Summary of STONE ENERGY CORP

Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This Form 10-Q and the information referenced herein contain statements that constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The words "plan," "expect," "project," "estimate," "assume," "believe," "anticipate," "intend," "budget," "forecast," "predict" and other similar expressions are intended to identify forward-looking statements. These statements appear in a number of places and include statements regarding our plans, beliefs or current expectations, including the plans, beliefs and expectations of our officers and directors. We use the terms "Stone," "Stone Energy," "Company," "we," "us" and "our" to refer to Stone Energy Corporation.
When considering any forward-looking statement, you should keep in mind the risk factors that could cause our actual results to differ materially from those contained in any forward-looking statement. Important factors that could cause actual results to differ materially from those in the forward-looking statements herein include the timing and extent of changes in commodity prices for oil and gas, operating risks, liquidity risks and other risk factors as described in our Annual Report on Form 10-K in Part I, Item 1, "Business - Forward-Looking Statements", and Item 1A, "Risk Factors", and in this report under Part II, Item 1A, "Risk Factors". Furthermore, the assumptions that support our forward-looking statements are based upon information that is currently available and is subject to change. We specifically disclaim all responsibility to publicly update any information contained in a forward-looking statement or any forward-looking statement in its entirety and therefore disclaim any resulting liability for potentially related damages. All forward-looking statements attributable to Stone Energy Corporation are expressly qualified in their entirety by this cautionary statement.
Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") contained in this Form 10-Q should be read in conjunction with the MD&A contained in our Annual Report on Form 10-K for the year ended December 31, 2008.
Overview
Stone Energy Corporation is an independent oil and gas company engaged in the acquisition, exploration, exploitation, development and operation of oil and gas properties located primarily in the Gulf of Mexico. On August 28, 2008, we completed the acquisition of Bois d'Arc Energy, Inc. ("Bois d'Arc") in a cash and stock transaction totaling approximately $1.7 billion. Bois d'Arc was an independent exploration company engaged in the discovery and production of oil and natural gas in the Gulf of Mexico. We are also active in the Appalachia region. Prior to November 30, 2008, we participated in an exploratory joint venture in Bohai Bay, China. Our business strategy is to increase reserves, production and cash flow through the acquisition, exploitation and development of mature properties in the Gulf Coast Basin and exploring opportunities in the deep water environment of the Gulf of Mexico, Appalachia and other potential areas. Throughout this document, reference to our "Gulf Coast Basin" properties includes our Gulf Coast onshore, shelf, deep shelf and deep water properties.
Public Offering of Common Stock - In June 2009, we sold 8,050,000 shares of our common stock in a public offering at a price of $8.00 per share resulting in net proceeds of approximately $60.4 million after underwriters' discounts and offering expenses. The net proceeds were used for general corporate purposes, including the reduction of outstanding bank debt.
Pyrenees Discovery - In June 2009, we announced a discovery on our deepwater Pyrenees Prospect, located on Garden Banks Block 293. The well encountered approximately 125 feet of net hydrocarbon pay in three zones. We have a 15% working interest in the prospect and a small overriding royalty. Delineation drilling on the Pyrenees Discovery is now complete and has provided the necessary information to appraise the three pay zones discovered in the initial well. We, along with the operator, expect to propose a development program which might include the appraisal of several shallow sands and possibly a deeper objective.
Bank Credit Facility Borrowing Base Redetermination - In connection with the acquisition of Bois d'Arc on August 28, 2008, we entered into an amended and restated revolving credit facility of $700 million, maturing on July 1, 2011, with a syndicated bank group. Our bank credit facility had a borrowing base of $625 million at December 31, 2008. On April 28, 2009, our bank credit facility was amended, and on April 29, 2009, our borrowing base was reduced to $425 million. On October 9, 2009, the semi-annual redetermination process was completed and our borrowing base was reaffirmed at $425 million. See Bank Credit Facility below for additional information regarding the amended and restated credit facility.
Unwinding of 2009 Hedge Positions - In March 2009, we unwound all of our then existing crude oil hedges for the period from April 2009 through December 2009 and two of our natural gas hedges for the period from April 2009 through December 2009, resulting in proceeds of approximately $113 million. These contracts were unwound to provide a source of liquidity to assist with funding capital expenditures, which were heavily weighted toward the first two quarters of the year.
Declining Commodity Prices - During the first quarter of 2009, we experienced declines in oil and natural gas prices which resulted in a ceiling test write-down of $340.1 million.

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Critical Accounting Policies
Our Annual Report on Form 10-K describes the accounting policies that we believe are critical to the reporting of our financial position and operating results and that require management's most difficult, subjective or complex judgments. Our most significant estimates are:
• remaining proved oil and gas reserves volumes and the timing of their production;

• estimated costs to develop and produce proved oil and gas reserves;

• accruals of exploration costs, development costs, operating costs and production revenue;

• timing and future costs to abandon our oil and gas properties;

• the effectiveness and estimated fair value of derivative positions;

• classification of unevaluated property costs;

• capitalized general and administrative costs and interest;

• insurance recoveries related to hurricanes;

• estimates of fair value in business combinations;

• current income taxes; and

• contingencies.

This Quarterly Report on Form 10-Q should be read together with the discussion contained in our Annual Report on Form 10-K regarding these critical accounting policies.
Other Factors Affecting Our Business and Financial Results In addition to the matters discussed above, our business, financial condition and results of operations are affected by a number of other factors. This Quarterly Report on Form 10-Q should be read in conjunction with the discussion in our Annual Report on Form 10-K regarding these other risk factors. Known Trends and Uncertainties
Hurricanes - Since the majority of our production originates in the Gulf of Mexico, we are particularly vulnerable to the effects of hurricanes on production. During the first nine months of 2009, we experienced deferrals of production due to Hurricanes Gustav and Ike of approximately 11.8 Bcfe. Production deferrals for Hurricanes Gustav and Ike amounted to 18.1 Bcfe in the second half of 2008. In 2007, 2006 and 2005, we experienced deferrals of production due to Hurricanes Katrina and Rita of approximately 3.6 Bcfe, 15.6 Bcfe and 16.4 Bcfe, respectively. Additionally, affordable insurance coverage for property damage to our facilities for hurricanes is becoming more difficult to obtain. We have narrowed our insurance coverage to selected properties, increased our deductibles and are shouldering more hurricane related risk in the environment of rising insurance rates.
Credit Crisis - Beginning in the second half of 2008 and continuing into 2009, world financial markets experienced a severe reduction in the availability of credit. It is difficult to predict the impact of this condition on us in future quarters. Possible negative impacts could include additional decreases in the borrowing base under our credit facility, limitations on our ability to access the debt and equity capital markets and complete asset sales, a need to repay borrowings sooner than expected, an increased counterparty credit risk on our derivatives contracts and under our bank credit facility and the requirement by contractual counterparties of us to post collateral guaranteeing performance.
Declining Commodity Prices - We experienced a significant decline in oil and natural gas prices in 2008 and the first quarter of 2009. This resulted in a ceiling test write-down of our oil and gas properties in the fourth quarter of 2008 and the first quarter of 2009. Should these restrained pricing conditions persist it could severely impact future cash flows, result in further decreases in our borrowing base under our credit facility, constrain capital budgets and result in additional ceiling test write-downs.
Bank Credit Facility Borrowing Base Redetermination - On April 29, 2009, our borrowing base under our bank credit facility was reduced from $625 million to $425 million. On October 9, 2009, the borrowing base was reaffirmed at $425 million at the semi-annual redetermination. As of November 5, 2009, we had $225 million of outstanding borrowings under the facility and $67.6 million in letters of credit had been issued pursuant to the facility, leaving $132.4 million of availability under the facility. Stone's cash position at November 5, 2009 is approximately $84 million. If a lower commodity price environment were to persist (see discussions above), we could experience a further reduction in the borrowing base under our bank credit facility.
Louisiana Franchise Taxes - We have been involved in litigation with the state of Louisiana over the proper computation of franchise taxes allocable to the state. This litigation relates to the state's position that sales of crude oil and natural gas from properties located on the Outer Continental Shelf, which are transported through the state of Louisiana, should be sourced to Louisiana for purposes of computing franchise taxes. We disagree with the state's position. However, if the state's position were to be upheld, we could incur additional expense for alleged underpaid franchise taxes in prior years and higher franchise tax

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expense in future years. See "Item 1. Legal Proceedings." As of September 30, 2009, the state of Louisiana had asserted claims of additional franchise taxes in the amount of $9.0 million plus accrued interest of $4.2 million. There are open franchise tax years which the state has not yet audited.
Regulatory Inquiries and Stockholder Lawsuits - We have been named as a defendant in certain regulatory inquiries and stockholder lawsuits resulting from our reserve restatement. The ultimate resolution of these matters and their impact on us is uncertain. See "Item 1. Legal Proceedings." Liquidity and Capital Resources
As described above in "Known Trends and Uncertainties," the significant decline in oil and natural gas prices in early 2009 has materially adversely affected our cash flow from operations and liquidity. We experienced a material reduction in the borrowing base under our bank credit facility in April 2009. In October 2009, our borrowing base was reaffirmed at the level established in April 2009. Our next scheduled redetermination is expected by May 2010. Our capital expenditure budget for 2009 has been set at $300 million, which we intend to finance with cash flow from operations. If we do not have sufficient cash flow from operations or availability under our bank credit facility, we may be forced to reduce our capital expenditures. To the extent that 2009 cash flow from operations exceeds our estimated 2009 capital expenditures, we may pay down a portion of our existing debt, expand our capital budget, expand our leasehold in Appalachia, or invest in the money markets.
Cash Flow and Working Capital. Net cash flow provided by operating activities totaled $372.9 million during the nine months ended September 30, 2009 compared to $487.2 million in the comparable period in 2008. Net cash flow provided by operating activities during the nine months ended September 30, 2009 includes $35.1 million of proceeds from the unwinding of derivative contracts which will be recognized in production revenue during the fourth quarter of 2009.
Net cash flow used in investing activities totaled $227.9 million during the nine months ended September 30, 2009, which primarily represents our investment in oil and natural gas properties partially offset by proceeds from the sale of oil and natural gas properties. Net cash flow used in investing activities totaled $1.2 billion during the nine months ended September 30, 2008, which primarily represents cash used in the acquisition of Bois d'Arc and our investment in oil and natural gas properties partially offset by proceeds from the sale of oil and natural gas properties.
Net cash flow used in financing activities totaled $115.4 million for the nine months ended September 30, 2009, which primarily represents repayments of borrowings under our bank credit facility of approximately $175.0 million net of proceeds from the sale of common stock of approximately $60.4 million. Net cash flow provided by financing activities totaled $431.3 million for the nine months ended September 30, 2008, which primarily represents borrowings under our bank credit facility in conjunction with the acquisition of Bois d'Arc and proceeds from the exercise of stock options and vesting of restricted stock.
We had working capital at September 30, 2009 of $38.6 million. Capital Expenditures. Third quarter 2009 additions to oil and gas property costs of $48.7 million included $2.0 million of lease acquisition costs, $4.8 million of capitalized salaries, general and administrative expenses (inclusive of incentive compensation) and $6.6 million of capitalized interest. Year-to-date 2009 additions to oil and gas property costs of $202.7 million included $4.3 million of lease acquisition costs, $13.5 million of capitalized salaries, general and administrative expenses (inclusive of incentive compensation) and $19.4 million of capitalized interest. These investments were financed by cash flow from operating activities and proceeds from the stock offering.
Bank Credit Facility. On August 28, 2008, we entered into an amended and restated revolving credit facility totaling $700 million, maturing on July 1, 2011, with a syndicated bank group. At December 31, 2008, our bank credit facility had a borrowing base of $625 million. On April 28, 2009, the credit facility was amended, and on April 29, 2009, the borrowing base was reduced to $425 million. On October 9, 2009, the borrowing base was reaffirmed at $425 million at the semi-annual redetermination. At September 30, 2009, we had $250 million of outstanding borrowings under our bank credit facility, letters of credit totaling $69 million had been issued under the facility, and the weighted average interest rate was 3.0%. As of November 5, 2009, we had $225 million of outstanding borrowings under our bank credit facility and $67.6 million in letters of credit had been issued pursuant to the facility, leaving $132.4 million of availability under the facility. The facility is guaranteed by all of our material direct and indirect subsidiaries, including Stone Energy Offshore, L.L.C. ("Stone Offshore"), a wholly owned subsidiary of Stone.
The borrowing base under our bank credit facility is redetermined semi-annually, in May and November, by the lenders taking into consideration the estimated value of our oil and gas properties and those of our direct and indirect material subsidiaries in accordance with the lenders' customary practices for oil and gas loans. In addition, we and the lenders each have discretion at any time, but not more than two additional times in any calendar year, to have the borrowing base redetermined. Our bank credit facility is collateralized by substantially all of Stone's and Stone Offshore's assets. Stone and Stone Offshore are required to mortgage, and grant a security interest in, their oil and gas reserves representing at least 80% of the discounted present value of the future net cash flows from their oil and gas reserves reviewed in determining the borrowing base. At Stone's option, loans under the credit facility will bear interest at a rate based on the adjusted London Interbank Offering Rate plus an applicable

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margin, or a rate based on the prime rate or Federal funds rate plus an applicable margin. Our bank credit facility provides for optional and mandatory prepayments, affirmative and negative covenants, and interest coverage ratio and leverage ratio maintenance covenants. Stone has been and remains in compliance with all of the financial covenants under our bank credit facility.
Share Repurchase Program. On September 24, 2007, our Board of Directors authorized a share repurchase program for an aggregate amount of up to $100 million. The shares may be repurchased from time to time in the open market or through privately negotiated transactions. The repurchase program is subject to business and market conditions, and may be suspended or discontinued at any time. Through September 30, 2009, 300,000 shares had been repurchased under this program at a total cost of $7.1 million. Contractual Obligations and Other Commitments We are contingently liable to surety insurance companies relative to bonds issued on our behalf to the United States Department of the Interior Minerals Management Service ("MMS"), federal and state agencies and certain third parties from which we purchased oil and gas working interests. At September 30, 2009, we were contingently liable in the aggregate amount of $59.8 million, a reduction from our contingent liability at December 31, 2008 of $84.4 million. This redetermination was accomplished by the posting of additional letters of credit in April of 2009. The bonds represent guarantees by the surety insurance companies that we will operate in accordance with applicable rules and regulations and perform certain plugging and abandonment obligations as specified by applicable working interest purchase and sale agreements. Results of Operations
The following tables set forth certain information with respect to our oil and gas operations.

                                                  Three Months Ended
                                                    September 30,
                                                2009             2008           Variance         % Change
Production:
Oil (MBbls)                                       1,741              943              798               85 %
Natural gas (MMcf)                               11,517            6,213            5,304               85 %
Oil and natural gas (MMcfe)                      21,963           11,871           10,092               85 %
Revenue data (in thousands) (a):
Oil revenue                                   $ 134,737        $ 100,726        $  34,011               34 %
Natural gas revenue                              67,982           66,584            1,398                2 %

Total oil and natural gas revenue             $ 202,719        $ 167,310        $  35,409               21 %
Average prices (a):
Oil (per Bbl)                                 $   77.39        $  106.81        $  (29.42 )            (28 %)
Natural gas (per Mcf)                              5.90            10.72            (4.82 )            (45 %)
Oil and natural gas (per Mcfe)                     9.23            14.09            (4.86 )            (34 %)
Expenses (per Mcfe):
Lease operating expenses                      $    1.28        $    3.38        $   (2.10 )            (62 %)
Salaries, general and administrative
expenses (b)                                       0.43             0.88            (0.45 )            (51 %)
DD&A expense on oil and gas properties             3.06             4.30            (1.24 )            (29 %)

(a) Includes the cash settlement of effective hedging contracts.

(b) Exclusive of incentive compensation expense.

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                                                  Nine Months Ended
                                                    September 30,
                                                2009             2008            Variance         % Change
Production:
Oil (MBbls)                                       4,579            3,647               932               26 %
Natural gas (MMcf)                               30,899           24,631             6,268               25 %
Oil and natural gas (MMcfe)                      58,373           46,513            11,860               25 %
Revenue data (in thousands) (a):
Oil revenue                                   $ 313,563        $ 380,002        $  (66,439 )            (17 %)
Natural gas revenue                             198,472          253,503           (55,031 )            (22 %)

Total oil and natural gas revenue             $ 512,035        $ 633,505        $ (121,470 )            (19 %)
Average prices (a):
Oil (per Bbl)                                 $   68.48        $  104.20        $   (35.72 )            (34 %)
Natural gas (per Mcf)                              6.42            10.29             (3.87 )            (38 %)
Oil and natural gas (per Mcfe)                     8.77            13.62             (4.85 )            (36 %)
Expenses (per Mcfe):
Lease operating expenses                      $    2.18        $    2.26        $    (0.08 )             (4 %)
Salaries, general and administrative
expenses (b)                                       0.53             0.69             (0.16 )            (23 %)
DD&A expense on oil and gas properties             3.12             3.95             (0.83 )            (21 %)

(a) Includes the cash settlement of effective hedging contracts.

(b) Exclusive of incentive compensation expense.

During the third quarter of 2009, we reported net income totaling $51.1 million, or $1.06 per share, compared to net income for the third quarter of 2008 of $34.1 million, or $1.04 per share. For the nine months ended September 30, 2009, we reported a net loss totaling $147.6 million, or $3.45 per share. For the nine months ended September 30, 2008, we reported net income of $179.2 million, or $5.97 per share. All per share amounts are on a diluted basis. On August 28, 2008, we completed the acquisition of Bois d'Arc. The revenues and expenses associated with Bois d'Arc have been included in Stone's Condensed Consolidated Financial Statements since August 28, 2008.
We follow the full cost method of accounting for oil and gas properties. At the end of the first quarter of 2009, we recognized a ceiling test write-down of our oil and gas properties totaling $340.1 million ($221.1 million after taxes). The write-down did not impact our cash flow from operations but did reduce net income and stockholders' equity.
The variance in the three and nine-month periods' results was due to the following components:
Production. During the third quarter of 2009, total production volumes increased 85% to 22.0 Bcfe compared to 11.9 Bcfe produced during the third quarter of 2008. Oil production during the third quarter of 2009 totaled approximately 1,741,000 barrels compared to 943,000 barrels produced during the third quarter of 2008, while natural gas production totaled 11.5 Bcf during the third quarter of 2009 compared to 6.2 Bcf produced during the third quarter of 2008. Year-to-date production totaled 4,579,000 barrels of oil and 30.9 Bcf of natural gas compared to 3,647,000 barrels of oil and 24.6 Bcf of natural gas produced during the comparable 2008 period.
Production rates were positively impacted during the third quarter of 2009 as substantially all of the hurricane affected wells are back on line. Without the effects of hurricane production deferrals, production volumes increased approximately 4.1 Bcfe for the third quarter of 2009 compared to the comparable 2008 quarter. Production deferrals due to hurricanes totaled approximately 1.1 Bcfe and 7.1 Bcfe for the third quarter of 2009 and 2008, respectively. Production associated with the Bois d'Arc acquisition totaled approximately 7.4 Bcfe for the third quarter of 2009.
Production deferrals due to hurricanes for the nine months ended September 30, 2009 amounted to 11.8 Bcfe (43 MMcfe per day). Without the effects of hurricane production deferrals, year-to-date 2009 production volumes increased approximately 16.6 Bcfe from year-to-date 2008 production volumes. Production associated with the Bois d'Arc acquisition totaled approximately 19.9 Bcfe for the nine months ended September 30, 2009.
Prices. Prices realized during the third quarter of 2009 averaged $77.39 per Bbl of oil and $5.90 per Mcf of natural gas, or 34% lower, on an Mcfe basis, than third quarter 2008 average realized prices of $106.81 per Bbl of oil and $10.72 per Mcf of natural gas. Average realized prices during the nine months ended September 30, 2009 were $68.48 per Bbl of oil and $6.42 per Mcf of natural gas compared to $104.20 per Bbl of oil and $10.29 per Mcf of natural gas realized during the first nine months of 2008. All unit pricing amounts include the cash settlement of effective hedging contracts.
We enter into various hedging contracts in order to reduce our exposure to the possibility of declining oil and gas prices. Our effective hedging transactions increased our average realized natural gas price by $2.37 per Mcf and increased our average realized oil price by $10.92 per Bbl in the third quarter of 2009. During the third quarter of 2008, our effective hedging transactions decreased our average realized natural gas price by $0.07 per Mcf and decreased our average realized oil price by $16.89 per Bbl. Effective hedging transactions for the nine months ended September 30, 2009 increased our average realized natural gas price by $2.44 per Mcf and increased our average realized oil price by $12.39 per Bbl. For the nine months ended

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September 30, 2008, effective hedging transactions decreased our average realized oil price by $11.50 per Bbl and had no impact on average realized natural gas prices.
Income. Oil and natural gas revenue increased 21% to $202.7 million in the third quarter of 2009 from $167.3 million during the third quarter of 2008. The increase is attributable to an 85% increase in oil and gas production volumes partially offset by a decrease in average realized prices on a gas equivalent basis. Oil and natural gas revenue related to the properties acquired from Bois d'Arc totaled $42.9 million in the third quarter of 2009. Year-to-date 2009 oil and natural gas revenue totaled $512.0 million compared to $633.5 million during the comparable 2008 period. The decrease was due to a 36% decrease in average realized prices on a gas equivalent basis, partially offset by oil and natural gas revenue related to the properties acquired from Bois d'Arc, totaling $115.3 million for the nine months ended September 30, 2009.
Interest income totaled $0.2 million during the third quarter of 2009 . . .