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Stone Energy Corp. (NYSE: SGY - News) reported better-than-expected second-quarter earnings of 60 cents per share, well above the Zacks Consensus Estimate of 51 cents. However, earnings per share was down 7.7% on a year-over-year basis. Despite increased volumes, the year-over-year negative comparison was mainly due to lower gas price realizations.

Revenues in the reported quarter decreased 2.4% year over year to $166.2 million, compared with the Zacks Consensus Estimate of $162 million.

Production during the quarter averaged 217 million cubic feet of gas equivalent per day (MMcfe/d), up approximately 4% from the year-earlier level. Of the total production, natural gas accounted for 56%.

Prices realized during the quarter averaged $72.14 per barrel of oil (up more than 3% year over year) and $5.46 per Mcf of natural gas (down nearly 15%). Overall realization, on a per Mcfe basis, was down 7.4% at $8.31.

On the costs front, unit lease operating expenses decreased 14% to $1.87 per Mcfe. DD&A was up nearly 8% year over year at $3.16 per Mcfe and SG&A expenses were almost flat at 51 cents per Mcfe.

At the end of the quarter, the company had approximately $77.3 million in cash and $525 million in long-term debt. Discretionary cash flow was $116.4 million during the quarter, slightly up year over year.

For the third quarter, the company expects net daily production of 195−210 MMcfe. Stone has now revised its full-year production target downward to 205–215 MMcfe from 205–225 MMcfe.

Stone has maintained its 2010 capex at $400 million. The company intends to deploy 55% of this year’s capital budget to the Gulf of Mexico (GoM) regions. The GoM remained the company’s principal area for growth prospects.

Following the deepwater Gulf of Mexico (GoM) drilling moratorium, Stone is considering a shift in some of its capital to onshore locations, such as the Rockies and the Marcellus Shale play. Stone has already commenced its 14-well Marcellus horizontal drilling program for 2010. We are currently Neutral on Stone Energy shares.

STONE ENERGY CORP (SGY): Read the Full Research Report