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, 1998
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: (318) 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 12, 1998 there were 15,063,408 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, 1998 and December 31, 1997........... 1
Condensed Consolidated Statement of Operations
for the Three Months Ended March 31, 1998 and 1997... 2
Condensed Consolidated Statement of Cash Flows
for the Three Months Ended March 31, 1998 and 1997... 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 5. Other Information........................................ 10
Item 6. Exhibits and Reports on Form 8-K......................... 11
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STONE ENERGY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(In thousands)
March 31, December 31,
Assets 1998 1997
----------------- -----------------
(Unaudited)
Current assets:
Cash and cash equivalents.................................... $9,538 $10,304
Marketable securities, at market............................. 32,857 19,940
Accounts receivable.......................................... 22,223 22,731
Other current assets......................................... 56 176
----------------- -----------------
Total current assets....................................... 64,674 53,151
Oil and gas properties, net:
Proved....................................................... 295,237 274,116
Unevaluated.................................................. 33,137 17,304
Building and land, net .......................................... 3,516 3,538
Fixed assets, net................................................ 1,145 1,089
Other assets, net................................................ 3,779 4,946
----------------- -----------------
Total assets............................................... $401,488 $354,144
================= =================
Liabilities and Stockholders' Equity
Current liabilities - accounts payable and
accrued liabilities.......................................... $51,861 $44,823
Long-term loans.................................................. 167,002 132,024
Deferred tax liability........................................... 20,479 18,659
Other long-term liabilities...................................... 1,982 2,001
----------------- -----------------
Total liabilities.......................................... 241,324 197,507
----------------- -----------------
Common stock..................................................... 151 150
Additional paid in capital....................................... 119,111 118,883
Retained earnings................................................ 40,902 37,604
----------------- -----------------
Total stockholders' equity................................. 160,164 156,637
----------------- -----------------
Total liabilities and stockholders' equity................. $401,488 $354,144
================= =================
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STONE ENERGY CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
Three Months Ended
March 31,
------------------------------------------
1998 1997
----------------- -----------------
Revenues
Oil and gas production....................................... $28,357 $15,809
Overhead reimbursements and management fees.................. 146 124
Other income................................................. 292 304
----------------- -----------------
Total revenues............................................. 28,795 16,237
----------------- -----------------
Expenses
Normal lease operating expenses.............................. 3,597 1,904
Major maintenance expenses................................... 455 83
Production taxes............................................. 532 845
Depreciation, depletion and amortization..................... 15,217 6,078
Interest..................................................... 2,529 426
Salaries, general and administrative......................... 1,072 891
Incentive compensation plan.................................. 275 162
----------------- -----------------
Total expenses............................................. 23,677 10,389
----------------- -----------------
Net income before income taxes................................... 5,118 5,848
----------------- -----------------
Provision for income taxes
Current...................................................... - -
Deferred..................................................... 1,820 2,252
----------------- -----------------
1,820 2,252
----------------- -----------------
Net income....................................................... $3,298 $3,596
================= =================
Earnings per common share (see Note 2):
Basic earnings per share..................................... $0.22 $0.24
================= =================
Diluted earnings per share................................... $0.22 $0.24
================= =================
Average shares outstanding................................... 15,061 15,015
================= =================
Average shares outstanding assuming dilution................. 15,319 15,198
================= =================
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STONE ENERGY CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
(Unaudited)
Three Months Ended
March 31,
-----------------------------------------
1998 1997
----------------- ----------------
Cash flows from operating activities:
Net income.................................................... $3,298 $3,596
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, depletion and amortization............... 15,217 6,078
Provision for deferred income taxes.................... 1,820 2,252
----------------- ----------------
20,335 11,926
Increase in marketable securities...................... (12,917) (13,128)
Decrease in accounts receivable........................ 509 2,643
Decrease in other current assets....................... 106 77
Increase in accrued liabilities........................ 3,814 1,253
Other.................................................. (18) 29
----------------- ----------------
Net cash provided by operating activities........................ 11,829 2,800
----------------- ----------------
Cash flows from investing activities:
Investment in oil and gas properties.......................... (48,745) (17,106)
Building additions and renovations............................ - (178)
(Increase) decrease in other assets .......................... 1,095 (165)
----------------- ----------------
Net cash used in investing activities............................ (47,650) (17,449)
----------------- ----------------
Cash flows from financing activities:
Proceeds from borrowings...................................... 35,000 13,000
Repayment of debt............................................. (21) (14)
Deferred financing costs...................................... (152) -
Exercise of stock options..................................... 228 -
Expenses for common stock offering............................ - (104)
----------------- ----------------
Net cash provided by financing activities........................ 35,055 12,882
----------------- ----------------
Net decrease in cash............................................. (766) (1,767)
Cash balance beginning of period................................. 10,304 9,864
----------------- ----------------
Cash balance end of period....................................... $9,538 $8,097
================= ================
Supplemental disclosures of cash flow information: Cash paid during the period
for:
Interest (net of amount capitalized)....................... $4,756 $414
Income taxes............................................... - -
----------------- ----------------
Total......................................................... $4,756 $414
================= ================
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STONE ENERGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - INTERIM FINANCIAL STATEMENTS
The condensed consolidated financial statements of Stone Energy
Corporation (the "Company") at March 31, 1998 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 the Company's Annual Report on Form 10-K for
the year ended December 31, 1997. The results of operations for the three-month
period ended March 31, 1998 are not necessarily indicative of future financial
results. Certain prior year amounts have been reclassified to conform to current
year presentation.
NOTE 2 - EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 ("SFAS No. 128"), "Earnings Per
Share," which simplifies the computation of earnings per share ("EPS"). The
Company adopted SFAS No. 128 in the fourth quarter of 1997 and restated prior
periods' EPS data as required by SFAS No. 128. All EPS data in the financial
statements and accompanying footnotes reflects the adoption of SFAS No. 128.
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 certain employees which totaled approximately 258,000 shares in the first
quarter of 1998 and 183,000 shares in the first quarter of 1997. Options which
were considered antidilutive as a result of the exercise price of the options
exceeding the average price for the applicable period were immaterial during the
first quarters of 1998 and 1997.
NOTE 3 - HEDGING ACTIVITIES
In order to reduce its exposure to the possibility of declining oil and
gas prices, from time to time the Company hedges with third parties certain of
its crude oil and natural gas production in various swap agreement contracts.
The crude oil contracts are tied to the price of NYMEX light sweet crude oil
futures and are settled monthly based on the differences between contract prices
and
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the average NYMEX prices for that month applied to the related contract volumes.
Settlement for gas swap contracts is based on the average closing prices of
either the last three days or last full month of trading on the NYMEX for each
month of the swap.
The Company's forward positions as of May 12, 1998, are summarized as
follows:
Oil Gas
---------------------- --------------------
Average Average
MBbls Price Bbtu Price
--------- --------- -------- ----------
Second quarter, 1998 36 $21.15 1,050 $2.574
Third quarter, 1998 -- -- 2,300 $2.633
During the first quarter of 1998, the Company had 17% of its crude oil
production hedged at $21.58 per barrel and 26% of its natural gas production
hedged at $2.94 per MMBTU. As a result, the Company realized a net oil and gas
hedging gain of $1.9 million, which was recorded in the accompanying condensed
consolidated statement of operations as an increase of revenues from oil and gas
production.
NOTE 4 - LONG-TERM LOANS
In March 1998, the Company and its bank group increased the size of the
Company's credit facility to $150 million, increased the borrowing base under
the revolving credit loan (the "Revolver") from $55 million to $120 million and
extended the term of the Revolver by one year to July 30, 2001. The borrowing
base limitation is based on a borrowing base amount established by the banks for
the Company's oil and gas properties. Interest under the Revolver is payable
quarterly and, at March 31, 1998, the weighted average interest rate of the
facility was 6.4% per annum, the total outstanding principal balance was $64
million and letters of credit totaling $7.5 million had been issued pursuant to
the facility.
NOTE 5 - NEW ACCOUNTING STANDARDS
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income" and SFAS No. 131, "Disclosures About Segments of an Enterprise and
Related Information." SFAS No. 130 establishes standards for reporting and
display of comprehensive income in the financial statements. Comprehensive
income is the total of net income and all other non-owner changes in equity.
SFAS No. 131 requires that companies disclose segment data based on how
management makes decisions about allocating resources to segments and measuring
their performance. SFAS Nos. 130 and 131 are effective for 1998. The Company
adopted these standards in 1998 with no effect on the Company's financial
statements, financial position or results of operations.
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AUDITORS' REVIEW REPORT
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, 1998, and
the related condensed consolidated statements of operations and cash flows for
the three-month periods ended March 31, 1998 and 1997. 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
the financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit in
accordance with generally accepted auditing standards, 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 generally accepted accounting principles.
We have previously audited, in accordance with generally accepted
auditing standards, the balance sheet of Stone Energy Corporation as of December
31, 1997 (not presented herein), and, in our report dated March 2, 1998, we
expressed an unqualified opinion on that statement. In our opinion, the
information set forth in the accompanying condensed consolidated balance sheet
as of December 31, 1997, is fairly stated, in all material respects, in relation
to the balance sheet from which it has been derived.
ARTHUR ANDERSEN LLP
New Orleans, Louisiana
April 30, 1998
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Stone Energy Corporation is an independent oil and gas company engaged in
the development, acquisition and operation of oil and gas properties onshore and
offshore in the Gulf Coast Basin. The Company and its predecessors have been
active in the Gulf Coast Basin since 1973, which gives the Company extensive
geophysical, technical and operational expertise in this area. The Company's
business strategy is to increase production, cash flow and reserves through the
acquisition and development of mature properties located in the Gulf Coast
Basin.
RESULTS OF OPERATIONS
The following table sets forth certain operating information with
respect to the oil and gas operations of the Company for the three-month periods
ended March 31, 1998 and 1997.
Three Months Ended
March 31,
------------------------------------------
1998 1997
----------------- -----------------
Production:
Oil (MBbls).................................................. 638 349
Gas (MMcf)................................................... 7,310 2,979
Oil and gas (MBOE)........................................... 1,856 846
Sales data (in thousands)(a):
Total oil sales.............................................. $10,285 $7,559
Total gas sales.............................................. 18,072 8,250
Average sales prices(a):
Oil (per Bbl)................................................ $16.12 $21.66
Gas (per Mcf)................................................ 2.47 2.77
Per BOE...................................................... 15.28 18.69
Average costs (per BOE):
Normal lease operating expenses (b).......................... $1.94 $2.25
Salaries, general and administrative......................... 0.58 1.05
Depreciation, depletion and amortization..................... 8.09 7.03
(a) Net of the effects of hedging
(b) Excludes major maintenance expenses
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For the first quarter of 1998, the Company reported net income totaling
$3.3 million, as compared to net income reported for the first quarter of 1997
of $3.6 million. On a diluted per share basis, first quarter net income was
$0.22 in 1998 and $0.24 in 1997.
In December 1997, production commenced from the Company's D platform at
its South Pelto Block 23 Field. This new production, combined with increases at
Vermilion Block 46 and Eugene Island Block 243 and the acquisition of Vermilion
Block 255 in mid-1997, resulted in an increase in first quarter 1998 production
volumes of 119%, on a BOE basis, over the production volumes during the
comparable 1997 period. First quarter 1998 production volumes of both oil and
gas, compared to the 1997 quarter, rose 83% and 145% respectively, totaling 638
MBbls of oil and 7,310 of MMcf of gas.
First quarter 1998 oil and gas revenues rose 79% to $28.4 million, as
compared to first quarter 1997 oil and gas revenues of $15.8 million. The
average prices received for oil and natural gas during the three months ended
March 31, 1998, were $16.12 per barrel and $2.47 per Mcf, as compared to $21.66
per barrel and $2.77 per Mcf received during the year ago period. Stated on a
BOE basis, unit prices for the first quarter of 1998 declined 18% from 1997's
first quarter. Oil and gas revenues and unit prices for the first quarter of
1998 are net of a hedging gain of $1.9 million, while the comparable 1997
amounts are net of a hedging loss of $0.8 million.
Operating costs for the first quarter of 1998 increased in total to
$3.6 million, as compared to $1.9 million during the first three months of 1997
due to an increase in the number of properties and significantly higher
production rates. Stated on a unit of production basis, however, such costs
declined 14% to $1.94 per BOE for the three-month period ended March 31, 1998,
from $2.25 per BOE for the first quarter of 1997.
General and administrative expenses increased to $1.1 million during the
first quarter of 1998, as compared to $0.9 million during the 1997 quarter, due
to the overall increase in the Company's operations. On a unit basis, however,
these costs decreased 45% to $0.58 per BOE in the first quarter of 1998 as
compared to $1.05 per BOE in the 1997 quarter. Depreciation, depletion and
amortization expense increased to $15.0 million for the first three months of
1998 from $5.9 million for the same 1997 period because of higher production
rates, increased investment in the properties and lower quarter-end oil and gas
prices. As a result of the Company's increased borrowings under its bank credit
facility and the issuance in September 1997 of $100 million 8-3/4% Senior
Subordinated Notes, interest expense for the three-month period ended March 31,
1998, increased to $2.5 million, as compared to $0.4 million for the first
quarter of 1997.
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LIQUIDITY AND CAPITAL RESOURCES
WORKING CAPITAL AND CASH FLOW. Working capital at March 31, 1998 was
$12.8 million. The Company believes that the available borrowings under its
recently increased bank credit facility (as described below) combined with the
expected cash flow from its increased production levels will be sufficient to
fund its working capital needs for the foreseeable future. Net cash flow from
operations before working capital changes for the first quarter of 1998 was
$20.3 million, representing an increase of 71% from the $11.9 million reported
for the same period of 1997. On a diluted per share basis, net cash flow was
$1.33 in the first quarter of 1998 and $0.78 in the first quarter of 1997.
During the first quarter of 1998, the Company invested $52 million in
its oil and gas properties as compared to $24 million in the comparable period
of 1997. First quarter 1998 investments included the acquisition of a 37.5%
working interest in the East Cameron Block 64 Field for $12.7 million and
exploration and development expenditures at the South Pelto Block 23 Field
totaling approximately $15.6 million. First quarter 1998 investments also
included $1.2 million of capitalized general and administrative and interest
costs.
LONG-TERM FINANCING. In March 1998, the Company and its bank group
increased the size of the Company's bank credit facility to $150 million,
increased the borrowing base under the Revolver from $55 million to $120 million
and extended the term of the Revolver by one year to July 30, 2001. The
borrowing base limitation is based on a borrowing base amount established by the
banks for the Company's oil and gas properties. The increased Revolver capacity
will provide the Company with a source of capital to partially finance its 1998
capital expenditures budget. Interest under the Revolver is payable quarterly
and, at March 31, 1998, the weighted average interest rate of the facility was
6.4% per annum, the total outstanding principal balance was $64 million and
letters of credit totaling $7.5 million had been issued pursuant to the
facility.
The near-term outlook for oil and gas prices is below 1997 levels, and
a recent review of 1998 development plans resulted in certain minor
modifications to the capital expenditures budget for the remainder of the year.
The Company has budgeted approximately $85 million for the last three quarters
of 1998 for expenditures on oil and gas properties it now owns. Significant
investments are planned at Eugene Island Block 243, South Pelto Block 23,
Vermilion Block 255 and Clovelly. The planned development operations include
projects which seek to increase cash flow from proved reserves and provide
additions to the Company's reserve base. It is anticipated that these
investments will be funded from a combination of available working capital, cash
flow from operations and borrowings under the bank credit facility.
The Company is in the process of evaluating a number of opportunities
to acquire reserves, although no future acquisitions can be assured. One or a
combination of certain of these possible transactions could fully utilize the
sources of capital currently available to the Company. If these opportunities
materialize, the Company intends to explore a variety of options to finance
these new
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projects, including nonrecourse financing, sales of non-strategic properties and
joint venture financing.
In attempting to maximize stockholder value, the Company will continue
to contrast and compare the cost of debt financing with the potential dilution
of equity offerings. The Company's goal is to maintain a relatively low level of
bank debt because of the volatility of oil and gas prices.
Although the Company has no current plans to access the public markets
for purposes of entering into an underwritten equity financing, it would
consider such funding sources if the amount of capital needed for its
acquisition and development activities increased significantly or if total debt
reached an unacceptable level. Availability of these sources of capital and the
Company's ability to access new opportunities will depend upon a number of
factors, some of which are beyond the control of the Company.
FORWARD-LOOKING STATEMENTS. Certain of the statements in this Form 10-Q
are "forward-looking statements" within the meaning of Section 27A of the
Securities Act and Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). All statements other than statements of historical
facts included in this Form 10-Q, regarding budgeted capital expenditures,
increases in oil and gas production, the Company's financial position, business
strategy and other plans and objectives for future operations, are
forward-looking statements. Although the Company believes that the expectations
reflected in such forward-looking statements are reasonable, it can give no
assurance that such expectations will prove to have been correct. Important
factors that could cause actual results to differ materially from the Company's
expectations are disclosed under "Risk Factors" and elsewhere in the Company's
1997 Form 10-K. Should one or more of these risks or uncertainties occur, or
should underlying assumptions prove incorrect, the Company's actual results and
plans for 1998 and beyond could differ materially from those expressed in
forward-looking statements. All subsequent written and oral forward-looking
statements attributable to the Company or persons acting on its behalf are
expressly qualified in their entirety by such factors.
PART II
ITEM 5. OTHER INFORMATION
The following is a summary of certain of the Company's recent
activities:
In December 1995, Goodrich Leasehold L.L.C. and Goodrich Drillers
L.L.C. filed a civil action against the Company in an attempt to set aside a
Farmout Agreement affecting portions of the West Flank of the Weeks Island Field
in Iberia Parish, Louisiana. This case was tried in Harris County, Texas, and on
March 12, 1998, the jury found in favor of the Company. The Company does not
anticipate an appeal by either party.
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In April 1998, the Company entered into a swap transaction to reduce
the price volatility for future gas production. Under the agreement, the Company
hedged 25,000 MMBTU per day of gas production from June to September 1998 at a
price of $2.63 per MMBTU.
On May 5, 1998, the Company announced the results of recently-completed
exploration and development activities, and reported the status of operations in
progress. Among the results reported, the Company announced that the No. 28
(E-2) Well at South Pelto Block 23 accomplished its primary objective of
confirming the Company's interpretation of the limits of the fields principle
pay sands. The well, which encountered 113 feet of net pay in five oil sands and
one gas sand, is being sidetracked to test the Tuna Prospect with first
production expected during the third quarter of 1998 following the installation
of the E Platform. Other events reported included the completion of drilling on
the No. A-6 Well at Eugene Island Block 243, the Provost Cyr No. 8 Well at the
Weeks Island Field and the Exxon et al No. 1 Well at the Clovelly Field. The No.
A-6 Well encountered 81 net feet of gas pay in three sands and first production
is expected in June 1998. The Provost Cyr No. 8 Well was unsuccessful and was
abandoned as a dry hole while the Exxon et al No. 1 Well encountered an
aggregate of 80 net feet of pay with first production expected in May 1998.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 10.1- First Amendment and Restatement of the Third
Amended and Restated Credit Agreement between the Registrant,
the financial institutions named therein and NationsBank of
Texas, N.A., as Agent, dated as of March 31, 1998.
(b) Exhibit 15.1- Letter from Arthur Andersen LLP dated May 12,
1998, regarding unaudited interim financial information.
(c) Exhibit 27.1- Financial Data Schedule
(d) There were no reports on Form 8-K filed for the three months
ended March 31, 1998.
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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 thereunto duly authorized.
STONE ENERGY CORPORATION
Date: May 12, 1998 By: /s/ Michael L. Finch
-----------------
Michael L. Finch
Executive Vice President and
Chief Financial Officer
(Authorized Officer and Principal
Financial Officer)
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