Guarantor Financial Statements

Stone Offshore is an unconditional guarantor (the "Guarantor Subsidiary") of the 2017 Convertible Notes and the 2022 Notes. Our other subsidiaries (the “Non-Guarantor Subsidiaries”) have not provided guarantees. The following presents unaudited condensed consolidating financial information as of September 30, 2016 and December 31, 2015 and for the three and nine month periods ended September 30, 2016 and 2015 on an issuer (parent company), Guarantor Subsidiary, Non-Guarantor Subsidiaries and consolidated basis. Elimination entries presented are necessary to combine the entities.

CONDENSED CONSOLIDATING BALANCE SHEET

SEPTEMBER 30, 2016

(In thousands)



	Parent			Guarantor Subsidiary			Non- Guarantor Subsidiaries			Eliminations			Consolidated
Assets
Current assets:
Cash and cash equivalents	$	152,384		$	30,015		$	—		$	—		$	182,399
Accounts receivable	17,336			40,736			883			(14,892		)	44,063
Fair value of derivative contracts	—			6,261			—			—			6,261
Current income tax receivable	19,863			—			—			—			19,863
Other current assets	11,176			—			—			—			11,176
Total current assets	200,759			77,012			883			(14,892		)	263,762
Oil and gas properties, full cost method:
Proved	1,932,435			7,586,930			45,196			—			9,564,561
Less: accumulated DD&A	(1,932,640		)	(7,076,233		)	(45,196		)	—			(9,054,069		)
Net proved oil and gas properties	(205		)	510,697			—			—			510,492
Unevaluated	261,101			143,125			—			—			404,226
Other property and equipment, net	27,227			—			—			—			27,227
Other assets, net	28,852			948			—			—			29,800
Investment in subsidiary	480,971			—			—			(480,971		)	—
Total assets	$	998,705		$	731,782		$	883		$	(495,863	)	$	1,235,507
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable to vendors	$	35,189		$	8,963		$	—		$	(14,893	)	$	29,259
Undistributed oil and gas proceeds	6,535			904			—			—			7,439
Accrued interest	22,917			—			—			—			22,917
Asset retirement obligations	—			60,223			—			—			60,223
Current portion of long-term debt	292,795			—			—			—			292,795
Other current liabilities	10,778			125			—			—			10,903
Total current liabilities	368,214			70,215			—			(14,893		)	423,536
Long-term debt	1,122,945			—			—			—			1,122,945
Asset retirement obligations	1,336			181,480			—			—			182,816
Other long-term liabilities	25,871			—			—			—			25,871
Total liabilities	1,518,366			251,695			—			(14,893		)	1,755,168
Commitments and contingencies
Stockholders’ equity:
Common stock	56			—			—			—			56
Treasury stock	(860		)	—			—			—			(860		)
Additional paid-in capital	1,657,028			1,344,577			109,079			(1,453,656		)	1,657,028
Accumulated deficit	(2,179,803		)	(868,408		)	(108,196		)	976,604			(2,179,803		)
Accumulated other comprehensive income	3,918			3,918			—			(3,918		)	3,918
Total stockholders’ equity	(519,661		)	480,087			883			(480,970		)	(519,661		)
Total liabilities and stockholders’ equity	$	998,705		$	731,782		$	883		$	(495,863	)	$	1,235,507

CONDENSED CONSOLIDATING BALANCE SHEET

DECEMBER 31, 2015

(In thousands)



	Parent			Guarantor Subsidiary			Non- Guarantor Subsidiaries			Eliminations			Consolidated
Assets
Current assets:
Cash and cash equivalents	$	9,681		$	2		$	1,076		$	—		$	10,759
Accounts receivable	10,597			39,190			—			(1,756		)	48,031
Fair value of derivative contracts	—			38,576			—			—			38,576
Current income tax receivable	46,174			—			—			—			46,174
Other current assets	6,848			—			33			—			6,881
Total current assets	73,300			77,768			1,109			(1,756		)	150,421
Oil and gas properties, full cost method:
Proved	1,875,152			7,458,262			42,484			—			9,375,898
Less: accumulated DD&A	(1,874,622		)	(6,686,849		)	(42,484		)	—			(8,603,955		)
Net proved oil and gas properties	530			771,413			—			—			771,943
Unevaluated	253,308			186,735			—			—			440,043
Other property and equipment, net	29,289			—			—			—			29,289
Other assets, net	16,612			826			1,035			—			18,473
Investment in subsidiary	745,033			—			1,088			(746,121		)	—
Total assets	$	1,118,072		$	1,036,742		$	3,232		$	(747,877	)	$	1,410,169
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable to vendors	$	16,063		$	67,901		$	—		$	(1,757	)	$	82,207
Undistributed oil and gas proceeds	5,216			776			—			—			5,992
Accrued interest	9,022			—			—			—			9,022
Asset retirement obligations	—			20,400			891			—			21,291
Other current liabilities	40,161			551			—			—			40,712
Total current liabilities	70,462			89,628			891			(1,757		)	159,224
Long-term debt	1,060,955			—			—			—			1,060,955
Asset retirement obligations	1,240			203,335			—			—			204,575
Other long-term liabilities	25,204			—			—			—			25,204
Total liabilities	1,157,861			292,963			891			(1,757		)	1,449,958
Commitments and contingencies
Stockholders’ equity:
Common stock	55			—			—			—			55
Treasury stock	(860		)	—			—			—			(860		)
Additional paid-in capital	1,648,687			1,344,577			109,795			(1,454,372		)	1,648,687
Accumulated deficit	(1,705,623		)	(624,824		)	(95,306		)	720,130			(1,705,623		)
Accumulated other comprehensive income (loss)	17,952			24,026			(12,148		)	(11,878		)	17,952
Total stockholders’ equity	(39,789		)	743,779			2,341			(746,120		)	(39,789		)
Total liabilities and stockholders’ equity	$	1,118,072		$	1,036,742		$	3,232		$	(747,877	)	$	1,410,169

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

THREE MONTHS ENDED SEPTEMBER 30, 2016

(In thousands)



	Parent			Guarantor Subsidiary			Non- Guarantor Subsidiaries			Eliminations			Consolidated
Operating revenue:
Oil production	$	3,587		$	67,529		$	—		$	—		$	71,116
Natural gas production	7,216			8,385			—			—			15,601
Natural gas liquids production	5,737			929			—			—			6,666
Other operational income	1,044			—			—			—			1,044
Total operating revenue	17,584			76,843			—			—			94,427
Operating expenses:
Lease operating expenses	2,771			14,205			—			—			16,976
Transportation, processing and gathering expenses	9,607			1,026			—			—			10,633
Production taxes	669			166			—			—			835
Depreciation, depletion and amortization	26,388			32,530			—			—			58,918
Write-down of oil and gas properties	1			36,483			—			—			36,484
Accretion expense	58			10,024			—			—			10,082
Salaries, general and administrative expenses	15,425			—			—			—			15,425
Incentive compensation expense	2,160			—			—			—			2,160
Restructuring fees	5,784			—			—			—			5,784
Other operational expenses	9,214			(155		)	—			—			9,059
Derivative expense, net	—			199			—			—			199
Total operating expenses	72,077			94,478			—			—			166,555
Loss from operations	(54,493		)	(17,635		)	—			—			(72,128		)
Other (income) expenses:
Interest expense	16,924			—			—			—			16,924
Interest income	(43		)	(15		)	—			—			(58		)
Other income	(64		)	(208		)	—			—			(272		)
Other expense	16			—			—			—			16
Loss from investment in subsidiaries	19,300			—			1			(19,301		)	—
Total other (income) expenses	36,133			(223		)	1			(19,301		)	16,610
Loss before taxes	(90,626		)	(17,412		)	(1		)	19,301			(88,738		)
Provision (benefit) for income taxes:
Current	(991		)	—			—			—			(991		)
Deferred	—			1,888			—			—			1,888
Total income taxes	(991		)	1,888			—			—			897
Net loss	$	(89,635	)	$	(19,300	)	$	(1	)	$	19,301		$	(89,635	)
Comprehensive loss	$	(93,102	)	$	(19,300	)	$	(1	)	$	19,301		$	(93,102	)

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

THREE MONTHS ENDED SEPTEMBER 30, 2015

(In thousands)



	Parent			Guarantor Subsidiary			Non- Guarantor Subsidiaries			Eliminations			Consolidated
Operating revenue:
Oil production	$	1,633		$	103,380		$	—		$	—		$	105,013
Natural gas production	7,111			10,256			—			—			17,367
Natural gas liquids production	3,502			2,478			—			—			5,980
Other operational income	1,392			—			—			—			1,392
Derivative income, net	—			2,444			—			—			2,444
Total operating revenue	13,638			118,558			—			—			132,196
Operating expenses:
Lease operating expenses	2,680			21,562			2			—			24,244
Transportation, processing and gathering expenses	13,697			4,511			—			—			18,208
Production taxes	1,777			275			—			—			2,052
Depreciation, depletion and amortization	27,518			34,418			—			—			61,936
Write-down of oil and gas properties	295,679			—			—			—			295,679
Accretion expense	92			6,406			—			—			6,498
Salaries, general and administrative expenses	19,348			200			4			—			19,552
Incentive compensation expense	794			—			—			—			794
Other operational expenses	142			300			—			—			442
Total operating expenses	361,727			67,672			6			—			429,405
Income (loss) from operations	(348,089		)	50,886			(6		)	—			(297,209		)
Other (income) expenses:
Interest expense	10,871			1			—			—			10,872
Interest income	(39		)	(7		)	(1		)	—			(47		)
Other income	(117		)	(294		)	—			—			(411		)
Other expense	148			—			—			—			148
(Income) loss from investment in subsidiaries	(227,973		)	—			16,272			211,701			—
Total other (income) expenses	(217,110		)	(300		)	16,271			211,701			10,562
Income (loss) before taxes	(130,979		)	51,186			(16,277		)	(211,701		)	(307,771		)
Provision (benefit) for income taxes:
Deferred	160,986			(193,059		)	16,267			—			(15,806		)
Total income taxes	160,986			(193,059		)	16,267			—			(15,806		)
Net income (loss)	$	(291,965	)	$	244,245		$	(32,544	)	$	(211,701	)	$	(291,965	)
Comprehensive income (loss)	$	(297,564	)	$	244,245		$	(32,544	)	$	(211,701	)	$	(297,564	)

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

NINE MONTHS ENDED SEPTEMBER 30, 2016

(In thousands)



	Parent			Guarantor Subsidiary			Non- Guarantor Subsidiaries			Eliminations			Consolidated
Operating revenue:
Oil production	$	4,971		$	199,131		$	—		$	—		$	204,102
Natural gas production	13,642			29,685			—			—			43,327
Natural gas liquids production	9,246			5,873			—			—			15,119
Other operational income	1,737			—			—			—			1,737
Total operating revenue	29,596			234,689			—			—			264,285
Operating expenses:
Lease operating expenses	9,313			46,023			13			—			55,349
Transportation, processing and gathering expenses	17,174			1,483			—			—			18,657
Production taxes	1,311			583			—			—			1,894
Depreciation, depletion and amortization	45,452			121,255			—			—			166,707
Write-down of oil and gas properties	15,859			268,128			350			—			284,337
Accretion expense	174			29,973			—			—			30,147
Salaries, general and administrative expenses	48,392			(199		)	—			—			48,193
Incentive compensation expense	11,809			—			—			—			11,809
Restructuring fees	16,173			—			—			—			16,173
Other operational expenses	43,059			125			6,082			—			49,266
Derivative expense, net	—			687			—			—			687
Total operating expenses	208,716			468,058			6,445			—			683,219
Loss from operations	(179,120		)	(233,369		)	(6,445		)	—			(418,934		)
Other (income) expenses:
Interest expense	49,764			—			—			—			49,764
Interest income	(459		)	(15		)	—			—			(474		)
Other income	(123		)	(717		)	—			—			(840		)
Other expense	27			—			—			—			27
Loss from investment in subsidiaries	250,029			—			6,445			(256,474		)	—
Total other (income) expenses	299,238			(732		)	6,445			(256,474		)	48,477
Loss before taxes	(478,358		)	(232,637		)	(12,890		)	256,474			(467,411		)
Provision (benefit) for income taxes:
Current	(4,178		)	—			—			—			(4,178		)
Deferred	—			10,947			—			—			10,947
Total income taxes	(4,178		)	10,947			—			—			6,769
Net loss	$	(474,180	)	$	(243,584	)	$	(12,890	)	$	256,474		$	(474,180	)
Comprehensive loss	$	(488,214	)	$	(243,584	)	$	(12,890	)	$	256,474		$	(488,214	)

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

NINE MONTHS ENDED SEPTEMBER 30, 2015

(In thousands)



	Parent			Guarantor Subsidiary			Non- Guarantor Subsidiaries			Eliminations			Consolidated
Operating revenue:
Oil production	$	12,487		$	311,618		$	—		$	—		$	324,105
Natural gas production	39,375			33,236			—			—			72,611
Natural gas liquids production	21,458			7,921			—			—			29,379
Other operational income	3,184			—			—			—			3,184
Derivative income, net	—			4,871			—			—			4,871
Total operating revenue	76,504			357,646			—			—			434,150
Operating expenses:
Lease operating expenses	12,767			66,481			2			—			79,250
Transportation, processing and gathering expenses	47,779			8,072			—			—			55,851
Production taxes	5,411			983			—			—			6,394
Depreciation, depletion and amortization	113,682			112,627			—			—			226,309
Write-down of oil and gas properties	966,216			—			45,169			—			1,011,385
Accretion expense	274			19,041			—			—			19,315
Salaries, general and administrative expenses	52,747			201			29			—			52,977
Incentive compensation expense	3,621			—			—			—			3,621
Other operational expenses	1,312			300			—			—			1,612
Total operating expenses	1,203,809			207,705			45,200			—			1,456,714
Income (loss) from operations	(1,127,305		)	149,941			(45,200		)	—			(1,022,564		)
Other (income) expenses:
Interest expense	31,687			22			—			—			31,709
Interest income	(186		)	(42		)	(7		)	—			(235		)
Other income	(437		)	(727		)	(3		)	—			(1,167		)
Other expense	148			—			—			—			148
(Income) loss from investment in subsidiaries	(273,147		)	—			45,190			227,957			—
Total other (income) expenses	(241,935		)	(747		)	45,180			227,957			30,455
Income (loss) before taxes	(885,370		)	150,688			(90,380		)	(227,957		)	(1,053,019		)
Provision (benefit) for income taxes:
Deferred	(113,111		)	(167,649		)	—			—			(280,760		)
Total income taxes	(113,111		)	(167,649		)	—			—			(280,760		)
Net income (loss)	$	(772,259	)	$	318,337		$	(90,380	)	$	(227,957	)	$	(772,259	)
Comprehensive income (loss)	$	(820,517	)	$	318,337		$	(90,380	)	$	(227,957	)	$	(820,517	)

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

NINE MONTHS ENDED SEPTEMBER 30, 2016

(In thousands)



	Parent			Guarantor Subsidiary			Non-Guarantor Subsidiaries			Eliminations			Consolidated
Cash flows from operating activities:
Net loss	$	(474,180	)	$	(243,584	)	$	(12,890	)	$	256,474		$	(474,180	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation, depletion and amortization	45,452			121,255			—			—			166,707
Write-down of oil and gas properties	15,859			268,128			350			—			284,337
Accretion expense	174			29,973			—			—			30,147
Deferred income tax provision	—			10,947			—			—			10,947
Settlement of asset retirement obligations	(78		)	(14,129		)	(899		)	—			(15,106		)
Non-cash stock compensation expense	6,407			—			—			—			6,407
Non-cash derivative expense	—			1,261			—			—			1,261
Non-cash interest expense	14,278			—			—			—			14,278
Other non-cash expense	—			—			6,081			—			6,081
Change in current income taxes	21,584			—			—			—			21,584
Non-cash loss from investment in subsidiaries	250,029			—			6,445			(256,474		)	—
Change in intercompany receivables/payables	(1,658		)	1,658			—			—			—
(Increase) decrease in accounts receivable	7,966			(3,116		)	(882		)	—			3,968
(Increase) decrease in other current assets	(4,459		)	—			33			—			(4,426		)
Increase (decrease) in accounts payable	7,385			(4,168		)	—			—			3,217
Decrease in other current liabilities	(13,924		)	(298		)	—			—			(14,222		)
Other	(7,389		)	(718		)	—			—			(8,107		)
Net cash (used in) provided by operating activities	(132,554		)	167,209			(1,762		)	—			32,893
Cash flows from investing activities:
Investment in oil and gas properties	(63,075		)	(137,196		)	(351		)	—			(200,622		)
Investment in fixed and other assets	(1,231		)	—			—			—			(1,231		)
Change in restricted funds	—			—			1,046			—			1,046
Investment in subsidiaries	—			—			716			(716		)	—
Net cash (used in) provided by investing activities	(64,306		)	(137,196		)	1,411			(716		)	(200,807		)
Cash flows from financing activities:
Proceeds from bank borrowings	477,000			—			—			—			477,000
Repayments of bank borrowings	(135,500		)	—			—			—			(135,500		)
Repayments of building loan	(285		)	—			—			—			(285		)
Deferred financing costs	(900		)	—			—			—			(900		)
Equity proceeds from parent	—			—			(716		)	716			—
Net payments for share-based compensation	(752		)	—			—			—			(752		)
Net cash provided by (used in) financing activities	339,563			—			(716		)	716			339,563
Effect of exchange rate changes on cash	—			—			(9		)	—			(9		)
Net change in cash and cash equivalents	142,703			30,013			(1,076		)	—			171,640
Cash and cash equivalents, beginning of period	9,681			2			1,076			—			10,759
Cash and cash equivalents, end of period	$	152,384		$	30,015		$	—		$	—		$	182,399

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

NINE MONTHS ENDED SEPTEMBER 30, 2015

(In thousands)



	Parent			Guarantor Subsidiary			Non-Guarantor Subsidiaries			Eliminations			Consolidated
Cash flows from operating activities:
Net income (loss)	$	(772,259	)	$	318,337		$	(90,380	)	$	(227,957	)	$	(772,259	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation, depletion and amortization	113,682			112,627			—			—			226,309
Write-down of oil and gas properties	966,216			—			45,169			—			1,011,385
Accretion expense	274			19,041			—			—			19,315
Deferred income tax benefit	(113,111		)	(167,649		)	—			—			(280,760		)
Settlement of asset retirement obligations	(15		)	(59,811		)	—			—			(59,826		)
Non-cash stock compensation expense	9,163			—			—			—			9,163
Non-cash derivative expense	—			10,854			—			—			10,854
Non-cash interest expense	13,210			—			—			—			13,210
Change in current income taxes	7,211			—			—			—			7,211
Non-cash (income) expense from investment in subsidiaries	(273,147		)	—			45,190			227,957			—
Change in intercompany receivables/payables	31,320			(41,056		)	9,736			—			—
Decrease in accounts receivable	29,561			4,317			17			—			33,895
Increase in other current assets	(1,050		)	—			(40		)	—			(1,090		)
(Increase) decrease in inventory	(2,415		)	2,415			—			—			—
Decrease in accounts payable	(7,562		)	(4,030		)	—			—			(11,592		)
Increase (decrease) in other current liabilities	(6,855		)	102			—			—			(6,753		)
Other	645			(727		)	—			—			(82		)
Net cash (used in) provided by operating activities	(5,132		)	194,420			9,692			—			198,980
Cash flows from investing activities:
Investment in oil and gas properties	(177,497		)	(197,471		)	(10,560		)	—			(385,528		)
Proceeds from sale of oil and gas properties, net of expenses	—			11,643			—			—			11,643
Investment in fixed and other assets	(1,455		)	—			—			—			(1,455		)
Change in restricted funds	177,647			—			1,828			—			179,475
Investment in subsidiaries	—			—			(9,708		)	9,708			—
Net cash used in investing activities	(1,305		)	(185,828		)	(18,440		)	9,708			(195,865		)
Cash flows from financing activities:
Proceeds from bank borrowings	5,000			—			—			—			5,000
Repayments of bank borrowings	(5,000		)	—			—			—			(5,000		)
Equity proceeds from parent	—			—			9,708			(9,708		)	—
Net payments for share-based compensation	(3,127		)	—			—			—			(3,127		)
Net cash (used in) provided by financing activities	(3,127		)	—			9,708			(9,708		)	(3,127		)
Effect of exchange rate changes on cash	—			—			(2		)	—			(2		)
Net change in cash and cash equivalents	(9,564		)	8,592			958			—			(14		)
Cash and cash equivalents, beginning of period	72,886			1,450			152			—			74,488
Cash and cash equivalents, end of period	$	63,322		$	10,042		$	1,110		$	—		$	74,474