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Stone Energy Turns Away From Appalachia, Exploring Alternatives as Debt Mounts

Stone Energy Corp. said this month that it has borrowed another $385 million to cover general costs, maxing out its $500 million borrowing base and pushing its debt to $1.1 billion, which the company warned could lead to a default on its credit facility.

Stone said it received notice from its lenders earlier this month requesting a redetermination, which it believes will result in a borrowing base reduction. After taking the $385 million, Stone has $477 million drawn on its credit facility in addition to $19 million of outstanding letters of credit. As of Feb. 22, the company had cash on hand of just $23 million.

"We felt it important to increase our liquidity in the current low price commodity environment to ensure we have adequate financial flexibility," said CEO David Welch. "We will continue to explore various options to strengthen our balance sheet, including alternatives to address our debt position."

Given the company's debt and low commodity prices, Stone said it could possibly breach its lending agreements by the end of this quarter, which could result in default. In that case, lenders could accelerate its debt obligations. Stone said it is currently negotiating a waiver or amendment with its bank lenders. It has also hired Lazard Ltd. as its financial advisor and Latham & Watkins LLP as a legal advisor to help it explore alternative financing and "strategic alternatives," including assets sales and debt restructuring.

The company's primary assets are located in the offshore Gulf of Mexico and the Marcellus Shale of West Virginia. Stone cut this year's budget to $200 million from the $450 million it spent in 2015. It has also turned its attention away from the Appalachian Basin, where differentials have been squeezing its returns. In 2013, the company allocated 33% of its budget to the Marcellus; in 2014 it spent 26% of its budget there and in 2015 it spent 8% in Appalachia.

Late last year, the company said low commodity prices and negative differentials forced it to shut-in the Mary Field in West Virginia, a 39,200 acre field that is its largest in the basin (see Shale Daily, Feb. 23; Sept. 25, 2015). That led to 100 MMcfe/d of 2015 curtailments and the company plans to keep the field shut-in throughout 2016, when it intends to spend nearly all of its budget in the GOM.

The Marcellus curtailments pushed 2015 production to 238 MMcfe/d, down from 256 MMcfe/d in 2014. The company also lost $1.09 billion last year.

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