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SEC Begins Inquiry into Stone Energy's Reserves Revisions

Stone Energy Corp. said Friday the staff of the Securities and Exchange Commission has launched an informal inquiry into the company's proved reserves revision and financial restatements. Stone said it intends to cooperate.

Just a month after revising its proven oil and natural gas reserves downward, the company said last week it would restate financial results between 2001 and 2Q2005 because of possible lapses in reserves bookings. Stone, which expects to file amended reports by Monday (Nov. 14), said an independent review suggests "inadequate training and understanding" of regulatory requirements and "a tone of optimism and aggressiveness set by management regarding reserve booking."

Stone focuses its exploration on the Gulf Coast, where it has operated since 1973, and in the Rocky Mountains. In October, the independent revised its proved reserves downward by 171 Bcfe following an internal review. The Lafayette, LA-based operator retained the law firm of Davis Polk & Wardwell to perform a review of booking practices, and the law firm issued a preliminary report earlier this month critical of the company's past reserves estimates and review practices.

Since the reserves revisions, Stone and its audit committee have been "actively working to implement controls and procedures that will ensure the integrity of the company's reserve booking process," the company said in a statement. Already, it has put several controls in place or is in the process of implementing changes, which include improved training regarding Securities and Exchange Commission guidelines; revisions of documentation procedures and controls; continued use of one or more independent third party engineering firms; formation of a specific reserves committee of the board of directors to review the reserve booking process; and appointment of a reservoir engineer as a vice president of reserves.

Stone's net daily production volumes in 3Q2005 averaged 211 MMcfe/d, down 8% from 229 MMcfe/d reported in 3Q2004. Average daily natural gas production fell slightly, to 138 MMcf/d from 140 MMcf/d for the same period of 2004. Quarterly rates were negatively impacted by Gulf Coast production shut ins because of Hurricanes Katrina and Rita, amounting to about 6.4 Bcfe or 70 MMcfe/d. This compares to an approximate 1.7 Bcfe deferral, or 19 MMcfe/d, from Hurricane Ivan in 3Q2004. Stone is currently producing at a rate of 155 MMcfe/d and expects to increase volumes through the remainder of the year as platform repairs and third party pipeline and processing plant repairs are completed.

Because of delays in third party midstream repairs from the hurricanes, Stone now expects 4Q2005 daily production rate to be on the lower end of the 180-220 MMcfe/d guidance provided in October. Similarly, Stone expects full year 2005 net average daily production rates to be on the lower end of the 230-245 MMcfe/d. Platform repairs and third party pipeline and processing plant repairs are ongoing, and depending on the timing of the repairs, the exit rate for the year is still expected to be more than 250 MMcfe/d.

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