Stone Energy Corporation (SGY) reported third-quarter 2009 earnings of $1.06 per share, beating the Zacks Consensus Estimate of 66 cents and the year-earlier earnings of $1.04. The robust results were driven by increased production volumes and reduced costs.

Production during the quarter averaged 239 million cubic feet of gas equivalent per day (MMcfe/d), compared to average daily production of 209 MMcfe/d in the prior quarter and 129 MMcfe/d in the year-ago quarter. This increase was primarily due to the company’s successful execution of its hydraulic rig work over program, reduced cycle time and optimization of individual well rates.

Stone expects net daily production to average 225-235 MMcfe in the fourth quarter and 210-220 MMcfe in 2009.

Discretionary cash flow was $157 million during the quarter, down approximately 4% year over year. Prices realized during the quarter averaged $77.39 per barrel of oil (down more than 27% year-over-year) and $5.90 per Mcf of natural gas (down nearly 45% year-over-year). Overall realization, on a per Mcfe basis, was down in excess of 34% year-over-year to $9.23 per Mcfe.

On the costs front, unit lease operating expenses (LOE) were down significantly to $1.28 per Mcfe. The significant reduction in LOE was due to lower maintenance projects operation. DD&A was down nearly 29% year-over-year to $3.06 per Mcfe and SG&A expenses were down 51% year-over-year to 43 cents per Mcfe.

Stone’s capex guidance for 2009 is $300 million, excluding acquisitions, capitalized interest and G&A. For 2010, the company is expecting $350 million of capex though it is yet to be approved by the Board. At the end of the quarter, the company had approximately $98 million in cash and $650 million in long-term debt. Current debt-to-capitalization ratio is 59.9%.

The Gulf of Mexico (GoM) shelf has helped the company to deliver a strong quarter underpinned by both production growth and decreased cost. Last year’s acquisition of Bois d’Arc Energy, a pure-play GoM player, has increased Stone’s footprint in this region. Given this acquisition, the company has now visibility into three years to five years of oil development drilling and more approved developed non-producing reserves.

However, Stone’s high cost and capital-intensive Gulf Coast-centric asset base as well as lack of meaningful exposure to the emerging shale plays are competitive disadvantages. Consequently, we recommend a Neutral rating for the stock.

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