Stone Energy abandons Rocky Mountain properties, returns to Gulf

New Orleans CityBusiness, Jun 16, 2008 by Richard A Webster

For Stone Energy Corp., 2007 will be viewed as the year it saved itself from oblivion. The question now remains whether the fix was permanent or temporary.

"Stone Energy had fallen on hard times for quite a long period of time," said Sheraz Mian, an analyst with Zacks Equity Research in Chicago. "Up to the beginning of last year, it was pretty much on the block for anybody to come and buy it. But a change in strategy and the apparent ability of management in the eyes of the market to execute that strategy was the one key element which has benefited the stock over the past year."

Stone Energy divested itself of recent acquisitions in a move to refocus on its original Gulf Coast area. Last year it sold its Rocky Mountain properties for $578 million and purchased for $1.8 billion Bois d'Arc Energy, which had a considerable presence in the Gulf of Mexico.

"We believe that the combination of (Stone and Boise d'Arc) will lead to the formation of one of the largest Gulf of Mexico-focused operating companies," Mian said.

The moves pushed Stone's earnings per share from 38 cents in first quarter 2007 to $2.22 in first quarter 2008, a 484 percent increase. Its net income increased from $10.5 million to $62.2 million, a 492 percent increase.

"Stone is a strong exploitation and development company and combined with Bois d'Arc's outstanding inventory of shelf exploration projects, the combined company will be a leading Gulf of Mexico producer," said Stone Energy CEO David Welch.

Stone Energy has come a long way since 2006 when it was on the verge of being purchased by a number of companies including Energy Partners Ltd. But Mian questions the long-term viability of its recent moves.

"I wasn't happy with the fact that they divested their Rockies assets," Mian said. "The Rockies have a long reserve life and keep pumping gas for a number of years longer than in the Gulf of Mexico. So by divesting those assets they were further shrinking and reducing their reserve lines and increasing their reliance on the relatively high-cost and low-reserve life of the Gulf Coast region."

The acquisition of Boise d'Arc improves Stone Energy's long-term prospects, but Mian remains skeptical given the company's track record, the quality of its asset base and the number of major near- term challenges it faces.

"Lack of production-growth visibility, above peer-group-average unit costs, high natural decline rates and weak reserve lives remain some of the major challenges," Mian said. "Its unit finding and development costs and other operating expenses are also one of the highest in our coverage universe. While oilfield cost inflation is an industrywide issue, it is particularly significant for small operators like Stone."