EPL Reports 71% Exploratory Success Rate

Energy Partners, Ltd. (EPL) on Wednesday said that it recently drilled a discovery well at East Cameron 46 offshore Louisiana, bringing its year-to-date exploratory success rate to 71%.

Also in its operations update, the company said that it has drilled 12 discoveries out of 17 exploratory tests in the Gulf of Mexico and onshore in the Gulf Coast region in 2006 to date. The former figure includes two discoveries in the deepwater Gulf of Mexico.

EPL also announced its financial results for the second quarter of 2006 and provided updates on other operational highlights and the company's pending acquisition of Stone Energy Corp.

Net income available to common stockholders was $12.6 million for the second quarter of 2006 compared to $18.1 million for the second quarter of 2005. Net income per diluted share for the second quarter 2006 was $0.31 compared to $0.45 per diluted share in the same quarter a year ago. The company also reported a new record high average production level of 28,117 barrels of oil equivalent (Boe) per day and a new record high for revenue of $121.2 million for the second quarter of 2006.

Stone Acquisition Update

The acquisition of Stone was announced on June 23, 2006, and is expected to close early in the fourth quarter. The company noted that EPL and Stone filed a preliminary joint proxy statement with the Securities and Exchange Commission (SEC) on July 21, 2006 and received clearances under the Hart-Scott-Rodino Antitrust Improvements Act (HSR) on July 25, 2006. The company confirmed its intention to reduce its leverage through the repayment of acquisition related debt in an amount approximating $700 million by the end of 2008. The reduction is expected to come from a combination of excess cash flow and proceeds from the disposition of non strategic properties. EPL stated that it intends to hedge up to 80% of the projected combined production for 2007 and 2008, implemented through a coordinated establishment of positions with Stone to provide significant downside protection and substantial upside participation to the market.

"Our second quarter results reflect record levels for production and revenue and near record levels for cash flow, along with the challenges we face with equipment constraints and costs in the Gulf of Mexico," said Richard A. Bachmann, EPL's chairman and CEO. "We remain on track to deliver the annual production growth target of 28,000 to 30,000 Boe per day we set for ourselves earlier this year."

Bachmann continued: "We are also very pleased with the progress we are making toward our acquisition of Stone which we expect to close early in this year's fourth quarter. We have thus far received HSR clearance and have made our initial filings with the SEC. We intend to continue to fast track the completion of the transaction to combine our companies as quickly as possible and achieve the synergies and cost savings we have previously outlined as well as pursue a number of exciting exploitation and exploration opportunities on our combined portfolio."

Financial Results

Revenue for the second quarter of 2006 rose to $121.2 million, a new record high for the company and a 14% increase over second quarter 2005 revenues of $106.4 million. Discretionary cash flow, which is cash flow from operating activities before changes in working capital and exploration expenses, rose to $98.5 million, up 28% from $77.2 million in the second quarter last year. (See reconciliation of discretionary cash flow schedule in the tables.) Cash flow from operating activities in the second quarter of 2006 was $111.1 million compared with $75.1 million in the same quarter a year ago, representing a 48% increase.

EPL benefited from increased production volumes, record oil prices and strong natural gas prices during the second quarter of 2006, as well as $10.6 million in claims accrued under the company's business interruption insurance coverage. These benefits were reduced in the second quarter by increased lease operating expenses due to non-routine workover expenses and costs associated with hurricane related repairs not covered by insurance. In addition, the company said higher exploration expenses in the quarter were the result of dry hole costs, as well as significant seismic expenditures and lease expiration write-offs. The company said depreciation, depletion and amortization (DD&A) expenses per Boe, which had increased to $22.78 per Boe in the first quarter of 2006 from prior periods, declined to $19.40 in the second quarter of 2006.

Production for the second quarter of 2006 averaged 28,117 Boe per day, a new record high for EPL, up 22% from 22,991 Boe per day in the first quarter of 2006, and up 4% from 27,126 Boe per day in the second quarter of 2005. Natural gas production in the second quarter of 2006 averaged 119.6 million cubic feet (Mmcf) per day, also a new record high for EPL, a 26% rise from 94.8 Mmcf per day in the first quarter of 2006. Oil production in the most recent quarter averaged 8,187 barrels per day, a 14% rise from the average of 7,185 Boe per day in the first quarter of this year. Second quarter 2006 production volumes were up compared to the first quarter of 2006 due to new wells coming on line and hurricane related shut-in production continuing to be restored. The company estimated it has approximately 1,100 Boe per day of hurricane shut-in production remaining, the majority of which should be restored during the latter part of the third quarter.

Oil price realizations for the second quarter of 2006 averaged $61.72 per barrel, a 35% increase from $45.80 per barrel in the same period a year ago. Natural gas price realizations in the quarter averaged $6.90 per thousand cubic feet (Mcf), remaining essentially flat as compared to $6.88 per Mcf in the second quarter of 2005. All commodity prices are stated net of hedging impact.

For the six months ended June 30, 2006, net income available to common stockholders was $27.4 million, or $0.68 per diluted share. This represents a 27% decrease from $37.5 million, or $0.95 per diluted share in the same period of 2005. Discretionary cash flow for the first two quarters of 2006 totaled $191.4 million, up 30% from $147.4 million in the same period a year ago. Cash flow from operating activities in the first six months of 2006 was $174.9 million, up 21% from the total of $144.5 million in the same period of 2005.

For the first six months of 2006, EPL said capital expenditures for exploration and development activities totaled $207.7 million. The company continues to anticipate that its 2006 capital budget for exploration and development activities will total approximately $360.0 million, which is expected to be funded from internally generated cash flow and does not include any costs associated with the pending acquisition of Stone. In addition, the company has spent $43.5 million in acquisition costs related to the merger agreement with Stone, which is the full amount of the break-up fee paid to Plains Exploration and Production Co. on behalf of Stone to terminate the merger agreement between Plains and Stone.

As of June 30, 2006, EPL had cash on hand of $12.9 million, total debt of $270.0 million, and a debt to total capitalization ratio of 38%. The company also had $105 million of remaining capacity available under its current bank facility, which was extended in early June to May 2011 with the redetermined borrowing base of $225 million, up from $150 million.

Operational Highlights

Federal Lease Sale

EPL has been awarded a total of 10 leases from the 11 blocks on which the company submitted the high bid at the March 2006 Central Gulf of Mexico Lease Sale. The successful bids represent approximately 48,000 gross acres, including two deepwater tracts as well as eight other areas on the Gulf of Mexico Shelf. EPL's share of the lease bonuses for the successful high bids totaled $7.0 million.

Gulf of Mexico and Onshore

EPL on Wednesday announced a new discovery on the Shelf, the East Cameron 46 A-6st well. The moderate-risk, moderate-potential well, drilled to a total depth of 8,800 feet and encountered high quality natural gas pay in a single interval. The A-6st well is expected to be on line in the third quarter of 2006. Newfield Exploration Co., the operator, holds a 75% working interest in the well and EPL holds the remaining 25%. EPL also stated that an onshore South Louisiana exploratory well at Bay Batiste in which it held a 25% working interest was determined to be a dry hole. For the year-to-date, the company has drilled 12 discoveries out of 17 exploratory tests with eight discoveries located on the Shelf in the Gulf of Mexico, two onshore in the Gulf Coast region, and two in the deepwater Gulf of Mexico, for an overall success rate of 71%.

EPL also said Thomas D. DeBrock has been named Vice President of Exploration. DeBrock previously was the company's Exploration Manager in New Orleans and has been in the industry for over 21 years and an employee of EPL since its founding.

Current Operations

EPL is currently drilling two exploratory wells: a high risk, high potential Lakeside prospect onshore in Cameron Parish and a moderate-risk, moderate-potential East Cameron 109 #5 well on the Shelf. In addition, the company said that it plans to commence the drilling of 10 more exploratory wells before the end of year, four of which are high-potential. These totals include a deepwater delineation well in Mississippi Canyon 292, scheduled to begin in September or October, 2006. This moderate-risk, high-potential well is the third deepwater well for the company since the February announcement of its entry into the deepwater Gulf of Mexico with an agreement to acquire a 25% working interest in 23 undeveloped leases with 13 identified prospects from Noble Energy, Inc.

The company also said that the installation of the permanent platform in the South Timbalier (ST) 41/42 area is underway, which should allow first production through the platform by early September 2006. EPL plans to bring on the ST 42#1, a 2005 discovery, and the recent ST 42#2 discovery concurrent with the start up of production through the new permanent platform. This will bring the total number of producing wells in the ST 41/42 area to seven, with plans to flow the wells through the permanent platform and through the facilities in EPL's adjacent ST 26 field in which the company holds a 100% interest.

Bachmann concluded: "With 12 discoveries in 17 exploratory tests year-to-date, two operations underway, and ten wells left to commence drilling, we are very pleased with our exploratory pace to date. While we have worked hard over the last several weeks to expedite the completion of the Stone acquisition, we have not lost our operational focus. We are very excited that the installation of the permanent platform in the South Timbalier 41/42 area is well underway, and are looking forward to ramping up production in that area. We are also scheduled to bring on a number of new wells, including recent drill wells, workover program wells, and development wells, which will have a very positive impact on our production in the fourth quarter of this year. We believe we are well positioned to meet our annual production guidance of 28,000 to 30,000 Boe per day."

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