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, 2009


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		72-1235413
(State or Other Jurisdiction of Incorporation or Organization)		(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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o 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.


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 5, 2009, there were 48,244,217 shares of the registrant’s Common Stock, par value $.01 per share, outstanding.

PART I — FINANCIAL INFORMATION


Item 1.		Financial Statements

STONE ENERGY CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEET
(In thousands of dollars)


	September 30,			December 31,
	2009			2008
	(Unaudited)			(Note 1)
Assets
Current assets:
Cash and cash equivalents	$	97,749		$	68,137
Accounts receivable		104,495			151,641
Fair value of hedging contracts		17,155			136,072
Deferred tax asset		3,683			—
Current income tax receivable		6,637			31,183
Inventory		10,299			35,675
Other current assets		1,038			1,413

Total current assets		241,056			424,121

Oil and gas properties — United States — full cost method of accounting:
Proved, net of accumulated depreciation, depletion and amortization of $4,299,700 and $3,766,676, respectively		873,296			1,130,583
Unevaluated		420,733			493,738
Building and land, net		5,736			5,615
Fixed assets, net		4,306			5,326
Other assets, net		48,928			46,620
Fair value of hedging contracts		704			—

Total assets	$	1,594,759		$	2,106,003


Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable to vendors	$	98,826		$	144,016
Undistributed oil and gas proceeds		12,919			37,882
Fair value of hedging contracts		21,028			—
Deferred taxes		—			32,416
Asset retirement obligations		40,175			70,709
Other current liabilities		29,461			15,759

Total current liabilities		202,409			300,782

Long-term debt		650,000			825,000
Deferred taxes		113,849			193,924
Asset retirement obligations		174,231			186,146
Fair value of hedging contracts		7,686			1,221
Other long-term liabilities		11,358			11,751

Total liabilities		1,159,533			1,518,824


Commitments and contingencies

Stockholders’ equity:
Stone Energy Corporation stockholders’ equity:
Common stock, $.01 par value; authorized 100,000,000 shares; issued 47,495,137 and 39,430,637 shares, respectively		475			394
Treasury stock (16,582 shares, respectively, at cost)		(860	)		(860	)
Additional paid-in capital		1,322,184			1,257,633
Accumulated deficit		(902,631	)		(754,987	)
Accumulated other comprehensive income		16,058			84,912

Total Stone Energy Corporation stockholders’ equity		435,226			587,092

Non-controlling interest		—			87

Total stockholders’ equity		435,226			587,179

Total liabilities and stockholders’ equity	$	1,594,759		$	2,106,003

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,
	2009			2008			2009			2008
Operating revenue:
Oil production	$	134,737		$	100,726		$	313,563		$	380,002
Gas production		67,982			66,584			198,472			253,503
Derivative income, net		—			5,045			3,106			1,433

Total operating revenue		202,719			172,355			515,141			634,938


Operating expenses:
Lease operating expenses		28,136			40,149			127,412			105,302
Other operational expense		—			—			2,400			—
Production taxes		2,126			1,325			5,966			6,228
Depreciation, depletion and amortization		68,652			51,962			186,322			186,180
Write-down of oil and gas properties		—			8,759			340,083			18,859
Accretion expense		8,131			4,146			24,884			12,367
Salaries, general and administrative expenses		9,490			10,481			31,073			32,015
Incentive compensation expense		1,932			283			3,349			2,183
Impairment of inventory		1,275			—			8,454			—
Derivative expenses, net		91			—			—			—

Total operating expenses		119,833			117,105			729,943			363,134


Income (loss) from operations		82,886			55,250			(214,802	)		271,804


Other (income) expenses:
Interest expense		5,170			3,036			15,124			10,528
Interest income		(155	)		(2,255	)		(437	)		(10,601	)
Other income		(1,017	)		(1,421	)		(3,270	)		(3,775	)
Other expense		80			—			508			—

Total other (income) expenses		4,078			(640	)		11,925			(3,848	)


Net income (loss) before income taxes		78,808			55,890			(226,727	)		275,652


Provision (benefit) for income taxes:
Current		1,615			(45,583	)		1,638			1,395
Deferred		26,140			67,352			(80,748	)		95,083

Total income taxes		27,755			21,769			(79,110	)		96,478


Net income (loss)		51,053			34,121			(147,617	)		179,174
Less: Net loss attributable to non-controlling interest		—			—			(27	)		—

Net income (loss) attributable to Stone Energy Corporation	$	51,053		$	34,121		$	(147,644	)	$	179,174


Basic earnings (loss) per share attributable to Stone Energy Corporation stockholders	$	1.06		$	1.04			($3.45	)	$	5.99
Diluted earnings (loss) per share attributable to Stone Energy Corporation stockholders	$	1.06		$	1.04			($3.45	)	$	5.97

Average shares outstanding		47,478			32,441			42,762			29,457
Average shares outstanding assuming dilution		47,679			32,670			42,762			29,740

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,
	2009			2008
Cash flows from operating activities:
Net income (loss)		($147,617	)	$	179,174
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation, depletion and amortization		186,322			186,180
Write-down of oil and gas properties		340,083			18,859
Impairment of inventory		8,454			—
Accretion expense		24,884			12,367
Deferred income tax provision (benefit)		(80,748	)		95,083
Settlement of asset retirement obligations		(61,394	)		(42,202	)
Non-cash stock compensation expense		4,392			6,286
Excess tax benefits		—			(3,045	)
Non-cash derivative expense		3,451			(1,654	)
Other non-cash expenses		(96	)		1,307
Unrecognized proceeds from unwound derivative contracts		35,095			—
Change in current income taxes		32,050			(92,714	)
Decrease in accounts receivable		49,885			101,428
(Increase) decrease in other current assets		391			(1,483	)
Decrease in inventory		16,923			—
Decrease in accounts payable		(18,516	)		(300	)
Increase (decrease) in other current liabilities		(20,477	)		30,069
Investment in hedging contracts		—			(1,914	)
Other		(164	)		(243	)

Net cash provided by operating activities		372,918			487,198


Cash flows from investing activities:
Acquisition of Bois d’Arc Energy, Inc., net of cash acquired (Note 10)		—			(922,538	)
Investment in oil and gas properties		(232,209	)		(311,338	)
Proceeds from sale of oil and gas properties, net of expenses		5,571			14,090
Sale of fixed assets		35			4
Investment in fixed and other assets		(1,276	)		(1,176	)
Acquisition of non-controlling interest in subsidiary		(40	)		—

Net cash used in investing activities		(227,919	)		(1,220,958	)


Cash flows from financing activities:
Proceeds from bank borrowings		—			425,000
Repayments of bank borrowings		(175,000	)		—
Net proceeds from issuance of common stock		60,442			—
Excess tax benefits		—			3,045
Deferred financing costs		(65	)		(8,738	)
Purchase of treasury stock		(347	)		(4,185	)
Net proceeds from exercise of stock options and vesting of restricted stock		(417	)		16,155

Net cash provided by (used in) financing activities		(115,387	)		431,277


Net increase (decrease) in cash and cash equivalents		29,612			(302,483	)
Cash and cash equivalents, beginning of period		68,137			475,126

Cash and cash equivalents, end of period	$	97,749		$	172,643

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, 2009 and for the three and nine-month periods ended September 30, 2009 and 2008 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, 2008 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, 2008. The results of operations for the three and nine-month periods ended September 30, 2009 are not necessarily indicative of future financial results.

Note 2 — 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 201,000 and 228,000 dilutive shares for the three months ended September 30, 2009 and 2008, respectively. There were no dilutive shares for the nine months ended September 30, 2009 because we had a net loss for the period. There were approximately 284,000 dilutive shares for the nine months ended September 30, 2008.

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 436,000 and 105,000 shares in the three months ended September 30, 2009 and 2008, respectively. All outstanding stock options (501,000 shares) were considered antidilutive during the nine months ended September 30, 2009 because we had a net loss for the period. 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 65,000 shares in the nine months ended September 30, 2008.

During the three months ended September 30, 2009, approximately 8,900 shares of common stock were issued upon the vesting of restricted stock by employees. During the nine months ended September 30, 2009, approximately 114,000 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. On June 10, 2009, 8,050,000 shares of common stock were issued in a public offering (see Note 3).

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 Energy, Inc. (“Bois d’Arc”) (see Note 10).

Under U.S. Generally Accepted Accounting Principles (“GAAP”), as codified, instruments granted in share-based payment transactions are participating securities prior to vesting and are therefore required to be included in the earnings allocation in calculating earnings per share under the two-class method. Companies are required to treat unvested share-based payment awards with a right to receive non-forfeitable dividends as a separate class of securities in calculating earnings per share. This rule became effective for us on January 1, 2009 and the net effect of its implementation on our financial statements was immaterial.

Note 3 — Public Offering

In June 2009, we sold 8,050,000 shares of our common stock in a public offering at a price of $8.00 per share resulting in net proceeds of approximately $60.4 million after deducting the underwriting discount and offering expenses. The net proceeds are reflected in the common stock and additional paid-in capital accounts of our condensed consolidated balance sheet at September 30, 2009.

Note 4 — Derivative Instruments and Hedging Activities

Our hedging strategy is designed to protect our near and intermediate term cash flow from future declines in oil and natural gas prices. This protection is essential to capital budget planning which is sensitive to expenditures that must be committed to in advance such as rig contracts and the purchase of tubular goods. 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. These hedges are designated as cash flow hedges upon entering into the contract. We do not enter into hedging transactions for trading purposes. We have no fair value hedges.

The nature of a derivative instrument must be evaluated to determine if it qualifies for hedge accounting treatment. If the instrument qualifies for hedge accounting treatment, it is recorded as either an asset or liability measured at fair value and subsequent changes in the derivative’s fair value are recognized in equity through other comprehensive income (loss), net of related taxes, to the extent the hedge is considered effective. Additionally, monthly settlements of effective hedges are reflected in revenue from oil and gas production and cash flows from operations. Instruments not qualifying for hedge accounting are recorded in the balance sheet at fair value and changes in fair value are recognized in earnings through derivative expense (income). Typically, a small portion of our derivative contracts are determined to be ineffective. This is because oil and natural gas price changes in the markets in which we sell our products are not 100% correlative to changes in the underlying price basis indicative in the derivative contract. Monthly settlements of ineffective hedges are recognized in earnings through derivative expense (income) and cash flows from operations.

We have entered into zero-premium collars and fixed-price swaps with various counterparties for a portion of our expected 2009, 2010 and 2011 oil and natural gas production from the Gulf Coast Basin. The natural gas collar settlements are based on an average of New York Mercantile Exchange (“NYMEX”) prices for the last three days of a respective month. The collar contracts require payments to the counterparties if the average price is above the ceiling price or payment from the counterparties if the average price is below the floor price. Some of our fixed-price gas swap settlements are based on an average of NYMEX prices for the last three days of a respective month and some are based on the NYMEX price for the last day of a respective month. The fixed-price oil swap settlements are based upon an average of the NYMEX closing price for West Texas Intermediate (“WTI”) during the entire calendar month. Swaps typically provide for monthly payments by us if prices rise above the swap price or to us if prices fall below the swap price. Our outstanding collar is with BNP Paribas. Our outstanding fixed-price swap contracts are with J.P. Morgan Chase Bank, N.A., The Toronto-Dominion Bank, Barclays Bank PLC, BNP Paribas and The Bank of Nova Scotia.

All of our derivative instruments at September 30, 2009 and December 31, 2008 were designated as hedging instruments. The following tables disclose the location and fair value amounts of derivative instruments reported in our balance sheet at September 30, 2009 and December 31, 2008.


Fair Value of Derivative Instruments at September 30, 2009
(in millions)
	Asset Derivatives			Liability Derivatives
		Fair			Fair
Description	Balance Sheet Location	Value		Balance Sheet Location	Value
Commodity contracts	Current assets: Fair value of hedging contracts	$	17.2	Current liabilities: Fair value of hedging contracts	$	(21.0	)
	Long-term assets: Fair value of hedging contracts		0.7	Long-term liabilities: Fair value of hedging contracts		(7.7	)

		$	17.9		$	(28.7	)


Fair Value of Derivative Instruments at December 31, 2008
(in millions)
	Asset Derivatives			Liability Derivatives
		Fair			Fair
Description	Balance Sheet Location	Value		Balance Sheet Location	Value
Commodity contracts	Current assets: Fair value of hedging contracts	$	136.1	Long-term liabilities: Fair value of hedging contracts	$	(1.2	)
		$	136.1		$	(1.2	)

The following tables disclose the effect of derivative instruments in the statement of operations for the three and nine-month periods ended September 30, 2009 and 2008.


The Effect of Derivative Instruments on the Statement of Operations for the Three Months Ended September 30, 2009 and 2008
(in millions)
Derivatives in	Amount of Gain (Loss) Recognized					Gain (Loss) Reclassified from						Gain (Loss) Recognized in Income on
Cash Flow Hedging	in OCI on Derivative					Accumulated OCI into Income						Derivative
Relationships	(Effective Portion)					(Effective Portion) (a)						(Ineffective Portion)
	2009			2008		Location	2009		2008			Location	2009			2008

Commodity contracts	$	(28.5	)	$	119.9	Operating revenue - oil/gas production	$	46.4	$	(16.4	)	Derivative income (expense), net	$	(0.1	)	$	5.0

Total	$	(28.5	)	$	119.9		$	46.4	$	(16.4	)		$	(0.1	)	$	5.0


(a)		For the three months ended September 30, 2009, effective hedging contracts increased oil revenue by $19.0 million and increased gas revenue by $27.4 million. For the three months ended September 30, 2008, effective hedging contracts reduced oil revenue by $15.9 million and reduced gas revenue by $0.5 million.


The Effect of Derivative Instruments on the Statement of Operations for the Nine Months Ended September 30, 2009 and 2008
(in millions)
Derivatives in	Amount of Gain (Loss) Recognized					Gain (Loss) Reclassified from						Gain (Loss) Recognized in Income on
Cash Flow Hedging	in OCI on Derivative					Accumulated OCI into Income						Derivative
Relationships	(Effective Portion)					(Effective Portion) (a)						(Ineffective Portion)
	2009			2008		Location	2009		2008			Location	2009		2008

Commodity contracts	$	(68.9	)	$	32.3	Operating revenue - oil/gas production	$	132.1	$	(41.8	)	Derivative income (expense), net	$	3.1	$	1.4

Total	$	(68.9	)	$	32.3		$	132.1	$	(41.8	)		$	3.1	$	1.4


(a)		For the nine months ended September 30, 2009, effective hedging contracts increased oil revenue by $56.7 million and increased gas revenue by $75.4 million. For the nine months ended September 30, 2008, effective hedging contracts reduced oil revenue by $41.9 million and increased gas revenue by $0.1 million.

On March 3, 2009, we unwound all of our then existing crude oil hedges for the period from April 2009 through December 2009, resulting in proceeds of approximately $59 million. On March 6, 2009, we unwound two of our natural gas hedges for the period from April 2009 through December 2009, resulting in proceeds of approximately $54 million. These amounts (net of the ineffective portion and related deferred income tax effect) were recorded in accumulated other comprehensive income. As the original time periods for these contracts expire, applicable amounts are being reclassified into earnings. During the three months ended September 30, 2009, $36.6 million (before related deferred income tax effect) of the proceeds were reclassified into production revenue. During the nine months ended September 30, 2009, $73.9 million (before related deferred income tax effect) of the proceeds were reclassified into production revenue. At September 30, 2009, $35.1 million (before related deferred income tax effect) remains in other comprehensive income.

At September 30, 2009, we had accumulated other comprehensive income of $16.1 million, net of tax, which related to the fair value of our 2009, 2010 and 2011 collar and swap contracts. A portion of this amount relates to the contracts that were unwound. We believe that approximately $20.4 million of the accumulated other comprehensive income will be reclassified into earnings in the next twelve months.

The following tables illustrate our hedging positions for calendar years 2009, 2010 and 2011 as of November 5, 2009:


	Zero-Premium Collars
	Natural Gas
	Daily
	Volume		Floor		Ceiling
	(MMBtus/d)		Price		Price
2009		20,000	$	8.00	$	14.30


	Fixed-Price Swaps
	Natural Gas					Oil
	Daily
	Volume			Swap		Daily Volume			Swap
	(MMBtus/d)			Price		(Bbls/d)			Price
2009		20,000	(a)	$	4.24		3,000	(b)	$	50.00
2009		20,000	(b)		5.00		2,000	(b)		50.45
2009		20,000	(b)		5.13		4,000	(b)		71.25

2010		20,000			6.97		2,000			63.00
2010		20,000			6.50		1,000			64.05
2010		10,000			6.50		1,000			60.20
2010							1,000			75.00
2010							1,000			75.25
2010							4,000	(c)		73.65

2011		10,000			6.83		1,000			70.05
2011							1,000			78.20


(a)		July — September

(b)		October — December

(c)		January — March

Note 5 — Long-Term Debt

Long-term debt consisted of the following at:


	September 30,		December 31,
	2009		2008
	(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		250.0		425.0

Total long-term debt	$	650.0	$	825.0

On August 28, 2008, we entered into an amended and restated revolving credit facility totaling $700 million, maturing on July 1, 2011, with a syndicated bank group. In December 2008, the borrowing base was set at $625 million. On April 28, 2009, our bank credit facility was amended, and on April 29, 2009, the borrowing base under our bank credit facility was reduced from $625 million to $425 million. On October 9, 2009, the semi-annual borrowing base redetermination was completed and our borrowing base was reaffirmed at $425 million by our bank group. At September 30, 2009, we had $250 million in borrowings under our bank credit facility, letters of credit totaling $68.9 million had been issued pursuant to the facility, and the weighted average interest rate under our bank credit facility was approximately 3.0%. As of November 5, 2009, we had $225 million in borrowings and $67.6 million of outstanding letters of credit, leaving $132.4 million of availability under our bank credit facility.

The amendment increased our borrowing base pricing grid by 75 basis points in respect of London Interbank Offering Rate (“Libor Rate”) advances, by a range of 125 to 150 basis points in respect of base rate advances and by a range of 0 to 12.5 basis points in respect of commitment fees under the credit agreement. The facility is guaranteed by all of our material direct and indirect subsidiaries, including Stone Energy Offshore, L.L.C. (“Stone Offshore”), a wholly owned subsidiary of Stone.

The borrowing base under our bank credit facility is redetermined semi-annually, typically in May and November, by the lenders taking into consideration the estimated value of our oil and gas properties and those of our direct and indirect material subsidiaries in accordance with the lenders’ customary practices for oil and gas loans. In addition, we and the lenders each have discretion at any time, but not more than two additional times in any calendar year, to have the borrowing base redetermined. Our bank credit facility is collateralized by substantially all of Stone’s and Stone Offshore’s assets. Stone and Stone Offshore are required to mortgage, and grant a security interest in, their oil and gas reserves representing at least 80% of the discounted present

value of the future net cash flows from their oil and gas reserves reviewed in determining the borrowing base. At Stone’s option, loans under our bank credit facility will bear interest at a rate based on the adjusted Libor Rate plus an applicable margin, or a rate based on the prime rate or Federal funds rate plus an applicable margin. Our bank credit facility provides for optional and mandatory prepayments, affirmative and negative covenants, and interest coverage ratio and leverage ratio maintenance covenants.

Note 6 — Comprehensive Income

The following table illustrates the components of comprehensive income for the three and nine-month periods ended September 30, 2009 and 2008:


	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2009			2008		2009			2008
	(in millions)
Net income (loss)	$	51.1		$	34.1	$	(147.6	)	$	179.2
Other comprehensive income (loss), net of tax effect:
Adjustment for fair value accounting of derivatives		(28.5	)		119.9		(68.9	)		32.3

Comprehensive income (loss)		22.6			154.0		(216.5	)		211.5
Comprehensive income attributable to non-controlling interest		—			—		—			—

Comprehensive income (loss) attributable to Stone Energy Corporation	$	22.6		$	154.0	$	(216.5	)	$	211.5

Note 7 — Asset Retirement Obligations

The change in our asset retirement obligations during the nine months ended September 30, 2009 is set forth below:


	Nine Months
	Ended
	September 30,
	2009
	(in millions)
Asset retirement obligations as of the beginning of the period, including current portion	$	256.9
Liabilities settled		(61.4	)
Divestment of properties		(6.0	)
Accretion expense		24.9

Asset retirement obligations as of the end of the period, including current portion	$	214.4

Note 8 — Impairments

Under the full cost method of accounting, we compare, at the end of each financial reporting period, the present value of estimated future net cash flows from proved reserves (based on period-end hedge adjusted commodity prices and excluding cash flows related to estimated abandonment costs), to the net capitalized costs of proved oil and gas properties net of related deferred taxes. We refer to this comparison as a “ceiling test.” If the net capitalized costs of proved oil and gas properties exceed the estimated discounted future net cash flows from proved reserves, we are required to write-down the value of our oil and gas properties to the value of the discounted cash flows. At March 31, 2009, our ceiling test computation resulted in a write-down of our oil and gas properties of $340.1 million based on a March 31, 2009 Henry Hub gas price of $3.63 per MMBtu and a West Texas Intermediate oil price of $44.92 per barrel. The benefit of hedges in place at March 31, 2009 reduced the write-down by $85.0 million.

For the nine months ended September 30, 2009, we recorded a write-down of our tubular inventory in the amount of $8.5 million. This charge was the result of the market value of these tubulars falling below historical cost.

Note 9 — Fair Value Measurements

U.S. GAAP, as codified, establishes a fair value hierarchy which has three levels based on the reliability of the inputs used to determine the fair value. These levels include: Level 1, defined as inputs such as unadjusted quoted prices in active markets for identical assets or liabilities; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs for use when little or no market data exists, therefore requiring an entity to develop its own assumptions. Effective June 15, 2009, disclosures about the fair value of financial instruments are required for interim reporting periods of publicly traded companies as well as in annual financial statements.

As of September 30, 2009, we held certain financial assets and liabilities that are required to be measured at fair value on a recurring basis, including our commodity derivative instruments and our investments in money market funds. We utilize the services of an independent third party to assist us in valuing our derivative instruments. We used the income approach in determining the fair value of our derivative instruments utilizing a proprietary pricing model. The model accounts for the credit risk of Stone and its counterparties in the discount rate applied to estimated future cash inflows and outflows. Our swap contracts are included within the Level 2 fair value hierarchy and collar contracts are included within the Level 3 fair value hierarchy. Significant unobservable inputs used in establishing fair value for the collars were the volatility impacts in the pricing model as it relates to the call and put portions of the collar. For a more detailed description of our derivative instruments, see Note 4 — Derivative Instruments and Hedging Activities. We used the market approach in determining the fair value of our investments in money market funds, which are included within the Level 1 fair value hierarchy.

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, 2009.


	Fair Value Measurements at September 30, 2009
			Quoted Prices		Significant
			in Active		Other		Significant
			Markets for		Observable		Unobservable
			Identical Assets		Inputs		Inputs
Assets	Total		(Level 1)		(Level 2)		(Level 3)
	(in millions)
Money market funds	$	30.9	$	30.9	$	—	$	—
Hedging contracts		17.9		—		12.0		5.9

Total	$	48.8	$	30.9	$	12.0	$	5.9


	Fair Value Measurements at September 30, 2009
				Quoted Prices
				in Active		Significant
				Markets for		Other			Significant
				Identical		Observable			Unobservable
				Liabilities		Inputs			Inputs
	Total			(Level 1)		(Level 2)			(Level 3)
Liabilities	(in millions)
Hedging contracts	$	(28.7	)	$	—	$	(28.7	)	$	—

Total	$	(28.7	)	$	—	$	(28.7	)	$	—

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, 2009.


	Hedging
	Contracts, net
	(in millions)
Balance as of January 1, 2009	$	68.1
Total gains/(losses) (realized or unrealized):
Included in earnings		75.1
Included in other comprehensive income		(47.1	)
Purchases, sales, issuances and settlements		(90.2	)
Transfers in and out of Level 3		—

Balance as of September 30, 2009	$	5.9


The amount of total gains/(losses) for the period included in earnings attributable to the change in unrealized gain/(losses) relating to derivatives still held at September 30, 2009	$	(0.4	)

We have applied fair value concepts in recording the assets and liabilities acquired in our acquisition of Bois d’Arc (see Note 10 — Acquisitions and Divestitures). In determining the fair value of Bois d’Arc’s most significant assets, proved and unevaluated oil and gas properties, we used elements of both the income and market approaches. Future income for oil and gas properties was estimated based on proved, probable, possible and prospective reserve volumes and quoted commodity prices in the futures markets. We then applied appropriate discount rates based on the risk profile of the respective reserve categories. Resulting values from the income approach were compared to ranges of prices paid in the acquisition of similar oil and gas properties in other transactions. Values determined under the income approach were within market ranges.

The fair value of cash and cash equivalents, accounts receivable, accounts payable to vendors and our variable-rate bank debt approximated book value at September 30, 2009 and December 31, 2008. As of September 30, 2009 and December 31, 2008, the fair value of our $200 million 8¹/4% Senior Subordinated Notes due 2011 was $190 million and $145 million, respectively. As of September 30, 2009 and December 31, 2008, the fair value of our $200 million 6³/4% Senior Subordinated Notes due 2014 was $154 million and $101 million, respectively. The fair values of our outstanding notes were determined based upon quotes obtained from brokers.

Note 10 — Acquisitions and Divestitures

Acquisitions

On August 28, 2008, we completed the acquisition of 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. 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 was preliminarily recorded in Stone’s consolidated financial statements on August 28, 2008, the date the acquisition closed. The preliminary purchase price allocation was adjusted in the fourth quarter of 2008 as a result of further analysis of the assets acquired, principally proved and unevaluated oil and gas properties, and liabilities assumed, principally asset retirement obligations and deferred taxes, which resulted in an adjustment to the preliminary allocation to goodwill. The adjustments were the result of additional analysis of proved, probable and possible reserves at the time of the acquisition. 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.


	(in millions)
Fair value of Bois d’Arc’s net assets:
Net working capital, including cash of $15.3	$	27.9
Proved oil and gas properties		1,339.1
Unevaluated oil and gas properties		422.2
Fixed and other assets		0.3
Goodwill		466.0
Deferred tax liability		(467.9	)
Dismantlement reserve		(4.2	)
Asset retirement obligations		(127.4	)

Total fair value of net assets	$	1,656.0

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


	(in millions)
Consideration paid for Bois d’Arc’s net assets:
Cash consideration paid	$	935.4
Stone common stock issued		717.9

Aggregate purchase consideration issued to Bois d’Arc stockholders		1,653.3
Plus: Direct merger costs (1)		2.7

Total purchase price	$	1,656.0


(1)		Direct merger costs include legal and accounting fees, printing fees, investment banking expenses and other merger-related costs.

The allocation of the purchase price included $466 million of asset valuation attributable to goodwill. Goodwill 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 was not deductible for tax purposes. Goodwill is required to be tested for impairment at least annually. We tested goodwill created in the Bois d’Arc acquisition for impairment on December 31, 2008. A substantial reduction in commodity prices and the existence of a full cost ceiling test write-down in the fourth quarter of 2008 were indications of potential impairment. The reporting unit for the impairment test was Stone Energy Corporation and its consolidated subsidiaries. The fair value of the reporting unit was determined using average quoted market prices for Stone common stock for the two market days prior to through the two market days after December 31, 2008. A control premium of 25% was applied to the market capitalization. The control premium was based on a history of control premiums paid for the acquisition of entities in similar industries. The resulting fair value of the reporting unit was $504 million below the reporting unit’s carrying value. Additional analysis indicated no implied value of the recorded goodwill, resulting in the impairment of the entire amount of goodwill of $466 million at December 31, 2008.

The following summary pro forma combined statement of operations data of Stone for the three and nine-month periods ended September 30, 2008 has been prepared to give effect to the merger as if it had occurred on January 1, 2008. 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 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		Nine Months
	Ended		Ended
	September 30,		September 30,
	2008		2008
	(in millions, except per share amounts)
Revenues	$	271.8	$	995.7
Income from operations		81.7		361.3
Net income		45.3		229.2
Basic earnings per share	$	1.14	$	5.82
Diluted earnings per share		1.14		5.78

During the second quarter of 2009, we acquired the entire non-controlling interest in a subsidiary. As a result of this transaction, all of our subsidiaries are now wholly-owned.

Divestitures

In the first quarter of 2008, we completed the divesture of a small package of Gulf of Mexico properties which totaled 17.4 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 $32.9 million. In the second quarter of 2009, we completed the sale of an onshore Louisiana field for cash consideration of approximately $5.0 million. The estimated asset retirement obligation for this field was $6.0 million. The sale of these properties was accounted for as an adjustment of capitalized costs with no gain or loss recognized.

Note 11 — Subsequent Events

We evaluated subsequent events through November 5, 2009, which represents the date our financial statements were issued, and we have no subsequent events to report in this Quarterly Report on Form 10-Q for the quarter ended September 30, 2009.

Note 12 — Commitments and Contingencies

We have been served with several petitions filed by the Louisiana Department of Revenue (“LDR”) in Louisiana state court claiming additional franchise taxes due of approximately $9.0 million plus accrued interest of approximately $4.2 million. 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 claims relate to franchise tax years from 1999 through 2006. The Company disagrees with these contentions and intends to vigorously defend itself against these claims. The franchise tax years 2007 through 2009 for Stone and franchise tax years 2006 through 2008 for Bois d’Arc 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.

A consolidated putative class action is pending 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 (“Securities Action”). The consolidated complaint alleges a putative class period to commence on May 2, 2001 and to end on March 10, 2006 and contends 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 October 1, 2007, the Federal Court ordered 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. The remaining claims are still pending.

On or about May 12, 2008, then Lead Plaintiff El Paso Fireman & Policeman’s Pension Fund filed a motion to certify the Securities Action as a class action (“Class Certification Motion”). Defendants filed an 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. In a memorandum ruling filed on February 27, 2009, the Court held that El Paso Fireman & Policeman’s Pension Fund did not have capacity to sue or be sued and dismissed it from the lawsuit. Subsequently, the Court denied the Class Certification Motion as moot. El Paso Fireman & Policeman’s Pension Fund is appealing its dismissal.

On September 30, 2009, the City of Knoxville Employees’ Pension Board was appointed as the new lead plaintiff. On October 30, 2009, the City of Knoxville Employees’ Pension Board filed a new motion for class certification.

In addition, pending in the Federal Court and in the 15^th Judicial District Court, Parish of Lafayette, Louisiana (the “State Court”) are actions purportedly alleging claims derivatively on behalf of Stone. The operative complaints in these derivative actions name Stone 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 as defendants. The State Court action purports to allege 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 action purports to assert 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. The Federal Court action has been stayed since December 21, 2006.

The foregoing pending actions are at an early stage, and 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.

Stone’s Certificate of Incorporation and/or its Restated Bylaws provide, to the extent permissible under the law of the State 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.

Note 13 — 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. Our remaining subsidiaries (the “Non-Guarantor Subsidiaries”) have not provided guarantees. The following presents condensed consolidating financial information as of September 30, 2009 and December 31, 2008 and for the three and nine-month periods ended September 30, 2009 and 2008 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 (UNAUDITED)
SEPTEMBER 30, 2009
(In thousands of dollars)


							Non-
				Guarantor			Guarantor
	Parent			Subsidiary			Subsidiaries			Eliminations			Consolidated
Assets
Current assets:
Cash and cash equivalents	$	83,337		$	14,209		$	203		$	—		$	97,749
Accounts receivable		12,512			92,147			(164	)		—			104,495
Fair value of hedging contracts		17,155			—			—			—			17,155
Deferred tax asset		3,683			—			—			—			3,683
Current income tax receivable		6,609			28			—			—			6,637
Inventory		9,423			876			—			—			10,299
Other current assets		1,023			15			—			—			1,038

Total current assets		133,742			107,275			39			—			241,056
Oil and gas properties — United States
Proved, net		35,585			836,328			1,383			—			873,296
Unevaluated		252,240			168,493			—			—			420,733
Building and land, net		5,736			—			—			—			5,736
Fixed assets, net		4,306			—			—			—			4,306
Other assets, net		48,928			—			—			—			48,928
Fair value of hedging contracts		704			—			—			—			704
Investment in subsidiary		568,794			1,639			—			(570,433	)		—

Total assets	$	1,050,035		$	1,113,735		$	1,422		$	(570,433	)	$	1,594,759

Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable to vendors	$	31,750		$	67,029		$	47		$	—		$	98,826
Undistributed oil and gas proceeds		12,278			641			—			—			12,919
Fair value of hedging contracts		21,028			—			—			—			21,028
Asset retirement obligations		40,111			64			—			—			40,175
Other current liabilities		28,796			665			—			—			29,461

Total current liabilities		133,963			68,399			47			—			202,409
Long-term debt		650,000			—			—			—			650,000
Deferred taxes *		(149,833	)		212,411			—			51,271			113,849
Asset retirement obligations		47,735			126,212			284			—			174,231
Fair value of hedging contracts		7,686			—			—			—			7,686
Other long-term liabilities		11,358			—			—			—			11,358

Total liabilities		700,909			407,022			331			51,271			1,159,533


Commitments and contingencies

Stockholders’ equity:
Common stock		475			—			—			—			475
Treasury stock		(860	)		—			—			—			(860	)
Additional paid-in capital		1,322,110			2,016,364			1,639			(2,017,929	)		1,322,184
Retained earnings (deficit)		(988,657	)		(1,309,651	)		(548	)		1,396,225			(902,631	)
Accumulated other comprehensive income		16,058			—			—			—			16,058

		349,126			706,713			1,091			(621,704	)		435,226

Non-controlling interest		—			—			—			—			—

Total stockholders’ equity		349,126			706,713			1,091			(621,704	)		435,226

Total liabilities and stockholders’ equity	$	1,050,035		$	1,113,735		$	1,422		$	(570,433	)	$	1,594,759


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

CONDENSED CONSOLIDATING BALANCE SHEET (UNAUDITED)
DECEMBER 31, 2008
(In thousands of dollars)


							Non-
				Guarantor			Guarantor
	Parent			Subsidiary			Subsidiaries			Eliminations			Consolidated
Assets
Current assets:
Cash and cash equivalents	$	67,122		$	818		$	197		$	—		$	68,137
Accounts receivable		119,918			32,080			99			(456	)		151,641
Fair value of hedging contracts		136,072			—			—			—			136,072
Current income tax receivable		29,480			1,703			—			—			31,183
Inventory		32,965			2,710			—			—			35,675
Other current assets		1,356			57			—			—			1,413

Total current assets		386,913			37,368			296			(456	)		424,121

Oil and gas properties — United States
Proved, net		654,048			474,953			1,582			—			1,130,583
Unevaluated		218,297			275,441			—			—			493,738
Building and land, net		5,615			—			—			—			5,615
Fixed assets, net		5,068			258			—			—			5,326
Other assets, net		46,620			—			—			—			46,620
Investment in subsidiary		199,932			1,475			—			(201,407	)		—

Total assets	$	1,516,493		$	789,495		$	1,878		$	(201,863	)	$	2,106,003


Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable to vendors	$	82,129		$	61,582		$	761		$	(456	)	$	144,016
Undistributed oil and gas proceeds		37,517			365			—			—			37,882
Deferred taxes		32,416			—			—			—			32,416
Asset retirement obligations		45,634			25,075			—			—			70,709
Other current liabilities		13,861			1,898			—			—			15,759

Total current liabilities		211,557			88,920			761			(456	)		300,782
Long-term debt		825,000			—			—			—			825,000
Deferred taxes *		25,315			117,338			—			51,271			193,924
Asset retirement obligations		133,109			52,787			250			—			186,146
Fair value of hedging contracts		1,221			—			—			—			1,221
Other long-term liabilities		11,751			—			—			—			11,751

Total liabilities		1,207,953			259,045			1,011			50,815			1,518,824


Commitments and contingencies

Stockholders’ equity:
Common stock		394			—			—			—			394
Treasury stock		(860	)		—			—			—			(860	)
Additional paid-in capital		1,257,633			1,647,428			1,474			(1,648,902	)		1,257,633
Retained earnings (deficit)		(1,033,539	)		(1,116,978	)		(694	)		1,396,224			(754,987	)
Accumulated other comprehensive income		84,912			—			—			—			84,912

		308,540			530,450			780			(252,678	)		587,092

Non-controlling interest		—			—			87			—			87

Total stockholders’ equity		308,540			530,450			867			(252,678	)		587,179

Total liabilities and stockholders’ equity	$	1,516,493		$	789,495		$	1,878		$	(201,863	)	$	2,106,003


*		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, 2009
(In thousands of dollars)


							Non-
				Guarantor			Guarantor
	Parent			Subsidiary			Subsidiaries			Eliminations		Consolidated
Operating revenue:
Oil production	$	40,212		$	94,525		$	—		$	—	$	134,737
Gas production		31,952			36,030			—			—		67,982

Total operating revenue		72,164			130,555			—			—		202,719


Operating expenses:
Lease operating expenses		9,401			18,735			—			—		28,136
Production taxes		1,432			694			—			—		2,126
Depreciation, depletion, amortization		11,515			57,059			78			—		68,652
Accretion expense		2,319			5,800			12			—		8,131
Salaries, general and administrative		9,480			10			—			—		9,490
Incentive compensation expense		1,932			—			—			—		1,932
Impairment of inventory		1,055			220			—			—		1,275
Derivative expense, net		91			—			—			—		91

Total operating expenses		37,225			82,518			90			—		119,833


Income (loss) from operations		34,939			48,037			(90	)		—		82,886


Other (income) expenses:
Interest expense		5,149			21			—			—		5,170
Interest income		(149	)		(6	)		—			—		(155	)
Other (income) expense, net		(813	)		25			(149	)		—		(937	)

Total other (income) expenses		4,187			40			(149	)		—		4,078


Income before taxes		30,752			47,997			59			—		78,808


Provision for income taxes:
Current		1,615			—			—			—		1,615
Deferred		9,319			16,821			—			—		26,140

Total income taxes		10,934			16,821			—			—		27,755


		19,818			31,176			59			—		51,053

Less: Net loss attributable to non-controlling interest		—			—			—			—		—

Net income	$	19,818		$	31,176		$	59		$	—	$	51,053

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

		36,940			(2,811	)		(8	)		—		34,121
Less: Net loss attributable to non-controlling interest		—			—			—			—		—

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

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 2009
(In thousands of dollars)


							Non-
				Guarantor			Guarantor
	Parent			Subsidiary			Subsidiaries			Eliminations		Consolidated
Operating revenue:
Oil production	$	106,662		$	206,901		$	—		$	—	$	313,563
Gas production		89,919			108,553			—			—		198,472
Derivative income, net		3,106			—			—			—		3,106

Total operating revenue		199,687			315,454			—			—		515,141


Operating expenses:
Lease operating expenses		28,587			98,825			—			—		127,412
Other operational expense		2,400			—			—			—		2,400
Production taxes		4,728			1,238			—			—		5,966
Depreciation, depletion, amortization		33,184			152,938			200			—		186,322
Write-down of oil and gas properties		—			340,083			—			—		340,083
Accretion expense		7,448			17,402			34			—		24,884
Salaries, general and administrative		30,891			181			1			—		31,073
Incentive compensation expense		3,349			—			—			—		3,349
Impairment of inventory		7,414			1,040			—			—		8,454

Total operating expenses		118,001			611,707			235			—		729,943


Income (loss) from operations		81,686			(296,253	)		(235	)		—		(214,802	)


Other (income) expenses:
Interest expense		15,062			62			—			—		15,124
Interest income		(430	)		(7	)		—			—		(437	)
Other (income) expense, net		(2,368	)		65			(459	)		—		(2,762	)

Total other (income) expenses		12,264			120			(459	)		—		11,925


Income (loss) before taxes		69,422			(296,373	)		224			—		(226,727	)


Provision (benefit) for income taxes:
Current		1,638			—			—			—		1,638
Deferred		22,902			(103,650	)		—			—		(80,748	)

Total income taxes		24,540			(103,650	)		—			—		(79,110	)


		44,882			(192,723	)		224			—		(147,617	)

Less: Net loss attributable to non-controlling interest		—			—			(27	)		—		(27	)

Net income (loss)	$	44,882		$	(192,723	)	$	197		$	—		($147,644	)

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


		181,993			(2,811	)		(8	)		—		179,174

Less: Net loss attributable to non-controlling interest		—			—			—			—		—

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

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 2009
(In thousands of dollars)


							Non-
				Guarantor			Guarantor
	Parent			Subsidiary			Subsidiaries			Eliminations			Consolidated
Cash flows from operating activities:
Net income (loss)	$	44,882		$	(192,723	)	$	224		$	—		$	(147,617	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation, depletion and amortization		33,184			152,938			200			—			186,322
Write-down of oil and gas properties		—			340,083			—			—			340,083
Impairment of inventory		7,414			1,040			—			—			8,454
Accretion expense		7,448			17,402			34			—			24,884
Deferred income tax provision (benefit)		22,902			(103,650	)		—			—			(80,748	)
Settlement of asset retirement obligations		(6,138	)		(55,256	)		—			—			(61,394	)
Non-cash stock compensation expense		4,392			—			—			—			4,392
Non-cash derivative expense		3,451			—			—			—			3,451
Other non-cash expenses		(96	)		—			—			—			(96	)
Unrecognized proceeds from unwound derivative contracts		35,095			—			—			—			35,095
Change in current income taxes		30,374			1,676			—			—			32,050
(Increase) decrease in accounts receivable		100,980			(50,902	)		263			(456	)		49,885
Decrease in other current assets		349			42			—			—			391
Decrease in inventory		16,129			794			—			—			16,923
Increase (decrease) in accounts payable		(20,667	)		2,866			(715	)		—			(18,516	)
Decrease in other current liabilities		(19,520	)		(957	)		—			—			(20,477	)
Other expenses		(191	)		27			—			—			(164	)

Net cash provided by (used in) operating activities		259,988			113,380			6			(456	)		372,918


Cash flows from investing activities:
Investment in oil and gas properties		(132,681	)		(99,984	)		—			456			(232,209	)
Proceeds from sale of oil and gas properties, net of expenses		5,571			—			—			—			5,571
Sale of fixed assets		—			35			—			—			35
Investment in fixed and other assets		(1,276	)		—			—			—			(1,276	)
Acquisition of non-controlling interest in subsidiary		—			(40	)		—			—			(40	)

Net cash provided by (used in) investing activities		(128,386	)		(99,989	)		—			456			(227,919	)


Cash flows from financing activities:
Net proceeds from issuance of common stock		60,442			—			—			—			60,442
Repayment of bank borrowings		(175,000	)		—			—			—			(175,000	)
Deferred financing costs		(65	)		—			—			—			(65	)
Purchase of treasury stock		(347	)		—			—			—			(347	)
Net proceeds from exercise of stock options and vesting of restricted stock		(417	)		—			—			—			(417	)

Net cash used in financing activities		(115,387	)		—			—			—			(115,387	)


Net increase in cash and cash equivalents		16,215			13,391			6			—			29,612
Cash and cash equivalents, beginning of period		67,122			818			197			—			68,137

Cash and cash equivalents, end of period	$	83,337		$	14,209		$	203		$	—		$	97,749

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 (loss)	$	181,993		$	(2,811	)	$	(8	)	$	179,174
Adjustments to reconcile net income (loss) 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
Change in current income taxes		(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, 2009, and the related condensed consolidated statement of operations for the three and nine-month periods ended September 30, 2009 and 2008, and the condensed consolidated statement of cash flows for the nine-month periods ended September 30, 2009 and 2008. 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, 2008, 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 26, 2009, 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, 2008, 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, 2009

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

This Form 10-Q and the information referenced herein contain statements that constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The words “plan,” “expect,” “project,” “estimate,” “assume,” “believe,” “anticipate,” “intend,” “budget,” “forecast,” “predict” and other similar expressions are intended to identify forward-looking statements. These statements appear in a number of places and include statements regarding our plans, beliefs or current expectations, including the plans, beliefs and expectations of our officers and directors. We use the terms “Stone,” “Stone Energy,” “Company,” “we,” “us” and “our” to refer to Stone Energy Corporation.

When considering any forward-looking statement, you should keep in mind the risk factors that could cause our actual results to differ materially from those contained in any forward-looking statement. Important factors that could cause actual results to differ materially from those in the forward-looking statements herein include the timing and extent of changes in commodity prices for oil and gas, operating risks, liquidity risks and other risk factors as described in our Annual Report on Form 10-K in Part I, Item 1, “Business — Forward-Looking Statements”, and Item 1A, “Risk Factors”, and in this report under Part II, Item 1A, “Risk Factors”. Furthermore, the assumptions that support our forward-looking statements are based upon information that is currently available and is subject to change. We specifically disclaim all responsibility to publicly update any information contained in a forward-looking statement or any forward-looking statement in its entirety and therefore disclaim any resulting liability for potentially related damages. All forward-looking statements attributable to Stone Energy Corporation are expressly qualified in their entirety by this cautionary statement.

Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) contained in this Form 10-Q should be read in conjunction with the MD&A contained in our Annual Report on Form 10-K for the year ended December 31, 2008.

Overview

Stone Energy Corporation is an independent oil and gas company engaged in the acquisition, exploration, exploitation, development and operation of oil and gas properties located primarily in the Gulf of Mexico. On August 28, 2008, we completed the acquisition of Bois d’Arc Energy, Inc. (“Bois d’Arc”) in a cash and stock transaction totaling approximately $1.7 billion. Bois d’Arc was an independent exploration company engaged in the discovery and production of oil and natural gas in the Gulf of Mexico. We are also active in the Appalachia region. Prior to November 30, 2008, we participated in an exploratory joint venture in Bohai Bay, China. Our business strategy is to increase reserves, production and cash flow through the acquisition, exploitation and development of mature properties in the Gulf Coast Basin and exploring opportunities in the deep water environment of the Gulf of Mexico, Appalachia and other potential areas. Throughout this document, reference to our “Gulf Coast Basin” properties includes our Gulf Coast onshore, shelf, deep shelf and deep water properties.

Public Offering of Common Stock — In June 2009, we sold 8,050,000 shares of our common stock in a public offering at a price of $8.00 per share resulting in net proceeds of approximately $60.4 million after underwriters’ discounts and offering expenses. The net proceeds were used for general corporate purposes, including the reduction of outstanding bank debt.

Pyrenees Discovery — In June 2009, we announced a discovery on our deepwater Pyrenees Prospect, located on Garden Banks Block 293. The well encountered approximately 125 feet of net hydrocarbon pay in three zones. We have a 15% working interest in the prospect and a small overriding royalty. Delineation drilling on the Pyrenees Discovery is now complete and has provided the necessary information to appraise the three pay zones discovered in the initial well. We, along with the operator, expect to propose a development program which might include the appraisal of several shallow sands and possibly a deeper objective.

Bank Credit Facility Borrowing Base Redetermination — In connection with the acquisition of Bois d’Arc on August 28, 2008, we entered into an amended and restated revolving credit facility of $700 million, maturing on July 1, 2011, with a syndicated bank group. Our bank credit facility had a borrowing base of $625 million at December 31, 2008. On April 28, 2009, our bank credit facility was amended, and on April 29, 2009, our borrowing base was reduced to $425 million. On October 9, 2009, the semi-annual redetermination process was completed and our borrowing base was reaffirmed at $425 million. See Bank Credit Facility below for additional information regarding the amended and restated credit facility.

Unwinding of 2009 Hedge Positions — In March 2009, we unwound all of our then existing crude oil hedges for the period from April 2009 through December 2009 and two of our natural gas hedges for the period from April 2009 through December 2009, resulting in proceeds of approximately $113 million. These contracts were unwound to provide a source of liquidity to assist with funding capital expenditures, which were heavily weighted toward the first two quarters of the year.

Declining Commodity Prices — During the first quarter of 2009, we experienced declines in oil and natural gas prices which resulted in a ceiling test write-down of $340.1 million.

Critical Accounting Policies

Our Annual Report on Form 10-K describes the accounting policies that we believe are critical to the reporting of our financial position and operating results and that require management’s most difficult, subjective or complex judgments. Our most significant estimates are:

	•		remaining proved oil and gas reserves volumes and the timing of their production;

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

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

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

	•		the effectiveness and estimated fair value of derivative positions;

	•		classification of unevaluated property costs;

	•		capitalized general and administrative costs and interest;

	•		insurance recoveries related to hurricanes;

	•		estimates of fair value in business combinations;

	•		current income taxes; and

	•		contingencies.

This Quarterly Report on Form 10-Q should be read together with the discussion contained in our Annual Report on Form 10-K regarding these critical accounting policies.

Other Factors Affecting Our Business and Financial Results

In addition to the matters discussed above, our business, financial condition and results of operations are affected by a number of other factors. This Quarterly Report on Form 10-Q should be read in conjunction with the discussion in our Annual Report on Form 10-K regarding these other risk factors.

Known Trends and Uncertainties

Hurricanes — Since the majority of our production originates in the Gulf of Mexico, we are particularly vulnerable to the effects of hurricanes on production. During the first nine months of 2009, we experienced deferrals of production due to Hurricanes Gustav and Ike of approximately 11.8 Bcfe. Production deferrals for Hurricanes Gustav and Ike amounted to 18.1 Bcfe in the second half of 2008. In 2007, 2006 and 2005, we experienced deferrals of production due to Hurricanes Katrina and Rita of approximately 3.6 Bcfe, 15.6 Bcfe and 16.4 Bcfe, respectively. Additionally, affordable insurance coverage for property damage to our facilities for hurricanes is becoming more difficult to obtain. We have narrowed our insurance coverage to selected properties, increased our deductibles and are shouldering more hurricane related risk in the environment of rising insurance rates.

Credit Crisis — Beginning in the second half of 2008 and continuing into 2009, world financial markets experienced a severe reduction in the availability of credit. It is difficult to predict the impact of this condition on us in future quarters. Possible negative impacts could include additional decreases in the borrowing base under our credit facility, limitations on our ability to access the debt and equity capital markets and complete asset sales, a need to repay borrowings sooner than expected, an increased counterparty credit risk on our derivatives contracts and under our bank credit facility and the requirement by contractual counterparties of us to post collateral guaranteeing performance.

Declining Commodity Prices — We experienced a significant decline in oil and natural gas prices in 2008 and the first quarter of 2009. This resulted in a ceiling test write-down of our oil and gas properties in the fourth quarter of 2008 and the first quarter of 2009. Should these restrained pricing conditions persist it could severely impact future cash flows, result in further decreases in our borrowing base under our credit facility, constrain capital budgets and result in additional ceiling test write-downs.

Bank Credit Facility Borrowing Base Redetermination — On April 29, 2009, our borrowing base under our bank credit facility was reduced from $625 million to $425 million. On October 9, 2009, the borrowing base was reaffirmed at $425 million at the semi-annual redetermination. As of November 5, 2009, we had $225 million of outstanding borrowings under the facility and $67.6 million in letters of credit had been issued pursuant to the facility, leaving $132.4 million of availability under the facility. Stone’s cash position at November 5, 2009 is approximately $84 million. If a lower commodity price environment were to persist (see discussions above), we could experience a further reduction in the borrowing base under our bank credit facility.

Louisiana Franchise Taxes — We have been involved in litigation with the state of Louisiana over the proper computation of franchise taxes allocable to the state. This litigation relates to the state’s position that sales of crude oil and natural gas from properties located on the Outer Continental Shelf, which are transported through the state of Louisiana, should be sourced to Louisiana for purposes of computing franchise taxes. We disagree with the state’s position. However, if the state’s position were to be upheld, we could incur additional expense for alleged underpaid franchise taxes in prior years and higher franchise tax

expense in future years. See “Item 1. Legal Proceedings.” As of September 30, 2009, the state of Louisiana had asserted claims of additional franchise taxes in the amount of $9.0 million plus accrued interest of $4.2 million. There are open franchise tax years which the state has not yet audited.

Regulatory Inquiries and Stockholder Lawsuits — We have been named as a defendant in certain regulatory inquiries and stockholder lawsuits resulting from our reserve restatement. The ultimate resolution of these matters and their impact on us is uncertain. See “Item 1. Legal Proceedings.”

Liquidity and Capital Resources

As described above in “Known Trends and Uncertainties,” the significant decline in oil and natural gas prices in early 2009 has materially adversely affected our cash flow from operations and liquidity. We experienced a material reduction in the borrowing base under our bank credit facility in April 2009. In October 2009, our borrowing base was reaffirmed at the level established in April 2009. Our next scheduled redetermination is expected by May 2010. Our capital expenditure budget for 2009 has been set at $300 million, which we intend to finance with cash flow from operations. If we do not have sufficient cash flow from operations or availability under our bank credit facility, we may be forced to reduce our capital expenditures. To the extent that 2009 cash flow from operations exceeds our estimated 2009 capital expenditures, we may pay down a portion of our existing debt, expand our capital budget, expand our leasehold in Appalachia, or invest in the money markets.

Cash Flow and Working Capital. Net cash flow provided by operating activities totaled $372.9 million during the nine months ended September 30, 2009 compared to $487.2 million in the comparable period in 2008. Net cash flow provided by operating activities during the nine months ended September 30, 2009 includes $35.1 million of proceeds from the unwinding of derivative contracts which will be recognized in production revenue during the fourth quarter of 2009.

Net cash flow used in investing activities totaled $227.9 million during the nine months ended September 30, 2009, which primarily represents our investment in oil and natural gas properties partially offset by proceeds from the sale of oil and natural gas properties. Net cash flow used in investing activities totaled $1.2 billion during the nine months ended September 30, 2008, which primarily represents cash used in the acquisition of Bois d’Arc and our investment in oil and natural gas properties partially offset by proceeds from the sale of oil and natural gas properties.

Net cash flow used in financing activities totaled $115.4 million for the nine months ended September 30, 2009, which primarily represents repayments of borrowings under our bank credit facility of approximately $175.0 million net of proceeds from the sale of common stock of approximately $60.4 million. Net cash flow provided by financing activities totaled $431.3 million for the nine months ended September 30, 2008, which primarily represents borrowings under our bank credit facility in conjunction with the acquisition of Bois d’Arc and proceeds from the exercise of stock options and vesting of restricted stock.

We had working capital at September 30, 2009 of $38.6 million.

Capital Expenditures. Third quarter 2009 additions to oil and gas property costs of $48.7 million included $2.0 million of lease acquisition costs, $4.8 million of capitalized salaries, general and administrative expenses (inclusive of incentive compensation) and $6.6 million of capitalized interest. Year-to-date 2009 additions to oil and gas property costs of $202.7 million included $4.3 million of lease acquisition costs, $13.5 million of capitalized salaries, general and administrative expenses (inclusive of incentive compensation) and $19.4 million of capitalized interest. These investments were financed by cash flow from operating activities and proceeds from the stock offering.

Bank Credit Facility. On August 28, 2008, we entered into an amended and restated revolving credit facility totaling $700 million, maturing on July 1, 2011, with a syndicated bank group. At December 31, 2008, our bank credit facility had a borrowing base of $625 million. On April 28, 2009, the credit facility was amended, and on April 29, 2009, the borrowing base was reduced to $425 million. On October 9, 2009, the borrowing base was reaffirmed at $425 million at the semi-annual redetermination. At September 30, 2009, we had $250 million of outstanding borrowings under our bank credit facility, letters of credit totaling $69 million had been issued under the facility, and the weighted average interest rate was 3.0%. As of November 5, 2009, we had $225 million of outstanding borrowings under our bank credit facility and $67.6 million in letters of credit had been issued pursuant to the facility, leaving $132.4 million of availability under the facility. The facility is guaranteed by all of our material direct and indirect subsidiaries, including Stone Energy Offshore, L.L.C. (“Stone Offshore”), a wholly owned subsidiary of Stone.

The borrowing base under our bank credit facility is redetermined semi-annually, in May and November, by the lenders taking into consideration the estimated value of our oil and gas properties and those of our direct and indirect material subsidiaries in accordance with the lenders’ customary practices for oil and gas loans. In addition, we and the lenders each have discretion at any time, but not more than two additional times in any calendar year, to have the borrowing base redetermined. Our bank credit facility is collateralized by substantially all of Stone’s and Stone Offshore’s assets. Stone and Stone Offshore are required to mortgage, and grant a security interest in, their oil and gas reserves representing at least 80% of the discounted present value of the future net cash flows from their oil and gas reserves reviewed in determining the borrowing base. At Stone’s option, loans under the credit facility will bear interest at a rate based on the adjusted London Interbank Offering Rate plus an applicable

margin, or a rate based on the prime rate or Federal funds rate plus an applicable margin. Our bank credit facility provides for optional and mandatory prepayments, affirmative and negative covenants, and interest coverage ratio and leverage ratio maintenance covenants. Stone has been and remains in compliance with all of the financial covenants under our bank credit facility.

Share Repurchase Program. On September 24, 2007, our Board of Directors authorized a share repurchase program for an aggregate amount of up to $100 million. The shares may be repurchased from time to time in the open market or through privately negotiated transactions. The repurchase program is subject to business and market conditions, and may be suspended or discontinued at any time. Through September 30, 2009, 300,000 shares had been repurchased under this program at a total cost of $7.1 million.

Contractual Obligations and Other Commitments

We are contingently liable to surety insurance companies relative to bonds issued on our behalf to the United States Department of the Interior Minerals Management Service (“MMS”), federal and state agencies and certain third parties from which we purchased oil and gas working interests. At September 30, 2009, we were contingently liable in the aggregate amount of $59.8 million, a reduction from our contingent liability at December 31, 2008 of $84.4 million. This redetermination was accomplished by the posting of additional letters of credit in April of 2009. The bonds represent guarantees by the surety insurance companies that we will operate in accordance with applicable rules and regulations and perform certain plugging and abandonment obligations as specified by applicable working interest purchase and sale agreements.

Results of Operations

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


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

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


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

(b)		Exclusive of incentive compensation expense.


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

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


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

(b)		Exclusive of incentive compensation expense.

During the third quarter of 2009, we reported net income totaling $51.1 million, or $1.06 per share, compared to net income for the third quarter of 2008 of $34.1 million, or $1.04 per share. For the nine months ended September 30, 2009, we reported a net loss totaling $147.6 million, or $3.45 per share. For the nine months ended September 30, 2008, we reported net income of $179.2 million, or $5.97 per share. All per share amounts are on a diluted basis. On August 28, 2008, we completed the acquisition of Bois d’Arc. The revenues and expenses associated with Bois d’Arc have been included in Stone’s Condensed Consolidated Financial Statements since August 28, 2008.

We follow the full cost method of accounting for oil and gas properties. At the end of the first quarter of 2009, we recognized a ceiling test write-down of our oil and gas properties totaling $340.1 million ($221.1 million after taxes). The write-down did not impact our cash flow from operations but did reduce net income and stockholders’ equity.

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

Production. During the third quarter of 2009, total production volumes increased 85% to 22.0 Bcfe compared to 11.9 Bcfe produced during the third quarter of 2008. Oil production during the third quarter of 2009 totaled approximately 1,741,000 barrels compared to 943,000 barrels produced during the third quarter of 2008, while natural gas production totaled 11.5 Bcf during the third quarter of 2009 compared to 6.2 Bcf produced during the third quarter of 2008. Year-to-date production totaled 4,579,000 barrels of oil and 30.9 Bcf of natural gas compared to 3,647,000 barrels of oil and 24.6 Bcf of natural gas produced during the comparable 2008 period.

Production rates were positively impacted during the third quarter of 2009 as substantially all of the hurricane affected wells are back on line. Without the effects of hurricane production deferrals, production volumes increased approximately 4.1 Bcfe for the third quarter of 2009 compared to the comparable 2008 quarter. Production deferrals due to hurricanes totaled approximately 1.1 Bcfe and 7.1 Bcfe for the third quarter of 2009 and 2008, respectively. Production associated with the Bois d’Arc acquisition totaled approximately 7.4 Bcfe for the third quarter of 2009.

Production deferrals due to hurricanes for the nine months ended September 30, 2009 amounted to 11.8 Bcfe (43 MMcfe per day). Without the effects of hurricane production deferrals, year-to-date 2009 production volumes increased approximately 16.6 Bcfe from year-to-date 2008 production volumes. Production associated with the Bois d’Arc acquisition totaled approximately 19.9 Bcfe for the nine months ended September 30, 2009.

Prices. Prices realized during the third quarter of 2009 averaged $77.39 per Bbl of oil and $5.90 per Mcf of natural gas, or 34% lower, on an Mcfe basis, than third quarter 2008 average realized prices of $106.81 per Bbl of oil and $10.72 per Mcf of natural gas. Average realized prices during the nine months ended September 30, 2009 were $68.48 per Bbl of oil and $6.42 per Mcf of natural gas compared to $104.20 per Bbl of oil and $10.29 per Mcf of natural gas realized during the first nine months of 2008. All unit pricing amounts include the cash settlement of effective hedging contracts.

We enter into various hedging contracts in order to reduce our exposure to the possibility of declining oil and gas prices. Our effective hedging transactions increased our average realized natural gas price by $2.37 per Mcf and increased our average realized oil price by $10.92 per Bbl in the third quarter of 2009. During the third quarter of 2008, our effective hedging transactions decreased our average realized natural gas price by $0.07 per Mcf and decreased our average realized oil price by $16.89 per Bbl. Effective hedging transactions for the nine months ended September 30, 2009 increased our average realized natural gas price by $2.44 per Mcf and increased our average realized oil price by $12.39 per Bbl. For the nine months ended

September 30, 2008, effective hedging transactions decreased our average realized oil price by $11.50 per Bbl and had no impact on average realized natural gas prices.

Income. Oil and natural gas revenue increased 21% to $202.7 million in the third quarter of 2009 from $167.3 million during the third quarter of 2008. The increase is attributable to an 85% increase in oil and gas production volumes partially offset by a decrease in average realized prices on a gas equivalent basis. Oil and natural gas revenue related to the properties acquired from Bois d’Arc totaled $42.9 million in the third quarter of 2009. Year-to-date 2009 oil and natural gas revenue totaled $512.0 million compared to $633.5 million during the comparable 2008 period. The decrease was due to a 36% decrease in average realized prices on a gas equivalent basis, partially offset by oil and natural gas revenue related to the properties acquired from Bois d’Arc, totaling $115.3 million for the nine months ended September 30, 2009.

Interest income totaled $0.2 million during the third quarter of 2009 compared to $2.3 million during the comparable quarter of 2008 and $0.4 million during the nine months ended September 30, 2009 compared to $10.6 million during the comparable 2008 period. The decrease in interest income is the result of lower interest rates and a decrease in our cash balances during the periods after the acquisition of Bois d’Arc.

Derivative Income/Expense. During the year-to-date period ended September 30, 2009, 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 quarter ended September 30, 2009, totaled $0.1 million, consisting of $0.2 million of cash settlements on the ineffective portion of derivative contracts, less $0.3 million of changes in the fair market value of the ineffective portion of derivative contracts. Net derivative income for the nine months ended September 30, 2009, totaled $3.1 million, consisting of $7.8 million of cash settlements on the ineffective portion of derivative contracts, less $4.7 million of changes in the fair market value of the ineffective portion of derivative contracts.

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.

Expenses. Lease operating expenses during the third quarter of 2009 totaled $28.1 million compared to $40.1 million for the third quarter of 2008. In the third quarter of 2009, there was approximately $12 million in downward adjustments of previously accrued major maintenance and base lease operating costs as a result of actual costs being less than the previously accrued estimated amounts. During the third quarter of 2008, lease operating expenses included $6.8 million of repairs in excess of estimated insurance recoveries related to damage from Hurricanes Gustav and Ike. For the first nine months of 2009 and 2008, lease operating expenses totaled $127.4 million and $105.3 million, respectively. The increase in lease operating expenses on a year-to-date basis is primarily the result of $50.8 million of lease operating expenses associated with the properties acquired from Bois d’Arc. On a unit of production basis, lease operating expenses were $2.18 per Mcfe and $2.26 per Mcfe for the nine months ended September 30, 2009 and 2008, respectively.

The other operational expense charge of $2.4 million for the nine months ended September 30, 2009 relates to the cancellation of a drilling contract.

Depreciation, depletion and amortization (“DD&A”) on oil and gas properties for the third quarter of 2009 totaled $67.2 million compared to $51.0 million during the third quarter of 2008. On unit of production basis, DD&A on oil gas properties was $3.06 per Mcfe for the third quarter of 2009, a decrease from $4.30 per Mcfe for the third quarter of 2008, primarily a result of the 2008 year-end ceiling test write-down. For the nine months ended September 30, 2009 and 2008, DD&A expense totaled $181.9 million and $183.9 million, respectively. The overall decrease in DD&A from 2008 is primarily due to the 2008 year-end and first quarter 2009 ceiling test write-downs, which reduced the carrying value of the full cost pool for our oil and gas properties.

Accretion expense for the third quarter of 2009 was $8.1 million compared to $4.1 million for the comparable period of 2008. For the nine months ended September 30, 2009 and 2008, accretion expense totaled $24.9 million and $12.4 million, respectively. Due to falling commodity prices and hurricanes, the timing on a substantial portion of our asset retirement obligations was revised in the fourth quarter of 2008 leading to a redetermination of the present value of these obligations. In this redetermination, our credit adjusted risk free interest rate was increased to account for current credit conditions, resulting in a material increase in accretion expense in 2009. Also contributing to the increase was the addition of liabilities associated with properties acquired from Bois d’Arc.

Salaries, general and administrative (“SG&A”) expenses (exclusive of incentive compensation) for the third quarter of 2009 were $9.5 million compared to $10.5 million in the third quarter of 2008. For the nine months ended September 30, 2009 and 2008, SG&A totaled $31.1 million and $32.0 million, respectively.

The impairment of inventory for the third quarter of 2009 totaling $1.3 million relates to the write-down of our tubular inventory. For the nine months ended September 30, 2009, the impairment charge totaled $8.5 million. This charge was the result of the market value of these tubulars falling below historical cost. We consider only tubular goods not committed to capital projects to be inventory items.

Interest expense for the third quarter of 2009 totaled $5.2 million, net of $6.6 million of capitalized interest, compared to interest expense of $3.0 million, net of $7.0 million of capitalized interest, during the third quarter of 2008. For the nine months ended September 30, 2009, interest expense totaled $15.1 million, net of capitalized interest of $19.4 million, compared to interest expense of $10.5 million, net of capitalized interest of $15.7 million for the nine months ended September 30, 2008. The increase is primarily the result of interest expense associated with an increase in borrowings under our bank credit facility in 2009 compared to the first nine months of 2008.

We estimate that we have incurred approximately $1.6 million of current federal income tax expense for the nine months ended September 30, 2009. We have a $6.6 million current income tax receivable at September 30, 2009 which is the result of 2008 tax year estimated tax payments exceeding our 2008 estimated federal income tax liability.

Recent Accounting Developments

Financial Accounting Standards Board Accounting Standards Codification. The Financial Accounting Standards Board (“FASB”) voted to approve the FASB Accounting Standards Codification (the “ASC”) as the single source of authoritative nongovernmental U.S. GAAP as of July 1, 2009. The ASC is effective for interim and annual periods ending after September 15, 2009. The ASC reorganizes the many U.S. GAAP pronouncements into approximately 90 accounting topics, with all topics using a consistent structure. It also includes relevant authoritative content issued by the Securities and Exchange (“SEC”), as well as selected SEC staff interpretations and administrative guidance. The ASC became effective for this September 30, 2009 Current Report on Form 10-Q. The ASC does not change or alter existing GAAP and will not have any impact on our consolidated financial statements. Effective July 1, 2009, changes to the ASC are communicated through an Accounting Standards Update (“ASU”).

Determining Whether Instruments Granted in Share-Based Payment Transactions are Participating Securities. ASC 260-10 addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and are therefore required to be included in the earnings allocation in calculating earnings per share under the two-class method. Under ASC 260-10, companies are required to treat unvested share-based payment awards with a right to receive non-forfeitable dividends as a separate class of securities in calculating earnings per share. The guidance provided in ASC 260-10 is effective for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. We adopted this rule effective January 1, 2009. The net effect of the implementation of this rule on our financial statements was immaterial.

Interim Disclosures About Fair Value of Financial Instruments. ASC 825-10 requires disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. This rule became effective for us on June 15, 2009.

Subsequent Events. ASC 855-10 modifies the definition of subsequent events and requires disclosure of the date through which an entity has evaluated subsequent events and the basis for that date. This rule became effective for us on June 15, 2009.

Fair Value Measurements and Disclosures (ASC Topic 820). ASU 2009-05 was issued in August 2009 to reduce potential ambiguity in financial reporting when measuring the fair value of liabilities by providing clarification for measurement techniques in circumstances in which a quoted price in an active market for the identical liability is not available. The guidance provided in ASU 2009-05 will be effective for us on October 1, 2009.

Modernization of Oil and Gas Reporting. In December 2008, the SEC issued a final rule, “Modernization of Oil and Gas Reporting,” which adopts revisions to the SEC’s oil and gas reporting requirements. It is effective January 1, 2010 for Annual Reports on Form 10-K for years ending on or after December 31, 2009, with early adoption prohibited. The revisions are designed to modernize and update the oil and gas disclosure requirements to align them with current practices and changes in technology. Among other things, the revisions will: replace the single-day year-end pricing with a twelve-month average pricing assumption; permit the reporting of probable and possible reserves in addition to the existing requirement to disclose proved reserves; allow the use of new technologies to determine proved reserves if those technologies have been demonstrated empirically to lead to reliable conclusions about reserve volumes; require the disclosure of the independence and qualifications of third party preparers of reserves; and require the filing of reports when a third party is relied upon to prepare reserve estimates. We will be required to adopt the provisions of the new rule as of December 31, 2009 for our 2009 Annual Report on Form 10-K.

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 23% of our estimated 2009 production, 42% of our estimated 2010 production, and 10% of our estimated 2011 production. See Item 1. Financial Statements — Note 4 — Derivative Instruments and 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, 2008, 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 $650 million at September 30, 2009, of which $400 million, or approximately 62%, 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, 2009, the remaining $250 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, 2009, the weighted average interest rate under our bank credit facility was approximately 3.0% per annum. We currently have no interest rate hedge positions in place to reduce our exposure to changes in interest rates.

On April 28, 2009, our bank credit facility was amended, and on April 29, 2009, the borrowing base under the credit facility was reduced from $625 million to $425 million. In connection with this redetermination, our borrowing base pricing grid was increased by 75 basis points in respect of Libor rate advances, by a range of 125 to 150 basis points in respect of base rate advances and by a range of 0 to 12.5 basis points in respect of commitment fees payable under the credit facility.

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, 2009. 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

There has not been any change in our internal control over financial reporting that occurred during the quarter ended September 30, 2009 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. 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. Further, on January 7, 2009, Stone was served with a petition (civil action number 2008-7193) claiming additional franchise taxes due for the taxable years ended December 31, 2005 and 2006 in the amount of $4.0 million plus accrued interest calculated through October 21, 2008 in the amount of $1.7 million. 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 2007 through 2009 for Stone and franchise tax years 2006 through 2008 for Bois d’Arc remain subject to examination.

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 Stone 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 Stone’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”). El Paso Fireman & Policeman’s Pension Fund 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 began, and the parties exchanged initial disclosures, document requests, and interrogatories and also began producing documents.

On or about May 12, 2008, El Paso Fireman & Policeman’s Pension Fund 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. In a memorandum ruling filed on February 27, 2009, the Court dismissed El Paso Fireman & Policeman’s Pension Fund from the lawsuit, holding that El Paso Fireman & Policeman’s Pension Fund did not have capacity to sue or be sued, and subsequently, the Court denied the Class Certification Motion as moot. El Paso Fireman & Policeman’s Pension Fund is appealing its dismissal.

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.

On March 30, 2006, the Federal Court entered an order consolidating the Federal Court derivative actions and naming Robert Farer, Priscilla Fisk and Joint Pension Fund, Local No. 164, I.B.E.W. as co-lead plaintiffs in the consolidated 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.

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.

Item 1A. Risk Factors

The following risk factors update the Risk Factors included in our Annual Report on Form 10-K for the year ended December 31, 2008. 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, 2008.

The continuing financial crisis may impact our business and financial condition. The continuing financial crisis may adversely impact our ability to obtain funding under our current bank credit facility or in the capital markets.

The credit crisis and related turmoil in the global financial systems have had an impact on our business and our financial condition. A continuation of the economic crisis could further reduce the demand for oil and natural gas and continue to put downward pressure on the prices for oil and natural gas, which have declined significantly since reaching historic highs in July 2008. These price declines have negatively impacted our revenues and cash flows in 2009. We may face additional challenges if economic and financial market conditions further deteriorate. Historically, we have used our cash flow from operations and borrowings under our bank credit facility to fund our capital expenditures and have relied on the capital markets and asset monetization transactions to provide us with additional capital for large or exceptional transactions. In the future, we may not be able to access adequate funding under our bank credit facility as a result of (i) a decrease in our borrowing base due to the outcome of a borrowing base redetermination, or (ii) an unwillingness or inability on the part of our lending counterparties to meet their funding obligations. In addition, we may face limitations on our ability to access the debt and equity capital markets and complete asset sales, an increased counterparty credit risk on our derivatives contracts and the requirement by contractual counterparties of us to post collateral guaranteeing performance.

Certain U.S. federal income tax deductions currently available with respect to oil and gas exploration and development may be eliminated as a result of future legislation.

President Obama’s Proposed Fiscal Year 2010 Budget includes proposed legislation that would, if enacted into law, make significant changes to United States tax laws, including the elimination of certain key U.S. federal income tax incentives currently available to oil and natural gas exploration and production companies. These changes include, but are not limited to, (i) the repeal of the percentage depletion allowance for oil and natural gas properties, (ii) the elimination of current deductions for intangible drilling and development costs, (iii) the elimination of the deduction for certain domestic production activities, and (iv) an extension of the amortization period for certain geological and geophysical expenditures. It is unclear whether any such changes will be enacted or how soon any such changes could become effective. The passage of any legislation as a result of these proposals or any other similar changes in U.S. federal income tax laws could eliminate certain tax deductions that are currently available with respect to oil and gas exploration and development, and any such change could negatively affect our financial condition and results of operations.

The adoption of climate change legislation by Congress could result in increased operating costs and reduced demand for the oil and natural gas we produce.

The U.S. House of Representatives has recently passed a bill—the “American Clean Energy and Security Act of 2009,” also known as the “Waxman-Markey cap-and-trade legislation” or ACESA—to control and reduce the emission of GHGs in the United States through the grant of emission allowances which would gradually be decreased over time, and the Senate is considering similar legislation. Moreover, nearly half of the states, either individually or through multi-state initiatives, already have begun implementing legal measures to reduce emissions of GHGs. Also, the U.S. Supreme Court’s holding in its 2007 decision, Massachusetts, et al. v. EPA, that carbon dioxide may be regulated as an “air pollutant” under the federal Clean Air Act could result in future regulation of GHG emissions from stationary sources, even if Congress does not adopt new legislation specifically addressing emissions of GHGs. In late September and early October of 2009, the United States Environmental Protection Agency (“EPA”) officially proposed two sets of rules regarding possible future regulation of GHG emissions under the Clean Air Act, one of which would regulate emissions of GHGs from motor vehicles and the other of which would regulate emissions of GHGs from large stationary sources such as power plants or industrial facilities. EPA indicated that it hopes to adopt final versions of both sets of rules by March 2010. While it is not possible at this time to fully predict how legislation or new regulations that may be adopted in the United States to address GHG emissions would impact our business, any such future laws and regulations could result in increased compliance costs or additional operating restrictions, and could have an adverse effect on demand for the oil and natural gas that we produce.

The adoption of derivatives legislation by Congress could have an adverse impact on our ability to hedge risks associated with our business.

Congress is currently considering legislation to impose restrictions on certain transactions involving derivatives, which could affect the use of derivatives in hedging transactions. ACESA contains provisions that would prohibit private energy commodity derivative and hedging transactions. ACESA would expand the power of the Commodity Futures Trading Commission, or CFTC, to regulate derivative transactions related to energy commodities, including oil and natural gas, and to mandate clearance of such derivative contracts through registered derivative clearing organizations. Under ACESA, the CFTC’s expanded authority over energy derivatives would terminate upon the adoption of general legislation covering derivative regulatory reform. The CFTC is considering whether to set limits on trading and positions in commodities with finite supply, particularly energy commodities, such as crude oil, natural gas and other energy products. The CFTC also is evaluating whether position limits should be applied consistently across all markets and participants. Separately, two committees of the House of Representatives, the Financial Services and Agriculture Committees, acted on October 15 and October 21, 2009, respectively, to adopt legislation that would impose comprehensive regulation on the over-the-counter (OTC) derivatives marketplace. This legislation would subject swap dealers and major swap participants to substantial supervision and regulation, including capital standards, margin requirements, business conduct standards, and recordkeeping and reporting requirements. It also would require central clearing for transactions entered into between swap dealers or major swap participants, and would provide the CFTC with authority to impose position limits in the OTC derivatives markets. A major swap participant generally would be someone other than a dealer who maintains a “substantial” position in outstanding swaps other than swaps used for commercial hedging, or whose positions create substantial exposure to its counterparties or the system. Although it is not possible at this time to predict whether or when Congress may act on derivatives legislation or how any climate change bill approved by the Senate would be reconciled with ACESA, any laws or regulations that may be adopted that subject us to additional capital or margin requirements relating to, or to additional restrictions on, our trading and commodity positions could have an adverse effect on our ability to hedge risks associated with our business or on the cost of our hedging activity.

Federal and state legislation and regulatory initiatives relating to hydraulic fracturing could result in increased costs and additional operating restrictions or delays.

Congress is currently considering legislation to amend the federal Safe Drinking Water Act to require the disclosure of chemicals used by the oil and gas industry in the hydraulic fracturing process. Hydraulic fracturing involves the injection of water, sand and chemicals under pressure into rock formations to stimulate natural gas production. Sponsors of bills currently pending before the Senate and House of Representatives have asserted that chemicals used in the fracturing process could adversely affect drinking water supplies. The proposed legislation would require the reporting and public disclosure of chemicals used in the fracturing process, which could make it easier for third parties opposing the hydraulic fracturing process to initiate legal proceedings based on allegations that specific chemicals used in the fracturing process could adversely affect groundwater. In addition, these bills, if adopted, could establish an additional level of regulation at the federal level that could lead to operational delays or increased operating costs and could result in additional regulatory burdens that could make it more difficult to perform hydraulic fracturing and increase our costs of compliance and doing business.

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. 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. 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 2009:


						Total Number of		Maximum Number (or
						Shares (or Units)		Approximate Dollar Value)
						Purchased as Part		of Shares (or Units) that May
	Total Number of					of Publicly		Under the
	Shares (or Units)			Average Price Paid		Announced Plans or		Yet be Purchased
Period	Purchased			per Share (or Unit)		Programs		Plans or Programs
Share Repurchase
Program:
July 2009		—			—		—
August 2009		—			—		—
September 2009		—			—		—

		—			—		—	$	92,928,632


Other:
July 2009		3,588	(a)	$	7.81		—
August 2009		—			—		—
September 2009		—			—		—

		3,588			7.81		—		N/A

Total		3,588		$	7.81		—


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


Item 6.		Exhibits


3.1		Certificate of Incorporation of the Registrant, as amended (incorporated by reference to Exhibit 3.1 to the Registrant’s Registration Statement on Form S-1 (Registration No. 33-62362)).

3.2		Certificate of Amendment of the Certificate of Incorporation of Stone Energy Corporation, dated February 1, 2001 (incorporated by reference to Exhibit 4.1 to the Registrant’s Form 8-K, filed February 7, 2001).

3.3		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)).

*15.1		Letter from Ernst & Young LLP dated November 5, 2009, 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.


*		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.

EXHIBIT INDEX


Exhibit
Number		Description
3.1		Certificate of Incorporation of the Registrant, as amended (incorporated by reference to Exhibit 3.1 to the Registrant’s Registration Statement on Form S-1 (Registration No. 33-62362)).

3.2		Certificate of Amendment of the Certificate of Incorporation of Stone Energy Corporation, dated February 1, 2001 (incorporated by reference to Exhibit 4.1 to the Registrant’s Form 8-K, filed February 7, 2001).

3.3		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)).

*15.1		Letter from Ernst & Young LLP dated November 5, 2009, 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.


*		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.


	STONE ENERGY CORPORATION
Date: November 5, 2009	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)

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PART I — FINANCIAL INFORMATION

Item 1. Financial Statements:
Condensed Consolidated Balance Sheet as of September 30, 2009 and December 31, 2008		1

Condensed Consolidated Statement of Operations for the Three and Nine Months Ended September 30, 2009 and 2008		2

Condensed Consolidated Statement of Cash Flows for the Nine Months Ended September 30, 2009 and 2008		3

Notes to Condensed Consolidated Financial Statements		4

Report of Independent Registered Public Accounting Firm		21

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		22

Item 3. Quantitative and Qualitative Disclosures About Market Risk		29

Item 4. Controls and Procedures		30

PART II — OTHER INFORMATION

Item 1. Legal Proceedings		31

Item 1A. Risk Factors		32

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		34

Item 6. Exhibits		35

Signature		36
EX-15.1
EX-31.1
EX-31.2
EX-32.1