Is Stone Energy Corporation (NYSE:SGY) a sleeping stock that could fly higher, the way its neighboring McMoRan Exploration flew when it was acquired by Freeport-McMoRan few weeks ago? Although I can’t know if Stone is an acquisition target, I know that it is very undervalued currently, and now is the time to get greedy.
Strengths
Production Growth: Although the production for 2013 is expected to remain relatively flat, with 2012 production at 41,000-44,000 boepd (~54% oil and liquids), the projected production in 2014 and 2015 is expected to grow, exceeding 50,000 boepd as longer-term projects from the Deep Water area are developed.
Proved Reserves Growth: After the latest independent reserves report in early 2013, the proved reserves climbed up to 129 Mmboe (49% oil and liquids), as compared with 100 Mmboe at year-end 2011, representing a 28% increase in its estimated proved reserves. That was the third consecutive year of reserve growth in 2012. From all sources, Stone replaced approximately 288% of production in 2012.
Reserve Life Extension: The reserve life for this Louisiana-based producer has grown from 5.2 years in 2009 to approximately 8.5 years currently.
Funds from Operations (FFO) Stability: Stone has been maintaining stable and positive operating cash flows for four consecutive years. Additionally, most of the operating cash flow for 2013 is protected because Stone has completed its active hedging program for 2013, while the programs for 2014 & 2015 are in progress.
Earnings Stability: The company has been profitable for ten consecutive quarters and it trades with a low P/E of 7 based on the estimated earnings for 2012.
Debt/FFO (annualized): The company has a significant safety cushion in place, as the D/CF (annualized) ratio is below 2. The 2013 capital program is expected to be funded by projected cash flow and cash on hand without hurting the debt line. The borrowing base of $400 million under the bank credit facility remains undrawn, with $379 million available after accounting for outstanding letters of credit of $21 million.
Liquidity: The current ratio (short-term assets/ short-term liabilities) is in safe territory and the company doesn’t face any cash shortfall as this ratio currently hovers well above 1. Actually Stone’s current cash position is over $200 million after the recent issuance of the $300 million Senior Notes due 2022, and after the completion of the tender offer, redemption and retirement of all the $200 million Senior Subordinated Notes due 2014.
Pricing: Stone has high margins and strong free cash flow because it receives Louisiana sweet crude pricing, which is very close to Brent pricing.
Land and 2P Reserves Diversification: Stone has a balanced portfolio of assets with three core areas. Its operations extend from the liquids-rich Marcellus shale to the conventional shelf and the deep water areas of the Gulf of Mexico (GOM). The corporate 2P reserves are also very diversified.
Weaknesses
The Gulf Coast effects: Due to the fact that Stone produces more than 50% of its oil and natural gas from GOM, it incurs high seasonal maintenance costs for its platforms, which are exposed to hurricanes. For instance, Stone’s production was impacted by shut-ins due to Hurricane Isaac in Q3 2012.
The Operating Hiccups: Stone will lose production in Q1 2013 from the Mary field. This field has been shut-in since December 2012 due to a third party pipeline repair issue impacting 8,350 boepd. The repair will be completed by Feb. 2013. However, the company expects to replace part of the lost production from the La Cantera #3 well that came on stream in Q3 2012.
