Opportunities
Deep Water Exploration Program: Stone’s results are dependent on the outcome of various deep water exploration prospects. A part of the capital budget of 2013 is directed on exploration drilling, and Stone expects to participate in 2-4 non-operated exploration wells for 2013 spending $80 million. The company also entered into a joint venture deal with ConocoPhillips on four deep water GOM prospects. Either way, the allure of deep water drilling is indisputable and its impact is hard to dismiss.
Eagle Ford and Bakken: Part of the capital budget for 2013 is focused on non-operated development drilling in the oil-rich Eagle Ford Shale formation. Additionally, Stone Energy holds 35,000 net acres in Glacier County, Montana targeting the Bakken formation where Newfield Exploration Co. (NYSE:NFX) is the operator, holding 320,000 net acres. Newfield recently sold its GOM assets to focus on its onshore properties (i.e. the Uinta Basin), and it is striving to become oilier, lowering its operating costs. Newfield’s production is 51% natural gas, and if its program is successful in Montana Stone’s stock will also be positively impacted. Newfield’s first well in Montana had an IP=225 boepd.
Leasehold Position Expansion: The Bureau of Ocean Energy Management (BOEM) awarded Stone and its partners 23 high bid leases from its June 2012 lease sale.
Significant Discount To Peers: With an estimated exit production of 44,000 boepd in Q4 2012, year-end 2012 proved reserves of 129 MMboe and Enterprise Value (EV) of $2 billion, Stone trades for $45,400/boepd (54% oil & liquids) and $15.5/boe of proved reserves, which is a discount to its peers’ valuation. For instance, EPL Oil and Gas Inc (NYSE:EPL) has 22,300 boepd exit production for 2012, along with 77 MMboe proved reserves and an EV of $1.7 billion currently. This gives it $76,200/boepd (71% oil and liquids) and $22.1/boe of proved reserves. EPL was transformed from a gas profile to oil by acquiring four companies within two years, and it forecasts a decent production growth for 2013. Additionally, Energy XXI (Bermuda) Limited (NASDAQ:EXXI) has production of 47,000 boepd currently, along with 120 MMboe proved reserves and an EV of $3.5 billion. Thus, it trades for $74,470/boepd (68% oil and liquids) and $29.17/boe of proved reserves, operating five of the eleven largest oil fields on the GOM shelf. Energy XXI plans to increase its CapEx to $700 million in 2013, from $591 million in 2012.
Threats
Commodity Volatility: Stone’s liquidity is impacted by oil and natural gas prices. If they drop significantly in 2013, the operating cash flow from the unhedged production will decline.
The bottom line is that Stone is undervalued based on any key metric and the market has turned a blind eye thus far. Although I don’t know exactly what Stone is worth, it is worth considerably more than what the current share price suggests.
The article Stone Energy (NYSE:SGY): This Stone Can Ignore Gravity originally appeared on Fool.com and is written by Nathan Kirykos.
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