As 2006 draws to a close the management and staff at Lafayette, LA-based independent Stone Energy Corp. are saying goodbye to what they likely will remember as the company’s annus horribilis.

Next year will be a “breather year” for Stone as it recovers from a tumultuous 2006. The independent producer plans to cut its exploration exposure and focus on lower-risk exploitation projects as it brings order to its balance sheet through asset sales. Stone, jilted in a scuttled merger earlier this year, is not seeking a merger partner at this time, management said last week.

The Stone Energy board approved a plan to refocus the company on its Gulf of Mexico (GOM) continental shelf exploitation properties with plans to divest certain Rocky Mountain, GOM and Gulf Coast assets. Divestitures are expected to be completed in 2Q2007, and asset sale proceeds will likely be used to reduce debt, the company said.

“After 15 months in which Stone has endured significant external and internal distractions, the board has elected to focus a majority of its capital on Stone’s Gulf of Mexico exploitation projects as its near-term strategy,” said CEO David Welch. “These projects have historically provided high production rates and a quick payback. We expect to limit our exploration spending to a smaller percentage of our capital program in 2007, with most of the exposure being tied to our exploration venture in Bohai Bay, China.”

CFO Kenneth Beer said realizations from planned asset sales “should significantly improve our balance sheet. We have a multi-year inventory of Gulf of Mexico exploitation projects and will target our program to generate excess cash flow for future debt reduction, acquisitions, and/or stock repurchases.”

Stone’s debt currently stands at about $800 million, and the company would like to cut that by 25-50%, Adrienne Hulin, corporate planning analyst, told NGI. She explained, for instance, that Rockies assets have been selected for sale because the company does not currently have the capital to make a go of an exploration effort there. She said the company is dealing with a balance sheet issue, not one of liquidity.

Stone has not released a list of properties it intends to sell and there is a number of possible asset combinations that could come up for sale, Hulin said. There will be a data room following selection of sale properties.

This year Stone has seen the departure of 30-40 employees, Hulin said. Staffing stands at about 250 currently and there are no plans to hire more just now.

Earlier this year Stone was the target of two merger proposals within six months. Stone passed on an offer from Plains Exploration & Production to accept a sweeter bid from Energy Partners Ltd. (see NGI, June 26). However, New Orleans-based Energy Partners backed out of the deal once it became the target of an offer from ATS Inc., a subsidiary of Australia’s Woodside Petroleum Ltd. (see NGI, Oct. 16). For a while, Stone said it was looking for a new merger partner. Perhaps a consolation to Stone, last month the ATS offer for Energy Partners expired as several of its conditions had not been satisfied, mainly the minimum tender of more than 50% of Energy Partners shares.

Stone garnered Securities and Exchange Commission scrutiny last year for reserves bookings discrepancies (see NGI, Nov. 14, 2005). And the company’s GOM operations took a hit from last year’s hurricanes (see NGI, Oct. 3, 2005). Stone, which has been in business since 1973, has concentrated its activities in the shallow GOM and onshore along the Gulf Coast. As of October, 76% of its reserves were off the coast of Texas and Louisiana. Stone’s strategy has been to pick up low-cost properties from exploratory producers who are moving on to new opportunities.

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