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Table of Contents

 

 

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 June 30, 2014

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 of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

625 E. Kaliste Saloom Road

Lafayette, Louisiana

  70508
(Address of principal executive offices)   (Zip Code)

(337) 237-0410

(Registrant’s telephone number, including area code)

 

 

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  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

As of August 5, 2014, there were 56,181,661 shares of the registrant’s common stock, par value $.01 per share, outstanding.

 

 

 


Table of Contents

TABLE OF CONTENTS

 

          Page  

PART I – FINANCIAL INFORMATION

  

Item 1.

  

Financial Statements:

  
  

Condensed Consolidated Balance Sheet
as of June 30, 2014 and December 31, 2013

     1   
  

Condensed Consolidated Statement of Income
for the Three and Six Months Ended June 30, 2014 and 2013

     2   
  

Condensed Consolidated Statement of Comprehensive Income
for the Three and Six Months Ended June 30, 2014 and 2013

     3   
  

Condensed Consolidated Statement of Cash Flows
for the Six Months Ended June 30, 2014 and 2013

     4   
  

Notes to Condensed Consolidated Financial Statements

     5   

Item 2.

  

Management’s Discussion and Analysis of Financial
Condition and Results of Operations

     23   

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk

     30   

Item 4.

  

Controls and Procedures

     30   

PART II – OTHER INFORMATION

  

Item 1.

  

Legal Proceedings

     31   

Item 1A.

  

Risk Factors

     32   

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

     32   

Item 6.

  

Exhibits

     33   
  

Signatures

     34   
  

Exhibit Index

     35   


Table of Contents

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

STONE ENERGY CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEET

(In thousands of dollars)

 

     June 30,     December 31,  
     2014     2013  
     (Unaudited)        
Assets     

Current assets:

    

Cash and cash equivalents

   $ 333,886      $ 331,224   

Accounts receivable

     197,495        171,971   

Fair value of derivative contracts

     —          4,549   

Current income tax receivable

     7,372        7,366   

Deferred taxes

     36,308        31,710   

Inventory

     3,723        3,723   

Other current assets

     1,955        1,874   
  

 

 

   

 

 

 

Total current assets

     580,739        552,417   

Oil and gas properties, full cost method of accounting:

    

Proved

     8,520,195        7,804,117   

Less: accumulated depreciation, depletion and amortization

     (6,144,815     (5,908,760
  

 

 

   

 

 

 

Net proved oil and gas properties

     2,375,380        1,895,357   

Unevaluated

     554,201        724,339   

Other property and equipment, net

     28,302        26,178   

Fair value of derivative contracts

     415        1,378   

Other assets, net

     43,015        48,887   
  

 

 

   

 

 

 

Total assets

   $ 3,582,052      $ 3,248,556   
  

 

 

   

 

 

 
Liabilities and Stockholders’ Equity     

Current liabilities:

    

Accounts payable to vendors

   $ 193,900      $ 195,677   

Undistributed oil and gas proceeds

     62,927        37,029   

Accrued interest

     9,025        9,022   

Fair value of derivative contracts

     25,711        7,753   

Asset retirement obligations

     77,132        67,161   

Other current liabilities

     79,539        54,520   
  

 

 

   

 

 

 

Total current liabilities

     448,234        371,162   

Long-term debt

     1,033,931        1,027,084   

Deferred taxes

     404,188        390,693   

Asset retirement obligations

     431,060        435,352   

Fair value of derivative contracts

     5,251        470   

Other long-term liabilities

     47,843        53,509   
  

 

 

   

 

 

 

Total liabilities

     2,370,507        2,278,270   
  

 

 

   

 

 

 

Commitments and contingencies

    

Stockholders’ equity:

    

Common stock, $.01 par value; authorized 100,000,000 shares; issued 54,872,749 and 48,750,533 shares, respectively

     549        488   

Treasury stock (16,582 shares, at cost)

     (860     (860

Additional paid-in capital

     1,624,795        1,397,885   

Accumulated deficit

     (394,778     (425,165

Accumulated other comprehensive loss

     (18,161     (2,062
  

 

 

   

 

 

 

Total stockholders’ equity

     1,211,545        970,286   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 3,582,052      $ 3,248,556   
  

 

 

   

 

 

 

The accompanying notes are an integral part of this balance sheet.

 

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Table of Contents

STONE ENERGY CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF INCOME

(In thousands, except per share amounts)

(Unaudited)

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2014     2013     2014     2013  

Operating revenue:

        

Oil production

   $ 142,393      $ 184,498      $ 280,682      $ 371,423   

Gas production

     46,667        47,832        103,029        84,654   

Natural gas liquids production

     15,936        11,200        43,906        20,378   

Other operational income

     2,050        979        3,047        1,786   

Derivative income, net

     —          1,368        —          147   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating revenue

     207,046        245,877        430,664        478,388   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

        

Lease operating expenses

     49,454        50,517        96,357        103,561   

Transportation, processing and gathering expenses

     14,098        8,896        28,724        14,293   

Production taxes

     3,257        4,091        6,319        6,180   

Depreciation, depletion and amortization

     92,835        87,209        175,481        162,644   

Accretion expense

     7,733        8,318        15,288        16,581   

Salaries, general and administrative expenses

     16,637        15,198        32,966        29,150   

Incentive compensation expense

     3,903        2,050        7,037        3,481   

Other operational expenses

     —          73        212        145   

Derivative expense, net

     2,516        —          3,115        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     190,433        176,352        365,499        336,035   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     16,613        69,525        65,165        142,353   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other (income) expenses:

        

Interest expense

     9,913        8,895        18,270        18,530   

Interest income

     (193     (115     (336     (232

Other income

     (722     (682     (1,429     (1,408

Other expense

     179        —          179        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other expenses

     9,177        8,098        16,684        16,890   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     7,436        61,427        48,481        125,463   
  

 

 

   

 

 

   

 

 

   

 

 

 

Provision (benefit) for income taxes:

        

Current

     —          (6,993     —          (10,739

Deferred

     2,992        29,398        18,094        56,422   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total income taxes

     2,992        22,405        18,094        45,683   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 4,444      $ 39,022      $ 30,387      $ 79,780   
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic earnings per share

   $ 0.08      $ 0.78      $ 0.59      $ 1.60   

Diluted earnings per share

   $ 0.08      $ 0.78      $ 0.59      $ 1.60   

Average shares outstanding

     52,050        48,687        50,540        48,653   

Average shares outstanding assuming dilution

     52,373        48,725        50,727        48,691   

The accompanying notes are an integral part of this statement.

 

2


Table of Contents

STONE ENERGY CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2014     2013     2014     2013  

Net income

   $ 4,444      $ 39,022      $ 30,387      $ 79,780   

Other comprehensive income (loss), net of tax effect:

        

Derivatives

     (9,765     14,561        (16,355     (3,780

Foreign currency translation

     755        (523     256        (523
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

   ($ 4,566   $ 53,060      $ 14,288      $ 75,477   
  

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of this statement.

 

3


Table of Contents

STONE ENERGY CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(In thousands)

(Unaudited)

 

     Six Months Ended
June 30,
 
     2014     2013  

Cash flows from operating activities:

    

Net income

   $ 30,387      $ 79,780   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation, depletion and amortization

     175,481        162,644   

Accretion expense

     15,288        16,581   

Deferred income tax provision

     18,094        56,422   

Settlement of asset retirement obligations

     (24,915     (37,335

Non-cash stock compensation expense

     5,358        4,866   

Excess tax benefits

     —          (104

Non-cash derivative expense

     2,697        311   

Non-cash interest expense

     8,229        8,181   

Change in current income taxes

     (6     (16,399

(Increase) decrease in accounts receivable

     (25,524     1,138   

Increase in other current assets

     (82     (245

Decrease in inventory

     —          158   

Increase in accounts payable

     1,843        6,593   

Increase (decrease) in other current liabilities

     50,785        (3,170

Other

     (675     (3,448
  

 

 

   

 

 

 

Net cash provided by operating activities

     256,960        275,973   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Investment in oil and gas properties

     (517,904     (320,218

Proceeds from sale of oil and gas properties, net of expenses

     51,955        —     

Investment in fixed and other assets

     (3,896     (1,711

Change in restricted funds

     (356     (3,515
  

 

 

   

 

 

 

Net cash used in investing activities

     (470,201     (325,444
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Net proceeds from issuance of common stock

     226,036        —     

Deferred financing costs

     (3,167     (11

Excess tax benefits

     —          104   

Net payments for share-based compensation

     (6,948     (3,590
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     215,921        (3,497
  

 

 

   

 

 

 

Effect of exchange rate changes on cash

     (18     (186
  

 

 

   

 

 

 

Net change in cash and cash equivalents

     2,662        (53,154

Cash and cash equivalents, beginning of period

     331,224        279,526   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 333,886      $ 226,372   
  

 

 

   

 

 

 

The accompanying notes are an integral part of this statement.

 

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STONE ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1 – Interim Financial Statements

The condensed consolidated financial statements of Stone Energy Corporation (“Stone”) and its subsidiaries as of June 30, 2014 and for the three and six month periods ended June 30, 2014 and 2013 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 periods. The condensed consolidated balance sheet as of December 31, 2013 has been derived from the audited financial statements as of that date contained in our Annual Report on Form 10-K for the year ended December 31, 2013 (our “2013 Annual Report on Form 10-K”). 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 our 2013 Annual Report on Form 10-K. The results of operations for the three and six month periods ended June 30, 2014 are not necessarily indicative of future financial results.

Note 2 – Earnings Per Share

The following table sets forth the calculation of basic and diluted weighted average shares outstanding and earnings per share for the indicated periods:

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2014     2013     2014     2013  
     (In thousands, except per share data)  

Income (numerator):

        

Basic:

        

Net income

   $ 4,444      $ 39,022      $ 30,387      $ 79,780   

Net income attributable to participating securities

     (111     (1,015     (698     (1,794
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to common stock - basic

   $ 4,333      $ 38,007      $ 29,689      $ 77,986   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted:

        

Net income

   $ 4,444      $ 39,022      $ 30,387      $ 79,780   

Net income attributable to participating securities

     (111     (1,015     (697     (1,793
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to common stock - diluted

   $ 4,333      $ 38,007      $ 29,690      $ 77,987   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares (denominator):

        

Weighted average shares - basic

     52,050        48,687        50,540        48,653   

Dilutive effect of stock options

     58        38        54        38   

Dilutive effect of convertible notes

     265        —          133        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares - diluted

     52,373        48,725        50,727        48,691   
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic earnings per share

   $ 0.08      $ 0.78      $ 0.59      $ 1.60   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted earnings per share

   $ 0.08      $ 0.78      $ 0.59      $ 1.60   
  

 

 

   

 

 

   

 

 

   

 

 

 

Stock options that were considered antidilutive because the exercise price of the options exceeded the average price of our common stock for the applicable period totaled approximately 120,000 shares and 131,000 shares during the three and six months ended June 30, 2014, respectively, and 333,000 shares during the three and six months ended June 30, 2013.

During the three months ended June 30, 2014 and 2013, approximately 40,000 shares and 45,000 shares of our common stock, respectively, were issued from authorized shares upon the lapsing of forfeiture restrictions of restricted stock and the exercise of stock options by employees and nonemployee directors. During the six months ended June 30, 2014 and 2013, approximately 372,000 shares and 336,000 shares of common stock, respectively, were issued from authorized shares upon the lapsing of forfeiture restrictions of restricted stock and the exercise of stock options by employees and nonemployee directors. In May 2014, 5,750,000 shares of our common stock were issued in a public offering (see Note 3 – Common Stock Offering).

Because it is management’s stated intention to redeem the principal amount of our 1 34% Senior Convertible Notes due 2017 (the “2017 Convertible Notes”) (see Note 5 – Long-Term Debt) in cash, we have used the treasury method for determining dilution in the diluted earnings per share computation. During the three months ended June 30, 2014, the average price of our common stock exceeded the effective conversion price of the 2017 Convertible Notes, and therefore, such notes were dilutive for

 

5


Table of Contents

the three and six months ended June 30, 2014. For the prior year periods presented, the average price of our common stock was less than the effective conversion price for such notes, resulting in no dilutive effect on the diluted earnings per share computation for such periods. For all periods presented, the average price of our common stock was less than the strike price of the Sold Warrants (as defined in Note 5 – Long-Term Debt) and therefore, such warrants were not dilutive for such periods. Based on the terms of the Purchased Call Options (as defined in Note 5 – Long-Term Debt), such call options are antidilutive and therefore, were not included in the calculation of diluted earnings per share.

Note 3 – Common Stock Offering

In May 2014, we sold 5,750,000 shares of our common stock in a public offering at a price of $41.00 per share resulting in net proceeds of approximately $226.0 million after deducting the underwriting discount and offering expenses.

Note 4 – Derivative Instruments and Hedging Activities

Our hedging strategy is designed to protect our near and intermediate term cash flows from future declines in oil and natural gas prices. This protection is essential to capital budget planning, which is sensitive to expenditures that must be committed to in advance, such as rig contracts and the purchase of tubular goods. We enter into derivative transactions to secure a commodity price for a portion of future production that is acceptable at the time of the transaction. These derivatives generally are designated as cash flow hedges upon entering into the contracts. We do not enter into derivative transactions for trading purposes. We have no fair value hedges.

The nature of a derivative instrument must be evaluated to determine if it qualifies as a hedging instrument. If the instrument qualifies as a hedging instrument, it is recorded as either an asset or liability measured at fair value and subsequent changes in the derivative’s fair value are recognized in stockholders’ equity through other comprehensive income (loss), net of related taxes, to the extent the hedge is considered effective. Monthly settlements of effective hedges are reflected in revenue from oil and gas production and cash flows from operating activities. Instruments not qualifying as hedging instruments are recorded in our balance sheet at fair value, and changes in fair value are recognized in earnings through derivative expense (income). Monthly settlements of ineffective hedges and derivative instruments not qualifying as hedging instruments are recognized in earnings through derivative expense (income) and cash flows from operating activities.

We have entered into fixed-price swaps with various counterparties for a portion of our expected 2014, 2015 and 2016 oil and natural gas production from the Gulf Coast Basin. Some of our fixed-price oil swap settlements are based on an average of the New York Mercantile Exchange (“NYMEX”) closing price for West Texas Intermediate crude oil during the entire calendar month, and some are based on the average of the Intercontinental Exchange closing price for Brent crude oil during the entire calendar month. Our fixed-price gas swap settlements are based on the NYMEX price for the last day of a respective contract month. Swaps typically provide for monthly payments by us if prices rise above the swap price or monthly payments to us if prices fall below the swap price. Our fixed-price swap contracts are with The Toronto-Dominion Bank, Barclays Bank PLC, BNP Paribas, The Bank of Nova Scotia, Bank of America, Natixis and Regions Bank.

The following table illustrates our derivative positions for calendar years 2014, 2015 and 2016 as of August 5, 2014:

 

     Fixed-Price Swaps (NYMEX, except where noted)  
     Natural Gas      Oil  
     Daily Volume
(MMBtus/d)
    Swap Price
($)
     Daily Volume
(Bbls/d)
    Swap Price
($)
 

2014

     10,000        4.000         1,000        90.06   

2014

     10,000        4.040         1,000 (a)      90.25   

2014

     10,000        4.105         1,000        92.25   

2014

     10,000        4.190         1,000        93.55   

2014

     10,000 (b)      4.250         1,000        94.00   

2014

     10,000        4.250         1,000        98.00   

2014

     10,000        4.350         1,000        98.30   

2014

          2,000 (c)      98.85   

2014

          1,000        99.65   

2014

          1,000 (d)      103.30   

2015

     10,000        4.005         1,000        89.00   

2015

     10,000        4.120         1,000        90.00   

2015

     10,000        4.150         1,000        90.25   

2015

     10,000        4.165         1,000        90.40   

2015

     10,000        4.220         1,000        93.28   

2015

     10,000        4.255         1,000        93.37   

2015

          1,000        94.85   

2015

          1,000        95.00   

2016

     10,000        4.110        

2016

     10,000        4.120        

 

(a) October through December
(b) February through December
(c) January through June
(d) Brent crude oil contract

 

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Table of Contents

All of our derivative instruments at December 31, 2013 were designated as effective cash flow hedges. At June 30, 2014, certain of our natural gas derivative instruments no longer qualified as cash flow hedges as it was no longer probable, subsequent to the sale of our non-core Gulf of Mexico (“GOM”) conventional shelf properties (see Note 13 – Subsequent Events), that GOM natural gas production would be sufficient to cover the GOM volumes hedged. Accordingly, we discontinued hedge accounting for such contracts as of June 30, 2014 and recognized the related accumulated other comprehensive loss of $1.5 million as derivative expense in the second quarter of 2014. Contracts no longer qualifying as cash flow hedges were comprised of three natural gas contracts for the months of August through December 2014 and two natural gas contracts for the months of January through December 2015. Additionally, a small portion of our cash flow hedges are typically determined to be ineffective because oil and natural gas price changes in the markets in which we sell our products are not 100% correlative to changes in the underlying price basis indicative in the derivative contract. At June 30, 2014, we had an accumulated other comprehensive loss of $17.8 million, net of tax, related to the fair value of our effective cash flow hedges that were outstanding as of June 30, 2014. We believe that approximately $14.8 million, net of tax, of accumulated other comprehensive loss will be reclassified into earnings in the next 12 months.

Derivatives qualifying as hedging instruments:

The following tables disclose the location and fair value amounts of derivatives qualifying as hedging instruments, as reported in our balance sheet, at June 30, 2014 and December 31, 2013:

 

Fair Value of Derivatives Qualifying as Hedging Instruments at June 30, 2014  

(In millions)

 
    

Asset Derivatives

    

Liability Derivatives

 

Description

  

Balance Sheet Location

   Fair
Value
    

Balance Sheet Location

   Fair
Value
 

Commodity contracts

   Current assets: Fair value of derivative contracts    $ —         Current liabilities: Fair value of derivative contracts    $ 24.2   
   Long-term assets: Fair value of derivative contracts      0.4       Long-term liabilities: Fair value of derivative contracts      5.3   
     

 

 

       

 

 

 
      $ 0.4          $ 29.5   
     

 

 

       

 

 

 
Fair Value of Derivatives Qualifying as Hedging Instruments at December 31, 2013  

(In millions)

 
    

Asset Derivatives

    

Liability Derivatives

 

Description

  

Balance Sheet Location

   Fair
Value
    

Balance Sheet Location

   Fair
Value
 

Commodity contracts

   Current assets: Fair value of derivative contracts    $ 4.5       Current liabilities: Fair value of derivative contracts    $ 7.8   
   Long-term assets: Fair value of derivative contracts      1.4       Long-term liabilities: Fair value of derivative contracts      0.5   
     

 

 

       

 

 

 
      $ 5.9          $ 8.3   
     

 

 

       

 

 

 

 

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The following tables disclose the before tax effect of derivatives qualifying as hedging instruments, as reported in the statement of income, for the three and six month periods ended June 30, 2014 and 2013:

 

Effect of Derivatives Qualifying as Hedging Instruments on the Statement of Income

for the Three Months Ended June 30, 2014 and 2013

(In millions)

 

Derivatives in Cash

Flow Hedging

Relationships

   Amount of Gain
(Loss) Recognized
in Other
Comprehensive
Income on
Derivatives
    

Gain (Loss) Reclassified from

Accumulated Other Comprehensive

Income into Income

(Effective Portion) (a)

    

Gain (Loss) Recognized in Income

on Derivatives

(Ineffective Portion)

 
     2014     2013     

Location

   2014     2013     

Location

   2014     2013  

Commodity contracts

   ($ 26.0   $ 30.0       Operating revenue - oil/gas production    ($ 9.2   $ 7.3       Derivative (expense) income, net    ($ 1.0   $ 1.4   
  

 

 

   

 

 

       

 

 

   

 

 

       

 

 

   

 

 

 

Total

   ($ 26.0   $ 30.0          ($ 9.2   $ 7.3          ($ 1.0   $ 1.4   
  

 

 

   

 

 

       

 

 

   

 

 

       

 

 

   

 

 

 

 

(a)    For the three months ended June 30, 2014, effective hedging contracts decreased oil revenue by $6.1 million and decreased gas revenue by $3.1 million. For the three months ended June 30, 2013, effective hedging contracts increased oil revenue by $5.3 million and increased gas revenue by $2.0 million.

         

Effect of Derivatives Qualifying as Hedging Instruments on the Statement of Income

for the Six Months Ended June 30, 2014 and 2013

(In millions)

 

Derivatives in Cash

Flow Hedging

Relationships

   Amount of Gain
(Loss) Recognized
in Other
Comprehensive
Income on
Derivatives
    

Gain (Loss) Reclassified from

Accumulated Other Comprehensive

Income into Income

(Effective Portion) (a)

    

Gain (Loss) Recognized in Income

on Derivatives

(Ineffective Portion)

 
     2014     2013     

Location

   2014     2013     

Location

   2014     2013  

Commodity contracts

   ($ 43.4   $ 9.9       Operating revenue - oil/gas production    ($ 16.3   $ 15.9       Derivative (expense) income, net    ($ 1.6   $ 0.1   
  

 

 

   

 

 

       

 

 

   

 

 

       

 

 

   

 

 

 

Total

   ($ 43.4   $ 9.9          ($ 16.3   $ 15.9          ($ 1.6   $ 0.1   
  

 

 

   

 

 

       

 

 

   

 

 

       

 

 

   

 

 

 

 

(a) For the six months ended June 30, 2014, effective hedging contracts decreased oil revenue by $8.6 million and decreased gas revenue by $7.7 million. For the six months ended June 30, 2013, effective hedging contracts increased oil revenue by $9.9 million and increased gas revenue by $6.0 million.

Derivatives not qualifying as hedging instruments:

The following table discloses the location and fair value amounts of our derivatives not qualifying as hedging instruments, as reported in our balance sheet, at June 30, 2014. All of our derivatives at December 31, 2013 qualified as hedging instruments.

 

Fair Value of Derivatives Not Qualifying as Hedging Instruments at June 30, 2014

(In millions)

 

Description

  

Balance Sheet Location

   Fair Value  

Commodity contracts

   Current liabilities: Fair value of derivative contracts    $ 1.5   

Gains or losses related to changes in fair value and cash settlements for derivatives not qualifying as hedging instruments are recorded as derivative income (expense) in the statement of income. The following table discloses the before tax effect of our derivatives not qualifying as hedging instruments on the statement of income for the three and six month periods ended June 30, 2014:

 

Amount of Loss Recognized in Derivative Expense

(In millions)

 

Description

   Three Months Ended
June 30, 2014
    Six Months Ended
June 30, 2014
 

Commodity contracts:

    

Cash settlements

   $ —        $ —     

Change in fair value

     (1.5     (1.5
  

 

 

   

 

 

 

Total losses on non-qualifying hedges

   ($ 1.5   ($ 1.5
  

 

 

   

 

 

 

 

 

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Offsetting of derivative assets and liabilities:

Our derivative contracts are subject to netting arrangements. It is our policy to not offset our derivative contracts in presenting the fair value of these contracts as assets and liabilities in our balance sheet. The following presents the potential impact of the rights of offset associated with our recognized assets and liabilities at June 30, 2014 (in millions):

 

     As Presented
Without
Netting
    Effects of
Netting
    With Effects of
Netting
 

Current assets: Fair value of derivative contracts

   $ —        $ —        $ —     

Long-term assets: Fair value of derivative contracts

     0.4        (0.4     —     

Current liabilities: Fair value of derivative contracts

     (25.7     —          (25.7

Long-term liabilities: Fair value of derivative contracts

     (5.3     0.4        (4.9

Note 5 – Long-Term Debt

Long-term debt consisted of the following at:

 

     June 30,
2014
     December 31,
2013
 
     (In millions)  

1 34% Senior Convertible Notes due 2017

   $ 258.9       $ 252.1   

7 12% Senior Notes due 2022

     775.0         775.0   

Bank debt

     —           —     
  

 

 

    

 

 

 

Total long-term debt

   $ 1,033.9       $ 1,027.1   
  

 

 

    

 

 

 

Bank Debt. On June 24, 2014, we entered into an amended and restated revolving credit facility with commitments totaling $900 million (subject to borrowing base limitations) through a syndicated bank group, replacing our previous facility. The bank credit facility matures on July 1, 2019. Our initial borrowing base under the bank credit facility has been set at $500 million, an increase from the previous borrowing base of $400 million. As of June 30 and August 5, 2014, we had no outstanding borrowings under the bank credit facility and $21.0 million in letters of credit had been issued pursuant to the bank credit facility, leaving $479.0 million of availability under the bank credit facility. Subject to certain exceptions, the bank credit facility is required to be guaranteed by all of our material domestic direct and indirect subsidiaries. The bank credit facility is guaranteed by our only material subsidiary, Stone Energy Offshore, L.L.C. (“Stone Offshore”).

The borrowing base under the bank credit facility is redetermined semi-annually, in May and November, by the lenders, taking into consideration the estimated loan value of our oil and gas properties and those of our subsidiaries that guarantee the bank facility in accordance with the lenders’ customary practices for oil and gas loans. In addition, we and the lenders each have discretion at any time, but not more than two additional times in any calendar year, to have the borrowing base redetermined. The bank credit facility is collateralized by substantially all of Stone’s and Stone Offshore’s assets. Stone and Stone Offshore are required to mortgage, and grant a security interest in, their oil and natural gas reserves representing at least 80% of the discounted present value of the future net cash flows from their proved oil and natural gas reserves reviewed in determining the borrowing base.

Interest on loans under the bank credit facility is calculated using the London Interbank Offering (“LIBOR”) rate or the base rate, at the election of Stone. The margin for loans at the LIBOR rate is determined based on borrowing base utilization and ranges from 1.500% to 2.500%. The bank credit facility provides for optional and mandatory prepayments, affirmative and negative covenants and interest coverage ratio and leverage ratio maintenance covenants. We were in compliance with all covenants as of June 30, 2014.

2017 Convertible Notes. On March 6, 2012, we issued in a private offering $300 million in aggregate principal amount of the 2017 Convertible Notes to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”). The 2017 Convertible Notes are convertible into cash, shares of our common stock or a combination of cash and shares of our common stock, at our election, based on an initial conversion rate of 23.4449 shares of our common stock per $1,000 principal amount of 2017 Convertible Notes, which corresponds to an initial conversion price of approximately $42.65 per share of our common stock. On June 30, 2014, our closing share price was $46.79. The conversion rate, and thus the conversion price, may be adjusted under certain circumstances as described in the indenture related to the 2017 Convertible Notes. Upon conversion, we will be obligated to pay or deliver, as the case may be, cash, shares of our common stock or a combination of cash and shares of our common stock, at our election. Prior to December 1, 2016, the 2017 Convertible Notes will be convertible only upon the occurrence of certain events and during certain periods, and thereafter, at any time until the second scheduled trading day immediately preceding the maturity date.

 

 

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In connection with the offering, we entered into convertible note hedge transactions with respect to our common stock (the “Purchased Call Options”) with Barclays Capital Inc., acting as agent for Barclays Bank PLC and Bank of America, N.A. (the “Dealers”). We paid an aggregate amount of approximately $70.8 million to the Dealers for the Purchased Call Options. The Purchased Call Options cover, subject to customary antidilution adjustments, approximately 7,033,470 shares of our common stock at a strike price that corresponds to the initial conversion price of the 2017 Convertible Notes, also subject to adjustment, and are exercisable upon conversion of the 2017 Convertible Notes.

We also entered into separate warrant transactions whereby, in reliance upon the exemption from registration provided by Section 4(2) of the Securities Act, we sold to the Dealers warrants to acquire, subject to customary antidilution adjustments, approximately 7,033,470 shares of our common stock (the “Sold Warrants”) at a strike price of $55.91 per share of our common stock. We received aggregate proceeds of approximately $40.1 million from the sale of the Sold Warrants to the Dealers. If, upon expiration of the Sold Warrants, the price per share of our common stock, as measured under the Sold Warrants, is greater than the strike price of the Sold Warrants, we will be required to issue, without further consideration, under each Sold Warrant a number of shares of our common stock with a value equal to the amount of such difference.

As of June 30, 2014, the carrying amount of the liability component of the 2017 Convertible Notes was $258.9 million. During the three and six months ended June 30, 2014, we recognized $3.5 million and $6.8 million, respectively, of interest expense for the amortization of the discount and $0.3 million and $0.6 million, respectively, of interest expense for the amortization of deferred financing costs related to the 2017 Convertible Notes. During the three and six months ended June 30, 2014, we recognized $1.3 million and $2.6 million, respectively, of interest expense related to the contractual interest coupon on the 2017 Convertible Notes.

Note 6 – Asset Retirement Obligations

The change in our asset retirement obligations during the six months ended June 30, 2014 is set forth below:

 

     Six Months
Ended
June 30, 2014
 
     (In millions)  

Asset retirement obligations as of the beginning of the period, including current portion

   $ 502.5   

Liabilities incurred

     25.7   

Liabilities settled

     (24.9

Divestment of properties

     (10.4

Accretion expense

     15.3   
  

 

 

 

Asset retirement obligations as of the end of the period, including current portion

   $ 508.2   
  

 

 

 

Note 7 – Divestitures

On January 16, 2014, we completed the sale of our interests in the Cut Off and Clovelly fields for cash consideration of approximately $44.8 million and the assumption of the associated asset retirement obligations of approximately $9.2 million. On January 31, 2014, we completed the sale of our interest in the Hatch Point field for cash consideration of approximately $9.7 million and the assumption of the associated asset retirement obligations of approximately $1.2 million. These sales were accounted for as an adjustment to capitalized costs with no gain or loss recognized.

On July 31, 2014, we completed the sale of certain of our non-core properties in the GOM conventional shelf (see Note 13—Subsequent Events).

Note 8 – Fair Value Measurements

U.S. Generally Accepted Accounting Principles (“GAAP”) establish a fair value hierarchy that has three levels based on the reliability of the inputs used to determine the fair value. These levels include: Level 1, defined as inputs such as unadjusted quoted prices in active markets for identical assets or liabilities; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs for use when little or no market data exists, therefore requiring an entity to develop its own assumptions.

As of June 30, 2014 and December 31, 2013, we held certain financial assets and liabilities that are required to be measured at fair value on a recurring basis, including our commodity derivative instruments and our investments in marketable securities. We utilize the services of an independent third party to assist us in valuing our derivative instruments. We used the income approach in determining the fair value of our derivative instruments utilizing a proprietary pricing model. The model

 

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accounts for our credit risk and the credit risk of our counterparties in the discount rate applied to estimated future cash inflows and outflows. Our swap contracts are included within the Level 2 fair value hierarchy. For a more detailed description of our derivative instruments, see Note 4 – Derivative Instruments and Hedging Activities. We used the market approach in determining the fair value of our investments in marketable securities, which are included within the Level 1 fair value hierarchy.

The following tables present our assets and liabilities that are measured at fair value on a recurring basis at June 30, 2014:

 

     Fair Value Measurements at June 30, 2014  

Assets

   Total      Quoted Prices
in Active
Markets for
Identical Assets

(Level 1)
     Significant
Other
Observable
Inputs

(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
 
     (In millions)  

Marketable securities (Other Assets)

   $ 8.7       $ 8.7       $ —         $ —     

Derivative contracts

     0.4         —           0.4         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 9.1       $ 8.7       $ 0.4       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 
     Fair Value Measurements at June 30, 2014  

Liabilities

   Total      Quoted Prices
in Active
Markets for
Identical
Liabilities

(Level 1)
     Significant
Other
Observable
Inputs

(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
 
     (In millions)  

Derivative contracts

   $ 31.0       $ —         $ 31.0       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 31.0       $ —         $ 31.0       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

The following tables present our assets and liabilities that are measured at fair value on a recurring basis at December 31, 2013:

 

     Fair Value Measurements at December 31, 2013  

Assets

   Total      Quoted Prices
in Active
Markets for
Identical Assets

(Level 1)
     Significant
Other
Observable
Inputs

(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
 
     (In millions)  

Marketable securities (Other Assets)

   $ 8.2       $ 8.2       $ —         $ —     

Derivative contracts

     5.9         —           5.9         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 14.1       $ 8.2       $ 5.9       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 
     Fair Value Measurements at December 31, 2013  

Liabilities

   Total      Quoted Prices
in Active
Markets for
Identical
Liabilities

(Level 1)
     Significant
Other
Observable
Inputs

(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
 
     (In millions)  

Derivative contracts

   $ 8.3       $ —         $ 8.3       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 8.3       $ —         $ 8.3       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

The fair value of cash and cash equivalents and our variable-rate bank debt approximated book value at June 30, 2014 and December 31, 2013. As of June 30, 2014 and December 31, 2013, the fair value of the liability component of the 2017 Convertible Notes was approximately $276.1 million and $260.4 million, respectively. As of June 30, 2014 and December 31, 2013, the fair value of the 7 12% Senior Notes due 2022 (the “2022 Notes”) was approximately $854.4 million and $814.7 million, respectively.

The fair value of the 2022 Notes was determined based on quotes obtained from brokers, which represent Level 1 inputs. We applied fair value concepts in determining the liability component of the 2017 Convertible Notes (see Note 5 – Long-Term Debt) at inception, June 30, 2014 and December 31, 2013. The fair value of the liability was estimated using an income approach. The significant inputs in these determinations were market interest rates based on quotes obtained from brokers and represent Level 2 inputs.

 

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Note 9 – Accumulated Other Comprehensive Income (Loss)

Changes in accumulated other comprehensive income (loss) by component for the three and six months ended June 30, 2014 were as follows (in millions):

 

     Cash Flow
Hedges
    Foreign
Currency
Items
    Total  

For the Three Months Ended June 30, 2014

      

Beginning balance, net of tax

   ($ 8.0   ($ 1.2   ($ 9.2
  

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss) before reclassifications:

      

Change in fair value of derivatives

     (26.0     —          (26.0

Foreign currency translations

     —          0.8        0.8   

Income tax effect

     9.4        —          9.4   
  

 

 

   

 

 

   

 

 

 

Net of tax

     (16.6     0.8        (15.8
  

 

 

   

 

 

   

 

 

 

Amounts reclassified from accumulated other comprehensive income:

      

Operating revenue: oil/gas production

     (9.2     —          (9.2

Derivative expense, net

     (1.5     —          (1.5

Income tax effect

     3.9        —          3.9   
  

 

 

   

 

 

   

 

 

 

Net of tax

     (6.8     —          (6.8
  

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of tax

     (9.8     0.8        (9.0
  

 

 

   

 

 

   

 

 

 

Ending balance, net of tax

   ($ 17.8   ($ 0.4   ($ 18.2
  

 

 

   

 

 

   

 

 

 
     Cash Flow
Hedges
    Foreign
Currency
Items
    Total  

For the Six Months Ended June 30, 2014

      

Beginning balance, net of tax

   ($ 1.4   ($ 0.7   ($ 2.1
  

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss) before reclassifications:

      

Change in fair value of derivatives

     (43.4     —          (43.4

Foreign currency translations

     —          0.3        0.3   

Income tax effect

     15.7        —          15.7   
  

 

 

   

 

 

   

 

 

 

Net of tax

     (27.7     0.3        (27.4
  

 

 

   

 

 

   

 

 

 

Amounts reclassified from accumulated other comprehensive income:

      

Operating revenue: oil/gas production

     (16.3     —          (16.3

Derivative expense, net

     (1.5     —          (1.5

Income tax effect

     6.5        —          6.5   
  

 

 

   

 

 

   

 

 

 

Net of tax

     (11.3     —          (11.3
  

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of tax

     (16.4     0.3        (16.1
  

 

 

   

 

 

   

 

 

 

Ending balance, net of tax

   ($ 17.8   ($ 0.4   ($ 18.2
  

 

 

   

 

 

   

 

 

 

 

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Table of Contents

Changes in accumulated other comprehensive income (loss) by component for the three and six months ended June 30, 2013, were as follows (in millions):

 

     Cash Flow
Hedges
    Foreign
Currency
Items
    Total  

For the Three Months Ended June 30, 2013

      

Beginning balance, net of tax

   $ 10.5      $ —        $ 10.5   
  

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss) before reclassifications:

      

Change in fair value of derivatives

     30.0        —          30.0   

Foreign currency translations

     —          (0.5     (0.5

Income tax effect

     (10.8     —          (10.8
  

 

 

   

 

 

   

 

 

 

Net of tax

     19.2        (0.5     18.7   
  

 

 

   

 

 

   

 

 

 

Amounts reclassified from accumulated other comprehensive income:

      

Operating revenue: oil/gas production

     7.3        —          7.3   

Income tax effect

     (2.6     —          (2.6
  

 

 

   

 

 

   

 

 

 

Net of tax

     4.7        —          4.7   
  

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of tax

     14.5        (0.5     14.0   
  

 

 

   

 

 

   

 

 

 

Ending balance, net of tax

   $ 25.0      ($ 0.5   $ 24.5   
  

 

 

   

 

 

   

 

 

 
     Cash Flow
Hedges
    Foreign
Currency
Items
    Total  

For the Six Months Ended June 30, 2013

      

Beginning balance, net of tax

   $ 28.8      $ —        $ 28.8   
  

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss) before reclassifications:

      

Change in fair value of derivatives

     9.9        —          9.9   

Foreign currency translations

     —          (0.5     (0.5

Income tax effect

     (3.5     —          (3.5
  

 

 

   

 

 

   

 

 

 

Net of tax

     6.4        (0.5     5.9   
  

 

 

   

 

 

   

 

 

 

Amounts reclassified from accumulated other comprehensive income:

      

Operating revenue: oil/gas production

     15.9        —          15.9   

Income tax effect

     (5.7     —          (5.7
  

 

 

   

 

 

   

 

 

 

Net of tax

     10.2        —          10.2   
  

 

 

   

 

 

   

 

 

 

Other comprehensive loss, net of tax

     (3.8     (0.5     (4.3
  

 

 

   

 

 

   

 

 

 

Ending balance, net of tax

   $ 25.0      ($ 0.5   $ 24.5   
  

 

 

   

 

 

   

 

 

 

Note 10 – Investment in Oil and Gas Properties

In April 2013, we entered into an agreement to participate in the drilling of exploratory wells in Canada. Included in unevaluated oil and gas property costs at June 30, 2014 and December 31, 2013, were $14.7 million and $10.6 million, respectively, of capital expenditures related to our oil and gas property investments in Canada.

 

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Table of Contents

Note 11 – Commitments and Contingencies

We are named as a party in certain lawsuits and regulatory proceedings arising in the ordinary course of business. We do not expect that these matters, individually or in the aggregate, will have a material adverse effect on our financial condition.

In August 2013, Kimmeridge Energy Exploration Fund, L.P. (“Kimmeridge”) filed a lawsuit against Stone in the 15th Judicial District Court in Lafayette Parish, Louisiana seeking damages in the amount of approximately $18.4 million plus interest, costs and attorney fees. Kimmeridge alleges that (1) Stone was obligated by virtue of a letter of intent to negotiate in good faith and close an acquisition involving approximately 33,000 net mineral acres in the Illinois basin, and (2) Stone failed to pay brokerage costs incurred after December 31, 2012 pursuant to a separate letter of understanding between Stone and Kimmeridge. Stone denies Kimmeridge’s claims, as well as its damage calculations, and is vigorously defending against both claims. We cannot estimate the potential range of loss at this time.

Note 12 – Recently Issued Accounting Standards

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers” to clarify the principles for recognizing revenue and to develop a common revenue standard and disclosure requirements. The core principle of ASU 2014-09 is that an entity will recognize revenue when it transfers control of goods or services to customers at an amount that reflects the consideration to which it expects to be entitled in exchange for those goods or services. The standard is effective for fiscal years beginning after December 15, 2016, and for interim periods within those fiscal years. Early application is not permitted. Entities can choose to apply the standard using either a full retrospective approach or a modified retrospective approach, with the cumulative effect of initially applying ASU 2014-09 recognized at the date of initial application. Although we are still evaluating the effect that this new standard may have on our financial statements and related disclosures, we do not anticipate that the implementation of this new standard will have a material effect.

Note 13 – Subsequent Events

On July 31, 2014, we completed the sale of certain of our non-core properties in the GOM conventional shelf for cash consideration of approximately $177.6 million, after giving effect to preliminary purchase price adjustments, and the assumption of the associated asset retirement obligations. At December 31, 2013, the estimated proved reserves associated with these assets represented approximately 9% of our total estimated proved oil and natural gas reserves. The sale will be accounted for as an adjustment to capitalized costs with no gain or loss recognized since the adjustment will not significantly alter the relationship between capitalized costs and proved reserves.

All of the proceeds from the sale have been deposited with a Qualified Intermediary (under the terms of a Qualified Trust Agreement and Exchange Agreement) for potential reinvestment in like-kind replacement property as defined under Section 1031 of the Internal Revenue Code. We have until September 14, 2014 (the “Identification Period”) to identify qualified replacement property and have until January 27, 2015 (the “Exchange Period”) to close on such property. Compliance with these provisions provides for deferral of taxable gain on these sales proceeds. The Qualified Trust Agreement and Exchange Agreement provide for certain restrictions on the use of these funds during the Identification Period and, assuming identification is accomplished, additional restrictions during the Exchange Period.

 

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Note 14 – Guarantor Financial Statements

Stone Offshore is an unconditional guarantor (the “Guarantor Subsidiary”) of the 2017 Convertible Notes and the 2022 Notes. Our other subsidiaries (the “Non-Guarantor Subsidiaries”) have not provided guarantees. The following presents unaudited condensed consolidating financial information as of June 30, 2014 and December 31, 2013 and for the three and six month periods ended June 30, 2014 and 2013 on an issuer (parent company), Guarantor Subsidiary, Non-Guarantor Subsidiaries and consolidated basis. Elimination entries presented are necessary to combine the entities.

CONDENSED CONSOLIDATING BALANCE SHEET

JUNE 30, 2014

(In thousands)

 

     Parent     Guarantor
Subsidiary
    Non-
Guarantor
Subsidiaries
    Eliminations     Consolidated  

Assets

          

Current assets:

          

Cash and cash equivalents

   $ 244,254      $ 89,388      $ 244      $ —        $ 333,886   

Accounts receivable

     153,316        80,436        —          (36,257     197,495   

Current income tax receivable

     7,372        —          —          —          7,372   

Deferred taxes *

     1,565        34,743        —          —          36,308   

Inventory

     3,440        283        —          —          3,723   

Other current assets

     1,955        —          —          —          1,955   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

     411,902        204,850        244        (36,257     580,739   

Oil and gas properties, full cost method:

          

Proved

     1,475,522        7,044,673        —          —          8,520,195   

Less: accumulated DD&A

     (527,605     (5,617,210     —          —          (6,144,815
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net proved oil and gas properties

     947,917        1,427,463        —          —          2,375,380   

Unevaluated

     302,396        237,146        14,659        —          554,201   

Other property and equipment, net

     28,302        —          —          —          28,302   

Fair value of derivative contracts

     —          415        —          —          415   

Other assets, net

     30,734        1,880        10,401        —          43,015   

Investment in subsidiary

     798,664        —          25,156        (823,820     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

   $ 2,519,915      $ 1,871,754      $ 50,460      ($ 860,077   $ 3,582,052   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities and Stockholders’ Equity

          

Current liabilities:

          

Accounts payable to vendors

   $ 93,251      $ 125,177      $ 11,729      ($ 36,257   $ 193,900   

Undistributed oil and gas proceeds

     60,724        2,203        —          —          62,927   

Accrued interest

     9,025        —          —          —          9,025   

Fair value of derivative contracts

     —          25,711        —          —          25,711   

Asset retirement obligations

     —          77,132        —          —          77,132   

Other current liabilities

     76,461        3,078        —          —          79,539   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

     239,461        233,301        11,729        (36,257     448,234   

Long-term debt

     1,033,931        —          —          —          1,033,931   

Deferred taxes *

     (16,629     420,817        —          —          404,188   

Asset retirement obligations

     3,764        427,296        —          —          431,060   

Fair value of derivative contracts

     —          5,251        —          —          5,251   

Other long-term liabilities

     47,843        —          —          —          47,843   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

     1,308,370        1,086,665        11,729        (36,257     2,370,507   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Commitments and contingencies

          

Stockholders’ equity:

          

Common stock

     549        —          —          —          549   

Treasury stock

     (860     —          —          —          (860

Additional paid-in capital

     1,624,795        1,309,562        39,580        (1,349,142     1,624,795   

Accumulated deficit

     (394,778     (506,723     (28     506,751        (394,778

Accumulated other comprehensive loss

     (18,161     (17,750     (821     18,571        (18,161
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total stockholders’ equity

     1,211,545        785,089        38,731        (823,820     1,211,545   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 2,519,915      $ 1,871,754      $ 50,460      ($ 860,077   $ 3,582,052   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

* Deferred income taxes have been allocated to the Guarantor Subsidiary where related oil and gas properties reside.

 

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CONDENSED CONSOLIDATING BALANCE SHEET

DECEMBER 31, 2013

(In thousands)

 

     Parent     Guarantor
Subsidiary
    Non-
Guarantor
Subsidiaries
    Eliminations     Consolidated  

Assets

          

Current assets:

          

Cash and cash equivalents

   $ 246,294      $ 84,290      $ 640      $ —        $ 331,224   

Accounts receivable

     74,887        97,128        —          (44     171,971   

Fair value of derivative contracts

     —          4,549        —          —          4,549   

Current income tax receivable

     7,366        —          —          —          7,366   

Deferred taxes *

     8,659        23,051        —          —          31,710   

Inventory

     3,440        283        —          —          3,723   

Other current assets

     1,874        —          —          —          1,874   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

     342,520        209,301        640        (44     552,417   

Oil and gas properties, full cost method:

          

Proved

     1,309,527        6,494,590        —          —          7,804,117   

Less: accumulated DD&A

     (459,932     (5,448,828     —          —          (5,908,760
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net proved oil and gas properties

     849,595        1,045,762        —          —          1,895,357   

Unevaluated

     325,113        388,643        10,583        —          724,339   

Other property and equipment, net

     26,178        —          —          —          26,178   

Fair value of derivative contracts

     —          1,378        —          —          1,378   

Other assets, net

     45,410        1,349        2,128        —          48,887   

Investment in subsidiary

     747,472        —          12,711        (760,183     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

   $ 2,336,288      $ 1,646,433      $ 26,062      ($ 760,227   $ 3,248,556   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities and Stockholders’ Equity

          

Current liabilities:

          

Accounts payable to vendors

   $ 173,147      $ 22,530      $ 44      ($ 44   $ 195,677   

Undistributed oil and gas proceeds

     34,386        2,643        —          —          37,029   

Accrued interest

     9,022        —          —          —          9,022   

Fair value of derivative contracts

     —          7,753        —          —          7,753   

Asset retirement obligations

     —          67,161        —          —          67,161   

Other current liabilities

     53,682        838        —          —          54,520   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

     270,237        100,925        44        (44     371,162   

Long-term debt

     1,027,084        —          —          —          1,027,084   

Deferred taxes *

     10,227        380,466        —          —          390,693   

Asset retirement obligations

     4,945        430,407        —          —          435,352   

Fair value of derivative contracts

     —          470        —          —          470   

Other long-term liabilities

     53,509        —          —          —          53,509   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

     1,366,002        912,268        44        (44     2,278,270   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Commitments and contingencies

          

Stockholders’ equity:

          

Common stock

     488        —          —          —          488   

Treasury stock

     (860     —          —          —          (860

Additional paid-in capital

     1,397,885        1,309,563        27,403        (1,336,966     1,397,885   

Accumulated deficit

     (425,165     (574,003     (52     574,055        (425,165

Accumulated other comprehensive loss

     (2,062     (1,395     (1,333     2,728        (2,062
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total stockholders’ equity

     970,286        734,165        26,018        (760,183     970,286   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 2,336,288      $ 1,646,433      $ 26,062      ($ 760,227   $ 3,248,556   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

* Deferred income taxes have been allocated to the Guarantor Subsidiary where related oil and gas properties reside.

 

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Table of Contents

CONDENSED CONSOLIDATING STATEMENT OF INCOME

THREE MONTHS ENDED JUNE 30, 2014

(In thousands)

 

     Parent     Guarantor
Subsidiary
    Non-
Guarantor
Subsidiaries
    Eliminations     Consolidated  

Operating revenue:

          

Oil production

   $ 5,854      $ 136,539      $ —        $ —        $ 142,393   

Gas production

     20,800        25,867        —          —          46,667   

Natural gas liquids production

     10,219        5,717        —          —          15,936   

Other operational income

     1,880        170        —          —          2,050   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating revenue

     38,753        168,293        —          —          207,046   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

          

Lease operating expenses

     5,046        44,408        —          —          49,454   

Transportation, processing and gathering expenses

     10,456        3,642        —          —          14,098   

Production taxes

     1,903        1,354        —          —          3,257   

Depreciation, depletion, amortization

     30,385        62,450        —          —          92,835   

Accretion expense

     61        7,672        —          —          7,733   

Salaries, general and administrative

     16,639        —          (2     —          16,637   

Incentive compensation expense

     3,903        —          —          —          3,903   

Derivative expense, net

     —          2,516        —          —          2,516   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     68,393        122,042        (2     —          190,433   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

     (29,640     46,251        2        —          16,613   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other (income) expenses:

          

Interest expense

     9,880        33        —          —          9,913   

Interest income

     (146     (41     (6     —          (193

Other income

     (192     (530     —          —          (722

Other expense

     179        —          —          —          179   

Income from investment in subsidiaries

     (29,947     —          (8     29,955        —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other (income) expenses

     (20,226     (538     (14     29,955        9,177   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before taxes

     (9,414     46,789        16        (29,955     7,436   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Provision (benefit) for income taxes:

          

Current

     —          —          —          —          —     

Deferred

     (13,858     16,850        —          —          2,992   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total income taxes

     (13,858     16,850        —          —          2,992   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 4,444      $ 29,939      $ 16      ($ 29,955   $ 4,444   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

   ($ 4,566   $ 29,939      $ 16      ($ 29,955   ($ 4,566
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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CONDENSED CONSOLIDATING STATEMENT OF INCOME

THREE MONTHS ENDED JUNE 30, 2013

(In thousands)

 

     Parent     Guarantor
Subsidiary
    Non-
Guarantor
Subsidiaries
    Eliminations     Consolidated  

Operating revenue:

          

Oil production

   $ 8,378      $ 176,120      $ —        $ —        $ 184,498   

Gas production

     20,071        27,761        —          —          47,832   

Natural gas liquids production

     6,378        4,822        —          —          11,200   

Other operational income

     790        189        —          —          979   

Derivate income, net

     —          1,368        —          —          1,368   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating revenue

     35,617        210,260        —          —          245,877   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

          

Lease operating expenses

     3,425        47,092        —          —          50,517   

Transportation, processing and gathering expenses

     5,729        3,167        —          —          8,896   

Production taxes

     1,320        2,771        —          —          4,091   

Depreciation, depletion, amortization

     25,088        62,121        —          —          87,209   

Accretion expense

     93        8,225        —          —          8,318   

Salaries, general and administrative

     15,150        —          48        —          15,198   

Incentive compensation expense

     2,050        —          —          —          2,050   

Other operational expenses

     51        22        —            73   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     52,906        123,398        48        —          176,352   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

     (17,289     86,862        (48     —          69,525   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other (income) expenses:

          

Interest expense

     8,882        13        —          —          8,895   

Interest income

     (70     (38     (7     —          (115

Other income

     (217     (465     —          —          (682

(Income) loss from investment in subsidiaries

     (55,893     —          39        55,854        —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other (income) expenses

     (47,298     (490     32        55,854        8,098   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before taxes

     30,009        87,352        (80     (55,854     61,427   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Provision (benefit) for income taxes:

          

Current

     (6,993     —          —          —          (6,993

Deferred

     (2,020     31,418        —          —          29,398   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total income taxes

     (9,013     31,418        —          —          22,405   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ 39,022      $ 55,934      ($ 80   ($ 55,854   $ 39,022   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

   $ 53,060      $ 55,934      ($ 80   ($ 55,854   $ 53,060   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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CONDENSED CONSOLIDATING STATEMENT OF INCOME

SIX MONTHS ENDED JUNE 30, 2014

(In thousands)

 

     Parent     Guarantor
Subsidiary
    Non-
Guarantor
Subsidiaries
    Eliminations     Consolidated  

Operating revenue:

          

Oil production

   $ 12,490      $ 268,192      $ —        $ —        $ 280,682   

Gas production

     49,639        53,390        —          —          103,029   

Natural gas liquids production

     28,473        15,433        —          —          43,906   

Other operational income

     2,704        343        —          —          3,047   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating revenue

     93,306        337,358        —          —          430,664   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

          

Lease operating expenses

     9,059        87,298        —          —          96,357   

Transportation, processing and gathering expenses

     20,773        7,951        —          —          28,724   

Production taxes

     3,584        2,735        —          —          6,319   

Depreciation, depletion, amortization

     58,440        117,041        —          —          175,481   

Accretion expense

     129        15,159        —          —          15,288   

Salaries, general and administrative

     32,964        2        —          —          32,966   

Incentive compensation expense

     7,037        —          —          —          7,037   

Other operational expenses

     176        36        —          —          212   

Derivative expense, net

     —          3,115        —          —          3,115   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     132,162        233,337        —          —          365,499   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

     (38,856     104,021        —          —          65,165   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other (income) expenses:

          

Interest expense

     18,233        37        —          —          18,270   

Interest income

     (225     (99     (12     —          (336

Other income

     (373     (1,056     —          —          (1,429

Other expense

     179        —          —          —          179   

Income from investment in subsidiaries

     (67,292     —          (12     67,304        —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other (income) expenses

     (49,478     (1,118     (24     67,304        16,684   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before taxes

     10,622        105,139        24        (67,304     48,481   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Provision (benefit) for income taxes:

          

Current

     —          —          —          —          —     

Deferred

     (19,765     37,859        —          —          18,094   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total income taxes

     (19,765     37,859        —          —          18,094   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 30,387      $ 67,280      $ 24      ($ 67,304   $ 30,387   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 14,288      $ 67,280      $ 24      ($ 67,304   $ 14,288   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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CONDENSED CONSOLIDATING STATEMENT OF INCOME

SIX MONTHS ENDED JUNE 30, 2013

(In thousands)

 

     Parent     Guarantor
Subsidiary
    Non-
Guarantor
Subsidiaries
    Eliminations     Consolidated  

Operating revenue:

          

Oil production

   $ 13,721      $ 357,702      $ —        $ —        $ 371,423   

Gas production

     27,269        57,385        —          —          84,654   

Natural gas liquids production

     8,677        11,701        —          —          20,378   

Other operational income

     1,439        347        —          —          1,786   

Derivate income, net

     —          147        —          —          147   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating revenue

     51,106        427,282        —          —          478,388   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

          

Lease operating expenses

     5,716        97,845        —          —          103,561   

Transportation, processing and gathering expenses

     7,781        6,512        —          —          14,293   

Production taxes

     2,187        3,993        —          —          6,180   

Depreciation, depletion, amortization

     35,279        127,365        —          —          162,644   

Accretion expense

     186        16,395        —          —          16,581   

Salaries, general and administrative

     29,098        4        48        —          29,150   

Incentive compensation expense

     3,481        —          —          —          3,481   

Other operational expenses

     101        44        —            145   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     83,829        252,158        48        —          336,035   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

     (32,723     175,124        (48     —          142,353   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other (income) expenses:

          

Interest expense

     18,509        21        —          —          18,530   

Interest income

     (150     (75     (7     —          (232

Other income

     (441     (967     —          —          (1,408

(Income) loss from investment in subsidiaries

     (112,721     —          39        112,682        —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other (income) expenses

     (94,803     (1,021     32        112,682        16,890   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before taxes

     62,080        176,145        (80     (112,682     125,463   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Provision (benefit) for income taxes:

          

Current

     (10,739     —          —          —          (10,739

Deferred

     (6,961     63,383        —          —          56,422   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total income taxes

     (17,700     63,383        —          —          45,683   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ 79,780      $ 112,762      ($ 80   ($ 112,682   $ 79,780   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

   $ 75,477      $ 112,762      ($ 80   ($ 112,682   $ 75,477   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

SIX MONTHS ENDED JUNE 30, 2014

(In thousands)

 

     Parent     Guarantor
Subsidiary
    Non-
Guarantor
Subsidiaries
    Eliminations     Consolidated  

Cash flows from operating activities:

          

Net income

   $ 30,387      $ 67,280      $ 24      ($ 67,304   $ 30,387   

Adjustments to reconcile net income to net cash provided by operating activities:

          

Depreciation, depletion and amortization

     58,440        117,041        —          —          175,481   

Accretion expense

     129        15,159        —          —          15,288   

Deferred income tax provision (benefit)

     (19,765     37,859        —          —          18,094   

Settlement of asset retirement obligations

     (82     (24,833     —          —          (24,915

Non-cash stock compensation expense

     5,358        —          —          —          5,358   

Non-cash derivative expense

     —          2,697        —          —          2,697   

Non-cash interest expense

     8,229        —          —          —          8,229   

Change in current income taxes

     (6     —          —          —          (6

Non-cash income from investment in subsidiaries

     (67,292     —          (12     67,304        —     

Change in intercompany receivables/payables

     (126,526     114,841        11,685        —          —     

(Increase) decrease in accounts receivable

     (42,216     16,692        —          —          (25,524

Increase in other current assets

     (82     —          —          —          (82

Increase (decrease) in accounts payable

     2,052        (209     —          —          1,843   

Increase in other current liabilities

     48,987        1,798        —          —          50,785   

Other

     381        (1,056     —          —          (675
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash (used in) provided by operating activities

     (102,006     347,269        11,697        —          256,960   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from investing activities:

          

Investment in oil and gas properties

     (121,836     (384,349     (11,719     —          (517,904

Proceeds from sale of oil and gas properties, net of expenses

     9,777        42,178        —          —          51,955   

Investment in fixed and other assets

     (3,896     —          —          —          (3,896

Change in restricted funds

     —          —          (356     —          (356

Investment in subsidiaries

     —          —          (12,176     12,176        —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     (115,955     (342,171     (24,251     12,176        (470,201
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from financing activities:

          

Net proceeds from issuance of common stock

     226,036        —          —          —          226,036   

Deferred financing costs

     (3,167     —          —          —          (3,167

Equity proceeds from parent

     —          —          12,176        (12,176     —     

Net payments for share-based compensation

     (6,948     —          —          —          (6,948
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by financing activities

     215,921        —          12,176        (12,176     215,921   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Effect of exchange rate changes on cash

     —          —          (18     —          (18
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net change in cash and cash equivalents

     (2,040     5,098        (396     —          2,662   

Cash and cash equivalents, beginning of period

     246,294        84,290        640        —          331,224   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 244,254      $ 89,388      $ 244      $ —        $ 333,886   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

SIX MONTHS ENDED JUNE 30, 2013

(In thousands)

 

     Parent     Guarantor
Subsidiary
    Non-
Guarantor
Subsidiaries
    Eliminations     Consolidated  

Cash flows from operating activities:

          

Net income (loss)

   $ 79,780      $ 112,762      ($ 80   ($ 112,682   $ 79,780   

Adjustments to reconcile net income to net cash provided by operating activities:

          

Depreciation, depletion and amortization

     35,279        127,365        —          —          162,644   

Accretion expense

     186        16,395        —          —          16,581   

Deferred income tax provision (benefit)

     (6,961     63,383        —          —          56,422   

Settlement of asset retirement obligations

     —          (37,335     —          —          (37,335

Non-cash stock compensation expense

     4,866        —          —          —          4,866   

Excess tax benefits

     (104     —          —          —          (104

Non-cash derivative expense

     —          311        —          —          311   

Non-cash interest expense

     8,181        —          —          —          8,181   

Non-cash income (loss) from investment in subsidiaries

     (112,722     —          40        112,682        —     

Change in current income taxes

     (16,399     —          —          —          (16,399

Change in intercompany receivables/payables

     170,815        (170,859     44        —          —     

(Increase) decrease in accounts receivable

     (17,365     18,503        —          —          1,138   

Increase in other current assets

     (245     —          —          —          (245

Decrease in inventory

     158        —          —          —          158   

Increase in accounts payable

     4,507        2,086        —          —          6,593   

Increase (decrease) in other current liabilities

     (5,258     2,088        —          —          (3,170

Other

     (2,482     (966     —          —          (3,448
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

     142,236        133,733        4        —          275,973   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from investing activities:

          

Investment in oil and gas properties

     (176,896     (133,659     (9,663     —          (320,218

Investment in fixed and other assets

     (1,711     —          —          —          (1,711

Change in restricted funds

     —          —          (3,515     —          (3,515

Investment in subsidiaries

     (14,000     —          (13,404     27,404        —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     (192,607     (133,659     (26,582     27,404        (325,444
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from financing activities:

          

Deferred financing costs

     (11     —          —          —          (11

Excess tax benefits

     104        —          —          —          104   

Equity proceeds from parent

     —          —          27,404        (27,404     —     

Net payments for share-based compensation

     (3,590     —          —          —          (3,590
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash (used in) provided by financing activities

     (3,497     —          27,404        (27,404     (3,497
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Effect of exchange rate on cash

     —          —          (186     —          (186
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net change in cash and cash equivalents

     (53,868     74        640        —          (53,154

Cash and cash equivalents, beginning of period

     228,398        51,128        —          —          279,526   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 174,530      $ 51,202      $ 640      $ —        $ 226,372   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

22


Table of Contents
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

The information in this Quarterly Report on Form 10-Q (this “Form 10-Q”) includes “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 or current facts, that address activities, events, outcomes and other matters that we plan, expect, intend, assume, believe, budget, predict, forecast, project, estimate or anticipate (and other similar expressions) will, should or may occur in the future are forward-looking statements. These forward-looking statements are based on management’s current belief, based on currently available information, as to the outcome and timing of future events. When considering forward-looking statements, you should keep in mind the risk factors and other cautionary statements as described in our 2013 Annual Report on Form 10-K and in this Form 10-Q.

Forward-looking statements appear in a number of places in this Form 10-Q and include statements with respect to, among other things:

 

    any expected results or benefits associated with our acquisitions;

 

    expected results from risked weighted drilling success;

 

    estimates of our future oil and natural gas production, including estimates of any increases in oil and natural gas production;

 

    planned capital expenditures and the availability of capital resources to fund capital expenditures;

 

    our outlook on oil and natural gas prices;

 

    estimates of our oil and natural gas reserves;

 

    any estimates of future earnings growth;

 

    the impact of political and regulatory developments;

 

    our outlook on the resolution of pending litigation and government inquiry;

 

    estimates of the impact of new accounting pronouncements on earnings in future periods;

 

    our future financial condition or results of operations and our future revenues and expenses;

 

    the amount, nature and timing of any potential divestiture transactions;

 

    our access to capital and our anticipated liquidity;

 

    estimates of future income taxes; and

 

    our business strategy and other plans and objectives for future operations.

We caution you that these forward-looking statements are subject to all of the risks and uncertainties, many of which are beyond our control, incident to the exploration for and development, production and marketing of oil and natural gas. These risks include, among other things:

 

    commodity price volatility;

 

    consequences of a catastrophic event like the Deepwater Horizon oil spill;

 

    domestic and worldwide economic conditions;

 

    the availability of capital on economic terms to fund our capital expenditures and acquisitions;

 

    our level of indebtedness;

 

    declines in the value of our oil and gas properties resulting in a decrease in our borrowing base under our bank credit facility and impairments;

 

    our ability to replace and sustain production;

 

    the impact of a financial crisis on our business operations, financial condition and ability to raise capital;

 

    the ability of financial counterparties to perform or fulfill their obligations under existing agreements;

 

    third-party interruption of sales to market;

 

    inflation;

 

    lack of availability and cost of goods and services;

 

    market conditions relating to potential acquisition and divestiture transactions;

 

    regulatory and environmental risks associated with drilling and production activities;

 

    drilling and other operating risks;

 

    unsuccessful exploration and development drilling activities;

 

    hurricanes and other weather conditions;

 

    adverse effects of changes in applicable tax, environmental, derivatives and other regulatory legislation, including changes affecting our offshore and Appalachian operations;

 

    uncertainty inherent in estimating proved oil and natural gas reserves and in projecting future rates of production and timing of development expenditures; and

 

    other risks described in this Form 10-Q.

 

 

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Table of Contents

For additional information regarding known material factors that could cause our actual results to differ from our projected results, please see (1) Part II, Item 1A. Risk Factors, of this Form 10-Q and (2) Part I, Item 1A, of our 2013 Annual Report on Form 10-K. Should one or more of the risks or uncertainties described above, in our 2013 Annual Report on Form 10-K or elsewhere in this Form 10-Q occur, or should underlying assumptions prove incorrect, our actual results and plans could differ materially from those expressed in any forward-looking statements. We specifically disclaim all responsibility to publicly update any information contained in a forward-looking statement or any forward-looking statement in its entirety and therefore disclaim any resulting liability for potentially related damages. All forward-looking statements attributable to us are expressly qualified in their entirety by this cautionary statement.

Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) contained in this Form 10-Q should be read in conjunction with the MD&A contained in our 2013 Annual Report on Form 10-K.

Overview

We are an independent oil and natural gas company engaged in the acquisition, exploration, exploitation, development and operation of oil and gas properties. We have been operating in the Gulf Coast Basin since our incorporation in 1993 and have established a technical and operational expertise in this area. We have expanded our reserve base outside of the conventional shelf of the GOM and into the more prolific reserve basins of the GOM deep water and GOM deep gas as well as onshore oil and gas shale opportunities, including the Marcellus Shale in Appalachia.

Critical Accounting Estimates

Our 2013 Annual Report on Form 10-K describes the accounting estimates that we believe are critical to the reporting of our financial position and operating results and that require management’s most difficult, subjective or complex judgments. Our most significant estimates are:

 

    remaining proved oil and natural gas reserve volumes and the timing of their production;

 

    estimated costs to develop and produce proved oil and natural gas reserves;

 

    accruals of exploration costs, development costs, operating costs and production revenue;

 

    timing and future costs to abandon our oil and gas properties;

 

    effectiveness and estimated fair value of derivative positions;

 

    classification of unevaluated property costs;

 

    capitalized general and administrative costs and interest;

 

    estimates of fair value in business combinations;

 

    current and deferred income taxes; and

 

    contingencies.

This Form 10-Q should be read together with the discussion contained in our 2013 Annual Report on Form 10-K regarding these critical accounting policies.

Other Factors Affecting Our Business and Financial Results

In addition to the matters discussed above, our business, financial condition and results of operations are affected by a number of other factors. This Form 10-Q should be read in conjunction with the discussion in Part I, Item 1A, of our 2013 Annual Report on Form 10-K and in this Form 10-Q under Part II, Item 1A. Risk Factors, regarding our known material risk factors.

Known Trends and Uncertainties

Hurricanes – Since the majority of our production originates in the GOM, we are particularly vulnerable to the effects of hurricanes on production. Additionally, affordable and practical insurance coverage for property damage to our facilities for hurricanes has been difficult to obtain for some time so we have eliminated our hurricane insurance coverage. Significant hurricane impacts could include reductions and/or deferrals of future oil and natural gas production and revenues, increased lease operating expenses for evacuations and repairs and possible increases to and/or acceleration of plugging and abandonment costs.

Deep Water Operations – We are currently operating two significant properties in the deep water of the GOM. Additionally, we are engaged in deep water drilling operations. Operations in the deep water can result in increased operational risks as has been demonstrated by the Deepwater Horizon disaster in 2010. Despite technological advances since this disaster, liabilities for environmental losses, personal injury and loss of life and significant regulatory fines in the event of a disaster could be well in excess of insured amounts and result in significant current losses on our statement of income as well as going concern issues.

 

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Table of Contents

Non-U.S. Operations In April 2013, we entered into an agreement to participate in the drilling of exploratory wells in Canada. Included in unevaluated oil and gas property costs at June 30, 2014 are $14.7 million of capital expenditures related to our oil and gas property investments in Canada. Under full cost accounting, investments in individual countries represent separate cost centers for the computation of depreciation, depletion and amortization (“DD&A”) as well as for full cost ceiling test evaluations. Given that this is our sole investment in Canada, it is possible that upon a more complete evaluation of this project that some or all of this investment could be recognized as a charge to expense on our statement of income.

Earnings Per Share – On March 5, 2012, we issued $300 million of 2017 Convertible Notes. These notes are convertible into cash, shares of our common stock or a combination thereof at our election. Current accounting standards require us to use the treasury method for determining dilution in our diluted earnings per share computation since it is management’s intention to settle the principal amount of the notes in cash. However, if due to changes in facts and circumstances beyond our control, such intention were to change, or it becomes probable that we will be unable to settle the principal in cash, we could be required to change our methodology for determining fully diluted earnings per share to the if-converted method. The if-converted method would result in a substantial dilutive effect on diluted earnings per share when compared to the treasury method.

For the second quarter of 2014, our average stock price exceeded the conversion price of $42.65 per share provided in our 2017 Convertible Notes and had a nominal dilutive impact on our diluted earnings per share computation. If this condition were to continue, it will have a dilutive impact on our diluted earnings per share computation in future quarters. Additionally, if our average stock price were to exceed the strike price of the Sold Warrants in future quarters, this would have an additional dilutive impact on our diluted earnings per share computation. Under U.S. GAAP, the mitigating impact of the antidilutive Purchased Call Options cannot be considered in the computation of diluted shares outstanding.

Liquidity and Capital Resources

As of August 5, 2014, we had $479 million of availability under our bank credit facility and cash on hand of approximately $445 million. Our capital expenditure budget for 2014 has been set at $825 million, which excludes material acquisitions and capitalized salaries, general and administrative (“SG&A”) expenses and interest. In addition, based on the results of our drilling program in the first half of 2014, we expect to have additional capital requirements in 2014 related to the development of our oil and gas properties, which may require an increase in our capital expenditure budget for 2014. Any increase in our capital expenditure budget will be subject to approval of our Board of Directors. Based on our outlook of commodity prices and our estimated production, we expect our 2014 capital expenditures to exceed our cash flows from operating activities. We intend to finance our capital expenditure budget with cash flows from operating activities, cash on hand and proceeds received from the divestitures of non-core properties and the recently completed equity offering.

Cash Flows and Working Capital. Net cash provided by operating activities totaled $257.0 million during the six months ended June 30, 2014 compared to $276.0 million in the comparable period in 2013.

Net cash used in investing activities totaled $470.2 million during the six months ended June 30, 2014, which primarily represents our investment in oil and natural gas properties of $517.9 million offset by proceeds from the sale of oil and natural gas properties of $52.0 million. Net cash used in investing activities totaled $325.4 million during the six months ended June 30, 2013, which primarily represents our investment in oil and natural gas properties.

Net cash provided by financing activities totaled $215.9 million during the six months ended June 30, 2014, which primarily represents net proceeds from the sale of common stock of approximately $226.0 million offset by net payments for share-based compensation of approximately $6.9 million and deferred financing costs of approximately $3.2 million associated with our new credit facility. Net cash used in financing activities totaled $3.5 million during the six months ended June 30, 2013, which primarily represents net payments for share-based compensation.

We had working capital at June 30, 2014 of $132.5 million.

Capital Expenditures. During the three months ended June 30, 2014, additions to oil and gas property costs of $269.7 million included $29.2 million of lease and property acquisition costs, $8.4 million of capitalized SG&A expenses (inclusive of incentive compensation) and $11.3 million of capitalized interest. During the six months ended June 30, 2014, additions to oil and gas property costs of $545.9 million included $31.3 million of lease and property acquisition costs, $16.1 million of capitalized SG&A expenses (inclusive of incentive compensation) and $24.1 million of capitalized interest. These investments were financed with cash on hand and cash flows from operations.

 

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Bank Credit Facility. On June 24, 2014, we entered into an amended and restated revolving credit facility with commitments totaling $900 million (subject to borrowing base limitations) through a syndicated bank group, replacing our previous facility. The bank credit facility matures on July 1, 2019. Our initial borrowing base under the bank credit facility has been set at $500 million, an increase from the previous borrowing base of $400 million. As of June 30 and August 5, 2014, we had no outstanding borrowings under the bank credit facility and $21.0 million in letters of credit had been issued pursuant to the bank credit facility, leaving $479.0 million of availability under the bank credit facility. Subject to certain exceptions, the bank credit facility is required to be guaranteed by all of our material domestic direct and indirect subsidiaries. The bank credit facility is guaranteed by our only material subsidiary, Stone Offshore.

The borrowing base under the bank credit facility is redetermined semi-annually, in May and November, by the lenders, taking into consideration the estimated loan value of our oil and gas properties and those of our subsidiaries that guarantee the bank facility in accordance with the lenders’ customary practices for oil and gas loans. In addition, we and the lenders each have discretion at any time, but not more than two additional times in any calendar year, to have the borrowing base redetermined. The bank credit facility is collateralized by substantially all of Stone’s and Stone Offshore’s assets. Stone and Stone Offshore are required to mortgage, and grant a security interest in, their oil and natural gas reserves representing at least 80% of the discounted present value of the future net cash flows from their proved oil and natural gas reserves reviewed in determining the borrowing base.

Interest on loans under the bank credit facility is calculated using the LIBOR rate or the base rate, at the election of Stone. The margin for loans at the LIBOR rate is determined based on borrowing base utilization and ranges from 1.500% to 2.500%. Under the financial covenants of our bank credit facility, we must (1) maintain a ratio of Consolidated Funded Debt to consolidated EBITDA, as defined in the credit agreement, for the preceding four quarterly periods of not greater than 3.75 to 1 and (2) maintain a ratio of consolidated EBITDA to consolidated Net Interest Expense, as defined in the credit agreement, for the preceding four quarterly periods of not less than 2.50 to 1. As of June 30, 2014, our debt to EBITDA ratio was 1.77 to 1 and our EBITDA to consolidated Net Interest Expense ratio was approximately 17.13 to 1. In addition, our bank credit facility includes certain customary restrictions or requirements with respect to disposition of properties, incurrence of additional debt, change of control and reporting responsibilities. These covenants may limit or prohibit us from paying cash dividends but do allow for limited stock repurchases. These covenants also restrict our ability to prepay other indebtedness under certain circumstances. We were in compliance with all covenants as of June 30, 2014.

Common Stock OfferingIn May 2014, we sold 5,750,000 shares of our common stock in a public offering at a price of $41.00 per share resulting in net proceeds of approximately $226.0 million after deducting the underwriting discount and offering expenses. The net proceeds are being used for general corporate purposes, which may include development of the Amethyst discovery, additional development drilling in the Cardona area, potential Utica Shale development and/or the acquisition of additional Appalachian acreage.

Sale of Non-core GOM Conventional Shelf Properties On July 31, 2014, we completed the sale of certain of our non-core properties in the GOM conventional shelf (the “sold properties”) for cash consideration of approximately $177.6 million, after giving effect to preliminary purchase price adjustments, and the assumption of the associated asset retirement obligations. All of the proceeds from the sale have been deposited with a Qualified Intermediary for potential reinvestment in like-kind replacement property as defined under Section 1031 of the Internal Revenue Code. We have until September 14, 2014 (the “Identification Period”) to identify qualified replacement property and have until January 27, 2015 (the “Exchange Period”) to close on such property. Compliance with these provisions provides for deferral of taxable gain on these sales proceeds. The Qualified Trust Agreement and Exchange Agreement provide for certain restrictions on the use of these funds during the Identification Period and, assuming identification is accomplished, additional restrictions during the Exchange Period.

 

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Results of Operations

The following tables set forth certain information with respect to our oil and gas operations:

 

     Three Months Ended
June 30,
              
     2014      2013      Variance     % Change  

Production:

          

Oil (MBbls)

     1,481         1,767         (286     (16 %) 

Natural gas (MMcf)

     12,363         11,745         618        5

Natural gas liquids (“NGLs”) (MBbls)

     467         407         60        15

Oil, natural gas and NGLs (MMcfe)

     24,051         24,789         (738     (3 %) 

Revenue data (in thousands): (1)

          

Oil revenue

   $ 142,393       $ 184,498       ($ 42,105     (23 %) 

Natural gas revenue

     46,667         47,832         (1,165     (2 %) 

NGLs revenue

     15,936         11,200         4,736        42
  

 

 

    

 

 

    

 

 

   

Total oil, natural gas and NGL revenue

   $ 204,996       $ 243,530       ($ 38,534     (16 %) 

Average prices: (1)

          

Oil (per Bbl)

   $ 96.15       $ 104.41       ($ 8.26     (8 %) 

Natural gas (per Mcf)

     3.77         4.07         (0.30     (7 %) 

NGLs (per Bbl)

     34.12         27.52         6.60        24

Oil, natural gas and NGLs (per Mcfe)

     8.52         9.82         (1.30     (13 %) 

Expenses (per Mcfe):

          

Lease operating expenses

   $ 2.06       $ 2.04       $ 0.02        1

SG&A expenses (2)

     0.69         0.61         0.08        13

DD&A expense on oil and gas properties

     3.82         3.48         0.34        10

 

(1) Includes the cash settlement of effective hedging contracts.
(2) Excludes incentive compensation expense.

 

     Six Months Ended
June 30,
              
     2014      2013      Variance     % Change  

Production:

          

Oil (MBbls)

     2,899         3,434         (535     (16 %) 

Natural gas (MMcf)

     25,004         22,103         2,901        13

NGLs (MBbls)

     977         623         354        57

Oil, natural gas and NGLs (MMcfe)

     48,260         46,445         1,815        4

Revenue data (in thousands): (1)

          

Oil revenue

   $ 280,682       $ 371,423       ($ 90,741     (24 %) 

Natural gas revenue

     103,029         84,654         18,375        22

NGLs revenue

     43,906         20,378         23,528        115
  

 

 

    

 

 

    

 

 

   

Total oil, natural gas and NGL revenue

   $ 427,617       $ 476,455       ($ 48,838     (10 %) 

Average prices: (1)

          

Oil (per Bbl)

   $ 96.82       $ 108.16       ($ 11.34     (10 %) 

Natural gas (per Mcf)

     4.12         3.83         0.29        8

NGLs (per Bbl)

     44.94         32.71         12.23        37

Oil, natural gas and NGLs (per Mcfe)

     8.86         10.26         (1.40     (14 %) 

Expenses (per Mcfe):

          

Lease operating expenses

   $ 2.00       $ 2.23       ($ 0.23     (10 %) 

SG&A expenses (2)

     0.68         0.63         0.05        8

DD&A expense on oil and gas properties

     3.60         3.46         0.14        4

 

(1) Includes the cash settlement of effective hedging contracts.
(2) Excludes incentive compensation expense.

Net Income. During the three months ended June 30, 2014, we reported net income totaling $4.4 million, or $0.08 per share, compared to net income for the three months ended June 30, 2013 of $39.0 million, or $0.78 per share. During the six months ended June 30, 2014, we reported net income totaling $30.4 million, or $0.59 per share, compared to net income for the six months ended June 30, 2013 of $79.8 million, or $1.60 per share. All per share amounts are on a diluted basis.

 

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The variance in the three and six month periods’ results was due to the following components:

Production. During the three months ended June 30, 2014, total production volumes decreased to 24.1 Bcfe compared to 24.8 Bcfe produced during the comparable 2013 period, representing a 3% decrease. Oil production during the three months ended June 30, 2014 totaled approximately 1,481,000 Bbls compared to 1,767,000 Bbls produced during the comparable 2013 period. Natural gas production totaled 12.4 Bcf during the three months ended June 30, 2014 compared to 11.7 Bcf during the comparable 2013 period. NGL production during the three months ended June 30, 2014 totaled approximately 467,000 Bbls compared to 407,000 Bbls produced during the comparable 2013 period.

During the six months ended June 30, 2014, total production volumes increased to 48.3 Bcfe compared to 46.4 Bcfe produced during the comparable 2013 period, representing a 4% increase. Oil production during the six months ended June 30, 2014 totaled approximately 2,899,000 Bbls compared to 3,434,000 Bbls produced during the comparable 2013 period. Natural gas production totaled 25.0 Bcf during the six months ended June 30, 2014 compared to 22.1 Bcf during the comparable 2013 period. NGL production during the six months ended June 30, 2014 totaled approximately 977,000 Bbls compared to 623,000 Bbls produced during the comparable 2013 period.

The increase in gas production during the six months ended June 30, 2014 was attributable to new wells in the Mary and Heather fields that were brought online during the fourth quarter of 2013 and the third well in the La Cantera field that was brought online during the second quarter of 2013. The decrease in oil production during the six months ended June 30, 2014 was partially attributable to extended downtime at our Main Pass 288 field, as well as the sale of our Weeks Island, Cut Off and Clovelly fields. Additionally, production during the three months ended June 30, 2014 was negatively impacted by scheduled production downtime at our Pompano deep water platform, unscheduled third party pipeline downtime at our Mary field in West Virginia and a slight delay in bringing new Appalachian wells on production. The Main Pass 288 field, Pompano platform and the Mary field have been returned to full production. During the six months ended June 30, 2013, production was negatively impacted by third-party pipeline failures in Appalachia.

On July 31, 2014, we completed the sale of certain of our non-core GOM conventional shelf properties. For the three months ended June 30, 2014, total production volumes attributable to the sold properties were approximately 5.0 Bcfe, comprised of 2.9 Bcf of natural gas, 315,000 Bbls of oil and 36,000 Bbls of NGLs.

Prices. Prices realized during the three months ended June 30, 2014 averaged $96.15 per Bbl of oil, $3.77 per Mcf of natural gas and $34.12 per Bbl of NGLs, or 13% lower, on an Mcfe basis, than average realized prices of $104.41 per Bbl of oil, $4.07 per Mcf of natural gas and $27.52 per Bbl of NGLs during the comparable 2013 period. Prices realized during the six months ended June 30, 2014 averaged $96.82 per Bbl of oil, $4.12 per Mcf of natural gas and $44.94 per Bbl of NGLs, or 14% lower, on an Mcfe basis, than average realized prices of $108.16 per Bbl of oil, $3.83 per Mcf of natural gas and $32.71 per Bbl of NGLs during the comparable 2013 period. All unit pricing amounts include the cash settlement of effective hedging contracts.

We enter into various derivative contracts in order to reduce our exposure to the possibility of declining oil and gas prices. Our effective hedging transactions decreased our average realized natural gas price by $0.26 per Mcf and decreased our average realized oil price by $4.15 per Bbl during the three months ended June 30, 2014. During the three months ended June 30, 2013, our effective hedging transactions increased our average realized natural gas price by $0.17 per Mcf and increased our average realized oil price by $3.02 per Bbl. During the six months ended June 30, 2014, our effective hedging transactions decreased our average realized natural gas price by $0.31 per Mcf and decreased our average realized oil price by $2.98 per Bbl. During the six months ended June 30, 2013, our effective hedging transactions increased our average realized natural gas price by $0.27 per Mcf and increased our average realized oil price by $2.88 per Bbl.

Revenue. Oil, natural gas and NGL revenue was $205.0 million during the three months ended June 30, 2014 compared to $243.5 million during the comparable period of 2013. The decrease was attributable to a 13% decrease in average realized prices in addition to a 3% decrease in production quantities on a gas equivalent basis. For the six months ended June 30, 2014 and 2013, oil, natural gas and NGL revenue totaled $427.6 million and $476.5 million, respectively. The decrease was attributable to a 14% decrease in average realized prices, which was partially offset by a 4% increase in production quantities on a gas equivalent basis. For the three months ended June 30, 2014, total oil, natural gas and NGL revenues attributable to the sold properties were $46.4 million. As a result of the July, 2014 divestiture, we expect that total revenue will be lower in future quarters until production begins at our deep water Cardona and Cardona South discoveries.

        Expenses. Lease operating expenses during the three months ended June 30, 2014 and 2013 totaled $49.5 million and $50.5 million, respectively. For the six months ended June 30, 2014 and 2013, lease operating expenses totaled $96.4 million and $103.6 million, respectively. On a unit of production basis, lease operating expenses were $2.06 per Mcfe and $2.04 per Mcfe for the three months ended June 30, 2014 and 2013, respectively, and $2.00 per Mcfe and $2.23 per Mcfe for the six months ended June 30, 2014 and 2013, respectively. The decrease in lease operating expenses during the six months ended June 30, 2014 was primarily attributable to a decrease in major maintenance projects. Lease operating expenses attributable to the sold properties were $16.5 million for the three months ended June 30, 2014. We expect lease operating expenses to be lower in future quarters as a result of the July, 2014 divestiture.

Transportation, processing and gathering expenses during the three months ended June 30, 2014 and 2013 totaled $14.1 million and $8.9 million, respectively. For the six months ended June 30, 2014 and 2013, transportation, processing, and gathering expenses totaled $28.7 million and $14.3 million, respectively. The increase was attributable to higher gas and NGL volumes, particularly in Appalachia, where processing and gathering costs are higher. For the three months ended June 30, 2014, transportation, processing and gathering expenses attributable to the sold properties were $1.3 million.

DD&A expense on oil and gas properties for the three months ended June 30, 2014 totaled $91.9 million compared to $86.3 million during the comparable period of 2013. For the six months ended June 30, 2014 and 2013, DD&A expense totaled $173.7 million and $160.8 million, respectively. On a unit of production basis, DD&A expense was $3.82 per Mcfe and $3.48 per Mcfe during the three months ended June 30, 2014 and 2013, respectively. For the six months ended June 30, 2014 and 2013,

 

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DD&A expense, on a unit of production basis, was $3.60 per Mcfe and $3.46 per Mcfe, respectively. The increase in DD&A on a per unit basis was primarily attributable to the higher unit cost of reserve additions attributable to our GOM exploration program. We anticipate that DD&A on a unit of production basis will decrease slightly in the second half of 2014 with the expected booking of additional Appalachian reserves at a lower unit cost.

SG&A expenses (exclusive of incentive compensation) for the three months ended June 30, 2014 were $16.6 million compared to $15.2 million for the three months ended June 30, 2013. For the six months ended June 30, 2014 and 2013, SG&A expenses (exclusive of incentive compensation) totaled $33.0 million and $29.2 million, respectively. The increase was the result of increased legal fees for the six months ended June 30, 2014, as well as increased staffing and salary adjustments. SG&A expenses for the six months ended June 30, 2013 include a reimbursement of $1.6 million of legal fees relating to the settlement of litigation in prior periods.

For the three months ended June 30, 2014 and 2013, incentive compensation expense totaled $3.9 million and $2.1 million, respectively. For the six months ended June 30, 2014 and 2013, incentive compensation expense totaled $7.0 million and $3.5 million, respectively. These amounts relate to the accrual of estimated incentive compensation bonuses calculated based on the projected achievement of certain strategic objectives for each fiscal year.

Interest expense for the three months ended June 30, 2014 totaled $9.9 million, net of $11.3 million of capitalized interest, compared to interest expense of $8.9 million, net of $10.9 million of capitalized interest, during the comparable 2013 period. For the six months ended June 30, 2014, interest expense totaled $18.3 million, net of $24.1 million of capitalized interest, compared to interest expense of $18.5 million, net of $20.9 million of capitalized interest, during the comparable 2013 period. The decrease in interest expense during the six months ended June 30, 2014 was primarily the result of an increase in the amount of interest capitalized to oil and gas properties.

Off-Balance Sheet Arrangements

None.

Recent Accounting Developments

Revenue Recognition. In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers” to clarify the principles for recognizing revenue and to develop a common revenue standard and disclosure requirements. The core principle of ASU 2014-09 is that an entity will recognize revenue when it transfers control of goods or services to customers at an amount that reflects the consideration to which it expects to be entitled in exchange for those goods or services. The standard is effective for fiscal years beginning after December 15, 2016, and for interim periods within those fiscal years. Early application is not permitted. Entities can choose to apply the standard using either a full retrospective approach or a modified retrospective approach, with the cumulative effect of initially applying ASU 2014-09 recognized at the date of initial application. Although we are still evaluating the effect that this new standard may have on our financial statements and related disclosures, we do not anticipate that the implementation of this new standard will have a material effect.

Defined Terms

Oil, condensate and NGLs are stated in barrels (“Bbls”) or thousand barrels (“MBbls”). Natural gas is stated in billion cubic feet (“Bcf”), million cubic feet (“MMcf”) or thousand cubic feet (“Mcf”). Oil, condensate and NGLs 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. 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. Liquidity is defined as the ability to obtain cash quickly either through the conversion of assets or incurrence of liabilities.

 

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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 natural 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 natural 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 natural gas price declines, we occasionally enter into oil and natural gas price hedging arrangements to secure a price for a portion of our expected future production.

Our hedging policy provides that not more than 50% of our estimated production quantities can be hedged for any given year without the consent of our board of directors. We believe that our hedging positions, taking into consideration the board-approved divestiture of our non-core GOM conventional shelf properties, have hedged approximately 52% of our estimated 2014 production from estimated proved reserves, 48% of our estimated 2015 production from estimated proved reserves and 7% of our estimated 2016 production from estimated proved reserves. See Part I, Item 1. Financial Statements – Note 4 – Derivative Instruments and Hedging Activities, of this Form 10-Q for a detailed discussion of hedges in place to manage our exposure to oil and natural gas price declines.

Since the filing of our 2013 Annual Report on Form 10-K, there have been no material changes in reported market risk as it relates to commodity prices.

Interest Rate Risk

We had total debt outstanding of $1,075 million at June 30, 2014, all of which bears interest at fixed rates. The $1,075 million of fixed-rate debt is comprised of $300 million face value of the 2017 Convertible Notes and $775 million of the 2022 Notes.

Our bank credit facility is subject to an adjustable interest rate. See Part I, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources of this Form 10-Q. We had no outstanding borrowings under our bank credit facility as of June 30, 2014. If we borrow funds under our bank credit facility, we may be subject to increased sensitivity to interest rate movements.

 

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As required by Rule 13a-15(b) of the Exchange Act, we have evaluated, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of the end of the period covered by this Form 10-Q. Our disclosure controls and procedures are designed to provide reasonable assurance that the information required to be disclosed by us in reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure and is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. Based upon the evaluation, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures were effective as of June 30, 2014 at the reasonable assurance level.

Changes in Internal Controls Over Financial Reporting

There has not been any change in our internal control over financial reporting that occurred during the quarter ended June 30, 2014 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II – OTHER INFORMATION

 

Item 1. Legal Proceedings

We are named as a party in certain lawsuits and regulatory proceedings arising in the ordinary course of business. We do not expect that these matters, individually or in the aggregate, will have a material adverse effect on our financial condition.

On November 11, 2013, two lawsuits were filed, and on November 12, 2013, a third lawsuit was filed, against Stone and other named co-defendants, by the Parish of Jefferson (“Jefferson Parish”), on behalf of Jefferson Parish and the State of Louisiana, in the 24th Judicial District Court for the Parish of Jefferson, State of Louisiana, alleging violations of the State and Local Coastal Resources Management Act of 1978, as amended, and the applicable regulations, rules, orders and ordinances thereunder (collectively, “the CRMA”), relating to certain of the defendants’ alleged oil and gas operations in Jefferson Parish, and seeking to recover alleged unspecified damages to the Jefferson Parish Coastal Zone and remedies, including unspecified monetary damages and declaratory relief, restoration of the Jefferson Parish Coastal Zone and related costs and attorney’s fees. In addition, on November 8, 2013, a lawsuit was filed against Stone and other named co-defendants by the Parish of Plaquemines (“Plaquemines Parish”), on behalf of Plaquemines Parish and the State of Louisiana, in the 25th Judicial District Court for the Parish of Plaquemines, State of Louisiana, alleging violations of the CRMA, relating to certain of the defendants’ alleged oil and gas operations in Plaquemines Parish, and seeking to recover alleged unspecified damages to the Plaquemines Parish Coastal Zone and remedies, including unspecified monetary damages and declaratory relief, restoration of the Plaquemines Parish Coastal Zone and related costs and attorney’s fees. Stone engaged counsel and removed the cases to federal court. The Parishes oppose removal, and these motions are pending. Stone is in the beginning stages of investigating and evaluating the allegations.

In October 2012, we received a notice from the Bureau of Safety and Environmental Enforcement (“BSEE”) that it was initiating an enforcement proceeding with respect to an Incident of Non-Compliance observed at our Vermillion Block 255 Platform H in April 2012. We believe that the conditions observed were not actually violations of applicable rules and accordingly initiated discussions with BSEE to resolve the matter. Notwithstanding these discussions, by “Reviewing Officer’s Final Decision” dated July 9, 2013, BSEE assessed a penalty against Stone of $200,000 based on $25,000 per day for eight days of alleged improper venting of gas at the platform. An administrative appeal before IBLA is pending. We do not believe that this proceeding will have a material adverse effect on our financial condition or results of operations.

In December 2011, a slope failure occurred adjacent to a well pad where we were drilling a well in Wetzel County, West Virginia. The slope failure was near a stream, and an estimated 250 to 300 cubic yards of soil and debris entered the stream. We responded to the incident by removing the discharged material from the stream and stabilizing the area in which the slope failure occurred. In October 2013, we received notice from the West Virginia Department of Environmental Protection that it was proposing to impose a penalty on us for an unauthorized discharge of pollutants into the affected stream. In January 2014, Stone and the West Virginia Department of Environmental Protection, Office of Oil and Gas (“OOG”), agreed to a Consent Order requiring Stone to pay $284,190, with $170,515 due within 30 days of the signed order and the balance of $113,675 to be applied to a Supplemental Environmental Project (“SEP”) within one year of entry of the Consent Order. On March 31, 2014, Stone received the signed order. Stone made the initial settlement payment and is awaiting the OOG’s approval of the proposed SEP.

In August 2013, Kimmeridge Energy Exploration Fund, L.P. (“Kimmeridge”) filed a lawsuit against Stone in the 15th Judicial District Court in Lafayette Parish, Louisiana seeking damages in the amount of $18,372,819 plus interest, costs and attorney fees. Kimmeridge alleges that (1) Stone was obligated by virtue of a letter of intent to negotiate in good faith and close an acquisition involving approximately 33,000 net mineral acres in the Illinois basin, and (2) Stone failed to pay brokerage costs incurred after December 31, 2012 pursuant to a separate letter of understanding between Stone and Kimmeridge. Stone denies Kimmeridge’s claims, as well as its damage calculations, and is vigorously defending against both claims.

In November 2012 and March 2013, after inspecting three Stone locations, the U.S. Environmental Protection Agency (“EPA”) issued two compliance orders relating, respectively, to Stone’s Maury pad site and Stone’s Weekley pad site and associated roads in Wetzel County, West Virginia. The EPA compliance orders allege that Stone placed fill material in United States jurisdictional waters without first obtaining the required Clean Water Act Section 404 permits and require that Stone restore the affected areas. The EPA proposed an administrative penalty and Stone submitted restoration plans for the affected areas. On June 2, 2014, Stone accepted the EPA’s offer to settle both compliance orders for $177,500. The subsequently issued consent agreement is subject to public comment, after which it will become final by August 12, 2014.

Legal proceedings are subject to substantial uncertainties concerning the outcome of material factual and legal issues relating to the litigation. Accordingly, we cannot currently predict the manner and timing of the resolution of some of these matters and may be unable to estimate a range of possible losses or any minimum loss from such matters.

 

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Item 1A. Risk Factors

There have been no material changes with respect to Stone’s risk factors previously reported in Part I, Item 1A, of our 2013 Annual Report on Form 10-K.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

On September 24, 2007, our board of directors authorized a share repurchase program for an aggregate amount of up to $100 million. The shares may be repurchased from time to time in the open market or through privately negotiated transactions. The repurchase program is subject to business and market conditions and may be suspended or discontinued at any time. Additionally, shares are sometimes withheld from certain employees and nonemployee directors to pay taxes associated with the vesting of restricted stock. These withheld shares are not issued or considered common stock repurchases under our authorized share repurchase program. The following table sets forth information regarding our repurchases or acquisitions of our common stock during the three months ended June 30, 2014:

 

Period

   Total Number
of Shares

Purchased (1)
     Average Price
Paid per Share
     Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs (2)
     Approximate Dollar Value
of Shares that May Yet be
Purchased Under the Plans
or Programs
 

April 1 – April 30, 2014

     —         $ —           —        

May 1 – May 31, 2014

     8,832         43.47         —        

June 1 – June 30, 2014

     —           —           —        
  

 

 

    

 

 

    

 

 

    
     8,832       $ 43.47         —         $ 92,928,632   
  

 

 

    

 

 

    

 

 

    

 

(1) Amount includes shares of our common stock withheld from employees and nonemployee directors upon the vesting of restricted stock in order to satisfy the required tax withholding obligations.
(2) There were no repurchases of our common stock under our repurchase program during the three months ended June 30, 2014.

 

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Table of Contents
Item 6. Exhibits

 

      3.1   Certificate of Incorporation of the Registrant, as amended (incorporated by reference to Exhibit 3.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2012 filed August 7, 2012 (File No. 001-12074)).
      3.2   Amended & Restated Bylaws of Stone Energy Corporation, dated December 19, 2013 (incorporated by reference to Exhibit 3.2 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2013 filed February 27, 2014 (File No. 001-12074)).
    10.1   $900,000,000 Fourth Amended and Restated Credit Agreement among Stone Energy Corporation as Borrower, Bank of America, N.A. as Administrative Agent and Issuing Bank, and the financial institutions named therein, dated June 24, 2014 (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, filed June 25, 2014 (File No. 001-12074)).
    10.2   Purchase and Sale Agreement (as amended) between Stone Energy Offshore, L.L.C. and Stone Energy Corporation, collectively as the seller, and Talos Energy Offshore LLC, as buyer, dated June 27, 2014 (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, filed August 1, 2014 (File No. 001-12074)).
  *31.1   Certification of Principal Executive Officer of Stone Energy Corporation as required by Rule 13a-14(a) of the Securities Exchange Act of 1934.
  *31.2   Certification of Principal Financial Officer of Stone Energy Corporation as required by Rule 13a-14(a) of the Securities Exchange Act of 1934.
*#32.1   Certification of Chief Executive Officer and Chief Financial Officer of Stone Energy Corporation pursuant to 18 U.S.C. § 1350.
*101.INS   XBRL Instance Document
*101.SCH   XBRL Taxonomy Extension Schema Document
*101.CAL   XBRL Taxonomy Extension Calculation Linkbase Document
*101.DEF   XBRL Taxonomy Extension Definition Linkbase Document
*101.LAB   XBRL Taxonomy Extension Label Linkbase Document
*101.PRE   XBRL Taxonomy Extension Presentation Linkbase Document

 

* Filed or furnished herewith.
# Not considered to be “filed” for the purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liabilities of that section.

 

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Table of Contents

SIGNATURES

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: August 6, 2014

    By:  

/s/ Kenneth H. Beer

      Kenneth H. Beer
      Executive Vice President and
      Chief Financial Officer
      (On behalf of the Registrant and as
      Principal Financial Officer)

 

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Table of Contents

EXHIBIT INDEX

 

Exhibit
Number

 

Description

      3.1   Certificate of Incorporation of the Registrant, as amended (incorporated by reference to Exhibit 3.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2012 filed August 7, 2012 (File No. 001-12074)).
      3.2   Amended & Restated Bylaws of Stone Energy Corporation, dated December 19, 2013 (incorporated by reference to Exhibit 3.2 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2013 filed February 27, 2014 (File No. 001-12074)).
    10.1   $900,000,000 Fourth Amended and Restated Credit Agreement among Stone Energy Corporation as Borrower, Bank of America, N.A. as Administrative Agent and Issuing Bank, and the financial institutions named therein, dated June 24, 2014 (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, filed June 25, 2014 (File No. 001-12074)).
    10.2   Purchase and Sale Agreement (as amended) between Stone Energy Offshore, L.L.C. and Stone Energy Corporation, collectively as the seller, and Talos Energy Offshore LLC, as buyer, dated June 27, 2014 (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, filed August 1, 2014 (File No. 001-12074)).
  *31.1   Certification of Principal Executive Officer of Stone Energy Corporation as required by Rule 13a-14(a) of the Securities Exchange Act of 1934.
  *31.2   Certification of Principal Financial Officer of Stone Energy Corporation as required by Rule 13a-14(a) of the Securities Exchange Act of 1934.
*#32.1   Certification of Chief Executive Officer and Chief Financial Officer of Stone Energy Corporation pursuant to 18 U.S.C. § 1350.
*101.INS   XBRL Instance Document
*101.SCH   XBRL Taxonomy Extension Schema Document
*101.CAL   XBRL Taxonomy Extension Calculation Linkbase Document
*101.DEF   XBRL Taxonomy Extension Definition Linkbase Document
*101.LAB   XBRL Taxonomy Extension Label Linkbase Document
*101.PRE   XBRL Taxonomy Extension Presentation Linkbase Document

 

* Filed or furnished herewith.
# Not considered to be “filed” for the purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liabilities of that section.

 

35