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Ohio Utica Shale

Stone Energy drills its first Utica well in West Virginia

By Bob Downing Published: August 8, 2014

From Louisiana-based Stone Energy Corp.:

LAFAYETTE, La., Aug. 5, 2014 /PRNewswire/ -- Stone Energy Corporation (NYSE: SGY) today announced financial and operational results for the second quarter of 2014. Some of the highlights include:

  • On schedule with Cardona/Cardona South development project
  • Sanctioned Amethyst development
  • Spud Utica test well in the Mary field
  • Equity offering raised $226 million
  • Sold non-core conventional shelf assets for $200 million

Chairman, President and Chief Executive Officer David Welch stated, "In the second quarter of 2014, we continued to execute our growth model by sanctioning our deep water Amethyst discovery, spudding the Utica shale test well, progressing our Cardona development project, obtaining an agreement to sell our non-core conventional shelf assets, and completing a successful equity offering. The deep water Cardona project is expected to come on production less than six months after drilling was completed. The divestiture of non-core shelf assets coupled with the equity offering were important steps in our growth plan as we look to secure a multi-year deep water rig contract, advance our deep water and deep gas exploration prospects, and evaluate development options for our Utica position. Our deep water development projects and steady Appalachia drilling underpin our projected production growth through 2016, while our deep water portfolio, deep gas prospects and Utica position provide material exploration exposure into the future."

Financial Results

For the second quarter of 2014, Stone reported net income of $4.4 million, or $0.08 per share, on oil and gas revenue of $205.0 million, compared to net income of $25.9 million, or $0.52 per share, on oil and gas revenue of $222.6 million in the first quarter of 2014, and compared to net income of $39.0 million, or $0.78 per share, on oil and gas revenue of $243.5 million in the second quarter of 2013. Lower natural gas and natural gas liquids (NGL) realized prices and a higher unit depreciation, depletion and amortization (DD&A) rate were the primary causes of the reduced earnings in the second quarter of 2014 compared to the first quarter of 2014.

Discretionary cash flow totaled $117.5 million during the second quarter of 2014, as compared to $138.0 million during the first quarter of 2014, and as compared to $169.6 million during the second quarter of 2013. Please see "Non-GAAP Financial Measures" and the accompanying financial statements for a reconciliation of discretionary cash flow, a non-GAAP financial measure, to net cash flow provided by operating activities.

Net daily production during the second quarter of 2014 averaged 44.1 thousand barrels of oil equivalent (MBoe) per day (264 million cubic feet of gas equivalent (MMcfe) per day), compared with net daily production of 44.8 MBoe (269 MMcfe) per day in the first quarter of 2014, and net daily production of 45.4 MBoe (272 MMcfe) per day in the second quarter of 2013. Second quarter of 2014 production mix was 37% oil, 12% natural gas liquids and 51% natural gas. Second quarter of 2014 production was negatively impacted by unscheduled third party pipeline downtime at the Mary field in West Virginia, a slight delay in bringing new Appalachian wells on production, paraffin plug at Main Pass 288 and scheduled downtime at the Pompano deep water platform. All three fields have been returned to full production.

For the third quarter of 2014 and full year 2014, the sale of the non-core shelf properties on July 31, 2014 has been reflected in the updated production guidance. Production volumes associated with these properties averaged approximately 48 MMcfe per day (58% natural gas) in July 2014. In July 2014, the Amberjack platform had scheduled pipeline maintenance which lasted approximately three weeks, which is also reflected in the third quarter production guidance. Production from over 30 Appalachian wells (four different pads) is expected to impact volumes for the third and fourth quarters and is reflected in the updated production guidance for 2014.

Prices realized during the second quarter of 2014 averaged $96.15 per barrel of oil, $34.12 per barrel of NGLs and $3.77 per Mcf of natural gas. Average realized prices for the second quarter of 2013 were $104.41 per barrel of oil, $27.52 per barrel of NGLs and $4.07 per Mcf of natural gas. Effective hedging transactions decreased the average realized price of natural gas by $0.26 per Mcf and decreased the average realized price of oil by $4.15 per barrel in the second quarter of 2014. Effective hedging transactions increased the average realized price of natural gas by $0.17 per Mcf and increased the average realized price of oil by $3.02 per barrel in the second quarter of 2013.

Lease operating expenses during the second quarter of 2014 totaled $49.5 million ($12.34 per Boe or $2.06 per Mcfe), compared to $50.5 million ($12.23 per Boe or $2.04 per Mcfe), in the second quarter of 2013. We expect lease operating expenses to decline in the second half of 2014 due to the sale of non-core shelf properties.

Depreciation, depletion and amortization (DD&A) on oil and gas properties for the second quarter of 2014 totaled $91.9 million ($22.93 per Boe or $3.82 per Mcfe), compared to $86.3 million ($20.88 per Boe or $3.48 per Mcfe), in the second quarter of 2013. The increase in DD&A on a per unit basis was primarily due to the higher unit cost of reserve additions attributable to our GOM exploration program, which included the Amethyst, Cardona, Cardona South, Mica Deep and Tomcat projects. We anticipate that DD&A on a unit of production basis will decrease slightly in the second half of 2014 with the expected booking of additional Appalachian reserves at a lower unit cost.

Salaries, general and administrative (SG&A) expenses for the second quarter of 2014 were $16.6 million ($4.15 per Boe or $0.69 per Mcfe), compared to $15.2 million ($3.68 per Boe or $0.61 per Mcfe), in the second quarter of 2013.

Capital expenditures before capitalized SG&A and interest during the second quarter of 2014 were approximately $252.9 million, which includes $15.1 million of plugging and abandonment expenditures. Additionally, $8.4 million of SG&A and $11.3 million of interest were capitalized during the second quarter of 2014. This is compared to capital expenditures before capitalized SG&A and interest during the second quarter of 2013 of approximately $190.4 million, which includes $22.5 million of plugging and abandonment expenditures. Additionally, $7.5 million of SG&A and $10.9 million of interest were capitalized during the second quarter of 2013. Based on the results of our drilling program in the first half of 2014, we expect to have additional capital requirements in 2014 related to the development of our oil and gas properties, which may require an increase in our capital expenditure budget for 2014.

In May of 2014, Stone completed an equity offering, which generated $226 million in net proceeds after deducting the underwriting discount and offering expenses. Stone sold 5.75 million shares of our common stock at a price to the public of $41.00 per share in the offering.

On July 31, 2014, Stone Energy Corporation completed the previously announced sale of its non-core Gulf of Mexico conventional shelf properties to Talos Energy Offshore LLC for cash consideration of approximately $178 million, after giving effect to preliminary purchase price adjustments. Talos also assumed the future undiscounted abandonment liabilities estimated at approximately $117 million. The effective date of the sale was April 1, 2014. At December 31, 2013, the estimated proved reserves associated with these properties represented approximately 9% of Stone's year end 2013 total estimated proved reserves. Production volumes associated with these properties averaged approximately 48 MMcfe per day (58% natural gas) in July 2014. Under the terms of the agreement, Stone will retain a four-year option for a 50% working interest in the deep drilling rights on the properties.

On June 24, 2014, Stone entered into an amended and restated revolving credit facility, which matures on July 1, 2019. The initial borrowing base under the bank credit facility has been set at $500 million, an increase from the previous borrowing base of $400 million. As of June 30 and August 5, 2014, there were no outstanding borrowings under the bank credit facility and $21.0 million in letters of credit had been issued, leaving $479.0 million of availability. As of August 5, 2014, we had cash on hand of approximately $445 million.

Operational Update

Mississippi Canyon 29 – Cardona and Cardona South (Deep Water). The downhole sections of the Cardona and Cardona South wells have been completed and the rig has been released. The looped gathering system for both wells is being installed and is projected to be completed in the fourth quarter of 2014. Both wells will be flowed back to the Stone owned (100%) and operated Pompano platform. The combined gross rate is expected to be approximately 12,000 barrels of oil equivalent per day, with production expected by early first quarter of 2015. The Cardona and Cardona South successes extend the productive zone of the Mississippi Canyon 29 TB-9 well to the adjacent fault blocks to the north and south, with potential for a second and third well in the fault block to the south. Stone holds a 65% working interest in the project and is the operator.

Mississippi Canyon 26 – Amethyst (Deep Water). A development plan for Amethyst was sanctioned early in the second quarter of 2014 and long lead items have been ordered for a single well tie-back to the Stone owned and operated Pompano platform, located less than five miles from the discovery. Production is expected to begin in 2016. The Amethyst discovery (100% working interest) encountered approximately 90 feet of net hydrocarbon pay. Production results from the Amethyst well will assist in the evaluation of Stone's Derbio prospect located nearby.

Amberjack Development Drill Program (Deep Water). Stone expects to secure a platform rig for its Amberjack (Mississippi Canyon 109) drill program. The rig is expected to become available in late 2014 or early 2015. The program is expected to consist of four to six development wells.

Pompano Development Drill Program (Deep Water). Stone expects to secure a platform rig for its Pompano (Viosca Knoll 989) drill program. It is anticipated that the rig will become available in late 2015. The program is expected to consist of four to five development wells.

Mississippi Canyon 118 - Harrier (Deep Water). The Harrier exploration well targets the Miocene interval and is projected to spud in early 2015. Stone currently controls a 37% working interest in the prospect, which is operated by ConocoPhillips. The well is estimated to take four months to drill.

Walker Ridge 89 - Goodfellow (Deep Water). The Goodfellow exploration well targets the Lower Tertiary and is projected to spud early in 2015. Stone currently holds an approximate 13% working interest in the prospect, which is operated by Eni. The well is estimated to take five months to drill.

Utica Shale Test (Appalachian Basin). Stone spudded a Utica shale test well late in the second quarter of 2014 on its existing acreage in the Mary field in West Virginia. Stone plans to drill, log and take sidewall cores in a vertical well drilled through the Utica formation (11,000 feet true vertical depth). Following evaluation of the vertical hole, Stone plans to plug back and drill a 3,750 foot horizontal lateral through the Point Pleasant member of the Utica shale. Intermediate casing has been set at 8,450 feet in preparation to drill the vertical section through the Utica formation. The well is scheduled to be completed during the third quarter of 2014 with the production test commencing in the fourth quarter of 2014.

Marcellus Shale Drilling Program Update (Appalachian Basin). Stone drilled nine horizontal Marcellus shale wells and performed completion operations on 18 wells during the second quarter of 2014. By year-end 2014, Stone expects to have drilled 32 to 38 wells and to have completed 28 to 34 wells in the Marcellus shale.

Marcellus Shale Production Update (Appalachian Basin). During the second quarter of 2014, Stone averaged approximately 81 MMcfe per day (56 MMcf per day of gas and 4,200 barrels per day of liquids) from Stone's Marcellus shale position, despite a week of shut in production at the Mary field due to third party pipeline issues, which affected approximately 70 MMcfepd. In the third quarter of 2014, Stone expects to bring the 10-well Howell pad online in the Mary field. In addition, Stone plans to bring on the 8-well Stone pad, the 5-well Pribble pad (includes Utica test well), and the 8-well ZMBG pad during the fourth quarter of 2014. In the Heather field, capacity limitations at the Mobley gas processing plant have restricted the 8-well Mills-Wetzel pad #3 from producing at full rate. This issue is expected to be resolved late in the third quarter of 2014.

West Cameron 176 - Tomcat (Deep Gas). The Tomcat exploration well was tied back to the nearby Stone operated East Cameron 64 production platform and was brought online in June 2014. The well is producing approximately 750 barrels of oil and 2.4 MMcf of gas per day. Stone is 100% owner and operator of the well.

La Montana (Deep Gas). A rig has been secured for the La Montana exploration well, which is expected to spud in late 2014 or the first half of 2015. Stone is targeting a 75% working interest in the project and is the operator. The well is estimated to take four months to drill.

Cayenne (Deep Gas). The Cayenne exploration well, slated to use the same rig as the La Montana exploration well, is expected to spud in the second or third quarter of 2015. Stone holds a 50% working interest in the project and is the operator. The well is estimated to take four months to drill.

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ODNR Division of Oil and Gas Resources Management. State drilling permits. List is updated weekly.

ODNR Division of Geological Survey.

Ohio Environmental Protection Agency.

Ohio State University Extension.

Ohio Farm Bureau.

Ohio Oil and Gas Association, a Granville-based group that represents 1,500 Ohio energy-related companies.

Ohio Oil & Gas Energy Education Program.

Energy In Depth, a trade group.

Marcellus and Utica Shale Resource Center by Ohio law firm Bricker & Eckler.

Utica Shale, a compilation of Utica shale activities.

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National Geographic's The Great Shale Rush.

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Buckeye Forest Council.

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Stop Fracking Ohio.

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Fracking: Gas Drilling's Environmental Threat by ProPublica, an online journalism site.

Penn State Marcellus Center.

Pipeline, blog from Pittsburgh Post-Gazette on Marcellus shale drilling.

Allegheny Front, environmental public radio for Western Pennsylvania.