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12 Nov 2010
Outlook remains stable
New York, November 12, 2010 -- Moody's Investors Service assigned a Caa1 rating to Stone Energy Corporation's
(Stone) new notes which are a $100 million add-on to the
company's existing $275 million 8.625% senior
notes due 2017. Stone's Corporate Family Rating (CFR) of
B3, Probability of Default Rating of B3, and stable outlook
are unaffected by this action. In addition, the existing
senior notes that are rated Caa1 and the senior subordinated notes that
are rated Caa2 are also unaffected. The proceeds of the offering
will initially be used for general corporate purposes.
The B3 CFR and Caa1 senior note rating take into account the company's
reserve concentration in the Gulf of Mexico which have a short reserve
life due to rapid production decline rates. The ratings also reflect
Stone's extremely high finding and development costs over the last
three years (over $50 per BOE), high debt to proved developed
reserves of $11.85 per BOE, and weak cash flow coverage,
with debt plus future development costs in excess of $22 per BOE
of total proved reserves. Stone's credit metrics were adversely
affected by poor drilling results in the 2008 and 2009 time frame.
We expect the company to deliver better finding and development costs
in 2010. Over the last two years, Stone has reduced its total
debt by nearly $300 million by applying free cash flow to debt
reduction. However, challenges remain ahead with increased
uncertainty regarding drilling activity in the deepwater Gulf of Mexico
and the possibility of increased regulatory requirements and costs for
shallow water GOM drilling.
Production declined in the third quarter due to natural well declines
as well as delayed drilling due to permitting issues in the Gulf of Mexico.
More recently, activity levels have picked up and the drilling of
wells at the Amberjack platform has recommenced. As these new,
highly productive wells are put on production, we expect the company's
production decline rates to reverse. Looking forward, the
company plans to diversify its asset base by increasing its spending onshore,
especially in the Marcellus shale in Appalachia.
At September 30th, 2010, Stone had $50 million of borrowings
in addition to $63.1 million of letters of credit issued
under its recently re-determined $395 million borrowing
base. With $282 million of availability, the company
has adequate liquidity for the time being but must address the upcoming
July 1, 2011 expiration of its credit facility.
The last rating action on Stone was on June 24, 2010 when the outlook
was changed to stable from positive. Future rating actions will
be driven by the degree of success the company exhibits in growing reserves
while controlling its debt levels. A key determinate for the future
direction of the company's ratings will be the finding and development
cost figures reported with the company's yearend 2010 financial
The principal methodology used in rating Stone was Moody's Global Exploration
and Production (E&P) rating methodology, published in December
2008 and available on www.moodys.com in the Rating Methodologies
sub-directory under the Research & Ratings tab. Other
methodologies and factors that may have been considered in the process
of rating this issuer can also be found in the Rating Methodologies sub-directory
on Moody's website.
Stones ratings are based on information provided by the company,
publicly available information, and confidential and proprietary
Moody's Investors Service information.
Stone Energy Corporation, headquartered in Lafayette, LA.,
is an independent oil and gas company engaged in the acquisition and subsequent
exploration, development, operation and production of oil
and gas properties located onshore and offshore in the Gulf of Mexico.
Over the last few years, the company began expanding its resource
base to include the Appalachian region and the Rocky Mountains.
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service
MD - Corporate Finance
Corporate Finance Group
Moody's Investors Service
Moody's Investors Service
Moody's assigns a Caa1 Rating to Stone Energy's $100 million add-on to its 8.625% notes due 2017
250 Greenwich Street
New York, NY 10007
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