000,000 shares to 100,000,000 shares. The vote was
11,015,213 shares for the amendment, 2,717,566 shares against, 89,809 shares
abstaining, and 4,713,520 shares not voting. Additionally, the shareholders
approved the issuance of the shares of Stone's common stock to be received by
Basin Exploration, Inc.'s stockholders in the merger between Basin and Partner
Acquisition Corp., a newly-formed, wholly-owned subsidiary of Stone Energy
Corporation. The vote was 13,700,209 shares for the merger, 4,230 shares
against, 118,149 shares abstaining, and 4,713,520 shares not voting.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
*15.1 - Letter from Arthur Andersen LLP dated May 11, 2001,
regarding unaudited interim financial information.
* Filed herewith
(b) The following reports on Form 8-K were filed during the three months
ended March 31, 2001:
Date of Event Reported Item Reported
--------------------------- ------------------------
` February 1, 2001 Item 5
February 1, 2001 Items 2, 5 and 7
February 21, 2001 Item 5
February 28, 2001 Items 7 and 9
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: May 14, 2001 By: /s/James H. Prince
------------------------------------
James H. Prince
Vice President, Chief Financial
Officer and Treasurer
(Principal Financial Officer)