Hedging Activities

        We entered into additional natural gas hedges during January 2003 under fixed-price swap contracts for our Rocky Mountain production based upon Inside FERC published prices for deliveries at Kern River and put contracts for our Gulf Coast Basin production. The swap contracts effectively hedge 10,000 MMBtu per day of Rocky Mountain production at a swap price of $3.68 per MMBtu from April 2003 until December 2003 and 15,000 MMBtu per day at a swap price of $3.42 per MMBtu from January 2004 until December 2005. The put contracts effectively hedge an additional 25,000 MMBtu per day of Gulf Coast Basin production with a floor price of $3.50 per MMBtu from March 2003 until December 2003. The put contracts’ cost of approximately $0.5 million will be charged to earnings as the contracts settle.

        The following is a breakdown of non-cash derivative expenses for the respective periods:

Liquidity and Capital Resources

        Cash Flow.    Net cash flow provided by operating activities for the three months ended March 31, 2003 was $109.3 million compared to $53.9 million reported in the comparable period in 2002. The increase in net cash flow provided by operating activities was primarily attributable to increased oil and gas revenue caused by higher average realized prices on oil and gas during 2003, offset in part by a 6% decrease in production volumes for the corresponding period.

        Net cash flow used in investing activities totaled $81.5 million and $67.7 million during the first quarter of 2003 and 2002, respectively, which primarily represents our investment in oil and gas properties.

        Net cash flow provided by (used in) financing activities totaled ($20.0) million and $12.7 million for the three months ended March 31, 2003 and 2002, respectively. During the first quarter of 2003, we used a portion of our excess cash flow to repay $20.0 million of borrowings under our bank credit facility. In total, cash and cash equivalents increased from $27.6 million as of December 31, 2002 to $35.4 million as of March 31, 2003.

        We had working capital at March 31, 2003 of $39.7 million. We believe that our working capital balance is not a good indication of our liquidity because it fluctuates as a result of borrowings or repayments under our credit facility and the timing of capital expenditures.

        Capital Expenditures.   First quarter 2003 additions to oil and gas property costs of $119.1 million included $52.0 million of asset retirement costs in connection with the adoption of SFAS No. 143. Capital expenditures incurred during the first quarter of 2003 totaled $67.1 million, which included $14.3 million of acquisition costs, $3.5 million of capitalized salaries, general and administrative expenses and $2.0 million of capitalized interest. These investments were financed by cash flow from operating activities and working capital.

        Budgeted Capital Expenditures.    Our current estimated 2003 capital expenditures budget of approximately $240 million is allocated 89% to Gulf Coast operations and 11% to Rocky Mountain activities. We are currently seeking board approval to increase our 2003 capital expenditures budget to approximately $270 million. We expect to drill 51 gross wells during 2003, 37 in the onshore and shallow water offshore regions of the Gulf Coast Basin and 14 in the Rocky Mountains. While the 2003 capital expenditures budget does not include any projected acquisitions, we continue to seek growth opportunities that fit our specific acquisition profile.

        Based upon our outlook on oil and gas prices and production rates, we expect cash flow from operations to be more than sufficient to fund the remaining 2003 capital expenditures budget. However, if oil and gas prices or production rates fall below our current expectations, we believe that the available borrowings under our bank credit facility will be sufficient to fund the capital expenditures in excess of operating cash flow.

        Bank Credit Facility.    At March 31, 2003, we had $111.0 million of borrowings outstanding under our bank credit facility. Letters of credit totaling $13.1 million have been issued under the facility. During the first quarter of 2003, we repaid $20.0 million of borrowings under the credit facility. We currently have a loan base under the credit facility of $300 million with availability of an additional $175.9 million in borrowings as of May 5, 2003. The credit facility matures on December 20, 2004. Our borrowing base under the credit facility, which is re-determined periodically, is based on an amount established by the bank group after its evaluation of our proved oil and gas reserve values.

        Production Marketing Risk.    The publicly disclosed deteriorating financial conditions and recently reduced credit ratings of certain purchasers of production increase the possibility that we may not receive payment for a portion of our future production. We have attempted to diversify our sales and obtain credit protections such as letters of credit, guarantees and prepayments from certain of our purchasers. We are unable to predict, however, what impact the financial difficulties of certain purchasers may have on our future results of operations and liquidity.

        Operating Risk.    The exploration for and development of oil and gas properties involves a variety of operating risks as described in our 2002 Annual Report on Form 10-K. In accordance with industry practice, we maintain insurance against some, but not all, of the operating risks inherent in our business. During 2002, we experienced two separate production interruptions resulting from the two named Gulf of Mexico storms. At the time, we maintained loss of production insurance to protect us against uncontrollable disruptions in production operations from events of this nature. However, we have decided not to renew loss of production coverage effective May 1, 2003, based on our assessment of the cost to retain this policy as compared to the benefits we received as a result of production interruptions caused by these storms.

Environmental

        Compliance with applicable federal, state and local environmental and safety regulations has not required any significant capital expenditures or materially affected our business or earnings. We believe we are in substantial compliance with environmental and safety regulations and foresee no material expenditures in the future; however, we are unable to predict the impact that compliance with future regulations may have on our capital expenditures, earnings, results of operations, financial condition or competitive position.

Defined Terms

        Oil and condensate are stated in barrels (“Bbl”) or thousand barrels (“MBbl”). Natural gas is stated herein in billion cubic feet (“Bcf”), million cubic feet (“MMcf”) or thousand cubic feet (“Mcf”). Oil and condensate are converted to natural gas at a ratio of one barrel of liquids per six Mcf of gas. Bcfe, MMcfe, and Mcfe represent one billion cubic feet, one million cubic feet and one thousand cubic feet of gas equivalent, respectively. MMBtu represents one million British Thermal Units and BBtu represents one billion British Thermal Units. An active property is an oil and gas property with existing production. A primary term lease is an oil and gas property with no existing production, in which we have a specific time frame to establish production without losing the rights to explore the property.

Item 3.    Quantitative and Qualitative Disclosures About Market Risk

Commodity Price Risk

        Our major market risk exposure continues to be the pricing applicable to our oil and gas production. Our revenues, profitability and future rate of growth depend substantially upon the market prices of oil and natural gas, which fluctuate widely. Oil and gas price declines and volatility could adversely affect our revenues, cash flows and profitability. Price volatility is expected to continue. In order to manage our exposure to oil and gas price declines, we occasionally enter into oil and gas price hedging arrangements to secure a price for a portion of our expected future production. We do not enter into hedging transactions for trading purposes.

        Our hedging policy provides that not more than one-half of our estimated production quantities can be hedged without the consent of the Board of Directors. See Note 3 – Hedging Activities for a detailed discussion of hedges in place to manage our exposure to oil and gas price declines.

Interest Rate Risk

        At March 31, 2003, Stone had long-term debt outstanding of $411.0 million. Of this amount, $300 million, or 73%, bears interest at fixed rates averaging 8.4%. The remaining $111.0 million of debt outstanding at March 31, 2003 bears interest at a floating rate. At March 31, 2003, the weighted average interest rate under our floating-rate debt was approximately 2.7%. Because the majority of our long-term debt at March 31, 2003 was at fixed rates, we consider our interest rate exposure at such date to be minimal. At March 31, 2003, we had no open interest rate hedge positions to reduce our exposure to changes in interest rates.

        Since the filing of our 2002 Annual Report on Form 10-K, there have been no material changes in reported market risk as it relates to interest rates and commodity prices.

Item 4.    Controls and Procedures

Evaluation of Disclosure Controls and Procedures

        Our chief executive officer and our chief financial officer, with the participation of other members of our senior management, reviewed and evaluated the effectiveness of the design and operation of Stone’s disclosure controls and procedures as of a date within 90 days before the filing of this quarterly report on Form 10-Q. Based on this evaluation, our chief executive officer and chief financial officer believe:

• Stone’s disclosure controls and procedures are designed to ensure that information required to be disclosed by Stone in the reports it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms; and
   
• Stone’s disclosure controls and procedures were effective to ensure that material information was accumulated and communicated to Stone’s management, including Stone’s chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Controls

        There were no significant changes in Stone’s internal controls or, to the knowledge of our chief executive officer and chief financial officer, in other factors that could significantly affect these controls subsequent to the date of their evaluation, nor were there any significant deficiencies or material weaknesses in Stone’s internal controls. As a result, no corrective actions were required or undertaken.

PART II – OTHER INFORMATION

Item 6.      Exhibits and Reports on Form 8-K

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.

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER

I, D. Peter Canty, President and Chief Executive Officer of Stone Energy Corporation, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Stone Energy Corporation (the "Registrant");
   
   
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
   
   
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this quarterly report;
   
   
4. The Registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
   
   

   a)	Designed such disclosure controls and procedures to ensure that material information relating to the Registrant, including its consolidated subsidiary, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
   b)	Evaluated the effectiveness of the Registrant's disclosure controls and procedures as of a date within 90 days prior to the filing of this quarterly report (the "Evaluation Date"); and
   c)	Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

   
   
5. The Registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the Registrant's auditors and the audit committee of the Registrant's board of directors:
   
   

   a)	All significant deficiencies in the design or operation of internal controls which could adversely affect the Registrant's ability to record, process, summarize and report financial data and have identified for the Registrant's auditors any material weaknesses in internal controls; and
   b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal controls; and

   
   
6. The Registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER

I, James H. Prince, Senior Vice President, Chief Financial Officer and Treasurer of Stone Energy Corporation, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Stone Energy Corporation (the "Registrant");
   
   
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
   
   
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this quarterly report;
   
   
4. The Registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
   
   

   a)	Designed such disclosure controls and procedures to ensure that material information relating to the Registrant, including its consolidated subsidiary, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
   b)	Evaluated the effectiveness of the Registrant's disclosure controls and procedures as of a date within 90 days prior to the filing of this quarterly report (the "Evaluation Date"); and
   c)	Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

   
   
5. The Registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the Registrant's auditors and the audit committee of the Registrant's board of directors:
   
   

   a)	All significant deficiencies in the design or operation of internal controls which could adversely affect the Registrant's ability to record, process, summarize and report financial data and have identified for the Registrant's auditors any material weaknesses in internal controls; and
   b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal controls; and

   
   
6. The Registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.