Strategically Aligning Operational Focus to Boost Cash Flows

Wednesday 6 March 2013, Amsterdam

Strategically Aligning Operational Focus to Boost Cash Flows
Stone’s major operating activities are located in the conventional shelf, deep gas and deepwater areas in the GoM and the Marcellus Shale in the Appalachian Basin. Until 2011, the majority of its production was driven by the GoM shelf area, which contributed 89.3% towards its total production in the year; however, going forward, it plans to diversify production sources through increased focus on other areas such as deepwater and deep gas areas of the GoM, and the Marcellus Shale. In line with this, Stone acquired the deepwater assets in the Pompano field and other areas during 2011–2012 in a series of transactions. Apart from diversifying its geographic footprints to other areas, the company also shifted the capital investment to areas other than GoM shelf in 2012 as compared to 2011. The company invested 44% of its 2011 capex towards the GoM; however, it has allocated only 36% of its 2012 capex towards this area. This shift in the capital allocation is due to the company’s strategic prioritization of operational areas. Going forward, it plans to maintain steady production and cash flows from its legacy assets in the GoM shelf, and utilizing the cash flows in accelerating the development of its future growth assets in the deepwater areas of the GoM and the Marcellus Shale. This operational realignment will help the company to offset the decline from the legacy assets and add new production centers, thereby reducing dependence on GoM and ensuring long-term growth simultaneously.

In line with this strategy, Stone acquired deepwater assets in a series of transactions during 2011–2012. In Q4 2011, the company acquired BP’s 75% interest in the deepwater Pompano field in the Mississippi Canyon, a 51% interest in Mississippi Canyon’s block 29, a 50% interest in the Mica field, which is tied back to the Pompano platform, and interests in 23 deepwater exploration leases located near the Pompano field. This acquisition entitled Stone to 3,300 Thousand Barrels of Oil Equivalent per Day (mboe/d) of production capacity and 17mmboe of proved reserves. These proved reserves consisted of 83% crude oil and 17% natural gas. These assets were acquired near the end of the year, and thus their contribution was very low in 2011; however, this is expected to increase in the future. Moreover, the company also completed another transaction in Q2 2012, when it acquired the remaining 25% interest from Anadarko Petroleum Corporation. This acquisition entitled Stone to its remaining 25% interest in the deepwater Pompano field in the Mississippi Canyon, a 22% working interest in Mississippi Canyon’s block 29, and a 10% working interest in portions of block MC 72. Consequently, Stone expanded its reserve base by 5.9mmboe and production by more than 1,000boe/d. These assets mainly consisted of oil resources and as a result will support the company’s oil production in a scenario of high imparity between oil and gas prices, thereby strategically boosting its profitability in the near future and ensuring stronger cash flows.

Currently, Stone holds a substantial drilling inventory of deepwater prospects such as the Parmer, Phinisi, Amethyst, Amberjack, Cordona, Mica Deep, Sherwood, TwentyOne, Fiji, Marauder, Taggert, Floyd and Lamprey prospects. These prospects are currently in the initial exploration and appraisal phase of development. The development of these prospects will drive Stone’s long-term growth.

Moreover, the company is also accelerating its development activities in the Marcellus Shale, where its development activities are mainly focused on liquid-rich targets such as the Mary and Heather fields. Apart from these fields, it has several other targets in the initial evaluation phase; these targets include the Christine, Katie/Andie and Buddy prospects. The development of these prospects is expected to further boost its production and reserves in the long-term.

Thus, Stone has strategically built up its drilling inventory in core areas, which provides it with the opportunity to accelerate exploration and development activities. Moreover, the company plans to allocate moderate capex to its legacy assets in the GoM conventional shelf. This will allow it to generate a steady stream of cash flow from its GoM shelf assets and invest in the high-growth assets in the deepwater areas and other assets. Thus, the company’s strategic development plan, coupled with its strong drilling inventory and steady cash flows, will allow it to maintain capital discipline. Stone’s operational alignment will allow it to maintain sufficient liquidity as well as drive its growth, which is expected to improve its valuation statistics and shareholders’ value.
Stone Energy Corporation, Company Intelligence Report

Stone Energy Corporation, Company Intelligence Report

Publish date : January 2013
Report code : ASDR-47936
Pages : 94

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