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Summary: Due Diligence Report: SGY Falls off S&P SmallCap 600; Future Unpredictable
Stone Energy Corporation, incorporated on March 15, 1993, is an independent oil and natural gas company. The Company is engaged in the acquisition, exploration, exploitation, development and operation of oil and gas properties. The Company operates in the Gulf of Mexico (GOM) basin. The Company has leveraged its operations in the GOM conventional shelf and has its reserve base in the prolific basins of the GOM deep water, Gulf Coast deep gas, and the Marcellus and Utica shales in Appalachia. Its estimated proved oil and natural gas reserves are approximately 60 million barrels of oil equivalents (MMBoe) or 340 billion cubic feet equivalent (Bcfe). Approximately 95 MMBoe or 570 Bcfe of its estimated proved reserves are revised downward. Its subsidiaries are Stone Energy Offshore, L.L.C. (Stone Offshore), Stone Energy Holding, L.L.C., Stone Energy Canada, U.L.C, SEO A LLC and SEO B LLC.
The Company has made investments in seismic data and leasehold interests, and has geological, geophysical, engineering and operational operations in the deep water arena to evaluate potential exploration, development and acquisition opportunities. The Company holds over two deep water platforms, producing reserves and numerous leases. The Company has a portfolio of deep water projects ranging from lower risk development projects incorporating existing facilities to higher risk exploration prospects that would require a new production facility. Its deep water properties account for approximately 90% of its estimated proved oil and natural gas reserves on a volume equivalent basis. The Gulf Coast deep gas play (prospects below 15,000 feet) provides it with high potential exploration opportunities with existing infrastructure nearby, which shortens the lead time to production. The Company has made over two onshore, south Louisiana, deep gas discoveries and a GOM shelf deep gas discovery. Its conventional shelf and deep gas properties account for approximately 9% of its estimated proved oil and natural gas reserves on a volume equivalent basis.
The Company has operations in Appalachia to execute the acreage acquisition, drilling and production of this resource play. The Company has leasehold interests in the Appalachia regions of Pennsylvania and West Virginia, and holds leasehold interests in approximately 89,000 net acres and has completed over 140 wells. In addition to the Marcellus shale, it has development opportunities in the Utica shale on most of its acreage position. Its Appalachian properties account for approximately 58% of its estimated proved oil and natural gas reserves on a volume equivalent basis.
Stone Energy Corporation has a current market capitalization of $45.00 with 56.85 M outstanding shares. Its daily average volume traded is 5.44 M shares.
Financial Highlights (Q4 2015):
Revenue: 110.50 M
Gross Profit: 86.13 M
Net Income: -318.66 M
Cash and Cash Equivalents: 10.76 M
Total Debt: 1060.95 M
Recent News and Analysis:
The company recently announced that Quorum Health Corporation (NYSE:QHC) will replace Stone Energy Corp. (SGY) in the S&P SmallCap 600 after the close of trading on Monday, May 2. S&P MidCap 400 constituent Community Health Systems (CYH) is spinning off Quorum Health in a transaction expected to be completed on Friday, April 29. Post spin-off, Community Health Systems will remain in the S&P MidCap 400. Stone Energy is ranked near the bottom of the S&P SmallCap 600 and is no longer appropriate for that index.
Stone Energy Corporation had announced on April 14, 2016 that banks had severely cut its borrowing base. Imperial Capital’s Kim Pacanovsky downgraded the rating for the company from In-Line to Underperform, while reducing the price target from $1.25 to $0.50. The analyst mentioned that following the massive shrinking of its borrowing base, Stone Energy had “little hope for a recovery,” apart from there being a quick and large rebound in crude pricing. The revised price target reflects downside of about 50 percent from the recent share price. The company’s borrowing base has been reduced by $200mn to $300mn. In anticipation of the cut, Stone Energy had on March 10 already borrowed the entire funds available on its former borrowing base. Therefore, the company’s borrowings now exceed the new base by $175mn. “After paying down the overage, incorporating an $18.3mn Letter of Credit, an $11.8mn building loan, and addressing the 2017 maturity, we estimate that the company will be left with $53mn of liquidity,” analyst Kim Pacanovsky wrote.
The natural gas price deck for 2016 has been reduced to $2.16/mcf. Consequently, the EPS and EBITDA estimates for 2016 have been reduced from ($2.71) to ($2.90) and from $158.1mn to $147.8mn, respectively. The deck for 2017 has been lowered to $2.80/mcf for natural gas and to $62/bbl for crude oil. Therefore, the EPS and EBITDA estimates for 2017 have been reduced from $0.48 to $0.02 and from $354.7mn to $312.5mn, respectively. Production for the first quarter of 2016 was approximately 34 MBoe (or 204 MMcfe) per day, above the first quarter production guidance of 32-33 MBoe per day provided by Stone in its earnings release for year-end 2015 results. Gross volumes from the Gulf of Mexico deep water benefited from approximately 17,400 Boe per day from the four-well Cardona field (65% working interest) and approximately 24 MMcfe per day from the new Amethyst well (100% w.i.) which commenced production in late December 2015. The fourth Cardona #7 well came on production on February 24, 2016 and is currently producing approximately 4,800 Boe per day gross (65% w.i.). Production from the Mary field in Appalachia remained shut-in for the first quarter of 2016, while net production from other Appalachian fields averaged approximately 23 MMcfe per day. Stone’s Pompano platform drilling program has completed one work over project, and Stone expects to finish the first well (Silverthrone) in May 2016. After the Silverthrone well has been completed, the utilization of the platform rig will be evaluated due to 2016 capital constraints.
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