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, 2002
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 6, 2002, there were 26,335,952 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 March 31, 2002 and December 31, 2001................ 1
Condensed Consolidated Statement of Operations
for the Three Months Ended March 31, 2002 and 2001........ 2
Condensed Consolidated Statement of Cash Flows
for the Three Months Ended March 31, 2002 and 2001........ 3
Notes to Condensed Consolidated Financial Statements....... 4
Report of Independent Public Accountants................... 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.. 11
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K............................ 12
Signature................................................... 13
STONE ENERGY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(In thousands)
MARCH 31, DECEMBER 31,
ASSETS 2002 2001
------ ------------------ ----------------
(Unaudited)
Current assets:
Cash and cash equivalents.................................... $12,088 $13,155
Accounts receivable.......................................... 46,691 46,987
Other current assets......................................... 1,261 1,832
Put contracts................................................ 8,218 26,207
------------------ ----------------
Total current assets....................................... 68,258 88,181
------------------ ----------------
Oil and gas properties, net:
Proved....................................................... 891,831 880,534
Unevaluated.................................................. 117,281 113,372
Building and land, net........................................... 5,320 5,352
Fixed assets, net................................................ 5,665 4,883
Other assets, net................................................ 10,140 9,461
------------------ ----------------
Total assets............................................... $1,098,495 $1,101,783
================== ================
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable to vendors .................................. $59,115 $69,197
Undistributed oil and gas proceeds............................ 20,484 23,741
Deferred taxes................................................ 1,225 5,312
Fair value of swap contracts.................................. 4,542 2,194
Other accrued liabilities..................................... 7,074 5,834
------------------ ----------------
Total current liabilities.................................. 92,440 106,278
Long-term debt................................................... 436,000 426,000
Production payments.............................................. 2,778 4,323
Deferred taxes................................................... 31,986 30,244
Fair value of swap contracts..................................... 3,633 3,619
Other long-term liabilities...................................... 2,126 1,294
------------------ ----------------
Total liabilities.......................................... 568,963 571,758
------------------ ----------------
Common stock..................................................... 263 262
Additional paid in capital....................................... 452,063 449,111
Retained earnings................................................ 81,380 75,213
Treasury stock................................................... (1,706) (2,057)
Other comprehensive income (loss)................................ (2,468) 7,496
------------------ ----------------
Total stockholders' equity................................. 529,532 530,025
------------------ ----------------
Total liabilities and stockholders' equity................. $1,098,495 $1,101,783
================== ================
The accompanying notes are an integral part of this balance sheet.
STONE ENERGY CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
THREE MONTHS ENDED
MARCH 31,
-------------------------------------
2002 2001
--------------- ---------------
Revenues:
Oil and gas production....................................... $80,530 $142,994
Other revenue................................................ 878 1,007
--------------- ---------------
Total revenues............................................. 81,408 144,001
--------------- ---------------
Expenses:
Normal lease operating expenses.............................. 14,613 10,682
Major maintenance expenses................................... 1,289 1,347
Production taxes............................................. 1,070 1,862
Depreciation, depletion and amortization..................... 40,749 36,636
Interest..................................................... 5,454 1,075
Salaries, general and administrative expenses................ 3,400 2,724
Incentive compensation plan.................................. 188 523
Non-cash derivative expenses................................. 5,021 455
Merger expenses.............................................. - 25,523
--------------- ---------------
Total expenses............................................. 71,784 80,827
--------------- ---------------
Net income before income taxes................................... 9,624 63,174
--------------- ---------------
Provision for income taxes
Current...................................................... - 2,726
Deferred..................................................... 3,368 21,189
--------------- ---------------
Total income taxes......................................... 3,368 23,915
--------------- ---------------
Net income....................................................... $6,256 $39,259
=============== ===============
Earnings per common share:
Basic earnings per share..................................... $0.24 $1.51
=============== ===============
Diluted earnings per share................................... $0.24 $1.49
=============== ===============
Average shares outstanding................................... 26,262 25,982
=============== ===============
Average shares outstanding assuming dilution................. 26,447 26,437
=============== ===============
The accompanying notes are an integral part of this statement.
STONE ENERGY CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
(Unaudited)
THREE MONTHS ENDED
MARCH 31,
--------------------------------------
2002 2001
---------------- ----------------
Cash flows from operating activities:
Net income.................................................... $6,256 $39,259
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, depletion and amortization................ 40,749 36,636
Provision for deferred income taxes..................... 3,368 21,189
Non-cash effect of production payments.................. (1,492) (1,585)
Non-cash derivative expenses............................ 5,021 455
Other non-cash expenses................................. 160 726
---------------- ----------------
54,062 96,680
Decrease in accounts receivable......................... 296 1,179
Decrease in other current assets........................ 561 1,999
Increase (decrease) in other accrued liabilities........ (2,017) 10,797
Investment in put contracts............................. - (6,466)
Other................................................... 984 (1,334)
---------------- ----------------
Net cash provided by operating activities....................... 53,886 102,855
---------------- ----------------
Cash flows from investing activities:
Investment in oil and gas properties....................... (65,512) (97,342)
Building additions and renovations......................... (3) (360)
Sale of unevaluated properties............................. - 1,366
Increase in other assets .................................. (2,146) (2,428)
---------------- ----------------
Net cash used in investing activities........................... (67,661) (98,764)
---------------- ----------------
Cash flows from financing activities:
Proceeds from bank borrowings................................ 10,000 5,000
Repayment of debt............................................ - (53,000)
Deferred financing costs..................................... (162) -
Issuance (purchase) of treasury stock........................ 351 (45)
Proceeds from the exercise of stock options.................. 2,519 414
---------------- ----------------
Net cash provided by (used in) financing activities............. 12,708 (47,631)
---------------- ----------------
Net decrease in cash and cash equivalents....................... (1,067) (43,540)
Cash and cash equivalents, beginning of period.................. 13,155 78,557
---------------- ----------------
Cash and cash equivalents, end of period........................ $12,088 $35,017
================ ================
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest (net of amount capitalized)...................... $3,433 $3,218
Income taxes.............................................. - 2,726
The accompanying notes are an integral part of this statement.
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, 2002 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
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,
2001. The results of operations for the three-month period ended March 31, 2002
are not necessarily indicative of future financial results.
NOTE 2 - CONOCO PROPERTY ACQUISITION
On December 31, 2001, Stone completed the acquisition of eight producing
oil and gas properties and related assets located in the Gulf of Mexico from
Conoco. The purchase price of approximately $300 million was financed with net
proceeds from the December 2001 issuance of $200 million principal amount of
8-1/4% Senior Subordinated Notes due 2011 and borrowings under the bank credit
facility. This acquisition was accounted for under the purchase method of
accounting.
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 applicable to common stock by the
weighted-average number of common shares outstanding during the period plus the
weighted-average number of dilutive stock options granted to outside directors
and employees. There were approximately 185,000 and 455,000 dilutive shares for
the first quarters of 2002 and 2001, 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 1,040,000 and 389,000 shares in the first quarters of 2002 and
2001, respectively.
NOTE 4 - HEDGING ACTIVITIES
We adopted Statement of Financial Accounting Standard (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 hedge accounting
treatment. If the instrument qualifies for hedge accounting treatment, it is
recorded as either an asset or liability measured at fair value and subsequent
changes in the derivative's fair value are recognized in equity through other
comprehensive income, to the extent the hedge is considered effective.
Instruments not qualifying for hedge accounting treatment are recorded in the
balance sheet at fair value and changes in fair value are recognized in
earnings.
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
possibility 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 puts.
Under SFAS No. 133, our current oil and gas put contracts are considered
effective cash flow hedges and therefore, changes in fair value of the puts are
reflected in other comprehensive income. 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 price. Oil contracts typically settle using the average
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.
In addition to put contracts, we utilize a fixed price swap to hedge a
portion of our future natural gas production. Fixed price swaps provide for
monthly payments by us or to us based on the difference between the strike price
and the agreed-upon average of NYMEX prices. Our natural gas swap contract is
with a subsidiary of Enron Corp. Due to Enron's financial difficulties, there is
no assurance that we will receive full or partial payment of any amounts that
may become owed to us under this contract. Accordingly, this swap no longer
qualifies as an effective hedge under SFAS No. 133. As a result, the change in
fair value each period is recorded through earnings and amounts previously
recorded in other comprehensive income are amortized through earnings over the
remaining life of the swap. At March 31, 2002, other comprehensive income
included $3.7 million related to the ineffective natural gas swap that remains
to be amortized.
During the first quarter of 2002 and 2001, we recognized non-cash expenses
of $5.0 million and $0.5 million, respectively, related to commodity
derivatives, a portion of which represents the cost associated with put
contracts that settled during the respective periods. Also included in non-cash
derivative expense for the three months ended March 31, 2002 is a $0.6 million
charge from amortization of other comprehensive income and a $2.4 million loss
related to the change in fair value of the natural gas swap. At March 31, 2002,
the unsettled put contracts were recorded as assets totaling $8.2 million and
the unsettled gas swap was recorded as a liability totaling $8.2 million.
Our hedge positions for the period April 1, 2002 through December 31, 2003
are summarized as follows. Currently, we have no open hedge positions subsequent
to December 31, 2003.
PUTS
----------------------------------------------------------------------------------------------
GAS OIL
--------------------------------------------- ---------------------------------------------
VOLUME COST VOLUME AVERAGE COST
(BBTUS) FLOOR (MILLIONS) (BBLS) FLOOR (MILLIONS)
------------ ------------ ------------- ------------ ------------- ------------
2002............... 16,500 $3.50 $3.9 3,902,500 $24.75 $7.2
FIXED PRICE GAS SWAP
------------------------------
VOLUME
(BBTUS) PRICE
------------ -------------
2002.................... 2,750 $2.15
2003.................... 3,650 2.15
During the first quarters of 2002 and 2001, we realized net increase
(decrease) in oil and gas revenues related to hedging transactions of $6.5
million and ($8.8) million, respectively.
NOTE 5 - LONG-TERM DEBT
Long-term debt consisted of the following:
MARCH 31, DECEMBER 31,
2002 2001
------------ ------------
(In millions)
8 1/4% Senior Subordinated Notes due 2011.. $200 $200
8 3/4% Senior Subordinated Notes due 2007.. 100 100
Bank debt.................................. 136 126
------------ ------------
Total long-term debt.................. $436 $426
============ =============
On December 5, 2001, we issued $200 million principal amount of 8 1/4%
Senior Subordinated Notes due 2011. The Notes were sold at par value and we
received net proceeds of $195.5 million. At March 31, 2002, $4.8 million had
been accrued in connection with the June 15, 2002 interest payment.
Borrowings outstanding at March 31, 2002 under our bank credit facility
totaled $136 million and letters of credit totaling $7.3 million have been
issued pursuant to the facility. At March 31, 2002, we had $106.7 million of
borrowings available under the credit facility and the weighted average interest
rate under the credit facility was approximately 3.5%. The credit facility
matures on December 20, 2004. The borrowing base limitation is re-determined
periodically and is based on a borrowing amount established by the banks for our
oil and gas properties.
NOTE 6 - COMPREHENSIVE INCOME
Prior to the adoption of SFAS No. 133, our only component of comprehensive
income was net income. Effective January 1, 2001 we adopted SFAS No. 133. The
impact of SFAS No. 133 created other components of comprehensive income. The
following table presents the components of comprehensive income for the first
quarters of 2002 and 2001.
THREE MONTHS ENDED
MARCH 31,
-------------------------------------
2002 2001
---------------- ---------------
(In millions)
Net income.......................................................... $6.3 $39.3
Other comprehensive income (loss), net of tax effect:
Cumulative effect of accounting change for derivatives........... - (26.1)
Net change in fair value of derivatives.......................... (10.4) 6.0
Amortization of other comprehensive income from swap............. 0.4 -
---------------- ---------------
(10.0) (20.1)
---------------- ---------------
Comprehensive income (loss)...................................... ($3.7) $19.2
================ ================
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) and subsidiary as of March 31,
2002, and the related condensed consolidated statements of operations and cash
flows for the three-month periods ended March 31, 2002 and 2001. 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 26, 2002
ITEM 2. 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 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 a leading, Gulf Coast Basin-focused independent
oil and gas company engaged in the acquisition and subsequent exploration,
development, production and operation of oil and gas properties.
Our business strategy, which has remained consistent since 1990, is to
increase production, cash flow and reserves through the acquisition and
development of mature properties. Currently, our property base consists of 91
active properties, 56 in the Gulf Coast Basin and 35 in the Rocky Mountains, and
38 primary term leases in the Gulf of Mexico. We serve as operator on 55 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
major and large independent companies on projects away from the onshore and
shallow water shelf regions of the Gulf of Mexico.
RESULTS OF OPERATIONS
The following table sets forth certain operating information with respect
to our oil and gas operations.
THREE MONTHS ENDED
MARCH 31,
----------------------------
2002 2001
------------ ------------
PRODUCTION:
Oil (MBbls).............................................. 1,618 1,010
Gas (MMcf)............................................... 16,877 17,025
Oil and gas (MMcfe)...................................... 26,585 23,085
SALES DATA (In thousands) (a):
Oil...................................................... $33,931 $29,588
Gas...................................................... 46,599 113,406
Total oil and gas sales.................................. 80,530 142,994
AVERAGE SALES PRICES (a):
Oil (per Bbl)............................................ $20.97 $29.30
Gas (per Mcf)............................................ 2.76 6.66
Oil and gas (per Mcfe)................................... 3.03 6.19
EXPENSES (per Mcfe):
Normal lease operating expenses (b)...................... $0.55 $0.46
Salaries, general and administrative expenses............ 0.13 0.12
DD&A on oil and gas properties........................... 1.51 1.57
(a) Includes the effects of hedging
(b) Excludes major maintenance expenses
NET INCOME. Net income for the first quarter of 2002 totaled $6.3 million,
or $0.24 per share, compared to net income reported for the first quarter of
2001 of $39.3 million, or $1.49 per share.
PRICES. Prices realized during the first quarter of 2002 averaged $20.97
per barrel of oil and $2.76 per Mcf of gas compared to first quarter 2001
average realized prices of $29.30 per barrel of oil and $6.66 per Mcf of gas.
All unit pricing amounts include the effects of hedging. During the first
quarter of 2002, hedging transactions increased the average realized price we
received for gas by $0.34 per Mcf and increased the realized price of oil by
$0.48 per barrel. Hedging transactions in the first quarter of 2001 deceased the
average realized price of natural gas by $0.54 Mcf.
PRODUCTION. Oil production during the first quarter of 2002 increased 60%
to approximately 1,618,000 barrels compared to first quarter 2001 production of
1,010,000 barrels, while natural gas production during the first quarter of 2002
totaled approximately 16.9 Bcf, compared to first quarter 2001 gas production of
17.0 Bcf. On a natural gas equivalent basis, production volumes for the first
quarter of 2002 totaled 26.6 Bcfe compared to first quarter 2001 production of
23.1 Bcfe. The increase in production in the first quarter of 2002 is primarily
due to producing properties acquired from Conoco in December 2001.
OIL AND GAS REVENUES. As a result of lower realized prices, first quarter
2002 oil and gas revenues totaled $80.5 million, compared to first quarter 2001
oil and gas revenues of $143.0 million.
EXPENSES. Normal operating costs during the first quarter of 2002 increased
to $14.6 million, or $0.55 per Mcfe, compared to $10.7 million, or $0.46 per
Mcfe, for the comparable quarter in 2001. The increase in normal operating costs
is primarily attributable to the increase in the number of active properties. On
a sequential basis, normal operating costs per Mcfe decreased 3.5% from fourth
quarter 2001 normal operating costs of $0.57 per Mcfe.
Salaries and general and administrative expenses for the first quarter of
2002 totaled $3.4 million, or $0.13 per Mcfe, compared to first quarter 2001
amount of $2.7 million, or $0.12 per Mcfe. The higher salaries and general and
administrative expenses were primarily due to the increase in the number of
employees resulting from 2001's merger and acquisition activity. First quarter
2002 salaries and general and administrative expenses per unit, however, were
28% lower than the fourth quarter of 2001 salaries and general and
administrative expenses of $0.18 per Mcfe.
Depreciation, depletion and amortization (DD&A) expense on oil and gas
properties for the first quarter of 2002 totaled $40.2 million, or $1.51 per
Mcfe. DD&A expense was $36.2 million, or $1.57 per Mcfe, for the first quarter
of 2001.
As a result of the Conoco property acquisition, which was financed with
$200.0 million principal amount of 8 1/4% Senior Subordinated Notes due 2011 and
borrowings under the bank credit facility, interest expense for the first
quarter of 2002 was $5.5 million compared to $1.1 million during the first
quarter of 2001.
In connection with the February 2001 merger, during the first quarter of
2001, we incurred merger expenses of $25.5 million, or $0.97 per share.
In accordance with SFAS No. 109, "Accounting for Income Taxes," Stone has
determined its statutory federal income tax rate to be 35%. However in 2001, 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.
NEW ACCOUNTING STANDARDS
In July 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard (SFAS) No. 141, "Business
Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS
No. 141 prohibits the use of the pooling-of-interest method of accounting for
all business combinations initiated after June 30, 2001. SFAS No. 142 requires
that goodwill not be amortized in any circumstances and also requires goodwill
to be tested annually for impairment or when events or circumstances occur
between annual tests indicating that goodwill for a reporting unit might be
impaired. SFAS No. 142 establishes a new method for testing goodwill for
impairment based on a fair value concept and is effective for fiscal years
beginning after December 15, 2001. The adoption of SFAS Nos. 141 and 142 is not
expected to have a material impact on our financial statements, because we do
not have any goodwill recorded.
In July 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations," effective for fiscal years beginning after June 15,
2002. This statement will require us to record the fair value of liabilities
related to future asset retirement obligations in the period the obligation is
incurred. We expect to adopt SFAS No. 143 on January 1, 2003. Upon adoption, we
will be required to recognize cumulative transition amounts for existing asset
retirement obligation liabilities, asset retirement costs and accumulated
amortization. We have not yet determined the transition amounts.
HEDGING ACTIVITIES
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 hedge accounting treatment. If the instrument qualifies for hedge accounting
treatment, it is recorded as either an asset or liability measured at fair value
and subsequent changes in the derivative's fair value are recognized in equity
through other comprehensive income, to the extent the hedge is considered
effective. Instruments not qualifying for hedge accounting treatment are
recorded in the balance sheet at fair value and changes in fair value are
recognized in earnings.
Our natural gas swap contract is with a subsidiary of Enron Corp. Due to
Enron's financial difficulties, there is no assurance that we will receive full
or partial payment of any amounts that may become owed to us under this
contract. Accordingly, this swap no longer qualifies as an effective hedge under
SFAS No. 133. As a result, the change in fair value for each period is recorded
through earnings and amounts previously recorded in other comprehensive income
are amortized through earnings over the remaining life of the swap. For the
three months ended March 31, 2002, we recorded $0.4 million, after taxes,
relative to the amortization of other comprehensive income from the natural gas
swap contract.
During the first quarters of 2002 and 2001, we recognized $5.0 million and
$0.5 million, respectively, of non-cash derivative expense, a portion of which
represents the cost associated with put contracts that settled during the
respective periods. Also included in non-cash derivative expense for the three
months ended March 31, 2002 is a $0.6 million charge from amortization of other
comprehensive income and a $2.4 million loss related to the change in fair value
of the natural gas swap. At March 31, 2002, the unsettled put contracts were
recorded as assets totaling $8.2 million and the unsettled gas swap was recorded
as a liability totaling $8.2 million. All changes in fair values of the puts
were recorded in equity through other comprehensive income.
On April 3, 2002, we entered into additional oil put contracts with three
separate counter-parties totaling 12,000 barrels of oil per day at a price of
$25.00 per barrel. These contracts begin May 1, 2002 and extend through December
31, 2002. The cost of these contracts totaling $4.8 million will be charged to
earnings as the contracts settle. These contracts qualify as effective hedges
under SFAS No. 133.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOW. Net cash flow from operations before working capital changes for
the first quarter of 2002 was $54.1 million, or $2.04 per share, compared to
$96.7 million, or $3.66 per share, reported for the same period of 2001.
CAPITAL EXPENDITURES. Capital expenditures during the first quarter of 2002
totaled $55.4 million. First quarter 2002 capital expenditures included $2.5
million of capitalized salaries, general and administrative expenses and $2.1
million of capitalized interest. These investments were financed by cash flow
from operations, working capital and bank borrowings.
BUDGETED CAPITAL EXPENDITURES. Our current estimated 2002 capital
expenditures budget of approximately $200 million is allocated 96% to Gulf Coast
operations and 4% to Rocky Mountain activities. We expect to drill 50 gross
wells during 2002, 34 in the onshore and shallow water offshore regions of the
Gulf Coast Basin and 16 in the Rocky Mountains. While the 2002 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
expect cash flow from operations to be sufficient to fund the remaining 2002
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.
At March 31, 2002, we had $136 million of borrowings outstanding under our
bank credit facility. Letters of credit totaling $7.3 million have been issued
pursuant to the facility. During December 2001, we increased our credit facility
to $350 million. We currently have a loan base under the credit facility of $250
million with availability of an additional $97.7 million in borrowings as of May
6, 2002. The credit facility matures on December 20, 2004. Stone's borrowing
base under the credit facility, which is re-determined periodically, is based on
an amount established by the bank group for Stone's oil and gas properties.
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 of 1933 and Section 21E
of the Securities Exchange Act of 1934. The words "plan," "expect," "project,"
"estimate," "assume," "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.
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. In April 2002, we entered into additional oil put contracts to secure
what we believe to be an attractive floor price for a portion of our oil
production for the remainder of 2002. See Note 4 - Hedging Activities for a
detailed discussion of hedges in place to manage our exposure to oil and gas
price declines.
INTEREST RATE RISK
At March 31, 2002, Stone had long-term debt outstanding of $436 million. Of
this amount, $300 million, or 69%, bears interest at fixed rates averaging 8.4%.
The remaining $136 million of debt outstanding at March 31, 2002 bears interest
at a floating rate. Because the majority of our long-term debt at March 31, 2002
was at fixed rates, we consider our interest rate exposure at such date to be
minimal. At March 31, 2002, we had no open interest rate hedge positions to
reduce our exposure to changes in interest rates.
Since the filing of our 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.
PART II
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
*15.1 - Letter from Arthur Andersen LLP dated May 9, 2002,
regarding unaudited interim financial information.
* Filed herewith
(b) The following reports on Form 8-K were filed during the three
months ended March 31, 2002:
DATE OF EVENT REPORTED ITEM REPORTED
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February 14, 2002 Item 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 9, 2002 By: /s/James H. Prince
----------------------------
James H. Prince
Senior Vice President, Chief
Financial Officer and Treasurer
(Principal Financial Officer)