Exploration & Production | Discoveries | Quarterly / Earnings Reports | Second Quarter (2Q) Update
Stone Talks Conventional Shelf Divestiture, 2Q Growth
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Stone Energy Corporation has reported financial and operational results for the second quarter of 2014.
Highlights:
- On schedule with Cardona/Cardona South development project
- Sanctioned Amethyst development
- Spud Utica test well in the Mary field
- Equity offering raised $226 million
- Sold non-core conventional shelf assets for $200 million
Chairman, President and Chief Executive Officer David Welch stated, "In the second quarter of 2014, we continued to execute our growth model by sanctioning our deep water Amethyst discovery, spudding the Utica shale test well, progressing our Cardona development project, obtaining an agreement to sell our non-core conventional shelf assets, and completing a successful equity offering. The deep water Cardona project is expected to come on production less than six months after drilling was completed. The divestiture of non-core shelf assets coupled with the equity offering were important steps in our growth plan as we look to secure a multi-year deep water rig contract, advance our deep water and deep gas exploration prospects, and evaluate development options for our Utica position. Our deep water development projects and steady Appalachia drilling underpin our projected production growth through 2016, while our deep water portfolio, deep gas prospects and Utica position provide material exploration exposure into the future."
Operational Update
Stone Energy has reported an update on its Gulf of Mexico and Appalachian operations, which can be accessed below:
Stone 'On Track' with GoM Cardona, Amethyst Discoveries
Stone Spuds First Utica Test Well; Adds Nine in the Marcellus
Financial Results
For the second quarter of 2014, Stone reported net income of $4.4 million, or $0.08 per share, on oil and gas revenue of $205.0 million, compared to net income of $25.9 million, or $0.52 per share, on oil and gas revenue of $222.6 million in the first quarter of 2014, and compared to net income of $39.0 million, or $0.78 per share, on oil and gas revenue of $243.5 million in the second quarter of 2013. Lower natural gas and natural gas liquids (NGL) realized prices and a higher unit depreciation, depletion and amortization (DD&A) rate were the primary causes of the reduced earnings in the second quarter of 2014 compared to the first quarter of 2014.
Discretionary cash flow totaled $117.5 million during the second quarter of 2014, as compared to $138.0 million during the first quarter of 2014, and as compared to $169.6 million during the second quarter of 2013. Please see "Non-GAAP Financial Measures" and the accompanying financial statements for a reconciliation of discretionary cash flow, a non-GAAP financial measure, to net cash flow provided by operating activities.
Net daily production during the second quarter of 2014 averaged 44.1 thousand barrels of oil equivalent (MBoe) per day (264 million cubic feet of gas equivalent (MMcfe) per day), compared with net daily production of 44.8 MBoe (269 MMcfe) per day in the first quarter of 2014, and net daily production of 45.4 MBoe (272 MMcfe) per day in the second quarter of 2013. Second quarter of 2014 production mix was 37% oil, 12% natural gas liquids and 51% natural gas. Second quarter of 2014 production was negatively impacted by unscheduled third party pipeline downtime at the Mary field in West Virginia, a slight delay in bringing new Appalachian wells on production, paraffin plug at Main Pass 288 and scheduled downtime at the Pompano deep water platform. All three fields have been returned to full production.
For the third quarter of 2014 and full year 2014, the sale of the non-core shelf properties on July 31, 2014 has been reflected in the updated production guidance. Production volumes associated with these properties averaged approximately 48 MMcfe per day (58% natural gas) in July 2014. In July 2014, the Amberjack platform had scheduled pipeline maintenance which lasted approximately three weeks, which is also reflected in the third quarter production guidance. Production from over 30 Appalachian wells (four different pads) is expected to impact volumes for the third and fourth quarters and is reflected in the updated production guidance for 2014.
Prices realized during the second quarter of 2014 averaged $96.15 per barrel of oil, $34.12 per barrel of NGLs and $3.77 per Mcf of natural gas. Average realized prices for the second quarter of 2013 were $104.41 per barrel of oil, $27.52 per barrel of NGLs and $4.07 per Mcf of natural gas. Effective hedging transactions decreased the average realized price of natural gas by $0.26 per Mcf and decreased the average realized price of oil by $4.15 per barrel in the second quarter of 2014. Effective hedging transactions increased the average realized price of natural gas by $0.17 per Mcf and increased the average realized price of oil by $3.02 per barrel in the second quarter of 2013.
Lease operating expenses during the second quarter of 2014 totaled $49.5 million ($12.34 per Boe or $2.06 per Mcfe), compared to $50.5 million ($12.23 per Boe or $2.04 per Mcfe), in the second quarter of 2013. We expect lease operating expenses to decline in the second half of 2014 due to the sale of non-core shelf properties.
Depreciation, depletion and amortization (DD&A) on oil and gas properties for the second quarter of 2014 totaled $91.9 million ($22.93 per Boe or $3.82 per Mcfe), compared to $86.3 million ($20.88 per Boe or $3.48 per Mcfe), in the second quarter of 2013. The increase in DD&A on a per unit basis was primarily due to the higher unit cost of reserve additions attributable to our GOM exploration program, which included the Amethyst, Cardona, Cardona South, Mica Deep and Tomcat projects. 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.
Salaries, general and administrative (SG&A) expenses for the second quarter of 2014 were $16.6 million ($4.15 per Boe or $0.69 per Mcfe), compared to $15.2 million ($3.68 per Boe or $0.61 per Mcfe), in the second quarter of 2013.
Capital Expenditures
Capital expenditures before capitalized SG&A and interest during the second quarter of 2014 were approximately $252.9 million, which includes $15.1 million of plugging and abandonment expenditures. Additionally, $8.4 million of SG&A and $11.3 million of interest were capitalized during the second quarter of 2014. This is compared to capital expenditures before capitalized SG&A and interest during the second quarter of 2013 of approximately $190.4 million, which includes $22.5 million of plugging and abandonment expenditures. Additionally, $7.5 million of SG&A and $10.9 million of interest were capitalized during the second quarter of 2013. 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.
In May of 2014, Stone completed an equity offering, which generated $226 million in net proceeds after deducting the underwriting discount and offering expenses. Stone sold 5.75 million shares of our common stock at a price to the public of $41.00 per share in the offering.
Sale of Gulf of Mexico Shelf Assets
On July 31, 2014, Stone Energy Corporation completed the previously announced sale of its non-core Gulf of Mexico conventional shelf properties to Talos Energy Offshore LLC for cash consideration of approximately $178 million, after giving effect to preliminary purchase price adjustments. Talos also assumed the future undiscounted abandonment liabilities estimated at approximately $117 million. The effective date of the sale was April 1, 2014. At December 31, 2013, the estimated proved reserves associated with these properties represented approximately 9% of Stone's year end 2013 total estimated proved reserves. Production volumes associated with these properties averaged approximately 48 MMcfe per day (58% natural gas) in July 2014. Under the terms of the agreement, Stone will retain a four-year option for a 50% working interest in the deep drilling rights on the properties.
On June 24, 2014, Stone entered into an amended and restated revolving credit facility, which matures on July 1, 2019. The 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, there were no outstanding borrowings under the bank credit facility and $21.0 million in letters of credit had been issued, leaving $479.0 million of availability. As of August 5, 2014, we had cash on hand of approximately $445 million.