Stone Energy Corporation (SGY)

Q3 2012 Earnings Call

November 7, 2012 11:00 AM ET

Executives

David Welch – Chairman, President and CEO

Ken Beer – EVP and CFO

Analysts

Mike Glick – Johnson Rice

Adam Lawlis – Simmons & Company

Sam Culbert – University of California

Curtis Trimble – Global Hunter Securities

Jeb Bachmann – Howard Weil

Hubert van der Heijden – Tudor Pickering Holt

Presentation

Operator

Good morning, ladies and gentlemen. My name is Carla and I will be your conference operator for today. At this time, I would like to welcome everyone to the Stone Energy Third Quarter 2012 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks today, there will be a question-and-answer session. (Operator Instructions)

I do thank you for joining us. Mr. David Welch, Chairman, President and CEO, will now take over the call.

David Welch

Okay. Thank you very much, Carla, and welcome everyone to our third quarter earnings conference call. Joining us this morning is Ken Beer, who is our Executive Vice President and Chief Financial Officer. Ken is going to hit some of the financial highlights and then turn it back over to me for an update on some operational results and progress toward executing our strategy to invest in margin-advantaged natural gas basins and world-class oil basins. We’ll then be happy to take your questions.

So Ken, I’ll turn it to you, please.

Ken Beer

Thank you, Dave. I’ll start with forward-looking statements. In this conference call, we may make forward-looking statements within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934. These forward-looking statements are subject to all the risks and uncertainties normally incident to the exploration for and development and production of oil and natural gas. We urge you to read our 2011 Annual Report on Form 10-K and the most recent 10-Q that we filed for a discussion of the risks that could cause our actual results to differ materially from any of those forward-looking statements we may make today.

In addition, in this call, we may refer to financial measures that may be deemed non-GAAP measures, as defined under the Act. Please refer to the press release we issued yesterday, which is posted on our website for a reconciliation of the differences between these financial measures and the most directly comparable GAAP financial measures. And with that, I will move forward rather than go through in detail. I’ll assume that the people have seen the release and focused on selected items.

First, discretionary cash flow for the quarter was $143 million or about $2.90 per share and earnings for the quarter were about $27 million, or $0.48 per share. Cash flow was about $0.20 above first call average estimates, while earnings were about $0.05 or so under.

Production for the quarter came in at just under 42,000 barrel equivalents a day, or 251 million cubic feet a day which was well above the upper end of our adjusted guidance of 38,000 to 40,000 barrels a day provided after Hurricane Isaac in early September. The increase in volumes from Appalachia and from the incremental Pompano working interest purchased from Anadarko in late June helped to more than offset the shut-ins caused by Hurricane Isaac.

As is noted in the release, the fourth quarter guidance increased to 42,500 to 45,000 barrel equivalents per day or about 255 million to 270 million cubic feet equivalent a day as Appalachia continues to incline bolstered by the volumes from the second La Cantera deep gas well.

The third quarter production mix continue to have an effect of oil and liquids weighting with about 45% oil, 9% NGLs, and 46% natural gas. We would expect a slight shift for gas in the fourth quarter as incremental volumes from Appalachia and La Cantera #2 are more gas oriented.

The average price realization for the third quarter 2012 was just under $10 per Mcfe or about $59 per Boe helped by continued strong realized oil pricing and positive oil and gas hedges. The Louisiana sweet to WTI differential was about $15 per barrel in the quarter. And this should continue to bolster our overall oil price realization as substantially all of our current oil production is Louisiana sweet crude. This does help offset the current weak gas and NGL pricing.

On the cost side, our LOE came in at $61 million for the third quarter. The LOE was a little higher than expected due to higher seasonal major maintenance work and incremental LOE from the working interest acquired from Anadarko in June and some added expense from Hurricane Isaac. The LOE associated with our increasing Marcellus volumes are inclining as well. However, we would expect both the absolute figure and the per unit cost to decrease in the fourth quarter as the seasonal major maintenance drops off or the much of the actual cost from Isaac will flow through in the fourth quarter.

Accordingly, we’re adjusting our annual LOE guidance up to $210 million to $215 million that range, to account for the extra Isaac cost and the incremental Pompano LOE. The transportation, processing and gathering expenses are tracking within our guidance of $22 million to $28 million as the fourth quarter should continue to incline slightly with the increasing volumes.

And our G&A before incentive comp is running about $13.5 million per quarter as we have seen increases in personnel, particularly as we step up in our deepwater efforts. Additionally, there is a higher amount of non-cash stock vesting accretion that is hitting the G&A line this year.

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