Edgar Filing: STONE ENERGY CORP

e10vq

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2008


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 1-12074

STONE ENERGY CORPORATION

(Exact Name of Registrant as Specified in Its Charter)


Delaware (State or Other Jurisdiction of Incorporation or Organization)		72-1235413 (I.R.S. Employer Identification No.)

625 E. Kaliste Saloom Road Lafayette, Louisiana (Address of Principal Executive Offices)		70508 (Zip Code)

Registrant’s Telephone Number, Including Area Code: (337) 237-0410

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer þ	Accelerated filer o	Non-accelerated filer o	Smaller reporting company o
		(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No þ

As of November 3, 2008, there were 39,873,710 shares of the registrant’s Common Stock, par value $.01 per share, outstanding.

TABLE OF CONTENTS


	Page
PART I – FINANCIAL INFORMATION

Item 1. Financial Statements:

Condensed Consolidated Balance Sheet as of September 30, 2008 and December 31, 2007		1

Condensed Consolidated Statement of Operations for the Three and Nine Months Ended September 30, 2008 and 2007		2

Condensed Consolidated Statement of Cash Flows for the Nine Months Ended September 30, 2008 and 2007		3

Notes to Condensed Consolidated Financial Statements		4

Report of Independent Registered Public Accounting Firm		16

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		17

Item 3. Quantitative and Qualitative Disclosures About Market Risk		23

Item 4. Controls and Procedures		24

PART II – OTHER INFORMATION

Item 1. Legal Proceedings		24

Item 1A. Risk Factors		26

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		27

Item 4. Submission of Matters to a Vote of Security Holders		27

Item 6. Exhibits		28

Signature		29
EX-4.4
EX-4.5
EX-15.1
EX-31.1
EX-31.2
EX-32.1

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

STONE ENERGY CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEET

(In thousands of dollars)


	September 30,			December 31,
	2008			2007
	(Unaudited)			(Note 1)
Assets
Current assets:
Cash and cash equivalents	$	172,643		$	475,126
Accounts receivable		146,792			186,853
Fair value of hedging contracts		37,578			2,163
Deferred tax asset		—			9,039
Current income tax receivable		36,323			—
Inventory		15,457			—
Other current assets		2,046			521

Total current assets		410,839			673,702
Oil and gas properties – United States – full cost method of accounting:
Proved, net of accumulated depreciation, depletion and amortization of $2,389,315 and $2,158,327, respectively		2,588,132			1,001,179
Unevaluated		663,491			150,568
Oil and gas properties – China – full cost method of accounting:
Unevaluated, net of accumulated depreciation, depletion and amortization of $27,023 and $8,164, respectively		12,123			29,565
Building and land, net		5,632			5,667
Fixed assets, net		5,674			5,584
Other assets, net		32,601			23,338
Fair value of hedging contracts		6,863			—
Goodwill		337,886			—

Total assets	$	4,063,241		$	1,889,603

Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable to vendors	$	123,676		$	88,801
Undistributed oil and gas proceeds		73,873			37,743
Fair value of hedging contracts		8,560			18,968
Asset retirement obligations		65,411			44,180
Current income taxes payable		—			57,631
Deferred income taxes		2,394			—
Other current liabilities		27,673			13,934

Total current liabilities		301,587			261,257
Long-term debt		825,000			400,000
Deferred taxes		721,584			89,665
Asset retirement obligations		362,845			245,610
Fair value of hedging contracts		434			—
Other long-term liabilities		11,829			7,269

Total liabilities		2,223,279			1,003,801


Minority interest		163			—


Commitments and contingencies

Common stock		396			278
Treasury stock		(2,878	)		(1,161	)
Additional paid-in capital		1,259,331			515,055
Retained earnings		561,418			382,365
Accumulated other comprehensive income (loss)		21,532			(10,735	)

Total stockholders’ equity		1,839,799			885,802

Total liabilities and stockholders’ equity	$	4,063,241		$	1,889,603

The accompanying notes are an integral part of this balance sheet.

STONE ENERGY CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2008			2007			2008			2007
Operating revenue:
Oil production	$	100,726		$	100,759		$	380,002		$	305,516
Gas production		66,584			77,653			253,503			246,120
Derivative income, net		5,045			—			1,433			—

Total operating revenue		172,355			178,412			634,938			551,636


Operating expenses:
Lease operating expenses		40,149			39,476			105,302			131,072
Production taxes		1,325			1,542			6,228			8,214
Depreciation, depletion and amortization		51,962			71,096			186,180			231,275
Write-down of oil and gas properties		8,759			—			18,859			—
Accretion expense		4,146			4,394			12,367			13,226
Salaries, general and administrative expenses		10,481			7,844			32,015			25,479
Incentive compensation expense		283			1,319			2,183			2,680
Derivative expenses, net		—			36			—			127

Total operating expenses		117,105			125,707			363,134			412,073


Gain on Rocky Mountain Region properties divestiture		—			(89	)		—			55,727


Income from operations		55,250			52,616			271,804			195,290


Other (income) expenses:
Interest expense		3,036			6,281			10,528			27,756
Interest income		(2,255	)		(5,314	)		(10,601	)		(6,923	)
Other income, net		(1,421	)		(1,356	)		(3,775	)		(4,591	)
Early extinguishment of debt		—			592			—			592

Total other (income) expenses		(640	)		203			(3,848	)		16,834


Income before taxes		55,890			52,413			275,652			178,456


Provision (benefit) for income taxes:
Current		(45,583	)		29,000			1,395			46,500
Deferred		67,352			(10,655	)		95,083			15,429

Total income taxes		21,769			18,345			96,478			61,929


Net income	$	34,121		$	34,068		$	179,174		$	116,527


Basic earnings per share	$	1.05		$	1.23		$	6.08		$	4.22
Diluted earnings per share		1.04			1.23			6.02			4.21

Average shares outstanding		32,441			27,630			29,457			27,583
Average shares outstanding assuming dilution		32,670			27,722			29,740			27,669

The accompanying notes are an integral part of this statement.

STONE ENERGY CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(In thousands of dollars)

(Unaudited)


	Nine Months Ended
	September 30,
	2008			2007
Cash flows from operating activities:
Net income	$	179,174		$	116,527
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, depletion and amortization		186,180			231,275
Write-down of oil and gas properties		18,859			—
Accretion expense		12,367			13,226
Deferred income tax provision		95,083			15,429
Gain on sale of oil and gas properties		—			(55,727	)
Settlement of asset retirement obligations		(42,202	)		(53,668	)
Non-cash stock compensation expense		6,286			3,342
Excess tax benefits		(3,045	)		(959	)
Non-cash derivative expense		(1,654	)		127
Early extinguishment of debt		—			592
Other non-cash expenses		1,307			1,968
Increase (decrease) in current income taxes payable		(92,714	)		46,500
Decrease in accounts receivable		101,428			58,893
Increase in other current assets		(1,483	)		(505	)
Increase (decrease) in accounts payable		(300	)		(700	)
Increase (decrease) in other current liabilities		30,069			(1,986	)
Investment in hedging contracts		(1,914	)		—
Other		(243	)		(3	)

Net cash provided by operating activities		487,198			374,331


Cash flows from investing activities:
Acquisition of Bois d’Arc Energy, Inc., net of cash acquired (Note 2)		(922,538	)		—
Investment in oil and gas properties		(311,338	)		(194,290	)
Proceeds from sale of oil and gas properties, net of expenses		14,090			571,862
Sale of fixed assets		4			691
Investment in fixed and other assets		(1,176	)		(1,039	)

Net cash provided by (used in) investing activities		(1,220,958	)		377,224


Cash flows from financing activities:
Proceeds from bank borrowings		425,000			—
Repayments of bank borrowings		—			(172,000	)
Redemption of senior floating rate notes		—			(225,000	)
Deferred financing costs		(8,738	)		—
Excess tax benefits		3,045			—
Purchase of treasury stock		(4,185	)		—
Net proceeds from exercise of stock options and vesting of restricted stock		16,155			2,054

Net cash provided by (used in) financing activities		431,277			(394,946	)


Net increase (decrease) in cash and cash equivalents		(302,483	)		356,609
Cash and cash equivalents, beginning of period		475,126			58,862

Cash and cash equivalents, end of period	$	172,643		$	415,471

The accompanying notes are an integral part of this statement.

STONE ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1 – Interim Financial Statements

The condensed consolidated financial statements of Stone Energy Corporation (“Stone”) and its subsidiaries as of September 30, 2008 and for the three and nine-month periods ended September 30, 2008 and 2007 are unaudited and reflect all adjustments (consisting only of normal recurring adjustments), which are, in the opinion of management, necessary for a fair presentation of the financial position and operating results for the interim periods. The condensed consolidated balance sheet at December 31, 2007 has been derived from the audited financial statements at that date. The consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto, together with management’s discussion and analysis of financial condition and results of operations, contained in our Annual Report on Form 10-K for the year ended December 31, 2007. The results of operations for the three and nine-month periods ended September 30, 2008 are not necessarily indicative of future financial results.

Note 2 – Acquisitions and Divestitures

Acquisitions

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. The primary factors considered by management in making the acquisition included the belief that the merger would position the combined company as one of the largest independent Gulf of Mexico-focused exploration and production companies, with a solid production base, a strong portfolio for continued development of proved and probable reserves, and an extensive inventory of exploration opportunities. At the time of the transaction, management expected the merger would be accretive to our stockholders during 2008 and 2009 with respect to earnings per share, reserves and production. Pursuant to the terms and conditions of the agreement and plan of merger, Stone paid total merger consideration of approximately $935 million in cash and issued approximately 11.3 million common shares, valued at $63.52 per share. The per share value of the Stone common shares issued was calculated as the average of Stone’s closing share price for the two days prior to through the two days after the merger announcement date of April 30, 2008. The cash component of the merger consideration was funded with approximately $510 million of cash on hand and $425 million of borrowings from our amended and restated bank credit facility.

The acquisition was accounted for using the purchase method of accounting for business combinations. The acquisition has been included in Stone’s Condensed Consolidated Financial Statements since August 28, 2008, the date the acquisition closed. The following table represents the allocation of the total purchase price of Bois d’Arc to the acquired assets and liabilities of Bois d’Arc. The allocation represents the fair values assigned to each of the assets acquired and liabilities assumed. The purchase price allocation is preliminary, subject to finalized fair value appraisals and completed evaluations of proved and unproved oil and natural gas properties and deferred income taxes. These and other estimates are subject to change as additional information becomes available and is assessed by Stone.


	(In thousands)
Fair value of Bois d’Arc’s net assets:
Net working capital, including cash of $15,333	$	30,563
Proved oil and gas properties		1,471,747
Unevaluated oil and gas properties		425,115
Fixed and other assets		333
Goodwill		337,886
Deferred tax liability		(533,869	)
Dismantlement reserve		(4,239	)
Asset retirement obligations		(71,720	)

Total fair value of net assets	$	1,655,816

The following table represents the breakdown of the consideration paid for Bois d’Arc’s net assets.


	(In thousands)
Consideration paid for Bois d’Arc’s net assets:
Cash consideration paid	$	935,425
Stone common stock issued		717,887

Aggregate purchase consideration issued to Bois d’Arc stockholders		1,653,312
Plus:
Estimated direct merger costs *		2,504

Total purchase price	$	1,655,816


*		Estimated direct merger costs include legal and accounting fees, printing fees, investment banking expenses and other merger-related costs.

The allocation of the purchase price includes $337.9 million of asset valuation attributable to goodwill. Goodwill has been determined in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 141, “Business Combinations”, and represents the amount by which the total purchase price exceeds the aggregate fair values of the assets acquired and liabilities assumed in the merger, other than goodwill. Goodwill will not be deductible for tax purposes.

The following summary pro forma combined statement of operations data of Stone for the three and nine-month periods ended September 30, 2008 and 2007 has been prepared to give effect to the merger as if it had occurred on January 1, 2008 and 2007, respectively. The pro forma financial information is not necessarily indicative of the results that might have occurred had the transaction taken place on January 1, 2008 and 2007 and is not intended to be a projection of future results. Future results may vary significantly from the results reflected in the following pro forma financial information because of normal production declines, changes in commodity prices, future acquisitions and divestitures, future development and exploration activities, and other factors.


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2008		2007		2008		2007
	(In thousands, except per share amounts)
Revenues	$	271,818	$	266,399	$	995,657	$	806,851
Income from operations		87,107		48,404		376,477		189,477
Net income		48,820		29,321		239,142		106,788
Basic earnings per share	$	1.23	$	0.75	$	6.08	$	2.75
Diluted earnings per share	$	1.23	$	0.75	$	6.03	$	2.74

Divestitures

During 2008, we completed the divesture of a small package of Gulf of Mexico properties which totaled 17.4 billion cubic feet of natural gas equivalent (“Bcfe”) of reserves at December 31, 2007 for a cash consideration of approximately $14.1 million after closing adjustments. The properties that were sold had estimated asset retirement obligations of $32.7 million. These properties were mature, high cost properties with minimal exploitation or exploration opportunities. The sale of these oil and gas properties was accounted for as an adjustment of capitalized costs with no gain or loss recognized.

On June 29, 2007, we completed the sale of substantially all of our Rocky Mountain Region properties and related assets to Newfield Exploration Company in two separate transactions for a total cash consideration of $582 million. At December 31, 2006, the estimated proved reserves associated with these assets totaled 182.4 Bcfe, which represented 31% of our estimated proved oil and natural gas reserves. Sales of oil and gas properties under the full cost method of accounting are accounted for as adjustments of capitalized costs with no gain or loss recognized, unless the adjustment significantly alters the relationship between capitalized costs and reserves. Since the sale of these oil and gas properties would significantly alter that relationship, we recognized a net gain on the sale in 2007 in the amount of $59.8 million.

Note 3 – Earnings Per Share

Basic net income per share of common stock was calculated by dividing net income applicable to common stock by the weighted-average number of common shares outstanding during the period. Diluted net income per share of common stock was calculated by dividing net income applicable to common stock by the weighted-average number of common shares outstanding during the period plus the weighted-average number of dilutive stock options and restricted stock granted to outside directors and employees. There were approximately 228,000 and 92,000 dilutive shares for the three months ended September 30, 2008 and 2007, respectively, and 284,000 and 86,000 dilutive shares for the nine months ended September 30, 2008 and 2007, respectively.

Stock options that were considered antidilutive because the exercise price of the option exceeded the average price of our common stock for the applicable period totaled approximately 105,000 and 837,000 shares in the three months ended September 30, 2008 and 2007, respectively. Stock options that were considered antidilutive totaled 65,000 and 1,010,000 shares in the nine months ended September 30, 2008 and 2007, respectively.

During the three months ended September 30, 2008, approximately 41,000 shares of common stock were issued upon the vesting of restricted stock by employees and nonemployee directors and 100,000 shares of common stock were repurchased under our stock repurchase program. During the nine months ended September 30, 2008, approximately 545,000 shares of common stock were issued upon the exercise of stock options and vesting of restricted stock by employees and nonemployee directors and the awarding of employee bonus stock pursuant to the 2004 Amended and Restated Stock Incentive Plan and 100,000 shares of common stock were repurchased under our stock repurchase program. On August 28, 2008, 11,301,751 shares of common stock were issued upon the completion of our acquisition of Bois d’Arc (see Note 2).

During the three months ended September 30, 2007, approximately 74,000 shares of common stock were issued upon the exercise of stock options and vesting of restricted stock by employees and nonemployee directors. During the nine months ended September 30, 2007, approximately 133,000 shares of common stock were issued upon the exercise of stock options and vesting of restricted stock by employees and nonemployee directors and the awarding of employee bonus stock pursuant to the 2004 Amended and Restated Stock Incentive Plan.

Note 4 – Hedging Activities

We enter into hedging transactions to secure a commodity price for a portion of future production that is acceptable at the time of the transaction. The primary objective of these activities is to reduce our exposure to the risk of declining oil and natural gas prices during the term of the hedge. We do not enter into hedging transactions for trading purposes. We currently utilize zero-premium collars, fixed-price swaps and puts for hedging purposes.

The following tables illustrate our hedging positions for calendar years 2008 and 2009:


	Zero-Premium Collars
	Natural Gas							Oil
	Daily							Daily
	Volume			Floor		Ceiling		Volume		Floor		Ceiling
	(MMBtus/d)			Price		Price		(Bbls/d)		Price		Price
2008		30,000	*	$	8.00	$	14.05		3,000	$	60.00	$	90.20
2008		20,000	**		7.50		11.35		2,000		65.00		81.00
2008		20,000	***		9.00		17.90		3,000		70.00		110.25
2008		20,000	***		9.00		18.45
2009		20,000			8.00		14.30		3,000		80.00		135.00
2009		20,000			9.00		14.63


*		January — March

**		April – December

***		July – December

Fixed-Price Swaps

Natural Gas

Oil

Daily

Volume

Swap

Volume

Swap

(MMBtus/d)

Price

(Bbls/d)

Price

2009

20,000

10.15

2,000

107.90

Put Contracts

Natural Gas

Daily

Volume

Floor

Unamortized

(MMBtus/d)

Price

Cost

2008

20,000

10.00

$0.52/MMBtu


*		July – December

Effective hedging transactions reduced our natural gas revenue by $0.5 million and reduced oil revenue by $15.9 million during the three months ended September 30, 2008. During the three months ended September 30, 2007, effective hedging transactions increased our natural gas revenue by $7.3 million and reduced oil revenue by $0.1 million. During the nine months ended September 30, 2008, we realized a net increase of $0.1 million in natural gas revenue and a net decrease of $41.9 million in oil revenue related to our effective hedging transactions. We realized a net increase of $8.4 million in natural gas revenue and a net increase of $1.0 million in oil revenue related to our effective hedging transactions during the nine months ended September 30, 2007.

During the quarter ended September 30, 2008, as a result of extended shut-ins of production after Hurricanes Gustav and Ike, our September 2008 crude oil and natural gas production levels were below the volumes that we had hedged. Consequently, some of our crude oil and natural gas hedges for the month of September 2008 were deemed to be ineffective. During the quarter ended September 30, 2007, certain of our derivative contracts were determined to be partially ineffective because of differences in the relationship between the fixed price in the derivative contract and actual prices realized. Derivative expense (income) for the three and nine months ended September 30, 2008 and 2007 consisted of the following:


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2008			2007			2008			2007
	(In thousands)
Cash settlement on the ineffective portion of derivatives	$	736		$	—		$	736		$	—
Amortization of the cost of puts		(957	)		—			(957	)		—
Changes in fair market value of ineffective portion of derivatives		5,266			(36	)		1,654			(127	)

Total derivative income (expense)	$	5,045		$	(36	)	$	1,433		$	(127	)

As of September 30, 2008, our outstanding derivative contracts are with JPMorgan Chase Bank, N.A., BNP Paribas and Bank of America, N.A.

Note 5 – Long-Term Debt

Long-term debt consisted of the following at:


	September 30,		December 31,
	2008		2007
	(In millions)
8¹/4% Senior Subordinated Notes due 2011	$	200.0	$	200.0
6³/4% Senior Subordinated Notes due 2014		200.0		200.0
Bank debt		425.0		—

Total long-term debt	$	825.0	$	400.0

At September 30, 2008, we had $425.0 million in borrowings under our bank credit facility and letters of credit totaling $46.1 million had been issued pursuant to the facility. On August 28, 2008, we entered into an amended and restated revolving credit facility totaling $700 million, maturing on July 1, 2011, through a syndicated bank group. The new facility has an initial borrowing base of $700 million and replaces the previous $300 million facility. At September 30, 2008, the weighted average interest rate under the credit facility was approximately 5.5%. As of November 3, 2008, after accounting for the $46.1 million of letters of credit, we had $228.9 million of borrowings available under the new credit facility. The facility is required to be guaranteed by all of our material direct and indirect subsidiaries. As of August 28, 2008 the facility is guaranteed by Stone Energy Offshore, L.L.C. (“Stone Offshore”), a wholly owned subsidiary of Stone.

The borrowing base under the 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. The bank group is currently conducting its scheduled November review of the borrowing base.

The 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 consolidated net income of Stone, Stone Offshore and their material subsidiaries’ 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 margin, or a rate based on the prime rate or Federal funds rate plus an applicable margin. The credit facility provides for optional and mandatory prepayments, affirmative and negative covenants, and interest

coverage ratio and leverage ratio maintenance covenants.

On August 28, 2008, we entered into supplemental indentures governing the terms of our 8 ¹/4% Senior Subordinated Notes due 2011 (the “2011 Notes”) and our 6 ³/4% Senior Subordinated Notes due 2014 (the “2014 Notes”). The 2011 Notes and the 2014 Notes are now guaranteed by Stone Offshore on an unsecured senior subordinated basis.

Note 6 – Comprehensive Income

The following table illustrates the components of comprehensive income for the three and nine months ended September 30, 2008 and 2007:


	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2008		2007			2008		2007
			(In millions)
Net income	$	34.1	$	34.1		$	179.2	$	116.5
Other comprehensive income (loss), net of tax effect:
Adjustment for fair value accounting of derivatives		119.9		(2.1	)		32.3		(6.7	)

Comprehensive income	$	154.0	$	32.0		$	211.5	$	109.8

Note 7 – Asset Retirement Obligations

During the third quarter of 2008 and 2007, we recognized non-cash expenses of $4.1 million and $4.4 million, respectively, related to the accretion of our asset retirement obligations. For the nine-month periods ended September 30, 2008 and 2007, we recognized accretion expense of $12.4 million and $13.2 million, respectively.

The change in our asset retirement obligations during the nine months ended September 30, 2008 is set forth below:


	Nine Months
	Ended
	September 30,
	2008
	($ in millions)
Asset retirement obligations as of the beginning of the period, including current portion	$	289.8
Liabilities incurred		—
Liabilities settled		(42.2	)
Liabilities assumed		72.4
Divestment of properties		(32.7	)
Accretion expense		12.4
Revision of estimates		128.6

Asset retirement obligations as of the end of the period, including current portion	$	428.3

The revision of estimates primarily relates to increases in estimates of plugging and abandoning the structures that were lost in Hurricane Ike.

Note 8 – International Operations

During 2006, we entered into an agreement to participate in the drilling of exploratory wells on two offshore concessions in Bohai Bay, China. After the drilling of three wells, it has been determined that additional drilling will be necessary to evaluate the commercial viability of this project. During the fourth quarter of 2007, our investment was deemed to be impaired in the amount of $8.2 million. During the three and nine-month periods ended September 30, 2008, our investment was deemed to be impaired in the amount of $8.8 million and $18.9 million, respectively. Included in unevaluated oil and gas property costs at September 30, 2008 are $12.1 million of remaining capital expenditures related to our properties in Bohai Bay, China.

Note 9 – Fair Value Measurements

We adopted the provisions of SFAS No. 157, “Fair Value Measurements,” on January 1, 2008. SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosure about fair value measurements. The net effect of the implementation of SFAS No. 157 on our financial statements was immaterial.

The following tables present our assets and liabilities that are measured at fair value on a recurring basis during the nine months ended September 30, 2008 and are categorized using the fair value hierarchy. The fair value hierarchy has three levels based on the reliability of the inputs used to determine the fair value.


	Fair Value Measurements at September 30, 2008
			Quoted Prices in		Significant
			Active Markets		Other		Significant
			for Identical		Observable		Unobservable
			Assets		Inputs		Inputs
Assets	Total		(Level 1)		(Level 2)		(Level 3)
			(In millions)
Money market funds	$	14.2	$	14.2	$	—	$	—
Hedging contracts		44.4		—		—		44.4

Total	$	58.6	$	14.2	$	—	$	44.4


	Fair Value Measurements at September 30, 2008
				Quoted Prices in		Significant
				Active Markets		Other		Significant
				for Identical		Observable		Unobservable
				Liabilities		Inputs		Inputs
Liabilities	Total			(Level 1)		(Level 2)		(Level 3)
				(In millions)
Hedging contracts	$	(9.0	)	$	—	$	—	$	(9.0	)

Total	$	(9.0	)	$	—	$	—	$	(9.0	)

The table below presents a reconciliation for assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the nine months ended September 30, 2008.


	Hedging
	Contracts, net
	(In millions)
Balance as of January 1, 2008	$	(16.8	)
Total gains/(losses) (realized or unrealized):
Included in earnings		1.4
Included in other comprehensive income		9.6
Purchases, issuances and settlements		41.2
Transfers in and out of Level 3		—

Balance as of September 30, 2008	$	35.4


The amount of total gains/(losses) for the period included in earnings attributable to the change in unrealized gains/(losses) relating to derivatives still held at September 30, 2008	$	1.7

In February 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 159, “The Fair Value Option for Financial Assets and Liabilities – Including an amendment of FASB Statement No. 115”. SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value. This statement became effective for us on January 1, 2008. We did not elect the fair value option for any of our existing financial instruments other than those mandated by other FASB standards and accordingly the impact of the adoption of SFAS No. 159 on our financial statements was immaterial. We have not determined whether or not we will elect this option for financial instruments we may acquire in the future.

Note 10 – Commitments and Contingencies

In June 2008, management approved a commitment to purchase $46 million of long-lead items, mainly tubular goods, to allow for the efficient execution of our drilling program in late 2008 and early 2009. We have paid out approximately $19.5 million to date on these long-lead items, leaving a remaining commitment of $26.5 million. Tubular goods held for use in our oil and gas operations at September 30, 2008 totaled approximately $15.5 million and have been classified as a current asset on our balance sheet. After the closing of the merger with Bois d’Arc, we currently have rig commitments totaling approximately $34.6 million due within six months or less.

On December 30, 2004, Stone was served with two petitions (civil action numbers 2004-6227 and 2004-6228) filed by the

Louisiana Department of Revenue (“LDR”) in the 15th Judicial District Court (Parish of Lafayette, Louisiana) claiming additional franchise taxes due. In one case, the LDR is seeking additional franchise taxes from Stone in the amount of $640,000, plus accrued interest of $352,000 (calculated through December 15, 2004), for the franchise tax year 2001. In the other case, the LDR is seeking additional franchise taxes from Stone (as successor to Basin Exploration, Inc.) in the amount of $274,000, plus accrued interest of $159,000 (calculated through December 15, 2004), for the franchise tax years 1999, 2000 and 2001. Further, on December 29, 2005, the LDR filed another petition in the 15^th Judicial District Court claiming additional franchise taxes due for the taxable years ended December 31, 2002 and 2003 in the amount of $2.6 million plus accrued interest calculated through December 15, 2005 in the amount of $1.2 million. Also, on January 2, 2008, Stone was served with a petition (civil action number 2007-6754) claiming $1.5 million of additional franchise taxes due for the 2004 franchise tax year, plus accrued interest of $800,000 calculated through November 30, 2007. These assessments all relate to the LDR’s assertion 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 the state of Louisiana for purposes of computing the Louisiana franchise tax apportionment ratio. The Company disagrees with these contentions and intends to vigorously defend itself against these claims. The franchise tax years 2005, 2006 and 2007 remain subject to examination.

In 2005, Stone received an inquiry from the Philadelphia Stock Exchange investigating matters including trading prior to Stone’s October 6, 2005 announcement regarding the revision of Stone’s proved reserves. Stone cooperated fully with this inquiry. Stone has not received any further inquiries from the Philadelphia Exchange since the original request for information.

On or around November 30, 2005, George Porch filed a putative class action in the United States District Court for the Western District of Louisiana (the “Federal Court”) against Stone, David Welch, Kenneth Beer, D. Peter Canty and James Prince purporting to allege violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. Three similar complaints were filed soon thereafter. All complaints had asserted a putative class period commencing on June 17, 2005 and ending on October 6, 2005. All complaints contended that, during the putative class period, defendants, among other things, misstated or failed to disclose (i) that Stone had materially overstated Stone’s financial results by overvaluing its oil reserves through improper and aggressive reserve methodologies; (ii) that the Company lacked adequate internal controls and was therefore unable to ascertain its true financial condition; and (iii) that as a result of the foregoing, the values of the Company’s proved reserves, assets and future net cash flows were materially overstated at all relevant times. On March 17, 2006, these purported class actions were consolidated, with El Paso Fireman & Policeman’s Pension Fund designated as Lead Plaintiff (“Securities Action”). Lead Plaintiff filed a consolidated class action complaint on or about June 14, 2006. The consolidated complaint alleges claims similar to those described above and expands the putative class period to commence on May 2, 2001 and to end on March 10, 2006. On September 13, 2006, Stone and the individual defendants filed motions seeking dismissal of that action.

On August 17, 2007, a Federal Magistrate Judge issued a report and recommendation (the “Report”) recommending that the Federal Court grant in part and deny in part the Motions to Dismiss. The Report recommended that (i) the claims asserted against defendants Kenneth Beer and James Prince pursuant to Section 10(b) of the Securities Exchange Act and Rule 10b-5 promulgated thereunder and (ii) claims asserted on behalf of putative class members who sold their Company shares prior to October 6, 2005 be dismissed and that the Motions to Dismiss be denied with respect to the other claims against Stone and the individual defendants.

On October 1, 2007, the Federal Court issued an Order directing that judgment on the Motions to Dismiss be entered in accordance with the recommendations of the Report. On October 23, 2007, Stone and the individual defendants filed a motion seeking permission to appeal the denial of the Motions to Dismiss to the Fifth Circuit Court of Appeals, which motion was denied. The discovery process is now underway. The parties have exchanged initial disclosures, document requests, and interrogatories and have begun producing documents. On or about May 12, 2008, Lead Plaintiff filed a motion to certify the Securities Action as a class action under Rule 23 of the Federal Rules of Civil Procedure (“Class Certification Motion”). Defendants filed their opposition to the Class Certification Motion on June 27, 2008. Defendants also filed a Motion for Judgment on the Pleadings and a related Motion to Amend Answer to the Consolidated Class Action Complaint on or about June 11, 2008. The Court has not yet ruled on any of these three motions. The Federal Court has entered the parties’ agreed Joint Plan of Work and Proposed Scheduling Order, which provides deadlines for additional pre-trial proceedings, including discovery, expert reports, and dispositive motions. The Federal Court has set trial to begin in the Securities Action on September 21, 2009.

In addition, on or about December 16, 2005, Robert Farer and Priscilla Fisk filed respective complaints in the Federal Court purportedly alleging claims derivatively on behalf of Stone. Similar complaints were filed thereafter in the Federal Court by Joint Pension Fund, Local No. 164, I.B.E.W., and in the 15^th Judicial District Court, Parish of Lafayette, Louisiana (the “State Court”) by Gregory Sakhno. Stone was named as a nominal defendant and David Welch, Kenneth Beer, D. Peter Canty, James Prince, James Stone, John Laborde, Peter Barker, George Christmas, Richard Pattarozzi, David Voelker, Raymond Gary, B.J. Duplantis and Robert Bernhard were named as defendants in these actions. The State Court action purportedly alleged claims of breach of fiduciary duty, abuse of control, gross mismanagement, and waste of corporate assets against all defendants, and claims of unjust enrichment and insider selling against certain individual defendants. The Federal Court derivative actions asserted purported claims against all defendants for breach of fiduciary duty, abuse of control, gross mismanagement, waste of corporate assets and unjust enrichment and claims against certain individual defendants for breach of fiduciary duty and violations of the Sarbanes-Oxley Act of 2002.

Court derivative action at least until resolution of the then-pending motion to dismiss the Securities Action after which time a hearing was to be conducted by the Federal Court to determine the propriety of maintaining that stay. As of the date hereof, the Federal Court has yet to consider any potential modification of the stay.

On July 18, 2008, each of Stone, Stone Energy Offshore, L.L.C. (“Merger Sub”), Bois d’Arc Energy, Inc. (“Bois d’Arc”) and Comstock Resources (“Comstock”) was served with a summons and complaint in which Bois d’Arc, its directors and certain of its officers, as well as Comstock, Stone and Merger Sub, have been named as defendants in a putative class action lawsuit seeking certification in the District Court of Clark County, Nevada, entitled Packard v. Allison, et al., Case No. A567393. This lawsuit was brought by Gail Packard, a purported Bois d’Arc stockholder, on behalf of a putative class of Bois d’Arc stockholders and, among other things, seeks to enjoin the named defendants from proceeding with the proposed merger, seeks to have the merger agreement rescinded, and seeks an award of monetary damages. Plaintiff asserts that the decisions by Bois d’Arc’s directors and Comstock to approve the proposed merger constituted breaches of their respective fiduciary duties because, Ms. Packard alleges, they did not engage in a fair process to ensure the highest possible purchase price for Bois d’Arc’s stockholders, did not properly value Bois d’Arc, failed to disclose material facts regarding the proposed merger, and did not protect against conflicts of interest arising from the participation agreement to be entered into between Stone and former executives of Bois d’Arc, parachute gross-up payments, and the change in control and severance arrangements. The complaint was subsequently amended to substitute Thomas Packard as plaintiff in lieu of Gail Packard, and the amended complaint eliminated Stone and Merger Sub as defendants. On August 21, 2008, the court denied plaintiff’s motions for a preliminary injunction and for expedited discovery, noting that a likelihood of plaintiff’s success on the merits is questionable. Each of the remaining defendants filed a motion to dismiss plaintiff’s complaint, which motions are currently pending.

Stone’s Certificate of Incorporation and/or its Restated Bylaws provide, to the extent permissible under the law of Delaware (Stone’s state of incorporation), for indemnification of and advancement of defense costs to Stone’s current and former directors and officers for potential liabilities related to their service to Stone. Stone has purchased directors and officers insurance policies that, under certain circumstances, may provide coverage to Stone and/or its officers and directors for certain losses resulting from securities-related civil liabilities and/or the satisfaction of indemnification and advancement obligations owed to directors and officers. These insurance policies may not cover all costs and liabilities incurred by Stone and its current and former officers and directors in these regulatory and civil proceedings.

The foregoing pending actions are at an early stage and subject to substantial uncertainties concerning the outcome of material factual and legal issues relating to the litigation and the regulatory proceedings. Accordingly, based on the current status of the litigation and inquiries, we cannot currently predict the manner and timing of the resolution of these matters and are unable to estimate a range of possible losses or any minimum loss from such matters. Furthermore, to the extent that our insurance policies are ultimately available to cover any costs and/or liabilities resulting from these actions, they may not be sufficient to cover all costs and liabilities incurred by us and our current and former officers and directors in these regulatory and civil proceedings.

Note 11 – Guarantor Financial Statements

Stone Offshore is an unconditional guarantor (the “Guarantor Subsidiary”) of our 8¹/4% Senior Subordinated Notes due 2011 and 6³/4% Senior Subordinated Notes due 2014 (see Note 5 – Long-Term Debt). Our remaining subsidiaries (the “Non-Guarantor Subsidiaries”) have not provided guarantees. The following presents condensed consolidating financial information as of September 30, 2008 and for the three and nine months ended September 30, 2008 on an issuer (parent company), guarantor subsidiary, non-guarantor subsidiary, and consolidated basis. Elimination entries presented are necessary to combine the entities. There were no subsidiary guarantees of any of our debt as of December 31, 2007 or for the three or nine month periods ended September 30, 2007.

CONDENSED CONSOLIDATING BALANCE SHEET (UNAUDITED)
SEPTEMBER 30, 2008
(In thousands of dollars)


							Non-
				Guarantor			Guarantor
	Parent			Subsidiary			Subsidiaries			Eliminations			Consolidated
Assets
Current assets:
Cash and cash equivalents	$	131,116		$	41,409		$	118		$	—		$	172,643
Accounts receivable		112,923			33,586			283			—			146,792
Fair value of hedging contracts		37,578			—			—			—			37,578
Current income tax receivable		35,610			713			—			—			36,323
Inventory		12,747			2,710			—			—			15,457
Other current assets		2,030			16			—			—			2,046

Total current assets		332,004			78,434			401			—			410,839
Oil and gas properties – United States
Proved, net		1,119,907			1,466,182			2,043			—			2,588,132
Unevaluated		235,940			427,551			—			—			663,491
Oil and gas properties – China
Unevaluated		12,123			—			—			—			12,123
Building and land, net		5,632			—			—			—			5,632
Fixed assets, net		5,404			270			—			—			5,674
Other assets, net		29,086			3,515			—			—			32,601
Fair value of hedging contracts		6,863			—			—			—			6,863
Investment in subsidiary		1,647,254			1,475			—			(1,648,729	)		—
Goodwill		—			337,886			—			—			337,886

Total assets	$	3,394,213		$	2,315,313		$	2,444		$	(1,648,729	)	$	4,063,241


Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable to vendors	$	108,140		$	15,536		$	—		$	—		$	123,676
Undistributed oil and gas proceeds		27,322			46,384			167			—			73,873
Fair value of hedging contracts		8,560			—			—			—			8,560
Asset retirement obligations		65,411			—			—			—			65,411
Deferred income taxes		2,394			—			—			—			2,394
Other current liabilities		24,687			2,986			—			—			27,673

Total current liabilities		236,514			64,906			167			—			301,587
Long-term debt		825,000			—			—			—			825,000
Deferred taxes *		187,714			533,870			—			—			721,584
Asset retirement obligations		290,106			72,092			647			—			362,845
Fair value of hedging contracts		434			—			—			—			434
Other long-term liabilities		11,827			2			—			—			11,829

Total liabilities		1,551,595			670,870			814			—			2,223,279


Minority interest		—			—			163			—			163


Commitments and contingencies

Common stock		396			—			—			—			396
Treasury stock		(2,878	)		—			—			—			(2,878	)
Additional paid-in capital		1,259,331			1,647,254			1,475			(1,648,729	)		1,259,331
Retained earnings (deficit)		564,237			(2,811	)		(8	)		—			561,418
Accumulated other comprehensive income		21,532			—			—			—			21,532

Total stockholders’ equity		1,842,618			1,644,443			1,467			(1,648,729	)		1,839,799

Total liabilities and stockholders’ equity	$	3,394,213		$	2,315,313		$	2,444		$	(1,648,729	)	$	4,063,241


*		Deferred income taxes have been allocated to guarantor subsidiary where related oil and gas properties reside.

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED SEPTEMBER 30, 2008
(In thousands of dollars)


							Non-
				Guarantor			Guarantor
	Parent			Subsidiary			Subsidiaries			Eliminations		Consolidated
Operating revenue:
Oil production	$	99,501		$	1,225		$	—		$	—	$	100,726
Gas production		63,373			3,211			—			—		66,584
Derivative income, net		5,045			—			—			—		5,045

Total operating revenue		167,919			4,436			—			—		172,355


Operating expenses:
Lease operating expenses		35,873			4,276			—			—		40,149
Production taxes		1,339			(14	)		—			—		1,325
Depreciation, depletion, amortization		49,382			2,580			—			—		51,962
Write-down of oil and gas properties		8,759			—			—			—		8,759
Accretion expense		3,770			373			3			—		4,146
Salaries, general and administrative		10,436			45			—			—		10,481
Incentive compensation expense		283			—			—			—		283

Total operating expenses		109,842			7,260			3			—		117,105


Income (loss) from operations		58,077			(2,824	)		(3	)		—		55,250


Other (income) expenses:
Interest expense		3,028			8			—			—		3,036
Interest income		(2,233	)		(22	)		—			—		(2,255	)
Other (income) expense, net		(1,427	)		1			5			—		(1,421	)

Total other (income) expenses		(632	)		(13	)		5			—		(640	)


Income (loss) before taxes		58,709			(2,811	)		(8	)		—		55,890


Provision (benefit) for income taxes:
Current		(45,583	)		—			—			—		(45,583	)
Deferred		67,352			—			—			—		67,352

Total income taxes		21,769			—			—			—		21,769


Net income (loss)	$	36,940		$	(2,811	)	$	(8	)	$	—	$	34,121

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 2008
(In thousands of dollars)


							Non-
				Guarantor			Guarantor
	Parent			Subsidiary			Subsidiaries			Eliminations		Consolidated
Operating revenue:
Oil production	$	378,777		$	1,225		$	—		$	—	$	380,002
Gas production		250,292			3,211			—			—		253,503
Derivative income, net		1,433			—			—			—		1,433

Total operating revenue		630,502			4,436			—			—		634,938


Operating expenses:
Lease operating expenses		101,026			4,276			—			—		105,302
Production taxes		6,242			(14	)		—			—		6,228
Depreciation, depletion, amortization		183,600			2,580			—			—		186,180
Write-down of oil and gas properties		18,859			—			—			—		18,859
Accretion expense		11,991			373			3			—		12,367
Salaries, general and administrative		31,970			45			—			—		32,015
Incentive compensation expense		2,183			—			—			—		2,183

Total operating expenses		355,871			7,260			3			—		363,134


Income (loss) from operations		274,631			(2,824	)		(3	)		—		271,804


Other (income) expenses:
Interest expense		10,520			8			—			—		10,528
Interest income		(10,579	)		(22	)		—			—		(10,601	)
Other (income) expense, net		(3,781	)		1			5			—		(3,775	)

Total other (income) expenses		(3,840	)		(13	)		5			—		(3,848	)


Income (loss) before taxes		278,471			(2,811	)		(8	)		—		275,652


Provision (benefit) for income taxes:
Current		1,395			—			—			—		1,395
Deferred		95,083			—			—			—		95,083

Total income taxes		96,478			—			—			—		96,478


Net income (loss)	$	181,993		$	(2,811	)	$	(8	)	$	—	$	179,174

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 2008
(In thousands of dollars)


							Non-
				Guarantor			Guarantor
	Parent			Subsidiary			Subsidiaries			Consolidated
Cash flows from operating activities:
Net income	$	181,993		$	(2,811	)	$	(8	)	$	179,174
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, depletion and amortization		183,600			2,580			—			186,180
Write-down of oil and gas properties		18,859			—			—			18,859
Accretion expense		11,991			373			3			12,367
Deferred income tax provision		95,083			—			—			95,083
Settlement of asset retirement obligations		(42,202	)		—			—			(42,202	)
Non-cash stock compensation expense		6,286			—			—			6,286
Excess tax benefits		(3,045	)		—			—			(3,045	)
Non-cash derivative expense		(1,654	)		—			—			(1,654	)
Other non-cash expenses		1,307			—			—			1,307
Decrease in current income taxes payable		(92,714	)		—			—			(92,714	)
(Increase) decrease in accounts receivable		75,913			25,632			(117	)		101,428
Increase in other current assets		(204	)		(1,279	)		—			(1,483	)
Decrease in accounts payable		(300	)		—			—			(300	)
Increase in other current liabilities		14,578			15,309			182			30,069
Investment in hedging contracts		(1,914	)		—			—			(1,914	)
Other		3,994			(4,237	)		—			(243	)

Net cash provided by operating activities		451,571			35,567			60			487,198


Cash flows from investing activities:
Acquisition of Bois d’Arc Energy, Inc.		(929,364	)		6,768			58			(922,538	)
Investment in oil and gas properties		(310,412	)		(926	)		—			(311,338	)
Proceeds from sale of oil and gas properties, net of expenses		14,090			—			—			14,090
Sale of fixed assets		4			—			—			4
Investment in fixed and other assets		(1,176	)		—			—			(1,176	)

Net cash provided by (used in) investing activities		(1,226,858	)		5,842			58			(1,220,958	)


Cash flows from financing activities:
Proceeds from bank borrowings		425,000			—			—			425,000
Deferred financing costs		(8,738	)		—			—			(8,738	)
Excess tax benefits		3,045			—			—			3,045
Purchase of treasury stock		(4,185	)		—			—			(4,185	)
Net proceeds from exercise of stock options and vesting of restricted stock		16,155			—			—			16,155

Net cash provided by financing activities		431,277			—			—			431,277


Net increase (decrease) in cash and cash equivalents		(344,010	)		41,409			118			(302,483	)
Cash and cash equivalents, beginning of period		475,126			—			—			475,126

Cash and cash equivalents, end of period	$	131,116		$	41,409		$	118		$	172,643

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

TO THE STOCKHOLDERS OF
STONE ENERGY CORPORATION:

We have reviewed the condensed consolidated balance sheet of Stone Energy Corporation as of September 30, 2008, and the related condensed consolidated statement of operations for the three and nine-month periods ended September 30, 2008 and 2007, and the condensed consolidated statement of cash flows for the nine-month periods ended September 30, 2008 and 2007. These financial statements are the responsibility of the Company’s management.

We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with standards of the Public Company Accounting Oversight Board, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to the condensed consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Stone Energy Corporation as of December 31, 2007, and the related consolidated statements of operations, cash flows, changes in stockholders’ equity and comprehensive income for the year then ended (not presented herein) and in our report dated February 25, 2008, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2007, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.


	/s/ Ernst & Young LLP

New Orleans, Louisiana
November 5, 2008

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 and other risk factors as described in our Annual Report on Form 10-K. 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, 2007.

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. Prior to June 29, 2007, we also had significant operations in the Rocky Mountain Region. We are also engaged 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, Rocky Mountain Region, Appalachia, Bohai Bay, China and other potential areas. Throughout this document, reference to our “Gulf Coast Basin” properties includes our onshore, shelf, deep shelf and deep water properties. Reference to our “Rocky Mountain Region” includes our properties in several Rocky Mountain Basins and the Williston Basin.

Acquisition

Amended Credit Facility

In connection with the acquisition of Bois d’Arc on August 28, 2008, we entered into an amended and restated revolving credit facility, maturing on July 1, 2011, through a syndicated bank group. The new facility has an initial borrowing base of $700 million. See Bank Credit Facility below for additional information regarding the amended and restated credit facility.

Hurricanes

Hurricanes Gustav and Ike caused significant disruption in our operations for the quarter resulting in production deferrals approximating 7.1 Bcfe and significant damage to our offshore facilities. Although we are still quantifying the financial impact of the damage we anticipate it will exceed our insurance coverage limits.

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;

	•		goodwill impairment testing and measurement;

	•		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

International Operations. Included in unevaluated oil and gas property costs at September 30, 2008 are $12.1 million of remaining capital expenditures related to our properties in Bohai Bay, China. Under full cost accounting, investments in individual countries represent separate cost centers for computation of depreciation, depletion and amortization as well as for full cost ceiling test evaluations. During the fourth quarter of 2007, this investment was deemed to be impaired in the amount of $8.2 million. During the three and nine-month periods ended September 30, 2008, this investment was deemed to be impaired in the amount of $8.8 million and $18.9 million, respectively. This is our sole investment in the Peoples Republic of China. It is possible that future evaluations of this project could result in additional impairment charges to income on our income statement.

Credit Crisis. During the quarter ended September 30, 2008, world financial markets experienced a severe reduction in the availability of credit. Although we have not been severely impacted by this condition in the short-term, it is difficult to predict its impact on us in future quarters. Possible negative impacts could include a decrease in the availability of borrowings under our credit facility, an increased counterparty credit risk on our derivatives contracts and the requirement by contractual counterparties of us to post collateral guaranteeing performance.

Goodwill. The acquisition of Bois d’ Arc resulted in the recording of goodwill on our balance sheet in the amount of $337.9 million. Generally accepted accounting principles require that we periodically test goodwill for impairment. If we were to determine that goodwill is impaired this would result in a charge on our income statement in future periods.

Lease Operating Expenses. Although we have not completely quantified the damage caused by Hurricanes Gustav and Ike, we expect that lease operating expenses will increase in the coming quarters as repairs are initiated.

Declining Commodity Prices. We have experienced a significant decline in oil and natural gas prices in the last several months. If this trend were to continue it could increase the likelihood of goodwill impairments and write-downs of oil and gas properties, reduce the available borrowings under our credit facility and severely impact our cash flows used to fund operations and capital expenditures.

Liquidity and Capital Resources

Cash Flow and Working Capital. Net cash flow provided by operating activities totaled $487.2 million during the nine months ended September 30, 2008 compared to $374.3 million in the comparable period in 2007. Based on our outlook of commodity prices and our estimated production, we expect to fund our 2008 capital expenditures with cash flow provided by operating activities.

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. Net cash flow provided by investing activities totaled $377.2 million during the first nine months of 2007, which primarily represents proceeds received from the sale of substantially all of our Rocky Mountain Region properties offset by our investment in oil and gas properties.

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. Net cash flow used in financing activities totaled $394.9 million for the nine months ended September 30, 2007, which primarily represents the redemption of our senior floating rate notes and repayments of borrowings under our bank credit facility.

We had working capital at September 30, 2008 of $109.3 million. We believe that our working capital balance should be viewed in conjunction with the availability of borrowings under our bank credit facility when measuring liquidity. “Liquidity” is defined as the ability to obtain cash quickly either through the conversion of assets or incurrence of liabilities. See “Bank Credit Facility”.

Capital Expenditures. Third quarter 2008 additions to oil and gas property costs of $2.1 billion included $29.4 million of lease acquisition costs, $1.9 billion of property acquisition costs, $4.3 million of capitalized salaries, general and administrative expenses (inclusive of incentive compensation) and $7.0 million of capitalized interest. Year-to-date 2008 additions to oil and gas property costs of $2.3 billion included $69.1 million of lease acquisition costs, $1.9 billion of property acquisition costs, $14.2 million of capitalized salaries, general and administrative expenses (inclusive of incentive compensation) and $15.7 million of capitalized interest. These investments were financed by cash flow from operating activities, borrowings under our bank credit facility and the issuance of common stock.

Our 2008 capital expenditures budget, which excludes acquisitions, asset retirement costs and capitalized interest, salaries, general and administrative expenses, was approximately $395 million prior to the Bois d’Arc acquisition. After adjusting for the Bois d’Arc acquisition and the impact of the hurricanes, we now expect 2008 capital expenditures to be approximately $425 to $450 million. To the extent that 2008 cash flow from operating activities exceeds our estimated 2008 capital expenditures, we may repurchase shares of common stock or invest in the money markets. If cash flow from operating activities during 2008 is not sufficient to fund estimated 2008 capital expenditures, we believe that our bank credit facility will provide us with adequate liquidity. See "Bank Credit Facility.”

Bank Credit Facility. At September 30, 2008, we had $425 million of outstanding borrowings under our bank credit facility and letters of credit totaling $46.1 million had been issued under the facility. On August 28, 2008, we entered into an amended and restated revolving credit facility totaling $700 million, maturing on July 1, 2011, through a syndicated bank group. The new facility has an initial borrowing base of $700 million and replaces the previous $300 million facility. At September 30, 2008, the weighted average interest rate under the credit facility was approximately 5.5%. As of November 3, 2008, after accounting for the $46.1 million of letters of credit, we had $228.9 million of borrowings available under the new credit facility. The facility is required to be guaranteed by all of our material direct and indirect subsidiaries. As of August 28, 2008 the facility is guaranteed by Stone Energy Offshore, L.L.C. (“Stone Offshore”), a wholly owned subsidiary of Stone.

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, 2008, 100,000 shares had been repurchased under this program at a total cost of $4.2 million.

Contractual Obligations and Other Commitments

In June 2008, management approved a commitment to purchase $46 million of long-lead items, mainly tubular goods, to allow for the efficient execution of our drilling program in late 2008 and early 2009. We have paid out approximately $19.5 million to date on these long-lead items, leaving a remaining commitment of $26.5 million. After the closing of the merger with Bois d’Arc, we currently have rig commitments totaling approximately $34.6 million due within six months or less.

Results of Operations

The following tables set forth certain information with respect to our oil and gas operations.


	Three Months Ended
	September 30,
	2008		2007		Variance			% Change
Production:
Oil (MBbls)		943		1,313		(370	)		(28	%)
Natural gas (MMcf)		6,213		10,801		(4,588	)		(42	%)
Oil and natural gas (MMcfe)		11,871		18,679		(6,808	)		(36	%)
Revenue data (in thousands) (a):
Oil revenue	$	100,726	$	100,759	$	(33	)		—
Natural gas revenue		66,584		77,653		(11,069	)		(14	%)

Total oil and natural gas revenue	$	167,310	$	178,412	$	(11,102	)		(6	%)
Average prices (a):
Oil (per Bbl)	$	106.81	$	76.74	$	30.07			39	%
Natural gas (per Mcf)		10.72		7.19		3.53			49	%
Oil and natural gas (per Mcfe)		14.09		9.55		4.54			48	%
Expenses (per Mcfe):
Lease operating expenses	$	3.38	$	2.11	$	1.27			60	%
Salaries, general and administrative expenses (b)		0.88		0.42		0.46			110	%
DD&A expense on oil and gas properties		4.30		3.76		0.54			14	%


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

(b)		Exclusive of incentive compensation expense.


	Nine Months Ended
	September 30,
	2008		2007		Variance			% change
Production:
Oil (MBbls)		3,647		4,691		(1,044	)		(22	%)
Natural gas (MMcf)		24,631		34,109		(9,478	)		(28	%)
Oil and natural gas (MMcfe)		46,513		62,255		(15,742	)		(25	%)
Revenue data (in thousands) (a):
Oil revenue	$	380,002	$	305,516	$	74,486			24	%
Natural gas revenue		253,503		246,120		7,383			3	%

Total oil and natural gas revenue	$	633,505	$	551,636	$	81,869			15	%
Average prices (a):
Oil (per Bbl)	$	104.20	$	65.13	$	39.07			60	%
Natural gas (per Mcf)		10.29		7.22		3.07			43	%
Oil and natural gas (per Mcfe)		13.62		8.86		4.76			54	%
Expenses (per Mcfe):
Lease operating expenses	$	2.26	$	2.11	$	0.15			7	%
Salaries, general and administrative expenses (b)		0.69		0.41		0.28			68	%
DD&A expense on oil and gas properties		3.95		3.67		0.28			8	%


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

(b)		Exclusive of incentive compensation expense.

During the third quarter of 2008, net income totaled $34.1 million, or $1.04 per share, compared to $34.1 million, or $1.23 per share for the third quarter of 2007. For the nine months ended September 30, 2008, net income totaled $179.2 million, or $6.02 per share, compared to $116.5 million, or $4.21 per share, during the comparable 2007 period. 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. During the third quarter of 2008, we recognized a ceiling test write-down of our oil and gas properties in China totaling $8.8 million ($5.7 million after taxes). During the nine months ended September 30, 2008, we recognized a ceiling test write-down of our oil and gas properties in China totaling $18.9 million ($12.3 million after taxes). The write-down did not impact our cash flow from operations but did reduce net income and stockholders’ equity.

Included in the nine month 2007 net income is a $55.7 million gain ($36.3 million net of tax) on the sale of our Rocky Mountain Region properties, representing the excess of the proceeds from the sale over the carrying value of the oil and gas properties and other assets sold and transaction costs.

The variance in the three and nine-month periods’ results was also due to the following components:

Production. During the third quarter of 2008, total production volumes decreased 36% to 11.9 Bcfe compared to 18.7 Bcfe produced during the third quarter of 2007. Oil production during the third quarter of 2008 totaled approximately 943,000 barrels compared to 1,313,000 barrels produced during the third quarter of 2007, while natural gas production totaled 6.2 Bcf during the third quarter of 2008 compared to 10.8 Bcf produced during the third quarter of 2007. Year-to-date 2008 production totaled 3,647,000 barrels of oil and 24.6 Bcf of natural gas compared to 4,691,000 barrels of oil and 34.1 Bcf of natural gas produced during the comparable 2007 period.

Production rates were negatively impacted during the third quarter of 2008 by Gulf Coast shut-ins due to Hurricanes Gustav and Ike, amounting to volumes of approximately 7.1 Bcfe (77 MMcfe per day). Production rates were negatively impacted during the third quarter of 2007 by extended Gulf Coast shut-ins due to Hurricanes Katrina and Rita, amounting to volumes of approximately 0.9 Bcfe (10 MMcfe per day). Without the effects of hurricane production deferrals, production volumes decreased approximately 0.6 Bcfe for the third quarter of 2008 compared to the comparable 2007 quarter. Slightly offsetting this decrease was production associated with the Bois d’Arc acquisition, which closed on August 28, 2008, totaling approximately 0.6 Bcfe through September 30, 2008. Production deferrals due to hurricanes for the nine months ended September 30, 2008 and 2007, amounted to 7.1 Bcfe (26 MMcfe per day) and 3.1 Bcfe (17 MMcfe per day), respectively. Without the effect of production deferrals, year-to-date 2008 production volumes decreased approximately 11.8 Bcfe from year-to-date 2007 production volumes. The decrease was primarily the result of the sale of substantially all of our Rocky Mountain Region properties on June 29, 2007 and the divestiture of non-core Gulf of Mexico properties in the first quarter of 2008. Rocky Mountain Region production was 6.6 Bcfe for the nine months ended September 30, 2007.

Prices. Prices realized during the third quarter of 2008 averaged $106.81 per Bbl of oil and $10.72 per Mcf of natural gas, or 48% higher, on an Mcfe basis, than third quarter 2007 average realized prices of $76.74 per Bbl of oil and $7.19 per Mcf of natural gas. Average realized prices during the first nine months of 2008 were $104.20 per Bbl of oil and $10.29 per Mcf of natural gas compared to $65.13 per Bbl of oil and $7.22 per Mcf of natural gas realized during the first nine months of 2007. 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 decreased our average realized natural gas price by $0.07 per Mcf and decreased our average realized oil price by $16.89 per Bbl in the third quarter of 2008. During the third quarter of 2007, our effective hedging transactions increased our average realized natural gas price by $0.68 per Mcf and decreased our average realized oil price by $0.09 per Bbl. Effective hedging transactions for the first nine months of 2008 decreased our average realized oil price by $11.50 per Bbl and had no impact on average realized natural gas prices. Natural gas prices realized during the first nine months of 2007 were increased by $0.25 per Mcf and oil prices were increased by $0.21 per Bbl as a result of effective hedging transactions.

Income. Third quarter 2008 oil and natural gas revenue totaled $167.3 million, compared to third quarter 2007 oil and natural gas revenue of $178.4 million. The decrease is attributable to a 36% decrease in production volumes slightly offset by a 48% increase in average realized prices on a gas equivalent basis. Year-to-date 2008 oil and natural gas revenue totaled $633.5 million compared to $551.6 million during the comparable 2007 period. The increase was due to a 54% increase in average realized prices on a gas equivalent basis, partially offset by a 25% decline in production volumes. Oil and natural gas revenue related to the properties acquired from Bois d’Arc totaled $4.4 million from August 28, 2008 through September 30, 2008. We sold substantially all of our Rocky Mountain Region properties on June 29, 2007. Rocky Mountain Region oil and natural gas revenue amounted to $47.1 million for the nine months ended September 30, 2007.

Interest income totaled $2.3 million during the third quarter of 2008 compared to $5.3 million during the comparable quarter of 2007 and $10.6 million during the nine months ended September 30, 2008 compared to $6.9 million during the comparable 2007 period. The increase in interest income for the nine months ended September 30, 2008 is the result of an increase in our cash balances

during the 2008 periods after the sale of substantially all of our Rocky Mountain Region properties in June 2007. During the third quarter of 2008, interest income decreased as a result of a decrease in our cash balances after the acquisition of Bois d’Arc.

During the quarter ended September 30, 2008, as a result of extended shut-ins of production after Hurricanes Gustav and Ike, our September 2008 crude oil and natural gas production levels were below the volumes that we had hedged. Consequently, some of our crude oil and natural gas hedges for the month of September 2008 were deemed to be ineffective. Net derivative income for the quarter ended September 30, 2008, totaled $5.0 million, consisting of $0.7 million of cash settlements on the ineffective derivative contracts, $5.3 million of changes in the fair market value of the ineffective portion of derivative contracts, less $1.0 million of amortization of the cost of puts. Net derivative income for the nine months ended September 30, 2008, totaled $1.4 million, consisting of $0.7 million of cash settlements on the ineffective derivative contracts, $1.7 million of changes in the fair market value of the ineffective portion of derivative contracts, less $1.0 million of amortization of the cost of puts.

During the quarter ended September 30, 2007, certain of our derivative contracts were determined to be partially ineffective because of differences in the relationship between the fixed price in the derivative contract and actual prices realized. Net derivative expense for the three and nine-month periods ended September 30, 2007, totaled $36,000 and $0.1 million, respectively, representing changes in the fair market value of the ineffective portion of the derivatives.

Expenses. Lease operating expenses during the third quarter of 2008 totaled $40.1 million compared to $39.5 million for the third quarter of 2007. Primarily as a result of the production disruption from Hurricanes Gustav and Ike, however, unit costs increased to $3.38 per Mcfe during the third quarter of 2008 compared to $2.11per Mcfe for the comparable period of 2007. For the first nine months of 2008 and 2007, lease operating expenses totaled $105.3 million and $131.1 million, respectively. The decrease in lease operating expenses in the nine months ended September 30, 2008 compared to the comparable period of 2007 was the result of decreased major maintenance activity, the sale of substantially all of our Rocky Mountain Region properties in late June 2007, and operational efficiencies. Rocky Mountain Region lease operating expenses totaled $8.6 million during the nine months ended September 30, 2007. Included in lease operating expenses from August 28, 2008 through September 30, 2008 are $4.3 million of expenses for the properties acquired from Bois d’Arc. Additionally, third quarter 2008 lease operating expenses included approximately $6.8 million of repairs in excess of estimated insurance recoveries related to damage from Hurricanes Gustav and Ike. On a unit of production basis, year-to-date 2008 lease operating expenses were $2.26 per Mcfe as compared to $2.11 per Mcfe for the comparable period of 2007 due to the production disruption from Hurricanes Gustav and Ike.

Depreciation, depletion and amortization (“DD&A”) on oil and gas properties for the third quarter of 2008 totaled $51.0 million, or $4.30 per Mcfe, compared to $70.3 million, or $3.76 per Mcfe, for the third quarter of 2007. For the nine months ended September 30, 2008 and 2007, DD&A expense totaled $183.9 million and $228.5 million, respectively.

Salaries, general and administrative (SG&A) expenses (exclusive of incentive compensation) for the third quarter of 2008 were $10.5 million compared to $7.8 million in the third quarter of 2007. For the nine months ended September 30, 2008 and 2007, SG&A totaled $32.0 million and $25.5 million, respectively. The increase in SG&A is primarily due to additional compensation expense associated with restricted stock issuances, higher legal fees, and the expensing of deferred financing costs associated with our credit facility which was amended. Year-to-date 2007 SG&A included severance and retention payments of $2.1 million made to employees in our Denver District which was discontinued following the sale of substantially all of our Rocky Mountain Region properties in June 2007. For the nine months ended September 30, 2007, Denver District SG&A expense totaled $3.8 million.

Interest expense for the third quarter of 2008 totaled $3.0 million, net of $7.0 million of capitalized interest, compared to interest expense of $6.3 million, net of $3.3 million of capitalized interest, during the third quarter of 2007. For the nine months ended September 30, 2008, interest expense totaled $10.5 million, net of capitalized interest of $15.7 million, compared to interest expense of $27.8 million, net of capitalized interest of $12.7 million for the nine months ended June 30, 2007. The decrease in interest expense in 2008 primarily relates to the redemption of our senior floating rate notes in August 2007. The decrease also results from an increase in capitalized interest related to the unevaluated properties acquired from Bois d’Arc on August 28, 2008. Slightly offsetting these decreases is interest expense associated with $425 million of borrowings under our bank credit facility on August 28, 2008 in conjunction with the acquisition of Bois d’Arc.

Production taxes during the third quarter of 2008 totaled $1.3 million compared to $1.5 million in the third quarter of 2007. For the nine months ended September 30, 2008 and 2007, production taxes totaled $6.2 million and $8.2 million, respectively. The overall decrease in production taxes for the nine months ended September 30, 2008 resulted from the sale of substantially all of our Rocky Mountain Region properties in June 2007. Rocky Mountain Region production taxes totaled $4.0 million for the nine months ended September 30, 2007.

We estimate that we have incurred $1.4 million of current federal income tax expense for the nine months ended September 30, 2008. We have a $36.3 million current income tax receivable at September 30, 2008 as a result of current year estimated tax payments exceeding our current estimated federal income tax liability. Our previous estimate of current taxes was adjusted downward as a result of production deferrals associated with the hurricanes as well as a decline in commodity prices.

Recent Accounting Developments

Non-controlling Interests & Business Combinations. In December 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 160, “Non-controlling Interests in Consolidated Financial Statements — an amendment of ARB No. 151” and SFAS No. 141(R), “Business Combinations.” These statements are designed to improve, simplify and converge internationally the accounting for business combinations and the reporting of non-controlling interests in consolidated financial statements. These statements are effective for us beginning on January 1, 2009.

Derivative Instruments and Hedging Activities. In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities – an amendment of FASB Statement No. 133.” SFAS No. 161 requires enhanced disclosures about an entity’s derivative and hedging activities. SFAS No. 161 will be effective for financial statements issued for fiscal years beginning after November 15, 2008.

We have not yet determined whether the implementation of these new standards will have a material effect on our financial statements.

Defined Terms

Oil and condensate are stated in barrels (“Bbls”) or thousand barrels (“MBbls”). Natural gas is stated herein in billion cubic feet (“Bcf”), million cubic feet (“MMcf”) or thousand cubic feet (“Mcf”). Oil and condensate are converted to natural gas at a ratio of one barrel of liquids per six Mcf of gas. Bcfe, MMcfe, and Mcfe represent one billion cubic feet, one million cubic feet and one thousand cubic feet of gas equivalent, respectively. MMBtu represents one million British Thermal Units and BBtu represents one billion British Thermal Units. An active property is an oil and gas property with existing production. A primary term lease is an oil and gas property with no existing production, in which we have a specific time frame to establish production without losing the rights to explore the property. Liquidity is defined as the ability to obtain cash quickly either through the conversion of assets or incurrence of liabilities.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Commodity Price Risk

Our major market risk exposure continues to be the pricing applicable to our oil and natural gas production. Our revenues, profitability and future rate of growth depend substantially upon the market prices of oil and natural gas, which fluctuate widely. Oil and natural gas price declines and volatility could adversely affect our revenues, cash flows and profitability. Price volatility is expected to continue. In order to manage our exposure to oil and natural gas price declines, we occasionally enter into oil and natural gas price hedging arrangements to secure a price for a portion of our expected future production.

Our hedging policy provides that not more than 50% of our estimated production quantities can be hedged without the consent of the board of directors. We believe our current hedging positions have hedged approximately 50% of our estimated 2008 production and 30% — 40% of our estimated 2009 production. See Item 1. Financial Statements – Note 4 – Hedging Activities for a detailed discussion of hedges in place to manage our exposure to oil and natural gas price declines.

Since the filing of our Annual Report on Form 10-K for the year ended December 31, 2007, there have been no material changes in reported market risk as it relates to commodity prices.

Interest Rate Risk

We had long-term debt outstanding of $825 million at September 30, 2008, of which $400 million, or approximately 48%, bears interest at fixed rates. The $400 million of fixed-rate debt is comprised of $200 million of 8¹/4% Senior Subordinated Notes due 2011 and $200 million of 6³/4% Senior Subordinated Notes due 2014. At September 30, 2008, the remaining $425 million of our outstanding long-term debt bears interest at a floating rate and consists of borrowings outstanding under our bank credit facility. At September 30, 2008, the weighted average interest rate under our bank credit facility was approximately 5.5% per annum. We currently have no interest rate hedge positions in place to reduce our exposure to changes in interest rates.

Since the filing of our Annual Report on Form 10-K for the year ended December 31, 2007, there have been no material changes in reported market risk as it relates to interest rates.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We have established disclosure controls and procedures to ensure that material information relating to Stone Energy Corporation and its consolidated subsidiaries (collectively “Stone”) is made known to the officers who certify Stone’s financial reports and the Board of Directors. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives.

Our chief executive officer and our chief financial officer, with the participation of other members of our senior management, reviewed and evaluated the effectiveness of Stone’s disclosure controls and procedures as of the end of the quarterly period ended September 30, 2008. Based on this evaluation, our chief executive officer and chief financial officer believe:

	•		Stone’s disclosure controls and procedures were effective to ensure that information required to be disclosed by Stone in the reports it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms; and

	•		Stone’s disclosure controls and procedures were effective to ensure that information required to be disclosed by Stone in the reports that it files or submits under the Securities Exchange Act of 1934 was accumulated and communicated to Stone’s management, including Stone’s chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Controls Over Financial Reporting

As a result of the acquisition of Bois d’ Arc, the Company has expanded its controls over financial reporting to encompass the acquired organization. There were no other significant changes in our internal control over financial reporting that occurred during our quarterly period ended September 30, 2008 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

On December 30, 2004, Stone was served with two petitions (civil action numbers 2004-6227 and 2004-6228) filed by the Louisiana Department of Revenue (“LDR”) in the 15th Judicial District Court (Parish of Lafayette, Louisiana) claiming additional franchise taxes due. In one case, the LDR is seeking additional franchise taxes from Stone in the amount of $640,000, plus accrued interest of $352,000 (calculated through December 15, 2004), for the franchise tax year 2001. In the other case, the LDR is seeking additional franchise taxes from Stone (as successor to Basin Exploration, Inc.) in the amount of $274,000, plus accrued interest of $159,000 (calculated through December 15, 2004), for the franchise tax years 1999, 2000 and 2001. Further, on December 29, 2005, the LDR filed another petition in the 15^th Judicial District Court claiming additional franchise taxes due for the taxable years ended December 31, 2002 and 2003 in the amount of $2.6 million plus accrued interest calculated through December 15, 2005 in the amount of $1.2 million. Also, on January 2, 2008, Stone was served with a petition (civil action number 2007-6754) claiming $1.5 million of additional franchise taxes due for the 2004 franchise tax year, plus accrued interest of $800,000 calculated through November 30, 2007. These assessments all relate to the LDR’s assertion 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 the state of Louisiana for purposes of computing the Louisiana franchise tax apportionment ratio. The Company disagrees with these contentions and intends to vigorously defend itself against these claims. The franchise tax years 2005, 2006 and 2007 remain subject to examination.

complaint on or about June 14, 2006. The consolidated complaint alleges claims similar to those described above and expands the putative class period to commence on May 2, 2001 and to end on March 10, 2006. On September 13, 2006, Stone and the individual defendants filed motions seeking dismissal of that action.

On March 30, 2006, the Federal Court entered an order naming Robert Farer, Priscilla Fisk and Joint Pension Fund, Local No. 164, I.B.E.W. as co-lead plaintiffs in the Federal Court derivative action. On December 21, 2006, the Federal Court stayed the Federal Court derivative action at least until resolution of the then-pending motion to dismiss the Securities Action after which time a hearing was to be conducted by the Federal Court to determine the propriety of maintaining that stay. As of the date hereof, the Federal Court has yet to consider any potential modification of the stay.

Item 1A. Risk Factors

The following risk factor updates the Risk Factors included in our Annual Report on Form 10-K for the year ended December 31, 2007. Except as set forth below, there have been no material changes to the risks described in Part I, Item 1A, of our Annual Report on Form 10-K for the year ended December 31, 2007.

Our debt level and the covenants in the current and any future agreements governing our debt could negatively impact our financial condition, results of operations and business prospects.

The terms of the current agreements governing our debt impose significant restrictions on our ability to take a number of actions that we may otherwise desire to take, including:

	•		incurring additional debt;

	•		paying dividends on stock, redeeming stock or redeeming subordinated debt;

	•		making investments;

	•		creating liens on our assets;

	•		selling assets;

	•		guaranteeing other indebtedness;

	•		entering into agreements that restrict dividends from our subsidiary to us;

	•		merging, consolidating or transferring all or substantially all of our assets; and

	•		entering into transactions with affiliates.

Our level of indebtedness, and the covenants contained in current and future agreements governing our debt, could have important consequences on our operations, including:

	•		making it more difficult for us to satisfy our obligations under the indentures or other debt and increasing the risk that we may default on our debt obligations;

	•		requiring us to dedicate a substantial portion of our cash flow from operating activities to required payments on debt, thereby reducing the availability of cash flow for working capital, capital expenditures and other general business activities;

	•		limiting our ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions and other general business activities;

	•		limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;

	•		detracting from our ability to successfully withstand a downturn in our business or the economy generally;

	•		placing us at a competitive disadvantage against other less leveraged competitors; and

	•		making us vulnerable to increases in interest rates, because debt under our credit facility is at variable rates.

We may be required to repay all or a portion of our debt on an accelerated basis in certain circumstances. If we fail to comply with the covenants and other restrictions in the agreements governing our debt, it could lead to an event of default and the acceleration of our repayment of outstanding debt. Our ability to comply with these covenants and other restrictions may be affected by events beyond our control, including prevailing economic and financial conditions. Our borrowing base under our bank credit facility, which is re-determined periodically, is based on an amount established by the bank group after its evaluation of our proved oil and gas reserve

values. Upon a redetermination, if borrowings in excess of the revised borrowing capacity were outstanding, we could be forced to repay a portion of our bank debt.

We may not have sufficient funds to make such repayments. If we are unable to repay our debt out of cash on hand, we could attempt to refinance such debt, sell assets or repay such debt with the proceeds from an equity offering. We cannot assure you that we will be able to generate sufficient cash flow from operating activities to pay the interest on our debt or that future borrowings, equity financings or proceeds from the sale of assets will be available to pay or refinance such debt. The terms of our debt, including our credit facility and our indentures, may also prohibit us from taking such actions. Factors that will affect our ability to raise cash through an offering of our capital stock, a refinancing of our debt or a sale of assets include financial market conditions and our market value and operating performance at the time of such offering or other financing. We cannot assure you that any such offering, refinancing or sale of assets can be successfully completed.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

On September 24, 2007, our Board of Directors authorized a share repurchase program for an aggregate amount of up to $100 million. Additionally, shares were withheld from certain employees to pay taxes associated with the employees’ vesting of restricted stock. The following table sets forth information regarding our repurchases or acquisitions of common stock during the third quarter of 2008:


							Total Number of
							Shares (or Units)		Maximum Number (or
							Purchased as Part		Approximate Dollar Value)
	Total Number of			Average Price			of Publicly		of Shares (or Units) that May
	Shares (or Units)			Paid per Share			Announced Plans or		Yet be Purchased Under the
Period	Purchased			(or Unit)			Programs		Plans or Programs
Share Repurchase Program:
July 2008		—		$	—			—
August 2008		—			—			—
September 2008		100,000			41.85	(b)		100,000

		100,000			41.85			100,000	$	95,814,720

Other:
July 2008		3,399	(a)		62.80			—
August 2008		12,937	(a)		49.02			—
September 2008		—			—			—

		16,336			51.89			—		N/A

Total		116,336		$	43.26			100,000


(a)		Amounts include shares withheld from employees upon the vesting of restricted stock in order to satisfy the required tax withholding obligations.

(b)		This amount represents the weighted average price paid per share and includes a per share commission for all repurchases.

Item 4. Submission of Matters to a Vote of Security Holders

At a special meeting of stockholders held on August 27, 2008, a proposal by Stone’s Board of Directors to approve the issuance of additional shares of common stock of Stone pursuant to the Agreement and Plan of Merger dated as of April 30, 2008, by and among Stone, Stone Energy Offshore, L.L.C., and Bois d’Arc Energy, Inc., was approved by the stockholders. The vote was 23,126,790 shares for, 578,849 shares against, and 59,338 shares abstained; 97.31% of the quorum shares voted in favor of this proposal.

Item 6. Exhibits


2.1	–	Agreement and Plan of Merger, by and among Stone Energy Corporation, Stone Energy Offshore, L.L.C. and Bois d’Arc Energy, Inc., dated as of April 30, 2008 (incorporated by reference to Exhibit 2.1 to the registrant’s Current Report on Form 8-K dated April 30, 2008 (File No. 001-12074)).

2.2	–	Stockholder Agreement, by and among Stone Energy Corporation and Comstock Resources, Inc., dated as of April 30, 2008 (incorporated by reference to Exhibit 2.2 to the registrant’s Current Report on Form 8-K dated April 30, 2008 (File No. 001-12074)).

2.3	–	Stockholder Agreement, by and among Stone Energy Corporation and Wayne and Gayle Laufer, dated as of April 30, 2008 (incorporated by reference to Exhibit 2.3 to the registrant’s Current Report on Form 8-K dated April 30, 2008 (File No. 001-12074)).

2.4	–	Stockholder Agreement, by and among Stone Energy Corporation and Gary Blackie, dated as of April 30, 2008 (incorporated by reference to Exhibit 2.4 to the registrant’s Current Report on Form 8-K dated April 30, 2008 (File No. 001-12074)).

2.5	–	Participation Agreement, among Stone Energy Corporation, Gary W. Blackie, William E. Holman, and Gregory T. Martin, dated as of April 30, 2008 (incorporated by reference to Exhibit 2.5 to the registrant’s Current Report on Form 8-K dated April 30, 2008 (File No. 001-12074)).

3.1	–	Amended & Restated Bylaws of Stone Energy Corporation dated May 15, 2008 (incorporated by reference to Exhibit 3.1 to the registrant’s Current Report on Form 8-K dated May 15, 2008 (File No. 001-12074)).

4.1	–	Amendment No. 4 to Rights Agreement between Stone Energy Corporation and Mellon Investor Services LLC, as rights agent, dated as of April 30, 2008 (incorporated by reference to Exhibit 4.1 to the registrant’s Current Report on Form 8-K dated April 30, 2008 (File No. 001-12074)).

4.2	–	First Supplemental Indenture, dated August 28, 2008, to the Indenture between Stone Energy Corporation and JPMorgan Chase Bank dated December 10, 2001 (incorporated by reference to Exhibit 4.1 to the registrant’s Current Report on Form 8-K dated August 27, 2008 (File No. 001-12074)).

4.3	–	First Supplemental Indenture, dated August 28, 2008, to the Indenture between Stone Energy Corporation and JPMorgan Chase Bank, National Association, as trustee, dated December 15, 2004 (incorporated by reference to Exhibit 4.2 to the registrant’s Current Report on Form 8-K dated August 27, 2008 (File No. 001-12074)).

*4.4	–	$700,000,000 Second Amended and Restated Credit Agreement between Stone Energy Corporation and the financial institutions named therein, dated August 28, 2008.

*4.5	–	Amended and Restated Security Agreement, dated as of August 28, 2008, among Stone Energy Corporation and the other Debtors parties hereto in favor of Bank of America, N.A., as Administrative Agent.

*15.1	–	Letter from Ernst & Young LLP dated November 5, 2008, regarding unaudited interim financial information.

*31.1	–	Certification of Principal Executive Officer of Stone Energy Corporation as required by Rule 13a-14(a) of the Securities Exchange Act of 1934.

*31.2	–	Certification of Principal Financial Officer of Stone Energy Corporation as required by Rule 13a-14(a) of the Securities Exchange Act of 1934.

*†32.1	–	Certification of Chief Executive Officer and Chief Financial Officer of Stone Energy Corporation pursuant to 18 U.S.C. § 1350.

99.1	–	Summons and Complaint filed with the District Court of Clark Count, Nevada entitled Packard v. Allison, et al., Case No. A567393 (incorporated by reference to Exhibit 99.1 to the registrant’s Current Report on Form 8-K dated July 18, 2008 (File No. 001-12074)).


*		Filed herewith

†		Not considered to be “filed” for the purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liabilities of that section.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.


	STONE ENERGY CORPORATION
Date: November 5, 2008	By:	/s/ J. Kent Pierret
		J. Kent Pierret
		Senior Vice President, Chief Accounting Officer and Treasurer (On behalf of the Registrant and as Chief Accounting Officer)

EXHIBIT INDEX


2.1	–	Agreement and Plan of Merger, by and among Stone Energy Corporation, Stone Energy Offshore, L.L.C. and Bois d’Arc Energy, Inc., dated as of April 30, 2008 (incorporated by reference to Exhibit 2.1 to the registrant’s Current Report on Form 8-K dated April 30, 2008 (File No. 001-12074)).

2.2	–	Stockholder Agreement, by and among Stone Energy Corporation and Comstock Resources, Inc., dated as of April 30, 2008 (incorporated by reference to Exhibit 2.2 to the registrant’s Current Report on Form 8-K dated April 30, 2008 (File No. 001-12074)).

2.3	–	Stockholder Agreement, by and among Stone Energy Corporation and Wayne and Gayle Laufer, dated as of April 30, 2008 (incorporated by reference to Exhibit 2.3 to the registrant’s Current Report on Form 8-K dated April 30, 2008 (File No. 001-12074)).

2.4	–	Stockholder Agreement, by and among Stone Energy Corporation and Gary Blackie, dated as of April 30, 2008 (incorporated by reference to Exhibit 2.4 to the registrant’s Current Report on Form 8-K dated April 30, 2008 (File No. 001-12074)).

2.5	–	Participation Agreement, among Stone Energy Corporation, Gary W. Blackie, William E. Holman, and Gregory T. Martin, dated as of April 30, 2008 (incorporated by reference to Exhibit 2.5 to the registrant’s Current Report on Form 8-K dated April 30, 2008 (File No. 001-12074)).

3.1	–	Amended & Restated Bylaws of Stone Energy Corporation dated May 15, 2008 (incorporated by reference to Exhibit 3.1 to the registrant’s Current Report on Form 8-K dated May 15, 2008 (File No. 001-12074)).

4.1	–	Amendment No. 4 to Rights Agreement between Stone Energy Corporation and Mellon Investor Services LLC, as rights agent, dated as of April 30, 2008 (incorporated by reference to Exhibit 4.1 to the registrant’s Current Report on Form 8-K dated April 30, 2008 (File No. 001-12074)).

4.2	–	First Supplemental Indenture, dated August 28, 2008, to the Indenture between Stone Energy Corporation and JPMorgan Chase Bank dated December 10, 2001 (incorporated by reference to Exhibit 4.1 to the registrant’s Current Report on Form 8-K dated August 27, 2008 (File No. 001-12074)).

4.3	–	First Supplemental Indenture, dated August 28, 2008, to the Indenture between Stone Energy Corporation and JPMorgan Chase Bank, National Association, as trustee, dated December 15, 2004 (incorporated by reference to Exhibit 4.2 to the registrant’s Current Report on Form 8-K dated August 27, 2008 (File No. 001-12074)).

*4.4	–	$700,000,000 Second Amended and Restated Credit Agreement between Stone Energy Corporation and the financial institutions named therein, dated August 28, 2008.

*4.5	–	Amended and Restated Security Agreement, dated as of August 28, 2008, among Stone Energy Corporation and the other Debtors parties hereto in favor of Bank of America, N.A., as Administrative Agent.

*15.1	–	Letter from Ernst & Young LLP dated November 5, 2008, regarding unaudited interim financial information.

*31.1	–	Certification of Principal Executive Officer of Stone Energy Corporation as required by Rule 13a-14(a) of the Securities Exchange Act of 1934.

*31.2	–	Certification of Principal Financial Officer of Stone Energy Corporation as required by Rule 13a-14(a) of the Securities Exchange Act of 1934.

*†32.1	–	Certification of Chief Executive Officer and Chief Financial Officer of Stone Energy Corporation pursuant to 18 U.S.C. § 1350.


99.1		–		Summons and Complaint filed with the District Court of Clark Count, Nevada entitled Packard v. Allison, et al., Case No. A567393 (incorporated by reference to Exhibit 99.1 to the registrant’s Current Report on Form 8-K dated July 18, 2008 (File No. 001-12074)).


*		Filed herewith

†		Not considered to be “filed” for the purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liabilities of that section.

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