Lafayette, Louisiana-based Stone Energy Corporation (SGY) is an independent oil and gas exploration and production company focused on the U.S. Gulf Coast, where the bulk of its assets are concentrated offshore in the Gulf of Mexico (GoM). The company also has properties in the Rocky Mountain and Williston basins. Stone is also engaged in an exploratory joint venture in Bohai Bay, China. As of year-end 2006, the company had estimated proved reserves of approximately 591 billion cubic feet equivalent (Bcfe), of which 71% were proved developed and 58% were natural gas. During 2006, 85% of the company's production and 69% of proved reserves came from its GoM properties, while the remaining was from the Rocky Mountain region. However, the company recently completed the previously announced sale of substantially all of its Rocky Mountain properties to Newfield Exploration Company for $578 million.
Following a major reservoir-level review of proved reserve base, Stone Energy announced a major reserve revision late 2005, which shaved off roughly one-fifth of its previously reported year-end 2004 proved reserves tally. As a result of the reserve revisions, the company delayed the release of its third-quarter 2005 results and associated SEC filing (the third-quarter 2005 10Q was finally released on March 13, 2006), and restated its financial results since 2001. The filing delay triggered compliance issues with some of its debt covenants, from which it had to obtain a waiver. The SEC initiated an informal investigation, which was subsequently upgraded to the level of a formal investigation. In addition, the company is faced with several class action lawsuits on behalf of investors.
In order to resolve this multitude of issues, management decided earlier in 2006 to put the company on the block. The first proposal came from Plains Exploration and Production Company (PXP Not Covered), which offered an all-stock deal valued at $1.94 billion, including the assumption of debt. After Plains' offer was accepted, an even better proposal emerged from Energy Partners, Ltd. (EPL Not Covered), which offered a cash and stock deal valued at approximately $2.2 billion. Following Plains' apparent reluctance to trump EPL's bid, Stone Energy accepted EPL's offer. In the meantime, Australia's Woodside Petroleum announced an unsolicited bid for EPL, contingent on the latter terminating its Stone deal. As a result, Energy Partners and Stone Energy terminated their deal, bringing the latter back to square one.
Being unsuccessful in its efforts to sell the company, Stone's board decided to pursue a go-it-alone strategy. The company plans to limit its exploration exposure and focus on exploitation opportunities on its GoM shelf properties. The company plans to strengthen its balance sheet by using sale proceeds from its Rockies assets pay down debt. Given the ongoing credit market turmoil, this puts the company in a better position to operate. However, we remain skeptical given the quality of the company's asset base and recent track record.