Stone Energy Corporation (SGY) has raised its full-year capital expenditure (capex) and production forecast. The company’s big pile of capital projects called for the capex increase and supported its upbeat projection.
The company expects capital expenditures between $475 million and $500 million, versus its prior expectation of $425 million for 2011. The increased expectation was mainly fueled by superior production till date and a significant improvement in oil prices. Importantly, the company raised its 2011 daily production guidance to a range of 205–225 million cubic feet equivalent (MMcfe) compared with the previous expectation of 200–220 MMcfe per day. Stone Energy aims to fund the raised capex agenda with operating cash flow.
The company has an extensive capital project inventory and is generating surplus cash flow with no bank debt. Although Stone Energy aims to apportion the capital across its portfolio, the key focus areas will be the Gulf of Mexico shelf as well as the Marcellus region. Again, the company remains optimistic on further deepwater opportunities in the near term.
Last quarter, Stone Energy reported better-than-expected first-quarter 2011 results on the back of production growth and higher oil price realizations, as well as lower lease operating expenses. Although the company’s reported production of 214.2 MMcfe/d exceeded its guidance range, it increased less than 1% from the year-ago level.
Despite the modest improvement in the production level in the last quarter, the company continues to pursue Appalachia, the Rockies and Deep Gas/Deepwater projects to sustain its growth momentum in 2011. We view the latest capex hike as favorable for the company, but fear that it will not experience the consequential production improvement until 2012.
Again, the natural gas weighted production (almost 50% of the last quarter’s production was natural gas) profile remains a concern and hence the results are vulnerable to fluctuations in the natural gas markets. Competition from peers like Cabot Oil & Gas Corporation (COG) is also a threat to the company. Hence, we maintain our long-term Neutral recommendation for the company.
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