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, 1999
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 13, 1999 there were 15,085,408 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, 1999 and December 31, 1998.......... 1
Condensed Consolidated Statement of Operations
for the Three Months Ended
March 31, 1999 and 1998............................. 2
Condensed Consolidated Statement of Cash Flows
for the Three Months Ended
March 31, 1999 and 1998............................. 3
Notes to Condensed Consolidated
Financial Statements................................ 4
Auditors' Review Report............................... 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................... 8
PART II
Item 5. Other Information...................................... 11
Item 6. Exhibits and Reports on Form 8-K....................... 11
STONE ENERGY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(In thousands)
March 31, December 31,
Assets 1999 1998
------------------------ ----------------------
(Unaudited)
Current assets:
Cash and cash equivalents.................................... $12,987 $10,550
Marketable securities, at market............................. 17,009 16,853
Accounts receivable.......................................... 19,888 26,803
Other current assets......................................... 52 184
------------------------ ----------------------
Total current assets....................................... 49,936 54,390
Oil and gas properties, net:
Proved....................................................... 290,724 286,098
Unevaluated.................................................. 8,753 7,726
Building and land, net........................................... 3,810 3,559
Fixed assets, net................................................ 1,948 1,336
Other assets, net................................................ 3,363 3,460
Deferred tax asset............................................... 8,877 9,821
------------------------ ----------------------
Total assets............................................... $367,411 $366,390
======================== ======================
Liabilities and Stockholders' Equity
Current liabilities - accounts payable and
accrued liabilities.......................................... $39,897 $44,506
Long-term loans.................................................. 213,913 209,936
Other long-term liabilities...................................... 6,351 6,616
------------------------ ----------------------
Total liabilities.......................................... 260,161 261,058
------------------------ ----------------------
Common stock..................................................... 151 151
Additional paid in capital....................................... 119,380 119,208
Retained deficit................................................. (12,281) (14,027)
------------------------ ----------------------
Total stockholders' equity................................. 107,250 105,332
------------------------ ----------------------
Total liabilities and stockholders' equity $367,411 $366,390
======================== ======================
STONE ENERGY CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
Three Months Ended
March 31,
------------------------------------------------
1999 1998
-------------------- ---------------------
Revenues
Oil and gas production....................................... $30,490 $28,357
Overhead reimbursements and management fees 161 146
Other income................................................. 271 292
-------------------- ---------------------
Total revenues............................................. 30,922 28,795
-------------------- ---------------------
Expenses
Normal lease operating expenses.............................. 4,828 3,597
Major maintenance expenses................................... 100 455
Production taxes............................................. 515 532
Depreciation, depletion and amortization 17,688 15,217
Interest..................................................... 3,814 2,529
Salaries, general and administrative 1,077 1,072
Incentive compensation plan.................................. 210 275
-------------------- ---------------------
Total expenses............................................. 28,232 23,677
-------------------- ---------------------
Net income before income taxes................................... 2,690 5,118
-------------------- ---------------------
Provision for income taxes
Current...................................................... - -
Deferred..................................................... 944 1,820
-------------------- ---------------------
944 1,820
-------------------- ---------------------
Net income....................................................... $1,746 $3,298
==================== =====================
Earnings per common share (see Note 2):
Basic earnings per share..................................... $0.12 $0.22
==================== =====================
Diluted earnings per share................................... $0.11 $0.22
==================== =====================
Average shares outstanding................................... 15,078 15,061
==================== =====================
Average shares outstanding assuming dilution 15,281 15,319
==================== =====================
STONE ENERGY CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
(Unaudited)
Three Months Ended
March 31,
------------------------------------------------
1999 1998
-------------------- ---------------------
Cash flows from operating activities:
Net income...................................................... $1,746 $3,298
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, depletion and amortization 17,688 15,217
Provision for deferred income taxes 944 1,820
-------------------- ---------------------
20,378 20,335
Increase in marketable securities (156) (12,917)
Decrease in accounts receivable 6,915 509
Decrease in other current assets 110 106
Increase (decrease) in accrued liabilities (5,040) 3,814
Other................................................. (264) (18)
-------------------- ---------------------
Net cash provided by operating activities 21,943 11,829
-------------------- ---------------------
Cash flows from investing activities:
Investment in oil and gas properties........................... (22,592) (48,745)
Building additions and renovations............................. (274) -
(Increase) decrease in other assets ............................. (790) 1,095
-------------------- ---------------------
Net cash used in investing activities (23,656) (47,650)
-------------------- ---------------------
Cash flows from financing activities:
Proceeds from borrowings..................................... 4,000 35,000
Repayment of debt............................................ (22) (21)
Deferred financing costs...................................... - (152)
Exercise of stock options.................................... 172 228
-------------------- ---------------------
Net cash provided by financing activities 4,150 35,055
-------------------- ---------------------
Net increase (decrease) in cash and cash equivalents 2,437 (766)
Cash and cash equivalents, beginning of period 10,550 10,304
-------------------- ---------------------
Cash and cash equivalents, end of period $12,987 $9,538
==================== =====================
Supplemental disclosures of cash flow information: Cash paid during the period
for:
Interest (net of amount capitalized) $6,026 $4,756
Income taxes.............................................. - -
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, 1999 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, 1998. The results of operations for the three-month
period ended March 31, 1999 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
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 203,000 shares in the first
quarter of 1999 and 258,000 shares in the first quarter of 1998. Options which
were considered antidilutive because the exercise price of the options exceeded
the average price for the applicable period totaled approximately 7,800 shares
and 100 shares during the first quarters of 1999 and 1998, respectively.
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 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 13, 1999, are summarized as
follows:
Oil Gas
-------------------------- ---------------------------
Average Average
MBbls Price Bbtu Price
-------- ---------- ---------- -----------
Second quarter, 1999 300.7 $16.43 3,640 $2.195
Third quarter, 1999 340.4 16.34 4,600 2.211
Fourth quarter, 1999 - - 4,600 2.450
First quarter, 2000 - - 4,550 2.528
During the first quarter of 1999, the Company had 38% of its natural gas
production hedged at $2.535 per MMBTU. As a result, the Company realized a net
hedging gain of $2.4 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 May 1999, the Company's bank group increased the borrowing base under
the Company's bank credit facility from $120.0 million to $127.5 million. 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, 1999, the weighted-average interest rate of
the facility was 6.3% per annum, the total outstanding principal balance was
$111.0 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 the 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. For
the quarter ended March 31, 1999 and the year ended December 31, 1998, the
Company's only component of comprehensive income was net income. SFAS No. 131
requires that companies disclose segment data based on how management makes
decisions about allocating resources to segments and measuring their
performance. Because the Company operates in a single industry within a single
geographic location, the Company does not have separately identifiable segments
as defined under SFAS No. 131. SFAS Nos. 130 and 131 became effective and were
adopted by the Company during 1998 with no effect on the Company's financial
statements, financial position or results of operations.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The Statement establishes accounting and
reporting standards that require every derivative instrument (including certain
derivative instruments embedded in other contracts) to be recorded in the
balance sheet as either an asset or liability measured at its fair value and
that changes in the derivative's fair value be recognized currently in earnings
unless specific hedge accounting criteria are met. The Company expects to adopt
SFAS No. 133 during the first quarter of 2000. Because of the nature of the
Company's only derivative instrument, the Company does not expect that the
adoption of SFAS No. 133 will have a material impact on the Company's results of
operations. However, the adoption may create volatility in equity through
changes in other comprehensive income.
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, 1999, and the
related condensed consolidated statements of operations and cash flows for the
three-month periods ended March 31, 1999 and 1998. 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 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, 1998 (not presented herein), and, in our report dated March 2, 1999, 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, 1998, 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
May 3, 1999
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, exploration, 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, 1999 and 1998.
Three Months Ended
March 31,
-------------------------------------
1999 1998
------------- ---------------
Production:
Oil (MBbls)............. 830 638
Gas (MMcf).............. 9,918 7,310
Oil and gas (MMcfe)..... 14,898 11,138
Sales data (in thousands) (a):
Total oil sales......... $9,804 $10,285
Total gas sales......... 20,686 18,072
Average sales prices (a):
Oil (per Bbl)............ $11.81 $16.12
Gas (per Mcf)............ 2.09 2.47
Per Mcfe................. 2.05 2.55
Average costs (per Mcfe):
Normal lease operating
expenses (b)........... $0.32 $0.32
Salaries, general
and administrative..... 0.07 0.10
Depreciation, depletion
and amortization....... 1.17 1.35
(a) Net of the effects of hedging
(b) Excludes major maintenance expenses
For the first quarter of 1999, the Company reported net income totaling
$1.7 million or $0.11 per share, as compared to net income reported for the
first quarter of 1998 of $3.3 million, or $0.22 per share.
Production volumes of oil and gas during the first quarter of 1999,
compared to the 1998 quarter, rose 30% and 36%, respectively, totaling
approximately 830,000 barrels of oil and 9.9 billion cubic feet of gas. On a
thousand cubic feet of gas equivalent (Mcfe) basis, production rates for the
first quarter of 1999 were 34% higher than the comparative 1998 period. The
increase in production volumes from first quarter 1998 levels was primarily
attributable to the commencement of production from the E Platform at the South
Pelto Block 23 Field in November 1998 and production increases at the Vermilion
Block 255 and Clovelly Fields.
First quarter 1999 oil and gas revenues increased to $30.5 million, as
compared to first quarter 1998 oil and gas revenues of $28.4 million. Prices
during the first quarter of 1999 averaged $11.81 per barrel of oil and $2.09 per
Mcf of gas, as compared to averages of $16.12 per barrel and $2.47 per Mcf
received in the 1998 period. Stated on a Mcfe basis, prices received during the
quarter ended March 31, 1999 were 20% lower than the prices received during the
comparable 1998 period. Both total and unit revenue amounts include the effects
of hedging transactions.
Normal operating costs during the first quarter of 1999 increased to $4.8
million, as compared to $3.6 million during the 1998 period due to an increase
in the number of producing wells and higher production rates. However, on a unit
of production basis, first quarter 1999 operating costs were consistent with the
1998 quarter as costs totaled $0.32 per Mcfe during both quarterly periods.
General and administrative expenses totaled $1.1 million during the
first quarter of 1999 and the first quarter of 1998. On a unit basis, these
costs declined 30% during the 1999 quarter to $0.07 per Mcfe, as compared to
$0.10 per Mcfe during the 1998 period. Depreciation, depletion and amortization
("DD&A") expense on the Company's oil and gas properties increased to $17.4
million for the first three months of 1999, compared to $15.0 million for the
1998 period because of higher production rates and lower oil and gas prices.
However, unit DD&A expense for 1999's first quarter declined to $1.17 per Mcfe
versus $1.35 per Mcfe for the comparable 1998 period. As a result of the
increase in the Company's outstanding borrowings under its bank credit facility,
interest expense during the first quarter of 1999 increased to $3.8 million, as
compared to $2.5 million during the three month 1998 period.
LIQUIDITY AND CAPITAL RESOURCES
WORKING CAPITAL AND CASH FLOW. During late-1998, due in part to the oil and
gas price environment at the time, the Company adjusted its 1999 capital
expenditures budget to enable the Company to finance its 1999 drilling and
development plans with cash flow from operations and available borrowings under
its bank credit facility. Based upon the Company's outlook for 1999 oil and gas
prices and production rates, the Company believes that its cash flow from
operations, combined with the available borrowings under its bank credit
facility, will be sufficient to fund its current 1999 capital expenditures
budget. Working capital at March 31, 1999 totaled $10.0 million. Net cash flow
from operations before working capital changes for the first quarter of 1999 was
$20.4 million, compared to $20.3 million reported for the same period of 1998.
Capital expenditures during the first quarter of 1999 totaled $23.0
million and primarily consisted of exploration and development expenditures at
the Vermilion Block 255, Eugene Island Block 243 and Clovelly Fields. First
quarter 1999 capital expenditures included $1.4 million of capitalized general
and administrative costs. These investments were financed by a combination of
cash flow from operations and borrowings under the Company's bank revolver.
LONG-TERM FINANCING. In May 1999, the Company and its bank group
increased the borrowing base under the Company's bank credit facility from
$120.0 million to $127.5 million. 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,
1999, the weighted average interest rate of the facility was 6.3% per annum, the
total outstanding principal balance was $111.0 million and letters of credit
totaling $7.5 million had been issued pursuant to the facility.
The Company has a capital expenditures budget of approximately $61 million
for the last three quarters of 1999 for oil and gas properties it now owns.
Significant investments are planned at the Eugene Island 243, Vermilion Block
255, Vermilion Block 131 and Lake Hermitage Fields. The planned activities
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 believes that the level of its 1999 capital expenditures budget
provides flexibility for the Company to participate in opportunities on new
properties. The Company is currently evaluating a significant number of
potential acquisitions, 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 projects.
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
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 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.
YEAR 2000 COMPLIANCE. The Year 2000 ("Y2K") issue is the result of
computerized systems being written to store and process the year portion of
dates from and after January 1, 2000 without critical systems failure. During
1998, the Company's executive management and Board of Directors implemented a
program to identify, evaluate and address the Company's Y2K risks to ensure that
its Information Technology ("IT") Systems and Non-IT Systems will be Y2K
compliant. The Company, with the assistance of outside consultants, completed
the evaluation of its IT Systems for Y2K compliance and began replacing or
modifying non-compliant systems during the first quarter of 1999. The Company
expects to have all non-compliant IT Systems replaced or modified to Y2K
compliant systems by the end of the second quarter of 1999.
Regarding the Company's Non-IT Systems, which primarily consist of systems
with embedded technology, the Company has completed its preliminary assessment
of all date-sensitive components. Based upon this assessment, the Company has
determined that there will be minimal modification required to become Y2K
compliant. The Company expects to have replaced or modified all non-compliant
Non-IT Systems by the end of the second quarter of 1999. Costs incurred as of
March 31, 1999, and estimated remaining costs related to Y2K compliance total
approximately $15,000. In addition to the expensed Y2K compliance costs, the
Company capitalized a total of $0.8 million of costs related to computer
hardware and software upgrades during the fourth quarter of 1998 and the first
quarter of 1999. The upgrades were necessary due to the growth in the Company's
number of employees and level of operations over the past 24 months. All
upgrades were Y2K compliant.The Company does not separately track internal
payroll costs incurred for employees involved in the Y2K compliance effort.
Based on preliminary risk assessments, the Company believes the most
likely Y2K related failure would be a temporary disruption in certain materials
and services provided by third parties, which would not be expected to have a
material adverse effect on the Company's financial condition or results of
operations. As part of its assessment of the Y2K risk associated with third
parties' systems, the Company has contacted its material suppliers and customers
to determine their level of Y2K compliance. The Company expects to complete its
assessment by the end of the second quarter of 1999. While the Company believes
that the probability of the occurance of a disruption is low, the Company will
develop specific contingency plans to address certain risk areas, as needed.
There can be no assurance that the Company will not be materially adversely
affected by Y2K problems or related costs.
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, the
assessment of the Company's Year 2000 compliance, 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 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 factors as disclosed under "Risk Factors" and
elsewhere in the Company's 1998 Annual Report on Form 10-K as filed with the
Securities and Exchange Commission. Should one or more of these risks or
uncertainties occur, or should underlying assumptions prove incorrect, the
Company's actual results and plans for 1999 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:
On May 4, 1999, the Company announced that during April 1999, its estimated
net average daily production rates were approximately 107 million cubic feet of
gas and 8,700 barrels of oil, and that it realized sales prices which averaged
approximately $2.07 per Mcf of gas and $15.91 per barrel of oil. The prices
include the effects of hedging contracts. In addition, the Company reported that
it has a 1999 capital expenditures budget of $84.1 million for properties it
owns and that through April 1999, it had completed seven drilling operations
resulting in six successful wells and one dry hole with two wells in progress.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 10.1- Amendment and Restatement No. 2 of the Third
Amended and Restated Credit Agreement between the
Registrant, the financial institutions named therein and
NationsBank, N.A., as Agent, dated as of May 3, 1999.
(b) Exhibit 27.1- Financial Data Schedule
(c) There were no reports on Form 8-K filed for the three months
ended March 31, 1999.
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 13, 1999 By: /s/ Michael L. Finch
-----------------------
Michael L. Finch
Executive Vice President and
Chief Financial Officer
(Authorized Officer and Principal
Financial Officer)