On Dec 29, 2015, we issued an updated research report on Stone Energy Corporation SGY, the Louisiana-based independent oil and gas explorer.
Stone Energy holds an opportune place in the industry with widespread high-yielding inventory. The company also has an extensive capital project inventory. Although Stone Energy aims to apportion the capital across its portfolio, the focus will be on the Gulf of Mexico (GoM) shelf.
An initial 2016 capital expenditure budget of $200 million has been authorized by Stone Energy’s board of directors. Of the total, about 80–85% has been assigned to the GoM basin, 3–5% to Appalachia and 10–15% for abandonment expenditures. Capex for 2016 is down 56.5–57.4% from $460–$470 million estimated for 2015.
Per the budget, three development wells are to be drilled in the GoM using a platform rig, which has been fitted onto the Pompano platform. The ENSCO 8503 deep water drilling rig recently finished completion operations and a well test at the Amethyst well. The well is projected to start production by Jan 2016, with an expected initial production rate of about 40–60 million cubic feet of gas equivalent per day (Mmcfepd) after clean up.
Further, Stone Energy expects to use the ENSCO 8503 rig to drill and complete the Cardona #7 development well in the first quarter of 2016. Thereafter, the company intends to pursue a potential farm out of the rig or the drilling of either the Lamprey or the Derbio prospect.
With advancement in technology, a shift to unconventional drilling is more widespread. However, the uncertainty regarding the regulation of these practices presents an investment risk. Increased precaution and regulation in the wake of oil spills have increased the cost pressure on companies like Stone Energy, thus affecting cash flows.
During the third quarter of 2015, the company reported loss per share. In the prior-year quarter, the company had generated earnings. Its revenues too decreased year over year. Lower price realizations led to the deterioration in third-quarter results. As is the case with other independent exploration and production companies, results for Stone Energy are directly exposed to oil and gas prices, which are inherently volatile and subject to complex market forces. Realized prices could differ significantly from our estimates, thereby affecting the company’s revenues, earnings and cash flow.
Growing exploration exposure to the mature, low reserve life and capital intensive GoM shelf is expected to aggravate Stone Energy’s risk profile. Other risks faced by the company are changes in government regulations, dependence on individual well performance, the possibility of unsuccessful wells and leverage to the company's drilling pace.
Zacks Rank and Stocks to Consider
Stone Energy carries a Zacks Rank #3 (Hold). Some better-ranked players from the same space are Energy Transfer Equity, L.P. ETE, ReneSola Ltd. SOL and Boardwalk Pipeline Partners, LP BWP. Each of these stocks sports a Zacks Rank #1 (Strong Buy).
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