After Tough Year, Stone Taking Low-Risk Approach, Not Seeking Merger

Stone Energy Corp. plans to reduce its exploration exposure and focus on lower-risk exploitation projects. The company, jilted in a scuttled merger earlier this year, is not seeking a merger partner at this time, management said Wednesday.

The Stone Energy board approved a plan to refocus the company on its Gulf of Mexico (GOM) continental shelf exploitation properties with plans to divest certain Rocky Mountain, GOM and Gulf Coast assets. Divestitures are expected to be completed in 2Q2007, and asset sale proceeds will likely be used to reduce debt, the company said.

"After 15 months in which Stone has endured significant external and internal distractions, the board has elected to focus a majority of its capital on Stone's Gulf of Mexico exploitation projects as its near-term strategy," said CEO David Welch. "These projects have historically provided high production rates and a quick payback. We expect to limit our exploration spending to a smaller percentage of our capital program in 2007, with most of the exposure being tied to our exploration venture in Bohai Bay, China."

Kenneth Beer, CFO of the Lafayette, LA-based independent, said realizations from planned asset sales "should significantly improve our balance sheet. We have a multi-year inventory of Gulf of Mexico exploitation projects and will target our program to generate excess cash flow for future debt reduction, acquisitions, and/or stock repurchases."

Earlier this year Stone was the target of two merger proposals within six months. Stone passed on an offer from Plains Exploration & Production to accept a sweeter bid from Energy Partners Ltd. (see Daily GPI, Oct. 16). However, New Orleans-based Energy Partners backed out of the deal once it became the target of an offer from ATS Inc., a subsidiary of Australia's Woodside Petroleum Ltd. For a while, Stone said it was looking for a new merger partner. While perhaps a consolation to Stone, last month the ATS offer for Energy Partners expired as several of its conditions had not been satisfied, mainly the minimum tender of more than 50% of Energy Partners shares.

Stone garnered scrutiny last year for reserves bookings discrepancies (see Daily GPI, Nov. 10, 2005). And the company's GOM operations took a hit from last year's hurricanes (see Daily GPI, Sept. 28, 2005).

Stone, which has been in business since 1973, concentrates its activities in the shallow GOM and onshore along the Gulf Coast. As of October, 76% of its reserves were off the coast of Texas and Louisiana. Stone's strategy has been to pick up low-cost properties from exploratory producers who are moving on to new opportunities.

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